ZIPR reported revenues and a loss per share of $21.7 million and ($0.37) vs. consensus of $24.1 million and ($0.19). The miss was driven by four factors:

• A very weak start to the quarter in January, which was offset by an improvement in transaction volume over the course of the quarter. It appears March was the strongest month within the quarter and the company entered 2Q09 with significant momentum in transaction volume. Overall, the company still increased closed transactions 33% YOY.

• A larger than expected decline in the average home price sold. During the quarter, the number of distressed sales as a percentage of transaction volume increased from 46% in 4Q08 to 53% in 1Q09 (36% in 3Q08). This dampened the average price of home sold and revenues per transaction. The average price of homes sold and revenue/transaction declined 23% and 20% YOY, respectively. We had been looking for a decline of 15%. We expect 2009 to be the nadir for revenue/transaction. The chart below outlines average home sales price and revenue/transaction for ZIPR over the past 5-years.

• Lower than expected agent productivity. Agent productivity as measured by the number of transactions/agent was effectively flat YOY. We had expected a slight improvement in the first quarter. In order for ZIPR to achieve profitability, we estimate ZIPR needs to achieve agent productivity of 8.50x or more. We are hopeful that management will minimize the number of new market openings and increase its focus on enhancing the productivity of its existing agent base.

• An increase in healthcare costs and reimbursable expenses, without a commensurate increase in revenues. We view this as an effort by management to reduce agent turnover during a period in which commission opportunities have been somewhat depressed.

While we never like to see companies we recommend miss a quarter, we find it helpful to revisit our investment thesis to see whether the results confirmed or deviated from our longer term outlook for the company.

1. ZIPR is well positioned in California, now the fastest growing residential real estate market in the country. During the quarter, overall single family home sales in California increased 82%, while ZIPR increased transaction volume 62% YOY. We would like to see the company grow transaction volumes inline with market growth, but we anticipate ZIPR will benefit from growth in California for the remainder of the year. In the former bubble markets (AZ, CA, FL, and NV), ZIPR increased revenues 12% YOY in 1Q09.
2. ZipRealty is gaining market share. During the first quarter, ZIPR generated a 34% YOY increase in transaction volume vs. a 27% increase in volumes in the markets in which it operates.
3. We expect operating losses from operations in new markets to decline over the next 12-24 months as housing volumes stabilize and recently hired agents increase productivity. As noted above, agent productivity has not yet incrased a large amount, but we expect improvement over the course of the year. During the quarter, revenues from new markets increased 86% YOY.
4. ZIPR has an outstanding balance sheet. ZIPR ended 1Q09 with $45 million in cash and no debt, down from $49.4 as of 12/31/08. 1Q09 will likely be ZIPR’s largest cash use during the year. The company has $2.24/share in cash and no debt.

Our long term thesis, remains intact and it appears momentum increased in March and April.

As always, please act accordingly….

Disclaimer: The author of this post owns shares in ZIPR, positions can change at any time without notice.