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ZIPREALTY INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations:
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion should be read together with our financial statements
and related notes appearing elsewhere in this report. This discussion contains
forward-looking statements based upon current expectations that involve numerous
risks, uncertainties and assumptions. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including but not limited to those described under "Risk Factors" and elsewhere
in this report. Except as otherwise required by law, we do not intend to update
any information contained in these forward-looking statements.
OVERVIEW
We are the most prominent online, technology-enabled real estate brokerage
company in the United States. Our company owned-and-operated real estate
brokerage serves 19 metropolitan markets with over 1,500 licensed REALTORS®. We
serve an additional 15 markets through our Powered by Zip, or PBZ, business,
which provides our technology platform as an enterprise cloud-based application.
We operate ZipRealty.com, the most visited brokerage website with approximately
2.4 million unique monthly visitors. We also provide consumers with highly rated
mobile applications that offer all of the key features of our website and
optimize them for all major platforms and devices.
Both our owned-and-operated brokerage and our Powered by Zip network share the
same internal engine: the powerful proprietary customer service technology,
known as Zap, and the online marketing capabilities that form the foundation of
our business. We developed Zap over a 14 year period during which our technology
team partnered with REALTORS® across the country to collaboratively develop a
customer service platform that empowers real estate professionals to deliver
superior customer service in a significantly more efficient approach.
We refer to this innovation feedback loop as our "innovation factory" and
believe that our disciplined management of this process directly led to Zap's
success in our brokerage and Powered by Zip network and also allows us to keep
this application on the cutting-edge. In December 2012, we launched a
transformational Zap upgrade that made it even easier for REALTORS® to
efficiently manage small and large contact pools with follow-up plans, that
features an enhanced intelligence engine which predicts client behaviors and
propensity to transact, and that is completely redesigned with an intuitive
stylized Web 2.0 interface. We consider our innovation factory to be one of our
core competencies, helping us maintain our technology leadership in the
residential real estate industry.
As the direct result of offering the most accurate, timely and comprehensive
housing information, buyers using our services can quickly find relevant home
listings that meet their search criteria and are well positioned when they are
ready to interact with local REALTORS® affiliated with our owned-and-operated
brokerage or our PBZ network. At the same time, sellers using our system gain
assurance that their listings are marketed effectively online to interestedhome
buyers.
Our proprietary technology, established reputation as full service online
brokerage, and Powered by Zip network, as well as our prominence both online and
in mobile, allow us to serve three main constituencies in the residential real
estate industry:
· First and foremost, we serve serious consumers, which we define as those who
expect to purchase or sell a home within the next six to eighteen months. We
offer these consumers our technology and services to provide control, choice and
seamless, customized service. Through ZipRealty.com and our award-winning mobile
apps, we provide consumers with the most accurate and relevant data on homes
currently for sale wrapped up in a beautiful and easy-to-use interface and, when
they are ready, connect them with knowledgeable local REALTORS® to assist them
through every step of their real estate transaction.
· Second, we serve real estate professionals in our owned-and-operated
brokerage business. For these professionals, who seek more productive ways to
conduct business in the fiercely competitive residential real estate industry,
we generate a large base of customer leads which, through an advanced algorithm
developed over the course of 14 years, have been systematically matched to yield
productive agent-client relationships. These leads are made even more valuable
with Zap, which is a system that helps incubate customer relationships with the
assistance of powerful prospecting tools and real-time data on client activity
that enables agents to provide excellent anticipatory service. We also market
ZipRealty-affiliated REALTORS® on ZipRealty.com by showcasing their local
know-how and real estate activity and by providing them with personalized agent
websites.
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· Third, we serve other real estate brokerages and their affiliated agents who
seek a competitive edge in this new era in which consumers are increasingly
using online services for home buying and selling. For these brokerages, we not
only generate online leads on their behalf, but we also provide them access to
Zap as an enterprise cloud-based application that better enables them to turn
these leads into closed transactions. Zap gives these brokerages crystal-clear,
real-time visibility on their transaction pipeline, brokerage operations and
financials, while facilitating a paperless office environment. Because Zap is a
cloud-based application, our brokerage partners benefit from our rapid
innovation cycle without the burden of expensive IT maintenance and software
upgrade costs.
Geographic reach
We conduct our owned-and-operated brokerage services in 19 markets nationwide,
all of which were opened prior to May 2009: Austin, TX, Baltimore, MD, Boston,
MA, Chicago, IL, Dallas, TX, Denver, CO, Houston, TX, Las Vegas, NV, Los
Angeles, CA, Orange County, CA, Orlando, FL, Phoenix, AZ, Richmond, VA,
Sacramento, CA, San Diego, CA, the San Francisco Bay area, CA, Seattle, WA,
Portland, OR, and Washington, DC.
Our Powered by Zip network serves leading local brokerages in 15 markets where
we do not otherwise conduct business: Atlanta, GA, Jacksonville, FL, Nashville,
TN, the Greater Philadelphia area, PA, Raleigh-Durham, NC, Salt Lake City, UT,
Tucson, AZ, Westchester/Bronx, NY, Tampa, FL, Palm Beach, FL, Long Island, NY,
Brooklyn, NY, Miami, FL., Minneapolis, MN, and Virginia Beach, VA.
The markets in our owned-and-operated brokerage and Powered by Zip network are
served by approximately 2,000 local, licensed real estate agents, all of whom
are independent contractors.
In 2012, we extended our MLS coverage to include several new markets where we do
not yet have a physical presence or a PBZ partner. This expanded coverage
facilitates expansion of our PBZ network. At December 31, 2012, our total
coverage area encompassed 45% of the U.S. population.
All of our revenues derive from our core business of offering the best
proprietary technology and online marketing capabilities available in our
industry. We derive the majority of our net revenues from commissions earned in
our owned-and-operated brokerage representing buyers and sellers in residential
real estate transactions. We record commission revenues net of any commission
discount, transaction fee adjustment or, when applicable, rebate. Net
transaction revenues are principally driven by our base of real estate
professionals whose productivity leads to the number of transactions closed and
the average net revenue per transaction. Average net revenue per transaction is
a function of the home sales price and percentage commission received on each
transaction and can vary significantly by market. We also derive revenues from
net commission earned by brokerages in our Powered by Zip network. Brokerages in
our Powered by Zip network typically pay a combination of a monthly subscription
and transaction-based success fee for our full SaaS solution. This solution
includes a co-branded website, online agent marketing, a steady stream of leads
for their metropolitan area, the Zap brokerage operating system for managing the
business, and the full agent functionality of the Zap platform for managing the
client interaction, lead incubation and customer service. Additionally, we
derive revenues from our website through marketing arrangements with residential
mortgage service providers as well as the sale of online display advertising.
Finally, we earn lead referral fees. For 2012, marketing and other revenues,
which includes Powered by Zip revenues, represented approximately 7% of ournet
revenues.
RECENT DEVELOPMENTS
Restructuring and realignment: In early 2011, we began a restructuring to
refocus on our core strengths in technology, online marketing and on our most
attractive local real estate markets. To that end, we closed our offices in 12
markets in the first quarter of 2011: Fresno/Central Valley, CA, Charlotte, SC,
Naples, FL, Jacksonville, FL, Miami, FL, Palm Beach, FL, Tampa, FL, Hartford,
CT, Minneapolis, MN, Virginia Beach, VA, Tucson, AZ, Atlanta, GA. We continued
our restructuring in the fourth quarter of 2011 by closing our offices in
Raleigh-Durham, NC, and the Greater Philadelphia area, PA, and in 2012 by
closing our offices in Salt Lake City, UT, and in Westchester County/Long
Island, NY. In connection with several of our office closings, we transitioned
our local operations to eight third-party brokerages in our Powered by Zip
network, who now serve Tucson, AZ, Atlanta, GA, Raleigh-Durham, NC, the Greater
Philadelphia area, PA, Salt Lake City, UT, Westchester, NY, Long Island, NYand
Brooklyn, NY.
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In early 2012, we reorganized our corporate structure by realigning our
organization to operate more efficiently and to refocus our resources on the
highest value priorities. We combined our product and marketing functions, and
we separated our brokerage operations from our technology and marketing
functions. We recruited a real estate veteran, Van Davis, to be our President of
Brokerage Operations. Mr. Davis conducted a further reorganization of our field
sales team, which has empowered our local offices and real estate professionals
to make decisions that are better tailored to the dynamics of their particular
markets, with the goal of increasing productivity and customer service levels.
In total, we reduced our corporate overhead, which excludes cost of revenues, by
approximately 23% when comparing 2012 to 2011.
Legal settlement: On September 28, 2012, we signed a settlement agreement with
the State of California's Department of Labor Standards Enforcement, or DLSE,
for a release of all its claims that we failed to pay our California real estate
agents, who were at the time in question classified as employees, minimum wage
and overtime mandated by California laws. Pursuant to that settlement, in the
fourth quarter of 2012, we paid $0.2 million to the DSLE for attorneys' fees and
costs and $4.8 million to a trust for disbursement to our former employees as
back wages. As this trust disburses funds to our former employees, we will be
required to pay the employer's share of F.I.C.A. taxes and other employer tax
responsibilities on back wages on those disbursements, as well as the
administrative costs of the claims administrator for the trust, which totaled
$0.8 million for the fourth quarter of 2012, which totaled $0.8 million in 2012,
and which could total an additional $0.2 million if all remaining former
employee claimants participate. A liability and corresponding expense for this
additional $0.2 million of employer taxes and administrative fees have not been
reflected within the balance sheet because an estimate of the ultimate liability
for payment of these payroll taxes cannot be reasonably determined. Given the
unique qualitative test that applies under California law in evaluating the
outside sales exemption and the deference afforded the DLSE in the context of a
law enforcement action, we believed that this settlement was a reasonable
resolution in this case. Further, by agreeing to settle this issue, which
relates to an employee agent model that we discontinued in 2010 and early 2011,
we were able to avoid potentially millions of dollars in future litigation costs
and the diversion of excessive time and attention of our management and
employees from key business initiatives.
Powered by Zip: In 2011, we launched the Powered by Zip program to provide
third-party real estate brokerages with our robust proprietary end-to-end
technology solution. Since then, we have built a network of 15 independent
brokerages that use our technology, which we refer to as our Powered by Zip
network. Over the past year, we have gained significant experience serving our
Powered by Zip customers. The terms on which we offer our technology vary among
these brokerages because we are still developing, testing and building our
business model, and because each brokerage is at a different stage of adoption
and incorporation of the technology and services into their business. We
currently evaluate each individual brokerage's performance using the same
metrics that we do for our owned-and-operated brokerage, as well as other
subjective measures such as the agents' experience and level of engagementwith
our technology.
We are developing new pricing schedules for our current offering, which is
currently offered on an exclusive basis in any one metropolitan area.
Additionally, our technology and product teams are developing new versions of
the offering, including a version designed to serve multiple customers in the
same metropolitan area nonexclusively, and a subscription model for real estate
professionals. We are also in the process of developing a formal organizational
structure for the Powered by Zip business and, within the next several quarters,
we expect to hire managers and staff in sales, account management, operations
and integration, and product development.
Customer Service Platform (Zap):Zap is the proprietary technological engine that
drives our business. We continually upgrade Zap in response to feedback from
consumers, real estate professionals, field leadership, and corporate management
and staff. This year, we embarked upon an aggressive program to develop and
deliver the most transformational change to Zap in over five years. To that end,
in December 2012, we launched a transformational upgrade that made it even
easier for REALTORS® to efficiently manage small and large contact pools with
follow-up plans, that features a new intelligence engine that predicts client
behaviors and their propensity to transact, and that is completely redesigned
with an intuitive, stylized Web 2.0 sheen. We believe that adoption of the
upgraded Zap in our owned-and-operated and Powered by Zip businesses will help
improve agent productivity in 2013.
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MARKET CONDITIONS AND TRENDS IN OUR BUSINESS
We compete in the domestic residential real estate market. For the past few
years, this market has been negatively impacted by the significant correction in
the total value of homesale transactions in 2005 and the deep economic recession
that followed. The Federal Reserve responded to these events by implementing an
extraordinary accommodation policy designed to improve economic activity. In
2012, the country experienced an increase in economic activity as measured by
Gross Domestic Product (GDP). The U.S. Department of Commerce, Bureau of
Economic Analysis (BEA) recently announced that GDP grew 2.2% in 2012 versus
1.8% in 2011. However, the BEA recently reported that real GDP grew at an annual
rate of just 0.1% in the fourth quarter of 2012. There are signs that a recovery
may be underway, but there are reasons to be cautious.
Macroeconomic forces: The current Federal Reserve monetary policy is one of the
most significant economic variables affecting the real estate market. For the
past few years, the Federal Reserve has been pursuing an accommodative monetary
policy designed to spur economic growth. In 2012, perhaps in response to the
continued perception that the pace of economic recovery was sluggish, the
Federal Reserve messaged a direct connection between the federal funds rate and
macroeconomic factors. Specifically, as detailed in the January 30, 2013 press
release, the Federal Reserve stated its plan to maintain the federal funds rate
at 0 to 0.25% until unemployment drops below 6.5%; long term inflation (defined
as that rate projected for the twelve month period between one and two years in
the future) rises above 2.5%, and projections of the inflation rate more than
two years ahead remain consistent with the Federal Reserve's 2% inflation rate.
This statement appears to be designed to message that the Federal Reserve is
committed to keeping interest rates low until the domestic economy returns to
the healthy economic parameters of unemployment below 6.5% and inflation ator
below 2.0%.
This accommodative monetary policy continues to depress mortgage rates.
According to Freddie Mac, in November and December 2012, the national average
commitment for a 30-year, conventional, fixed-rate mortgage was 3.35%, the
lowest rate on record. These low rates make housing more affordable for new
entrants and existing homeowners who are able to refinance their mortgages and
also encourages investors to purchase residential real estate for resale or
rental.
In 2013, we believe that the health of the residential housing market will
continue to be significantly affected by the availability of credit, inventory
and shadow inventory levels, the pace at which banks process their foreclosure
pipelines, and interest rates, as well as any significant change in unemployment
levels. We cannot predict any changes in those macroeconomic forces, nor can we
predict the combined impact of those changes on the residential real estate
market.
Federal action: The federal government, state governments and related agencies
have acted repeatedly to address the decline in the residential real estate
market and the availability of home mortgage credit. Currently, under the
Dodd-Frank Wall Street Reform Act, federal regulators must develop rules to
discourage risky home mortgage lending practices by requiring lenders to retain
5% of the risk in the mortgages they originate, other than qualified residential
mortgages, also known as QRMs, and other than mortgages that are backed by
federally insured mortgage programs. Mortgages that do not meet these exemptions
could carry higher interest rates or be less available to home buyers, which
could dampen the housing market, particularly if the definition of a QRM is
drawn narrowly. It is too soon to tell what the final rules will require. To the
extent that governments and related agencies take actions to address the
residential real estate market or the home mortgage market, there can be no
assurance that those activities will have a positive, meaningful and lasting
impact on either market, or that they will not result in unintended
consequences.
Current residential real estate market conditions: Recent indicators of national
residential real estate market include the following:
· Volume: According to the National Association of REALTORS®, or NAR, total sales
in 2012 were the highest in five years. NAR's preliminary annual total for
existing-home transactions in 2012 was 4.65 million, up 9.2 percent from 4.26
million in 2011. This volume level represented the highest level since 2007's
transaction volume of 5.03 million. Further, the volume increase in 2012 was
the highest since 2004. Persistently low mortgage interest rates seem to have
played a large role in affecting sales volume, although inventory shortages and
tight lending criteria may be limiting buying opportunities.
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· Price: NAR's preliminary estimate of median existing-home price for the full
year 2012 was $176,600, up 6.3 percent from $166,100 in 2011. This
year-over-year increase represented the highest annual price gain since 2005,
when the median price rose 12.4 percent. The price increase may have been due,
in part, to a decrease in the percentage of national home sales that
represented distressed properties, as well as inventory shortages.
· Inventory: NAR reported a December 2012 housing inventory level of 1.82 million
homes, which it stated was approximately a 4.4-month supply at its estimated
current sales pace. Once again, this level is the lowest since May of 2005,
which is the year many consider to be at or near the peak of the housing boom.
The sharp decrease in housing inventory is a recent phenomenon: Housing
inventory dropped 21.6 percent over the past twelve months. Tight inventory
supplies can distort the market by causing sharp price increases that are
typically only sustainable over a short period of time.
· Distressed Properties: Currently, a significant percentage of our sales
transaction volume is composed of distressed properties. Distressed properties
are homes that are in foreclosure, are real estate owned, or REO, by the
lending bank, government agency or government loan insurer after an
unsuccessful sale as a foreclosure auction, or are "short sales," meaning a
sale where the sale price is less than the loans or debt secured by the home
listed for sale. In the fourth quarter of 2012, the percentage of our sales
transactions composed of distressed properties in our owned-and-operated
markets was approximately 26%, which was down from 37% in the fourth quarter of
2011 for those same markets. Distressed properties not only tend to sell at
reduced prices, but they also tend to put downward pressure on the values of
other homes for sale in the same and nearby neighborhoods. We expect distressed
properties to continue to represent a significant portion of the residential
real estate market and of our business for the foreseeable future.
· Shadow Inventory: "Shadow inventory" refers to distressed and other properties
that have not yet been listed for sale, as well as properties that homeowners
wish to sell, but will not sell at current market prices. For October 2012,
CoreLogic, a leading provider of consumer, financial and property information,
analytics and services to business and government, estimated shadow inventory
at 2.3 million properties, which consisted of 1.04 million properties backed by
loans classified as seriously delinquent, 903,000 properties with loans that
were in some stage of foreclosure, and 354,000 properties that were REO. The
CoreLogic report estimated that the October 2012 shadow inventory number fell
by 12% year-over-year.
Shadow inventory is problematic because it represents properties that would
negatively impact the housing market if placed on the market for sale. The
timing and volume of such action is driven by a wide range of variables
including the financial health of the lender that holds the title, an owner's
financial income, federal and state regulations on foreclosure and local
government foreclosure moratoriums. It is impossible to accurately assess the
current volume of shadow inventory and its future impact on the residential real
estate market, particularly given the uncertainty surrounding the foreclosure
processing delays instituted by many major mortgage lenders as they settle their
disputes with regulators concerning their lending practices.
Fluctuations in quarterly profitability:We have experienced fluctuations in
profitability from period to period. Our profitability has been impacted by
various factors, including ongoing market challenges, government intervention,
seasonality, market expansions and closures, and legal settlements such as the
September 2012 settlement with the California DLSE discussed above.
Industry seasonality and cyclicality:The residential real estate brokerage
market is influenced both by seasonal factors and by overall economic cycles.
While individual markets vary, transaction volume nationally tends to increase
progressively from January through the summer months, then to slow gradually
over the last three to four months of the calendar year. Revenues in each
quarter are significantly affected by activity during the prior quarter, given
the typical 30 to 45-day time lag between contract execution and closing for
traditional home purchases. For non-traditional sales, the time lag from
contract execution to closing can be longer. We have been, and believe we will
continue to be, influenced by overall market activity and seasonal forces. We
generally experience the most significant impact in the first and fourth
quarters of each year, when our revenues are typically lower relative to the
second and third quarters as a result of traditionally slower home sales
activity and reduced listings inventory between Thanksgiving and Presidents'
Day.
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The impact of seasonality can be masked by the general health of the residential
real estate market at any given point in time, whether affected by macroeconomic
events, periodic business cycles or other factors. Generally, when economic
conditions are fair or good, the housing market tends to perform well. If the
economy is weak, if interest rates dramatically increase, if mortgage lending
standards tighten, or if there are disturbances such as terrorist attacks or
threats, the outbreak of war or geopolitical uncertainties, the housing market
likely would be negatively impacted.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, costs and expenses and
related disclosures. On an ongoing basis, we evaluate our estimates and
assumptions. Accordingly, our actual results may differ from these estimates
under different assumptions or conditions.
Our significant accounting policies are described in Note 1 of the Notes to
Consolidated Financial Statements, and of those policies, we believe that the
following accounting policies are the most critical to understand and evaluate
our financial condition and results of operations.
Revenue recognition
Revenue is recognized only when the price is fixed or determinable, persuasive
evidence of an arrangement exists, the service has been delivered and
collectability of the resulting receivable is reasonably assured.
We derive the majority of our net revenues from commissions earned in our
owned-and-operated residential real estate brokerage, and from commission
referrals earned from brokers in our Powered by Zip network. We recognize
commission based revenues upon closing of a sale and purchase transaction, net
of any rebate, commission discount or transaction fee adjustment. These
transactions typically do not have multiple deliverable arrangements.
Non-commission based revenues are derived primarily from marketing agreements
with residential mortgage service providers, the sale of online advertising,
lead referral fees and other revenues. We classify these revenues as marketing
and other revenues. Marketing service revenues are recognized over the term of
the agreements as the contracted services are delivered. Advertising revenues on
contracts are recognized as impressions are delivered or as clicks are provided
to advertisers. Advertising and marketing contracts may consist of multiple
deliverables which generally include a blend of various impressions or clicks as
well as other marketing deliverables. Revenues related to revenue sharing
arrangements are recognized based on revenue reports received from our partners,
provided that collectability is reasonably assured.
Internal-use software and website development costs
We account for internal-use software and website development costs, including
the development of our customer service platform which we refer to as Zap, in
accordance with the guidance set forth in the related accounting standards. We
capitalize internal costs consisting of payroll and direct payroll-related costs
of employees who devote time to the development of internal-use software, as
well as any external direct costs. We amortize these costs over their estimated
useful lives, which typically is 24 months. Our judgment is required in
determining the point at which various projects enter the stages at which costs
may be capitalized, in assessing the ongoing value of the capitalized costs, and
in determining the estimated useful lives over which the costs are amortized.
The estimated life is based on management's judgment as to the product life
cycle. We periodically evaluate the carrying value of capitalized internal-use
software and website development costs for impairment when events and
circumstances warrant such a review. As of December 31, 2012, we have not
recorded any charges for impairment of capitalized internal-use software and
website development costs to date.
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Stock-based compensation
We follow the provisions of accounting standards for share-based payments, which
requires the measurement and recognition of compensation expense for all
stock-based payment awards made to employees, consultants and directors,
including employee stock options and employee stock purchases, based on
estimated fair values. Under the fair value recognition provisions of the
accounting standards, stock-based compensation cost is estimated at the grant
date based on the fair value of the awards expected to vest and recognized as
expense using the straight-line method over the requisite service period ofthe
award.
We estimate the fair value of stock options using the Black-Scholes option
pricing model, which incorporates various assumptions including volatility,
expected life and interest rates. The expected volatility is based on the
historical volatility of our common stock. The expected life of options is
estimated by taking the average of the vesting term and the contractual term of
the option. We estimate expected forfeitures based on various factors including
employee class and historical experience. The estimation of stock awards that
will ultimately vest requires judgment, and to the extent actual results or
updated estimates differ from our current estimates, such amounts will be
recorded as a cumulative adjustment in the period the estimates are revised.
Income taxes
Deferred tax assets and liabilities arise from the differences between the tax
basis of an asset or liability and its reported amount in the financial
statements as well as from net operating loss and tax credit carry forwards. The
measurement of current and deferred tax assets and liabilities is based on
provisions of enacted tax laws; the effects of future changes in tax laws or
rates are not anticipated. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. Income tax
expense or benefit is the tax payable or refundable, respectively, for the
period adjusted for the change during the period in deferred tax assets and
liabilities.
The accounting guidance for income taxes requires that deferred tax assets be
evaluated for future realization and reduced by a valuation allowance to the
extent we believe a portion will not be realized. We consider many factors when
assessing the likelihood of future realization of our deferred tax assets,
including our recent historical results and our expectations for the future.
Historically, we have recorded a valuation allowance on our deferred tax assets,
the majority of which relate to net operating loss carryforwards and we maintain
that a full valuation allowance should be accounted for against our net deferred
tax assets at December 31, 2012.
Restructuring charges
In connection with our cost reduction initiatives, we record restructuring
charges for employee termination costs, costs related to leased facilities to be
abandoned or subleased, fixed asset impairments and other exit-related costs.
Formal plans are developed and approved by management. Restructuring costs
related to employee severance and related expenses are recorded when probable
and estimable. Fixed assets impaired as a result of restructuring are typically
accounted for as assets held for sale or abandoned. The recognition of
restructuring charges requires us to make judgments and estimates regarding the
nature, timing, and costs associated with the planned restructuring activity,
including estimating sublease income and the fair value, less selling costs, of
fixed assets being disposed of. Estimates of future liabilities may change,
requiring us to record additional restructuring charges or to reduce or reverse
the amount of liabilities already recorded. At the end of each reporting period,
we evaluate the remaining accrued liabilities to ensure their adequacy, that no
excess accruals are retained and that the utilization of the provisions is for
the intended purpose in accordance with the approved restructuring plan. In the
event circumstances change and the provision is no longer required, the
provision is reversed.
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Litigation
We are involved in legal proceedings on an ongoing basis. Based upon our
evaluation and consultation with outside counsel handling our defense in these
matters and an analysis of potential results, we accrue for losses related to
litigation if we determine that a loss is probable and it can be reasonably
estimated. If only a range of estimated losses can be determined, then we record
an amount within the range that, in our judgment, reflects the most likely
outcome; if none of the estimates within that range is a better estimate than
any other amount, we record the low end of the range. Any such accrual is
charged to expense in the appropriate period. We record litigation expenses in
the period in which the litigation services were provided.
Recent accounting pronouncements
In December 2012, the FASB issued Accounting Standard Update ("ASU") No.
2011-11," Disclosure about Offsetting Assets and Liabilities." ASU 2011-11 will
require the Company to disclose information about offsetting related
arrangements to enable users of its financial statements to understand the
effects of those arrangements on its financial position. The new guidance is
effective for the Company's interim period ending March 3, 2013. The disclosures
required are to be applied retrospectively for all comparative periods
presented. The Company does not expect that this guidance will have an impact on
its financial position, results of operations or cash flows as it is
disclosure-only in nature.
In January 2013, the Financial Accounting Standards Board ("FASB") amended its
guidance on the presentation of comprehensive income. The new guidance requires
entities to present information regarding reclassification adjustments from
accumulated other comprehensive income in a single note or on the face of the
financial statements. The amendment becomes effective for reporting periods
beginning after December 15, 2012 and is applied prospectively. The Company has
adopted this guidance during the year ended December 31, 2012. This guidance did
not have an impact on the Company's consolidated financial position, results of
operations or cash flows as it is an enhancement to current required
disclosures.
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RESULTS OF OPERATIONS
The following table summarizes certain financial data related to our operations
for the periods indicated:
Year Ended December 31,
2012 2011 2010
Statement of Operations Data (In thousands, except per share amounts)
Net revenues $ 73,820 $ 85,149 $ 118,696
Operating costs and expenses
Cost of revenues 40,661 45,757 67,185
Product development (1) 6,957 8,738 10,393
Sales and marketing 20,490 28,079 43,545
General and administrative 7,795 9,147 13,376Litigation settlement charges (Note 6) 5,825 878 -
Restructuring charges, net 1,686 2,339 -
Total operating costs and expenses 83,414 94,938 134,499
Loss from operations (9,594 ) (9,789 ) (15,803 )
Interest income 22 58 253
Loss before income taxes (9,572 ) (9,731 ) (15,550 )
Provision for income taxes 106 - -
Net loss $ (9,678 ) $ (9,731 ) $ (15,550 )
Net loss per share:
Basic and diluted $ (0.47 ) $ (0.47 ) $ (0.76 )
Weighted average common shares outstanding:
Basic and diluted 20,641 20,543 20,510
(1) Amortization of internal-use software and
website development costs included in product
development $ 1,156 $ 1,095 $ 1,117
The following table presents our operating results as a percentage of net
revenue for the periods indicated:
Year Ended December 31,
2012 2011 2010
Statement of Operations Data
Net revenues 100.0 % 100.0 % 100.0 %
Operating costs and expenses
Cost of revenues 55.1 53.7 56.6
Product development (1) 9.4 10.3 8.7
Sales and marketing 27.8 33.0 36.7
General and administrative 10.6 10.7 11.3
Litigation settlement charges 7.9 1.0 -
Restructuring charges, net 2.3 2.7 -
Total operating costs and expenses 113.1 111.4 113.3
Loss from operations (13.1 ) (11.4 ) (13.3 )
Interest income - 0.1 0.2
Loss before income taxes (13.1 ) (11.3 ) (13.1 )Provision for (benefit from) income taxes 0.1 - -
Net loss (13.2 )% (11.3 )% (13.1 )%
37
Comparison of the years ended December 31, 2012 and December 31, 2011
Other operating data (1)
Year Ended December 31, Increase Percent
2012 2011 (decrease) ChangeNumber of markets-same markets (2) 19 21 (2 )
Number of markets-total markets (2) 19 21 (2 )
Number of transactions closed during
the period-same markets (3) 10,299 12,862 (2,563 ) (19.9 )%
Number of transactions closed during
the period-total markets (3) 10,418 14,255 (3,837 ) (26.9 )%
Average net revenue per
transaction-same markets (4) $ 6,578 $ 5,693 885 15.5 %
Average net revenue per
transaction-total markets (4) $ 6,577 $ 5,599 978 17.5 %
Number of agents at end of the
period-same markets 1,540 1,701 (161 ) (9.5 )%
Number of agents at end of the
period-total markets 1,540 1,701 (161 ) (9.5 )%
(1) Other operating data includes our owned-and-operated markets only and
excludes marketing and other revenue along with Powered by Zip revenue.
(2) Same markets operating data excludes markets closed as the result of our 2011
and 2012 restructuring plans. These plans included closing our
owned-and-operated brokerage operations in selected underperforming markets
and, in certain markets, transitioning operations to a third-party brokerage
joining our Powered by Zip network. We closed our owned-and-operated
brokerage offices in Fresno/Central Valley, Charlotte, Naples, Jacksonville,
Miami, Palm Beach, Tampa, Hartford, Minneapolis, Virginia Beach, Atlanta, and
Tucson during the quarter ended March 31, 2011 and we closed Philadelphia and
Raleigh-Durham during the quarter ended December 31, 2011. Operations in
Atlanta, Tucson, Raleigh, and Philadelphia were transitioned to our Powered
by Zip network of third-party brokerages. Our brokerage operations in Salt
Lake City were closed and transitioned to a brokerage in the Powered by Zip
network during the quarter ended March 31, 2012. The Westchester/Bronx
portion and the Long Island portion of our New York brokerage operations were
transitioned to third-party brokerages in the Powered by Zip network during
the quarter ended June 30, 2012 and September 30, 2012, respectively, and are
excluded from the owned-and-operated data for all periods.
(3) The term "transaction" refers to each representation of a buyer or seller in
a real estate purchase or sale.
(4) Average net revenue per transaction equals net transaction revenues divided
by number of transactions with respect to each period.
Net revenues
Net transaction revenues consist primarily of commissions earned in our
owned-and-operated residential real estate brokerage. Marketing and other
revenues consist primarily of marketing agreements, lead generation, advertising
and transaction referral commission, including commission referrals earned from
brokers in our Powered by Zip network.
Year Ended December 31, Increase Percent
2012 2011 (decrease) Change
(In thousands)
Net transaction revenues:
Same market $ 67,750 $ 73,224 $ (5,474 ) (7.5 )%
Closed market 766 6,585 (5,819 ) (88.4 )%
68,516 79,809 (11,293 ) (14.2 )%
Marketing and other revenues 5,304 5,340 (36 ) (0.7 )%
Total net revenues $ 73,820 $ 85,149 $ (11,329 ) (13.3 )%
38
The decrease in our net transaction revenues of $11.3 million or 14.2% for the
year ended December 31, 2012 compared to the year ended December 31, 2011 was
driven primarily by a decrease in the number of transactions closed during the
period of 3,837 or 26.9% compared to the last year. Transactions closed during
the period on a same market basis were 10,299 compared to 12,862 last year, a
decrease of 2,563 or 19.9%. We believe the decrease in same market transaction
volume was attributable to the disruption to our business model and to our agent
population from our restructuring and the conversion of our agents to
independent contractors. The market continues to be impacted by weak economic
conditions and reduced availability of mortgage financing, although, as noted
above, there are signs that a recovery may be underway. Same market average net
revenue per transaction for the period was $6,578 compared to $5,693 last year,
an increase of $885 or 15.5%. We discontinued our commission rebate program
during late summer 2011 resulting in lower cash rebates paid during the year
which increased average net revenue per transaction in 2012 by approximately
$600 compared to the prior year. The remaining increase in the same market
average net revenue per transaction was due to the impact of higher average
homesale prices and changes in our average commission rates.
The decrease in marketing and other revenues for the year ended December 31,
2012 compared to the year ended December 31, 2011 was attributable to a decrease
in lead generation income and advertising revenue of approximately $0.5 million
offset by an increase in transaction referrals, principally from brokers in our
Powered by Zip network, of approximately $0.5 million.
We expect our net revenues will increase modestly in 2013 compared to 2012,
driven by an increase in the overall number of transactions closed and an
increase in the average net revenue per transaction. We also expect our
marketing and other revenue will increase for 2013 primarily attributable to
increased transaction commission referrals earned from brokers in our Powered by
Zip network.
Cost of revenues
During the quarter ended March 31, 2011, we completed the transition of our
agent force from an employee model to an independent contractor model. Under the
employee model, our cost of revenues consisted principally of commissions,
payroll taxes, benefits including health insurance, performance and tenure based
award programs and agent expense reimbursements. Under the independent
contractor model, our cost of revenues consists principally of commissions and
related costs. Agent commissions are generally paid on net transaction revenues
plus referral and other revenues generated by our agent.
Year Ended December 31, Increase Percent
2012 2011 (decrease) Change
(In thousands)
Cost of revenues:
Same markets $ 40,291 $ 42,183 $ (1,892 ) (4.5 )%
Closed markets 370 3,574 (3,204 ) (89.6 )%
Total $ 40,661 $ 45,757 $ (5,096 ) (11.1 )%
The decrease in cost of revenues for the year ended December 31, 2012 compared
to the year ended December 31, 2011 was primarily related to the overall
decrease in net revenues on which we pay agent commissions. Same market cost of
revenues for the year ended December 31, 2012 were $40.3 million compared to
$42.2 million for the year ended December 31, 2011. Agent commissions decreased
by approximately $1.9 million or 4.5%. Agent performance and tenure based
programs, benefits and expense reimbursements decreased by approximately $0.2
million or 100.0% attributable to the transition of our agents to independent
contractors who do not qualify for benefits and expense reimbursements and to
the elimination of performance and tenure based programs as a component of agent
compensation. Same market cost of revenues as a percentage of net transaction
revenues was 58.6% in 2012 compared to 57.0% in 2011.
39
We expect our cost of revenues will increase in absolute dollars in 2013,
compared to 2012, because of an expected increase in net revenues. Our cost of
revenues move in relation to the market net revenues on which commissions are
based and also increases or decreases as a result of the mix of commissionrates
paid to our agents.
Product development
Product development expenses include our information technology costs relating
to the maintenance of our website, proprietary technology platforms and system
infrastructure. These costs consist primarily of compensation and benefits,
software, equipment and infrastructure costs consisting primarily of facilities,
communications and other operating expenses. Product development expenses also
include amortization of capitalized internal-use software and website
development costs.
Year Ended December 31, Increase Percent
2012 2011 (decrease) Change
(In thousands)
Product development $ 6,957 $ 8,738 $ (1,781 ) (20.4 )%
The decrease in product development expenses for the year ended December 31,
2012 compared to the year ended December 31, 2011 was due primarily to decreases
in salaries and benefits of $1.1 million attributable to reductions in
headcount, technology infrastructure costs of $0.6 million and depreciation of
computer hardware and software expense of $0.1 million. As a percentage of net
revenues, product development expenses decreased by 0.9% for the year ended
December 31, 2012 compared to the year ended December 31, 2011.
We expect to continue enhancing tools and features on our website and technology
platform for consumers and brokers in our Powered by Zip network and expect that
our product development expenses will increase in 2013 in absolute dollars.
Sales and marketing
Sales and marketing expenses consist primarily of compensation and related costs
for personnel engaged in sales, sales support and customer service as well as
promotional, advertising and client acquisition costs.
Year Ended December 31, Increase Percent
2012 2011 (decrease) Change
(In thousands)
Sales and marketing:
Market level $ 15,759 $ 22,537 $ (6,778 ) (30.1 )%
Regional/corporate support and marketing 4,731 5,542 (811 ) (14.6 )%
Total $ 20,490 $ 28,079 $ (7,589 ) (27.0 )%
Market level sales and marketing expenses decreased for the year ended
December 31, 2012 compared to the year ended December 31, 2011 primarily as a
result of closing markets and eliminating positions in our remaining markets
attributable to our 2011 and 2012 restructuring. The decrease of $6.8 million or
30.1 % was principally attributable to decreases in salaries and benefits of
$2.1 million, customer acquisition costs of $3.8 million, facilities and
operating expenses of $0.7 million, travel of $0.1 million and depreciation of
$0.1 million. Approximately $2.9 million of the overall decrease was
attributable to operations of the closed markets. As a percentage of net
revenues, market level sales and marketing expenses were 21.4% in 2012 compared
to 26.5% in 2011.
Regional/corporate sales support and marketing expenses decreased by
approximately $0.8 million and consisted primarily of decreased salaries and
benefits of $1.0 million, travel of $0.1 million, depreciation of $0.1 million,
consulting of $0.1 million and advertising of $0.1 million offset by increases
in customer acquisition of $0.4 million and operating expenses of $0.1 million.
As a percentage of net revenues, regional/corporate sales support and marketing
expenses were approximately 6.4% in 2012 compared to 6.5% in 2011.
40
We expect our market level and regional/corporate sales and marketing expenses
to increase in absolute dollars and as a percentage of net revenues for 2013
primarily as a result of our Powered by Zip expansion and associated salesand
marketing activities.
General and administrative
General and administrative expenses consist primarily of compensation and
related costs for personnel, facilities and operating expenses related to our
executive, finance, human resources, facilities and legal organizations, and
fees for professional services. Professional services are principally comprised
of outside legal, audit and tax services.
Year Ended December 31, Increase Percent
2012 2011 (decrease) Change
(In thousands)General and administrative $ 7,795 $ 9,147 $ (1,352 ) (14.8 )%
General and administrative expenses for the year ended December 31, 2012
compared to the year ended December 31, 2011 decreased by approximately $1.4
million or 14.8% which was primarily attributable to decreased salaries and
benefits of $0.6 million due to reductions in headcount, operating expenses of
$0.3 million, recruiting of $0.1 million and professional fees of $0.3 million.
As a percentage of net revenues, general and administrative expenses were 10.6%
for the year compared to 10.7% in the year ended December 31, 2011.
We expect our general and administrative expenses for 2013 will decrease in
absolute dollars and as a percentage of net revenues primarily as a result of
the full year impact of our 2012 restructuring and a reduction in anticipated
legal fees.
Litigation settlement charges
Litigation settlement charges consist of settlement and claims expense for
litigation associated with our former employee model for our agents which has
since been transitioned to an independent contractor model and other non-core
litigation settlements.
Year Ended December 31, Increase Percent
2012 2011 (decrease) Change
(In thousands)
Litigation settlement charges,
net (Note 6) $ 5,825 $ 878 $ 4,947 563.2 %
Litigation settlement charges for the year ended December 31, 2012 compared to
the year ended December 31, 2011 increased by approximately $4.9 million or
563.2% and was primarily attributable to the settlement agreement we entered
into with the State of California's Department of Labor Standards Enforcement,
or DLSE, for a release of all its claims that we failed to pay our California
real estate agents, who were at the time in question classified as employees,
minimum wage and overtime mandated by California laws; see Note 6 of the
Financial Statements.
41
Restructuring charges
Year Ended December 31, Increase Percent
2012 2011 (decrease) Change
(In thousands)
Restructuring charges, net $ 1,686 $ 2,339 $ (653 ) (27.9 )%
During the twelve months ended December 31, 2012, we implemented a cost
reduction initiative which included reducing our workforce in our corporate
sales support and administrative functions. The restructuring charge includes
severance pay and related expenses of approximately $1.7 million. Adjustments to
non-cash stock-based compensation expense resulting from expense reversals for
unvested stock awards that were forfeited were not significant. At December 31,
2012, the aggregate outstanding restructuring liability was approximately $0.2
million which primarily relates to employee severance and related expenses and
to non-cancelable lease costs we expect to pay over the remaining term of the
leases, which end by the third quarter of 2016.
Some expenses required estimates, particularly those related to our ability and
the timing of generating sublease income and terminating lease obligations, and
may require future adjustments to the amount of the restructuring charge
recorded. We expect to incur additional charges for these restructuring of less
than $0.1 million in future periods.
Interest income
Interest income relates to interest we earn on our money market deposits and
short-term investments.
Year Ended December 31, Increase Percent
2012 2011 (decrease) Change
(In thousands)
Interest income $ 22 $ 58 $ (36 ) (62.9 )%
Interest income fluctuates as our cash equivalents and short-term investment
balances change and applicable interest rates increase or decrease. The decrease
in interest income for the year ended December 31, 2012, compared to the year
ended December 31, 2011, was due primarily to lower interest rates earned on
lower average balances. The lower interest rates were primarily attributable to
overall decreases in market interest rates combined with maintaining higher
money market account balances yielding lower interest rates as we decreased our
short-term investments positions. The lower average balances were primarily
attributable to cash used in our operating activities as a result of the losses
incurred during the year.
Provisions for income taxes
Year Ended December 31, Increase Percent
2012 2011 (decrease) Change
(In thousands)Provisions for income taxes $ 106 $ - $ 106
100 %
Provision for income taxes for the year ended December 31, 2012 compared to the
year ended December 31, 2011 increased by approximately $0.1 million
attributable to state income tax obligations.
42
Comparison of the years ended December 31, 2011 and December 31, 2010
Other operating data
Year Ended December 31, Increase Percent
2011 2010 (decrease) ChangeNumber of markets-same markets (2) 21 21 -
Number of markets-total markets (2) 21 35 (14 )
Number of transactions closed during
the period-same markets (3) 13,489 16,655 (3,166 ) (19.0 )%
Number of transactions closed during
the period-total markets (3) 14,255 22,013 (7,758 ) (35.2 )%
Average net revenue per
transaction-same markets (4) $ 5,679 $ 5,549 130 2.3 %
Average net revenue per
transaction-total markets (4) $ 5,599 $ 5,162 437 8.5 %
Number of agents at end of the
period-same markets 1,701 2,532 (831 ) (32.8 )%
Number of agents at end of the
period-total markets 1,701 3,403 (1,702 ) (50.0 )%
(1) Other operating data includes our owned-and-operated markets only and
excludes marketing and other revenue along with Powered by Zip revenue.
(2) Same markets operating data excludes markets closed as the result of
restructurings during 2011. The restructurings included closing our
owned-and-operated brokerage offices in fourteen markets and eliminating
additional positions in field sales support, corporate sales support and
administration. Our operations in Fresno/Central Valley, Charlotte, Naples,
Jacksonville, Miami, Palm Beach, Tampa, Hartford, Minneapolis, Virginia
Beach, Atlanta and Tucson were closed during the quarter ended March 31, 2011
and our operations in Philadelphia and Raleigh-Durham were closed during the
quarter ended December 31, 2011.
(3) The term "transaction" refers to each representation of a buyer or seller in
a real estate purchase or sale.
(4) Average net revenue per transaction equals net transaction revenues divided
by number of transactions with respect to each period.
Net revenues
Net transaction revenues consist primarily of commissions earned in our
owned-and-operated residential real estate brokerage. Marketing and other
revenues consist primarily of marketing agreements, lead generation, advertising
and transaction referral commission, including commission referrals earned from
brokers in our Powered by Zip network.
Year Ended December 31, Increase Percent
2011 2010 (decrease) Change
(In thousands)
Net transaction revenues:
Net transaction revenue $ 79,809 $ 113,637 $ (33,828 ) (29.8 )%
Marketing and other revenues 5,340 5,059 281 5.5 %
Total net revenues $ 85,149 $ 118,696 $ (33,547 ) (28.3 )%
43
The decrease in our net transaction revenues of $33.8 million or 29.8% for the
year ended December 31, 2011 compared to the year ended December 31, 2010 was
driven primarily by a decrease in the number of transactions closed during the
period of 7,758 or 35.2%. Transactions closed during the period on a same market
basis were 13,489 compared to 16,655 last year, a decrease of 3,166 or 19.0%. We
believe the decrease in same market transaction volume was attributable to the
impact of changes in our business model involving the conversion of our agents
to independent contractors as well as continued weak economic conditions,
reduced availability of mortgage financing and high unemployment. Same market
average net revenue per transaction for the period was $5,679 compared to $5,549
last year, an increase of $130 or 2.3%. We discontinued our commission rebate
program during late summer 2011 resulting in lower cash rebates paid during the
year which increased average net revenue per transaction in 2011 by
approximately $359. This increase was partially offset by the impact of lower
average homesale prices, which decreased average net revenue per transaction by
approximately $229. Average net revenue per transaction in 2011 continued to be
impacted by a combination of market factors that also impacted 2010, including
overall decreases in housing prices from previous years, the impact of
foreclosure, bank real estate owned ("REO") and short sale transactions,
typically at further reduced sales prices and ongoing reduced availability of
consumer mortgage financing that particularly impacted the sale of higher priced
housing
The increase in marketing and other revenues for the year ended December 31,
2011 compared to the year ended December 31, 2010 was primarily attributable to
increased transaction referrals, principally from brokers in our Powered by Zip
network of $0.3 million and $0.3 million of advertising income, offset by
decreases in lead generation fees of $0.3 million.
Cost of revenues
Our cost of revenues consists principally of commissions, payroll taxes,
benefits including health insurance, performance and tenure based award programs
and agent expense reimbursements. Agent commissions are generally paid on net
transaction revenues plus referral and other revenues generated by our agents.
Year Ended December 31, Increase Percent
2011 2010 (decrease) Change
(In thousands)
Cost of revenues:
Same markets $ 43,947 $ 55,136 $ (11,189 ) (20.3 )%
Closed markets 1,810 12,049 (10,239 ) (85.0 )%
Total $ 45,757 $ 67,185 $ (21,428 ) (31.9 )%
The decrease in cost of revenues for the year ended December 31, 2011 compared
to the year ended December 31, 2010 was primarily related to the overall
decrease in net revenues on which we pay agent commissions. Same market cost of
revenues for the year ended December 31, 2011 were $43.9 million compared to
$55.1 million for the year ended December 31, 2010. Agent commissions decreased
by approximately $4.8 million or 9.8%. Agent performance and tenure based
programs, benefits and expense reimbursements decreased by approximately $6.4
million or 97.6% attributable to the transition of our agents to independent
contractors who do not qualify for benefits and expense reimbursements and to
the elimination of performance and tenure based programs as a component of agent
compensation. Same market cost of revenues as a percentage of net transaction
revenues was 57.4% in 2011 compared to 59.7% in 2010.
Product development
Product development expenses include our information technology costs relating
to the maintenance of our website, proprietary technology platforms and system
infrastructure. These costs consist primarily of compensation and benefits,
software and equipment and infrastructure costs consisting primarily of
facilities, communications and other operating expenses. Product development
expenses also include amortization of capitalized internal-use software and
website development costs.
44
Year Ended December 31, Increase Percent
2011 2010 (decrease) Change
(In thousands)
Product development $ 8,738 $ 10,393 $ (1,655 ) (15.9 )%
The decrease in product development expenses for the year ended December 31,
2011 compared to the year ended December 31, 2010 was due primarily to decreases
in salaries and benefits of $1.0 million attributable to reductions in
headcount, technology infrastructure costs of $0.7 million and depreciation of
computer hardware and software expense of $0.1 million partially offset by an
increase in consulting fees of $0.2 million. As a percentage of net revenues,
product development expenses increased by 1.5 percentage points for the year
ended December 31, 2011 compared to the year ended December 31, 2010.
Sales and marketing
Sales and marketing expenses consist primarily of compensation and related costs
for personnel engaged in sales, sales support and customer service as well as
promotional, advertising and client acquisition costs. These expenses have been
categorized below between those incurred in our market offices and those
expenses which are incurred by the regional and corporate support functionsacross all markets.
Year Ended December 31, Increase Percent
2011 2010 (decrease) Change
(In thousands)
Sales and marketing:
Market level $ 22,538 $ 36,176 $ (13,638 ) (37.7 )%
Regional/corporate support and marketing 5,541 7,369 (1,828 ) (24.8 )%
Total $ 28,079 $ 43,545 $ (15,466 ) (35.5 )%
Market level sales and marketing expenses decreased for the year ended
December 31, 2011 compared to the year ended December 31, 2010 primarily as a
result of closing markets and eliminating positions in our remaining markets
attributable to our 2011 restructuring. The decrease of $13.6 million or 37.7%
was principally attributable to decreases in salaries and benefits of $5.5
million, customer acquisition costs of $6.2 million, facilities and operating
expenses of $1.5 million, travel of $0.2 million and recruiting and training of
$0.2 million. Approximately $7.6 million of the overall decrease was
attributable to operations of the closed markets. As a percentage of net
transaction revenues, market level sales and marketing expenses were 28.2% in
2011 compared to 31.8% in 2010.
Regional/corporate sales support and marketing expenses decreased by
approximately $1.8 million and consisted primarily of decreased salaries and
benefits of $1.1 million, operating expenses of $0.6 million and travel of $0.1
million. As a percentage of net revenues, regional/corporate sales support and
marketing expenses were approximately 6.5% in 2011 compared to 6.2% in 2010.
General and administrative
General and administrative expenses consist primarily of compensation and
related costs for personnel, facilities and operating expenses related to our
executive, finance, human resources, facilities and legal organizations, and
fees for professional services. Professional services are principally comprised
of outside legal, audit and tax services.
45
Year Ended December 31, Increase Percent
2011 2010 (decrease) Change
(In thousands)General and administrative $ 9,147 $ 13,376 $ (4,229 ) (31.6 )%
General and administrative expenses for the year ended December 31, 2011
compared to the year ended December 31, 2010 decreased by approximately $4.2
million or 31.6% and were primarily attributable to decreased salaries and
benefits of $3.1 million attributable to reductions in headcount, travel of $0.1
million, operating expenses of $0.5 million and professional fees of $0.5
million. Salaries and benefits for the year ended December 31, 2010 include
expenses associated with the departure of our former Chief Executive Officer and
President of approximately $0.6 million. As a percentage of net revenues,
general and administrative expenses were 11.8% for the year compared to 11.3% in
the year ended December 31, 2010.
Litigation settlement charges
Litigation settlement charges consist of settlement and claims expense for
litigation associated with our former employee model for our agents which has
since been transitioned to an independent contractor model and other non-core
litigation settlements.
Year Ended December 31, Increase Percent
2011 2010 (decrease) Change
(In thousands)
Litigation settlement charges,
net (Note 6) $ 878 $ - $ 878 100 %
Litigation settlement charges for the year ended December 31, 2011 compared to
the year ended December 31, 2010 increased by approximately $0.9 million and was
primarily attributable to the settlements of claims for litigation associated
with our former employee model for our agents which has since been transitioned
to an independent contractor model.
Restructuring charges
Year Ended December 31, Increase Percent
2011 2010 (decrease) Change
(In thousands)
Restructuring charges, net $ 2,339 $ - $ 2,339 100.0 %
During the year ended December 31, 2011, we implemented a cost reduction
initiative, including closing brokerage operations in fourteen markets and
reducing our workforce in the remaining market brokerage operations as well as
in our corporate sales support and administrative functions. The restructuring
charges include lease obligation costs and other non-cash charges relating to
lease terminations of approximately $0.9 million and severance pay and related
expenses of approximately $1.4 million. Adjustments to non-cash stock-based
compensation expense resulting from expense reversals for unvested stock awards
that were forfeited were not significant. At December 31, 2011, the aggregate
outstanding restructuring liability was approximately $0.4 million, most of
which relates to non-cancelable lease costs we expect to pay over the remaining
term of the leases, which end by the third quarter of 2016.
Some expenses required estimates, particularly those related to our ability and
the timing of generating sublease income and terminating lease obligations, and
may require future adjustments to the amount of the restructuring charge
recorded.
46
Interest income
Interest income relates to interest we earn on our money market deposits and
short-term investments.
Year Ended December 31, Increase Percent
2011 2010 (decrease) Change
(In thousands)
Interest income $ 58 $ 253 $ (195 ) (77.0 )%
Interest income fluctuates as our cash equivalents and short-term investment
balances change and applicable interest rates increase or decrease. The decrease
in interest income for the year ended December 31, 2011, compared to the year
ended December 31, 2010, was due primarily to lower interest rates earned on
lower average balances. The lower interest rates were primarily attributable to
overall decreases in market interest rates combined with maintaining higher
money market account balances yielding lower interest rates as we decreased our
short-term investments positions. The lower average balances were primarily
attributable to cash used in our operating activities as a result of the losses
incurred during the year.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity for 2012 were our cash, cash equivalents and
short-term investments. As of December 31, 2012 and 2011, we had cash, cash
equivalents and short-term investments at fair value of $12.9 million and
$22.1 million, respectively. We had no bank debt, line of credit or equipment
facilities at December 31, 2012 and 2011.
Operating activities
Our operating activities used cash in the amount of $7.3 million, $8.3 million
and $9.4 million in the years ended December 31, 2012, 2011 and 2010,
respectively. Cash used in the year ended December 31, 2012 resulted primarily
from a net loss of $9.7 million partially offset by $1.8 million of depreciation
and amortization, $1.2 million of non-cash stock-based compensation expense and
net changes in working capital. Cash used in the year ended December 31, 2011
resulted primarily from a net loss of $9.7 million partially offset by
$2.0 million of depreciation and amortization, $1.6 million of non-cash
stock-based compensation expense and net changes in working capital. Cash used
in the year ended December 31, 2010 resulted primarily from a net loss of $15.6
million partially offset by $2.2 million of depreciation and amortization,
$3.7 million of non-cash stock-based compensation expense and net changes in
working capital.
Our primary source of operating cash flow is the collection of our net
commission income from escrow companies or similar intermediaries in the real
estate transaction closing process offset by cash payments for agent commissions
and related costs as well as for product development, sales and marketing and
general and administrative costs including employee compensation, benefits,
client acquisition costs and other operating expenses. Due to the structure of
our commission arrangements, our accounts receivable are settled in cash on a
short-term basis and our accounts receivable balances at period end have
historically been significantly less than one month's net revenues.
Investing activities
Our investing activities provided cash of $7.5 million and $7.6 million for the
years ended December 31, 2012 and 2011, respectively, and used cash of $0.9
million in the year ended December 31, 2010. Cash provided for the years ended
December 31, 2012 and 2011 primarily represents the net proceeds from the sale
and purchase of short-term investments offset by the purchase of property and
equipment, including amounts expended for internal-use software and website
development costs. Cash used for the yearended December 31, 2010 primarily
represents the purchase of property and equipment, including amounts expended
for internal-use software and website development costs offset by the net
proceeds from the sale and purchase of short-term investments.
47
Currently, we expect our 2013 capital expenditures to be approximately
$2.0 million primarily attributable to amounts capitalized for internal-use
software and website development costs as well as expenditures for increased
server capacity and software. In the future, our ability to make significant
capital investments may depend on our ability to generate cash flow from
operations and to obtain adequate financing, if necessary and available.
Financing activities
Our financing activities provided cash of $0.1 million in the year ended
December 31, 2012, primarily from stock option exercises, and provided cash of
an insignificant amount in the year ended December 31, 2011. The use of cash of
$0.1 million for the year ended December 31, 2010 primarily represents the
repurchase of shares of our common stock in connection with the payment of
withholding and payroll taxes due upon vesting of employee restricted stockawards.
Future needs
We believe that our current cash, cash equivalents and short-term investments
will be sufficient to fund cash used in our operations, restructurings and
capital expenditures for at least the next twelve months. Our future capital
requirements will depend on many factors, including our level of investment in
technology and online marketing initiatives, our rate of growth in our local
markets and in expanding our Powered by Zip broker referral network and possible
litigation settlements and legal fees. Although there are signs that an economic
recovery may be underway, if the recent depressed macroeconomic environment and
residential real estate market continues without recovering or worsens, we may
have a greater need to fund our business by using our cash, cash equivalent and
short-term investment balances, which could not continue indefinitely without
raising additional capital.
We currently have no bank debt or line of credit facilities. In the event that
additional financing is required, we may not be able to raise it on terms
acceptable to us or at all. If we are unable to raise additional capital when
desired, our business and results of operations will likely suffer.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
We lease office space under non-cancelable operating leases with various
expiration dates through July 2017. The following table provides summary
information concerning our future contractual obligations and commitments at
December 31, 2012.
Payments Due by Period
Less Than 1 to 3 3 to 5 More Than
1 Year Years Years 5 Years Total
(In thousands)
Operating lease commitments $ 1,747 $ 2,531 $ 1,307 $ - $ 5,585
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance-sheet arrangements, other than the
indemnification agreements discussed in Note 6 "Commitments and Contingencies"
of the Notes to Consolidated Financial Statements, investments in special
purpose entities or undisclosed borrowings or debt. Additionally, we are not a
party to any derivative contracts or synthetic leases.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
See "Recent Accounting Pronouncements" in Note 1 "The Company and Summary of
Significant Accounting Policies" of the Notes to Consolidated Financial
Statements for a full description of recent accounting pronouncements including
the respective expected dates of adoption.
48
NON-GAAP MEASURE
The table below shows the trend of Adjusted EBITDA as a percentage of revenue
for the periods indicated:
Year Ended December 31,
2012 2011 2010
(In thousands)
Net revenue $ 73,820 $ 85,149 $ 118,696
Adjusted EBITDA $ 823 $ (2,988 ) $ (9,903 )
Adjusted EBITDA margin 1.1 % (3.5 )% (8.3 )%
We present Adjusted EBITDA, a non-GAAP financial measure, as a supplemental
measure of our performance. We believe Adjusted EDITDA provides useful
information regarding the operating results of our core business activity and
prospects for the future. We define Adjusted EBITDA as net income (loss) less
interest income plus interest expense, provision for (benefit from) income
taxes, depreciation and amortization expense, stock-based compensation and
further adjusted to eliminate the impact of certain items that we do not
consider reflective of our ongoing core operating performance including
litigation settlement charges associated with our former model for our agents,
which has since been transitioned from an employee to an independent contractor
model.
We present Adjusted EBITDA because we believe it assists investors and analysts
in comparing our operating performance across reporting periods on a consistent
basis by excluding items that we do not believe are reflective of our core
operating performance. In addition, we use Adjusted EBITDA to evaluate our
financial results and business strategies, develop budgets, manage expenditures
and as a factor in evaluating management's performance when determining
incentive compensation.
Our use of Adjusted EBITDA has limitations as an analytical tool. Some of these
limitations are:
· Adjusted EBITDA does not reflect our cash expenditures, or future requirements,
for capital expenditures or contractual commitments;
· Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
· Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future;
· Adjusted EBITDA does not reflect any cash requirements for such replacements;
non-cash stock-based compensation is and will remain a key element of our
overall long-term incentive compensation package, although we exclude it as an
expense when evaluating our ongoing operating performance for a particular
period;
· Adjusted EBITDA does not reflect the impact of certain cash charges or credits
resulting from matters we consider not to be reflective of our core ongoing
operations; and
· Other companies, including companies in our industry, may calculate Adjusted
EBITDA differently than we do, which limits its usefulness as a comparative
measure.
Because of these limitations, Adjusted EBITDA should not be considered in
isolation or as a substitute for performance measures calculated in accordance
with GAAP. When evaluating our performance, Adjusted EBITDA should be considered
alongside other financial measures, including net income and our other GAAPresults.
49
The following is a reconciliation of Adjusted EBITDA to the most comparable GAAP
measure, net loss, for the years ended December 31, 2012, 2011 and 2010:
Year Ended December 31,
2012 2011 2010
(In thousands)
Reconciliation of non-GAAP Adjusted EBITDA to
net income (loss)
Net loss $ (9,678 ) $ (9,731 ) $ (15,550 )
Add back:
Interest income (22 ) (58 ) (253 )
Provision for income taxes 106 - -
Depreciation and amortization 1,807 1,974 2,228Stock-based compensation expense 1,179 1,610 3,672
Restructuring charges, net (1) 1,606 2,339 -
Litigation settlement charges(
non-core-operating) (2) 5,825 878 -
Non-GAAP Adjusted EBITDA $ 823 $ (2,988 ) $ (9,903 )
(1) Restructuring charges, net for Adjusted EBTIDA reconciliation purposes
excludes $80,000 of non-cash stock based compensation expense associated with
a modification of certain awards previously granted to employees affected by
the restructuring which are reflected in the stock-based compensation expense
line.
(2) Litigation settlement charges (non-core operations) represents amounts we
consider not reflective of our core ongoing operations and includes
settlement and claim expense for litigation associated with our former model
for our agents which has since been transitioned from an employee to an
independent contractor model.
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