CoStar Group, Inc.
Q4 2014 Earnings Call Transcript

Published: 26 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome the CoStar Group Fourth Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Rich Simonelli. Please go ahead, sir.

[Richard Simonelli:]

Thank you, operator, and good morning, everyone, and welcome to our fourth quarter 2014 conference call. We're delighted you joined us. Before I turn the call over to Andy, you should know that certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in our February 25, 2015 press release on fourth quarter and year-end earnings and in CoStar's filings with the SEC, including our most recent annual report on Form 10-K and most recent quarterly report on Form 10-Q. In each case under the heading Risk Factors. All forward-looking statements are based on information available to CoStar on the date of this call, and we assume no obligation to update these statements whether as a result of new information, future events or otherwise. As a reminder, today's conference call is being broadcast live and in color on the Internet, at www.costar.com, and a replay will be available approximately 1 hour after the call concludes and will be available until the end of the month. To listen to the replay, call [phone] within the U.S. or Canada or 320-36-53844 outside the U.S. and Canada. The access code is 352633 and a replay, as I say, will be available on our website as well. [Operator Instructions] I'll now turn the call over to Andy.

[Andrew C. Florance:]

Thank you, Rich, appreciate it. And welcome, and thank you for joining us on this snow day in Washington, D.C. I'm happy to have the opportunity to share our very strong financial results for the fourth quarter of 2014. In 2014, our annual revenue increased $135 million over 2013. And we generated annual EBITDA of over $151 million. Our adjusted EBITDA for the year was $188 million. We achieved revenue in the fourth quarter of 2014 of $156 million compared to $116 million in the fourth quarter of 2013, for an increase of 35%. EBITDA increased 36% to $43 million in the fourth quarter 2014 compared to $32 million in the fourth quarter of 2013. Non-GAAP earnings per share grew to $0.93 per share in the same period. Our annual subscription business continues to enjoy a high trailing 12-month renewal rate of 92% with 98% renewal for those customers with us 5 years or longer. Our investment in the expansion of our sales force is going well. In 2014, we added over $63 million of annualized net new business. We achieved CoStar's highest-ever net new sales on annual contracts with $17.3 million in the fourth quarter of 2014. As we discussed last quarter, we signed a onetime, one-off $1 million advertising contract in Q4 of 2013. So when you adjust for that contract our net new sales actually grew 17% year-over-year. Our field sales force continues to do an excellent job as the pace of net new sales for CoStar's core business accelerated 36% in the fourth quarter of 2014 over the third quarter of 2014 and 26% year-over-year. As we reach a new stable state with our larger sales force, our sales reps will gain more experience and we fully expect to see an increase in per rep productivity and higher net new sales overall. With successful service offerings like CoStar, LoopNet and Apartments.com, our sales force has absolutely no shortage of products to sell. Over time we plan for -- prepare most of our sales force to sell all three services to streamline the relationship with our clients and prospects, and maximize their efficiency. We acquired Apartments.com less than a year ago in April of 2014. Before we had even closed the deal, our product design team had put forth a Herculean effort, and had redesigned the site from top to bottom. While we felt that Apartments.com was a great company with a good product, we also knew the industry is highly competitive and changes rapidly, so we needed to ensure that our product would lead the industry. We understand that other competing sites with significant revenue were working in aging business models and that there was a unique opportunity to reinvent the space with a more renter-centric website. We believe that if Apartments.com gives renters what they want and need, then we'll be able to give our paying advertisers the quality leads they want. We focused on building a site with more powerful and responsive mapping and searching tools. One of CoStar Group's core competencies is collecting and building content. We felt that renters really wanted a more comprehensive inventory of rentals, including condos and houses, with actual rents and availabilities, so they can narrow down their search for an apartment without having to call every other building in town. We also learned from renters and apartmenters that they believed there was no prominent, trusted, clear, branded website that stood out on the Internet for finding an apartment. After we closed the Apartments.com acquisition, our entire team from LoopNet, CoStar and Apartments came together with a clear purpose

[Brian J. Radecki:]

Did you take a breath, Andy. So what is that, download times are down, what? They're 344% faster? But the earnings call's up how many minutes, Rick?

[Richard Simonelli:]

7 milliseconds.

[Andrew C. Florance:]

Depends on how fast you read your script.

[Brian J. Radecki:]

I was crossing out paragraphs as Andy was just reading off all my numbers. I was like, "Well, I don't have to talk about that. Well, let's not talk about that." But I'll reread a couple just because I know you guys you want to hear me. Thanks, Andy. As Andy mentioned, we're very pleased with our performance in the fourth quarter and full year 2014. CoStar Group's organic business continues to show solid top line growth, while we grew earnings, all while we made exceptional progress integrating Apartments.com and investing for the long term. Our strong 2014 performance has created an opportunity for us to further invest in research and marketing in 2015. As discussed in last week's call, seems like we're talking to these guys every other day, we have begun to do so, and we will continue to invest through 2015, which we believe will accelerate revenue growth for many years to come. Starting with CoStar Group's results for the fourth quarter 2014, the company reported $156.1 million of revenue, an increase of 35% compared to the fourth quarter of 2013. For the full year 2014, revenues were $575.9 million, an increase of $135 million or approximately 30.6% for the full year 2013. We reported adjusted EBITDA of $54.3 million for the fourth quarter of 2014, which is an increase of $13.5 million compared to the fourth quarter of 2013. Another way to look at it, is that we had $217 million of Q4 annualized adjusted EBITDA, with an adjusted EBITDA margin of 34.8% for the fourth quarter 2014. Now this is, again, all while we're investing in research as we discussed prior. Adjusted EBIT for the full year 2014 was $188.5 million, which is an increase of 37.8% or $51.7 million compared to the full year 2013. Adjusted EBITDA margins increased to an all-time high of approximately 33% for the full year 2014. Net income for the fourth quarter 2014 was $13.9 million, an increase of $1.1 million from the $12.8 million in the fourth quarter of 2013. Non-GAAP net income for the fourth quarter of 2014 was $29.8 million or $0.93 per diluted share, which is a 34% increase from 2013. Did you give that number? Gross margins was $113.2 million for the fourth quarter or 72.5% of revenue, which again includes the majority investments as research -- in research that we've discussed and is essentially unchanged from Q4 2013. Reconciliation of all non-GAAP and income, EBITDA adjusted EBITDA and all the non-GAAP financial measures discussed on this call to their GAAP basis results are shown in detail along with definitions for those terms in our press release issued yesterday and are available at www.costar.com. Or if you didn't catch that because I went too fast, just email [e-mail]. Get rich.

[Richard Simonelli:]

Rich Simonelli.

[Brian J. Radecki:]

No, just get [e-mail], it will go right to him. Cash and investments increased $36.9 million to $544.2 million as of December 31, 2014, up from last quarter. Cash and investments exceeded total short and long-term debt of $385 million as of December 31. Cash flow from operations was very strong at $47.9 million for the fourth quarter of 2014 and was $143.9 million for the 12 months ended December 31, 2014, which continues to demonstrate the very, very strong cash flow profile of our business. Now I'd like to give you some additional color and some metrics to highlight -- further highlight our strong performance in Q4 of 2014. As of December 31, we had approximately 504 total salespeople across the company. Of that, 219 were sort of U.S. CoStar field sales reps and 136 were Apartment field sellers, up from 80 at the time of the acquisition. Now after our February sales conference, all these reps are working together, in the field, under one management structure. Additionally, we had approximately 87 inside reps across CoStar, LoopNet and Apartments, 22 field reps in the U.K. and another 40 across our other verticals and businesses. Revenue from subscription services annual contracts was $103.4 million for the fourth quarter or 66.2% of revenue for the trailing 12 months ended December 31. Subscription revenue from annual contracts was $389.7 million, up 19% for the 12-month period ended 2013, reflecting our continued success in growing these annual subscriptions faster than our non-subscription services. The year-over-year growth in annual subscription revenue remained at approximately 19% to 20% for the past 6 quarters, which is pretty important to remember. We expect to continue to grow revenue from subscription services on annual contracts back up into the 70s this year and eventually back into the 80%, 90% range of our total revenue as we move forward. Renewal rates for annual subscriptions remained high during the quarter. The 12-month trailing renewal rate for CoStar subscription base revenue was 91.5% in the fourth quarter of 2014. As we've discussed the last few quarters, the introduction of more annual contracts at Loop, and eventually Apartments, into our subscription base is expected to cause the 12-month renewal rate to edge down slightly, possibly a percent or 2, over the next year or so. Therefore, we'll expect it to be in the 90% to 91% range. The renewal rate of CoStar subscribers who've been with us for 5 years, as Andy mentioned, and never hurts to mention again, is approximately 98%. Hotel California. With the February 17 press release, that was last week, announcing the launch of the new Apartments.com site and the increased investment and marketing for the site, we provided 2015 guidance ranges for revenue and non-GAAP and income per diluted share. These outlook ranges are already incorporated in the exact Q4 2014 results we released last night, as well as the marketing investments we announced last week. Not surprising, a week later, there have been no changes to those projections. So I'm reaffirming my guidance ranges for the first quarter of 2015 and the full year. Our model has not changed and therefore, I assume yours hasn't either. And I'm not going to reread the results, even though my team wrote it because Rich told me he was going to turn the music on. So in summary, I'm very pleased with the CoStar's financial results for the fourth quarter and full year 2014. Our strong cash flow profile and adjusted EBITDA margin improvement in 2014 is allowing us to continue to invest in the business to propel future revenue growth for many, many years. We achieved a 35% adjusted EBITDA margin in the fourth quarter, an increase over the prior quarter, even with increased levels of research investment. Thanks, Fred Carchedi. With the investment in marketing for Apartments mostly weighted towards the first half of 2015, we expect margins to be back in the low to mid-30% range by Q4 this year. Beyond 2015, the marketing spend for Apartments, as Andy mentioned, will be lower and is discretionary. It will be based on our success in driving accelerated revenue growth and market share gains. I remain confident we can deliver mid-teens revenue growth all along the path to our $1 billion in annual revenue goal by 2018, with 40-plus percent adjusted EBITDA margins. And to AJ, who's done North Carolina on Twitter, Facebook, Pinterest, LinkedIn, Google Hangouts and every other social media ever invented, I'm not sure how the guy gets any work done. He asked the question

[Operator:]

[Operator Instructions] And our first question is comes from the line of Sterling Auty from JPMorgan.

[Darren R. Jue:]

It's actually Darren Jue on for Sterling. Just a question about research staff hiring. Just given that the cost of sales in the quarter came in a bit lower than we were expecting, I was just wondering if you were -- if you made all of the hires that you had planned to make in the quarter? And did you end up seeing that -- I think it was a $4 million to $5 million impact that you guided to last quarter?

[Brian J. Radecki:]

Yes. This is Brian. So I think we did a great job. I mean, we added hundreds of researchers. Frank Carchedi and his group did an amazing job collecting the content. We probably were at the low end of that range. So we definitely got the majority of the cost structure and people in the door that we wanted to. Probably a little bit more spilled over in Q1 than I would expect. As you get into Q2 and forward, you'll see the gross margins begin to climb again. So I'd say we got the majority of it in there. There's probably maybe a million or so that will spill over into Q1.

[Operator:]

And we do have a question from the line of Michael Huang with Needham & Company.

[Michael Huang:]

It's great to see, kind of the strength in unique visitors across LoopNet and the other properties. I was wondering, are you guys doing something different on the marketing front? Or is there some external driver here as well?

[Brian J. Radecki:]

All the traffic we're talking about right now is pre the major B2C marketing spend. The -- on the LoopNet side, there is no material change in our marketing spend. In fact, it's probably a slight reduction from prior year. It's basically better -- we're bringing a little bit more of an investment in search engine marketing this year in LoopNet. Certainly, a significant increase in search engine marketing in Apartments.com. A little bit of an increase in Land and Farm and Lands of America. But big picture it is mostly effective SEO and content advantage. That won't be true next quarter and the following quarter, I hope. I believe that then you'll see organic traffic is being heavily influenced by major B2C media spends on the Apartments.com side.

[Operator:]

And we do have a question from the line of Sara Gubins with Bank of America Merrill Lynch.

[Sara Gubins:]

Just wanted to be clear on your plans for the sales force. You've made a big hiring increase last year. You've talked a lot about blending them and being able to cross-sell and cross-train the sales force. So what -- if you can speak to what your planned sales increase -- sales headcount increases are for 2015 and maybe if that's the -- if it's even a relevant metric anymore to focus on, say, CoStar information field sales.

[Andrew C. Florance:]

I think the -- it's a good point. So I think that you can just focus on total field sales people, because the vast majority of our salespeople are now whether in Apartments or CoStar, they're focusing on selling annual contracts wherever possible with high-renewal potential. So it's just basically field sales in the core product areas. We are -- we feel that at this point, with the acquisition of Apartments.com, the growth that occurred in their sales force since the acquisition, and the growth that occurred in the CoStar sales field sales force in the course of 2014. At this point, we have a very large field sales force. And you put them all together in one room at the sales conference, and you see we have a very large field sales force. And right now, what's really important is training, productivity gains, teaming, effective segmentation of that sales force, and I don't really feel like right now it's about headcount growth. It's about effective segmentation and crosstraining and teaming, making sure that the most experienced reps in a particular area are handling the highest-value opportunities in that particular area. And that's a lot of work to do during 2015. That's where we're going to be focusing on. We might see some growth in a couple of areas, that's going to be minor. It won't really move the dial. We are going to grow our field sales force that's dedicated to only our rural land products. We still believe that's a diamond in the rough. Maybe many diamonds in the rough. And then we also may begin to build a little bit more of a dedicated farmer account management model in some of these much larger accounts like CB Richard Ellis or Bank of America, some of these large groups where -- as we deploy more and more software upgrades that we think will be very valuable to them, we want to make sure that they know how to use them and that they get deployed. And we can pay for that by selling LoopNet subscriptions to individuals as we go into those accounts. So we can actually fund our own account management process, I think, through LoopNet subscriptions. So I do not think that the headline of 2015 will be headcount growth in sales force. It'll have to be changing conditions in '16 or '17 that cause that.

[Brian J. Radecki:]

And just add to Andy's brief response, the -- I gave both numbers because I think most people have their models, separated into two. But as I said in my prepared remarks, we certainly look at them in one bucket now and as Andy said, we obviously have pockets of areas, whether it's debt and equity or in the other verticals that we might add some. But I think, in general, we'll be focused on productivity gains. When you look out to, your one -- your 3-, 5-year model, I mean, we will probably then go back to sort of increasing the size by 10% to 15%. But I think, for this year, there could be movements within the numbers, but it's going to be plus or minus that 500 or so number. So thank you.

[Operator:]

And we do have a question from the line of Brett Huff with Stephens Inc.

[Brett Huff:]

My question is about the LoopNet price increase on the info biz, and it's kind of a 2-part question. one, is the $15 million to $20 million of sunsetting rev in that LoopNet info biz, is that driven by the price increases? Or is there some official turning off of some of that product? And then #2, what is the kind of take rate or cross sale rate that you've seen, or if people move off the LoopNet info biz, characterize how they're moving on to the CoStar info biz?

[Andrew C. Florance:]

Okay. So Fred, good question, good spot, that was the line that you should notice and say, wow, that's a heck of a movement. So we are trying to -- I mean, we're certain that we want to migrate everyone from the LoopNet platform over to the CoStar information platform, for so many reasons. We are -- we obviously see huge revenue gains when we move someone from the LoopNet to the CoStar platform. Just see very steady price increases. We also see a more satisfied customer. We see higher renewal rates overall, once we move them into the CoStar information platform. We had wanted to -- we wanted to stop selling LoopNet information products this year in the first quarter, but realistically, given all the opportunities in the apartment sector, we did not want our sales force to be putting all their efforts into the LoopNet up-sell right now. So we, rather than just shut off the e-commerce models of selling LoopNet information, we decided to bring the price up to parity with entry-level CoStar. Now initially, as we do that, we're actually retaining about 80 -- with these very high price increases, we're retaining 80% of the revenue we were seeing before, but we certainly are not going to be suffering the same sort of cannibalization effect. So I think we're seeing an over -- we'll see an overall net increase of information sales without distracting the sales force. The other thing we want to do is, when we do sunset the LoopNet information, we want to make sure that we've integrated the back ends, and that you have, always in every case, in any submarket, any product type, higher-quality information in CoStar across the board and unified data entry. So that's something that's going to take us most of the year. So the goal is that in 2016, we will begin to sunset all that revenue. And we believe that as we sunset that revenue of probably $40-some million, that we could, over a several-year period, see up to $250 million of revenue come into the CoStar side in an optimistic sense. And then you see a reduction in cancellations associated with people going to our bargain-basement product offering. So Brian, do you want to add anything?

[Brian J. Radecki:]

Yes. So from German to English. What it means is that, we continue to test the various things. We talked about the Orlando experiment. Essentially, what we're doing here is that, when we get to the end of the year, the $40 million will likely be less by -- with LoopNet, that base is a high churn, month to month. So as people are churning, we're not letting them come back in at a lower price, it's a bigger price. So clearly, volumes are significantly down. So, you don't know where those people go. The assumption is, they will come back and our sales force will sell them, what is that time period, 2 months, 6 months, 8 months, 9 months, whatever it is. So the same sunsetting revenue of $14 million to $20 million, I haven't changed that because essentially, you're seeing a lot, a lot lower volume because people are churning out on the monthly side. We are picking up some of those as Andy said, with higher contracts that are more on par with the CoStar Information. Essentially, you're getting the same result without having to sort of turn it off by doing price increases. So we continue, as we've mentioned in the past, to test various ways to carefully transition these people, from one bucket to the other, but ultimately, the financial result for this year is going to be the same, I believe, within that same range. So we'll just keep updating as we move forward, so.

[Andrew C. Florance:]

And we remain very confident. As we look at granular level data in this LoopNet book, you've got tens of thousands of people who've been using LoopNet as an information product continuously for multiple years and intensely. We do not believe that those people will go away forever and we do not believe that those people will find a better value in some other information solution. So we believe that we will capture a major piece of that client base at a higher price point with a higher renewal rate.

[Operator:]

We do have a question from the line of Andre Benjamin with Goldman Sachs.

[Andre Benjamin:]

First, I just want to follow up on the last one, just to make sure I heard the math right. Because there are a few numbers embedded in there. I think I heard 80% of the revenue for LoopNet being retained as you increase the pricing. But then I also know that you had said something about actually being net up, because these people are paying higher prices. So I just want to make sure that, kind of got the moving parts right there. Was it 80% of the customers are staying, or is it 80% of the volume?

[Brian J. Radecki:]

So I have to clarify, Andre. So Andre, so the -- so on the e-commerce, which is the only place where we're currently selling LoopNet information products. As we increase the price dramatically to be on par with entering into a 1-person, low end CoStar information contract, the volume of the LoopNet sales goes way down, is going way down, but the price being up, you are still retaining 80% of that revenue pace from the LoopNet e-commerce module. Higher price, lower volume. Now without a doubt, every time we sell a -- in the past, when we were selling a Premium Searcher account for $74 a month, rather than $250 a month, you are getting a substitution effect against CoStar information, which would be priced at $250, $395 for one user in a secondary market. So with the increase in prices occurring on the LoopNet e-commerce information platform, you should see a reduction and substitution effect or cancellation against CoStar. So I believe that net-net, your overall CoStar Group corporate headquarter umbrella information revenue is going up. So roughly the same revenue coming in the LoopNet e-commerce model. And a reduction in cancellations on the CoStar side or reduction in loss of the CoStar side. And more people opting to take the higher-quality CoStar information, if the prices are about the same. Did I make that -- is that about clear?

[Brian J. Radecki:]

And I'll follow up with that. I mean, so Andre, as far as the models go, the financial models, our model hasn't changed as far as the revenue range. You're still moving -- your -- the goal is again, to still move people from one bucket to the other. We're just testing different ways of doing it. And the price increases that we talked about have been less than a week. So again, I'm not changing my model. I wouldn't recommend anybody else's. As we talked about on prior calls, we have the ability to pull the lever. So we can obviously control that. But our goal is to -- is quickly as we can, move everybody from one bucket to the other. When you do that, you'll have a bunch of people that drop out for 2 or 3 quarters, which will cause the, whatever the range was, $15 million -- $14 million to $20 million. But again, we believe that, as you get into 2016 and '17, you'll pick all that up by multiples of 3, 4, 5x. So financially modeling, it ends up to be the same place. We're just getting there a little bit different way, which makes it easier on our sales force. So thank you.

[Operator:]

And we do have a question from the line of Peter Lowry with JMP Securities.

[Peter Lowry:]

What impact, if any, do you see from such a strong push on Apartments.com branding on CoStar branding?

[Brian J. Radecki:]

Okay, good question. I think that for people in the know, people in the industry, especially people who are operating in both office industrial and multifamily or retail and multifamily, you will definitely get a halo effect over to the CoStar brands. We did make the decision to streamline the branding of -- in the campaign. We considered branding the commercials, Apartments.com powered by CoStar Group. But we felt that it was much more important to keep a simple, clean message in the renter's mind, the simplest possible URL. And just throw on a halo effect. It -- when we go and talk to customers, remember that we're not just trying to sell advertising on Apartments.com. We're trying to sale an awful lot of information solutions on the CoStar side. So when people see -- what we're seeing when owners of commercial properties and apartment buildings see this branding campaign, Apartments.com, and the acquisition of Apartments.com by the CoStar Group, they attribute, an attribute of much higher quality apartment information now in CoStar Group than anywhere else. So we are getting -- they really latch onto that, and we are getting a benefit from that. We will get a benefit from that. And that one contract I mentioned is an example of that. We'll see more of that.

[Operator:]

And we do have a question from the line of Phil Stiller with Citi.

[Philip Stiller:]

I guess, I wanted to ask about Apartments.com. I guess, first what was the revenue in the fourth quarter? And then maybe you could talk about the assumptions implicit in the 2015 guidance in terms of revenue from Apartments.com. Just trying to understand what benefits you're assuming from the marketing spend in the first half of the year?

[Brian J. Radecki:]

Sure, yes. And so, Apartments -- the actual Q4 revenue is down slightly over Q3, which is sort of what's expected, and sort of -- sort of like LoopNet, Q4 is always usually down from Q3, and then up in Q1. They did well year-over-year. I think it was again, around a 15%, 16% year-over-year growth rate. The expectations for this year, I think, I was pretty clear in the last call, but I can clarify a little bit more is that, as we move from one side to the other, in February, there's small buckets of loss revenues. So the revenue for -- their actual revenue for Q1 will probably be lower as you transition from one site to the other. And then the marketing campaign starts in March and really runs through September, the heavy piece of it. So reality is, I believe you'll start to see the contracts or, we'll obviously have contracts coming in by the next call, but I think we'll be talking about that, but I think the reality is, a good cross-sell number and the bulk of it will really come in the July call, where we'll be talking about the success of the campaign. Because you're not going to have 1 month out there. You're going to 4 months of activity out there. So I believe that you'll get the actual GAAP revenue for that to start to come in, in Q3 and really by Q4 and then Q1 of next year, where you'll see the acceleration, I think, out of the teens and, as you get into next year, into the 20s. So you're not going to see -- I mean, you could see it, but I think reality is, you actually have to market it for 3 or 4 months, you have to go sell it and then you got to get in your revenue, so there's not much expectations in the model for this year.

[Andrew C. Florance:]

Brian, would it change your thinking at all if I were to tell you I just got a text from Adam Silverman, that he just got a 3-year deal with Paradigm, a great multifamily company for advertising and CoStar information combined value, $14,000 net new monthly, a 3-year deal. This is from an industry that historically only signed 6-month contracts. Does that change your thinking at all?

[Brian J. Radecki:]

Doesn't change my model. But I'm awfully confident though. Thank you.

[Operator:]

And we do have a question from the line of Bill Warmington with Wells Fargo.

[William A. Warmington:]

The -- a question on Apartments.com, and the contract structure. Because as you mentioned, historically you've been selling under -- they were annual contracts but cancelable after 6 months. As you're going to market now, are you using annual, noncancelable contracts? Do you -- how have those been received, and are you planning to stick to that? And what impact does that potentially have in terms of recognition and net new?

[Brian J. Radecki:]

So we -- the industry, had historically done a lot of 6-month contracts. When you're dealing with a 250-unit building, you're never going to run out of the need to market that building. So I think the 6-month contracts are more an artifact of the fact that no one was differentiating their brand in a material way. But when we go in there, we offer people a significant discount on information product they're very interested in getting. And we give them some flexibility to add and remove communities, and we're talking about a 20-community owner. We think we can do, like that contract that just came in, we think we can do annual deals. Because that makes sense. That's like baseline annual leases with their renters, why not do annual deals for marketing? We will still take 6-month deals in some instances, we pay a different commission rate to our salespeople. But remember, when we did LoopNet, everything was month to month, and we transitioned that to overwhelmingly annual deals. And we think the same opportunity exists here. It gives you much more visibility in your revenue. And you can do it.

[Andrew C. Florance:]

Yes, so Bill, just to add quickly on to that. I mean, it is a lot like LoopNet. I mean, they're a year and they're cancelable after 6 months, and they're essentially month-to-month after that. So this is, sort of, an industry that's used to that. So we are going out with annual contracts, but just like with LoopNet, we have to sort prove that we can actually sell it, since this was rolled out a little bit over a week ago. We have texts and e-mails of individual stories. But the reality is, we have to do it. I'm fairly confident when you look at, our goal always, our core business model to, when I talked about it earlier, was we used to be 90% plus subscription revenue. After LoopNet, we dropped down to like 70%, then we got it back up 80%, and now with this, we dropped down to the low 60s. I think we will be -- I mean, I mentioned it in my prepared remarks, by the end of next year, I think we'll be back up into the high 60s or 70%, and in the following years, I think we can get back to 80% and 90%. But it'll take a little while. I mean, I don't expect every single deal that's going to come in is going to be on an annual contract. We're not going to kick them out if they don't. It will take time to sort of get the industry used it. So it'll happen over time. Thank you.

[Operator:]

And at this time, I turn it back over to the host for closing remarks.

[Andrew C. Florance:]

I want to thank everyone for joining us for this fourth quarter 2014 earnings call. And we look forward to updating you on the progress we're making in the business next quarter. Thank you, all, for joining us. I'm sorry for running 4 minutes late. Brian, you owe them 4 minutes.

[Operator:]

And ladies and gentlemen, that does conclude your conference for today. Thank you for participation and for using the AT&T Executive Teleconference service. You may now disconnect.