CoStar Group Inc (CSGP) 2007 Q4 法說會逐字稿

Good morning. My name is Tasha and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter 2007 and year-end earnings announcement conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Trainor, you may begin your conference.

Thank you, Tasha. Good morning, everyone, and welcome to CoStar Group's fourth quarter and year-end 2007 conference call. Before I turn the call over to our CEO, Andrew Florance, let me state that certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar's fourth quarter press release and in CoStar's filings with the SEC, including its Form 10K for the year-ended December 31st, 2006, and its Form 10Q for the period ended September 30, 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.

As a reminder, today's conference call is also being broadcast live over the Internet at www.costar.com/corporate/investor. A replay will be available two hours after this call concludes and remain available through midnight, March 7th, 2008. To listen to the replay call 800-642-1687 within the United States, or 706-645-9291 outside the United States. Please refer to conference ID number 33444915. The replay will also be available on CoStar's website for a period of time following the call. Thank you for joining us. I will now turn the call over to Andy.

Thank you, Mr. Trainor. Welcome, everyone, to this fourth quarter and year-end 2007 conference call. I'm very pleased to report a very strong fourth quarter to close what was a very successful and important year for CoStar Group. As you know, last quarter we announced that we had largely finished an intensive multi-year period of investment associated with our effort to complete coverage of the United States commercial real estate market, and that we now have transitioned to the next phase of our business in which we expect to generate significant earnings growth from that investment. I think we are now really seeing those results. Net income increased 28.5% for the year to $16 million or $0.82 per diluted share compared to $12.4 million or $0.65 per diluted share in 2006. EBITDA for the year was $34 million, a 31.3% increase compared to EBITDA of $25.9 million in 2006. Revenues increased to $192.8 million, 21.3% more than our 2006 revenue of $158.9 million. As of December 31, 2007, we have $187.4 million in cash, cash equivalents assured from investments and we have no long-term debt. I believe the overall earnings picture for us going into 2008 is quite positive.

Demand for our information product and services remains strong. Our existing markets are slow -- showing continued consistent growth and our recent investments have added additional growth drivers. We continue to enjoy high renewal rates into the fourth quarter of 2007, and we saw continued growth in the subscriber base, which we believe when coupled with our flat or declining cost basis, points to the potential for growing our earnings for quite some time. We are continuing to project achieving a 30% EBITDA margin in the U.S. for the fourth quarter of 2008 and break even in our international operations by the end of 2008. Brian Radecki, our CFO, will address the fourth quarter and year-end 2007 results in more detail at the end of this call. Before he does I would like to talk about some of the trends and issues we're facing as a company, as well as some of the new products and initiatives we have planned, and how we expect it will contribute to growing earnings and revenues in 2008 and beyond.

U.S. subscription contract bookings in the fourth quarter 2007 were $5.9 million, up 4% from $5.6 million in the third quarter of 2007. Our renewal rate remained high for the fourth quarter at 91%, underscoring the usefulness of our information and its central role in our subscribers day to day mission critical activities. Of the cancellations we are seeing, 60% appear to be due to the client's inability to keep the account current, i.e., business failure. The company now has 131 U.S. subscription sales field reps, nine U.S. advertising reps, seven in-house reps and 22 U.K. sales reps, for a total of 169 quota carrying reps. I believe we now have one of the best sales forces we have ever had. The group has real potential. Because of the recent rapid hiring, we still have a relatively inexperienced sales force which we believe means that the group has yet to reach full productivity. We are not anticipating significant further growth in the sales force this year, so as the year progresses we expect to see the sales force reach maturity. We anticipate that as this happens we will return to the higher level of per salesperson productivity that we enjoyed prior to the rapid expansion of our sales force.

Newer salespeople tend to sell into smaller dollar accounts which drives the company's average new contract price down. CoStar enjoyed an especially robust subscriber growth in the fourth quarter, signing approximately 1,700 net new paying individual subscribers which we believe confirms the value of our research verified information service. We added 526 new subscribing firms in the U.S. in the fourth quarter of 2007, which is 17% more than the 451 we added in the fourth quarter of 2006. The average new contract value dropped 23% year-over-year from $12,003 in the fourth quarter of 2006 to $9,276 -- I'm sorry, $9,277 in the fourth quarter of 2007. Those numbers are an annual subscription basis.

Again this is likely due to the fact that we still have so many new sales reps who typically are assigning smaller first contracts. We expect this trend of a higher volume of lower dollar contracts to continue into the first two quarters of 2008, as the sales force targets hundreds of smaller companies that we believe have particular strategic value to CoStar. We added 2,214 new subscribing firms in the U.S. in 2007, which is a 21% increase over the 1,827 we added in 2006. We mentioned in the last earnings call that we were running a trial of CoStar services for CCIM members. When the trial was over, 133 firms decided to subscribe and we are very pleased with these results.

This January, 2008 we brought in the second highest number of contracts we've ever seen, but they were at lower average dollar values. Some time ago in our second quarter of 2007 earnings call we pointed out that leasing activity was off 37% from the levels we had seen in the first half of 2006. Leasing activity is a direct driver of brokerage commissions and a reduction of 37% leasing activity is an implied reduction in brokerage leasing commissions of 37%. We have had a number of questions about what could happen to CoStar's performance if the commercial real estate market slows. To me that is a bit like asking someone who is swimming comfortably around a pool if they know how to swim. We are already in a down market. The fact is the U.S. commercial real estate market has now been down for some time. In particular, southern California, Arizona and Florida have seen clearly weakening markets since the beginning of 2006.

In retrospect it's clear that 2007 was a challenging year for the commercial real estate industry. By no means has the downturn been as challenging as the downturn experience in residential real estate. The slowdown hasn't caused an increase in our cancellations as we have reported particularly in the weakest markets. This in turn caused a slowing of our sequential quarterly growth rates that we saw earlier in 2007.

At the same time CoStar's financial performance in this environment has remained relatively strong. CoStar has proven it can generate growth in revenues and earnings through four quarters of a challenging commercial real estate market. Obviously the market could worsen, but we also believe that it's equally likely that the market could stabilize and improve within the next four to six quarters. It's a little bit like the old story about how by the time you realize you're in a recession it's already half over. We anticipate that should continues weaken further, it could negatively impact our revenue growth, but it would be less likely to have the same negative impact on our earnings growth. Of course, as and when the recovery occurs, we look forward to accelerating revenue and earnings growth.

Demand for commercial real estate remains soft continuing a trend going back to 2006. U.S. office absorption was 17 million square feet this quarter, which is 34% lower than it was a year ago. Industrial absorption was 32 million square feet, which is off by 15% from the same quarter last year. Retail real estate reported absorption of 31 million square feet unchanged from year-ago levels. The silver lining that we are starting to see now that we have not seen in the past quarters is new construction levels beginning to taper off. It appears that the market is reacting relatively quickly and appropriately to the changes in demand. Office construction activity leveled off three quarters ago and currently sits at 146 million square feet, roughly the same as it was in the first quarter of 2007. Industrial construction has declined by 17 million square feet or 11% since the first quarter of 2007, and retail construction is down slightly as well, dropping from 167 million square feet since the first quarter of 2007 to 164 million square feet.

This lowering of both absorption and construction activity is causing vacancy rates to level in recent quarters. The office market has seen vacancy rates hover between 11.1% and 11.2% for the past five quarters. Industrial vacancy has been between 8.4% and 8.5% for six consecutive quarters, and retail vacancy has been between 6.5% and 6.6% for six straight quarters. The reduction of new construction activity if it continues should help prop up the markets this year and keep vacancy levels from rising too dramatically, should demand continue to soften with the overall cooling of the economy. We are also seeing the commercial real estate capital markets in a transitional period. The office market is starting to see sales transaction volume decline for the first time since the 1990s. Sales volume was off 17% in the third quarter of 2007 from what it was a year ago. Average sales prices also declined by 1% in the third quarter of 2007 from what it was a year ago, coming in at $226 per square foot. Cap rates, however, continue to decline from a year ago going from 6% in the third quarter of 2007 to 5.9% this year.

In the retail sector we are seeing both prices and transaction volume holding up. Sales volume of retail properties were $8.9 billion in the most recent quarter versus $8.8 billion a year ago and prices are up 5% over what they were a year ago at $183 per square foot. If our current analysis is correct and should demand stabilize at this softer level, then once the existing construction activity completes at the end of 2008 or early 2009, the markets will have seen the worst of the cycle. This could set the stage for rental rate growth once demand for space returns. Real estate cycles come and go. We have managed our business through several of them over the years and through each one of them we have grown the number of subscribers, increased revenues every quarter since our IPO a decade ago and well before that.

Based on our consistent long term revenue growth experienced with our older markets, CoStar believes that the company can reach $1 billion in sales over the next decade or so. During down cycles the company will make slower progress towards that goal and during up cycles the company will make faster progress towards that goal, and I don't think any rational person would predict that all the future cycles will be down cycles. No matter the cycle, the goal of $1 billion in revenue remains the same. If the company were to progress towards the goal at a 20% year-over-year growth rate, the company would reach the $1 billion revenue mark in 2017. If the company made progress towards the goal at 15% year-over-year growth rate, then the goal -- the company would reach $1 billion in revenues in 2019.

Nonetheless the goal remains the same. We have believe that many firms have just as great of need for information in a down market. With hundreds of billions of dollars invested in commercial real estate, investors prize the accuracy and detail of CoStar's researched backed information to forecast market trends and support their investment decisions. Having access to comprehensive detailed information for the national down to the individual building suite level is essential for conducting the thorough investment due diligence that helps minimize risk and analyze investment performance. CoStar's comprehensive approach to researching commercial property markets provides a much better window into the market for analyzing and comparing the performance of commercial property assets. Our detailed building-by-building information can reveal where rents are being achieved and where future abilities may -- availabilities may occur among competitive properties in a given market. To the best of my knowledge, no other information source can offer institutional investors, lenders and their advisors the depth of building level detail, broad market coverage and powerful analytics than CoStar's suite of information products.

I was struck recently by a profile in our local newspaper, "The Washington Post," of a long-term head of a well respected locally based commercial brokerage firm. This leader in our industry founded and built the firm (inaudible) Pinkerton, one of the most successful in this region over the past 27 years. As part of the profile the reporter asked this individual what was the lowest point of his career. He said it came in the early '90s during the depths of that downturn. His firm cut from 41 people to 17, and it barely survived. He had to make every cut that he could. Eventually that firm went on to enjoy tremendous success. That firm was a CoStar client throughout the entire downturn period in the early '90s. At no time did the firm ever ask to cancel its contract. I was struck by how essential our services to subscribers. When "The Post" reporter asked him if this cycle was worse than the 1990's cycle, he replied, no, not even close. And I agree with him.

In 2007 CoStar achieved an important milestone. We substantially completed the multi-million dollar increase in cost structure and investment required to expand our coverage so that we had complete coverage of the U.S. commercial real estate market. The addition of the 80 some CBSAs effectively completes our U.S. coverage by incorporating a great deal of new geography we previously did not cover and adding continuous market areas to make our coverage more comprehensive and robust than it was before. With this effort complete we have taken appropriate steps to stabilize this cost structure and we expect it to remain flat or decline over the foreseeable future. Our research team provides the core data that is the source of our value and identifies us as a company. The fact they have done an outstanding job in researching these new markets and aggregating so many listings in such an efficient and timely manner does in no way infer that their job is done, but our cost structure is now stable.

Total research and verified commercial real estate listings in CoStar's U.S. database grew 32% year-over-year from approximately 623,000 in the fourth quarter of 2006 to 825,000 in the fourth quarter of 2007. In total between the U.S. and the U.K. the company now has 907,000 listings. The total U.S. rentable square footage tracked maintained by CoStar now exceeds 43.7 billion square feet. By the end of the fourth quarter 2007, our U.S. product tracked detailed information on more than two million individual properties across all types and classes of commercial real estate, a 41% increase over 2007. Our retail listing database for the U.S. increased 42% during 2007 to 341,000 listings. CoStar's account of for sale listings increased 45% since the beginning of 2007 to 303,000 and now has an aggregate value of $411 billion.

You have probably seen press releases about two lawsuits CoStar is currently involved in. Since we have received questions on these cases, I want to briefly answer some of the questions we have received. In the first case CoStar recently filed a lawsuit against a competitor called LoopNet in federal court in New York City alleging false advertising. Fundamentally this issue is about whether a direct competitor has made false and misleading claims about the size and character of its service, does deciding where to list their commercial property. If the two newspapers were competing for the same potential advertisers, it would obviously be wrong for one of the two newspapers to report that it had an audience dramatically larger than it actually did. And it would be wrong for it to claim that its audience was growing year-over-year if, in fact, its audience was declining.

Once the competing newspaper being damaged became aware of the other newspaper's false statements, it would need to take all reasonable steps to expose and correct them to protect the interest of its shareholders. The market's perception of the relative value of the audience that uses CoStar's information services is critically important to CoStar's ability to generate revenue growth. This will become even more important as we release our showcase product. This is similar to the way in which a newspaper circulation and a TV station's ratings, for example, helps determine what they can charge advertisers. A newspaper with a small declining circulation is worth less to investors, readers or advertisers than is a newspaper with a large and growing circulation. The same is true on the web. When people are selecting which web service or product they're going to purchase, they understandably place great weight on which product or service has been the most successful in attracting the largest user base for critical mass. The newspaper analogy is appropriate as LoopNet has in the past compared advertising of property on LoopNet to advertising of property in "The San Francisco Chronicle" newspaper.

LoopNet prominently says on its website that LoopNet's listings are seen by 2.5 million registered members, or that advertised listings are immediately exposed to 2.5 million registered members. For this prominent and important claim to be true LoopNet would need a current audience of 2.5 million users. CoStar has information that leads us to strongly believe that LoopNet does not have a current audience of 2.5 million users. We recently obtained confirmation that the 2.5 million registered users that LoopNet reports is not the number of current users, but rather the total cumulative number of user IDs created over the last decade or so. In other words, the 2.5 million figure must include user IDs that have not been used in years and in some cases multiple user IDs for the same person. Our lawsuit alleges that LoopNet's use of this 2.5 million figure to competitively market how many users it currently has is improper and inaccurate. If LoopNet's approach were appropriate, "The New York Times" could claim it can expose an advertisement placed today to everyone who has cumulatively ever read "The New York Times" in the past decade. The difference of the number of people who have ever read "The New York Times" and the people who currently read "The New York Times" is massive and would obviously be improper for "The New York Times" to pretend that the former is the latter.

Richard Boyle, LoopNet's Chief Executive Officer in public -- I'm sorry, Richard Boyle, LoopNet's Chief Executive Officer and President claimed in a February, 2008, earnings call that LoopNet had 2,567,729 registered users at the end of the fourth quarter, 2007, which he describes as a 45% year-over-year growth. Not withstanding LoopNet's claims that it has 2.5 million users, CoStar believes based on a study by a respected independent research firm that the actual audience of current LoopNet users is declining, not growing. Going to comScore, Inc., an Internet audience and rating service that LoopNet itself has cited the number of people that actually signed into LoopNet actually declined by 20% to the fourth quarter of 2007. Indeed comScore reports that LoopNet's total visits and total minutes all declined year-over-year from Q4 2006 to Q4 2007 and from Q3 2007 to Q4 2007 as well. Because brokers and property owners may be misled in thinking that putting a property listing on LoopNet gains them much more relative exposure than it does, CoStar went to court to stop what it believes to be an unlawful practice.

In a second lawsuit LoopNet has filed a complaint against CoStar in California alleging that CoStar has unlawfully copied listings from LoopNet's systems. We are confident that these claims are untrue. Moreover, we believe that once LoopNet's claims are exposed to the light of day its own clients will agree that LoopNet has missed the boat here. LoopNet does not contend that anyone at CoStar has logged into LoopNet's website and taken listings, nor does CoStar believe that to be the case. Instead LoopNet's lawsuit appears to be largely about who controls listings created by commercial real estate brokers and owners that use LoopNet. LoopNet apparently believes that it controls those listings and that it can prevent brokers from marketing their own listings as they please.

LoopNet provides a software and hosting solution to brokerage firms called LoopLink that a broker can use to display his or her listings on that broker's own website. The brokers type their own listing information into the software and upload their own photos. Brokers understand that they own the listings they create and often direct CoStar personnel to market those listings on CoStar Property as well. Sometimes the brokers use an e-mail to a friend function available in LoopNet service to sender listings for marketing on to CoStar. Incredibly however the central contention of LoopNet's lawsuit appears to be that if a broker's website uses LoopNet's technology to display that broker's listings then those listings actually become to quote LoopNet LoopNet's listings. We think such an argument is no more credible than Microsoft claiming some form of copyright ownership of any book offered in Microsoft Word or Google claiming some form of copyright ownership of any content that passes through G mail.

We have filed a response and a counter suit to this complaint. At LoopNet's insistence the heart of our most important claims is filed under seal and is kept secret. Because of that we run able to discuss important elements for a defense in our counterclaims against LoopNet in this suit. We look forward to prevailing in each of these lawsuits and are confident we will. Since this is ongoing litigation I will not take questions today on this subject during the question-and-answer period. On a more positive note, finally I want to update you are progress we are making on various product development initiatives.

We continue to anticipate releasing a new service during the first half of 2008 called Showcase that will give brokers the ability to very cost effectively mark their listings to an open Internet site in order to generate leads from principals and tenants searching the Internet. Told our clients largely use their information service to market their listings to a professional broker. We met an internal targeted release date for the product yesterday. I have had the chance to work with the product and I think it's a very innovative looking product and am really quite pleased with it. We now are in the process of gathering feedback and market reaction to the product, finalizing pricing, finalizing marketing plans and making some last minute enhancements to the product. Outside of our efforts on Showcase, much of our system's development efforts continue to focus on building our next generation faster, more flexible and more powerful integrated multi-national global international platform.

Before I turn the call over to Brian, I want to reiterate again that this quarter and at this time the company's focus and direction is on transitioning from previous periods of heavy but valuable investment, into one of leveraging these many investments to show consistent earnings growth over the next quarters as we move into 2008 and to 2009. The company is very focused on controlling our costs, pursuing customer service excellence, enhancing the already high quality of research we perform, enhancing further the cutting edge software we provide to our clients, and reaching out and the finding the thousands of prospects out there that will find real value in the huge array of products we have produced. Our first goal is long-term, intermediate-term and short-term earnings growth. We are very pleased to have clearly delivered on that commitment this quarter. Brian?

Thank you, Andy. Today I'm going to focus principally on the sequential results of the fourth quarter 2007 compared to the third quarter 2007, and our outlook for the first quarter and full year of 2008. Total revenues grew sequentially by 3% overall from Q3 to Q4 increasing from $49.3 million to $50.8 million with subscription renewal rates consistent at 91.1% for the fourth quarter compared to the third quarter of 2007. During Q4 our international operations contributed approximately 12% for total revenues. International revenues increased from $5.8 million in Q3 from 2007 to $6.1 million in Q4 of 2007. International revenues increased $2.5 million or 71% from $3.6 million in Q4 of 2006 compared to $6.1 million in Q4 of 2007, principally as a result of the Propex and Grecam acquisitions. Total subscription revenues for the company continue to account for approximately 95% of the revenues during Q4. Again let me reiterate the company has reported sequential revenue increases through several commercial real estate cycles and in every quarter since its IPO in 1998.

Gross margins increased by $1 million from $29.8 million in Q3 to $30.8 million in Q4 on a $1.5 million increase in revenues. Overall margin percentages increased from 60.4% in Q3 to 60.6% in Q4 as expected. The U.S. margin percent increase continued to increase in the U.S. side from Q3 to Q4 at a more rapid rate, while the international margin percentage decreased as expected during the quarter due to the full quarter step-up of costs related to our research operations center in Glasgow, Scotland, and some additional purchase amortization from the Propex acquisition. Operating expenses decreased from $26 million in Q3 to $18.5 million in Q4. Excluding the $7.6 million one-time gain from London Lease settlement operating expenses were basically flat as expected at $26.1 million in Q4 compared to $26 million in Q3. As reported earlier, we believe that the company's overall operating expenses have now stabilized in the cost phase, excluding the one time gain is expected to remain relatively fixed moving forward as we focus on driving earnings growth for 2008 and into 2009. As a result of the solid revenue growth, stable cost structure and the $7.6 million one-time gain, EBITDA increased $8.8 million from $8 million in Q3 of 2007 to $16.8 million in Q4 of 2007.

GAAP basis net income increased $6.4 million from $3.3 million or $0.17 per share in Q3 of 2007 to $9.7 million or $0.50 per share in Q4 of 2007. Reconciliation to GAAP basis results of nonGAAP financial measures discussed on this call including EBITDA is shown in detail in our press release issued yesterday, which is available on our website at www.costar.com. Our overall tax rate decreased for both the fourth quarter and full year 2007, due to the fact that the tax expense recognized from the one-time gain on lease settlement with tax at the U.K.'s lower rate. Capital expenditures for Q4 of 2007 were approximately $5.6 million including $3 million related primarily to the London headquarters move for the lease settlement and expansion in the U.K. For 2007 total capital expenditures were approximately $14 million. We close the year with approximately $187.4 million in cash, cash equivalents and short-term investments, an increase of approximately $23 million during the fourth quarter ended December 31, 2007.

Now I'll discuss for -- wait a second. Hold on a second. Let me check something. Okay. Hold on a second. That was an increase of $23.2 million during the fourth quarter. Wow. $23.2 million in cash in one quarter.

Now I'll discuss the outlook for the first quarter in the full year 2008. As indicated in our press release, we expect fully diluted net income per share of approximately $1 to $1.05 for 2008, which includes $5 million to $6 million in pre-tax noncash equity compensation charges led to the investing of restricted stock and stock option grants. For the first quarter of 2008 we expect fully diluted net income per share of approximately $0.20 to $0.22. We expect overall revenue growth in the 14% to 16% range for the full year of 2008. For the first quarter of 2008 we expect a sequentially quarter increase in revenue of 2% to 4%.

We continue to believe there's upside in revenue growth potential, which is somewhat dependent on the overall economy in commercial real estate cycle in the shorter term and longer term based on the successful sales force productive, particularly in the view of the opportunities resulting from momentum in established markets, ramp-up of the newly released markets, the retail offering, new product releases and international opportunities. We continue to believe that in the longer term we could experience sequential quarterly revenue growth rates in the 3% to 5% per quarter or higher range. Gross margin percent is expected to somewhat improve from Q4 to Q1, as we continue to leverage operational efficiencies in both the U.S. and U.K. Operating expenses are expected to remain relatively stable over Q4 of 2007, excluding the one-time gain.

For the full year 2008 we do not expect any major step-ups in operating cost structure, but we do expect normal inflationary or cost of living escalations for the current cost base, coupled with our seasonal international sales conference in Q1, ICSC in Q2, and some administrative and legal fees throughout the year. Our effective tax rate is expected to be in the 43% to 45% range for 2008. As we continue to invest internationally, the mechanics of our effective rate calculation continue to be affected by the amount of income or loss in the U.K., where we do not get an equivalent tax expense or benefit to offset the U.S. corporate tax rate. This results in an overall blended effective rate which may increase or decrease over the current rate. Essentially if we move the U.K. forward to profitability faster, our tax rate will be at the low end of the range. Otherwise our tax rates could increase to the high end of the range if we incur more losses than expected.

In addition, we expect to utilize the remainder of our approximately $15 million of U.S. net operating loss carry-forwards early in 2008. Therefore, we expect to begin to make full U.S. cash tax payments moving forward of approximately $11 million to $12 million in 2008 compared to approximately $1 million in 2007. Finally we expect capital expenditures to decline in 2008 over 2007 to approximately $8 million to $9 million, which includes investments in facilities, photography, network equipment and workstations to support our ongoing operations. In conclusion, core revenue growth remains solid and we expect to continue to grow earnings for 2008 and in 2009. The entire CoStar management team is fully committed to achieving the aggressive earning goals we have set out for 2008 by achieving the 30% EBITDA margin in the U.S. and break even internationally by the end of the year. We look forward to reporting that progress to you. And with that, I'll open it up for questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of John Maietta with Needham & Company.

Andy, with regard to the CCIM trial could we potentially see further trials?

We do trials probably every other year, every 18 months or so, where it's appropriate we have an opportunity to do something unique.

Okay. And then as you look at the sales pipeline, I was wondering if you could just qualitatively describe what you see in terms of demand from the different constituencies in the customer base, kind of broker demand versus developer demand versus property manager demand, if if anything kind of stands out there.

I think one of the segments that we're very focused on right now and sometimes it's difficult to determine if -- to separate increasing demand from increasing company focus on a particular sector. So one of these we're very focused on right now is addressing many of the strategically important brokerage firms across the United States that we now can more effectively address, now that we're covering the whole United States, and now that we have so much more for sale inventory, now that we have so many more retail listings. So we're basically trying to focus on bringing our products to the people that are giving us these listings in these new areas. So we're definitely seeing a lot of activity in that broker area.

At the same time I mentioned in maybe investor conference and possibly last earnings call that while we saw real slowdown in banks or mortgage lenders purchasing of our products in the summer, but we saw a pickup in some modern lenders or banks using our products to analyze the loans they've made later in 2007. So we're also seeing some good progress from the biggest retail owners in reaching them with our products and services, but I would put the emphasis right now on brokerage firms.

Okay. And then just a final question I had with regard to Showcase and the go-to-market strategy, can you just remind us, would that be a separate segment of the sales force that would manage that process, or would the existing folks sell that as part of their portfolio?

I think that the people who are doing a great job for us selling our advertising products would be ideally suited to sell that service, but realistically this product I think will have the greatest appeal to our existing cut brokerage and owner customers across the United States and in those cases our sales, our normal -- our larger sales force, subscription sales force, in the U.S. of 131 folks, have relationships there, and this should be a fairly straightforward add-on sale to these folks. These brokerage firms understand what a international lead generation product is, and where all our guys have -- our men and women in our sales force, have relationships with -- longer term relationships with these clients, they're the right ones to go in there and sell this new product.

Okay. Thanks very much.

Thank you.

Thanks, John.

Your next question comes from the line of John Neff with William Blair.

Hey, guys.

Good morning, John.

Hey, John.

Could you give us a sense of what kind of renewal rates are assumed in your 2008 revenue guidance?

I think we've been consistent in the 90+% range, and I think one thing we've said is we do think in this environment you could see that pop around a couple percentage points, and so I think that's what we're factoring in in our model.

Keeping in mind, John, that our total sales numbers are still very strong, the gross sales number.

Yes, absolutely. The -- you mentioned sort of expectations of relatively minimal growth in sales force headcount in '08. Any growth -- does that mean any growth at all, or maybe 5%, 10% kind of thing?

I think it's the latter that you mentioned there. It's probably 5%, 10% growth. So what we're trying to do is where we now have a larger sales force than we had in 2006, and what we're focusing on now is quality and effectiveness and productivity of that sales force rather than growing size. So we'd like to really stabilize that group and drive the quality and the efficiency of the performance rather than the volume.

Can you give us -- that was kind of my next question. Can you give us an update on the experience, the current experience mix in the port -- in the sales force and what sort of -- and how the newer folks are ramping in terms of reaching average productivity?

Right. It -- I would still characterize it as being a fairly green sales force, but not nearly as green as what we suffered through in the last two quarters, the last three quarters of 2007. So we now have a group where typically the folks in our sales force have been there for six months or so and then a possibly 30% or so are multi-year players now. So you're -- by -- as you move through 2008, you'll get to the point where the majority have more than a year or so of experience which is very valuable to us. Again, realistically with this sophisticated information sale like this it does take a year to really get into your stride.

Have you ever, or can you quantify, the productivity differences on average between a sub one-year salesperson and a plus one-year salesperson?

We have absolutely done that at various are times and I don't have any concrete numbers for you right now. I can only answer anecdotally that typically it's two to one. In other words, a highly experienced I would say would probably be twice as productive as a very junior person.

A couple of quick housekeeping questions. I think you gave the total number, I think you said 169 quota carrying reps. What's the total sales force head count at the end of the quarter, Brian?

Total head count sales force, 192.

Okay. Now is that number comparable to the number I have as of last quarter, which was 221?

It should be fairly comparable, yes. It includes the numbers that Andy talked about as far as field AEs. It includes sales managers, your small inside sales force, the ad sales force support team and the U.K.

So there was actually a decline, then, sequentially?

There's a slight decline.

And then what was the trailing 12-month renewal rate as of the fourth quarter?

Trailing 12-month renewal rate was approximately 91%, but I'll give you the exact number, John, if you give me a second.

Sure. And while you're looking at numbers, Brian, the percentage of revenue from a -- total revenue from subscription.

The trailing would be 91.6% for the 12, and the exact number on the subscription was 95.3%.

95.3%.

95 --

Okay, thanks you. That's great. Last question. I apologize. I know, believe me, I know it's too early to talk about 2009, but do you have any thoughts at all about EBITDA margin targets in '09, as you start to look to maybe begin your expansion into continental Europe?

Let me repeat what I've said in the past, and I think the message should remain consistent ongoing. Our goal is to get the U.S. operations to 30% EBITDA margin by the fourth quarter of '08, and to get to a real EBITDA profitability in the United Kingdom by the fourth quarter -- and for the fourth quarter of '08. After that our focus is to get our overall operations to 30% EBITDA profitability both the U.K. and the U.S., and invest in further global expansion from the percentage points above the 30% EBITDA margin as our profitability climbs over 30%. So we are not interested in reducing our EBITDA margins in '09 in order -- below 30% in order to pursue international expansion.

And so, John, essentially in Q4 plus or minus a percentage point you'll get a blended rate of about 25% plus or minus a little bit. So that's what you'll be kind of entering -- exiting '08, entering '09 and for the company is at a blended rate.

That's very helpful. Thank you.

Thank you.

Respect all the depth of questions there, John.

Your next question comes from the line of Chris Malone with Deutsche Bank.

Hi, guys. Thanks.

Morning, Chris.

Hey, Chris.

Good morning. In your prepared marks, Andy, you talked about the potential for the PRE market to slow down further and how that might impact revenue growth more than it would impact earnings growth. I mean is it something that could test the low end of the 14% to 16% range in '08, if conditions worsen whereby you might have to revisit that range?

Well, we don't expect -- at this point we don't expect to revisit that range. I mean that's what we believe the number is right now, but as I mentioned the other day, I know enough to know that I don't know everything, and that it's obviously an unusual air of anxiety out there nowadays, and my personal feeling is that it's -- when it comes to commercial real estate that anxiety is more perception than reality, but you never know. So if the economy completely went to shambles, we'd have to reassess things, but at this point I'm actually quite impressed -- or I'm somewhat optimistic about the fact that in this particular real estate cycle, which I think we could be half-way through, the industry has moved very unusually compared to past cycles, has moved unusually quickly to reduce the amount of new construction activity, which could prevent a runaway in vacancy rates, which will keep this whole thing fairly mild.

Okay. Do you have anything, I guess, sort of baked in your guidance for contribution from the 80 new markets you could talk to?

The majority of the meaningful revenue growth in the company is always coming from markets that are three, four, five, six years or older. So the -- while the performance of the 80 some new CBSAs are valuable to our long-term revenue growth, they will not be the key determinate of our success in 2008. It's more of they'll more be core drivers in 2009, 2010, '11, in those outer periods. It's more about Boston still than Albuquerque.

And we would still expect the same thing we've seen historically at those markets will be break even in the 12 to 18 months range.

Okay. And I guess as a final question, we always sort of separated you and LoopNet's -- your business models pretty convincingly, always thought of CoStar as sort of addressing a different part of the market than LoopNet does. Could you maybe just talk to again maybe your philosophy on why -- behind releasing Showcase and getting closer to offering more of, I guess, a LoopNet type product and especially when demand for your for your service offering continues to be so high?

I've always felt that our services are directly competitive, and I know this is probably not the way it's characterized in our areas, but I've always felt that when I look at the 1,700 customers that we signed up in the previous quarter, I would imagine that some significant percentage of them have used LoopNet in the past. So I would actually characterize ourselves as having been competitive for quite some time. Now I think that it's fair to say that LoopNet -- one element of LoopNet services, is that they offer a -- more of an internet lead generation service with their website, where they create or generate principal leads for brokers, owners and other people. And we think that's a product area that's sort of internet lead generation area that our customers think is interesting. And we have hundreds of thousands of unique visitors that come to our website that we don't believe ever go to any competing websites, such as a LoopNet. And that we can monetize that traffic, and that the investment involved in us bringing Showcase to market is actually quite nominal, and the potential upside, and more importantly the margin potential I think is very attractive.

So we do not have a lot of revenue or margin baked into our model for 2008 for Showcase, and because we don't like to anticipate a big success with anything like that until we actually see the success, but I think it will be an ongoing important component of our product offerings. And I think that going forward you're going to see CoStar offering both an increasingly stronger suite of information products paired up with a dramatically enhanced set of marketing products -- internet marketing products. So I just think it's a good rounding out of our products especially given the information in sales assets that we already have out there -- the relationships and client relationships we already have out there. I hope that answers that.

Yes, I know, that's helpful. Then I guess, yes, one quick follow-up. What -- the 1,700 net new subs added in the fourth quarter, what was the comparable numbers for both the third quarter of '07 and the fourth quarter of '06 on that metric?

I actually don't have that with me right here.

Okay. Maybe Brian.

It would probably be fairly consistent. I think that though I would say that the four -- of the four quarters -- of the four times we've ever seen months where we get more than 200 new subscribing firms, two of those four ever months have occurred in the last several months. So we do have a little pit of a tick-up here in total volume of new subscribing firms, but again at lower price points. It's not so much I think because we're cutting our prices. It's more that that's the demographic we're having to be going after right now and it's good for the long-term growth of the company.

Okay. That's all have I for now. Thanks, guys.

Okay, thank you, Chris.

Your next question comes from the line of Jim Wilson with JMP Securities.

Good morning, Jim.

Actually a lot of my questions have gotten answered. I was just thinking your growth assumptions though, but obviously you've defined it pretty much all the growth has come from existing markets. Can you suggest, Andy, what you think in terms of property type that you might see the most growth out of? Obviously, your retail base is up a lot in terms of listings, but it sounds like you're not anticipating a whole lot of retail growth on that other revenue side?

Well, I do anticipate revenue growth from the retail side, but what we're finding is particularly with the five-person brokerage shop in a second tier or third tier United States city, the five-person brokerage shop does a little bit of office, does a little bit of retail, does a little bit of land, industrial. They do whatever can come their way and they often do both leasing and sales. Whereas, when you go to New York City, you'll find that a brokerage firm will focus entirely on only office tenant representation. So your target customer segment in these tertiary and secondary cities are more jack-of-all-trades, very well rounded sort of firms. So we're going to be seeing sort of phantom or difficult to quantify retail revenue coming in from our ability to penetrate these smaller mid-size firms and secondary and tertiary tiers. And, unfortunately, we will not be able to quantify that retail revenue for you, because we can't really say how much of that revenue is because they did an office deal, or how much was because they did an investment sales deal, and how much was because they did a retail deal.

So, I spent some time with some clients in a tertiary market last week, and it was very clear that increasingly the way the brokerage firms view our product is not an office solution, but -- an office leasing solution, but a all product type, both investment sale and leasing. So it's -- I anticipate that the retail component of our business will be a core growth driver for the business, but difficult to quantify for you in the way we'd like to.

Okay. Got it. Makes sense. And the only other question I had left, I might have missed it, but is, Brian, the effective tax rate, did you -- GAAP tax rate, do you think you might report for '08?

Yes. We think it will be in the 43% to 45% range, Jim, and kind of how I explained it was that if we move the U.K. to profitability faster, it will be on the low end of range. If it moves there on a slower basis, it will be -- the tax rate will be at the high end of the range, if that makes any sense.

Okay.

Okay?

All right. Sounds good. Thanks.

Thanks, Jim.

(OPERATOR INSTRUCTIONS)

It appears that we don't have any further questions. So at this point I'd like to thank everyone for joining us on this year-end conference call, and we look forward to updating you on our progress at the Q1 2008 conference call. Thank you very much for joining us today.

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