CoStar Group Inc (CSGP) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CoStar Group first quarter 2009 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 session with instructions being given at that time. (OPERATOR INSTRUCTIONS.) As a reminder, today's 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 first quarter 2009 conference call. Before I turn the 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 not limited to, those statements in CoStar's first quarter 2009 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, 2008 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 the date of this call, and CoStar assumes no obligation to update these statements. You can find a webcast on our website at www.costar.com/investors. Thank you for joining us.

I will now turn the call over to Andy.

Thank you, Mr. Trainor, and welcome, everyone, to CoStar Group's first quarter 2009 conference call. I'm very pleased to once again report that CoStar Group completed another profitable quarter earning $6.1 million in the first three months of 2009. This represents a 21% increase from $5 million in net income in the first quarter of 2008.

First quarter 2009 EBITDA also increased year-over-year to $14.4 million, a 25% increase compared to EBITDA of $11.5 million in the first quarter of 2008. Being able to report year-over-year growth and quarterly net income in the middle of a very challenging economy is a test and is the strength of our business model and certainly something that all of us here at CoStar Group are proud of.

I'm pleased to report the Company continues to enjoy a very strong financial position. CoStar Group completed the first quarter with no debt and very large cash reserves. Because we identified deteriorating market conditions more than two years ago, we have focused on growing earnings, expanding our EBITDA margin, and significantly strengthening our balance sheet, which remains one of the Company's greatest assets.

We increased our cash balance by $8.9 million in the first quarter of 2009 for a total of $233.5 million in cash, cash equivalents, and investments on hand. The majority of these assets are in cash or invested in U.S. Treasury or other U.S. government money market funds putting CoStar in a very secure and strong financial position.

Commercial real estate marketing conditions have continued to weaken in the face of unprecedented job cuts and deteriorating credit markets. As a result, many of our customers have experienced severely declining revenues and slowed their purchasing activity. Many commercial real estate companies and related companies have failed. Despite the current environment, renewal rates for CoStar Group's services remain relatively high within our core cut client base. Demand for our services is strong and we believe not nearly as cyclical or volatile as real estate markets are overall.

In fact, search activity in both our subscription-based information products and in our lead generation marketing products has been climbing steadily reaching an all-time high of activity in March. We believe CoStar is still an essential part of the commercial real estate business providing indispensible research verified information that is integral to our customers' leasing, asset valuation, marketing, and sales processes.

Furthermore, we believe we are still in the early phases of penetrating the full potential for commercial real estate information and marketing services in the United States and the United Kingdom. Last year, for example, approximately 56% of our gross sales were derived from new customers.

As economic conditions improve, we believe we will see a return to higher sequential quarterly revenue growth. Given our leading market position, the highly advantaged infrastructure we have in place, and the vast potential market we see for our services, we believe we can continue to achieve significant earning goals we have set for the Company as we have consistently done over the years.

While this past quarter has been slow for the industry, it's been busy and productive for CoStar's research operations. In the prior 12-month period, CoStar research interviewed 275,000 different industry players. In doing so, we conducted more than 2 million telephone interviews in order to verify and collect information. We processed more than 3 million incoming electronic submissions with information coming from brokers, owners, and the like. We reviewed nearly 100,000 SEC filings, CMBS filings, generally over the course of 24 hours after they're filed.

Our research analysts added more than 425 million square feet of new space availabilities during the first quarter of this year. Together with the more than $500 billion in forced sell inventory that was listed in our database, this comprehensive aggregation of available for lease and for sale listings represents a unique competitive advantage for our subscribers.

As I stated last call, the last thing I believe we should do in this current situation is to potentially harm our business by reducing the quality or scope of our research. Certainly, keeping an eye on costs and minimizing spending are the watch words of any recession, but even more important, I believe, is keeping the focus on our customers and ensuring that CoStar continues to provide the quality of information they expect and require in their line of work.

We have begun the process announced last call to grow our research operations slightly this year in order to continue to meet customer expectations. We are committed to protecting what we view as our unique competitive advantage by ensuring that our information and marketing services remain an indispensible solution for our customers.

It appears that commercial real estate asset markets have followed residential real estate into an asset bubble condition, and the bubble is well into the process of bursting. The CMBS and debt markets remain frozen creating something of a liquidity nightmare. Spreads on existing CMBS debt have skyrocketed. The commercial real estates are in disarray and, in fact, Dr. Larry Summers, one of President Obama's top economic advisors, said on Meet the Press this weekend that commercial real estate is quote -- the commercial real estate markets are falling part.

Outside of the credit problem, the most serious issues is soaring job losses. We have lost 5.2 million U.S. jobs in the past 18 months, and it is quite possible that we will lose a total of 8.6 million before the economy recovers. Office sector job losses alone could climb as high as 2.8 million. Assuming the average office worker consumes 250 square feet of space, this number of job losses implies a potential for 700 million square feet of negative absorption.

While there has been an increase of hundreds of millions of square feet of available space being marketed for future availability, we have actually seen just 20 million square feet of negative absorption in the office sector as of the end of the first quarter of 2009. The vacancy rates and negative absorption, that's the sort of stuff that [Arete] or CMBS would report in their public filings.

What's not being reported is that 680 million square feet of negative absorption lays ahead potentially. Leasing activity is down by approximately 30% and office vacancy has climbed from a recent low of 11% to a current rate of 12.4%, which is really not that bad a vacancy rate. It's pretty -- it's decent.

The space availability rate, however, which is the leading indicator for future vacancy, has climbed from 14% in the first quarter of 2006 to 24% today. This is a level we have not seen since the late 1980s and is an extremely high level. The spread between vacancy and availability rates historically is approximately 200 basis points and it is now around 1,100 basis points. Also, the average number of days that a block of space remains on the market before being leased has climbed from 166 days at the strongest point in this market to over 474 days today.

U.S. office vacancy rates could climb to over 18% before it peaks, which is expected to occur in early 2010. And that would be ranging from 14% in Los Angeles to more than 27% in Detroit. Inflation adjusted rents have fallen from an average of $29.88 per square foot in 2001 to $24.69 per square foot today. With climbing vacancy rates, rents will likely continue to fall and income per square foot will also decline.

Cap rates in the office sector have increased from 5% in the second quarter of 2008 to 7.6% currently, a 260 basis point increase, an unprecedented rate and speed of deterioration. However, cap rates have historically averaged 8.5% in the office sector so they could erode further to revert to the mean.

All this is cumulated in an unprecedented drop in prices per square foot for Class A office space. Inflation adjusted prices for Class A office peaked at $400 per square foot in the second quarter of 2008 and have fallen more than 50% to $185 per square foot currently. Inflation adjusted prices for Class A office space have reverted to their 20-year mean within two quick quarters.

At the same time, sales volumes have fallen off a cliff to as low as $1 billion per quarter. While many feel that because this drop in average sales prices is associated with a small volume of building sales and is not really reflective of true asset values, others believe that the low volumes reflect the slow acceptance among sellers for either structural or psychological reasons to the new reality of lower price levels. Nonetheless, the change in volumes, liquidity, and sales prices create the risk for significant debt defaults ahead.

So [in point of fact], we feel that the Company's 2.8 sequential decline in revenues quarter-over-quarter given the extremely negative market conditions demonstrates the strength of our business model rather than any weakness. In addition, CoStar historically begins to see improvements in market performance a quarter or so before vacancy levels peak, which we believe should occur within three to four quarters from now.

On more positive news, CoStar won two prestigious awards during the first quarter of 2009. We became the first commercial real estate related company to win Energy Star award of excellence for promotion from the U.S. Environmental Protection Agency. The EPA selected CoStar for this award in recognition of our role in databasing green buildings and making the information available to the commercial real estate industry.

In addition, we were recognized for producing the groundbreaking study we published on the income premium associated with green buildings, specifically those that have earned the EPA's Energy Star label. The American Real Estate Society awarded CoStar's study a prestigious academic real estate award. We did co-author that study with Dr. Norm Miller from the University of San Diego.

ARES, whose members include leading global academic and professional researchers, annually recognizes papers that explore the critical issues of applied real estate decision making. CoStar has been and continues to be an active supporter of academic research involving energy efficiency issues in the [built] environment.

We've partnered with ARES to sponsor the Journal of Sustainable Real Estate, a new real estate academic series with a goal of publishing a collection of research papers addressing sustainable real estate issues. In addition to actively sponsoring academic research, CoStar is a long-standing program that provides qualified university professors and their students with full access to our comprehensive online information services for use in their research and in the classroom.

More than 1,100 professors and graduate students in more than 100 universities are currently enrolled in the CoStar university program. These institutions include Harvard University, MIT, and the Wharton School of Business. We are very happy to be playing an active role in providing market data and research tools for these future industry leaders. By introducing our services to new entrants in the industry as they first start their careers, we believe we could gain lifelong customers.

I think you would agree that calling the current commercial real estate conditions challenging is certainly an understatement. The widely publicized problems in the economy, and particularly their impact on the commercial real estate industry, continue to have an adverse effect on sales and revenue as has the devaluation of the relative value of the pound to dollar.

Our revenues declined 2.8 sequentially quarter-over-quarter, or $52.9 million to $51.4 million. At the end of the first quarter of 2009, the Company had 154 sales representatives on staff consisting of 114 U.S. subscription sales reps, 8 U.S. advertising sales reps, 11 in-house sales reps, and 21 very good UK field sales reps that had a great month last month. This is a slight increase over the prior quarter.

We currently have a strong class of sales reps in training and we've been fortunate to attract several top candidates with exceptional sales in commercial real estate experience. With a weaker market, we are now focusing on hiring only experienced sales reps with commercial real estate experience. I expect our overall sales force to grow moderately in the second and third quarters.

The average new contract value for the first quarter was down at $4,964. We signed a total of 613 new subscribing firms during the first quarter of 2009, a 19% increase over the fourth quarter of 2008. And although these new firms tend initially to buy at a lower price point, once they become clients and learn more about our product offerings, they tend to buy additional information and marketing services from us. Last year, just under half of our gross sales were from existing clients, so we're very happy to see this continued success in attracting new subscribers.

The impact from adverse market conditions was also apparent in our net subscriber count, which dropped during the quarter to approximately 84,000 subscribers. The UK saw a disproportionate share of this decline in subscriber count due to product consolidation, weak market conditions, and customer list scrubbing. The overall number of subscriber sights dropped only slightly during the quarter from 15,920 at year-end to 2008 to -- I'm sorry, from 15,920 at year-end 2008 to 15,500 subscriber sites at the end of the quarter for 2009. So you have about a 420 subscriber site drop Q over Q. Discrepancy between the very small drop in subscriber sites and a larger drop in individual subscribers is predominantly attributable to pervasive headcount reductions among our clients.

Our 12-month trailing customer renewal rate for CoStar's subscription based services dropped slightly to 87%, and renewal rates with customers who have subscribed to CoStar for more than 5 years remained over 90%, which we believe is very encouraging given that many of these firms have seen significant declines in their revenue.

In order to maximize our renewal rate, we actively track all of our cancellations in an attempt to accurately determine their root cause. Our sales quality assurance team makes every attempt to debrief any loss customer, review the customer history, speak with the CoStar account rep that was on the account, and ultimately determine the true cause of the cancellation. By doing this and making this investment, we hope to learn what actions we can take to reduce any cancellations.

For the first three months of 2009, we can tell you that 56% of the cancellations are attributable to economic conditions, 7% are due to a customer leaving commercial real estate, 13% are due to bankruptcy, 1% we shut off because they were sharing passwords or stealing services, 3% canceled because of concerns about our data quality, 1% canceled to use a competing service, 5% canceled because they just didn't find enough use for our service, 3% cited their inability to afford or justify the price, and 10% we attributed to our poor customer service or account executive performance.

We can further concentrate those cancellations causes to 76% due to economic conditions, 13% are CoStar's fault, 9% are because the product is not the right fit, 1% is due to theft, and 1% is due to competitive loss. If you factor in those cases where customers reduce the number of seats or services to reduce their contract spend, well more than 80% of our current cancellations are possibly attributable to economic conditions.

As I previously indicated, we have put into effect several policies to address this issue of higher cancellation rates, especially among our newest clients, who traditionally take up several years to fully integrate our products into their business operations. Under our current 2009 commission plan, CoStar's sales executives are paid only for new subscribers who actively use our services in any given month during their first year of service. As a result, the usage rate among new customers has soared to 70%. At this point, the usage associated with our newest customers is on par with that of our established customers. With the 2009 sales incentive plan, there is much greater focus of making sure that all of our subscribing potential users are, in fact, using and gaining value from our products.

During the course of the first quarter of 2009, nearly 5,000 individual subscribers who were not recently or had never used our products began using them. CoStar signed a number of major clients to renewal agreements during the quarter. In addition to the multi-million dollar enterprise-wide agreement with Cushman & Wakefield we announced in February, we renewed agreements with Wells Fargo, the financial services giant that recently acquired Wachovia, and that has Eastdil Secured, a large -- leading investment sales broker, as a subsidiary.

We renewed Simon Property Group, the largest U.S. shopping mall owner, and UGL Equis a leading tenant [ref] firm with 27 offices throughout the United States. In addition, we renewed Deloitte, the auditing, financial advisor, risk management, and tax services firms. CoStar group welcomes the opportunity to continue serving these clients for years to come.

Since launching last May, CoStar Showcase has proven to be an extremely valuable tool for helping commercial real estate brokers maintain or expand their flow of leads from prospective tenants and buyers at a time when traditional lead channels are drying up.

Total search volume on Showcase again increased during the quarter from 2.9 million searches on Showcase in the fourth quarter of 2008 to 3.3 million in the first quarter of 2009. And property views increased as well during the same period to more than 96 million. We now have more than 1,500 subscribing entities representing approximately 4,000 brokers with listings. As a result, we are now generating more than 3.3 million in annualized revenue from Showcase. We believe we can show strong growth in the product throughout the year. We also believe that the product is now profitable and that incremental sales are at an extremely high margin.

As a standard practice, CoStar offers our information services under Company-wide subscriptions, and that is how we initially marketed Showcase. However, we believe Showcase holds wide appeal for individual brokers who may want to take advantage of the service but whose company is not prepared to subscribe. For this reason, we recently made the decision to begin offering individual Showcase subscriptions in addition to the company-wide subscription option we have offered since launch.

Primary competitors to Showcase offer individual subscriptions so we believe this move now puts Showcase on an equal footing with those services in terms of contract structure. To further enhance the appeal of Showcase, we are making these individual subscriptions available at a low flat monthly rate of $49.95 no matter how many listings the client -- listings the client chooses to advertise, so it's basically an all-you-can-eat buffet.

The service can be ordered directly from our website using a credit card and is available on a month-to-month basis with no long-term agreement required. We believe this pricing model of one low price and unlimited listings will compete very favorably with our primary competitor in this space which bases its fees on the number of listings advertised and has aggressively raised its prices of late, particularly on those people who have a large number of listings.

We believe an individual with one to three listings will save $240 a year if they use Showcase rather than the primary competitor in this space. An individual or a broker with four listings will save $720 a year using our service rather than the competitor's service. And a broker with 15 listings will save $2,340 a year or 79% by using Showcase rather than the competing service, one low, very simple price no matter how many listings the broker has. We also are convinced that Showcase is a superior service so the value proposition is even more compelling, spending dramatically less and get a much better service. It's like asking would you rather spend $4 a gallon for regular unleaded or save 79% and pay $0.84 per gallon for premium unleaded.

All Showcase subscribers will continue to benefit from the features that we believe have really helped distinguish Showcase from competitors in this space, including CoStar's ongoing significant investment in paid search marketing efforts on behalf of our clients to capture more traffic from major search engines such as Google and Yahoo and MSN, the strong appeal for searchers to take advantage of the continuously updated listing information available on Showcase through CoStar's extensive research operations, and the fact that Showcase does not require searchers to register before they can see all details on a Showcase listing.

Before turning the call over to Mr. Radecki for a more in-depth discussion of our quarterly financial performance and outlook, let me reiterate that we remain very focused on managing our business efficiently, minimizing spending, and preserving value to continue operating profitably in this difficult economic environment. There is no question that the rest of 2009 will be challenging, and of course, we will continue to monitor our position very carefully and respond accordingly.

We believe that the fact that we continue to generate strong earnings during what certainly appears to be the worst recession in two generations reflects the strong fundamentals of our business. I am confident that we will continue delivering long-term value to our customers and shareholders, as well as opportunity to our employees, and additional growth opportunities for CoStar Group. Brian?

Thank you, Andy. Hang on a second, wait. I think we just hit a record. We did.

I'm being dissed.

Sorry, Andy.

It was 35 minutes, so I think in ten years of doing --

Thirty-one.

-- earnings calls, that was the -- 31?

Thirty-one.

Thirty-one. Tim says 31. Thirty-one minutes, that was Andy's shortest script. He cut it back from a hundred pages down to 50. Good. Thanks, Andy.

You're welcome, Brian.

As mentioned -- as Andy mentioned, we are continuing to manage the business well in is what a difficult economic environment. Despite U.S. GDP falling over 6% in the fourth quarter of 2008 and the national unemployment rate rising 8.5% in March, CoStar achieved another strong quarter of earnings and cash generation in the first quarter of 2009. Our net income for the first quarter of 2009 increased 21.1% to $6.1 million or $0.31 per diluted share from $5 million or $0.26 per diluted share in the first quarter of 2008.

EBITDA, which is our earnings before interest, taxes, depreciation, and amortization, for the first quarter of 2009 was $14.4 million, an increase of 25.2% compared to EBITDA of $11.5 million for the first quarter of 2008. Reconciliation of EBITDA and all non-GAAP financial measures discussed on this call to GAAP basis results shown in detail on our press release issued yesterday is available on our website at www.costar.com.

Revenues in the first quarter of 2009 decreased approximately $900,000 compared to the first quarter of 2008. These revenues included unfavorable impact of foreign exchange rate fluctuations of approximately $1.6 million on our international revenue. On a functional currency basis, U.S. revenue in the first quarter of 2009 totaled $47.1 million, which is a 1.6% increase compared to $46.4 million in the first quarter of 2008.

International revenue totaled GBP2.9 million in the first quarter of 2009 compared to GBP3 million in the fourth quarter of 2008. International operations contributed approximately 8.2% of total revenues in the first quarter, and international subscription revenues accounted for approximately 88.8% of the international revenues in the first quarter of 2009.

In Q1 of 2009, non-subscription based revenues, which is ad hoc revenue that is mostly related to services to 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 several 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. Co-Star's subscription revenues actually accounted for 95.9% of our total revenues in the first quarter of 2009.

Turning to our renewal rate, which is a measure of renewing subscribing revenue, our 12 month trailing renewal rate remains strong at 87.3%. We consider the 12 month trailing 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 or longer-term agreements. As we have publicly stated for more than a year now, we do expect our 12 month trailing renewal rate to continue to decline to the low to mid '80s for the calendar year in this current economic cycle.

Our EBITDA margins for our U.S. operations was $30.9 million in the first quarter 2009, which is a testament to the earnings power of our business model in even the most challenging environments. Our overall consolidated EBITDA margin for Q1 of 2009 was 28.1 compared to 22% in Q1 of 2008. We remain focused on our 2009 plan and outlook and working towards our goal that we set out in Q2 of 2008 of $100 million in annualized EBITDA run rate.

We fully expect to return to more normalized revenue growth rates we have enjoyed in the past decade and expanding margins once we see positive GDP growth and encouraging employment figures. For now, we continue to expect to add new subscribers, renew current subscribers, and to generate strong earnings and cash flow through this challenging environment.

I would like to remind everybody that when we return to revenue growth, the majority or our incremental revenue drops from the top line to the bottom line, which provides us with strong earnings and cash flow generation.

Moving to gross margin on a quarter-over-quarter basis, gross margin decreased by approximately $700,000 from $35.2 million in Q4 of 2008 to $34.5 million in Q1 of 2009. Gross margin percentage improved to 67.1% in Q1 of 2009 from 66.5% in Q4 of 2008.

Turning to expenses for the quarter, overall expenses were $23.7 million in Q1, an increase of $1.3 million from $22.4 million in Q4 of 2008. This increase resulted principally from increased sales and marketing expenses, as well as a slight increase in bad debt as expected. Legal expenses for the first quarter was approximately $1.1 million, an increase of $300,000 from Q4 of 2008. We consider these legal costs, like most other public companies, to be normal reoccurring costs, and we anticipate these 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 based accounting, report all our legal expenses in our income statement, EBITDA, and in our earnings outlook for the year.

With respect to the balance sheet, we ended the first quarter of 2009 with approximately $233.5 million in cash, cash equivalents, and investments, an increase of $8.9 million since December 2008, and we have no long-term debt.

Now I'll conclude my remarks with our outlook for the second quarter and the full year 2009 in detail. As is typical, our guidance takes into account recent growth rates and our results, which may be impacted by uncertainties surrounding foreign exchange rate fluctuations, as well as changes in the global economy. We have attempted to reflect global weakness in the economy and our guidance, but recognize we are in a period of significant flux and the economic environment is still in uncharted territory. However, we remain confident in our earnings guidance as we believe one of the key strengths of our subscription based business model with a relatively fixed cost structure is it provides good earnings visibility even in a difficult environment. Unlike many other public companies out there who have decided not to give annual guidance, we continue to provide this visibility and we include our legal expenses.

As stated in our press release, we expect for the second quarter of 2009 revenue in the range of $49.5 million to $51 million and for the full year we continue to expect approximately $198 million to $203 million in revenues. Given the unprecedented current economic conditions, our actual second quarter results and full year 2009 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 is approximately $16.9 million in Q1, to rise slightly throughout the year due to the variable timing differences of new hires in research and other research related costs. As we explained last quarter, we expect to continue to hire and staff our research group to provide the highest quality information to meet the needs of our clients in this difficult environment.

Moving down the P&L, we expect seasonally higher selling and marketing expenses of approximately $1 million primarily associated with the ICSC trade show and the marketing of Showcase. Software development should remain fairly consistent quarter-over-quarter and flat for 2009. G&A is expected to increase by approximately $1 million in the second quarter due to the increased legal costs, and we expect approximately $700,000 in purchase amortization in Q2 of 2009 and approximately $3.5 million for the full year 2009.

Continue to expect the interest rate for interest income to be approximately 0.5% in 2009. The majority of our approximately $233 million in cash, cash equivalents, and investments is currently in cash and assets in U.S. treasuries or other government money market funds. Overall, our effective tax rate we expect to be approximately 45% for 2009.

In terms of earnings, we expect second quarter 2009 fully diluted net income per share of approximately $0.22 to $0.25. We continue to expect fully diluted net income of approximately $1 to $1.05 per share for the full year 2009, which includes approximately $6 million in pre-tax, non-cash equity compensation charges related to restricted stock and options.

Capital expenditures for the first quarter 2009 was approximately $1 million and we continue to expect capital expenditures in 2009 of approximately $4 million to $7 million, which include investments in the facilities to upgrade several field sales office hubs, network equipment, and work stations to upgrade and support the ongoing operations.

We continue to look for areas of cost savings and may consolidate or move office space in 2009 to save money and/or upgrade the space, which would create (inaudible) gains or losses for the Company, which is similar to what we did in Q4 of 2007 and Q2 of 2008. Just like in prior years, we would expect this would create substantial long-term savings for the Company.

In conclusion, the entire CoStar management team remains focused and fully committed to achieving our outlook for 2009. We expect to manage the business through this current environment and to capitalize on our stable subscription based business model to position us for long-term growth opportunities in working towards our long-term goal of $100 million in annualized EBITDA run rate.

Economic conditions could worsen, but we believe we are prepared to weather this economic cycle. We believe our services are core to our clients' ability to deliver on their business and that the market need for our service remains resilient. Our business model remains strong on the fact that we have a 95% subscription based business with high renewal rates, a unique proprietary database with a market leading position, strong balance sheet, no debt, and high cash flow.

We believe these challenging times will continue to create opportunities for us as a market leader. We continue to believe there is significant opportunity for high margin revenue growth on the investments we have made in the addition of new services like CoStar Showcase. No company is recession proof, but as I've said many times, CoStar is not immune to the challenges in this economy, but without a doubt, we're 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 call for any questions.

All right. Thank you. (OPERATOR INSTRUCTIONS.) And our first question comes from John Neff from William Blair. Please go ahead.

Hey, guys.

Good morning, Mr. Neff.

Hey, John.

A few questions for you and I can get back in queue for some others, but the last quarter the guidance range was 201 to 207 million, now 198 to 203. Is that all due to foreign exchange, and what -- does it assume exchange rates continue as of when? The end of the quarter, or where they stand today?

John, I didn't change those. I just basically reiterated it and what I did was consolidated it. When we came up with and provided our initial calendar year 2009 revenue guidance in February, we assumed that the U.S. dollar would strengthen versus the pound over the course of 2009 because that was the trend for the prior six months and there is no sign of it stopping, so we're really not trying to forecast exchange rates. We're really just kind of reiterating the same thing, and I consolidated them to make it simpler for people because I think there's some confusion around that.

Okay, so it's purely a reflection of the UK --

Correct.

-- portion of the business?

Correct.

And -- okay. So it's really just due to [SA]?

Correct.

And we confused you in order to avoid confusion.

What were the net annualized subscription bookings in the quarter?

Do you have that number?

We haven't -- John, I mean, they were obviously negative because revenue growth was negative. So we haven't really talked about that. The last few quarters have been focusing on more some of the operating metrics.

Okay, and then you mentioned bad debt expense. DSOs are creeping up a little bit, but what's been going on with bad debt expense? Has that been keeping pace and where does that stand as of the quarter?

Yes, it's up slightly over the fourth quarter. It's right about where we thought it would be. We kind of assumed we'd have a half a million to a million more in bad debt this year, and right now it's probably right around where we thought it would be. So, hasn't really gotten significantly worse, but obviously in this environment, you've got companies that are struggling and some of them that are just going out of business.

Okay, and then the -- quick question on the Showcase and then I can get back in queue. The new individual -- individualized contracts pricing, $49.95 a month, roughly $600 a year, how does that compare to the average enterprise annual subscription size?

If you take the average enterprise agreement, it would be just slightly less than that. So you'd have some enterprise agreements that would be slightly more and some that would be slightly less, but on average, the new individuals slightly below that enterprise agreement level. You get more benefits if you are in enterprise. So, for instance, you get the company website and you don't get that if you're an individual subscriber. You get your listings on Showcase and you get a broker page, but if you're a firm subscribing, you get a firm website, broker pages for all your brokers, plus all your firm listings on the site. So they're not entirely similar. They're slightly -- there's a little more benefit, especially with the enterprise agreement.

Is that enterprise agreement -- is it $900 on average or is it --

I'm only -- I only have the numbers for what it boils down to on a per person basis and it's just slightly more than the individual cost. I think that reflects the benefit of the firm website and the fact that the firm has a tougher time managing, collecting, and posting all of their listings up than does an individual broker. So we think there's not a lot of competition between the two.

Okay.

I mean, there's some, but not a lot.

Great. Thank you.

You're welcome.

Thank you, and our next question comes from Jon Maietta from Needham and Company. Please go ahead.

Hey, thanks very much.

Hey, Jon.

Hey, Andy. Hey, Brian.

Hey, Jon.

Andy, the first question I had was that I don't think you talked about the analytics offering at all this quarter. Could you just maybe talk about the processes of refreshing that offering?

Sure. The -- that remains a significant focus for us, and we are toning down our discussion of it so that when we release those products, they'll be something of a surprise in the nature and depth and scope to our competitors. So we are -- our development teams are working and we're continuing to grow our capabilities there and we think it's a $50 million to $100 million potential revenue add over five years plus, but we're discussing -- we're not discussing the details about it as much now.

Got it. Fair enough. Okay. And then, Andy, just as a point of clarification, you had mentioned, I think, that you had -- either you, CoStar, or the markets will typically see a rebound a couple quarters ahead of the vacancy rates peaking. Was that correct or --

Yes, we -- I mean, we only have a sample set of two cycles, but there appears to be a pretty strong correlation where our market performance tends to pick up about a quarter or so before our vacancy rates shift directions or hit their peak. So, I mean, that's generally because people can sort of tell right before the vacancy rates hit the peak that the markets are churning and vacancy rates are pretty much the driver of the income and the rental rates and the values outside of capital market costs.

Got it. Okay. And then, Brian, as you think about kind of revenue linearity over the course of this year, just given the nature of the subscription model, does it become tough to go sequentially negative three quarters in a row, four quarters in a row barring a dozen larger customers falling out in one quarter?

Yes, I mean, barring anything major which you saw happen from the large financial service firms, I mean, I think as we're anticipating the renewal rate to decline a little bit, I think you're going to see the second quarter's going to look a lot like the first quarter. And I do think as you get into the third and fourth quarter, because of the subscription based model, I do think it gets harder, but I definitely think that the second quarter's going to look a lot like, which is what we've expected for a long time now, the first quarter.

And you have sort of hit a plateauing here, so it's sort of a decline in the rate of decline.

Yes. All right, and then just for -- a couple more quick ones. The million dollars in incremental legal expenses that was filed on the press release, was that -- is that incremental to the guidance that was provided on the last quarterly call or was that already baked into the earnings guidance?

I'm going to read my prepared statement from my legal counsel here, and I anticipated this question, so I had him give it to me right before the call started. During Q2, we have increased discovery related legal costs, depositions, document productions, etc., in connection with our lawsuits against LoopNet in New York and California. We also have a trial scheduled in June on one of our anti-piracy cases. For Q3, we anticipate we'll have preliminary injunction hearings in July on our California case against LoopNet and continuing discovery costs on our New York litigation against LoopNet. So what I think this is -- and again, you have to see how these things pan out -- that was my prepared statement. I think that it remains to be seen. I think what's happened is some of the cost may be accelerated. They're coming sooner so, of course, you have to wait and kind of see how those things pan out. So, it's definitely -- it's an increase in Q2, which is -- I didn't originally anticipate, but I think it's baked into the -- kind of that $1 to $1.05 range that I had already given for the year, so I'm not really coming off of that.

Got it. Okay. And then just the last one from me. I was wondering if in addition to the renewal rate that you guys published, do you also track kind of dollar renewal rates, so if you had X amount of dollars coming up for renewal this quarter, what percentage of those actually renewed?

Well, the renewal rate is based on dollars, not sites or paying subscribers. It's based on the dollars renewing. That's essentially what it is. Obviously, if you actually looked at -- if you looked at those three metrics, the sites only decreased slightly, the revenue decreased slightly, 2.8%, but the paying subscribers dropped a lot more. So it's always dollars renewing. It wouldn't be fair to say if we lost a client that was paying us $10 million a year that we only lost one client, a small percentage of our clients.

But the two, by chance, tend to be fairly similar.

Correct.

Sites and dollars.

The sites and dollars will track much closer than the paying subscriber number.

Okay. Got it. Okay. Thanks very much.

You're welcome.

Thanks, Jon.

Thank you, and our next question come from Brett Huff with Stephens, Incorporated. Please go ahead.

Good morning, Brian. Good morning, Andy.

Good morning, Brett.

Hey, Brett.

Question on -- just, Andy, maybe you could give us some color on how the conversations are going just from a value proposition point of view, both when you all are pitching new business and/or when you're pitching cross sales just so that I get a better sense of what are the things people are focused on and what seems to be working?

Well, it's -- a lot of the same value proposition is the propositions that it has always been and it is cost reduction, so I think the bigger firms are more focused on the fact that our products cut their costs in total and provide a high quality service to their folks. At the mid size and smaller firm, it's revenue generation that they're focused on as much as anything, so being able to produce some more powerful, more professional presentation and generate leads off the internet is working. And the appraisal side of the world, they're actually likely to see a little bit of an uptick in appraisal volume and, in fact, the cancellation rates there are -- haven't even come off of historical highs. Their cancellation rates are very, very low right now, and those folks, it's just critical to them in terms of productivity. It allows them to do appraisals much more cost effectively so they really need it to make their margin goals. And a big overriding challenge is the fact that some of these firms, it's not unusual that these firms are seeing their revenues down in excess of 40% right now, so that's a challenge we're getting through.

Okay. And when you -- can you give us more of a sense of cross sales? You've never given us really data on sort of what the cross sale numbers were in terms of numbers of firms that you cross sold additional products into and/or sort of the average dollar amount. Could you give us any even qualitative sense of that? Is it more or less or steady versus a couple quarters ago or can you give us any color on that?

I can say that because of Showcase and a larger volume of smaller -- slightly smaller contracts, the cross selling activity is slightly lower because the other side picked up, so we're at probably 45% of the sales each month. A little more than 45% of sales each month is cross selling products. I don't have hard data on the number of firms in any given time period. I think it's remained fairly constant. It's basically half of what the new sales activity is, and I would imagine that it's probably similar in terms of number of contracts. There's a lot of new markets they add on. They add on additional services, be it Showcase, be it comps or tenant, and then there's a lot of new user growth. So, right now there's a lot of musical chairs going on in the industry, and you might have a firm failing and then other smaller firms in the market picking up the brokers who are at that firm and they'll add a license here or there and we could consider that cross selling, so they're already clients. They pick up a brokerage (inaudible) from a failed firm, and they add two seats and begin paying us incrementally more for those additional seats.

And Brett, I think -- when I look back at that, I would say historically over the past decade it's always been around 50%, so as Andy said, I think it may be -- it gets down to 45%. I think that's because we're getting a lot of these newer Showcase type people and which I think we talked about a couple quarters ago, that was what we anticipated to happen, but it's typically around that 50% plus or minus 5%, and it is exactly what Andy said. It's people adding new geography, new products and services, upgrading the suite. I think we have a very successful track record for a decade and a half, two decades of getting people in kind of on a basic service and after they see the value on that, up-selling them, and it's something we've done for decades, and I would anticipate a lot of these sales that we have today will do the same thing over the next decade.

Okay, and then one last question again, so sort of a bigger picture. In the -- I don't know how you want to talk about them, but in the secondary and tertiary markets that are relatively newer to your geography spread, I remember looking at your slide and there's that pyramid of early adopters, middle, and then late. Can you give us color on how that's going? Has the economy made that harder? Have you found that the characteristics of those markets are making it easier or harder to penetrate right now and are -- how many markets do you feel like you're being very successful in or can you give us a sense of that?

I think it's safe to say -- you know, I think different markets are in different phases and cycles, and it's no different than the larger markets, so like a Boston would've been extremely successful for us right off the bat whereas a Philadelphia was a slow bloomer but is now an extremely successful market, so it may -- Philadelphia probably took us a couple extra years to get going, but is now extremely successful. The same thing is true with this -- with these 200 new markets. Some have come on really quickly, like Richmond, Virginia, and then others are much slower, and it could be something like a Grand Rapids where the economy there is just not very robust and there's not a lot of demand for anything there. So, I would say that the majority of the markets are -- of the small, tertiary markets are in the top of the pyramid still. They're in the early stages, and a smaller percentage, maybe 20%, are moving into the mid part of the pyramid, that traditional moving into owners and smaller brokerage firms phase. But we have a strategy that we hope to deploy within the next quarter or so for these smaller markets that we think will accelerate the growth in the smaller markets that we're really quite excited about and think it'll be a -- we think it's a very strong strategy that we're not going to talk about.

Okay. And I do have one last question, I guess, is easy. Any color on specifically the -- I think it's round numbers, 20% that are -- of customers that are owners, bank lenders, banks, [reef], stuff like that? Any change in how that's looking? I assume it's not getting better and that it's getting worse, but --

Yes. When you go through a list of who some of your bigger cancellations are, they're the names, they're the -- there's some bigger owners or banks or lenders or commercial real estate investment banks. So, but the big picture, the -- looking at where the reversals come from, the brokerage reversals are slightly less than they are as a percentage of our revenue, and the owners and mortgage folks and institutional investors are slightly higher than they represent as a percentage of our customer base. And then I think retailers are slightly higher than they represented as part of our customer base. And then appraisers and government remain very low at a cancellation level.

Okay. Thank you.

Thank you, and our next question comes from Jim Wilson with JMP Securities. Please go ahead.

Thanks. Good morning, guys.

Hey, Jim.

Hi, Jim.

Would -- let's see, one, I guess just to continue one little part of the new customer question, and I'm guessing it's too early, but are you seeing any interest or sales to real estate private equity, opportunity funds, or anything starting to crop up that you might see as the vultures here eventually attack in the commercial real estate shift of assets?

Well, I mean, you're right to pick up on the fact that some people who are fresh capital are going to begin to acquire assets now moving forward are probably going to end up making a real killing over the next decade, a la Sam Zell, similar to what he did in the past cycle. So, I think we are beginning to see some of that, but we're probably -- they're forming right now. We're hearing a lot about it, and some of them are just people who are basically traditional, commercial real estate investors who are now just calling themselves to stress the vulture funds to raise capital. But you're beginning to see it and you saw the Vornado equity offering with that label of the stressed opportunity fund kind of thing. So it's beginning to pick up, and I think -- and we've been waiting for that and I think that's probably something we're going to see this quarter or next quarter. One interesting little segment we're seeing some revenue come from is engineers who are looking to go into buildings and certify them as Energy Star. We had a great sales month in London last month on the basis of these engineers looking to go in there and get ready to capture some of these conversions, some more energy-efficient buildings. And in the U.S., I think it would be an even bigger market with all the stimulus dollars going into retrofitting buildings. Someone's got to do that, and CoStar has all the information as to which ones are greens, which ones are not, and who's who. So I think that'll also drive some unusual revenue.

Okay. And then I guess my second question -- that's great on your overview and five-year outlook on the analytic side. I was wondering since it's part of your guidance in the beginning of the year to be adding research staff, sort of how that's progressing. Are you quarters a way -- ahead of us, 12 month curve, or how should we kind of think about that?

Yes, I think -- I mean, we've actually just begun. I mean, it seems like we just talked to you guys yesterday, but that process just kind of has begun at the end of the first quarter, so I think we're up -- I don't have the exact numbers with me, but ten or so researchers and I think we plan on them being up 50 or 60 this year, so I think we're starting that process and it will probably be fairly gradual throughout the year, so that's just kind of beginning now.

All right. Great. Thanks.

Thank you, Jim.

Thank you, and our next question comes from Vance Edelson of Morgan Stanley. Please go ahead, sir.

Hi. Thanks a lot. First, just following up on a recent question, could you provide a little more color on the pricing environment? It sounds like at least for Showcase, competitors are charging more, which is good news for you. Elsewhere, what are you hearing from customers in terms of their ability and their willingness to pay given the macro environment? So, in other words, regardless of the value proposition to their own business, how is the pricing environment for your services?

I think that on the Showcase front, we're a new entrant there, and we have the advantage of having a major piece of our cost basis covered through our other profitable product areas, so this is sort of a product for us which is incremental margin. We think we're cost advantaged here, so we can take significant share and generate good earnings (inaudible) with a more competitive price point, because more it's just competitive positioning issue for us. Most of the folks can afford to pay -- aren't really a lead generation in a down market, they're willing to pay for it. You've got a clear segment of the market, which is probably 40% of the folks out there right now who are down to only essential expenses or have moved below essential expenses, and so those folks, it's just tough to sell them anything or renew them on anything.

And then you've got another segment of the market, you know, as Jim Wilson points out, folks who are beginning to come in as vulture investors who are very flush. Hedge funds are very flush. They come into this space. Pricing is not an issue with those folks, and then another thing that -- when the -- the silver lining in a negative cycle is many, many, many of these larger firms get really serious about cleaning out overlapping expenses, and they rely more and more on CoStar Group in a down cycle like this, and they're very -- they want to get a fair price, but they're looking to save five, ten times as much out of their internal operations by going to a CoStar Group, so they're less price sensitive and ultimately we come out of the cycle with a stronger relationship with those bigger firms.

Okay.

How's that answer?

Yes, that answers it. Thanks. And then I may have missed it, but what are you thinking in terms of uses of cash considering the healthy cash balance? Could you just give us an update on your thinking there?

We are continuing to evaluate at every board meeting the options there for buyback, dividend, and the like. Obviously, in this very unusual environment, we like to have a window to when the vacancy rates stabilize. That's usually our strong point. We like to be -- have a clear vision of that position of strength as we make those sorts of decisions. And there is a fairly robust set of opportunities out there for acquisitions that become more reasonable as the market moves on, so we think there's some interesting things out there that could be uses of cash that would be accretive for the Company as strategically valuable.

Okay. That's great. Thanks a lot.

Thank you.

Thank you, and our next question comes from John Neff of William Blair. Please go ahead.

Hey, guys. Thanks for the follow-ups. Hey, Brian, I just wanted to make sure I understood the timing. You talked about the $100 million annualized EBITDA as being a long-term target. I wanted to see if that was -- if that was in any way anchored to the previous, not expectation, but exiting [for Q10] in terms of time frame --

Yes, I think --

-- indeterminate time frame.

Yes, I think we're still focused on it. I mean, that is the long-term goal and I think Andy and I stated last quarter, I think as we -- as things clarify at the end of this year and early next year, if conditions improve, that could still be doable. So I think, obviously, it's fairly long term. It's out there. It's a couple years away, and we'll just see how it goes each quarter.

Okay. And then you mentioned, Andy, good color on sort of the reasons or rationale for cancellations. I think you said 3% of the cancels fell into sort of a data quality issue, and I was just wondering --

Yes.

-- if you could give us a little bit more color on what were the concerns that were voiced about data quality and how seriously you take those.

Well, obviously, you'd like the number to be zero, but the -- what we attempt to do as a business is obviously impossible to do perfectly, is tracking the largest imaginable moving marketplace in a pretty wild, wild west environment. So, as things go, 3% cancellation for data is very low. We're not entirely happy with it, and it would be -- it'd be something that we are increasing the size of the research staff to continually improve the quality of the data right now. We think that as we come through the year and get that research staff, the number of people managing portfolio is up by 50 plus people, we can probably pull that cancellation from 3% for data down to 1.5% for data. You'll never get it to zero because there'll be somebody who has purchased the product for some sort of function that requires perfect, perfect data and maybe data we don't collect, so maybe they're trying to get -- they're trying to sell elevator maintenance and they need to know precisely the number of elevators in every property and the speed or something. We just don't have that data. So, it could be a market where they're perhaps a lead researcher causing it or it could be something where the expectation for what we could provide was simply not realistic. But, big picture, it's -- that's a pretty good number. I'd say that in our operating history there have been probably two different periods where the number (inaudible) was probably dramatically higher than that, so we probably had a period or two where we were in the 10%, 12%, so 3%'s pretty good.

Hey, John, let me just add a few things to that. Three percent is actually very, very low in this type of environment when you track buildings as square feet of data as we do that's moving as fast as it is, but I would just like to make sure to reiterate we've got almost 900 researchers. We're looking at adding 50, 60, 70 this year to improve the data quality even more. What we add this year will be more than -- more researchers than anybody else out there. Just what we add this year, forget the 900 we already have. So I think it's always comparable to what's the next closest person out there. I think it's not even close. Our data quality is heads and tails so much higher than anything else out there, and that's why you see the CB agreement, you see the Cushman & Wakefield agreement. I mean, it just -- it speaks for itself.

Great. Thank you very much.

All right. Thanks, guys.

So with that, we're at an hour and almost 15 minutes. We're going to wind up our first quarter call. Thank you all very much for joining us, and look forward to updating you on our progress and performance at the next quarterly earnings conference call.

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