Loop Industries, Inc.
Q2 2010 Earnings Call Transcript

Published: 29 Jul 2010

[Operator:]

Good day, ladies and gentlemen and welcome to LoopNet, Inc.'s Earnings Conference Call for the Second Quarter of 2010. The date of this call is July 28th, 2010. This call is the property of LoopNet, Incorporated and any recording, reproduction or transmission of this conference call without the expressed prior written consent of LoopNet, Incorporated is strictly prohibited. This call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of LoopNet’s website. The webcast will be available on the company’s website until August 27th, 2010. I will now turn the call over to Derek Brown, VP, Investor Relations and Corporate Planning. Please proceed, Mr. Brown.

[Derek Brown:]

Good afternoon. Thank you for joining us to discuss LoopNet’s financial and operating results for the second quarter of 2010. With me today are Rich Boyle, Chief Executive Officer and Chairman; and Brent Stumme, Chief Financial Officer. Today, Rich will provide an overview of the business and corporate strategy, a summary of the company’s second quarter performance, and review of our marketplace and information services lines of business. Brent will review the second quarter financial results and provide third quarter 2010 guidance. In Q3 2010, LoopNet has planned to meet with institutional investors in New York and Chicago among other locations and we will participate in the Pacific Crest Technology Leadership Forum in Vail, Colorado and in Morgan Keegan's Technology Conference in New York. We hope to see you at these events, but we will also make webcasts of our presentations available on the Investor Relations section of LoopNet’s website. I would now like to bring the following to your attention. On the call today, you may hear forward-looking statements about events and circumstances that have not yet occurred. Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. Please refer to the Company’s recent SEC filings at the SEC’s website at www.sec.gov for detailed discussions of the relevant risk and uncertainties. The company does not intend to update the forward-looking statements in this conference call, which are based on information available to us as of the date of this call. The press release distributed today that announced the company’s results is available on the company’s website at www. LoopNet.com in the Investor Relations section, under Financial Press Releases. The current report on Form 8-K furnished with respect to our press release is available on the company’s website in the Investor Relations section under SEC Filings and on the SEC’s website. You will also hear discussion of non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most comparable GAAP financial measures are contained in the press release distributed today and available on the Investor Relations section of the company’s website. Now, I will turn the call over to Rich Boyle, Chief Executive Officer and Chairman.

[Rich Boyle:]

Thank you, Derek. I would like to welcome all of you to the LoopNet second quarter 2010 earnings call. On our call today, we will discuss our performance during Q2 2010, share with you our perspective on current conditions in the commercial real estate industry and discuss how these conditions are impacting our business. We will also provide you with updates on a number of other important initiatives at the company, including an update on the progress we are making with new investments to expand the breadth and depth of services we provide to our customers. Following my prepared remarks and those of Brent Stumme, our Chief Financial Officer, we will be opening the line for questions. LoopNet delivered very strong results across the board in the second quarter and we made ongoing meaningful progress in developing key areas of our business for the future. We are increasingly confident that the first quarter of 2010 was an inflection point for our business as we moved past the worst of the cycle that began in August of 2007. Some of the key achievements from the second quarter that we would like to highlight are; exceeding the financial targets we set three months ago, increasing revenue year-over-year for the first time since the fourth quarter of 2008, increasing revenue sequentially at the fastest pace since the second quarter of 2008, increasing our base of premium members sequentially for the second consecutive quarter and only the second time since the third quarter of 2007, introducing initially in a beta release our new property research database service, signing a long-term expanded enterprise agreement with CB Richard Ellis which includes access to the new property research database service, advancing our efforts to integrate recent acquisitions, and continuing to accelerate our organic investment program to expand the breadth and depth of the services we provide to our customers. Revenue in Q2 of 2010 was $19.4 million compared to our guidance of $18.6 million to $18.8 million, and adjusted EBITDA was $7.2 million or $0.17 per share compared to our guidance of $6.4 million to $6.6 million. Our adjusted EBITDA margin for the quarter was 37.4%, which is above the high end of our stated target range for 2010 of low-to-mid 30s on a percentage basis. While favorable timing issues on both the revenue and expense sides of the ledger aided us from a top line and margin perspective in the quarter, we think these better-than-expected results speak largely to the strength of our underlying business model, our financial discipline, increasing stabilization of industry conditions, and the ability of our team to execute. Equally important, several key operating and activity measures of our core business improved again in the quarter, many for the fourth consecutive time. As mentioned previously, our base of premium members grew sequentially in the second quarter of 2010 for the second consecutive quarter and only the second at all since the third quarter of 2007. We also saw positive year-to-year changes in the number of gross premium member additions, the average monthly cancellation rate of our premium members, profile views, and profile views per listing, as well as the number of subscribers to recent sales. In our view, this activity and other data from our marketplace, coupled with market insights from third-party sources such as CB Richard Ellis, Jones Lang LaSalle, and Real Capital Analytics lends further support to our view that dynamics in the commercial real estate market continued to stabilize, if not, improve very modestly during the second quarter of the year. We are also particularly excited about the progress we made in Q2 2010 on developing new products and initiatives we expect will deliver meaningful value to our customers and shareholders as we bring them to market over time. Most noteworthy, with the late May beta launch of our property research database service. Despite its nascent form, we believe that the property research database has been extremely well received and it is clear to us that it will serve as an important foundation on which we can build for years to come. In short, Q2 of 2010 was a busy and productive period for LoopNet and we are very happy to be in growth mode once again. Let's begin by reviewing the current conditions in the commercial real estate market. Overall, industry dynamics have not changed radically and transaction activity remains at a historically low level. That said, there were increasing signs of stabilization across many dimensions and in some segments, activity has picked up substantially. On the for-sale side of the market, overall activity has increased modestly on a year-over-year basis and continues to improve, albeit gradually, which is largely consistent with our expectations. Research from Real Capital Analytics reported recently that the total number of transactions in segments they track increased 8% year-over-year in the second quarter of 2010, marking the second consecutive quarter of annual growth. While certainly encouraging given the free fall the deal volume had been in throughout 2008 and 2009, this level of activity remains far below historical norms. For a bit of perspective on this, we note that the transaction totals in the first half of 2010 remained at about half of those recorded in the same period in 2003 and 2004. So deal volume would need to double from here for the industry to reach what we would consider to be more normalized levels. While increasing activity is certainly a positive for our business, the rate of increase remains modest as we have been communicating to investors for several quarters now. Further, we believe that activity levels for higher-end properties have recovered more than for small property transactions, in part due to investors' disproportionate interest in those properties, driven by a flight-to-quality mindset and in part due to availability of financing for those segments. Our expectation is for these relatively moderate positive trends to continue for at least the next several quarters. The leasing side of the industry also showed signs of increasing stabilization and ongoing activity increases, although these improvements were modest as well. Overall vacancy rates remain quite high compared to historical averages and rental rates continues to show softness, despite segments and markets showing meaningful gains. For example, CB Richard Ellis reported recently that for the second quarter of 2010, the national vacancy rates for office, industrial, and retail properties, each increased a modest 10 basis points to 16.7%, 14.1%, and 13.2%, respectively. The rate of increase has declined substantially since last year at these sectors and in some sectors, the vacancy rates have begun falling. For example, CBRE reported that the national vacancy rate for apartment buildings decreased by 60 basis points. The broader economic recovery that will eventually drive improvements in rents and occupancy remains, in our view, very tentative. And key drivers like the unemployment rate remain at historically high levels. We believe that current weakness in the market is driven by a lack of demand rather than a gutter supply, suggesting that a recovery in the leasing market could happen relatively quickly as the economy strengthens and employment picks up. Now, let's drill down a little more deeply into how those industry conditions impacted our business. Our core marketplace experienced ongoing improvements in a number of key operating metrics for the fourth consecutive quarter. While trends may not remain consistently positive going forward, we are very encouraged by many aspects of what we saw during Q2 of 2010 and more broadly what we have seen since mid-2009 and continue to expect very gradual improvement in the months and quarters ahead. We ended the second quarter of 2010 with 69,368 premium members, an increase of 559 paying subscribers to this service from the first quarter of 2010, marking the second consecutive quarter-to-quarter increase in our base of premium members since 2007. We believe this sequential gain demonstrates both the value we deliver and the industry stabilization after almost three years of credit crunch related disruption. Growth in new account sales and a meaningful year-over-year improvement in our cancellation rates were the primary reasons for gains in our premium membership totals in the quarter. Gross sales of our premium membership products increased on a year-over-year basis for just the second time in the last two-and-a-half years and did so at the fastest pace since the second quarter of 2007. While this growth was admittedly still modest, we are very encouraged to see more customers at the top end of our subscriber base funnel. At the same time, our Q2 2010 cancellation rate, which remains comfortably within the 4.5% to 6.5% range that we began seeing two-plus years ago, was the lowest it has been since the fourth quarter of 2007 and the absolute number of premium members cancellations in Q2 of 2010 was the lowest we have experienced since the first quarter of 2007. Over time, this combination of more gross additions and fewer cancellations even at moderate levels can have significant long-term benefits to our company's growth and profit profile. In total, premium membership revenue in Q2 of 2010 was $13.8 million or approximately 70% of total company revenue, up from – up about 2% from $13.6 million in Q1 of 2010, marking the first sequential growth in premium member revenue since Q3 of 2008. Consistent with prior quarters, roughly 60% of our premium membership revenue was derived from the marketing of listings with the remaining 40% associated with the searching for availabilities. Looking at the supply side of LoopNet's marketplace, at the end of Q2 2010, there were more than 465,000 listings of spaces for lease and over 300,000 properties for sale, bringing the total to more than 766,000 active listings, up 7% year-over-year. Overall growth was fueled by activity in the for-lease segment, which saw a year-over-year growth in spaces being marketed approach 12%, consistent with both an elevated rate of vacancy nationwide and our success in capturing market share as more brokers choose LoopNet to market their for-lease listings. Conversely and perhaps not surprisingly, for-sale listings on our platform increased very modestly both year-over-year and quarter-over-quarter, reflecting the deadlocked nature of the broader commercial real estate for-sale sector that we previously noted. We continue to believe that the strong performance of our marketplace on both the for-sale and for-lease sides is being fueled by the ongoing secular shift online of the industry and by the superior performance, size, and scope of our platform as compared to alternatives, both offline and online and by the growing stabilization and cyclical recovery in the commercial real estate market. Our business-for-sale unit, which includes BizBuySell, as well as BizQuest, ended the quarter with 83,071 listings, up roughly 2% from the first quarter of 2010, which was our first quarter owning BizQuest. We believe listing patterns and growth rates in the business-for-sale industry tend to follow a similar trajectory as those in the small property for sale segment of the commercial real estate industry. Turning now to the demand side of our marketplace, we are pleased to report that we saw record levels of activity in the second quarter of 2010. Continuing a trend we began to note in the second half of 2009, bargain-hunting principals are focusing even more time and resources analyzing markets and searching for potential investment properties or spaces for lease on our marketplace. As a result, profile of user listings on LoopNet.com increased to record 51.5 million in the second quarter of 2010, up 47% from year-ago levels, marking the largest year-over-year increase we've seen in this metric since the fourth quarter of 2006. At the same time, the number of profile views per LoopNet listing, a key measure of overall liquidity in our marketplace, reached 67.2 in the second quarter of 2010, an increase of 37% from Q2 of 2009 and 13% from Q1 of 2010. This is the third consecutive quarter of improvement in this metric on a year-over-year basis and marked the largest year-over-year increase we have seen in it since Q2 of 2006. We experienced robust growth in both the for-sale and for-lease segments of our marketplace, lending further credence to the view that a significant compression of pricing and increasing confidence in the economy are fueling demand side interest. At the same time, comScore Media Metrix reported that the average number of monthly unique visitors during the second quarter to our collection of websites including LoopNet.com, CityFeet.com, LandandFarm.com, BizQuest.com, and BizBuySell.com was 2.1 million on average during the quarter. Traffic to LoopNet.com was approximately 1.5 million unique visitors per month in the second quarter of 2010, again, according comScore. These traffic numbers do not include unique visitors to the broader network of distribution partner websites available to brokers listing on LoopNet such as the Wall Street Journal or American City's Business Journals website. In short, our overall marketplace and distribution network continues to generate unparalleled visitor traffic and marketing exposure for our listing customers compared to any online alternative. We believe that multiple factors contributed to this significant increase in vibrancy in our marketplace, including ongoing improvements to our marketing efforts, the overall growth and scale of our marketplace, and ongoing indications of an incremental increase in demand side interest as market conditions stabilize. Now, I'd like to update you on some of the other areas of our business, as the second quarter of 2010 also saw us make meaningful progress in a number of areas beyond premium members. In late May, we launched our property research database service. While still at beta form, our property research database maybe one of the most important new product introductions of our company's history. With more than 7.5 million property records nationwide across the office, industrial, retail, multifamily, and hotel segments, the LoopNet property research database marks a significant extension of the services that LoopNet delivers to all commercial real estate participants. Now, in addition to our members being able to search for and/or market available for-sale and for-lease properties in our marketplace and use recent sales to get information about completed sale transactions, they are able to discover, evaluate, and leverage an expansive array of information on millions of properties that may or may not be currently available. Key datasets we now offer includes historical sale and lease listings, owner details and histories, tenant rosters, mortgage and lending histories, tax records and assessed values, maps and aerial imagery, demographic data, and market pricing information among others. As a result, the LoopNet property research database helps our customers make better decisions and work more efficiently as they spot trends, prospect for new business, value properties, develop client presentations, and negotiate rent. The information in this service is, we believe, incredibly useful today in supporting key aspects of the commercial real estate lifecycle and also sets the stage for us to continue to build upon it to create even more solutions for our customers going forward. Despite its early stage of development, our property research database service has received overwhelmingly positive feedback from our customers. For example, the enterprise agreement we announced today with CB Richard Ellis, the largest brokerage firm in the industry, offers tremendous validation of this offering's potential. We intend to build on this positive momentum in quarters ahead as we continue expanding and customizing the tools we offer, increasing the ways in which our customers will be able to access and interact with the wealth of information that we are providing. Additionally, we remain focused on expanding our coverage, growing the number of records we maintain, and adding more depth to the property information in our database. We believe that our unique hybrid approach, which marries user-generated marketplace data with a variety of other sources and development methods, offers us the unmatched stability to deliver easy access to timely, useful, accurate market data at prices well below traditional alternatives. The property research database service in its current beta form is being provided at no additional cost to our existing premium members. As we gather and respond to customer feedback in the next few quarters, we will also be developing our monetization plans for the product, which may include both bundled options with other services like premium membership, as well as standalone access. In other areas, we are happy to report that the total subscribers to recent sales, which is our database of comparable sale records, continued to grow solidly during the second quarter. This ongoing growth offers us yet another indication that demand activity is on the rise with principals and other industry participants increasingly familiarizing themselves with market pricing dynamics in front of potential transactions or to value existing portfolio of properties. This product is one of the areas where we are ramping our investment, adding new information content, as well as software functionality to the service. Equally important, we added strong leadership to the product line in the second quarter of 2010 with the addition Hilary Jensen as General Manager. We remain particularly excited about opportunities we see for investment and growth in this segment of our business. We currently offer four commercial real estate-focused subscription services; property marketing, property searching, recent sales, professional profiles – and professional profiles. Property marketing and property searching, together, constitute our existing premium membership service. We are increasingly working to cross-sell multiple services to our customers and expect to do more of that as we broaden our range of services. To give you a sense of the overall scope of our current customer base, as of June 30th 2010, LoopNet had 83,137 total unique paying subscribers to one or more of our commercial real estate related services. To be clear, this aggregate total includes our previously discussed base of premium members, as well as approximately 10,000 CB Richard Ellis professionals, covered by our just announced enterprise agreement. In the second quarter of 2010, these 83,137 unique subscribers paid us $59.73 per month on average for the services to which they have access. LoopNet's total commercial real estate related subscription revenue was $14.9 million in Q2 of 2010, representing 77% of total company revenue in the quarter. The second quarter also saw us make steady progress integrating BizQuest and Reaction Web, two private companies we acquired in the first quarter of 2010. We are pleased with our initial progress in the integration of Reaction Web's online marketing solution with the LoopNet marketplace. We expect customers to see more tangible evidence of this integration during the second half of 2010 and into 2011 as we introduce a greatly enhanced set of marketing tools to brokers' marketing listings on the LoopNet platform. In our business-for-sale segment, we are happy to report that BizBuySell was recently chosen to power the business-for-sale listings sections of the websites of the International Business Brokers Association, the largest trade association of business brokers and M&A Source, the largest organization of middle-market intermediaries. A key component of the value proposition behind these agreements was our early success delivering a single point of entry solution to customers of both BizBuySell and BizQuest, following on our acquisition of BizQuest. As you can see, we have been actively scaling our investments to enhance longer-term growth, consistent with our announcement to do so earlier this year. While it has taken a bit more time than we originally planned to put these investment dollars to work, the opportunities we see ahead of us are no less compelling than they were previously. Looking forward then, we remain committed to investing aggressively in our business, focusing our efforts in three key areas. First, we are accelerating the aggregation of activity on our core marketplace platform. We are focused on increasing both the scale and activity around marketing and searching for listings. We are also continuing to invest and innovate to add new functionality to our users, for example, by integrating the Reaction Web suite of services on the marketing side of our marketplace or with our groundbreaking mobile access solutions on the searching side of the platform. Second, we are focusing substantial resources on the organic development and enhancement of information services we deliver to a broad set of industry participants. As I mentioned previously, the LoopNet property research database is a beta offering and remains very much a nascent effort. As a result, we expect significant additions and improvements to the service in coming quarters, increasing the breadth, depth, timeliness, utility, and accuracy of the data we provide. Similarly, we will also be investing aggressively to build out recent sales team and offering. We also plan to continue our investment in client and in our market trends offering and to introduce new services to customers in coming months. With the combination of these new services and our marketplace-based services, we are assembling all of the essential tools to support not only the marketing of and searching for availabilities, but also the information required to develop strategies, analyze market trends, and support key decisions for all market participants throughout the commercial real estate lifecycle. In addition, we continue exploring new potential acquisitions and push the ball forward upgrading, integrating, and expanding the offerings from some of the acquisitions we have done in the past, including REApplications, Land and Farm, and now BizQuest and Reaction Web. In conclusion, we are very pleased with LoopNet's performance in the second quarter of 2010 and remain optimistic about our ability to capitalize on opportunities we see in the industry. We comfortably topped our financial targets for the quarter, increased revenue year-over-year for the first time since the fourth quarter of 2008, grew our base of premium members quarter-over-quarter, saw healthy improvement in the number of key operating metrics such as our premium member gross addition and cancellation rates, launched the beta version of property research database, and continued pushing forward on other initiatives we expect will deliver increasing value to our customers over time. We believe industry conditions will continue to improve gradually throughout the year and remain enthusiastic about our potential to grow our mind share, market share, and business in the coming years. Thank you. And now, Brent Stumme, our Chief Financial Officer, will take us through the quarter's financial results.

[Brent Stumme:]

Thank you, Rich. LoopNet's revenue for the second quarter of 2010 was $19.4 million compared to $18.8 million in the first quarter of 2010, $19.2 million in the second quarter of 2009, and our guidance of $18.6 million to $18.8 million. This marked the first year-over-year increase in our revenues since Q4 of 2008, reflecting an increase in our base of premium members and subscribers to recent sales during the current quarter, the impact of recently completed acquisitions, out-performance in more volatile areas of our business such as advertising, and a modest improvement in broader industry conditions. LoopNet's adjusted EBITDA for the quarter was $7.2 million or 37.4% of revenues compared to $8.2 million in the second quarter of 2009 and our guidance of $6.4 million to $6.6 million. Adjusted EBITDA margin was higher than planned and above our stated target range due largely to favorable timing issues associated with our hiring and product development efforts, coupled with a revenue upside from advertising and other high-margin sources. Net income applicable to common stockholders for the second quarter of 2010 was $3.2 million or $0.07 per diluted share compared to $1.8 million or $0.04 per diluted share in the second quarter of 2009 and our guidance of $0.04 to $0.05 per diluted share. Net income applicable to common stockholders for the second quarter of 2010 included an insurance recovery related to past litigation costs of $0.02 per diluted share and the second quarter of 2009 included litigation costs of $0.03 per diluted share. Non-GAAP net income, which we define as net income excluding stock-based compensation, amortization of acquired intangible assets, and litigation related costs for the second quarter of 2010 was $4.2 million or $0.10 per diluted share compared to $4.6 million or $0.11 per diluted share in second first quarter of 2009. LoopNet repurchased 1,989,206 shares of its common stock during the quarter ended June 30th, 2010 for $23.2 million. The company also repurchased an additional 408,969 shares of its common stock for $4.9 million from July 1, 2010 through July 28th, 2010. Since February 2010, the company has now repurchased 2,700,000 shares of its common stock or 6.8% of total shares outstanding for $31.1 million. As a result, $43.9 million remains on our previously announced for repurchase of up to $75 million of common stock. As of June 30th, 2010, the company had $100.5 million of cash, cash equivalents, and short-term investments, and no debt. Now, I would like to review some of our key operating metrics. The number of registered members, which includes both basis and premium members, grew to 4,287,730 during the second quarter of 2010, a 4% increase over the first quarter of 2010 and a 19% increase over the second quarter of 2009 [ph]. The number of premium members as of the end of the second quarter of 2010 was 69,368, a 0.8% increase from the first quarter of 2010. Embedded in this metric was an average monthly cancellation rate that was within the 4.5% to 6.5% range we began seeing since the end of 2007. Average monthly revenue per premium member was $66.65 in the second quarter of 2010, a 1.2% increase compared to the second quarter of 2009. The number of profile views of listings on the LoopNet marketplace during the quarter was 51.5 million, a 47% increase from the second quarter of 2009. Average monthly unique visitors, as reported by comScore Media Metrix during the second quarter of 2010 to LoopNet-owned websites including LoopNet.com, CityFeet.com, LandandFarm.com, BizQuest.com, and BizBuySell.com was approximately 2.1 million. Average monthly unique visitors, as reported by comScore Media Metrix during the second quarter of 2010 to LoopNet.com were approximately 1.5 million. As Rich mentioned earlier, we are also introducing two new operating metrics this quarter in an effort to provide a more holistic view of our footprint within the commercial real estate sector. To this end, the number of unique paying subscribers to LoopNet's commercial real estate marketing and information services was 83,137 at June 30th, 2010 and the average monthly revenue per unique paying subscriber was $59.73 during Q2 of 2010. As of June 3oth, 2010 the LoopNet marketplace contained 766,356 listings, a 2% increase compared to March 31, 2010 and a 7% increase compared to June 30, 2009. Additionally, our business-for-sale marketplace contained 83,071 listings of operating businesses for sale, a 2% increase compared to March 31st, 2010 and a 74% increase compared to June 30th, 2009. This increase compared to June 30th, 2009 was primarily the result of our acquisition of BizQuest in the first quarter of 2010. That brings me to our business outlook. Based on current industry dynamics and marketplace trends, the company expects revenue for the quarter ending September 30th, 2010 to be in the range of $19.2 million to $19.4 million; adjusted EBITDA to be in the range of $6.6 million to $6.8 million; and net income applicable to common shareholders to be in the range of $0.04 to $0.05 per diluted share, assuming stock based compensation of approximately $0.03 per diluted share net of tax, and an effective tax rate of approximately 38%. Thanks for joining us today. I will now open up the call for questions.

[Operator:]

(Operator instructions) Our first question, ladies and gentlemen, comes from the line of Ian Corydon with B. Riley & Company. Please proceed.

[Rich Boyle:]

Hi, Ian.

[Ian Corydon:]

Hi. Couple of questions on the for-lease and for-sale listings. How do you expect the lease list – the number of lease listings to trend as they can be stabilized or decreased? Is there still room for upside there? And then do you have much visibility into sales listings and when those might pick up a little bit more than they have been?

[Rich Boyle:]

Yes. I guess, a couple of quick thoughts. So on the leasing side, we definitely saw the growth rate mitigate a bit from where it had been running. I think we have been running close to 20% year-over-year for the last couple of years even. And I think the slowdown in the growth rate, there is two factors. I mean, one is just as the denominator gets bigger, it's sort of a natural effect. But then secondly, vacancy rates that were ballooning up rapidly last year, it's really kind of tapered off and so they are somewhat stabilized. So I think there is a little less wind at our backs. That said, yes, there is still plenty of room for growth there. We don't view ourselves as anywhere near a 100% penetrated in terms of having all of the listings in the world – or in the market on our platform. And so even with that basis alone, there is lots of opportunity to keep growing, even with slightly less wind at our backs, if you will. The for-sale side, the market is still, in a very broad sense, moving pretty slowly. We did see data from like Real Capital Analytics and firms like CB Richard Ellis showing that investment sale activities picking up. However, we primarily believe that's initially starting more at the high end of the market. Investors, they are sort of a – a flight-to-quality mentality about the properties they are looking to buy. There is also more financing available for larger properties. The sort of small property world financed by community banks is lagging that somewhat. So I think our view is it's going to continue to be a positive trend, but continue to develop frankly pretty slowly as the issue about the commercial loan balances that are held in the books of community banks throughout the country still have to get worked out if they are pre-conditioned to increase deal volume.

[Ian Corydon:]

It makes sense. And on the property database, I realize you are still kind of figuring out the monetization there, but should we think of that as a monthly contract? And also, do you have any sense for how many of your premium members are currently actively using the database?

[Rich Boyle:]

In inverse order, it's a relatively small percentage so far. We just launched it in May; we've just kind of begun spilling up all the marketing programs around it to get people aware of it and using it. There is also a substantial amount of software functionality that we are going to be adding to it over the next few quarters. So I think we are in the very early stages of driving awareness and usage. As we have been out in the field showing it to customers, the feedback has been fantastic. People are really excited about the information in it and where they see it going, and what they can do with it. So we are pretty pleased, but it's very early in the game in terms of rolling that out and getting people to start using it. In terms of the monetization, I do believe we will see it as a subscription-based service. There maybe some slight differences in terms of how it is consumed by customers from our primary premium membership products. And a couple of examples would be the opportunity to do an enterprise agreement with a firm like CB Richard Ellis that we announced today is something that the research and information services typically get organized at the corporate level, whereas the marketing services we provide in premium membership right now are very often a broker-by-broker decision. So the opportunity to do something at a corporate level for at least some of the firms, we think, is a little bit different. And then just in general, the consumption of the information is relevant outside of just the transaction. So it's very relevant for somebody who is maybe marketing a deal or searching for a deal, but it's also relevant to a broader set of people in a broader lifecycle of commercial real estate, if you will. So we think it opens up some interesting opportunities for us to go into new areas there as well. But by and large, we do see it as a subscription service, maybe a little bit packaged differently than premium membership, but that's how it will develop over time, we expect.

[Ian Corydon:]

And do you have the ability to create tiered packages within the database, either regionally or in some other way?

[Rich Boyle:]

It – we – absolutely, we have that ability. The way it's working right now in the beta period is we are most eagerly just seeking customer feedback. And so it is not constricted on a geographic basis at all. Anybody who is an existing premium member has full access to the property information in the property research database and they can use it nationwide for all the information. That is an example, though, of something that if we felt like that was appropriate for how customers wanted to consume it going forward, we absolutely can build that kind of access level then, if you will.

[Ian Corydon:]

Great. Thank you.

[Rich Boyle:]

Thank you.

[Operator:]

Ladies and gentlemen, our next question comes from the line of Mitch Bartlett with Craig-Hallum. Please proceed.

[Mitch Bartlett:]

Hi. Hi, Rich. Hi.

[Rich Boyle:]

Hi, Mitch.

[Mitch Bartlett:]

Sorry to make you do this again, because I'm juggling so many companies here. But will the – the property database, when it becomes part of a bundled package, will there be new content added to that that will drive that subscription? Do the – do folks have pretty much 80%, 90% of what will be consumed in a subscription available at their fingertips now, but it will be just differently organized? I know you just answered this, but could you just put a little bit more to that?

[Rich Boyle:]

Yes. Well, so when you look at – and specifically talking about the property research database service now, not premium membership or recent sales, when you look at the property research database in and of itself, what we launched at the end of May is a massive set of information that LoopNet customers did not have available to them before. So it really is an unprecedented amount of new stuff that they can access. Now, at the moment, we are making that available people who are already paying subscribers at no additional cost, just because we are trying to solicit their feedback on what could make the product work for them in these first few months of life of the product, if you will, which is a not unusual strategy for companies like us. So the product, as it stands today, we think will be monetizable in a very direct way once we get a little bit further down the road about reacting to some of this customer feedback. So that's point one. But then point two, we will continue to invest in it, expanding breadth, depth, and detail of information in the service so that over time, it will – at whatever monetization level it goes out when we first flip the switch on that, we do think over time we will be continuing to invest in the product to add more and more value to it. Does that –?

[Mitch Bartlett:]

Yes. Yes, thank you. The second question and I'll jump off here, is did I hear you say sequentially, profile views were up 13%? Does that –?

[Rich Boyle:]

They were definitely up sequentially. Let me just double-check –

[Mitch Bartlett:]

The real question here is, is that seasonally an acceleration? Is that kind of normal seasonal improvement? Q1 to Q2, is the business improving from a profile view?

[Rich Boyle:]

Yes. I think it was actually up 15% sequentially from Q1 to Q2. And it's actually – the normal seasonality, if you go back all the way before September of '07 when a bunch of patterns in the world shifted a little bit, the normal seasonality for us was that Q2 was a typically a little bit lighter than Q1. When you looked at it, whether it was sort of operating metrics like profile views or monetization metrics like new – net new premium members was usually down a bit in Q2 relative to Q1. And so the sequential improvement in that, we think, is actually kind of a further indicator that the industry is stabilizing a bit and activity is picking up.

[Mitch Bartlett:]

That's great. Thank you.

[Rich Boyle:]

Sure.

[Operator:]

Our next question comes from the line of John Blackledge with Credit Suisse. Please proceed.

[John Blackledge:]

Thank you. Thanks for taking the questions. Just a couple of questions. Firstly, just wondering what led to the share buyback activity in the second quarter and what your view is on capital allocation in the back half of the year. You guys have a (inaudible) on the balance sheet is – are share buybacks going to continue, are you guys done with – largely done with M&A activity at this point? Just an update there. And then the second question would be, with modest improvement in premium members and it's stabilizing, albeit a weak commercial real estate environment, just wondering why you expect kind of flattish revenue sequentially in the third quarter. Is there some seasonality there? Thanks.

[Rich Boyle:]

Hi, John. This is Rich. So why don't I'll – maybe I'll take the first one and I'll let – Brent and I can kind of tag-team on the second one. So, on the buybacks topic, a couple of things. One, we back in the beginning of the year announced the increased authorization from our Board to do more buybacks. One of the things that we said is that the Board had encouraged us to execute buybacks at least to a level to offset options solution and that's basically the level that we've achieved so far through this year. And so that's something that is an ongoing policy matter, I think, the company will be looking at doing. In terms of the bigger picture, we do still have significant remaining authorization to do buybacks. Another way to look at what we did so far this year was basically offset cash that we've generated over the last year or so in the business. And so we still have substantial cash reserves at the company, I'll ballpark at about $100 million. I think our first preference, as it always has been, is going to be to go forward with our organic investment program. Our second preference is to continue to look for acquisitions. We do think there are still a number of things out there. They do frankly tend to be some of the smaller opportunities and so as we have excess cash, having that sit in the bank and earn a quarter-of-a-percent is, we think, no the best productive activity with it. So I think for now, we are going to continue the organic investment program, we are going to continue to look for acquisitions, we will probably be looking at additional buybacks down the road a little more opportunistically now that we've achieved the initial options offset that we wanted to.

[John Blackledge:]

Okay.

[Rich Boyle:]

And talking about Q3, maybe I'll let Brent talk a little bit about that.

[John Blackledge:]

Okay, yes.

[Brent Stumme:]

So as far your question about the Q3 revenue guidance, I think that the main delta there is our – kind of our non-subscription revenues, mainly advertising in Q2 came in strongly than we were expecting. I'd say our Q3 guidance, we are – we probably are assuming it's not going to come in quite as strong as they did in Q2. So that's part of the main delta.

[John Blackledge:]

Okay. How is advertising tracking thus far in the quarter? I don't know if you guys know of it.

[Brent Stumme:]

I guess I don't feel comfortable kind of giving the inter-quarter results at this point.

[John Blackledge:]

Okay. Okay, that's fine. Thanks for taking the questions.

[Rich Boyle:]

Thanks, John.

[Brent Stumme:]

Thank you.

[Operator:]

Ladies and gentlemen, our next question comes from the line of Steve Weinstein with Pacific Crest. Please proceed.

[Steve Weinstein:]

Great. Great, thanks for taking my question.

[Rich Boyle:]

Hi, Steve.

[Steve Weinstein:]

Yes. The first question, a follow-up on the previous question that in Q3 guidance. So I just – I'm not sure I understand correctly that the reason you got in basically flat to slightly down is potential revenue trends not related to kind of the core premium membership business. If you broke those out, would you think that the premium membership business would continue to grow sequentially, just kind of given the momentum we've seen so far this year and potential inflection in the industry? That would be my first question. And then the second one is, understanding that you can't go into details around your deal with CB Richard Ellis, but I am wondering just the pricing model in general, how that works, is that going to be based on the number of people how use it? Did you set up a flat fee? Is there a way to kind of scale that over time with increasing usage? Thanks a lot.

[Rich Boyle:]

Hi, Steve. It's Rich. So in terms of the first question on Q3 guidance, yes, I think if you broke out just premium membership, we are expecting a modest sequential growth in that product line for the third quarter. Building on kind of the momentum and industry dynamics we've seen so far this year, we think the industry is stabilizing; it is getting better, but at a pretty modest rate so far. But that's what we would expect to see happen in that product line. Regarding the contract with CB Richard Ellis, you are right, we can't go into tremendous detail. In the near term, the monetization impact is quite modest. The centerpiece of that agreement is really accessed by them to the property research database service, which is in beta and being given away for free right now at no additional cost to the existing subs. And so we weren’t in a position to go to CB Richard Ellis and say, everyone else can access it at no additional cost and we'd like you to pay up for it. We also view them very much as, frankly, a development partner in this service. They are, I think, a great partner of ours in business in general, not just the customer, giving us a lot of great feedback on what they like to see in the product. So it will begin to have an opportunity and I think that contract has some very significant opportunities in terms of monetization down the road. But over the next couple of quarters, as that service is kind of in its beta phase, it really won't have much of an impact at all.

[Steve Weinstein:]

Okay, great. Thanks for the explanation.

[Operator:]

Ladies and gentlemen, our next question comes from the line of Brett Huff with Stephens. Please proceed.

[Brett Huff:]

Good afternoon, and congrats on a nice quarter.

[Rich Boyle:]

Thanks, Brett. We can go ahead and say it's from Stephens so that we give you guys your advertising.

[Brett Huff:]

That's all right. I'm trying to understand from a market – your market commentary is always really helpful. Can you drill down a little bit and talk about which group of people was the driver of the premium sub growth? In my understanding, it's the demand side that has been sort of on the lane and is this a continuing increase in demand from the searchers or can you kind of characterize that for us?

[Rich Boyle:]

Yes. I mean, we did see modest growth on the searcher side. I think that's probably where we saw a little bit more. That said, the overall proportion between the searchers and listers didn't change dramatically, it's still in the ballpark of 60-40 people on the marketing side, people on the searching side. I think the searching side grew a little bit more on a year-over-year basis. And it – we – that's probably where we are seeing a little bit more unit adds and maybe getting a little bit of pricing on the marketing side.

[Brett Huff:]

Okay, that's helpful. And then in terms of the transactions, in the past you've talked about the types of – either trends that are listing that you've seen come on that are distressed or whatever and I am curious if you can comment on that? And then maybe in the same breadth, comment on – is there any way for you to view or understand how many of the – how much of your activity that you are seeing in the increase is driven by the refi's that, I think, we are all expecting to start driving commercial real estate metrics generally here in the near term?

[Rich Boyle:]

Yes. I don't have the specific numbers on the distressed listing right in front of me. We will put it in our updated investor press. That will be up on the website. But I'll give it to you as well, Brett. I do know that, as we've been watching it through the early part of this year, it has continued to go up. The number of new distressed listings coming out in the year in the first part of the year were still accelerating pretty rapidly. That said, the overall picture hasn't really changed much from where it was in Q1, which is the resolution of that problem in the small end of the market where banks recognize that they maybe have a loan on a small commercial property that is under water, they are trying to write it down to a soft landing as opposed to the force the disposition to the property and take a write-down in the near term. That is still absolutely the phenomenon that's kind of dominating activity. And so the real flood, if you will, of distressed listings that I think the commercial real estate community expected, say, a year ago is materializing much more slowly than everybody expected and I think that's still the case now.

[Brett Huff:]

Okay. And then on the leasing, I know that you commented a little bit more on leasing. The way I understand it is that leasing always kind of precedes buy and sell in the recovery and it seems the data that you are seeing sort of supports that thesis in this kind of recovery. Can you just describe again kind of the leasing?

[Rich Boyle:]

Yes.

[Brett Huff:]

Leasing metrics or give us more color on that?

[Rich Boyle:]

Yes. Well, so the broad dynamic – I mean, vacancy rates are still really high. So CB Richard Ellis' numbers were around 17% nationwide office vacancy. And that's a very high to put in context if you look back over the last 15 or 20 years for example. That said, they only increased very, very slightly last quarter. They increased by about 10 basis points. If you go back to last summer, they were increasing by probably 50 basis points to 60 basis points per quarter at least. And so the rate at which the empty space is expanding has slowed considerably and it is now sort of flat. We are not really back into absorption territory where it starts to go back down. And so it's sort this issue of existing businesses swapping out for higher-quality space is very much a – there is baseline of activity that I think is going on. I think that definitely accrues disproportionately to bigger firms in the market like CBRE and they are – I think they probably reported a pretty good quarter in activity as a result of that. But the big driver in an overall sense is going to be when things like unemployment start to come back down meaningfully. They came down a bit, but I think national unemployment data from Bureau of Labor Statistics is still we are at 9.5% or something like that. And that's still a really high number. And so I think to have leasing activity really pick back up to a more normalized level and net absorption to go positive to bring the vacancy rates back down is going to require unemployment growth – sorry, employment growth and the overall economy picking back up in a way that it's showing some signs of life, but it's nowhere near back to a normal level at this point.

[Brett Huff:]

Okay. And then just two more questions, I'll be quick. In terms of the database, the info you generate, as I recall, a lot of that is historical data that you all have been aggregating for a while and are just now kind of putting to use. Is that the right way to think about it?

[Rich Boyle:]

Yes, that's a very massive chunk of the information. Other is information that we have worked with third-party partners to aggregate and integrate, other is information we proactively go out and gather ourselves through a variety of different means. But the centerpiece of it, if you will, is this information that's generated as a byproduct in operating our marketplace.

[Brett Huff:]

And that's primarily – is it still primarily user-driven or is there a – have you been proactive, not using third parties, you have been proactive yourself in doing research?

[Rich Boyle:]

The starting point of listings information on LoopNet is absolutely still the user-generated content model. There is no question about that. And we think it's going to continue to be. There are segments of the industry where we do proactively gather listings information ourselves; we've talked about that and some of our efforts over the past few years to gather more data. But most of it is still user-generated in the beginning. However, we've always had a substantial operation internally. It's more leveraged on technology than it is just simply throwing bodies at it, but to then standardize and organize and cleanse and qualify that information. And so there is a lot of work that goes into making it good information that then synchronizes back to a specific building and ties up to all the other information we have about that building. And that's a process that we are doing more of than we used to do. But we've done it for a decade plus.

[Brett Huff:]

And then, last question. I appreciate the extra time. In terms of profile views, I am very encouraged by the number of profile views. Is it right to think of that as a leading indicator of interest? I think what you said in your prepared remarks was people are basically doing more work and thinking harder about looking at properties. Is that the right way to interpret that?

[Rich Boyle:]

Yes, we think so. I mean, if you go all the way back over the course of the last year and half, two years, I mean what we said way back in the beginning of '08 was as this market went sour in terms of activity, what was going to happen eventually is – on the for-sale side, if pricing came down, you would start see buyers come back in and get interested. I think we are definitely at a point now where there is a lot of buy-side interest in some very attractive pricing in the market and the challenge has now shifted to a lack of supply. The buildings that are out there that would be sold at pricings right now, it sort of breaks into two camps, broadly speaking. One is owners who don't have to sell, who are looking at a not very attractive pricing environment and they are just deciding to hold. And two is people that are facing a refinance over the next few years that you would expect to have to sell, whether they like it or not and this pretend-and-extend phenomenon that we've talked about where the banks are extending their loans and giving them some flexibility that's basically letting those owners not be forced into a situation where they have to take the loss – the owners and the banks not be forced into that situation. So in the market, the demand has definitely started to grow in Q3 of last year, has continued to grow since, and we feel pretty good about that trend, and we definitely feel like it's a leading indicator. But the bottleneck right now is bringing more supply to the market, I think.

[Derek Brown:]

And Brett – Brett, this is Derek, just with one additional comment. Not just looking at profile views to get a sense for demand though, we've also seen some encouraging signs in the premium member base, both on the adds and the cancels, and also seeing activity on recent sales over the last several quarters as well. So there are sort of a bunch of different data points that we are looking at that point us to improving conditions on the demand side.

[Brett Huff:]

Great. I appreciate the time.

[Rich Boyle:]

Thanks, Brett.

[Operator:]

(Operator instructions) Our next question comes from the line of Jim Wilson with JMP. Please proceed.

[Jim Wilson:]

Thanks. Good afternoon, guys.

[Rich Boyle:]

Hi, Jim.

[Jim Wilson:]

With just – I guess, first one the – just I guess, a maintenance or a numbers question. The insurance (inaudible), is that actually reversed out of G&A and where do I find that?

[Brent Stumme:]

Yes. Yes, you'll see that it's just a net – netted out of G&A line item.

[Jim Wilson:]

Okay.

[Brent Stumme:]

And then we back – backed it out in kind of our non-GAAP number, if you look at the last table of our earnings release.

[Jim Wilson:]

Yes, okay. And then the other, I – just more general, Rich, is I think everyone is trying out some of the same questions, the premium membership, but where or how do you foresee most likely being able to charge for additional services here and – I don't know, maybe if not, how much, but – which is hard to answer, maybe when do you see foresee that you might be able to start to tack on additional charges to premium membership for accessing different products and different – and the database?

[Rich Boyle:]

Yes, the – I mean, the timing on some of the new products like the research database for example, I mean, it is still up in the air, it's going to vary depending on – there are two primary things. One is we are actively working on enhancing yet more functionality around the product now, some stuff that's going to be coming online in the second half of the year, and then soliciting customer feedback, basically. We want to make sure that we get it right in terms of what customers are really excited about. Maybe an interesting way to think about it is I think when we first launched our recent sales service a few years ago, it was out in beta form for probably a couple of quarters before we really started to sell it. And so I think looking at timing, just a quarter or two down the road as we build more functionality and react to customer feedback to make sure we've got the product right is probably the right kind of timing. But we do think that's a product that has some significant potential for us in the coming years. As we also then look at reinvesting, building more functionality and content in the recent sales product, that's something that we are also working on right now. And then I think we have some other new stuff that we will probably be talking about later this year, sort of broadening out the product suite as well.

[Jim Wilson:]

Okay. All right, great. That's all I have.

[Rich Boyle:]

Thanks, Jim.

[Operator:]

With no further questions in the queue, I would like to turn the call over to the Vice President of Investor Relations and Corporate Planning, Mr. Derek Brown. Please proceed.

[Derek Brown:]

Thank you for taking time. We look forward to sharing more with you in coming weeks and coming months. Thank you.

[Operator:]

Ladies and gentlemen, that concludes today's conference. I would like to thank you for your participation and you may now disconnect. Have a great day.