Deal Overview Total Shares: 6,000,000, (5,000,000 primary)Deal size is $90M at the $15 mid-point of the filing range. Bankers are JPM & Deutsche (lead) with a syndicate of RBC, Needham and William Blair. Shares to trade as TRLA on the NYSE. Total outstanding post deal will be 27.3M for a market cap of $410M. Revenue run rate is $68M with a negative 5% operating margin.
Commentary Trulia is an online residential real estate site that generates advertising and subscription revenue. Competitive strategy is to have a bigger database and be better at technology and social networking. Trulia also leverages user generated content to keep costs low. With total monthly visitors of 23M the company has reached scale and is a credible #2 to Zillow (Z). Speaking of Zillow if we look back on their IPO roadshow from July of 2011 they had about the same monthly unique visitors but a lower revenue run rate of about $45M.(Zillow posted $66M in actual revenues for 2011 and should do around $120M this year. Ad revenue in the real estate market is big – around $25B. It’s driven by real estate agents, lenders, home improvement, contractors and renters. Transaction sizes and margins are high in real estate generally so multiple revenue models including sponsored listings and subscriptions tend to work well.Both Trulia and Zillow are aggressively going after the 1.8 million licensed real estate agents in the US. The agents have held out and maybe won the first battle – remember Zip Realty? But now the reality of the majority of activity being online is forcing them to come over. Their fees remain intact though; at least for now. There are a few differences in the fundamental approach Trulia is taking vis a vis Zillow. They are concentrating more on related local information like schools and neighborhood analysis that are very important for families.
Management We’ve listed the team here. On the roadshow you only get to hear from the painfully mechanical CEO for most of the time. He could suck the energy out of the best story around. The CEO is fine but totally scripted and lifeless. The management flatness nags at us as we go through the fundamentals. We have the
Zillow roadshow slides and the Zillow IPO roadshow transcript but not the full video. CEO: Pete Flint, lastminute.com CFO: Sean Aggarwal – eBay, Amazon, Merril Lynch COO: Paul Levine – current, adBrite, Yahoo, E*Trade VP Engineering: Daniele Farnedi – shopping.com, looksmart (?!) Counsel: Scott Darling – Imperva, Microsoft, Danger Investors/Board: Accel, Sequoia Capital The vast majority of the Zillow team is from Expedia/Hotwire but a few hail from Ticketmaster and Yahoo. Overall the Zillow team is a notch above the Trulia group based on their background and experience.
Business Model Trulia is generating revenue from a combination of advertising and a freemium model for agents. Paid products are targeted at real estate agents who can use Trulia as their business platform. Cost is $1,500/year which the company suggests is a 10x return on investment for the average agent. Company claims acquisition costs of $500 for customer with a “life-time revenue” of $5,000 in “high demand” zipcodes. Paying subscribers are growing rapidly (~50%/year) and average revenue per user is increasing. Company is on a path to do well over $60M in 2012 versus $39M in 2011. There is lots of hand waving going on regarding the path between the current business model (-5% EBITDA) and the target (47.5% EBITDA) – That’s over 40 points of expansion! We believe a few parts of it like R&D, G&A and even Gross Margin but the sales and marketing goal of 17.5% versus the current 46% is probably off by 10 points. Even a 27% EBITDA margin would be a good target. It’s not clear why management decided to stretch beyond what most rational people would given the current state of the company, the market and the potential for competitive rivalry. There’s another odd fly in the ointment when the CFO puts out some figures on user targets. The goal of 225,000 paying subscribers seems not only doable, even modes. But the $450/month ARPU?! That’s almost insane. Remember that’s average so that means they will have agents paying much more? Given the current ARPU this seems like a huge stretch. Again the number of subscribers is modest and could easily be 2x and allow a reasonable ARPU target of $225/month.
Conclusion Fortunately for Trulia their arch competitor has done very well as an IPO over the last year. The shares stand at more than double the $20 IPO price and just below the $43 secondary offering price. As a multiple of revenue the shares trade at 14x which is more than double the proposed valuation of Trulia at the mid-point. Zillow is more profitable than Trulia and has enough advantages over Trulia to trade at a premium. But the market is large and attractive enough to support at least two successful players (there are others like Redfin, Craigslist, and Realtor.com). We expect the deal to do well even though the management team and the story feel a little less inspiring than they should.