Costar Group Inc (CSGP) — Q2 2019 Earnings Call Transcript

Thank you, operator, and welcome to CoStar Group's second quarter 2019 conference call. Before I turn the call over to Andy Florance, CoStar CEO and Founder; and Scott Wheeler, our CFO, I'd like to share some very interesting and important items that can actually make your day. First of all, certain portions of our discussion may contain forward-looking statements, which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to those stated in our press release today, July 23, 2019, on our second quarter results and in our company's outlook and corporate 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 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 non-GAAP guidance, are shown in detail in our press release issued today, along with definitions of these terms. The press release is also available on our website located at costargroup.com. As a reminder, today's conference call is being broadcast live and in color on our website. So, please refer to today's release to see how to access the replay of the call. I have a feeling you’re really going to want to listen to this one again. So look up the recall number. Just remember one question. So, make it a good one. I will now turn the call over to Andy Florance. Andy?

Thank you, Richard. Thank you for joining us for CoStar Group's second quarter 2019 earnings call. In this, the week is the 50th anniversary of the Apollo 11 moon landing, a slightly more impressive feat than our second quarter earnings, slightly. In the second quarter 2019, CoStar Group total revenue was $344 million, up 16% year-over-year. That's $7 million above the upper end of our guidance for the second quarter, so this is one of our biggest revenue beats. We had our best sales quarter ever, generating $59 million in company-wide net new bookings, an increase of 32% year-over-year. The primary driver behind our exceptional sales result was a much better-than-expected Apartments.com sales. Apartments.com net new bookings alone increased 122% year-over-year in the second quarter of 2019. In each of the past three quarters, Apartments.com has beaten all prior sales records for a quarter, with the second quarter of 2019 and the first quarter, Apartments.com net sales bookings were up 44%. In my experience, there are very few times when you get the monthly sales close numbers and are stunned by how big the number is. And this was one of those quarters repeatedly. The Apartments.com sales team is performing exceptionally well, is operating at the highest productivity level we've ever achieved. We expect to reach a $0.5 billion annualized revenue run rate milestone for Apartments.com next quarter. This is a major milestone for us, given that we purchased Apartments.com in 2014, with only $86 million of revenue there. From that point of acquisition five years ago to now, we have grown Apartments.com at over 40% compound annual growth rate. We believe that we have every opportunity to continue this exceptional growth rate. CoStar Suite revenue growth was strong and crossed the $600 million revenue run rate in the second quarter. We now have over 150,000 individual subscribers to CoStar Suite. Net new bookings were up 26% from Q1 of this year. Our core US CoStar Suite revenue growth of 3.5% and our year-over-year US CoStar Suite revenue growth of 15.1% are right in line with our 5-year averages. I find it valuable to look at the revenue generated by our core US sales force, our CoStar sales force, which is US CoStar Suite combined with LoopNet Premium Lister subscriptions. The quarter-over-quarter growth for this combination was 3.7% and the year-over-year was 15.7%. The 3.7% quarter-over-quarter growth rate is exactly our 5-year average. The year-over-year growth number is above the 5-year average of 15.5%. We are growing the CoStar sales force, which we believe will support future acceleration in bookings. We entered 2019 with 213 reps in production. We now have 262, and we hope to reach 300 reps selling CoStar and LoopNet by the end of the year. We hired approximately 50 additional sales reps that are going into production over the next three months. We believe that they will impact sales results about nine months after going into production. We saw strong sales of LoopNet Premium Lister product in the second quarter, with net new bookings up 46% quarter-over-quarter. Real Estate Manager net new bookings dropped 40% quarter-over-quarter and 6% year-over-year because the booking increases of the prior year had reached such a high level of 400%. Overall, revenue growth was great for Real Estate Manager as total subscription revenue climbed 75% year-over-year and 24% quarter-over-quarter. Net new bookings for our land business was up 27% quarter-over-quarter and net new bookings for our business for sale marketplaces was up 36% quarter-over-quarter. It’s important not to overlook the tremendous value of these smaller or mid-sized businesses CoStar Real Estate Manager lands and BizBuySell. This quarter five years ago, those three businesses combined had annualized revenue of $28 million. This quarter, they combined annualized revenue of $108 million. They have grown at a really impressive compound annual growth rate of 31% for five years. They're very profitable, and they have more than seven times or eight times the revenue that CoStar had in total the year we went public. We continue to focus on prioritizing and selling subscription-based services with high renewal rates over selling one-off services with non-recurring revenue. Subscription-based revenue has grown to comprise 82% of our overall revenue. As of the second quarter 2019, our trailing 12-month subscription revenue grew 25% year-over-year, which is faster than our overall revenue growth. And for the first time, we crossed a billion dollars of subscription revenue on a trailing 12-month basis. We continue to show strong growth in profitability. Net income for the second quarter 2019 was $63 million, an increase of 44% over net income of $44 million for the second quarter of 2018. EBITDA for the second quarter was $94 million, an increase of 45% versus EBITDA of $64 million for the second quarter of 2018. With strong cash flow, our balance sheet is stronger than ever, with $1.3 billion in cash and no debt.

That's a great story. Thank you, Andy. We certainly didn't have a terrific first half of the year, but I am going to try not to repeat that our net income for the second quarter was $63 million, an increase of 44% over the second quarter of '18. I also will not say again that our balance sheet is stronger than ever, with $1.3 billion in cash and no debt. And I'm certainly not going to tell people that we just turned in our best sales quarter ever with $59 million in bookings. That's your job.

As reported by comScore, Apartments.com continues to pull further away from the competition as we increase our industry-leading position among Internet listing services by achieving all-time highs in unique visitors and number of visits. In the second quarter, the Apartments.com network had 175 million visits, up 21% year-over-year. The huge renter traffic we have built there is very valuable, particularly for clients with newly constructed properties in the lease-up phase. Today, 70% of apartments that have delivered in the last two years are advertising with us. But some properties need more exposure and are willing to pay an additional fee to soar even higher up on our site to get more leads. To meet this demand, we have recently begun selling a new higher-tiered advertising level called Diamond Plus, with very creative naming. This ad package guarantees the advertiser placement in the top three search results in a given submarket. In the second quarter, we sold $6 million in Diamond Plus ads at an average of approximately $3,600 per month, with apartment communities in some markets paying as much as $7,500 per month. That's a new exciting price point for us. This stands in sharp contrast with our primary competitor, who began advertising $99 a month ads if you bought social media with them. That price is 175th of our Diamond Plus price point. I think that tells you everything you need to know about the competitive landscape.

So let me start with our revenue performance by services. CoStar Suite revenue growth remained strong at 14% in the second quarter of 2019 versus second quarter of 2018. Revenue growth rate for CoStar Suite is expected to be in the 12% to 13% range for the full year of 2019, modest improvement over our expectations we told you last quarter. Revenue in Information Services grew 33% year-over-year in the second quarter of 2019, primarily as a result of CoStar Real Estate Manager revenue growth of 57% year-over-year. This includes both the subscription revenue growth of 75% that Andy mentioned and the one-time implementation revenue growth of 25% for new customer implementations.

Good afternoon. Thanks for taking my question. And Rich, you are right about that replay. I had a question about the -- Andy, I think you were talking about, there is a portion of the Apartments.com network that is getting free ads, that is shutting off now, obviously, because of the success you've had on driving lead growth. Has that happened? Is that going to happen? And then when is that going to happen? What's the timeline? And what are you kind of expecting for those free ads turning into paid ads?

So it's happening in phases. Some of it has happened. When we first relaunched, we were running free ads for communities of all sizes, up to 250 units, be it properties over 100 units. And as we started building up more and more content and more and more traffic, we started eliminating free ads above 200 units at above 150 units, at 100 units. And we just keep on bringing that level down. And as we do that, a significant number of those folks decide to go ahead and sign up for Apartments.com and not lose that lead flow. So the communities below 100 units, that will roll out over the course of the remainder of the year and we will be trying to build up that inside sales force quickly enough to be able to pursue the leads that generates. So it will be flexible, but it will be six months to 12 months to eliminate the free ads below 100. Now we won't -- we will continue to carry the very small communities for free for quite some time. So the condo for rent, to the house for rent, the real small stuff. And I also want to reiterate that our second quarter had $59 million in bookings.

Commercial property and land revenue grew 16% year-over-year in the second quarter of 2019. All of our marketplace businesses including LoopNet, lands and business for sale are delivering solid growth in the mid to upper teens, which we expect to continue and increase in the second half of the year. Accordingly, we expect year-over-year organic growth in commercial property and land in the 17% to 19% range for 2019.

We had a strong Apartments.com sales success at the National Apartment Association Annual Conference in Denver this year held in May. It was attended by over 10,000 property managers who are our prime targets and prospects and clients. Once again, Apartments.com was front and center with an amazing presence, and we attracted more than 4,000 visitors to our booth. The Apartments.com sales force met with 916 property managers over the course of the two-day conference in Denver. As I mentioned, we bought Apartments.com in 2014, we had approximately 17,000 paying properties. Nearly 90% of those properties were from communities of 100 units or more. Today, we have just over 50,000 paying communities and nearly 13,500 of those properties are in a smaller 1 unit to 99 unit property size range. We have successfully grown our annual multifamily revenue from $86 million in 2014 to a run rate that we expect to reach $500 million later this year.

Our operating expenses were $197 million for the second quarter of 2019, which was in line with our expectations, including the higher seasonal marketing spend we experienced in the second quarter. Our second quarter adjusted EBITDA of $110 million represents a 29% increase compared to adjusted EBITDA of $85 million in the second quarter of 2018. Second quarter adjusted EBITDA was approximately $8 million above the top end of our guidance range. Stronger revenue was the main driver of the positive variances. The resulting adjusted EBITDA margins of 32% is 220 basis points above the midpoint of our guidance range and 340 basis points above the 25.9% margin we achieved in the second quarter of 2018.

Given the success of our Diamond Plus offering, we have decided to introduce a plus option in each of our platinum, gold and silver categories. We plan to offer the plus ads at fixed price with little to no discounting. In June, we purchased Off Campus Partners, a leading online multifamily marketplace service for student housing in the United States. There are over 17 million college students in need of housing near universities, and they're paying approximately $100 billion in rent annually. Often their parents assist with these rent payments. We believe Apartments.com has a unique opportunity to develop a long-lasting connection with students as they move into other stages in their lives to become renters Off Campus.

Good afternoon. I missed that bookings number. So…

It was $59 million.

Hi, this is Joe Goodwin on for Pat. Just a quick question. Andy, how's the environment for CoStar to do more M&A? Any commentary you can provide us there? And then I have another question after that.