CoStar Group Inc (CSGP) 2002 Q3 法說會逐字稿

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience.

Good morning. My name Tisha and I will be your conference facilitator. At this time, I would like to welcome everyone to the CoStar Group third quarter earning conference call. Today, we have Andrew Florance, chief executive officer, Frank Carchedi and Mark Klionsky. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. I will now like to turn the call over to Mark Klionsky Thank you.

Good morning. I'm Mark Klionsky, senior vice president of investor relations. I'd like to welcome you to the third quarter of 2002 conference call of CoStar corporation. Before I turn the call over to Andrew Florance, president and CEO of CoStar, let me state that certain portions of this discussion include 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 materially include, but are not limited to those stated in CoStar's third quarter press release and in CoStar's form 10-Q for the quarter ended June 30, 2002. All forward-looking statements are based on information available to CoStar on the date of this call and CoStar sees no obligation to update the statements. Andy?

Thank you, mark. Welcome to the third quarter conference call. I'm very pleased to report our ninth consecutive growth and earnings improvement. This quarter we posted $1.6 million of EBITDA on 20.1 million of revenue. Our pro forma net income of $418,000 represents a dramatic improvement over our third quarter 2001 pro forma net loss of $862,000. Attend of the third quarter, our cash balance increased by $500,000 to $42.6 million. We have no long-term debt. The company's balance sheet is very strong, and we are well positioned to take advantage of opportunities that emerge. This was evident in our recent acquisition of real net which I'll discuss later on. Frank Carchedi, our chief financial officer, will discuss the third quarter financials a little later in the call. Before we discuss our third quarter results I'd like to talk about a major product initiative that's nearing successful fruition. We plan to convert customers to our new Internet plat platform of CoStar property. As most of you know, CoStar property is our leasing and market analysis information service. It is our flagship product and it drives more than 37 million of our annual revenue. The new web-based version is tightly integrated with our four other successful web programs, CoStar comps, tenant, exchange and connect and offers significant propositions to our thousands of existing clients, as well as to potential new customer segments. With this Internet platform we continue to lay the groundwork for option of our technology in a market opportunity we believe may ultimately exceed $1 billion. Specifically there are five key factors that will encourage broad adoption. First, this product represents CoStar's most significant technology evolution within the last seven years. The product is based firmly upon the successes of the preceding den generations of CoStar property that we released in four different operating systems. But this the first version to incorporate the feedback we have received from our rapidly expanding national user base of the last five years. This product represents a quantum leap beyond the brokerage house that they can develop in house. The initial response to the product suggests that it's a very compelling offering to a number of commercial real estate officials that have yet to outsource their basic data requirements. We believe that this product is unique in that it helps our clients enhance their value in their client's eyes. Secondly, we believe the new web-based platform will allow us to deliver our products more cost effectively and securely would should lead to faster and deeper market penetration. For example in Denver, as an example city, we have 80% penetration of brokerage firms with ten or more brokers. But our penetration of one and two person shops is only 5%. We see huge upside in achieving deeper overall market penetration across our entire platform. With the desktop product, we have product and training, and without the high start-up costs we'll be able to more cost effectively reach broader market segments that have been slow to adopt our products. Historically as we achieve high levels of penetration among the top to 30r brokerage firms in the market, our overall penetration of broader market expanse exponentially. We have had good success in penetrating the top firms and we are well positioned to pursue broader market penetration. In addition, the vast majority of the clients only purchase data for one or two cities, but we believe that many of these customers would opt to purchase national data if the cost was not cost prohibitive. The new CoStar property enables us to distribute national level data more securely and cost effectively. We also believe web property with our ability to off ever an easily successful database will open up new growth for CoStar in the high-end institutional markets. Finally, our new technology also provides much better security both for CoStar and our customers. In our desktop product it was much easier for unauthorized users to get access to our data. Our new web-based platform will use certificates, a technology that ties each user a specific computer, making it much more difficult for unlicensed users to access our services. We believe that the new product will enable us to recapture a portion of the revenues certainly lost town authorized users. The same technology also allows us to provide every web property customer with powerful productivity and communication tools few firms could build on their own. For example, every web property user will have their own secure on-line file cabinet where they can store surveys and documents and share them with other brokers in their office if they choose. And when used in tandem with CoStar connect, web property becomes a secure extra net where brokers can post CoStar documents, spreadsheets, just about any file type on line for our clients to access on our -- for our clients clients to access on our client's website. This value enhancement directly supports our client's efforts to strengthen their relationships with their clients. Our exceptional team of more than 20 software developers has spent almost two years developing this new platform, and we're all very excited about bringing it to market. I'm confident our customers will be excited too as it incorporates much of the feedback we have received from them over the years and provides them with powerful technology addresses their need for advanced productivity and greater control of the data. In late August, we began holding CoStar property, sneak preview breakfast and luncheon events in cities across the country. The first of the events drew an audience of just over a dozen clients, but the buzz about the new product has spread across the country and the events are drawing 150 to 250 customers another each event. Thousands of customers and potential customers is seen the new platform and the feedback has been very positive. Excitement is building in the marketplace and in anticipation of the release. Prospects have not considered to outsource the CoStar property are now asking for proposals. We are confident our new web platform will improve the current customer satisfaction and secure our leading market position. I'd like to take a moment to address commercial real estate market conditions. Overall T commercial real estate market remains weak. Net absorption of office space A key measure of the commercial real estate markets has been very negative for six consecutive quarters. Year to date, net absorption has been negative 63 million square feet to give you some idea of the scale we are discussing, with all that negative absorption was the concentrated in one city, say Houston, Texas, that means they vacated every office building in one quarter's time. At the same time, the national office vacancy rate has soared almost 60% from its low of 9.3% in first quarter of 2000, to 14.7% today. Rates are off 10 to 20% from their peak. These weak market conditions are having an I believe impact on the core customer base. The market conditions have weakened is a test amount to the value and cost saves our customers recognize in our products. That recognition of that value also is evident if achieving the highest renewal rates we have seen for several quarters. We believe the positive trend in revenue growth and renewal rates are related to new initiatives instituted with the sales force in 2002. As I mentioned our call last quarter we have changed the way we compensate our salespeople to award net revenue and customer retention, rather than purely new sales. This shift in emphasis is leading the company to a stronger financial position. We are seeing the benefits in higher net sales and our customers are enjoying a much higher level of service. Our subscription renewal rate increased to 89% for the third quarter of 2002, versus 85% for the third quarter of 2001. Our renewal rate among core customers commercial real estate brokers and owners is 90%. As the sales force continues the intense focus on customer service, training and support, we expect renewal rates to remain high. In addition to higher renewal rates, we are continuing to see about 50% of new sales come from existing customers. With a launch of web-based CoStar property this trend should continue as customers add additional services to maximize the benefits of our product integration. As we discussed in the call last quarter, strengthening in our sales force has been a major focus this year. We believe it is an excellent investment and are committed to building the preeminent technology and information distribution channel into the commercial real estate industry. We are pleased with the results of our efforts here to date. Our goal for the sales force this year was to reach 80 to 85 account executives. We have reached that goal ahead of schedule. We currently have 87 account executives. In addition, we are continuing to strengthen our training programs as we work to develop a strong and seasoned group of professionals. We haven't talked much about acquisitions in recent quarters. That's because for the past two years we have been very focused on integrating prior acquisitions, reducing on right expenses and achieving profitability. However, we continue to keep a watchful eye out for investments that are either opportunistic, strategic or both. In September, we acquired the assets of Portland, Oregon-based real net and on line subscription-based Internet base. This is a relatively small acquisition, but this will enable us to expand our product offering for the Midwest. It was currently lists in excess of 150 million square feet of inventory. Portland, Oregon is not entirely new for CoStar Group. In 1998, we began offering the comps in Portland, followed a few years ago by the CoStar exchange. However, company combined with the launch of our web-based platform gives people a more product offering. In addition, many of the national and regional firms were also in Portland such as Wakefield, grub and Ellis, already use our platform as a standard and will benefit from our expanded coverage. In a matter of just weeks, our west coast research teams did an outstanding job getting the acquired data products into the CoStar system. We plan to convert real net customers to the CoStar platform within the next several weeks. We believe weak market conditions and increasing competition for single market information providers may yield similar acquisition opportunities in the immediate time frame -- intermediate time frame. Our strong balance sheet and outstanding cash position leave us well positioned to take advantage of the opportunities as they arise. And finally I'd like to note that CoStar Group was named week to the Deloitte & Touche fast 500 ranking for the fourth consecutive year. Deloitte & stush a national ranking of the 500 fastest growing technology companies in North America. Between 1997 and 2001, the five-year period in which the rankings are based, our revenue grew 918%. We're especially proud to earn a place on the prestigious place because it recognizes consistent sustained revenue growth. At this point, I'd like to turn the conference call over to our chief financial officer, Frank Carchedi.

Thank you Andy, as reported yesterday in the press release, revenues increased 8.8% from the third quarter of 2001 to 20.1 million dollar in the third quarter of 2002. Gross margin has improved from 10.9 million in third quarter of 2001 to 13.1 million this the third quarter of 2002 and margin percentages have improved from 59.2% to 65.2%. Pro forma net income improved significantly from a loss of $862,000 or negative six cents per share in the third quarter of 2001 to earnings of $418,000 or positive three cents per share for the third quarter of 2002. Meanwhile, our GAAP basis results have improved from a loss of $4 million or 26 cent in the third quarter of 2001 to a loss of 1.1 million or seven cents per share in the third quarter of 2002. The year over year progress we have made is substantial, but I'm going to focus on a discussion of the third quarter results as they compare to the second quarter of 2002. The sequential results of 22, 2002 are important in understanding where the company is in its business model and why it is that we believe we are positioned for continued revenue and earnings growth. Total revenue grew sequentially by 2.7% overall from Q2 to Q3, increasing from 19.5 million to 20.1 million. The last three quarters are sequential rate of revenue growth has been increasing during a period of weak conditions in the commercial real estate sector. The growth for the quarter was principally the result of further penetration of the potential customer base across our national platform, as well as the successful cross selling of products into our existing customer base. Subscription-based information products including CoStar property, tenant, comes, exchange and connect continue to account for over 90% of revenues and grew over 3% for the third quarter. Gross margin increased from 12.6 million in Q2 to 13.1 million in Q3 as margin percentages grew from 64.5 to 65.2%. Cost of sales increased very slightly from 6.9 million in Q2 to 7 million in Q3. With regard to operating expenses, overall operating expenses excluding purchase amortization increased as expected by approximately 2% from 22 to Q3. A more detailed level, selling at market expenses increased as expected from 5.6 million in the second quarter of 2002 to 5.9 million in the third quarter of 2002. This was primarily due to marketing expenditures related to the launch of web property and the first full quarter of personnel expense from the ramp-up of the sales force. Software development remained constant at 1.4 million in the second quarter of 2002 to the third quarter of 2002. The company continues its focus on products enhancement and development as well as development of internal information systems. General and administrative expenses remained constant at 6.2 million from the second quarter to the third quarter. We've been able to control the company's overall overhead costs despite upward cost pressure on certain expense items. I'll summarize the results by discussing the pro forma earnings for the third quarter. Pro forma results exclude the related tax benefit and am of thization. Net income per share was 3 cents for the quarter an increase of 1 cent from the second quarter of 2002. This represents the fourth consecutive quarter of pro forma earnings for the company. The recent improvement in pro forma earnings results from sequential revenue growth, growth in margin percentages which over the last year increased six percentage points and relatively stable operating expenses. We continue to have strong indicators of potential for earnings growth. Overall operating margins coming out of off our markets were stable at approximately 45%, more mature markets are continuing to see contribution margins up to 70%. Also, it is important to note that over the last several quarters, all 5050 of the company's markets were profitable. Our EBITDA improved from 1.4 million in Q2 to 1.6 million in Q3. The calculation of EBITDA starts with loss from operations of 1.3 million and excludes 641,000 of purchased amortization and cost of revenues. 902,000 of purchase amortization in operating expenses, and over 1.3 million of depreciation and non-purchase amortization included throughout the cost structure. On the balance sheet, we closed the quarter with approximately 42 pvpt 6 million in cash and short-term investments, a 500,000 increase over June 30, 2002. We continue to believe we have adequate resources to operate under our current business plan and this near a strong financial position coming out of the quarter. Now, I'll discuss the outlook for the fourth quarter. For the fourth quarter as we indicated in our press release, we anticipate quarterly sequential revenue growth at approximately 3% and pro forma earnings of four cents per share. We expect to achieve our stated goal of approximately ten cents of pro forma earnings for the year, which would be a significant turn around from last year's 51 cent pro forma loss per share. We continue to believe that in the longer term higher revenue growth rates are possible. We continue to grow and mature the sales force and additionally we saw sequential quarterly growth rates of 5% or more in many of off markets during the third quarter while operating in adverse economic conditions. Some of the market performances that exceeded the company's overall results include Seattle which grew 13%. San Diego which grew 12%. Houston which grew 6% and Kansas City which grew 5%. Gross margin percentage is expected to increase by another percent in Q4. Margin percentages are expected to move upward in the fourth quarter based on revenue growth and a fixed research cost structure. Operating expenses including software development and GNA are expected to increase by approximately two to three percent overall in Q4 as we invest in the sales and marketing areas to drive stronger long-term revenue growth. Amortization included in operating expenses is expected to remain consistent at approximately 900,000 for the fourth quarter. We make progress toward GAAP bases earnings and expect to achieve GAAP earnings in 2003. In conclusion, we believe we have and will continue to demonstrate the strength of our business model and our ability to execute our plan. We believe we're well positioned to achieve revenue and earns growth much as we have in a difficult business environment throughout 2001, and the first three quarters of 2002. We look forward to reporting our progress to you. And with that, I'll open the call for questions and answers.

At this time, I would like to remind everyone if you would like to ask a question, press star and then the number one on your telephone keypad. We'll pause for just a moment to come pile the Q&A roster. Your first question comes from Charles Trackens of Adams Hawkness and hill.

Thanks. Good morning.

Good morning.

On the competitive front, do you guys have any latest intelligence about the octane group and where you think they stand competitively?

Well, the octane group is comprised of several major brokerage firms, I believe, insignia, Trammell Crow, Richard Ellis and La Salle. It has been in existence for some number of years. It has been -- it's a consortium we try to produce productivity tools. We license data to those major players, and we have worked with those major players to allow them to license -- to use our data in those productivity tools. So we see ourselves being complimentary with an octane, not a direct competitor.

Okay. Did you guys -- you guys might have mentioned this Earl year, but what was the renewal rate on the core clients and then the second question is, you were talking about having I think your example was Denver, you have 5% of the one or two person shops, but 80% of the ten-plus firms. How would you think your target market breaks up? Is it an 80/20 role? 80% of it working the big firms or how would you categorize that?

The answer to your first question is 3 the renewal rate in our core customer base is in excess of 90%.

Great.

The overall is 89%. So it's well in excess of 90%. In Denver, that question there, that sort of reflects the fact that we've only been in Denver for maybe four years or something, about that time period.

Right.

Three to four years. Initially, it's the major firms that outsource to us right off the bat.

Right.

As time goes on, the smaller firms adopt once the vast image I have to the major firms are in there. So in our first three years in the city, probably 80% of our revenue comes from the major firms and 20% comes from smaller firms. Ten years into a market, it probably switches the other way around, and maybe 60% of the revenue, 70% of the revenue comes from small firms and then it comes from big firms.

Interesting. So is it like that in Washington, D.C., for example?

Yeah, in Washington, D.C., frank, I think probably --

I think even more so in Washington.

Probably 80% of the revenue comes from outside that top 20 brokerage firms, top 20 brokerage firms.

Do you make the same kind of margin on those guys than the other guys?

Higher margin.

Okay. Last question. Did y'all have any comment on pricing this year? Relative to last year. And I'll let you go. Thank you.

Sure. I'd have to say we have no specific comment other than to say that I would -- I think that our pricing is much more accurately controlled this year. We're getting better pricing consistency. As our sales force what chufrs, as our back-end customer relationship management system is deployed A new system is deployed, we're able to price our customers much more consistently, which means there's less discounting. And overall, that probably is -- represents an increase. Also, we've put this -- this summer, we began implementing a new fee, an implementation fee that's generally approximately one month of service fees. For our products, and we have collected several hundred thousand dollars year to date on that new implementation fee. And that's being well accepted by our customers as we have direct costs up front as we install them.

Great, thanks.

Thank you.

Your next question comes from James Rip with SSE.

Hi, James.

-- the driven by new customers in the quarter. What percent came from brokerages and if you could provide any further detail on the size of those new customers maybe by the number of brokers they have. And then secondly, frank, you provided markets that did, you know, exceeded the company revenue growth rate. Can you actually provide us detail of the underperforming marks? Thanks.

We missed the first --you got cut off in the first part of the question.

Your audio came through halfway through the question.

Sorry about that. In terms of new sales T sales driven by new customers the quarter, what percent of that came from brokerages?

To answer, it would have to be anecdotal. I don't think we have a specific number on the quarter. I would -- I would say probably at least 50% is brokerage firms revenue. The remainder being institutions, banks, appraisal, shops, owners, government agencies and the like. And in terms of the profile, it's -- the majority of that would be mid to small-sized firms. There are some large firms still adopting, so we have some good wins and some larger accounts in various markets. But predominantly it's mid and smaller sized firms. I'll let Frank answer that second question.

James, I don't want to go market by market, but I can give you, you know, for example, San Francisco, for example. They were slightly under the company' overall growth rate. And they were at about 1.7%. However, that's not a bad performance because San Francisco was really flat for a couple of quarters or so, and has really been a struggling commercial real estate environment. So there are markets like that dollar performing under, you know, but we sort of look at each one and the dynamics in the marketplace. And how they have done, you know N other quarters.

Okay.

So it's pretty dynamic. If you look across the markets, you know, they tend to jump around a little bit from quarter to quarter. They are generally trending upward. And I think that's probably the best answer I can give for that.

To put a different spin on that, I think there's no question what's happening in San Francisco right now is about the worst commercial real estate market anyone has ever seen. Rents falling from $110 per square foot annually down to $30 per square foot in a matter of six quarters, eight quarters. And so, you know, we're actually quite pleased with a small revenue growth in that market area.

One follow up question. It's been two years and a couple quarters since comp -- couple quarters since comp.com, and can you tell us how that acquisition has trended and, you know, where the current product is.

The -- that's been an extremely successful acquisition. As you know, when we acquired that operation, they were losing probably $2.5 million per month. We executed significant restructuring of the operations and to date that company is a major contributor to our profitability. It's profitable. We have been able to take their historical growth rate for the comps product and triple their monthly sales numbers over preacquisition. We've absolutely recognized a number of the synergies we were trying to achieve. For instance, we felt we could improve our data quality both in the -- in our CoStar property leasing information product, and in the comps product by being able to borrow data sets from each other. That has happened and we have integrated some of the back ends there. So that now with a comparable sale occurs somewhere in the company, we're able to publish that comparable sale in that comps organization much faster because 30% of the research is already done on that sale by the leasing information products. So -- I'd have to say culturally that acquisition has been very well integrated into the company. The -- they're the back -- comps are now the backbone of our west coast operations which are doing very well. We've moved a lot of our property research out to the west coast under the direction of the CEO of operation, Craig Farington and another gentleman, Dave Shanes. They have done very well. They're performing at the top of our pack. And all in all, we have to say it been an extremely successful acquisition and we're very pleased with it.

Your next question comes from Dalton Chandler with Adam and company.

Hi, guys.

Hi, Dalton.

Hi Dalton from Needam

Well, we'll answer to most anything. The -- I was just a follow-up on the under performing markets. If San Francisco is actually up sequentially, did you have any markets that declined sequentially?

Yes. I would say we -- I don't have it in front of me, but we probably had a couple that went downward for a quarter. And, you know, when you look across 50 markets, you know, you will have markets that go in all different directions. Generally every one of them is trending up inward. But you know, they have all different kinds of dynamics.

Okay. And you know, on the renewal rate of the 11% that did not renew, what was generally the reason for that?

The 11% that did not renew, you're going to have a mix of reasons. Definitely some percentage of that is business failures. You still have telecommunications in there. Many of those are going out of business. You have things in there like Arthur Andersen. You have -- you're going to have probably some significant percentage being business failures. You also have some customers who may be retrenching to some degree. So a firm may have been purchasing Washington data and Baltimore data, but a they have reduced the number of brokers and now operating only in Washington. And they cancel their Baltimore subscription. Still a client, but they no longer subscribe to one of the non-core information streams. And then you have vendors typically do not renew as -- as high a rate as commercial real estate firms do. We have been consistently de-emphasizing that sales focus, stress to all the vendors, but they're going to be part of that. We're a moving company buys a product, uses it for a year, stockpiles more leads than they can use for several years and then cancels the product. And then you've got -- you're going to have a very, very small number of, you know, commercial real estate companies simply choosing not to use our product anymore. But that would be, you know, a couple percentage points at most. I should also say that of those companies that do go out of business, we continuously pick them back up in another form. So you have a brokerage firm that closes its doors and ten brokers are unemployed, very often you have a start-up firm somewhere else and resubscribe. If we were able to track that, the renewal rate would be in fact higher if we were able to track the recaptures.

Okay. And then in the press release you talked about your Trammell Crow deal and the fact that it could be extended for up to nine years. Can you just talk about, you know, what sort of price escalators you have in there to protect yourself in the really long term deal like that?

Well, the -- one of the -- one of our goals there, as we mentioned earlier in the call, over time those leading companies are a relatively small percentage of our revenues. So our single biggest client is 2.5% of the revenues. Trammell Crow would be significantly smaller than that. That number. In going into the long-term contracts, we have CPI escalations and various other escalators so that as our costs of providing the service goes up, we can pass that cost along. There are limits on the price increases in term of the contract. You know, we can't give them 15% price increases. The contract does not address any limits on new products we develop, which historically while the primary drivers have increased revenue from an existing customer. So if you look at -- if you look at any of the big customers, our revenues from any one of the customers do grow consistently and dramatically over time, but what drives that is we add a Portland, Oregon, to the system, and that they acquire that product or we add the information and they acquire that product. That's no caps on new product areas, and, you know, we will likely to continue the bring product areas out there. Also, it -- if contracts -- the contracts tend to address things like how many users they currently have, and we would love to see Trammell Crow grow because as they grow, we would be able to recapture additional revenue on a licensing plan. But, at the same time T important thing here is that Trammell Crow feels very comfortable with CoStar being the data standard long-term because they know where they sit vis-a-vis us, and they have visibility to what the cost will be.

And just one last question you -- in giving some fairly specific guidance on the fourth quarter you hinted around a little bit about 2003, but I want to give you an opportunity to be a little more specific there. Your sequential growth rate has been ramping up. Do you expect that to continue or how do you see 2003 unfolding?

Well, Dalton, well, first of all, I appreciate that opportunity.

Any time.

It's a little bit too early for us to give specific guidance, but I think I can make some comments about revenue generally. You're right, we have seen several quarters of gradually improving overall sequential growth as well as improving growth in the core sector. And I mentioned that the sequential growth in the core sector, the subscription revenue base was even slightly higher than what we did overall for the quarter. You know, considering the weak economic conditions, there's, you know, probably a lot less visibility out into -- you know, toward the end of next year as there would normally be. But we continue to be optimistic that we can build on the sequential growth rate. I think it will be -- continue to be gradual. That's my current view. And I think generally we expect that our overall growth rate for 2003 will be higher than our growth rate for '02. So we're -- you know, we're optimistic about that. And just, you know, keep in mind that we're not getting a lot of help from the external factors in the sector. Most what we're doing here in terms of ramping up this growth rate, we are doing through internal execution. Growth of the sales force, improved productivity, you know, marketing activities, that kind of stuff.

Okay. Thanks a lot.

Thanks.

Your next question comes from Jim Wilson with KMT.

Hi, good morning, guys. I was wondering if you could comment a little bit on the success rate or what you think the opportunities are, I guess both, for further up selling products and services to the major brokerage firms that you already have the -- have a long-term basic license agreement with. And then the second thing sort of your thoughts particularly on opportunities in the financial institutions marketplace to sell them, particularly I guess comps and other products that help in their collateral evaluation process.

Okay, great. I think on that first question, there is very significant opportunity to up sell those major organizations. If you look at our single biggest customer, Richard Ellis, they have about approximately 9,000 professionals in their organization of which only 3,000 today use our products. Either because of the markets they're in or the type of commercial real estate they practice. We anticipate that there will be, you know, a number of opportunities to continue providing additional products and services to them. The -- as an example, the first company we entered into a national contract with was Grub and Ellis. That was a year or so ago. That -- the revenue that we are earning from Grub & Ellis went up more than 50% in the six quarters following the signing of that national deal. And the reason is that it created an environment where it was easier for various grub & Ellis offices and practice groups to buy additional products from us at predetermined discount prices. So generally, actually, you know, we are seeing the fact that there are a lot of continued revenue opportunity in those national agreements there. Absolutely not a cap on revenue over the long term. And the second question --

Sorry. Was financial institutions.

Yeah. We're very excited about that, especially as we go into the first quarter of 2003, because the new version of web property changes -- fundamentally changes the way our products are delivered. Historically, if a financial institution wanted to be able to keep a close eye on supply and demand conditions in various U.S. markets, they would have to install three or four different software systems, three or four different methoddologies from us. They would have to load also 150 CD-ROMs every two weeks. Then they would have to run queries against each of the specific markets. They couldn't do one query against the entire United States. That's all changed with the new product. With the new product, there are no CDs. It's one integrated interface. They learn it once and they know them all, and there's no restrictions on geography. You can seamlessly market the trends throughout the country. We also have added features to the new products, things like forecasting tools that allow them to take this mass of data covering 20 billion feet and be able to boil it down to what it means, for what directions and trends are in the market, actually get a educated guess as to what trends will likely be over the next several quarters. So while we're not -- while we don't expect to see dramatic impact from the sales potential, we do think that will be a very strong avenue for us in 2003 and we're very excited about it.

Thanks, Andy.

Your welcome

Your next question comes from Gary Schinero with J.P. Morgan.

Hi, Andy and frank. Can you give us a little color on the maturation of your sales force? I guess you hired a good number of people over the last six months or so. Just what's going on there, you know, I guess maybe the mood of them, trying to sell and not being able to sell and this sort of thing.

You're referring to people in training that haven't been able the get out there and sell?

Well, I guess where are those people? Are they still training? Just maybe start with number of salespeople you have. How many are in training, you know, how many came off the training in the last three to six months that sort of thing.

Yeah. I'd say a significant percentage of them probably a minimum of a quarter are 25% of them are not into full production at this point. They're either in classroom training or they're in the early stages of, you know, apprenticeship or internship out in the market under a more senior AE. So 25% of them approximately we're seeing cost associated with them, but not yet seeing revenue associated with them. Traditionally it takes three to -- it takes three to six months from when we hire them until we're actually seeing revenue until we see revenue associated with their coming on board. So while we have achieved our goal at growing the sales force, that's not being reflected in the numbers we're reporting this quarter. That really starts to show up fourth quarter of this year, and first quarter of next year. We have put the sales force through some significant changes this year which are definitely in the interest of both the company and the client base, and that involves shifting them from a commission plan that pays them for just getting new business to compensating them for retaining business and getting new business. That does change the demands on some of the salespeople so we have had some turnover from people who don't want to have to deal with customers on an ongoing basis. We're comfortable with that turnover. We anticipated that turnover. We over hired to compensate for it. And overall, our turnover rate in the sales force is about a third of the level it was two years prior. So it's on track. It's going quite well. We have a more seasoned and competent management team than we ever had before directing the sales force. And we're really quite pleased that we have reached our year end goal by October, and that gives us a lot of room to really focus on continued training and quality of that group of sales professionals. So we're very happy where it is.

And how many people have you lost and with respect to the training, is that done in the individual markets? Is there centralized training? Can you give more clarity on that?

I don't have a specific number on turnover. You know, I don't have a specific number on turnover there. I can say that the training is done -- I do know that it's much lower turnover rate than we have seen in previous years. The way the training works now is the regional managers recruit the new salesperson, and upon hiring they spend four weeks here in our headquarters in Bethesda, Maryland. A gentleman, Bob Cantor, who has 25 years in commercial real estate runs the training program with the assistance of other managers. So it's a formal training program, it's exhaustive, it covers all the aspects of our business and our products. And by the time they leave after four weeks, they have a good academic understanding of our products and services. Then they go out to the field and the regional manager will spend -- will actually go with them on probably several dozen appointments before they're ever out there. So it's a -- it's -- it is a careful and thorough training process, but yielding good results. We are seeing people come out of the training program and they are outperforming some of the salespeople we hired two or three years ago. So we're very encouraged by the new program and that program is new for 2002.

Great. Thank you very much.

Your next question comes from Michael Grossman with FX investments.

Hi, guys. My first question, it pertains to the mix of revenue. I think you mentioned that 50% of revenue comes from cross selling and 50% come from new customers. Is that something you see continuing going forward?

That is something we see continuing going forward for sure. We have five to seven product offerings in some markets. So we have a typical customer buying perhaps two products as they get more and more comfortable with our products and as we integrate the products together in one common interface, there's a path there for customers to pick up more information products. So perhaps I have -- I'm a brokerage firm in orange county and I have been buying leasing information from CoStar Group. There's a path where I might choose to buy information on tenants in orange county. So there is a lot of room there for many years to come on that -- for that friend to continue. So we expect it to -- we might even see it grow to 55% to 60% of our revenues coming from existing customers over the next year or two.

That's all higher margin, obviously?

Yes. It's also nice because it's securing in the customer relationships, so they go to new contracts.

My second question pertains to the new web-based product that's coming out, how that's going to impact revenues in both the new customers and in existing customers.

We have -- it will be -- it will have a positive impact on revenues. We do not plan to charge significant price increases for existing customers who are receiving this product. Our cost of distributing our products actually go down as we deploy this product. And we have better control over usage and better metrics on usage. As we pointed out there, we probably will be charging slightly higher rates for new customers coming into the product because the product has significant added functionality. It will enable us to go back to customers who for whatever reason over whatever period of time happen to be paying a very low rate or well below list price, and renegotiated price that is closer to list price. So while we're not taking our customer prices up, we may eliminate some discounts as we roll the new product out.

Okay. Thank you very much.

At this time, there are no further questions.

I want to thank you for joining us for third quarter 2002 earnings call, and we look forward to talking with you for the fourth quarter conference call. Thank you.

This concludes today's CoStar conference call, and you may now