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Trulia, Inc. · IPO:  424B4 · On 9/20/12

Filed On 9/20/12, 6:14am ET   ·   Accession Number 1193125-12-397566   ·   SEC File 333-183364

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 9/20/12  Trulia, Inc.                      424B4                  1:3.3M                                   RR Donnelley/FA

Initial Public Offering (IPO):  Prospectus   —   Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Filed Pursuant to Rule 424(B)(4)                    HTML   1.99M 


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Prospectus Summary
"Risk Factors
"Special Note Regarding Forward-Looking Statements
"Use of Proceeds
"Dividend Policy
"Capitalization
"Dilution
"Selected Financial and Other Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Business
"Management
"Executive Compensation
"Certain Relationships and Related Party Transactions
"Principal and Selling Stockholders
"Description of Capital Stock
"Shares Eligible for Future Sale
"Material U.S. Federal Income Tax Consequences to Non-U.S. Holders
"Underwriting
"Legal Matters
"Experts
"Additional Information
"Index to Financial Statements
"Report of Independent Registered Public Accounting Firm
"Balance Sheets
"Statements of Operations
"Statements of Stockholders' Equity (Deficit)
"Statements of Cash Flows
"Notes to Financial Statements

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  Filed Pursuant to Rule 424(b)(4)  
Table of Contents

 

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-183364

6,000,000 Shares

 

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of Trulia, Inc.

Trulia is offering 5,000,000 shares to be sold in this offering. The selling stockholders identified in this prospectus are offering an additional 1,000,000 shares. Trulia will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. The initial public offering price per share is $17.00. Trulia’s common stock has been approved for listing on the New York Stock Exchange under the symbol “TRLA.”

Trulia is an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings. See “Risk Factors” on page 13 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $ 17.00       $ 102,000,000   

Underwriting discount

   $ 1.19       $ 7,140,000   

Proceeds, before expenses, to Trulia

   $ 15.81       $ 79,050,000   

Proceeds, before expenses, to the selling stockholders

   $ 15.81       $ 15,810,000   

To the extent that the underwriters sell more than 6,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 900,000 shares from Trulia at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares on or about September 25, 2012.

 

J.P. Morgan   Deutsche Bank Securities

 

RBC Capital Markets    Needham & Company      William Blair   

 

 

Prospectus dated September 19, 2012


Table of Contents

 

LOGO


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     34   

Use of Proceeds

     36   

Dividend Policy

     37   

Capitalization

     38   

Dilution

     40   

Selected Financial and Other Data

     42   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     45   

Business

     80   

Management

     97   

Executive Compensation

     104   

Certain Relationships and Related Party Transactions

     124   

Principal and Selling Stockholders

     127   

Description of Capital Stock

     130   

Shares Eligible for Future Sale

     135   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     138   

Underwriting

     142   

Legal Matters

     148   

Experts

     148   

Additional Information

     148   

Index to Financial Statements

     F-1   

Through and including October 14, 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than as contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and provide no assurance as to the reliability of, any information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

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Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms “Trulia,” the company,” “we,” “us,” and “our” in this prospectus refer to Trulia, Inc.

Overview

Trulia is redefining the home search experience for consumers and changing the way that real estate professionals build their businesses. Our marketplace, delivered through the web and mobile applications, gives consumers powerful tools to research homes and neighborhoods and enables real estate professionals to efficiently market their listings and attract new clients. We believe we deliver the best home search experience by combining our superior user interface with our comprehensive database of real estate properties, local insights, and user-generated content. We offer free and subscription products that provide real estate professionals with access to transaction-ready consumers and help them enhance their online presence. In the six months ended June 30, 2012, we had 22.0 million monthly unique visitors. As of June 30, 2012, we had more than 360,000 active real estate professionals in our marketplace, 21,544 of whom were paying subscribers.

We empower consumers to make more informed housing decisions by delivering the “inside scoop” on homes, neighborhoods, and real estate professionals through an intuitive and engaging user experience. Our large, continually refreshed, and searchable database contains more than 110 million properties, including 4.5 million homes for sale and rent. We supplement listings data with local information on schools, crime, and neighborhood amenities to provide unique insights into each community. In addition, we harness rich, insightful user-generated content from our active community of contributors, which includes consumers, local enthusiasts, and real estate professionals. With more than 5 million unique user contributions, we believe we have the largest collection of user-generated content on homes, neighborhoods, and real estate professionals.

We enable real estate professionals to better promote themselves and their listings and connect with transaction-ready consumers through our online and mobile marketing products. Our free products allow real estate professionals to build their personal brand by creating an online profile, contributing content to our marketplace, leveraging social media for endorsements, and establishing their presence through mobile features such as “check-ins.” Our subscription products enable real estate professionals to increase their visibility, promote their listings in search results, target mobile users, and generate more highly qualified leads from our large audience of transaction-ready consumers. We believe that our audience is highly motivated and ready to purchase homes, as supported by our surveys conducted between November 2011 and May 2012 in which 76% of over 290,000 respondents contacting real estate professionals through our marketplace indicated that they are planning to move in the next six months, and in which almost half of over 210,000 respondents stated that they are pre-qualified for a mortgage. We believe that the combination of our compelling solution with our transaction-ready audience results in a high return on investment for real estate professionals who purchase our subscription products.

We benefit from powerful network effects and a vibrant user community. Consumers contribute content by posting questions, reviewing neighborhoods, and writing agent recommendations. Real estate professionals, seeking to connect with our consumers, engage in our community by sharing local knowledge, answering consumers’ questions, and contributing content to our marketplace. The breadth and quality of user-generated content contributed to our marketplace has helped to build our brand, deepen the engagement of our existing users, and attract more users.

 

 

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We are a leading mobile platform for the home search process and mobile devices are increasingly critical to consumers and real estate professionals. We have introduced iPhone, iPad, Android, and Kindle applications that provide tailored mobile experiences, which has led to rapid growth in mobile use of our solution. In the six months ended June 30, 2012, we had over 4.3 million mobile monthly unique visitors, an increase of 176% over the same period in 2011. In addition, our mobile users are more likely than our web users to contact real estate professionals through our marketplace.

Our online marketplace is experiencing rapid growth. Monthly unique visitors to our marketplace increased from 5.0 million in the six months ended June 30, 2009 to 22.0 million in the six months ended June 30, 2012, and our subscribers increased from 2,398 as of June 30, 2009 to 21,544 as of June 30, 2012. We generate revenue primarily from sales of subscription products to real estate professionals. We also generate revenue from display advertising sold to leading real estate and consumer brand advertisers seeking to reach our attractive audience. In the years ended December 31, 2009, 2010, and 2011, and the six months ended June 30, 2012, we generated revenue of $10.3 million, $19.8 million, $38.5 million, and $29.0 million, respectively. During the same period, we had net losses of $7.0 million, $3.8 million, $6.2 million, and $7.6 million, respectively.

Industry and Challenges

The residential real estate industry, which we estimate accounts for more than a trillion dollars in annual spending in the United States, is undergoing a profound transformation. Technology is changing the way that consumers search for homes and the way in which real estate professionals attract clients and build their businesses. In addition, the recent unprecedented downturn in the housing market is causing real estate professionals to seek more effective ways to market themselves and achieve a greater return on their marketing investment. These trends present significant opportunities to capitalize on shifts in behavior.

Historically, consumers lacked readily available access to detailed and comprehensive information essential to making housing decisions, relying instead on disparate sources of information such as real estate professionals, local newspapers, and word of mouth. Over time, more information has become available online and, as a result, the Internet has become a primary source of research for housing decisions. According to a November 2011 survey by the National Association of Realtors, a trade organization for real estate professionals, 88% of home buyers used the Internet to research homes. Additionally, the use of mobile devices for home searches has become more prevalent. According to a 2012 survey by The Real Estate Book, a real estate website, 52% of respondents reported using a mobile device to look for homes, with 85% of non-users stating that they would consider using a mobile device for their next search.

As consumers increasingly research homes online, real estate professionals are shifting their marketing expenditures online to reach prospective clients. While initially these real estate professionals focused their spending on email, search, and creating websites with listings, now these professionals are increasingly using online real estate marketplaces to generate leads.

With technology driving the home search process online, consumers, real estate professionals, and advertisers face distinct challenges. Consumers are challenged to effectively compile and use fragmented information, gain local insights, and obtain information on the go. Real estate professionals are challenged to reach today’s online consumers, target the right leads, manage their businesses while on the go, and optimize their marketing spend. Advertisers are challenged to efficiently reach the right consumers while maximizing the effectiveness of their advertising.

 

 

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Market Opportunity

We believe that there are significant opportunities to address the challenges faced by consumers, real estate professionals, and advertisers. Borrell Associates, Inc., an advertising research and consulting firm, estimated in an August 2012 industry paper that $23.7 billion would be spent in 2012 on real estate-related marketing in the United States. According to a November 2011 survey by the National Association of Realtors, 88% of home buyers used the Internet to research homes. However, according to the Borrell Associates report, only 55% of the real estate marketing dollars in the United States were projected to be spent online in 2012. We believe that there is a disconnect between where marketing dollars are spent and where consumers research homes. Therefore, we expect that real estate-related marketing spend will continue to migrate online from traditional channels.

The Trulia Marketplace

Our marketplace provides the following key benefits for consumers, real estate professionals, and advertisers:

Key benefits for consumers

 

   

Large, continually refreshed, searchable database of homes for sale and rent. We provide consumers with access to a large, continually refreshed, and searchable database of properties. We enable consumers to customize their searches with property-specific filters to obtain up-to-date listings that are rich with property facts, price, and sale data.

 

   

Trusted insights, social recommendations, and proprietary analytics that provide local context. We provide consumers with local insights, critical to a successful home search, not available elsewhere on an easy to use and comprehensive basis. These insights include information about schools, crime, neighborhood amenities, and real estate professionals.

 

   

Anytime and anywhere access. Our marketplace is accessible anytime and anywhere on the web and on major mobile platforms. Since the introduction of our first mobile application in 2008, mobile use of our marketplace has grown rapidly.

Key benefits for real estate professionals

 

   

Broad reach to transaction-ready consumers. We provide real estate professionals the ability to connect with our large audience of transaction-ready consumers at scale on the web and through our mobile applications. We believe that a large portion of consumers using Trulia do not use other real estate websites, and that this enables real estate professionals on Trulia to effectively identify and market themselves to consumers that they cannot find anywhere else.

 

   

Products that boost presence and deliver high-quality leads. Our free products enable real estate professionals to create and manage an online profile, promote their personal brand with consumers by contributing content to our marketplace, and leverage social media for endorsements. Our subscription products enable real estate professionals to boost their visibility, promote their listings in search results, and generate more high-quality leads from potential home buyers.

 

   

Anytime and anywhere access to critical information and tools. We offer mobile applications designed specifically for real estate professionals to take their business on the go. Using our mobile applications, real estate professionals can access critical information that they need to conduct their business, including listings details, contacts, driving directions, and local information about neighborhoods.

 

   

Significant return on investment. We believe that our subscription products deliver a high return on investment to real estate professionals.

 

 

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Key benefits for advertisers

 

   

Attractive audience. We believe our audience is highly attractive to consumer brand advertisers. A substantial portion of our audience is either college educated, has a household income above $75,000, or is in the 25 to 54 age group. U.S. consumers with these characteristics tend to spend more of their annual income on home maintenance, insurance, household furnishings, apparel and services, and entertainment than the average consumer, according to the Bureau of Labor Statistics 2010 Consumer Expenditure Survey, which makes our audience attractive for consumer brand advertisers.

 

   

Display advertising products that efficiently reach target consumers. We enable our advertisers to reach segments of our audience that are attractive to them. Advertisers benefit from improved reach, impact, relevancy, and measurement of their marketing campaigns in our marketplace.

Our Strengths

We believe that our competitive advantage reflects the following strengths:

 

   

We deliver the “inside scoop.” We are one of the leading online real estate marketplaces and provide consumers with powerful tools and unique content that together deliver valuable insights into homes, neighborhoods, and real estate professionals. For example, our crime heat maps provide consumers with a view into neighborhood safety and our Facebook integration gives consumers recommendations on real estate professionals from people in their social network. Through our Trulia Voices forum, we also provide consumers with local content from our community of contributors, including consumers, local enthusiasts, and real estate professionals.

 

   

Superior products and user experience. We believe we have the best products in the industry for consumers and real estate professionals. We invest significant resources into technology development and product design to create a superior user interface that provides compelling features and rich functionality for our users.

 

   

Large, differentiated, transaction-ready audience. Our website and mobile applications have attracted 22.0 million monthly unique visitors in the six months ended June 30, 2012 and, based on data from comScore, Inc., a marketing research company, a significant portion of our visitors do not visit our primary competitors’ websites. For instance, according to comScore, during each month in 2011 and in each of the six months ended June 30, 2012, more than 50% of our audience did not visit Zillow.com. We believe that our audience is highly motivated and ready to purchase homes, as supported by our surveys conducted between November 2011 and May 2012 in which 76% of over 290,000 respondents contacting real estate professionals through our marketplace are planning to move in the next six months, and in which almost half of over 210,000 respondents stated that they are pre-qualified for a mortgage.

 

   

Strong mobile monetization. We believe that we are one of the few companies that is monetizing its mobile products at a higher rate than web products. Since we launched our subscription product for mobile devices in May 2012, we have sold this product at prices that yield a higher average monthly revenue per subscriber than our subscription products that are not focused on mobile devices. In addition, our users are more likely to contact real estate professionals through our mobile applications than our website.

 

   

Better ROI for real estate professionals. We believe our subscription products provide compelling value and a better return on investment than other marketing channels. On average, paying subscribers receive more than five times the number of monthly leads compared to real estate professionals who only use our free products.

 

 

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Powerful network effects driven by unique content. We benefit from a self-reinforcing network effect that helps build our brand, drives user engagement in our marketplace, and attracts more users to our website and mobile applications. Consumers post questions in our marketplace, attracting real estate professionals who add more content by answering these questions, which in turn attracts more consumers to our marketplace.

 

   

Big data and analytics platform. We employ proprietary advanced analytics and heuristics capabilities to aggregate, filter, and analyze large amounts of data from disparate sources that we have cultivated over the years. Our expertise in handling large amounts of externally-sourced data and combining it with user activity data collected from our marketplace allows us to improve the user experience by developing innovative new tools and new functionality.

Our Strategy

Our goal is to build the leading online real estate marketplace. We intend to focus on the following key strategies in pursuit of our goal:

 

   

Expand our audience and increase user engagement. We intend to grow our large, transaction-ready audience by continuing to offer superior products for consumers. We plan to continuously enhance and refresh our database of homes, partner with third parties to add new and relevant local content, and encourage our users to contribute useful content. We also plan to develop new features and tools that deepen our users’ engagement with our website and mobile applications, and to promote and foster interaction in our vibrant user community.

 

   

Grow the number of real estate professionals in our marketplace. We intend to further penetrate the large base of more than 2.8 million real estate professionals in the United States by communicating the value proposition of our free and subscription products, growing our audience of transaction-ready consumers, and creating additional products.

 

   

Increase revenue. We plan to increase our revenue by selling more subscription and advertising products and by optimizing our pricing.

 

   

Increase brand awareness. We have built a leading real estate and consumer brand with limited marketing spend to date. We plan to continue to grow our brand by providing our users with superior and innovative products.

 

   

Pursue adjacent opportunities. We plan to pursue opportunities in a number of large adjacent markets, such as rentals, mortgages, home improvement, and agent tools, and to expand our business internationally.

Risks Associated with Our Business

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, before making a decision to invest in our common stock. Some of these risks are:

 

   

We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects.

 

   

We have a history of losses and we may not achieve or maintain profitability in the future.

 

   

Real estate professionals may not continue to subscribe to our products, we may be unable to attract new subscribers, and we may not be able to optimize the pricing of our products.

 

   

Advertisers may reduce or end their advertising spending with us or we may be unable to attract new advertisers.

 

 

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We may not be able to obtain comprehensive and accurate real estate listing information.

 

   

We may not be able to continue to innovate and provide useful products.

 

   

We participate in a highly competitive market.

Corporate Information

Trulia, Inc. was incorporated in Delaware in June 2005. Our principal executive offices are located at 116 New Montgomery Street, Suite 300, San Francisco, California 94105, and our telephone number is (415) 648-4358. Our website address is www.trulia.com. In addition, we maintain a Facebook page at www.facebook.com/trulia and a twitter feed at www.twitter.com/trulia. Information contained on, or that can be accessed through, our website, Facebook page or twitter feed does not constitute part of this prospectus and inclusions of our website address, Facebook page address and twitter feed address in this prospectus are inactive textual references only.

“Trulia” is our registered trademark in the United States and in certain other jurisdictions. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

 

 

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THE OFFERING

 

Common stock offered by us

5,000,000 shares

 

Common stock offered by the selling stockholders

1,000,000 shares

 

Common stock to be outstanding after this offering

26,376,654 shares

 

Option to purchase additional shares from us

We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional 900,000 shares from us.

 

Use of proceeds

The proceeds to us from the sale of shares of our common stock that we are selling in this offering will be approximately $75.1 million (or approximately $89.3 million if the underwriters’ option to purchase additional shares in this offering is exercised in full), based upon the initial public offering price of $17.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders.

 

  We currently intend to use the net proceeds of this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products, services, technologies, or other assets. See the section titled “Use of Proceeds” for additional information.

 

Concentration of Ownership

Upon completion of this offering, our executive officers, directors and holders of 5% or more of our outstanding common stock will beneficially own, in the aggregate, approximately 61.1% of our outstanding shares of common stock.

 

NYSE trading symbol

“TRLA”

The number of shares of common stock that will be outstanding after this offering is based on 21,287,554 shares outstanding as of June 30, 2012, and after giving effect to the issuance of 89,100 shares of our common stock to be acquired by certain selling stockholders through option exercises at the closing of this offering in order to sell those shares in this offering, and excludes:

 

   

3,340,370 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of June 30, 2012 (which does not include 89,100 shares to be sold in this offering by certain selling stockholders upon the exercise of options), with a weighted average exercise price of $4.39 per share;

 

   

547,396 shares of common stock issuable upon the exercise of options to purchase common stock granted after June 30, 2012, with a weighted average exercise price of $16.65 per share;

 

   

44,646 shares of common stock issuable upon the exercise of a warrant to purchase common stock that was outstanding as of June 30, 2012, with an exercise price of $4.29 per share, which warrant is expected to be exercised prior to the closing of this offering;

 

 

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Up to 120,961 shares of common stock, on an as-converted basis, issuable upon the exercise of a warrant to purchase convertible preferred stock that was outstanding as of June 30, 2012, with an exercise price of $8.47 per share, of which 56,054 were exercisable as of June 30, 2012; and

 

   

2,225,138 shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan, which contains provisions that automatically increase its share reserve each year.

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 14,161,444 shares of common stock, the conversion of which will occur immediately prior to the completion of this offering;

 

   

a 1-for-3 reverse split of our common stock, which became effective on September 6, 2012;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering; and

 

   

no exercise by the underwriters of their option to purchase up to an additional 900,000 shares of common stock from us in this offering.

 

 

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SUMMARY FINANCIAL AND OTHER DATA

The following tables summarize our historical financial and other data. We have derived the summary statement of operations data for the years ended December 31, 2009, 2010, and 2011 from our audited financial statements included elsewhere in this prospectus. We have derived the summary statement of operations data in the six months ended June 30, 2011 and 2012 and our balance sheet data as of June 30, 2012 from our unaudited interim financial statements included elsewhere in this prospectus. The unaudited interim financial statements reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the six months ended June 30, 2012 are not necessarily indicative of results to be expected for the full year or any other period. The following summary financial and other data should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,     Six Months Ended June 30,  
     2009     2010     2011     2011     2012  
     (In thousands, except share and per share data)  

Statement of Operations Data:

          

Revenue

   $ 10,338      $ 19,785      $ 38,518      $ 16,248      $ 28,987   

Cost and operating expenses: (1)

          

Cost of revenue (exclusive of amortization) (2)

     2,855        3,657        5,795        2,359        4,693   

Technology and development

     7,056        8,803        14,650        6,651        9,905   

Sales and marketing

     5,532        8,638        17,717        7,278        15,197   

General and administrative

     1,912        2,501        6,123        2,531        6,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

     17,355        23,599        44,285        18,819        35,820   

Loss from operations

     (7,017     (3,814     (5,767     (2,571     (6,833

Interest income

     55        15        17        6        7   

Interest expense

     (21     (39     (389     (41     (491

Change in fair value of warrant liability

                   (16            (323
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (6,983     (3,838     (6,155     (2,606     (7,640

Provision for income taxes

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (6,983   $ (3,838   $ (6,155   $ (2,606   $ (7,640
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted (3)

   $ (1.21   $ (0.64   $ (0.92   $ (0.40   $ (1.10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted (3)

     5,752,478        6,016,550        6,657,045        6,566,142        6,949,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (3)

       $ (0.29     $ (0.35
      

 

 

     

 

 

 

Weighted average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (3)

         20,818,489          21,111,201   
      

 

 

     

 

 

 

Other Financial Information:

          

Adjusted EBITDA (4)

   $ (5,857   $ (2,497   $ (1,787   $ (714   $ (4,231
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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(1) 

Stock-based compensation was allocated as follows:

 

     Year Ended December 31,      Six Months Ended June 30,  
         2009              2010              2011                  2011                      2012          
     (In thousands)  

Cost of revenue

   $ 10       $ 8       $ 11       $ 3       $ 14   

Technology and development

     177         176         482         159         376   

Sales and marketing

     105         97         183         92         179   

General and administrative

     13         73         808         583         447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $         305       $         354       $     1,484       $                 837       $               1,016   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(2)      Amortization of product development costs was included in technology and development as follows:

   $ 179       $ 366       $ 708       $ 264       $ 481   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3) 

See Note 11 to our audited financial statements for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders and the weighted average number of shares used in the computation of the per share amounts.

(4) 

See “—Non-GAAP Financial Measures” for more information and a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with generally accepted accounting principles in the United States.

 

     As of June 30, 2012  
     Actual     Pro Forma  (1)     Pro Forma as
Adjusted (2)(3)
 
     (In thousands)  

Balance Sheet Data:

      

Cash and cash equivalents and short-term investments

   $ 10,356      $         10,356      $ 85,666   

Working capital (deficit)

     (4,901     (4,281     71,029   

Property and equipment, net

     5,885        5,885        5,885   

Total assets

     27,610        27,610        102,920   

Deferred revenue

     11,049        11,049        11,049   

Total indebtedness

     9,684        9,684        9,684   

Preferred stock warrant liability

     620                 

Total stockholders’ equity (deficit)

     (3,240     (2,620     72,690   

 

(1) 

The pro forma column in the balance sheet data table above reflects the automatic conversion of all outstanding shares of our convertible preferred stock as of June 30, 2012 into an aggregate of 14,161,444 shares of common stock, which conversion will occur immediately prior to the completion of this offering, as if such conversion had occurred on June 30, 2012, and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital.

(2) 

The pro forma as adjusted column in the balance sheet data table above gives effect to the pro forma adjustments set forth above and the sale and issuance by us of 5,000,000 shares of common stock in this offering at the initial public offering price of $17.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

(3) 

Includes option exercises at the closing of this offering by certain selling stockholders, who will exercise options to purchase 89,100 shares of our common stock, with a weighted average exercise price of $2.92 per share, in order to sell those shares in this offering.

 

 

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Key Business Metrics

To analyze our business performance, determine financial forecasts, and help develop long-term strategic plans, we review the following key business metrics:

 

     Year Ended December 31,      Six Months
Ended June 30,
 
     2009      2010      2011          2011              2012      

Monthly unique visitors (in thousands)

     5,206         7,935         14,776         13,407         22,030   

Mobile monthly unique visitors (in thousands)

     30         484         2,088         1,592         4,389   

New contributions to user-generated content (in thousands)

     507         1,386         1,991         1,049         1,397   

Total subscribers (at period end)

     4,667         10,070         16,849         14,766         21,544   

Average monthly revenue per subscriber ($)

     47         80         110         91         140   

We count a unique visitor the first time a computer or mobile device with a unique IP address accesses our website or our mobile applications during a calendar month. If an individual accesses our website or mobile applications using different IP addresses within a given month, the first access by each such IP address is counted as a separate unique visitor. We calculate our monthly unique visitors based on the monthly average over the applicable period. Our number of monthly unique visitors includes mobile monthly unique visitors.

For an explanation of our key business metrics, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Key Business Metrics.”

Non-GAAP Financial Measures

Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles in the United States, or GAAP. We define Adjusted EBITDA as net loss adjusted to exclude interest income, interest expense, depreciation and amortization, change in fair value of warrant liability, and stock-based compensation. Below, we have provided a reconciliation of Adjusted EBITDA to our net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we calculate the measure.

We include Adjusted EBITDA in this prospectus because it is an important measure upon which our management assesses our operating performance. We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets, changes related to the fair value remeasurements of our preferred stock warrant, and the impact of stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel, and in evaluating acquisition opportunities. In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;

 

 

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Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; and

 

   

Other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.

In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to our net loss, the most comparable GAAP measure, for each of the periods indicated:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2009     2010     2011     2011     2012  
     (In thousands)  

Net loss attributable to common stockholders

   $ (6,983   $ (3,838   $ (6,155   $ (2,606   $ (7,640

Non-GAAP adjustments:

          

Interest income

     (55     (15     (17     (6     (7

Interest expense

     21        39        389        41        491   

Depreciation and amortization

     855        963        2,496        1,020        1,586   

Change in fair value of warrant liability

                   16               323   

Stock-based compensation

     305        354        1,484        837        1,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (5,857   $ (2,497   $ (1,787   $ (714   $ (4,231
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results, and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.

We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We have a limited operating history in an evolving industry that may not develop as expected. Assessing our business and future prospects is challenging in light of the risks and difficulties we may encounter. These risks and difficulties include our ability to:

 

   

increase the number of consumers using our website and mobile applications;

 

   

continue to obtain home listing information, as well as information on schools, crime, and neighborhood amenities;

 

   

increase the number of real estate professionals subscribing to our products;

 

   

increase the revenue from real estate professionals subscribing to our products;

 

   

increase the revenue from advertisers on our website;

 

   

successfully develop and deploy new features and products;

 

   

encourage and foster the growth of user-generated content;

 

   

successfully compete with other companies that are currently in, or may in the future enter, the business of providing residential real estate information online and on mobile applications, as well as with companies that provide this information offline;

 

   

successfully compete with existing and future providers of other forms of offline, online, and mobile advertising;

 

   

successfully navigate fluctuations in the real estate market;

 

   

effectively manage the growth of our business;

 

   

successfully expand our business into adjacent markets, such as rentals, mortgages, and home improvement; and

 

   

successfully expand internationally.

If the demand for residential real estate information online does not develop as we expect, or if we fail to address the needs of consumers, real estate professionals, or advertisers, our business will be harmed. We may not be able to successfully address these risks and difficulties, which could harm our business and cause our operating results to suffer.

We have a history of losses and we may not achieve or maintain profitability in the future.

We have not been profitable on a quarterly or annual basis since we were founded, and as of June 30, 2012, we had an accumulated deficit of $43.8 million. We expect to make significant future investments in the development and expansion of our business which may not result in increased revenue or growth. In addition, as a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain increased revenue to achieve and maintain future profitability. While our revenue has grown in recent periods, this growth

 

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may not be sustainable and we may not achieve sufficient revenue to achieve or maintain profitability. We may incur significant losses in the future for a number of reasons, including slowing demand for our products, increasing competition, weakness in the residential real estate market, as well as other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications and delays, and other unknown factors. Accordingly, we may not be able to achieve or maintain profitability and we may continue to incur significant losses in the future, and this could cause the price of our common stock to decline.

If real estate professionals do not continue to subscribe to our products, or we are unable to attract new subscribers, our business and operating results would be harmed.

We rely on subscriptions purchased by real estate professionals to generate a substantial portion of our revenue. Subscriptions accounted for 32%, 47%, 58%, and 68% of our revenue in 2009, 2010, 2011, and the six months ended June 30, 2012, respectively. We generally offer subscriptions for periods between one month to 12 months, with most real estate professionals preferring to subscribe for periods shorter than 12 months.

Our ability to attract and retain real estate professionals as subscribers, and to generate subscription revenue, depends on a number of factors, including:

 

   

our ability to attract transaction-ready consumers to our website and mobile applications;

 

   

the number of consumers using our website and mobile applications;

 

   

the quality of the leads that we provide to our subscribers;

 

   

the number of leads that we provide to our subscribers;

 

   

the strength of the real estate market;

 

   

the competition for real estate professionals’ marketing dollars; and

 

   

the strength of our brand.

A key focus of our sales and marketing activities has been to further penetrate the large base of more than 2.8 million real estate professionals in the United States. As of June 30, 2012, we had more than 360,000 active real estate professionals in our marketplace, and 21,544 total subscribers. We spend a considerable portion of our operating expenses on sales and marketing activities. Our sales and marketing expenses were our largest operating expenses in 2011 and the six months ended June 30, 2012. Sales and marketing expenses reflect many of the costs that we incur in acquiring new subscribers and retaining existing subscribers, and we expect that sales and marketing expenses will continue to increase in absolute dollars as we seek to grow the number of subscribers in our marketplace. If we are unable to increase the number of total subscribers in our marketplace, our revenue may not grow and our operating results could suffer.

Real estate professionals may not continue to subscribe with us if we do not deliver a strong return on their investment in subscriptions, and we may not be able to replace them with new subscribers. In addition, real estate professionals sometimes do not renew their subscriptions with us because of dissatisfaction with our service. If subscribers do not renew their subscriptions with us with the same or higher subscription fees, or at all, or we are unable to attract new subscribers, our business and operating results would be harmed.

Further, although a majority of our revenue in 2011 and the six months ended June 30, 2012 was generated from subscriptions purchased by real estate professionals, we cannot be certain that subscribers will renew their subscriptions with us and that we will be able to achieve the same or higher amounts of subscription revenue in the future. Historically, we have not focused on renewal rate as an important metric for our business. Moreover, we believe renewal rate may be a misleading metric for our business as a result of seasonality, the fact that many real estate professionals only purchase subscriptions for a limited period of time as part of their advertising campaigns, and other factors.

 

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In addition, if we need to reduce our subscription fees due to competition, our business, operating results, financial condition, and prospects would suffer if we are unable to offset any reductions in our fees by increasing our number of consumers and advertisers, reducing our costs, or successfully developing and deploying new features on a timely basis.

If we are not able to optimize our pricing and increase our average revenue per subscriber, we may not be able to grow our revenue over time.

Our ability to grow revenue depends, in part, on our ability to optimize pricing and increase average monthly revenue per subscriber over time. Since launching our first subscription product in 2007, we have continued to expand our products and optimize pricing of our products. In 2009, 2010, 2011, and the six months ended June 30, 2012, our average monthly revenue per subscriber was $47, $80, $110, and $140, respectively. As we continue to optimize our pricing, real estate professionals may not accept these new prices, which may harm our business and growth prospects.

If advertisers reduce or end their advertising spending with us, or if we are unable to attract new advertisers, our business and operating results would be harmed.

Display advertising accounted for 68%, 53%, 42%, and 32% of our revenue in 2009, 2010, 2011, and the six months ended June 30, 2012, respectively. Our advertisers can generally terminate their contracts with us at any time or on very short notice. Our ability to attract and retain advertisers, and to generate advertising revenue, depends on a number of factors, including:

 

   

the number of consumers using our website and mobile applications;

 

   

our ability to continue to attract an audience that advertisers find attractive;

 

   

our ability to compete effectively for advertising spending with other real estate marketplaces, offline companies, and online companies;

 

   

the amount of spending on online advertising generally; and

 

   

our ability to deliver an attractive return on investment to advertisers.

We may not succeed in capturing more spending from advertisers if we are unable to demonstrate to advertisers the effectiveness of advertising in our marketplace as compared to alternatives, including traditional offline advertising media such as newspapers and magazines.

If advertisers reduce or terminate their advertising spending with us and we are unable to attract new advertisers, our revenue, business, operating results, and financial condition would be harmed. For example, although we experienced sequential increases in media revenue during each of the eight quarters ended December 31, 2011, the growth in our media revenue slowed during the year ended December 31, 2011 and our media revenue decreased in the three months ended March 31, 2012 relative to the three months ended December 31, 2011. The primary reason for the decrease in media revenue during the three months ended March 31, 2012 was the loss of a significant customer which declared bankruptcy. In our display advertising business, we also have a limited ability to replace the loss of revenue resulting from the loss of a customer during a particular quarter because of the significant time required to secure an alternative advertiser for such advertising inventory, run the alternative advertising campaign on our marketplace, and satisfy our revenue recognition criteria from such campaign. As a result, the loss of a customer during a quarter could result in our inability to replace the lost revenue from such customer within that quarter and, therefore, we will sometimes encounter variances in our media revenue.

If we cannot obtain comprehensive and accurate real estate listing information, our business will suffer.

Our offerings are based on receiving current and accurate real estate listing data. We depend on, and expect to continue to depend on, relationships with various third parties to provide this data to us, including real estate listing aggregators, multiple listing services, real estate brokerages, apartment management companies, and other

 

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third parties. Many of our agreements with our listing sources are short-term agreements that may be terminated with limited or no notice. If our relationship with one or more of these parties is disrupted, the quality of the experience we provide to users would suffer.

We currently depend on a listing aggregator to provide us with a substantial portion of the unique listings in our database. While these listings are available from their original sources, it would take substantial time and effort for us to aggregate these listings from all of the original sources. Therefore, if the agreement with our largest listing aggregator is terminated, we may not be able to fully replace the listings in a timely manner or on terms favorable to us, or at all, which would adversely affect our business and operating results. In addition, as real estate brokers typically control the distribution and use of their listings, our business could suffer if real estate brokers withheld their listings from us. From time to time in the past, real estate brokers have refused to syndicate their listings to us, and we cannot assure you this will not happen in the future. If real estate brokers refuse to syndicate listings to us, the quality of our products would suffer due to the decline of timely and accurate information, which could adversely affect our business and operating results.

If use of our mobile products does not continue to grow or we are not able to successfully monetize them as we expect, our operating results could be harmed and our growth could be negatively affected.

Our future success depends in part on the continued growth in the use of our mobile products by our users and our ability to monetize them. During 2011 and in the six months ended June 30, 2012, our mobile products accounted for 14% and 20% of our total traffic, respectively. We currently monetize our mobile offerings through our Trulia Mobile Ads subscription product for real estate professionals and through our mobile website, m.trulia.com. We monetize our mobile applications principally through our Trulia Mobile Ads subscription product through which real estate professionals can purchase local advertising on our mobile applications and our mobile website by zip code or city and by share of a given market. We monetize our mobile website through the sale of display advertisements and we also provide our subscribers rotational placement in a local lead form that appears on certain pages of our mobile website. The use of mobile technology may not continue to grow at historical rates, and consumers may not continue to use mobile technology for real estate research. Further, mobile technology may not be accepted as a viable long-term platform for a number of reasons, including actual or perceived lack of security of information and possible disruptions of service or connectivity. In addition, traffic on our mobile applications may not continue to grow if we do not continue to innovate and introduce enhanced products on mobile platforms, or if users believe that our competitors offer superior mobile products. The growth of traffic on our mobile products may also slow or decline if our mobile applications are no longer compatible with operating systems such as iOS or Android or the devices they support. Additionally, real estate professionals and advertisers may choose to devote less of their spending to target mobile users for a number of reasons, including a perceived lack of effectiveness of display advertising on mobile devices. Although we have seen strong results in our mobile product monetization efforts with the launch of Trulia Mobile Ads in May 2012, these are early results with only a few months of data and we cannot assure you that we will continue to monetize our mobile products as effectively in the future. If use of our mobile products does not continue to grow, or if real estate professionals or advertisers decrease their spending on our mobile products, our business and operating results could be harmed.

If we do not continue to innovate and provide useful products, we may not remain competitive, and our business and financial performance could suffer.

Our success depends in part on our ability to continue to innovate. This is particularly true with respect to mobile applications, which are increasingly being used by our audience. Our competitors regularly enhance their offerings and create new offerings for consumers, real estate professionals, and others involved in the residential real estate industry. If we are unable to continue to offer innovative products or to keep pace with our competitors’ offerings, our business and operating results will suffer.

 

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We rely on Internet search engines to drive traffic to our website, and if we fail to appear high up in the search results, our traffic would decline and our business would be adversely affected.

We depend in part on Internet search engines, such as Google, Bing, and Yahoo!, to drive traffic to our website. For example, when a user types a physical address into a search engine, we rely on a high organic search ranking of our webpages in these search results to refer the user to our website. However, our ability to maintain high organic search result rankings is not within our control. Our competitors’ search engine optimization, or SEO, efforts may result in their websites receiving a higher search result page ranking than ours, or Internet search engines could revise their methodologies in a way that would adversely affect our search result rankings. If Internet search engines modify their search algorithms in ways that are detrimental to us, or if our competitors’ SEO efforts are more successful than ours, overall growth in our user base could slow. Search engine providers could provide listings and other real estate information directly in search results or choose to align with our competitors. Our website has experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of users directed to our website through search engines could harm our business and operating results.

Our recent revenue growth rates may not be indicative of our future growth, and we may not continue to grow at our recent pace, or at all.

From 2007 to 2011, our revenue grew from $1.7 million to $38.5 million, which represents a compounded annual growth rate of approximately 119%. In the future, our revenue may not grow as rapidly as it has over the past several years. For instance, while our media revenue grew more rapidly in the year ended December 31, 2011 than the year ended December 31, 2010, our media revenue grew more slowly in the six months ended December 31, 2011 than it did in the six months ended June 30, 2011. We believe that our future revenue growth will depend, among other factors, on our ability to:

 

   

acquire additional subscribers and sell additional products to existing subscribers;

 

   

sell advertising to third parties;

 

   

attract a growing number of users to our website and mobile applications;

 

   

increase our brand awareness;

 

   

successfully develop and deploy new products for the residential real estate industry;

 

   

maximize our sales personnel’s productivity;

 

   

respond effectively to competitive threats;

 

   

successfully expand our business into adjacent markets, such as rentals, mortgages, and home improvement; and

 

   

successfully expand internationally.

We may not be successful in our efforts to do any of the foregoing, and any failure to be successful in these matters could materially and adversely affect our revenue growth. You should not consider our past revenue growth to be indicative of our future growth.

Our revenue and operating results could vary significantly from period to period, which could cause the market price of our common stock to decline.

We generate revenue through sales of subscriptions to real estate professionals and sales of display advertising to advertisers. Our subscription and advertising sales can be difficult to predict and may result in fluctuations in our revenue from period to period. Our revenue and operating results have fluctuated in the past, and may continue to fluctuate in the future, as a result of a variety of factors, many of which are outside of our control. As a result, comparing our revenue and operating results on a period-to-period basis may not be meaningful, and you should not rely on past results as an indication of future performance.

 

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Our revenue, operating results, or both, may be affected by a number of factors, including:

 

   

our subscription and advertising sales, particularly large advertising campaigns;

 

   

fluctuations in user activity on our website and mobile applications, including as a result of seasonal variations;

 

   

competition and the impact of offerings and pricing policies of our competitors;

 

   

the effects of changes in search engine placement and prominence of our website;

 

   

the amount and timing of operating expenses related to the maintenance and expansion of our business, operations, and infrastructure;

 

   

our ability to control costs, particularly those of third-party data providers;

 

   

our ability to reduce costs in a given period to compensate for unexpected shortfalls in revenue;

 

   

the timing of costs related to the development or acquisition of technologies or businesses;

 

   

our inability to complete or integrate efficiently any acquisitions that we may undertake;

 

   

our ability to collect amounts owed to us from advertisers;

 

   

changes in our tax rates or exposure to additional tax liabilities;

 

   

claims of intellectual property infringement against us and any resulting temporary or permanent injunction prohibiting us from selling our products or requirements to pay damages or expenses associated with any of those claims;

 

   

our ability to successfully expand in existing markets and enter new markets;

 

   

our ability to keep pace with changes in technology;

 

   

changes in government regulation affecting our business;

 

   

the effectiveness of our internal controls;

 

   

conditions in the real estate market; and

 

   

general economic conditions.

For example, individuals hired to join our sales team typically do not reach their maximum productivity until they have been employed for several months or more. Our fixed expenses related to the addition of personnel may not result in an increase in revenue in a given period or at all.

As a result of the foregoing factors and others discussed in this “Risk Factors” section, our operating results in one or more future periods may fail to meet or exceed our projections or the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline.

Seasonality may cause fluctuations in our traffic, revenue, and operating results.

We generally experience seasonality in subscription revenue and display advertising due to fluctuations in traffic to our website and mobile applications. During the fourth quarter of each year, traffic to our marketplace has historically declined and our revenue has historically grown more slowly than in other quarters. Conversely, we typically experience higher growth in traffic and revenue during the spring and summer months, when consumers are more likely to buy new homes. We expect that seasonality will continue to affect traffic in our marketplace, as well as our revenue from subscriptions and advertising.

 

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Declines in, or changes to, the real estate industry could adversely affect our business and financial performance.

Our business and financial performance are affected by the health of, and changes to, the residential real estate industry. Although we have built and grown our business during a worldwide economic downturn, home-buying patterns are sensitive to economic conditions and tend to decline or grow more slowly during these periods. A decrease in home purchases could lead to reductions in user traffic, reductions in subscriptions by real estate professionals, and a decline in marketing spend. Furthermore, online advertising products may be viewed by some existing and potential advertisers on our website and mobile applications as a lower priority, which could cause advertisers to reduce the amounts they spend on advertising, terminate their use of our products, or default on their payment obligations to us. In addition, we may become subject to rules and regulations in the real estate industry that may restrict or complicate our ability to deliver our products. These changes would harm our business and operating results.

Most recently, beginning in 2008, domestic and global economic conditions deteriorated rapidly, resulting in a dramatic slowdown in the housing market, which slowed advertising spending in the real estate industry. In addition, changes to the regulation of the real estate industry and related areas, including mortgage lending and the deductibility of home mortgage interest, may negatively affect the prevalence of home purchases. Real estate markets also may be negatively impacted by a significant natural disaster, such as earthquake, fire, flood, or other disruption. Declines or disruptions in the real estate market or increases in mortgage interest rates could reduce demand for our products and could harm our business and operating results.

We participate in a highly competitive market, and pressure from existing and new companies may adversely affect our business and operating results.

The market to provide home listings and marketing services for the residential real estate industry is highly competitive and fragmented. Homes are not typically marketed exclusively through any single channel. Consumers can access home listings and related data through more than one source. Accordingly, current and potential competitors could aggregate a set of listings similar to ours. We compete with online real estate marketplaces, such as Zillow and Realtor.com, other real estate websites, and traditional offline media. We compete to attract consumers primarily on the basis of the number and quality of listings; user experience; the breadth, depth, and relevance of insights and other content on homes, neighborhoods, and professionals; brand and reputation; and the quality of mobile products. We compete to attract real estate professionals primarily on the basis of the quality of the website and mobile products, the size and attractiveness of the consumer audience, the quality and measurability of the leads we generate, the perceived return on investment we deliver, and the effectiveness of marketing and workflow tools. We also compete for advertisers against other media, including print media, television and radio, social networks, search engines, other websites, and email marketing. We compete primarily on the basis of the size and attractiveness of the audience; pricing; and the ability to target desired audiences.

Many of our existing and potential competitors have substantial competitive advantages, such as:

 

   

greater scale;

 

   

stronger brands and greater name recognition;

 

   

longer operating histories;

 

   

more financial, research and development, sales and marketing, and other resources;

 

   

more extensive relationships with participants in the residential real estate industry, such as brokers, agents, and advertisers;

 

   

strong relationships with third-party data providers, such as multiple listing services and listing aggregators;

 

   

access to larger user bases; and

 

   

larger intellectual property portfolios.

 

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The success of our competitors could result in fewer users visiting our website and mobile applications, the loss of subscribers and advertisers, price reductions for our subscriptions and display advertising, weaker operating results, and loss of market share. Our competitors also may be able to provide users with products that are different from or superior to those we can provide, or to provide users with a broader range of products and prices.

We expect increased competition if our market continues to expand. In addition, current or potential competitors may be acquired by third parties with greater resources than ours, which would further strengthen these current or potential competitors and enable them to compete more vigorously or broadly with us. If we are not able to compete effectively, our business and operating results will be materially and adversely affected.

If our users do not continue to contribute content or their contributions are not valuable to other users, our marketplace would be less attractive, which could negatively affect our unique visitor traffic and revenue.

Our success depends on our ability to provide consumers with the information they seek, which in turn depends in part on the content contributed by our users. We believe that one of our primary competitive advantages is the quality and quantity of the user-generated content in our marketplace, and that information is one of the main reasons consumers use our platform. If we are unable to provide consumers with the information they seek because our users do not contribute content, or because the content that they contribute is not helpful and reliable, the number of consumers visiting our website and mobile applications may decline. If we experience a decline in consumers visiting our website and using our mobile applications, real estate professionals and advertisers may not view our marketplace as attractive for their marketing expenditures, and may reduce their spending with us. Any decline in visits to our website and usage of mobile applications by consumers and any decline in spending by real estate professionals and advertisers with us would harm our business and operating results.

In addition, we monitor new contributions to user-generated content because we believe this metric is a key indicator of our user engagement and the strength of our community. In the event that the number of new contributions to user-generated content declines, this metric may provide a leading indicator of the health of our business. However, if the quantity of new contributions to user-generated content continues to increase but the quality of user-generated content declines, this metric would not capture any corresponding declines in user engagement or the strength of our community as evidenced by the lower quality of user-generated content, and such data would be of limited use in those circumstances.

Our growth depends in part on our relationship with third parties to provide us with local information.

Third parties provide us with information that we use to provide users with insights that go beyond listings, such as information about schools, crime, and neighborhood amenities. Property descriptions and sale transactions obtained via third-party data providers also inform the valuations provided by our Trulia Estimates feature. If these third-party data providers terminate their relationships with us, the information that we provide to users may be limited or the quality of the information may suffer. If we are unable to renew our agreements with these data providers on favorable terms to us or to secure alternative sources for this information, our costs may increase and our business may be harmed.

If we do not display accurate and complete information on a timely basis, our user traffic may decline, our reputation would suffer, and our business and operating results would be harmed.

We receive listing and other information provided by listing aggregators and other third parties that we include on our website and mobile applications. Our reputation with consumers depends on the accuracy and completeness of the information that we provide, although the accuracy and completeness of this data is often outside of our control. We cannot independently verify the accuracy or completeness of all of the information provided to us by third parties. If third parties provide us with inaccurate or incomplete information that we then display on our website and mobile applications, consumers may become dissatisfied with our products, our

 

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traffic may decrease, and our reputation may suffer. Real estate professionals also expect listings data and other information to be accurate and complete, and to the extent our information is incorrect or incomplete, our reputation and business relationships may suffer.

In addition, we update the listing information that we provide on our website and mobile applications on a daily basis. To the extent that we are no longer able to update information in our marketplace on a timely basis, or if consumers begin to expect updates in a more timely manner, we may be forced to make investments which allow us to update information with higher frequency. There can be no assurance that we will be able to provide information at a pace necessary to satisfy consumers in a cost-effective manner, or at all.

Growth of our business will depend on a strong brand, and any failure to maintain, protect, and enhance our brand would hurt our ability to retain or expand our base of users, or our ability to increase their level of engagement.

We believe that a strong brand is necessary to continue to attract and retain consumers and, in turn, the real estate professionals and others who choose to advertise on our websites and mobile applications. We need to maintain, protect, and enhance the “Trulia” brand in order to expand our base of users and increase their engagement with our website and mobile applications. This will depend largely on our ability to continue to provide high-value, differentiated products, and we may not be able to do so effectively. While we may choose to engage in a broader marketing campaign to further promote our brand, this effort may not be successful. Furthermore, negative publicity about our company, including our content, technology, sales practices, personnel, or customer service could diminish confidence in and the use of our products, which could harm our operating results. If we are unable to maintain or enhance user and advertiser awareness of our brand cost effectively, our business, operating results, and financial condition could be harmed. In addition, our website serves as a forum for expression by our users, and if some of our users contribute inappropriate content and offend other users, our reputation could be harmed.

We rely on a small number of advertising partners for a substantial portion of our media revenue, and we are subject to risks as a result of this advertiser concentration.

In each of the years ended December 31, 2010 and 2011, the ten largest advertising partners for the respective period accounted for more than 50% of our media revenue. For the six months ended June 30, 2012, the ten largest advertising partners in that period accounted for more than 60% of our media revenue. One of our growth strategies is to increase the amount large advertisers spend in our marketplace, and we expect this revenue concentration to continue. If one or more of these large advertisers were to decrease or discontinue advertising with us, our business and operating results will be adversely affected.

Our operating results may be adversely affected by a failure to collect amounts owed to us by advertisers.

We often run display advertisements in our marketplace prior to receiving payment from an advertiser, which makes us subject to credit risks. In the past, certain advertisers have been unable to pay us due to bankruptcy or other reasons, and we cannot assure you that we will not experience collection issues in the future. If we have difficulty collecting amounts owed to us by advertisers, or fail to collect these amounts at all, our results of operations and financial condition would be adversely affected.

We depend on our talented personnel to grow and operate our business, and if we are unable to hire, retain, manage, and motivate our personnel, or if our new personnel do not perform as we anticipate, we may not be able to grow effectively.

Our future success will depend upon our continued ability to identify, hire, develop, motivate, and retain talented personnel. We may not be able to retain the services of any of our employees or other members of senior management in the future. We do not have employment agreements other than offer letters with any key employee,

 

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and we do not maintain key person life insurance for any employee. In addition, from time to time, there may be changes in our senior management team that may be disruptive to our business. If our senior management team fails to work together effectively and to execute our plans and strategies, our business could be harmed.

Our growth strategy also depends on our ability to expand our organization by hiring high-quality personnel. Identifying, recruiting, training, integrating, managing, and motivating talented individuals will require significant time, expense, and attention. Competition for talent is intense, particularly in the San Francisco Bay Area, where our headquarters is located. If we are not able to effectively recruit and retain our talent, our business and our ability to achieve our strategic objectives would be harmed.

Growth may place significant demands on our management and our infrastructure.

We have experienced substantial growth in our business that has placed, and may continue to place, significant demands on our management and our operational and financial infrastructure. As our operations grow in size, scope, and complexity, we will need to improve and upgrade our systems and infrastructure. The expansion of our systems and infrastructure will require us to commit substantial financial, operational, and technical resources in advance of an increase in the volume of business, with no assurance that the volume of business will increase. Continued growth could also strain our ability to maintain reliable service levels for our users and advertisers, develop and improve our operational, financial, and management controls, enhance our reporting systems and procedures, and recruit, train, and retain highly skilled personnel.

Our products are accessed by a large number of users often at the same time. If the use of our marketplace continues to expand, we may not be able to scale our technology to accommodate increased capacity requirements, which may result in interruptions or delays in service. The failure of our systems and operations to meet our capacity requirements could result in interruptions or delays in service or impede our ability to scale our operations.

Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results, and financial condition would be harmed.

A significant disruption in service on our website or of our mobile applications could damage our reputation and result in a loss of users of our products and of advertisers, which could harm our business, operating results, and financial condition.

Our brand, reputation, and ability to attract users and advertisers depend on the reliable performance of our network infrastructure and content delivery. We may experience significant interruptions with our systems in the future. Interruptions in these systems, whether due to system failures, computer viruses, or physical or electronic break-ins, could affect the security or availability of our products on our website and mobile applications, and prevent or inhibit the ability of users to access our products. Problems with the reliability or security of our systems could harm our reputation, result in a loss of users of our products and of advertisers, and result in additional costs.

Substantially all of the communications, network, and computer hardware used to operate our website and mobile applications is located at a single colocation facility in Santa Clara, California. While we have made investments to back up our system in the event of a disruption involving this facility, our systems are not fully redundant. In addition, we do not own or control the operation of this facility. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses, earthquakes, and similar events. The occurrence of any of these events could result in damage to our systems and hardware or could cause them to fail.

Problems faced by our third-party web hosting providers could adversely affect the experience of our users. Our third-party web hosting providers could close their facilities without adequate notice. Any financial difficulties, up to and including bankruptcy, faced by our third-party web hosting providers or any of the service

 

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providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party web hosting providers are unable to keep up with our growing capacity needs, our business could be harmed.

Any errors, defects, disruptions, or other performance or reliability problems with our network operations could cause interruptions in access to our products as well as delays and additional expense in arranging new facilities and services and could harm our reputation, business, operating results, and financial condition.

Our failure to protect confidential information of our users against security breaches could damage our reputation and brand and harm our business and operating results.

We maintain sensitive information provided by users and advertisers. We rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information, including personally identifiable information and credit card numbers. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. If we are unable to maintain the security of confidential information that is provided to us by our users, our reputation and brand could be harmed and we may be exposed to a risk of loss or litigation and possible liability, any of which could harm our business and operating results.

Failure to adequately protect our intellectual property could harm our business and operating results.

Our business depends on our intellectual property, the protection of which is crucial to the success of our business. We rely on a combination of patent, trademark, trade secret, and copyright law and contractual restrictions to protect our intellectual property. In addition, we attempt to protect our intellectual property, technology, and confidential information by requiring our employees and consultants to enter into confidentiality and assignment of inventions agreements and third parties to enter into nondisclosure agreements. These agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property, or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property, or technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our website features, software, and functionality or obtain and use information that we consider proprietary.

We have registered “Trulia” as a trademark in the United States, the European Union and Canada. Competitors may adopt service names similar to ours, thereby harming our ability to build brand identity and possibly leading to user confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of the term “Trulia.”

We currently hold the “Trulia.com” Internet domain name and various other related domain names. The regulation of domain names in the United States is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars, or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain all domain names that use the name Trulia.

Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies in the United States and abroad may be necessary in the future to enforce our intellectual property rights, to protect our patent rights, trade secrets, and domain names and to determine the validity and scope of the proprietary rights of others. Our efforts to enforce or protect our proprietary rights may be ineffective and could result in substantial costs and diversion of resources, which could harm our business and operating results.

Intellectual property infringement assertions by third parties could result in significant costs and harm our business and operating results.

Other parties have asserted, and may in the future assert, that we have infringed their intellectual property rights. Such litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue, and therefore our own issued and pending patents may provide little or no deterrence.

 

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We could also be required to pay damages in an unspecified amount. For example, in September 2011, we entered into a settlement agreement with CIVIX-DDI LLC, or CIVIX, relating to a claim by CIVIX that we infringed two CIVIX patents relating to searching and locating real estate. Under the settlement agreement, we agreed to pay CIVIX to settle the litigation.

In addition, on September 12, 2012, Zillow, Inc., or Zillow, filed a lawsuit against us in the United States District Court for the Western District of Washington, alleging that we infringe on one U.S. patent held by it. The lawsuit alleges that one component of our Trulia Estimates feature infringes upon Zillow’s patent insofar as Trulia Estimates allows homeowners to claim their homes and provide additional information about the properties, which enables us to update the valuation estimates for such properties. We started offering our Trulia Estimates feature in 2011. Zillow is seeking declaratory judgment that its patent is valid and enforceable, a permanent injunction against the alleged infringement, compensatory damages, and attorneys’ fees. This litigation could cause us to incur significant expenses and costs. In addition, the outcome of any litigation is inherently unpredictable, and as a result of this litigation, we may be required to pay damages; an injunction may be entered against us that requires us to change our Trulia Estimates feature; or a license or other right to continue to deliver an unmodified version of Trulia Estimates may not be made available to us at all or may require us to pay ongoing royalties and comply with unfavorable terms. Any of these outcomes could harm our business. Even if we were to prevail, this litigation could be costly and time-consuming, could divert the attention of our management and key personnel from our business operations, and may discourage consumers, real estate professionals, and advertisers from using our marketplace.

Furthermore, we cannot predict whether other assertions of third-party intellectual property rights or claims arising from such assertions will substantially harm our business and operating results. The defense of these claims and any future infringement claims, whether they are with or without merit or are determined in our favor, may result in costly litigation and diversion of technical and management personnel. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s patent or copyright rights; cease making, licensing or using products that are alleged to incorporate the intellectual property of others; expend additional development resources to redesign our products; and enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, or at all. In any event, we may need to license intellectual property which would require us to pay royalties or make one-time payments. Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, the time and resources necessary to resolve them could harm our business, operating results, financial condition, and reputation.

Valuation and other proprietary data may be subject to disputes.

We provide data that is relevant to the decision to purchase a home and some of this data is subject to revision, interpretation, or dispute. For example, our Trulia Estimate tool provides users with home valuations and is based on algorithms we have developed to analyze third-party data. We revise our algorithms regularly, which may cause valuations to differ from those previously provided. Consumers and real estate professionals sometimes disagree with our estimates. Any such variation in or disagreements about the estimates that we present could result in negative user feedback, harm our reputation, or lead to legal disputes.

We are subject to payments-related risks.

We accept payments using a variety of methods, including credit and debit cards. For certain payment methods, including credit and debit cards, we pay bank interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit and debit cards and our business would be disrupted if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with

 

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these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from consumers or facilitate other types of online payments, and our business and operating results could be adversely affected.

Our business is subject to a variety of state and federal laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.

We are subject to a variety of federal and state laws, including laws regarding data retention, privacy, and consumer protection, that are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting. For example, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted, or the content provided by users. In addition, regulatory authorities are considering a number of legislative and regulatory proposals concerning data protection and other matters that may be applicable to our business. Changes to existing laws or regulations or the adoption of new laws or regulations could negatively affect our business. It is difficult to predict how existing laws will be applied to our business and the new laws to which we may become subject.

Our business may be adversely affected if we encounter difficulties as we implement an enterprise resource planning system.

We are in the process of implementing an enterprise resource planning, or ERP, systems for our company. This ERP system will combine and streamline the management of our financial, accounting, human resources, sales and marketing and other functions, enabling us to more effectively manage operations and track performance. However, this ERP system will require us to complete numerous processes and procedures for the effective use of this system or with running our business using this system, which may result in substantial costs. Until we have completed the implementation of an ERP system and have experience with its operation, the implementation of the new ERP system poses a risk to our disclosure controls, internal control over financial reporting, and business operations. Any disruptions or difficulties in implementing this system could adversely affect our controls and harm our business, including our ability to forecast or make sales and collect our receivables. Moreover, such disruption or difficulties could result in unanticipated costs or expenditures and diversion of management’s attention and resources.

If we fail to remediate deficiencies in our internal control over financial reporting or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy, and timeliness of our financial reporting may be adversely affected.

In connection with the audits of our financial statements for 2009, 2010, and 2011, we identified a material weakness in the design and operating effectiveness of our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, that creates a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness that we identified resulted from a lack of sufficient number of qualified personnel within our accounting function that possessed an appropriate level of expertise to effectively perform the following functions:

 

   

identify, select, and apply GAAP sufficiently to provide reasonable assurance that transactions were being appropriately recorded; and

 

   

design control activities over the financial flows and reporting processes necessary to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements.

 

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We are taking numerous steps that we believe will address the underlying causes of the control deficiencies described above, primarily through the hiring of additional accounting and finance personnel with technical accounting and financial reporting experience, development and implementation of policies, and improved processes and documented procedures. If we fail to effectively remediate deficiencies in our control environment or are unable to implement and maintain effective internal control over financial reporting to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by law or exchange regulations.

Even if we are able to report our financial statements accurately and in a timely manner, if we do not make all necessary improvements to address the material weakness, continued disclosure of a material weakness will be required in future filings with the Securities and Exchange Commission, or SEC, which could cause our reputation to be harmed and our stock price to decline.

We have not performed an evaluation of our internal control over financial reporting, such as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, control deficiencies, including material weaknesses and significant deficiencies, in addition to those discussed above, may have been identified. In addition, we are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, and as such we may elect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act until we cease to be an “emerging growth company.” See “—We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors,” for additional risks relating to our “emerging growth company” status.

Complying with the laws and regulations affecting public companies will increase our costs and the demands on management and could harm our operating results.

As a public company and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting, and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC and the New York Stock Exchange impose various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal, accounting, and financial compliance costs and have made and will continue to make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or our board committees or as executive officers.

In addition, the Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, beginning with the year ending December 31, 2013, we will need to perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. As an “emerging growth company” we may elect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial

 

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reporting under Section 404 of the Sarbanes-Oxley Act. However, we may no longer avail ourselves of this exemption when we cease to be an “emerging growth company” and, when our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

Furthermore, investor perceptions of our company may suffer if deficiencies are found, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting, or financial results and could result in an adverse opinion on internal control from our independent registered public accounting firm.

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years following the completion of this offering, although, if we have more than $1.0 billion in annual revenue, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the following December 31. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the Jumpstart Our Business Startups Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We have pledged substantially all of our assets to secure indebtedness.

On September 15, 2011, we entered into a loan and security agreement with Hercules Technology Growth Capital, Inc., or Hercules, providing for a secured term loan facility, or the credit facility, in an aggregate principal amount of up to $20.0 million to be used for general business purposes. Indebtedness we incur under this agreement is secured by substantially all of our assets. This agreement contains customary affirmative and

 

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negative covenants, including covenants that limit or restrict our ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets, merge or consolidate, and make acquisitions. In May 2012, we failed to comply with the covenant that required delivery of audited financial statements for the year ended December 31, 2011 within the time period set forth in the credit facility. Hercules granted a waiver arising from our failure to comply with this reporting covenant. If we default on our obligations under this agreement, Hercules may foreclose on our assets to repay our outstanding obligations to Hercules, which would materially and adversely impact our business. As of June 30, 2012, we had drawn $10.0 million in term loans under the credit facility, and an additional $10.0 million in term loans remained available to be drawn, subject to the terms and conditions of the credit facility. If we default on payments due pursuant to the credit facility and are forced to sell assets to satisfy these obligations, our business would be materially and adversely affected.

Our operating results may be harmed if we are required to collect sales taxes for our products.

There is general uncertainty in the industry about the obligation of Internet-based businesses to collect and remit sales taxes in jurisdictions where their commerce is solely virtual. In the current climate, it is possible that one or more states or countries could seek to impose sales or other tax collection obligations on us or our subscribers with regards to our products, which taxes may be applicable to past sales. A successful assertion that we should be collecting additional sales or other taxes on our products could result in substantial tax liabilities for past sales, discourage subscribers from purchasing our products, or otherwise harm our business and operating results.

If we fail to expand effectively into adjacent markets, our growth prospects could be harmed.

We intend to expand our operations into adjacent markets, such as rentals, mortgages, and home improvement, and into international geographies. We may incur losses or otherwise fail to enter these markets successfully. Our expansion into these markets will place us in competitive environments with which we are unfamiliar and involves various risks, including the need to invest significant resources and the possibility that returns on such investments will not be achieved for several years, or at all. In attempting to establish a presence in new markets, we expect to incur significant expenses and face various other challenges, such as expanding our sales force and management personnel to cover these markets.

Future acquisitions and investments could disrupt our business and harm our financial condition and operating results.

Our success will depend, in part, on our ability to expand our products and markets, and grow our business in response to changing technologies, user, and advertiser demands, and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses and technologies rather than through internal development, including, for example, our recent acquisition of Movity, Inc., a geographic data company. The identification of suitable acquisition candidates can be difficult, time-consuming, and costly, and we may not be able to successfully complete identified acquisitions. The risks we face in connection with acquisitions include:

 

   

diversion of management time and focus from operating our business to addressing acquisition integration challenges;

 

   

coordination of research and development and sales and marketing functions;

 

   

transition of the acquired company’s users to our website and mobile applications;

 

   

retention of employees from the acquired company;

 

   

cultural challenges associated with integrating employees from the acquired company into our organization;

 

   

integration of the acquired company’s accounting, management information, human resources, and other administrative systems;

 

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the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may have lacked effective controls, procedures, and policies;

 

   

liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities; and

 

   

litigation or other claims in connection with the acquired company, including claims from terminated employees, users, former stockholders, or other third parties.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally. Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, or the write-off of goodwill, any of which could harm our financial condition. Also, the anticipated benefits of any acquisitions may not materialize.

We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features and products or enhance our existing products, improve our operating infrastructure, or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be impaired, and our business may be harmed.

Risks Related to Ownership of Our Common Stock and this Offering

Concentration of ownership among our existing executive officers, directors, and their affiliates may prevent new investors from influencing significant corporate decisions.

Upon completion of this offering, our executive officers, directors, and holders of 5% or more of our outstanding common stock will beneficially own, in the aggregate, approximately 61.1% of our outstanding shares of common stock. Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. These stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation, and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders, which in turn could reduce the price of our common stock.

 

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An active, liquid, and orderly trading market for our common stock may not develop, the price of our stock may be volatile, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for shares of our common stock. The initial public offering price of our common stock will be determined through negotiation with the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares of common stock following this offering. In addition, the trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

The price of our common stock may be volatile, and you could lose all or part of your investment.

The trading price of our common stock following this offering may fluctuate substantially and may be higher or lower than the initial public offering price. The trading price of our common stock following this offering will depend on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

volatility in the market prices and trading volumes of high technology stocks;

 

   

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

   

sales of shares of our common stock by us or our stockholders;

 

   

failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

   

the financial projections we may provide to the public, any changes in those projections, or our failure to meet those projections;

 

   

announcements by us or our competitors of new products;

 

   

the public’s reaction to our press releases, other public announcements, and filings with the SEC;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

actual or anticipated changes in our operating results or fluctuations in our operating results;

 

   

actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape generally;

 

   

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

   

developments or disputes concerning our intellectual property or other proprietary rights;

 

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announced or completed acquisitions of businesses or technologies by us or our competitors;

 

   

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

changes in accounting standards, policies, guidelines, interpretations, or principles;

 

   

any significant change in our management;

 

   

conditions in the real estate industry or changes in mortgage interest rates; and

 

   

general economic conditions and slow or negative growth of our markets.

In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market prices of a particular companies’ securities, securities class action litigations have often been instituted against these companies. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

A total of 20,376,654, or 77.3%, of our total outstanding shares after the offering are restricted from immediate resale, but may be sold on a stock exchange in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, and the perception that these sales could occur may also depress the market price of our common stock. Based on shares outstanding as of June 30, 2012, after giving effect to the issuance of 89,100 shares of our common stock to be acquired by certain stockholders through option exercises at the closing of this offering in order to sell those shares in this offering, we will have 26,376,654 shares of common stock outstanding after this offering. Of these shares, the common stock sold in this offering will be freely tradable in the United States, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933. The holders of shares of outstanding common stock have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock during the 180-day period beginning on the date of this prospectus, except with the prior written consent of J.P. Morgan Securities LLC and Deutsche Bank Securities Inc. After the expiration of the 180-day restricted period, these shares may be sold in the public market in the United States, subject to prior registration in the United States, if required, or reliance upon an exemption from United States registration, including, in the case of shares held by affiliates or control persons, compliance with the volume restrictions of Rule 144. In addition, a portion of these shares is subject to early release under certain circumstances described in the section titled “Underwriting” in this prospectus.

Upon completion of this offering, stockholders owning an aggregate of 18,206,604 shares will be entitled, under contracts providing for registration rights, to require us to register shares of our common stock owned by them for public sale in the United States. In addition, we intend to file a registration statement to register the approximately 6,112,904 shares reserved for future issuance under our equity compensation plans. Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and, in certain cases, lock-up agreements with the representatives of the underwriters referred to above, the shares of common stock issued upon exercise of outstanding options will be available for immediate resale in the United States in the open market.

Sales of our common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause our stock price to fall and make it more difficult for you to sell shares of our common stock.

 

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Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Our certificate of incorporation, bylaws, and Delaware law contain or will contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include or will include provisions:

 

   

creating a classified board of directors whose members serve staggered three-year terms;

 

   

authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend, and other rights superior to our common stock;

 

   

limiting the liability of, and providing indemnification to, our directors and officers;

 

   

limiting the ability of our stockholders to call and bring business before special meetings;

 

   

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

   

controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings; and

 

   

providing our board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

Any provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

The net proceeds from the sale of our shares of common stock by us in this offering may be used for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire complementary businesses, products, services, or technologies. However, we do not have any agreements or commitments for any acquisitions at this time. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be invested with a view towards long-term benefits for our stockholders and this may not increase our operating results or market value. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock of $17.00 per share is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. Therefore, if you

 

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purchase our common stock in this offering, you will incur immediate dilution of $14.33 in the net tangible book value per share from the price you paid. In addition, following this offering, purchasers who bought shares from us in the offering will have contributed 67.5% of the total consideration paid to us by our stockholders to purchase shares of common stock, in exchange for acquiring approximately 19.0% of our total outstanding shares as of June 30, 2012 after giving effect to this offering. The exercise of outstanding stock options and warrants will result in further dilution.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

We do not expect to declare any dividends in the foreseeable future.

We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. In addition, the terms of our credit facility currently prohibit us from paying cash dividends on our capital stock. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our future financial performance, including our revenue, cost of revenue, gross profit or gross margin, operating expenses, ability to generate positive cash flow, and ability to achieve and maintain profitability;

 

   

the sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

   

our ability to increase the number of consumers using our website and mobile applications;

 

   

our ability to attract and retain real estate professionals that subscribe to our products, and to optimize the pricing for such products;

 

   

our ability to attract and retain advertisers that purchase display advertising on our website;

 

   

the continued availability of home listing and other information relevant to the real estate industry;

 

   

the growth in the usage of our mobile applications and our ability to successfully monetize this usage;

 

   

our ability to innovate and provide a superior user experience;

 

   

our ability to capitalize on adjacent opportunities;

 

   

the effects of the market for real estate and general economic conditions on our business; and

 

   

the attraction and retention of qualified employees and key personnel.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

 

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This prospectus also contains statistical data, estimates, and forecasts that are based on independent industry publications, such as those published by Borrell Associates, the National Association of Realtors, and the Real Estate Book, or other publicly available information, as well as other information based on our internal sources. Although we believe that the third-party sources referred to in this prospectus are reliable, neither we nor the underwriters have independently verified the information provided by these third parties. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under the section titled “Risk Factors” and elsewhere in this prospectus.

 

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USE OF PROCEEDS

The net proceeds to us from the sale of shares of our common stock that we are selling in this offering will be approximately $75.1 million, based upon the initial public offering price of $17.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, our net proceeds would be approximately $89.3 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our common stock, and facilitate our future access to the public equity markets.

We currently intend to use the net proceeds that we will receive from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds that we receive to acquire or invest in complementary businesses, products, services, technologies, or other assets. We have not entered into any agreements or commitments with respect to any acquisitions or investments at this time.

We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant. In addition, the terms of our credit facility currently prohibit us from paying cash dividends on our capital stock.

 

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CAPITALIZATION

The following table sets forth cash and cash equivalents and short-term investments, as well as our capitalization, as of June 30, 2012 as follows:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 14,161,444 shares of common stock, which conversion will occur immediately prior to the completion of this offering, as if such conversion had occurred on June 30, 2012, and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital; and

 

   

on a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above, (ii) the sale and issuance by us of 5,000,000 shares of common stock in this offering, based upon the initial public offering price of $17.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (iii) option exercises at the closing of this offering by certain selling stockholders in order to sell those shares in this offering, and (iv) the filing and effectiveness of our amended and restated certificate of incorporation in Delaware immediately prior to the completion of this offering.

You should read this table together with our financial statements and related notes, and the sections titled “Selected Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

    As of June 30, 2012  
        Actual           Pro Forma       Pro Forma as
Adjusted
 
   

(In thousands, except share and per share data)

 

Cash and cash equivalents and short-term investments

  $ 10,356      $ 10,356      $ 85,666   
 

 

 

   

 

 

   

 

 

 

Preferred stock warrant liability

    620                 

Total debt

    9,684        9,684        9,684   

Stockholders’ equity (deficit):

     

Convertible preferred stock, par value $0.000033 per share, issuable in Series A, B, C, and D: 42,897,601 shares authorized, 14,161,444 shares issued and outstanding, actual; 42,897,601 shares authorized, no shares issued and outstanding, pro forma; no shares authorized, issued, and outstanding, pro forma as adjusted

                    

Preferred stock, par value $0.00001 per share: no shares authorized, issued, and outstanding, actual and pro forma; 20,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted

                    

Common stock, par value $0.000033 per share, actual and pro forma; par value $0.00001 per share, pro forma as adjusted: 77,200,000 shares authorized, 7,129,453 shares issued, 7,126,110 shares outstanding, actual; 77,200,000 shares authorized, 21,290,897 shares issued, 21,287,554 shares outstanding, pro forma; 1,000,000,000 shares authorized, 26,379,997 shares issued, 26,376,654 shares outstanding, pro forma as adjusted

           1        1   

Additional paid-in capital

    40,604        41,223        116,533   

Accumulated deficit

    (43,844     (43,844     (43,844
 

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (3,240     (2,620     72,690   
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 7,064      $ 7,064      $ 82,374   
 

 

 

   

 

 

   

 

 

 

 

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If the underwriters’ option to purchase additional shares from us were exercised in full, pro forma as adjusted cash and cash equivalents and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and shares outstanding as of June 30, 2012 would be $99.9 million, $130.8 million, $86.9 million and 27,276,654, respectively.

The pro forma and pro forma as adjusted columns in the table above exclude the following:

 

   

3,340,370 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of June 30, 2012 (which does not include 89,100 shares to be sold in this offering by certain selling stockholders upon the exercise of options), with a weighted average exercise price of $4.39 per share;

 

   

547,396 shares of common stock issuable upon the exercise of options to purchase common stock granted after June 30, 2012, with a weighted average exercise price of $16.65 per share;

 

   

44,646 shares of common stock issuable upon the exercise of a warrant to purchase common stock that was outstanding as of June 30, 2012, with an exercise price of $4.29 per share, which warrant is expected to be exercised prior to the closing of this offering;

 

   

Up to 120,961 shares of common stock, on an as-converted basis, issuable upon the exercise of a warrant to purchase convertible preferred stock that was outstanding as of June 30, 2012, with an exercise price of $8.47 per share, of which 56,054 were exercisable as of June 30, 2012; and

 

   

2,225,138 shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan, which contains provisions that automatically increase its share reserve each year.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value (deficit) as of June 30, 2012 was $(5.4) million, or $(0.76) per share. Our pro forma net tangible book value (deficit) as of June 30, 2012 was $(4.8) million, or $(0.22) per share, based on the total number of shares of our common stock outstanding as of June 30, 2012, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock as of June 30, 2012 into an aggregate of 14,161,444 shares of common stock, which conversion will occur immediately prior to the completion of this offering, and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital.

After giving effect to the sale by us of 5,000,000 shares of common stock in this offering at the initial public offering price of $17.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as well as the issuance of 89,100 shares of our common stock to be acquired by certain selling stockholders through option exercises at the closing of this offering in order to sell those shares in this offering, our pro forma as adjusted net tangible book value as of June 30, 2012 would have been $70.5 million, or $2.67 per share. This represents an immediate increase in pro forma net tangible book value of $2.89 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $14.33 per share to investors purchasing shares of common stock in this offering at the initial public offering price. The following table illustrates this dilution:

 

Initial public offering price per share

     $
 
17.00
 
  
  

Pro forma net tangible book value (deficit) per share as of June 30, 2012

   $ (0.22  

Increase in pro forma net tangible book value (deficit) per share attributable to new investors in this offering

     2.89     
  

 

 

   

Pro forma as adjusted net tangible book value per share immediately after this offering

       2.67   
    

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

     $ 14.33   
    

 

 

 

In addition, to the extent any outstanding options or warrants to purchase common stock or convertible preferred stock are exercised, new investors would experience further dilution. If the underwriters exercise their option to purchase additional shares from us in full, the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering would be $3.11 per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $13.89 per share.

 

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The following table presents, on a pro forma as adjusted basis as of June 30, 2012, after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock immediately prior to the completion of this offering, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common stock and convertible preferred stock, cash received from the exercise of stock options, and the average price per share paid or to be paid to us at the initial public offering price of $17.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price
per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     21,376,654         81.0   $ 40,864,000         32.5   $ 1.91   

New investors

     5,000,000         19.0        85,000,000         67.5        17.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Totals

     26,376,654         100   $ 125,864,000         100   $ 4.77   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

To the extent any outstanding options or warrants to purchase common stock or convertible preferred stock are exercised, new investors will experience further dilution.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full from us, our existing stockholders would own 78.4% and our new investors would own 21.6% of the total number of shares of our common stock outstanding upon the completion of this offering.

The number of shares of our common stock to be outstanding after this offering is based on the number of shares of our common stock outstanding as of June 30, 2012, and after giving effect to the issuance of 89,100 shares of our common stock to be acquired by certain selling stockholders through option exercises at the closing of this offering in order to sell those shares in this offering, and excludes:

 

   

3,340,370 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of June 30, 2012 (which does not include 89,100 shares to be sold in this offering by certain selling stockholders upon the exercise of options), with a weighted average exercise price of $4.39 per share;

 

   

547,396 shares of common stock issuable upon the exercise of options to purchase common stock granted after June 30, 2012, with a weighted average exercise price of $16.65 per share;

 

   

44,646 shares of common stock issuable upon the exercise of a warrant to purchase common stock that was outstanding as of June 30, 2012, with an exercise price of $4.29 per share, which warrant is expected to be exercised prior to the closing of this offering;

 

   

Up to 120,961 shares of common stock, on an as-converted basis, issuable upon the exercise of a warrant to purchase convertible preferred stock that was outstanding as of June 30, 2012, with an exercise price of $8.47 per share, of which 56,054 were exercisable as of June 30, 2012; and

 

   

2,225,138 shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan, which contains provisions that automatically increase its share reserve each year.

 

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SELECTED FINANCIAL AND OTHER DATA

The following selected statement of operations data for the years ended December 31, 2009, 2010, and 2011 and the balance sheet data as of December 31, 2010 and 2011 have been derived from our audited financial statements included elsewhere in this prospectus. The selected statement of operations data in the six months ended June 30, 2011 and 2012 and the balance sheet data as of June 30, 2012 have been derived from our unaudited interim financial statements included elsewhere in this prospectus. The selected statement of operations data for the years ended December 31, 2007 and 2008 and the balance sheet data as of December 31, 2007, 2008, and 2009 have been derived from our financial statements which are not included in this prospectus. The unaudited interim financial statements reflect, in the opinion of management, all adjustments, of a normal, recurring nature that are necessary for the fair presentation of the financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the six months ended June 30, 2012 are not necessarily indicative of results to be expected for the full year or any other period. You should read the following selected financial and other data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

    Year Ended December 31,     Six Months Ended
June 30,
 
    2007     2008     2009     2010     2011     2011     2012  
    (In thousands, except share and per share data)  

Statement of Operations Data:

             

Revenue

  $ 1,675      $ 8,066      $ 10,338      $ 19,785      $ 38,518      $ 16,248      $ 28,987   

Cost and operating expenses: (1)

             

Cost of revenue (exclusive of amortization) (2)

    921        2,680        2,855        3,657        5,795        2,359        4,693   

Technology and development

    2,464        5,202        7,056        8,803        14,650        6,651        9,905   

Sales and marketing

    3,480        5,194        5,532        8,638        17,717        7,278        15,197   

General and administrative

    2,795        3,143        1,912        2,501        6,123        2,531        6,025   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

    9,660        16,219        17,355        23,599        44,285        18,819        35,820   

Loss from operations

    (7,985     (8,153     (7,017     (3,814     (5,767     (2,571     (6,833

Interest income

    339        298        55        15        17        6        7   

Interest expense

           (11     (21     (39     (389     (41     (491

Change in fair value of warrant liability

                                (16            (323
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (7,646     (7,866     (6,983     (3,838     (6,155     (2,606     (7,640

Provision for income taxes

                                                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (7,646   $ (7,866   $ (6,983   $ (3,838   $ (6,155   $ (2,606   $ (7,640
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted (3)

  $ (1.42   $ (1.40   $ (1.21   $ (0.64   $ (0.92   $ (0.40   $ (1.10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted (3)

    5,392,807        5,606,337        5,752,478        6,016,550        6,657,045        6,566,142        6,949,757   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (3)

          $ (0.29     $ (0.35
         

 

 

     

 

 

 

Weighted average shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (3)

            20,818,489          21,111,201   
         

 

 

     

 

 

 

Other Financial Information:

             

Adjusted EBITDA (4)

  $ (6,983   $ (6,890   $ (5,857   $ (2,497   $ (1,787   $ (714   $ (4,231
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) 

Stock-based compensation was allocated as follows:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
       2007          2008          2009          2010          2011          2011          2012    
     (In thousands)  

Cost of revenue

   $ 13       $ 22       $ 10       $ 8       $ 11       $ 3       $ 14   

Technology and development

     115         166         177         176         482         159         376   

Sales and marketing

     73         119         105         97         183         92         179   

General and administrative

     485         446         13         73         808         583         447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 686       $ 753       $ 305       $ 354       $ 1,484       $     837       $     1,016   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(2)      Amortization of product development costs were included in technology and development as follows:

   $     301       $     321       $     179       $     366       $ 708       $ 264       $ 481   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3) 

See Note 11 to our audited financial statements for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders and the weighted average number of shares used in the computation of the per share amounts.

(4) 

See “—Non-GAAP Financial Measures” for more information and a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with generally accepted accounting principles in the United States, or GAAP.

 

     As of December 31,      As of
June 30,

2012
 
       2007          2008          2009          2010         2011       
     (In thousands)  

Balance Sheet Data:

                

Cash and cash equivalents and short-term investments

   $ 6,329       $ 14,012       $ 7,587       $ 4,395      $       11,341       $     10,356   

Working capital (deficit)

     6,345         14,137         6,881         (132     4,165         (4,901

Property and equipment, net

     730         1,131         847         3,465        5,548         5,885   

Total assets

     7,779         16,843         11,162         15,710        24,195         27,610   

Deferred revenue

     13         212         546         1,810        4,827         11,049   

Total indebtedness

             640         517         1,955        9,592         9,684   

Preferred stock warrant liability

                                    297         620   

Total stockholders’ equity (deficit)

     7,095         14,912         8,262         7,142        3,039         (3,240

Non-GAAP Financial Measures

Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles in the United States, or GAAP. We define Adjusted EBITDA as net loss adjusted to exclude interest income, interest expense, depreciation and amortization, change in the fair value of our warrant liability and stock-based compensation. Below, we have provided a reconciliation of Adjusted EBITDA to our net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner as we calculate the measure.

We include Adjusted EBITDA in this prospectus because it is an important measure upon which our management assesses our operating performance. We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences primarily caused by variations in capital structures, tax positions, the impact of depreciation and amortization expense on our fixed assets, changes related to the fair value remeasurements of our preferred stock warrant, and the impact of stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel, and in evaluating acquisition opportunities. In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities.

 

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Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; and

 

   

Other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.

In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses similar to the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss and other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to our net loss, the most comparable GAAP measure, for each of the periods indicated:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2007     2008     2009     2010     2011     2011     2012  
     (In thousands)  

Net loss attributable to common stockholders

   $ (7,646   $ (7,866   $ (6,983   $ (3,838   $ (6,155   $ (2,606   $ (7,640

Non-GAAP adjustments:

              

Interest income

     (339     (298     (55     (15     (17     (6     (7

Interest expense

            11        21        39        389        41        491   

Depreciation and amortization

     316        510        855        963        2,496        1,020        1,586   

Change in fair value of warrant liability

                                 16               323   

Stock-based compensation

     686        753        305        354        1,484        837        1,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (6,983   $ (6,890   $ (5,857   $ (2,497   $ (1,787   $ (714   $ (4,231
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Financial and Other Data” and financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus.

Overview

Trulia is redefining the home search experience for consumers and changing the way that real estate professionals build their businesses. Our marketplace, delivered through the web and mobile applications, gives consumers powerful tools to research homes and neighborhoods and enables real estate professionals to efficiently market their listings and attract new clients. We believe we deliver the best home search experience by combining our superior user interface with our comprehensive database of real estate properties, local insights, and user-generated content. We offer products that provide real estate professionals with access to transaction-ready consumers and help them enhance their online presence.

Key elements of our marketplace are extensive consumer reach, an engaged base of real estate professionals and a comprehensive database of real estate information and local insights. In the six months ended June 30, 2012, we had 22.0 million monthly unique visitors, and as of June 30, 2012, we had more than 360,000 active real estate professionals in our marketplace, 21,544 of whom were paying subscribers. Our large, continually refreshed, and searchable database contains more than 110 million properties, including 4.5 million homes for sale and rent. We supplement listings data with local information on schools, crime and neighborhood amenities to provide unique insights into each community. In addition, we harness rich, insightful user-generated content from our active community of contributors, including consumers, local enthusiasts, and real estate professionals. With more than 5 million unique user contributions, we believe we have the largest collection of user-generated content on homes, neighborhoods, and real estate professionals. We deliver this information on mobile devices through our iPhone, iPad, Android, and Kindle applications and also provide tailored mobile experiences, such as GPS-based search.

We offer our products free to consumers. We deliver the “inside scoop” on homes, neighborhoods, and real estate professionals in an intuitive and engaging way, helping consumers make more informed housing decisions. For real estate professionals, we offer a suite of free and subscription products to promote themselves and their listings online, and to connect with consumers searching for homes. Our free products attract users to our marketplace and the quality of our products drives the growth of our audience and promotes deep engagement by our users. We believe this leads real estate professionals to convert to paying subscribers and brand advertisers to purchase our advertising products.

We generate revenue primarily from sales of subscription marketing products that we offer to real estate professionals. Our Trulia Pro product allows real estate professionals to receive prominent placement of their listings in our search results. With our Trulia Local Ads and Trulia Mobile Ads products, real estate professionals can purchase local advertising on our website and mobile applications, respectively, by locale and by share of a given market. We also generate revenue from display advertising we sell to leading real estate advertisers and consumer brands seeking to reach our attractive audience. Pricing for our display advertisements is based on advertisement size and position on our web page, and fees are based on a per-impression or on a per-click basis.

To date, we have focused our efforts and investments on developing and delivering superior products and user experiences, attracting consumers and real estate professionals to our marketplace, and growing our revenue. We have invested heavily to build our robust data and analytics platform, and continue to spend significantly on

 

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technology and engineering. In 2005, we launched the initial version of our website. Since then, we have become one of the leading online real estate marketplaces in the United States by achieving key product development and business milestones that have driven our revenue and user growth, including:

 

   

In May 2007, we launched Trulia Voices, a forum for our users to get the “inside scoop” on what it is like to live in a neighborhood from our community of contributors, including consumers, local enthusiasts, and real estate professionals;

 

   

In June 2008, we launched Trulia Pro, a premium advertising product by which real estate professionals promote their listings and market themselves to consumers;

 

   

In August 2008, we launched our first mobile product for consumers with a home search application on the iPhone and our mobile-optimized website m.trulia.com for consumers that is available on any mobile device browser;

 

   

In January 2010, we launched Trulia Local Ads, allowing real estate professionals to purchase promotional display space on Trulia’s search results and property details pages;

 

   

In December 2010, we acquired Movity, Inc., a geographic data company, for its engineering team and its data visualization expertise;

 

   

In January 2011, we expanded our presence by opening a dedicated sales and customer service center in Denver, Colorado, increasing our headcount by 149 people;

 

   

In March 2011, we expanded our mobile products for consumers with home search applications on the iPad and Android phones;

 

   

In December 2011, we launched Trulia for Agents on the iPhone, a mobile application dedicated to helping real estate professionals. Key features of the application include “check-ins” and lead notifications; and

 

   

In May 2012, we launched Trulia Mobile Ads, an innovative marketing product that allows real estate professionals to target consumers who are researching homes on mobile devices.

We have experienced rapid growth in the past three years. In the years ended December 31, 2009, 2010, and 2011, and the six months ended June 30, 2012, we generated revenue of $10.3 million, $19.8 million, $38.5 million, and $29.0 million, respectively. During the same period, we had net losses of $7.0 million, $3.8 million, $6.2 million, and $7.6 million, respectively.

Opportunities and Challenges

We believe that the growth of our business and our future success are dependent upon many factors including our ability to increase our audience size and user engagement, grow the number of subscribers in our marketplace, increase the value of our advertising products, and successfully invest in our growth. While each of these areas presents significant opportunities for us, they also pose important challenges that we must successfully address in order to sustain the growth of our business and improve our operating results.

Increase in Audience Size and User Engagement. We believe that increases in audience size and user engagement would make our marketplace more attractive to real estate professionals and advertisers which could lead to additional subscriptions, higher rates for our subscription products, more display advertising, and higher rates for display advertising. In order to increase our audience size and user engagement, we plan to continuously enhance and refresh our database of homes, to partner with third parties to add new and relevant local content, and to develop new features, tools, and products, each of which may increase our expenses. If we are not able to increase audience size and user engagement in our marketplace, we may not be able to increase the revenue from our subscription and display advertising products, and our operating results may be harmed.

Growth in the Number of Subscribers in our Marketplace. We believe that we will need to further penetrate the large base of more than 2.8 million real estate professionals in the United States in order to increase our

 

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revenues and improve our operating results. As of June 30, 2012, we had more than 360,000 active real estate professionals in our marketplace, 21,544 of whom were paying subscribers. If we are able to increase the number of paying subscribers in our marketplace, we expect that this would increase our revenue and improve our operating results, and any failure to increase the number of paying subscribers in our marketplace would adversely affect our revenue and operating results. To attract additional real estate professionals to our marketplace and to encourage real estate professionals to become paying subscribers, we plan to communicate the value of our free and subscription products, to continue to offer our subscribers high-quality leads from consumers using our marketplace, to enhance and increase the ways that real estate professionals can market themselves and communicate with prospective clients in our marketplace, and to create additional value-added products to help professionals more effectively manage their leads, documents, and other key elements of their business. We expect that our expenses will increase as we take these actions to increase the number of real estate professionals and subscribers in our marketplace. In addition, our sales and marketing expenses were our largest operating expenses in 2011 and the six months ended June 30, 2012. Sales and marketing expenses reflect many of the costs that we incur in acquiring new subscribers and retaining existing subscribers, and we expect that sales and marketing expenses will continue to increase in absolute dollars as we seek to grow the number of subscribers in our marketplace.

Increase Value of Advertising Products. We intend to continue to increase the attractiveness of our display advertising products in order to increase advertiser demand and thereby increase the amount advertisers spend with us. We aim to increase the attractiveness of our advertising products through increasing the size of our audience and engagement of our users, improving our ability to select relevant content of interest to individual users, and improving the measurement tools available to advertisers to optimize their campaigns.

Investments for Growth. We expect to continue to invest in our marketplace, our infrastructure, and our personnel in order to drive future growth, as well as to pursue adjacent opportunities. We plan to continuously enhance and refresh our database of homes and make ongoing product enhancements intended to improve the user experience. We also expect to continue to make investments in our technical infrastructure to ensure that our growing user base can access our marketplace rapidly and reliably. In addition, we anticipate continuing to increase our headcount to ensure that our research and development function drives improvements in our marketplace and our sales and marketing function maximizes opportunities for growing our business and revenue. As part of our strategy, we also intend to invest in pursuing opportunities in large adjacent markets, such as rentals, mortgages, home improvement, and agent tools, and to expand our business internationally. We expect that these investments will increase our operating expenses, and that any increase in revenue resulting from these investments will likely trail the increase in expenses.

Key Business Metrics

To analyze our business performance, determine financial forecasts, and help develop long-term strategic plans, we review the following key business metrics:

 

   

Monthly Unique Visitors. We count a unique visitor the first time a computer or mobile device with a unique IP address accesses our website or our mobile applications during a calendar month. If an individual accesses our website or mobile applications using different IP addresses within a given month, the first access by each such IP address is counted as a separate unique visitor. Our number of monthly unique visitors includes mobile monthly unique visitors. We calculate our monthly unique visitors based on the monthly average over the applicable period. We view monthly unique visitors as a key indicator of the growth in our business and audience reach, the quality of our products, and the strength of our brand awareness. In the six months ended June 30, 2012, the number of monthly unique visitors increased to 22.0 million from 13.4 million in the six months ended June 30, 2011, a 64% increase. We attribute the growth in our monthly unique visitors principally to our increasing brand awareness, the popularity of our mobile products and the overall industry trend of more consumers using the web and mobile applications to research housing decisions.

 

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Mobile Monthly Unique Visitors. We count a unique mobile visitor the first time a mobile device with a unique IP address accesses our website or our mobile applications during a calendar month. We calculate our mobile monthly unique visitors based on the monthly average over the applicable period. These mobile monthly unique visitors are included in the monthly unique visitors metric. We view mobile monthly unique visitors as a key indicator of the growth in our business and audience reach, and believe that having more unique visitors using our mobile applications will drive faster growth in our revenue. We plan to expand our mobile products to support our rapidly growing mobile user base. In the six months ended June 30, 2012, the number of mobile monthly unique visitors increased to 4.4 million from 1.6 million in the six months ended June 30, 2011, a 176% increase. We attribute this growth to the overall adoption of smartphones and the growth of mobile applications and mobile web use by consumers. We also attribute the growth in our mobile monthly unique visitors to our increased efforts in developing a mobile website and mobile applications. Due to the significant growth rate of usage of our mobile products and solutions, our mobile monthly unique visitors has grown as a percentage of our monthly unique visitors over recent periods and we expect this trend to continue.

 

   

New Contributions to User-Generated Content. We define user-generated content as any content contributed by a user through our website or mobile applications, such as Q&A discussions, blogs, blog comments, user votes, recommendations, and neighborhood ratings and reviews. We view the changes in the volume of new contributions to user-generated content as a key indicator of our user engagement and the strength of our community. In the six months ended June 30, 2012, new contributions to user-generated content increased by 1,397,200 contributions, and we now have over 5 million cumulative contributions on our marketplace. We expect new contributions to user-generated content to continue to grow as our monthly unique visitors and total subscribers grow and as we introduce new features to our marketplace. While the absolute number of new contributions to user-generated content may continue to grow period-over-period, the rate of growth has slowed and we expect that the rate of growth may continue to slow as the aggregate size of our user-generated content increases. We believe the slowing growth rate of new contributions to user-generated content is a function of the large historical number of new contributions to user-generated content on our marketplace, which makes achievement of increasing rates of growth more challenging. We continue to focus on promoting new contributions to user-generated content to increase the engagement of our users with our marketplace.

 

   

Total Subscribers. We define a subscriber as a real estate professional with a paid subscription at the end of a period. Total subscribers has been, and we expect will continue to be, a key driver of revenue growth. It is also an indicator of our market penetration, the value of our products, and the attractiveness of our consumer audience to real estate professionals. As of June 30, 2012, we had 21,544 total subscribers, a 46% increase from 14,766 total subscribers as of June 30, 2011. We attribute this growth to our increasing sales and marketing efforts, principally from the launch and growth of our inside sales team, as well as growth in monthly unique visitors. Although our total subscribers are growing period-over-period and we expect total subscribers to continue to grow, the rate of growth may slow as we increase efforts to sell more products to existing subscribers. In addition, subscribers often purchase subscriptions for limited periods as a result of seasonality, as part of their advertising campaigns, and other factors.

 

   

Average Monthly Revenue per Subscriber. We calculate our average monthly revenue per subscriber by dividing the revenue generated from subscriptions in a period by the average number of subscribers in the period, divided again by the number of months in the period. Our average number of subscribers is calculated by taking the average of the beginning and ending number of subscribers for the period. Our average monthly revenue per subscriber is a key indicator of our ability to monetize our marketplace, and we monitor changes in this metric to measure the effectiveness of our marketplace monetization strategy. In the six months ended June 30, 2012, our average monthly revenue per subscriber increased to $140 from $91 in the six months ended June 30, 2011, a 54% increase. We have been able to increase our average monthly revenue per subscriber by launching new products to sell to existing customers, raising prices in certain geographic markets, and selling to existing subscribers the

 

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additional advertising inventory created by traffic growth to our marketplace. In addition, in geographic markets that show strong demand for our subscription products—those where inventory is sold out and wait lists to purchase our products exist—average monthly revenue per subscriber is higher than in markets with less demand for our products. While the average monthly revenue per subscriber has increased and may continue to increase in absolute dollars period-over-period, the rate of increase has slowed and we expect that the rate of increase may continue to slow as the average monthly revenue per subscriber increases. We believe that the slowing growth rate of our average monthly revenue per subscriber is the result of our larger subscriber base and the resulting challenge associated with achieving higher growth rates. Despite this slowing growth rate, we believe we have significant opportunities to continue to increase average monthly revenue per subscriber by further penetrating markets and by offering new products to existing subscribers.

Our key business metrics are as follows:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
         2009              2010              2011              2011              2012      

Monthly unique visitors (in thousands)

     5,206         7,935         14,776         13,407         22,030   

Mobile monthly unique visitors (in thousands)

     30         484         2,088         1,592         4,389   

New contributions to user-generated content (in thousands)

     507         1,386         1,991         1,049         1,397   

Total subscribers (at period end)

     4,667         10,070         16,849         14,766         21,544   

Average monthly revenue per subscriber ($)

     47         80         110         91         140   

Components of Statements of Operations

Revenue

Our revenue is comprised of marketplace revenue and media revenue.

Marketplace Revenue. Marketplace revenue primarily consists of our fixed-fee subscription products. We currently provide two sets of products to real estate professionals on a subscription basis. The first set of products, which include Trulia Local Ads and Trulia Mobile Ads, enables real estate professionals to promote themselves on our search results pages and property details pages for a local market area. Real estate professionals purchase subscriptions to this product based upon their specified market share for a city or zip code, at a fixed monthly price, for periods ranging from one month to one year, with pricing depending on the location and the percentage of market share purchased. We price Trulia Local Ads and Trulia Mobile Ads subscriptions similarly based on geography, the share of a market, and demand. Our second set of products allows real estate professionals to receive prominent placement of their listings in our search results. Real estate professionals sign up for subscriptions to this service at a fixed monthly price for periods that generally range from one month to 12 months. We recognize our subscription revenue ratably over the term of the subscription.

Media Revenue. We derive media revenue from sales of display advertisements to real estate advertisers, such as home improvement companies and mortgage lenders. We also derive media revenue from sales of display advertisements to leading consumer brands, such as home furnishings, cable, and automotive companies. Our media products enable our customers to display advertisements to promote their brand on our website and mobile website, m.trulia.com. Pricing is based on advertisement size and position on our web page, and fees are billed monthly, based on a per impressions or a per click basis. Impressions are the number of times an advertisement is loaded on our web page, and prices are measured on a cost per thousand, or CPM, basis. Clicks are the number of times users click on an advertisement, and prices are measured on a cost per click, or CPC, basis. CPC is based on the number of times a user clicks an advertisement. This media revenue is recognized in the periods the clicks or impressions are delivered. Our media revenue is generated primarily through advertisements placed on our website, although we do generate some media revenue from display advertising on our mobile website. We price display advertisements on our mobile website on a per-impression basis. We also ran one display advertising campaign for an advertiser in November and December 2011 on our iPad mobile application, and we may offer display advertising on our other mobile applications in the future. We do not

 

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currently generate any media revenue from our mobile applications. As our mobile web pages offer less space on which to display advertising, a shift in user traffic from our website to mobile products could decrease our advertising inventory and negatively affect our media revenue. We do not believe that we have experienced a shift in user traffic from our website to our mobile applications, as our monthly unique visitors and mobile monthly unique visitors each continued to grow at a rapid pace.

During the years ended December 31, 2009, 2010, and 2011 and the six months ended June 30, 2011 and 2012, we recognized marketplace revenue and media revenue as follows:

 

    Year Ended December 31,     Six Months Ended June 30,  
    2009 (1)     2010 (1)     2011     2011     2012  
    (In thousands, except percentages)  
          % of
Revenue
          % of
Revenue
          % of
Revenue
          % of
Revenue
          % of
Revenue
 

Marketplace revenue

  $ 3,288        32   $ 9,358        47   $ 22,252        58   $ 8,717        54   $ 19,733        68

Media revenue

    7,050        68        10,427        53        16,266        42        7,531        46        9,254        32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $ 10,338        100   $ 19,785        100   $ 38,518        100   $ 16,248        100   $ 28,987        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

For the years ended December 31, 2009 and 2010, because we had not yet established the fair value for each element, revenue for multiple element arrangements was recognized ratably over the contract term for financial reporting purposes. However, in order to provide added transparency and help facilitate the discussion herein, we have separated marketplace and media revenue based on selling prices, which management has determined to be a reasonable separation methodology.

Both our marketplace revenue and media revenue have grown over the periods disclosed above. Our marketplace revenue has grown significantly faster than our media revenue and, as a result, now constitutes the majority of our total revenue. We expect this trend to continue and for the percentage of our media revenue, as a share of our total revenue, to continue to decline.

Cost and Operating Expenses

Cost of Revenue. Cost of revenue consists primarily of expenses related to operating our website and mobile applications, including those associated with the operation of our data center, hosting fees, customer service related headcount expenses including salaries, bonuses, benefits and stock-based compensation expense, licensed content, credit card processing fees, third-party contractor fees, and allocated overhead.

Technology and Development. Technology and development expenses consist primarily of headcount related expenses including salaries, bonuses, benefits and stock-based compensation expense, third-party contractor fees, and allocated overhead primarily associated with developing new technologies. Technology and development also includes amortization expenses related to capitalized costs from internal and external development activities for our marketplace.

Sales and Marketing. Sales and marketing expenses consist primarily of headcount-related expenses including salaries, bonuses, commissions, benefits and stock-based compensation expense for sales, customer service, marketing, and public relations employees and third-party contractor fees. Sales and marketing expenses also include other sales expenses related to promotional and marketing activities, and allocated overhead.

General and Administrative. General and administrative expenses consist primarily of headcount related expenses including salaries, bonuses, and benefits and stock-based compensation expense for executive, finance, accounting, legal, human resources, recruiting, and administrative support personnel. General and administrative expenses also include legal, accounting, and other third-party professional service fees, bad debt, and allocated overhead.

Interest Income

Interest income consists primarily of interest earned on our cash and cash equivalent and short-term investment balances.

 

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Interest Expense

Interest expense consists primarily of interest on our outstanding long-term debt and capital lease obligations. See Note 6 of our audited financial statements included elsewhere in this prospectus for more information about our long-term debt and Note 7 for more information about our capital lease obligations.

Change in Fair Value of Warrant Liability

Change in the fair value of the warrant liability includes charges from the remeasurement of our preferred stock warrant liability on a mark-to-market basis as of each period end. These preferred stock warrants will remain outstanding until the earlier of the exercise or expiration of the warrants or the completion of our initial public offering, at which time, the warrant liability will be remeasured to fair value and any remaining liability will be reclassified to additional paid-in capital. See Note 9 of the audited financial statements included elsewhere in this prospectus for more information about our preferred stock warrants.

Provision for Income Taxes

Our provision for income taxes has not been historically significant to our business as we have incurred losses to date. We currently have federal and state net operating loss carryforwards of $29.7 million and $24.9 million, which expire at various dates beginning in 2025 and 2015, respectively. See Note 12 of our audited financial statements included elsewhere in this prospectus for more information about our provision for income taxes.

The Internal Revenue Code provides limitations on our ability to utilize net operating loss carryforwards and certain other tax attributes, including tax credit carryforwards, after an ownership change, as defined in Section 382 of the Internal Revenue Code. California has similar rules that may limit our ability to utilize our state net operating loss carryforwards. If we were to experience an ownership change in the future, this could limit our use of our net operating loss carryforwards.

Results of Operations

The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our total revenue:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2009     2010     2011     2011     2012  
     (In thousands)  

Statement of Operations Data:

          

Revenue

   $ 10,338      $ 19,785      $ 38,518      $ 16,248      $ 28,987   

Cost and operating expenses: (1)

          

Cost of revenue (2)

     2,855        3,657        5,795        2,359        4,693   

Technology and development

     7,056        8,803        14,650        6,651        9,905   

Sales and marketing

     5,532        8,638        17,717        7,278        15,197   

General and administrative

     1,912        2,501        6,123        2,531        6,025   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

     17,355        23,599        44,285        18,819        35,820   

Loss from operations

     (7,017     (3,814     (5,767     (2,571     (6,833

Interest income

     55        15        17        6        7   

Interest expense

     (21     (39     (389     (41     (491

Change in fair value of warrant liability

                   (16            (323
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (6,983     (3,838     (6,155     (2,606     (7,640

Provision for income taxes

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (6,983   $ (3,838   $ (6,155   $ (2,606   $ (7,640
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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(1) 

Stock-based compensation was allocated as follows:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
         2009              2010              2011              2011              2012      
     (In thousands)  

Cost of revenue

   $ 10       $ 8       $ 11       $ 3       $ 14   

Technology and development

     177         176         482         159         376   

Sales and marketing

     105         97         183         92         179   

General and administrative

     13         73         808         583         447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 305       $ 354       $     1,484       $ 837       $ 1,016   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(2)      Amortization of product development costs was included in technology and development as follows

   $       179       $       366       $ 708       $       264       $         481   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Year Ended December 31,     Six Months Ended
June 30,
 
         2009             2010             2011             2011             2012      

Percentage of Revenue:

        

Revenue

     100     100     100     100     100

Cost and operating expenses:

          

Cost of revenue

     28        18        15        15        16   

Technology and development

     68        44        38        41        34   

Sales and marketing

     54        44        46        45        52   

General and administrative

     18        13        16        16        21   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

           168        119        115        116        124   

Loss from operations

     (68     (19     (15     (16     (24

Interest income

     1        *        *        *        *   

Interest expense

     *        *        (1     *        (2

Change in fair value of warrant liability

                   *               (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (68     (19     (16     (16     (26

Provision for income taxes

                    —                —                —                —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

     (68 )%      (19 )%      (16 )%      (16 )%      (26 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Less than 0.5% of revenue.

Comparison of the Six Months Ended June 30, 2011 and 2012

Revenue

 

     Six Months Ended
June 30,
     2011 to 2012
% Change
 
         2011              2012         
     (In thousands)         

Revenue

   $ 16,248       $ 28,987         78

Revenue increased to $29.0 million in the six months ended June 30, 2012 from $16.2 million in the six months ended June 30, 2011, an increase of $12.8 million, or 78%. Marketplace revenue and media revenue represented 68% and 32%, respectively, of total revenue in the six months ended June 30, 2012, compared to 54% and 46%, respectively, of total revenue in the six months ended June 30, 2011. The continued increase in marketplace revenue as a percentage of total revenue was the result of significant growth in our subscription business. Increases in total subscribers and average monthly revenue per subscriber outpaced the growth of our advertising business.

 

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Marketplace revenue increased to $19.7 million in the six months ended June 30, 2012 from $8.7 million in the six months ended June 30, 2011, an increase of $11.0 million, or 126%. The increase in marketplace revenue was primarily attributable to the 54% increase in the average monthly revenue per subscriber from $91 in the six months ended June 30, 2011 to $140 in the six months ended June 30, 2012, which resulted in a $5.7 million increase in marketplace revenue during the six months ended June 30, 2012 when compared to the six months ended June 30, 2011. The increase in marketplace revenue was also partly attributable to the 46% increase in the number of total subscribers from 14,766 as of June 30, 2011 to 21,544 as of June 30, 2012, which resulted in a $3.7 million increase in marketplace revenue during the six months ended June 30, 2012 when compared to the six months ended June 30, 2011.

Media revenue increased to $9.3 million in the six months ended June 30, 2012 from $7.5 million in the six months ended June 30, 2011, an increase of $1.8 million, or 23%. This increase in media revenue was primarily attributable to the increase in the number of impressions sold on a CPM or CPC basis which was primarily driven by an increase in overall advertiser demand for our display advertising inventory as we recognized an increase in monthly unique visitors from 13.4 million in the six months ended June 30, 2011 to 22.0 million in the six months ended June 30, 2012, a 64% increase. Although there is a correlation between numbers of monthly unique visitors and our media revenue, it is not a direct correlation. Therefore, and as in prior periods, the growth rate in our monthly unique visitors has outpaced the growth rate of our media revenue.

Cost of Revenue

 

     Six Months Ended
June 30,
     2011 to 2012
% Change
 
         2011              2012         
     (In thousands)         

Cost of revenue

   $      2,359       $   4,693         99

Cost of revenue increased to $4.7 million in the six months ended June 30, 2012 from $2.4 million in the six months ended June 30, 2011, an increase of $2.3 million, or 99%. This increase in cost of revenue was primarily the result of a $1.2 million increase in headcount and related benefits due primarily to growth in sales and customer service headcount following the opening of our new facility in Denver in February 2011, and a $0.9 million increase in content license fees, hosting fees, and credit card fees due to higher subscription revenue. Cost of revenue increased to 16% of revenue in the six months ended June 30, 2012 from 15% of revenue in the six months ended June 30, 2011, reflecting higher customer service-related costs in connection with the establishment of our new facility in Denver.

Technology and Development Expenses

 

     Six Months Ended
June 30,
     2011 to 2012
% Change
 
         2011              2012         
     (In thousands)         

Technology and development

   $   6,651       $   9,905         49

Technology and development expenses increased to $9.9 million in the six months ended June 30, 2012 from $6.7 million in the six months ended June 30, 2011, an increase of $3.2 million, or 49%. This increase was comprised primarily of a $2.3 million increase in headcount and related benefits, a $0.2 million increase in stock-based compensation expenses, a $0.3 million increase in facilities expenses to support our headcount growth, and a $0.2 million increase in amortization of capitalized product development costs. Technology and development expenses decreased to 34% of revenue in the six months ended June 30, 2012 from 41% of revenue in the six months ended June 30, 2011, reflecting the increase in our revenue. We expect our technology and development expenses to increase in dollar amount as we continue to invest in the development of our products.

 

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Sales and Marketing Expenses

 

     Six Months Ended
June 30,
     2011 to 2012
% Change
 
         2011              2012         
     (In thousands)         

Sales and marketing

   $   7,278       $   15,197         109

Sales and marketing expenses increased to $15.2 million in the six months ended June 30, 2012 from $7.3 million in the six months ended June 30, 2011, an increase of $7.9 million, or 109%. This increase was primarily the result of a $5.9 million increase in headcount and related benefits associated with the expansion of our sales personnel in our new Denver facility, a $0.8 million increase in recruiting, depreciation, and facilities related expenses due to headcount growth, a $1.4 million increase in marketing and advertising expenses as we increased marketing activities for Trulia Mobile Ads, partially offset by a $0.4 million decrease in external contractor fees as we converted third-party contractors to full time employees. Sales and marketing expenses increased to 52% of revenue in the six months ended June 30, 2012 from 45% of revenue in the six months ended June 30, 2011. We expect sales and marketing expenses to increase in dollar amount as we hire additional employees to expand our sales force and to support our direct marketing initiatives.

General and Administrative Expenses

 

     Six Months Ended
June 30,
     2011 to 2012
% Change
 
         2011              2012         
     (In thousands)         

General and administrative

   $   2,531       $   6,025         138

General and administrative expenses increased to $6.0 million in the six months ended June 30, 2012 from $2.5 million in the six months ended June 30, 2011, an increase of $3.5 million, or 138%. This increase was primarily the result of a $1.6 million increase in headcount and related benefits, a $1.6 million increase in third-party professional services related to consulting and external audit services, partially offset by a $0.1 million decrease in stock-based compensation expenses. General and administrative expenses increased to 21% of revenue in the six months ended June 30, 2012 from 16% of revenue in the six months ended June 30, 2011. We expect our general and administrative expenses to increase in dollar amount as we expand our financial, accounting, and legal personnel and resources to support our anticipated public reporting requirements.

Interest Expense

 

     Six Months Ended
June 30,
     2011 to 2012
% Change
 
         2011              2012         
     (In thousands)         

Interest expense

   $      41       $     491         1,098

Interest expense increased to $0.5 million in the six months ended June 30, 2012 from $41,000 in the six months ended June 30, 2011. This increase was primarily the result of the incremental interest expense associated with the increased principal amount of our outstanding indebtedness during the six months ended June 30, 2012. Our indebtedness increased from $3.3 million as of June 30, 2011 to $9.7 million as of June 30, 2012. We expect that our interest expense will continue to vary in future periods based on the terms specified and amounts borrowed under our existing credit facility.

 

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Change in Fair Value of Warrant Liability

 

     Six Months Ended
June 30,
    2011 to 2012
% Change
 
         2011              2012        
     (In thousands)        

Change in fair value of warrant liability

   $       —       $     (323     N/M   

N/M – not meaningful

Change in fair value of warrant liability was $0.3 million in the six months ended June 30, 2012, reflecting the increase in the fair value of our outstanding preferred stock warrants. In September 2011, we issued preferred stock warrants in conjunction with establishing a new credit facility. Upon the exercise or expiration of the warrants, the conversion of the underlying shares of convertible stock, or the completion of our initial public offering, the preferred stock warrant liability will be remeasured to fair value and any remaining liability will be reclassified to additional paid-in capital. We expect the fair value of the warrants to increase leading up to our initial public offering but we do not expect any future charges following the completion of our initial public offering.

Comparison of the Years Ended December 31, 2009, 2010, and 2011

Revenue

 

     Year Ended December 31,      2009 to 2010
% Change
    2010 to 2011
% Change
 
     2009      2010      2011       
     (In thousands)               

Revenue

   $ 10,338       $ 19,785       $ 38,518         91     95

2010 Compared to 2011

Revenue increased to $38.5 million in the year ended December 31, 2011 from $19.8 million in the year ended December 31, 2010, an increase of $18.7 million, or 95%. Marketplace revenue and media revenue represented 58% and 42%, respectively, of total revenue in the year ended December 31, 2011, compared to 47% and 53%, respectively, of total revenue in the year ended December 31, 2010. The increase in marketplace revenue as a percentage of total revenue was the result of significant growth in our subscription business, driven by increases in total subscribers and average monthly revenue per subscriber, which outpaced the growth of our advertising business.

Marketplace revenue increased to $22.3 million in the year ended December 31, 2011 from $9.4 million in the year ended December 31, 2010, an increase of $12.9 million, or 138%. This increase in marketplace revenue was primarily attributable to the 67% increase in the number of total subscribers from 10,070 as of December 31, 2010 to 16,849 as of December 31, 2011. This increase in total subscribers resulted in a $5.8 million increase in marketplace revenue during the year ended December 31, 2011 when compared to the year ended December 31, 2010. The increase in marketplace revenue was also partly attributable to a 38% increase in the average monthly revenue per subscriber from $80 in the year ended December 31, 2010 to $110 in the year ended December 31, 2011. This increase in average revenue per subscriber resulted in a $4.9 million increase in marketplace revenue during the year ended December 31, 2011 when compared to the year ended December 31, 2010.

Media revenue increased to $16.3 million in the year ended December 31, 2011 from $10.4 million in the year ended December 31, 2010, an increase of $5.9 million, or 56%. This increase in media revenue was primarily the result of the increase in the number of impressions sold on a CPM or CPC basis as we recognized an increase in overall advertiser demand for our display advertising inventory during the year ended December 31, 2011. These increases were primarily driven by an increase in our average monthly unique visitors from 7.9 million in the year ended December 31, 2010 to 14.8 million in the year ended December 31, 2011, an increase of 86%. Although there is a correlation between monthly unique visitors and our media revenue, it is not a direct correlation. Therefore, the growth rate in our monthly unique visitors has outpaced the growth rate of our media revenue.

 

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2009 Compared to 2010

Revenue increased to $19.8 million in the year ended December 31, 2010 from $10.3 million in the year ended December 31, 2009, an increase of $9.5 million, or 91%. Marketplace revenue and media revenue represented 47% and 53%, respectively, of total revenue in the year ended December 31, 2010, compared to 32% and 68%, respectively, of total revenue in the year ended December 31, 2009.

Marketplace revenue increased to $9.4 million in the year ended December 31, 2010 from $3.3 million in the year ended December 31, 2009, an increase of $6.1 million, or 185%. This increase in marketplace revenue was primarily attributable to the 116% increase in the number of total subscribers from 4,667 as of December 31, 2009 to 10,070 as of December 31, 2010, which was driven by our Trulia Local Ads product launch in January 2010. This increase in total subscribers resulted in a $3.7 million increase in marketplace revenue during the year ended December 31, 2010 when compared to the year ended December 31, 2009. The increase in marketplace revenue was also partly attributable to a 70% increase in the average monthly revenue per subscriber from $47 in the year ended December 31, 2009 to $80 in the year ended December 31, 2010. This increase in average revenue per subscriber resulted in a $2.9 million increase in marketplace revenue during the year ended December 31, 2010 when compared to the year ended December 31, 2009.

Media revenue increased to $10.4 million in the year ended December 31, 2010 from $7.1 million in the year ended December 31, 2009, an increase of $3.3 million, or 48%. This increase in media revenue was primarily attributable to the increase in the number of impressions sold on a CPM or CPC basis as we recognized an increase in overall advertiser demand for our display advertising inventory. We also experienced an increase in our average monthly unique visitors from 5.2 million in the year ended December 31, 2009 to 7.9 million in the year ended December 31, 2010, a 52% increase.

Cost of Revenue

 

     Year Ended December 31,      2009 to 2010
% Change
    2010 to 2011
% Change
 
     2009      2010      2011       
     (In thousands)               

Cost of revenue

   $ 2,855       $ 3,657       $ 5,795         28     58

2010 Compared to 2011

Cost of revenue increased to $5.8 million in the year ended December 31, 2011 from $3.7 million in the year ended December 31, 2010, an increase of $2.1 million, or 58%. This increase in cost of revenue was primarily the result of a $0.8 million increase in headcount and related benefits due to growth in customer service headcount following the establishment of our new facility in Denver in February 2011 and a $0.3 million increase in our credit card fees, a $0.2 million increase in content license fees, and a $0.4 million increase in hosting fees, due to growth in our subscriptions and additional traffic. Cost of revenue declined to 15% of revenue in the year ended December 31, 2011 from 18% of revenue in the year ended December 31, 2010.

2009 Compared to 2010

Cost of revenue increased to $3.7 million in the year ended December 31, 2010 from $2.9 million in the year ended December 31, 2009, an increase of $0.8 million, or 28%. This increase in cost of revenue was primarily the result of a $0.4 million increase in partnership payments due to growth in media and builder advertisers and a $0.3 million increase in credit card fees due to higher subscription revenue, content license fees, and hosting fees. Cost of revenue declined to 18% of revenue in the year ended December 31, 2010 from 28% of revenue in the year ended December 31, 2009.

Technology and Development Expenses

 

     Year Ended December 31,      2009 to 2010
% Change
    2010 to 2011
% Change
 
     2009      2010      2011       
     (In thousands)               

Technology and development

   $ 7,056       $ 8,803       $ 14,650         25     66

 

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2010 Compared to 2011

Technology and development expenses increased to $14.7 million in the year ended December 31, 2011 from $8.8 million in the year ended December 31, 2010, an increase of $5.9 million, or 66%. This increase was primarily the result of a $3.4 million increase in headcount and related benefits a $0.3 million increase in stock-based compensation expenses, a $0.6 million increase in equipment and facilities related costs to support the headcount growth, a $0.6 million increase related to additional recruiting and travel expenses, and a $0.3 million increase related to amortization of capitalized product development costs. Technology and development expenses declined to 38% of revenue in the year ended December 31, 2011 from 44% of revenue in the year ended December 31, 2010, reflecting the increase in our revenue.

2009 Compared to 2010

Technology and development expenses increased to $8.8 million in the year ended December 31, 2010 from $7.1 million in the year ended December 31, 2009, an increase of $1.7 million, or 25%. This increase was primarily the result of a $1.2 million increase in headcount and related benefits expenses, a $0.3 million increase in recruiting and consulting fees, and a $0.2 million increase related to amortization of capitalized product development costs. Technology and development expenses decreased to 44% of revenue in the year ended December 31, 2010 from 68% of revenue in the year ended December 31, 2009, reflecting the increase in our revenue.

Sales and Marketing Expenses

 

     Year Ended December 31,      2009 to 2010
% Change
    2010 to 2011
% Change
 
     2009      2010      2011       
     (In thousands)               

Sales and marketing

   $ 5,532       $ 8,638       $ 17,717         56     105

2010 Compared to 2011

Sales and marketing expenses increased to $17.7 million in the year ended December 31, 2011 from $8.6 million in the year ended December 31, 2010, an increase of $9.1 million, or 105%. This increase was primarily the result of a $4.1 million increase in headcount and related benefits, a $2.7 million increase in consulting costs largely for temporary contractors when we opened our new Denver facility, where we subsequently hired to expand our sales team, a $1.0 million increase in facilities related costs and a $0.5 million increase in depreciation due to our growth and a $0.4 million increase in marketing and advertising expenses. Sales and marketing expenses increased to 46% of revenue in the year ended December 31, 2011 from 44% of revenue in the year ended December 31, 2010.

2009 Compared to 2010

Sales and marketing expenses increased to $8.6 million in the year ended December 31, 2010 from $5.5 million in the year ended December 31, 2009, an increase of $3.1 million, or 56%. This increase was primarily the result of a $3.1 million increase in headcount and related benefits. Sales and marketing expenses declined to 44% of revenue in the year ended December 31, 2010 from 54% of revenue in the year ended December 31, 2009.

General and Administrative Expenses

 

     Year Ended December 31,      2009 to 2010
% Change
    2010 to 2011
% Change
 
     2009      2010      2011       
     (In thousands)               

General and administrative

   $ 1,912       $ 2,501       $ 6,123         31     145

 

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2010 Compared to 2011

General and administrative expenses increased to $6.1 million in the year ended December 31, 2011 from $2.5 million in the year ended December 31, 2010, an increase of $3.6 million, or 145%. This increase was primarily the result of a $1.5 million increase in headcount and related benefits, a $0.8 million increase in professional services related to legal, recruiting, and accounting as we scaled our business, and a $0.7 million increase in stock-based compensation expenses. General and administrative expenses increased to 16% of revenue in the year ended December 31, 2011 from 13% in the year ended December 31, 2010.

2009 Compared to 2010

General and administrative expenses increased to $2.5 million in the year ended December 31, 2010 from $1.9 million in the year ended December 31, 2009, an increase of $0.6 million, or 31%. This increase was primarily the result of a $0.2 million increase in headcount and related benefits, and a $0.2 million increase in professional services and consulting fees. General and administrative expenses decreased to 13% of revenue in the year ended December 31, 2010 from 18% of revenue in the year ended December 31, 2009.

Interest Expense

 

     Year Ended December 31,      2009 to 2010
% Change
    2010 to 2011
% Change
 
         2009              2010              2011           
     (In thousands)               

Interest expense

   $         21       $         39       $       389         86     897

2010 Compared to 2011

Interest expense increased to $0.4 million in the year ended December 31, 2011 from $39,000 in the year ended December 31, 2010. This increase was primarily the result of the incremental interest expense associated with the increased principal amount of our outstanding indebtedness, which increased from $2.0 million as of December 31, 2010 to $9.6 million as of December 31, 2011.

2009 Compared to 2010

Interest expense increased to $39,000 in the year ended December 31, 2010 from $21,000 in the year ended December 31, 2009. This increase was primarily the result of the incremental interest expense associated with the increased principal amount of our outstanding indebtedness, which increased from $0.5 million as of December 31, 2009 to $2.0 million as of December 31, 2010.

Quarterly Results of Operations

The following unaudited quarterly statements of operations data for each of the ten quarters in the period ended June 30, 2012 have been prepared on a basis consistent with our audited annual financial statements and include, in our opinion, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the three and six months ended June 30, 2012 are not necessarily indicative of results to be expected for 2012 or any other period. The following quarterly financial data should be read in conjunction with our audited financial statements and the related notes included elsewhere in this prospectus.

 

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Table of Contents
    Three Months Ended  
    March 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    March 31,
2011
    June 30,
2011
    Sept. 30,
2011
    Dec. 31,
2011
    March 31,
2012
    June 30,
2012
 
    (In thousands, except share and per share data)        

Statement of Operations Data:

                   

Revenue

  $ 3,458      $ 4,494      $ 5,626      $ 6,207      $ 6,946      $ 9,302      $ 10,533      $ 11,737      $ 12,162      $ 16,825   

Cost and operating expenses: (1)

                   

Cost of revenue (exclusive of amortization) (2)

    748        871        1,023        1,015        1,016        1,343        1,642        1,794        2,205        2,488   

Technology and development

    1,306        2,346        2,418        2,733        3,038        3,613        3,626        4,373        4,646        5,259   

Sales and marketing

    1,867        1,884        2,213        2,674        3,192        4,086        5,010        5,429        6,075        9,122   

General and administrative

    518        510        550        923        1,365        1,166        1,660        1,932        2,971        3,054   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

    4,439        5,611        6,204        7,345        8,611        10,208        11,938        13,528        15,897        19,923   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (981     (1,117     (578     (1,138     (1,665     (906     (1,405     (1,791     (3,735     (3,098

Interest income

    4        4        4        3        3        3        4        7        3        4   

Interest expense

    (7     (10     (12     (10     (28     (13     (94     (254     (252     (239

Change in fair value of warrant liability

                                                     (16     (216     (107
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (984     (1,123     (586     (1,145     (1,690     (916     (1,495     (2,054     (4,200     (3,440

Provision for income taxes

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (984   $ (1,123   $ (586   $ (1,145   $ (1,690   $ (916   $ (1,495   $ (2,054   $ (4,200   $ (3,440
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

  $ (0.17   $ (0.19   $ (0.10   $ (0.19   $ (0.26   $ (0.14   $ (0.22   $ (0.30   $ (0.61   $ (0.49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net loss per share attributable to common stockholders, basic and diluted

    5,825,572        6,015,995        6,050,806        6,169,669        6,552,492        6,579,642        6,720,268        6,772,664        6,882,065        7,017,449   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Information:

                   

Adjusted EBITDA (3)

  $ (771   $ (774   $ (220   $ (732   $ (623   $ (91   $ (400   $ (673   $ (2,473   $ (1,758
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
(1)

Stock-based compensation was allocated as follows:

 

    Three Months Ended  
    March 31,
2010
    June 30,
2010
    September 30,
2010
    December 31,
2010
    March 31,
2011
    June 30,
2011
    September 30,
2011
    December 31,
2011
    March 31,
2012
    June 30,
2012
 
    (In thousands)        

Cost of revenue

  $ 2      $ 2      $ 3      $ 1      $ 2      $ 1      $ 4      $ 4      $ 5      $ 9   

Technology and development

    29        50        50        47        59        100        160        163        192        184   

Sales and marketing

    22        18        29        28        50        42        44        47        55        124   

General and administrative

    19        17        18        19        487        96        96        129        213        234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $           72      $ 87      $ 100      $ 95      $ 598      $ 239      $ 304      $ 343      $ 465      $ 551   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(2) Amortization of product development costs was included in technology and development as follows:

  $ 16      $       123      $           113      $         114      $         118      $         146      $           183      $           261      $           274      $ 207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(3)

See “—Non-GAAP Financial Measures” for more information and a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with generally accepted accounting principles in the United States.

 

    Three Months Ended  
    March 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    March 31,
2011
    June 30,
2011
    Sept. 30,
2011
    Dec. 31,
2011
    March 31,
2012
    June 30,
2012
 
    (In thousands)        

Marketplace revenue

  $ 1,375      $ 2,104      $ 2,780      $ 3,099      $ 3,664      $ 5,053      $ 6,236      $ 7,299      $ 8,684      $ 11,049   

Media revenue

    2,083        2,390        2,846        3,108        3,282        4,249        4,297        4,438        3,478        5,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  $     3,458      $     4,494      $     5,626      $     6,207      $     6,946      $     9,302      $     10,533      $     11,737      $     12,162      $ 16,825   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended  
    March 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    March 31,
2011
    June 30,
2011
    Sept. 30,
2011
    Dec. 31,
2011
    March 31,
2012
    June 30,
2012
 

Percentage of Revenue:

                   

Revenue

    100     100     100     100     100     100     100     100     100     100

Cost and operating expenses:

                   

Cost of revenue

    22        19        18        16        15        14        16        15        18        15   

Technology and development

    38        52        43        44        44        39        34        37        38        31   

Sales and marketing

    54        42        39        43        46        44        48        46        50        54   

General and administrative

    15        11        10        15        20        13        16        16        24        18   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and operating expenses

    128        124        110        118        124        110        113        115        131        118   

Loss from operations

    (28     (24     (10     (18     (24     (10     (13     (15     (31     (18

Interest income

    *        *        *        *        *        *        *        *        *        *   

Interest expense

    *        *        *        *        *        *        (1     (2     (2     (1

Change in fair value of warrant liability

                                       *        *        *        (2     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (28     (24     (10     (18     (24     (10     (14     (18     (35     (20

Provision for income taxes

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

    (28 )%      (24 )%      (10 )%      (18 )%      (24 )%      (10 )%      (14 )%      (18 )%      (35 )%      (20 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Less than 0.5% of revenue

 

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Quarterly Trends

Revenue and gross profit increased sequentially in all quarters presented. The strong increase in consumer adoption of our website and mobile applications was reflected in the significant growth in users over the periods, which contributed to substantial increases in marketplace and media revenue. Although we experienced sequential increases in media revenue during each of the eight quarters ended December 31, 2011, the growth in media revenue slowed during the year ended December 31, 2011 and media revenue decreased in the three months ended March 31, 2012. The primary reason for the decrease in media revenue during the three months ended March 31, 2012 was the loss of a significant customer which declared bankruptcy. Although the growth rate of media revenue has slowed, we expect media revenue to grow as our business grows but at a slower rate than our marketplace revenue. Accordingly, we also recognized a shift toward a greater percentage of our total revenue resulting from marketplace products as opposed to media products. The growth in our subscription business continues to outpace the growth in our advertising business and we expect this trend to continue. We have also experienced seasonality in our revenue generally as a result lower traffic in the fourth calendar quarter due to the traditionally lower volume of home sale transactions during the holiday season. In addition, our operating expenses have increased sequentially as a result of our growth, primarily related to increased headcount to support our expanded operations.

Adjusted EBITDA

The following table presents a reconciliation of Adjusted EBITDA to our net loss, the most comparable GAAP measure, for each of the periods indicated below. See the section titled “Selected Financial and Other Data” for the detailed reconciliation to our net loss and for more information on our use and the limitations of Adjusted EBITDA as a measure of our financial performance.

 

    Three Months Ended  
    March 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    March 31,
2011
    June 30,
2011
    Sept. 30,
2011
    Dec. 31,
2011
    March 31,
2012
    June 30,
2012
 
    (In thousands)        

Net loss attributable to common stockholders

  $ (984   $ (1,123   $ (586   $ (1,145   $ (1,690   $ (916   $ (1,495   $ (2,054   $ (4,200   $ (3,440

Non-GAAP adjustments:

                   

Interest income

    (4     (4     (4     (3     (3     (3     (4     (7     (3     (4

Interest expense

    7        10        12        10        28        13        94        254        252        239   

Provision for income taxes

                                                                     

Depreciation and amortization

    138        256        258        311        444        576        701        775        797        789   

Change in fair value of warrant liability

                                                     16        216        107   

Stock-based compensation

    72        87        100        95        598        239        304        343        465        551   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (771   $ (774   $ (220   $ (732   $ (623   $ (91   $ (400   $ (673   $ (2,473   $ (1,758
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our Adjusted EBITDA fluctuated during the ten quarters in the period ended June 30, 2012. During the three months ended June 30, 2012, our net loss was the primary driver in the changes in our Adjusted EBITDA. Seasonality in our revenue in the fourth calendar quarter is also reflected in the Adjusted EBITDA for those periods.

Liquidity and Capital Resources

As of June 30, 2012, our principal sources of liquidity were cash and cash equivalents totaling $9.5 million, short-term investments of $0.9 million, and $10.0 million available for draw down under our credit facility. Since inception, our operations have been financed primarily by net proceeds of $32.6 million from the sales of shares of our convertible preferred stock and $15.2 million in proceeds from the issuance of indebtedness. As of June 30, 2012, we had $9.7 million of outstanding debt on our balance sheet, which reflects a debt discount of $0.3 million.

 

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We have incurred cumulative losses of $43.8 million from our operations to date, and expect to incur additional losses in the future. We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months. However, our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, and the timing and extent of our spending to support our technology and development efforts. To the extent that existing cash and cash equivalents, and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

On September 15, 2011, we entered into a loan and security agreement providing for a secured term loan facility, or the credit facility, in an aggregate principal amount of up to $20.0 million. Our ability to draw additional funds under the credit facility will expire on December 31, 2012. As of June 30, 2012, we had $10.0 million in aggregate principal outstanding under the credit facility, and an additional $10.0 million remained available to be drawn under the facility.

Amounts currently outstanding under the credit facility bear interest at floating annual rates that range from 6.0% up to the greater of (i) the prime rate plus 5.5% and (ii) 8.75%. Unless we prepay all amounts outstanding under the credit facility, we will pay accrued interest on amounts outstanding under the credit facility on a monthly basis until March 31, 2013, and beginning on April 1, 2013, we will repay the amounts outstanding under the credit facility plus all accrued interest in 30 equal monthly payments until the maturity date of September 1, 2015. We also paid certain customary fees in connection with obtaining the credit facility.

If we prepay the amounts outstanding under the credit facility in full by paying the entire outstanding principal balance, all accrued and unpaid interest, and, prior to the closing of this offering, a prepayment charge ranging from 1.0% to 3.0%, depending on the length of time the credit facility is outstanding, will become due and payable. Upon and after the closing of this offering, no prepayment charge will be payable in connection with a prepayment of the amounts outstanding under the credit facility. In addition, we must prepay the amounts outstanding under the credit facility and any prepayment charge upon a change in control.

The credit facility is secured by a security interest in substantially all of our assets. The credit facility contains customary affirmative and negative covenants, including covenants that limit or restrict our ability to, among other things, incur indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets, merge or consolidate, and make acquisitions.

The credit facility includes customary events of default that include, among other things, non-payment defaults, covenant defaults, the occurrence of events constituting a material adverse effect, inaccuracy of representations and warranties, bankruptcy and insolvency defaults, attachment of our assets, material judgment defaults, and cross defaults to material debt. The occurrence of an event of default could result in the acceleration of our obligations under the credit facility and a right of Hercules to exercise remedies under the credit facility, including foreclosing on the assets serving as security. During the existence of an event of default, interest on the obligations under the credit facility could be increased by five percentage points. We were in compliance with all covenants under the credit facility as of December 31, 2011 and June 30, 2012. In May 2012, we failed to comply with the covenant that required delivery of audited financial statements for the year ended December 31, 2011 within the time period set forth in the credit facility. The lender granted a waiver arising from our failure to comply with this reporting covenant. See Note 6 of the audited financial statements included elsewhere in this prospectus for more information about our credit facility.

 

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Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2009     2010     2011     2011     2012  
     (In thousands)  

Cash provided by (used in) operating activities

   $ (5,402   $ (1,120   $ 1,132      $ 438      $ 1,595   

Cash provided by (used in) investing activities

     (909     (3,479     (6,638     (4,826     1,245   

Cash provided by (used in) financing activities

     (114     1,407        8,152        1,489        (425

Cash Flows from Operating Activities

Cash provided by operating activities in the six months ended June 30, 2012 was $1.6 million. The primary component of our cash flows during the six months ended June 30, 2012 was our net loss of $7.6 million. The cash flows from our net loss were more than offset by our non-cash operating activities and net cash flows provided through changes in certain of our operating assets and liabilities. Specifically, we recognized non-cash charges of $1.6 million for depreciation and amortization of our property and equipment, $1.0 million for stock-based compensation, and $0.3 million for the change in fair value of the preferred stock warrant liability related to preferred stock warrants issued in September 2011. We also recognized changes in operating assets and liabilities which provided $6.2 million of cash from operating activities. The primary driver of the changes in our operating assets and liabilities was a $6.2 million increase in deferred revenue due primarily to the increase the number of total subscribers and average monthly revenue per subscriber and, to a lesser extent, the launch of our latest mobile product, Trulia Mobile Ads, in May 2012. Changes in our operating assets and liabilities were also significantly affected by increases in accounts payable and accrued liabilities in the amount of $0.7 million, primarily due to the overall growth of our business, and third-party professional fees for consulting and audit services as we prepared for our initial public offering. Changes in our operating assets and liabilities were also affected by an increase in accrued compensation and benefits in the amount of $1.5 million due to the growth in our headcount and an increase in accounts receivable of $1.6 million, primarily due to our revenue growth but also due to timing of certain payments related to generally slower collections during the period.

Cash provided by operating activities for the year ended December 31, 2011 was $1.1 million. The primary component of our cash flows during the year ended December 31, 2011 was our net loss of $6.2 million. The cash flows from our net loss were more than offset by our non-cash operating activities and net cash flows provided through changes in certain of our operating assets and liabilities. Specifically, we recognized non-cash charges of $2.5 million for depreciation and amortization of our property and equipment, $1.5 million for stock-based compensation, and $0.2 million provision for doubtful accounts. We also recognized changes in operating assets and liabilities which provided $3.0 million of cash from operating activities. The primary driver of the changes in our operating assets and liabilities was a $3.0 million increase in deferred revenue due to the increase the number of total subscribers and average monthly revenue per subscriber during the year. Changes in our operating assets and liabilities were also significantly affected by an increase in accounts receivable of $1.4 million, primarily due to our revenue growth but also to timing of certain payments related to generally slower collections during the year. Changes in our operating assets and liabilities were also affected by increases in accrued compensation and benefits of $0.7 million and deferred rent of $0.7 million due to the growth in our headcount and expanded facilities during the year. Changes in our operating assets and liabilities were also affected by an increase in accounts payable and accrued liabilities in the amount of $0.4 million, due primarily to the overall growth in our business during the year.

Cash used in operating activities for the year ended December 31, 2010 was $1.1 million. The primary component of our cash flows during the year ended December 31, 2010 was our net loss of $3.8 million. The cash flows from our net loss were partially offset by our non-cash operating activities and net cash flows provided through changes in certain of our operating assets and liabilities. Specifically, we recognized non-cash

 

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charges of $1.0 million for depreciation and amortization of our property and equipment, $0.4 million for stock-based compensation, and $0.1 million for provision for doubtful accounts. We also recognized changes in operating assets and liabilities which provided $1.3 million of cash from operating activities. The primary driver of the changes in our operating assets and liabilities was a $1.3 million increase in deferred revenue due to the increase the number of total subscribers and average monthly revenue per subscriber during the year. Changes in our operating assets and liabilities were also significantly affected by increases in accrued compensation and benefits in the amount of $0.7 million and accounts receivable of $0.7 million due primarily to our growth in headcount and revenue, respectively, during the year. Changes in our operating assets and liabilities were also affected by an increase in deferred rent of $0.4 million due primarily to the growth of our business during the year and by an increase in accounts payable and accrued liabilities of $0.3 million.

Cash used in operating activities for the year ended December 31, 2009 was $5.4 million. The primary component of our cash flows during the year ended December 31, 2009 was our net loss of $7.0 million. The cash flows from our net loss were partially offset by our non-cash operating activities and net cash flows provided through changes in certain of our operating assets and liabilities. Specifically, we recognized non-cash charges of $0.9 million for depreciation and amortization of our property and equipment, $0.3 million for stock-based compensation, and $0.1 million for provision for doubtful accounts. We also recognized changes in operating assets and liabilities which provided $0.3 million of cash from operating activities. These changes in our operating assets and liabilities were primarily as a result of increases in accounts payable and accrued liabilities aggregating to $0.3 million due to the growth in our business. These changes were offset by an increase in accounts receivable of $0.5 million due to the growth in our revenue.

Cash Flows from Investing Activities

Cash provided by investing activities for the six months ended June 30, 2012 was primarily related to the maturity of short-term investments in the amount of $3.4 million, partially offset by the acquisition of property and equipment in the amount of $2.2 million.

Historically, cash used in investing activities was primarily related to the acquisition of property and equipment and patents, which amounted to $0.2 million, $2.6 million, and $4.8 million for the years ended December 31, 2009, 2010, and 2011. Cash used in investing activities was also attributable to the increases in our restricted cash balance of $0.7 million, $2.1 million, and $2.2 million in the years ended December 31, 2009, 2010, and 2011.

Cash Flows from Financing Activities

Cash used in financing activities for the six months ended June 30, 2012 of $0.4 million was comprised of $0.6 million payment in capitalizable costs related to our initial public offering and $0.2 million of capital lease payments, partially offset by proceeds of $0.3 million from the exercise of stock options.

Cash provided by financing activities for the year ended December 31, 2011 of $8.2 million was primarily comprised of proceeds of $12.0 million from additional borrowings and $0.4 million from exercise of stock options, which were partially offset by $4.2 million of capital lease and long-term debt repayments.

Cash provided by financing activities for the year ended December 31, 2010 of $1.4 million was primarily comprised of proceeds of $2.1 million from additional borrowings which were partially offset by $0.8 million of capital lease and long-term debt repayments.

Cash used in financing activities for the year ended December 31, 2009 of $0.1 million was primarily comprised of $0.3 million of capital lease and long-term debt repayments, which were partially offset by proceeds of $0.2 million from additional borrowings.

 

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Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations as of December 31, 2011:

 

     Payments Due by Period  

Contractual Obligations:

   Less Than
1 Year
     1 to 3
Years
     3 to 5
Years
     More Than
5 Years
     Total  
     (In thousands)  

Long-term debt

   $ 917       $ 7,984       $ 1,099       $       $ 10,000   

Interest on long-term debt

     744         802         14                 1,560   

Operating leases (1)

     1,264         2,152                         3,416   

Capital leases

     318         161                         479   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $     3,243       $ 11,099       $ 1,113       $           —       $ 15,455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Operating leases include total future minimum rent payments under noncancelable operating lease agreements.

We had unrecognized tax benefits in the amount of $0.5 million as of December 31, 2011 related to uncertain tax positions. However, there is uncertainty regarding when these liabilities will require settlement so these amounts were not included in the contractual obligations table above.

We made regular rent payments under our noncancelable operating leases and capital leases during the six months ended June 30, 2012. We did not enter into any new material agreements during the period.

During the six months ended June 30, 2012, we achieved certain financial milestones under our credit facility, which resulted in the extension of the beginning of the interest-only repayment period from September 2012 to March 2013 and the maturity date from March 2015 to September 2015.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.

Segment Information

We have one business activity and operate in one reportable segment.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities as follows:

Interest Rate Risk

We had cash and cash equivalents of $9.5 million as of June 30, 2012, which consists of bank deposits and money market funds. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant. We also had total outstanding debt of $9.7 million as of June 30, 2012, of which $0.8 million is due within 12 months. Amounts outstanding under our credit facility carry variable interest rates ranging from 6.0% to 8.75%.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. The interest rate on our outstanding debt is variable, which also reduces our exposure to these interest rate risk. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

 

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Critical Accounting Polices and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving our judgments and estimates.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collection is reasonably assured. We consider a signed agreement, a binding insertion order, or other similar documentation reflecting the terms and conditions under which products will be provided to be persuasive evidence of an arrangement. Collectability is assessed based on a number of factors, including payment history and the creditworthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash.

Our revenue includes marketplace revenue and media revenue. Marketplace revenue consists primarily of subscription revenue, which is recognized ratably over the term of the subscription. Media revenue consists primarily of advertisement sales, which is recognized in the periods the clicks or impressions are delivered.

We also enter into arrangements with customers that include combinations of CPC or CPM media placements and subscription products. Beginning on January 1, 2011, we adopted new authoritative guidance on multiple-element arrangements, using the prospective method for all arrangements entered into or materially modified from the date of adoption. Under this new guidance, we allocate arrangement consideration in multiple-element revenue arrangements at the inception of an arrangement to all deliverables or those packages in which all components of the package are delivered at the same time, based on the relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor-specific objective evidence, or VSOE, if available; (ii) third-party evidence, or TPE, if VSOE is not available, and (iii) best estimate of selling price, or BESP, if neither VSOE nor TPE is available.

VSOE- We determine VSOE based on our historical pricing and discounting practices for the specific product when sold separately. In determining VSOE, we require that a substantial majority of the standalone selling prices for these products fall within a reasonably narrow pricing range. For certain subscription products, we have been able to establish VSOE.

TPE- When VSOE cannot be established for deliverables in multiple-element arrangements, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of our products cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor selling prices are on a standalone basis. As a result, we have not been able to establish selling price based on TPE.

BESP- When we are unable to establish selling price using VSOE or TPE, we use BESP in the allocation of arrangement consideration. The objective of BESP is to determine the price which we would transact a sale

 

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if the service were sold regularly on a standalone basis. As we have not been able to establish VSOE or TPE for CPM and CPC products and certain subscription products, we determine BESP for these deliverables based on the following:

 

   

The list price represents a component of our go-to-market strategy established by senior management. Our list prices are based on the features of the products offered. These features, which consist of the size and placement of the advertisements on our website, impact the list prices which vary depending on the specifications of the features. In addition, the list prices are impacted by market conditions, including the conditions of the real estate market and economy in general, and our competitive landscape; and

 

   

Analysis of our selling prices for these deliverables.

We limit the amount of allocable arrangement consideration to amounts that are fixed or determinable and that are not contingent on future performance or future deliverables. We regularly review BESP. Changes in assumptions or judgments or changes to the elements in the arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.

Allowances for Doubtful Accounts

We record a provision for doubtful accounts based on historical experience and a detailed assessment of the collectability of our accounts receivable. To assist with the estimate, our management considers certain factors such as historical experience, industry data, credit quality, age of accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. In cases where we become aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due from the customer and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. There is significant judgment involved in estimating the allowance for doubtful accounts.

Goodwill

Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net tangible assets acquired. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We have determined that we operate as one reporting unit and have selected December 1 as the date to perform our annual impairment test. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the net book value exceeds its fair value, then we would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. When performing the valuation of our goodwill, we make assumptions regarding our estimated future cash flows to determine the fair value of our business. If our estimates or related assumptions change in the future, we may be required to record impairment loss related to our goodwill. We have not recognized any goodwill impairments since our inception.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured first by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, an impairment loss would be recognized. When measuring the recoverability of these assets, we will make assumptions regarding our estimated future cash flows expected to be generated by the assets. If our estimates or related assumptions change in the future, we may be required to impair these assets. We have not recognized any impairment of long-lived assets to date.

 

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Product Development Costs

Costs incurred in connection with the development of our marketplace are accounted for as follows: all costs incurred in the preliminary project and post-implementation stages are expensed as incurred. Certain costs incurred in the application development stage of a new product or projects to provide significant additional functionality to existing products are capitalized if certain criteria are met. Maintenance and enhancement costs are typically expensed as incurred. Such costs are amortized on a straight-line basis over the estimated useful lives of the related assets, which was estimated to be two years. Amortization expense is included in technology and development expense in the statements of operations.

Stock-Based Compensation

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is recognized on a straight-line basis over the requisite service period, which is the vesting period of the respective awards.

The fair value of the awards granted during the years ended December 31, 2009, 2010, and 2011 and the six months ended June 30, 2011 and 2012 was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
         2009              2010              2011          2011      2012  

Expected term (in years)

     5.5         5.5         5.5         5.5         5.5   

Expected volatility

     57%         55%         55%         55%         53%   

Risk-free interest rate

     2.3%         1.7%         1.9%         2.4%         1.0%   

Dividend rate

     0%         0%         0%         0%         0%   

The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, including the expected term and the price volatility of the underlying stock, which determine the fair value of stock-based awards. These assumptions include:

 

   

Expected term. The expected term represents that the period that the stock-based awards are expected to be outstanding. We estimate the expected term of the options based on a study of publicly traded industry peer companies and the historical data on employee exercises and post-vesting employment termination behavior taking into account the contractual life of the options;

 

   

Expected volatility. The expected volatility is derived from the historical stock volatilities of several comparable publicly listed peers over a period approximately equal to the expected term of the options. We use this method because we have limited information on the volatility of our common stock since we have no trading history. When making the selections of our comparable industry peers to be used in the volatility calculation, we considered the size, operational and economic similarities to our principle business operations;

 

   

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal the expected term of the options; and

 

   

Expected dividend. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.

In addition to the assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. Our forfeiture rate is based on an

 

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analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in our financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in our financial statements.

We will continue to use judgment in evaluating the expected volatility, expected terms, and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to the estimates of our expected volatility, expected terms, and forfeiture rates, which could materially impact our future stock-based compensation expense.

We are also required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair value of the common stock underlying our stock-based awards was estimated on each grant date by our board of directors, with input from management. Our board of directors is comprised of employee and non-employee directors with significant experience investing in and operating companies in the real estate and technology industries. As such, we believe that our board of directors has the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the fair value of our common stock including:

 

   

contemporaneous valuations performed by unrelated third party specialists;

 

   

rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

 

   

actual operating and financial performance;

 

   

present value of future cash flows;

 

   

likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature and history of our business;

 

   

illiquidity of stock-based awards involving securities in a private company;

 

   

experience of our management team;

 

   

market multiples of comparable companies in our industry;

 

   

stage of development;

 

   

industry information such as market size and growth; and

 

   

macroeconomic conditions.

The independent valuations performed by unrelated third-party specialists were just one factor used by our board of directors to assist with the valuation of the common stock and our management and board of directors have assumed full responsibility for the estimates. Our board of directors generally utilized the fair values of the common stock derived in the third-party valuations in determining the exercise price for options granted.

In valuing our common stock, our board of directors considered two valuation approaches to determine the equity value of our business, an income approach and a market approach.

 

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The income approach estimates the fair value of a company based on the present value of the company’s future estimated cash flows and the residual value of the company beyond the forecast period. These future values are discounted to their present values to reflect the risks inherent in the company achieving these estimated cash flows. The discount rates are used in the income approach for early stage companies because these companies tend to be relatively risky investments and therefore command rates of return commensurate with such risk. The discount rates used in our valuation were based primarily on benchmark venture capital studies of discount rates for other companies in our stage of development, considered along with industry based weighted average cost of capital rates. Other significant inputs of the income approach (in addition to our estimated future cash flows themselves) include but are not limited to the long-term growth rate assumed in the residual value and normalized long-term operating margin. The market approach estimates the fair value of a company by applying market multiples of comparable publicly traded companies in the same industry or similar lines of business. More specifically, we selected our comparable publicly traded companies by analyzing various factors, including, but not limited to, industry similarity, financial risk, company size, geographic diversification, profitability, the availability of adequate financial data, and whether or not they had an actively traded stock price. The market multiples are based on key metrics implied by the enterprise or acquisition values of comparable publicly traded companies and, for our valuations in 2012, we primarily utilized the last twelve months and projected twelve months revenue multiples from our comparable publicly traded peers in the market approach. These observed multiples were averaged and then applied to our historical twelve months and projected revenue to arrive at an indication of value. We deemed multiples of revenue to be the most relevant in our industry as we are still in a relatively high growth phase, and thus have not reached normalized profitability or generated positive historical profit thus making the application of profit based multiples not possible or less reliable. Other significant inputs of the market approach include historical and projected operating metrics. Our third-party valuations for the year ended December 31, 2011 discussed below used only an income approach because we were an operating entity expected to generate future cash flows for our owners and any future sale of or transaction to purchase our business would likely be based on our future cash flow expectations. In addition, we were not generating sufficient operating metrics, consisting primarily of revenue, as compared to our publicly traded peer companies to generate meaningful results from the market approach at the time of the 2011 valuations. For the valuations from the year ending December 31, 2012, we have thus far used both the income approach and the market approach with the respective values weighted appropriately. The market approach was added to the 2012 valuations as a result of our revenue growth and growth in maturity and size compared to our publicly traded peer companies and also as our board began preparations for an initial public offering.

The enterprise value determined by the income and market approach was then allocated to the common stock using the option pricing method. The option pricing method, or OPM, treats common stock and convertible preferred stock as call options on a business, with exercise prices based on the liquidation preference of the convertible preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of a liquidity event such as a merger, sale or initial public offering, assuming the business has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled to be a call option with a claim on the business at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OPM uses the Black-Scholes option-pricing model to price the call option. The OPM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasts would be highly speculative. The probability weighted expected return method, or PWERM, was considered but not used due to the uncertainty of our estimates of the probabilities for future potential liquidity events.

 

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Information regarding stock awards granted to our employees since April 1, 2011 is summarized as follows:

 

Grant Date

   Number of Shares
Granted
     Exercise
Price
     Fair Value Per Share
of Common Stock
     Aggregate Grant
Date Fair Value
 

May 11, 2011

     574,587       $ 4.29       $ 4.29       $ 1,257,000   

June 20, 2011

     677         4.29         4.29         1,000   

September 1, 2011

     185,220         4.59         4.59         409,000   

November 9, 2011

     470,787         5.55         5.55         1,280,000   

November 17, 2011

     88,333         5.55         5.55         243,000   

February 13, 2012

     151,563         6.81         6.81         495,000   

March 20, 2012

     64,964         9.42         9.42         297,000   

May 8, 2012

     92,405         12.15         12.15         538,000   

June 5, 2012

     99,062         13.32         13.32         630,000   

July 19, 2012

     149,124         16.53         16.53         1,174,000   

July 27, 2012

     253,410         16.53         16.53         1,997,000   

No single event caused the valuation of our common stock to increase through July 2012. Instead, a combination of the following factors, described in greater detail in the individual valuation discussions below, led to the changes in the fair value of the underlying common stock as determined by our board of directors. Primarily, the increase was attributable to business developments during this intervening period. Specifically, our subscribers, visitors, and revenue were primarily increasing during this period. In addition to the increase as a result of business developments, the increase was a result of our progress towards an initial public offering, including discussions with prospective underwriters and an organizational meeting in April 2012. In addition, the global economies as well as the stock markets, including the market for initial public offerings, improved through the first quarter of 2012.

To assist our board of directors with the determination of the exercise price for our stock options and the fair value of the common stock underlying the options, we obtained third-party valuations of our common stock as of February 28, June 30, September 30, and December 31, 2011, and as of February 29, April 30, May 31, and July 13, 2012. An analysis of our valuations and determinations of the exercise price and the fair value of the underlying common stock for our stock-based awards granted on or between the respective valuation dates are discussed further below.

May and June 2011 Awards

We granted 574,587 options on May 11, 2011 and 677 options on June 20, 2011. Our board of directors set an exercise price of $4.29 per share for these options based in part on a contemporaneous third-party valuation prepared as of February 28, 2011. To calculate the stock-based compensation expense for these options, we also used the fair value as determined in the February 28, 2011 valuation of $4.29 per share as the fair value of the underlying common stock for these options.

The February 28, 2011 contemporaneous valuation was prepared on a minority, non-marketable basis assuming our business was in the expansion stage of development. We considered our business to be in the expansion stage of development because we were gaining traction in our industry although our future growth rates were still uncertain. Also, companies within the expansion stage of development are generally growing quickly and producing positive profit margins which help reduce the downside risk to potential investors. However, this growth generally requires more working capital than can be generated from internal cash flows. The expansion stage of development is generally for companies more mature than companies determined to be either start-up or early stage of development, but less mature than companies in the rapid growth or mezzanine stage of development.

This valuation was developed using the income approach, specifically a discounted cash flow analysis, to determine the value of our business. The discounted cash flow analysis was developed based on our forecast and

 

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our historical financial statements. The forecasted cash flows represent the economics that both a minority and controlling shareholder would be able to realize and therefore were assumed to represent both a control and minority premise of value. In addition, the discount rate was developed considering the capital structure of the industry and the long-term expected capital structure of our business. The valuation used a discount rate of 35%. The discount rate of 35% used in this valuation was based primarily on benchmark venture capital studies of discount rates for other companies in the expansion stage of development, considered along with industry based weighted average cost of capital rates.

The aggregate equity value was allocated to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of two years, risk-free rate of 0.67%, dividend yield of 0%, and volatility of 65% over the time to a liquidity event. The time to a liquidity event was determined based on the expectation of our board of directors of us completing an initial public offering, the risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities of two years, the dividend yield was zero based on the expectation of our board of directors regarding future dividends, and the volatility was based on the historical volatility of our comparable peer companies, consisting of the eight technology companies that were determined to be the most comparable to our business, over a two year period. The fair value of our common stock, as determined by an OPM and after applying a marketability discount of 25%, was $4.29 per share. The marketability discount, which has a negative impact on the fair value of the common stock, was based on empirical evidence from multiple sources which incorporated studies of companies with outstanding restricted stock who also have unrestricted shares that are freely traded and studies of different private transactions which occurred prior to a company’s initial public offering. Based on these studies and our stage of development, a 25% marketability discount was determined to be appropriate. Our board of directors decided not to increase the fair value between February 28, 2011 and these options grants as they were not aware of any evidence that would require revision to the fair value determined as of February 28, 2011.

September 2011 Awards

We granted 185,220 options on September 1, 2011. Our board of directors set an exercise price of $4.59 per share for these options based in part on a third-party valuation prepared as of June 30, 2011. The June 30, 2011 valuation was prepared on a minority, non-marketable basis assuming our business was still in the expansion stage of development as we were still growing quickly and producing positive profit margins but also generally still in need of more working capital than we could generate from operations.

This valuation was developed using the income approach, specifically a discounted cash flow analysis, to determine the value of our business. The discounted cash flow analysis was developed based on our forecast and our historical financial statements. The valuation used a discount rate of 32.5%. The discount rate of 32.5% used in this valuation was based primarily on benchmark venture capital studies of discount rates for other companies in the expansion stage of development. Based on the results of these studies and other factors such as an increase in our current projections and the reduction in the potential time to a liquidity event, we determined a slightly reduced discount rate of 32.5% which was still consistent with the benchmark studies. The reduction in the discount rate resulted in an increase in the fair value of the common stock, as generally a reduced discount rate will result in higher equity values.

The aggregate equity value was allocated to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 1.75 years, risk-free rate of 0.43%, dividend yield of 0%, and volatility of 65% over the time to a liquidity event. Both the time to a liquidity event and the comparable peer companies used to determine the volatility remained consistent with the February 28, 2011 valuation. The fair value of our common stock, as determined by an OPM and after applying a marketability discount of 25%, was $4.50 per share as of June 30, 2011. However, our board of directors decided to increase the exercise price slightly to $4.59 per share due to continued improvements in the business during the intervening period. The increase in the fair value from the February 28, 2011 valuation of $4.29 per share to the fair value of $4.59 per share was primarily due to the reduction in the time to a liquidity event due to the passage of time and the related reduction in the discount rate.

 

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November 2011 Awards

We granted 470,787 options on November 9, 2011 and 88,333 options on November 17, 2011. Our board of directors set an exercise price of $5.55 per share for these options based in part on a third-party valuation prepared as of September 30, 2011. The September 30, 2011 valuation was prepared on a minority, non-marketable basis assuming our business was still in the expansion stage of development.

This valuation was developed using the income approach, specifically a discounted cash flow analysis, to determine the value of our business. The discounted cash flow analysis was developed based on our forecast and our historical financial statements. The valuation used a discount rate of 30%. The discount rate of 30% used in this valuation was based primarily on benchmark venture capital studies of discount rates for other companies in the expansion stage of development. Based on the results of these studies and other factors such as an increase in our current projections and the reduction in the potential time to a liquidity event due to the passage of time, we determined a discount rate of 30% which was slightly lower than but still consistent with the benchmark studies. The reduction in the discount rate resulted in an increase in the fair value of the common stock.

The aggregate equity value was allocated to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 1.25 years, risk-free rate of 0.17%, dividend yield of 0% and volatility of 55% over the time to a liquidity event. The time to a liquidity event was accelerated by three months from the estimate used in the June 30, 2011 valuation based on the expectation of our board of directors of the timing for an initial public offering while the comparable peer companies used to determine the volatility remained consistent with the June 30, 2011 valuation. The fair value of our common stock, as determined by an OPM and after applying a marketability discount of 20%, was $5.55 per share as of September 30, 2011. Our board of directors decided not to increase the exercise price between November 9 and the November 17, 2011 options as they were not aware of any evidence that would require revision to the fair value determined as of September 30, 2011.

The marketability discount was reduced from 25% in the June 30, 2011 valuation to 20% for the September 30, 2011 valuation due to the reduction in the estimated time to a liquidity event. In addition to the decrease in the marketability discount, the reduction in the estimated time to a liquidity event, and the reduced volatility all had a positive effect on the fair value of the common stock between the June 30, 2011 and September 30, 2011 valuations. Also, general improvements in our business during this period resulted in revised forecast and reduced discount rate for our discounted cash flow analysis which increased the fair value of our common stock from the June 30, 2011 valuation to the September 30, 2011 valuation.

February 2012 Awards

We granted 151,563 options on February 13, 2012. Our board of directors set an exercise price of $6.81 per share for these options based in part on a third-party valuation prepared as of December 31, 2011. The December 31, 2011 valuation was prepared on a minority, non-marketable basis assuming our business was in the rapid growth stage of development. We considered our business to be in the rapid growth stage of development because we are growing rapidly and we expect a liquidity event within the coming years but the timing and form are still uncertain. In addition, we may need more cash to sustain this growth but we are generally successful and stable enough to reduce downside risk to potential investors. The rapid growth stage of development is generally for companies more mature then earlier stage companies which would generally fall within either the start-up, early development, or expansion stage of development, but less mature than companies in the mezzanine stage of development.

This valuation was developed using the income approach, specifically a discounted cash flow analysis, to determine the value of our business. The discounted cash flow analysis was developed based on our forecast and our historical financial statements. The valuation utilized a discount rate of 30%, consistent with the September 30, 2011 valuation, even though we transitioned to the rapid growth stage of development as 30% was still within the ranges provided by benchmark venture capital studies of discount rates for other companies in the rapid growth stage of development. Based on the results of these studies and other factors such as an increase in our current projections, we determined a discount rate of 30% was appropriate for this valuation.

 

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The aggregate equity value was allocated to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of one year, risk-free rate of 0.13%, dividend yield of 0%, and volatility of 55% over the time to a liquidity event. The estimated date of a liquidity event remained consistent with the September 30, 2011 valuation, however, the comparable peer companies were updated to include one newly listed company in our industry. The fair value of our common stock, as determined by an OPM and after applying a marketability discount of 15%, was $6.81 per share as of December 31, 2011. Our board of directors decided not to increase the exercise price for the February 2012 options as they were not aware of any evidence that would require revision to the fair value determined in the December 31, 2011 valuation.

The marketability discount was reduced from 20% in the September 30, 2011 valuation to 15% for the December 31, 2011 valuation due to the additional reduction in the estimated time to a liquidity event due to the passage of time, which had a positive effect on the fair value of our common stock. Also, general improvements in our business during this period resulted in revised forecast for our discounted cash flow, which increased the fair value of our common stock from the September 30, 2011 valuation to the December 31, 2011 valuation.

March 2012 Awards

We granted 64,964 options on March 20, 2012. Our board of directors set an exercise price of $9.42 per share for these options based in part on a third-party valuation prepared as of February 29, 2012. The February 29, 2012 valuation was prepared on a minority, non-marketable basis assuming our business was in the mezzanine stage of development. We considered our business to be in the mezzanine stage of development because we were in the early phases of planning for our initial public offering and we did not anticipate raising additional funds prior to an initial public offering.

This valuation was developed using the income approach, specifically a discounted cash flow analysis, and the market approach to determine the value of our business. The discounted cash flow analysis was developed based on our forecast and our historical financial statements. The market approach estimate was developed by applying market multiples of comparable peer companies in our industry or similar lines of business. For the February 29, 2012 contemporaneous valuation, we used multiples of an adjusted market value to both the last twelve months’ revenue and forecasted twelve months revenue. The valuation used a discount rate of 20% which was a reduction from the 30% discount rate used in the December 31, 2011 valuation. The discount rate was reduced to 20% primarily as a result of our transition to the mezzanine stage of development. As a result of this transition, our discount rate is now based primarily on benchmark venture capital studies of discount rates for other companies in the mezzanine stage of development. We also considered industry-based weighted average cost of capital rates. Based on the results of these studies and other factors such as an increase in our current projections and the reduction in the potential time to a liquidity event, we settled on a discount rate of 20% which was slightly lower than the benchmark studies but higher than the industry based weighted average cost of capital. The reduction in the discount rate resulted in an increase in the fair value of the common stock. In addition, we also recognized increases in the fair value of our common stock in our market approach analysis as a result of an increase in our observed revenue multiples as well as the continued growth in business.

During this period, we revised our list of comparable publicly traded companies by analyzing various factors, including, but not limited to, industry similarity, financial risk, company size, geographic diversification, profitability, the availability of adequate financial data, and whether or not it had an actively traded stock price. As a result of this analysis, we determined that we had just two “pure-play” comparables that are directly competing market participants with substantially similar business and monetization models. The last twelve months and projected twelve months revenue multiples for both companies were therefore directly relied upon and applied in the market approach used in the February 29, 2012 valuation. These observed multiples were averaged and then applied to our historical twelve months and projected revenue to arrive at an indication of value. We deemed multiples of revenue to be the most relevant in our industry as we are still in a relatively high growth phase similar to our comparable peer companies, and thus have not reached normalized profitability or generated positive historical profit thus making the application of profit based multiples not possible or less reliable. In addition, we did consider a broader group of comparable peer companies along with the “pure-play”

 

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comparables for purposes of estimating industry based cost of capital, volatility, and other financial benchmarking, and these companies were the same that were utilized in the September 30, 2011 and December 31, 2011 valuations.

The values determined by the income approach and the market approach were combined, weighting the income approach value by 80% while only weighting the market approach value by 20%. The aggregate value was then allocated to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 0.85 years, risk-free rate of 0.15%, dividend yield of 0%, and volatility of 70% over the time to a liquidity event. The time to a liquidity event remained consistent with the December 31, 2011 valuation. The fair value of our common stock, as determined by an OPM and after applying a marketability discount of 15%, was $9.42 per share as of February 29, 2012 and, consistent with the prior practice of our board of directors of using a fair value similar to that determined by the most recent, prior contemporaneous valuation as the exercise price for our options, our board of directors used this value for the exercise price for the options granted in March 2012. The increase in the fair value of our common stock was primarily due to the continued growth of our business and improvements in our results during this period which generally resulted in our progression towards an initial public offering and the reduced time to such an event, a decrease in the discount rate primarily related to our transition to the mezzanine stage of development, and a shift towards including a weighted value determined from the market approach within this valuation.

May 2012 Awards

We granted 92,405 options on May 8, 2012. Our board of directors set an exercise price of $12.15 per share for these options based in part on a third-party valuation prepared as of April 30, 2012. The April 30, 2012 valuation was prepared on a minority, non-marketable basis assuming our business was in the mezzanine stage of development as the initial public offering was formally kicked off and progressing during this intervening period and we were also projecting positive operating results.

This valuation was developed using the income approach, specifically a discounted cash flow analysis, and the market approach to determine the value of our business. The discounted cash flow analysis was developed based on our forecast and our historical financial statements. The market approach estimate was developed by applying market multiples of comparable peer companies in our industry or similar lines of business. For the April 30, 2012 contemporaneous valuation, we used multiples of an adjusted market value to both the last twelve months revenue and forecasted twelve months revenue. The valuation used a discount rate of 18% which was lower than the rates seen in the benchmark venture capital studies of discount rates for other companies in the mezzanine stage of development but still higher than the industry based weighted average cost of capital. We chose to lower the discount rate slightly as we continued to progress towards an initial public offering which coincided with the shorter time to a liquidity event than was used in the February 13, 2012 valuation due to the passage of time. The reduction in the discount rate resulted in a small increase in the fair value of the common stock. In addition, we also recognized increases in the fair value of our common stock in our market approach as a result of an increase in our observed multiples of revenue, our projected revenue, and the continued growth in our historical revenue, primarily on a trailing twelve month basis. Also, our comparable publicly traded peer companies did not change from the companies used in the February 13, 2012 valuation.

The values determined by the income approach and the market approach were then combined, weighting the income approach value by 70% while only weighting the market approach value by 30%. The weighting of the market approach was increased to 30% from 20% used in the February 13, 2012 valuation. This increase in weighting toward the market approach is consistent with the reduction in the discount rate over the same period. As we have held our long-term forecasted cash flow projections constant during 2012, the decrease in discount rate was used to closer reconcile the indications of value between the market approach and income approach and reflect our progress towards a potential initial public offering. The aggregate value was then allocated to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 0.67 years, risk-free rate of 0.17%, dividend yield of 0% and volatility of 60% over the time to a liquidity event. The time to a

 

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liquidity event remained consistent with the February 29, 2012 valuation. The fair value of our common stock, as determined by an OPM and after applying a marketability discount of 11%, was $12.15 per share as of April 30, 2012 and, consistent with the prior practice of our board of directors of using a fair value similar to that determined by the most recent, prior contemporaneous valuation as the exercise price for our options, our board of directors used this value for the exercise price for the options granted in May 2012. The reduction in the marketability discount from 15% in the February 13, 2012 valuation to 11% in this valuation, which had a positive impact on the fair value of the common stock, was due to our progress towards an initial public offering as well as indications from a quantitative model that indicates a lower discount as the assumed time horizon and volatility decreases. Therefore, the increase in the fair value of our common stock was primarily due to the continued growth of our business and improvements in our results during this period which generally resulted in our progression towards an initial public offering and the reduced time to such an event, a decrease in the discount rate and the marketability discount, a decrease in volatility of our comparable publicly traded peers, and a shift towards a heavier weighting of the value determined from the market approach.

June 2012 Awards

We granted 99,062 options on June 5, 2012. Our board of directors set an exercise price of $13.32 per share for these options based in part on a third-party valuation prepared as of May 31, 2012. The May 31, 2012 valuation was prepared on a minority, non-marketable basis assuming our business was in the mezzanine stage of development as the initial public offering was still progressing at this time.

This valuation was developed using the income approach, specifically a discounted cash flow analysis, and the market approach to determine the value of our business. The discounted cash flow analysis was developed based on our forecast and our historical financial statements. The market approach estimate was developed by applying market multiples of comparable peer companies in our industry or similar lines of business. For the May 31, 2012 contemporaneous valuation, we used multiples of an adjusted market value to both the last twelve months revenue and forecasted twelve months revenue. The valuation used a discount rate of 17% which was lower than the rates seen in the benchmark venture capital studies of discount rates for other companies in the mezzanine stage of development but still higher than the industry based weighted average cost of capital. We chose to lower the discount rate slightly as we continued to progress towards an initial public offering which coincided with the shorter time to a liquidity event since the April 30, 2012 valuation due to the passage of time. In addition, we also recognized increases in the fair value of our common stock in our market approach as a result of an increase in our observed revenue multiples, our projected revenue, and the continued growth in our historical revenue, primarily on a trailing twelve month basis. Also, our comparable publicly traded peer companies did not change from the companies used in the April 30, 2012 valuation.

The values determined by the income approach and the market approach were then combined, weighting the income approach value by 70% while only weighting the market approach value by 30%. The weighting of the market approach was not changed from the weighting used in the April 30, 2012 valuation as we did not feel that there were significant enough changes in the month since the prior valuation, including only a 1% reduction in the discount rate, that should result in a reassessed allocation at this time. The aggregate value was then allocated to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 0.59 years, risk-free rate of 0.15%, dividend yield of 0% and volatility of 55% over the time to a liquidity event. The time to a liquidity event remained consistent with the April 30, 2012 valuation. The fair value of our common stock, as determined by an OPM and after applying a marketability discount of 10%, was $13.32 per share as of May 31, 2012 and, consistent with the prior practice of our board of directors of using a fair value similar to that determined by the most recent, prior contemporaneous valuation as the exercise price for our options, our board of directors used this value for the exercise price for the options granted in June 2012. The reduction in the marketability discount from 11% in the April 30, 2012 valuation to 10% in this valuation, which had a positive impact on the fair value of the common stock, was due to our continuing progress towards an initial public offering. Therefore, the increase in the fair value of our common stock was primarily due to the continued growth of our business and improvements in our results during this period which generally resulted in our progression

 

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towards an initial public offering and the reduced time to such an event, a decrease in the discount rate and marketability discount, and a decrease in volatility of our comparable publicly traded peers.

July 2012 Awards

We granted 149,124 options on July 19, 2012 and 253,410 options on July 27, 2012. Our board of directors set an exercise price of $16.53 per share for these options based in part on a third-party valuation prepared as of July 13, 2012. The July 13, 2012 valuation was prepared on a minority, non-marketable basis assuming our business was in the mezzanine stage of development as the initial public offering was still progressing at this time and we were projecting positive operating results.

This valuation was developed using the income approach, specifically a discounted cash flow analysis, and the market approach to determine the value of our business. The discounted cash flow analysis was developed based on our forecast and our historical financial statements. The market approach estimate was developed by applying market multiples of comparable peer companies in our industry or similar lines of business. For the July 13, 2012 contemporaneous valuation, we used multiples of an adjusted market value to both the last twelve months revenue and forecasted twelve months revenue. The valuation used a discount rate of 15% which was lower than the rates seen in the benchmark venture capital studies of discount rates for other companies in the mezzanine stage of development but still higher than the industry based weighted average cost of capital. We chose to lower the discount rate as we continued to progress towards an initial public offering which coincided with the shorter time to a liquidity event. In addition, we also recognized increases in the fair value of our common stock in our market approach as a result of an increase in our observed multiples of revenue as well as the continued growth in our historical revenue, primarily on a trailing twelve month basis. Also, our comparable publically traded peer companies did not change from the companies used in the May 2012 valuation.

The values determined by the income approach and the market approach were then combined, weighting the income approach value by 60% while only weighting the market approach value by 40%. The weighting of the market approach was increased to 40% from 30% used in the May 2012 valuation. This increase in weighting toward the market approach is consistent with the reduction in the discount rate over the same period. As we have held our long-term forecasted cash flow projections constant during 2012, the decrease in discount rate was used to closer reconcile the indications of value between the market approach and income approach and reflect our progress towards a potential initial public offering. The aggregate value was then allocated to the common stock utilizing an OPM with the following assumptions: a time to a liquidity event of 0.22 years, risk-free rate of 0.10%, dividend yield of 0%, and volatility of 60% over the time to a liquidity event. The time to a liquidity event was accelerated as a result of our expected timing for an initial public offering. The fair value of our common stock, as determined by an OPM and after applying a marketability discount of 6%, was $16.53 per share as of July 13, 2012 and, consistent with the prior practice of our board of directors of using a fair value similar to that determined by the most recent, prior contemporaneous valuation as the exercise price for our options, our board of directors used this value for the exercise price for the options granted in July 2012. The reduction in the marketability discount from 10% in the May 2012 valuation to 6% in this valuation, which had a positive impact on the fair value of the common stock, was due to our continuing progress towards an initial public offering. Therefore, the increase in the fair value of our common stock was primarily due to the continued growth of our business and improvements in our results during this period which generally resulted in our progression towards an initial public offering and the reduced time to such an event. The increase was also attributable to the decrease in the discount rate and marketability discount as well as an increase in the observed multiples of our comparable publicly traded peers.

September 2012 Underwriter Valuation

In September 2012, our underwriters communicated to us an estimated offering price range of $14.00 to $16.00 per share of common stock to be sold in this offering. This estimate was based upon valuation information regarding comparable companies and an equity market analysis prepared by the underwriters. After considering the estimated offering price range and other factors, our board of directors concluded that the midpoint of the estimated offering price range provided by our underwriters of $15.00 per share is a reasonable

 

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estimate of the fair value of our common stock as of September 15, 2012. The change in the fair value of our common stock to the midpoint of the estimated price range for this offering was not significant, and no equity awards were granted by the board of directors after July 27, 2012 until September 19, 2012.

September 2012 Awards

We granted 144,862 options on September 19, 2012 to certain of our employees and directors. These grants have an exercise price equal to $17.00, our initial public offering price.

The options to purchase shares of common stock granted to our directors were in the following amounts:

 

   

Sami Inkinen — 10,500

   

Theresia Gouw Ranzetta — 10,500

   

Robert Moles — 5,825

Stock-Based Compensation Expense

Stock-based compensation expense included in operating results during the years ended December 31, 2009, 2010, and 2011 and the six months ended June 30, 2011 and 2012 was included in cost and expenses as follows:

 

     Year Ended December 31,      Six Months Ended June 30,  
         2009              2010              2011                  2011                      2012          
     (In thousands)  

Cost of revenue

   $ 10       $ 8       $ 11       $ 3       $ 14   

Research and development

     177         176         482         159         376   

Sales and marketing

     105         97         183         92         179   

General and administrative

     13         73         808         583         447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $     305       $     354       $ 1,484       $             837       $             1,016   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The intrinsic value of all outstanding options as of June 30, 2012 was $43.4 million based on the initial public offering price of our common stock of $17.00 per share. As of June 30, 2012, we had $3.9 million of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted average period of 2.9 years. In future periods, our stock-based compensation expense is expected to increase as a result of our existing, unrecognized stock-based compensation, to be recognized as these awards vest and as we issue additional stock-based awards to attract and retain employees.

Income Taxes

We account for our income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments, and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities as well as any valuation allowance to be recorded against a deferred tax asset.

Our assumptions, judgments, and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws, and possible outcomes of current and future audits conducted by domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although we believe our assumptions, judgments, and estimates are reasonable, changes in tax laws or our interpretation of tax laws, and the resolution of potential tax audits could significantly impact the amounts provided for income taxes in our financial statements.

Our assumptions, judgments, and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render

 

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our current assumptions, judgments and, estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments, and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.

Since inception, we have incurred operating losses, and accordingly, we have not recorded significant provisions for income taxes for any of the periods presented. We do not expect any significant changes until we are no longer incurring losses.

We have provided a full valuation allowance for net operating losses, credits, and other deferred tax assets for the state of California and the United States. A valuation allowance is provided when based upon the available evidence, and when management concludes that it is more likely than not that some portion of the deferred tax assets will not be realized. We maintained a full valuation allowance as of December 31, 2011 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. As of December 31, 2011, we had federal and state net operating loss carry forwards of $29.7 million and $24.9 million. The federal net operating loss carry forward will expire at various dates beginning in the year ending December 31, 2025, if not utilized. If not used, the state net operating loss carry forward will expire at various dates beginning in the year ending December 31, 2015.

Recently Issued and Adopted Accounting Pronouncements

Under the Jumpstart Our Business Startups Act, or JOBS Act, we meet the definition of an “emerging growth company.” We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In January 2010, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic 820)Fair Value Measurements and Disclosures, which requires additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, and the activity in Level III fair value measurements. This guidance was effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level III activity disclosure requirements that became effective for reporting periods beginning after December 15, 2010. Accordingly, we adopted this new guidance beginning January 1, 2010, except for the additional Level III requirements, which were adopted beginning January 1, 2011. Level III assets and liabilities are those whose fair value inputs are unobservable and reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The adoption of this guidance required additional disclosures but did not have a material impact on our results of operations or financial position.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, or IFRS. This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level III fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011, with early adoption prohibited. We adopted this standard on January 1, 2012 as reflected in Note 3 of our audited financial statements included elsewhere in this prospectus.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which requires an entity to present total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. We early adopted this guidance on January 1, 2012, retrospective. During the years ended December 31, 2009, 2010, 2011 and the six months ended June 30, 2011 and 2012, we did not have any other comprehensive income and, therefore, the net loss and comprehensive loss was the same for all periods presented.

 

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BUSINESS

Overview

Trulia is redefining the home search experience for consumers and changing the way that real estate professionals build their businesses. Our marketplace, delivered through the web and mobile applications, gives consumers powerful tools to research homes and neighborhoods and enables real estate professionals to efficiently market their listings and attract new clients. We believe we deliver the best home search experience by combining our superior user interface with our comprehensive database of real estate properties, local insights, and user-generated content. We offer free and subscription products that provide real estate professionals with access to transaction-ready consumers and help them enhance their online presence. In the six months ended June 30, 2012, we had 22.0 million monthly unique visitors. As of June 30, 2012, we had more than 360,000 active real estate professionals in our marketplace, 21,544 of whom were paying subscribers.

We empower consumers to make more informed housing decisions by delivering the “inside scoop” on homes, neighborhoods, and real estate professionals through an intuitive and engaging user experience. Our large, continually refreshed, and searchable database contains more than 110 million properties, including 4.5 million homes for sale and rent. We supplement listings data with local information on schools, crime, and neighborhood amenities to provide unique insights into each community. In addition, we harness rich, insightful user-generated content from our active community of contributors, which includes consumers, local enthusiasts, and real estate professionals. With more than 5 million unique user contributions, we believe we have the largest collection of user-generated content on homes, neighborhoods, and real estate professionals.

We enable real estate professionals to better promote themselves and their listings and connect with transaction-ready consumers through our online and mobile marketing products. Our free products allow real estate professionals to build their personal brand by creating an online profile, contributing content to our marketplace, leveraging social media for endorsements, and establishing their presence through mobile features such as “check-ins.” Our subscription products enable real estate professionals to increase their visibility, promote their listings in search results, target mobile users, and generate more highly qualified leads from our large audience of transaction-ready consumers. We believe that our audience is highly motivated and ready to purchase homes, as supported by our surveys conducted between November 2011 and May 2012 in which 76% of over 290,000 respondents contacting real estate professionals through our marketplace indicated that they are planning to move in the next six months, and in which almost half of over 210,000 respondents stated that they are pre-qualified for a mortgage. We believe that the combination of our compelling solution with our transaction-ready audience results in a high return on investment for real estate professionals who purchase our subscription products.

We benefit from powerful network effects and a vibrant user community. Consumers contribute content by posting questions, reviewing neighborhoods, and writing agent recommendations. Real estate professionals, seeking to connect with our consumers, engage in our community by sharing local knowledge, answering consumers’ questions, and contributing content to our marketplace. The breadth and quality of user-generated content contributed to our marketplace has helped to build our brand, deepen the engagement of our existing users, and attract more users.

We are a leading mobile platform for the home search process and mobile devices are increasingly critical to consumers and real estate professionals. We have introduced iPhone, iPad, Android, and Kindle applications that provide tailored mobile experiences, which has led to rapid growth in mobile use of our solution. In the six months ended June 30, 2012, we had over 4.3 million mobile monthly unique visitors, an increase of 176% over the same period in 2011. In addition, our mobile users are more likely than our web users to contact real estate professionals through our marketplace.

 

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Our online marketplace is experiencing rapid growth. Monthly unique visitors to our marketplace increased from 5.0 million in the six months ended June 30, 2009 to 22.0 million in the six months ended June 30, 2012, and our subscribers increased from 2,398 as of June 30, 2009 to 21,544 as of June 30, 2012. We generate revenue primarily from sales of subscription products to real estate professionals. We also generate revenue from display advertising sold to leading real estate and consumer brand advertisers seeking to reach our attractive audience. For the years ended December 31, 2009, 2010, and 2011, and the six months ended June 30, 2012, we generated revenue of $10.3 million, $19.8 million, $38.5 million and $29.0 million, respectively. During the same period, we had net losses of $7.0 million, $3.8 million, $6.2 million, and $7.6 million, respectively.

Industry

The residential real estate industry, which we estimate accounts for more than a trillion dollars in annual spending in the United States, is undergoing a profound transformation. Technology is changing the way that consumers search for homes, and the way in which real estate professionals attract clients and build their businesses. In addition, the recent unprecedented downturn in the housing market is causing real estate professionals to seek more effective ways to market themselves and achieve a greater return on their marketing investment. These trends present significant opportunities to capitalize on shifts in behavior.

Housing decisions are among the most important in people’s lives as a home purchase is one of the largest investments consumers will ever make. As a result, consumers devote tremendous time and energy to researching their decisions, seeking information on home prices, home features, schools, crime, neighborhood amenities, financing options, home values, real estate professionals, and numerous other factors as they evaluate prospective homes. The insights learned from this research inform their decisions of where to live, how much to pay, and who to hire as an agent.

Historically, consumers lacked readily available access to detailed and comprehensive information essential to making housing decisions, relying instead on disparate sources of information such as real estate professionals, local newspapers, and word of mouth. Over time, more information has become available online and, as a result, the Internet has become a primary source of research for housing decisions. According to a November 2011 survey by the National Association of Realtors, 88% of home buyers used the Internet to research homes. Additionally, the use of mobile devices for home searches has become more prevalent. According to a 2012 survey by The Real Estate Book, 52% of respondents reported using a mobile device to look for homes, with 85% of non-users stating that they would consider using a mobile device for their next search.

As consumers increasingly research homes online, real estate professionals are shifting their marketing expenditures online to reach prospective clients. While initially these real estate professionals focused their spending on email, search, and creating websites with listings, now these professionals are increasingly using online real estate marketplaces to generate leads.

Real estate professionals are not alone in recognizing the growing importance and tremendous value of online targeted marketing. Online real estate marketplaces provide an efficient channel for the broader real estate ecosystem to more effectively reach potential customers. Landlords with properties for rent, mortgage companies, and home service providers are also finding targeted marketplaces fertile ground for leads and are increasingly advertising on these sites.

Industry challenges

As technology drives the home search process online, consumers, real estate professionals, and advertisers face distinct challenges.

 

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Challenges for consumers

Consumers face challenges as they search for a home, including:

 

   

Fragmented and stale information. Real estate information is highly local and remains largely fragmented. Each house has unique facts and each block has its own characteristics. Consumers have historically lacked the ability to efficiently aggregate this information from numerous sources and receive it on a regularly updated basis in order to make the best home decision.

 

   

Lack of local insights. Consumers have difficulty obtaining relevant local insights, such as information on schools, crime, and neighborhood amenities, in a single place to provide context into what it is really like to live in a home or neighborhood. Further, consumers lack a trusted community and forum to engage with local enthusiasts and real estate professionals to get socially-informed insights and recommendations on neighborhoods and real estate professionals.

 

   

Difficulty accessing information on the go. The home search process is inherently mobile, requiring house visits and neighborhood tours. Consumers, however, have lacked effective tools to access up-to-date, relevant real estate information on the go.

Challenges for real estate professionals

Real estate professionals face challenges in attracting clients and growing their businesses, including:

 

   

Difficulty reaching today’s consumers. Real estate professionals need to adapt to the way consumers conduct their home searches using the Internet and mobile technologies. They have historically lacked tools that allow them to efficiently connect with large numbers of prospective clients.

 

   

Trouble targeting the right prospects. Real estate professionals rely on closing deals to generate commissions. Traditional marketing tools fail to provide real estate professionals with the ability to identify potential clients that are ready to buy or rent. Consequently, real estate professionals have trouble optimizing the time they spend with the right prospects.

 

   

Inability to manage business on the go. Real estate professionals historically lacked the ability to efficiently manage interactions with prospects and clients and access critical information on the go. Consumers expect timely responses and insights from real estate professionals who spend much of their time out of the office while viewing homes and meeting clients.

 

   

Inefficient marketing spend. Real estate professionals need to maximize the return on their marketing spend. With traditional channels, real estate professionals lack the ability to target the right audience and measure the success of their marketing spend.

Challenges for advertisers

Advertisers face challenges as they seek to connect with consumers searching for homes. Advertisers historically lacked the ability to efficiently reach a relevant consumer audience and target specific subsets of that audience, based on demographics and other factors. Additionally, advertisers need to maximize the return on their advertising budget in a measurable and data-driven way.

Market Opportunity

We believe that there are significant opportunities to address the challenges faced by consumers, real estate professionals, and advertisers. Borrell Associates estimated in an August 2012 industry paper that $23.7 billion would be spent in 2012 on real estate-related marketing in the United States. According to a November 2011 survey by the National Association of Realtors, 88% of home buyers used the Internet to research homes. However, according to the Borrell Associates report, only 55% of the real estate marketing dollars in the United States were projected to be spent online in 2012. We believe that there is a disconnect between where marketing dollars are spent and where consumers research homes. Therefore, we expect that real estate-related marketing spend will continue to migrate online from traditional channels.

 

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The Trulia Marketplace

We are redefining the home search experience for consumers and changing the way that real estate professionals build their businesses. We believe we deliver the best home search experience by combining our superior user interface with our comprehensive database of real estate properties, local insights, and user-generated content. We offer free and subscription products that provide real estate professionals with access to transaction-ready consumers and help them enhance their online presence. In the six months ended June 30, 2012, we had 22.0 million monthly unique visitors. As of June 30, 2012, we had more than 360,000 active real estate professionals in our marketplace, 21,544 of whom were paying subscribers.

Our marketplace provides the following key benefits for consumers, real estate professionals, and advertisers:

Key benefits for consumers

Large, continually refreshed, searchable database of homes for sale and rent. We provide consumers with access to a large, continually refreshed, and searchable database of properties. We enable consumers to customize their searches with property-specific filters to obtain up-to-date listings that are rich with property facts, price, and sale data. We believe the scope and quality of the information contained in our database and the ease of use of our solution empowers consumers to more effectively find the right home.

Trusted insights, social recommendations, and proprietary analytics that provide local context. We provide consumers with local insights, critical to a successful home search, not available elsewhere on an easy to use and comprehensive basis. These insights include information about schools, crime, neighborhood amenities, and real estate professionals. We provide this broad range of local insights and rich features on our marketplace through our proprietary Trulia Voices forum and via our integration with Facebook. We also provide proprietary analytics on home valuation, including comparative historical price trends down to the neighborhood level. We believe the relevance of our data, paired with socially-informed insights, enables our consumers to better inform themselves on where to live.

Anytime and anywhere access. Our marketplace is accessible anytime and anywhere on the web and on major mobile platforms. To meet the needs of consumers who are increasingly conducting their real estate research on mobile devices, including while touring neighborhoods and visiting homes, we offer mobile applications that are currently available for use on the iPhone, iPad, Android phones, Android tablets, and Kindle Fire. Since the introduction of our first mobile application in 2008, mobile use of our marketplace has grown rapidly.

Key benefits for real estate professionals

Broad reach to transaction-ready consumers. We provide real estate professionals the ability to connect with our large audience of transaction-ready consumers on the web and through our mobile applications. We believe that a large portion of consumers using Trulia do not use other real estate websites, and that this enables real estate professionals on Trulia to effectively identify and market themselves to consumers that they cannot find anywhere else.

Products that boost presence and deliver high-quality leads. We offer a suite of differentiated products that provides real estate professionals with access to transaction-ready consumers, delivers high-quality leads and helps close deals. Our free products enable real estate professionals to build their personal brand by creating an online profile, contributing content to our marketplace, leveraging social media for endorsements, and establishing their presence through mobile features such as “check-ins.” Our subscription products enable real estate professionals to boost their visibility, promote their listings in search results, and generate more high-quality leads from our large audience of transaction-ready consumers.

 

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Anytime and anywhere access to critical information and tools. We offer mobile applications designed specifically for real estate professionals to take their business on the go. Using our mobile applications, real estate professionals can access critical information that they need to conduct their business, including listings details, contacts, driving directions, and local information about neighborhoods. They also receive real-time notifications of new leads so that they can respond quickly and secure new clients. Our latest mobile product, Trulia Mobile Ads, allows professionals to reach a local, transaction-ready audience by advertising on our mobile applications for consumers.

Significant return on investment. We believe that our subscription products deliver a high return on investment to real estate professionals. Unlike traditional marketing channels, we provide tools to track leads and manage performance, enabling real estate professionals to measure and quantify the value of our products.

Key benefits for advertisers

Attractive audience. We believe our audience composition is highly attractive to consumer brand advertisers. A substantial portion of our audience is college educated, has a household income above $75,000, or is in the 25 to 54 age group. U.S. consumers with these characteristics tend to spend more of their annual income on home maintenance, insurance, household furnishings, apparel and services, and entertainment than the average consumer, according to the Bureau of Labor Statistics 2010 Consumer Expenditure Survey, which makes our audience attractive for consumer brand advertisers.

Display advertising products that efficiently reach target consumers. We enable our advertisers to reach the specific segments of our audience that are attractive to them. Advertisers benefit from improved reach, impact, relevancy, and measurement of their marketing campaigns in our marketplace.

Our Strengths

We believe that our competitive advantage reflects the following strengths:

We deliver the “inside scoop”

We are one of the leading online real estate marketplaces and we provide consumers with powerful tools and unique content that together deliver valuable insights into homes, neighborhoods, and real estate professionals. Consumers require information from local sources in addition to detailed property data to gain a comprehensive view of a home and neighborhood. We supplement our extensive database of over 110 million properties in the U.S. with information on schools, crime, and neighborhood amenities, and enable social recommendations. For example, our crime heat maps provide consumers with a view into neighborhood safety and our Facebook integration gives consumers recommendations on real estate professionals from people in their social network. Through our proprietary Trulia Voices forum, we also provide consumers with local content from our community of contributors, including consumers, local enthusiasts, and real estate professionals. With over 5 million unique user contributions, we believe we have the largest collection of user-generated content on homes, neighborhoods, and real estate professionals.

Superior products and user experience

We believe we have the best products in the industry for consumers and real estate professionals. We invest significant resources into technology development and product design to create a superior user interface that provides compelling features and rich functionality for our users. In addition, we offer unique search capabilities that allow users to search for homes in more intuitive ways, including by school districts, and by designating customizable areas on an interactive map. We also aggregate and integrate information from multiple sources and display it in an easy-to-consume manner that provides a more comprehensive view of a home or neighborhood. Our agent tools provide an easy way to manage their listings and interactions with leads and clients. We believe our products and user experience are a primary reason why, with limited marketing expenditures, we have been able to attract a large audience.

 

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Large, differentiated, engaged, transaction-ready audience

We believe we have become the online destination of choice for transaction-ready consumers in the residential real estate market. Our website and mobile applications attracted 22.0 million monthly unique visitors in the six months ended June 30, 2012, and based on data from comScore, a significant portion of our visitors do not visit our primary competitors’ websites. For instance, according to monthly data reported by comScore, during 2011, an average of 64% of our audience did not visit Zillow.com, and during the six months ended June 30, 2012, an average of 56% of our audience did not visit Zillow.com. In addition, based on data from comScore, our audience is more engaged with our marketplace than users of our primary competitor’s website, Zillow.com. Based on monthly data reported by comScore, during the 18 month period ended June 30, 2012, each unique visitor on average spent 14% more time per month on our marketplace than on Zillow.com’s marketplace, and viewed 44% more pages on our marketplace than on Zillow.com’s marketplace. We also believe that our audience is highly motivated and ready to purchase homes, as supported by our surveys in which 76% of respondents contacting real estate professionals on our marketplace indicated that they are planning to move in the next six months, and in which almost half stated that they are pre-qualified for a mortgage. We believe the transaction-ready nature of our audience results in better qualified leads for real estate professionals and an attractive audience for advertisers.

Strong mobile monetization

We believe we are one of the few companies that is monetizing its mobile products at a higher rate than web products. Since we launched our subscription product for mobile devices in May 2012, we have sold this product at prices that yield a higher average monthly revenue per subscriber than our subscription products that are not focused on mobile devices. In addition, our users are more likely to contact real estate professionals through our mobile applications than our website.

High ROI for real estate professionals

We believe our subscription products provide compelling value and a high return on investment for real estate professionals. On average, paying subscribers receive more than five times the number of monthly leads as real estate professionals who only use our free products. Unlike traditional marketing channels, our online marketplace allows real estate professionals to track, manage, and communicate with prospects, helping to measure and quantify the value we create. Based on our attractive monthly pricing, the likelihood that our users will complete real estate transactions, and the large commissions generated by real estate professionals on transactions, we believe our products generate significant return on investment for our subscribers. The value our real estate professionals receive from our marketplace is validated by our high subscriber growth and our increasing average monthly revenue per subscriber.

Powerful network effects driven by unique content

We benefit from a self-reinforcing network effect that helps build our brand, drives user engagement in our marketplace, and attracts more users to our website and mobile applications. As consumers engage in our marketplace, they contribute content by reviewing homes and neighborhoods, writing agent recommendations, and posting questions to our community of local enthusiasts and real estate professionals. Based on our internal records, we have determined that consumers who interact with our user-generated content view more pages per visit and spend more time per visit on our marketplace, and ultimately generate more leads for our subscribers. The opportunity to interact with, and market to, these consumers attracts more real estate professionals, who engage with consumers by sharing local knowledge and contributing more content to our forum. The growing breadth and quality of user-generated content contributed by both consumers and real estate professionals builds our brand as a differentiated resource and, we believe, attracts more users to our website and mobile applications.

 

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Big data and analytics platform

We have invested heavily over many years to build a robust data and analytics platform. We employ proprietary advanced analytics and heuristics capabilities to aggregate, filter, and analyze large amounts of data from disparate sources that we have cultivated over the years, including MLS and broker listing feeds, local demographic sources, and government archives. Our expertise in handling large amounts of externally-sourced data and combining it with user activity data collected from our marketplace allows us to improve the user experience by developing innovative new tools and new functionality. Additionally, we use this rich data to drive strategic business decisions and to publish insightful analysis on trends in local housing markets and macroeconomic trends in residential real estate. For example, we recently added the ability for real estate professionals to learn the geographic origin of search queries for homes in their market. We believe that our robust data and analytics platform gives us a competitive advantage in developing a superior experience for consumers and real estate professionals and raises awareness of our products in the real estate industry.

Our Strategy

Our goal is to build the leading online real estate marketplace. We intend to focus on the following key strategies in pursuit of our goal:

Expand our audience and increase user engagement

We intend to grow our large, transaction-ready audience by continuing to offer superior products for consumers. We plan to continuously enhance and refresh our database of homes, to partner with third parties to add new and relevant local content, and to encourage our users to contribute useful content. We also plan to develop new features, tools, and products that deepen our users’ engagement with our website and mobile applications, and to promote and foster interaction in our vibrant user community.

Grow the number of real estate professionals in our marketplace

We intend to further penetrate the large base of more than 2.8 million real estate professionals in the United States. We plan to attract more real estate professionals to our marketplace by communicating the value proposition of our free and subscription products and continuing to offer access to high-quality leads from our large and growing audience of transaction-ready consumers. We also intend to enhance and increase the ways in which real estate professionals can market themselves and communicate with prospective clients on our site, and to create additional value-added products to help professionals more effectively manage their leads, documents, and other key elements of their business.

Increase revenue

We plan to increase our revenue by selling more subscription and advertising products and by optimizing our pricing. We seek to attract more real estate professionals to our marketplace, convert more of our free real estate professional users to paying subscribers, and up-sell existing subscribers. We also intend to optimize the pricing of our products. Additionally, we plan to continue growing our advertising business by seeking larger and longer-term commitments from advertisers, diversifying our client base into different advertising verticals, and by adding additional media sales personnel to market to advertisers looking to target our large, attractive audience.

Increase brand awareness

We have built a leading real estate and consumer brand with limited marketing spend to date. We plan to continue to grow our brand by providing our users with superior and innovative products. We plan to build our brand as the most trusted source of real estate information with concerted public relations efforts that use our data and analytics platform to educate consumers and deliver relevant insights into the real estate market.

 

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Pursue adjacent opportunities

We plan to pursue opportunities in a number of large adjacent markets, such as rentals, mortgages, home improvement, and agent tools, and to expand our business internationally. We believe that given our attractive audience, leading brand, and powerful technology platform, we are well positioned to capitalize on the large opportunities that these adjacent markets offer.

Data

Management of data is a critical component of our solution. We manage over one terabyte of data on a daily basis. We organize data as listings data, local information, and user-generated content:

 

LOGO

Listings data

We refresh and supplement our listings database of over 110 million properties and for sale and for rent listings with data we receive from thousands of feeds on a daily basis. We receive feeds covering millions of new and existing for sale and for rent listings every day from MLSs, real estate brokerages, real estate agents, real estate listings aggregators, and other third parties. We also obtain detailed ownership and property data from vendors who collect and digitize information from public county records.

We process this wealth of data through our proprietary algorithms and heuristic data validation engine to sort, augment, and select the most up-to-date and accurate data to display. As a next step, we apply our search logic to the data, and overlay additional local information on schools, crime, neighborhood amenities, home values, and other community information. The final product is a complete profile of a property or listing with property facts, price data, local information, and agent contact information, which we publish in our marketplace in an intuitive and engaging user experience.

Local information

We inform consumers on what it is like to live in a neighborhood by delivering insights on schools, crime, neighborhood amenities, home values, and other community information.

 

   

Schools. We provide information on schools by district, type, parent reviews, and ratings, which is based on data that we receive from third parties. We overlay this information onto our maps and color code the data points with a sliding color scale to differentiate between schools with low, medium, or high ratings.

 

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Crime. We receive raw data from third parties about the occurrence, type, location, and description of non-violent and violent crime. We conduct proprietary analysis on the data and aggregate our findings into a tabular format or into our proprietary crime heat map. Our crime heat map provides an overview, visualized through a sliding color scale of the incidence of crime in the area and highlights in callout text boxes the number of violent crimes in the area.

 

   

Neighborhood amenities. We provide the location, names, and ratings of nearby restaurants, grocery stores, banks, and gas stations on our maps based on data that we receive from Yelp.

 

   

Home values. Based on our analysis of the sales records and property information in our database, we have developed market- and local-level views of the trends in price, number of sales, and number of listings by property type and location, which we publish on our listings pages and on the Local Info section of our website in interactive chart formats and in our proprietary heat map format.

 

   

Other community information. We analyze data from the U.S. Census Bureau to provide users with information on how the median household and family income, age of homes, and commute times of a neighborhood compare to those of the city.

Additionally, we have an agreement with Google to use its basic maps, over which we integrate our proprietary insights.

User-generated content

The user-generated data in our marketplace is organized under the Advice section of our website by type of content, questions and answers, blogs, real estate guides, and along topics relevant to our audience such as local information, tips on home buying and selling, and observed market trends. We also allow real estate professionals to publish their own profile and receive recommendations from their clients under the Find a Pro section of our website.

The content in our marketplace is generated by our vibrant community of users. Users can vote on the quality of content using our “thumbs up” or “thumbs down” icons and can follow the voting results. Additionally, users can “flag” inappropriate content on our site, which is escalated to our Trulia community team whose enforcement actions follow the terms and conditions for user-submitted content as published on our website.

Our Products for Consumers

Our products for consumers focus on helping them find the right home. Our consumer products are offered for free and provide a robust set of tools for evaluating where to live.

Searchable database

Search

We maintain one of the largest searchable databases of homes for sale and rent in the United States. Our database includes more than 110 million properties with 4.5 million listings of homes for sale and rent. We provide users with the ability to search our database along a variety of parameters as described below:

 

All Properties

  

Sale properties only

  

Rentals only

  

Sold properties only

City

Bedrooms

Bathrooms

Price range

Square footage

Property type Keyword search

  

Open houses

Year built
Lot size

Foreclosure type

MLS ID
Price per square foot

  

Pets

Amenities

  

Time since sale date

 

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Our users can customize their search along as few or many features as they prefer and by keyword search of specific property attributes. From our search results, users have access to the detailed data on each home in our database, photos of the home, and the for sale or for rent listing information.

Additionally, we enhance our users’ experience by giving them the choice to display their search results in listings or map formats. The map format provides the added functionality of polygonal search, which enables users to delineate the precise area of their searches. We offer products that further enhance our users’ experience with visually impactful maps, graphics, and photos of homes and neighborhood characteristics.

Trulia Estimate

Trulia Estimate is our estimate of an off-market property’s value based on our proprietary analysis of relevant home data such as recent sales of similar homes and property facts. This search function allows users to conduct a precise search by street address to find our estimate of the value of that home. Additionally, home owners may claim their home in our database and edit their home’s specific facts and details so that our proprietary system can revise its estimated value.

Rich insights and content

We provide users with rich insights and content that are critical to a successful home search and that cannot be discovered through home listings data alone. We deliver these insights through the following products:

 

   

Local Info. We aggregate local data from a variety of sources and make it more useful to our consumers through Google Maps overlays using our proprietary data visualization tools. These types of local insights include crime heat maps, school boundary and performance statistics, local amenity location and reviews through our integration with Yelp, and transit information.

 

   

Advice. We provide our users with the “inside scoop” on homes, neighborhoods, and real estate professionals based on the advice generated by our active community of contributors. Users of our marketplace can post questions and receive answers in the Trulia Voices portion of our website and also scour the collection of advice columns and blogs that other users post. With over 5 million unique user contributions and over 650,000 topics discussed on Trulia Voices, we believe we have amassed the largest online collection of user-generated content in the U.S. residential real estate market. This gives our users access to the insights of consumers, local enthusiasts, and real estate professionals who are knowledgeable about the neighborhoods in which our users are searching.

 

   

Find a Pro. We provide consumers with a directory of over 800,000 real estate professionals that is searchable by location, name, and type of professional. Our platform integrates with Facebook to leverage the power of social networks for clients to recommend real estate professionals and for real estate professionals to take advantage of online “word of mouth” referrals. For example, a consumer searching for a real estate agent in our marketplace can quickly find whether someone in their social network has recommended an agent in a particular area in which they are looking.

 

   

Value information. Each property detail page features information and analytics on the property value, including price comparisons of similar properties based on median home sale data by neighborhood, zip code and city, price history and trends, and property taxes based on assessed property values. We believe this information helps users better assess the value of the property beyond what can be gleaned from price data alone.

 

   

Mortgage. Given the significant cost of a home purchase, we provide our users with guides on how to finance their purchase, information on mortgage rate trends, and calculators to determine their estimated mortgage payment based on the rates and terms quoted.

 

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Mobile

Our products are accessible anytime and anywhere online and on mobile devices. We provide the following differentiated Trulia mobile applications for consumers on several major mobile platforms and devices:

 

   

m.trulia.com, a mobile-optimized website accessible on mobile device browsers

 

   

iPhone “Trulia”

 

   

iPad “Trulia”

 

   

Android “Trulia”

 

   

Android Tablet “Trulia”

 

   

Amazon Kindle Fire “Trulia”

 

   

iPhone “Trulia For Rent”

 

   

Android “Trulia For Rent”

Our Products for Real Estate Professionals

We offer real estate professionals a set of subscription and free products to promote themselves and their listings online and to connect with consumers searching for homes. We generally sell our subscription products on a one, three, six, or twelve-month basis, and therefore, our subscribers’ commitment periods may be short-term in nature. We also offer our subscription products at different price points. In addition to the pricing options, our subscribers can choose among different features and packages with each of our subscription products, as described below.

Our subscription products include:

 

   

Trulia Pro. Real estate agents can purchase one of three differently priced Trulia Pro packages to enhance their online presence, feature their listings in search results, and interact with potential clients more effectively. Benefits include enhanced lead generation, greater local lead rotation, featured listings, robust property pages, detailed contact information in search results, instant leads via mobile, and integrated recommendations with Facebook. We provide similar products to real estate brokers under the name Premium Listings.

 

   

Trulia Local Ads. Real estate professi