CoStar Group, Inc.
Q3 2019 Earnings Call Transcript

Published: 23 Oct 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Third Quarter Financial Results Conference Call. At this time, everyone joining by phone is in a listen-only or muted mode, and then later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, the conference is being recorded.I’ll now turn the conference over to our host, Mr. Rich Simonelli, Investor Relations. Please go ahead.

[Rich Simonelli:]

Thank you, operator, and welcome to CoStar Group's third quarter 2019 conference call everyone. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Scott Wheeler, our CFO, I'd like to share some important facts.Certain portions of our discussion today may contain forward-looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to those stated today in CoStar Group’s October 22, 2019, press release on our third quarter results and in company's outlook and then CoStar's filings with the SEC, including our most recent Annual Report on Form 10-K and our subsequent Quarterly Reports on Form 10-Q, under the heading Risk Factors.All forward-looking statements are based on information available to CoStar on the date of this call. 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 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 for these terms and they can also be found on the press release on our website, which is located at costargroup.com.As a reminder, today's conference call is being broadcast live and in color on our Investor Relations website. So, please refer to today's press release on how to access the replay of this call. Remember, one question, and if we have time permitting we'll re-queue.But I'll now turn the call over to Andy Florance. Andy?

[Andy Florance:]

Thank you, Rich. That was extremely well done.

[Rich Simonelli:]

Thank you.

[Andy Florance:]

Thank you for joining us for CoStar Group's third quarter 2019 earnings call. CoStar Group's total revenue was $353 million in the third quarter of 2019, an increase of 15% year-over-year. During the second quarter of 2019, CoStar Suite revenue moved through the $600 million annualized run rate mark.In the third quarter, Apartments.com moved past the $500 million annualized run rate mark and did so with a 20% year-over-year growth. This is outstanding sustained growth, considering we're in the six years – six year of owning Apartments.com. But we expect there's much more to come.Multifamily is a huge opportunity. We estimate that total addressable market multifamily is somewhere between $8 billion and $10 billion. This is four to five times bigger than we initially estimated the multifamily opportunity was when we entered the space in 2014.Net income for the third quarter 2019 was $79 million, an increase of 34% over net income of $59 million for the third quarter of 2018. EBITDA was very strong for the third quarter of 2019, coming in at $113 million, an increase of 24% versus EBITDA of $91 million for the third quarter of 2018.Adjusted EBITDA margins moved to 37%, and we achieved 80% gross margin in the third quarter. Our balance sheet remains strong, and we expect to have over $1 billion in cash at year-end and no debt, even after the closing of the STR acquisition earlier today.We continue to show strong growth in profitability, while we continue to invest in the future growth of the company. I'm delighted with our ability to consistently deliver on both fronts. There's a massive opportunity in both the United States and abroad in information, analytics and marketing for commercial real estate. While I'm pleased that we are approaching $1.4 billion of revenue in 2020, we believe there are billions of dollars of opportunity not yet realized, so continued investment is optimal.We had another excellent sales quarter, generating $50 million in company-wide net bookings, and increased 27% year-over-year in the third quarter. Our average net new sales of $52.5 million per quarter year-to-date in 2019 is 32% higher than the comparable period in 2018 when the average net new sales per quarter was $39.8 million.On the multifamily side of the business, the larger sales force we deployed in 2018 has delivered in a big way. In fact, both CoStar Suite and Apartments.com sales team each achieved more than 30% growth in net new sales in the third quarter of 2019 compared to the third quarter of last year.I'm optimistic that our sales levels will continue to be strong for the remainder of 2019, and can improve in 2020 as we are proactively increasing the size of our sales force, offering new products and services, and continue to grow share in our huge addressable market.We now have 280 field sales reps in production for CoStar Suite and LoopNet, and we look to add -- enter 2020 with about 300. In the third quarter of 2019, we identified and distributed list of 17,000 CRE owner as strong sales lease to our sales force. Each rep has a target owner list. We have been aggressively preparing our sales force to target and sale owners both LoopNet signature listings and more CoStar Suite.I'm pleased to announce that we closed on the acquisition today of STR for $450 million. Founded 1985, the STR team has created the global industry-leading benchmarks in analytics that are the primary information tools, hotel management investors rely on to monitor and optimize their assets. They provide the foundation for daily hotel and lodging pricing strategies.This is an extraordinary company that's a viable partner with the hotel industry. Ultimately, the cash flow intelligence STR provides is the fundamental value driver in the $3 trillion hospitality sector commercial real estate. The industry needs information to effectively develop finance appraise and transact hospitality properties.We are bringing together a leading provider of commercial real estate information, analytics and online marketplaces with the gold standard, global hospitality industry for premium performance benchmarking and revenue forecast. We are excited to add this world leader as an extent of the depth and reach of our comprehensive CoStar platform.STR aggregates data from over 65,000 hotels worldwide, representing 9 million guestrooms in over 180 countries. Hotels electronically submit their revenue and occupancy data to STR in a weekly basis.CoStar currently provides billing information on 80,000 hotels, 45,000 hotels sales comparables and 4,500 hotels currently offered for sale. We plan to integrate the STR day with CoStar to create exciting new products that provide hotel building data, aggregate income and occupancy information, sales comps and fore sale information.STR has expanded our global footprint. CoStar now has over 4,400 employees in 19 countries with over 600 working outside the United States. For the first time, CoStar now has staff in Singapore, Australia, China, Colombia, Brazil, UAE, Indonesia, Italy, India, South Africa and Japan. Just imagine the air miles.Smith Travel brings an unrivalled reputation within the global hospitality industry for their data integrity, reliability and strict confidentiality. And we look forward to continue to build on those core values in the next chapter Smith Travel's growth.CoStar has extensive experience, segregating and protecting highly confidential client information, such as accounting data, leases in lease abstractions, major deals and progress, payroll data and sensitive banking data.Integration of STR with the CoStar product will maintain absolute confidentiality while also allowing property owners, investors and service providers in the hospitality sector, a more holistic, aggregated view of industry at market levels.I've already had a chance to meet with the STR team in London. It's a great group. And tomorrow, I will be in Hendersonville, Tennessee to welcome hundreds of new employees to the CoStar team.I'm looking forward to working with our outstanding management team including

[Scott Wheeler:]

Thank you, Andy. Well said.

[Andy Florance:]

Thank you.

[Scott Wheeler:]

It probably didn't seem like we took a break this summer. The third quarter delivering another great financial outcome, while initiating and closing our acquisition of STR took less than 12 weeks, but who's counting.Well, Andy mentioned a number of highlights of our third quarter results, including our second consecutive quarter of net new bookings of $50 million or more. We also had strong double-digit revenue growth, 50% year-over-year, which by the way, its 10 straight quarters of revenue growth of 15% or more and for all of you EBITDA lovers out there, another fun fact over the trailing four quarters. We amassed over $500 million in adjusted EBITDA, that's $0.5 billion, certainly a significant achievements for all of us here at CoStar.So, starting-off with revenue, which came in above the midpoint of our guidance range for the third quarter at 15% and for the year, we expect consolidated revenue growth of approximately 16% to 17%.Looking at revenue performances by services, CoStar Suite revenue growth was 12% in the third quarter versus the third quarter of 2018. Revenue growth rate for CoStar Suite expected to be approximately 13% for the full year of 2019.Revenue in our Information Services sector grew 11% year-over-year in the third quarter of 2019, primarily as a result of CoStar Real Estate Manager revenue growth of 19% year-over-year. As we get further past the lease accounting standard adoption dates, Real Estate Manager results include subscription revenue growth of 44% year-over-year in the third quarter, and the 20% drop in one-time implementation revenues.We expect Information Services revenue to grow at a rate of 20% to 21% on a year-over-year basis in 2019, which includes approximately $3 million to $4 million of STR revenue. More on our STR outlook a little later in the call.Multifamily revenue growth for the third quarter remained strong at 20% over the third quarter of 2018, the full year 2019 revenue growth for multifamily is expected in the 20% to 21% range. Commercial property and land revenue grew 17% year-over-year in the third quarter of 2019.Our LoopNet marketplace, which represents approximately 75% of the revenue in the commercial property and land sector, has seen continued strong growth numbers, even as we repositioned LoopNet into the premium advertising solution for property owners. There's a lot of work going on behind the scenes to implement our plans for LoopNet, as Andy mentioned, and this includes discontinuation of certain legacy products and contracts that are not in line with our strategy.Excluding these one-time impacts of discontinued products and contracts, the third quarter revenue growth rate of LoopNet would have been over 20%. We expect year-over-year organic growth in the commercial property and land sector to be about 16% for the full year of 2019, and looking forward to stronger growth rates from LoopNet as we continue to build that sector of our company.Our gross margins came in at 80% in the third quarter of 2019, slightly increasing from 79% gross margins we achieved in the second quarter of 2019. This is the result of strong cost leverage.Our revenues increased $9 million from the third quarter of 2019 compared to the second quarter of 2019, but our cost of revenues remained relatively unchanged sequentially. We now expect overall gross margins of approximately 79% to 80% for the full year of 2019.Operating expenses of $187 million for the third quarter of 2019 were slightly below our estimates and down from the $197 million in the second quarter of 2019, as a result of seasonally slower marketing spend in the third quarter. As mentioned during our last financial update in July, we increased our planned levels of marketing spend in the third quarter, which we expect to continue through the end of the year.Our third quarter adjusted EBITDA of $129 million represents an 18% increase compared to adjusted EBITDA of $110 million in the third quarter of 2018. It was approximately $2 million above the top end of our guidance range. Favorable personnel expenses were the main reason for the positive variance. The resulting adjusted EBITDA margin of 37% is 80 basis points above the 36% margin we achieved in the third quarter of 2018.Net income in the third quarter of 2019 was $79 million, an increase of 34%, or $20 million compared to the Q3 of 2018. Our effective tax rate in the quarter was 21%, reflecting benefits associated with our share-based payment transactions and R&D credits.Non-GAAP net income for the third quarter increased 21% to $96 million compared to Q3 2018, or $2.61 per diluted share, includes adjustments for stock-based compensation, acquisition expenses, some restructuring costs associated with the organizational changes in Apartments.com and research that we discussed last quarter. Non-GAAP net income for Q3 assumes a tax rate of 25%, which does not include other discrete tax adjustment items.Cash and investment balances were approximately $1.4 billion as of September 30, 2019, up approximately $91 million since last quarter. And as you know, we closed on the STR acquisition today, so we expect our cash balance to be approximately $1 billion, somewhere around that at the end of 2019.Now let's take a look at some of our performance metrics for the quarter. We had another strong bookings quarter with net new sales of $50 million, an increase of 27% year-over-year for the third quarter. The sequential decline from the $59 million of bookings in the second quarter is a result of seasonal sales patterns, primarily in our online marketplace businesses.At the end of the third quarter, our salesforce totaled approximately 820 people, up about 40 people from last quarter and up almost 90 people from the third quarter of 2018. Most of this growth is in our commercial real estate sales team, which is focused on selling CoStar and LoopNet.We expect to continue growing the commercial real estate salesforce during the remainder of this year along with the ramp-up of our mid-market sales team in Apartments.com. Despite our sales team will grow to an approximate range from 880 to 890 by the end of 2019. The renewal rate on annual contracts for the third quarter 2019 was in line with the rate achieved in the second quarter of 2019 at 90%.The renewal rate for the quarter for customers who have been subscribers for 5 years or longer was 95%, also in line with the renewal rate of 95% in the second quarter of 2019. Subscription revenue on annual contracts now accounts for 82% of our revenue in the third quarter, up from 80% this time last year and flat compared to last quarter.I'll now discuss our outlook for the full year and the fourth quarter of 2019 beginning with the outlook for the STR acquisition. We expect that STR will contribute between $3 million to $4 million in revenue in the fourth quarter of 2019. Our revenue estimate is impacted by the negative accounting effect of deferred revenue that was on STR's books at the time of acquisition.STR's deferred revenue balances are quite significant relative to other acquisitions we've completed in the recent past. This is because STR builds and collects the full year amount for annual subscriptions in the first quarter of the calendar year. This is a that I'm particularly quite fond of, but it does reduce the accounting revenue post acquisition.Similarly, our estimate of adjusted EBITDA for STR in the fourth quarter is negatively impacted by the accounting adjustments for deferred revenue, so all the impact of integration costs. We expect the negative impact to adjusted EBITDA of approximately $5 million to $6 million in the fourth quarter as a result of the acquisition.These estimated impacts to revenue adjusted EBITDA from the acquisition STR are included in the revised outlook for 2019. As we look towards 2020, the results for STR will continue to be affected by the negative accounting adjustments for deferred revenue.For example, the current annual revenue run rate for STR of approximately $64 million would be reduced by an estimated $10 million of deferred revenue that carries over to 2020. This would result in a revenue outlook of approximately $55 million for STR in 2020 before any anticipated growth or integration changes.Similarly, the deferred revenue effects in 2020 flow through to the EBITDA for STR. We need time to develop the detailed plan for STR and the integration in 2020, but at this stage, we expect the acquisition to become accretive in the second half of the year and contribute positive EBITDA for 2020. Of course, these are all accounting results for STR, which in no way impact the economic attractiveness of combining CoStar and STR, which we've discussed previously.We continue to expect, as we said in the press release for the acquisition, that within the 3 to 4 years, our investments in new products and our focused on growth of the combined businesses will generate annual revenue growth above 20%, which is approximately 2 times STR's current growth rate and profit margins in line with CoStar's long-term goal of 40% plus adjusted EBITDA margins by 2023.Now I'll discuss the combined outlook for the company. We're raising our revenue outlook slightly to $1.385 billion to $1.391 billion for the full year of 2019 to include the estimated revenue from the STR acquisition. The outlook reflects revenue growth for the year between 16% and 17%. We expect revenue for the fourth quarter of 2019 in the range of $360 million to $366 million, representing topline growth in the range of 14% to 16% for the quarter versus Q4 2018.We expect adjusted EBITDA be in the range of $494 million to $500 million for the full year of 2019, which is relatively unchanged from our previous guidance except for the inclusion of the estimated STR results mentioned previously.We expect full year adjusted EBITDA growth of approximately 19% year-over-year with an adjusted EBITDA margin for the year of approximately 36%. Up approximately 70 basis points at the midpoint of the range compared to 2018, despite the negative short-term impacts of the STR acquisition.The fourth quarter of 2019 we expect adjusted EBITDA in the range of $129 million to $135 million. Included in our outlook for fourth quarter, adjusted EBITDA are the impacts of STR acquisition along with the increased level of marketing spend for Apartments.com.As Andy discussed, we've seen outstanding results from the increased spend levels and expect to continue investing in Apartments.com marketing at the higher level. The net result, the fourth quarter up, considering other costs offsets, with an incremental spend of approximately $5 million to $6 million for the fourth quarter of 2019.In terms of earnings, we expect full year non-GAAP net income for diluted share of $9.90 to $10.02, based on 36.6 million shares. For the fourth quarter of 2019, we expect non-GAAP net income per diluted share, in the range of $2.52 to $2.64, based on 36.7 million shares.Looking ahead, we believe that 2020 is the right time to increase our investment in marketing, to rapidly expand our multifamily business. Although, it's too early to provide detailed guidance for 2020, we expect overall adjusted EBITDA margins to decline by approximately 400 basis points in 2020, from the adjusted EBITDA margin outlook for 2019.In dollar terms, we will need to generate approximately $65 million of incremental profit to recover those 400 basis points. To put that in perspective, in 2019, we expect to add approximately $80 million of adjusted EBITDA.We believe that by increasing our marketing investment in 2020, the results in the form of increased revenue growth will improve our ability to reach our long-term goal of $3 billion as run rate revenue. And 40% plus adjusted EBITDA margins in 2020 to 2023.I'd like to add additional financial perspective to this investment, which is similar in size to the initial marketing investment we made, when we launched Apartments.com back in 2015. As many of you may recall, after we bought Apartments.com, we placed a big bet by investing $100 million in marketing, to go after what we believe at the time was a $2 billion addressable market opportunity.Looking at that now, it's hard to argue with the results, which indicate that this bet has clearly paid off. Since we launched Apartments.com, our multifamily revenues have grown from $160 million in 2015, to almost $500 million in 2019, an increase of 310%.During that same period, our annual Apartments marketing spend has grown from $130 million in 2015 to only $150 million in 2019. That's an increase of only 15% in total over four years. So revenue has grown 20 times faster than the marketing spend. I think that's pretty good leverage. Although, some might argue that we've actually underinvested in marketing, as we've grown this business.This year, as oppose to 2015, we are in a much stronger position to increase marketing spend, both operationally and financially than ever before, which increases our chance for even greater success.Our direct sales force is much larger and continues to deliver record sales level each year. Our site traffic leads the industry. Our data content is massive. And the addressable market opportunity that we see now is $8 billion to $10 billion, which is four to five times the size it was back in 2015.Also, back in 2015, our marketing costs represented 80% of the multifamily revenue. Now in 2019, they're only 30% of multifamily revenue. With this potential increase in our marketing budget of $100 million, we estimate that marketing would represent approximately 40% to 45% of multifamily revenue in 2020.CoStar is now big enough and growing fast enough to absorb investments of a size. If our growth continues in 2020 at the same rate as 2019, we could potentially add $200 million in revenue next year, which would be two times the potential increase in marketing.To summarize, now is the time to increase our multifamily investment. We believe the market opportunity is bigger and much easier to see them before. We have more assets at our disposal, and more experience to leverage these for success. Investment required is actually much smaller than before, relative to our size and scale. And we believe the returns will be bigger and faster, than in 2015.Overall, I believe our strong results and operational improvements have us well positioned for the fourth quarter and beyond. We're happy to have closed the STR deal so quickly. And once again, we want to welcome everybody at STR to the CoStar team.With that -- that was a mouthful -- we'll now open the call for questions.

[Operator:]

[Operator Instructions] Our first question from the line of Brett Huff with Stephens. Please go ahead.

[Brett Huff:]

Good afternoon, guys.

[Andy Florance:]

Hello, Brett.

[Scott Wheeler:]

Hi, Brett.

[Brett Huff:]

Scott, thank you for the sort of thoughts and justifications around the additional ad spend, that's super helpful. Can you just go through those -- go through that one more time for me? And then talk a little bit about, where does ad spend go from there?And Andy, you mentioned right after you guys did the first Apartments deals people are worried about it I think the worry was that, if this business in order to grow it require incrementally even more ad spend. Can you just give us your thoughts as you go forward that 20 times return is compelling, but just explain how you guys think about that long-term? Thank you.

[Scott Wheeler:]

All right. Okay, Brett. Let me walk through that one more time so the financial perspectives around this thing. So, definitely we did the initial investment in marketing in 2015, $100 million. We had a report out that said that, the marketplace is $2 billion in size.And then, as you know, we worked through the large end of that marketplace. We've seen the opportunity in the mid-market, we've seen how the opportunity in the I/O large-scale market. And we know that, that estimate is now growing to between $8 billion to $10 billion opportunity.So, we think the $100 million to go after $2 billion, was a great move. We think the $100 million to go after the next $8 billion is an even better move. So, that was one important note.The other that -- the time when we made that investment, the total company multifamily was not nearly as bigger and stronger as we are now. So, we had $130 million marketing spend and that was 80% of the revenue.Clearly, we've grown that now to be almost $500 million in revenue and saw an incremental $100 million in spent against that fast-growing business. There's much lesser portion of the business, much less of a bigger bet.The other thing I think is important to notice is that, that we've now grown salesforce much bigger than it was before and produces a very high level. The site traffic has grown significantly. The amount of data we have, the amount of electronic feeds, all the strength of that site their to leverage into this next size of the market that will make that $100 million even much more effective they are like softening up the beach head before the troops all go in on the attack.And then I think when you look at just the ability the company now when we're growing as rapidly at $1.4 billion in revenue, we had couple of hundred million of revenue in year at our current growth rates. We've added over $110 million, $115 million in costs this year.So, adding investment in costs are just -- they are going to be bigger numbers, they scare people a bit, because they're big, but when you look at the relative size of the company, these are the best we should be making to keep increasing the scale and the growth on the topline. So, that's what I probably comment on. And let Andy add little more.

[Andy Florance:]

Yeah. And Brett it -- it sort of, I express concern from the 2014 period where -- well, we have continuously invest -- increases these investments in marketing. One of the things that is unique about this industry is we are one of the only aggregators out there investing any material money into the industry.So, this is not something where we are doing it in a zero-sum game trying to keep-up with some other competitor. What we're doing is we're seeing that when people are aware of our products and services, they are tending to buy them and renew at a higher rate.And with an unaided awareness in the 20s to low 30s, there's still a lot of people who are not aware of the product and we want to make more people aware of the products and services that we can sell to more people.We also foresee this strategic advantage of investing ahead of the pack. We want to be -- we are confident and believe that we will be turning through a $1 billion revenue mark on Apartments at some point going beyond there. We want to be investing into that size of company not into what the industry was doing a couple of years ago.So, this is really driven by the fact that we now have much better numbers, metrics, ROI, analysis, SEM analysis. We have a good handle of what we can sell and who we can sell it to at what price points. And we just want to go capture the opportunity. It's a relatively small investment compared to what we think the upside game is.Some people think that there's a big opportunity in the Apartment sector. That would be one of us. And some people think there's not a big opportunity for apartment sector.But we believe there's a big one, so we're investing there. We're not being driven by an escalating tit for tat with a bunch of head-to-head competitors. We're not in a beer business or the car business or the insurance business, we're all alone in a multi-trillion dollar asset class. So we're pretty excited about, we think it's good.

[Operator:]

And our next question from Andrew Jeffrey with SunTrust. Please go ahead.

[Andrew Jeffrey:]

Hi, guys. Good afternoon.

[Andy Florance:]

Good afternoon, Andrew.

[Andrew Jeffrey:]

Lots to absorb as usual. One of the things I think you touched on Andy in LoopNet is the changing behavior of commercial property owners and managers and more of a focus on online. What if you could provide a little texture around that, and why you think we’re at a tipping point and what specifically you're doing at LoopNet to capture that opportunity. May not get as much air time or attention as that at the big marketing spend in multi-family, but it sounds like a structural change in the market you're addressing?

[Andy Florance:]

Yes, it is. So I've had the good fortune to spend a couple of decades in the industry, and I was there back in a completely offline side then you see it move into unsophisticated online where there was an area where online marketing commercial real estate meant that you save $0.55 on a staff when you send your flyers, a PDF to the brokers and staff.But really what's happened is we could see as clear as day is you look at the traffic coming into LoopNet, LoopNet's got 80 some percent share of the folks looking for commercial property coming through. And we through reverse IPs and through Google analytics, we can get an idea of who these folks are and they're pretty much the Fortune 100, they're Walmart, they're Amazon, it's McDonald's, that's all the major tenants, it’s the big law firms just like people are using the Internet and everything from dating to buying a house, to buying a car, buying insurance. Everything they do, people are looking for commercial real estate. And they should not -- Facebook is a client of ours, it should not surprise anybody that Facebook goes on the Internet to look for commercial space, right?But it does surprise the industry, because the industry is trying to figure out is locked into a historical marketing mindset of you can't market to end users. There’s just too many of them. And it's just not possible in traditional methods to do it. But the whole digital folks searching out on the Internet rather than you going out and try to market to them, they come to you, and we’re producing the tools where the owners could be visible when they come looking for them.So I'm very bullish on it. I think it is just an identifiable mathematical certainty that it's occurring, but -- and so we're going to push that and we’re going to create awareness with folks how it’s happening. And I think it’s pretty interesting opportunity, because the broker, broker models pretty good at the 30,000 foot, 50,000 foot size, but it doesn't work so well when you get below 10,000 feet, and that's where the majority of transactions are.So we're going to push on it. We're going to see, I believe, we'll see success in it, and I'm pretty excited about it. But it doesn't happen overnight. We're rebuilding LoopNet. We can see it when you go look at the site, you can look at some office buildings for lease and at certain stage, you'll see that we're no longer presenting the data like to simply Craigslist where you're just presenting raw data. We're now paying attention to how the buildings are branded online and the image they present, and the image of the architect, the image of the owner, the image of the brokers.And so we're not just presenting them. We're controlling the kind of frequency they get by controlling where they sort, the size of placard, we’re controlling the branding, the reach. And so I think we're producing what will be the most powerful marketing tools the industry has ever seen, and I think it’s going to be exciting revenue opportunity. And it’s pretty much I think about it half a day.

[Operator:]

Thanks. We'll go to Bill Warmington with Wells Fargo. Please go ahead.

[Bill Warmington:]

So congratulations on closing the STR deal.

[Andy Florance:]

Thank you very much, Bill.

[Bill Warmington:]

So the question I have for you is on LoopNet. Maybe you could talk a little bit about the pricing asset being applied to the real estate brokers and then the pricing as it applies to the owners. And you gave the -- an update on the TAM for multifamily at 8 billion to 10 billion. I was hoping we could get an update on LoopNet TAM as well?

[Andy Florance:]

Yes. So the -- again the way LoopNet was historically marketed. It was geared to brokers just because LoopNet one of the standalone company had no Research Department and needed to get content via the broker ads. So they would sell buckets of ads to brokers at super low prices.Brokers have a relatively small economic interest in the transactions. They typically -- the LoopNet as were purchased by broker who was pooling 1.5% of the economics themselves. And unlike in honor, the actual price achieved and the sale or a lease transaction isn't nearly as leverage for the broker as it is for the owner.So brokers have small budgets. Remember when we first picked up LoopNet part of the average ad price was $6 a building. We are now seeing owners who have 95% of deal economics, and who are willing to pay the sort of the top have walked -- videos of walked in building, want to pay for drone videos, willing to pay for larger placards. Those folks are willing to pay price points at 5,000, 6,000. Remember, we were selling ads to owners and print were up to 12,000 up to 50,000 a building.So we're just – we’re migrating and it's not something we're doing in conflict with the brokers. The brokers like what we're doing because the brokers get promoted since they're the ones representing this building.So the owners paying to promote their building get broader reach for the building and frequency in exposure and branding and that also carries that list brokers too. So it's sort of fun when you can be raising prices by shifting to a different segment with a different value proposition for what you're producing and not alienating anybody. So that's what we're doing.In terms of the TAM, we haven't really recalculated that but we're at – we are under 200 million now on that. We were roughly about 160 million and the last calculated on this was between 2 billion and 2.5 billion -- top of the envelope version. So we haven’t updated that lightly, but as we get further into the selling and we see the take rates and the full sales force behind the products that we launched over this next few months, we will probably be able to update that as we get into the – mid part of next year.And that's just looking at the marketing side of it. There's -- there are a number of things we perceive industry we find valuable, like reducing their workload in sub 2,000-foot leases. So we're comfortable that it's a pretty big TAM, and that we have a lead on it.

[Operator:]

We have a question from George Tong with Goldman Sachs. Please go ahead.

[George Tong:]

Hi. Thanks. Good afternoon.

[Andy Florance:]

Hi.

[George Tong:]

You're planning to increase your Apartments.com marketing spend by $100 million in 2020, which amounts to about 600 basis points of margin headwind. You mentioned earlier that you expect margins to decline by about 400 basis points next year. So can you discuss where you expect positive margin offsets to confirm? Whether it's from productivity gains or cost cutting elsewhere in the business?

[Andy Florance:]

Yes. There's a certain amount -- George that we'll spend each year. You know outside of marketing, it's natural to the business. Heads we've added this year. Salary increases those things. They'll go into next year, but they won't go as fast as these increases in marketing.So our forecast now looks at around 36% margin at the midpoint for 2019. So if you take into account extra $100 million in marketing and then the rest of those costs will say personal cost and related nearly will grow nearly as fast. And so that will provide a bit of an offset.So in the end of the day we'd expect to have about that 400 basis point drop off the 36 as a rough guide. Now obviously, they'll be some variety around that when we get into specific planning and we'll share that in February. But that's really where we are. We don't see there needs to be a bunch of cost cuts out there. It's more of – it’s managing after we've done a nice bit of investing this year, our cost base into next year.

[Operator:]

Our next question will be from Pete Christiansen with Citi. Please go ahead.

[Pete Christiansen:]

Good afternoon. Thanks, guys. Andy, how can you -- it's obviously, a huge step up in marketing spend here, make sense to lean in at this time, but how can you ensure you get the right efficiency when you're trying to target the eye or independent owner category versus the broader category? How do you ensure that you get that efficiency? What's the strategy more like…

[Andy Florance:]

That's a really good question, and that is right on target. It's something I think a lot about. And I sort of have a simple answer, which is, we're not targeting the I/O strategy. We are -- we can look -- we're targeting general awareness. We're targeting making sure that we're capturing increasing percentage in share of the renters hitting Internet, regardless whether they go to institutional property or to a low-end property.That creates value and it's hard to – and it's really not that easy to mess up on that. We have an experienced strong team on handling our SCM on Apartments. We have a good sense of what the good keywords are, good neighborhoods and the like. So, that one is a pretty safe investment. That's driving demand to our clients.Secondarily, we are -- we've broken open on this middle market opportunity. So we have gotten great penetration of the larger sized properties, really good institution at 100 unit plus to 200 unit plus, but we are selling 10,000 plus ads in an area that folks never really knew existed, which is the five units to 100 unit community.So, we are just trying to create general awareness for the person that's got a 30 unit apartment building, and softening the road for the hundreds of folks we got in the apartment sales force, selling exactly the same thing we've been selling successfully. So, it's just creating awareness in the same way for the same folks.Now as a derivative of that, it has a side benefit of supporting our I/O effort, because as they become aware of the site, you see that pickup rate where someone puts an apartment -- onto Apartments.com for lease. They select the renter tools. At this early stage, we're seeing 36% opt-in. So, just awareness -- general awareness of the site will support the I/O initiative.And when we run focused groups, we're getting positive feedback from both the renter and the small owner on what we're offering. We're getting extremely positive feedback from the renter. And so, our primary concern is just to make sure that we have a large pool of owners opting into the tools so that the renters can take advantage of them.So we're thinking a lot about it. A lot of it is very basic blocking and tackling, blocking and tackling of low risk and then what we're doing is we're fine tuning the messaging, creating awareness amongst the 300,000 folks with apartment buildings that we haven’t sold too, and we hope to sell to over the next couple of years. So lot of money.

[Operator:]

And we'll go next to Ryan Tomasello with KBW. Your line is open.

[Ryan Tomasello:]

Hi. Good evening, everyone. The revenue profile of the businesses is obviously, involve a lot over the past three years, and it seems like that will definitely continue to be the case as Apartments.com's reach, expands the prospect for LoopNet owner initiative seems strong, and of course, the push into hospitality with STR.So Andy, I was hoping you could provide us with your updated thoughts on the resiliency of the business model through a downturn as these new businesses grow? And how your efforts to manage the revenue quality of the business are perhaps governing your decisions with respect to new investments across the CoStar platform?

[Andy Florance:]

Sure. So, I mean, it's an important question. We are obviously, in a very mature cycle. I went through the market economics for CRE right now and they -- when you say they can’t get better, they get better. And then they get better. So we're not seeing any weakness in the CRE industry however, just common senses says that we’re not at the end of cycles.So, we -- one of the things I do like is that if you look at the CoStar information revenue stream, it is -- a lot of that revenue is now coming from banks and major owners. And when you go into a cycle, banks stepped up. They're buying typically. They don't reduce it.So, that is a stabilizing influence. And we are -- we continue having gone through 2008. We continue to discourage salespeople putting a lot of energy into plant, water and companies, and moving companies, and other companies that evaporate in the cycle. And we put effort into major owners, banks, investors, who tend to have more demand in the cycle.Now, we operated Showcase and we can observe LoopNet in a cycle. And there's a little bit of counter cyclicality there, where when you've got $150 million, but that looses a tenant, you're willing to spend thousands a month to try to replace that vacancy.And what we hear from people who have operated the apartment business through cycles is that, this is actually the worst cycle to be in, right. These are so low and, well, they can increase people's budgets, go up for marketing apartments. That makes sense.You do in a cycle get complete bankruptcies. But then, that's quickly followed by someone picking up the asset with an unlimited marketing budget, which is a wonderful thing to see.The STR revenue, we believe is very resilient. The renewal rates there are shockingly high. So we think there's some resilience there. And it's a basic operating metric being used by the hotels between their -- from their sales manager, general manager to the flags, brands and investors. It's something that is a utility. And it's not something that they have the optionality to shut off in a down cycle, even if -- unless they just simply don't exist anymore. So, we've done well in past cycles.We don't -- I think, we drop -- CoStar's sales drop 3% in 2008, which is remarkable, given the scope of it. And I think we're pretty diversified and pretty resilient when the next one comes. And there's the offsetting thought, which is, when you go into a cycle, it's a wonderful time to buy really good companies at a big discount, which we really look forward to.

[Operator:]

We'll go next to Mayank Tandon with Needham & Company. Please go ahead.

[Mayank Tandon:]

Thank you. Good evening. I know that you give the margin guidance, but you could at least qualitatively talk about the revenue outlook for next year, just in the context of should we expect the growth to accelerate, given the investments or will that be more of a 2021 scenario? And then should we look at the 2019 growth rates across the different product lines, may be a baseline for 2020?

[Scott Wheeler:]

Yes. Thanks, Mayank. It's always a tricky spot and we're in the third quarter. We don't have our specific guidance ready to forecast or budget prepared for 2020. I alluded in my comments to continuing growth next year like we've seen this year, which certainly what we've been planning for and investing for.And we expect certainly with the increased investments in marketing to help underpin that. What we more look out was, we gave that 5-year outlook previously, and obviously, when you make a new marketing investment, you want to be sure that the business one can absorb it, make it invested effectively, and then the outcomes of that will get us more assurance that we'll hit those goals. And I think as we work through that exercise, you could see just by the scale of the business were now you can invest $100 million and you may take a bit of a margin drag on that.But with the size and the speed of our growth, you could recover that margin drag within a year and then go back on top of it quickly in the second year out. Now these are all financial models. They're not plans or budgets yet. So I don't want to get out ahead of ourselves on what that means.But we certainly expect that these investments will continue the growth rates where we are and we want them to move us forward into the mid-later part of next year and really see the benefits of them into 2021. And so we have to invest now to get that to happen. Hopefully, that helps, give you some direction on how we think about it.

[Operator:]

Our next question from Sterling Auty with JPMorgan. Please go ahead.

[Sterling Auty:]

Yeah. Thanks. Hi, guys.

[Andy Florance:]

Good evening, Sterling.

[Sterling Auty:]

Good evening. On the marketing, Andy, you've said the number of times that this actually is the tougher time of the multifamily cycle where occupancy rates are so high, vacancies are so low. So, is the incremental investment more tied to just where you think the competitive position is? So you can just take a disproportionate amount of market share because of the healthier competitors? And it's not about the cycle, or is it in preparation for to have vacancy rates rise in 2020 not only the competitive position but maybe get a little bit of a tailwind from the cycle as well?

[Andy Florance:]

Sterling, it's -- the primary driver is not an upcoming sense of a cycle. Though that is true, you'd want to have greater awareness and broader share. It's more the first thing you said, which is, it's an open field. There is a clear massive transition from offline to online for the apartment industry. We're the leader and each time we gain more information about what the market looks like, we think it's bigger than we anticipated and we want to -- you use the word get disproportionate share, we don't believe in the word disproportionate share. We believe in the word a lot of share and nothing's disproportionate.We're just going to get a lot of share, and that we just think it's the -- relatively speaking it is a period or a time in the evolution of the industry where you can buy at the cheapest price you can possibly buy it. Just because no one's bidding for it really aggressively, no one's fighting for it really aggressively. We're, sort of, alone in this space right now, or we're not alone in this space right now, but people don't seem to be investing in it even though there's a lot of player's out there.

[Operator:]

We have a question from Stephen Sheldon with William Blair. Please go ahead.

[Unidentified Analyst:]

Great. Thanks. It's actually Josh on for Stephen.

[Andy Florance:]

Hey, Josh.

[Unidentified Analyst:]

Hey. Just want to get your quick thoughts on the delayed timeline of ASC 842? And how it might impact Real Estate Manager results for the rest of the year? And then is there anything else that you guys are watching that could act as a headwind or tailwind to the adoption of that product over the near-term? Thanks.

[Scott Wheeler:]

Yeah. Sure. The delay of the adoption certainly gives you a little bit of a trough now as people may back-off a bit. We think that will -- they will tick back-up next year when more of the requirements come in.The effect of that now is we believe we're losing that implementation revenue that the one-time that is going backwards. But it's nice to see the subscription piece still growing over 40%.So, we expect that will all moderate out in to the 15% to 20% growth range over time. And then, it's really the future growth for that business will be less dependent on the accounting teams, and what they do and more around how we integrate it with CoStar, and we provide more services and tools for their clients to use the rest of CoStar in managing their real estate portfolios. And that should fuel the growth of Real Estate Manager much longer and more effectively than the near-term effects of the accounting teams.

[Rich Simonelli:]

Great. With that, I believe we have no more questions. And thank you very much for joining us for the third quarter earnings call. And we look forward to updating you on our progress at the year-end -- at year-end call in February.

[Scott Wheeler:]

In February.

[Rich Simonelli:]

It's a big thing. It's exciting.

[Andy Florance:]

Happy holidays, everyone.

[Rich Simonelli:]

Thank you, everyone, for joining us. And we won't see you until you're through Thanksgiving and the holidays, December holidays, Christmas, New Year's and everything else, but we'll see you soon.

[Operator:]

Thank you. Ladies and gentlemen, this will conclude our teleconference for today. We thank you for your participation and for using AT&T Executive Teleconference Service. And you may now disconnect. Thank you.