CoStar Group Inc (CSGP) 2003 Q1 法說會逐字稿

Welcome to the CoStar's Group First Quarter 2003 Earnings Conference Call. Today we have with us Andrew Florence President and CEO; Frank Carchedi CFO, and Mark Klionsky of Vice President of Marketing Corporate Communications. I would now turn the call over to Mr. Klionsky.

Good morning. I am Mark Klionsky Senior Vice President of Investor Relations. I would like to welcome to you CoStar Group's 2002 conference call. Before I turn the call over to Andrew Florence, President and CEO of CoStar, let me state that certain portions of this discussion include forward looking statements which involve many risks, uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include but are not limited to those in CoStar's first quarter press release and CoStar's filings with FCC including its form 10K for December 31st, 2002, under the heading risk factors. Also forward looking statements are based on information available to CoStar at the data call, CoStar assumes no obligation to update these statements. In addition, please visit the corporate section of our website WWW.co-star.com for a web cast of this conference call and for the reconciliation of all non-GAAP financial measures [inaudible] on this call to GAAP basis results.

Andy?

Welcome to this first quarter 2003 conference call. Although commercial real estate market conditions remain weak, I am pleased to report we have continued to achieve significant revenue in earnings growth. In addition to a strong UK operation, together with the continued organic growth of our core US business contribute to revenue growth of 18.3% for the first quarter of 2003 over the first quarter of 2002. Revenues for the first quarter of 2003 were $22.6 million compared to $19.1 million in the first quarter of 2002. Revenues increased sequentially by 9% for the first quarter of 2003 over the 4th quarter of 2002. In addition, we have continued to see dramatic improvement in our EBITDA and pro forma net income which excludes only purchase and amortization. In addition, we have also seen a sharp decline in our GAAP base net loss as our new revenues are added to our relatively fixed cost structure. Frank Carchedi, our Chief Financial Officer will address the first quarter financials in more detail later in the call.

We have now reported revenue growth for 19 consecutive quarters since our initial public offering. Our strong performance this quarter reflects the combination of consistent organic growth in our core business, our U.S. operations, and the addition of the property intelligence business which was acquired in January of 2003. Dimension marketing continue to remain weak in the United States. Net absorption of office space has declined since its peak in the second quarter of 2000.

We have seen almost 110 million square feet of negative net absorption since mid-2000. We have seen transaction activities down more than 23% in that time. The national vacancy rate for office space has climbed from 9.7% as low in the fourth quarter of 2000 to almost 15% at the end of the first quarter of 2003. Rental rates have declined almost 13% since their peek. These severe market conditions have had negative impact on our core customer base as real estate service providers typically draw most of their income from transaction fees. For example, our largest single customer, CB Richard Ellis, reported the revenues were the same in 2002 versus 2001,despite a 10.5% increase in the leasing and sales transaction volume. At same time, other large customers reported year over year declines in both revenues and transaction volume.

We have continued to post valid revenue increases in this difficult economic environment because our products provide real value and cost savings to our customers. Market conditions in the United Kingdom currently are very similar to those in the United States. London has seen a dramatic increase space availability in the past year. This is largely the result of high levels of new construction delivering against weak demand.

Rental values fell by more than 15% in 2002. Our U.K. operation represented about 7% of the revenue for the first quarter of 2003. The property intelligence business performed in line with our expectations for the quarter. But more importantly, the Focus Information Products, as they are commonly known, represent another exciting avenue for growth. We have a strong track record in acquiring and integrating complimentary businesses.

Over the years, CoStar has acquired and successfully integrated 15 companies and in almost every instant, one of the most valuable benefits realized in acquisition is the increased depth and perspective you gain in best practices of your respective operations. For example, we acquired lease tread in 1999 to accelerate our expansion in the mid-west. By integrating those operations we have learned how to collect data effectively and how to package that content to provide value to a broader customer audience. The Comps acquisition in 2000 brought an outstanding team of software developers and managers who have taken on positions of greater responsibility in the combined organization. In fact, Michael Arby, formerly from Comps, was recently promoted to the position of Senior Vice President of Sales.

In January, we began the process of melding some aspects of the CoStar and Focus operations and cross training key personnel. CoStar has transferred two experienced staff members to London to join that office and our senior managers in London interact regularly with our senior managers in [Bethesda]. We have identified some product concepts for implementation in the US based on what we have learned in the U.K., as well as some new customers service techniques that increase product usage and customer loyalty. In the U.K., we have seen opportunities on Focus’s current services and better control costs by consolidating product offerings.

In March, CoStar and focus shared an exhibit at [Minthum] (ph) the international property Martincan (ph) France. The world's largest real estate trade event was attended by more than 14,000 property professionals. It was the first time either a CoStar or Focus had participated at Minthum and provided a great opportunity for us to meet face to face with leaders of the industries top multi-national firms. I mentioned Minthum because it is reinforces the belief I shared with you on previous conference calls. Even though CoStar is clearly established a leading position worldwide, we believe our company is still in the very early stages of penetrating the vast market for commercial real estate information.

We believe that there are relatively very few competitors providing any product similar to CoStar in Europe. Yet there appears to be significant interest in the sort of services we provide. As our customers become increasingly global in scope, we believe CoStar's ability to deliver integrated service will ultimately lead to the expansion of overall of the market opportunity. CoStar has no short term plans to enter any additional international markets.

I want to stress that one of our teams highest current priorities is the ongoing upgrading of CoStar Property users to our new web based platform. I can't say enough about how pleased we are with the power capabilities and potential of our new product platform and we want to realize the value of that platform as quickly as possible. In mid-December just after the release of the new platform, only about 3% of our customers sites had access to the new CoStar Property. As of today, 88% of our customer sites have access to the new system. At the time of the last conference call, we have processed 10,000 user accounts with a new platform and in the two months since that call, we have almost doubled the number of user accounts to 20,000.

The number of user sessions in a rolling six-day period has grown 283% since the last conference call from 36,000 sessions to 140,000 sessions. On the same basis, the overall page views have grown 260% in the proceeding two months. At the time of the last conference call, 21% of the potential users were actively using this system. That number has almost doubled in two months to 41% of potential users using the system. We consider users to be active when they log in to the system for more than 100 page use in a 60 day period. We are very pleased with the strong adoption rate so early in the platforms life cycle. A significant amount of credit for this rapid adoption goes to our sales force.

Our account executives have met face to face with 6,000 of our customers since March 1st 2003 answering questions about the new system, and conducting effective training. While not all of this activity results in the immediate sales gains, it is an invaluable opportunity for the sales professionals to strengthen relationships with existing and very valuable customers. We believe the intermediate and long-term payoff of a dramatic increase in customer satisfaction is invaluable.

As I’ve mentioned on previous calls with a desktop version of CoStar Property it was difficult to monitor who was using the product or how often they used it. Hundreds of desktop users have completely discontinued the old system in favor of the new platform with a new web based system we can accurately monitor successful usage. We believe the number of users currently logging on to the web based version of CoStar Property is already approaching the total number of people who were once using the desktop system. This tells us that the audience for the web based product is potentially much greater than for the old versions. In addition, we now know who is using the product and more importantly who is not.

We can target training and promotional activities to generate further increases in product usage. Throughout the remainder of 2003, our sales and market team will continue an intense focus on driving usage and creating value within our existing client base use our new product platform. Over time, we believe we could double the number of people using CoStar Property within our existing customer base.

Although we don't charge customers based on their actual product usage, higher usage rates mean our customers are driving more value from our products and that ultimately will enable us to deliver more value to our shareholders. Usage rates are also important because customers who use our product are more likely to renew their subscription, buy additional products, recommend our produces to other potential customers, and purchase our products if they switch jobs to another employer, which happens quite frequently in commercial real estate. They are also more likely to feel that the charges for our services represent a good value. As we have mentioned before, there are cost savings ahead for us as well.

Once our customer base is converted and we turn off the old desk top system, we believe they'll see over a million in savings annually. As we can eliminate dozens of servers and focus 100% on software development efforts on supporting one product platform. We estimate saving half a million annually in fulfillment costs alone since we will no longer be producing or shipping image CDs.

In addition, we're seeing customers take advantage of state and local tax savings when they accept complete delivery of services over the internet. 19 states do not currently require to us collect taxes of our services that are delivered completely over the internet. In some cases, the taxes run as high as 10%. There is a strong financial incentive for customers to turn from the desktop and take delivery solely via the internet. It’s another factor that gets us closer to our goal of retiring the desktop product by the end of 2003.

While CoStar Property [inaudible] represents the most advanced research technology available for commercial real estate, that doesn’t mean we're finished. Since the initial release in December, we have had a number of incremental releases adding valuable new features and another major release is scheduled for later this month. These features include enhanced statistics and analytics, [resolutionarial] images and alert notification system, report enhancements, property [tour] order function and ability to export data for further analysis.

I want to take just a moment to share with you just how these enhancements add value to our customers. CoStar subscribers can now view high quality digital aerial photographs for the majority of buildings in the CoStar database. That is because with integrated aerials and images with commercial property data to offer a new way to conduct space searches and sight analysis in CoStar Property [8-o]. Aerial views offer yet another way to analyze commercial real estate and we're providing our customers with this capability at no additional charge.

Equally important our customers are less likely to miss a new space or property coming up on the market. Simply by clicking an alert notification button for any saved survey, customers will automatically receive alerts letting them know of new properties or spaces on the market that meet their specific requirements. Our customers told us that this was on their wish-list of enhancements and we're pleased to now offer it.

The schedule released next month includes our much anticipated CoStar analytic. A new modular we are adding to CoStar Property 8-o, Costar Analytics will provide individual users with all the tools needed to analyze current and historical data with precision and produce professional quality color charts and graphs as part of the report, modeled after our quarterly office reports, the new analytics module will offer in depth analysis on vacancy, absorption, rental rates, existing inventory and new construction all at the click of a mouse. Best of all, the new analytics module allows customization. Customers can analyze an entire market or select a group of buildings or even just one. The customer defines the market by selecting which buildings or sub marks are included or excluded for analysis and defines the time period and criteria upon which to run the analysis. There are endless possibilities to the analytics that can be run and we believe our customers will find this enhancement to be one of its most powerful aspects of CoStar Property 8-o.

No other service comes close to offering such a robust and flexible tool for analysis and forecasting. With these enhancements and more on the way, we believe CoStar Property 8-o will open up new avenues of growth for CoStar among rates, commercial banks and the high end institutional markets. Analytics feature in particular would give these customers incredible perspective in analyzing their properties and portfolios. For example, a portfolio manager investing in commercially back securities CMBS’s can use CoStar Property 8-o to look at the performance of a property compared to a general office market or to a property peer group. A read analyst can quickly compare the performance of car Americas portfolio to Equity Office portfolio or to a custom portfolio based on any criteria of his or her choosing.

While it used to take days for these investment analysts, will now just take seconds. With the addition of analytics to CoStar 8-0 we now have a valuable product to offer this new customer segment.

Our traditional customer segment is growing as well. On Monday, we announced that we had signed a multi-year renewal agreement to provide CoStar Property and CoStar tenant to [Jones Line Procel] professionals and 32 offices nationwide. This renewal is particularly significant because[inaudible] was the first major player to consolidate all of his individual licenses nationally on our information platform almost three years ago. It was our first major renewal. Since that time, that initial contract three years ago, almost every major international brokerage firm has followed their lead.

Now Joe [inaudible] is not only renewing but upgrading to our new web based platform. I would like to add that Joe's line was [inaudible] along with the [Christina Wakefield] company also connect in the market of four lease on their website. These three firms were early adopters of [Lute Net’s] competitive service and we're pleased they have now upgraded to our platform. In addition, CoStar recently secured a major endorsement from the greater Washington Commercial Association of Realtors. The association just completed an exhaustive review of their marketing information needs and was getting serious consideration to starting a commercial row of information exchange, but after a year analyzing such things as functionality, cost, ownership and accuracy of the data, service and support, the members concluded that CoStar was the best choice.

The greater Washington commercial area association of realtors has provided us with a reference letter signed by several leading members of their board stating their decision and they'll be mailing it to all the boards of realtors nationwide. I would like to read you a small portion of that letter.

“We understand why an exchange rate approach is appealing but in the final analysis, we decided to go with an established independent provider who’s core business is aggregating, verifying and disseminating the highest quality data at the best possible value. Collectively and unanimously we are endorsing CoStar Group.”

We are thrilled to refer this kind of endorsement. We know that as other boards of realtors around the country go through similar due diligence. This strong endorsement will serve as well. CoStar group continues to enjoy a dominant market position. Our conference of database, proactive research model and high touch customer service model provide a competitive advantage and represent significant [various] to entry. At this time, we are very focused in bringing significant additional value to our existing customers through this successful upgrading and deployment of our new product platform. We believe we will continue to generate new revenue growth by reaching new customers with core products and selling additional products to the current customers. In addition, we still plan to expand our product offerings in some of our established markets where we currently do not offer our full sweet of products. I look forward to updating you next quarter on our progress.

I will now turn the call over to the Chief Financial Officer Frank Carchedi.

Thank you. Andy, as reported in our press release yesterday, revenues increased 18.3% from $19.1 million in the first quarter of 2002 to $22.6 million to the first quarter of 2003, due to the addition of the UK operations and continued organic growth of the core business. Gross margin has improved from $12 million in the first quarter of 2002 to $15 million in the first quarter of 2003 and margin percentages have improved from 63% to 66% over those same periods.

Pro forma net income which excludes purchase amortization improved significantly from $225,000 or 1 cent per share in the first quarter of 2002 to $972,000 or 6 cents per share for the first quarter of 2003. Meanwhile, our GAAP basis results continue to improve from a net loss of $1.6 million or 10 cents per share for the first quarter of 2002 to a net loss of $843,000 or 5 cents per share for the first quarter of 2003.

The year over year progress we have made is substantial. I am going to focus on a discussion of the first quarter of 2003 results as they compare to the fourth quarter of 2002. The sequential results of Q4 2002 and Q1 2003 are important in understand the company's progress and why we believe we are positioned for continued revenue and earnings growth.

Total grew sequentially by 9% overall from Q4 to Q1 increasing from $20.7 million to $22.6 million.

The growth for the quarter was principally the result of additional revenue from the property intelligence acquisition, 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. The U.K. operation contributed approximately 7% of the revenue in Q1 as expected. Organic growth was achieved in subscription based information products which include CoStar Property tenant, comps, exchange, connect and focus.

With the addition of the U.K. based Focused Products, subscription revenues for the company accounted 94% of revenues during Q1 of 2003. Gross margins increased from $13.7 million in Q4 to $15 million in Q1 and margin percentages remained at 66% overall as expected with a slight increase in U.S. margins all set by the addition of margins from the U.K. operation ranging in the area of 60%. Cost of revenues increased as expected to $7 million in Q4 to $7.6 million in Q1 due to the addition of the UK cost of revenues, while U.S. cost of revenues experienced a slight decline.

With regard to operating expenses, overall operating expenses excluding purchase amortization increased as expected by approximately 8% from Q4 to Q1 due to the addition of approximately $1 million in operating expenses for the U.K. On a more detailed level, selling and marketing expenses increased from $6.1 million in the fourth quarter of 2002 to $6.6 million in the first quarter of 2003.

This increase was primarily due to addition of approximately 300,000 for the U.K. selling and marketing expenses and are planned annual sales person training costs during the first quarter. Software development increased from $1.4 million in the fourth quarter to $1.7 million in the first quarter of 2003. This increase was due to the addition of the U.K. software development expenses and company's continued focus on product enhancements and development as well as the development of internal information systems.

General and administrative expenses increased slightly from $6.3 million for the fourth quarter of 2002 to $6.5 million in the first quarter of 2003. This increase was due to the addition of $600,000 for the U.K. G&A expenses which was somewhat offset by lower U.S. G&A expenses as the company continues to monitor and leverage it's overhead costs. Additionally, purchase amortization and operating expenses increased from $907,000 from Q4 to $1.1 million for Q1 of 2003 due to the amortization of the U.K. acquisition.

As a result of the sequential growth, the U.K. acquisition, and control over our cost structure pro forma net income improved from 5 cents per share in Q4 on of 2002 to six cents per share in Q1 2003, and EBITDA improved from $2 million in Q4 2002 to $2.4 million in Q1 of 2003.

Reconciliation to GAAP basis results of all non GAAP financial measures I am discussing on this call including EBITDA and pro forma net income are shown in detail in our press releases issued yesterday and are available on the website. We closed the quarter with approximately $26.3 million in cash and short term investments. We continue to believe we have adequate resources to operate under our current business plan and that we are in a very strong financial position coming out of this quarter.

Now on I will discuss the outlook for the second quarter and the remainder of 2003.

The second quarter of 2003, as we indicated in the press release, we expect quarterly sequential revenue growth of approximately 2% and pro forma net income of approximately 8 cents per share. Our goal continues to be reaching approximately 40 cents of pro forma net income per share for the year which should be a significant improvement over last year’s 11 cents pro forma net income per share.

We continue to believe that in the longer term higher revenue growth rates are possible. We continue to train and mature the sales force and additionally we saw sequentially quarterly growth rates of 7% or more in many of our markets during the first quarter while operating in adverse economic conditions.

Some of those market performances includes Portland, Pittsburgh, Seattle, Raleigh and Sacramento which all grew between 7% and 12% sequentially during the first quarter of 2003.

Gross margin percentage is expected to increase by another 1/2 to 1% in Q2 and is expected to continue to trend upward at the same rate quarterly moving forward through 2003 based on revenue growth and a relatively fixed cost structure. Operating expenses including selling and marketing software development and G&A are expected to increase by approximately 1% overall per quarter for the remainder of 2003 primarily due to salary and cost escalations.

Adjusting the pro forma guidance with purchase amortization which we anticipate to be consistent with the charges for the first quarter of 2003, we expect a GAAP basis net loss of approximately 3 cents per share for the second quarter of 2003 and GAAP basis total net loss of approximately 5 cents per share for the year 2003. We continue to make progress towards GAAP basis net income and expect to reach GAAP basis net income during 2003.

In conclusion, we believe we have and will continue to demonstrate the strength of our business model and ability to execute our plan. We believe we are well positioned to continue to achieve revenue and earnings growth as much as we have in a difficult business environment throughout the past two years. We look forward to reporting our progress to you. With that, I will open the call for questions and answers.

At this time, I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone key pad. We will pause for a moment to compile a Q and A roster. Your first question comes from Dalton Chandler with Needham and Company.

Good morning, guys.

Good morning, Dalton.

I heard you say 94% of revenue was subscription based in the quarter. Did you give a historical comparable to that?

No, I didn't. It has historically been 90% or better.

Okay. And I wanted to ask you a little bit more about your projections for property on the new platform. I believe you said you believed you could double usage within the existing customer base. Can you explain a little bit more about that? I thought that about half of your customers or maybe a little more already used property. So what exactly did you mean by that?

Well, it's a good point to clarify. What I mean by that is with the old system, we did not have good visibility to specifically which individuals of a licensed customer site were or were not using the product. Now we get very precise information on which licensed individuals on the site are successfully using the product. Though historically and it is obviously very mixed by city but historically you might have a brokerage firm with 20 brokers and five administrative people and perhaps six individuals at that site with really usage of CoStar Property in the old system. We had no way of knowing whether it was 6 or 20 at that site. With the new system, we know who is at that site and we can say specifically who is not using the product, and then we can target trying to teach them how to use the product and get them up to speed and use the product with proactive efforts.

We think that is very valuable because we enjoy a lot of viral marketing because these people switch companies then they request the product as they go to new companies. So as we look at the adoption rates of the individuals within our existing customer base as they switch over, we believe we can eventually get about twice as many personnel as previously was the case using our products with any customer base. We believe that is very valuable to us over the intermediate term.

Did I clarify that?

Okay. That helps. And let me ask you then about the new analytics module how you're pricing that and how many additional modules we should expect to see?

Within our existing customer base, the analytic module is just part of the general CoStar Property system. What we are really focused on is reaching a whole new audience of people that before couldn't find real value in CoStar Property because of the way it was a local system and because they didn't have power point capability. So, we are more looking towards reaching new audiences, like banks, CMBS’s, read Analysts and the like and owners as well. Owners is a -- the ownership community there are 100,000 plus owners that own more than $2.5 million of commercial real estate. We very likely penetrated that group. With this new analytic modules, we believe it becomes a much more powerful product for that audience. We look at this as a new penetration tool. The price points for those individuals for those new audiences for owners for CMBS’s, those price points traditionally range from a low of maybe $5,000 annually on up to $800,000 annually. Depending upon the size of the firm and the number of organization usage, number of o number of licenses and the like. So I think it say meaningful audience.

Okay. The 5,000 to 8,000 would include how many seats?

I meant 800,000.

Okay.

5,000 would generally give you a seat for a city two seats for one city. $800,000 would give a larger organization access to 100 users per national data, a large bank say. A GMAC or something like that.

Okay. And would you break out the organic growth of the domestic versus the U.K. business?

Yeah. Dalton, the 9% sequential growth breaks down approximately like this. There's about 7.5% growth coming from the U.K. operation. Within that, in other words, that's the new inorganic revenue that hits us within the quarter. Within that, there is probably a .25% to .5% of what amounts to organic growth from the U.K.

In other words, during Q1 they actually grew a little bit over where they were in Q4 before we acquired them. And then on top of that 7.5%, there is approximately 2% growth in subscription based products on the additional CoStar side and some of that was offset maybe a half percent by declines in revenue in the non-core revenue area, the non-subscription based products which we are typically not that focused on at this time.

You said U.K. grew 7.5%?

The U.K. contributed 7.5%.

Of the 9%.

Of the 9%, and just keeping in mind of that contribution, that includes maybe a .25% a .5% of U.K. organic growth. They would have experienced in the quarter over Q4.

Okay.

Then added that to our core growth.

Okay. Got it. And final question, Andy, you said had no short-term plans to enter additional European markets. Can you define short term and tell us what the long-term plan is?

Is today Wednesday?

I think one of the things we have seen is that relatively speaking there are not a lot of competitors in Europe. As you show your products to potential customers in the Harold from Germany, Japan or wherever else, they are very interested in what the products are. They're very interested in knowing if they can get them for their cities.

It is not in our -- certainly not in 2003 time frame. I would be surprised if it was at this point. We had no intention at this point of 2004. I don't think it is a problem to hold off on it. Because we had so many opportunities here in the United States, United Kingdom to grow revenue and to grow profitability. We would like to pursue growing revenue and profitability in out existing foot print. We were relieved as we look at the rest of Europe and Asia that we don't have to be where established mature company is growing rapidly. Those markets are blocking us out of future expansion.

As you move into the mid of the decade, we believe those doors could be opened to us and small competitors in international markets are good news for us because those are entry platforms. Very good entry platforms. So it is good news [there is no] big competitors. We don’t have a [inaudible] strategically of doing anything other than to focus on the revenue and to profit opportunities in the United States and the UK.

Okay. I think you sort of partially answered this question, but if you don’t see a lot of competition that also means --

No immediate plans for Toronto.

I don't considered that a foreign country. But, if you don't see a lot of competition and there is also not a lot of companies to look at acquiring. Is that fair to say?.

That is fair to say. A handful.

Great. Thanks a lot, guys.

Your next question comes from Jim Wilson with JMB securities.

I was wondering if you could particularly in the [Jone’s deal] differentiate anything whether web based or added products that is in the new contract that was not in the old one? And if there is any material change in sort of the annual dollar contribution of that contract?

There is a slight increase in the revenue. That is associated with a new contract. There is over the three years of the contracts period Jones [inaudible] has as any company does change the foot print a little bit. Added mortgage to lead the market. They have adjusted the contract to address what they currently need.

I think probably the bigger addition is the -- they've been doing that for a while. It is not a significant change in what they're actually purchasing. With exception being that now we have their U.K. business and they're with the acquisition of focus. That's a dramatic increase. They're a significant player in the U.K.

Any further thoughts as you look out into the year to again particularly with the web property that usage or increase usage or [docks] our potential with your commercial real estate lending rope?

Absolutely. The new products. When you look at where these products are going to be in 2004 versus what we have to offer the lending community in 2001, it is an apples and oranges comparison. These products are dramatically more accessible, powerful, comprehensive, for a lender. So I think these -- while the price did have value in 2001 to a lender, we think that we can buy-- in order to magnitude increase the attractives to lenders we go to 2004 and we're all really quite excited about the potential as we go into later part 2003 and 2004 and the products.

These products are growing. The functionality in our products are growing at a much faster rate than we have ever seen before. The new platforms we are working much more quickly. Add functionality that reaches new audiences. We hope to see much deeper penetration in the community in 2003, 2004.

Maybe looking at your crystal ball in '03 and '04 combined, on the margin, not as a percentage of revenue, but on the margin of new business won or potentially to win, would you see it more evenly balanced now amongst operators, lenders and service companies than obviously the historical mix of business? Or what do you think?

We still remain very focused on our core audience which is the service providers. We still have thousands of service providers to win over in the United States and get descriptions with. But we think that on a dollar basis, we are continuing to see that the shift towards more balance between all the different segments and we think with the change in the new products, that will only continue and accelerate. I'm pretty sure if you look at 2004, the ratios will continue to, the service providers will continue to diminish as a percentage of our revenues and owners financial institutions and vendors and others will become a much larger share of our business.

Okay. Very good. Thanks.

Once again, I would like it remind everyone in order to ask a question, please press star then the number 1 on your telephone key pad. Your next question comes from Charles Carter with CSFB.

I think I am building off Dalton's question, but with the inorganic revenue contribution from the U.K., can we assume or infer that like the sequential organic Q2 revenue growth would be like down, you know, low to mid-single digit? And also wanted to see, I guess has your full year revenue the target of $95 million changed over the recently. Back to actually the first question. If the organic revenue should decline in Q2, what's the primary driver behind that? Thanks.

Charlie, I think to go to your question about London, generally we expect London's organic growth to be consistent with the overall business and perhaps even to exceed the overall business. We stated that before. As far as Q2, the guidance we have given is 2% overall organic growth. That would include the London operations. That would be building entirely on top of Q1 numbers.

As far as the $95 million, we haven't given any further specific revenue guidance for the year. I think that the $95 million which we gave guidance on before, is still in the picture. We will have to achieve higher organic growth rates than the guidance I am giving in Q2 to get to 95 million and I think both Andy and I believe that higher growth rates then 2% a quarter are possible even in the current environment.

One the realities as you look from Q1 to Q2 is again our sales force conducted - met face to face with 6,000 customers in the last 55 days with the deployment of this new product. That rapid rate of adoption is very good news. The only reason our sales force is able to get that time, face to face time with our customers is that our products are getting good reviews. The down side of that is,-- the upside is that you have got a more solid customer base better references, better long-term value. The down side is your sales force is spending an unusually high ratio of their time with existing customer base during the first quarter. A lot of sales do come out of that because half of our sales in a given month is cross selling. One of the nice things is when you come out of the process, the sales force is reenergized and higher confidence in the products and, the dynamic is there. At this point, we're not changing or giving guidance on the $95 million one way or the other.

Thanks, sorry about the confusion on the sequential year over year.

Thank you.

You do have a follow-up question from Dalton Chandler with Needham & Company.

Hi, again. I don't mean to beat this to death but when you say 2%, are you saying 2% organic growth in the quarter or 2% total growth? Because you do pick up something since the U.K. was only in 2/3rds of the first quarter. So, just like getting a full quarter?

I am glad you mentioned that Dalton, so let me clarify that. The U.K. transaction closed on the 6th of January. There is a full quarter of U.K. activity.

Okay. I thought it was later than that.

It is on the excel spreadsheet. So since we clarified there was a full quarter U.K. activity, when I talk about 2% overall organic growth for Q2, what I am saying is Q2 and Q1 will basically be apples and apples with respect to that acquisition. I am looking for 2% overall on top of the total Q1 revenue.

Okay. Thanks a lot.

Okay.

At this time, there are no further questions. Andrew Florence, are there any other closing remarks?

I want to thank everyone for joining us on this conference call. We look forward to speaking with you at the next conference call and I hope to present a good informative conference call then. Thank you.

This concludes today's CoStar Group conference call. You may now disconnect.