CoStar Group Inc (CSGP) 2005 Q2 法說會逐字稿

Good morning, my name is Angela, and I will be your conference facilitator. At this time I would like to welcome everybody to the CoStar Second Quarter 2005 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. [ OPERATOR INSTRUCTIONS ] Thank you. Mr. Kilonsky, you may begin your conference.

Good Morning, I'm a Mark Kilonsky, Senior Vice President of Investor Relations. I'd like to welcome you to CoStar Group's second quarter 2005 conference call.

Before I turn the call over to Andrew Florance, President and CEO of CoStar Group, 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 include but are not limited to those stated in CoStar's second quarter press release and in CoStar's filings with SEC, including its Form 10-Q for the period ended March 31st, 2005, under the heading Risk Factors. All forward-looking are based on information available to CoStar on the date of this call and CoStar assumes no obligation to update these statements.

In addition please visit our website at www.costar.com/corporate/investor for a webcast of this conference call and for the reconciliation of all of non-GAAP financial measures discussed on this call to GAAP basis results. Andy?

Thank you, Mark. Welcome everyone to the second quarter 2005 conference call.

We are very pleased to report a quarter with increasing rates of revenue growth and solid earnings. Our revenues for the second quarter 2005 were 32.9 million, an increase up 4.9% over the first quarter of 2005 and a 19.7% increase year-over-year. The Company had EBITDA, earnings before interest, taxes and depreciation and amortization, of 4.2 million, a net income of approximately 1.1 million, or $0.06 per share in the second quarter of 2005. We ended the second quarter with 113.4 million in cash, cash equivalents and short-term investments. We have no material debt. Frank Carchedi our Chief Financial Officer will address the second quarter results in more detail in a later part of the call.

First I would like to highlight some of the interesting trends we're seeing in our business and update you on the progress we're making with our aggressive growth plan we are currently pursuing. I'd like to begin by focusing for a minute on the strong increase we experienced in quarterly sequential revenue growth from the first quarter of 2005 to the second quarter of 2005. The 4.9% sequential increase in the second quarter is the highest organic sequential quarterly revenue growth rate we have seen in about 4 years, and nearly all of that revenue growth was driven by CoStar's core markets. We consider the core markets to be the markets we're in before we began last year's geographic expansion. Think of it as the equivalent of same-store sales.

The 1.5 million of new revenue added in this quarter does not include any meaningful contribution from acquisitions or the 5 new expansion markets we added to our platform in 2005. We are very excited about the expansion markets coming online and beginning to contribute to revenues after almost a year in a half of hard work in the field, but we do not expect the revenue from these markets to really impact overall revenues meaningfully until the second half of the year.

We experienced our best quarter ever for both monthly gross U.S. sales and monthly net new U.S. sales in the second quarter of 2005 beating the previous record set one quarter ago. Monthly net new U.S. sales, which is our gross sales minus any cancellations, increased sequentially by 13.5% in the second quarter of 2005 over the first quarter of 2005 and 52% over the second quarter of 2004. In addition, in the U.S., we signed 538 new customers during the second quarter of 2005, an 87% increase over the 290 new customers we added in the same period in 2004, and a 17% increase over the 453 new customers we added in the first quarter of 2005.

Our centralized inside sales team is a major contributor to our growing sales strength. While the direct field sales force model remains crucial for maintaining strong relationships with our clients, we now have a full year of experience under our belts with our lower-cost centralized inside sales model and the results are outstanding. This group has the ability to conduct demonstrations and close business completely over the Internet and phone, and has proven to be a very valuable, lower-cost model for reaching a larger audience for our products.

At the end of 2004, 6 months after formalizing the group, the inside sales team contributed to 13% of our net new monthly sales, but only directly accounted for about 5% of our sales personnel costs. At the end of the first quarter 2005, the inside sales contribution had grown to 15% and by the end of the second quarter the inside sales contribution represented approximately 18.5% of net new sales for the quarter. Given the fact that this group represents a small part of our overall sales personnel costs, we are very pleased with their 18.5% contribution to net sales.

We currently have 17 people in production inside sales and will shortly add another 8 from trading. We plan to continue to grow this group aggressively. It is relatively easy to staff this group, since about half of our inside sales people are recruited from our research organization. Our researchers already know our product and are very effective at communicating our value propositions. This gives us the added benefit of being able to offer an exciting new career path for some of our researchers. We have recently opened a second inside sales group in our San Diego office where we can recruit from our pool of 200 researchers based on the West Coast.

We believe we are continuing to enjoy some of the highest levels of customer satisfaction we have ever experienced. The first place it is evident is in the feedback we get from customers in the field and on the phone. It is also evident in the increased usage we have seen of our subscription services. Average weekly page views in CoStar Properties surpassed 6.3 million in June, the highest level we have ever seen. Usage at the end of June was up approximately 35% from January, 2005. Usage of CoStar COMPS is also running about 33% higher than its historical average. Usage of our For Sale products has increased by an astounding 300+% year-to-date. We've enhanced this product for our customers and upgrading the For Sale software and switching from licensing only local data to subscribers to providing national For Sale data to our customers.

The satisfaction level among our existing customers, as measured by renewal rates, also continue to grow. The renewal rate for CoStar's subscription services increased from approximately 91.6% in the second quarter of 2004 to approximately 93.5% in the second quarter of 2005.

I'd like to highlight a major renewal that closed in July because it has not previously been announced. We recently signed a major renewal agreement with Equity Office Properties Trust, the nation's largest private office building owner, and also the largest real estate investment trust. Equity Office is extending and expanding its relationship with CoStar under a three-year license agreement that renews services for Equity Offices professionals throughout the U.S. and provides Equity Offices headquarters staff which expanded national access to CoStar Property Professional and CoStar Tenant.

Equity Office will be using our data in a very interesting way. Our comprehensive property information gives owners tremendous insight into what is going on in surrounding properties to assess where their competition is likely to come from and what their opportunities are. Equity Office told us they will be using our information on tenant activity to help formulate leasing strategies for future vacancies in their portfolio.

For example, if they have a full floor coming available next year, but most of the tenants with leases expiring are only small users, they might decide to divide the floor to meet that smaller demand, and lease out faster. Conversely, if they see a large number of larger users likely to enter the market in the coming year, they may keep the space intact and hold out for a more efficient, full floor tenant.

Equity Office owns more than 700 significant buildings totaling over 124 million square feet, so you can see the tremendous potential upside if they can make better decisions on even a small percentage of that portfolio.

I'd now like to shift gears for a moment and update you on our retail real estate information initiatives. We've begun the process of integrating the required NRB information into the CoStar database and our using our field research staff and contractors to photograph the 40,000 some NRB shopping centers as quickly and cost effectively as possible.

In May we participated for the first time at the major level at the ICSC Spring Convention in Las Vegas. The International Council of Shopping Centers is a major association in the shopping center field and the Spring Convention is far and away the industry's largest event. Over 40,000 people were said to have attended this year's show. While we do not expect to have completed a high end retail offering that truly meets the needs of major retail players until mid 2006, this recent ICSC convention was an excellent forum in which to try out our product concepts and start to build brand awareness for the CoStar product line. We knew that getting enough exposure would be a challenge, given the mammoth size of the show, and the fact that the major shopping center owners typically spend millions of dollars on marketing to bring the crowds to their booths. A significant portion of our own increased sales and marketing expenses in the second quarter were directly related to the cost of effectively introducing our brand at the ICSC.

We are extremely pleased with the positive indications of interest we received at this show. As I walked to the show floor and talked with retailers, owners and brokers, I was deeply impressed with what appears to be an awesome opportunity ahead for CoStar. The industry appears to be information starved. Tens of thousands of brochures were being handed back and forth with either a retail property in search of a tenant, or conversely a tenant in search of a retail property. It's just astounding to me that 40,000 major retailers and other key industry participants still have to get together and rely on sheets of paper at this annual convention as a primary means of gathering and distributing information to facilitate billions in leasing and sales activities. We even saw a retailer walking the floor wearing sandwich boards advertising their needs for properties.

We met over 1,500 prospects in a booth over the two and a half days. Our plans to provide a comprehensive database of retail properties with space availabilities, for sale listings, and integrated demographic data, were very well received. I said it when we acquired NRB and I will say it again, we believe the revenue opportunity in retail eventually may be larger than the opportunity we are already pursuing in office and industrial real estate.

The Company is continuously developing new research methodologies and technology to improve the quality and timeliness of our information while reducing the cost of our research processes. As most of you know, the Company recently completed a multimillion-dollar upgrade to the research software systems we use to collect the information we sell. As we had hoped, this recent upgrade to the Company's research system, and the adoption of new tenant research methodologies, has had a favorable impact on the quality and efficiency in our research process and our tenant research process, in particular.

Today, with the new research software system, the majority of tenants and lease expiration's added to our systems are added by researchers conducting integrated property and tenant research from either our Maryland or California research centers. In addition, we have successfully developed new confidential techniques that we believe will enable us to collect much more accurate and viable lease in commission at a much lower cost per accurate record. Because of these factors and after detailed analysis and careful consideration, the Company has concluded that its Research Center in Mason, Ohio, which focused predominantly on tenant research, is no longer required and is no longer the most efficient center from which to collect our tenant research.

As a result yesterday, July 21st, we closed our Mason research center. The center represents approximately 5% of the company's total head count. We're very grateful for the contributions the Mason staff made to the Company over the years and we provided them with a severance and outplacement services. The Company plans to reinvest a significant portion of the savings from this restructuring into its other research centers that both support both tenant research and other expansion related research, such as retail. Net of this reinvestment, the Company expects to realize significant overall pre-tax savings of approximately $1 million annually.

In addition the Mason office closings should simplify and streamline our operations for the better are reducing the number of regions from which we conduct and manage research. It is our belief that the net impact of this research center closing, is that we will be able to provide more accurate and more valuable information to our clients while reducing our associated costs.

CoStar Group is continuing to invest in major geographic expansion and is expected to add over 500,000 properties to our North American database by the end of 2006. Since the expansion program began in May of 2004, we have added a approximately 208,000 properties in 21 new geographic areas. Seven new markets have come on line to date, including the recent additions of Hanson, West Virginia, Las Vegas, San Antonio, and Tucson. CoStar recently delivered local databases to those last four markets that totaled more than 40,000 properties. These databases track over 685 million square feet of commercial space and include approximately 49 million square feet of available space.

In each market CoStar has researched and photographed the vast majority of office, industrial, and retail properties to deliver a database significantly larger than anything previously available to local real estate professionals. This intense research effort paid off in Richmond and Hampton Roads, the first totally organic new markets to open in 2005, and we're confident high customer satisfaction there will pave the way for similar success of as we ramped up presales activity in the remaining new markets.

We opened at Hampton Roads with the support of all six of the top six brokerage firms as customers. The list includes Advantage GBA, CB Richard Ellis in Virginia, Dovaress Real Estate, NAA Harvey Lindsey Commercial, SL Nussbaum Realty and Tolheimer, a member of the Cushman and Wakefield Alliance. If you're not familiar with Hampton roads, it's actually the largest NSA between Atlanta and Washington D.C.

In San Antonio CoStar has already signed four of the market's top brokerage firms, NAI Rodey, Optimer's (ph) and Siegel, Trammell Crow Company, Transwestern Commercial Services, and Travis Commercial Reality, among others.

Selling activity is just now begun in Las Vegas and Tucson. In these markets CoStar has signed Caldwell Banker Commercial EPN, Lee and Associates, Caldwell Banker Success, Long Realty Commercial, Thicker Commercial Real Estate Services, Oxford Realty Advisors and Tucson Realty and Trust, among other important firms.

Our remaining field research work is on schedule in the majority of the remaining markets. At this point we still expect to open up 8 new markets in the third quarter of 2005.

Earlier this week we began rolling out one of our most ambitious marketing campaigns to date. The first ever free trial offer on CoStar Property Professional. We have always believed that one of the primary reasons people don't buy from us is that they have never seen or do not understand our products. That belief was confirmed last fall in focus groups, where we tested a number of different offers and prospects made it clear the best way to sell to them was to let them try our product before buying. The idea made sense. Our very high renewal rates to demonstrate that once people use CoStar property they rarely give up.

We previously considered offering free trials, but the idea really wasn't technologically feasible in the past. We believe the key to a successful free trial is the training to insure the successful implementation of the service. Before we moved to the web based platform it was too labor-intensive to go out and physically install and train a customer site with no revenue attached. Even after we had moved to the Web, our field sales costs were too high for our account executives to perform the training and the follow-up required. Now we have a lower cost inside sales team that is very adept at conducting sales demonstration training and closing business over the phone and Web Ex.

The offer began mailing this week to approximately 20,000 general prospects. It's a three-dimensional mailing that features a miniature CoStar field research vehicle and reinforces that CoStar offers a valuable service because of our extensive research process. Many of these people have seen our field research vehicles in their markets. We want them to make the connection that those vehicles are behind the best commercial real estate information available anywhere.

Our entire sales force will be involved in following up and closing prospects in what we hope will be at a significant number of new accounts. The offer is a free trial of CoStar Property Professional, our premium service, for up to 90 days. The trial system is restricted to prevent exporting data. There are incentives built-in for users for users to sign a one-year subscription during the free trial period, so we don't believe this campaign will have an adverse effect on normal sales during the third quarter. In fact, we believe it sets us up to have a very strong finish to the year. We see this as a great opportunity to introduce CoStar to as many prospects as possible in a compressed time frame.

We have recently released a new look and feel for our homepage. When we last overhauled our Web page it was to support our then goal of smoothly migrating tens of thousands of users from Windows to the Web. With that goal long since successfully accomplished, our primary mission now is to develop yet another major selling channel for our products through our Web site. We believe that by providing more free content to draw traffic, creating innovative on-line demos, creating more targeted marketing content and producing a fresher, simpler and more open face on our Web site, we can accelerate our sales efforts.

One concrete example of this is our new free building look-up on our Web site. Today anyone, client or not, can see a photograph of a property and get very basic facts on a property and see its location on a map. While that limited level of service is not likely to cannibalize our products in any way, it is nonetheless a very valuable tool to anyone active in commercial real estate who does not yet subscribe to CoStar.

Imagine the broker who has been using only listing sheets, the newspaper classifieds or broker lists and photo lists, office directories. That broker could benefit from our simple web tool to help the broker understand what the building in the newspaper ad looked like and exactly where it is. The more times that broker and potential customer returns to our site, the more chances and opportunities we have to market the benefits and values of our pay services. We also believe that our Web site and Web products can become more powerful tools for near frictionless cross selling of our products to existing customers. Furthering this trend, in the future we intend to offer more of our product for pure e-purchasing from our website, such as selling our statistical reports online.

At this point, I'm going to turn the call over to Frank Carchedi, CoStar's Chief Financial Officer, and he will discuss the financial results of the second quarter in more detail.

Thank you, Andy. Today I'm going to focus principally on discussion of the second quarter, 2005 results as they compare to the first quarter of 2005 and our outlook for Q3 and Q4, 2005.

Total revenues grew sequentially by 4.9% overall from Q1 to Q2, increasing by over 1.5 million from 31.3 million to 32.9 million. Growth in the second quarter was principally the result of recent strong growth in our overall sales force productivity, combined with a renewal rate of over 93% for the quarter.

It's important to note that the organic revenue amount added to the second quarter was 35% higher than the comparable amount added in Q1. Also, 96% of the revenue growth achieved was in the core markets, demonstrating the continued strength of these markets and the prospect for continued long term opportunity.

Subscription revenues for the Company accounted for approximately 95% of revenues during Q2. Our UK operations contributed approximately 8.4 of the revenue in Q2, as expected.

Gross margin increased by 1.2 million on the 1.5 million increase in revenues. Margin percentages increased from 66.5% in Q1 to 67% in Q2, while some individual markets continued to experience gross margins in the 80% plus range.

With regard to operating expenses, overall operating expenses increased from 19.8 million in Q1 to 20.8 million in Q2, mainly due to higher than expected sales and marketing expenses. The overall increase was slightly higher than expected and was primarily due to faster revenue growth and resulting commissions, as well as of the cost of our seasonal ICSC trade show participation in the second quarter. We continue to control and leverage G&A, which decreased slightly in dollars and as a percentage of revenue during Q2, even with the expansion efforts underway.

As a result of the impact of our expansion cost on margin percentage and higher sales and marketing expenses, our EBITDA, which is earnings before interest, taxes and depreciation and amortization, remained at 4.2 million in Q2 of 2005. Our net income increased from 1 million to 1.1 million for Q2.

Reconciliation to GAAP basis results of all non GAAP financial measures discussed on this call, including EBITDA, is shown in detail in our press release issued yesterday, which is available on our website.

Capital expenditures for Q2 of 2005 were approximately 3.2 million, of which 2.4 million was related to our market expansion efforts, and the remaining 800,000 to the support of our existing platform. We closed the quarter with approximately 113.4 million in cash, cash equivalents and short-term investments and continue to maintain a strong financial position as we enter the third quarter.

Now I'll discuss the outlook for the third quarter and the fourth quarter of 2005. As we indicated in our press release, we expect quarterly sequential revenue growth of approximately 4.5 to 5%, or approximately 1.5 million of organic revenue growth for the third quarter of 2005. We expect revenue growth to remain strong in the fourth quarter as well with the effect of new market openings. We continue to expect to reach approximately 135 million in revenue for 2005, representing approximately 20% overall revenue growth from 2004, with approximately 19% organic revenue growth. We continue to expect the majority 2005 revenue growth to come from the existing core markets.

As announced last night in our press release, the Company's Board of Directors has approved the closing of the Mason, Ohio operation, which is expected to result in a one time pretax charge of approximately 2 to 2.5 million in the third quarter of 2005. After closing the operation and restructuring the related research processes over the next several quarters, we believe that the resulting ongoing annual pretax savings from this discussion are approximately 1 million. The third quarter restructuring charge includes the amount for wages, severance, occupancy and other costs. Including these charges, for the third quarter of 2005, we expect fully diluted net income per share of approximately $0.03 to $0.04. For the fourth quarter 2005 we now expect fully diluted net income per share of approximately $0.14, slightly higher than our original expectations.

Overall gross margin is expected to increase in the third and fourth quarter of 2005, based on expected strong revenue growth combined with estimated cost reductions from the restructuring, which we expect to be partially offset by continued investment in our current plan. Overall gross margins are now expected to be in the 68 to 69% range through the remainder of 2005. We expect operating expenses, including selling and marketing, software development, and G&A expenses to remain consistent in Q3 of 2005 and increase by approximately 1 to 2% in Q4 of 2005. During Q3, we expect to have substantially lower marketing expenses compared to Q2, which will be mostly offset as we continue to grow the sales force to pursue our planned expansion.

Finally, we expect capital expenditures to continue to include investments and assets required to support our planned market and retail expansion, including additional field research equipment, building photography, communications, photographic, and computer equipment, leasehold improvements and workstations, totaling approximately 1.5 to 2 million per quarter. In addition, we expect approximately 1 million of capital expenditures per quarter in 2005 to support existing operations consist with expenditures for the past several years.

In conclusion, we remain focused on our solid organic growth, investments in new markets and retail, increasing margins, and the creation of future opportunities for growth in revenue and earnings. As always, we look forward to reporting our progress to you. And with that I'll open the call for questions.

[ OPERATOR INSTRUCTIONS ] Your first question comes from Brandt Sakakeeny with Deutsche Banc.

Thanks, good morning.

Good morning, Brent.

On the sales force could you give us an update on how the new sales force compensation is going, in terms of reductions of turnover or attrition? And I guess also just maybe an update on a couple of specific markets, including Richmond and Memphis. Thanks.

The change in the compensation structure that we introduced a little over a year in a half ago with the sales force where they're not only compensated for signed new business, but they also receive a smaller compensation for work resigning renewal contracts has been extraordinarily successful in dramatically reducing our turnover rate from the high double digits to just about 6% annually. So our turnover rate in our sales group right now is extraordinarily low. That includes terms resignations and the like. So we're very pleased with that and that's worked very well. That is also contributing to the fact that we're seeing a much more productive sales force. They're more experienced, we're spending less time on training new people and recruiting and more time focused on winning business.

On updating Richmond and Memphis, Richmond continues to do well, continues to grow. It is profitable on a four wall cash flow basis and we're getting very strong customer feedback from that market. And Memphis, I know is also profitable on a four wall cash flow basis and I'm not as familiar with the numbers for that particular market, but I would know if there was a problem there. So I think it's doing well.

Great. Is there any reason why the new markets shouldn't ultimately have the same margin as your sort of original markets?

No, there is no reason they shouldn't have the same margins as the original markets on a percentage basis. In fact, we've seen some of our smaller markets in the core business yield very high margins, competitive with the bigger cities. When you look at providing a product in the Richmond, Virginia, our research costs are dramatically lower. We actually don't maintain a physical office in that market. We rely on outbound sales and a regional sales person. So our cost structure is much lower in Richmond, and the software in the multimarket aspect of our product are more the value proposition so our margin is a little bit better.

Okay, great, thank you very much.

You’re welcome.

Next question comes from John Neff with William Blair and Company.

Hey, guys. Several questions. First off, given the 4.9% sequential growth in Q2, why wouldn't we expect an acceleration from that level? I realize it's possible, given your guidance for the third quarter of 4.5 to 5, but with the new markets coming on line, why would we not expect an acceleration from the 4.9 level.

John, I'm going to let Frank answer that question.

Thanks, Andy. John, let me give some specifics on what I see coming up for revenue in the third quarter. There are 3 reasons that I'm holding that guidance on the cautious side and you're right to point it out. The guidance of 4.5 to 5, relative to the 4.9 that we already did for Q2. Those reasons are as follows.

One is, we have a lot of new markets coming out. We still have markets coming on top of markets here in the third quarter. But as you know, the timing of those releases, the preselling amounts and how they will affect recognized revenue can vary quite dramatically. So I'm being cautious there and we'll see how it goes on that front.

Secondly, sales force productivity is key, whether you're talking about core business or new markets and we're entering here into the summer months, July, August typically not the better selling months. So again, another reason to be cautious. And finally, there's a mechanical issue, which is, you probably noticed, there's recently been a fairly dramatic strengthening of the dollar against the Pound. And if you work through the mechanics of that, you would find that the change in exchange rate that occurred from the last month of Q2 through the first month of Q3 can have enough of an effect on that sequential revenue to move the dial. So we're keeping an eye on that.

But those are some of the reasons that I'm given the guidance for Q3 in the way I am.

Okay, great. How much would you estimate you spent at the conference in May? On sales and marketing?

I'd rather not give you a specific number for competitive reasons on specific conference spending, but I can tell you that over all, the surge that you see and marketing, our sales and marketing line item, is largely attributable to that. Of course it will drop off as we head into Q3 but as I mentioned, other sales and marketing costs, particularly in sales costs, headcount growth, commissions, etc. We expect to grow and offset that seasonal decline.

Okay, great. I was wondering, last question and I'll get back in the queue, if you could just comment on advertising revenue in the quarter and why non-subscription revenue declined year-over-year. Thank you.

Advertising -- in terms of subscription revenue is 95%, the vast majority of the gross is in the subscription core platform. The ad revenue is running at about 1 to 1.5% of revenues right now. So it has experienced very strong growth but it's still a small part of the overall revenue puzzle.

You have any other questions, John?

Your next question comes from Brandon Dobell with Credit Suisse First Boston.

Hi, Chris.

Hi guys, this is actually Chris Pitt on the line for Brandon. Just curious if you're seeing any competitive response in your new markets as you get closer to opening those up?

We are dealing with a wide variety of potential competitors, many of the markets really don't have a direct competitor, so in those markets, obviously we're not seeing any competitive response. Probably half, two-thirds of the markets have some sort of regional or local competitor of some sort are another, and as expected, those competitors would have been working overtime to prepare a defense or some sort of response if they felt there was some substitution between our product and their product. That is the sort of results that we're seeing, we're pleased with. They are meeting our expectations, in some cases exceeding our expectations. That's in the face of whatever competitive response people are putting up. So our services are very compelling. There are a number of advantages our products offer over a local product and our sales people are working on them. There's no apparent major problems there.

Just if you could give us a little more color on the closure of the research center. Is that an event that's likely to become more common as you move staff around?

I think that -- I think the situation where we have a West Coast and an East Coast center and a London center, and there are real advantages to that, and being in the right time zones and being in sync with your customers. Given the fact that we're so telephone intensive and we're having so many phone calls during the day with our clients and our research sources. The Mason office was not really engaged in the integrated research where they're doing comps and tenant and property and they weren't engaged in the high call volume with our customers and with our commercial real estate practitioners. So the Mason office sort of was in a situation - a unique situation where they weren't well positioned to move into the more complicated, integrated role that we find is much more effective and much more efficient. So it's probably fairly isolated.

Very good, thanks a lot.

Your next question comes from Dalton Chandler with Needham and Company.

Good morning.

Good morning, Dalton.

Just staying on that topic for a minute, you have any other regional centers or are you now down to just London, East Coast, West Coast?

We have the San Diego center with about 200 personnel. We have two centers in Maryland. One outside of Washington and one outside of Baltimore. And the new one being the one outside of Baltimore, that center has some advantages for us. It's a lower-cost area, the Baltimore/Columbia center has the advantage that it's a lower cost center, and we were able to transfer a large number of experienced personnel into the center to provide a core so we could grow from there. So we're going to grow that center from being about 100 today to being about 200 people. We have a center in London and we think that's a pretty good mix.

Okay, and how many total researchers do have today?

I'll say a little over 700, between field and the centers.

Okay. And what's your best guess today out of these 21 new markets, how many do you think can be break-even on launch?

It's difficult to say. I mean the first two I think were. One of the things we did decide to do is we decided not to presell months in advance, because an unexpected thing occurred in Richmond and Hampton Roads. All the big players signed up, they all got excited about it and the second they signed up they began complaining about the fact that the product was not ready tomorrow. So we decided to not presell months and months ahead of the opening and hold back a little bit and begin selling right around the opening.

So I think it’s probably a better question is do we think that -- how many of these 21 markets we think can be cash flow positive on four wall basis inside the first quarter or two? And I think it's very early to tell, but if I were guessing, I would say it's a very significant number of them, because we are getting a positive response in these markets.

Okay.

And we're getting good names signing up in all of these cities.

Okay. And then if I could ask you to look ahead a bit further, I think you mentioned in the past that there are some other attractive markets in North America. You'll be finished in a few months with this new group. Any thoughts on how many more are out there and what the timing might be on going after those?

I think it's already happening, but as we complete these new 21 markets we're doing, I think we're transitioning from looking at growth and building count by -- transitioning from getting growth and building count from geography to getting growth and building count by product type. And that's the retail initiatives. The retail Initiative is very challenging and large, very large. And that's going to remain our focus for quite some time.

The remaining markets in the United States, as opposed to Canada, get significantly smaller. And none of the remaining markets in the United States are nearly as challenging as say, Las Vegas or Salt Lake or Minneapolis in terms of the skill. They wouldn't make nearly the dent in cost structure that these other 21 markets have made. And one of the things we would like to start doing is we would like to actually no longer restrict what properties come into our system in the United States. Pretty much accept that space availabilities of for sale properties or comparable sales, or tenant information we learn. Allow any of that information to come into our database from any place in the United States, so that we blur the distinction between which cities we are in and not in. As an increasing percentage of our customer base is buying just U.S. national data from us.

So I would not be looking in 2006 for a major cost changing cost structure associated with opening another 21 specific geographies in the U.S. It's more of a thing after we've seen success, a light at the end of the tunnel from our initiatives in retail, which is going to be a much longer term program. This 21 market expansion was 1.5 years and will be 2 years before we're all done, so in retail I think would be at least in that scale – or scope.

Okay, thanks so much.

You're welcome.

At this time you have a follow-up question John Neff with William Blair and company.

John, that was very polite of you.

It was. Thank you very much. Just a couple of kind of housekeeping issues. The effective tax rate in the quarter 41%, a little different than the 40% level we were using. Any change there?

I think in the near term, John, it's going to be approximately the 40% range but it's going to jump around a little bit. One of the reasons it is slightly higher than what you would intuitively expect, because for tax purposes, we have losses in the UK location, but we have income here. And the tax rates are lower, the overall corporate tax rates are lower in the UK so the benefit is not apples to apples as valuable, so it slightly pushes up the effective rate. But going forward, I generally think it's going to be in the 40% range.

Okay. Great. Got cut off a little bit last time, but the reason for the non-subscription revenue decline, given the growth in advertising is it the ad hoc subscriptions are trailing off? Would that be correct to say?

I think I might be misunderstanding the question. I think the growth of subscription based product, if you look at the overall quarter to quarter growth as we go from year to year, is just by far overwhelming the other areas.

You’re asking of the nonsubscription revenues as a percentage are dropping?

In terms of the dollar amounts declining year-over-year.

Well, I think -- I would just point out that the advertising is increasing dollar amounts significantly. You could be seeing some drop-off in the Ares, which is a non-subscription discontinued product. And I think we have -- we're not seeing strong growth in the comps one-off purchasing because we're getting so many of those people signing up for subscriptions. So we're getting some -- we're getting a trend towards the people who buy one-off comparable sales on our website moving into subscriptions, which suppresses the growth of the revenues there because we're pulling so many of the people out of the one-off purchasing and putting them into subscriptions.

Okay, that's a good problem.

Yes, it's a good problem. We investigated and it's positive and positive.

And finally, I think you gave, Frank, a sales force productivity number in the quarter. As of last quarter it was up 42% year-over-year. Is there a comparable statistic for the second quarter.

I don't know if Andy gave that. That was a -- I think you discussed gross and net sales production. I don't know if you gave that a comparable number. That number you're talking about, John, is sales production of new contracts, not -- in other words, ultimately it gets reflected in recognized revenue. In fact you see that this quarter where I said that the dollar amount of contributed new revenue went up 35%, apples to apples, so that's the translation of that productivity into the recognized revenue.

By contract count, it was up 52% year-over-year in this quarter. Quarter over quarter it was up 52%, so it continued to increase.

Okay. Great, thank you.

Thank you. I understand that’s our last question in the queue. So we like to thank you for joining us for the second quarter 2005 earnings call. And we look forward to speaking with you again next quarter for the Q3 earnings call. Thank you very much for joining us.

This concludes today's CoStar second quarter 2005 earnings. You may now disconnect.