Costar Group Inc (CSGP) — Q2 2018 Earnings Call Transcript

Thank you, operator and welcome to the CoStar Group's second quarter of 2018 conference call. Before I turn the call over to Andy Florance, our CEO and Founder; and Scott Wheeler, our CFO, I would like to share some very interesting and important items that can have a positive effect on your life. Certain portions of our discussion today may 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 today in our July 24, 2018, press release on our second quarter results and company's outlook as well as in CoStar's filings with the SEC, including our most recent annual report on Form 10-K and our subsequent quarterly reports 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 we assume no obligation to update these statements whether as a result of new information, future events or otherwise. Reconciliations 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 earlier. The press release is available on our website located at costargroup.com. As a reminder, today's conference call is being broadcast live on our website, where you can also find CoStar's Investor Relations page. Please refer to the press release on how to access the replay of this call. Remember just one question, so make it a good one. I'll now turn the call over to Andy Florance. Andy?

Thank you for joining us for our second quarter 2018 earnings call. This month marks CoStar's 20-year anniversary as a public company, making this our 80th earnings call. Congratulations to those of you who bought our stock on July 1, 1998, when we listed on NASDAQ at $9 a share. The only thing better than your 4000% gain is the thrill you enjoyed listening to more than one hundred hours of these excellent information-packed CoStar Group earnings calls. On our IPO roadshow in 1998, we had less than $10 million in trailing full year revenue. Back then, many investors expressed skepticism to our claim that CoStar Group had a $100 million potential total addressable market. In June of 2018, we achieved our first $100 million revenue month, and we're now at a $1.2 billion revenue run rate. In the second quarter of 2018, our Apartments.com business alone generated its first $100 million revenue quarter. Revenue for the second quarter 2018 was $297 million, an increase of 25% over revenue of $237 million for the second quarter of 2017. Year-over-year net income in the second quarter of 2018 doubled to $44 million, and non-GAAP net income, which excludes one-time costs associated with the acquisition of ForRent, was up 114%. I strongly believe we will meet our 40% adjusted EBITDA margin goal for the fourth quarter of 2018. Our strong momentum in sales continues; bookings in the second quarter of 2018 were very strong as we generated $45 million, an increase of 23% year-over-year versus the $37 million we achieved in the second quarter of 2017. Just one year ago, that $37 million had been the best net new sales quarter we'd ever had. Our commercial property and land marketplaces had their best sales quarter ever in the second quarter of 2018, with a year-over-year revenue increase of 105%. This increase featured significant sales of LoopNet Premium Lister and Power Ads on LoopNet.com. With the integration of the CoStar and LoopNet databases, we were able to eliminate LoopNet's information product and focus LoopNet entirely on being the best possible marketing solution for commercial real estate. We're making significant enhancements within the LoopNet marketplace month in and month out so we can further capitalize on this significant opportunity. Since last year's integration, the number of views per advertised property has doubled. We're shifting our priority to developing and selling our higher-end LoopNet power ads, such as our gold, platinum and diamond level advertising. The diamond ads on LoopNet reach the end-user markets of its tenants and small investors more effectively with larger ads that soar to the top of relevant search results. They are enhanced with immersive virtual reality walkthroughs, drone shots, videos and more. They will also appear prominently throughout CoStar in order to make a strong impression on our broker audience as well. As we invest in growing our news service, the diamond ads will reach this audience through our newsletters and news website. Many landlords advertising believe that reaching the professional audience within CoStar Suite is equally as important as reaching the tenants themselves, as the vast majority of leased transactions over 5000 square feet involve tenants represented by professional brokers. We are already beginning to sell diamond ads on LoopNet for as much as $2,200 per month, which is 60 times the $35 per month we currently average on LoopNet. We believe that properties advertised on LoopNet and CoStar are leasing and selling faster, so there is real economic value in return on our clients' advertising investment. Conversely, vacant or unleased space is incredibly expensive for landlords, so reducing that downtime by marketing the space with us provides an immediate and substantial return on investment. We're also now focusing on selling to owners instead of just the brokers; owners typically have 94% of the economic interest at stake in a deal compared to a listing broker who has just 1.5% of the economics after they share the commission with other brokers or his or her firm. We believe the return on investment argument resonates much more strongly with an owner who has the most at stake. We believe that our commercial real estate advertising products are countercyclical. When an owner has a leasing crisis in a $250 million property, a one-of-a-kind $2,200 a month effective marketing solution is a no-brainer. While the CoStar sales force remains focused on generating strong sales growth for the company, we also have them heavily focused on pricing integrity and relationship development with our existing clients. As we've mentioned in the last earnings call, we're holding the line on our pricing policies and not accepting discount or under-licensed contracts. As a result, we've seen an 80% increase in the average price per new broker user licensed over the past six months. In January of 2018, with discounts incentives, we were licensing new brokerages at $255 per broker. But by July, we were licensing new brokerages at $466 per broker. This increase improves our intermediate and long-term revenue but does come at a cost of some reduction in short-term contract volume. We average 624 total new CoStar contracts per month at the beginning of the second quarter, and that dropped to 474 new contracts at the end of the second quarter. So the trade-off is approximately 25% overall lower contract volume, but they're at significantly higher price points. Beginning in March of this year, we felt it was important to incentivize our sales team to visit each of their CoStar customers, provide training, build stronger relationships and demonstrate the exceptional value of our CoStar Suite service. We are focusing our sales force on relationship development right now for a number of important reasons. We've added tens of thousands of new users in the past 12 months. I feel it's important that these new and existing clients feel that we're in partnership with them and focused on their success. Working closely with our clients, we expect to gain stronger referrals, lower cancellations, better learn our clients' needs, upsell other products and more accurately license and price our products as contracts renew. It's working; from April to June in the second quarter of 2018, we saw a 75% increase in the number of face-to-face meetings our salespeople had with our clients focused on relationship development. As we do with Apartments.com sales force, we carefully track these meetings and get client feedback. This resulted in an improvement of our net promoter score each month in the second quarter. In June 2018, our net promoter score reached 9.1 on a 10-point scale, very positive referrals. I firmly believe that while this focus does not maximize short-term sales productivity, it does create greater customer satisfaction and relationships that will definitely increase intermediate-term and long-term sales results. I believe it also significantly widens our competitive moat. Today, we kicked off a multi-day strategy session here at our headquarters with several dozen of Cushman & Wakefield's global leaders building strategies to best leverage CoStar technologies, information platforms and marketplaces to fuel the growth of their global platform. We believe it is positive for the industry and our business for the number 3 commercial real estate brokerage in this space, Cushman & Wakefield, to be going public. Cushman is only one of only three really large global brokerage firms; they have got almost $7 billion in revenue, 48,000 employees in 70 countries and an awesome brand that dates back over 100 years. We know the company aims to continue to drive growth by investing in its technology to best serve clients and deliver margin expansion as it drives efficiency with recently acquired businesses. Apartments.com continues to strengthen its lead as the number one apartment Internet listings service. We achieved our first $100 million quarter, which is remarkable since we only entered the multi-family marketing business just four years ago with the acquisition of Apartments.com, which at the time only had annual revenue of $85 million. During the second quarter, we once again achieved all-time highs in visitors and traffic. Our SEO performance remains remarkably strong; based on Google rankings in May of this year of 10,000 apartment keywords, Apartments.com had 73% of the number one slots. That's 7 times the 7% Zillow has or 25 times the 3% RentPath has. As reported by comScore during the second quarter of 2018, Apartments.com averaged 15.2 million unique monthly visitors, an increase of 37% year-over-year. Apartments.com had 3 times more unique monthly visitors than Apartment Guide. This 4.9 million unique visitors represented a decrease of 11% during the same period. Excluding traffic from Move in both periods, our Apartments.com network averaged 47.6 million visits per month, up 33%. In June of 2018, our entire Apartments.com network had more than doubled the number of unique visitors, 112% more to be precise, than the RentPath network according to comScore. We had 2.5 times the total number of visits of RentPath in June as well. Our network produced a stunning number of leads; it produced 41% more leads in the second quarter of 2018 than we did a year ago during the same period. Since we believe we have the highest quality leads in the industry, this should make a listing on Apartments.com network even more valuable. In June 2018, we announced that we are resuming our partnership with News Corp. subsidiary Move Inc. to power exclusively apartment community listings on Move's websites, Realtor.com and Doorsteps.com. Move had partnered with Apartment List in the first part of 2018, but that partnership failed quickly. Our partnership with Move significantly broadens the distribution of the apartments listed on Apartments.com. Move's Realtor.com brings us almost 7 million unique potential renters a month. We believe this will result in the most cost-effective use of advertiser dollars, as their listings will enjoy increased exposure and will be available now on up to 11 different apartment websites. In June, we delivered our best gross sales month ever for Apartments.com. One of our primary priorities for our Apartments.com team this year has been integrating the legacy Apartments.com sales force with the new sales team additions from ForRent. The ForRent business is being integrated quickly and effectively. We initially set a goal of integrating ForRent's operations, clients and software within 12 to 24 months. Given the great progress we're making, it looks like we will complete the integration in less than 12 months. Our integrated sales force has been performing really well from the start. They're selling an integrated network and advertising package that we expect will further increase exposure for our clients and generate more leads for them. Since the ForRent acquisition closed in February, we have met with all of our ForRent customers multiple times. This has created enormous goodwill and decreased cancellations dramatically. Since we integrated the sales force, average monthly ForRent cancellations were almost 35% less than the monthly average of ForRent cancellations in 2017. We've converted over 4,100 ForRent clients to bundled Apartments.com network contracts, stabilizing and retaining the associated revenue. At the end of the quarter, we had 48,500 apartment communities investing in the Apartments.com network. That is up from approximately 18,000 communities four years ago. We're now very focused on that record-setting 50,000 community milestone. Once again, we had a strong presence at last month's National Apartment Association annual conference in San Diego, resulting in millions of dollars of net new sales. We had enormous interest from property managers from around the United States, which resulted in thousands of booth visitors, leads captured, and demos delivered. We have already generated over $3.2 million in net new sales from the NAA conference with more sales still rolling in. The highlight of the conference for me was the very positive feedback I heard from multiple principals of major clients on the value they received for their partnership with Apartments.com. The CoStar real estate manager solution is now an established leader in facilities project management, lease abstraction, and lease accounting. We continue to add to a strong list of Fortune 1000 companies as customers including top financial, industrial, healthcare, retail and service companies. Additionally, existing customers continue to expand their use of our services as they seek to meet the new ASC 842 leases standard. Over 350 companies are currently utilizing the service. In fact, a couple of the companies on today's earnings call use it. CoStar real estate manager sales continue to impress with year-over-year revenue growth in the second quarter of 2018 of 118%. This year, CoStar Real Estate Manager is expected to exit Q4 2018 at approximately $43 million revenue run rate with margins approaching 25%. We've purchased Real Estate Manager in October of 2011 when it was known as Virtual Premise. You may recall this was right in the middle of the period that our acquisition of LoopNet was under very careful review by the FTC. This shows we're able to do more than one thing successfully at that time. We paid $17 million for Virtual Premise, which had approximately $7 million in revenue, so we paid 2.5 times revenue. I think you would agree that this business, growing positively to $43 million in revenue with a 118% growth rate, is now worth a lot more than the $17 million we paid for it. The purchase of Real Estate Manager builds our track record of making quality acquisitions that are selective, that expand the total addressable markets we operate in, grow revenue and profitability of the company and strengthen our unique commercial real estate platform. This has ultimately been a major contributor to increasing shareholder value. As we manage our capital and the balance sheet of CoStar and look for our next M&A opportunity, we're careful we do not overpay for businesses or make recklessly risky bets. I'd rather wait and identify quality businesses that have the high potential to integrate into our platform and that can grow and add significant value to our customers and shareholders. This is what leads to successful M&A like CoStar Real Estate Manager, Apartments.com, LoopNet and many, many others. I want to update you on our research operations. Our ability to collect and curate valuable commercial real estate content is our primary core competency. Our research operations continue to perform really well. In order to optimize the efficiency and effectiveness of our research process, we're closing two major research centers and consolidating them into other centers. In August 2018, we'll be closing our research center in Glasgow, Scotland, and consolidating it into London. At the same time, we're closing our research center in Columbia, Maryland. Our centers in San Diego, Richmond and Washington will pick up the Columbia center's workload. Both of the Glasgow and Columbia leases expire this fall. CoStar listing manager continues to be very additive to CoStar's research process. Many brokers like to have direct control over when and how their listings are presented. With brokers self-entering quality information, it frees up our researchers to continue to gather even more information as they perform their monthly update cycles. We are not seeing any slowdown to the robust start from broker entry we had in the first six months of CoStar Listing Manager. In June, 23,000 new listings were entered directly into CoStar by brokers as 38% of all new listings we experienced. In the same month, 36% of all listings, or 297,000, were added directly by brokers and owners using CoStar Listing Manager. We believe as brokers learn more about Listing Manager, their participation will increase even more. Our CoStar product development teams have been working hard to deliver a significant update to the core CoStar platform. We expect this will provide a far more intuitive user experience to search, filter and view results, generate reports and produce visually stunning analytic charts covering every important measure within the search results. The upcoming release is not just a big leap forward aesthetically, but it's been optimized for serious performance. Searches resulting in tens of thousands of records will typically return in less than a second. In fact, it's often measured in milliseconds. Yesterday, I ran a series of searches in the updated CoStar and initially thought something was wrong because the screens weren't really changing as I did the queries. Looking more carefully it turned out it was actually moving so quickly I couldn't see the results coming back. The results just seemed to appear instantly. Clients really like speed in software, so they're really going to like the updated CoStar. They should. So there is one person who has listened to every one of CoStar's 80 earnings calls. It's Frank Carchedi, who was our CFO when we went public until he retired in 2007. Frank is addicted to CoStar, so Frank unretired in 2009 for an extra nine years and has played a valued role in our M&A team. He's also successfully managed a number of our acquired companies. We all want to thank him for making CoStar's incredible journey from $5 million of revenue a year to $100 million a month possible. It would not have happened without him. Frank is going to be retiring this fall, and I'm confident that even in retirement, he'll be there for our 100th earnings call, watching over his CoStar shares. I will make sure I speak loudly so he can hear me. This summer, the U.S. economic expansion has entered its 10th year. Yet growth seems to be accelerating rather than slowing. Consensus estimates for the 2018 GDP growth are strong, and recent job growth has been solid as well, all of which is good for commercial real estate and apartment demand. For investors, prospects of rising interest rates have been the primary cause of concern in the commercial real estate industry as cap rates had compressed to record levels. However, the 10-year Treasury reverberated its trend after crossing 3%, and some of the interest rate fears have eased. Record capital is being raised for real estate investment, and that should support real estate values in the future as well. The investment sales market has been fairly steady over the past 2.5 years, with investment sales volume peaking in '15, steady in '16, down a bit in '17 and so far in '18 as well. All four major sectors of commercial real estate have performed well in this economic cycle; occupancies exceeded the best readings of the last cycle and rent growth easily surpassed inflation. This year is turning to be a bit of an exception. Net absorption, a measure of tenant demand, is slightly down year-over-year for all property types except multifamily. This is not surprising as industrials had a tremendous run-up due to e-commerce growth. Retail is on a painful side of the e-commerce coin as more people stay at home with full employment; the office sector is starting to feel the slowdown of office job creation, inevitably resulting in slightly lower demand growth. On the supply side, the slowdown in completions has been similar across all property types, with deliveries this year running below last year's totals, making the market fundamentals look as healthy as they were at the beginning of the year. Rent growth among the property types is diverse, with industrial being the clear winner at just under 6% year-over-year growth, while retail is lagging at 1.4%. The apartment sector is worth highlighting as after a strong supply pipeline and weakening fundamentals, the market is recovering once again with rent growth accelerating up 40 basis points to 3% compared to the end of last year. So, the highlights of the second quarter include great sales growth, cost reductions, strong margin expansion, successful new product innovation, phenomenal marketplace traffic, strengthening customer relationships, outstanding competitive positioning across multiple products, and all in all a solid economic outlook. I will now turn the call over for everyone's favorite part of the earnings call to our CFO, Scott Wheeler.

Thank you, Andy. Great list of highlights; I don't think I can top that. Yes, we are making great progress against our operating objectives for 2018, and we continue to deliver strong financial results. We certainly remain confident about the trajectory of the business moving forward. As Andy mentioned, we delivered outstanding sales this quarter with $45 million in net bookings, which exceeded our expectations overall and we're up 23% from the second quarter of 2017. We are particularly encouraged by these results as there are a number of initiatives currently underway across our sales team. Our commercial real estate sales force continues to convert former LoopNet customers to higher-value CoStar and LoopNet marketing contracts at a solid pace. Through the end of the second quarter, we've converted approximately 9,300 LoopNet customers to CoStar and our marketing contracts at an average price of approximately $527 per month. On average, these LoopNet users were paying only $54 per month for an average monthly price lift of $473 per month, consistent with our results last quarter. At this point, we have generated $53 million in annual incremental contract revenue from the LoopNet conversion. In addition, we initiated our pricing and licensing compliance program in the second quarter, resulting in higher prices per user on new contracts. We expect that this effort, along with our focus on client service, will result in improved sales and customer value over the long term. Our focus on LoopNet as a marketing site is certainly paying off. LoopNet sales were particularly strong in the quarter, as the commercial real estate field sales team increased their LoopNet advertising sales over 250% compared to the second quarter of 2017. Our field sales team is becoming increasingly effective at selling power ads in the second quarter, selling seven times the level that they sold in the second quarter of 2017. Now granted, this is from a small base, but the momentum is certainly encouraging. Finally, we had our best month of multifamily growth sales ever in June, which is impressive considering our focus on integrating the ForRent and apartment sales forces in the second quarter. The anticipated cancellations of some legacy ForRent clients resulted in lower net bookings for multifamily in total, which we expect will be short-lived as we complete customer integration and we continue reducing the ForRent property cancellations. Switching over to revenue, our growth rate was 25% in the second quarter of 2018 over the second quarter of 2017, coming in slightly above the high end of our guidance range. As we indicated last quarter, we are now actively moving existing customers and selling new customers a combined multifamily network product that includes both the Apartments.com and the ForRent family of websites. Accordingly, we're no longer able to effectively calculate an organic growth rate for multifamily or for the company in total. Overall, our revenue growth in our two largest businesses, CoStar Suite and multifamily, is very strong, and we expect consolidated revenue to grow in a range of 22% to 24% for the year, a slight improvement over our guidance from the first quarter of 2018. Looking at our revenue performance by services, CoStar Suite revenue growth was an outstanding 18% in the second quarter of 2018 versus the second quarter of 2017, a significant increase from the 13% annual growth rate we reported just a year ago in the second quarter of 2017. We expect CoStar Suite to continue delivering elevated growth levels, with the growth rate for full year 2018 at or near the low end of our 18% to 20% guidance range. Revenue growth rates in information services were negative 14% in the second quarter of 2018 as expected due to the shutdown of the LoopNet information services in the first quarter of this year. Excluding the LoopNet information services, our Real Estate Manager and other services in this group grew a whopping 57% in this quarter over the second quarter of 2017. Real Estate Manager continues to exceed our expectations with growth in excess of 100% in the second quarter of 2018 over the second quarter of 2017. With the shutdown of LoopNet bringing the integration substantially complete and the strong growth at Real Estate Manager, we expect information services revenue to decline at a rate of negative 12% to negative 15% on a year-over-year basis in 2018, a significant improvement from our last outlook. Multifamily revenue grew 54% in the second quarter of 2018, including the impact of the ForRent acquisition. The integration is progressing ahead of schedule, but there's still a lot of work left to do. Accordingly, our revenue expectations remain unchanged, and we expect multifamily revenue growth of 40% to 45% for the year. Rounding out our services performance, commercial property and land grew 16% year-over-year in the second quarter of 2018. Organic revenue growth, normalizing for the May 2017 acquisition of LandWatch, was 12% in the second quarter of 2018 versus the second quarter of 2017. With strong sales levels in both LoopNet and the Land marketplaces, we expect revenue growth rates to improve through the rest of 2018 and expect organic growth in commercial property and land in the 13% to 15% range for 2018. Our gross margins came in at 77% in the second quarter of 2018, in line with last quarter. Gross margins in the second half of 2018 are expected to remain in line with the second quarter, improving slightly towards the latter part of the year following the closure of our Columbia, Maryland and Glasgow, Scotland research facilities. Our outlook includes some severance costs associated with these changes and modest savings in facilities and staff costs in the latter quarters. Operating expenses of $186 million for the second quarter of 2018 were below our estimates as we are laser-focused on delivering our margin goals for the year. Approximately $3 million of our expense favorability in the quarter was associated with lower than expected personnel costs. Marketing expenses increased seasonally as expected in the second quarter, although we pushed approximately $3 million of our marketing spend out of the second quarter and into the third quarter of 2018. The balance of the expense favorability related to focused cost management and operating efficiencies across the business, including better-than-planned results in the ForRent integration. Our second quarter 2018 adjusted EBITDA was $85 million or 29% of revenue. This was approximately $15 million above the top-end of our guidance range and a full 600 basis points above our projected margin. We're very pleased that we were able to maintain this high level of adjusted EBITDA margin in the second quarter when advertising and marketing costs reached their peak for the year. Net income for the second quarter of 2018 of $44 million increased an impressive 98% compared to the second quarter of 2017. Our effective tax rate in the quarter was 4%, which includes income tax benefits of $6 million for state-level research and development tax credits for the years 2013 through 2017, along with $3 million of tax benefits associated with share-based payment transactions. Non-GAAP net income for the second quarter of 2018 increased 114% to $60 million or $1.66 per diluted share and includes the adjustments for stock-based compensation and acquisition-related expenses. Non-GAAP net income for the second quarter assumes a tax rate of 25%, which does not include the tax benefits of share-based payment transactions or the R&D tax credits we took this quarter. Now let's take a look at some of the performance metrics for the quarter. At the end of the second quarter of 2018, our sales force totaled 775 people. The decline from the 905 salespeople at the end of the first quarter relates primarily to the reductions associated with the ForRent integration. The renewal rate on annual contracts was 91% in the second quarter of 2018, up from 90.6% in the second quarter of 2017. The renewal rate for customers who've been subscribers for five years or longer was an impressive 97%. Subscription revenue on annual contract accounts for 77% of our revenue in the quarter, down slightly from 79% last quarter due to a full quarter impact from ForRent, which has a lower percentage of revenue on annual contracts. As with most of our acquisitions, we expect this percentage to start increasing again as we convert more customers to annual Apartments.com full network contracts. Before I get to the outlook, I'd like to give you an update on the ForRent integration. Our efforts to convert ForRent customers to the new Apartments network product is on track, and revenue retention is ahead of our expectations so far. Today, we have reduced approximately $20 million to $25 million in annual costs, which include staffing reductions of over 200 people and the elimination of other duplicative operating costs. We've incurred $9 million of non-recurring integration costs in the second quarter and $12 million year-to-date, which are included in our results and added back in our non-GAAP financials. Overall, we're very happy with the pace and execution of the integration and expect to be substantially complete within one year of purchasing ForRent. I'll now discuss our outlook for the full year and the third quarter of 2018. Based on strong year-to-date revenue and sales results, we are raising our 2018 revenue outlook by $4 million at the midpoint from our previous guidance. Our new 2018 revenue outlook is expected in the range of $1.18 billion to $1.192 billion. This revenue range implies an annual revenue growth rate of 22% to 24% compared to 2017. We expect revenue in the third quarter of 2018 in the range of $304 million to $307 million, representing top-line growth of around 23% at the midpoint. In terms of earnings, we are raising our guidance range for the full year of 2018 by $0.31 at the midpoint to a range of approximately $7.75 to $7.95 for non-GAAP net income per diluted share, and that's based on 36.5 million shares. We expect adjusted EBITDA to be in a range of $395 million to $405 million for the full year of 2018, an increase of $15 million compared to our previous outlook. Year-over-year, we expect adjusted EBITDA growth of approximately 40% to 45%. For the third quarter of 2018, we expect non-GAAP net income per share in a range of $2.02 to $2.10 and adjusted EBITDA in a range of $102 million to $106 million. We expect adjusted EBITDA margins to increase in the third quarter and again in the fourth quarter as marketing costs decline and we continue to progress with the ForRent integration. We expect to meet or exceed our goal of 40% adjusted EBITDA margin in the fourth quarter of 2018. Overall, I believe the strong results in the first half of 2018 position us to continue our revenue growth trajectory and margin expansion. I look forward to updating you on our progress throughout the year. With that, I will now open up the call for questions.

Hi, thanks. Good afternoon. You've converted 9,300 LoopNet customers through the end of Q2. Can you elaborate on the cadence of LoopNet conversions in the second quarter relative to earlier quarters, and how you expect future quarters to compare with Q2 with respect to conversion speed, conversion rate and the amount of pricing lift?

Pricing remains steady from Q1 to Q2, and we anticipate it will remain the same in Q3 and Q4. We are implementing some new marketing initiatives that we have been developing, which will launch in Q3 and Q4 and may enhance our conversion pace. Additionally, we are improving software to enhance the LoopNet product upsell experience, and we expect to maintain a solid momentum. As mentioned previously, we believe our conversion will continue at this rate for at least the next two years. Even after conversion, many former premium searchers will continue to utilize LoopNet as a crucial channel for upselling to CoStar. This allows us to effectively target individuals who require commercial real estate information with tailored marketing messages. Overall, the performance has been strong and should remain consistent for the foreseeable future. One point of consideration is that we are optimistic about the upcoming marketing enhancements for LoopNet. We have been ensuring that our sales team is well-versed in LoopNet's marketing solutions across CoStar Group. This has required some adjustment, shifting focus from information conversions to selling the LoopNet marketing solution. Nonetheless, we are very pleased with the overall results.

Good afternoon, guys. Congrats on a nice quarter.

Great. Thank you, Bret.

On the bookings number of $45 million, that's a focus some people have had. Can you provide some context around that, particularly regarding the planned cancellations or shutdowns from LoopNet that negatively impacted it? Can you quantify that for us again? Additionally, can you estimate the negative impact on pricing integrity concerning that $45 million? I believe those are questions we will receive frequently. Thanks.

Yes. So Brett, on the components last quarter, we took a large reduction in the LoopNet info; I think we talked a lot about that. This quarter there's only about a $1 million of negative drag for LoopNet info. The other transition item in this quarter as we do for rent integration is that we're seeing somewhere around $4 million or so of cancellations that come through as we work through the customer base and move the clients over to the network contract. So the pace and the revenue conversion for ForRent is happening as expected. But as you expect, there are a couple of quarters where you're going to see the cancellations to solidify all the revenue there. So that pulls the number down just a little bit more. But I think as you look at what we've done really on the CoStar side and we talked about the LoopNet conversions, there are still strong. The CoStar field team has really put in some great effort now selling more of the LoopNet product; in fact, 25% of their output is now selling LoopNet marketing, and it used to be 10% a year ago. So you see a little bit of shifting over to that commercial property and land which we talked a little bit about. And then, on the pricing side, the value increases there on the contract basis, I don't think we have a real slowdown in the quarter to talk through on pricing. I think it's more of the focus on the service initiatives, the LoopNet cross sells, and then continuing the pace following the large discounting that impacted the sales in the first quarter or the second quarter. So hopefully, that gives you some context on the different pieces.

Yes. And again, the ForRent cancellation number, we are outperforming that number. So when you put together two or three marketplaces, you expect to get very significant cost efficiencies, you expect to lose significant redundant advertising dollars which we're seeing, but we're actually getting a better-than-expected result on that. So we're really kind of happy with the way it's come out.

Yes. Our net sales for the quarter came out ahead of what we expected. Obviously, that's what allows us to raise our revenue guidance; it's in a few different buckets and what it may have been in the first quarter, but our sales are always volatile quarter-to-quarter. We're happy that we're in this mid-40s range this year; we were in the mid-30s range most of last year and we're happy with the momentum we have going forward.

Hey guys. Good afternoon.

Good afternoon, Andrew.

Like the same day conference call; it's turning into a tradition, I guess.

No extra charge for that.

Much appreciated. With regard to cross-sell as you've seen this nice success with LoopNet, any updates in terms of what you think the total cross-sell potential is? I know you've talked about, Andy, as much as a couple of hundred million dollars. Is that still a good long-term expectation, how can we think about that maybe nuanced or from a timing standpoint too?

Yes. I absolutely still believe that number is a multi-hundred million dollar number. I consistently believe that to be the case. And as you know, there will be two components sort of like that just looking at the number we have right now this quarter; relatively early on, it's a pretty solid number for cross-selling. But you've got two really solid legs you're working here. One is the selling LoopNet to CoStar customers and the other is selling CoStar to LoopNet users or former customers. And they're both - I feel very optimistic about both. And it will naturally waiver up and down slightly; you will have some volatility from quarter-to-quarter, but it will be a real consistent message line for the next three years.

Good afternoon, guys. Nice trend. Andy, can you rank some of the key reinvestment areas that you're looking at again sort of the next 12 months?

Yes. I mean just generally, one of the key areas is transformational product initiatives. We're working on at Apartments.com. We look at the apartment industry not just - it's not just a lead generation opportunity for the institutional great properties over a hundred units. We think there's a really exciting opportunity for us generally facilitating the leasing of apartments from the individual unit on up to the 400-unit property. I don't want to get too specific into some of the issues we're working on, but we are cranking on some product initiatives that we're pretty excited about, and I think they'll probably - they're going to require some investment and they are taking some investment now, and there will be something that matures over the course of 18 months or so. But when we are ready to bring this to market in the beginning of '18, we'll talk about them more explicitly. There are - we continue to feel that there - like ones or continue to feel there's an awful lot of opportunity in the owner-lenders segment of our industry. We've got some very exciting products we're working on to enhance CoStar to make it more useful for our many banking clients and try to win deeper penetration there. And we also believe that there is a significant global opportunity, so we continue to invest into Spain, and we'll be doing some investments into France where we already have a footprint. And the United Kingdom will probably begin cash flowing a little bit more, so they'll be priced for transfer investment into Germany. And so it's - those are some of our bigger initiatives. Something I forgot, Scott, that we're thinking about.

Certainly the LoopNet marketplace.

So the LoopNet marketplace, and you can see the numbers are really solid there. And you know that is becoming, I think that that has an opportunity; the LoopNet marketing commercials real estate on the internet, I believe is an opportunity on par with marketing apartments on the internet. So we're going to invest behind that a little bit over the next two years. And then we might also do some additional investment into the businesses for sale areas at the tail end of that 12 month horizon. So we're exploring a number of different things there. Obviously, remaining sensitive to achieving our 40% margin goal and beating it in the fourth quarter and then remaining somewhat consistent to that high margin level — remaining consistent with high margin level ongoing and out years. So we're balancing reinvestment in the business with maintaining the high margin levels. There is absolutely no shortage of potential investment initiatives; just a question of prioritizing the really exciting ones upfront work and then in as fast a process as we can responsibly and efficiently run these initiatives.

Thank you. Good evening. Scott, you touched on some of the pricing lift, and obviously, that has a lot to do with the LoopNet conversion. But could you just maybe parse out the growth rate that you expect going forward for '18, and then maybe longer term as well as in terms of how it breaks down between increased penetration within the installed base adding new customers? And then, of course, any other pricing uplift beyond the conversion on LoopNet?

Yes. So the growth rates going forward, we still expect to get about half of our growth from existing accounts and further penetration or broader geographies, and we expect to get about half from new business and getting new logos. We're seeing that pretty consistently; it doesn't change a whole lot. And the other area now that we're seeing more growth is really not only the pricing on the CoStar side, but as we've done more pricing on the LoopNet side for unlimited lister contracts and now on our listing plans, we're seeing good upward movement in pricing on the LoopNet side as well. But what we haven't called in really into the rest of the years is that the pricing right now has been on new contracts coming in for new customers. We have not begun our program on a scale basis to do repricing on existing contracts as they roll. And we expect that will start to work its way into the rest of the year and become a bigger impact into next year.

And that last point that Scott was making is huge. So on our existing customer base, we have not had in place rigorous processes to evaluate each contract renewing and making sure that it's appropriately priced at the point of renewal. So there is a lot of potential value, particularly in firms that might have signed up many years ago, have merged and grown about a lot of people have grown their footprint and our enterprise licensing hasn't kept up with that. So one of Scott's primary initiatives is setting up the systems around that to make sure we're capturing that appropriate revenue uplift. And then also making sure that our commission schedules support that; but that could be in — that alone over the next three years could be $100 million in uplift, right pricing those. So we'll continue to see this higher average price point hold, I believe. And then just the mix shift of going from marketing products to brokers in LoopNet to marketing products to owners, I think has an enormous net price uplift impact. So it'll be pretty significant for the next three years.

Thank you.

Good evening. In the past you have shown the number of advertising multifamily properties. Now that ForRent has come online, I wonder if I could get an update on that metric. And then, directionally, what portion of those properties are on a premium-level package versus a basic package? How much have you found that base already? Thank you.

Unfortunately, the sheet that was printed on I removed from the conference room to go grab something. I took it from Rich half an hour ago just before the meeting started. So we are at 42,147 on the Apartments.com before the ForRent came in. And the real impressive growth there is at the upper end with a 55% growth in our highest-end ad, the diamond ad, and then the silver ads only growing at 3% year-over-year. So the single highest growth category that people are buying is that premium level ad. So that's good news. And the reason is we're delivering a lot more leads and a lot more value and more value increase to the advertiser than the price is going up. And then overall it's 48,490 when you combine the ForRent apartments. Again, we will mark when we hit the 50,000 mark because that's like a hugely impressive feat of strength in the apartment marketing industry.

Yes. Thanks. Good evening, guys. How should we think about the factors that drove the adjusted EBITDA outperformance in the second quarter, coming in at $85 million versus guidance, I think $66 million to $70 million? You talked about the $3 million push out of advertising expense, but how much of the outperformance was driven by ForRent? What other factors may have driven it? And did you adjust your profit assumptions for ForRent over the remainder of the year?

Yes. You mentioned the marketing piece which was the part that shifts out. The rest of the outperformance was all from strong cost management and then a few million dollars of extra revenue that we had over our expectation. Yes, there's probably $2 million or $3 million of better-than-expected cost from the ForRent integration in the quarter. And so we expect that those benefits continue; we flowed the full $15 million of outperformance on EBITDA through to the guidance for the year. So we're confident that the things we're doing outside of the push in the marketing have to do with managing resources tightly as well as accelerating the ForRent integration and watching every other operating cost that we have, which we get a lot of duplicative marketing and other contracts that you find as you go through these integrations, and those we were able to get out the door quicker than what we expected. So it's a solid performance managing headcount closely and taking out those duplicative costs gave you that outperformance.

And Scott overlooks completely the single biggest factor, which is we tied 100% of all the senior executive team's bonuses for the year on meeting the 40% EBITDA margins—adjusted EBITDA margin target for the fourth quarter. And I have reminded them at every single executive meeting that it's either make the target or not...

That's true. You know that, every meeting.

Good afternoon, everyone.

Hello, Bill.

So, 100 hours of calls, I can say it only feels like half of that. And also before I forget, I just wanted to wish good luck to Rich on his less than a month left of bachelorhood.

Thank you. Angela will appreciate your mention.

My question has to do with one of those figures you threw out in terms of 41% more leads and higher quality, better conversion rates. And so my question is, what are you doing to better demonstrate the higher quality to the potential buyers? And also then, what are you doing to better monetize those leads? And can you somehow use that $1 billion in cash that you're sitting on to accelerate that process?

I appreciate your question, Bill. It's quite interesting that we have partnered with two leading providers of lead tracking services in the apartment industry. One of them, LeaseHawk, has analyzed 10 million incoming leads to apartment communities. Their service indicates that we generate the highest volume of leads and have significantly higher conversion rates than other sources, which is crucial for our clients as each lead represents an opportunity and incurs processing costs. We are collaborating with these third parties to communicate this data, along with the tracking metrics we offer, and our clients recognize the substantial advantage we provide. Many have mentioned that they previously needed two or three services for their lead flow, but now they receive all the leads they require just by advertising with the Apartments.com network. In conversations with clients, nearly all have confirmed that they measure and monitor leads, and they unequivocally acknowledge us for generating the most and highest quality leads. This is a strong narrative, and we believe we are effectively conveying it. With the lead flow and conversion rates increasing dramatically, the volume of leads this past quarter was surprisingly large, indicating a potential for price adjustments. We aim to explore these pricing opportunities while ensuring we remain reasonable. The growth in lead flow has exceeded our expectations, and we intend to find ways to capture additional value we provide. Regarding our cash balance, we are actively exploring market opportunities and have multiple prospects in consideration. We are being selective and not pursuing overvalued opportunities in this market cycle, focusing instead on reasonably priced assets that we believe could yield significant returns. We are committed to managing this balance diligently and pursuing the right opportunities.

Yes. Thanks. Hi, guys. Just one question on LoopNet conversions: of the 100,000 or so targets that you're going after, what percentage have you now kind of reached to do kind of the meetings and demos at this point to try to convert them?

I don't have an exact figure in front of me here, so I could only give you a guesstimate. And I would imagine it is 20% or so. But also remember that my experiences over the years has been that often you'll have a quick sale cycle where you meet with one of those conversions and they close within 30 days. So your initial conversion rate—initial close might be 50%. Your three-year close rate might be 75%. So you have the first run of it, and then those people often reconsider or eventually come around to it. So we have a motto here in our sales organization that eventually they all buy. It's just a question of when they see the light and they are ready to get a fantastic ROI for their investment in CoStar.

Good afternoon. Thank you. Are you seeing any trend in non-traditional users across any of your platforms? And if so, does that impact future product releases and/or marketing campaigns? Thank you.

We've experienced significant changes, particularly with the increase in owner participation. Initially, brokers were our main drivers; now, our largest customer base consists of owners, and this segment continues to grow. This shift is a key priority for our product developments. We also have a surprising range of unexpected users for our products—when reviewing various brands, it often raises questions about their purchases. Sometimes, there are valid reasons, such as the need to assess radio transmission blockages in buildings for calculations. There's always activity in this area. I believe the banking sector represents the next major opportunity for us. We can enhance our clients' loan portfolios with effective surveillance and robust underwriting tools at a reasonable cost, allowing us to create valuable solutions for the banking industry. We have initiatives underway in that direction. Additionally, we're developing tools for CMBS investors that provide early insights into the economic conditions of properties within their portfolio, ahead of the information being reported by servicers. This creates an information advantage, and I see strong potential in these tools. Currently, we are concentrating on expanding larger blocks of opportunities, aiming to increase contributions from segments that traditionally accounted for 4% of our revenues to 10%. There are likely five or six of these segments.

Thank you very much for joining us for our 80th CoStar earnings call. We look forward to updating you on our progress for the third quarter before long. And again, thank you very much for joining us.