CoStar Group Inc (CSGP) 2007 Q1 法說會逐字稿

Good morning. [Operator Instructions] At this time I would like to welcome everyone to the CoStar Group's Quarter One 2007 Earnings Results and Financial Outlook.

[Operator Instructions]

I will now turn the call over to Ms. Audra Capas, Vice President of Communications.

Thank you and good morning. I'm Audra Capas, Vice President of Communications for CoStar and I'd like to welcome you to our First Quarter 2007 Conference Call.

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 2007 press release and in CoStar's filings with the SEC, including it's Form 10-K for the period ending December 31, 2007 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.

Today's conference call is also being broadcast live over the Internet at www.costar.com/corporate/investor/. An audio replay will be available two hours after the live call concludes through midnight on May 4, 2007. The replay telephone number is 800-642-1687 within the United States, or 706-645-9291 outside the U.S. Refer to conference ID 4748092. The replay will also be available over the Internet at www.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 Audra. Welcome everyone to our First Quarter 2007 Conference Call. I'm pleased to report another strong quarter. We made significant investments in a number of important strategic initiatives, showed accelerating revenue growth, and maintained earnings.

Revenues for the first quarter of 2007 were $44.8 million, an increase of 20% over $37.3 million in the first quarter of 2006. Revenues increased 6.5% first quarter 2007 over fourth quarter of 2006.

Net income for the first quarter of 2007 was $1.8 million, down 2% from $1.9 million in the first quarter of 2006 due to these strategic investments.

EBITDA was $5 million in the first quarter of 2007, up 8% from $4.7 million in the first quarter of 2006.

Revenues attributable to our European operations for the first quarter of 2007 were $4.7 million, an increase of 63% over $2.9 million for the first quarter of 2006.

Frank Carchedi, our CFO, will address first quarter 2007 results in more detail later in the call. Before he does I will update you on significant developments here at CoStar Group.

Our investments in research have resulted in solid listings growth. During the quarter we invested heavily in increased research activities in order to expand the comprehensiveness of our retail product offering, significantly expand our U.S. geographical coverage, and enhance our U.K. product offering.

These investments include increased field research personnel and vehicles, additional researchers, and two new research centers. We have had excellent preliminary results from these investments.

In yesterday's earnings release the Company reported that the first quarter 2007 U.S. listing count was 623,000 listings, representing a 79% year-over-year increase. I'd like to clarify the listing counts and listing growth rates in that release.

The listing count as of the end of the first quarter of 2007 was actually higher at 724,000 listings, representing a 49% first quarter 2007 over first quarter of 2006 rate of growth. The previously reported total and component listing counts in growth rates were for year-end 2006, compared to year-end 2005 rather than for first quarter 2007 over first quarter of 2006.

We had 260,000 for sale listings in the U.S. at the end of the first quarter of 2007 compared to 143,000 listings at the end of first quarter of 2006. This represents a Q1 '07 over Q1 '06 growth rate of 82%.

The aggregate value of properties offered for sale through our information products doubled increasing by almost a $0.75 trillion dollars Q1 '07 over Q1 '06. The aggregate value of properties for sale is now $468 billion and is approaching $0.5 trillion in value. That'd be larger than the GDP of 166 countries and larger than Exxon's revenue.

The Company had 294,000 retail listings at the end of the first quarter 2007, compared to 155,000 listings at the end of the first quarter 2006. This represents a Q1 '07 over Q1 '06 growth rate of 90%.

We believe that these very impressive growth results are a direct result of our successful investment in additional research personnel and equipment over the past two quarters. We expect even greater listings growth during the remainder of 2007 as a result of a national sweepstakes the Company is launching early next month. Participants will be eligible to win significant prizes based on new listings or sales comparables they submit for verification, free of charge, to CoStar throughout the promotion period.

We believe that these investments will result in increased sales of our services in new U.S. geographies, additional retail sales of CoStar Property Professional, and accelerated growth rates in Europe.

In addition, we believe that these investments will strengthen the Company's leadership position within the commercial real estate information industry globally.

Our greatest listings growth year-over-year and in the first quarter occurred in the new geographies throughout the U.S. for which we have not historically offered our flagship Property Professional product. We now have 167,000 listings in these new geographies, up 155% from 66,000 at the end of the first quarter of 2006.

While we are obviously incurring significant expenses in these geographies, we do not expect to have material revenues from these geographies until we launch our services offerings there later this year. The Company expects to release Property Professional for sale in 81 U.S. cities or metro Core Based Statistical Areas, CBSAs, during the third and fourth quarters of '07. At that time, the Company believes it will begin generating revenues to offset the expenses incurred in these markets.

In line with past experience, the Company believes that these markets can become profitable, in aggregate, within 12 to 18 months of product release.

For consistency and clarity in reporting, CoStar will now use metropolitan and micropolitan statistical areas to measure its geographical coverage. Defined by the U.S. Office of Management and Budget for use by federal agencies in collecting, calculating, and publishing federal statistics, these geographic entities are more commonly known as Core Based Statistical Areas or CBSAs. They are county based and represent approximately 93% of the U.S. population. Metropolitan CBSAs include at least one urbanized area, 50,000 or more in population, and account for approximately 83% of the CBSA population or 77% of the entire United States.

Historically, CoStar has defined its geographical coverage by a proprietary group of counties known as commercial real estate markets. CoStar's traditional market nomenclature will remain, however it is now built around standardized CBSAs.

In addition to clarifying our investor reporting, CoStar's CBSA-based markets provide our customers with the ability to synchronize key factors in retail decisions such as demographic and housing data with CoStar's retail property information.

Although CBSAs are formed around high degrees of social and economic integration, they vary greatly in population size. Because of this some CBSAs represent more than one current CoStar market and others combine to form one CoStar market.

For example, the San Francisco/Oakland/Fremont CBSA, population 4.1 million, is actually currently two separate CoStar markets -- the San Francisco peninsula and the East Bay. The opposite is true in our Greenville/Spartanburg, South Carolina market. This is actually comprised of two CBSAs -- Greensville, population 600,000, and Spartanburg, population 300,000.

The 81 new CBSAs include cities such as Buffalo, Albany, Rochester, Syracuse, New Orleans, Louisville, Fresno, Omaha, Albuquerque, Little Rock, Portland, Maine, Knoxville, and many others. These 81 new CBSAs will be in addition to the 121 CBSAs in which CoStar Property Professional is currently marketed.

The 121 CBSAs that CoStar currently covers have a combined population of 180 million people, which means that CoStar's products cover 60% of the U.S. population. 40 million people live in the 81 new CBSAs where CoStar expects to initiate coverage later this year.

These expected product releases will grow the number of CBSAs served by 67% and increase the percentage of U.S. population covered by CoStar products by 22% to 73% in total.

The Company believes that this expansion will contribute to future revenue growth for more than a decade.

Last May we successfully launched our retail real estate information product offering with approximately 155,000 retail listings at the retail real estate industry's major conference ICSE.

Our single greatest marketing initiative this year will be our strong presence next month at the 2007 ICSE Conference. We return this year with a robust client list of leading retailers, retail developers, and retail brokers.

More importantly, with more than 300,000 retail listings we will have nearly twice as many listings in our product as we did at last year's show. We believe that our success at significantly increasing the depth and breadth of our retail database will enable us to further drive sales of our new retail information offering.

Since launching our retail real estate information service in May of 2006, CoStar has signed 141 new retail related license agreements valued at more than $3.5 million annually with a growing who's who of leading retail and commercial industry players.

In the first quarter of 2007, the Company inked 23 new retail related deals with such major retailers and retail related owners, developers, and brokers as Chick-fil-A, Dippin' Dots, General Growth Properties and Staubach Retail.

As we have announced previously, we initiated significant investment to grow our field sales force in order to better capture the significant revenue growth potential we believe our business has. I believe the primary regulator of sequential quarterly revenue growth is the size of our sales force, not the size of our market opportunity.

The size of our field sales force remained largely constant at an average of 74 quota carrying U.S. subscription reps in 2005, and 70 of these field U.S. subscription reps on average for the first half of 2006.

Given the massive opportunity the Company has, management set a goal of more than doubling the size of our field sales force by mid-2007 taking the number to 160 quota carrying U.S. subscription reps. Many of these sales reps will be placed in regions of the country that currently have no local sales coverage.

We have already made significant progress towards this goal. We now have 113 quota carrying and trained U.S. subscription reps in production, for an increase of 61% over the average headcount in the first quarter of 2006.

In addition, we have 17 more reps in training; another 18 reps have accepted job offers to join CoStar Group next Monday.

With these results, we are well positioned to reach our goal of more than doubling the sales force by mid-2007.

This ambitious growth goal represents a significant investment in and cost of recruiting, training, travel, capital expenditures and cycle of time. The typical account rep reaches 60% of normal productivity within six months of their hire date. We have varying expectations of productivity from our reps based upon the segment they focus on and the market they sell into. We are seeing recent hires contributing meaningfully to our sales production.

Once we have achieved our goal of doubling the field sales force, we will evaluate the results and potentially continue the growth in sales headcount.

Despite the disruption caused by this hiring surge, we showed good sales results in the first quarter of 2007. The number of new U.S. contracts increased 19% from 451 in Q1 2006 to 535 in Q1 2007. The U.S. subscription contract bookings were $6.7 million, almost level with the $6.8 million books in the fourth quarter of 2006, and up 31% from the $5.1 million booked in the third quarter of 2006.

Overall, the combined U.S. and U.K. sales teams set another record level in March breaking the record recently set in December 2006.

Our renewal rate remained high at 92.4% for the first quarter of 2007.

The average new contract value increased a dramatic 38% from $8,242 in Q1 2006, to $11,410 in Q1 2007.

Typically our new national access bookings with institutional buyers like [inaudible], pension funds, CMVS investors and the like, have significantly higher price points than our local market brokerage and appraiser price points. The number of these institutional purchases has continued to grow.

In addition, most of the new retail clients we are signing up are signing up for more services at a much higher price point than our traditional brokerage clients.

The average retail contract value is 244% of our average 2006 booking.

The many new salespeople we are hiring are generally barred from selling to mid-sized and larger firms until they have six months or more of experience. As a result, new salespeople have much lower average new contract values in their first year. So, while we are adding so many new salespeople, the overall average contract value will drop for a period of time.

Accordingly, the average new contract value decreased 5% from Q1 2006 to Q1 2007. And that's pretty much a-- you've got the retail and institutional contract values going up and the new salespeople cutting their teeth on smaller new brokerage firms.

During the first quarter of 2007, CoStar announced that it's wholly-owned U.K. subsidiary, CoStar Limited, acquired Property Investment Exchange Limited, Propex, for approximately $22 million in cash and stock.

Propex provides an online database of retail office and industrial properties that investment sale brokers use to introduce institutional grade investment properties to potential buyers in the U.K., using an electronic exchange platform.

A majority of the U.K.'s investment funds, institutions, property companies, and brokers, including the top 20 brokerage firms, rely on Propex as the U.K.'s central exchange for a wide variety of property investment transactions each year.

In addition, the U.K. market for commercial property for sale information Propex's product, Shopproperty, clearly leads the U.K. market for retail information solution. We believe that their database of 15,000 retail availabilities is the best in the U.K. and will provide the perfect starting point to launch the CoStar retail product in the U.K.

Founded in 1999, Propex has approximately $5 million in annual revenues, 500 subscribers and many more advertising customers.

Since our acquisition of U.K. based Focus in 2003, CoStar has operated in the U.K. under the Focus name. With our recent acquisition of Propex, Shopproperty, Screendata, SPN and Grecam, we have now introduced the CoStar group as the virtual brand encompassing all these companies in Europe.

The strategy appears to be working well as prospects and customers now see clear consolidation in what had been a very fragmented information market in the United Kingdom.

CoStar intends to invest significant system resources in 2007 and 2008, to integrate Focus and Propex into a common software platform with the U.S. product offerings.

CoStar intends to continuously upgrade the existing Focus, Propex, Grecam, Shopproperty and SPN software applications while we're simultaneously offering the integrated international platform.

In addition, CoStar intends to double the size of the U.K. research operation to ensure the same level of comprehensive coverage in the U.K. as we offer in the U.S.

With the integration of Propex personnel, and the addition of additional researchers, we anticipate U.K. headcount will climb by 80, to approximately 205 personnel by year-end 2007.

Our many global customers have told us that they would find a standardized international platform extremely valuable and that is exactly what we're pursuing.

We also believe that these acquisitions and the integration investment will consolidate and solidify CoStar's position as the leading commercial real estate information provider in the U.K.

During the first quarter of 2007, CoStar's operations in the U.K. and France represented approximately 10.4% of total CoStar revenue, and are expected to exceed 11% of the total revenues for 2007.

CoStar anticipates integrating its U.S., U.K., and French information systems will require an incremental investment of approximate $4 million operating cost during 2007 as we stated in earlier conference calls so that's not a new additional number -- the year-end conference call, year-end 2006 conference call.

Before we take questions, I'd like to turn the call over to Frank Carchedi and he'll talk a little bit more about the first quarter 2007 results.

Thank you Andy. Today I'm going to focus on the first quarter of 2007 results compared sequentially to the fourth quarter of 2006 and our outlook for the second quarter of 2007.

Total revenues grew sequentially by 6.5% overall from Q4 of 2006 to Q1 of 2007, increasing from $42.1 million to $44.8 million.

Organic revenue increased by 4.5% from $42.1 million in Q4 of 2006, to $43.9 million in Q1 of 2007.

Inorganic revenue increased from $45,000 in Q4 of 2006, to $904,000 in Q1 of 2007, as a result of the Grecam acquisition in December 2006, and the Propex acquisition in February 2007.

Core U.S. subscription revenue increased by 4.7% from Q4 of 2006 to Q1 of 2007. This represents a meaningful acceleration of the core growth rate, which was 3.9% last quarter. The acceleration is the result of sales force size and productivity, and relates back to the strong Q4 contract booking result that we discussed on the last call.

Total subscription revenues for the Company continue to account for approximately 95% of revenues during Q1 of 2007, with our international operations contributing 10.4% of total revenues.

Gross margin increased by $1.5 million from $25.5 million in Q4 to $27 million in Q1 on a $2.7 million increase in revenues.

Margin percentages remained relatively flat from 60.6% in Q4 to 60.2% in Q1 as we completed the majority of the cost ramp-up for research expansion and also added costs for acquired companies.

Costs of goods sold increased by approximately $400,000 due to the acquisitions.

Overall operating expenses increased by $4.1 million from $21.5 million in Q4 to $25.6 million in Q1, principally [technical difficulty] marketing area as a result of sales force expansion and training, increased sales commissions on higher sales production, and our annual sales training conference.

Acquisitions contributed approximately $800,000 to operating expenses, of which approximately $350,000 is in depreciation and purchase amortization.

As a result of our significant investment in expanded operations, as well as sales force expansion, EBITDA decreased $2.2 million from $7.2 million in Q4 to $5 million in Q1. GAAP-based net income decreased $1.7 million to $1.8 million or $0.09 per share in Q1 from $3.5 million or $0.18 per share in Q4.

This quarter we began to show a segment presentation for the U.S. and international revenue in EBITDA. We expect that this presentation will give you better visibility into expected expansion of U.S. margins and investment in international operations as we proceed through the year.

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 Q1 of 2007 were approximately $2.6 million -- within our expected range for the quarter. We closed the quarter with approximately $150 million in cash, cash equivalents, and short-term investments; a decrease of $7.8 million over the beginning of 2007. This includes $15.5 million in cash that was used for the Propex acquisition during the quarter, with offsets from operating cash flow and additional $376,000 generated through proceeds from stock option exercises for approximately 30,000-- 36,000 shares during the first quarter.

Now I'll discuss the outlook for the second quarter of 2007. As indicated in our press release, we expect overall sequential growth in the 5% to 6% range, including organic revenue growth of approximately 3.5% to 5%.

We continue to believe there is significant upside revenue growth potential. This is largely dependent on the successful growth of sales force size and productivity, particularly in view of opportunities resulting from momentum in established markets, ramp-up of newly released markets, the retail offering, our national expansion, and new international opportunities.

In the second quarter of 2007, we expect fully diluted net income per share of approximately $0.02 to $0.06. This result is lower sequentially from Q1, principally due to the continued sales force expansion that Andy described and the incremental expense for the annual ICSE trade show in May.

By the third quarter of 2007 we expect to return to earnings per share that are higher than those reported in the first quarter of 2007, and we continue to expect net income per share of $0.50 to $0.60 for 2007.

Implicit in this guidance is our expectation for significant earnings leverage as we move past the significant cost ramp-up for our current expansion.

Finally, we expect capital expenditures for the second quarter of approximately $4 million including investment of $1 to $2 million for international expansion.

We continue to expect capital expenditures for 2007 of approximately $12 million.

In conclusion, revenue growth remains solid and we expect growing margins in the core U.S. business during the second half of 2007, while we continue to invest aggressively in the expansion of U.S. building coverage, operations, and selling capability.

Additionally, we expect significant investment ramp-up in our international operations during the remainder of 2007, which will position those operations for long-term growth.

We look forward to reporting our progress to you. And with that I'll open the call for questions.

[Operator Instructions.] Jennifer Pinnick with Morgan Stanley.

Good morning. The margin in the U.S. expanded nicely year-over-year from 13.6% to 14.5%. Could you share with us any type of goal you have for the end of the year or some kind of long-term objective.

Well, Jennifer, for a long time we talked about 30% target margins in the business and we continue to have that as a long term goal. That 30% assumes that we will continue to reinvest in the business at some level going forward.

And if you think about where we are today, and you're looking at that segment data and those U.S. margins, as both Andy and I described, considerable investments-- considerable costs running through the P&L currently some of which, for example, the national expansion, have virtually no revenue associated with them. So they are very dilutive on that margin number.

So in one sense, as we've mentioned on past calls, if you consider these investment levels we believe that the core U.S. business is actually at or at least approaching the 30% zone already today.

Following up on that then, the 81 new cities that you'll be rolling out, all of those up front investments have been completed so there should be no incremental investments there, just the incremental revenues from the rollout.

That's largely correct. There could be specific marketing costs associated with opening those markets. They would be as part of the current outlook we've got for expense structure for the year.

Some of the new sales people we anticipate hiring will be going out into some of those new market areas and there could be some increased travel. But all that is relatively noise. So it's no significant larger incremental investment.

And do you have a sense for when you'll be EBITDA positive internationally?

Well, we think that we believe that we will continue to be investing through this year and as we exit '07. The majority of that investment and, in fact the majority of the operation is in the U.K., and we would expect to be turning that investment positive somewhere in the back half of '08.

Just one last question before I turn it over. You mentioned in the call that putting the systems on a similar platform to the U.S. is extremely valuable to your customers. Can you just expand on the value of these investments that you're making in the U.K?

Sure. If I am a-- as you may well know, a significant percentage, maybe as much as half of the capital flows going into institutional grade properties are cross border. So it's typical that when you're talking to an active developer of major properties in the U.S. their partner's going to be British or from Asia or whatever. So there's a lot of cross border investments.

So if I'm analyzing investment from United States into London, I can't really get apples to apples vacancy rates for London to compare against New York City. And by standardizing our software platforms and our methodology between the two countries, the cross border investor could actually get apples to apples numbers and analytics.

In addition, if I'm a brokerage operation or a retail operation, it would be very useful if I could develop in-house software systems that integrated with my commercial property information systems that were the same from country to country rather than writing a new system in each country which is what they currently do.

So it gives management of the CBs and Cushman and Wakefield's and the JLL's of the world much greater visibility of their brokerage operations if they could have a consistent backend data supply.

Thank you.

Kyle Evans with Stephens.

Good morning guys. You added 50 new salespeople in the quarter, almost a 40% increase in a single quarter, and you've got another 18 that have accepted already. Can you help us understand how the hiring and training process played out intraquarter across the three months so we can understand better how these new salary expenses and new revenues from these new salespeople might roll into the income statement going forward?

In terms of people who were hired in each month during the quarter?

Yes.

I wouldn't have a month-by-month breakdown with me. I would think it would be fairly balance, probably skewed at the beginning of the quarter.

Yes, we did have a big surge at the beginning of Q1 as people are moving through training and we've got another kind of a surge happening in Q2.

We took a breather of new hires in late March, early April.

Kyle Evans; Okay. Is there any of that hiring process in HR expenses that are in the G&A line or should we really just look at the selling and marketing line for those?

I think it's principally in selling and marketing. There is obviously some G&A infrastructure and that gets in there but I think it's all the training logistics, travel that's associated with those individuals, any obviously salaries, commissions, benefits, that's all up in selling and marketing.

Yes, I think Andy alluded in the last call to end markets for you guys that could support maybe a sales force at some future data of 300 people, roughly double the current goal of 160. What are some of the business milestones that we should be looking for that might trigger you to do another sales force expansion in the future?

A very successful first wave expansion could lead to a successful second wave expansion. I'm firmly convinced that-- when I look at the number of prospects we have, the size of the opportunity, the number of people we could go out there and show our products to, and then I look at the number of trained salespeople we've got, the sales force is simply small relative to the size of opportunity.

And so if we reach this goal that we've set for 2007, and they are producing and we can show a strong [IRR] and we can demonstrate that to the investors, we will continue to grow the organization and I would not be surprised if it didn't reach the 300 mark.

But it would be based upon demonstrable success with the first effort.

Okay, last question and I'll get back in queue. You talked a little bit about the $4 million international integration expense. Did any of that hit in the first quarter of the year and is the planned headcount ramp that you talked about in the U.K., is any of that in that $ 4 million or is that incremental expense?

The headcount ramp is the bulk of the $4 million incremental. And when I say $4 million what I'm thinking about is the apples to apples EBITDA produced internationally. So one of the things I would point to is that segment data chart, there's a note about the corporate allocations, the corporate allocations are not part of that. I'm just talking about end market costs going up by about $4 million for calendar '07.

So what's really happening is the U.K. was profitable, had margins on a direct basis in '06, and will go to net investment in '07.

And I spent most of the first quarter in a hotel room in London and that has to be a significant piece of the $4 million, if you've ever ordered breakfast in a hotel in London and see what that costs.

I have. Okay, thanks guys.

John Neff with William Blair.

Hey guys, good morning. I was just wondering, Andy in particular, if you could comment at all on the backdrop into the commercial real estate markets. It looked like from some numbers I had seen absorption still very positive in the first quarter but significantly less though than it has been in prior quarters.

I think the markets are-- despite all the noise we're hearing in the residential side of the marketplace, I think the commercial real estate markets, the fundamentals, appear to be very healthy. So, vacancy rates are largely flat, there is construction activity and supply. There are different cycles occurring in different areas.

So the U.S., by any sort of historical standard, is showing across the board fairly strong fundamentals. The United Kingdom is showing very strong fundamentals.

And obviously there's some tension in the air about a perception that cap rates have gotten as good as they're going to get in some market areas in the United States, which could lead to a softening in the investment sale area.

But by and large this still would be defined as one of the good periods with no clear indication of any change from that.

Frank, I was wondering, could you just quickly remind us, again, of the reasons behind the 45% effective tax rate and what to expect going forward?

Yes. The 45% tax rate is the result of the mechanics of combining the U.K. operation and the U.S. operation. The U.K. operation-- the U.K has lower overall corporate tax rates and that's where we have a net investment occurring as you see from that segment data.

So what's happening is when you merge the two together the benefit from the U.K. is not of equivalent value to the U.S. corporate tax, so your blended rate is getting driven up by that effect. And that's going to continue as we continue to have a negative P&L result in the U.K. for this year.

Ultimately, the good news is that the U.K. has a lower overall tax rate so when that turns around that will drive the overall rate down.

And then, Andy, I was just wondering you talked in the press release a fair amount about listings growth preceding revenue growth. And can you just explain why that is the case? What is it about listings growth?

And then sort of related to that, you talked about the 81 new CBSAs, 12 to 18 months to profitability. And am I interpreting it the right way that that's an extension of the time it took, for example, in the 21 market expansion completed early last year where it took 3 to 6 months? So if you could explain that seeming change.

Okay. First of all, if I graph out-- if I take a 10-year timeframe for the Company and I plot out a building count or listing growth and then I look at revenue growth, basically listing and building count growth in our database is a leading indicator for revenue growth historically. And obviously that can change.

And it's sort of intuitively obvious that if I had-- if we didn't offer our products and services in Baltimore, Maryland, we would have no listings for Baltimore, Maryland. It takes us six months to a year to ramp-up thousands of listings for Baltimore, Maryland and then we're ready to-- we have expenses associated with that, once we get to thousands of listings for Baltimore, Maryland, then you could [technical difficulty] begin selling the product and about 9 months later you begin to see some sort of meaningful revenue coming in.

So, you have to go collect the listings first and then you go sell them and that's what's really happening here. When you see the listing growth grow then you've got additional sales opportunities, new people who are impacted your research collection that you can basically provide solutions to.

So it's always been a number that I watch very closely. And it also gives you a feeling-- in my mind it gives you a feeling of the sentiment of the marketplace. So the fact that the retail industry and the participants in the retail industry feel it's important to take time out of their day to give CoStar researchers details on their listings and offerings, I believe says that they think we're becoming a meaningful clearinghouse for the industry which would be some sort of predictor that there's a revenue opportunity for us.

And, in addition, I think that having twice as many listings is not an arithmetic increase in value to your database. It actually is more of an exponential factor I think. So I'm odd by the rate of listing growth we've seen in the last 12 to 18 months, it's far exceeded my expectations. Been checking, rechecking the numbers and it's real and I think they're quality listings. So we're looking forward to getting out in those markets and selling them. And the markets being retail, U.K., 81 new CBSAs in the United States.

Now, in terms of why we use a number of 12 to 18 months after release in the 81 markets that we expect to see those markets become positive in aggregate, is that we're just simply being conservative with blending our experience through the late 1990s, early 2000, 2004 with our experience of 21 markets. And since some of these markets could be smaller we just want to make sure we're giving ourselves a little bit of room there. But we'd like to exceed that goal of 12 to 18 months again or beat that goal.

Just so I am clear on the whole. I guess the reason why I'm focused on this notion of listings versus properties database, the listing growth obviously there's a more sort of active connotation than a property with that.

Right. We used to talk a lot about buildings and then over time a bit more focused on the listings because that's the most valuable element of our database for the majority of our customer base. It's the hardest to collect, it's the closest correlation to your cost structure ongoing, but it's the real-- it's the core value in your product.

And it's sort of also a vote from the industry on where they perceive there's a clearinghouse for their-- meeting their objectives.

And then just another quick question and I'll get back in queue. As the direct sales force is growing are there plans for increased specialization?

That is occurring. So the numbers we're reporting include the direct field sales force and it includes those who are assigned a specific territories as general, as geographic territories as generalists, and people who are not assigned a specific territories and are specialists in a particular segment like institutional sales or retail sales.

So, both numbers are growing so we're getting more people into the specialist roles and we'll continue that.

Thank you.

[Robert Riggs] of Credit Suisse.

Good morning; nice quarter. I was just hoping you could give us a breakdown looking at your research staff between the U.S., the U.K., and your offshore markets. And then are you still happy with your offshore efforts?

I can give a rough breakdown of-- just rough numbers. The research in the U.S. order of magnitude is probably about 800, in the U.K. it's about 80, and offshore resources are probably 100 to 150 individuals. Something that-- I mean that's probably not extremely precise but generally there.

And in terms of-- and those are order of magnitude and that U.S. researcher include 150-some in the field, be additional contractors, and then the remainder in research centers in White Marsh, Columbia, Bethesda, and San Diego.

We are still happy with a number of the functions we are performing offshore and continue to explore ways to get a little operating leverage by using offshore assets. But we are-- we did run an experiment with trying to send some of those relationship related research tasks off to the Philippines and it was not as effective.

So we do need to maintain a research presence in the United States because it's something of a sales marketing role. They actually get to know people, develop relationships, talk about the baseball game. And that one's difficult offshore.

Great. And then looking at your retail deals, could you just give a sense of how many deals you're doing per month and just kind of an average deal size. Just trying to get a sense of kind of the deals that you're seeing.

Well, the average deal size I believe is about $24,000 annually, $25,000 annually something like that. It's about 2.5 times the typical deal we see.

And that is a blend of-- and there's a pretty big range within there because there'll be some small retail brokers, an individual signing up for a $3000 offering, and there's others that are significantly larger than that that might be approaching $100,000 or so per year. But the average is significantly higher than our typical.

And we've been doing it would be about 10 or so per month. And again, our focus is beginning to turn to our single biggest marketing event of the year which is our presence at ICSC starting next month. And we would expect the number to reaccelerate a little bit as we get to ICSC.

And we're excited about that because last year we were rolling out something that was new, untested, there were no clients for it because we turned the system on the first day of the show. Now we're back there, we've seen a number of these people before, they saw us there last year, we doubled the number of listings in content, we've got customers, we've got customers using our product, some of them using our product very heavily. Our salespeople are now more experienced. So we'd like to ideally, and I'd be surprised if it didn't happen, I'd like to see the retail sales in the second quarter of this year and the third quarter of this year exceed the first quarter for sure.

Great, thank you.

Brandt Sakakeeny with Deutsch Bank.

Thanks. Hi Andy and Frank. Can you just give us the quarter end sales count both-- well, I guess, if possible segmented by U.K., tele and direct? If not, just the total headcount would be great.

Well, the total quota carrying, currently it would be 113 direct field sales force which is the more salient number. You'd have just under 10 or so in advertising sales, you'd have 15 or so in inbound or telesales, and you'd have about 22 in the United Kingdom.

Great. And can you also just comment on your thoughts on the quality? Have you been pleased? I mean it obviously looks like you've got a great pipeline of folks that you've hired and just give us some early signs as to your thoughts about the quality of the sales people.

We have actually been-- one of the things we did is we invested fairly heavily in the infrastructure to bring in these people and train them. So historically when we were adding salespeople we might have had a recruiter based in Bethesda, Maryland. This time we had four recruiters located around the United States and we have had no trouble filling each of the classes we want to fill. In fact, we held the recruiters back, slowed them down.

And the quality of the candidates they've brought in have been generally outstanding. In fact, we even brought in a national celebrity, TV celebrity, which I will not mention the show or the name. So it's been a good group. Obviously it's very challenging to train all those people and I don't know.

So it's been a good group and I anticipate that we'll be able to continue to bring in quality hires throughout the year.

Okay, great. And then Frank, do you have the impact of currency on the organic growth rates? Was it minor, major?

I would say relatively minor. We did see a spike up, obviously, in the pound just recently but during the first quarter I think it was relatively stable.

And, I guess, just in terms of the still conservative second quarter guidance, was that just a function of the accrual accounting on the organic growth given the listing growth? The low end you guys are still 3.5%, is that just being conservative?

Well, let me just talk about a couple of things there. First of all, the organic growth rate can be affected by-- we give that bookings number, obviously that's an indicator and a contributor, it's also affected by the bookings within the current quarter. Some of those months we haven't reached yet for example. There's also that 5% of revenues that can be volatile that's non-subscription-based.

So all those things can move the dial around. If you think about that 1.5% spread that I'm giving you, that's a pretty tiny number on $40 to $50 million in revenues. So it's a pretty tight range.

And the approach we've taken Brandt is I'm not going to sort of slip that 1.5% range up and down to basically tell you what I think the ideal number is, it's just we're working in that range until we think we're not in that range anymore and then we'll move it.

And the other thing to remember is that we have probably-- approximately 165,000 listings basically preinventoried and they won't really be monetized materially until third and fourth quarter this year with the release of the 81 markets. And that's probably-- that's easily several hundred thousand buildings that won't really be monetized till third and fourth quarter when the products are ready for prime time.

And final question just is on the sweepstakes. Could you just talk a little bit more about that and sort of goals and costs that you've outlined for that program? Thanks.

We think it's a really good thing, any time we've got another participant in the commercial real estate industry feeling it's important to spend time with our researchers, giving them listing information, deal information, and basically exchanging information back and forth.

We are meeting-- being introduced to for the first time an unprecedentally large number of new participants as we go into these new markets, as the field research vehicles bring back new leads. And we want to make that introduction a little more exciting, get people excited about what we're doing. And obviously we're doing this from a position of strength because we're exceeding any of our wildest listing goals from last year.

I actually was looking at the presentation I made to our sales force at last year's sales conference as to what our goal was on listing counts a year out or 14 months out and I think we had a set goal of 500,000, and, as you know, we're over 723,000.

So we're putting strength on top of strength and we think the sweepstakes will engage the imagination of a lot of these participants and further enhance the flow of information back and forth with our researchers.

And we ran a sweepstakes program in 2003 with a rollout of our web-based Property Professional and it shocked us how well that worked.

So we would be looking at focus groups a year after that sweepstakes and you'd be-- the moderator would be interviewing a broker who is easily earning $1 million a year and the broker would say that they would make a point of logging into CoStar each morning because they'd want a $25 visa card from CoStar Group for logging in. And so they would log in several times a day.

That means that if we can get them to call our researchers several times a day with information, it's about the cheapest research we can do.

So, hopefully it'll go smoothly and further accelerate our successes in the content side.

Thanks for the color on that. That's it.

[Peter Luber], private investor.

Good morning guys, thanks for taking the call. How much revenue in the first quarter came from the retail?

We're running about $3.5 million annually on the retail and retail-related contracts.

So it's probably just under $1 million.

And then going back to the size of the contract, you said they were around $25,000. What would the distribution be like on those? Are there some really big ones and of the small ones are they all in and around that size?

I wouldn't have in front of me for sure but I'd give you some guesstimate color that it's around-- the smallest could be about $3,000. I noticed with disdain that one of our retail specialists sold a one person shop a local product for like $3,500 a year. And then the bigger ones would be approaching $100,000 a year.

And then also it's important to remember that those-- what we're talking about there with retail, when we say that we have $3.5 million of retail revenue, those are accounts to us that we have little to no doubt in our mind that they've bought our product only because we now have retail. So when we look at a general growth, there are a-- they're a shopping center developer, period, full stop, end of story. They have no interest in office information or industrial information, so they only bought our product for retail so we call that a retail customer and that's part of the $3.5 a year.

In reality, a number of our customers like a C.B. Richard Ellis or a Cushman Wakefield were buying our product all along and they are thrilled with the retail component of our product. It is part of their service offering. They may be buying more of our product or renewing it because of the retail product, we're just not attributing it directly to retail.

So the actual-- if you're an economist with too much time on your hands, the actual revenue number would be more than $3.5 million.

Okay, thanks.

Jim Wilson, JMP Securities.

Thanks guys. Good morning. Sort of similar questions, could you talk about the new markets, all the upwards of 100-- newer markets you're moving into and obviously there's smaller cities to begin with and then look at London also, or the U.K., as far as what you think deals might look like in size or starting to look like. Obviously, you're up and running in some of them. And relative size and maybe how many seats that entails.

Sure. I think that some of our salespeople-- I think maybe we've actually-- some of our salespeople have moved ahead and sold some product in Knoxville, Tennessee before release. And we've actually delivered and I think the customers are happy.

But the typical customers we'd expect to see in those 81 CBCA,s there'd be a handful of the-- there are a couple of the 60 broker shops, the 70 broker shops which are very large for us. There are a lot of the five to 10 person brokerage shops, an awful lot of those, and then, as always, a huge base of the one to two person shops.

So in many ways a lot of them will look like a Richmond, Virginia, a lot of the first-- the 21 expansion markets. Some of them like Bangor Maine-- well, I don't want to beat on Bangor, Maine, but you would not find 60-person brokerage shops in Bangor, the biggest shop would probably be about 12 brokers and they might so some residential somewhere in the shop.

When you look at London, I would say that every one of the top-- I would guess that every one of the top 100 brokerage firms in London is buying a product from us. And many are buying multiple products from us with the five-- four or five brands we have in London.

What we'll be doing is we will be producing a much stronger product, a consolidated product in CoStar Private Professional, and we'll be going back to some of those big customers and giving them an option to get this more powerful product at a higher price point.

So typically a U.K. customer for one of our brands is paying a lot less than what they'd be paying for one of our premium services in the United States.

And in areas like Birmingham, Liverpool, Leeds, Newcastle, Edinburgh, there are a lot more large firms that we still haven't reached because we haven't had the intensity of research in those markets to really provide our clearinghouse solutions there.

And then obviously Paris, at this point, is wide open for us because the company we acquired there is very small. Even though it's 37 years old it's-- or 28 years old it's still relatively small.

So I guess presumably still think though given the mix of your existing market per average deal size is $10,000-ish annually but you got your New York's and LA's and big cities in there too that your average or deal size in new markets would have to be smaller than the existing average.

You've probably got a dozen dynamics going on there. You've got-- as we release these 81 CBSAs we're going to reach the point that we're covering the vast majority of commercial real estate markets in the United States, which I believe will significantly drive up the value of our products to institutional investors, CMBS folks, major banks and the like.

That will be putting pressure on the upside of our average contract value because those deals are the largest. So our top producing salesperson is selling -- typically doing $100,000 deals or typical deals are $100,000 deals. So there'll be more of that. In the 81 markets we'll be doing more of those mid to upper-sized brokerage deals.

But we also are getting traction at the bottom with this Listings Express product with the one and two person shops that will be pushing the average down. And then the retail is pushing the number up because those are generally bigger firms, new firms to us.

So we're taking the contracts if they're big, small or middle because they're all basically incremental margin.

Thanks.

John Neff with William Blair.

The 21 expansion, you've given historically Frank what the revenue there is, the 21 recent expansion markets. I was wondering if you had that.

I do. And I assume you would like that.

If you'd be so kind.

It's approximately $1.5 million for the quarter. We had about a 6.5% sequential growth rate so a little bit higher there than on the overall core.

And I think that what's happening on the top line there is that the 21 markets could grow faster on obviously a smaller base but it all ties in with the sales force expansion. I think the 21 markets suffer from lack of selling resources today and we're obviously trying to fix that problem.

But it's important to note that at that $1.5 million level we believe that the direct margins that that project's producing are probably in about the 20% to 30% range already. So, we have a long way to go in terms of revenue opportunity although we've made good strides here.

And I think the profitability is already starting to emerge and prove itself.

And I believe that the revenue from those 21 expansion markets will continue to grow for more than a decade.

And then the 81 new market launch, is that going to be-- because you've described it I think in the past as sort of doing it on a sort of a staggered basis or of the 21 new markets you didn't launch until all the research coverage was completely buttoned up. I think you talked about doing this next iteration in more of a staggered basis like once the listings are available you'll launch. Is that still the plan?

It is a little different. We have actually-- in order to support our retail customers and our CMLS product we have been moving listings from these 81 markets into our system for quite some period of time here. So we've been actually cycling listings in say Rochester, New York, now for at least six, seven, eight months.

So we're fairly deep into these 81 markets at this point and now we're in the phase where our field researchers are largely adding fully leased inactive properties as baseline inventory. And they've been operating on a deadline basis of September of '07. And in some market they may set a bottom threshold of an inactive building of 5000 square feet RBA; another market they might set a threshold of 10 or 15,000 bottom-line RBA.

But because of that we expect that a lot of these markets will come into play all in September/October of '07. And so it'll be a little faster than the 21-market expansion that way.

Great, thank you.

At this time there are no further questions.

Great. Well, we'd like to thank everyone for joining us on this first quarter 2007 conference call, and appreciate your patience in staying with us for an hour and 22 minutes. And look forward to updating you on our progress at the second quarter conference call.

That concludes today's conference, you may now disconnect.