|Shares Out. (in M):||39||P/E||NA||34x|
|Market Cap (in $M):||365||P/FCF||20x||16x|
|Net Debt (in $M):||-39||EBIT||11||17|
Want to invest in the housing recovery, mobile growth, iPad application monetization, and the shift of real estate advertising dollars online at less than 8x forward free cash flow? MOVE provides investors that unique opportunity with a new management team that has stabilized the business and is beginning to benefit from company specific initiatives that have been in the works for years and industry tailwinds. The new management team of Move is lead by Steve Berkowitz who joined in 2009 bringing with him a history of success transforming online companies having most recently transformed AskJeeves over a 4 year period from a "dying" microcap search engine with less than $50 million in revenue to a growing company with over $300 million in revenue and sold it to IAC for ~$2 billion.
Move, Inc. herein referred to as “Move” or the “Company”, operates realtor.com, the leading online real estate information marketplace connecting consumers with the information they need to make informed home buying decisions. Move operated for years as a de-facto monopoly in the online home listings aggregation space as they have a direct relationship with the National Association of Realtors (NAR), the largest real estate trade organization in the United States and a direct feed from all the MLS’ (multiple listing services) to the most up to date real estate listings. Move failed to capitalize on this competitive advantage due to years of mismanagement; hampered by an onerous contract with the NAR, the Company failed in invest in new website design, products and technology. Move also limited pricing power by pricing its subscription based showcase agent product based on yearly historical listing count as opposed to leads generated. Steve Berkowitz joined Move in early 2009 and since joining has worked to transform the company and its culture, cutting non-essential costs, investing in product innovation, re-negotiating the contract with the NAR to allow more flexibility and beginning the transition from a subscription based model into one with the ability to monetize based on leads generated. For the first time in its history, Move has introduced a host of new products with enormous monetization opportunities: its first leads based product called connections, mobile applications for the iPhone, Android, iPad and Windows Phone 7, a mortgage lead generation website and an enhanced customer relationship management tool.
This business transformation has come about under the backdrop of positive secular changes in the industry. Tablets and touch phones have changed how customers shop for real estate, as home buyers compare real estate listings while visiting homes on the move. Move’s mobile leads have grown 400% year over year, with one third of Move’s page views now coming from mobile. This shift towards mobile not only increases the number of leads Move generates, but also the barriers to entry as consumers increasingly gravitate toward the mobile application with the most up to date listings. The days of local realtors putting up their own website and investing in search optimization to acquire leads is being replaced by costly app and mobile development not to mention customers never even searching for local agents after downloading a national apps like realtor.com on their iPad or iPhone. At the same time, it has become illegal for national franchisors like Century 21 to roll-up their local franchise listing feeds into a national site or application making national independent operators like Move even more valuable.
Move will also benefit from a structural change in how agents and brokers are spending their marketing dollars. Zillow has emerged as a strong online listings aggregation competitor, going public last year with great fanfare as investors extrapolated hockey stick revenue growth forward, valuing the Zillow enterprise ~$1 billion, compared to Move’s current enterprise value of ~$350 million. While Move was historically restricted by its NAR agreement to only provide advertising space to listings agents, Zillow has been effective in launching a leads based product to buyers’ agents. Through the success of its leads based product, Zillow has shown agents the value of a lead and trained them to focus their advertising spend on the highest return on capital. Zillow currently delivers 10 to 20 leads per month to an agent with a conversion rate of 3%. Assuming $2,500 in commission per home sale, Zillow generates $13,500 per year in value for an average agent. At the current price Zillow charges of $3,200 per year, an agent receives an over 300% return on their capital spend. Zillow continues to raise price and longer term many believe Zillow is pushing the industry toward a model where zip codes are auctioned at market clearing prices multiples above where we are today. While Zillow and Move generate similar unique users (21m for Move compared to 24m for Zillow), Move generates a more valuable and engaged customer (260m average minutes spent on site for Move compared to 187m on Zillow) and more importantly we estimate Move generates more than twice as many leads for agents as Zillow. While Zillow has continually raised prices, Move, already pricing its showcase product at a substantial discount to Zillow’s premier agent product, hasn’t raised price in over four years. As Move provides the highest return to an agent's advertising dollar, we expect Zillow’s price increases and agent’s increased focus on return on capital to provide a tailwind for Move to increase price on its core showcase product in late 2012/early 2013.
We believe Move now stands at an inflection point of accelerating revenue growth as the prior headwinds of a declining listing count give way to the monetization of its new products and higher pricing. Move generated revenue of over $250 million in 2007 before any investment in new products. Since 2007, Move’s revenue declined nearly 25% to $190 million as home listings on the site fell over 25%. However, since 2007, the value of the website to agents has increased as unique users grew from 6 million to 8 million and most importantly leads generated for agents have increased over 60%. We estimate the monetization of new products and price increase will contribute $50 million in incremental revenue through 2014. We also estimate an incremental $20 million in revenue from a moderate improvement in the housing market to more normalized levels, resulting in total revenue of $260 million by 2014. With its infrastructure largely in place, Move’s revenue growth will drop almost entirely to the bottom line, resulting in incremental margins greater than 65%. While Zillow is covered by eight analysts, Move is currently only covered by only two. As Move’s revenue growth accelerates and more analysts pick up coverage, we expect investors to turn their focus to the valuation disconnect between Zillow, trading at ~30x 2013E EBITDA, and Move, which trades at ~6.5x 2013E EBITDA, resulting in Move being assigned a growth multiple more reflective of its value.
There are a few key aspects to this story that we believe investors should focus on:
1) Move is increasingly becoming a dynamic product innovator, facilitated by CEO Steve Berkowitz’s leadership and is benefitting from mobile and tablet growth
2) Move possesses pricing power given its central importance in the real estate industry and ability to generate leads, which we believe can be monetized through its connections product and by increasing price on its showcase product as the business model transitions from subscription based to a price per lead model
3) Move’s revenue has significant leverage to a recovery in the housing market. The Company’s listing count is currently depressed at abnormally low levels given a cyclical low in existing homes sales and cyclical high in the average time a home spends on the market. Moreover, Move has already seen revenue related to its CRM product get cut almost in half off its peak and Move has yet to monetize its mortgage leads based service
4) Move has the long term ability to syndicate leads and drive additional leads to connections and mobile. Move’s acquisition of ListHub not only solidifies their leading position in the real estate industry, but also positions the Company to become a central hub for analytics reporting and advertising across the industry
5) Small increases in revenue have outsized increases in free cash flow for MOVE as it has incremental margins in excess of 65%, low capital intensity (less than $10 million per year in capex), and will pay no cash taxes for the foreseeable future due to over $1 billion in NOLs.
Move owns and operates a network of real estate websites, the most prominent of which is relator.com, which displays real estate listings from 900 MLS’ (multiple listing services, which are essentially where realtors enter all their listing information) across the United States, resulting in a searchable database of approximately four million properties for sale. Realtor.com has a direct relationship with the National Association of Realtors (NAR), the largest real estate trade organization in the United States and serves as NAR’s official website. Industry insiders describe realtor.com as the “mother-ship” of the real estate industry, as it’s the only company with a true direct link into the real time listing feeds of more than 99% of all the MLS’ across the United States. The ability to aggregate these listings into a national database of content requires a tremendous amount of resources and effort. As a result, realtor.com is able to provide the most accurate, comprehensive and up to date real estate listings in the industry, updating 75% of all its listings every 15 minutes. The Company has spent a significant amount of time and effort over the past 15 years building close relationships with over 400K local real estate agents and 70% of the national leading brokers and investing in their MLS partnerships, creating a significant barrier to entry.
While realtor.com acts as a lead generator for real estate brokers and realtors, the Company currently generates revenue from a yearly showcase subscription product (~40% of revenue), which allows a real estate agent or broker to enhance their listings by adding more photos, virtual tours, brochures, etc. to the basic listing for a yearly subscription fee of approximately $30 a listing. Enhanced listings are priced based on the number of historical listing counts for the past twelve months an agent may have. Realtor.com also generates revenue through Featured Home (~10% of revenue), which allows agents and brokers to more prominently display their properties by listing them first in relevant zip code searches, through Top Producer (~15% of revenue), which provides CRM software designed for real estate agents, including client management, appointment and task scheduling, internet lead distribution and comparative market analysis, through Display Advertising (~10% of revenue), which includes banner ads and Other Revenue (~15% of revenue), which includes several other websites providing multi-family rental, senior housing and moving related content.
Dynamic Product Innovation Driven by New Management
After years of mismanagement, which industry insiders describe as “inwardly focused” and “lacking in innovation”, Steve Berkowitz was appointed CEO in early 2009. After joining Move, Mr. Berkowitz essentially rebuilt the entire management team with a higher level of talent, hiring a new CTO, Chief Product Officer and CFO. While Steve realized there was a large opportunity in front of him, after years of mismanagement and outdated technology, he knew there was no quick fix and strengthening Move’s competitive advantage and positioning the Company for sustained long term growth would take time and require a complete overhaul of the Company’s technology and strategic positioning. He brought down the core expenses of the business by removing $30-$40m in unnecessarily costs while increasing investment into new product development and technology. The technology team re-structured the website’s platform architecture, separating the consumer and advertising front-end of the system from the back-end database, giving the product developers the flexibility to create more product innovations. Also, to strengthen its relationships with its key MLS partners, Move introduced a tool for real estate professionals allowing MLSs to provide their members with flexible access to all of the data from Move’s network of real estate web sites through a powerful search engine.
After fourteen years of operating under the old NAR agreement, in September, 2010, Steve was successful in negotiating a new contract, giving Move the ability to make more rapid innovations to their website, to syndicate their property listings to other sites and to generate leads from buying agents in addition to selling agents.
With this increased flexibility, Move’s engineers have rolled out a variety of new products in additions to the connections product and new mobile apps:
Transitioning to a Price per Lead Model and Leveraging Pricing Power:
While competitor sites like Zillow have been growing revenue by allowing buying agents to advertise on other broker’s listings, Move has historically been restricted by its operating agreement with the NAR to limiting advertising space to listing agents, generating no revenue from its non-enhanced basic listings (nearly 50% of all its listings). Released from this NAR restriction under the new contract, at the end of 2011, Move introduced its first lead based product, connections, operating as a lead form displayed next to basic listings. The connections product gives a buying agent the ability to own a share of an area code, paying for leads generated from the basic listings within that area. We estimate there are 20K good zip codes in the United States. Move charges on average $600 for a six month subscription to receive leads generated from a zip code compared to Zillow which charges $1,600 for six months and is continuing to raise price. We estimate Move will generate an incremental $25 million of revenue from the connections product as additional zip codes are rolled out through 2014 just based on penetration of zip codes and not optimizing price.
The new connections product also acts as conduit for Move to monetize leads generated from its mobile applications. In addition to the leads generated from the core website, the rollout of the Iphone, Windows Phone 7, Android and iPad applications over the past year has significantly increased lead generation and consumer engagement. On average, mobile users are delivering more than 150K leads per month through Move’s mobile apps. A mobile lead’s conversion rate is 2x that of a lead from the core realtor.com website. We estimate the introduction of a mobile connections product at the end of 2012 will increase the inventory of leads by over 35%, generating an incremental $10 million of revenue towards the connections product - again, just based on penetration of zip codes and not optimizing price.
We also expect Move to increase pricing on its core showcase product. Our calls with brokers and agents indicate that those that are analytically sophisticated and track their leads overwhelmingly find that their highest marketing return on capital and greatest lead generation comes from enhancing their listings on realtor.com. Other brokers that are not as sophisticated view enhancing their listings as a cost of doing business, as home sellers require their broker to enhance their home on realtor.com, the most trafficked real estate site. Given the outdated nature of its revenue model (Move is paid based on a yearly subscription fee of ~$30 per enhanced listing regardless of how many leads it generates), agents are significantly underpaying for the leads they receive through the showcase product. While Move prudently decided that raising showcase subscription pricing in a terrible real estate environment was a bad idea, the market seems to be more receptive now as Zillow and others have implemented significant price increases, real estate advertising on the web has become more of a necessity, and the overall market has improved. We estimate a 10% increase in price will generate $7.5 million in incremental revenue through 2014.
Syndication to Drive More Leads
Having the freedom to now syndicate their listings (due to the renegotiated NAR agreement), in Sept, 2010, Move acquired ListHub, which syndicates property listings from over 270 MLS’ to more than 70 different real estate websites, including MSN and Trulia and provides reporting analysis used to monitor online listing performance. ListHub resides in between the originators and owners of listings – the MLS’ and real estate sites like MSN. With Move already essentially controlling the source content data through its close relationships with over 99% of MLS’, the combination with ListHub gives Move the ability to expand ListHub’s access to MLS’ and to broaden its syndication efforts. The strategic importance of this acquisition wasn’t lost on Move’s competitor Zillow, which released a statement after the acquisition expressing their worry that “Pricing power aggregated into fewer hands means bigger bills. Move could use this power and data to help Realtor.com extract more money from the industry without having much alternative: pay and syndicate – or die”. While we agree that the acquisition significantly increases Move’s leverage, as opposed to using this power to stifle industry options, we expect Move to leverage Listhub to spur innovation and increase the leads generated for agents.
Currently, the method in which MLS’ distribute their listings across the web isn’t well thought out with little control over how they’re distributed. We expect Move to continue to improve ListHub’s analytical features, allowing MLS’ to better view how their advertising dollars are being spent across the web and give them better control over how their listings are syndicated. The longer term monetization opportunities of these initiatives are enormous. Our research suggests that operating a real estate web site is often unprofitable as they don’t generate enough revenue to support the infrastructure costs and sales and marketing budgets required to sell to real estate brokers. Even Google found it couldn’t be profitable in real estate, shutting down their real estate search option earlier last year. This provides Move the opportunity to leverage its vast broker and MLS relationships to sell enhanced listings not only on Realtor.com, but also on Move’s syndicated websites, increasing the inventory of leads generated for its connection and showcase products.
While we have not baked in the monetization of syndicated leads into our model, longer term we believe it can be significant. Recently, it became illegal for parent franchises like Century 21 to aggregate the listings from its local franchises into a national site making the need for syndication and the national site like realtor.com even more important. Longer term, as Move aggregates more click stream data, we expect them to help facilitate smaller local real estate websites make more targeted advertising decisions while monetizing a portion of each transaction, positioning Move to become a central hub for analytics reporting and advertising - in essence the Google AdSense of the real estate industry.
Leverage to the Real Estate Recovery
In addition to the monetization opportunities from its new products, Move will also benefit from improvement in the housing market. Move’s revenue is particularly levered to a recovery in existing home sales as home sales drive listings count and advertising dollars available to real estate agents. After falling nearly 40% from its peak of 7.1m in 2005, current existing home sales of 4.3 million imply a turnover rate (new home sales + existing home sales/number of households) of 3.8%, a cyclical low only seen at the bottom of three prior housing downturns over the past fifty years. A more normalized turnover rate of 5.1% would imply existing home sales of 5.9 million, a 40% increase from current levels. We conservatively estimate existing home sales will trend up moderately through 2014 to 5.7 million as housing price stabilization brings more buyers into the market and turnover moves towards more normalized levels.
Move’s revenue has also been negatively impacted by total listings on its website (listing count) falling further than existing home sales due to the average time a home stays on the market increasing from 6.5 days to over 8.5 days. We estimate that the time a home stays on the market will decline to more normalized level, declining to 7.7 through 2014.
We estimate the increase in listing count resulting from higher existing home sales and lower time on market will result in Move generating an incremental $20 million in revenue through 2014.
|Existing Home Sales||7.1||6.5||5.0||4.1||4.3||4.2||4.3||4.9||5.4||5.7|
|Move's listing count||9.0||8.4||7.1||7.6||6.5||6.8||7.7||8.5|
|Aveage # of months on the market||6.7||5.9||7.3||6.6||7.9||8.6||8.4||8.0|
At less than 8x 2013E free cash flow and 6.3x 2013E EBITDA, Move currently trades at a significant discount to its most relevant public market comparable, Zillow. Investors are overlooking the fact that Move has significant tailwinds for a price increase and will for the first time in its history be monetizing a host of new products: its first leads based product, new mobile applications, a mortgage lead generation website and an enhanced customer relationship management tool, which we collectively estimate will generate an incremental $50 million of revenue through 2014. In addition, a partial recovery in existing home sales to more normalized levels will generate an additional $20 million of incremental revenue. As the prior headwinds of a declining listing count give way to the monetization of its new products, recovery of top producer and higher pricing, we estimate revenue and EBITDA grow to $260 million and $75 million by 2014. With gross federal and state NOL’s of $900 million and $350m respectively, the Company will not be a tax payer for the foreseeable future. Capital expenditures are minimal at only $8 million a year. We estimate Move’s intrinsic value is $19 per share, 100% higher than the current share price based on a 14x multiple of 2014E free cash flow of $68 million discounted back to today at 15%, which we believe to be conservative particularly given the growth rate and that we are giving no credit for cash generated over that period of time which we estimate to be $65 million, or 20% of current enterprise value.
|Move listing count||9.0||8.4||7.1||7.6||6.5||6.8||7.7||8.5|
|Cost of revenue||33||41||43||46||48||43||40||39||40||42|
|% of sales||19.0%||22.8%||21.7%||20.9%||19.6%||17.7%||16.2%|
|Sales & Marketing||70||85||89||93||76||72||67||68||70||73|
|% of sales||38.3%||36.0%||36.3%||35.1%||34.2%||30.8%||28.4%|
|Product and Web Site Development||21||31||33||26||27||32||34||35||38||41|
|% of sales||10.6%||12.8%||16.3%||17.5%||17.7%||16.7%||15.9%|
|General and administrative||71||58||60||65||48||38||38||39||40||41|
|% of sales||22.7%||19.2%||19.6%||19.8%||17.6%||15.9%|
|Total Operating Expenses||162||173||182||184||152||142||138||142||148||155|
|Net Income to common||$7||$28||$5||($6)||($14)||($21)||$1||$11||$33||$54|
|Diluted Shares Outstanding||40||41||43|
|Free Cash Flow||$20||$43||$66|
|Move Current Valuation|
|Current Share Price (4/4/12)||$9.25|
|Free Cash Flow||$20||$43||$66|
|Move Intrinsic Value|
|Free Cash Flow||$20||$43||$66|
|Instrinsic Enterprise Value||$918|
|Multiple of Free Cash Flow||14.0x|
|Implied Multiple of EBITDA||12.5x|
|Discounted Enterprise Value at 15%||694|
|Implied Equity Value||733|
|Implied Equity Value||$18.60|
|Premium to curren price||101.1%|
|Market||Enterprise||--- Price/Earnings ---||--- EV / EBITDA ---|
|($ in millions, except per share price)||Cap||Value||2012E||2013E||2012E||2013E|
Risks include a potential push back from agents and brokers in moving towards higher pricing, another leg down in the broader real estate market and existing home sales (which could reduce Move’s historical listing count) and increased competition from competitor sites like Zillow, Trulia, Front Door and Red Fin.