Costar Group Inc (CSGP) — Q2 2024 Earnings Call Transcript

Thank you, Carmen. Good evening and thank you all for joining us to discuss the second quarter 2024 results of the CoStar Group. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Chris Lown, our CFO, I would like to review our Safe Harbor statement. Certain portions of this discussion today may contain forward-looking statements, including the company's outlook and expectations for the third quarter and full year of 2024, based on current beliefs and assumptions. Forward-looking statements involve many risks, uncertainties, assumptions, estimates, and other factors that can cause the actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's press release issued earlier today and in our filings with the SEC, including our most recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q under the heading Risk Factors. All forward-looking statements are based on the information available to CoStar on the date of this call. CoStar assumes no obligation to update these statements whether as a result of new information, future events, or otherwise. Reconciliation to the most directly comparable GAAP measure of any non-GAAP financial measures discussed on this call are shown in detail in our press release issued today, along with definitions for those terms. The press release is available on our website, located at costargroup.com under Press Room. As a reminder, today's conference call is being webcast and the link is also available on our website under Investors. Please refer to today's press release on how to access the replay of this call. And with that, I would like to turn the call over to our Founder and CEO, Andy Florance.

Thank you, Cyndi. I would note that that was the most upbeat reading of the preamble I've heard. Good evening and thank you for joining us for CoStar Group's second quarter earnings call. Second quarter 2024 revenue was $678 million, a 12% increase year-over-year, coming in above the midpoint of our guidance range and in line with consensus estimates. Our two billion-dollar businesses continue to deliver double-digit year-over-year revenue growth with Apartments.com growing 18% and CoStar growing 10%. Company net new bookings were $67 million in the second quarter, with 79% of our net new bookings coming from sales of our commercial real estate products and 21% from net new bookings of Homes.com memberships. Adjusted EBITDA was $41 million, which was well ahead of our guidance of $5 million to $10 million and consensus estimates of $10 million. Our commercial margins remain strong, delivering over 40% in the quarter and are expected to expand throughout the remainder of the year. Our average monthly unique visitors to our global websites reached a record of 183 million in the second quarter, according to Google Analytics, which is up 81% over the prior year. The Homes.com network delivered 148 million average monthly unique visitors for the second quarter, according to Google Analytics, which was an increase of 73% over the same quarter last year. Our Homes.com site alone delivered 99 million average monthly unique visitors for the quarter, an increase of 197% over the same quarter a year ago according to Google Analytics. We believe that complete site-centric census-style tools, like Google Analytics, are more accurate than user-centric panel estimate counts generated by firms such as comScore or SEMRush. I believe tools like Google Analytics are like election results, whereas a tool like SEMRush or comScore is more akin to an election poll. If I have the election results, I choose to report those rather than the sample poll result. Our leading competitors in the U.S. residential portal space combine and report traffic associated with home sales, home rentals, rural homes, land sales, and apartment rentals in their traffic numbers. For that reason, I believe the most accurate and best apples-to-apples comparison is comparing the traffic from our Homes network of sites to the reported traffic of these three leading competitors. Our Homes.com network includes our sites with home sales, home rentals, rural homes, land sales, and apartment rentals. The most recent reported traffic numbers we have for the leading residential portal competitors are from their first quarter results, so the comparison is not perfect. Our reported Homes.com network traffic of 148 million average monthly unique visitors for the second quarter is fast approaching Zillow's first quarter report of traffic of 217 million average monthly unique visitors. The Homes network has now solidly lapped Realtors' reported first quarter traffic of 70 million average monthly unique visitors and has thrice lapped Redfin's reported first quarter traffic of 49 million monthly unique visitors. These solid traffic numbers far exceed our traffic performance expectation for this quarter early in the development of the new Homes.com. The second quarter was our first full quarter of selling Homes.com memberships, and since mid-February, we have sold over $55 million in net new bookings. The first four full months selling Homes.com far exceed the launch sales pace of any of our prior product launches. By comparison, it took two years after the launch of Apartments.com to accumulate the level of net new bookings that Homes.com has achieved in its first full four months of sales. The solid booking numbers are exceptional for this early in development of the new Homes.com. We now have 10,200 member agents on the platform, and 86% are on 12-month contracts. Marketing efforts continue to be successful, delivering almost 10 billion consumer impressions and 21,000 commercial placements since we launched the product across broadcast, cable TV, streaming audio and video, digital and social media, and high-profile sponsorships. Unaided brand awareness continues to increase and is now at 27%, up from our prelaunch baseline of 4%. Over the past month or so, I attended focus groups with agents and consumers in Atlanta, Chicago, Irvine, and Nashville. Our growth in unaided awareness was clear. Agents reiterated that they prefer our business model of 'your listing, your lead.' We have more work to do to make them aware of that preferred business model, and we'll do that work. In each session, the moderator asked agents and consumers to spend a few minutes using the Homes.com site. The response was fantastic. The overwhelming majority of participants said that Homes.com is the better home search site than competing sites. Common themes were that the site is clean, it's beautiful, ad-free, has more information than other sites, has all the information you need in one spot, and participants like that the listing agent is clearly visible, is not obscured, and a listing agent who knows the most about the property can be readily reached to ask quick and simple questions. Agents responded very well to our value proposition, and two agents really stood out to me as they raved about how much value they were getting from their Homes.com membership. They stated that they were using the advantage that Homes.com membership offered to win more exclusive listings. I would like to quote one Chicago participant named Laura. She said, 'a couple of months ago, I became a premier agent on Homes.com. My listing that I used to get 6,000, 7,000, 8,000, 9,000, 10,000 views; I now get like 2 million views on my listings.' And it's a listing tool, she went on to say, so that she can then say to the seller, 'Well, go up and look up Orland Park, and I'll show up first if I've got a listing there.' She goes on to say, 'I say to the seller, my listing has 2 million views. Look at every other one after that, and they've got like 3,000, 4,000 views, and I've got 2 million views. I'm like #winning.' Another agent from California said, 'Homes.com has been great for me as a listing agent. I'm getting calls directly on my listings. I have a paid subscription where it puts my information in front of buyers who are calling me directly. In my actual listing presentation, I have marketing information about getting 60 times more views on my listings since I'm a pro member on Homes.com, and I think that has helped me secure listings.' Another agent from Columbia, South Carolina said, 'within two days of signing up for my Homes.com membership, I secured a new listing that went under contract less than a week.' Another agent from Spokane, Washington said, 'Since I've joined Homes.com, I've watched the amount of traffic on my listing increase 30 to 40 times compared to getting clients from anywhere else.' We built an analysis to understand the advantage member agents were having in winning new listings as compared to non-member agents. We created cohorts of members based upon the city, tier size they're in, the number of listings they had at the beginning of the study period, and the average list price of their listings. We compared members' new listing win count to non-members' wins for each month from March through June. This created a total of 192 cohorts. On average, members won 51% more new listings than non-members. More importantly to me, in 95% of the 192 cohorts, members outperformed non-member agents. This is very important and the core point. Winning new listings is a primary objective for real estate agents. We believe that the evidence is overwhelming that our product is enabling agents to achieve that core goal. We believe that the potential ROI for member agents is phenomenal. The average agent is getting 17 million annualized impressions for their listing and profile on Homes.com. Member listings get 46 times more exposure on average than non-member listings. Another analysis we ran indicated that on average, member agents are 20% more likely to sell the home in the first 10 days than non-members, and members are getting on average $11,000 more for a home. That second analysis will vary from time to time, but multiple analyses have each shown a benefit for members over non-members in selling homes. So, in summary, I believe the product is a winner. As of today, we've only demoed approximately 3.5% of residential agents. Building a dedicated Homes.com sales team is the key driver for future Homes.com revenue growth. We have 63 dedicated Homes.com salespeople in production, which I can see. We have an additional 53 in training and another 30 hired. We have been borrowing resources from our Apartments.com, CoStar, LoopNet, and other sales teams to supplement the Homes.com sales team. But those borrowed sales resources will inevitably return to selling their core products as they should. Growing the Homes.com sales force must be our top priority. OnTheMarket, our U.K. residential real estate portal, is making great progress. Listings on the platform are now up to 716,000, an increase of 41% from June of 2023. Average monthly visits for the month of June were 35 million, up 78% compared to June 2023, and average monthly unique visitors were up to 18 million in June, an increase of 118% over June 2023, according to Google Analytics. Lead counts are up 50% over the second quarter of last year, and the sales results are looking good. A recent article from a publication called The Negotiator said that a leading lead management platform has found that OnTheMarket has now overtaken Zoopla for engaged inquiries. Apartments.com continued its positive momentum with another strong quarter. Revenue was $264 million for the second quarter of 2024, representing 18% growth over the same period a year ago. We continue to add new customers with rentals of all sizes to our marketplace at a rapid pace and now have almost 76,000 paying communities on our network. In June, we had a record number of single-family rental listings, representing an increase of 108% over the prior year. Single-family rental listings have boosted lead counts by more than 4 times our Homes.com membership agents. Our mid-market efforts are contributing thousands of new properties, growing paid subscribers by almost 22% in the second quarter compared to the same quarter a year ago. New construction is also contributing to subscriber growth with 75% of all new 100-plus unit communities advertising with Apartments.com. That's a great stat. Our sales team continues to deliver exceptional results and extremely high engagement with our clients and prospects. During the quarter, Paige's team conducted over 187,000 quality meetings, which is an increase of 23% compared to the second quarter of last year. Our second quarter Net Promoter Score of 94 continues to lead the industry or just about any industry, which is a testament to the quality of the sales team and their service. We continue to outperform our competitors in lead quality and conversion. In the second quarter, Market Connections, a third-party market research firm, conducted a survey of industry decision-makers responsible for 18,000 communities with over 1.5 million units under management. Apartments.com continues to lead in all metrics that matter most to multifamily owners and property managers. We're number one in advertiser usage and deliver the highest quality leads. We continue to have the highest lead-to-lease conversion rate, significantly outperforming our next closest competitor in every one of these three metrics. Our 2024 Apartments.com marketing campaign featuring Jeff Goldblum as Brad Bellflower, the inventor of the Apartminternet, is in full swing again. We are reaching renters across all media channels during peak rental season and generating over 2.1 billion media impressions. This year, we launched a dedicated landlord campaign to generate awareness with landlords owning one to four rental properties and have generated almost $500 million in brand media impressions to date. As a result of our continued investment and success, our unaided brand awareness specifically attributed to apartment seekers is now 74% compared to Zillow, which is only at 42%. Our average monthly unique visitors for the quarter grew 3% year-over-year to 48 million, significantly outperforming the overall market, which was down 3% year-over-year according to Google. Economic conditions in the apartment industry continue to create a favorable advertising environment. Apartment vacancy rates of 3, 4, and 5-star properties are at elevated levels, with a 9.3% vacancy rate at the end of the quarter and are forecasted to remain at or above 9% for the remainder of this year. Unit level deliveries continue at all-time highs and are expected to be 561,000 units in 2024. Supply will continue to outweigh demand in the foreseeable future. Apartments.com continues to deliver strong growth and we expect to see Apartments.com revenue growth of 17% for the year, in line with our guidance. In the second quarter, CoStar continued to deliver double-digit revenue growth with $253 million of revenue, a 10% increase over the prior year and in line with our guidance. Our lender product had the highest net new sales quarter ever, with a 47% increase in revenue over the same period last year. We now have 298 banks and lending institutions on the platform, up 50% year-over-year with sales to several large institutions in the quarter. We believe that our product is superior to the competition, which is something we continue to hear from our customers. Our lender product has a $300 million market opportunity with 3,000 more significant lending institutions to pursue. The STR sales team had another strong quarter with a 54% increase in net new sales year-over-year. Revenue from our benchmarking product and CoStar subscriptions to hospitality clients increased 28% in the second quarter. We are well-positioned to penetrate this $300 million market opportunity with a best-in-class product. Our consistent strong revenue and sales performance for CoStar is the result of a steady stream of product innovation that delivers expanded capabilities and increased customer value. Over the past few years, we've integrated the STR benchmarking product, enhanced our fund data, added hospitality and CMBS data, launched a new lender product, and opened international reach for our CoStar customers. At the end of Q2, we just released our newest feature called Owner. The new Owner module of CoStar provides unparalleled insight into the underlying portfolios of the world's largest real estate developers and owners, their key tenants, acquisition and disposition trends, aggregate vacancies, and availabilities in key context. Our usage data continues to show that these customers are engaging with the platform more despite the economic cycle. Our customers logged in 5 million times in the quarter and conducted 68 million property searches, up 8% over the same period a year ago. Renewal rates are up to 92%, and our Net Promoter Scores are at 65%, which is the highest level in our history for NPS for CoStar. We've grown our subscriber base to 230,000 CoStar professional users, which is up 19% year-over-year. We have a proven track record of growth throughout economic cycles, and even in the face of historically low CRE transaction levels, CoStar is delivering solid growth and continues to be the mission-critical data and information product for brokers, owners, lenders, tenants, fund managers, and other participants in commercial property information markets. LoopNet revenue was $70 million, up 7% year-over-year, exceeding the high end of our 5% to 6% guidance. International revenue grew 17% in the second quarter year-over-year. The LoopNet network remains the number one platform in the market with six times the traffic of our nearest competitor. Average monthly unique visitors for the second quarter were 13 million, with direct and organic traffic at 75% of total traffic. Even considering the difficult commercial real estate market conditions, total detailed listing views are up 14% compared to the second quarter of last year. As the market normalizes over the coming years, LoopNet is poised to benefit significantly from that recovery. We continue to enhance all aspects of sales and client service. As a result, our NPS scores have improved to 58, which is up 87% since last year. We're growing our dedicated sales team, which will help us further penetrate this large and global market opportunity. Real Estate Manager revenue was up 9% year-over-year with renewal rates at 99%. Real Estate Manager continues to take market share from legacy competitors. Two-thirds of our customers are sharing their lease data for anonymized analysis, which will greatly enhance our analytics in the CoStar platform. Land.com revenue grew 5% year-over-year, Signature Ads increased 9% in the second quarter, and Diamond Ad sales were up tenfold in the last quarter. Land.com is the exclusive sponsor of a new show in production, Ranchland, which will stream on Paramount Plus and CBS, featuring aspirational ranches that are listed for sale on Land.com. Each episode will showcase an aspirational ranch currently on the market listed on Land.com and will feature a day in the life of the ranch owner. I know none of you are going to want to miss that exciting show. BizBuySell revenue increased 6% year-over-year. The platform had a record $2 billion in enterprise value that transacted in the second quarter. Our franchise directory leads are up 25% and listing leads are up 16% over the same period last year. Providing these quality leads to our customers and having customer response rates in the mid-19s correlates directly to our NPS score rising 15% to 55% this quarter. Our Ten-X platform continues to outperform the market with a trade rate of 50%, more than double the offline trade rate of 23%. We brought 57% more assets to the platform in the second quarter compared to the first quarter of 2024. CRE transaction volumes may be bottoming out with sales activity increasing slightly 6% year-over-year for the first time since the second quarter of 2022. To stress, sales are beginning to surface, particularly for office and multifamily, but remain historically low, with lenders still preferring to extend loans. CMBS delinquency rates remain elevated, and office delinquencies have increased notably to 7.4%. This is a significant opportunity as these properties will eventually need to change hands, and Ten-X is the most efficient way to execute commercial real estate transactions. I believe that the results this quarter demonstrate the strength of our commercial real estate business with continued double-digit growth and strong EBITDA margins in the face of economic headwinds. I believe that this quarter, Homes.com is coming into focus as a better product with a better business model than our competitors. I think that Homes.com’s value proposition is emerging clearly, it's compelling, and offers our future clients a huge potential ROI. Going forward, we need to focus on the blocking and tackling of building out our sales and marketing organization to realize the full revenue potential of Homes.com. At this point, I'm pleased to welcome our new CFO, Chris Lown, and will turn the call over to him.

Great. Thank you, Andy. Good evening. I'm excited to be here for my first of many CoStar earnings calls. I'm happy to report that CoStar has now reached its 53rd consecutive quarter of double-digit revenue growth, coming in at 12%, and we achieved a commercial business margin of 41% in the second quarter. Looking first at our Residential businesses, Residential revenue came in at $26 million, up 40% sequentially. In just four and a half months, we have delivered cumulative net new bookings of $55 million, which is a great accomplishment. We are focused on hiring dedicated Homes.com sales reps over the next year, who are more productive at selling Homes.com memberships and will also allow many of our commercial sales teams to return to selling their core products full time. As Andy mentioned, focus groups have bolstered our confidence in our Homes.com offering, and we are confident in our differentiated business model and our ability to capture this exciting long-term revenue and data opportunity. We now expect third-quarter Residential revenue to come in around $30 million and we are revising our full-year 2024 Residential revenue guidance to $105 million to $110 million. For the full year, we continue to expect to execute on our Homes.com investment plans. Apartments.com's second-quarter revenue growth came in at 11%. The Apartments.com team continues to perform well with the highest number of sales reps and the highest sales productivity of any brand in the company. We are on track to achieve the guidance we provided last quarter, resulting in 17% year-over-year revenue growth. CoStar revenue grew 10% in the second quarter, in line with our guidance, and we are maintaining our previous full-year guidance of 10% growth. We expect growth in the third quarter to be broadly in line with the full year. LoopNet revenue grew 7% in the second quarter, slightly ahead of our 5% to 6% guidance range. We are maintaining our full-year revenue outlook for LoopNet of mid-single-digit growth. Revenue from Information Services was flat sequentially and dropped 20% year-over-year due to the transition of STR into CoStar. We are reiterating our previously stated guidance of $130 million to $135 million for the full year and expect the third quarter to be consistent with the first two quarters of 2024. Other Marketplaces revenue was $31 million in the second quarter, and we are maintaining our guidance for Other Marketplaces to be relatively flat in the third quarter and full year. From a consolidated basis, adjusted EBITDA for the second quarter was $41 million at a 6% margin, meaningfully above the high end of our $5 million to $10 million second quarter guidance. The favorable performance relates primarily to slower-than-anticipated hiring as well as the timing of investment spend. We anticipate incurring some of the spend in the second half of the year. Our sales force totaled some 1,240 people at quarter end, an increase of 7% year-over-year and around 30 salespeople hired sequentially. Most of the increase in the second quarter was in our Homes.com sales force. Our contract renewal rate was 90% for the second quarter, with the renewal rate for customers who have been subscribers for five years or longer at 95%. Subscription revenue on annual contracts was 81% for the second quarter, consistent with the prior quarter and the second quarter of 2023. We continue to have a strong balance sheet with $4.9 billion in cash, which is net interest income of $53 million in the second quarter, a 5.1% rate of return. Our full-year 2024 revenue guidance is now in the $2.735 billion to $2.745 billion range, a 12% year-over-year increase at the midpoint. This range reflects our adjusted Residential revenue guidance for the second half of the year. The company expects third-quarter revenue of $692 million to $697 million, representing 11% year-over-year growth at the midpoint of the range. We are increasing the midpoint of our adjusted EBITDA guidance for the year with revised guidance of $195 million to $205 million. For the third quarter of 2024, adjusted EBITDA is expected to be in a range of $47 million to $52 million. I will now turn the call back over to our operator, Carmen, to open the line for questions.

Thank you. Good evening. Welcome Chris, great to have you. Congratulations for the shout-out to Rich. Good evening Andy. Lots of salutations there, anyway. Andy, it sounds like the momentum in the new sales for the resi side seems to have hit a bit of a speed bump. It sounds a bit more like blocking and tackling on the sales force. Can you talk about adjusting the sales force to sell, who normally sell to institutional clients, how they're selling to residential agents? And I just need to follow up. There's a notion that there's been either refunds or cancellations throughout the quarter, is it a function of the agent out there just becoming more educated on what Homes.com provides and how it differs from other portals? Thank you.

Sure. So, I think that the broad sales force of over 1,000 people can comfortably sell the Homes.com product. However, if you're an Apartments salesperson or CoStar salesperson, you've been selling those products for many years, and after the initial rush of selling a new product, you begin to migrate back to your existing product. And it's the type of thing that you can try to push them into the two products, but realistically, as we move into the second full quarter and the third or fourth full quarter, we want to rely more on a dedicated Homes.com selling team because there's a natural instinct for the broad sales force to go back into their core products. The other thing is that the Homes.com team—a dedicated sales team—does a better job with following up with the sales post-sales and has higher Net Promoter Scores, dramatically higher than those of the salespeople that we're borrowing from the other products. You don't want to pressure high-performing Apartments or CoStar or Real Estate Manager salespeople to move into Homes when they're really quite good at their core products. So, in terms of refunds, we did have a completely lenient cancellation policy during the initial time period. It is my understanding that initially one of the single biggest reasons for cancellations is that the credit card didn't process, which is not unusual for residential agents given the commission-to-commission nature of their pay. There's a little bit of the latter that you're talking about there, which is after two decades of agents being used to buying leads off of lead diversion sites to get buyer agency, there is definitely an education process. So, if I am an agent who doesn't really do normal residential real estate listings and have been buying leads from a lead diversion site like Realtor, those sites are scraping listing leads off of 100% of the agents and funneling them down to a small group of people just trying to work those buyer agency leads. We do something very different. We don't do those sort of mass scrape selling buyer agency leads; instead, we focus on giving agents an advantage in selling their owners' homes. So, we provide them dramatically more exposure for their listings on our site, which helps them win new sale listing leads or exclusive listings. After all the things going on in the world with NAR lawsuits, the sale listing generation serves as a safe harbor. Long story short: yes, we had a lenient cancellation policy, which is not what we normally do, but that's behind us now, and we would redirect and make sure people understand we're not a lead-stealing site but promoting homes and allowing agents to win listings and build their brand.

It was good color. I'm going to take that in. Very good. Thank you.

Hi Andy and hi Chris. Welcome to the new role. I wanted to ask a quick question about the new guidance for the residential business. So, as I see it, you're now assuming roughly a $4 million sequential increase of resi revenue in 3Q and then another $3 million or $5 million in 4Q, which is slightly different from the $10 million sequential increase that you were initially targeting. Just wondering what drove that decision to lower the guidance? And what is your feel around the membership additions that you're seeing at the moment?

Sure. Thank you for the question. I think a couple of things. Obviously, this was the launch of a new product, and there is a lot of brainpower going into trying to model out that analysis and what will happen, and the initial results were very strong, and therefore, there was a reaction to that. What you're seeing now is more of a growing momentum that you'll see evolve over time, while we don't provide quarterly guidance, your numbers make broad sense to me. I think what you're seeing is probably a more appropriate build of the business, hopefully a conservative build of the business. I would also highlight that as a new launch, this is phenomenally more successful than the Apartments.com launch. I think we feel good about that and the model outlook. So, as Andy said, we are hyper-focused on getting Homes.com salespeople into their seats, and that momentum will drive further growth as well.

And again, I would just add that the main issue is the rotation of the core sales force back into their core products, which is largely their choice. Now we move into the long term; as Chris says, we focus on the growth of that dedicated sales group, and a significant number of other product sales groups will keep selling Homes.com because they want to.

Understood. Thank you. Andy. And Chris, just a quick follow-up on the exit rate EBITDA margin target. Would you mind confirming if it's still 15% to 16%?

Within that range, yes.

Hi, thanks. Good afternoon. I'd also like to extend the welcome to Chris, and thanks to Cyndi. So, I want to stick with the Residential business, because it sounds like you're seeing good traction with respect to online traffic and bookings, and yet you're reducing your full-year residential revenue guide by about $20 million to $25 million. It sounds like some of that better appreciation of the trajectory and perhaps some sales force productivity insights, but just want to elaborate, if you can, on what's changed? Is it a function of hiring capacity with respect to the sales force? Is it a function of the productivity of the borrowed salespeople? Or is it a function of end-market demand for your product?

Yes. So, I think the number one factor is human behavior. It's the borrowed sales force—a significant portion of it returning to their comfort zones of selling their core products. So if I've sold Apartments.com for seven years and done quite well, I feel anxious about selling a new product that I'm not going to be selling long-term. The beginning, middle, and end of it is really about building a dedicated sales team, just like CoStar and STR, etc. We must build that core sales team for Homes.com so they can sell and service that product as their first priority. Those folks are doing well, and I'm happy with the results of this relatively new sales force, but we need to keep growing it. Traffic is phenomenal, the end-users prefer our product over others, and agents find significant value in what we're doing if they are actively involved in real estate. Now, it's just a question of building out that dedicated Homes sales team.

Got it, that’s helpful. Thank you.

Hi, thank you for the opportunity to ask my question. You mentioned Apartments earlier in the call, and I would appreciate your insights on the trends for next year, particularly regarding the supply dynamics. Additionally, I know there have been many questions about competition, especially as others have entered the apartment space. Could you share your thoughts on how you plan to maintain your leadership position as competition intensifies and what differentiates your business?

Yes. So, as you look at the economic environment we're operating in for Apartments.com, I do believe we are in the Goldilocks zone. We don't want to see vacancy rates too high; people then don't have liquidity to pay for the ads and we don't want to see them too low because the demand for the ads goes down. In terms of how we maintain our competitive advantage, we have a robust and broad product development line. You can see the traffic continue to grow, and we continue to consistently outpace competitors in lead-to-lease conversion, unaided awareness, and traffic growth across various metrics. There is a lot of room in this space because most apartment units are in the smaller category and among individual units and houses. While we're growing down there, our penetration is still in the single digits, so there's tons of room for us to grow there.

Thank you for that. And I could have missed it, but I was just curious, can you share just updated thoughts on commercial EBITDA margin for the year? And are your expectations still the same as they've been for the prior two quarters?

We did provide guidance as in the second quarter of around 41%, and we do expect those to slightly be roughly in the same area.

Hey good evening everyone. Thanks for taking my questions and Chris welcome. Andy, I was hoping you could touch on some of the organic levers for CoStar Suite going forward. I think last quarter, you talked about 220,000-odd subscribers, STR and the lender product being an opportunity. But I was wondering if you could maybe break that down further as we sort of think about the growth drivers of the business over the next two to three years? Thanks.

Sure. Continuing to develop products that are geared towards corporate users, owners, and lending institutions—that's a wide open area with relatively low penetration rates. As we add more and more people in those sectors or segments, it creates more energy in the customer base. Brokers are more likely to engage with the product if corporate users are in the product. We're building out vibrancy in the platform by going into those segments in which we have not traditionally prioritized but are huge growth areas. We're also continuing progress towards moving into Germany, France, Spain, and other markets for CoStar, as well as our global hospitality functions. I believe later this year, we'll be releasing STR’s more full global functionality, which will further drive growth.

Great. And if I could just follow-up on commercial bookings in the quarter. It looks like you did improve quarter-over-quarter, but it's still down year-over-year. So, any color that you could sort of provide there when do you think that could start getting moving again? Thank you.

Well, you see that when you have fixed hours in the day, the CoStar Apartments, LoopNet salespeople shift over and start selling Homes.com. That comes at a cost where they're selling their core products. So, I think the predominant reason for any reduction year-over-year comes from that effort in selling Homes.com.

Yes. Andy, could you discuss the key factors that will influence the budget for the Homes.com initiative over the next few years, particularly regarding the slowdown in net bookings? Also, what exit rate is assumed for ARR for Homes.com in the revenue guidance? Thank you.

So, I will let Chris answer the second part after I address the first. Big picture, we are rolling out the Homes.com product offering. In our first full quarter with a good result, we're running more than double the sales we ran for Apartments.com in those early stages. So, it's a little early to call it a stutter. We have high confidence we are on the road to building the best site and creating substantial value, and we haven't changed our minds about this. We're going to continue investing at that same level. In terms of exit rate, Chris.

Thanks. The ARR question: we had provided previous guidance in the range of $475 million to $500 million, and at the lower end of that range is where we still feel comfortable.

Thanks and Chris, welcome to the CFO seat and congrats. I look forward to working with Rich again. But for Homes.com, I know the unaided brand awareness metric, that's an important North Star for you guys. I think we're all trying to get a better grip on the rate of net residential investment spending in the years ahead. So, maybe just a two-part question here. Should we be thinking about Homes.com reaching that 50% level as a trigger point for spend relief? And then secondly, you guys have obviously moved that unaided awareness up quickly. It basically took Apartments.com almost a decade to hit 50%. You're spending multiple times more on Homes.com. So rather than ask you for an exact date, should we be thinking about that 50% level coming in the quarters ahead, the years ahead? Or should we be looking at the Apartments.com path as a guide?

Well, I do not believe it is on the same path. I believe it's going much faster and will continue to grow much faster than Apartments.com. We anticipate similar to Apartments.com relatively constant investment as you build this out, and only increasing investment when the revenue and EBITDA financial results are clearly attractive. But building out something as valuable as the number one residential portal platform doesn't happen in one quarter. It is likely a multi-year effort, just like Apartments.com and CoStar. It's all about steady, persistent progress down the road. Don't expect radical changes anytime soon or investments that would slow EBITDA growth.

Okay, that’s helpful. Thank you, Andy.

Great. Thanks for taking my questions. Two more on Homes.com. You've done a great job driving traffic up meaningfully. Can you speak to how you aim to get more leverage, the balance between shifting focus to driving more app downloads or time on the app, in terms of getting perhaps cheaper forms of traffic behind upper funnel advertising or social or things like that? And then I have a follow-up.

Sure. On the app download side, we are focused first on web mobile because that is the fastest way to collect traffic. It's the most predominant platform, and it reduces friction. People typically aren't downloading an app to adopt a new product. So, as we are in the early stages of product rollout, our design and development teams prioritize web mobile. I'm sure you've experienced this before: optimizing everything around that web mobile platform creates a great experience. That’s what we’re hearing from consumers about the Homes.com site—it is clean, fast, and offers more information than any other platform. While we're also addressing the app side, right now, our focus is on traffic attainment. I am thrilled with what our Homes product team has achieved and we're keeping up with app parallel functionality, but mostly it's about traffic capture. We are aggressively marketing via digital, streaming, social media, etc.

I sure do. And then I guess, maybe a bigger picture question. I think earlier you alluded to the idea that buyer leads are not as valuable as getting listing leads, which makes sense. But then how do you balance—thematically—how are you going to balance the value of the platform to home buyers, which seems to be less valuable, with the drive for upper funnel advertising for agents to win more listings? If at the marketplace isn't balanced and you can't draw home buyers, how do you continue to drive returns? If the focus is really on driving listings; you follow the question, it's a little tricky, but I heard two different comments on the call today.

So, I wouldn't hold you at fault for misinterpreting my poor formulation of words. But our first and foremost priority is to create the best site possible for home buyers, which I believe we're doing. So, we focus on attracting home buyers first. We're also generating agent-focused value. The 'your listing, your lead' model is preferred by sellers because, when they choose a real estate agent to help them achieve the best results for selling their home, they want that agent to ask the lead questions—an agent who knows the most about the property. We're not stealing leads; we're promoting homes, allowing agents to win listings and build their brand. I firmly believe we have the vastly superior model. There’s a distinction between winning listing leads and buyer agency leads. High percentages of buyer agency leads may not transact, while listings will transact quickly. We're integrating buyer agency intelligently and sustainably in line with traditional methods, not in a disruptive way.

Great. Thank you.

Well, thank you, everybody, for joining us today for the call. And Chris, welcome aboard.

Thank you.

No offense to Scott Wheeler, who I hope is listening today with a scotch in his hand, but Scott was good; Chris is clearly better. And then Cyndi, thank you for all the calls you've done. Cyndi will be rotating to focusing on her new role as Chief Accounting Officer. We've gone to the bullpen and we're bringing the ever-famous Rich Simonelli back to sit in the Investor Relations seat. So next quarter, I hope you'll be joining us, so we can update you, and we'll have Mr. Simonelli back and ask him to set the preamble to music. Thank you all for joining us. I look forward to talking to you all next quarter.