Costar Group Inc (CSGP) — Q1 2015 Earnings Call Transcript

Thank you, operator, and thank you all for joining us this morning and welcome to our first quarter 2015 conference call. Before I turn the call over to Andy and Brian I have some important facts for you to consider. Certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in our April 29, 2015 press release without our first quarter earnings, our plan to acquire ApartmentFinder and CoStar's recent filings with the SEC, including our Form 10-K for the year ended December 31, 2014 under the heading Risk Factors. All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements whether as a result of new information, future events or otherwise. As a reminder, today's conference call is being broadcast live on the Internet, at www.costar.com, where you can also find CoStar's Investor Relations page. A replay will be available approximately one hour after this call concludes and will be available for approximately 30 days.

Thank you, Rich, appreciate it. It's not really broadcast in color, is it? Good morning, everybody. We're glad to have the opportunity to talk with you today about our very strong financial results in the first quarter of 2015. The tremendous progress we're making with Apartments.com has been phenomenal and we also want to talk about our agreement to acquire ApartmentFinder, which we announced last night. Our revenue increased 34% year-over-year to $159 million in the first quarter of 2015, compared to $119 million in the first quarter of 2014. We achieved net bookings of $21 million for the quarter, a whopping 50% year-over-year increase. March net bookings surged well beyond our prior best ever month to $11 million, which represents a 91% increase versus March of 2014. March's record sales were a direct result of the successful launch of our new Apartments.com site and our new CoStar market analytics product. The magnitude of the March sales jump surprised all of us. Net new sales on annual contracts, as opposed to many of the six-month contracts that come in on apartments, were $16.2 million for the first quarter of 2015, which is up 10% over the first quarter of 2014. CoStar core services grew 20% during the first quarter of 2015 as compared to the same period. Our annual subscription business continues to enjoy a high trailing 12 months renewal rate of 91% with a 98% renewal for those customers with us for five years or longer. According to Google Analytics, our marketplaces drew their most traffic ever with 22 million unique visitors in aggregate in March of 2015. According to a study conducted by Kip Cassino and Borell Associates, Inc., apartment landlords will spend $1.5 billion in online advertising in 2015. We believe that this represents a major earnings opportunity for CoStar Group. We acquired Apartments.com, a major player in the sector, one year ago in April of 2014. In the one year since the acquisition, hundreds, if not 1,000, of my colleagues have put forth a herculean effort and have redesigned and rebuilt Apartments.com from top to bottom. I definitely want to congratulate the team on a great job. In a competitive and rapidly changing industry, we need to ensure that our service will lead that industry. We understand that other competing sites with significant revenue are working with aging business models and that there is a unique opportunity to reinvent this space and capture share with a more renter-centric website. We believe that Apartments.com gives renters what they want and need, and then we will be able to give our paying advertisers the quality leads they want. One of CoStar Group's core competencies is collecting and building content. We feel that renters really want a more comprehensive inventory of rentals, including condos and houses with actual rents and availabilities. Prior to the site launch, we wrestled with a number of risks. There was a risk that our development teams could not rebuild and integrate the site across multiple platforms in our budgeted timeframe. There was a risk that we would not be able to collect enough content to really improve the renter search experience and drive brand loyalty. Our decision to include paid and unpaid content created the risk that advertisers would opt for free listings where the advertisers would not receive enough incremental exposure over free listings to justify their investment. There was risk that the site redesign would cause existing advertisers to reconsider ad spend with us. There was the risk that our sales force would not have the skills necessary to effectively sell ads in our new business model. There was the risk that our belief in our efforts to cross-sell information and marketing in the apartment industry would not bear fruit. There was also the risk that our SEO would fall dramatically with a complete site rebuild and there was also the risk that our significant investment in marketing would not drive meaningful traffic gains. Once or twice I woke up at 4 in the morning during the process of rebuilding Apartments.com. Now that we have successfully launched the new site, driven significantly more traffic, retained the overwhelming majority of our advertisers and set all-time new sales records including significant cross-sell wins, we feel that many of the unknowns and risks are rapidly diminishing. That is very important to us. We're more confident than ever about our strategy and execution in the apartment rentals marketplace. The combined Apartments.com sales force and CoStar sales force are working effectively together and selling successfully. We're confident about our ability to gain significant market share. I believe that our early results demonstrate that our efforts are beginning to show clear payoffs. The launch of the new marketing campaign on March 1, 2015, featuring acclaimed actor Jeff Goldblum as Silicon Valley Executive Brad Bellflower, has been an outright home run for Apartments.com. The campaign is now in full swing with thousands of television spots, hundreds of outdoor placements, a large digital campaign and thousands of radio spots. We can see strong traffic gains as the various ads run. We've received very positive feedback from our customers on the campaign. Senior industry players have told me that they feel the major branding campaign is having a positive halo effect on the entire industry and they're pleased that it elevates their stature in the business community. I think that is a great result for us. The only negative feedback is coming from our competitors. Our intensive B2C campaign, coupled with our significant investment in search engine marketing, a dramatically improved site experience and strong improvements in SEO, is driving massive site traffic gains. Four of the leading independent companies that monitor Internet traffic; comScore, Compete.com, Experian, Hitwise, and Alexa, now show Apartments.com as the undisputed number one most heavily trafficked in the apartment rentals listing space. According to comScore, in March 2015, we more than doubled year-over-year traffic to Apartments.com with 15 million visits and 7 million unique visitors. Our own internal Google Analytics numbers show even higher traffic numbers. Alexa now shows us the most recent trailing pass-through day traffic numbers moving even higher with 9.1 million unique visitors to Apartments.com. That is nearly double Apartments Guide's five million unique visitors and quadruple Rent's unique visitors of 1.9 million. These two major competitors each have significantly more revenue than Apartments.com does today and generally charge half price points and they charge substantially more for their lesser traffic than we do. We believe that advertisers will find it attractive to switch their lead generation budgets to our more heavily trafficked Apartments.com and save money. It's really a nice sales visit when you go into a potential client, show them a superior product and save them money in their budget. We believe we can take significant share from these competitors. Alexa shows much more than just a traffic event for Apartments.com. According to Alexa, not only are more visitors coming to Apartments.com, but those that do stay, visit and stay approximately 50% longer on our site and they view more than twice as many pages on our site than any other competing apartment rental ILS site. Apartments.com has the lowest bounce rate in the apartment rentals listing space at one third lower than the rate of Apartments Guide or For Rent according to Alexa. Compete.com shows Apartments.com dominating the apartment rentals listing space with 60 million page views in the month of March 2015, which is twice the number for Apartment Guide and six times the number for For Rent. In their monthly newsletter, Compete.com called out Apartments.com as one of the 10 fastest upward momentum internet sites in the month of March. They also note our impressive growth and engagement stats as shown by pages per visit, length of visit and number of return visits. Experian not only shows us leading other apartment rental listing sites in traffic, but they also show us capturing an amazing 51% of all of the SEO number-one slots for critical industry search terms such as apartments. Apartment Guide, in contrast, is only capturing 7.2% of those key terms and For Rent is only capturing 1.2% of them. We're very proud of these impressive across-the-board results, but we view them as a great start and we're focused on continuing to widen our competitive lead. These impressive increases in traffic are creating massive exposure for our advertisers' listings and it's difficult to give you a fairly representative picture of the true increase in quality leads we're generating for advertisers. We can see tremendous lead growth. Leads during the first quarter of 2015 are up nearly 67% year-over-year. We've received a lot of positive feedback on results and I can share one I received just yesterday from Diane Callaghan, who manages Vista at Palma Sola apartments in Florida. She said, "We went live with Apartments.com on April 6. Since that day, our phones have not stopped ringing and we got 16 leases. To say the least, we're very happy with our decision to advertise our community on Apartments.com. Thank you for all that you do.". You're welcome, Diane. In this quote, the customer is attributing the source of $192,000 of leasing to their roughly $500,000 ad on Apartments.com under the traditional locator model, that have cost them $16,000. That when you take all that into consideration, it’s not surprising that we're having success selling. March was the first representative selling month post launch. March results exceed our highest sales expectations for the new site. At the end of the sales month, the Executive Team awaited further results late that night, last month as the results went out late at night around midnight, with our first ever eight-digit annualized net new sales result, the Management Team replied with responses like, "OMG, wow, holy blank!" Net sales on Apartments.com in the first quarter of 2015 were up 827% compared to the first quarter of 2014. We had more net property additions in March 2015 than all of the preceding year. We had more net property additions in March 2015 than in all the preceding year. So in one month, we had more net sales during the entire prior year. We cannot expect that pace to continue and certainly one month of sales does not make a meaningful trend, but it is a great result. We believe that many of the thousand plus apartment communities that signed up with us in March curtailed their spending on competing sites. We do know that was the case with ApartmentFinder. After turning in reasonable growth for the past few years, their sales turned down as we launched our new site. ApartmentFinder was founded in 1979 and is one of the most recognizable brands in the multi-family internet listing service industry and has been a significant player across the United States. In the fiscal year ended March 2015, ApartmentFinder had revenue of approximately $79 million and EBITDA of approximately $23 million. Today, ApartmentFinder reaches over 118 core markets in the multi-family space. ApartmentFinder's business model is very similar to the Apartments.com business with approximately 13,400 properties listed on its site. It combines website mobile apps and social media lead generation solutions with an optional digest-sized local print publication. 80% of the leads they generate for advertisers are from ApartmentFinder.com and 20% are from their print product. Its main source of revenue is listings, which represent 91% of the ApartmentFinder revenue as of the fiscal year ended March 2015. Typical average monthly spend by clients of ApartmentFinder is $482. They have an outstanding monthly renewal rate of 98%. We like the fact that their product is aggressively priced amongst industry competitors. Finder has two product lines that we do not currently offer in the apartment space. Finder Social is a content and social media marketing service for multi-family property customers and apartment communities. Finder's staff helps these clients create content and manage online relationships. About 10% of Finder clients use Finder Social. It is sold as a high-value add-on or standalone service. This has potentially greater value sold through our larger distribution channel. Finder has another product called Finder Sites, which is similar to our loop link product that we believe will be a strategically valuable addition to our offerings. We began negotiating to acquire ApartmentFinder well over a year ago at approximately the same time we were engaged in the process to acquire Apartments.com. After intense negotiations last year, we were unable to reach an agreement on a purchase at that level and both parties walked away more than six months ago. At the time several companies in the Apartments Rental ILS space were being offered in the 14 to 18 times EBITDA range. So people were trying to pick up 14-day 18 times EBITDA, once sold at 14 times, placing the valuation of that company at $1.5 billion. As we had previously communicated to investors, we were unwilling to purchase other ILS at the same EBITDA multiple that we paid to acquire Apartments.com. We passed on multiple potential deals. Using that multiple that was in play last year when we were unable to find the price we wanted, we would have been expected to pay over $300 million for Finder. A year ago, we wanted to focus our energies on successfully re-launching Apartments.com and reducing all those risks associated with that acquisition and the re-launch. Now that we have successfully launched Apartments.com, we've reduced so many risks in the business and developed new sales content, technology and brand assets that can be readily leveraged across other ILS sites. Within days of our national media blitz announcement and the new site launch, ApartmentFinder's owners contacted us and we resumed negotiations at a much lower price. We're acquiring ApartmentFinder for $170 million in cash, which is much lower than the $300 million I mentioned earlier. This means we're buying the company at approximately seven times EBITDA. This is less than half the multiple we paid for Apartments.com. The price that we paid is roughly $80 million less than the bottom price the seller had a year earlier and that difference is about what we spent on the incremental marketing campaign that helped us to achieve this lower price and so many other clear additional benefits. We're not planning to do an immense branding campaign for ApartmentFinder as we did with Jeff Goldblum for Apartments.com. We're focusing on online marketing for ApartmentFinder. However, there is no doubt that the advertising and brand work we're doing for Apartments.com will benefit ApartmentFinder because it will give our salespeople who sell both services access to buyers because of the power of an unprecedented Apartments.com campaign. We expect to achieve a run rate of $20 million of synergies over the next 18 months, which could effectively lower the multiple paid to somewhere around four times EBITDA. We believe that we can achieve these synergies while at the same time dramatically increasing our investment in digital marketing for Finder to drive significant traffic to the site. We're in Atlanta for the days cost so that we can get to work right away on our plans to integrate Finder once the transaction is closed in order to leverage all of our new and valuable assets. Our technical leadership is already meeting with their team to begin integration planning as we did with Apartments.com. We already had preliminary design specs done for the ApartmentFinder site by the time we announced the deal yesterday. We plan to consolidate all of Finder's content, billing and CRM into our new backend that we built to drive Apartments.com. That means that once this effort is complete, we will have one cost for collecting amazing content, great billing systems in CRM that's leveraged for two brands. Equally importantly, we expect Finder will gain huge new strengths and competitive advantage in content while gaining this better billing and CRM system and much larger sales force. ApartmentFinder offers its advertisers a print directory option that is relatively ineffective in driving leases and is expensive to produce and often tougher in organization to come to grips with and eliminate. We plan to eliminate the print offering as soon as possible. Print and distribution spend is $12 million and operating expenses for approximately $800,000 print publications a month, distributed through an extensive rack distribution network. Over time, we plan to shift the money ApartmentFinder has been spending in print publications to a larger investment in search engine marketing programs to deliver more leads online where most search activity is actually taking place. We believe that we can replace more than the print leads lost with additional online traffic generated on a new Finder site with this larger SEM budget. Apartments.com and ApartmentFinder eventually are powered by the same database, so we believe that we can also replace any leads lost from Finder print with silver level ads in Apartments.com. We hope to phase out print in less than a year. While we're phasing out of print, we expect to run both the print cost and the enhanced SEM cost. We're doing that because we feel that time is of the essence and we want to be aggressively growing all of our brands. We plan to continue to operate Apartments.com and ApartmentFinder as two separate and distinct brands, each with their own distinctively different website experiences and user interfaces. Our goal is that renters will view the brands as very different sites targeting different audiences. No matter how successful we are, you will never Google the search term apartments for rent and get a Google result page with Apartments.com as the only result with a great big white space below us. It's much better to compete with ourselves as the alternative choice than with a third party because Google, Bing or Yahoo users can recall multiple brands and we want to also occupy multiple considerations in their top of mind to capture a larger share of direct traffic as well. Our research shows that renters typically visit three to six sites in their apartment search. We want to engage them in as many of these sites as we can. In much the same way, Priceline is a highly profitable $65 billion market cap company that wisely operates multiple complementary brands in travel including Booking.com, Kayak, RentalCars.com, Agoda, and OpenTable. Expedia is another highly successful multi-billion company and it operates brands like Expedia, Hotels.com, Trivago, Hotwire, Travelocity, Car Rentals, Venere, and eLong. It's all about the real estate in the online world. Who shows up at the top of search results or top of mind can generate high-margin, big revenue, and that's why and it's why we've consistently operated from this strategy for a long time. When a searcher enters a term like office space for sale in San Diego into Google, the results are often great. Now the results are often multiple CoStar Group brands such as LoopNet, Showcase, CityFeet, and CoStar, and sometimes brokerage firm sites that are powered by our loop link product. This way when the searcher goes in there, we're not losing business to competitors and holding other slots on the page or not losing as much business. This is also the strategy that we're consistently using for our two brands in the land space and for our two brands in the business for sale space. Generating online leads for their apartment community is a mission-critical utility for an owner. They often want to market their property on multiple sites to diversify and generate more leads than they can get from one site. Again, remember that the ad spend online in this space is estimated at $1.5 billion in 2015. We're only getting a piece today and meeting customer demand is a good way to grow share. In focus groups, owners have told us that they would really like it if they could deal with just one sales representative and deal once with setting up online feeds and updating sites, working with just one company, but in doing this, they want to also be able to hire their goal of moving out to multiple sites. We plan to do that. So with this acquisition, we gain 120 valuable new apartment sales professionals. This team will join our existing 500 plus sales professionals giving us one of the largest sales forces in the industry. We've had tremendous success transforming Apartments.com into an industry leader in a very short period of time and I am looking forward to repeating that success with ApartmentFinder. We have an exceptional head start since much of the infrastructure we've built for Apartments.com is directly relevant and can be used for ApartmentFinder; acquire, beat and repeat. I'll wind up with a quick update on our international operations. The sales efforts in the U.K. continue to deliver great results as we achieve the highest ever net sales month in March 2015 and the annualized new sales of £301,000. We're closing in on our 1,000th customer for CoStar suite in the U.K. Our sales are accelerating with more than one new subscriber firm on average every day since the launch of the CoStar suite product in the U.K. We're now advancing our plans to retire the older focused product completely from the market and expect to complete that before mid-2016. I am very pleased with what we've achieved in the first quarter of 2015 overall. We've unleashed a powerful new sales platform that is driving record sales of CoStar and Apartments.com. We're confident we're the only company that can really deliver to property managers and owners a marketing solution along with a comprehensive information analytics platform for an exceptional price. We think that ApartmentFinder will be a very valuable and profitable asset that will strengthen our service offering. I believe in our way to $1 billion in revenue and 40% margins in 2018 and that we're exceptionally positioned for strong growth and financial success for many years to come. At this point, I will reluctantly turn the call over to Brian Radecki, our Chief Financial Officer.

Yeah, that wasn’t for two conference calls in one, Andy. I was expecting to go a little longer both the quarter and on acquisitions. Thank you, Andy. I know as Andy mentioned, we're very pleased with our performance in the first quarter of 2015. The investments we're making in marketing are showing positive early results with all-time high sales numbers, increased traffic, and leads. All the while CoStar Group's core business continues to show solid topline growth. While we're in the early stages of the Apartments.com website re-launch and national marketing campaign, the early uplift in sales and traffic support our view that apartment revenue will accelerate in the third and fourth quarter this year and obviously beyond. We expect the acquisition of ApartmentFinder will help expand our market share with property owners as well as our reach with consumers while generating sizeable cross-selling opportunities and synergies in 2016. The ApartmentFinder transaction we announced yesterday was paid for with cash on hand of about $170 million, which is, as Andy mentioned, a very favorable evaluation at seven times EBITDA. We expect the deal to close in 90 days or less. The valuation looks even better when you consider the $20 million in run rate synergies we expect to achieve within 18 months after the close. Given the attractive purchase price and the benefits that come along with that, we can drive significant value for shareholders. For the fiscal year ended March 31, 2015, revenue for the total ApartmentFinder business is approximately $75 million with EBITDA at approximately $23 million resulting in a 29% margin. However, there are several non-core assets, which we will likely sell and discontinue over the next 18 months. Example, rack space rentals in grocery stores, banner ads, and other selectable items. ApartmentFinder's core advertising revenue was approximately $68 million to $70 million for 2015. The ApartmentFinder business, as Andy mentioned, grew in the low single digits last year and was down slightly last quarter. We believe a refresh of the ApartmentFinder website with increased SEM initiatives will enhance the business and contribute revenue and EBITDA to CoStar in 2016. We expect to realize the longer-term cost synergies by running two distinct branded sites using the same IT infrastructure, same data collection research for both Apartments.com and ApartmentFinder. Just as we've done with Apartments.com and LoopNet, we expect to leverage the technology, research, marketing, and sales with the ApartmentFinder business, which will translate to significant revenue and EBITDA to CoStar. Turning your attention back to CoStar's results for the first quarter of 2015, the company reported $159 million of revenue, an increase of 33.5% compared to the first quarter of 2014. As previously discussed, the company made significant marketing investments in the first quarter for Apartments.com, therefore adjusted EBITDA was $23.8 million, non-GAAP net income was $10.8 million or $0.34 per diluted share and net income was a loss of $6.1 million. Strong gross margins of $113.6 million for the quarter or at 71.5% of revenue are similar to the gross margins reported in Q1 of last year, even though it includes the investments in research for multi-family in Canada that we've discussed the prior two quarters. Reconciliation of non-GAAP net income, adjusted EBITDA and all non-GAAP financial measures discussed on this call for their GAAP basis results along with definitions of those terms in our press release issued yesterday are available on our website at www.costar.com. Cash and investments increased to $558.4 million as of March 31, 2015, up $14.2 million from last quarter. Cash and investments exceeded total short and long-term debt of $380 million as of March 31. Now I would like to give some additional color on a few metrics to highlight our strong performance in the quarter. As Andy mentioned, we achieved $16.2 million in annualized net new sales of subscription services on annual contracts in the first quarter of 2015, an increase of 10.3% over the first quarter of 2014. Our annualized net bookings in the first quarter climbed to over $20 million, an increase of 50% over the same period last year. This is our best quarter ever of net bookings by a mile. This metric picks up all the six-month apartment contracts that are not included in the annual metric. Obviously viewed in conjunction with the annualized net new sales of subscription service metric, these are good indicators of future revenue growth. As of March 31, 2015, we had approximately 504 salespeople across the country, which is consistent with the prior quarter and does not include the additional salespeople we will pick up with ApartmentFinder. Revenue from subscription services and annual contracts was up $106.5 million for the first quarter or 66.9% of total revenue. For the trailing 12 months ended March 31, 2015, subscription revenue from annual contracts totaled $404.7 million, up 18.2% from the 12-months ended March 31, 2014, reflecting our continued success in growing annual subscriptions faster than non-subscription pieces of the business. The year-over-year growth in annual subscription revenue has remained in the 18% to 20% range for the past six quarters, which is important to remember. We expect to continue to grow revenue from subscriptions on annual contracts back up into the 70s in the near term and eventually through the 80% and 90% of our total revenue, which continues to be a focus across the company. Renewal rates for annual subscription revenue remained high during the quarter. The 12-month trailing renewal rate for CoStar subscription base revenue was 91.3% in the first quarter of 2015, which is fairly consistent with last quarter's 91.5%. As we've discussed for the last few quarters, the introduction of more annual LoopNet contracts and ApartmentFinder into the subscription base is expected to cause the 12-month renewal rate to edge down slightly, possibly by 1% or 2%. Therefore, we continue to expect to be in the 90% to 91% range. But remember, the renewal rate for CoStar subscribers who've been with us for five years or longer continues to remain high at 98%, it's actually 98.4%. One additional item we expect to impact our renewal rate in future quarters is GE's announcement to sell its real estate portfolio. GE is a long-time subscriber of CoStar and CoStar portfolio strategy. So this transaction could have a short term impact on our reported renewal rates reducing the annual size of the renewal rate by approximately half to one percentage point. We believe our revenue guidance range adequately accounts for the uncertainty related to this customer. I'll now discuss our outlook for the second quarter and full year 2015. We expect revenue of approximately $688 million to $698 million, based on our strong first quarter 2015 sales results we're raising the full year 2015 guidance for the core business by $3 million on both the top and bottom end of the range. We expect revenue trends to continue to improve in Q3 and Q4 of 2015. Additionally, we've incorporated ApartmentFinder into our annual outlook range by adding an additional $30 million to $35 million. For the second quarter of 2015, we expect revenue of approximately $162 million to $163.5 million. This includes previously disclosed de-emphasizing services, changing over the new Apartments.com website and does not include any revenue from ApartmentFinder for Q2. We expect non-GAAP net income per diluted share in the range of $1.98 to $2.08 for the full year of 2015 and approximately $0.10 to $0.14 for the second quarter. This outlook assumes minimal impact on non-GAAP net income per diluted share for the ApartmentFinder acquisition. For the remainder of 2015, investments in the ApartmentFinder website and increased search engine marketing are expected to approximately offset their earnings to pick up. As we mentioned earlier, we expect the ApartmentFinder acquisition to be significantly accretive in 2016 and beyond as we integrate the websites and utilize one backend and one information. Compared to our first quarter 2015 outlook, a large portion of our Q1 favorability in earnings is related to the timing of the marketing investment approximately $5 million in costs shifted from the first quarter to the second quarter, while total incremental cost of the marketing campaign remains at the $75 million. We still expect the media spend to peak in the second quarter of 2015 to coincide with the prime season for apartment renters. I should add that we just signed the ApartmentFinder acquisition on Monday. We will obviously be doing a lot more work in our integration plans and our forecast. So we look forward to updating investors on those plans and the impact on our outlook next quarter. In summary, I am very pleased with CoStar's financial results for the first quarter and we're off to a great start with Apartments.com traffic and sales. I look forward to reporting our continued progress in the coming quarters. As a reminder, we achieved a 35% adjusted EBITDA margin in Q4 of 2014 before launching the Apartments.com campaign, and with the potential synergies available with the ApartmentFinder deal this allows us to continue to remain even more confident in our prior stated goal of $1 billion of revenue with 40% plus adjusted EBITDA margins exiting 2018. Now as our confidence grows and 2018 gets closer, we look into the future. Therefore, we're going to establish a new longer-term range goal for 2020, or a 20-20 vision if you will. I can see the vision of $1.5 billion in revenue run rate with a 45% to 50% adjusted EBITDA margins. Everybody get that? So we're not going to adjust the 2018 goal. We're obviously confident in that, but we're going to set a new five-year goal. As always, I look forward to sharing our progress towards these goals with you in the coming quarter and now we'll open up the call to any questions.

Yeah, thanks guys. I appreciate it. In terms of the ApartmentFinder acquisition, when you look at the two properties, I understand the marketing delineation that you're trying to drive for. But how do you not end up cannibalizing your higher monthly charged property with the lower?

Are you asking about the free ads compared to the paid ads, or are you inquiring about the price difference between ApartmentFinder and Apartments.com?

Mainly the price differential, because aren't you going to end up with free content on both?

We are pleased with the site behavior and the differences we've observed between the significant exposure of premium content compared to the relatively minor exposure of free content. The paid content is attracting really good traffic, and we are comfortable with these numbers as they remain consistent. We're not worried about cannibalization, but it's crucial for renters to find complete content. They are always looking for something special, and we believe they prefer a well-organized, comprehensive site. This not only attracts more traffic but also creates a targeted funnel that boosts traffic to premium listings. The Finder price point is higher than the average price on Apartments.com, but is still competitive compared to other solutions in the market. Many other options charge between 40% and 80% more than we do on average. This allows us to achieve high-margin sales alongside information sales at a more affordable price than some competitors, which we appreciate. We offer a superior product at a profitable lower price point, and we are not concerned about cannibalization in this context. Does that address your question? I’m glad you asked, or else we wouldn’t have had a question today.

I wasn't sure if I should be asking about a tax rate in 2020. That's probably the top question. So first of all, congratulations on the deal, very impressive, and the performance as well in the quarter. With one question, I'm going to ask about the new metric. You've given the new net subscription sales historically. You're giving the net bookings now. The $4.8 million difference between the $16.2 million and the $21.0 million, is that all Apartments? Or does that include anything else in there that would be short term?

It includes anything else in there, obviously with the strong performance in apartments in March, the biggest piece of it is apartments. So that does include everything else. I think it's a metric we used to talk about years ago. Obviously the company really focuses on annual contracts. We're trying to move LoopNet's annual contracts, and when we first look at the apartment space, we were told that people won't sell annual contracts, as of course, lots of people are now. I think we will continue to push people up to the annual contracts which obviously has many benefits, but it includes an all-in number, and I’ve always said this. I don't think you look at any one metric, but I think when you look at the metrics combined, it obviously gives you trends right, and it gives you trends that the future looks bright for revenue growth for CoStar.

And that monthly bookings number that you had there? How do we look at that in that context?

Well obviously, it's by far a mile the highest number we've ever seen. So what that says is, as revenues, as that continues to go higher, you're going to obviously translate in Q3, Q4, and into the next year with higher revenue growth, which is sort of what we said. We said, listen, the first half of this year was going to be about getting the site converted, launching the marketing programs, and obviously having such success gives us even more confidence in the back half of the year, which is why raised up. It didn't really raise up Q2 that much a little bit, but really it's more about the back half of this year and obviously going into next year.

Thanks. Good morning.

Good morning.

I know you guys just signed the deal and have some work to do, but I wanted to dig a little bit more into how the sites will actually differ beyond just giving you the ability to fill the first page of Google results, which does have some value. Maybe a little more detail on how the interfaces will be different, differences in the branding. And what is the difference in the typical customer you hope to target or the property manager that would list on one site versus the other?

Good question, and I appreciate your prefacing it with the fact that we're one business hour into the announcement. So having said that, it's pretty the folks in the United States have $100 million ranchers in the United States. It's a very diverse group, and what drives them is very different. So if I take that 18 to 27 demographic and I do quartiles on up to 70 years old, you've got big audiences in each of those age groups. Obviously, those audiences are looking at the world, their apartment rent in very different ways and you also have people who are moving. 15% of the world is moving in the rental because they've been relocated to a new location. 50% is moving because of financial drivers. They're either trying to avoid a rent increase. They're trying to reduce their spend on rent. They've had an income adjustment. They're trying to get a large apartment for the same price. So 50% are very price sensitive. So there is a rich variety of options on how you actually target a site to different audiences and different needs of these very different audiences. We've done a ton of research into who these people are. We've literally interviewed 10,000 renters. We've done focus groups with hundreds and hundreds of renters in cities all over the United States. We've also done segmented focus groups looking at these different age groups. Now we’ve got at least six Zulia employees on the call today, so I'm not going to go into too much detail, but we've done really innovative things in the design, like use the color orange instead of the color green for the new design. We did tricky things like move the placards from the right of the map to the left of the back and I have to tell you, working with designers who have worked on the first site takes a lot of discipline to make sure that the site really develops an honest, unique personality. People keep trying to use things from the prior design. So ultimately when we're all said and done, we will have independent product management teams with mission statements as to what their product philosophy is, and they’ll maintain these unique UIs and there will be content on one side that does not exist on the other side. So we'll make it genuine, we'll make a genuine difference renter experience in these sites to cater to these very different marketplaces. Initially, the Finder feels like it could be a great opportunity to focus on those people who are driven primarily by economics in their decision.

And just to add to that is that the ApartmentFinder has been around and founded in 1979 as Andy said and it probably somewhat focuses on some of the smaller geographies. So it has its own sort of core following and following it for a long time. So I think that obviously will also continue to drive it ahead as its own unique sort of offering. It has lots of people obviously that have been going to it for many, many years.

Thanks. Good morning. Congrats, guys.

Good morning. Thank you.

I have a quick question for you. For the advertisers that you are bringing on board for Apartments.com, do you have a general idea of what percentage of their advertising budget you are capturing? How much potential is there for growth with these customers? Also, do you think ApartmentFinder aids in increasing penetration, or is it primarily for attracting new customers?

There is definitely a long way to go with these companies. When engaging with prospective clients for Apartments.com, we aimed to understand their spending on other platforms and what their overall marketing budget looked like. Typically, our share of their total marketing budget is relatively small. We have set specific targets for the percentage of their marketing budget we aim to capture, and we are just starting that journey. I have noticed that various owners often advertise across multiple platforms. It's crucial for them to have a diverse advertising strategy, particularly when they are in a lease-up phase with new constructions, which is quite common now. They prefer to run campaigns on several sites. Finder enables us to enter this space. In some of my meetings, I've observed that we capture about 10% of their budget, while other sites account for 20%, 40%, 10%, and 5% respectively. This situation allows us to negotiate and increase our share of their budget by around 15% through our two well-recognized brands, enabling us to pursue larger opportunities.

Hi, thank you. I'm hoping you could give us an update on core CoStar sales to institutional investor clients. And also, on the LoopNet price increases, any update on how that's going? I know that you've talked about a $10 million to $15 million revenue headwind for the year that's in guidance. But I'm wondering if there are any signs that you're actually losing to clients to a point that might support that headwind. Thank you.

I'll start with LoopNet and then turn it over to Andy to talk about debt and equity. So we expect the impact of the LoopNet to continue to be in the range of sort of what we had. Our strategy has somewhat evolved as we've opted to raise pricing of LoopNet information services fairly dramatically. So it reduces competition with the CoStar services instead of sitting down the channel in the short term. As planned sort of subscribers are declining, you're not picking as many of them up and they're declining. We'll obviously continue to evaluate that strategy. As LoopNet faced declines, we expect obviously over the next few quarters to assign many of those up to higher value CoStar contracts, but we'll be continuing to monitor that and tweak that.

And to answer your other question about our debt and equity sales and the core CoStar and what that looks like right now, I was looking at the list of salespeople who would be able to attend one of the big industry conferences in June two days ago and I did notice that the regular names or the regular suspects in our sales force who sell debt and equity outside of the traditional, this new Apartment.com sell debt and equity information. Those folks were looking really solid and were turning in some really good numbers. So I don't have detail on that, but I just see those guys, those folks producing good solid numbers. Without disclosing some specific names, we had one very big win, half million competitive win taken away from another player in the debt and equity space this month. So we're very thrilled with and we think it is a strategic win that could allow us to get additional new wins across that space. So that's going well, but one of our problems here, great problem, one of our problems here is that the sales force is watching what's going on and they're seeing people get some very big ticket sales on this combined Apartment.com CoStar market analytic sale to the multi-family world and now there is a line mile long of salespeople going after that space and they're all and in fact we've had to rely on our new commission structure to keep people focused on LoopNet. So our new commission structure, I think we've mentioned in the past, your percentage commission rates are set by how much you filled up the three core buckets of CoStar apartments and LoopNet. So that's the only thing keeping salespeople focused on some of the traditional things when they're seeing these big numbers in the apartment space.

Hi guys. Good afternoon.

Hi, Andrew.

A question for you, Brian, on the Apartments.com revenue contribution this quarter. Just trying to back into organic revenue growth, and then what your expectations will be, given these strong bookings numbers for organic revenue growth in the back half and maybe what you think the sustainable rate of underlying revenue growth can be, looking out.

Sure, yes, I think sort of pro forma I don't have the exact number around, but I think it's around 13% sort of pro forma. Obviously, we switched over the site. There is some revenue that falls off. The site got switched over basically at the end of February. So sort of one month worth and then obviously that will roll through the second quarter. So we feel pretty good. Core business continues to grow in that 12%, 13%, 14% range and once we get through the switch over and some of the things that we talked about, we think obviously these bookings are just a great sign for what we believe can happen in Q3, Q4 and obviously go into 2016. So the stated goals out there is that we will sort of in the back half of this year start to grow the apartments business into sort of the high teens and as you go into next year getting the 20% plus. I think it's sustainable. I think that when you have a current estimated $1.5 billion space that I believe is going to be $2 billion to $3 billion as more and more advertising dollars go offline, I believe we can run that piece of the business at 20% plus for many, many, many years to come. Looking ahead, I won't predict too much, but many people are curious. One reason I shared my 20-20 vision is to highlight that while 2018 won't change, our revenue goals are obviously within reach given our current position and the acquisition. We are also focused on EBITDA, which is important for many stakeholders, and the 20-20 vision suggests that when considering the combined business, we have the potential to maintain growth rates around 14% to 15% for an extended period.

Hi. Congratulations on a great quarter. Obviously, the marketing campaign has been very successful so far. Can you talk about how you address concerns that marketing spend may stay elevated after the campaign ends?

Well at this point it has been very successful. It has driven a lot of traffic. It has differentiated our brand in the space and it's allowing us to take a lot of share and set record sales numbers. It's obviously really early in the process though. We only have one month of sales. So we're not at this point setting our 2016 budget or strategy or plan, but remember that one of the things we're doing here is we definitely, I think the world has changed in that similar to the travel world, the apartment world will be a world where people will make investments in branding to consumers. It is a massive, massive marketplace and will remain so. So I think this is the new reality to some degree. It takes a lot more money to build a brand than to maintain a brand and we've tried various weeks where we pulled back on the campaign, or it's just part of our preset plan was to have certain regulatory pull back on the campaign and just watched traffic as that happened. And we're pretty happy with the way site performance remained up despite the fact that we pulled back in certain week to test, but it's so early and one of the things we're conscious of as we look at an acquisition of a finder is that it gives us additional scale, high-margin scale so that you can actually maintain a significant B2C in some component of your formula and leverage that across a broader revenue stream. So it's very early, but nothing has changed from our earlier feeling that our overall branding component of our campaign would moderate in 2016.

To add to that, we discussed last quarter and the previous quarter that our aim is to achieve over $500 million in this space over the next few years with a 50% margin. This goal still stands, and when you envision the business's future, it's clear that while we will continue to allocate marketing funds, those funds will cover a much larger revenue base. With higher revenue growth, we will be in a position to appropriately invest in marketing, while also providing the earnings that stakeholders are seeking. And if you look at other industries, when you look at like a Priceline or other companies, Expedia, they're growing, they have EBITDA margins in the 40%, 50% range. So we feel pretty confident in the long-term vision of the company and the profitability that it can hold. The other thing to sort of point out is that in the launch of this campaign, it's very aspirational or very visionary. You don't have an immediate near term ROI calculation because it's all theoretical. As you move into 2016, you actually can begin to move into a more calculated ROI for each specific investment and then each year it goes by, you'll be able to calculate that specific ROI more and more cleanly. So we'll be able to give more clarity as to what and why and how.

Good morning, Andy, Brian and Rich.

Good morning.

I need to follow up on a previous question about the $10 million to $15 million in fund-setting related to Loop revenue this year. Brian, I believe you addressed that question. What I'm trying to understand is that the sales, or net new bookings of annual subscription contracts, increased by 10% overall, and the information was up by 20%, which suggests LoopNet experienced a decline. The inquiry is how much of the $10 million to $15 million is negatively affecting that net new figure on the Loop side? Have we exhausted the $10 million to $15 million, and are we moving forward, or what is the current status? Will the net new for Loop improve as the year progresses?

Yes, I believe LoopNet will improve. When we dramatically increased the price, we experienced a loss of subscribers, particularly among premium searchers, most of whom are on a monthly plan. This loss is reflected in our $20 million bookings figure. As we lose these subscribers, it will impact that number. Furthermore, this change likely reduces the competition with our core CoStar service. As we reach out to those clients over the next few quarters, I believe it will contribute positively to LoopNet's annual performance. Rather than shutting LoopNet down, we're diversifying our approach by raising prices on LoopNet information services. Overall, this should yield a similar revenue impact for the year. We are closely monitoring the situation and have the flexibility to adjust our strategy. We feel optimistic about our current position.

Hi guys, thanks for taking my question. I guess I wanted to get a little more detail on the ApartmentFinder assumptions. So you gave the revenue and EBITDA numbers and then the synergy numbers. I'm just trying to understand, I guess, what the EBITDA impact is of getting rid of some of their legacy products. And then what is assumed in the $20 million synergy rate? Is that a straight expense synergy number or does that assume any benefit from some of the cross sales that Andy was talking about earlier?

Yeah, I think it's combined. So we talked pretty in detail about this. When we pick them up, we're obviously going to move fairly quickly on the search engine marketing side by increasing that before you can get to a lot of the expenses. So we obviously are going to rebuild the site with a goal by the end of the year and you will then look to transition over to one platform which then gives you the synergies. I think Andy mentioned the $12 million number on the print publications and those types of things that will look to obviously aggressively move out of. You can't move out of that till you get to the new site. So you're going to immediately start moving and spending on the digital side and you'll get the benefits of the synergies as you move to the new platform, which really should happen in 2016. So yes, I think you're going to get to $20 million of synergies, which is going to include and will include some cross-selling of the two. Obviously they have a ton of clients we don't have and vice versa and you can go back to those clients and offer both services at a great price and a price that's lower than the competitors prices out there. So I think 2016 will look great from that standpoint.

I just want to leverage that last question for a second. The synergies versus the, I guess, the site refresh, and I want to anticipate a marketing campaign once you get Finder organized like you want it to get, how do you think about the offset there? Are you going to save money to spend money? Should we expect the timing on those things to be not synchronized? I want to make sure I just understand the puts and takes as you move into owning it.

There are several types of marketing specific to the Finder site. One approach is search engine marketing, which is an effective way to acquire leads and measure their specific costs while competing with others for the same leads. This is a highly measurable return on investment activity, and we plan to become more aggressive in this area. The investment we make here will likely balance out our print investment, which is substantial given that we sell 800,000 copies in 119 cities. Direct search engine marketing and similar digital lead acquisition strategies will help offset costs associated with print. We do not anticipate any major branding activities around Finder, as the site can function well online without that level of branding, and we currently do not see a need for it. However, this could change in the future, and if it does, we will be clear about the reasons. There will be a balance between print and digital marketing along with various efficiencies coming into the business. Managing content from advertisers can be expensive and challenging, but since we already have full inventory, we are already sourcing and bearing the costs of the content that Finder needs. When we combine efforts, those duplicative content costs will vanish, leading to savings. This integration will allow us to populate more sites with the same resources and have better access to accounting and property management systems. I am optimistic that ApartmentFinder will quickly become a very profitable site, with cost savings arising naturally from business attrition. For example, at LoopNet, we realized significant cost synergies with minimal layoffs, and I expect a similar outcome here. I am very enthusiastic about ApartmentFinder's potential margins, which are considerable.

Yes, thanks. Hi guys. Can you give us an update on where you are in the projects and investment? You mentioned London, but how about with all the efforts that you laid out for Canada?

Canada, to be honest, February wasn't the best time to focus on this. No offense to my siblings there, but things are progressing well. I hear they're having a decent sales month, and we're currently launching in Calgary and Vancouver. Ottawa is a bit behind, but we are ramping up research in Montreal. I recently attended a research meeting with six researchers discussing things, and I think it’s going well.

Thanks for the additional question. So despite the valuation and the strategy that you've laid out, some investors that we've spoken with are still focused on the fact that this is somewhat of a reversal from prior statements that you didn't intend to be a consolidator of apartment sites. So I guess I just wanted to clarify, do you intend to use the rest of the cash to make more acquisitions, for one; and two, should we expect those to be other apartment sites or other types of assets?

I want to clarify that we were clear in stating that we decided against certain acquisitions, specifically regarding the marketing investment in Mr. Jeff Goldblum, which has proven very successful. We considered options such as acquiring other ILS at valuations similar to the Apartment.com acquisition or the Provident Equity acquisition of a share of Apartment Guide. We evaluated the return on investment from branding and market share gains against acquiring entities at 14 times EBITDA and concluded that acquiring companies at a much lower EBITDA range of four to seven times was the more advantageous choice. We would consider other highly beneficial opportunities within that range, as they align with our operational capabilities and represent good value. After acquiring Apartment.com, we found that we held less than 7% of the online spending in the apartment industry, which was not an expected advantage. No analyst predicted that the apartment space would generate $1 billion in revenue in 2016. So we want to get a major share here and picking up very cost-effective scale in 6% increment of the spend or 5% increment spend could be attractive and each time you do that, we think it's a prisoner's dilemma for remaining players where their value goes down faster based upon scale growing in other spaces. So I would encourage those investors to keep an open mind as we perform on this and remember that there was a lot of skepticism around our acquisition of LoopNet. A lot of people said, hey you're making tremendous progress with your online marketplace. Don't acquire LoopNet. You're capturing share from them, but we feel very good about our decision to acquire LoopNet. It was obviously the much higher multiple than ApartmentFinder and obviously was much more consolidation, but the folks that are a little skeptical about these things at the time they happen often don't circle back and say, oh you were right, but we would ask people to give us a little bit of room on this one because we feel pretty confident that this is straightforward.

And just to add to that, just to remind everybody what actually happened, when we did Apartments, I think we discussed that there were more deals out there that we had ever seen and that we were looking at other deals. I think that was pretty clear and communicated to investors. I think we came back to investors after looking at the price points that people wanted and said no, we don't want to do that and by the way, we want to focus as Andy mentioned on sort of getting Apartment.com and building that platform now and getting to a success. So I think now coming being able to now pick up other assets with having complementary brands like the Expedia, like the Pricelines, now at a good price point, specifically when all the risks are behind you and now you can have the significant synergies both on the cost side and revenue side, I think it makes a ton of sense.

Thank you very much. I appreciate it and we did not acquire ApartmentFinder because my initials are AF and ApartmentFinder is AF and my favorite color is orange. But anyway, thank you for joining us for this earnings call and we look forward to updating you on what's going on in the next quarter and have a good day.