Costar Group Inc (CSGP) — Q4 2018 Earnings Call Transcript

Thank you, operator. Welcome to CoStar Group’s fourth quarter and year-end 2018 conference call. Before I turn the call over to Andy Florance, CoStar’s CEO and Founder; and Scott Wheeler, our CFO, I have some really interesting and important items for you. 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 in our press release today on February 26th for our fourth quarter and year-end earnings as well as the Company's outlook and 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 at the time of this call. CoStar assumes 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 the non-GAAP financial measures discussed on this call including, but not limited to non-GAAP net income, EBITDA, adjusted EBITDA and forward-looking GAAP guidance are shown in detail in our press release issued today along with definitions for these terms. The press release is available on the Press Room section of our website located at costar.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 our press release on how to access the replay. Remember one question, so make it a good one. I'll now turn the call over to Andy.

Rich, that was authentic and moving. Thank you. Thank you all for joining us for CoStar Group's fourth quarter 2018 and year-end earnings call. The first number I want to focus on is our adjusted EBITDA margin in the fourth quarter, which was 44%. By achieving that strong margin, we have successfully accomplished an important financial goal. Five years ago in 2014, we set two key long-range financial goals for 2018, one was to achieve $1 billion in annual revenue; and the second was to reach a 40% adjusted EBITDA margin for the fourth quarter of 2018. Today, five years later, with $1.2 billion in revenue for the full year 2018 and a 44% adjusted EBITDA margin in the fourth quarter, our team is pleased to have solidly delivered on both of those goals. Delivering this sort of consistent growth is on target with our long-range record of good growth. Since 2011, we've achieved a 25% compound annual revenue growth rate, which is in line with our 20-year compound annual growth rate of 25%. For the full-year 2018, our adjusted EBITDA margin was 35%, over 600 basis points of improvement over 2017. EBITDA in 2018 was $351 million, an increase of 48% compared to $237 million for 2017. Net income was $238 million in 2018 compared to $123 million in 2017, a 94% increase. The past five years have proven that we can grow the top-line, expand margins and still make significant growth investments into the business. Some of those recent investments include the Richmond Research Center, expanding and marketing the Apartments.com network, growing our sales team, integrating the CoStar and LoopNet databases, and expanding our Canadian and European businesses. Our most significant growth investments are products and software development. Those investments have allowed us to build powerful, profitable businesses with strong leadership positions with CoStar Suite, the Apartments network, CoStar Real Estate Manager, LoopNet and many others. Because of our exceptional technology, deep understanding of real estate and the value of our connected commercial real estate communities, we have created transformative value for our clients. We are now attracting 42 million people to our websites monthly and have earned the business with 150,000 CoStar subscribers. This has enabled us to balance investing back into our business while still significantly expanding our margins. CoStar Group holds a leadership position in the exciting transformation of a multi-trillion-dollar real estate industry moving from offline to online. We have positioned the Company well for the enormous long-term opportunity that lies ahead of us by building an exceptionally strong balance sheet. We have $1.1 billion in cash, no debt, and $351 million of growing EBITDA to leverage. CoStar Group has acquired dozens of companies and expects to continue acquiring companies that will bring value to our shareholders. CoStar Suite revenue grew 18% in 2018 over 2017. Commercial property and land, which includes LoopNet.com as well as our land and business sites, grew 16% year-over-year in the fourth quarter of 2018. For the full-year of 2018, multifamily revenue grew 45% versus 2017, as our multifamily revenue increased to $406 million. CoStar Real Estate Manager grew an astounding 124% year-over-year and is already off to a strong start this year. That’s right, 124%. We now have more than $1 billion of visible, high-margin, recurring or subscription revenue. Company-wide net new bookings of $50 million in the fourth quarter of 2018 were the best we've ever achieved. That’s an increase of 15% year-over-year and 26% over the third quarter of 2018. Remember that the fourth quarter 2017 was an exceptional quarter for us as one of our long-term competitors filed bankruptcy. For the full year of 2018, we turned in another top performance with $169 million in net new bookings. In a sense, even that number is understated because it does not include all the work our sales team did in signing tens of millions of dollars of ForRent revenue into Apartments.com contracts. In the fourth quarter 2018, we signed two large brokerage firms to new, multiyear contracts. The contract we signed with CBRE was our first global contract. CBRE has been a great longtime customer of CoStar and their users are spending more time in our products than ever before. In 2018 CBRE users doubled their time spent working in CoStar over 2016. This is a testament to the growing utility of our products to top industry players. Marcus & Millichap also signed a multiyear contract renewal with us, and they pointed directly to improvements made in research, particularly our tenant data as a reason for going forward with us and expanding the volume of services they buy from us. They're also renewing and growing Canadian contracts with us. In 2018, our CoStar field sales force began focusing on selling LoopNet in addition to CoStar. We did this because it makes good sense and we feel that our customers prefer one point of contact. As a result, net new year-over-year bookings for LoopNet.com increased by 74%. With two products to sell, the sales force is selling a bit less CoStar but signing much more of the combined services. Clearly, this is a good tradeoff. Our Apartments.com sales force is doing a great job. The fourth quarter of 2018 was our best sales quarter ever for Apartments.com. Our sales force has essentially completed, converting ForRent customers to Apartments.com customers, so they now have more time available to focus on signing new business. Hitting a record Apartments.com sales quarter in the fourth quarter is a remarkable achievement, given the fact that historically apartment internet listing services suffered from sharp seasonality and historically would contract in the fourth quarter. So, setting records in the fourth quarter is great. Our Apartments.com sales force knows the power of client service and how it leads to more sales. In 2018, they conducted 309,000 client meetings and most of our reps averaged nearly seven meetings per day; some are averaging almost 10 client meetings a day. An independent group within CoStar follows up many of these meetings by calling and asking the client on a scale of 1 to 10, how likely they are to recommend Apartments.com to a friend. On average, our clients give us a score of 9.64. One of our best reps, Nicole Gagliardi across 1,000 meetings, scored an outstanding 9.94 and A++. I believe the sales team is the best in the industry, and I'm looking forward to another excellent year with them. In 2018, according to comScore, the Apartments.com network had half a billion visits for the full year, up 33% over 2017. In one month, according to Google Analytics, we saw 57 million visits across the Apartments.com network. We averaged 17 million unique visitors per month over the course of the year, according to comScore, which is an increase of 35% compared to 2017. This is by far the most in the industry as we continue to pull away from RentPath, which only had 208 million visits in 2018 and averaged less than 8.8 million unique visitors per month. Even more impressively, for the full year of 2018, Apartments.com leads were up 43%. With almost 300 million more visits than RentPath and great lead flow, we believe the obvious choice for an advertiser has to be Apartments.com. In 2018, 4,600 properties advertising with RentPath started advertising with Apartments.com. We estimate that there are only 6,000 to 8,000 that still advertise on RentPath and do not yet advertise on Apartments.com, and we are focused on capturing that business. In 2018, RentPath got a little competitive holiday where we focused on the ForRent conversion, but in 2019, we will dramatically increase the competitive intensity. We believe that RentPath may have a ticking time bomb of a pricing problem. We believe that similar apartment properties in the same city are paying wildly different prices for essentially the same advertising levels. This may have happened because they used to have a much better share of traffic and RentPath may be relying on long-term clients to keep paying yesterday's higher prices that might have been justified years ago when the traffic was good. But now these prices may not make any sense. How will long-term clients react if they find out that new clients are paying a fraction of the price for the same product? It used to make sense to pay $3 a minute to use a 10-pound mobile bag phone and you were cool. Today, a cellular provider would not be able to sustain that $3 a minute pricing for long in a highly competitive market. We now have over 50,000 properties advertised on our network, up from 18,000 when we purchased Apartments.com in 2014. In just 10 months, we have successfully integrated ForRent, the largest acquisition we've ever made. We're increasing our 2019 Apartments marketing budget by 11% year-over-year, in an effort to gain more share. We expect to launch our new, bigger 2019 marketing campaign shortly. The campaign will once again feature Jeff Goldblum as Brad Bellflower. The 2019 campaign is called "Enter the Apartmenternet." There will be a lot of futuristic technology and special effects that will make the ads fun and memorable. We hired director Taika Waititi, famous for directing the recent blockbuster smash hit, Thor: Ragnarok, to direct our spots, so that the production value and quality will be truly first-class. We just wrapped up filming these new TV spots. In the series, we emphasize the vast array of alternative futures the renter can potentially have by choosing various apartments. The aggressive plan calls for over 8,000 television ads, 6 billion digital impressions, and 300 million streaming impressions to reach 95% of renters. We expect that the net impact of this investment will be well over 600 million renter visits in 2019 to the Apartments.com network. According to Company estimates, there are 14 million apartment units in larger apartment buildings with 100 units or more. That represents only 31% of the 45 million rental units in the United States. Despite the fact that it represents only 31% of the market, the overwhelming majority of Apartments.com’s revenues come from this upper 31% of the market. 84% of the 540,000 apartment buildings in the U.S. are smaller and have between 4 and 100 units. In addition, there are 17 million other units altogether that are in condos, townhouses, or properties with less than four units. These smaller properties are owned by what we call the independent owners or the IO market. The IO market does not have the scale and resources of larger players like Greystar, AvalonBay, Pinnacle, and other large property managers; we believe that without the benefits of scale, independent owners spend more time and money leasing each unit. We further believe that there is far more absolute revenue potential in the independent owner and small apartment building market than there is in the upper end or institutional market. We believe we've done a better job than any other online company at monetizing the upper end of the market. Now, in 2019, monetizing the other 69% of the United States rental housing market will become our top priority. We have been and expect to continue to invest very aggressively in building out the software platforms and products that we believe will enable us to provide compelling online rental solutions that appeal to both renters and independent owners. We want to take many of the traditionally offline or disparate functions required to lease an apartment and move them into one seamless, online, easy-to-use solution. It's an exciting project to work on and we're motivated by the potential to have a very positive impact on tens of millions of renters and independent owners. Part of that effort includes our November purchase of Cozy Services. They’re a leader in the online rental property market and have nearly 60,000 landlords using their services. There are approximately 150,000 renters making lease payments through Cozy, totaling $1.7 billion in 2018. We believe that Cozy provides a best-in-class solution for one of the key components of the rental process, so we're integrating Cozy into the Apartments.com full rental cycle. We will control the costs associated with selling solutions to a much larger audience at lower price points by relying on e-commerce sales to monetize the higher volume independent owner market rather than using our field sales force. It's our goal that this new solution will form the foundation of our 2020 marketing campaign. We plan to share more details about our new products as we get closer to launching them. 2019 will be the first full year that LoopNet's position as a pure online marketplace, like Apartments.com rather than a hybrid information solution and marketing platform. LoopNet has become a vital utility for tens of thousands of commercial real estate professionals seeking to market their properties to the millions of tenants and investors looking for commercial real estate online. LoopNet is the most heavily trafficked commercial real estate marketplace with approximately 5 million unique visitors in a month. LoopNet generates $127 million of annual revenue on a very high margin. While we’ve more than tripled LoopNet’s marketing revenues since CoStar acquired the Company in 2012, we believe that we can further innovate and evolve the LoopNet solution and more than triple the revenue again with a focused effort and site relaunch. Early in LoopNet’s evolution, it was best suited to marketing smaller properties, often for sale properties in suburban areas, or tertiary cities. The economics on these smaller properties are a fraction of the economics involved in leasing large office properties or industrial. While CoStar group has years of experience marketing tens of thousands of major properties for office leasing, LoopNet was not originally optimized for marketing and leasing prestigious, brand-conscious office buildings. In 2019, we're investing aggressively to redevelop and relaunch the next generation of LoopNet, so that it better meets the needs of a much broader cross-section of the commercial real estate industry. This effort is very similar to the success we made by relaunching and repositioning the Apartments.com site after we acquired it from Classified Ventures in 2014. This is a comprehensive project, engaging much more than just our software development teams. Similar to the Apartments.com launch, we expect this will engage more than half our Company. We're very excited about the opportunity to exploit the potential of a next-generation online marketing platform for commercial real estate. 2018 ended with commercial vacancies near all-time lows, prices and rents at all-time highs, and leasing and transaction volume setting new records for the year. The ongoing health of commercial real estate is the result of solid economic growth in 2018, which although slowing in the fourth quarter, accelerated for the year, as fiscal stimulus kicked in. Almost 2.7 million jobs were created last year and the unemployment rate is hovering at or below 4%. All of that is great for commercial real estate. The industrial market continues to lead all property types in terms of rent growth, price appreciation, take-up, and new supply. The industrial sector’s outperformance results from the ongoing shift to online buying which has produced strong demand for infill and regional bulk distribution centers across all markets. E-commerce has also affected the traditional retail sector. Retail rents have trailed the other property types, and developers have delivered little new space. However, well-located retail assets continue to show strong performance, and demand for quality space matched with very little new construction has kept overall retail vacancies at historic lows. In the office sector, vacancies fell into the single digits last year for the first time since the early 2000s, the result of healthy absorption and limited new supply. Rent growth at the national level stayed within a narrow band of around 2% over the last eight quarters but has weakened in some coastal markets which are facing higher levels of supply. Many secondary markets, on the other hand, have enjoyed stronger rent growth as new construction remains low. For the multifamily sector, absorption reached a cyclical high as a strong labor market and rising mortgage rates resulted in high demand for rental units. Apartment rent growth accelerated, exceeding 3% for the first time since 2015, and transaction volume and pricing continue to set new records. In summary, 2018 was another remarkable year in an unprecedented streak for commercial real estate. We see no reason that the slow and steady status quo that has defined this cycle won't continue for the foreseeable future. That said, the prospect of rising interest rates and narrowing spreads appear to have broadened into nearly a decade of cap rate compression; the cap rates remain very low. Still, construction remains limited, leasing remains healthy across all property types, and rising mortgage rates could safeguard apartment demand. We're proud to have delivered on the financial goals we set for CoStar back in 2014. We are now coming off our best year ever, and we're moving into 2019 and a strong commercial real estate market with great products, great clients, great people, great research, and a phenomenal sales team. We believe that 2019 will be another great year for CoStar Group and our clients. We told you that upon completing our last five-year financial goal, we would set a new goal for 2023. That goal will be to exit 2023 at a $3 billion revenue run rate with an adjusted EBITDA margin of 40% or more for the full year. While we anticipate acquisitions will contribute, we believe that most of our growth will be organic.

Thank you, Andy. It's a great introduction, feeling very accomplished today. Let me go raise my chair a little. I feel better up here. Yes, 2018, what a great year we had for CoStar, very strong growth, we acquired three businesses, we invested for our future and we expanded our margin over 600 basis points. On top of that, I, for one, am happy we can put these old tired long-term goals behind us and move on to multibillion land next. All right. Let me start with some insights on our revenue results, which in the full year of 2018 increased 23% over 2017 while our growth rate in the fourth quarter of 2018 was 24% versus the prior year. Looking at our revenue performance by services, CoStar Suite revenue growth was 18% for the full year 2018, as expected and 16% in the fourth quarter of 2018, coming in slightly above our 15% guidance range. CoStar Suite sales were very good in the fourth quarter as we continued strong conversion of our LoopNet users to CoStar and we completed the long-term contract renewals with both CBRE and Marcus & Millichap as Andy mentioned. As we head into 2019, we expect the CoStar Suite growth rates to moderate sequentially as they did in the fourth quarter of 2018 and settle in, in the range of 11% to 13% for the year. There are a couple of factors converging here to note. First, we fully lapped the very high revenue growth quarters that followed the LoopNet integration and the Xceligent bankruptcy. Second, we have a sale substitution effect here as our CoStar sales force is focused on selling more LoopNet to accelerate the growth of that marketplace. In total, the team is delivering more combined sales, in fact 20% more in 2018 than in 2017. So, we like this increased productivity. We will see some shifting effect between CoStar and LoopNet. Revenue growth in Information Services was 11% in the fourth quarter of 2018, so our first quarter of positive growth in over two years when we stopped actively selling the LoopNet information product. In fact, that LoopNet information was over 50% of the revenue in Information Services. All that revenue has effectively gone, and CoStar Real Estate Manager and CoStar Risk Analytics have made up the gap. CoStar Real Estate Manager revenue continued its outstanding growth, increasing 165% in the fourth quarter of 2018 versus the fourth quarter of 2017. We expect total revenue from Information Services to increase at a rate of 11% to 13% on a year-over-year basis throughout 2019. It's great to finally put behind this negative growth rate. We had a very strong quarter in the fourth quarter in multifamily as revenue increased 45% year-over-year, including the impact for the ForRent acquisition. For the full year 2018, the average number of properties that advertised on our network increased approximately 25% while the average revenue per property improved 20%. Looking forward, we expect multifamily revenue growth of approximately 20% for the full year of 2019. We expect growth of approximately 30% in the first quarter of 2019 compared to the first quarter of 2018 as we lap the late February acquisition date of ForRent. Growth rates in the second and third quarters should be in the mid-teens due to the negative effect of certain duplicative and discontinued revenues from ForRent that were included in our 2018 results that won't be in our 2019 results. The growth rate exiting 2019 is expected to be in line with the 20% full year outlook for multifamily. Finally, in commercial property and land, revenue grew 17% year-over-year in the fourth quarter of 2018. This strong growth reflects the increased sales of LoopNet marketing products by our national CoStar field sales force. Our LoopNet tiered advertising products performed exceptionally well, growing approximately 50% for the year. For 2019, we expect revenue growth in commercial property and land in the 18% to 20% range. Our gross margin was 77% for the full year 2018 and it came in at 78% in the fourth quarter of 2018, up 200 basis points from the third quarter of 2018 and 130 basis points from the fourth quarter of 2017. We're certainly realizing the benefits of strong operating leverage in our research operations, which we expect to continue as our listing manager tools achieve greater adoption throughout 2019. We expect overall gross margins of 78% for 2019 with margins improving throughout the year to between 79% to 80% by the end of 2019. Fourth quarter adjusted EBITDA of $139 million was approximately $12 million above the midpoint of our guidance range, due to revenue outperformance of approximately $6 million and lower expenses, primarily personnel-related. I know we said it already, but it really never gets old. Our adjusted EBITDA margin for the fourth quarter came in at 44%, above our 41% margin guidance and long-term goal of 40%. Net income for the full year of 2018 was $238 million, 94% ahead of the prior year, reflecting tremendous operating profit growth as well as the R&D tax credits we achieved in the second quarter of 2018. Net income was $9 million ahead of the net income expected in our guidance forecast for the fourth quarter. Non-GAAP net income for the full year of 2018 was $302 million and includes adjustments for stock-based compensation and acquisition-related expenses. This represents growth of 96% compared to 2017. Now, let’s take a look at some performance metrics for the quarter. At the end of the year, our sales force totaled 741 people, a slight increase from the 733 salespeople we reported at the end of the third quarter of 2018. We anticipate a modest increase in the size of our sales force in 2019, primarily focused on CoStar and LoopNet. The renewal rate on annual contracts for the fourth quarter was broadly in line with the rate achieved in the third quarter of 2018 at 90%, which was down slightly from the 91% we achieved in the fourth quarter of 2017. The renewal rate for customers who have been subscribers for five years or longer was 96%, consistent with the third quarter of 2018 and down slightly from the 97% in the first quarter of 2017. Subscription revenue on annual contracts accounts for 80.9% of our revenue in the quarter, up from 79.7% this time last year. We're now one full year past the date we acquired ForRent when we completed the integration. When we announced the deal, we expected to add revenue of approximately $75 million to $85 million with adjusted EBITDA margins expected to be in a range of 45% to 55%. I'm happy to say we achieved our financial objectives after only 10 months. These results are highly accretive as you can tell by our profit results and indicate a post-synergy acquisition price of less than 9 times EBITDA. So, now, I'll discuss our outlook for the full year and the first quarter of 2019. We expect revenue in the range of $1.37 billion to $1.38 billion for the full year of 2019. This implies an annual growth rate of 15% to 16% over 2018. We expect revenue for the first quarter of 2019 in the range of $325 million to $329 million. This represents approximately 19% to 20% growth compared to the first quarter of last year. As I noted earlier, we booked approximately one month of ForRent revenue in the first quarter of 2018, which is why our consolidated growth for the first quarter of 2019 is stepping down from a 24% growth rate in the fourth quarter of 2018. As we pass the anniversary of the ForRent acquisition, we expect revenue growth in the range of 14% to 15% for the remaining quarters in 2019. We'll focus on a number of important growth investments in 2019, while at the same time growing our profit margins. Our top investments for 2019 include the independent owner software platform and products that Andy talked about along with the development and launch of the next generation of LoopNet. In addition, we're developing product capabilities within CoStar that we believe will take advantage of significant growth opportunities with both owners of commercial properties and lenders. We'll also continue to build our network of marketplace businesses, including our international operations in Europe and Canada. As a result, we expect total operating costs to increase between 9% and 11% against revenue growth of 14% to 15% in 2019. As in prior years, our advertising spend is expected to be more heavily weighted in the first half of the year, with the second quarter expected to be our largest marketing quarter. As a result, we expect the second quarter to be the low point for adjusted EBITDA margins for the year as was the case in 2017 and 2018. We expect adjusted EBITDA in the range of $495 million to $505 million, that's $0.5 billion for the full year of 2019, which represents 20% growth at the midpoint compared to 2018. We expect an adjusted EBITDA margin for the year of approximately 36% at the midpoint of our guidance range. For the first quarter, we expect adjusted EBITDA in the range of $120 million to $124 million, up 45% compared to the first quarter of 2018. We expect 2019 non-GAAP net income per diluted share in a range of $9.80 to $10 based on 36.6 million shares. For the first quarter, we expect non-GAAP net income per diluted share in the range of $2.38 to $2.47 based on 36.5 million shares. These ranges include a revised non-GAAP tax rate of 25%. Overall, I believe we're well-positioned in 2019 to deliver strong growth and margin expansion while at the same time making significant investments for the future. I'm excited about our long-term goals of $3 billion in run-rate revenue and 40% plus adjusted EBITDA margins in five years. Now, with regards to our margin improvements, keep in mind, we have a tendency to avoid doing things in a straight line. Accordingly, our margin trajectory may vary considerably from year-to-year.

Good afternoon. Thank you for the question. Andy, there has been some deal activity in Europe recently. I don't want to highlight one specific deal. However, there is also some startup activity in Asia with similar models as CoStar, which I believe reflects positively on your financial model. Events like these, while not pointing to any one deal, influence how CoStar is considering making international investments a higher priority.

Well, thanks, Peter. We are putting a significant amount of effort into our international operations. You'll see that when you look at our outlook, we have significant capital going into our European and Canadian operations. We think that some of the deals I believe you're referencing are interesting, but they're not direct parallels to what we're doing. So, they don't really shift the competitive picture in any which way. We're watching that and if something comes up that is really interesting we would participate in that. But we're going to continue to be aggressive but measured in our international operations. But to it, I'll be over there next week. So, we're watching it and continuing to build the operations there. I think at this point we have eight of the top 10 firms in Canada as clients now. And I think we are 9 or 10 of the top 10 in the United Kingdom. So, we’re doing well and Germany is continuing to do well, France and Spain continue to build there. So, we're watching it but not dramatically shifting.

Hey, guys. This is Oscar Turner on for Andrew. My question is on the incremental investments. I was wondering if you can quantify the incremental investment towards a couple of the top initiatives you talked about? And then, how should we think about the incremental revenue growth that those investments can drive and timing of the growth acceleration in LoopNet and Apartments?

Yes. Let me discuss the investments we are making and then we'll touch on the outlook. This year, our main focus is on the marketplace developments for LoopNet in the U.S. and the marketplace in the UK, which supports our Realla business. We anticipate investing between $20 million to $25 million in these platforms, covering marketing and other capabilities. Additionally, there is the investment in independent owners that Andy mentioned, which is currently seeing a significant amount of funding; we expect to increase this investment by about $10 million next year. We are also working on expanding the CoStar platform with owners and lenders, which includes promoting our listing management software, with an additional marketing push in CoStar. We estimate this will involve another $10 million to $15 million in costs and investments. When analyzing our cost growth, we determined that slightly less than half is related to investments made in 2018 that became effective in 2019, as well as labor increases and inflation. Therefore, a smaller portion of our cost growth is attributed to year-over-year normal business operations, with the majority going toward new investments that will positively impact future revenues.

Yes. I think that the revenue return on LoopNet is a reasonably short cycle. There’ll be a pretty aggressive focus on that product and our investment, that product over ‘19 and ‘20, but we think we’ll see results coming from them in the back half of ‘19 and ‘20 and then ongoing. And then, with the IO market, that's probably the more meaningful results there are probably in 2020. And then, for the increase in the Apartments.com budget, we think that while we are taking share and leading the market, we want to keep the pressure up and accelerate to keeping share to widen them out and increase the lead. So, it's a range of different outlooks on these. We feel pretty solid about all of them.

Hi. Thanks. Good afternoon. You’ve outlined goals of reaching $3 billion in run rate revenues by the end of 2023, which implies at least mid-teens annual revenue growth. Can you discuss how much pricing will contribute to these growth rates, given your previously discussed plans to eliminate discounting in CoStar Suite and potentially increase rate cards in the multifamily segment?

Sure. We believe the majority of this will come from price increases. Across Europe, Canada, and the United States, there are many new revenue opportunities, new customers, additional modules to purchase, and increased buying. We see a significant amount of this as gaining market share and capturing more wallet share. The price increases on platforms like LoopNet are shifting priorities from selling a basic ad to a broker for $50 or $60 to selling a more impactful ad, similar to those on Apartments.com, which features compelling presentations and appeals to owners with significant financial stakes. Office properties are included in this mix as well. New pricing could range from $60 to as much as $6,000 a month. Thus, there's a shift in budget, priorities, and target audience. We don't expect to reach $3 billion in revenue solely by raising prices for the same product for the same customers.

Good afternoon. Can you talk a little bit about the details of the LoopNet site relaunch, whether or not you consider launching a separate brand to differentiate between the up-market and the down-market there?

That's a great question. It’s a bit challenging to dive into too many specifics. We have considered this, but we believe it's not necessary. Initially, we will focus on promoting the CoStar marketing network. If you own a new office building in Washington D.C., we offer a variety of marketing solutions that help you connect with the professional community by advertising through the CoStar network. This includes exposure on CityFeet, Showcase, and CoStar, and we also enhance websites with LoopLink. Additionally, we provide email marketing through CDX direct, our direct email marketing product. We offer tactical and analytical support, producing insights on demand and supply for your specific products, helping you determine product positioning, pricing, possible subdivisions, and terms. Moreover, we uniquely connect to the largest end user audience via LoopNet. There are a couple of other features as well, but as we integrate all of this, we intend to simplify it into a network sale, similar to how we streamlined Apartments.com. LoopNet will be just one part of a comprehensive suite of marketing solutions designed to secure property leases at the best price and quickest timeframe. Over time, we plan to enhance LoopNet’s appearance and functionality, expanding its data range and adding valuable content that simplifies the leasing and investment processes. We will transition from industry jargon to more accessible language while incorporating engaging features, like local dining options and community insights. We believe the LoopNet brand is already very well-known, and we are aiming to elevate it and target a slightly different audience while retaining our original user base. Overall, we are quite pleased with the CoStar marketing network at this time.

Good afternoon, guys. My question is on the Suite mix in sales. I think, one consequence of having Suite salespeople also sell LoopNet was a little bit of extra juice for LoopNet and a little bit less growth in sales for Suite. We get some questions sometimes about penetration rates of Suite and are we getting to a point where those are starting to trickle off. Can you illuminate kind of how do we know that the mix of sales is a result of just kind of effort level being different versus maybe reaching the harder to reach TAM areas of that market?

When asked if CoStar has reached saturation, I can confidently say no. There are numerous ways in which the CoStar product continues to grow and add value. Last night, while preparing for this earnings call, I took a look at some apartment statistics and wondered about the mix of different unit types. I went into CoStar to pull some data based on company estimates, and I was truly impressed. The ability to access detailed information about the mix of apartment units in various communities, which wasn't available a couple of years ago, is invaluable. I can't imagine anyone investing in the apartment sector without that data. Since our public offering, we've seen approximately a 25% compound annual growth rate. Back then, there was much talk about CoStar being saturated, and even five years prior to that, the same conversation existed. Throughout my entire career, I've consistently heard the claim that CoStar is saturated, right from the early days after its launch. In my perspective, that's simply not the case. If I work another 20 years like my father, I still won’t see the market reach saturation. However, that’s just my personal opinion, and I firmly believe the saturation claim is unfounded.

Thank you. Andy or Scott, I just wanted to kind of dig in a little bit on the EBITDA trajectory for 2023. Maybe, Scott, you said, they won't be linear which was always to be expected. But, if you could just talk about the various levers that get you to that 40% target, and maybe you could talk about it by segment in terms of where you think the profitability will come from across the three different business lines?

Yes. The margin growth can be adjusted relatively quickly, as demonstrated last year with a 600 basis point increase. In 2017, when we focused on research investments, we moderated that growth and saw only modest improvements. It’s realistic to expect annual margin growth of 100 to 200 basis points while still allowing for significant investments aimed at future growth, as laid out in our 2019 plan. Overall, this organic growth remains stable, and if conditions stay the same, reaching over a 40% margin in five years is achievable. The key factor will be our acquisition strategy, including the margin profiles of acquired companies and how that may affect our overall margins over time. We've expressed some caution about maintaining margins above 40% because it greatly depends on our acquisition decisions, their nature, timing, and the duration required to elevate the acquired businesses' margins to our standards. Among different product sectors, our marketplaces usually achieve very high margins of over 50%. With CoStar historically in the 30% to 40% range, contingent on our investments, we expect significant growth from both sides of the business. Apartments are likely to outpace CoStar in a couple of years given our current growth patterns. We're anticipating margins in the 30% to 40% range from the investment aspect, while marketplaces will continue to grow rapidly towards those 40% to 50% margins.

Furthermore, CoStar is not in any way saturated.

Good afternoon, everyone. I'm a history major, so I sometimes need assistance with my math. I wanted to discuss some calculations with you to see if I'm interpreting them correctly. Last year, CoStar Suite had growth of about 18%. If we exclude $15 million to $20 million of revenue from the fourth quarter, it seems to imply that the organic growth for the quarter could be in the upper teens. Additionally, with net bookings around $50 million in Q4, which is a challenging comparison, if we project that to 2019, it would total about $200 million for the year, compared to $169 million, representing an increase of about 18%. My point is that the indicators for revenue appear to suggest growth closer to 18%, with mid-teens moving to the upper teens. I wanted to verify if this aligns with the calculations you are doing.

Bill, as I do that math, I start to think that Scott is somewhat conservative.

We had a better crystal ball on the quarterly sales numbers, Bill, and we watched this for so long. You see how they bounce up and down. $5 million swings quarter to quarter isn't unheard of depending on what we're focused on, what part of the business we're generating, timing of renewals on contracts. So, we always want to make sure that we don't get too far ahead of ourselves when we have a lot of plans for the year. And we'll continue to start the year that way and hopefully we'll get to the point where you can do our forecasting for us because your numbers will be a lot better than mine, I'm sure as we keep going. But we did have a good quarter in the fourth quarter, but those bounce around between quarters. So, we'll give ourselves time to sell out from under those in the first two quarters of this year.

Yes. Thanks. Hi, guys. I was just wondering if CoStar's opportunity is saturated?

Would you like to have a different question?

Yes, I would like to know more about the planned increase in sales headcount for 2019 and where those additional resources will be directed. You mentioned other budget increases and investments, so I’m interested in understanding the focus of those efforts. I assume you’re looking at multifamily and have a marketing campaign in mind, but I would like to clarify the structure of the investments in 2019.

Yes. They run broadly in line with the numbers I gave a bit earlier on I think someone asked one of the other questions of how much we're spending in the different investments. And those are broadly people-driven. The marketing side will be concentrated clearly more on the apartments in the LoopNet side, that's where the marketplaces are set. But we are adding a decent amount of resourcing into LoopNet, into technology. And then, when we say modest for sales, I consider that's less than 10%, which could still be 50 to 75 people easily for a sales force of that size. So, our big area of research, we're finding that they're getting so much good productivity, that's one area we don't need to add a lot of people as our Listing Manager products are freeing up resources that we then deploy onto owner and lender products and into helping support LoopNet. So, it's not going to be in the research world, it's going to be mostly in technology and the resources going into the building those investments and in the international marketplaces and independent owner space.

I have to say that if I were to look at my wish list from the beginning of 2018 on the sort of structural improvements we would like to complete on our sales force, I feel that we've accomplished a lot of those goals. We have one or two things to do in terms of go-to-market strategy on major accounts in CoStar. But over the years, I don't think I've been to a place where I feel like our sales force is more stable than it is now. We've got a good Apartments.com sales team led by Paige Forrest who is a very-experienced sales professional. We got Max Linnington doing a fantastic job. What's happening now is really tweaking a strong group. And we're still probably a year out from anything that would be a major structural change driven by a change in our acquisition or some other significant change. So, we're in a pretty stable place.

Hi. Good evening. So, you talked about building out software platforms to integrate more into the rental leasing process and moving past leads with Apartments.com to more the execution side, which appears to include Cozy. It makes a lot of sense but I also wanted to ask about how this could impact your ability to extract data from the rental cycle. So, beyond just alleviating pain points, is this also about getting and integrating more and better data into your core database?

One of the great aspects of marketplaces is that being in the data business enhances your effectiveness within them. Excelling in the marketplace, particularly in the data sector, allows access to valuable and exciting data while keeping overall costs lower than focusing solely on one market. This means we can obtain data and content that would typically be unaffordable without an additional revenue stream. We can offer consumers insights and marketplaces that we would likely not invest in if we didn't have a compensating source of income and information. Success in the IO market will produce a significant volume of real-time, reliable data. It also provides intriguing insights related to pricing, credit, and risk, and has the potential to create new types of valuable credit information for independent owners. The data collected from independent owners is also beneficial to institutional players since renters often transition between different markets. This creates mutual interest for both communities, especially since a Greystar property’s pricing in a particular market is influenced by the dynamics of the surrounding IO market. There is a strong relationship between these two segments, making for exciting data developments from the project on success.

Hi, guys. I was curious of the $1 billion plus you have in cash on the balance sheet, what do you actually need to run the day-to-day operations? And to the extent that you're carrying a fair amount above that, would that suggest an appetite for doing a larger transaction within the next couple of years?

I believe it is highly likely that we will continue to pursue acquisitions, as we have successfully done for the past 20 years. We still focus on smaller and mid-size deals, but we are gradually increasing the scale of some of our transactions. Therefore, we think it's quite probable that we will leverage our buying power to make acquisitions in the near future.

On the cash side, we’re going to get about $400 million of free cash coming out this next year. So, we'll be adding to our cash piles unless we're doing large acquisitions. We need new carpet.

I think with that we are done with the Q&A period. And thank you all for joining us. And don't forget, CoStar is not saturated. I'm excited about the many tens of thousands, if not hundreds of thousands of additional future clients we have ahead of us. Thank you for joining us.