Costar Group Inc (CSGP) — Q4 2015 Earnings Call Transcript

Thank you, operator, and good morning, everyone. Welcome to CoStar Group's fourth quarter and year-end 2015 conference call. Thanks for joining us. Before I turn the call over to Andy Florance and Scott Wheeler, I have a few important facts for you. 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 CoStar Group's February 24, 2016 press release on our fourth quarter and year-end results and in our 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 over the Internet on www.costargroup.com, where you can also find our Investor Relations page. A replay will be available approximately one hour after the call concludes and will be available for approximately 30 days. To listen to this replay, please call 800-230-1074 within the United States or Canada, or 612-288-0329 outside the U.S. The access code is 385-653. In the Q&A section, just as a reminder, please limit yourself to one question and we'll have you rejoin the queue if you have additional questions. So, I'd like to turn the call over now to Andy Florance. Andy?

Thank you, Rich. Good morning, and thank everyone for joining us for our fourth quarter and year-end financial results call. 2015 was an excellent year for CoStar Group. We generated excellent top line growth of 24% year-over-year, closing 2015 with $712 million in revenue, up from $576 million in 2014. We had $100 million of net new subscription sales on annual subscriptions during 2015. For the fourth quarter of 2015, net new sales on annual subscriptions were $29 million, an increase of 69% year-over-year. We achieved our highest quarter ever for net new sales on our core CoStar information services. LoopNet did well in the quarter as net new sales on annual subscriptions accelerated 80% sequentially from the third quarter of 2015 and 52% over the fourth quarter of 2014. Our primary focus for 2015 was investing aggressively to integrate CoStar, Apartments.com, and Apartment Finder in order to drive efficiencies and achieve sustainable long-term cost savings. In the fourth quarter of 2015, we increased net income year-over-year by 65%. Margin improvement was most dramatic in the fourth quarter of 2015 as we realized cost savings from our Apartments business integration efforts and increased EBITDA by 150% over the third quarter of 2015. Our EBITDA margin climbed 29% in the fourth quarter. We believe these results show that we are clearly on our way to achieving our stated goal of $1 billion revenue and 40% adjusted EBITDA margin exiting 2018. Before I update you on our progress on Apartments.com, I want to give you a clear picture of revenue growth in our core CoStar suite service and our other major products. Core CoStar Suite in North America grew 12.4% during the full-year 2015 over full-year 2014. And that is at the top end of our consistent 11% to 13% growth guidance. That is up in absolute dollars compared to the growth from full-year 2013 to full-year 2014 but down just 33 basis points from the 2014, 2013 growth rate of 12.7%, so they're roughly similar growth rates up and down a couple of basis points. Core CoStar revenue accelerated back up to 12.5% during the fourth quarter of 2015 over the fourth quarter of 2014. Core CoStar in the UK grew at a higher base of 13.8% year-over-year in local Great British pounds, but with the negative exchange rate effect, it grew at only 5.5% in U.S. currency basis. Despite the diversion of resources to the Apartment marketplace services, LoopNet Premium Listers still grew at 12% during the full year of 2015 compared to the full-year 2014. As we've mentioned before, we are de-emphasizing LoopNet information services and as a result, LoopNet Premium Searcher grew at 9% during the full year of 2015 versus 2014. For the full year 2015 over 2014, CoStar Real Estate Manager grew at 20%, our Businesses for Sale Marketplace grew at 16%, our Land for Sale services grew at 17%, and CoStar Portfolio of Strategies grew at 7%. We have eight other smaller services with a wide range of growth rates. We are no longer selling two of our smallest-producing services, so we expect their growth to be negative. The Core CoStar Services are consistently strong and growing. We believe that with the Apartment Services doing so well, we can balance our focus between our Core Information Services and the Apartment Rental Marketplace Services. As a result, we expect even more growth in the CoStar Core Services going forward. In 2015, we focused on building the premier marketplace for renting an apartment in the United States. According to comScore, Apartments.com enjoyed more visitor traffic in 2015 than any other apartment rental website. During the fourth quarter, we achieved the number one position among major competing apartment websites in: unique visitors, total visits, total page views, total time on site, average time on site, lowest bounce rate, consumer engagement, unaided awareness, search engine optimization, search engine marketing, and the number of apartment buildings offered. Apartments.com finished the year with 60% more page views than our number one competitor and 350% more page views than our number two competitor. Our most recent focus groups tell us that our website provides the best renter experience among our competitors. Revenue from Apartments.com was up approximately 30% year-over-year in the fourth quarter. Total apartment-related revenue in the fourth quarter of 2015 was $53.4 million, up 108% over $25.7 million in the fourth quarter of 2015. We achieved outstanding growth in the fourth quarter of 660% year-over-year in net new sales on Apartments annual subscriptions. We believe that the sales success stands in stark contrast to our significant competitors in the space, who we believe have shown little revenue growth over the past year. According to Moody's, RentPath's revenue is essentially flat since May 2012. In October 2015, Moody's reported a downgrade report that RentPath generated approximately $250 million in revenue for the 12 months ended June 30, 2015. Back in May 2012, Moody's reported that RentPath generated approximately $246 million in revenue in 2012, including approximately seven months of revenues from Rent.com following the acquisition close. 2015 was a particularly difficult year for RentPath's CEOs, as three different individuals have held the position since our relaunch at the NAA industry conference in June. We further believe that we are offering marketing opportunities to apartment communities with up to 10 times the exposure of major competitors at a price point 20% below theirs. That is driving significant share shift to us. In November of 2015, we announced our exclusive agreement with Move, Inc. to power 50-unit-plus apartment community listings on Move's network of websites, which includes Realtor.com, Move.com, and Doorsteps.com. We now promote our advertisers' communities across six major apartment websites with a single point of contact at prices we believe are below the largest providers in the market apartment listings space. So far, the results have been very good with over 0.25 million leads generated for our apartments' customers since their listings went live on Realtor.com's site in December. We expect that in February, the Move partnership will be responsible for 10% of leads to our advertisers. In March 2015, we embarked on an unprecedented marketing campaign complete with national advertising to promote Apartments.com. There are 110 million renters in the U.S., spending just under $0.5 trillion a year on rent. That compares to automobiles at roughly the same level, which is approximately five times what people spend on beer each year. The market for apartment renters is growing rapidly, and spending on rentals increased by $100 billion since 2010. This is one of the largest consumer segments in the U.S. Since the beginning of the campaign in March last year through the end of December, we generated over 7.9 billion impressions for our ads. Most of you have seen the television campaign featuring Jeff Goldblum; it was responsible for 2 billion impressions. We also generated over 3.4 billion impressions digitally, over 2.2 billion impressions for out-of-home and radio, while social media added another 190 million impressions. As we've previously stated, we expect to lower our 2016 marketing spend by approximately $20 million below our 2015 budget levels. Despite that, we were still able to begin 2016 with a bang as we initiated a comprehensive marketing campaign using Super Bowl 50 as the vehicle. In addition to continuing to build the Apartments.com brand, we demonstrated to property managers and owners that we're committed to the apartment space as we move into 2016. The earned media opportunity around our Super Bowl ad was very successful, achieving a publicity value of more than $14 million. On Tuesday before the Super Bowl, CBS showcased Apartments.com in a special primetime sneak preview feature alongside other top brands including Audi, Coca-Cola, Buick, and Budweiser. Our Moving On Up campaign featured Jeff Goldblum and Lil Wayne and saturated Super Bowl headlines with the inclusion of our Moving Day ad in 15 top commercial rankings in national news and entertainment publications.

Wonderful. Thank you very much, Andy. We have to call you Captain Florance going forward. But thanks for the warm welcome, Andy and team, and good morning, everyone. I do want to say that my first four to six weeks here with the group has been pretty eventful. I've had a chance to meet with a number of investors who I'm sure are on the phone. Also, I got to meet with our sales folks as they came in for the annual sales conference. Last week, I was in Atlanta getting to meet with clients and hear from them directly. And of course, my favorite was getting to watch Lil Wayne kick a football for our commercial. Anyway, who would have expected that when you start at a new business? Over the numbers, as Andy mentioned, we're very pleased with our performance for the fourth quarter and for the full year of 2015. The relaunch of Apartments.com, the related marketing investments, the acquisition and relaunch of the Apartment Finder, and our Core information businesses all drove strong sales results throughout the year and they're expected to contribute to the top-line revenue growth as well as continue margin expansion in 2016 and beyond. In the fourth quarter of 2015, the company reported $193 million of revenue, an increase of 24% compared to the fourth quarter of 2014. Full-year 2015 revenues were $712 million, an increase of $136 million or approximately 24% over the full year of 2014. Full-year growth for our core CoStar Suite business is in the 11% to 13% range as expected. Our gross margin was $148 million for the fourth quarter, or 76.6% of revenue compared to 72.5% of revenue in the fourth quarter of 2014. That is a very strong increase against both prior year and the Q3 gross margin. We've completed the aggressive transition away from print at Apartment Finder and this now starts to show up in the improved gross margins, a margin which I expect to increase as our business continues its growth throughout 2016. Adjusted EBITDA was $65 million or 34% of revenues for the fourth quarter of 2015, an increase of 20% from the $54 million in the fourth quarter of 2014. Non-GAAP net income in the fourth quarter was $35 million or $1.10 per diluted share, an increase of 19% compared to the $30 million in the fourth quarter of 2014. Net income in the fourth quarter of 2015 was $23 million or $0.71 per diluted share, an increase of 65% compared to the fourth quarter of 2014. Now, in the fourth quarter we really started to see these impacts of our cost management efforts come through in the stronger EBITDA performance. Personnel costs were very favorable as we focused on integrating our Apartments businesses and we slowed hiring across the company. In addition, we tightened up on a number of discretionary expense areas and we were able to achieve our outstanding marketing results that Andy mentioned with slightly lower spending. Cash investments totaled $437 million as of December 31, 2015, an increase of $46 million from the end of the third quarter. Short and long-term debt outstanding, net of debt issuance expenses, totaled $355 million at year-end. Cash flow generated from operating activities totaled $131 million for the 12 months ended December 31, 2015. You can see we closed out the year in a very strong cash position, which provides us great flexibility to take advantage of growth opportunities in the year ahead, a flexibility that many of our competitors just don't enjoy. Now I'd like to give some additional color on a few metrics to highlight our strong performance in the fourth quarter of 2015. At the end of the fourth quarter, we had approximately 535 salespeople across the company, which represents a decline of around 60 people from the end of Q3, resulting primarily from continued integration and alignment of the multi-family sales force. Despite this reduction, we still delivered very strong and impressive business orders and sales results. With Apartment Finder integration and the realignment efforts now behind us, we plan to increase the number of salespeople throughout 2016. Throughout this, the information sales force remained relatively stable throughout the fourth quarter. Revenue from subscription services on annual contracts was $136 million for the fourth quarter of 2015, or 70% of total revenue. This is up from 64% in the prior quarter. We made tremendous progress converting more of the Apartments customer base to annual contracts and expect this trend to continue going forward. For the trailing 12 months ended December 31, 2015, subscription revenue from annual contracts totaled $475 million, up 22% from the $390 million for the 12-month period ended December 31, 2014, once again reflecting our continued success in growing these annual subscriptions. Renewal rates, as Andy mentioned, for annual subscriptions revenue remained high during the fourth quarter. The 12-month trailing rate for CoStar subscription revenue was stable at 90.4%, while the 12-month trailing renewal rate for customers that have been with us for five years or longer was 96.3%, roughly in line with the last quarter. So, now let's look at the outlook for the full year and for the first quarter of 2016. For the full year of 2016, we expect revenue of approximately $830 million to $840 million, or 17% to 18% year-over-year growth versus our 2015 results. On a pro forma basis, revenue is expected to grow 13% to 14%. Our pro forma calculation assumes total revenue of $735 million for 2015, which includes the revenue from Apartment Finder for the full year and excludes the revenue from the businesses that we discontinued. The core business, again, as Andy mentioned, is expected to continue its double-digit growth of approximately 11% to 13% underpinned by our investment in CoStar marketing analytics and the refocused efforts of our sales forces post-integration. The combined Apartments business, including both Apartments.com and Apartment Finder, is expected to grow in a range of 20% to 25%. This growth range represents the combined growth of the Apartments.com business that grew at approximately 30% in the fourth quarter, along with the acquired Apartment Finder revenue base, going forward. We expect revenue for the first quarter of 2016 in the range of $196 million to $198 million, representing top-line growth of around 24% to 25%. In terms of earnings for the full year 2016, we expect non-GAAP net income per diluted share of approximately $3.62 to $3.72 based on 32.8 million shares, an increase of approximately 80% year-over-year at the midpoint. For the full year, we expect adjusted EBITDA in the range of $227 million to $232 million with a margin of approximately 27% at the midpoint, an increase of 8 full points compared to 2015. We expect to see strong margin growth in the second half of 2016 and exit the year with margins in the mid-30% range. This increase in margin demonstrates the high degree of leverage in our business model, with approximately 75% of the 2016 revenue increase converting to adjusted EBITDA. We expect first quarter 2016 fully diluted non-GAAP net income per share of approximately $0.66 to $0.70 based on 32.7 million shares. As Andy discussed, we expect our marketing costs to be down year-over-year, with advertising spend more heavily weighted in the first half as we resume our national advertising campaign ahead of the peak rental season. Also, as in prior years, other costs are expected to be seasonally higher in Q1, including payroll taxes and our annual sales conference. So, in summary, I'm very pleased with CoStar's financial results for the fourth quarter and for the full year of 2015. The relaunch of Apartments.com, the addition of Apartment Finder, and the continued investment in our information and analytics products will continue to prove our growth trajectory into 2016. We're also very focused on efficiency and cost management as we drive this strong top-line growth. We will continue to streamline the combined Apartments businesses and identify other areas for efficiencies throughout the company. We believe the current sales trends and the sustained focus on expense management will keep us well positioned to achieve our stated financial goals of $1 billion of revenue in 2018 and exiting that year with 40% adjusted EBITDA margins. So, having said all that, we can now open up the call to questions.

It would appear that we're going to do $1 billion of revenue someday; that's our goal. 40% margin. 2018 exiting. Great.

That's right.

Part of our new cost-saving initiatives, Rich, would you put another quarter in the phone? Yeah, we are ready to open up for questions.

Thanks. Good morning, guys.

Good morning, Andre.

Good morning.

So, you gave a ton of numbers. I guess I was wondering how you're thinking about the growth in the Core platform in 2016 embedded in the guidance, given the puts and takes in the CRE market these days? How you are thinking about the broker versus institutional side? I guess specifically, I'm trying to make sure my math is right. If I add up all the pieces that you gave us, the Apartment growth implies about deceleration for the Core business to about 7% in the fourth quarter? So, I guess we'd like to get this back up in next year and is the slowdown more driven by pricing or users? I only have one question, so I had to throw a bunch in there.

No worries. So, we don't get the same numbers on that. We show the Core business completely stable at roughly a 12.5% year-over-year growth rate in the fourth quarter. So, it's been hovering at that 12.7%, 12.5%, 12.3% number consistently. And we would expect improvement overall in 2016. That number will simply mechanically decline because in 2015, we borrowed a lot of salespeople to supplement the Apartments.com sales force to sell apartment-related products. As we go – and then we merged with Apartment Finder in mid-2015. That entire team did nothing but convert people from print to digital for the second half of the year. And that was a large, 100-some-person team. So, as we move into 2016, those folks have completed that task, those Apartment people have completed that task for Apartment Finder and they're now available to focus 100% of their energy on selling Apartments-related business, which gives us the size of scale of the Apartment sales force we want, and that allows us to bring some of the traditional CoStar people back to focusing on the Core.

You did. Thank you.

Let's try and wrap this call up before 3:00 o'clock. I'm sorry.

Hi. Thanks. Good morning.

Good morning.

Good morning.

Just a couple of real quick ones. Could you quantify the headwinds from Services at Apartment Finder that you're shutting down in 2016 numbers? Would you characterize ad spend as being down $20 million in 2016 or was there some shift from the fourth quarter into the New Year? And then the contract sales were fantastic, but they were sequentially down from the third quarter, so I just wanted to get your take on that. Thanks.

Sure. So, simply put, what happened was we are taking the 2016 spend on marketing around the Apartment space down $20 million over the comparative numbers from 2015. The cost savings you saw in the quarter – in the fourth quarter were largely elimination of redundant positions, and that's probably the single biggest beginning, middle and end of it.

Over two-thirds of it was from personnel-related costs.

Yeah. 200-some people.

Yeah. Very small amount was from the marketing piece in Q4.

So we think that's something that you'll see that the reduction in marketing spend. Though, remember, at a reduced number, we are still the most aggressive player by a wide margin, and as you can tell like Super Bowl ads and so on and so forth. And we believe that we will give us a significant advantage. And we think the marketing dollars at the lower level we are spending are highly efficient because if you're not competing with multiple other voices attempting to brand a similar product in the national space, you have very efficient dollars – there are very efficient dollars you're spending. So, in the fourth quarter, remember one of the things that was occurring. So, you asked about the Finder discontinuation of revenue, that number was $10 million, $13 million, something like that.

Yeah. It was roughly around that.

$10 million, $13 million net. This was revenue that just in the long term would distract us from other higher margin revenue. So, it was negative or a flat margin revenue that couldn't scale and we thought it was frankly competitive and distracting, so we took that away to focus on the Core. So, you'll get a headwind on that. Now, remember – a little headwind on that. But just year-over-year basis. Now, remember that we went into Apartment Finder really aggressively. So, we were not messing around and other companies have done print to digital conversions in the course of two or three years. We did a – I'm sorry. A print to digital. We did a print to digital in four months. So, we want to be really quick about it. And we took 100 and some Apartment Finder sales people and said, go to your customers and migrate them from a print publication to a digital publication, keep the pricing the same, but go from a month-to-month contract to a six-month contract or a one-year contract and do it by next Tuesday. So, it was very rapid. But we did that because of the margin benefit and the ability to focus aggressively and produce a much better product at the end and have a scaled sales force and get scale advantage to these websites. One point of sales, multiple websites for the clients to enjoy leads from. So in doing that, we did have some folks not go from print publications to digital. In particular, you might be in Albany, New York or something, where they love their newsstand book. But we still turned the great results we did despite that, and going forward we're in a much better place than if we kept messing around with print. I hope that answered the question.

Great. The last one was just new contract sales trends.

That's the new contract sales. There's a slight reduction there.

Oh, got it. Got it.

We lost contracts when we lose that company in Albany that really wanted a book.

Okay. Makes sense. Thank you.

We're not big believers in the book. Okay.

Good afternoon, everyone.

Good afternoon.

Hello.

Well, a question for you on the new CoStar product, the intermediate product going between LoopNet and CoStar Suite. I don't know, you have a name for it or is it CoStar Light, something like that?

Do you have a name for it?

Okay. And so, the context of the question is given that product you have your Premium Searcher revenue. I'd like to ask about approximately how much we're talking there, that you're looking to upsell to CoStar Light or to upsell to the CoStar full test. What are the different price points? How do we sort of do some back of the envelope on the potential scenarios there?

Sure. So, first of all, I think you're asking a great question and it is one that I feel is an important question for the company, and I think that we have a good solution for that with a lot of potential. So, I'm feeling very good about that area. So, one of the challenges with the traditional Premium Searcher revenue, which is what, $34 million?

About.

Roughly $34 million. Is that it was a relatively low-quality product for LoopNet historically, and it was a throwaway. So, they signed up a number of people at as little as $19 a month, which bears no resemblance to what CoStar charges for a higher quality information product. As the LoopNet brand has strengthened, the information has gotten better in LoopNet, and they're getting a lot more value than they're paying for. Now, you can't increase anybody from $17 to anything meaningful at any kind of other than usurious interest rate kind of growth rate. So, it's not a great approach. So, we are creating a new product, so we will – those folks who have Premium Searcher can see both basic and premium listings on LoopNet. Once we do the conversion, the only people that are going to be able to originate basic listings on LoopNet will be people who are paying to advertise with us, at least some property. That means some of the basic listings will disappear, reducing the value of the legacy product somewhat. We are offering the upsell product, which has twice the listing volume and more accurate listings than the legacy LoopNet product. We'll be offering that for probably in the $195 to $295 a month per person price range. The current legacy product was running at $115 average per month. Now, that average is very average because as you know, we took the price up to about $325 or something a month about a year or so ago, so that $115 is a blend of the $17 person and the $325 person.

Yeah.

And also, it's not apples to apples. It's comparing yens to pounds because a user at CoStar Group has an enterprise license where all the brokers of the site need to be licensed before the first broker gets the service. On the legacy LoopNet, one broker in a 100-shop brokerage firm might be the guy who bought the password and shares it with the entire office. So that $34-a-month account might be servicing 100 brokers. So, as we bring the new products on board, it will only be licensed at the enterprise site level, and it will be moving up to a higher price point. So, it'll be significant up from where we are before. So, it's probably a – if someone chooses to get the more robust intermediate information products through the LoopNet platform, on average, it will likely be a 300% price increase or so. And we think it will be compelling to people because we'll use exactly the same methodology LoopNet used to get people from just using the free LoopNet to the Premium Searcher LoopNet where every search you do, you can actually see how much content you're not seeing if you're not in the premium class. And then the CoStar service is probably another 60% increase above the intermediate service. So, we'll move people between these different price points with very clear and very discernible value proposition. So, I'm very excited about it. There's a lot of software work to do this year, but clearly our team is pretty darn good at doing that. And we're – they'll hit this one as aggressive as they hit Apartments.com, and as aggressive as they hit Apartment Finder. And then I'm really excited about what we're going to deliver to our CoStar sales force.

It's actually Darren Jue on for Sterling.

Good afternoon, Darren.

My question is about how you guys think about prioritizing spending between the Apartments.com and the Apartment Finder brands? And then how do you see the growth rates of those two brands trending, do they sort of converge in terms of growth rates over the long term?

Yeah. Good question. They are – we are prioritizing the branding spend around Apartments.com. So we put all the major media dollars into Apartments.com. And then – but we can leverage that investment, Apartments.com, to Apartment Finder or to Apartment Home Living in that, as someone is acquired by Apartments.com, we cookie them. And when they search for – this is an example – they search for a pet-friendly, one-bedroom in Cleveland Park in D.C., we know that. And then we retarget them, we spend digital dollars retargeting them, saying that Apartment Finder is the ideal site to find a dog-friendly apartment in Cleveland Park.

Yeah. I think it's an important message to bring up because as we move forward into this year, as we're selling this network through the sales force, there's not going to be a visible separation between Apartment Finder and Apartments.com from a revenue growth perspective. So, when I gave the guidance of look for 20% to 25% combined growth going forward, that's all of our apartments, properties together in this network cell. And it is exactly at or slightly above the growth rates on an organic basis we're seeing coming out of the end of 2015.

Okay. And just to clarify, the 20% to 25% growth, is that a pro forma growth, assuming that you had Apartment Finder for the full year in 2015?

Yeah, that's right. That's assuming that. And the number I gave, I think, was $735 million as the pro forma base that we grow off of in total, it includes that 20% to 25% Apartment.

Okay. All right. Thank you.

And we believe that combined business will be profitable in the fourth quarter.

Hi. It is afternoon now. How are you doing, Andy?

Good.

Welcome, Scott, look forward to working with you.

Great. You, too, Andrew. Thank you.

I guess what I'm trying to wrap my head around a little bit, kind of going back to Andre's question at the beginning of the Q&A session. Net new has historically been our best look-forward metric. It has accelerated to pretty remarkable levels, reminiscent of LoopNet coming out of the last recession. And yet, the implied rev guide for 2016 doesn't seem to capture that implied acceleration. So, I'm wondering if net new isn't the best sort of forward-looking metric anymore, or if there were some puts or takes or how we should think about your guidance vis-à-vis bookings growth and perhaps some conservatism? I'm just – give me a breakdown on the relationship, is what I'm trying to understand better.

It's a good question. I think as you think of – the net new is still the metric we'll be using in the annual subscriptions to show how that turns obviously into revenue in the future. The other thing we all have to get used to is now that we've got a really big multi-family Apartments business, it demonstrates a different seasonal pattern in its new and subscription revenue from quarter-to-quarter. Obviously, there's a peak season in the second and the third quarter for renting and then that cools off. That pattern is going to hold true for the sales efforts. It's also going to hold true for our marketing efforts. So, from what we've been used to in the past, we're going to see a more seasonal pattern that's decent in the first quarter, it grows second quarter, third quarter and then it softens in the fourth quarter when you look at apartment selling. So, when you peel all those pieces apart and we look sequentially and forward, each of the individual components, seasonality aside, continues to grow and will continue to grow in each quarter next year over the prior quarter. I know it's difficult to see because until we get annual periods of all this stuff in place, it's not as clear. But that's what we're seeing in the underlying metrics in the new business that we're putting on and then that's translating into consistent sequential growth going forward.

So, I think – I do think that it is the best single indicator of future revenue and expectations. You do have a lot happening. So, you have the Finder conversion really coming to a head in the fourth quarter, where we did record reductions. We had the shutdowns of revenue. So, that moving Finder through in essence in a three-month period creates a little bit of noise. And then I think that we're not looking to be overly aggressive as we go into 2016. We would like to see us continue to put up these unusually strong sales results ongoing. And not – don't want to speak on behalf of Scott but coming into the new CFO role, you wouldn't amp up all the dials from the prior year with your over four weeks of high confidence.

Thank you for that good introduction.

Okay. So you wouldn't call out for example any inflation in the net new number which is resulting from the conversion of less than annual terms to annual terms, which would otherwise blunt future revenue growth, in other words, better retention, better economics but maybe less related revenue growth?

No. And I believe our apartment renewal rates are doing really well. I think we're going to do a lot better in the apartment renewal rates than anyone in our industry has ever done. And anecdotally, there was one client that you would – we're bringing a lot to the table for the clients right now and so we have a much stronger hand or much stronger product than anyone has had in this space before. And there's one client that sticks in my mind that we saw a reduction in their spend, it was a major national player. Was the only major national player I was aware that we saw a reduction in their spend in the later part of the year, but they've actually brought that right back up online and above. So, I actually think our renewal rate in the Apartment side is pretty darn good. We'll be working hard to keep it up there, and I think it probably ends up being stronger than the LoopNet renewal rate. It's somewhere between the LoopNet and CoStar, and that makes that net bookings number actually a good fair representation of what's happening in the business.

Okay. Great. Thank you very much.

Thanks, and good morning, guys. Just a quick one for you. So, with respect to the annual sales conference that you hosted, what were the key takeaways? And could you share how you're thinking about ramping headcount across the product areas and maybe the profile of who you are hiring, and whether or not that's any different than kind of who you hired in the past? Thanks.

So, well, one really nice thing about the sales conference was that I felt that there was really good energy and integration between the CoStar sales team, the Apartments.com sales team, and the Apartment Finder sales team. So, this was the first time they all got an opportunity to get to the same room. And it was the first time that they had one relatively common set of products and it was also the first time that they had a really good – I think a really good territory system they get a hold of. So they could understand what their mission was in this collection of products. So, I felt there was really good energy. I thought there was a little bit of a morphing of the personalities as they, three different sales forces into a more corporate central casting, send me a high-end sales person look. I mean they were really dressed up. But the expansion areas would be we're adding customer relationship management people that the CoStar information sales team, about 80 people there. They have some selling responsibilities, but their core responsibility is driving usage. They're selling responsibility is really more around LoopNet to brokers. So, they'll sustain and drive the LoopNet PL. Then the other thing we did is Max and I spent a lot of time just saying very carefully about our rationales of potential revenue – existing revenue and just set slightly different target levels in different cities, especially cities that we think have a lot more revenue upside. So, it was a really good feel other than a blizzard that came in, and potentially was going to strand 700 sales people on my credit card for three days in Washington. So we had to get them out of there quickly ahead of the storm, and we only had to pick up the tab for about 30 Brits for the weekend, so, it turned out okay.

We'll also see the territories were aligned closely now in Apartments, and we have a couple of extra regions we've done and a couple hundred territories that we've now aligned with the combined sales force. You're going to expect those number of territories will need to put more folks against. And so, that's the other piece besides the customer relationship piece that Andy mentioned. We'll see more sales force in multi-family going out to those territories.

Good afternoon. And welcome, Scott.

Thanks, Brett.

Andy, can you talk about lead quality? You mentioned kind of you're expecting high renewal rates from the multi-family folks, the investment you all made in getting real time availability, I think, sort of was the game changer you're going after – it was supposed to produce higher quality of leads. Can you give us if it's a metric or anecdotes just to compel us that that's working as you've expected and that it is – the leads are higher quality?

Sure. So, again, there's not a – there is no sort of third party lead monitoring service that puts out a metric that we can use. But I can take an anecdotal from our biggest customers where they are watching that lead flow and they're saying that one customer, one major customer said, look, you all came in in March of last year saying you're going to have this great traffic and great lead flow, and you want us to immediately switch all our advertising to you after we have been doing this for 30 years. And so, we're not going to do that until we've watched results for a period of time. And they said that, they said, and it's consistent with what others are saying, that as they monitor it, they see a clear and growing differentiation between the leads they received from us and lead is a dirty word. What you're really looking for is lease. And so, the leases they're seeing come from us is differentiated from all the other sources. Which is why they're spending, as you can see, from any – just pretty clear there's a major shift from other sources to us, that is the best testament of lead quality. But we did an interesting study the other day, you'd go back to the old manual way of trying to lease out your apartment building. We know from digitally tracking the results of over 10 million phone calls into apartment communities in 2015, they only answer the telephone during normal business hours 27% of the time. So, they're only available to give somebody information on apartment 27% of the time and then working on a special project that we made 1,500 calls, that were all recorded legally, and that a separate person in each community was called and asked for one-bedroom availability by two different people. Each call was recorded, and then a third party determined whether or not an accurate answer was given on whether or not there's availability. The accuracy rate for when you call an apartment community and whether or not they have a one-bedroom availability is 50%. So, when you call and ask the community if they have a one-bedroom available, they're only able to give the right answer 50% of the time. So, you're down to, for every 100 calls that come in, only 13.5 of them are answered correctly. So, the only way the industry's going to lease stuff up is through digital presentation right from the property management systems to the customer. So, what we're doing is we're giving consumers real information as to what's available. We're making it readily accessible. We're not playing any games where we serve up apartments that aren't in the neighborhoods they asked for. We're not playing any games where we serve up apartments that are not available. So, the quality of our lead flow would follow is much better. And I think that's just is evidence.

Okay. That's great. That's what I need. I appreciate the detail.

Oh, great. Thanks. Just one quick one. Can you give us an update on your current M&A stance or other capital allocation plans? Thanks.

Sure. So, I would have to say there's more potential initiatives that we could pursue than I've ever seen before. There's a wide array, and they lie in our traditional business area, in the Core business area. They also are in the Apartments area. And then they're in related areas. We also separately are looking at smaller acquisition opportunities in Europe. But – so, we obviously – with growing cash balances and very conservative debt posture, we have capacity. But I would not want to let anything right now interfere with our core priority of integrating LoopNet and CoStar. So whatever happens, the first priority is getting the benefit integration done. And so, we're probably operationally adverse to adding additional workload for at least six months. But we – Frank Carchedi, who has been with us for a long, long time, he's one of four CFOs that hang around here, former CFOs that hang around here, has handed off his responsibilities for our very large research department and he's focusing on some of our subsidiaries and he's focusing on M&A. So, he's spending a lot more time on that. We are looking at a lot of things. But again, priority number one is operations and realizing the benefit of the resources and assets we already have.

Great. Thank you.

Thank you. So, what the heck? We're going to break the rules. We have one more question from Sara and then we're going to move to the second quarter results.

Thank you. So, I just want to clarify what the Apartments' guidance that you gave for 2016. You've been talking about 25% to 30% before. And I think that referred just to Apartment.com, and you're now including Apartment Finder and probably some of the products shut down that's impacting in 2016. Is that the reason for the lower growth versus the 25% to 30% that you talked about before?

Yeah, Sara that's exactly it. When we talked in the last quarter, we said 25% to 30% for Apartments.com. And until we finish the wind-off of Finder, we didn't have a good base to start using in our go-forward organic growth calculations to know what that combined business is going to be. Now, as you point out, we have that clarity, we know where it's running. You combine the 30% from Apartments.com with the remaining base of Apartment Finder, and on a go-forward basis, you get a 20% to 25% growth range, which is at or slightly above the equivalent of the 30% that we spoke about before. So, there's no decline there. There's no change there. It's actually a slight acceleration through each quarter we see next year from the '30%' that we said last year. Is that clear?

Yeah. That's very clear.

Perfect.

Okay. With that, we will wrap it up. Thank you all for joining us and congratulations, Scott, on your first earnings call with the CoStar Group.

Thank you very much.

See you next time.