CoStar Group, Inc.
Q2 2015 Earnings Call Transcript

Published: 2 Aug 2015

[Operator:]

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

[Rich Simonelli:]

Thank you, operator, and good morning everyone. Welcome to CoStar Group's second quarter 2015 conference call. Before I turn the call over to Andy, I want to have a second to talk to you about some really important facts. 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 July 29, 2015 press release on our second quarter results, and in CoStar's filings with the SEC, including our most recent annual report on Form 10-K, and quarterly report on Form 10-Q, under the heading Risk Factors. All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements whether as a result of new information, future events or otherwise. As a reminder, today's call is being broadcast live and in color over the Internet, at www.costargroup.com, where you can also find our investor relations page. A replay will be available approximately 1 hour after the call today, and will be available for approximately 30 days thereafter. To listen, call [phone] within the U.S. or Canada or 320-36-53844 outside the U.S. The access code is 364170, and it'll be available within an hour. So I'd like to turn the call over to Andy Florance.

[Andy Florance:]

Good morning, and thank you for joining us today for our second quarter earnings call. I'm sorry for the slight delay in getting going this morning, but the city began jack-hammering outside my office right at 5 of 11

[Brian Radecki:]

And these calls, they just never are dull. Thank you, Andy. As Andy mentioned, we are very pleased with the performance in the second quarter of 2015. The investments we're making in marketing are showing great results with all-time high sales numbers, increases in traffic, leads, all allow the CoStar Group's core business continues to grow at solid top line. We just closed the ApartmentFinder acquisition last month, and are aggressively integrating the business, while providing our sales force with another service to sell to our multifamily customers. In the second quarter of 2015 -- he just does that to see if he can just mess with me before I start, the company reported 170.7 million in revenue, an increase of 16%, compared to the second quarter of 2014. Gross margins, with 126 million for the second quarter of 2015 or 73.8% of revenue, the highest gross margin we reported in the company's history. So the continued margin expansion shows the leverage in strength of our business model, even with the research investments we've made in Canada, and in multifamily. So highest ever gross margins, which I -- we believe will continue to climb. Adjusted EBITDA of 11.3 million for the second quarter 2015, and non-GAAP net income in the second quarter was 2.4 million or $0.08 per diluted share. Both of which are impacted by the investments in marketing for Apartments.com, as well as expenses for the ApartmentFinder acquisition. Net income in the second quarter of 2015 was a loss of 15 million. Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA, and all non-GAAP financial measures discussed in this call. So the GAAP basis result are shown in detail, along with definitions for those terms in our press release issued yesterday, and are available on our Web site at www.costar.com. Cash in investments were 367.8 million, along with short term and long term debt outstanding of 375 million, as of June 30, 2015. Now, I would like to give some additional color on a few metrics to highlight the strong performance in the second quarter. As Andy mentioned, we achieved 25.5 million in annualized net sales of subscription services on annual contracts in the second quarter of 2015, an all-time high, an increase of 58.9% over the second quarter of 2014. This is an outstanding performance from our entire sales force, and reflects the impact of our marketing investments. We've been providing this metric consistently each quarter, this key metric, and it shows the strong results of our continual efforts to move customers to long term contracts. As of June 30, 2015, we had approximately 624 sales people across the company, which includes the addition of approximately 110 reps that came to us from the ApartmentFinder deal. We are actively working to integrate our sales force resources, and ensure that the field sales teams are appropriately sized and managed in each of the markets. Revenue from subscription services and annual contracts is 110.9 million in the second quarter of 2015 or 65% of total revenue. For the trailing 12 months, subscription revenue from annual contracts totaled 420.1 million, up 17.4% from the 12-month period ended 2014, reflecting our continued success in growing the annual subscriptions faster than the non-subscription services. We expect to continue to grow our revenue from subscription services on annual contracts back up into the 70's range in the near team, and eventually back up into the 80% and 90% range of our total revenue. Renewal rates for annual subscription revenue remained high during the quarter. The 12-month trailing renewal rate for CoStar's subscription-based services was 90.6%, in the second quarter of 2015, while the 12-month trailing renewal rate for customers who have been with us for five years or longer was 97%. As we discussed in our last call, this metric ticked down slightly in the quarter as GE, a long-time subscriber, sold its real estate portfolio. Now, I'll discuss the outlook for the third quarter, and the full year 2015. Full year 2015, we expect revenues of approximately 707 million to 712 million. Based on our strong second quarter 2015 sales results, we're happy to be able to raise the full year 2015 revenue guidance again, despite the fact I just announced an increase, on June 8th. At this point, the top end of our annual guidance range is now 52 million higher than our initial 2015 guidance range. ApartmentFinder contributes 40 million to 43 million of that increase, while the remaining upside is organic revenue growth resulting from the outstanding sales results in the first half of 2015. For the third quarter 2015, we expect revenue of approximately 187 million to 189 million. We expect non-GAAP net income per diluted share in the range of 162 to 170 for the full year of 2015, which is up $0.03 at the midpoint from the range we provided you in June. For the third quarter we expect non-GAAP net income per diluted share of approximately $0.42 to $0.45, which includes the impact of shifting some spending from the second quarter into the third quarter to support the recently announced Rent For Life campaign. For the fourth quarter 2015, we expect the range to increase to approximately $0.79 to $0.84 per diluted share. The investments associated with the marketing campaign are expected to trend down as we get past the peak rental season for 2015, and we expect that trend to be reflected in our quarterly earnings later this year. The sales results have been impressive in a short time since we launched the new Apartments.com Web site, in February 2015, and the start of the national consumer marketing campaign, in March of 2015. However, please remember that it's only been four months. Our models, moving forward, do not reflect continued sale growths at 50 plus percent rates on Apartments' revenue forever. I'd like a few more data points before people start modeling and extrapolating out four months of sales results into their model for every quarter going forward. But obviously we're extremely happy with where we are. At this point, I'd like to talk about the growth trajectory for the business. As we still see the core business growing annually in the 11%-12%-13% range moving forward. And as we previously discussed, we have a target for Apartments.com growth rate of 25% to 30% going into 2016. Based on the strong early results I'm seeing, I think we'll be at the high end or slightly above that range. As we integrate ApartmentFinder, our expectations should add about 70 millionish of revenue in 2016, as we discontinue the non-core products, and transition ApartmentFinder away from print and into all-digital. We continue to believe that we can reduce the cost base of our combined Apartments' business as we integrate ApartmentFinder. And we still expect the ApartmentFinder acquisition to be accretive to the bottom line in 2016, and beyond. As we've consistently stated, we'll be evaluating the effectiveness of our 2015 Apartments' marketing campaign as we get close to the end of the peak rental season, and begin planning for next year. I think it's clear the campaign is achieving our goals of expanding consumer awareness, driving traffic and leads to our clients, and supporting a very strong sales momentum. I look forward to updating investors on our plans for 2016 as we finalize those next quarter. In summary, I'm very pleased with CoStar's financial result for the second quarter 2015, and we're off to a great start with the Apartments.com traffic and sales in the first half of the year. We believe our historic sales results keep us well-positioned to achieve our stated financial goals of a billion in revenue, and a 40% adjusted margins exiting 2016, and our new goal of 1.5 billion revenue run rate, with 45% to 50% adjusted margins exiting 2020. As always, we look forward to sharing our progress with you on these goals in the upcoming quarters. Now, before I open up the call for questions, I have some additional news on a decision I have made. After 18 spectacular years at CoStar, I've decided to take a sabbatical for the next year to spend more time with my family. Now, I know this sounds very cliche, but the simple fact is I'd really like to spend more time with my family. As much as I love my job, I love my family much more. For anyone who knows me, it's been almost always on, day or night, for CoStar, and it's been nearly non-stop work since the beginning. And, unfortunately, with my all-or-nothing personality, striking the right balance between work and personal life has been a struggle for me. Truthfully, I enjoy working. I enjoy working really hard. And all of CoStar's success has made it very easy for me to keep doing what I like doing. Quite frankly, I have the best CFO job in the world, even if it means working long hours. To be the best there has been a lot of late nights and weekends. Spending more time with my family has been something I've thought about for years, but like most of us, it's been elusive for me because work has always been crazy. We've been in the middle of something exciting or about to close the next big deal. But over the past few years time seems to have accelerated, and the thought of one of my two high school kids leaving for college, next August, has had my head spinning -- excuse me. How much time have I spent with them? Has it been enough? Have I been the best father or husband I can be? I can pretty much go on and on. While contemplating these thoughts and talking to a good friend of mine, he simply advised me to list out what was important to me, what I should be doing and not doing, stack-rank it and go for it. So needless to say, when I do this it's pretty crystal clear; health and family comes first, and everything else, including the work I love, comes after that. So let's be clear. I'm not going anywhere for a few months. I'll be at CoStar working with Andy and the team as long as it takes to have a smooth transition. Therefore, I'll see many of you at various conferences, including next week that we'll be attending during the quarter. I'll also be working closely with Scott Yinger, our VP of Finance for the past five years, who most of you know. Scott will be the interim CFO while the company interviews both internal and external candidates for the position. He's been in the trenches every step of the way, so the company will be well served during this period. Really, it's been impossible for me to sum up the words CoStar has meant to me, but I want to thank all the truly incredible people I've worked with, for all that you have done for both, me personally and professionally. CoStar, and everyone I've worked with side by side for all these years, has really been a second family to me. So again thank you all. But mostly, I can't thank Andy enough. He is truly one of a kind; special in many ways. A real visionary and a good friend of mine, he's been amazing. And as usual, we are both on the same page. I couldn't be more excited about what we've accomplished to date, building a great company which grew from a 14 million evaluation, when I stared, to nearly 7 billion today. Resulting in 1800% shareholder return, over 10 times the NASDAQ average since our IPO, wow, that's some serious shareholder returns. But even with all we've done, I am still even more excited about the massive opportunity that lies ahead for the company, and I have no doubt we will dominate everything we turn our attention to. I realize this decision may be surprising to some, but I know in my heart it's the right thing for me today. And I look forward to spending more time with my family and reconnecting. At the end of the prepared remarks we'll only be taking work-related questions in the Q&A, so I'd appreciate keeping my private life exactly that private. If you still have questions related to my sabbatical feel free to contact me directly. So let's take some questions on the fantastic quarter we had, and the outstanding future of the company. Au revoir, Gopher. Andy?

[Andy Florance:]

Okay. On behalf of CoStar's Board of Directors, our investors, and all of Brian's colleagues, and most especially myself, I want to express our deepest appreciation and respect for all Brian's achievements and contributions over his 18 years with CoStar. I must say, 18 chronological years is a deception. Though Brian started 18 years ago, he's worked not a minute less than equivalent of 45 years. I clearly remember when Franc Carchedi, our EVP for Operations hired Brian, back when Franc was our CFO. The week Brian started, Franc and I headed off to New York City to meet with a venture capital, and we left Brian in Washington to run the shop. We left him with a bank statement on his first day of work, with $0.50 in it. We let him know payroll was $150,000 on Friday, and we encouraged him to get collecting. I know he called his wife that day, and told her that he thought he might have made a mistake leaving his stable job. We made payroll that week, and with Brain at center stage we built an exceptional business that positively impacts tens of millions of people, employs thousands, and has generated great returns. And we'll thrive for a very, very long time. This quarter, when an opportunity arose to make an opportunistic investment, like acquiring ApartmentFinder for 170 million or a non-material multi-million Euro company in Madrid, we can do that from cash on hand. That is thanks to how far Brian has brought us from that $0.50 bank balance. Rest assured Brian's greatest accomplishment is the strength and depth of the finance team he built. We will not miss a beat in transition with a team like Charlie Colligan, Don Wilson, Mark Zebra, Matthew Green, Tim Clutter, Rich Simonelli, especially Scott Yinger, and so many more. Scott Yinger, our VP of Finance, already leads the team. And with the highest qualifications, he will step into the Interim CFO role as we transition to a new permanent CFO. As Brain stated, he will remain onboard on a reduced schedule to assist in a smooth transition. We have retained Russell Reynolds, and the search for a new CFO is underway. I owe Brian more than I can every repay him for. He's been a close colleague, a genius, a fighter, and most importantly, a friend. The truth is he's spent more time with me over the last eight years than he did with his family. That's a mistake, because he has a wonderful family, and time is too short. The best I can do to repay him is to wish him well as he heads off in a well-deserved sabbatical, and hope he gets busy making new memorable, wonderful experiences with his family. He will always have a big office waiting for him here at CoStar. At this point, I'll turn the call over to questions. I would reiterate Brian's request that we focus the questions on the business, and respect Brian's privacy. Questions?

[Operator:]

Thank you. [Operator Instructions] And we'll go to Andre Benjamin with Goldman Sachs. Please go ahead.

[Andre Benjamin:]

My question is actually not on Apartments, but the core CoStar suite. I was wondering if you could confirm what the organic growth rate was just for core CoStar and the LoopNet platforms for this quarter ex Apartments, and then more deeply, how you're trending with just that core broker customer.

[Brian Radecki:]

Sure. I'll start and then hand it over to Andy. Thanks, Andre, 300 [ph]. So the core platform, the major brands that people think about, CoStar, LoopNet, and all that, they're all growing in the 11%-12%-13% rate the last few quarters. I think they're still growing fairly strong. Obviously there's a lot of focus around this recent release the last four months. But as we talked about in prior calls, we've devised a commission structure to people to be filling up the three major buckets on commissions. We think over time that will be -- still continue to be a strong area of growth.

[Andy Florance:]

And with that the reality is, is that we are seeing good growth in the core business, but there is a unusually strong opportunity for our entire sales force in the Apartment opportunity, and that for good reasons diverts sales people attention to those big commission dollars on the Apartment side. So with so much growth over there, I'm very impressed that we're maintaining those double-digit growth rates in the core business.

[Operator:]

We'll go to the line of Sara Gubins with Bank of America Merrill Lynch. Please go ahead.

[Sara Gubins:]

Hi, thank you. Brian, thanks for your comments, and I feel a little bit petty about asking a couple of numbers questions, but I'll do it anyway.

[Brian Radecki:]

That'll make it easier on me. Please do. I want the numbers.

[Sara Gubins:]

I'll throw them all in here. Could you help us break down revenue from ApartmentFinder and Apartments.com in the quarter? Was there any revenue to speak of for ApartmentFinder Social that you'll be shutting down? And just a broader question on Apartments.com, if you're seeing any competitive reaction.

[Brian Radecki:]

Yes, I'll talk the numbers. And Andy loves talking about competition, so I'll leave that piece to him. Yes, so in the quarter, for the year I think we said -- I'll go back and look at the transcript, but I think it's 40 million to 43 million. It's plus or minus 6 million in the quarter. So that's all in the core. I think we've disclosed all that for ApartmentFinder. Their core business is in that 68 million to 70 million. So there's probably about $10 million of revenue that we are currently shutting down. As you approach the end of the year for the conversion it's about $10 million are going to go into next year that you'll lose. I think I just mentioned, we'll expect about 70 millionish I mean, I'm not giving guidance for next year, but just so people can start gauging their numbers for ApartmentFinder for next year. Obviously, once we get through all those conversions, we get rid of the print, we get rid of the Social and all the stuff that we have going on, we convert to the new Web site, and we start selling it, then obviously we think we can grow that longer term at corporate rates, mid teens or so. But that'll be -- it's going to take the next 12 months to get through all that transition, and then start getting the engine going on the sales there. And competition?

[Andy Florance:]

And really -- the Social will -- elimination of Social will increase profitability without a doubt.

[Brian Radecki:]

Correct.

[Andy Florance:]

The competitive situation; frankly, Brain is right. I like competition. This may come as a surprise to people. The competitive front has been a lot of fun. There were a lot of players in the apartment space as we entered it. We have moved into number one. There have been reactions here and there. Our single largest competitor, RentPath, has for the first time begun to do some advertising to try to brand in reaction to our marketing campaign, national marketing campaigns. They've made some interesting choices. The mass majority of their revenue is on Apartment Guide. They decided to spend their marketing on Rent.com, which is the minority of their revenue. Our surveys show that Rent.com is less popular with apartment owners and managers. Apartment Guide is more popular. Watching Alexa, it would appear that there was spending really ahead of the NAA conference and no material traffic movement in Rent.com, which would look like to me, initially, who knows where it goes. It looks like a somewhat ineffective response. The CEO of that organization was replaced last month or this month. So I think that also might be an indication. Then I feel like we're in a very strong position with some of the other players that we're up against there. On the information side, I think we're having -- we're taking a lot of share from some of those smaller players providing multifamily information. I took a quick glance on the iPhone at a red light on the way down to the office this morning, at the only other publicly-traded company providing multifamily market information. And it would appear that their subscription revenue was absolutely flat for the first time in years, and that their revenue growth was all from consulting. And as you track -- have heard the term, zombie company, it's when you move to consulting instead of leveraged revenue. I think that shows that we're taking a lot of share there. And then folks who are in the space but not directly competitive, folks providing general real estate Web sites that begin with a C [ph] and end with a W, they're pretty busy right now on a lot of other issues. We are not seeing any share movement one way or another with them. So they have very little revenues in this space, and don't appear a big factor. I have to say it's been really rewarding to come in, and with our team build a really strong product offering, join up with the Finder folks, and the Apartments.com folks, ApartmentHomeLiving folks, and take a tremendous amount of share right now from everybody. If you want to ask to get back in line and ask the same question again, I'd love it.

[Operator:]

And we'll go to the line of Sterling Auty with JP Morgan. Please go ahead.

[Sterling Auty:]

Yes, thanks. Brian, congratulations on an excellent tenure, and enjoy the sabbatical. On to the business stuff, can you give us an update in terms of you talked about coming into the year, the elimination of, I think, the Premium Searcher with LoopNet? Where are you in the process, and is there a chance that you end up doing the same thing with FinderSocial, where maybe it's a wind-down and not a complete elimination?

[Brian Radecki:]

Okay, yes. I'll start, and Andy can jump in. LoopNet, again, we keep pulling the levers. It's the same as we've talked about in prior calls. We've jacked up the price significantly. We are losing some people on the searching side. Again, overall LoopNet is growing a little bit less this year. We got a little bit less revenue this year than growth in the last year, still in that 10%-11%-12%-13% range. But we're essentially getting the effect of what we wanted. I'll let Andy talk about it. I mean, eventually we will move all those people off of there, and make it a pure marketing site. On the social thing there will be zero chance, and Andy can obviously overrule me. Zero chance that we will not eliminate that revenue. And zero chance we will not shut down the print. That is an absolute. We're already staring the process. And obviously we want to get to pure digital play in those areas. And we're feeling great about where we are in little over a month on this.

[Andy Florance:]

Yes, so the folks who were prior doing the social and print are actually have been given their warn notice, and we are actually moving people into other job opportunities, and that is a fait accompli. The only thing delaying the Premium Searcher is Apartments.com, and then ApartmentFinder, and the fact we're working really focusing on that. Again, the price, when we acquired LoopNet for Premium Searcher was roughly $37. Today it's roughly $300. Yes, it continues to grow. By taking it up there, and moving it towards parity with CoStar Property, it will make the transition easier as we do that. Again, it continues to grow. We really want to have the back ends integrated between LoopNet and CoStar Group so that there is a 100% clear upgrade path for all customers. And that if a customer wants to use the CoStar content inside the LoopNet interface they'll be able to do that as well. So we'll make progress on that this year, but again it's just delayed by Finder and Apartments.com's successes.

[Brian Radecki:]

And just add one thing on that. We've got about 120 or so that we've given notices to. Most of them will be here through the end of the year, some a little bit going into the first quarter next year. So we're well underway. As most people know, CoStar moves a light speed. And we've done lots of very, very successful integrations and acquisitions. So I think we're well underway, maybe better than ever.

[Operator:]

And we'll go to the line of Andrew Jeffrey with SunTrust. Please go ahead.

[Andrew Jeffrey:]

Hi, thanks for taking the question. Brian, I hope your sabbatical doesn't mean we have boring conference calls for the next four quarters.

[Brian Radecki:]

I'll see you in Boston next week with Andy, don't worry.

[Andrew Jeffrey:]

I need more entertainment in my life, apparently. Could you talk a little bit about the growth strategy in Apartments, both Apartments.com and Finder vis-à-vis price? I wonder how much of the blow-out sales growth is a function of underpricing the competition, and at what point do you start to price for value, integrate data, and start to drive some greater yield, or if today and for the foreseeable future, share is your primary consideration?

[Andy Florance:]

Well, we -- in acquiring Apartments.com, one of the considerations was we looked at all of the other players, and looked at their price points they were charging people. We have experienced, though decades and decades ago, of converting from a print advertising medium to a digital information platform or digital marketing platform. And it's common that when someone converts from a print ad solution to a digital ad solution they maintain the cost structure of the -- just religiously maintain the cost structure of the print platform, which has ink, Heidelberg presses, and trucks involved. And that isn't always the right solution. You can actually -- when you have no direct cost for acquiring additional ad, other than the sales commission, it's possible to very profitably go for volume, and leave a player who is charging print prices vulnerable. So you can go for higher profitability at higher volume. And, clearly, the renters have told us they care about higher volume. That's the strategy we're going after. And the fun thing is that it's hard for the competitor who has set a strategy on high price at a low volume to respond to that quickly. So I'm very comfortable of the prices we're charging. Again, we have these differentiated scales, so we have silver, gold, platinum, and diamond. We're intentionally bringing people in on level three, and leaving open the ability to move them to level two and one over time. Buildings moving into lease-up or the vacancy problems move into -- will pay dramatically more, they'll pay more than twice or three times as much to go into the top [indiscernible] position with the most prominent ad. I believe that if you get some softness with over construction, some marketers will get a lot a more share and that people move into that two in one position to create a marketing exposure. And then the other thing is we just have a cost advantage here. I mean we're already collecting all those content about the buildings. We don't have to hire the people to collect that content in connection with the sale of an ad. So our costs are being distributed across the advertising platform and the information platform. So I feel very comfortable where we are right now, and I just think we're lucky as heck to have a cost advantage. And do not be afraid to be a little bit bold and change in the business model up a little bit. So did I answer your question? Okay, I'll assume it did.

[Operator:]

And we'll go to line of Brett Huff with Stephens Inc. Please go ahead.

[Jim Rutherford:]

Yes, this is Jim Rutherford in for Brett. I just wanted a quick update on hearing what multifamily owners are saying about lead quality and if there's been any change there, and then on the volume that they -- volumes of leads they're getting after switching to Apartments.com from other vendors.

[Andy Florance:]

Sure, happy to. I met with a lot of owners recently with NAA in Vegas, and was extremely pleased with the feedback I received. So across the board, the most senior principals of firms, and then the marketing leadership across the board, everybody I spoke to acknowledged that they were happy with ever seeing a material improvement in lead quality and quantity from Apartments.com over prior year. And in particular, one of our strategy differences from other competitors has been we are not focused on maximum lead volume or focused on lead quality. So a lead is a cost item. A lease is a revenue item. And the industry had gotten into a game where it was drive leads to the telephone leasing office, regardless whether or not that lead was even remotely qualified. So specifically you don't tell the person if the apartment, the one bedroom is available or not. You haven't called the leasing office to find out. That's a waste of the leasing office's time. So we've done, as we're telling people there's no one bedroom available here, don't bother calling unless you're really, really desperate. And that brings lead volume down a little bit. The marketing and the traffic brings lead volume up, but it's more qualified leads. So we're getting -- we are really pleased with what've heard. And I think now, especially for the 13,000 communities that have been advertising with the ApartmentFinder, I believe we're going to blow their minds. I think we're going to give them an increase of leads, like, they can't believe when you go from 2 million unique visitors to 14 million unique visitors. And you go from, again, this sort of murky lead shotgun game to really qualified high quality leads. I think it will work really well.

[Operator:]

And we'll go to the line of Bill Warmington with Wells Fargo Securities. Please go ahead.

[Bill Warmington:]

So, good afternoon everyone.

[Andy Florance:]

Hey, Bill.

[Brian Radecki:]

Hey, Bill.

[Bill Warmington:]

And so I heard a rumor that, Brian, you were trying out for the Washington Capitals and you were going to go on the ice, that it could be pro this time.

[Brian Radecki:]

Trying out, I already got a spot.

[Bill Warmington:]

I'm behind. Anyway, so congratulations on that, and we're going to miss you.

[Brian Radecki:]

Thanks, Bill.

[Bill Warmington:]

So I have a question for you on the sales force structure. I know you gave out the number of 624 and that included 110 coming in from Finder. But maybe it would be helpful if you could sketch that out for us now, how the sales force is actually organized across all the different products and how we should think about that in terms of how it's organized.

[Andy Florance:]

Okay. So, oversimplify…

[Bill Warmington:]

It can't be too simple for us for a sell-side analyst.

[Andy Florance:]

So if I extract out inside sales selling a LoopNet in tertiary markets, and I extract out verticals and real estate manager and things like that, these are little sales teams of -- just smallest sales team, which were not insignificant. There's probably a hundred some people there. And I focused on the core businesses. It really breaks into a CoStar information-oriented and commercial real estate oriented sales force. And then in Apartment, a marketing-oriented sales force. One of my big concerns, this time last year was that I did not have as big an apartment marketing sales force as my competitors did. And that was one of our disadvantages, so I was pushed to move the CoStar information sales people into supplement what we had in the apartment side. So the ApartmentFinder acquisition really solves a whole and has been exceeding expectations for the result. And especially it's different about this apartment business than from the office industrial retail business is that, the smallest cities in America play an outsized role. So Greensboro, and Biloxi, and Baton Rouge, Albany, Buffalo, they actually generate material revenue in these apartment sectors. So we did not have strong offices or personnel in those really, really small cities. And ApartmentFinder brought that to us. So it's complementary geographic distribution between where the ApartmentFinder folks are strong and where the Apartments.com people are strong. The tenure of the ApartmentFinder people we're bringing on is excellent. I mean it's not a typical that's eight years, 12 years, 14 years at NAA as I moved from little group, at the party, from little group of clients with a sales person, a little group of clients with sales person, I heard several times that this sales person was in this client's wedding party. So that's fantastic. And what that's done has given us real strength in the tertiary markets and good relationships, and then also, some strength in the primary markets. So for instance, Apartments.com had six sales people in Los Angeles, and ApartmentFinder has six people in Newport Beach, so it tells me that no one really manages sales people down there before, because you can't go from Newport to Santa Barbara effectively sell, and by bringing those two groups together, you actually begin to able to assign out L.A. in a realistic territory pattern. The thing that's key is the teaming between the information sales person and the marketing sales person. That's working like a homerun. People are teaming up. And they end up getting a lot more revenue and taking lot more share when they go into combined offering. And the other nice thing about that is historically the marketing people were gate-kept at the leasing office of the community. So they were often selling one community at a time to the leasing manager of the community. When you bring in the CoStar reps' information, they're used to selling to the C-suite of the organization, and that group has an interest in it. So they're bringing the marketing person up to the C-suite, and it's atypical we are getting a lot of deals with the 20 communities at once, which was prior unheard of, which is allowing us to move so much shares so quickly. Anecdotally, I would hypothecate that -- maybe six or seven competitors we're dealing with right now, I would guess that many of them are down 10% of their revenues this year. Again, I look carefully at our public. I look carefully at the subscription base for public information competitor. I think that this teaming in the sales force is working incredibly effectively, moving thousands of communities to us. So there will be - there is some overlap in some areas, but we want to grow that sales force for the -- there's an unlimited need to grow that marketing sales force on the LoopNet side in the field and the lands of America, which is still are very promising vibrant business with a great future. So I would -- I know you're not supposed to look at an acquisition and say that the sales force was like a real linchpin. You wouldn't spend that much money for just a sales force, but we did get fantastic sales forces here. And I am personally thrilled to finally look at like our Charlotte office and see real strength, see like 15, 16 solid sales people and the real CoStar presence in that community. So we're really a meaningful member of that business community. So that's happening all over the country, and I'm very thrilled with it. It will be a competitive strength.

[Operator:]

And we'll go to line of Michael Huang with Needham & Co.

[Michael Huang:]

Thanks very much. Brian, so have fun with family and good luck with everything. It's been great working with you. This is just a quick one here. So I appreciate the comments around not extrapolating from the strong bookings performance that you've been seeing here. I was wondering, was there anything one-time in nature that benefited the quarterly bookings? And I guess, as you think about the year, I know that you're not going to be extrapolating aggressively here. What should we be assuming around bookings source for the year? Should that tail off a little bit, or is there a way you could walk us through that? Thanks.

[Brian Radecki:]

Yes, I'll talk about. So I'm going to focus on the annualized contracts bookings number, the 25 million number. The other numbers are good number too. There's a lot of monthly stuff that comes in and out of there. Obviously all Finder stuff is monthly now. We are moving most of the apartments to annual, but there is still a lot of monthly stuff there and a lot of monthly -- three-month stuff at LoopNet. So, on the annualized number, which is really to me the key metric that we're tracking, that's obviously up fairly significantly, and that's the number -- I don't try to guide to it, Because I'll tell you quite frankly we're in uncharted territories here. Right? And that's why I'd say, it's four months into this, and I don't want to extrapolate things. I've always said this in the last two calls like let's get through one full year of the marketing campaign, and the sales stuff, and then really know what the trajectory is. Do I think we can grow that number, continue to grow at 50 plus percent for the next 50 years? No. But can we continue to grow at that rate? Possibly. We've never done it before. I mean so we're in the fourth month in, and I just think it's a spectacular number now. Obviously as we keep getting more experience each quarter, then we will continually sort of update that number. So in the annualized bookings number, there's nothing as far as I'm aware that's one-time in nature. So I think we'll just have to see how that plays out. I mean obviously there's NAA. There's a lot of big bang things upfront. So I think you have to get through a full 12-month cycle to see where we're going on that.

[Operator:]

And we'll go to Peter Lowry with JMP Securities. Please go ahead.

[Peter Lowry:]

Hi, great, thanks. It sounds like the synergies in between the recent acquisitions and the information on the analytics side of the business may be going better than expected. You mentioned the revenue synergies in terms of how the territories lay out, but is there anything else that's been surprising on that front?

[Andy Florance:]

And when you say it's surprising, do you mean in terms of specifically the synergies?

[Peter Lowry:]

Like, worked out better than expected.

[Andy Florance:]

Yes. We initially thought that the focus would be on selling the information product to the asset manager, at the owner, or at the property management firm, where property management is also involved in acquiring and disposing for their clients. So we thought we're showing more of an asset management tool with our product. And what's surprised us was that often the very same person who would make the most senior decision on the marketing was also the person that had the greatest need for tactical rental information. So you go meet with somebody, ensure the asset mangers are in there and they're interested, but the direct VP of Leasing has to manage and understand every day what all their competitors are charging for rent, and they either watch for the people who are raising or lowering their rents, and that same person is responsible for lead generation. So what thrilled us was that person when you could solve the problem that no one else could solve, because no one else is solving this problem we're solving here. There are other people, who provide information on apartment buildings, but they're updating a very small set of properties realistically with a very, very small staff. And they're doing it on a bimonthly basis typically, or a quarterly basis. And we are updating more properties and their rental information each day than I believe any of our competitors update all year long, like, update quarterly. So we're providing these people with really good pricing, competitive intelligence. And that is really compelling to them. And the great thing is they control a massive budget for marketing the properties. And then the other little secret there is that they -- it's appropriate, there's nothing wrong with it, but they have a big budget for marketing these 30 buildings they manage, but the marketing budget goes directly into the partnerships on the buildings. And if they can get packages that allow them to get discounts on information based on the spent at the building, they can get very low cost information of the general partnership, and they're really like that. You could make an argument that you could allocate information cost against the limited partnerships of the building set in, but we do that for them. So in many cases, if somebody moves, there's substantial advertising budget for 20 or 30 properties from a competitor to Apartments.com. They can get free information to manage their rentals and their asset managements. They're underwriting the whole nine yards. And I really enjoyed the other day listening to a sales pitch from a direct competitor, where it was quite clear at the end of the presentation that the CoStar marketing analytics was a better product, and was free, because of their marketing. And the competitive sales person just shrugged and disappeared. So that's the surprise. Thank you. So I believe at this point, we have no more questions. So thank you all for joining us in this call. And we look forward to those who are going to be up in New York for the Needham conference, and for those we are going to see up in Boston in the next -- the day following that. We look forward to seeing you. Again, thank you very much, and look forward to hearing from you all next quarter, and look forward to Scott leading the call next quarter, and Brian making comments from the peanut gallery. Thank you very much.

[Operator:]

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