Costar Group Inc (CSGP) — Q3 2017 Earnings Call Transcript

Thank you, operator. It's really great to be here today, and welcome to CoStar's Third Quarter 2017 Conference Call. We hope you all will enjoy it. Before I turn the call over to Andy Florance, our CEO and Founder; and Scott Wheeler, our CFO, I have some very interesting and important items for you to consider. Certain portions of our discussion today may contain forward-looking statements, which involve many risks and uncertainties that could 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 October 25, 2017, press release on our third quarter results and in our filings with the SEC, including our most recent annual report on Form 10-K and in quarterly reports on Form 10-Q under the heading Risk Factors. All forward-looking statements are based on information available to CoStar at the time of the call. We assume no obligation to update these statements, whether as a result of new information, future events or otherwise. Reconciliation to the most directly comparable GAAP measure to all of the non-GAAP financial measures discussed on this call, including but not limited to, non-GAAP net income, EBITDA, adjusted EBITDA and forward-looking non-GAAP guidance are shown in detail on our press release issued yesterday, which is also available on our website under costargroup.com. As a reminder, today's conference call is being broadcast live on our website. So you can also find the CoStar information page there. Please refer to yesterday's press release on how to access the replay of this call once it's available. Remember, one question, make it a good one. I'll now turn the call over to Andy Florance. Andy?

Rich, I want to thank you for sharing that deep and personal information. I know that took a lot of courage. Thank you for joining us today on our third quarter earnings call. The strong momentum we created in the first half of 2017 continued at an exceptionally strong pace into the third quarter of 2017. Year-over-year and sequential growth was excellent across the board. On a year-over-year basis, in the third quarter, our revenue growth accelerated to 16%, net income grew 48%, and EBITDA increased 26%. Sequentially, all three of our major revenue-by-services categories grew faster in the third quarter compared to the second quarter of this year. Our margins also rapidly expanded as adjusted EBITDA margin grew to 34%, up 1,100 basis points in the third quarter from 23% in the second quarter of 2017. Company-wide net bookings in the third quarter were up 31% year-over-year to $34 million, continuing an outstanding year in sales. Earlier this month, we completed the integration of LoopNet and CoStar, and our sales force began converting the LoopNet info users to CoStar users. I believe that based on results so far during the fourth quarter, the outlook for strong sales performance ahead is excellent. I'll have much more on this later. Overall, I believe we will see continued positive momentum during the rest of 2017, into 2018 and beyond. I'm truly amazed at the dedication and execution of the 3,600 CoStar professionals who have made us the number one platform in commercial real estate information and marketplaces. We are committed to constantly improving and building upon our prior successes to ensure that we continue to exceed client and investor expectations... We are moving full force into our second cross-selling and up-selling phase with LoopNet and CoStar. The first phase occurred from 2012 when we completed the LoopNet acquisition until 2015. In that first phase, we converted 28,000 LoopNet users to CoStar, generating 80 million of net new sales... This is valuable information because these are the buildings brokers want to win new listings in. Only CoStar provides information on millions of tenants, which are prospects for both brokers and owners. Only CoStar offers information on millions of comparable sales and leases used to value properties. Only CoStar offers statistics, analytics and forecasting.

Thank you, Andy. I know there's really a lot going on in the third quarter fairly on a positive result. Nothing like taking on a major product integration with CoStar-LoopNet, signing an important new acquisition with ForRent, executing a common stock offering, restructuring debt, and, by the way, we also turned on the Oracle cloud ERP system on October 1, so nothing like a quiet quarter here at CoStar. Yeah, great results. Revenue in the third quarter, as Andy mentioned, is up 16% over prior year. And we see the acceleration in all our major revenue growth rates on our primary revenue streams versus the prior quarter. Our organic growth rate in the third quarter was 14%, and that normalizes out the acquisition of WestsideRentals, The Screening Pros and LandWatch... We expect the Information Services revenue decline to accelerate in the last quarter of the year as we actively convert clients to CoStar... We had another very strong quarter in multi-family, as revenue increased 25% year-over-year and 22% on an organic basis. This is adjusting for the two small acquisitions. Revenue contribution from these two acquisitions was approximately $2 million from the quarter, which we expect will decline as we complete the integration of these two businesses in the quarters ahead... Renewal rates on annual contracts was 91% in the third quarter of 2017, up 30 basis points from 90.7% in the third quarter of 2016.

Thanks for all the details and particularly the LoopNet up-sell. A lot of folks have been, I know, very focused on that. My question is on bookings growth. I know this is sometimes a frustrating question to get asked. But 31% was a deceleration from, I think, the 39% growth last year or last quarter. And I wondered, just give us thoughts on that, was there some distraction of the sales force as they get trained up for Loop? I think you guys said in last call that maybe half of the 700 and some odd would be focused on this. Was there a tough comp? Just any thoughts on that would be helpful because folks have asked us about that. Thank you.

Yes, sure, Brett. Q2 obviously was a pretty phenomenal quarter, record net sales numbers. And we had this record sales number in CoStar Suite, which was obviously very positive. We had some pretty large national deals that were in there, which helped us in that quarter. So when you look at Q3 across all of our product groups, they performed very strongly and I think that the two factors I'd call out was, one, we didn't have any big, large national deal in the fourth or in the third quarter. And also we lost a number of selling days around a couple of our regions as we dealt with clients impacted by the Houston hurricane, the Florida hurricanes, and we backed off on, obviously, sales. And we also did some crediting for distressed clients there. It's not a huge impact, but it does sort of dampen the output. And then there was some getting ready for the CoStar LoopNet integration that occurred in the last month in the quarter. So I think all those things combined gave us a little softer than Q2. But still we're very happy with where that is, and we're averaging about 35 million a quarter this year in net new, which is a nice place to be.

So, just to add to that. I would just say that the focus in the sales force was 100% on the upcoming Loop integration. So that was the topic of the quarter. And so as you approach that integration period, there's a lot of energy, a lot of preparation going into that integration, which will be the highlight of the next two years. That will be the drumbeat that we're following for the next two years. And so in the lull right before you set off on that big effort, people weren't launching new major initiatives somewhere else. So it just was more of a timing issue where you're building up for what we've been describing in the last two weeks, which is a really strong result.

A lot of good information, a lot to chew on this quarter. Just some quick ones. Andy, I know it's early but any thoughts on the pace of the campaign given the first couple of weeks here? Is this something you think you may want to accelerate? Or it's status quo for now? And my second question was to Scott. I know you mentioned the offset bookings is going to most - a net positive on the conversion. But I guess, how do we think about that on a recurring revenue basis? Would it be roughly the same impact? I know you're not turning off everybody at once.

So, in terms of accelerating it, right now I would say we are measuring it. And the pace of the lead flow right now is massive. So we are just trying to keep up with the pace of the lead flow that's coming in. And so we will continue to assess that and figure out how we try to scale to take advantage of that.

Yes. The perspective on bookings and what we see going forward, as you can imagine, there's a good bit of noise that gets introduced in October that we're sifting through now. The very positive noise, obviously, from the pipeline and then the new sales and the uplift that we'll see in CoStar Suite. And then there's the noise around the info services declining both from the shift of CoStar and also that we no longer sell those to our e-com platform.

Now that the LoopNet is a pure-paid marketplace, do you have any early indications of behavior? I think there were about 100,000 free listers. Are you starting to see them soften up to, at least, to the basic ad package?

Sure. So yes, we've been watching that, I think there's 128,000 free listings or something at the point of conversion. And we've been very pleased with the response we've received from those folks. So they get - they basically understand that there are paying advertisers and that their free ads compete with the paying advertisers' exposure. And so not a big surprise to them that it's becoming a pure-paid marketing marketplace.

So first of all, congratulations to Andre Benjamin, nice to see you hiring a recovering sell-sider.

We have not yet begun to fight. So we have not yet entered the field on the advertising side. So the free-to-client movement on the advertising side will be significant.

This is Jackson Ader on for Sterling this morning, guys. One question from our side. How do you think about - after we get past this initial blitz of converting LoopNet over to CoStar, how are you thinking about pricing power or potentially pricing pressure moving forward after we get through the next maybe three or four quarters?

Yes, so I would say that the blitz is probably a ten-quarter activity. So the first phase where we did the 28,000 up-sells that occurred over three years. And I think this is a similar time period. I think this is multiple years of just bringing these folks into the CoStar information platform.

Can you talk a little bit about how you guys are thinking about other new products you're going to be focusing on? I know you're going to be jamming on the LoopNet cross-sale, but I know, Andy, you've always got kind of the next thing on the horizon. Any thoughts on that at this point? Or is it just sort of too early given your focus on LoopNet right now?

Sure. So we LoopNet marketing over the next three years will look very different than LoopNet marketing looks today. So if you go back to ancient history when CoStar used to sell print office directories around the world, around this region, we actually, in the late 80s, came out with online or computer-based information products and couldn't sell them because nobody had a computer so we had to go produce magazines instead. And we - it's in our DNA.

Thank you everyone for joining us. I appreciate your patience as we went through a pretty long call today and I blame Rich for that, I cut out at least ten pages that Rich wrote for me. But we look forward - we had - we were glad that we were able to report a fantastic early indication on the LoopNet-CoStar integration. It's still very early and I look forward to being able to come back at the year-end call and give you some more substance on what happened over the full three-month period. So thank you very much.