Costar Group Inc (CSGP) — Q2 2015 Earnings Call Transcript

Thank you, operator, and good morning everyone. Welcome to CoStar Group's second quarter 2015 conference call. Before I turn the call over to Andy, I want to have a second to talk to you about some really important facts. 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 July 29, 2015 press release on our second quarter results, and in CoStar's filings with the SEC, including our most recent annual report on Form 10-K, and quarterly report on Form 10-Q, 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 call is being broadcast live and in color over the Internet, at www.costargroup.com, where you can also find our investor relations page. A replay will be available approximately 1 hour after the call today, and will be available for approximately 30 days thereafter. To listen, call (800) 475-6701 within the U.S. or Canada or 320-36-53844 outside the U.S. The access code is 364170, and it'll be available within an hour. So I'd like to turn the call over to Andy Florance.

Good morning, and thank you for joining us today for our second quarter earnings call. I apologize for the slight delay in starting this morning due to some construction outside my office, but let's move forward. As we reach the midpoint of the year, I am pleased to report that our increased focus on the multifamily sector is clearly yielding results. While our acquisition of LoopNet has been recognized as a significant success, I believe we may be experiencing an even greater achievement in addressing the marketing and information demands of the vast multifamily industry. In a short time, we have transformed the competitive landscape for apartment Internet services, benefiting both those offering marketing solutions and those providing information analytics. We believe we have demonstrated a higher level of commitment and insight than our competitors. We are utilizing the strategies developed through the LoopNet and CoStar merger, integrating and optimizing a powerful information solution to enhance our marketing platform and vice versa. As a result, we are achieving remarkable sales success. To set optimal pricing, multifamily owners require daily competitive rental data, which traditional information providers do not adequately offer. Thanks to our research and technical capabilities in our Apartments.com marketplace, we provide users with extensive content and up-to-date pricing for tens of thousands of apartment communities. To reduce vacancy losses, multifamily owners need a continuous flow of qualified leads, which necessitates reaching the broadest audience of renters possible. By leveraging our technology and content and launching our first significant business-to-consumer apartment marketing campaign, which has reached tens of millions of potential renters, we have established the most visited apartment website. We are confident that we provide best-in-class information and marketing solutions, and by combining them, we offer the most attractive, low-cost solution. With this powerful combination, we are capturing significant business from various competitors. Our second quarter sales were outstanding. We achieved our highest sales figures yet, with $34 million in net bookings across the company. This represents a 95% increase in net bookings compared to the second quarter of 2014, and a 66% increase sequentially over the first quarter of 2015, which had net bookings of $21 million. This marks two consecutive quarters of impressive sales levels. Our net new sales from annual subscription contracts reached $25 million for the second quarter of 2015, up 59% from the same period last year, making this our strongest quarter ever for annual subscription sales. Our revenue increased by 16% year-over-year, amounting to $171 million in the second quarter of 2015, compared to $148 million in the second quarter of 2014. Our annual subscription business continues to maintain a strong renewal rate of 91% over the past twelve months. We completed the acquisition of ApartmentFinder on June 1st. Like Apartments.com, ApartmentFinder is a leading digital marketplace for renters looking to find apartments. Its services include digital advertising on ApartmentFinder.com, showcasing around 13,400 properties. ApartmentFinder's revenue for the fiscal year ending in March 2015 ranged from approximately $68 million to $70 million. It will continue as a distinctive and complementary brand to Apartments.com, featuring a unique user experience but will be powered by CoStar's information. This brand will target renters who are primarily interested in securing the best financial deal, spanning various income levels. Research indicates that most apartment seekers utilize the Internet for their search and typically explore several sites. By providing a variety of online marketing solutions, we believe property managers and owners will gain enhanced exposure for their listings; the more leads, the better reach. CoStar aims to integrate the backends of Apartments.com, CoStar, and ApartmentFinder by year-end, leveraging the same research, systems, support, and sales platform across all brands. We expect that this integration will result in cost synergies and improved operational efficiencies. Progress on this integration is well underway and is slated for completion this year. ApartmentFinder has around 110 field sales representatives across the United States. CoStar has merged its sales teams, allowing the advertising sales force to cross-sell all our apartment marketing solutions. I've spent considerable time with the ApartmentFinder sales force and believe they are a significant asset, possessing excellent sales skills and customer connections. As mentioned in previous calls, we are working to phase out ApartmentFinder's print component, as print marketing is becoming increasingly ineffective for apartment advertising. Print accounts for a small fraction of ApartmentFinder's leads and is labor-intensive and costly. We plan to cut those expenses this year and reinvest the savings into digital marketing to boost traffic to the Finder site. While transitioning ApartmentFinder clients who currently use a mix of print and digital marketing to a full digital approach, we will continue to bear the costs of both until we can demonstrate that we have fully replaced the leads lost from print with the enhanced digital marketing efforts. In the first full month of our sales team transforming these mixed accounts into pure digital contracts, we've converted 15% of the business, or over a thousand contracts. This will be a top priority for our sales team this year, which I believe is attainable. We are highly focused on expanding online marketing efforts for ApartmentFinder, and it is yielding results. In the first month of our ownership, a joint team from ApartmentFinder and CoStar has significantly increased traffic to the site, with visits soaring by 135% year-over-year just for June 2015, a remarkable turnaround considering that ApartmentFinder visits increased only slightly during April and May. Additionally, unique visitors to ApartmentFinder rose by 64% year-over-year in June 2015. To deliver a straightforward yet compelling value proposition, we are marketing our digital apartment marketplace offerings as a unified network. A property manager who had been advertising on ApartmentFinder earlier this year would have benefitted from a site that generated about 2 million unique visitors monthly along with a limited print distribution. After transitioning to a fully digital contract, their advertisement will be visible on ApartmentFinder, Apartments.com, and ApartmentHomeLiving. Consequently, the advertiser will reach a combined audience of around 14 million unique monthly visitors, representing an approximately 700% increase in traffic for those converted advertisers. We expect that this unparalleled exposure will facilitate the majority of ApartmentFinder's mixed print and digital business to transition to fully digital by year's end, and with this transition, we also foresee significant cost savings. Okay, at this point I'll put my glasses on, which should help. And of course, we're sitting here in a conference that is LEED platinum certified, which means it has no light. Okay, back to the call. ApartmentFinder offered a social media marketing service called Finder Social. The service was not profitable, and in fact was indirectly competitive with our profitable products. After careful consideration and review we have decided to eliminate Finder Social, and its associated significant costs. We believe the ultimate best value we can provide our clients is delivering the best network of digital apartment marketing websites, and the highest quality leads that turn into leases. We believe that once we have eliminated non-core ApartmentFinder products, and have achieved integrated operating efficiencies, ApartmentFinder will be very profitable. We used the National Apartment Association exposition, held in Las Vegas in June, to announce our acquisition of ApartmentFinder, and showcase the tremendous value proposition our network of apartment sites and CoStar marketing analytics can offer. The NAA event was attended by 9,000 multifamily professionals, a record for the event in our prime target audience. We created an enormous amount of buzz in brand recognition. We hosted a memorable client party at the event, with 4,500 clients and prospects attending. Well over 3,200 attendees visited our booth on the exhibit floor. We gave hundreds of product demonstrations of our integrated multifamily offering, and spoke to thousands of clients and prospects. It was really exciting to see our salespeople processing signed contracts well past the end of each day's session after the rest of the conference vendors had left the exposition hall. In just two days we signed 350 new communities. Even better was that our salespeople came out of the NAA event with multiple follow-up meetings for June and July, which have also resulted in sales. In combination, our websites are now generating more than 24 million unique visitors each month. That's the equivalent of every person down under in Australia visiting our websites last month. It's quite some traffic. For the fourth month in a row, Apartments.com is the undisputed number one most visited apartment listing site according to each of the four leading traffic authorities; comScore, Experian Hitwise, Amazon Alexa, and Compete. We're just four months into re-launching and marketing campaign of Apartments.com, and we have established Apartments.com as an absolute leader. Apartments.com has experienced a 70% year-over-year increase in unique visitors and a 65% year-over-year increase in total visits in the second quarter of 2015, according to comScore. In June 2015, we significantly increased the year-over-year traffic to Apartments.com, with over 14 million visits, and 6 million unique visitors. Our own internal Google Analytics numbers show much higher traffic numbers. Even more impressive than the traffic numbers is the behavior of consumers once they come to our sites. Apartments.com is engaging consumers as shown by time spent on site and page views. According to Compete, we had more than three times the number of page views on our site in June, than Apartment Guide, which was the closest competitor. According to comScore we also had 50% more time spent on our site than Apartment Guide in June. Clearly, customers like what they're seeing on Apartments.com. We are very pleased with our success and continue to grow traffic for our advertisers. We believe that with more traffic than any of our legacy apartment competitors, many of whom are charging more for less traffic, we can take significant share from our top competitors, who combined have nearly $500 million in revenue. We're already seeing good success in moving advertisers from Apartment Guide, Rent.com, and ForRent into our platform. We're not taking our early successes for granted, and we're working hard to move Apartments.com even further ahead. One of CoStar's strengths is collecting and building content. No competitor is matching us in providing the depth of data that our team of researchers, writers, field researchers, sales force, economists, and analysts are able to generate. We know that on the Internet content is king, and we're taking a number of innovative steps to increase quality and breadth of content on our site, and therefore consumer engagement traffic and, we believe, eventually sales. Our market research indicates that renters place an extremely high value on apartment reviews when they're searching for a new apartment. We know from other successful consumer sites, sites like Yelp, and TripAdvisor, that users really like to provide feedback about their experience, and other users want to be able to read what consumers, like them, are saying. Consumer ratings matter. And just recently Harvard Business Report published a study that found a one-star rating increase for restaurants on Yelp correlated to revenue gains of up to 9%. So reviews are really important for folks when they're looking at these apartments. In July, we launched an innovative campaign to encourage renters to provide quality reviews of their apartments. Apartments.com will give away free rent for a year to 12 weekly winners. Renters who write reviews that are rated as 'Helpful' will also be eligible for a free rent-for-life grand prize drawing, which will take place in October of this year. We expect that this promotion will draw many renters to our websites and drive more value for our advertisers. We are combining these objective consumer ratings with our objective fact-based scoring system driven by the data collected by our researchers. By combining facts and opinions, objective data, and subjective experiences we can create a rating system that we believe renters want. One they can count on to inform them for one of the most important decisions they have to make. As part of our previously announced marketing budget, we have also initiated a national marketing campaign to promote the newly released review functionality at Apartments.com. We're promoting this campaign on national and local television, cable T.V., digital, local radio, and social media. Our advertising customers have been given tools and resources to promote the campaign within their own communities. Prior to the campaign, it took Apartments.com three years to collect 12,000 reviews. We surpassed that number in the first 36 hours of this new campaign. At this very early stage in the campaign, we have 35,000 reviews submitted. I've read through them, and many of them are really quite good. And that the cost per review, I estimate, is running about $20-30, which is a really good value. In another technology innovation in the apartment space, we have been adding immersive 3D virtual tours for apartments to Apartments.com site with a technology known as Matterport. It's great technology. Renters can virtually walk through the apartment, and get a true feeling for the space in a unique way that pictures and floor plans do not capture. Property managers and renters love them. We now have over 20,000 Matterport 3D images on the Apartments.com website, and we're adding approximately 1,500 per week. We have almost reached 2 million renter views of these 3D immersive apartment walkthroughs, so they're really working. Accurately advising our clients on new construction will bring new supply and competition to the market is an important value proposition for CoStar Market Analytics. Additionally, we generally drive 6,000 or more per year for each property in the critical marketing phase post-construction around initial lease-up. While tracking new construction has always been a strength of ours, we are working to build an ever more accurate picture by flying over U.S. cities to monitor new construction in a way not possible with Google Maps, commercial satellites or ground-based researchers. We have expanded our field research fleet to include a Cessna aircraft equipped with state-of-the-art augmented reality computer software and camera systems. It will help us survey commercial real estate in a way that's never been done before. In the first 10 days we've completed four test markets. And during these 10 days we discovered and added over 100 new construction properties, 8.6 million square feet of new construction, and 2,375 new multifamily units to the CoStar database. Clearly, this will add to the depth and richness of our database, and provide valuable information about upcoming supply in the marketplace. Several of our clients and prospects were given demo flights at NAA, and even one was moved to sign a contract worth several hundred thousand dollars in the plane, up in the air. Great thing is it was a researcher that asked for the business, not the salesperson. Our advertising agency, RPA, and a third-party independent research firm has been providing us with detailed analysis from the first four months of Apartments.com's national campaign. Till the end of June, the campaign has created over 3 billion impressions, including 1.9 billion digital impressions, and 7.2 million social media ad engagements. As of June 2015, compared to February 2015, our awareness is up more than 50%, with a quarter of the respondents listing Apartments.com in the top four mentions. In June, Apartments.com was ahead of all other apartment listing sites in awareness, with only Craigslist edging us out. In several key markets, like Philadelphia, Houston, Los Angeles, and Phoenix we experienced 100% growth in awareness. Three out of four competitor apartment listing sites declined significantly in awareness over the last four months. Equally as impressive is the growth of intentions for Apartments.com, which nearly doubled from 11% in February, to 21% in June. The perception of Apartments.com as a leader surpassed key competitors, and ranks in the top three based on the same study, with the strengths being characterized as smart, an ally, honest, and trustworthy. Ultimately, the best judge of success of the campaign though is sales. And clearly the second quarter of 2015 and June, were all-time highs in sales, casting a vote of confidence for the effort. In addition to our agency's efforts, Apartments.com has conducted an independent national study for the past three years that surveys multifamily professionals nationwide regarding their use and opinions of leading apartment listing services. This year's survey focused on the first 60 to 90 days following the start of our national advertising campaign, capturing initial reactions to the new Apartments.com website. We gathered some interesting insights that I would like to share. When we asked trade professionals about their familiarity with apartment listing sites, the survey indicated that Apartments.com is now tied for first place with Craigslist. Awareness of Apartments.com rose to 94%, an increase of 200 basis points from the previous year, while Craigslist's awareness fell by the same margin. All three of our largest revenue competitors experienced a decline in awareness. 30% of respondents identified Apartments.com as the most effective source for quality prospects, compared to 24% for Apartment Guide, 22% for Craigslist, and 4% for Rent.com. Apartments.com also achieved a positive net effective score of 22% for the most effective advertising platform to deliver quality prospects, while Craigslist had a negative score of 14% due to low-quality leads. Zillow, Trulia, and Rent.com also saw negative scores. Our net value score rose to the number one position at 19%, while both Craigslist and Apartment Guide had a score of 7%, with other major competitors like Rent.com in negative territory. Examining net value trends highlights our strong performance, as Craigslist's score fell from 31% in 2013 to 7% in 2015, while Apartments.com increased from 5% in 2013 to 19% in 2015. Our marketing campaign has proven effective in reaching potential clients, with 93% of survey respondents reporting very high awareness of the campaign.

Thank you, Andy. We are very pleased with the performance in the second quarter of 2015. The investments we're making in marketing are showing great results with all-time high sales numbers and increases in traffic and leads, which allow CoStar Group's core business to continue growing at a solid pace. We closed the ApartmentFinder acquisition last month and are actively integrating the business, while providing our sales team with additional services to sell to our multifamily customers. In the second quarter of 2015, the company reported $170.7 million in revenue, an increase of 16% compared to the second quarter of 2014. Gross margins were $126 million for the second quarter of 2015, accounting for 73.8% of revenue, the highest gross margin we have reported in the company's history. This continued margin expansion demonstrates the strength of our business model, despite the research investments we've made in Canada and in multifamily. We achieved our highest gross margins ever, which I believe will continue to rise. Adjusted EBITDA was $11.3 million for the second quarter of 2015, and non-GAAP net income for the quarter was $2.4 million or $0.08 per diluted share. Both figures were impacted by our marketing investments for Apartments.com and expenses related to the ApartmentFinder acquisition. Net income for the second quarter of 2015 showed a loss of $15 million. A reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA, and all other non-GAAP financial measures discussed in this call are provided in detail in our press release issued yesterday and are available on our website at www.costar.com. Cash and investments totaled $367.8 million, with short-term and long-term debt outstanding of $375 million as of June 30, 2015. Now, I would like to give some additional color on a few metrics to highlight the strong performance in the second quarter. As Andy mentioned, we achieved $25.5 million in annualized net sales of subscription services on annual contracts in the second quarter of 2015, an all-time high, an increase of 58.9% over the second quarter of 2014. This is an outstanding performance from our entire sales force, and reflects the impact of our marketing investments. We've been providing this metric consistently each quarter, this key metric, and it shows the strong results of our continual efforts to move customers to long-term contracts. As of June 30, 2015, we had approximately 624 salespeople across the company, which includes the addition of approximately 110 reps that came to us from the ApartmentFinder deal. We are actively working to integrate our sales force resources, and ensure that the field sales teams are appropriately sized and managed in each of the markets. Revenue from subscription services and annual contracts is $110.9 million in the second quarter of 2015 or 65% of total revenue. For the trailing 12 months, subscription revenue from annual contracts totaled $420.1 million, up 17.4% from the 12-month period ended 2014, reflecting our continued success in growing the annual subscriptions faster than the non-subscription services. We expect to continue to grow our revenue from subscription services on annual contracts back up into the 70's range in the near term, and eventually back up into the 80% and 90% range of our total revenue. Renewal rates for annual subscription revenue remained high during the quarter. The 12-month trailing renewal rate for CoStar's subscription-based services was 90.6% in the second quarter of 2015, while the 12-month trailing renewal rate for customers who have been with us for five years or longer was 97%. As we discussed in our last call, this metric ticked down slightly in the quarter as GE, a long-time subscriber, sold its real estate portfolio. Now, I'll discuss the outlook for the third quarter, and the full year 2015. Full year 2015, we expect revenues of approximately $707 million to $712 million. Based on our strong second quarter 2015 sales results, we're happy to be able to raise the full year 2015 revenue guidance again, despite the fact I just announced an increase, on June 8th. At this point, the top end of our annual guidance range is now $52 million higher than our initial 2015 guidance range. ApartmentFinder contributes $40 million to $43 million of that increase, while the remaining upside is organic revenue growth resulting from the outstanding sales results in the first half of 2015. For the third quarter 2015, we expect revenue of approximately $187 million to $189 million. We expect non-GAAP net income per diluted share in the range of $1.62 to $1.70 for the full year of 2015, which is up $0.03 at the midpoint from the range we provided you in June. For the third quarter we expect non-GAAP net income per diluted share of approximately $0.42 to $0.45, which includes the impact of shifting some spending from the second quarter into the third quarter to support the recently announced Rent For Life campaign. For the fourth quarter 2015, we expect the range to increase to approximately $0.79 to $0.84 per diluted share. The investments associated with the marketing campaign are expected to trend down as we get past the peak rental season for 2015, and we expect that trend to be reflected in our quarterly earnings later this year. The sales results have been impressive in a short time since we launched the new Apartments.com website in February 2015, and the start of the national consumer marketing campaign in March of 2015. However, please remember that it's only been four months. Our models, moving forward, do not reflect continued sale growth at 50 plus percent rates on Apartments' revenue forever. I'd like a few more data points before people start modeling and extrapolating out four months of sales results into their model for every quarter going forward. But obviously we're extremely happy with where we are. At this point, I'd like to talk about the growth trajectory for the business. As we still see the core business growing annually in the 11%-12%-13% range moving forward. And as we previously discussed, we have a target for Apartments.com growth rate of 25% to 30% going into 2016. Based on the strong early results I'm seeing, I think we'll be at the high end or slightly above that range. As we integrate ApartmentFinder, our expectations should add about $70 million in revenue in 2016, as we discontinue the non-core products, and transition ApartmentFinder away from print and into all-digital. We continue to believe that we can reduce the cost base of our combined Apartments business as we integrate ApartmentFinder. And we still expect the ApartmentFinder acquisition to be accretive to the bottom line in 2016 and beyond. As we've consistently stated, we'll be evaluating the effectiveness of our 2015 Apartments marketing campaign as we get close to the end of the peak rental season, and begin planning for next year. I think it's clear the campaign is achieving our goals of expanding consumer awareness, driving traffic and leads to our clients, and supporting a very strong sales momentum. I look forward to updating investors on our plans for 2016 as we finalize those next quarter. In summary, I'm very pleased with CoStar's financial results for the second quarter 2015, and we're off to a great start with the Apartments.com traffic and sales in the first half of the year. We believe our historic sales results keep us well-positioned to achieve our stated financial goals of $1 billion in revenue, and 40% adjusted margins exiting 2016, and our new goal of $1.5 billion revenue run rate, with 45% to 50% adjusted margins exiting 2020. As always, we look forward to sharing our progress with you on these goals in the upcoming quarters. Now, before I open up the call for questions, I have some additional news on a decision I have made. After 18 spectacular years at CoStar, I've decided to take a sabbatical for the next year to spend more time with my family. Now, I know this sounds very cliché, but the simple fact is I'd really like to spend more time with my family. As much as I love my job, I love my family much more. For anyone who knows me, it's been almost always on, day or night, for CoStar, and it's been nearly non-stop work since the beginning. And, unfortunately, with my all-or-nothing personality, striking the right balance between work and personal life has been a struggle for me. Truthfully, I enjoy working. I enjoy working really hard. And all of CoStar's success has made it very easy for me to keep doing what I like doing. Quite frankly, I have the best CFO job in the world, even if it means working long hours. To be the best there has been a lot of late nights and weekends. Spending more time with my family has been something I've thought about for years, but like most of us, it's been elusive for me because work has always been crazy. We've been in the midst of something exciting or on the verge of closing a significant deal. However, time seems to have accelerated over the past few years, and the thought of my older child leaving for college next August has left me reflecting on how much time I’ve spent with my family. Has it been sufficient? Have I been the best father or husband I can be? While pondering these questions and talking to a close friend, I was advised to identify what truly matters to me, prioritize it, and take action. As I did this, it became clear that my health and family come first, and everything else, including my work, follows. I want to clarify that I am not going anywhere for a few months. I will be at CoStar working closely with Andy and the team to ensure a smooth transition. I will be attending various conferences, including one next week. Additionally, I'll be collaborating with Scott Yinger, our VP of Finance for the past five years, who many of you know. Scott will serve as the interim CFO as we interview candidates for the position. He has been deeply involved throughout, ensuring the company is well-supported during this time. It’s difficult for me to express how much CoStar means to me, but I want to extend my heartfelt thanks to all the amazing people I’ve worked with for everything you’ve done for me personally and professionally. CoStar and my colleagues have truly become a second family to me. Thank you all. But mostly, I can't thank Andy enough. He is truly one of a kind; special in many ways. A real visionary and a good friend of mine, he's been amazing. And as usual, we are both on the same page. I couldn't be more excited about what we've accomplished to date, building a great company which grew from a $14 million valuation when I started to nearly $7 billion today. Resulting in an 1800% shareholder return, over 10 times the NASDAQ average since our IPO, wow, that's some serious shareholder returns. But even with all we've done, I am still even more excited about the massive opportunity that lies ahead for the company, and I have no doubt we will dominate everything we turn our attention to. I realize this decision may be surprising to some, but I know in my heart it's the right thing for me today. And I look forward to spending more time with my family and reconnecting. At the end of the prepared remarks we'll only be taking work-related questions in the Q&A, so I'd appreciate keeping my private life exactly that private. If you still have questions related to my sabbatical, feel free to contact me directly. So let's take some questions on the fantastic quarter we had, and the outstanding future of the company.

On behalf of CoStar's Board of Directors, our investors, and all of Brian's colleagues, and most especially myself, I want to express our deepest appreciation and respect for all Brian's achievements and contributions over his 18 years with CoStar. I must say, 18 chronological years is a deception. Though Brian started 18 years ago, he's worked not a minute less than equivalent of 45 years. I clearly remember when Franc Carchedi, our EVP for Operations hired Brian, back when Franc was our CFO. The week Brian started, Franc and I headed off to New York City to meet with a venture capital, and we left Brian in Washington to run the shop. We left him with a bank statement on his first day of work, with $0.50 in it. We let him know payroll was $150,000 on Friday, and we encouraged him to get collecting. I know he called his wife that day, and told her that he thought he might have made a mistake leaving his stable job. We made payroll that week, and with Brian at center stage we built an exceptional business that positively impacts tens of millions of people, employs thousands, and has generated great returns. And we'll thrive for a very, very long time. This quarter, when an opportunity arose to make an opportunistic investment, like acquiring ApartmentFinder for $170 million or a non-material multi-million Euro company in Madrid, we can do that from cash on hand. That is thanks to how far Brian has brought us, from that $0.50 bank balance. Rest assured Brian's greatest accomplishment is the strength and depth of the finance team he built. We will not miss a beat in transition with a team like Charlie Colligan, Don Wilson, Mark Zebra, Matthew Green, Tim Clutter, Rich Simonelli, especially Scott Yinger, and so many more. Scott Yinger, our VP of Finance, already leads the team. And with the highest qualifications, he will step into the Interim CFO role as we transition to a new permanent CFO. As Brain stated, he will remain onboard on a reduced schedule to assist in a smooth transition. We have retained Russell Reynolds, and the search for a new CFO is underway. I owe Brian more than I can ever repay him for. He's been a close colleague, a genius, a fighter, and most importantly, a friend. The truth is he's spent more time with me over the last eight years than he did with his family. That's a mistake, because he has a wonderful family, and time is too short. The best I can do to repay him is to wish him well as he heads off in a well-deserved sabbatical, and hope he gets busy making new memorable, wonderful experiences with his family. He will always have a big office waiting for him here at CoStar.

My question is actually not on Apartments, but the core CoStar suite. I was wondering if you could confirm what the organic growth rate was just for core CoStar and the LoopNet platforms for this quarter ex Apartments, and then more deeply, how you're trending with just that core broker customer.

Sure. I'll start and then hand it over to Andy. Thanks, Andre. So the core platform, the major brands that people think about, CoStar, LoopNet, and all that, they're all growing in the 11%-12%-13% rate the last few quarters. I think they're still growing fairly strong. Obviously there's a lot of focus around this recent release the last four months. But as we talked about in prior calls, we've devised a commission structure to get people to fill up the three major buckets on commissions. We think over time that will continue to be a strong area of growth.

And with that, the reality is, that we are seeing good growth in the core business, but there is an unusually strong opportunity for our entire sales force in the Apartment opportunity, and that for good reason diverts sales people's attention to those big commission dollars on the Apartment side. So with so much growth over there, I'm very impressed that we're maintaining those double-digit growth rates in the core business.

Hi, thank you. Brian, thanks for your comments, and I feel a little bit petty about asking a couple of numbers questions, but I'll do it anyway.

That'll make it easier on me. Please do. I want the numbers.

I'll throw them all in here. Could you help us break down revenue from ApartmentFinder and Apartments.com in the quarter? Was there any revenue to speak of for ApartmentFinder Social that you'll be shutting down? And just a broader question on Apartments.com, if you're seeing any competitive reaction.

I will discuss the numbers. Andy will cover the competition. For the quarter, we indicated that the revenue range is between $40 million and $43 million, with a variance of plus or minus $6 million. This is all part of the core business. For ApartmentFinder, the core revenue is between $68 million and $70 million, but we are shutting down about $10 million in revenue. As we near the end of the year and transition, we will lose roughly $10 million that will go into next year. I mentioned earlier that we expect around $70 million for ApartmentFinder next year, although this is not formal guidance; it's just to help with forecasting. Once we complete the conversions, eliminate print and Social components, launch the new website, and start selling, we anticipate being able to grow long-term at corporate growth rates in the mid-teens. However, it will take about 12 months to get through this transition and then begin driving sales. And regarding competition?

The elimination of Social will undoubtedly increase profitability.

Correct.

The competitive landscape is interesting, and I appreciate Brian's perspective. I enjoy competition, which may surprise some. We've experienced a lot of engagement in the apartment market since our entry, and we've reached the top position. There have been some responses from competitors, particularly RentPath, which has recently started advertising to counter our national marketing efforts. They've made some curious decisions, especially considering that most of their revenue comes from Apartment Guide, yet they've chosen to focus their marketing on Rent.com, which generates a smaller portion of their income. Our research indicates that Rent.com is less favored among apartment owners and managers compared to Apartment Guide. Observing their activities, it seems they ramped up spending ahead of the NAA conference without seeing significant traffic increases to Rent.com, suggesting that their response might not be very effective. Additionally, RentPath's CEO was replaced recently, which could be a sign of turmoil. Overall, we feel confident regarding our position against other competitors, as we continue to gain market share, especially from smaller companies providing multifamily information. A quick look at another publicly-traded competitor this morning showed that their subscription revenue has stagnated for the first time in years, with growth only coming from consulting services. This trend often refers to a 'zombie company,' indicating a shift away from sustainable revenue sources. We're successfully capturing market share, and while other players in the real estate space are busy with various challenges, we haven't seen any notable changes in our share relative to them. It's been gratifying to collaborate with our team to develop a strong product offering and to integrate with Finder, Apartments.com, and ApartmentHomeLiving, allowing us to capture significant market share. If anyone would like to revisit this topic, I'm open to questions.

Yes, thanks. Brian, congratulations on an excellent tenure, and enjoy the sabbatical. On to the business stuff, can you give us an update in terms of you talked about coming into the year, the elimination of, I think, the Premium Searcher with LoopNet? Where are you in the process, and is there a chance that you end up doing the same thing with Finder Social, where maybe it's a wind-down and not a complete elimination?

Okay, yes. I'll start, and Andy can jump in. LoopNet, again, we keep pulling the levers. It's the same as we've talked about in prior calls. We've jacked up the price significantly. We are losing some people on the searching side. Again, overall LoopNet is growing a little bit less this year. We got a little bit less revenue this year than growth in the last year, still in that 10%-11%-12%-13% range. But we're essentially getting the effect of what we wanted. I'll let Andy talk about it. I mean, eventually we will move all those people off of there, and make it a pure marketing site. On the social thing there will be zero chance, and Andy can obviously overrule me. Zero chance that we will not eliminate that revenue. And zero chance we will not shut down the print. That is an absolute. We're already starting the process. And obviously we want to get to pure digital play in those areas. And we're feeling great about where we are in a little over a month on this.

Yes, so the folks who were prior doing the social and print actually have been given their warning notices, and we are actually moving people into other job opportunities, and that is a fait accompli. The only thing delaying the Premium Searcher is Apartments.com, and then ApartmentFinder, and the fact we're working really focusing on that. Again, the price, when we acquired LoopNet for the Premium Searcher was roughly $37. Today it's roughly $300. Yes, it continues to grow. By taking it up there, and moving it towards parity with CoStar Property, it will make the transition easier as we do that. Again, it continues to grow. We really want to have the back ends integrated between LoopNet and CoStar Group so that there is a 100% clear upgrade path for all customers. And that if a customer wants to use the CoStar content inside the LoopNet interface they'll be able to do that as well. So we'll make progress on that this year, but again it's just delayed by Finder and Apartments.com's successes.

Hi, thanks for taking the question. Brian, I hope your sabbatical doesn't mean we have boring conference calls for the next four quarters.

I'll see you in Boston next week with Andy, don't worry.

I need more entertainment in my life, apparently. Could you talk a little bit about the growth strategy in Apartments, both Apartments.com and Finder vis-à-vis price? I wonder how much of the blow-out sales growth is a function of underpricing the competition, and at what point do you start to price for value, integrate data, and start to drive some greater yield, or if today and for the foreseeable future, share is your primary consideration?

In acquiring Apartments.com, we considered all the competitors and their pricing structures. Our experience from transitioning from print advertising to digital platforms shows that many firms cling to the traditional cost model associated with print, which includes various overheads. However, in the digital arena, where direct costs for additional advertising are minimal, we have the opportunity to focus on volume while maintaining profitability. This allows us to place pressure on competitors who rely on high pricing and low volume. Our pricing strategy aligns with renter preferences for higher volume. We are confident in the pricing tiers we offer, which include silver, gold, platinum, and diamond levels. We are intentionally starting clients at level three, with the potential to move them to levels two and one as needed. Properties that are leasing up or facing vacancy challenges may pay significantly more for top ad positions. If market softness arises due to overbuilding, some advertisers may capture greater market share and move to levels two and one for better exposure. We also benefit from a cost advantage, as we already have extensive content about the properties, eliminating extra costs related to ad sales. Our costs are effectively spread across our advertising and information platforms. Overall, I feel confident about our current position and believe we are fortunate to have this cost advantage. It's important to be bold and flexible with our business model. Did I address your question? I’ll assume I did.

Yes, this is Jim Rutherford stepping in for Brett. I wanted to get a quick update on what multifamily owners are saying about lead quality and whether there have been any changes, as well as the volume of leads they are receiving after transitioning to Apartments.com from other vendors.

I recently met with many owners at the NAA event in Vegas, and I was very pleased with the feedback I received. The senior leaders from various firms and their marketing teams expressed satisfaction with the significant improvement in lead quality and quantity from Apartments.com compared to the prior year. One key strategy that sets us apart from competitors is our focus on lead quality rather than just maximizing lead volume. For us, a lead is an expense, while a lease represents revenue. The industry had been prioritizing driving leads to leasing offices without ensuring the leads were qualified, often wasting their time. We’ve made it clear that if a one-bedroom unit isn’t available, they should not bother calling unless they are truly desperate. While this approach may reduce lead volume slightly, our marketing efforts are generating more qualified leads. We're very encouraged by the feedback we’ve received. I believe that the 13,000 communities currently advertising with ApartmentFinder will be amazed by the increase in leads when we transition from 2 million unique visitors to 14 million. We're shifting from a scattershot approach to providing high-quality leads, which should be very effective.

So, good afternoon everyone.

Hey, Bill.

Hey, Bill.

And so I heard a rumor that, Brian, you were trying out for the Washington Capitals and you were going to go on the ice, that it could be pro this time.

Trying out; I already got a spot.

I'm behind. Anyway, so congratulations on that, and we're going to miss you.

Thanks, Bill.

So I have a question for you on the sales force structure. I know you gave out the number of 624 and that included 110 coming in from Finder. But maybe it would be helpful if you could sketch that out for us now, how the sales force is actually organized across all the different products and how we should think about that in terms of how it's organized.

Okay. So, oversimplify…

It can't be too simple for us for a sell-side analyst.

If I exclude the inside sales related to LoopNet in smaller markets, as well as some verticals and real estate managers, I'm looking at smaller sales teams that, while not large, number about a hundred people. My focus has been on the core businesses, which divide into a sales force centered on CoStar information and commercial real estate, alongside a marketing-oriented sales force for apartments. Last year, I was concerned about not having a robust apartment marketing sales team compared to competitors, which put us at a disadvantage. I had to integrate some of the CoStar information salespeople to bolster our apartment side. The ApartmentFinder acquisition has effectively addressed this gap and has surpassed our expectations. A distinct aspect of our apartment business is that smaller cities in the U.S. contribute significantly to revenue. Cities like Greensboro, Biloxi, Baton Rouge, Albany, and Buffalo are important players, and previously we lacked strong offices or personnel in these smaller markets. ApartmentFinder has filled that gap, providing complementary geographic coverage to where Apartments.com has strength. The experience level of the ApartmentFinder team is impressive, with many members having eight to fourteen years at NAA, and I've heard personal connections between salespeople and clients. This has strengthened our position in tertiary markets and helped us with relationships in primary markets. For example, Apartments.com had six salespeople in Los Angeles, and ApartmentFinder has six in Newport Beach, suggesting no one previously managed the sales effort effectively in that area. Combining these teams allows us to establish realistic territory management in Los Angeles. The collaboration between the information salespeople and marketing teams has been highly successful. By teaming up, they are significantly increasing revenue and market share through combined offerings. Traditionally, marketing representatives were restricted to selling one community at a time through leasing offices. Now, with the CoStar reps' information, they are engaging with the C-suite level, leading to deals involving multiple communities at once, which was uncommon before. I suspect that several competitors we are currently facing may see revenue declines of around 10% this year. I've closely monitored our public standing and the subscription base of competitors in public information. Our sales force collaboration is proving to be very effective, with many communities transitioning to us. While there might be overlap in certain areas, we aim to expand our sales force, particularly on the LoopNet side, where there is a significant and promising growth opportunity across the U.S. Although one wouldn't typically view an acquisition primarily as a way to enhance a sales force, we have indeed acquired an outstanding team. I'm personally excited to see our Charlotte office thrive with about 15 or 16 strong salespeople and a substantial CoStar presence in that area. This positive trend is occurring nationwide, and I am very pleased with it. It is a source of competitive strength for us.

Thanks very much. Brian, so have fun with family and good luck with everything. It's been great working with you. This is just a quick one here. So I appreciate the comments around not extrapolating from the strong bookings performance that you've been seeing here. I was wondering, was there anything one-time in nature that benefited the quarterly bookings? And I guess, as you think about the year, I know that you're not going to be extrapolating aggressively here. What should we be assuming around bookings source for the year? Should that tail off a little bit, or is there a way you could walk us through that? Thanks.

I'm going to focus on the annualized contracts bookings, specifically the $25 million figure. While other numbers are positive, a lot of our transactions are on a monthly basis. We're transitioning most apartments to annual contracts, but there's still a significant amount of monthly and quarterly transactions at LoopNet. The annualized figure is the key metric we're monitoring, and it's showing considerable growth. However, I prefer not to provide guidance since we are navigating unfamiliar territory. It's been four months, and I want to wait until we complete a full year of the marketing campaign and sales initiatives to understand the trend better. Do I believe we can sustain a growth rate of over 50 percent for the next 50 years? No, but it's possible to maintain that growth in the near term. This is a unique situation for us, and I think the current number is impressive. As we gain more experience each quarter, we'll continue to refine our projections. There doesn't appear to be anything one-time in nature within the annualized bookings, so we will have to see how that develops. There are significant upfront events, but I believe we need to complete a full 12-month cycle to accurately assess our direction.

Hi, great, thanks. It sounds like the synergies in between the recent acquisitions and the information on the analytics side of the business may be going better than expected. You mentioned the revenue synergies in terms of how the territories lay out, but is there anything else that's been surprising on that front?

And when you say it's surprising, do you mean in terms of specifically the synergies?

Like, worked out better than expected.

Initially, we believed our primary market would be asset managers or property management firms involved in buying and selling properties for clients. We thought we were providing an asset management tool with our product. However, we were surprised to find that the senior decision-maker in marketing often had a significant need for tactical rental information as well. When meeting with someone, while asset managers are involved, the VP of Leasing also needs to stay informed daily about what competitors charge for rent, monitoring those who adjust their prices. This person is also responsible for lead generation. We were excited to discover that when we could address a problem that no one else was solving, it resonated strongly with them. Other companies offer information on apartments but typically update a very limited number of properties with a small staff at bimonthly or quarterly intervals. In contrast, we update more rental information daily than our competitors do in an entire year, which is typically on a quarterly basis. We provide them with valuable pricing and competitive intelligence, which is highly compelling. Additionally, they have a significant marketing budget for the properties they manage. There's a practical aspect to this; while they manage a considerable budget for marketing 30 buildings, that budget flows directly into the partnerships on those buildings. If they can access discounted information based on their spending at the buildings, they obtain low-cost information through the general partnership, which they appreciate. One could argue that information costs could be allocated against the limited partnerships of the properties, and we facilitate that for them. Consequently, if a tenant moves out, there's a significant advertising budget for multiple properties routing to our platform. They can access free information to manage their rentals and asset management. I particularly enjoyed hearing a sales pitch from a direct competitor lately, where it was evident that our marketing analytics product outperformed theirs and came at no cost due to their marketing. The competitor's sales representative simply shrugged off the situation and left. That has truly been a surprising discovery. Thank you.

Thank you.