CoStar Group Inc (CSGP) 2006 Q1 法說會逐字稿

Welcome to CoStar Group’s first quarter 2006 conference call and Web demonstration. Today, we have with us Andrew Florance, President and CEO, Frank Carchedi, CFO, and Henry Stoever, VP of Marketing. [Operator instructions] Thank you. I would now like to turn the call over to Mr. Stoever. Please go ahead, sir.

Thank you, Nicole, and good morning to everyone on the call. I’m Henry Stoever, Vice President of Marketing for CoStar, and I’d like to welcome you to CoStar Group’s first quarter 2006 conference call and webcast.

Before I turn the call over to Andy Florance, our President and CEO, 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 first quarter 2006 press release, any of CoStar’s filings with the FCC, including its 110(k), for the period ending December 31, 2005 under the heading ‘Risk Factors.’ All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements.

I invite everyone listening today to log onto costar.com/earnings for a live Web demonstration of our new product offerings that Andy will be discussing in more detail. Today’s conference call is also being broadcast live over the Internet at costar.com/corporate/investor. An audio replay will be available two hours after the live call concludes through midnight on May 4, 2006. The replay telephone number is 800-642-1687 within the U.S., or 706-645-9291 outside of the U.S., and refer to conference ID 7663991. The replay will also be available over the Internet at costar.com/corporate/investor for a period of time following the call. Thanks for joining us, and I’ll now turn it over to Andy.

Thank you, Henry. Welcome, everyone, to our first quarter 2006 conference call. We have exciting updates to share with you today about the Company’s financial results and the upcoming launch of our new retail offering. We’re going to do something a little bit different today. We’re going to give you a short preview demonstration of our new retail service offering we plan to release next month at the ICSC conference in Las Vegas.

I’m going to be using the Web and WebEx to broadcast that demonstration. I really think it’s valuable for you to see this first-hand, because describing it using words just won’t adequately convey the potential value of this new product. So in order to see the demonstration of the product, you need to be on our audio call, the phone number we gave you, the conference ID we gave you, and you need to go to www.costar.com/earnings. Click on the ‘Join Conference’ link, and it should ask you for your name, it’ll ask you for your email address, and it will ask you for the password, which is, lower case, investor – singular, not plural. Once you type that in, if you’ve never used WebEx before, it will download a little piece of software quickly called an Active X. You might need to look at the upper part of your browser and click on the message from Microsoft saying, ‘Please, do you want to accept this Active X?’ That Active X has been used a million times, so it’s fairly harmless. It’s done by – I guess it’s not from Microsoft – it’s from WebEx. But once you’ve done that, you should be able to see what’s on my screen and then hear my voice over this audio call. And while it’s a little different for our earnings calls, I think it’s valuable to convey what we’re doing here at CoStar Group right now.

But before we begin the demo, let’s just begin with a quick discussion and overview of our quarterly performance. I’m very pleased to report another quarter or solid earnings and strong revenue growth. We doubled earnings per share for the first quarter of 2006 the same period a year ago. The Company, as of first quarter of this year, was net income of $1.9 million, or $0.10 a share, versus $1 million, or $0.05 a share, in the first quarter of 2005. Our revenues for the first quarter of 2006 were $37.3 million, an increase of 18.9% from the first quarter of 2005. Growth in core U.S. subscription base revenues also remain strong, up 21.4% from the first quarter of 2005.

Annualized net sales grew 24%, from $4.7 million in the first quarter of 2005 to $5.9 million in Q1 of 2006. The $5.9 million in net annualized new sales in the first quarter is down slightly over the fourth quarter of 2005. In fact, it’s down about $40,000. We’re at a revenue of about $150 million, so it’s essentially the same. We believe it didn’t climb because almost the entire Company right now is very focused on the pre-launch efforts of our new retail product offering, and that’s somewhat all-consuming. So we’re continuing to put up good sales numbers as we prepare for a major product launch.

Our March sales month was 8% higher than any previous monthly record, so we had a great – we had, actually, two great months in the quarter. And the renewal rate of existing customers remains steady at approximately 94%. That’s near an all-time high. Frank Carchedi, our chief financial officer, will address the first quarter results in more detail later in the call.

While the majority of our revenue growth and income streams continue to come from our core markets, we believe our 21 expansions markets in our new retail offering will create even more avenues for growth and earnings leverage for the Company going forward. Next month, when we unveil our retail product offering at the International Council of Shopping Centers conference, our database will contain more than 340,000 photographed and researched retail properties.

This product will address a huge industry segment. We believe we will offer tremendous value for retailers, brokers, owners and developers. This new product offering will combine traditional CoStar property professional services with retail properties and retail tenants, traffic counts, extensive demographic details, and a powerful new proximity search capability – it’s really quite stunning – with on-the-fly mapping and reporting capabilities. You’ll see exactly what I mean when you see our demo today of all of our technology [inaudible].

The market retail is enormous. It includes many diverse players – shopping center owners, multi-unit retailers, brokers, brokerage firms specializing in retail properties, as well as lenders and investors who are engaged in retail properties. We believe the U.S. retail market is as large, and probably larger, than the U.S. office market.

For the past six months, we’ve been conducting market testing to gauge the acceptance of our new product offering, and the response has, frankly, been tremendous. Some of the nations leading retailers, brokers and owners have said that our new retail offering is commercial real estate intelligence at its best. In fact, some retailers we’ve shown this product to have told us it could greatly improve their ability to open stores faster, at a lower cost, with less risk of store failure.

National retailers, from fast food companies and grocery stores to luxury apparel retailers and drug stores, believe they can save significant amounts of money by using our retail offering to quickly achieve, and even surpass, expansion goals with a higher degree of confidence in their site selections.

For example, one of our country’s more prominent retailers, Walgreens, told us in a meeting that our new product offering could save them millions of dollars a year by dramatically compressing the amount of time it takes their 30 real estate people to choose the right locations for the 500-some store openings they’re trying to do in the U.S. this year. Having instant access to the availabilities, co-tenancy, and photos alone could reduce a week-long cross-country research project to a day in the office.

Beyond retailers, over the past 30 days, our top sales and research representatives and managers have reached out to the industry’s 200 largest shopping center owners to demo this new offering. Invariably, the reaction has been consistent. It is, ‘We’re blown away by it,’ ‘We love the product,’ ‘We think it’s a fantastic product.’ We expect retail owners to be some of our more enthusiastic early adopters and to use our product offering in one of two ways. One is marketing intelligence for the leasing of their properties, and the other way is as an acquisition tool in acquiring new properties or land on which to build new properties.

In the past, we’ve had success selling our services to office and industrial owners, investors and developers. For our retail service, owners who only have retail properties or a mix of office, industrial and retail really didn’t have a strong interest in our products. That will all change with our new retail offering. Retail owners and developers will now have a powerful reason to subscribe to CoStar’s suite of products now that it has retail.

In the 30 or so meetings we’ve had with those larger owners to preview the offering, the overwhelming majority have had a very positive response, and frankly, I’ve been very pleasantly surprised by how positively this segment has reacted to the product. We had not really projected that owners would be the first or avid adopters of our new retail services. Now, it appears that they have quite an interest in it.

One reason is that even the large owners and developers find themselves competing for a commercial broker’s time and attention to help them acquire or lease retail centers quickly. With our new product offering, they’ll be able to search our retail database with speed and precision, they’ll be able to tap into the right demographics, know which properties are selling and at what price, and find out who else is buying in a particular area. They’ve told us that this new product offering could be a powerful tool for developing or acquiring new retail centers.

For commercial brokers who use our retail offering, there’s good news there, too. While nothing will ever completely eliminate a broker’s field work, firms like CB Richard Ellis, one of the world’s leading commercial real estate brokerage firms – their top retail managers believe our new product could greatly reduce the need for the intensive manual data gathering they do in the field and actually enable them to move a lot of their brokers back into the office and make it much more efficient. They feel that brokers could spend as much as half the time and effort to collect retail property information that they do now. It could also enable them, more importantly, to close more deals with clients, to do these deals more profitably, since they’re investing less time into them, and to widen the range of retail brokerage opportunities they pursue.

Currently, it’s difficult for a high-end retail broker to do a deal for a 4,000- or 5,000-square-foot store profitably because the amount of labor to do that deal is the same as the labor to do a 30,000- or 40,000-square-foot deal, but the commission is so much smaller. By reducing the amount of time they spend doing research, they can afford to, hopefully, move down to some of these smaller deal sizes. We can grow the retail brokerage business out there.

CoStar’s core mission has always been to bring comprehensive commercial real estate information solutions to the office and industrial markets in ways that dramatically reduce the cost of doing a deal for those in those industry segments. Until now, a customer was not in a position to address the retail market because doing so effectively required significant scale in operations.

To build this new robust product offering we’re launching, we had to invest heavily in this quarter and over the last several quarters in new data sources, data collection, marketing initiatives, and new software and systems. Today, CoStar is the only commercial real estate information provider with not just the scale, but the experience and infrastructure to meet the retail industry’s vast information needs. We also believe that no other commercial real estate information provider has this capability. We have increased the old NRB database that we acquired by 1,000% in property count, we have researched hundreds of thousands of retailer locations, we have pre-processed millions of demographic records, and we’ve built fairly impressive new software solutions.

At this point, I’d like to turn your attention to the WebEx broadcast. What you’re looking at is an alpha beta version of the product we’re going to be releasing next month. The final screens will look a little bit different, but this will give you a good feel for it. I’m going to give you a quick case study here. All the examples I’m going to give you today are hypothetical. They aren’t actually what these different companies I’ll use the name of are doing. They’re just for illustration, so don’t derive any meaning from the companies that I talk about here.

Let’s suppose I put myself in the shoes of being a real estate manager for Lowe’s Hardware in the Midwest, and suppose I’ve been tasked with the aggressive plan of opening 50 stores this year in the Midwest for Lowe’s. I’m going to have a pretty comprehensive set of requirements in terms of what kind of population I’m looking for around our new stores, what kind of competitor situation I’m looking for, visual characteristics of the properties, what kind of traffic we need driving by the store. It’s a lot of information, and historically that’s collected from a bunch of different sources and from a lot of field work.

If I were trying to open a store in Minneapolis, historically, I’d go spend a fair amount of time networking in Minneapolis and physically driving around Minneapolis looking for store locations. With the new product we’re launching, our hope is that I, as a real estate manager for Lowe’s, could actually do a lot of my advance work right in the office. So let’s go ahead and do that.

I’ve now initiated a retail search, and I’m going to say that we’re looking for shopping centers or a standalone retail. We want properties that exist, because we don’t want to take the time to wait for construction or do the development. And I’m going to say that we’re looking for – typically, we need stores that are 25,000- to 35,000-square feet in size. We actually want retail. So I’ve given some basic physical characteristics there. Now, I’m going to go down to our demographic criteria, and I’m going to talk a little bit about what kind of customer base I expect to be around one of these potential new stores.

First of all, I need enough people to live near that potential hardware store to bring in business, so I’m going to say that I need at least 75,000 people living within 3 miles of any potential store. And I need to make sure that the people living within the potential store can afford to buy a nice hammer, so I’m going to look for $50,000 of average household income within three miles of the potential store location. And then because CoStar has partnered with NRB here and has some pretty comprehensive demographic data, I’m going to go into a little more detail. I’m going to say that I’d like to make sure the people living around this potential new location have a propensity to buy miscellaneous household equipment, so I’m going to say that I want to see at least, historically, $30 million of spending on miscellaneous household equipment within five miles of any potential store location. Okay, so there we’ve described the demand side that we’re looking for around our store.

Now, in terms of store proximity, I’m going to put a couple of characteristics in there, because for one, I’m not going to look very bright over at Lowe’s Hardware if I open up new stores a block away from the existing stores and compete against ourselves, so I want to make sure that I don’t open up any stores within two miles of any existing Lowe’s Hardware store. And I would rather not compete directly against Home Depot, so I’m going to say I want to make sure that there are no Home Depots within two miles of any potential new store location.

Now, very often, retailers have done regression analysis to determine what other kind of co-tenancies drive sales for them, so we’ll say that as a hardware retailer, we found that people tend to bundle trips to the hardware store with a trip to a drugstore, so I want to make sure that there is a drugstore within a half a mile of any potential site. So at this point, we’ve gotten fairly specific here, and this gives you an idea of why the retailer’s job is so difficult in finding successful new store locations. And hopefully, as I go through here, there will be some properties that actually meet these criteria.

I’m going to go in, and I’m going to pull up a map of – I’m focusing on Minneapolis today. I’m going to pull up a map here, and my default is [inaudible] in Alabama. I’m going to switch gears to Minnesota, and I can now see a map of Minnesota, and I’m going to go ahead and I’m going to – it knows that I’m interested in Home Depots and Lowe’s and drugstores. I’m going to click the box and ask it to show me every Home Depot as an icon on the map of Minnesota. It should take just a moment. Many of you are now seeing the state of Minnesota and a little Home Depot icon showing every Home Depot in Minnesota. I’m going to go ahead and I’m going to zoom in down on Minneapolis specifically. [Inaudible] recognize the Home Depot, I guess.

I can now see the Home Depots, and they’re fairly centralized tightly in the center of the city. I’m going to go ahead and I’m going to draw a radius around Minneapolis and say I don’t want to really go any further out, when I look for store locations, than Home Depot has gone, my competitor, so I’m going to look for stores that are basically within about 60 miles of the center of Minneapolis.

At this point, I’m going to ask for the results to my question, and I should be – what this has done is presented more information in a more organized fashion than I would normally have been able to collect with one to two weeks of field research. And I’ve gotten nine properties back that I can go and check out. And I’m going to, again, look at those on a map so I can get a feel for them, and I can see – I’m now looking at a map, and the little building icons are shopping centers or standalone retail. I can still see the Home Depots. I can click on one of those icons, and it’ll pop up some quick facts. Right away, I’m looking at a fairly unattractive retail property on the Eastern side of Minneapolis at $13 a foot, and I’m thinking that it might be not the right class of property for a new Lowe’s location. So I’ll go over to the Western side of the city, and I see a slightly more interesting property, and I’ll double-click on it, and it will take me down to several hundred fields of information, maybe half a dozen photographs of that potential retail location.

So at this point, most of you are seeing Knollwood Mall in St. Louis Park, Minneapolis, and I’ll go on up and our record on Knollwood Mall here is connected to their website, so I can click on that address and it should bring up the website. And I can, from here, read about the mall, different events happening, go into the store directory, see their marketing image, see how polished they look.

Now, I notice this is a General Growth property. That’s one of the largest developers in the country, a very professional organization. They have 31,000 feet available in this mall. That’s the perfect size for me. Let me go right into the images and get a better view of the mall, as if I was actually there in Minneapolis. And you see about half a dozen images here of different shops and different views and angles of the mall, a floor plan, a sub-market map, and I’ll go ahead and expand just one of those images, so I now have a view of a fairly attractive looking mall with an Old Navy, a TJ Maxx, lots of parking, not many potholes – looks pretty good. And I could actually pull down an even higher resolution image if I needed it.

One of the neat things we can do here is – we also, for hundreds of thousands of shopping centers, or for maybe 50,000 shopping centers, we’ve actually taken 360-[degree] photographs, and if you look at the second image over, you should see it beginning to rotate. I’ll go ahead and double-click on that and expand it.

What you’re seeing here is a 360-degree photograph taken about 24 feet up from one of our specialized research trucks, and I can rotate around, and I can see that there’s a DSW Shoe Warehouse next to the Old Navy. I can continue to move around, and I can see a collection of retailers like Caribou Coffee, Cub Foods. Cub Foods is actually set back, and that’s what the availability is. I’ll move on around past the Subway, past the Factory Card Outlet, and I’ll look out to the street in front of the mall, and see there’s a dedicated exit lane, which I really like as a retailer to know there’s a dedicated exit lane to this property. I’ll go ahead and look across the street, and I see that there’s a Color Tile store, a carpet store, which is a good compatible use for Lowe’s Hardware. Continuing on around, I go past an apartment building in my view, and I can see a Walgreens right across the street, which is something we like. We like to see a drugstore compatible use with our potential new hardware store.

So at this point, I feel pretty good about this location. I’m going to want to go ahead and see it. I can take a look at the site plan, and I believe it’s a Cub Foods that’s available, which could really work quite well. And I would go through this process at this point, looking at which properties work well, which ones don’t work well. I might spend an hour or two doing pre-research, and when I hit the ground in Minneapolis, hopefully I would know the right people to talk to, and I’ll be a lot more productive. I’ll be able to open these stores faster, with more information, so there’s less risk of failure when the store opens, and I’ll be exceeding the store opening goals. And if I can open a store a week earlier, I can generate $100,000 more income for the company and thereby make our revenue growth goals for the year.

Now, that’s just a typical retailer looking for a location example, and I would think that a brokerage using the product would be very similar. Again, it’s a timesaving function for them.

There are a lot of secondary potential uses for this product that are going to be emerging here, and I’ll give you a quick example. Again, this is a complete hypothetical scenario. The names have not been changed to protect the innocent, but it’s completely hypothetical, and the story I’m describing does not exist.

So let’s say that I am – let’s suppose that I’m Blockbuster, and I’m approached by the parent company that owns Hollywood Video and Movie Gallery, and the parent company is prepared to sell me one of those two assets, but not both, and I want to evaluate – as Blockbuster, I want to evaluate which of those two chains would be a better fit with Blockbuster from a store location, store quality, complementary store location basis. So I’m going to go in there, and first I’ll analyze Movie Gallery, so I’ll say – no, actually, I’ll do Hollywood Video first. That’s the bigger one.

So I’ll say, ‘Show me all the Hollywood Videos,’ or, ‘Show me all the properties CoStar, at this point, has loaded up that have Hollywood Videos,’ and I push the ‘Count’ button. The ‘Count’ button is in the lower left down there. What you see is that we have 1,200, roughly, properties that have a Hollywood video in them right now in our database. Okay, that’s great. If I acquire Hollywood Video, those all become future Blockbusters.

Let’s go ahead and say, ‘But how many of those Hollywood Videos are not really already covered by a Blockbuster, and how many of them are more than two miles from an existing Blockbuster and therefore would not be competitive?’ So I’m going to redo the analysis, and I’m going to say, ‘How many of the Hollywood Videos are complementary to Blockbuster?’ And there are only 307 that are complementary of Blockbuster. Hollywood Video – 70% of their stores are within two miles of a Blockbuster, so it’s not clear how additive Hollywood Video would be to Blockbuster.

Now, let’s go and look at the second store. Let’s look at – let’s remove these queries. Let’s look at how many Movie Gallerys we have currently in our database – or how many properties we have with a Movie Gallery out there. Again, at the lower left of the screen, I hit the ‘Count’ button, and it tells me that we’re tracking 763 properties that have a Movie Gallery. We’ll do the same thing, and I’m going to say, ‘How many of them are not within two miles of a Blockbuster?’ So how many of them are very valuable to us? I do the count, and in the lower left it’s showing me that 550 are complementary. So it’s a sharp contrast to Hollywood Video. 70% of the Movie Gallerys would be going into new territory for Blockbuster, and thereby might be complementary.

Now, obviously, I do a little more analysis here. I begin to then take a next step and say, ‘What are my minimum demographic criteria around those Movie Gallery stores?’ If not one lives around those Movie Gallerys or drives by them, I’m not super-interested in them. But I can go ahead here and I can map out on the map of the United States where these 550 complementary Movie Gallerys are. I’m now seeing that they’re as far north as Alaska and as far west as Hawaii, and there seem to be an awful lot in the Eastern United States and the Southern United States.

I click on the Blockbuster icon, and now I’ll be able to see where those Movie Gallerys are in comparison to Blockbuster stores, and they seem to be – Movie Gallery doesn’t do much for Blockbuster in the Western United States, but it seems to be fairly helpful in the Southern and Midwestern United States. And I’ll zoom in on the Southern United States. I apologize for the waste here of the time that it’s taking. The actual production system is a little bit faster, and also, WebExing it out slows it down.

Shortly here, I should have a view of the Southern U.S. And as I look at this, I can see from Alabama over, Blockbuster would pick up a lot of new store locations. I’ll zoom in on, say, Birmingham here. Again, this is all fictional, just to illustrate a point. What you see is you look at Birmingham is – Blockbusters tend to locate in the center of Birmingham, while Movie Gallery has tended to be more suburban, or Movie Gallerys over there in Tuscaloosa, so they’re in tertiary cities, so it’s actually very complementary to Blockbuster.

If I were actually going to be doing this analysis seriously, I would then actually look at each store, the quality of the store, the quality of the location, and as you – if you can see this down on your screen, you see that this particular Movie Gallery doesn’t look like a Four Seasons.

And that will really conclude the live demo portion here. For those of you who have not seen it, we will have a – within the next month, we will have an online demo up on our website that you can look at to see what our retail product looks like. You can call our sales group, and they’d be happy to do a WebEx just for you and walk you through it. And as well, if you’re at the ICSC conference, we hope you will come by and visit our booth and see all the hoopla we’re trying to generate over there.

We’re fairly optimistic. There’s been a lot of work produced in this product at this point, and obviously, when we first release it, we don’t expect it to be absolutely perfect. We will listen closely to our new customers and move quickly to refine and evolve it, improve the quality of the data as we need to.

But we are very optimistic about what we’ve got here. I don’t know that we’ve ever brought a product out where I’ve had more positive feedback for the product. And one of the real proof points was – yesterday, we had a remarkable day. Yesterday, I think, was probably one of our best ever strategic sales days. And I think also it would probably be one of our competitors’ worst ever days, as well.

As you know, we opened up Milwaukee a couple of months ago, and we had been to date unable to pre-sell any of the strategic and important top ten firms, until we began showing them this new retail product in advance of the release. And in particular, a fairly large, but retail only brokerage firm in Milwaukee saw the product and thought it was spectacular and went around Milwaukee and really rallied the other major brokerage firms to make a move to adopt the CoStar group product in Milwaukee, and they had tremendous success. And yesterday, in just one day, we received contracts from seven of the top-ten brokerage firms in Milwaukee. And we believe that it’s likely we could see some more contracts. So that’s unheard of for us. I’ve never seen us – I don’t think I’ve ever seen us pull more than two or three contracts in a day, let alone seven in one city, so it’s really quite encouraging, and we think that this product could enable us to break through in other markets where we want to get a deeper penetration with major brokerage firms. So it’s pretty exciting. This product has the potential to both strengthen our core business and reach major new segments.

With that comment on Milwaukee, though we’ve spent most of my section of the conference call on the live demo, I should say that our 21-market expansion is continuing to do very well, as you hear from that Milwaukee example. Two years ago, when we began the expansion, we identified 87 key brokerage firms who we felt were influencers in their particular market. We wanted to really reach those 87 key brokerage firms, bring them on board with the CoStar service, and that would become a strong foundation for growth.

Today, several months after we released the last of the 21-expansion market, we already have 59 of those 87 brokerage firms as clients. 68% of those key target firms are now CoStar customers, and we’re very proud of that track record, but it’s only a beginning. So we continue to expect at this point that our expansion markets will be profitable in aggregate before the end of 2006.

At this point, I’m going to turn the conference call over to Frank Carchedi, CoStar’s CFO. He’ll take you through a little bit more detail on the financial results of the first quarter.

Thank you, Andy. As stated in the press release last night, net income nearly doubled from $1 million, or $0.05 per share, in Q1 of 2005 to $1.9 million, or $0.10 per share, in Q1 of 2006, despite the additional $1 million in equity compensation expense in the quarter. In additional, EBITDA increased $500,000 from $4.2 million in Q1 of 2005 to $4.7 million in Q1 of 2006 on year-over-year revenue growth in the 19% range.

Having said that, I’m going to focus principally on the first quarter of 2006 results compared sequentially to the fourth quarter of 2005, and also our outlook for upcoming Q2 and the rest of 2006.

Total revenues grew sequentially by 4.1% overall from Q4 to Q1 of 2006, increasing from $35.8 million to $37.3 million. The result for the first quarter was primarily due to continued solid growth in our core U.S. base subscription revenue combined with our continued high renewal rate of approximately 94% for the quarter. We reached a 4.8% sequential growth rate in the core U.S. subscription revenue areas. Total subscription revenues for the company, including the UK, accounted for approximately 96% of Q1 revenues.

The group of 21 newly opened markets, which has reached expansion revenue of approximately $1 million quarterly, or 2.8% of our overall revenue in Q1 of 2006, continues to present a significant opportunity, as Andy described. In aggregate, the new markets that have been open for six months or more are profitable, and we continue to expect that our expansion markets, in aggregate, will be profitable before the end of the year.

Gross margin increased by approximately $500,000, from $23.8 million in Q4 to $24.3 million in Q1, on a $1.5 million increase in revenues. Margin percentages decreased from 66.6% in Q4 to 65.3% in Q1, slightly lower than expected. We experienced a rapid ramp-up of offshore resources during the quarter and incurred costs to re-deploy our field research operations from the 21-market expansion to the retail project more quickly than we expected.

Overall operating expenses increased $2.8 million, from $19.7 million in Q4 to $22.5 million in Q1. Selling and marketing expenses increased $1.8 million, from $9.1 million to $10.9 million in Q1 as we increased the size of the inside sales force, expanded our marketing programs, and held our annual sales training event during the quarter.

In addition, equity compensation charges increased $850,000 from Q4 of 2005 to slightly over $1 million in Q1 of 2006 due to the adoption of stock option expensing, essentially increasing our overall personnel expenses. Equity compensation expense is primarily included in selling and marketing and general and administrative expense.

As a result of increased research, sales and marketing expenses, and the introduction of stock option expensing during the quarter, our EBITDA decreased from $7 million in Q4 of 2005 to $4.7 million in Q1 of 2006 as planned. Also, our GAAP basis net income decreased from $3.2 million, or $0.17 per share, in Q4 of 2005 to $1.9 million, or $0.10 per share, in Q1 of 2006. That was at the top of our expected range for the quarter. Reconciliation of EBITDA to GAAP basis results is shown in detail in our press release issued yesterday, which is now available on our website.

Capital expenditures for Q1 of 2006 were approximately $1.2 million, of which $750,000 was related to our research photography and retail expansion efforts, and the remainder was for the support of our existing platform.

We closed the quarter with approximately $142.3 million in cash, cash equivalents, and short-term investments, an increase of $8.1 million during the quarter. In addition to cash flow from operations, we have an additional $2.4 million generated through proceeds from stock option exercises for approximately 130,000 shares during the quarter.

Now I’ll discuss the outlook for the second quarter and 2006. As indicated in our press release for 2006, we are reiterating our expectation for organic revenue growth of approximately 18 to 22%, putting revenue in the $160 million range for 2006. We expect a sequential quarterly increase in revenue from the first quarter of 2006 to the second quarter of 2006 of approximately 3.5 to 5% and quarterly growth rates to reach up to 5 to 6.5% by the end of the year.

We continue to believe there is significant upside revenue growth potential from growth and sales force size and productivity, particularly in view of opportunities resulting from momentum in established markets and ramp-up from newly released market openings with potential upside from the retail offering later in 2006. We anticipate non-core revenue to remain flat or possibly decrease slightly in 2006.

We continue to expect 2006 fully diluted net income per share of approximately $0.45 to $0.60, implying the expectation of significant earnings leverage in the second half of 2006, while EBITDA is expected to reach $21 to $25 million for the year. For the second quarter of 2006, we expect fully diluted net income per share of approximately $0.03 to $0.07. In Q2, we expect a $2.5 to $3.5 million incremental expense for our retail launch, including the seasonal ICSC trade show in May. We expect these charges to drop off in Q3, and operating expenses for the back half of the year to otherwise show minimal fluctuations.

Gross margin percentage is expected to remain fairly steady in Q2 as we continue to ramp up research staffing to support our retail expansion. We expect gross margins to increase during the back half of the year to 66 to 68% as a result of sequential revenue growth and stabilizing research costs.

We continue to expect non-cash equity compensation charges, principally for the required expensing of unvested stock options and restricted stock grants, totaling approximately $1 million to $1.5 million per quarter. The majority of the expenses will be reported in sales and marketing and G&A.

In conclusion, organic growth remains solid, and we believe a substantial upside exists in revenue growth at high incremental margins for both established and new markets. Even with significant investments in retail, we continue to balance earnings growth with long-term investments as the core business generates high incremental margins and the new markets move steadily to profitability. We look forward to our retail launch and to reporting our progress to you.

And with that, I’ll open the call for questions.

[Operator instructions] Your first question is from Brad Eichler of Stephens, Inc.

Good morning, Andy and Frank.

Good morning, Brad.

Could you talk a little bit about the commercial multi-list product, the growth you’re seeing there in listings, et cetera, and number of subscribers.

Sure. The commercial multiple listings service product we launched is a low-end product we launched, I guess, in the middle of November. It is in the trial period phase still, where people can sign up for it and they’re not yet being billed for it. The target price is at a very low price point. I believe it’s $19 a month, somewhere around there, $19.95, and it’s been very well received. To date, we’ve signed up something on the order of 23,000 people who have come in there, registered, and used the product. Now, a much higher number have actually signed up but not used it. That’s a pretty good pace. That’s up from – I believe at the last conference call, the number was significantly lower. It was 14,000, I think, or something like that, 14,000 to 18,000, maybe 16,000. So it’s gone very well.

Our inventory has climbed – our inventory of both lease listings and for sale listings climbed dramatically during the quarter, and I think a lot of that is attributable to this new low-end product reaching a lot of people that are active or semi-active, more to the residential side of the market – the product is reaching a lot of those new people, and they’re bringing us listings as awareness of CoStar grows, and that cycle should feed back on itself and bring more value to all of our customers and, hopefully, bring new customers. So we’re going to continue to let the user base grow there, and later in the year move it to a pay model. But right now, we’re liking the listing growth we’re seeing. Does that answer the question, Brad?

It does. Just two other quick ones. Could you update us on where you are with your sales force, how many people you have in the field and then in-house, and what type of growth you expect in ’06?

Sure. We’re seeing very strong growth in the inside sales force. Frank, you’ve got the numbers right there, don’t you?

Yeah. Inside [inaudible] inside sales force, Brad, went from approximately 30 people at the end of Q4 2005 to approximately 50 people at the end of March, so that inside sales force ramp-up has been dramatic. The field sales for [quota carriers] has been more stable from one quarter to the next, at between 70 and 75 quota carriers.

And then the final question is –

Just to follow up on that, our plan is to continue to grow both those groups aggressively during the year, so we expect to see both of those groups get up to 85, 90 personnel each, so it’s continued strong growth in the sales force.

Thanks. And then the last question is, you mentioned the number of properties that you’re going to launch, the property product with – and if you mentioned it, I just didn’t hear it, but what do you expect to add through the balance of 2006 to that database?

An amazing amount. We have – so, again, as a benchmark, we are going to arrive at ICSC with more than 340,000 properties. NRB, the company we acquired and, arguably, previous leader in the space, was tracking somewhere closer to 34,000 properties, so the number we’re arriving at ICSC is 10 times the number that NRB had, so we’re fairly strong there. We’re trying to arrive with 100,000 lease and sale listings in those properties, so that’s a pretty broad offering, certainly larger, we believe, than what anyone else has got internally in any sort of research mechanism they’ve got.

Right now, we are bringing in several thousand per day, I believe, from aggressive field research efforts in Florida and California that have now been launched and are under way. We believe that California and Florida have a disproportionate amount of the retail properties in the United States. We have photographed every one of the NRB properties, the major shopping centers in the United States, or probably 98.5%, but virtually every one of them, and we’re going to be – the plan is to continue expanding that field research effort during the year and add each of the locations of the top 3,000, 4,000 retailers across the United States. That effort will take several years, but we’ll be bringing in thousands every day, ultimately, as we get into the third and fourth quarter, and we hope to add – cross the million property mark this year on the retail side. We’re making good progress towards that goal.

Thanks, Andy.

Yes, Brad.

The next question is from John Neff, William Blair & Company.

Hey, guys. Frank, I was wondering if you could just amplify on the gross margin decline in the quarter, specifically what that was from?

On the gross margin, we were probably maybe a couple hundred thousand dollars off the range of my expectations there, and as I said in my script, there are a lot of things happening in operations right now as we grow the research force to address the retail offering and shift resources from the 21-market effort to retail, and along those lines, I gave two examples of things that were costs beyond my expectations. We ramped up our offshore resources much more quickly than we expected during the quarter, which is a good thing about offshore resources, you can actually do that, and we do it for a reason. But that was a little quicker, so that cost came on a little faster than I thought.

And then we’re in the process of shifting some of the 21-market resources to other locations and other projects for retail, and that activity generated some costs and all happened a little bit faster than I thought, which ultimately is a good thing. I mean, that’s good news that it’s happening quickly.

What types of things were moved offshore?

Probably about a dozen functions have been moved offshore to some degree or another. A lot of public filings research and updating our [inaudible] databases have been moved offshore, Web research on [Tennyson] properties. We’ve begun successfully calling leads for space availability on for sale properties out of the Philippines. We are using both India and the Philippines to research the locations of the retailers. This is a pattern where if we continue to do this, then we can control headcount growth in the U.S. for quite some time. So we like where it’s going, and there’s a little bit of noise as you’re doing the transition.

Thank you. And again, you expect to ramp back up to around 68% by the fourth quarter.

Yeah. I think we’re going to see, on the back half, margins in the 66 to 68 [percent] range, and I think generally on the climb at that point as we stabilize the research effort and continue to grow the top line.

Thank you. And I think you said the 21 new markets contributed around $1 million to revenue in the first quarter. What was the contribution in the fourth quarter?

I believe it was less than 2% of revenues, and the overall gross, sequentially, in the 21 new markets was around 50% from one quarter to the next, so as you would expect, we’re experiencing a fast ramp-up there, although it’s obviously still a small part of the entire company revenue.

Okay, good. And then last question. Since fourth quarter, you said on the call that you did not expect a contribution to revenue from the retail product in 2006. It sounded like you’re now saying that’s a potential source of upside. What changed between now and then?

No. I think on the last call, I also identified it as a source of upside. The point I made in the first call this year covering the fourth quarter was that my annual guidance, getting to the 18 to 22 percent or the $160 [million] range on revenue, in my model is not dependent on success with the retail sector, so I continue to think there is some upside, as Andy described, in that customer base. But as we also said on the last conference call, we don’t have one of those customers using the retail product yet. Therefore, it’s not in our guidance. And aside from that, John, the other opportunity in the existing platform of the 21-market expansion is so significant that I’m confident we can get these top-line numbers with sales force growth and productivity just on that platform.

Right. And I guess I lied, one more question on the retail product. Can you give us any sense of whether there have been indications of interest or pre-selling of that product, and can you also discuss --? I know there have been some debates internally of exactly how to price this thing. Is that starting to crystallize as you get ready to launch? Thank you very much.

There have been some clear expressions of pre-interest in the product, so we’ve had – and again, I’ve been doing sales for a while, so I don’t count pre-expressions of interest as a sale, but just to quote what we’re hearing, a number of the people that we’ve shown the product to, if we’d presented them with a contract, the salespeople felt they would have signed the contract. So that’s good.

On the pricing front, we have begun to crystallize that pricing. We’ll finalize that in the next week or two. For the owners, it is similar to our institutional pricing, which is somewhat similar to a Bloomberg terminal pricing scheme. For the retailers, it is based upon the number of stores they’ve got and the number of states they’re interested in buying, and also the store characteristics and size is obviously a – a little photo mat out-parceled booth in the parking lot of a shopping center is not the same as a Neiman Marcus in terms of store value, so the simple matrix of small, medium and large stores and how many stores they’ve got.

One of the things we’re doing in order to be able to, hopefully, put our product to the retailers a little bit quicker without going through an arduous approval process and going quite as far up the ladder, we’re going to enable these retailers to – again, completely hypothetically, suppose Walgreens had an interest at the real estate director level. If they were doing a lot of store openings in California, we’re going to enable them to buy California only for a very reasonable number, several thousand dollars per month, and that way they can get familiar with the product, we can begin to develop a relationship with them and then upsell them to a full national subscription.

So we’re going to – that’s all crystallizing, as you said, as we feel pretty comfortable where that’s all going. And we will be – to launch this at ICSC, we will then begin pursuing contracts at that point, and we’re anticipating a 30- to 60-day sales cycle from the ICSC point onward, and we are continuing to hold back on signing contracts until we’ve got the whole sales force trained, the contracts ready, the product ready. We don’t want to have a false start.

Your next question is from Brandon Dobell of Credit Suisse.

Hi. Thanks. Maybe, again, if you could talk a little bit about what you think the gross margin expectations should be. As we think about retail versus commercial, is there a big difference in the ongoing business model fallback? You described the commercial space as kind of having a per-building cost to bring in inventory and kind of an ongoing maintenance cost. Anything that’s different there between the products?

That’s a good question. I think that I’m confident that the retail will, over time, over the intermediate term, will behave with similarly very high margins, and just basically the simplest level of the business model is very much the same. Rather than having 100 brokers wander around some neighborhood in Minneapolis looking for retail stores, you’ve got CoStar with a [inaudible] doing it once and reselling it to those 100 brokers. So I believe it is a very high margin product, as well.

I think the one variable we don’t – can’t at this point have perfect clarity on is – if we were opening up a city like a Richmond, Virginia or a Hampton Roads – we’ve done that so many times, we have an idea what the payback period is on the investment and the time to profitability. We expect all the expansion markets to go profitable within 12 months. On the retail side, we’re not quite sure how fast the adoption will go compared to the investment in the properties, but at the end of the day, I don’t think people will really care 18 to 24 months from now if we’re profitable in that zone. We don’t know exactly – is it 12 months? Is it 18 months? Is it 24 months? Is it 9 months? But we do expect it to be a high margin product. I’d be surprised if it was not.

Okay. In a different direction here, [inaudible] characterize your system from a technology perspective -- how easy is it for your customers to customize it, to link things in, if you consider it real close or real open or somewhere in between? I’m just trying to get a feel for as people tend to [inaudible] technology, it seems they tend to want to have more flexibility or ability to do their own thing with some of these products. How do you guys address that issue?

Well, you have the ability to export a fair amount of this information, and we are doing a number of customized feeds out for customers. I believe NRB is doing at least half a dozen to a dozen customized data feeds. Like for instance, General Growth gets a data feed from us through our NRB subsidiary. We anticipate, as we launch this product, to continue doing this customized feeds to flow into these retailers’ models where they can’t have an application software layer over the data.

But the product is – our priority is on reaching the mass market first and foremost so we can act as a clearinghouse, and there it won’t be highly customizable. They’ll have export capabilities, but it won’t be – it’s more of a – moves more towards the ATM software interface and trying to keep it as simple as possible for the mass market use.

Okay. And then, finally, for Frank, in your commentary about [inaudible] in the back half of the year, you said you expect minimal growth. Would that be relative to the first half of this year or the second half of last year [inaudible]?

I think what we’re going to see – what I was trying to do, Brandon, is contrast some of the volatility in the cost structure we’re going to have for Q2 with the product launch and the ICSC and that kind of thing with a return to our more typical cost structure model, which would have some escalations for, for example, growth in the sales force headcount and would otherwise have salary escalations and that kind of thing. But I think what I generally see in the back half is more of a return to something closer to what we think is the long-term cost structure or cost model of the business. In other words, generally pretty stable.

Okay, that makes sense. Thanks, guys.

Thank you.

Your next question is from Dalton Chandler, Needham & Company.

Good morning.

Hey, Dalton.

Hey, Dalton.

I wanted to ask a question about the state of, I guess, verification in the new retail product. It occurred to me, when you were going through your Movie Gallery example, that there – potentially, there are a lot of Movie Gallery stores that aren’t yet in your database. Is that something that you would confirm with these retailers? Because it’d be useful to know, in doing that analysis, there are 200 more stores out there somewhere or something along those lines.

Good question, Dalton. The technical answer that two-thirds of the [inaudible], but the – we actually have in our database – we believe we actually have 99% of the Movie Gallery stores already in our database. The example I gave was – the distinction is have we site-inspected that property, and do we have a photograph for that property? So I was really not – I was looking at the properties we’ve got, which are distinct for the Movie Gallerys, so actually I could have taken that map and I could have added back the other 200 Movie Gallerys that we haven’t yet put in a property specifically.

So even though we don’t have them in a property, we know where they are, and we can show them in a product. I was just doing an overly simple analysis there. Now, we do intend, using contractors over the next two to three years, to actually visit every single Movie Gallery, Exxon and the like in the United States, if they’re still called Movie Gallery then, or Netflix, so you will have them all in there. But right now we have a – we believe we have one of the more accurate sources out there, period, for where the Movie Gallerys are, where the Blockbusters and the like are.

We’ve developed a proprietary methodology to track that cost effectively, and we’re using a lot of offshore effort there. So there are people right now from the Philippines calling up Movie Gallery in Florence, Alabama saying, ‘I’m sorry, I can’t find your Movie Gallery. Where is it exactly?’

Okay. And then let me just ask, I guess, a cash flow question here. EBITDA for the quarter was about $4.7 million. You actually added a little more than $8 million in cash to the balance sheet. Can you talk about what the difference was there?

Yeah, Dalton. As I mention, a couple million or so came from the stock option expense. I mean, I’m sorry, a couple million came from the stock option proceeds, exercise in stock options. Additionally, if you think about EBITDA, I’ll give you another example. The equity compensation expense is included in EBITDA as a non-cash expense, so it’s actually generating cash flow that’s over and above EBITDA. Additionally, I think we had a change in the working capital accounts, but those are some of the big pieces.

Okay. And in your guidance, you talked about how you expect a sequential revenue growth to ramp up. Any reason to think that it wouldn’t continue into ’07 at the rate you exit ’06?

In terms of ongoing --?

Yeah, the ongoing sequential growth.

There’s no reason to think that it would not be able to continue. Obviously, we haven’t talked about ’07, but I think the growth rate can ramp up for a number of reasons, and I think could be sustained at a higher level for the intermediate term.

Okay, so 7% growth for ’07.

Did I say that?

All right. Thanks, guys.

Your next question is from Jim Wilson, JMP Securities.

Good morning, Jim.

Thanks. Good morning, guys. Andy, could you talk a little bit about your thoughts on, as you’re talking with retailers, where the retail product’s price structure, structure of – whether it’s contracts, or just subscription base, or whether it’ll be a variety of different ways you might negotiate a deal you give a retailer?

Well, we’re focusing initially on the top maybe 750 retailers, and we would like to do business with them only on annual or multi-year contracts [inaudible] continue that 95% subscription revenue base. At this point, and it could change, the pricing for the smallest retailers we’re going to really be focusing initially on the – somewhere around the average contracts that we have today, and that’s $12,000 anually for a single city or state working on up to $750,000 annually for a bigger retailer.

And again, for those bigger retailers for whom we are a completely new technology, a completely new system, a whole new way of thinking, we have a path that they can take to step up to that contract number by trying us out in a state. And very often these retailers will divide the country up into regions or states where they have specific real estate managers in each of those states so they could empower one team that, say, handles Texas or California or Florida with our product and see if that team doesn’t outperform the other teams. And then we will not forget to call them up very regularly and say, ‘Don’t you need the whole country?’

Okay. So that kind of central contract you would expect to announce as soon as maybe summer or whenever it might be.

Correct.

Maybe sort of in that kind of structure.

Well, what might happen is you might see some announcements of some decent-size contracts that involve major retailers buying a state or two, and possibly some owner contracts being announced, that are not going to be the $750,000 numbers – they’ll be much smaller numbers. And then the bigger value contracts would probably come late summer, early fall. But also, we’re already in the proof point because yesterday blew me away. I’ve never seen anything like yesterday. I’ve never seen seven companies that have been using a competitor for several years all switch in one day. There’s your first broker announcement.

Okay, good. That makes a lot of sense. Thank you.

The next question is from [Peter Hubard from Introv Capital].

Hi, guys. Thanks for taking the call. I just want to drill down a little bit on the cost of the retail product. You said $750,000 was capitalized in the quarter. How much was spent? And just as a follow up, how much do you think you’ll be spending going forward, and what’s the total cost of the project?

If you go back to our last conference call, we identified approximately $12 million in operating expenses that were going through the 2006 operating statement, and I guess – keep in mind that in an organization where everything is very focused on retail right now, it’s somewhat hard to identify every last cost that’s going into it. But if you take people that we know and can point to those that are working solely on the retail project, for example, we think it’s about $12 million in 2006. I don’t want to try to pull apart the P&L for the quarter and get into what’s retail and what’s not, but the principal point, and I think what your question is relating to, is that there are clearly millions of dollars quarterly or in 2006 moving through this P&L for a product not yet released and which has no revenues associated with it.

What do you think CapEx for the quarter will be?

Last quarter, we gave guidance on CapEx for 2006 at $12 to $15 million for the year. That was actually quite low for Q1 of 2006, but I think it’s going to ramp up pretty dramatically. And of that $12 to $15 [million], probably something in the $8 to $10 [million] range relates to the retail project during 2006.

Thank you very much, guys.

Thanks.

Your next question is from Brandt Sakakeeny of Deutsche Bank.

Hi, guys. It’s Chris for Brandt.

Hey, Chris.

Hey, Chris.

Let’s see, just looking back. You cited, Andy, two really good months in the quarter, but I look back at the core subscription revenue growth from the fourth quarter – I think it was 5.2%, and this quarter it was 4.8%, so I was just wondering [inaudible] could reconcile that.

Sure. The actual difference, again, between the two was maybe $40,000 of revenue, so it’s fairly small numbers between the – it was basically flat. Right now, our sales force is traveling all over the country, meeting with retailers, retail owners, doing a lot of pre-work for ICSC, and attending training classes for ICSC, and really ramping up for that effort, so while we’re continuing to put up some good sales numbers, our eye is really now focused on the second quarter and the third quarter and this opportunity. So we are running the business for the year, not for the month.

Okay. And then as a follow up, have you thought at all about any different metrics that you’ll release on a quarterly basis for the retail or possibly separating those revenues out going forward?

I’ll take a shot at it, and then I’ll let Frank give you the ultimate answer. I think there will be some ability to measure specific retailers who are a new segment to us and to talk about that. In situations like owners and brokerage firms, it will be difficult to identify was it the hundreds of thousands of office buildings that made them buy, or was it the hundreds of thousands of retail properties? So yesterday’s example of Milwaukee, it was absolutely some indefinable combination of the two databases that led them all to buy, and so we won’t be able to really break that out. But we will be able to break out things like CVS and Walgreens and the like.

There was one client that signed up yesterday in Milwaukee, a brokerage firm, that only does retail. We would never have expected them to buy our product prior, so that – buy that’ll be difficult to track.

Would you break it out going forward, Frank?

I agree with what Andy said, Chris.

Someone take a note.

Yeah. It’s a rare agreement. I think that when I look at the revenue model and the way this is going to proceed, I think one way to think of it is that the retail launch is really more CoStar Property. It’s essentially covering retail properties under the CoStar Property umbrella. And as Andy described, when we move forward, it’s going to be very difficult to pull apart a lot of these sales and determine was that really a retail sale. But I think what – I like, though, what Andy said. What I think is going to be very meaningful, and some of the comments I’ve made relate to, are the specific sales into the retail sector, because that is, obviously, where we think there’s a huge incremental marketplace for this.

I’m good.

Thank you.

Thank you.

Your final question is from [Michael Libberd, Darron Capital].

Good morning – I guess good afternoon, guys. Andy, first of all, I wanted to say thanks a lot for that demonstration. I thought it was great and really, really helpful.

Thank you.

Most of my questions have been answers, so I have just a couple of clarifications. Frank, so with respect to your EBITDA guidance, if I wanted to add back that compensation, I would take the – I think it was $21 to $25 million of EBITDA and add back the $5 to $5 [million], so the potential high end of that range might be $31 million of EBITDA in ’06?

If you’re looking at EBITDA and excluding the equity compensation. As I was saying, the equity compensation – that initially is part of EBITDA, so I think you’re correct on that.

Okay. If I was adjusting it for that, I would add it back.

Yeah. I want to be careful about what I’m telling you, because EBITDA is EBITDA. But yeah, if you look at EBITDA and back off that equity compensation, which I’ve given guidance on, it’d be $5 to $6 [million] for the year, and then you’d be up in that higher range.

Okay. And when you report core U.S. subscription business and the growth there, are you including or excluding the 21 new markets.

That does include the 21 markets.

It does include.

Yeah. The 21 markets are part of the core. That core is U.S. base subscription revenue, so that is really the most critical part of the revenue base and the part that we’re always focusing on the most.

Okay. And Andy, at one point it sounded like you were saying that we were not yet selling the retail product, but then I guess when you talked about the Milwaukee brokers, it certainly sounds like we’ve made some sales of our retail product. Is that fair?

Those would be pre-sales. None of those Milwaukee contracts have been installed, and generally the two- to three-week delay in installing them are setting up the trainings and getting everyone on board, and by that time, I will probably be installing up data of the retail product for that retailer, and then they’ll all have it within a month or so. We’ve been trying to keep the sales force on the – ‘Steady, steady, steady – don’t fire until you see the whites of their eyes.’

That would be an exception where they’re selling brokerage firms, and we did that with the expansion markets. And the sales manager, the VP of sales, Chris Tully, has been reminding the sales force regularly, ‘Please do not go out and demo retailers,’ and every once in a while an email will pop up – ‘I need pricing for a retailer I just demo'd.’ So we’re trying to keep it all at bay and have the product release not leak out.

I understand. But with respect to these brokers in Milwaukee, we did have terms that we presented them, either for the whole product including retail, or even the one broker you mentioned that was really exclusively a retail broker, we at least had pricing to present them, and I assume they signed a contract.

That is correct.

All right. Thank you.

They will be receiving what you saw today.

Okay.

I believe that is the last question we have in the queue, so we will wind up today’s earnings call. Thank you very much for joining us. For anyone who had trouble using WebEx and seeing the demo, I apologize. Again, we’d be happy to show you the product through our sales force, or at ICSC, or through our online demo on our website that should be up there in the next several weeks. Thank you very much for joining us, and we look forward to talking to you for the second quarter earnings call.

Thank you. This concludes today’s CoStar Group first quarter 2006 conference call and Web demonstration. You may now disconnect.