Notorious R.O.B.

RPR! We hardly knew ye!

Without a doubt, the topic of conversation at this year’s NAR National Convention has been the REALTOR Property Resource (Link: PDF) or RPR, the ambitious $20mm program rolled out with much fanfare by NAR.  You couldn’t avoid talking about RPR even if you tried.  And I wasn’t really trying that hard, because RPR is a fascinating product, an awesome user interface, and one where the team led by Marty Frame deserves a whole lot of credit for pulling such a great product together in such a short period of time (roughly 4 months).  Despite my concerns that RPR will trigger a civil war in the real estate industry, I thought (and continue to think) very highly of RPR.

However, it is now time to bury RPR.  It is dead on arrival in its current incarnation.

Suspicious Minds

Having presented at, and then having sat through the presentation of Dale Ross and Marty Frame on RPR, at the MLS Executives Meeting at NAR yesterday, I believe that the general mood of the MLS operators ranges between open hostility to cautious neutrality.  The larger MLS’s are biding their time, to see what some of the details are, possibly to see what is being offered by RPR for early adopters.  (Full disclosure: a large MLS, MRIS, is a client of 7DS, but I am writing this post, as I have every post on this topic, based on what I personally saw and heard, and public information, as opposed to anything discussed with them.)  The smaller MLS’s are worried what RPR could mean for them, and miffed that there is no revenue sharing arrangement for the sale of “their” data.

Brokerages are not bursting over with enthusiasm either.  They also wonder what’s in RPR for them, since they feel that the data that the MLS is supposed to provide RPR belongs to them.  The broker-owned MLS’s can’t make a decision without getting their shareholders on board, and the mood appears dark, to say the least.

The fatal flaw of RPR, I think, is the lack of revenue share.  Brokers, MLS executives, and Association executives might all look with favor or at least interest on a proposal that promised revenue streams that would allow them all to either make greater profits, or reduce the cost of service to their members.  Dale Ross made it crystal clear to the MLS executives that there is no revenue share for them; he urged them, in fact, to cooperate and collaborate with RPR for the good of the members because RPR will provide tools to help the members of MLS’s become better practitioners.  Ross’s concession that maybe five years down the line, after RPR’s revenues and profits are stabilized, he may consider revenue share did not, it seemed to me, to go over all that well with the audience.

Trouble is, those types of answers do not appear to assuage the suspicion on the part of MLS executives and brokerages that what NAR intends to do with RPR is to create a national MLS.

Into this environment of suspicion comes a critical piece of information.

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(Disclaimer: Move, Inc. is a client of Onboard Informatics, my employer.  But I have spoken to no one there, nor anyone here who deals with Move, for this post.  Everything here is my opinion, based on my own research into publicly available information.)

In what is an unusually long post for him, Dustin Luther laments the current state of Move’s stock:

When I started at Move in May ‘06, the stock (and my options) was priced at slightly above $6.  Today, I see the stock end today at $0.89, making for a very sad looking chart and definitive proof that I know nothing about timing my employment options.  I’m also not particularly good at reading financials, but I do know enough to know that having a market cap of $136M when you have $140M in total assets (down from over $200M in total assets from last year) is not a good thing.  I’d think they’d be an obvious take-over target except my guess is that many suitors would view the contract with NAR as more of an impediment to growth than an asset.

Yes, MOVE is an excellent takeover target.  And that contract with NAR is an asset (valued by MOVE itself at about $1.5m it seems, based on their Q3 2008 10-Q.)  And I think that contact could end up being pure gold if it means exemption for Realtor.com from the various IDX and VOW rules.

But really, that would mean that Move’s shareholders have lost their nerve completely.  And there’s no reason to panic, from what I can tell.  In fact, I think this is an amazing opportunity to build up long positions on MOVE.  (I am not a financial advisor, nor anyone competent to advise you on stocks, so uh… think of this post as being like a stock tip from your cabbie or something.)

Let me list my reasons.

1.  As Dustin points out, when your market cap is $136m, and your cash is $114m… um, yeah, you’re undervalued by alot.  In fact, the cash position is likely significantly better than $114m, as explained in the 10-Q, and is likely to be closer to $235m.  (The reason has to do with auction-rate securities, failures in that market, etc. which I noted earlier this year.)  But if you’re a shareholder of Move, you’d be an absolute moron to sell $235m for $136m, wouldn’t you?  Even discounting the ARS by some amount because of the risk, with the entire might of the U.S. government focused on bailing out the finance industry, I can’t see $121m worth of ARS being valued at only $22m (which is what $136m – $114m represents).

2.  The core business over at Move doesn’t seem that bad to me.  I’m no CFA, but looking at their Q3 results… yeah… there have been declines, but I see nothing to warrant a doom & gloom scenario.

Revenues went from $63.3m in Q3 of 2007 to $61.2m in Q3 of 2008.  it’s a loss, sure, but… not enough to warrant a drop from $2.50 a share range in Nov of 2007 to $0.94 today (when I just checked it).  The market must be pricing in some sort of future risk, but I’m just not sure I see it.

The management’s report contains this gem:

These changing conditions resulted in fewer home purchases and forced many real estate professionals to reconsider their marketing spend. In 2006, we saw many customers begin to shift their dollars from conventional offline channels, such as newspapers and real estate guides, to the Internet. We saw many brokers move their spending online and many home builders increased their marketing spend to move existing inventory, even as they slowed their production and our business grew as a result. However, as the slow market continued into 2008, it has caused our rate of growth to decline. While the advertising spend by many of the large agents and brokers appears steady, some of the medium and smaller businesses and agents have reduced expenses to remain in business and this has caused our growth rate to continue to decline and we may continue to experience a decline in revenue as we move into 2009.

So the big players are holding steady on their ad spends on Realtor.com, while the small guys are struggling to stay afloat.  This isn’t… shocking… but if it means losing about $2m per quarter for the next eight quarters… um… Move can deal with a $16m loss with their balance sheet.  But when you get even deeper in the weeds you get this:

Real Estate Services revenue decreased $1.4 million, or 3%, to $54.5 million for the three months ended September 30, 2008, compared to $55.9 million for the three months ended September 30, 2007. The decrease in revenue was primarily generated by a decrease in our HomeBuilder.com ^® business due to decreased Showcase Listings revenue and a decrease in our REALTOR.com ^® business due to decreased Featured Products revenue primarily due to reduced purchasing by one large broker customer. These decreases were partially offset by an increase in our Top Producer ^® product offerings. Real Estate Services revenue represented approximately 89% of total revenue for the three months ended September 30, 2008 compared to 88% of total revenue for the three months ended September 30, 2007.

So… the 3% decrease for Real Estate Services (which is where Realtor.com goes) is because of ONE customer?  I wonder who that is.  But that doesn’t strike me as a fatal flaw.  And then Move goes and sees increases from Top Producer?  In this economy?

Color me distinctly unimpressed with doomsayers.

3.  Move continues to invest in their core business.  The latest 10-Q is showing that they’ve spent $6.8m in product and web site development.  For the year, they’ve spent $20.5m on product and web site development.  I have to ask… who else is investing this kind of money into product and web development?

I seriously doubt that the RE 2.0 upstarts like Trulia and Zillow are spending $20m YTD on web development.  And if they are, I’m willing to bet neither of those companies have $235m in cash in the bank.

The thing that would concern me is if because of the economy, Move decided to slash and burn investment into its platform.  That would have serious reverberations down the line, at a time when the future of online real estate is still very much up in the air.  But $20m is not slash and burn by any stretch of the imagination.

4.  Their margins aren’t substantially affected.  Check out this beauty:

Gross margin percentage decreased to 81% for the three months ended September 30, 2008 compared to 83% for the three months ended September 30, 2007. The decrease is due to a decrease in margins in both the Real Estate Services and Consumer Media segments resulting from decreased revenues and increased costs in the segments.

Yeah, you read that right: 81% gross margins.  Those are some freakin’ sweet numbers.

Move could probably do more to cut some expenses, especially in Sales & Marketing, and in G&A (particularly the corporate overhead, which is unallocated to a business line).  They represent respectively $19.6m and $11.7m.

5.  Move still has the biggest war chest in the RE tech space:

We have generated positive operating cash flows in each of the last two years. We have stated our intention to invest in our products, our infrastructure, and in branding Move.com ^TM although we have not determined the actual amount of those future expenditures. We have no material financial commitments other than those under capital and operating lease agreements and distribution and marketing agreements and our operating agreement with the NAR. We believe that existing funds, cash generated from operations, and existing sources of debt financing are adequate to satisfy our working capital and capital expenditure requirements for the foreseeable future.

That seems right to me.  As the 10-Q indicates, even while reporting significant losses, Move was generating positive cashflow from operations — to the tune of $12.3m YTD.  Combine that with their $114 in short-term cash, $121 in auction-rate securities, and you’re looking at a formidable player somehow flying under the radar.

I figure the market has to get over its nerves re: housing market.  But until it does, fact is, Move and its properties are performing pretty darn well, and getting punished simply because they are connected to real estate.  And anything real estate is toxic right now to investors.

So I think I’m calling my broker and loading up on Move at $0.94 a share.  A drop of $2m in YOY quarterly results should not drop a stock from around $2.50 a share to less than half that.

Relax, Dustin.   And call your financial advisor.

Jonathan Washburn (whom I have named J-Dub, without his permission or approval) of ActiveRain and Localism hath sounded a call to arms for NAR to buy out Move, Inc (NASDAQ: MOVE).

J-Dub makes some good points (and the commenters on the thread support him) — namely, that Realtors hate Realtor.com, and that Realtor.com has lost its once enormous first-move advantage to newcomers like Trulia and Zillow:

Most Realtors I talk with hate Realtor.com. Or perhaps more accurately they hate the way Move monetizes the Realtor.com asset by selling extremely high priced marketing packages to Realtors. Prominent placement on Realtor.com should be a member right.

and

Realtor.com has less than a 5% market share among real estate category websites, with most of it’s top competitors boasting a marketing budget of less than 10% of that of Realtor.com’s. Realtor.com had a huge first mover advantage, perhaps the most valuable domain name possible, hundreds of millions of dollars in marketing support, and the, at least initial, grassroots support of 1,000,000+ Realtors.

J-Dub believes that NAR cannot get out of its agreement with Move, so the solution is for NAR to just take Move private and buy it outright. The cost, Jon says, would be cheap with enterprise value of Move just under $250m.

Let’s assume that J-Dub is correct on all counts. I still don’t believe that NAR should buy Move.

1. NAR knows nothing about running a business, never mind a complex technology-centric business, like Move’s. In my view, NAR has bigger fish to fry, bigger problems to solve — namely, how to improve the REALTOR brand such that it is not perceived by the public as “hateful lying sons of bitches”. (The main issue is how to establish clear distinctions in the consumer’s mind between a REALTOR and a real estate agent — read this and the comments for interesting observations.)

2. NAR already owns Realtor.com. Seeing as how its own members supposedly hate Realtor.com, it could just let it die. Just refuse to make any changes to the homepage, ever — NAR has that right as per the operating agreement. NAR can erect so many barriers in the way of advertising on Realtor.com which make it financially unattractive for Move to continue operating Realtor.com. Why buy the cow, when you can have the milk for free? Because NAR has these powers, simply letting Move know that it would like to terminate the agreement post haste is likely to initiate a cascade of events under which Move will exit the Realtor.com business at a price far less than the purchase price of the whole corporation.

In Move’s 2007 10-K (PDF), they list the relationship with NAR as a risk factor:

If it is true that Realtor.com is not adding any value to NAR and to its members, then NAR can simply let it wither on the vine, and lavish its love and money on other channels.

But it will never get to that. Move has no reason to want to continue operating a site — no matter what the agreement — in face of hostility from the actual site’s owner. In all seriousness, if NAR wanted Move to get out of the Realtor.com business, it merely need say so. NAR has too much power in how Move can operate Realtor.com, too many ways it can truly make life miserable for Move, for Move not to agree to let Realtor.com go. There might be a separation fee or something involved to avoid protracted litigation, but I just can’t imagine a scenario in which NAR tells Move to take a hike, and Move hangs on like some desperate girlfriend.

Thing is… if you’re NAR, what do you do to replace the 7.5 million unique visitors to Realtor.com under Move’s management?

Trulia and Zillow combined still have less than half the traffic of Realtor.com. So to kill the golden goose at this point in the game doesn’t strike me as an advisable strategy.

I have a better idea. Instead of spending $250m+ to buy Move, NAR could do a special assessment and spend $250m supporting new initiatives by the industry. Invest $25m into Localism and see what that can become (I’m frankly shocked that J-Dub isn’t making this argument). Throw $10m at the hordes of social media companies doing innovative things. Spend $50m setting up a real Center for Realtor Technology and challenge them to fix some of the widespread problems with data collection and distribution, or with geocoding and mapping, or with new ways of incorporating wireless and real estate. Still cheaper than spending $250m buying a public company, with far bigger upside for NAR and for the industry as a whole.

There are so many ideas that can really improve the industry that never see the light of day because funding for trying them do not exist.  $250m is a ton of money.  It could foster a whole environment of innovation in real estate — and with NAR leading the charge in investing in new technologies, new methodologies, new solutions to old problems, the private investment community will absolutely start to take notice.  That $250m seed can start to attract hundreds of millions more in investment from the VC and private equity communities.

In fact, this can be done for half that amount.  $100m NAR angel fund that fosters new ideas, then releases them into the wild of VC-land, could be the genesis of a transformation of the entire industry for the better. I am convinced more than ever that there is no shortage of talent in our industry — merely a shortage of will and of funding.

So, don’t look backwards into the past, NAR, in an attempt to fix something that isn’t working perfectly but is still working somewhat.  Look forwards into the future to start a new cycle of change, but one in which the industry is not caught completely off-guard.

-rsh

Move, Inc. — the folks behind Realtor.com and Top Producer — held its Q4 2007 earnings conference call recently. The transcript is available on Seeking Alpha. I think it’s well worth your time to check it out in full.

Move did $286M in 2007, vs. $280M in 2006. Considering the shape that the real estate market was in during the second half of 2007, that’s quite an accomplishment. What’s more amazing is that Move grew Q4 revenues by 2.4% to $71.7M in 2007. Michael Long, Move’s CEO, boasted:

In 2007, the toughest real estate market in 50 years, we grew revenues in our core real estate businesses, Realtor.com, Top Producer, and New Homes, amid unprecedented disruption and volatility. Revenue from Realtor.com and Top Producer on a combined basis was 10% higher than 2006. For the year we also delivered the highest EBITDA margin in our history and generated positive cash flow for the third consecutive year.

They’re in great shape.

Beyond the fact that they’re making money during tough times, I found three really, really interesting things from that call.

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