CoStar Group Inc (CSGP) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CoStar Group fourth quarter and year end 2008 conference call. Today we have CoStar Group's Chief Executive Officer, Andrew Florance; Chief Financial Officer Brian Radecki; and Communications Director Tim Trainor. At this time, all lines have been placed into a listen-only mode.

Later we will conduct a question-and-answer. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. Trainor. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to CoStar Group's fourth quarter and year end 2008 conference call. Before I turn call over to CoStar's Chief Executive, Andrew Florance, let me state for the record 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 number limited to those statements in CoStar's fourth quarter and year end 2008 press release which we issued yesterday and in CoStar's filings with the SEC, including CoStar's Form 10-K for the period ended December 31, 2007 and CoStar's Form 10-Q for the quarter ended September 30, 2008, under the heading "Risk Factors. "

All forward-looking statements are based on information available to CoStar on date of this call and CoStar assumes no obligation to update these statements. You can find a webcast on our Web site at www.CoStar.com/investors. Thank you for joining us.

I would turn the call over to Mr. Florance. Andy?

Thank you, Tim. Welcome, everyone, to CoStar's fourth quarter year end 2008 conference call. I am pleased today to report our results for 2008, a year in which CoStar continued to benefit from our core three attributes as a Company. The strength of our subscription-based business model, our industry-leading research and the value that our products provide to our subscribers, all of which help us to strengthen an already strong financial position and achieve the earnings goal we set out two years ago.

Net income for the year increased 145% to $24.6 million or $1.26 per diluted share compared to $10.1 million or $0.52 per diluted share for 2007. And EBITDA for the full year in 2008 was $56.6 million, a 115% increase compared to EBITDA of $26.4 million in 2007.

These results exclude the favorable one-time gain associated with the lease assignment on our former London office in 2007 to more clearly show the organic earnings growth we generated in our business. Being able to again report triple-digit year-over-year quarterly net income growth in the middle of a very challenging economy is something all of us here at CoStar Group are very proud of. The fact that we were successful in executing the plan we laid out to investors to achieve the earnings goals we set clearly demonstrates the absolute strengths and resilience of CoStar's business model.

The strong profits we generated followed the substantial investments we made to significantly expand our Commercial real estate coverage in the U.S. and the UK in 2006. In 2007, we completed the work of adding hundreds of thousands of new properties to our database, and we announced plans to focus on earnings leverage following those substantial investments.

In 2008, we delivered on the aggressive earnings growth we promised and succeeded in raising our then Company-wide 9% EBITDA earnings margin to a 30% EBITDA margin in our U.S. operations by the end of 2008. Having met and exceeded that target an entire quarter ahead of plan, we committed last quarter of achieving a Company-wide EBITDA margin of 30% by the end of 2008.

Once again, we achieved that very significant Company-wide margin by continuing to expand our margins in the U.S. and successfully bringing our International operations into the black. Our focus on growing earnings over the past year has had the additional benefit of significantly strengthening CoStar's balance sheet, which remains one of the Company's greatest assets.

We increased our cash balance by more than $37 million in 2008 for a total of $225 million in cash, cash equivalents and investments on hand at the end of last year. The majority of these assets are invested in cash, as well as in U.S. Treasury and other U.S. government money market funds. As a result of our success in growing earnings, managing costs, and continuing to provide real value to our clients, I am pleased to report that the Company is in a very favorable position well into this current downturn.

We are solidly profitable, have no debt, and have very large cash reserves. Brian will provide more detail on our full-year and fourth quarter 2008 financial results and our outlook for the first quarter of this year later in the call. Before he does I want to update you on several other important aspects of our business.

Having demonstrated consistent success in achieving the earnings goals we have set, I want to reiterate that we remain focused on, despite the current state of the economy, the goal we set of reaching $100 million in EBITDA run rate Company-wide by the end of 2010 or soon as reasonably practical. Despite the current conditions we are facing, if positive GDP growth returns before 2010, I believe it is still possible to capture that growth and continue the successful track record of achieving earnings goals we have accomplished as a Company.

There is no question that the rest of 2009 will be extremely challenging. Like most companies, we have taken a number of steps to further stabilize our cost structure, minimize new spending and preserve value to help offset the negative impact on sales and revenues. These steps include temporarily freezing employee salaries Company-wide at their current levels and reducing the Company match on employee contribution to the 401(k) plan in the U.S. with a corresponding reduction in matching pension contributions in our International operations.

We believe we have taken and we will continue to take all necessary measures to address any decline in revenue or renewal rates we may see in a difficult year ahead. We will continue to monitor our position carefully and respond should a recovery fail to appear as expected next year. However, I believe the last thing we want to do in our position is to harm our business by reducing the quality or scope of our research product.

Those of you who have followed our Company for any length of time know that we invest for the long term and have managed our business conservatively over the past two years. As I have consistently stated over the years, researched and verified information is what sets CoStar apart. It is the basis of everything we do and our ability to deliver trusted and accurate information through up and down economic cycles has won us the business of virtually all the leading Commercial real estate firms and thousands of smaller ones throughout the U.S. and UK.

In this environment, our clients are depending on us now more than ever to provide the highest quality information at the lowest possible cost, and that is exactly what we intend to do. That is why I want to make very clear that the recent cost reduction steps we are taking do not involve a curtailment of our research operations. In fact, because of continued unprecedented growth in the Company's databases it will be necessary to grow the research team in 2009 in order to continue meeting customer expectations and maintain our clear competitive advantage.

This modest increase in additional research head count we are considering does not fall into a category of discretionary spending. Consider that the record growth and expansion we experienced over the past two years resulted in unprecedented aggregation of content in CoStar's database. Our research team identified, confirmed and added literally hundreds of thousands of buildings and listings, resulting in an amazing amount of growth and content that we manage.

This record growth, which we believe will eventually translate to revenue growth, has not been accompanied by a corresponding increase in the size of our research staff. Despite achieving a 100%-plus increase in productivity gains on the part of our research team in covering the greatly expanded scope of our coverage, it's clear that we need to realistically address the research resources we devote to ensuring that CoStar continues to provide the quality of information that has set us apart from competitors and been the key to our successful growth over the past 20-plus years.

Certainly, keeping an eye on costs and minimizing spending are the watch words of this recession. But even more important, I believe, is keeping the focus on our customers and ensuring that CoStar continues to provide the type and quality of information they expect. Currently, there are a dozen or so vendors out there providing marketing or information solutions to Commercial real estate.

Due to the extreme economic conditions, I believe that about half of those service providers will fail in the course of the next two years. Indeed, I believe the need to focus on the quality of our product may be more critical in this economy than during any time of expansion. If you look at any successful mid-sized brokerage office, they are likely using two or three data providers. Now that their revenues have dropped many of these firms are facing the difficult choice of having to cut back to just one service.

We are committed to making sure that CoStar remains the indispensable solution for our customers by providing an overwhelming quality advantage. We believe that Commercial real estate information and marketing solutions we provide remain a billion dollar business opportunity. It was before this recession and it will be after this recession.

I believe it is both prudent and strategically advantageous to strengthen our position and further distance ourselves from weakened competitors. As we have experienced in previous downturns, the information available through CoStar play a crucial role in helping our customers answer the fundamental questions when determining the value of their buildings and portfolios and in making their properties for lease or sale marketed more efficiently.

Information is integral to facilitate real estate transactions and, therefore, integral to the real estate service providers' day-to-day business. Outsourcing, the labor-intensive and time-consuming task of conducting basic real estate research to CoStar, provides enormous benefit to our customers by providing them with higher quality information at a lower cost, especially when compared with the prospect of bringing research back in-house.

(phone rings) If that's for me, I am busy. Hiring additional staff and redirecting resources needed to gather, confirm and maintain information on a continuous basis.

Because our products help our customers improve productivity, cut costs and drive new revenues, we believe there will be continued strong demand for our services in a down market as long as we continue to provide the level and quality of information that has set CoStar apart and won us the business of essentially every major firm in Commercial real estate.

Last night's announcement of a new multiyear tens of million dollars subscription contract renewal and expansion with Cushman & Wakefield, the largest privately held Commercial real estate services firm in the world, is proof of the utility nature of our product in any economic environment. You can be certain that Cushman & Wakefield did its due diligence on CoStar. If they did not believe in the value added to their firm as a direct result of equipping their research, valuation and brokerage professionals with our information service and in the significant productivity gains that our service offers, they certainly would not have proceeded with this sizable contract in this market.

Under this new long-term agreement, Cushman & Wakefield will subscribe to additional CoStar services and have access to all CoStar U.S. markets licensed by Cushman & Wakefield and the alliance firms. With an official term of four years followed by two three-year renewal option periods, the agreement carries a total potential term of 10 years or until 2019.

Along with a standard two-year non-compete clause that we include in such major contracts, the potential extent of the agreement is to 2021. Fees CoStar stands to earn under the expanded agreement are about one-third higher than the monthly rate under the previous 2004 agreement at its start, and includes fixed increases in years 2, 3 and 4, as well as trailing 12-month CPIS escalations in each year of the renewal periods.

Separately, Cushman & Wakefield recently renewed their UK service agreement with us as well. CoStar welcomes the opportunity to continue providing our information and services to Cushman & Wakefield and look forward to working closely with them for the next decade as their business grows under this expanded agreement.

We have mentioned the current negative economic conditions in the Commercial real estate market. What is a bit shocking, however, is the clear magnitude of the changes we are seeing. Consider employment, perhaps the most important driver absorption and demand for Commercial real estate. After posting modest job losses through most of 2008, job losses turned extremely negative.

The U.S. lost about 140,000 jobs a month through August of last year. In January 2009, we lost 598,000 jobs, the largest monthly decline since December 1974. And that comes on the heels of nearly equally large number of job losses in November and December. In total, the U.S. lost 3 million jobs 2008 and if current forecasts hold, we are looking at significant job losses this year as well, far exceeding what we saw in the dot com bust.

Those of you who are tracking Commercial real estate back then recall that we saw approximately 46 million square feet of negative office absorption in the U.S. at the worst point during that cycle. It is likely we will see dramatic negative absorption in U.S. Commercial real estate markets, probably a billion square feet over the next two years. Looking at the office markets, looking just the office markets, essentially when a market loses a job it loses 200 square feet of demand for office space.

On a national level, the level of negative absorption [won't] expect from this amount of job losses translates to at least an increase in the average office vacancy rate from 12% to about 15% overall by the end 2009, 2010. Meanwhile, most lenders remain completely withdrawn from real estate and the CMBS market remains frozen, eliminating an important secondary market for commercial mortgages and a source for replenishing lenders making loans for commercial property.

CMBS spreads as recently as December 2008 were approximately 1400 basis points above LIBOR, a dramatic margin for those seeking financing for commercial real estate. As a result of all the above conditions, debt for commercial real estate remains extremely difficult to maintain. We are still in a frozen credit environment that is quite negative for commercial real estate.

This situation is critical because if it continues and lenders remain on the sidelines, a large number of commercial real estate loans set to mature over the next 12 to 24 months will face extremely limited or no credit options to refinance which could result in a wave of defaults. As one would expect given the absolute lack of available financing in frozen debt markets, property sales have borne the brunt of the impact from the economy within the commercial real estate industry, much more so than the leasing market which tends to remain fairly steady through down markets.

This sharp drop in sales activity has had a direct and extremely negative impact on the commissions brokerage firms earn. You may have seen yesterday's article in "The Wall Street Journal" on CB Richard Ellis. CBRE is one the best brokerage firms in the world capable of significantly lesser firms in a down market. CBRE's commissions revenue dropped nearly $0.5 billion or 44% in 2008 over 2007, with more of that drop occurring in the later half of 2008.

CBRE's commissions associated with the sale of commercial property dropped 65% year-over-year and commissions associated with leasing dropped 28%. For CoStar to grow revenue, 10% in this environment has been a significant testament to the strength of our business model. This is the worst drop I believe in marketing conditions I have seen in my two decades in the business.

As you are likely aware, CoStar's revenues are more driven by leasing marketplace which you can see is less negatively impacted. Vendors that rely more heavily on commissions from sales activity are in a very tenuous position right now because the market is much more negatively impacted and will very likely not recover for at least four years. We have seen a disproportionate share of our cancel rate coming from the sales segment and lending segment of the market.

Another primary trend we are seeing is a sharp drop-off in construction activity across all property types. New construction starts have all but ceased. It is likely that most projects under construction will top out and complete and the only activity going forward in this environment will be corporate build-to-suits, medical use and government projects. In some cases, developers are stopping in mid construction.

One of the most dramatic recent examples we have seen was a decision earlier this month by Boston Properties, a major owner and developer of office buildings, to suspend construction on 250 West 55th Street, a 1 million-square-foot office development in Manhattan, after a major tenant backed away from committing to the project after more than a year of negotiations.

Looking for a silver lining here, the fact is the industry was not aggressively over supplying inventory into the U.S. commercial real estate markets. Over the past 50 years, approximately 120 million square feet of new office inventory was completed each year. In the late '80s and early '90s, the industry over supplied when developers added 27% more office space than the average in that time period or about 1.2 billion square feet of excess real estate.

In the most recent cycle, developers added just 1% over the average, reflecting a balance of supply and demand going into the current downturn. As a result, we should see vacancy rates fall and rents and property values recover fairly quickly once employment and positive absorption returns.

Again, as I mentioned, keep in mind that leasing activity tends to remain fairly resilient in any kind of market, much more so than property sales. Leases expire, businesses have to either renew or move. In this environment, tenants are also likely to consider moving to new space to reduce operating costs. So leasing brokers stayed busy.

Quite often, in fact, building owners offer incentives to brokers who bring them tenants or lease space in difficult markets. That is certainly reflected in search activity inside of CoStar Property Professional which could be an indicator of future lease activity. Search activity in our information service has been fairly stable, indicating brokers are still out there searching for space for their clients.

General consumer search activity on the Internet for commercial real estate also remained high. We are seeing about 1 million searches a month being conducted on CoStar.com using our CoStar Showcase service. It is important to keep in mind when analyzing national averages, while they provide a good indicator of general overall trends, wide variations in market conditions exist between individual markets.

Some may be down dramatically, some may be fairly flat, and still others may be up dramatically. It is important when analyzing a specific market or asset to drill down to the market or even submarket level. Not all markets go into a cycle at the same time, come out of a cycle at the same time, or react the same in each cycle. CoStar products enable subscribers to analyze rents by market, submarket, even property class or for a specific set of selected buildings, enabling users to examine each market on its own, taking into account the economic drivers of the major impact of market and submarket conditions.

I expect we will see -- we will continue to see dramatic changes in market conditions over the next few quarters as the full extent of the impact from the financial crisis becomes clearer. However, it is clear now that the business environment is fundamentally changed and companies of all sizes and every industry will be grappling with the extent and severity of the crisis for some time.

Although the intrinsic value we believe our information provides continues be reflected in high overall customer renewal rates, the adverse economic conditions have had a negative impact on our customer base as reflected in net sales this past quarter, continuing a trend of slower quarterly revenue that we saw starting in the third quarter. Also again last quarter, the devaluation of the relative value of the pound and Euro to the dollar has continued to reduce the value of our dollar reporting from International sales.

It is clear the recession's impact is being felt across a wider spectrum of clients for their predominance of cancellations are still focused among firms of significant exposure and plunged the number of property sales. Fortunately CoStar's customer base is extremely diverse. Our large client accounts for less than 4% of our total revenues.

At the end of 2008, the Company had 105 U.S. subscription sales reps, eight U.S. advertising sales reps, 10 in-house sales reps and 21 UK field sales reps for a total of 144 sales representatives. We intend to continue to grow this number just slightly in the first and second quarter of this year. Net U.S. subscription contract bookings were $9.2 million for the full year.

The average new contract value decreased 13% quarter-over-quarter from $6,642 to $5,805. The impact from adverse market conditions was also apparent in total subscriber count which only increased slightly year-over-year. The total number of paying subscribers in the fourth quarter 2008 was 89,712 compared to 88,751 for the fourth quarter 2007, a 1% year-over-year increase.

The Company executed agreements with 514 new subscribing firms during the fourth quarter of 2008. Our 12-month trailing customer renewal rate for CoStar's subscription-based services was 89%. Renewal rates with customers who subscribed to CoStar for more than three years remained in the mid-90s which is impressive given that we believe many of these firms saw 50% drops in their commission revenue. Firms who have been CoStar clients for more than three years appear to have renewal rate in excess of 95% while clients who have been there for less than three years have a renewal rate of approximately 70%.

While this phenomenon is common in information services, we have moved quickly to address this issue and provide our newest clients with the training and guidance needed to gain a thorough understanding of our products and derive appropriate value from them. Among other things, we modified and added incentives to our sales commission program to make a significant portion of the account executives' incentive payable not on contract signing but upon successfully getting most of the users at a new customer site using our service on a regular basis.

We are also taking a number of additional steps that we believe should increase product usage with our new client sector, which we believe will result in an increase in their subscription renewal rate and eventually our overall renewal rate, as well as in additional cross-sell, up-sell opportunities. Unfortunately, another result of a down market is we are seeing an increase in attempts by a number of unscrupulous firms trying to obtain access to CoStar's services illegally rather than paying for them.

We continue to make substantial progress in quarter in our ongoing efforts to protect our intellectual property and paying subscribers from those who seek to fraudulently gain access to our information or who otherwise use our information or images illegally. As previously reported, we have an established internal anti-piracy group that uses extensive fraud detecting technology to continually monitor CoStar's online information products to detect and prevent unauthorized access.

In 2008 and year-to-date 2009, CoStar's anti-piracy team has brought in nearly $1 million in out-of-court settlements with firms engaged in password sharing and has signed new agreements properly licensing previously unauthorized users with an aggregate value of approximately $900,000 in annualized revenue. As a matter of policy, CoStar intends to continue to prosecute individuals and firms that engage in this unlawful activity.

To the extent that such theft constitutes a crime, CoStar plans to work with appropriate law enforcement to bring the perpetrators to justice. I would also like to briefly update you on the status of CoStar's false advertising lawsuit against LoopNet which was filed February 2008 in Federal court in New York City.

As you will recall, our complaint alleges that among other false advertising claims, LoopNet is grossly overstating the size of its online audience by continuing to advertise it has more than 3 million registered users who are supposedly immediately exposed to paid listings on LoopNet's Web site. Now the contradicting truth about LoopNet's registered members has come out in open court. Under court order, LoopNet disclosed that 2.1 million of its claimed 3 million plus registered users never logged on to the LoopNet Web site over the one-year period ending mid-January 2009.

Even more damning, 94% of its claimed number of registered members did not log on over a 30-day period from mid-December 2008 to mid-January 2009. LoopNet's audience claims that are predicated on registered members who apparently do not log on to their Web site stands in sharp contrast to the practices of sites such as Facebook who only claim as an audience the number of members who log in at a 30-day period.

Obviously, we feel vindicated about LoopNet's revelation about the true fractional size of their online audience. Unfortunately, it has not had the intended effect of making LoopNet stop making flawed claims about the size of their audience. Since its claim to have is a 3 million active users was discredited in Federal court, LoopNet is in the marketplace claiming to have multiple times more traffic than the next largest Web site in the industry. However, to produce these comparable audience metrics, LoopNet is relying on a consumer-focused panel comScore, an Internet audience estimating method that tends to favor nonbusiness Web sites due to the consumer focus composition of their panels.

As a result of this consumer skewed composition, panels such as comScore may [underguesstimate] Web sites that cater to a business audience like CoStar.com. Being that our marketing efforts are to driving a qualified business audience to our subscriber listings we feel strongly that these comparative comScore numbers are mostly irrelevant for a site like CoStar.com and unique services like Showcase.

The clearest concrete example of how dubious these new claims are is that the comScore traffic is only an estimate while LoopNet's log on activity is a fact. LoopNet's log-on activity is only 25% of LoopNet's claimed comScore traffic. So despite the braggadocio or the Pinocchio without the benefit of his cricket the reality of their business is in fact diminutive.

We believe that our competing service, CoStar Showcase, with its many advantages to brokers and Internet users can win in any fair competition, [undisturbed] by any false and misleading audience claims and we plan to continue our efforts to make sure that commercial real estate professionals have all the information they need to make informed decisions about which service will best service their needs.

We launched Showcase just last May and already we are fast approaching the $3 million mark in annualized sales. Showcase is also now a profitable product because it does not require the same research investment as our information-based products. Not only is Showcase an earnings positive business for CoStar, but more importantly, it has proven to be a major hit with our clients.

We are receiving more and more testimonials from customers telling us about a tour they just gave or a deal they closed as a result of a prospect finding them on Showcase. Showcase is proving to be a extremely valuable tool for commercial brokers looking to maintain their flow of tenant and buyer leads in a time when traditional channels are drying up. Total search volume on Showcase was up 50% during the fourth quarter, increasing from 1.9 million sources in the third quarter to 2.9 million in the fourth quarter and property views increased as well during the same period from 58 million property views to 61 million.

Additionally, we have seen consistent quarter-over-quarter increases in the number of unique visitors to CoStar.com following the product launch, another key indicator that Showcase is becoming increasingly popular among people searching the Internet for commercial property. We believe this will directly translate into stronger results for Showcase subscribers by generating more property views and leads.

We have been able to achieve growth in our unique visitor traffic, property views and leads generated while maintaining a fairly consistent marketing investment. Using intensive and ongoing search engine optimization efforts which involve various methods we use to capture more free traffic from major search engines like Google and Yahoo! The percentage of traffic generated from free organic search results was over 100% higher than the percent generated when we first launched product in the second quarter of 2008.

While we plan to continue to invest in paid search marketing efforts on behalf of our clients, a key benefit we believe really helps set us apart competitors in this space, we believe that the addition of these free links on the organic results generated by the search engines only bolsters Showcase's position as a preeminent place to advertise listings online.

We believe the extraordinary demonstration of acceptance and use of Showcase in such a short period of time is a testament to its overall success and provides the most effective platform available to commercial real estate professionals for generating leads from the tens of thousands of business professionals who search the Internet each day for available commercial real estate. In addition to the obvious appeal, the searchers of the continuously updated listing information afforded by CoStar's extensive research operations, Showcase does not searchers to register, join membership to search for available lease and for sale property lists on Showcase.

Unlike many other sites, Showcase does not pepper searchers with endless pop-ups and registration requirements. We believe that both property marketers and searchers favor the unrestricted and frictionless search format available on Showcase and in the end could result in more leads for our clients.

Finally, a big advantage for Showcase subscribers is that the service does not require additional upkeep and maintenance on their part. Their CoStar research analyst simply contacts them for their regular update as usual and the verified listing information is automatically displayed throughout CoStar's products, including Showcase, eliminating the need for any additional data entry on the broker's part.

Ultimately this rapidly growing service expands our Company's focus more directly than ever into the marketing side of the commercial real estate business. For more than 20 years, our clients have thought of CoStar as being their research partner. Now with Showcase, we have taken a major step to positioning CoStar as their marketing partner as well, and the timing could not have been better.

We believe that Showcase is a product that is countercyclical and it helps brokers to generate leads inexpensively and ultimately helps them to generate quality leads at a lower cost than other marketing alternatives. Proof of this countercyclicality is that we had our best month ever in advertising revenue in January. Jim Black and his advertising team that sells preferred positioning within our subscription products sold nearly $0.5 million in advertising revenue in January.

We believe this is exactly the lead generation remedy that brokers are looking for in a down market. Our research operations have continued to perform exceedingly well. Our research team provides the core data as a source for our value and identity as a Company. They continue to do an outstanding job in researching all the markets we cover and demonstrate their value by aggregating listings and confirming their accuracy in an extremely efficient and timely manner.

All told, these efforts ensure that CoStar offers what we believe to be the most comprehensive and accurate data of commercial property in the U.S. and UK with 3.2 million properties, now 9 billion square feet of space available, over 1.2 million listings, more than $1 trillion in listing value in our system currently for our clients, 7.4 million images, and information on 5.7 million tenants.

Finally, I want to expand on my earlier comment that we believe the research team will grow slightly this year in order to continue to meet customers' expectations. Research productivity has increased more than 100% over the last year or so, but at some level of listing growth, head count must increase somewhat.

As we stated in the press release issued yesterday, our strategy going forward is to remain focused on building and growing integrated research, information and marketing services for commercial real estate clients throughout the U.S. and UK. Despite the near-term challenges, we see opportunity in the current environment to capitalize on our existing research assets to introduce new products and services and expand our business in key areas while positioning the Company for accelerated growth when this recession ends.

One of the areas we intend to focus on is the expansion of CoStar's analytic capabilities. That has been a strategic goal for us for the past few years. Following the withdrawal of our offer last year to acquire REIS, a New York-based commercial real estate information provider, we stated our intention to focus on further developing our own analytics service rather than pursuing the acquisition of REIS.

Thousands of our clients recently participated in a recent series of webinars we conducted on the changes in market conditions and the clients' positive response underscores the demand for CoStar to expand our role as a data provider and provide clients with additional market analysis and insight. 90% of the webinar participants said they would be interested in attending future events.

In addition benefiting from CoStar's superior research and market coverage, we believe our core subscribers would value the addition of a more enhanced analytic module within CoStar Property Professional. We intend to pursue that option in the near future, and we believe it will be very well received.

Before finally turning the call over to Brian Radecki, CoStar's Chief Financial Officer, for a more in-depth discussion of financial performance and outlook, let me reiterate that we are very focused on managing our business, minimizing new spending, and preserving value to continue to operate profitably in this economic environment. We believe that the fact that we grew 10% and posted record earnings during what certainly appears to be the worst recession in two generations reflects the strong fundamentals for our business.

Our products provide great value to our customers. Our financial position is solid and is based on long-term investments that we expect will continue to generate additional revenue opportunities. I am confident that we will manage our expenses and continue to have the resources we need to operate our business and invest in areas that offer the greatest possibility for delivering long-term value to our customers and shareholders and opportunity to our employees, and additional growth opportunities for CoStar Group. Thank you. Brian?

Thank you, Andy, you can take a breath. As Andy mentioned earlier, during Q4 CoStar posted another strong quarter of earnings growth and cash generation. In yesterday's press release, we provide adjusted results for 2007, net of the Q4 2007 one-time lease settlement gain.

We believe these adjusted 2007 results provide a better basis for comparing our full-year and fourth quarter 2008 results. Our net income for the fourth quarter 2008 increased 96.5% to $7.5 million, or $0.38 per diluted share from $3.8 million or $0.20 per diluted share in the fourth quarter 2007 excluding the fourth quarter 2007 one-time lease settlement gain.

EBITDA, which is our earnings before interest, taxes and depreciation and amortization, for the fourth quarter 2008 was $16.7 million, an increase of 82.3% compared to EBITDA of $9.2 million for the fourth quarter 2007, again excluding the one-time lease settlement gain. Reconciliation of EBITDA and all non-GAAP financial measures discussed on this call to GAAP basis results shown in detail in our press release issued yesterday. The press release is also available on our Web site at www.CoStar.com.

Revenues in the fourth quarter of 2008 increased sequentially approximately $125,000 compared to the third quarter 2008, excluding the unfavorable impact of foreign exchange rate fluctuations on International revenue. In the fourth quarter 2008 alone, the unfavorable impact from quarter-over-quarter changes in exchange rates totaled approximately $1 million.

On a functional currently basis, U.S. revenue in the fourth quarter of 2008 totaled $48.2 million compared to $48 million in the third quarter of 2008 and International revenues totaled 3 million pounds in the fourth quarter of 2008 consistent with the third quarter of 2008. International operations contributed 9% of total revenues in the fourth quarter and International subscription revenues accounted for approximately 89.2% of this revenue in Q4 of 2008.

In Q4 of 2008, non-subscription-based revenued, which is ad hoc revenue that is mostly related to services that facilitate the buying and selling of commercial buildings, continued to be extremely weak. We do not expect this type of non-subscription-based revenue to improve for many, many quarters given the current market conditions. But as most of you probably know, this type of non-subscription-based revenue accounts for less than 5% of CoStar's total revenues unlike other competitors in our space.

CoStar's subscription revenues actually accounted for 95.7% of our total revenues in the fourth quarter of 2008. Turning to our renewal rate, which is a measure of renewing subscription revenue, our 12-month trailing renewal rate remains strong at 89%. We consider the 12-month trailing customer renewal rate to be a good indicator of the strength of our business model as subscription revenues account for most of our total revenue and the majority of our subscribers are on annual agreements.

All in all, we believe this type of renewal rate is still very healthy based on where we are today with regard to the economy and clearly is heads and tails above most of the other public companies that I am aware of. As I have publicly stated for the past year or so, we do expect the 12-month trailing renewal rate to continue to decline in this type of environment that we are currently in to the mid-80s this year.

As Andy stated earlier after announcing the Q2 it goal of 2007 of 30% EBITDA margin in the U.S. and break even in the UK before the end of the year, we have once again delivered on that goal. Our International operations finished the fourth quarter above break even, and our U.S. operations powered on tallying 34.5% EBITDA margin. In addition, the fourth quarter we actually surpassed the 30% EBITDA margin for the consolidated U.S. and International operations, a long-standing goal for the Company, most of you are aware of.

Our consolidated EBITDA margin in Q4 was 31.6%. Now we are focused on the 2009 plan and outlook and also remain focused on the longer-term goal of working toward achieving the goal we set out in the second quarter of 2008 much like the goal we set out in the second quarter of 2007 of $100 million in annualized EBITDA run rate by the end of 2010. We believe this goal is achievable based on our strong subscription-based business model even as we face a very difficult economic and commercial real estate environment in 2009, assuming conditions begin to recover by this time next year.

Once we start seeing positive GDP growth again, we expect to return to the more normalized revenue growth rates we have enjoyed over the past decade, which we expect should result in margin expansion up to the $100 million in EBITDA goal as the majority of the revenue drops from the top line to the bottom line. Continue to expect to add new subscribers, renew current subscribers and generate strong earnings through this challenging economic environment.

Now let's discuss gross margin which decreased by approximately $900,000 from $36.1 million in Q3 to $35.2 million in Q4 of 2008 mainly due to the decrease in revenues of approximately $800,000 coupled with a slight increase of revenues in $100,000. Gross margin was 66.5% in Q4 of 2008.

Moving to expenses for the quarter overall operating expenses were $22.4 million in Q4 2008, a decrease of $2.5 million from $24.9 million in Q3 2008. This decrease resulted principally from lower sales commissions as our net new revenue was moderate in Q4.

Some other reductions in marketing and travel and legal costs in the fourth quarter also contributed to the decrease in operating expenses. Legal expenses for the fourth quarter were approximately $800,000. We consider these legal costs like most other public companies to be normal recurring costs which we anticipate will continue for the foreseeable future.

As you are aware, we are currently involved in several lawsuits and could be involved in others aimed at protecting our intellectual property rights. As always we follow U.S. GAAP basis accounting and report all of our legal expenses in our income statement, EBITDA, and in our earnings outlook for the year.

With respect to our balance sheet, we ended the fourth quarter of 2008 with approximately $224.6 million in cash, cash equivalents and investments, an increase of $37.2 million since December 31, 2007 and have no long-term debt. In the fourth quarter 2008 alone, we added over $11 million in cash and investments. On a full-year basis, 2008, net income increased 144.9% to $24.6 million or $1.26 per diluted share compared to $10 million, or $0.52 per diluted share for 2007, excluding 2007's one-time lease gain.

EBITDA 2008 increased 114.5% compared to EBITDA of 2007 of 26.4% net of the one-time lease gain. Total revenues, as Andy said, were $212.4 million, an increase of 10.2% over revenues of $192.8 million million in 2007. Now I will conclude my remarks with our outlook for the first quarter and full-year 2009 in detail.

As always our guidance takes into account recent growth rates, and our results may be impacted by the uncertainties around foreign exchange fluctuations as well as changes in the global economy. We have attempted to reflect global weakness in the economy in our guidance, but recognize we are in a period of significant flux and cannot predict the direction of various market factors. However, we remain confident in our earnings guidance as we believe one of the key strengths of our subscription-based business model that it provides good earnings visibility even in a very difficult environment.

As explained in our press release, we are providing revenue guidance separately for our U.S. and International operations given the uncertainties around the exchange rate fluctuations. In the U.S., we expect first quarter 2009 revenue in the range of $47 million to $48 million and International revenue in the range of 2.7 million to 2.9 million in British pounds. For the full-year 2009, we expect U.S. revenue in the range of $185 million to $190 million and International revenues in the range of 11.5 million to 12 million British pounds.

Given the unprecedented current economic environment, our actual first quarter and full-year 2009 revenue results could differ slightly from our guidance. In more detail, let me talk about the rest of the P&L. We expect cost of revenues, which was approximately $17.7 million in Q4, to rise slightly throughout the year to approximately $18.8 million by the end of 2009, which relates to variable timing differences for new hires in research and other research-related costs.

If you go back to the last two conference calls, I will remind everybody that half of the decrease in cost of revenues, about $1.4 million that I pointed out in Q2 and $700,000 in Q3 I stated was only temporary. As Andy stated earlier, we expect to focus our efforts continually on striving to increase the quality of research and, therefore, we will expect to continue and hire and staff the research group to provide the highest quality information to meet the needs of our clients during this difficult environment.

There is no new investment here, just more focus on keeping the staffing levels where they should be. Selling and marketing should remain flat or slightly down in 2009 compared to 2008. Software development should remain fairly consistent and flat in 2009 compared to 2008. G&A is expected to increase slightly, $1 million to $1.5 million annually year-over-year mainly due to increased bad debt in 2009 compared to 2008 due to the current economic environment, which we are seeing an increase in the number of businesses failing or filing for bankruptcy.

We also expect the interest rate for our interest income to be approximately 0.5% to 0.8% in 2009. Please note the majority of our approximately $225 million in cash, cash equivalents and investments currently in cash or assets invested in U.S. Treasuries or other U.S. government money market funds. Therefore, we expect $3 million to $4 million less in interest income in 2009 compared to 2008. Just this morning I saw an e-mail saying that currently the Fed funds rate is at 0.15%, with the Fed funds target a range of 0% to 0.25% as I am sure most of you are aware.

As we continue to invest Internationally the mechanics of our effective tax rate calculation continues to be affected by the amount of income or loss in the UK. The tax expense or benefit from the UK operations is not equivalent to the tax rates of our U.S. operations, which can have an impact on our overall blended effective rate. Overall, we expect our effective rate to be approximately 45% for 2009.

In terms of earnings, we expect the first quarter 2009 fully diluted net income per share of approximately $0.28 to $0.30. For the full-year 2009 we expect fully diluted net income per share of approximately $1 to $1.05, which includes approximately $5 .5 million in pre-tax, non-cash equity compensation charges related to the divesting of restricted stock and stock options.

We also expect capital expenditures in 2009 of approximately $4 million to $7 million, including investments in facilities to upgrade several field hub sales offices so network equipment and workstations to upgrade and support the ongoing operations. In conclusion, the entire CoStar management team remains focused and fully committed to achieving our new outlook for 2009.

We fully expect to manage the business through this current environment and to capitalize on our stable subscription-based business to position us for long-term growth opportunities and to work towards our long-term goal of $100 million of annualized EBITDA. Once again, we believe our Q4 results demonstrate our commitment to delivering on long-term goals that we set out, just as we have many, many times before as a public Company.

Economic conditions could worsen, but we believe we are prepared to weather this economic cycle. We also believe our services are core to our clients' ability to deliver on their businesses and that the market need for our services remains resilient, as evidenced by the Cushman & Wakefield agreement signed yesterday.

Our business model remains strong on the fact that we have a 95% subscription-based business with high renewal rates, we have a unique proprietary database with a market leading position, with a strong balance sheet, and no debt, and high cash flow. We also believe these challenging times will continue to create opportunities for us as a market leader.

We continue to believe there is significant opportunity for additional high margin revenue growth following the investments we have made and with the addition of new services like CoStar Showcase. As we have explained many times, CoStar is not immune to the challenges facing the economy today, but without a doubt 2009 will be a tough year, but we are clear about our priorities and confident in our plans.

We continue to look forward to reporting that progress to you. And with that, I open up the operator, call for questions.

( Operator Instructions ) The first question will come from John Neff from William Blair, please go ahead.

Hey, guys.

Hi, John.

Andy, I just wanted to make sure I got a couple of things right that you said. I think you referenced 100% growth in research productivity during, I think, 2008. Can you talk about how you define that?

Sure. Actually in the -- in the two-year period, the listing count grew, I believe, 240% and researcher head count grew 13%. So a huge productivity gain over a two-year period. That was achieved through continuing improvements in software, the integration of the comparable sale research team, the tenant team and the listing team, made them much more efficient.

Call recording systems for better coaching of the researchers, but at some point, the sort of unprecedented growth in the database requires you to realistically not continuously count on productivity gains to deal with the increased workload. We still are meeting the quality expectations we want but we want to make sure we continue to do that.

John, I want to point out again. There are no investments here. This is keeping the staffing levels where they should be. We have been around for the past 12 months 850 to 950 researchers pretty consistently up and down in that range.

We happen to end the year at the low end of that range, and I think -- again, I encourage everyone to go back to my last -- the last two transcripts. I mean I pointed out fairly specifically the numbers in saying that half of it was temporary. I think the goal and focus this year, as Andy said, is to make sure we are providing the highest quality research, so we do expect to actually continually push that number up to the high end of that range to provide that quality to our clients.

No, I appreciate that. And then -- one thing, Andy, I am not sure if I heard you right as well. I think you talked about -- were you projecting 1 billion square feet of negative absorption over the next two years? Did I hear that right, number one? And number two, can you compare that to the magnitude of whatever you did say to prior downturns?

Sure. Okay. That is a number across all types of real estate. All types of commercial real estate. Not just the office sector, but that's right.

I mean we are talking about big numbers here. So if you lose 6 million jobs, that's going to have a significant negative impact on absorption. And by comparison, I think, during the dot com bust, the worst quarter for office only leasing was $37 million, negative absorption. So order of magnitude sort of increased in negative absorption.

And then -- I was wondering, could you just -- could you describe -- you mentioned a couple of things. Could you describe the types of specific analytics products you envision delivering in the next, call it 12 to 18 months? And then what has to be done/spent to deliver those products?

Good question, and I am going to remain somewhat vague for all those competitors listening to the call today. The -- what we are basically doing is we are redirecting a lot of our systems resources or software developer resources towards continuously releasing incremental upgrades to our product that makes the utility of our products more valuable to people who are trying to value and analyze commercial real estate assets.

So it's going to be a whole series of incremental upgrades giving you more indicators on the real estate markets, giving you a tie-in from our commercial real estate data to related streams of data. We are also going to be -- for instance, the Web in our series that we recently hosted we had several thousand people participate where we did 90-minute sessions by product type reviewing commercial real estate market conditions.

I did the office sector one. We like to bring in people other than myself to do those, and begin to bring in some top economists who interpret all the information that is in our system for our customers, as well as to add forecasting to our products.

So incremental spend is -- there is -- I don't really think there is an incremental increase in software development costs associated with this, and we are talking about probably less than half a dozen additional personnel. So it's more a change of focus than a cost investment.

Yes. So this is very incremental to your cost base?

Right. It will make us much more competitive in that space, though.

The -- the ad sales that you mentioned in January, I think $500,000, was that -- was that essentially preferred property listings on the Showcase/CoStar.com platform? Was that part of the $3 million annual sales for Showcase or was that categorized differently?

No, it was categorized differently. That was -- Jim Black, the person that -- the namesake of Black's Guide, for the last several years has been leading an advertising sales team that sells preferred placement within our professional products. So that the brokerage community, when they do a search for space available in a given area, advertised properties within our professional product will come to the top of the results site and get additional exposure to the brokers. So that half a million in sales in January, that product that has been out there for several years. That is not Showcase.

That is separate and distinct from Showcase, but shows the countercyclicality. If you are sitting on 100,000 square feet of class A space for $55 a foot and it's not leasing, you go buy an ad for a couple hundred books or a couple thousand dollars.

Then I just -- you gave the net bookings number for the year, I think it was $9.2 million. Just doing the math, is that -- it was about $100,000 net in the fourth quarter?

Yes. It was -- it was positive in the fourth quarter.

Okay. And then -- I can get back in queue, but maybe one more before I do that. Just -- thinking of the guidance, the -- the first quarter guidance, you take the midpoint and you get about $1.16 annualized in '09 EPS.

Your guidance is $1 to $1.05. Just wondering what that -- is that a reflection of -- of the renewal rates over the course of the year continuing to move down to that mid-80s level on a trailing 12-month basis, a function of gross sales, or is it -- is it expense -- it just seems a little -- you are clearly expecting things to get worse as the year progresses?

Yes, I think it is a function of kind of everything that you said. I think obviously I have been saying it for a long time, and I think we are seeing it happen. We do expect the trailing 12-month renewal rate to decline this year to the mid-80s. Obviously, I think that will put pressure on revenue hence the guidance ranges that we gave basically flat or down slightly.

So, again, we don't know how bad that is going to get. We will have to factor all that into our guidance. In addition to the other areas we talked about, I do expect the cost of sales line to increase slightly as we try -- as we try to basically stay fully staffed.

We have a lot lower turnover than we have ever had, part of it is the economy and part of it is the great job that the research group is doing, so we would expect to stay at more full staffing levels and you will see that number come up to what I would say is the more normalized rate which is again what I kind of communicated the last couple of quarters. I do expect to see increasing bad debt, John. I think it is unrealistic.

When I look at -- you know my days of sales are up 19.7 up to 22.3 from Q3 to Q4. Bad debt is up also, so I think it is prudent for me to guide to higher bad debt. There's just more companies going bankrupt. I think we have to factor that in.

And then, obviously, the interest of which I explained. The interest is basically almost zero. We have some longer-term instruments out that are still helping to push our number up a little bit, but I expect that to decline even with an increasing cash balance this year. So some of it to me is very mechanical as far as the interest goes.

That really has nothing to do with the core operations. But I think it's pretty prudent guidance. There's a lot of companies that are not coming out with annual guidance at all, which I don't necessarily agree with. So I think, obviously, we are trying to do the best we can in this type of environment.

Last question and then I will get back in queue. The fourth -- you mentioned the annual -- the typical annual term for the subscriptions. Is the fourth quarter -- first, can you remind us of seasonality of the renewals? Is it overly, is it typically concentrated in the fourth quarter or the first quarter? And what kind of advance notice are you -- are you requiring from customers from a renewal or a cancellation standpoint?

Sure. It is basically fairly smooth throughout the year. It is slightly higher in the first quarter, and -- and typically they would have to have at least two-month notice.

Great, thanks so much.

Thanks, John

Our next question from Jon Maietta from Needham and Company. Please go ahead.

Thanks, very much. Brian, just to piggyback off of John's question there. When thinking about kind of revenue linearity across the year, let's assume the economy stays as is for sake of argument, would it be fair to assume you will see a down sequential Q1, Q2, maybe some stabilization in the revenue line in Q3, and maybe we get an uptick in Q4. Is that kind of a rational way to think of about it?

Yes, I think it is pretty rational if you look at the guidance essentially, I am guiding down in the first quarter only by -- you can look at the range, a couple hundred thousand dollars or so. So I think we are expecting -- I think I am expecting -- companies are going to go bankrupt are not going to make it until the end of the year.

So realistically, if I am projecting I am thinking that the majority that will struggle are going to go out bankruptcy early in the year and, obviously, we do hope to see some recovery as we get through to the end of the year. So I think that is a good way to look at it.

Okay. And then, Andy, maybe you can talk about the customer base a little bit and maybe incorporate some of Brian's comments there in your feedback with regard to bankruptcies. Would the greatest preponderance of those bankruptcies do you think would be kind of with some of these property owners who have levered up in the past when debt was cheap, as well as some of the smaller brokers who are maybe just closing their doors for business as well?

Yes, -- the, there is a definite pattern to the folks who are going bankrupt. It's not your established. Obviously, the established brokerage firms of the mid to upper size are under severe pressure.

It's the folks that predominantly deal with buying and selling commercial real estate at the middle and lower end that are just getting killed and they are going bankrupt, or the folks who are originating commercial real estate mortgages, you know, smaller entrepreneurial operations. They are being decimated.

We actually had two cancellations in that area where the customers took their lives, where they were involved in some speculative stuff, some investment sales and just got hammered. So you are seeing some brokerage firms where they have speculative development as part of the firm who are in trouble. We don't have a lot of exposures to the owners who have overleverred. That is a smaller part of our business.

The good news here -- the very good news here is that our biggest exposure is to brokerage firms that do leasing for a living. And while that area is under duress, they are not experiencing anything like what these other sectors are experiencing.

Okay. And then any material change in some of the other customer sectors over the past couple of months whether appraisers, government agencies?

Well, the government is growing.

Yes. (laughter)

The appraisers are actually doing -- should actually do okay, because with values moving all over the place, people are more interested than ever in what the value of a corporation's assets are, an owner's assets are. So I think the appraisers will do okay in this situation, and I would hope that our government business grows over the next year or so.

Okay. And then Brian, just sort of a couple of items with regard to cash flow, would you happen to have what CapEx and cash from operations was in Q4?

Yes, CapEx was pretty low, it was about $0.5 million. I think we closed the year a little bit lower than $4 million, something lake that. Cash flow from Ops is in the $30 plus million or so. I don't have the exact number for me, but we will be filing our 10-K on Friday or Monday at the latest and we will get all the exact numbers in there.

Okay. And that's it for me. Thanks very much.

Thanks, Jon.

The next question is from Jim Wilson from JPMorgan Securities. Please go ahead.

Hi, good morning, guys.

Good morning, Jim.

Let's see, a couple two things here. You gave the number of new accounts generated at 514 for Q4.

Yes.

Do you have a number for how many you lost?

We do not.

More than 514 or less?

Just like with sales, sales was up slightly for the quarter. I don't have the exact number, Jim, but sales were up for the quarter, even net new bookings were still positive and client ads were positive.

So effectively you didn't necessarily see yet out of Q4 that loss has exceeded adds. You are just expecting that given the abysmal market conditions and what you are seeing or hearing from clients?

Correct.

Yes, that kind of makes sense. Same thing. Are you expecting any meaningful change. I am guessing you might spend less at ICSC this year?

Well, yes --

Or are you even going?

ICSC, what? ( laughter ) no, the -- we actually -- Jim, that is a good question. We are reducing our presence. You will not see a 10-story Billboard on the hotel across the street from the convention center this year.

We are definitely spending less money, but last year we actually sold more in annual subscriptions than we spent at the show. So the show was profitable on an absolute basis. We can't walk away from it. We have to participate. We made money there.

We are still participating I think we are obviously just trimming back a little bit of some of the expenses but we will still be there.

Sounds good, all right. -- final thing.

Sorry to waste your time, but I think we used to give away Porsches as a draw and then we went to a two-year lease, now we are doing a weekend rental.

Yes, okay. ( laughter ) okay. Then the final thing just -- all your cash. And I know you are asked this plenty of times. Any thoughts on anything you might do? Is this the point in time you might even look to buy stock back? Obviously -- or why what do you think of acquisitions? Obviously, the REIS deal or the would-be REIS deal went away, but what do you think of anything you can do with cash to drive a higher return?

We still are very optimistic about the ability to opportunistically take advantage of some potential acquisitions out there. There are companies that will take a beating that don't have a strong balance sheet in this downturn. They can have some real value to the Company.

We want to keep our eye on that and see what emerges. I think it is still a little early right now. So we're -- again, we constantly re-evaluate whether or not to do a share buyback to do something else with the cash, but given the extreme uncertainty in the market right now, it is likely we are going to sit tight for a little bit.

Okay.

But there are some interesting things out there.

All right, thanks.

Thanks, Jim.

The next question is from Chris [Simone] from Deutsche Bank. Please go ahead.

Thanks. Hi, guys.

Hi, Chris, how are you doing?

Good. First to be clear about the revenue guidance. The guidance isn't predicated on any sort of back half recovery. It's just something you are hopeful to see at this point, right?

I don't think we are terribly optimistic about recovery in 2009. I don't see that happening.

Okay. Sort of a follow-up to that. I know you made some comments on 2010 and hoping that GDP returns to positive territory. Where you sit today, is there anything that you are seeing that makes you optimistic that that could happen or is that -- just sort of drawing a line in the sand there? Can you maybe flesh that out a little bit your comments on 2010?

Well, we obviously -- I would defer to the Federal Reserve on the outlook for 2010. So we are just -- I -- based on our experience with the '90s, I would say it is safe to say that the -- that the investing side of commercial real estate, the selling -- the buying and selling of assets will -- will not recover in 2010. It will not recover in 2011, and probably won't recover until 2012.

The leasing marketplace will be the first to recover, and it will recover once employment losses stop. You will have a reasonably quick recovery because you don't have a lot of excess inventory. So '09 will be negative. And I -- it is out of my pay grade to forecast the GDP in '10.

Okay. Any sense -- I guess what -- what are your expectations for what Showcase will contribute to the top line this year?

I'm fairly optimistic. We have some -- we are not prepared to talk about it, but we have some innovative new ways to sell the product, and I think it will be a great year for CoStar Showcase, and I think it will keep the revenues moving in a very, very extraordinary difficult time.

And Showcase has been most successful product launch we have ever had as far as that goes and continues to be, and we do expect it to be all of '09 so --

Now, Chris, you took the one-time gain out last year so don't put it back in for the year-over-year comparison.

Right, right. ( laughter ) Okay. And I think you mentioned -- I think you mentioned your add -- you add a little bit to the salesforce on the first half. About how many heads are you guys expecting to --

I think 10. 10 to 15, somewhere in that zone -- hopefully good ones.

Yes. And then any -- any issues with, I guess, you mentioned you have very low turnover, was that just the research staff or is that sort of sales and research everybody all together that you are --

That's across the board, the research turnover is extremely low and generally turnover is very low as one would expect.

Right. All right, and -- go ahead.

Good news also is there are great candidates out there. As we bring in these new sales positions, there is some really good talent out there.

Okay. I guess lastly just on the UK. I know it's a relatively small part of the business still, but just liking at the last few quarters, has revenue really plateaued in that market or just --

Oh, absolutely not, Chris. I think my sense of things is that the UK commercial real estate market went into this downturn a full two quarters ahead of the United States, and so I think the brokerage community over there, the surveyors got hit a lot earlier than the U.S. did. And they -- and actually I think we are seeing some signs of recovery in our sales in the UK right now.

My belief, if you compare our revenues, we've accomplished a lot in the UK that wouldn't show up in revenues in 2008. Like we went from 30,000 listings at the beginning of '07 to 100,000 listings at the end of '08. As I met with our biggest customers in the UK in the fourth-quarter 2008, we have gone from being regarded as a small sort of optional vendor in that market to becoming clearly the best, highest-quality provider of information service to the industry over there and an absolute utility.

And if you take the it shall our experience of generating revenue per millions of square feet in a given market, I would expect that -- that market can quadruple and grow tenfold over the next 10 years or so. So I think that will be a bright spot to the Company over the next decade.

Great. That's it for me. Thanks, guys.

Thanks, Chris

The next question is from Vance Edelson from Morgan Stanley. Please go ahead.

Hi, thanks a lot. On the number of sales reps, it looked like it dropped from about 170 a year ago to 144 most recently. But you also mentioned that the turnover is very low. I assume that is across the entire business. So is that reduction mainly a reflection of the cost-cutting efforts in reaction to reduced selling opportunities during the slump, is that what we are seeing there?

A little bit of that. We are also -- given the very large number of markets we have released in the last two years, we are moving a little bit more to slightly more hub and spoke sales system. We are going to be concentrating -- not trying to put our salespeople into every single MSA out there in the United States, but rather than centralizing them in a couple of dozen, a dozen or so offices around the country. There's a transition going on there. We have a significant number of sales reps in training right now who will be in centralized locations.

Okay. Got it. And any plans to hedge the foreign exchange exposure. A lot of people expect the dollar to strengthen which would leave you susceptible to additional unfavorable FX impacts. Any additional thoughts there?

Actually we did the work. We have some money in several different international banks that we spoke to, RBC, HSBC, and I have gotten four or five different reports. I have one report of it going down to 1.1. Another report of it going up to 1.6.

I think currently we are at 1.4 something. So I think there is a lot of uncertainty going in both directions. So I think right now we will stay put. We have hedged in the past. So obviously we will watch it carefully and if we feel like it is appropriate, it is something that we will consider.

Okay. Got it. A final question from me. You mentioned as an example how CB Richard Ellis has reduced numbers that they have seen the past year. Can you comment on how lower activity levels in general could impact your ability to gather data and keep it up to date? Are there any special considerations there is on your operations as we move through this cycle?

Yes, well, you -- actually it will be kind of easier to collect the data. There will be more volume of it. So people are more motivated now than ever to make sure that they are putting their information into our system, and that is great.

We are continuing to see our "for sale" listings and our lease listings information boom, and our success is part of the reason we have to actually add a few more researchers because they are being very forthcoming and talking us to too much.

Got it. Okay. Thanks a lot.

Thank you.

(Operator Instructions) We do have a follow-up from John Neff. Please go ahead.

Hey, guys.

John, you always like to open and close these calls, right?

I try my best.

Okay.

Brian, I was wondering if you could just comment on the status of your NOL carry forwards and if you will be a full cash taxpayer in 2009, what the status there is? And then, Andy, I was wondering if you could comment on -- on what, if any, inroads you are seeing from Xceligent, given the funding of that company from one of your competitors in recent quarters? Thank you.

Sure. We have utilized all of our NOLs. After many, many years, we actually utilized all of them in the U.S. It will be full cash in the U.S.

We, obviously, have a bunch of NOLs in the UK that will be able to utilize over the coming years. So, again, it is kind of that blended rate. It will look a little bit higher than the actual cash taxes that we are paying. Even at 45% will be paying cash taxes at something just south of 40% or less because of the UK, U.S. differences.

And, John, to answer your question, I believe that the competitor you are referring to. There are rumors they have launched a service in Winter Harbor, Maine and in Osceola, Iowa, and that it will be up and running shortly. But in markets like San Diego, California, and I am being somewhat facetious. I think a press release about Little Rock and another market that would be in the -- would not be in the top 100 U.S. MSAs and the majority of the revenue business comes from the bigger cities.

We have seen, for instance, in Denver, we conducted focus groups out there recently. And the word there was that a number of major shops left the brokerage association there and had stopped subscribing to the competing company you are talking about. And then I heard in San Diego a number of major shops had stopped subscribing there as well, so we are actually doing extremely well against that competitor.

And I think as long as they are launching the cities that have less than 200,000 population it is a complete nonfactor.

And I believe we have more revenue in one of those markets than they have across the entire country. And shoot me the day our business is built on sub-200,000 MSA markets. Okay. Great. Anything else, John?

Nope, that was it. Thank you very much.

Thanks, guys. With that we will wind up and thank you for joining us for this fourth quarter year-end conference call and we look forward to speaking with you next quarter.

Thank you, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.