CoStar Group Inc (CSGP) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CoStar Group's fourth quarter and year-end 2000 (sic) conference call. At this time all phone lines are in a listen-only mode. (Operator Instructions). Speaking on the conference today are Chief Executive Officer, Andrew Florance; Chief Financial Officer, Brian Radecki; and Communications Director, Tim Trainor.

I will now turn the conference over to your opening speaker, Tim Trainor. Please go ahead.

Thank you, operator, and good morning, everyone. I would like to welcome you to CoStar Group's fourth quarter and year-end 2009 earnings conference call. Before I turn the call over to CoStar's CEO, Andrew Florance, let me state certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include but are not limited to those stated in CoStar's press release on our fourth quarter 2009 results and CoStar's filings with the SEC, including CoStar's Form 10-K for the year ended December 31, 2008, and CoStar's Form 10-Q for the quarter ended September 30, 2009.

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. A webcast of this conference call is available on our website at www.costar.com/investors.aspx. Thank you again for joining us. I will now turn the call over to Andy.

Thank you, Tim. Welcome to CoStar Group's fourth quarter 2009 conference call. We are pleased to report that during the quarter we continued to see clear signs of improvement in our business, and that improvement appears to be correlated with some early signs of good improvement we are seeing in the US commercial real estate economy.

For the first time in two years, we saw positive employment growth in the sectors of the economy that traditionally use office space. This employment growth drove unexpected positive absorption of office space in the US, which in turn led to a leveling of vacancy rates during the quarter. This is an important green shoot of recovery. In this improving environment we saw a significant strengthening of our renewal rates. We saw a strong increase in net new subscribers. We saw an increase in our average contract value. And most importantly we saw a return to positive quarterly net sales growth.

These successes combined with continued successful integration of our recent acquisitions of Resolve Technology and Property Portfolio Research resulted in quarterly record revenue of $54.6 million. This beat the prior CoStar revenue high-water mark of $53.8 million achieved in the third quarter of 2008. $54.6 million in revenue for the fourth quarter was a 2% sequential quarterly increase over the third quarter.

While uncertainty exists ahead of any sustained recovery, we are encouraged by the continued sequential quarterly improvement in our business. Fourth quarter 2009 EBITDA was $9.9 million. The Company earned $3.6 million during the fourth quarter, for a total of $18.7 million in annual earnings on $209.7 million in revenue.

We have achieved these solid earnings even after making significant investments, including growing our sales force and research departments, launching our new successful Showcase product and making several acquisitions. We believe that the combination of all of these investments will position the Company for even greater earnings growth as the markets recover.

Our core business continued to perform well throughout the year, adding $31.1 million to our balance sheet in 2009, $31.1 million in cash. At the end of the year we had a total of $255.7 million in cash, cash equivalents and investments on hand. The majority of these assets were held in cash or invested in US Treasury and other US Government money market funds. The Company has no long-term debt obligations, which also contributes to our strong financial position.

Since we are continuing to deal with extreme commercial real estate market conditions, I do want to take a moment to discuss the state of the industry. Overall 2009 was a very bad year for the commercial real estate industry. In the fourth quarter, however, we saw marked improvement in a number of important areas of commercial real estate. The US has lost 8.4 million jobs since the start of the recession December 2007. This is the most of any economic slow down in the post World War II era, either as an absolute number or as a percentage of the workforce. This loss of jobs has had a major and direct negative impact on commercial real estate.

For each office job lost, there is an approximate decrease of 200 square feet in demand for office space. We have lost millions of office jobs, and therefore we have lost hundreds of millions of square feet of demand for office space in the United States. To put this number in perspective, there are very -- there are fewer people employed at the end of 2009 than there were in 1999. This means we do not have the demand to fill the billions of square feet of commercial real estate that was built over the past decade. This lack of demand has driven vacancy rates up and rents down.

At the start of this recession, commercial real estate was experiencing an easy credit-driven asset bubble that is nearly perfectly identical to the one that residential real estate has experienced. The seized up credit markets coupled with falling income levels in properties create a perfect storm for commercial real estate. We believe that more than 20% of the leveraged commercial properties in the US today are worth less than their mortgages. Both lease and sales volumes plummeted in 2008 and remained very low in 2009. This is the Eeyore part of my script.

Fewer leasing and sales transactions at much lower values mean much less commission revenue for commercial real estate brokers. Our largest client segment and most players in commercial real estate have had two very difficult years. In that context, we think it is certainly noteworthy that our revenues are up this quarter over the high-water mark we reached at the market peak in '07/'08. We are pleased that we have been able to hold our own while revenue at many publicly traded commercial real estate related firms are down by anywhere from 20% or more.

Even better news here is that early important positive indicators in the commercial real estate markets are showing an improving market. As you may know and probably know, GDP is estimated to have increased at an annual rate of 5.7% in the fourth quarter of 2009. That is well above the projected 4.3% growth economists had predicted and is a strong rebound from the series of sluggish or negative quarters we have suffered through.

An expanding economy is good news, and GDP growth typically proceeds job growth. And job growth has a direct correlation to positive absorption and recovery in commercial real estate. The rate of job losses has steadily declined, and while the fourth quarter saw overall negative job growth, again job growth in office-using jobs was positive, adding 172,000 jobs during the quarter. The unexpected but welcome job growth resulted in positive net absorption in the office sector. This is the first sign of positive absorption we've seen in the office market since the end of 2008.

In total, US office markets posted about 6 million square feet of positive net absorption during the quarter thanks to the better than expected labor numbers. Not a huge number, but positive nonetheless. We have also seen steady sequential quarterly increase in leasing activity in each and every quarter in 2009. We believe this indicates a rebound of leasing-driven commission revenue in our core customer base. With construction activity remaining at a virtual stand still, the modest fourth quarter bump in absorption helped to level out the national office vacancy rate at 13.3%. If employment remains flat or positive over the quarters to come, I believe vacancy rates will be stable, and rents will stabilize or increase, bringing eventual recovery to commercial real estate.

While job growth and positive absorption is good news, we are unlikely to see dramatic positive absorption in the next year or two until the backlog supply of shadow or phantom space created by numerous layoffs is back filled. There is a small percentage chance that if very strong job growth should emerge in this environment with almost no construction activity, we could see a real surge in rents and unexpected upside in our business.

This hope for increase and demand for office space and leasing activity does not mean that rental rates, net operating incomes or commercial properties has stopped falling today. The average asking rent for office space has in fact declined dramatically since 2007. As leases signed five years ago renew or roll, those tenants will be able to take advantage of the lower rates available today relative to when they last signed a lease. Even if rental rates are climbing slightly from quarter-to-quarter currently, overall incomes are dropping for the building.

As a result, net operating income or cash flows for commercial properties are expected to continue moving down over the next several years. In addition the credit markets remain frozen for commercial real estate and risk premiums have increased dramatically as cap rates -- and cap rates are rising. So while the leasing marketplace is showing a good prognosis for recovery, the commercial real estate sales marketplace looks very weak for 2010 and beyond. We expect recent leasing activity will return to its normal historic levels soon, but I'm not sure that sales activity will ever return to the heady days of 2007. Fortunately most of CoStar's revenues derive from subscribers involved in leasing activity and valuation, and not sales.

To appreciate how far commercial property values have fallen, the price per square foot of the average office building in the United States during the fourth quarter of 2009 was down a dramatic 62% from the 2007 peak. We believe this is a long-term low in valuation for office buildings in the US, and in many cases makes it cheaper to own than to rent.

Quite simply, there has not been a better time to be a tenant or investor in the market for office space in decades. From the increase in leasing activity seen in each of the prior three quarters, tenants appear to be increasingly active in seeking to capitalize on lower rents available in the current market. Users with access to capital also appear to be capitalizing on lower values. In fact, in 2009, users became net buyers and institutional investors and private equity funds were net sellers of commercial real estate.

Having closely observed the changes in market conditions over the past 18 months, we have moved aggressively to take advantage of what we see as a window of opportunity to secure long-term low-cost leases and decade low prices for acquiring facilities. This activity will increase our costs as we consolidate and move facilities -- in the short-term it will increase our costs, but should reduce costs significantly over the long-term.

We are in the process of consolidating three different facilities in Boston, including those of CoStar, PPR and Resolve Technology, into one facility. Similarly in London, where rents have also fallen sharply, we took advantage of more formal rates to combine CoStar's and PPR's offices in a prime West End location within closer proximity to many of our major UK clients.

Most recently, as we announced earlier this month, CoStar purchased a two-year distressed asset office building in downtown Washington for use as our new low-cost-effective headquarters location. The office building located at 1331 L Street Northwest includes approximately 170,000 square feet of rentable space, state-of-the-art amenities and has been certified as LEED Gold by the US Green Building Council. It is situated at the center of Washington DC's transportation hub, making it readily accessible for employees throughout the region. And it's closer to a major airport, making it more convenient for clients that are visiting and employees from PPR and Resolve, as well as sales staff from around the US who travel to our headquarters frequently. It also brings our headquarters closer to the federal government, one of our fastest-growing accounts.

As we announced, CoStar was able to acquire this 10-story building for $41.25 million or $243 per square foot. This amount is less than half of the building's original development cost of $90.6 million. The purchase price of $243 per square foot was even below the market rate medium of $518 per square foot for class-A office buildings sold in Washington DC in this distressed economy since 2009.

In addition, moving our headquarters to Washington DC enables CoStar to take advantage of an incentive package for our Company approved by the City Council District of Columbia, consisting of $6.1 million in property tax abatements over a ten-year period. The abatement has certain requirements, such as requiring CoStar to hire 100 District residents among other conditions. CoStar may also be eligible for additional incentives, such as a five-year elimination of District corporate income tax and certain sale and use tax exemptions.

Factoring in these incentives, we believe the Company could save more than $2 million per year in occupancy costs versus leasing space in another building. While there are short-term costs associated with these moves, taking advantage of what we believe to be a historic opportunity to acquire an exceptional building at a greatly reduced price is a tremendous investment that should produce long-term cost savings and provide the flexibility and expansion space needed to support our long-term growth.

As I mentioned at the beginning of the call, our sales continued to build momentum through the third and fourth quarters, enabling the Company to finish the year in a strong financial position, posting a record amount of quarterly revenue, a big jump in the number of new subscribers, higher renewal rates and an increase in organic bookings.

Our improved revenue performance was directly related to strong Company-wide net sales for our core subscription products, supported by a significant contribution of sales of PPR services and Showcase, both of which continue to exceed original expectations. In addition to increased sales, cancellations for the quarter were also well down from the first half of the year, resulting in three consecutive months of positive Company-wide net new sales during the quarter.

During the quarter, CoStar added 1,705 positive new subscribers for a total of 85,325 at the end of the fourth quarter. This is the largest quarterly increase in new subscribers since the first quarter of 2008. Also the renewal rate in the fourth quarter was approximately 89%, a 5 percentage point increase over the prior quarter renewal rate of 84%. Renewal rates among customers who have been CoStar subscribers more than five years also increased during the fourth quarter to approximately 93%. Pretty good number given this environment.

The average new contract value increased to $9,143 in the fourth quarter, the highest level it has been in two years. The total number of subscription client sites was also a record for the quarter, increasing to approximately 16,000, and this includes both CoStar and PPR client sites.

Reflecting the positive impact of increase in our overall growth sales coupled with a slowing pace of reversals in contract write-downs, our annualized net bookings turned positive in the fourth quarter in both our US and UK sales for a quarter-over-quarter improvement of $3.1 million. Net subscription bookings improved from negative $1.4 million in the third quarter of 2009 to positive $1.7 million in the fourth quarter.

I believe one of the keys to recovering from this down cycle has been our intensive focus on driving product usage among our customers. From long experience, we know that clients who receive proper training and consistently use our products derive greater value from them. They also tend to remain customers for years and are more predisposed to subscribe to additional CoStar products or refer our services to others.

To support this effort to drive product usage, we adjusted our sales commission plan in 2009 to reward sales reps for achieving customer usage of our products. In the past, our sales people were paid when they signed a new customer to a subscription. Now the sales person only earns a commission when the customer uses the new product consistently. The results have dramatically reduced the number of customers who do not keep and pay for the service throughout the entire first year of subscription.

We had seen in prior years first year failed sales approaching 20%, 25%. In the fourth quarter of 2009, it had fallen to less than 10%. In addition, we have seen customers who in their first year of service at about 37% usage level. We're now seeing them at about 54%, 53% usage level, which moves them much closer to what we would normally see at year four or five for a customer, which should move them into the higher renewal rate categories, we believe.

As I noted in our last call, we continued to see renewed interest from former customers in becoming subscribers again now that the economic outlook is improving. Among larger clients to resign during the third and fourth quarters were Inland Real Estate Brokerage; Amco, one of the big -- largest owners and operators of apartment communities in the United States; and Charles Schwab. Given the high quality of information and the value CoStar offers, we expect more former subscribers will continue to rejoin us as their businesses recover.

We have also noted increasing demand for our information analytic services on the part of different types of customers as a result of the recent challenging economic environment. Several opportunity investment funds hoping to take advantage of the expected increase in the number of distressed assets have become clients. We've had government regulatory agencies that are required to closely monitor market conditions expand their subscriptions with us. Also accounting and other firms involved in tax appeal work resulting from the steep decline in property values have become subscribers or expanded their services. Despite the market downturn, there continues to be demand for higher quality research and information.

With the strengthening positive trends we've seen in our sales activity over the past two quarters, we believe we have now turned the corner in this business cycle. And while the fragile economic recovery no doubt will continue to present challenges, we remain confident in the prospects for our sales performance to continue improving in the quarters ahead.

In order to capture the growing opportunity we're seeing for our services, we continued to increase sales head count this past quarter. At the end of 2009, we had a total of 200 sales reps on staff, consisting of 128 US subscription sales reps, eight US advertising sales reps, 36 in-house sales reps, five excellent PPR sales reps, two Resolve sales reps and 21 UK field sales reps. Including the PPR and Resolve sales team, this is an increase of 56 net sales people for the full year, and an increase of eight during the fourth quarter.

This is a significant investment that prepares CoStar to successfully capture the revenue opportunity and industry leadership opportunity that an eventual economic recovery will bring. We saw the partial cost and results of this investment of a much larger sales force in 2009, but the entire impact to the greater investment will happen in 2010 following a full year of this larger salary pool. We believe this is a worthwhile and important investment that will pay off in higher margin sales as markets recover.

Outside the strong demand for our core subscription products, there the two areas in particular that saw exceptional sales interest. The first is the enhanced analytic and forecasting services of PPR, which became a CoStar subsidiary last year. The other is Showcase, our very successful internet marketing service. PPR and Resolve accounted for just under $9 million of CoStar's total revenue for the year. As expected, many cross-selling opportunities have emerged for PPR's forecasting and investment risk mitigation services, which provide investors with much needed insight and analysis on improving the performance of their real estate portfolios. Clients of all three firms understand and appreciate the strategic value of this merger, and they are eagerly awaiting the new applications, insights and tools we plan to provide as a single unified source.

Backed by CoStar's resources, we have product teams working with PPR and Resolve to scope up the next generation of services we plan to bring to market late this year. We believe this is an area with tremendous potential for revenue growth and well worth the investment. With one expectation, all partnership agreements PPR had prior to the acquisition remain in place. And what I consider to be a strong vote of confidence in this merger, one of PPR's important and largest clients, GE Capital Real Estate, recently renewed its agreement with us.

We continue to make great progress in integrating our three organizations in sales as well as research, IT, product development and marketing. Clients are already seeing the benefits of this collaborative effort in having CoStar data incorporated in PPR services, and PPR analysis and content incorporated into market updates presented to our clients. We had numerous -- we had tremendous success with a fourth quarter effort that resulted in cross-selling more than $1 million in PPR services to CoStar clients. In total between the third and fourth quarter, it was approximately $2 million of PPR services that we cross sold to CoStar clients. Obviously, that's a great story to be able to report following the acquisition.

We continue to review a number of potential opportunities currently available in the market. As we previously stated, we intend to selectively acquire successful companies that we believe can leverage CoStar's extensive data, strong balance sheet and highly effective sales channel in ways that can significantly enhance their potential to generate revenue growth and add value to our subscribers.

We continue to believe the current environment provides an excellent opportunity for such acquisitions. And similar to PPR and Resolve, we intend to pursue those that meet our criteria and possess what we believe to be the greatest potential for supporting long-term revenue growth.

One critically important but overlooked area of our business in these earnings calls is the tremendous competitive advantage resulting from CoStar's pioneering research operation. This intensive, highly evolved process produces an unprecedented amount of information each and every business day, and it is directly responsible for the quality and scope of the information so highly valued by our subscribers. Also by continuing to refine our processes over more than 20 years and by using more technology to extend our advantage in aggregating mountains of information, CoStar's expansive research also continuously strengthens our competitive position, or widens CoStar's moat, so to speak.

In 2009 CoStar's research team continued to expand our database to unprecedented levels. Having already doubled in size over the previous three years, we grew the database another 250,000 listings, a net increase generated from a total of 726,000 new listings over the course of 2009. Not only do the listings added in 2009 represent 726,000 potential revenue generating opportunities for our subscribers, the interrelated nature of our research means they also represent the potential additional -- the potential add of 726,000 future tenants, comparable transactions, renewal to dates and effective rents to our overall database.

CoStar's research process is built on the principle that commercial real estate data cannot be collected or interpreted in a vacuum. The primary source for a transaction is information that a listing is on the market. And the primary source for a listing is information that a tenant is moving out. And the primary source for confirming tenant occupied space in a property is information that a transaction has occurred. Missing any one of these three interrelated primary information sources, the result is partial data that has little chance of being accurate or timely.

Combine all these interrelated information pieces collected in the course of two million telephone interviews each year and millions of miles driven, and you get a sense of the organization capable of making these important data connections and providing the most complete picture of activity in the market. Do it this way for 23 years, and you can see CoStar's moat growing wider as the process efficiently delivers a torrent of listing and transaction data points that are invaluable to those engaged in the business of commercial real estate.

To date, this process has generated the current level of 1.4 million listings, 1.6 million transactions, and 7.2 million tenants and 9.4 million images. CoStar's exponential database growth has been and will continue to be the source of the most accurate and complete analytics in forecasting for US and UK commercial real estate.

The value of CoStar's data collection process was evident just yesterday when the Wall Street Journal reported that 500 commercial properties sold for more than $5 million in the month of December. They were citing data from a competitive commercial sales source. By contrast, CoStar had confirmed an additional 176 properties that sold in the same month for more than $5 million that the other service had missed. There is no doubt that CoStar's timely and complete research process led to this 35% difference in the reported December sales volume.

Experience has shown that CoStar has dramatically more breadth of data on each of those sales as well. If you open up the criteria in the comparison to include all commercial properties sold in December, not just the easier to track $5 million plus set, CoStar report on thousands of additional commercials sales that the other service did not capture and research.

Similarly another publicly trading competitor has been reporting a steady decline in dollar volume per sale listings available in its database, referring to the deadlocked nature of the broader commercial real estate for-sale sector for the decline. What appears to be deadlocked is the research process. In the past 12 months, as this competitor's for-sale dollar listing value decreased by $75 billion, the value of for-sale property lists on CoStar increased by $18 billion. We believe that CoStar holds the clear and distinct advantage in both leasing and sales, with $521 billion in for-sale listings compared to the competitor's $460 billion.

The quality and scope of CoStar's research produces the most complete and accurate information that remains the primary source of our value as a company. You have often heard me report on our growth in listings, transactions and tenants and properties. As much as this growth speaks to the value we provide our customers today, it is just as much about the continued value we will provide them tomorrow, and about the strength of our research process.

During the quarter, CoStar and LoopNet announced that they have settled all current litigation between the companies. We believe that the settlement is in the best interest of both parties, customers, shareholders and employees, and allows both companies to focus on the needs of our customers and building value for our shareholders.

We have mentioned that we have recently had significant success with our new Internet marketing product called Showcase. As we announced in a press release earlier this year, we've seen tremendous subscription growth for Showcase over the past year, especially the second half of 2009. At the end of the fourth quarter, there were 8,854 total Showcase subscribers generating more than $5.5 million in annualized revenue. And we believe we are just beginning to tap the total market potential for this service.

During 2009, total number of Showcase subscribers more than doubled. Much of that subscriber growth, approximately 80%, occurred over the past six months of the year as our marketing efforts gained traction in raising awareness of the service and resulted in more brokers making the decision to market their listings with Showcase.

Also Showcase has continued to gain market share and attract subscribers at a time when the number of people paying to use competitive services has fallen. When comparing the many choices available for marketing properties online, we believe brokers are choosing to market their listings on Showcase because it's a superior, more affordable alternative that delivers valuable exposure and generates leads for their commercial property listings directly from tenants and investors.

Individual Showcase subscriptions are $49.95 per month for an unlimited number of listings, which is up to 75% less expensive than other competing services, a really solid value. In many cases, the broker's listings are already in Showcase's database, requiring little additional effort to make them available in Showcase and keep the information up to date. And we believe that brokers marketing their listings on Showcase appreciate the fact that our service doesn't force researchers to register, join a membership or otherwise put up road blocks between searchers and their property listings as other services do.

More than 14 million searches were conducted on Showcase in 2009, with each search generating an average of 27 property views. And the total search volume continues to grow quarter-over-quarter. The CoStar and Showcase Web site attracted 5.7 million unique visitors during 2009, an increase of 22% from last year.

We have been able to achieve this high level of property views and searches while maintaining a fairly consistent marketing investment, using ongoing search engine optimization efforts to capture high levels of traffic from major search engines like Google, Yahoo! and Bing. The resulting traffic and higher placement on search results are key benefits for Showcase clients that we believe helps set Showcase apart from competitors and underscores its overall effectiveness as a preeminent place to advertise listings online.

Because of the success we have had with Showcase in the US, we are launching Showcase in the United Kingdom this week. This is CoStar's first integrated international software product launch, and we're really excited about the revenue growth potential for this new innovative product in that market as well.

We've also announced important personnel news yesterday with the appointment of Craig Gomez as CoStar Group's Chief Human Research Officer. He will be responsible for all aspects of human resource initiatives throughout CoStar and its operating subsidiaries, including hiring, training, and development compensation and benefits. Craig is a proven leader and highly respected human resources expert who brings a depth of knowledge and business expertise to his new business position with CoStar.

He has more than 27 years of experience as a senior human resources executive for several Fortune 500 companies that have been recognized for their innovative and successful human resource programs. These include General Electric, GE Capital, PepsiCo and Cisco Systems. His leadership and expertise will be instrumental in developing CoStar's single most important resource, our personnel, and supporting the Company's continued growth. He will be a key member of our executive management team.

Let me close my remarks by saying that we are greatly encouraged by the clear signs of renewed strength in our business. The noted improvement in sales, higher renewal rates and increasing subscriber counts that began to turn up in the third quarter have continued to strengthen through the end of last year. And we believe they are clear indications we've reached the bottom of this cycle and are beginning to enter an initial recovery and growth phase.

We have taken the opportunity in 2009 to invest in and expand our business on a number of fronts. We have built a much larger sales force. We have added close to 90 staff to our research team to ensure the quality of our data. We have invested to take advantage of market conditions to lower our lower long-term occupancy costs. We have invested and are continuing to invest to bring the successful new Showcase product to market. We have acquired and are integrating PPR's analytic and forecasting capabilities and Resolve Technology's advanced software with CoStar.

While these investment initiatives are suppressing earnings somewhat in 2010, we believe that they will provide our shareholders with outsized return later this year and beyond as the market recovery strengthens and we're positioned to take advantage of it. As we have experienced in previous downturns, the information available through CoStar plays a crucial role for those engaged in the business of marketing, leasing, analyzing, valuing, financing, buying and selling commercial real estate. As that activity once again returns to the market, we expect demand for our information, marketing and analytic services to increase as well.

While we are just emerging from the market downturn, we are investing in preparation for the upturn. We believe that in the likely recovery of the economy of the next several years, CoStar will be well positioned for surprisingly high margin growth.

At this point, I'd like to turn the call over for a wealth of very interesting information from Brian Radecki, our CFO.

Thank you, Andy. Take a breath. As mentioned, we are pleased to report CoStar achieved solid financial results for the fourth quarter 2009, and we continue to see market improvement in many areas of our business. Today I'm going to focus principally on sequential results for the fourth quarter of 2009 compared to the third quarter of 2009, and also on our outlook for the first quarter in full-year 2010.

As we continue to progress through the current economic and commercial real estate cycle, we believe sequential trends offer the most insight into the performance of our business. In Q4, revenues came in stronger than anticipated at $54.6 million, an increase of $1 million over the third quarter of 2009. Our continued improvement in revenue performance during the quarter was directly related to strong Company-wide net new sales and improvements in the renewal rate due to lower cancellations, as Andy mentioned earlier. Subscription revenues for the fourth quarter accounted for 94.9% of total revenues.

On a functional currency basis, international revenues is approximately GBP3.2 million in the fourth quarter of 2009, and we closed out the full year of 2009 with GBP12.1 million in international revenues, in line with our original annual expectation. International revenues were approximately 9% of the Company's total revenues in the fourth quarter.

As of 12/31/2009, our 12-month trailing renewal rate, which is a measure of renewing subscription revenue, was approximately 85%. As I've stated for nearly two years now, we expected our 12-month trailing renewal rate to decline to the low to mid-80s for the calendar year 2009, and then begin to recover in 2010. We are very pleased to see the 12-month trailing renewal rate improve ahead of our expectations. And more importantly, we are pleased with the second quarter in a row of higher in-quarter renewal rates due to low cancellations. In fact, Q4 cancels were the lowest we have seen since early 2008.

The positive trend we are seeing in renewal rates is directly attributable to the lower cancellations, and we believe is a result of the increased customer retention efforts on the part of our sales and customer service groups Andy discussed earlier. The improvement in renewal rates has translated into improved DSOs, lower bad debt in the fourth quarter, and as Andy mentioned, and in-quarter renewal rate improving significantly quarter-over-quarter as Company-wide net new sales rebounded.

Moving to gross margin, gross margin was $33.7 million in Q4 of 2009, mainly due to the impact -- full impact of PPR's comparatively lower gross margin and some investments in research, which we discussed on previous calls.

Moving down the income statement, total operating expenses for the fourth quarter 2009 were $27.8 million compared to $27.5 million in the third quarter of 2009. In addition and in line with our guidance, fourth quarter 2009 results included approximately $0.03 of deal-related costs, purchase amortization, equity compensation, and other costs related to the acquisition of Resolve Technology.

Turning to profitability, our fourth quarter 2009 net income of $3.6 million or $0.18 per diluted share in our EBITDA fourth quarter of $9.9 million. Reconciliation of EBITDA and all non-GAAP financial measures discussed on this call are shown in detail on the press release and also available on our Web site at www.costar.com.

Looking at our balance sheet, we ended the fourth quarter with approximately $255.7 million in cash, cash equivalents and investments, and an increase of $31.1 million since December 31, 2008. The Company continues to have no long-term debt. In addition, as we've previously disclosed, the Company purchased 1331 L Street in Washington DC on February 5 for $41.25 million in cash for our headquarters facility, as we plan to move there by October of this year.

Now I'll speak to our outlook for the first quarter and full year 2010. As is typical, our guidance takes into account recent revenue growth rates and results which may be impacted by the commercial real estate or overall global economy. Our forward-looking guidance reflects our current expectations.

Expect the first quarter of 2010 revenue for the quarter in the range of $54 million to $55 million, and approximately $218 million to $222 million of revenue for the full-year 2010, as we expect to see positive trends on the sales side continue.

Our guidance on the impact for foreign currency exchange fluctuations on our top-line results remain consistent within that. We do not attempt to predict foreign exchange rate fluctuations, and our guidance assumes little to no volatility from the current rate. The average rate for 2009 was GBP1.57 to the US dollar, and our 2010 guidance assumes foreign currency exchange of 1.6 for the majority of the year.

We expect total cost of revenues to be approximately $21 million to $22 million in Q1 of 2010. This will include continued investments in research, PPR and full quarter of Resolve.

Moving down the P&L, we expect selling and marketing expenses in the first quarter to be approximately $11.5 million to $12.5 million, software development of approximately $4.5 million, and G&A of approximately $11 million to $12 million. As we stated in our earnings release, during 2010, we expect $0.04 to $0.06 per share in the development of Resolve's products and services that we anticipate will result in additional penetration among commercial real estate owners and investors moving forward.

As we continue to invest internationally, the mechanics of our effective tax rate calculation continue to be affected by losses in the UK entity. Tax expense or benefits in the UK will not be equivalent to the US rates. In addition, any acquisitions, tax planning strategies or large one-time gains or losses may affect the actual tax rates for 2010. With that in mind, we currently expect the effective tax rates to be in the 40% to 44% range.

As we alluded to last quarter and explained in our earnings release, we'll begin discussing and guiding to additional non-GAAP financial disclosures in 2010. We believe that both management and investors can benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing the future periods. For additional information, please refer to the non-GAAP financial measures section in our press release posted yesterday on our Web site.

In terms of earnings, we expect first quarter 2010 fully diluted net income per share of approximately $0.11 to $0.13 and non-GAAP net income per diluted share of approximately $0.21 to $0.23 per share. Our first quarter outlook includes a full quarter of costs related to Resolve, costs related to the acquisition of our corporate headquarters in Washington DC and seasonally higher first quarter costs related to our annual sales conference and payroll taxes and benefits.

For the full year 2010, we expect GAAP net income per share of approximately $0.60 to $0.65 and non-GAAP net income per share of approximately $1.06 to $1.22. Our full-year guidance for GAAP net income diluted share includes investments in our products and service offerings, Showcase, analytics, sales and the product service and offerings at PPR. And Resolve.

In addition, we expect approximately $3 million to $3.5 million of costs related to acquisition and transmission of our corporate headquarters to Washington DC during 2010, and approximately $1.5 million to $1.8 million in restructuring and other related costs to the write-off of leases to consolidate our CoStar, PPR and Resolve offices into a single location in Boston during the third quarter of this year.

Costs in 2010 related to the acquisition and transition of our corporate headquarters to Washington DC are expected primarily to include overlapping occupancy costs to the end of our current lease term and the building carrying costs. Our lease expires on October 15, 2010. After this period, we expect to save over $2 million a year in occupancy costs in 2011 compared to 2010. And over a 10-year period, we expect to save over $25 million.

Since we bought the headquarters building ourselves, we could run the models out 15, 20, 25 years and obviously the savings would be significant. Once we get past the transition costs this year, we have created significant long-term value by permanently reducing the long-term cost structure of the Company for decades and decades.

Also our full-year guidance includes approximately $7.5 million to $8.5 million of pretax noncash equity compensation charges related to the vesting of stock options and restricted stock.

Our business model remains strong on the fact that we have a 95% subscription base business model with high renewal rates, a unique proprietary database, market-leading position, strong balance sheet, no debt and extremely high operating cash flow. We expect to return to more normalized revenue growth rates and expanding margins, which we have enjoyed over the past decade, in the near future and continue to see positive trends in our business in the overall economy. We are already seeing the revenue growth from the investments we've made in 2009 and are confident in continuing these investments in 2010 to drive higher revenue growth rates later this year into 2011 and beyond.

In addition, we expect to return to growing earnings along with the revenue growth rate later this year and return to moving toward our long-term EBITDA goals we have stated in the past.

As we have seen in the past, our subscription-based information model performs very, very well in a stabilized market. CoStar's management team believes there is significant opportunity for additional high-margin revenue and earnings growth, following the investments we have made in research and sales and the strategic acquisitions like PPR and Resolve. We continue to look forward to reporting that progress to you. And with that I open up the call for questions.

Thank you. (Operator Instructions). Our first question comes from the line of Jon Maietta with Needham & Company. Please go ahead.

Thanks very much. I wanted to touch on -- hi, guys. Wanted to touch on Showcase a little bit. Andy, maybe if you could talk a little bit about what you see there in terms of sales cycles, what a typical sales cycle looks like, if there is a typical case, in terms of duration. And then I wanted to get a sense also as to roughly what percentage of Showcase users are also using some other CoStar service?

Good questions. Because the answers are not intuitively obvious. On the sales cycle, it's a wonderful thing. We are -- the typical situation is we are promoting researchers who are interested in sales into a centralized sales force that is basically calling up brokers with listings, and some of them over the telephone using WebEx, and the sales cycle is typically 20 minutes. And it's a very reasonable cost of sale. It is fairly leveraged. These folks are coming in at a lower base cost, base pay cost. They are -- there is no travel involved, training is inexpensive in that we are able to cycle them up typically into 70% productivity within one month. Because they already know commercial real estate and our products. And there's a very high success rate in breaking -- bringing these sales people into this group and this selling process.

So the sells cycle is very solid. The difference here, I think it is obvious, is that we are selling a $49 product, not a $900 product. So it's a very high volume product. Actually I'm pleased with the fact that we are seeing this bar bell growth in the Company, where we are seeing good solid growth that is impacting the business at this $49 price level, and we're seeing good solid growth up at the PPR institutional side at these $80,000 a year contract level. So both sides are working well.

Then the second question you had was what other services are these people subscribing to Showcase purchasing from CoStar. And the number -- recently ran the analysis, and the number was surprising. I believe only 7% of the people who are subscribing to Showcase as individual subscribers are using another CoStar service, which means that we've got tremendous cross-selling opportunity here.

That means we've got thousands and thousands of brokers who on average have seven listings. They've now begun a client relationship with CoStar. And what we would like to try to do now over the years is do what we've done with other client relationships, and that is do a lot of cross selling into them. Eventually sell them perhaps Property Express, our lighter end leasing information service. And potentially move them on up to Property Professional. So that has a lot of potential. So we've really dialed in something that's really quite positive here on this Showcase product.

Okay, that's helpful. And a more mundane question for Brian, if we were to think about operating cash on the calendar year. Is a flattish and then maybe slightly up number fair?

Yes, I think it will be relatively flattish up year-over-year. I'd say that is probably about correct.

That was a good mundane answer, Brian.

Yes. Easy question.

Thank you.

Thanks, Jon.

We have a question next from Ian Corydon with B. Riley & Co.

Thanks. Let me just follow up on a couple of Showcase questions. The 84,000 or so subs you called out, that does not include Showcase, but does include PPR. Is that correct?

That 85,000 (multiple voices) includes Showcase.

It's everything, Ian.

It's everything.

Everything.

It excludes advertisers who are just buying one-off and excludes one-off purchasers, but people who are enrolling subscription agreements with us, 85,325, right. That includes the Showcase number.

Okay. And you mentioned that the average contract value was up. I would have thought Showcase would push that down and PPR pushes it up. But what are the dynamics for the underlying core subscription?

Sure. The -- it actually has pushed up -- PPR has pushed it up a little bit. Obviously PPR's less than 10% of our revenue, so it's not as affected as much. But the Showcase are month-to-month contracts, so we're not counting that in that subscription number. So that's actually true annual contracts, one year or longer subscriptions, and that's why you continue to see that climbing.

Great. And of the existing customers who are using Showcase, is there any bundled pricing? Or do they pay the flat $50 a month?

So far there has been no or very limited bundling of the product. So it's mostly for those, for that 7% -- or for those people who are traditional Property Pro customers or COMPS customers, they are paying the full additional amount to get Showcase. We will probably look at some bundling initiatives in order to try to get some new market penetration in the coming quarters, which we think will work well. But we won't be bundling with our existing customer base, probably.

And do you have any way to tell, or do you have a sense of what the magnitude of the audience is in terms of folks that are searching for products but obviously haven't signed up as customers?

Yes. I think I understand your question. I'll answer the question I think I understand. It's huge. And every time we reexamine this, which we sort of do once a year. We do a little analysis and look at the size of this brokerage market or the owner market that could be interested in either Property Pro or Showcase. It's massive. So if you look at -- one of the things we look at is brokers who have three listings or more, or brokers who have done three deals or more. By looking at that, that excludes the folks who are just casually in the market, dumping a facility or something. Once you've got three deals during the course of the year or three listings during the course of the year, you're actually probably a commercial broker.

Our penetration rate in that segment, our highest city penetration rate in that segment would be New York City where 66% of that profile subscribe to a service from us. It may be -- San Diego might be 60%, Los Angeles might be 58%. The lowest market penetrations are probably 1%, 2%, 3%. So, Albany, a new city for us, we might be at 5% penetration. Las Vegas, a new city for us might be at 18%. The median is about 25%. So if you just were look at -- once upon a time San Diego was at 1% and it grew to 60%. So there's basically 55,000-plus folks that we think we're trying to target out there. Which would be, at the current revenue numbers, would be another 300-some million in potential revenue. Obviously extremely high margin revenue.

Looking at the owner side of that, and we don't have -- this earnings call is not big enough to go through all the segments, but looking the owner side, same sort of thing. The longer we're in a market, the more we're penetrated the market. Significant owners in Washington DC, 15% subscribe to our service. Las Vegas, significant owners, no significant owner in Las Vegas subscribes, but one day they will. And we'll keep working on it. LA, where we are very successful, only 3% have so far subscribed. US overall is about 4%. But it is continuing to trend up.

So we're going to build products and services, especially with this Resolve-PPR initiative to make our products really applicable and valuable to that owner segment. There are thousands of those out there. And at the current kind of pricing we are looking at, that's $100 million in a marketplace. So 50,000, 75,000 would probably be a good answer.

Great. That's helpful. And then on PPR, can you talk about how customer retention is there? And where are you with the integration? And what's the timeline to develop an analytical product or service out of that business?

The customer retention at this point appears to be really quite strong. This is something that the customer base can understand what's going on. They are the ones, the customer base of PPR has been the driver demanding more granular data. They want PPR to be able to take that forecast from 30,000 feet, sort of big trend, big picture analysis applying the research, and be able to bring it down to a building. And go from building up to the top-level analysis. So the customers understand that the merger between CoStar and PPR will give PPR incredible capabilities to move from the granular to the big picture and back.

So the customers are excited about that, and we're seeing good retention of the customers, including recently GE, which is the single biggest customer. It's $2 million annual contract renewed, and obviously they examined all the things that were occurring in the merger. Again the message seems to resonate with prospects because we are able to cross-sell nearly $2 million in subscription revenue since the merger on the basis of taking this granular data with the best-in-class analysis and forecasting.

So it's going well. Without a doubt, there will be significant effort involved in integrating -- switching out the data sets PPR was using with the data sets that CoStar will provide them with. We've done that in a number of cases, so already that's happening on a pretty big scale. It will take at least a year or so to complete that process. We hope to be able to produce a product road map or present a product -- fairly flushed-out product concept at the PPR user conference in the fall that will give that customer base an idea of the kind of things the combined companies will be capable of. I think it will be pretty impressive.

We were working, prior to acquiring PPR, on an analytic product that would be, I won't say similar, but more in the genre of what PPR does. So we're well down the road. So post-acquisition we already had something in the development that we can blend with what PPR is doing, and I think we can get to the market a little bit faster with it. I'm very excited about the potential for that product area. The Resolve product area also has a lot of potential. That will take a little bit longer than the PPR integration.

Great. Thank you.

Thanks, Ian.

We have a question from the line of Brett Huff with Stephens. Please go ahead.

Good morning, guys.

Hello, Brett.

Hey, Brett.

Good morning, guys. A couple quick questions. First on the -- can you -- Brian, you talked about, or maybe it was maybe Andy. You talked about how much revenue was from PPR I think and Resolve in the quarter. Can you give that to me again? I didn't get that number.

I don't think we disclosed a specific number for PPR and Resolve. But it was about $9 million for the year.

It was $9 million for the year.

Correct.

That's what I needed. Okay. And then as I look forward in 2010 and looking at your revenue growth, the way I read your press releases, it sounds like you expect positive organic growth as well as growth in your acquired entities. Is that the right way to read your press release?

That's correct.

And then when I look the expenses that you all have articulated for us, I want to make sure I get all of them. You called some out in the press release, the $0.04 to $0.06 of increased investment, the building-related stuff and then the lease-consolidation-related stuff. But then I think I heard here again, you're now saying -- and again I think this is part of the dilution, I think, of PPR -- hey, we hired some new people, both -- or we got PPR bringing on new people as well as hiring on new sales people. Can you give us a sense of what that last piece impact was on a year-over-year basis? PPR plus the increase in the sales people you see?

If you look at the fourth quarter, you're not quite there because you don't have a full Resolve in there. But if you look at the cost structure in the fourth quarter, it will be a little bit higher in the first quarter because of having Resolve included in there. But essentially, we hired 100-plus people last year. I can't give you the exact numbers, but you can figure out average -- what an average person would make fully loaded, and you just assume you probably had about a half a year impact on that, because you were hiring them throughout the year.

So you are obviously going to roll that through, and that is what Andy was talking about when he was talking about the sales force. You roll that expense through, and it gives you a full year in 2010. So I think if you make some averages there without me giving you the exact numbers, I think you can figure out the impact on those hires in 2009 and how they roll through to 2010. So I think if you look at the $0.18 and you look at the numbers and where we're at, it's fairly easy to reconcile moving forward what the expense structure is going to be in 2010.

And one of the ways to look at that is, again if you go back to probably an earnings call in first quarter of 2008, we had more than quadrupled the size of our database and held the size of our research department at the same level. And we decided that in order to protect the quality of our product, we needed to recognize the need to grow the research staff some -- at some level in '09. So we probably doubled the productivity of the typical researcher over the last three years, but we felt it was unrealistic to think that we quadrupled the level of productivity of the average researcher.

So in order to make sure that we didn't damage the brand by hasty activity during what typically is a two-year down cycle, we wanted to protect the quality of the product, so that when we get into a market recovery, the brand is good, the sales force is in place and we can recognize the up swing. And these -- adding 100 researchers and 56 sales people during the course of 2009 and now seeing the full-year impact in 2010, when you're in a 2% sequential or light increased revenue environment, these are character-building investments. They will seem like nothing when you get back to some strong revenue growth hopefully in 2011, and you'll see -- and they won't hold back margin growth at all I think in '11 and '12.

And I mentioned that in my script, Brett. I think that people can look at the business model. It speaks for itself. You can go back to the 2006, 2007 time period, and the 2008. As we finished up the investments we had made, rolling out our services across the US, people saw the strength of the business model as you were dropping revenue straight from the top line and the bottom line, and the huge expanding margins.

So I think the business model speaks for itself. As you get through these investments and you move back to that normalized environment, I think there will be significant earnings potential, which is the same thing people have seen in the past. I always like to remind people that the $255 million in the balance sheet didn't just show up. We didn't issue warrants or do anything else in order to generate that cash. That essentially was generated through the operations of the business. It is basically a cash cow.

Sure. Last question, and again related to expenses. As I looked to 2011, which if we look at 2010 as a transition year, which is how I think you're positioning it. Which pieces drop off or which will be a run rate revenue in expenses? What I think I hear you saying is the building stuff and the lease consolidation stuff will not recur in '11, right?

That's correct.

It will swing the other way.

Yes.

For 2 -- to get $2 million of help. (Multiple voices.) And then $0.04 to $0.06 for Resolve, does that stop? Can we compartmentalize that in 2010 and have that not recur in 2011?

No, I don't think so. I think the building stuff obviously all goes away, goes the other direction. Starts helping you. I think most of the other cost structure, at least for where we sit today. We're not giving '011 guidance, but not planning on cutting any of the investments in Resolve. I think that will continue. As Andy has articulated, Resolve is a little bit longer term project than PPR. We think we're seeing returns on PPR immediately. We think Resolve is probably more of a two- or three-year time period on that. So that investment will continue.

And then, when I think about -- you articulated you had hired 200 people, and, Andy, you said you hired 100 sales and about 50 researchers, is that right?

90 plus researchers. 56 sales.

Do we need -- in order to make money, in order to move into '11 an d '12, how long will those increased hires keep us in good stead?

I think for quite some time. We've gone through -- remember we've been through a couple of big transitions in the Company the last three or four years. We added retail, we added for-sale and we added 200 new cities. So we had 54,000 properties for sale back in 2005. We really weren't a player in the for-sale area in 2005. That 54,000 has gone up now to over 400,000, I believe. So tremendous increase in that area. Similar level of increase in the number of retail properties in our system from '04-'05 to today. And then the massive increase from adding 200 cities.

So a lot of the growth in the research department was coming to grips with all that growth. And we were shocked. We didn't expect to see that much content come into the system as we went into those sectors. And we were dealing with it and adjusting with it. But we are seeing efficiently gains through technology and through management and experience and training and growth in market share. We continue to see efficiency gains in research. So we are not anticipating the need to add a lot of research over the years to come just dealing with the existing footprint we are in.

On the sales side, I think we are really well-positioned, and I think also we are defraying costs to a degree by being able to sell more effectively and have the centralized lower cost group really be effective. And supplement the revenue that comes from the valuable but more expensive field sales group. So I think we're well positioned. If we get continued recovery or even weak recovery, we'll be in a very good position with the sales force we've got right now.

And last question on margins, Brian, you referred to this, the goal is you think you can get back to the goals you set back before. And I think the number you're referring to is the 30% EBITDA. Is that the right number to think about as we go several years into the future?

I think so, yes.

Absolutely.

That's been the target goal for a long time. And I think, as we get through this transition year, we will start moving back toward that goal and probably give more specific guidance on a date we think we can achieve that.

Okay. That's what I needed. Thanks for your time.

Our next question from Jim Wilson from JMP Securities.

Good morning, guys.

Hi, Jim.

Hey, Jim.

So this question is on your top-line guidance. Because I guess backing into it, we really haven't discussed it, but given the revenue guidance compared to '09, it seems, I supposed pretty obvious, but tell me I'm wrong, that the average contract value that you're renewing at on the core CoStar product has gone down. I assume the organizations that are your clients -- obviously you have been shrinking over the last couple of years, so as the contract side has gone down, otherwise you're actually, it looks like showing, once you back out PPR, showing or you are guiding to a decline in core CoStar revenue?

I think when you take a look at the guidance, really what it is, is we think overall we're going to be having organic growth, whether its from PPR or CoStar, and those two services will be, obviously, moving forward and consolidating and selling combined. So it will get harder and harder to break those out. But also it is really the trajectory of the services, meaning that the CoStar service, if you looked at kind of core going back to the beginning of the year, declined for two or three quarters at over $1 million a quarter in the beginning of the year. And now it is starting to move back up, but of course, not at the same rates of decline. So it will be increasing all year even if it's down slightly if you compare it at the end of 2010, the year-over-year numbers. But we are projecting organic growth in almost all phases of business in 2010.

All right. I guess I don't understand how the math works out. But maybe just going back to the first question, are the average size contracts -- I assume this was the case, because they -- we know that brokerages have shrunk. But are some percentage of the number of contracts or the contracts you're resigning for lower dollar amounts because that client has shrunk in size?

Jim, I think what you're doing is taking the number we reported, 9,000, is the new contracts into the business in the fourth quarter. It's not the, does not factor the renewing contracts. So that has nothing to do with the contract that's hit the one-year roll. That's basically new folks we signed up. So did we present a number on the average contract value overall?

We don't. We haven't. We don't predict --

We didn't -- this quarter we did not have a number on the average contract overall. I'm not sure what that is -- (Multiple voices.)

And, Jim, that number that we're presenting is the identical number we've been presenting for years, and it's new contracts coming into the system. So I think that's where your math is a little bit off.

All right. I'll have to follow up off line.

I think we have presented in the past the number you're talking about. And I think we could try to bring that back up for the next earnings call so you could have both numbers.

Let me ask you this way, maybe. Since you noted that PPR and Resolve added 9 million in '09, and that was obviously less than half a year, so even if you just double it for sake of argument, basically all the growth you'd be showing, the 218 to 222, would come from simply adding in Resolve, and it would show CoStar -- the core CoStar then being flat.

Yes, I think the core service will be flat or up, and that's what the range implies. That's correct.

Okay. And since you had renewals, it sounds -- and again maybe you got some smaller clients or some that shrunk.

Jim, it's an interesting question. So we're getting some -- you're getting -- we're getting a lot of hiring contracts from folks like hedge funds and opportunity funds and government agencies and banks coming in. We have some smaller contracts coming in from some of these smaller cities. So your typical brokerage firm tends to be smaller in Albany or Omaha. And then there's a slight phenomena where during a down market, firms that might have expanded geographically contract back a little geographically. So they buy -- they might have -- they may be a San Diego-based firm, and during the heady times, the expansion times, they buy Phoenix and LA data from us. The market turns south, they bring their business back to being just San Diego.

Now the good news here and this is a neat -- if really you want to have fun with numbers sometimes, you can look at this distance of transaction over 20 years across millions of transactions. But this phenomena that's really clear and pronounced, where commercial real estate firms cover wide geography in good times and tight geography in small time -- in bad times. What this means is I think we will have another good driver, which is, as we come into recovery, people begin picking up additional geographical modules from us. That will be another upside revenue driver. So there could be a little bit of -- and those are our contract write-downs during the last two to three years, where they shed some additional geography.

That makes sense. Okay. That's good. And I guess just the other one. Just could -- you remind -- I think you talked about it before, how the Resolve and PPR margins, maybe even EBITDA-wise, obviously you can see it in the mix, but compare to core CoStar margins. And do you believe over time, which I guess getting back to 30%, you must believe it, that you're going to be able to pull the PPR resolve margins up to core CoStar levels?

That's correct. And I think if you went back to my script, I think it was last quarter or the quarter before. We brought PPR in, and it was probably about a 5% or so margin. In conjunction with everything we've talked about, and all the immediate cross-selling and really the integration of that service into CoStar, we clearly believe that could be 30% or even much, much higher. On the Resolve, they are as we discussed negative. They will be a drag on earnings this year. They will be a drag on earnings in '011. It's a little bit of a longer term project, but ultimately three to five years down the road, yes, we believe that there is significant margin upside, and so we do think that we can get them up but they are little bit more of an investment.

So in looking at those two businesses, PPR and Resolve, at the scale that a PPR is operating at, 187 customers, they're providing an outstanding service to those folks. Super bright group of people up there providing great applied research for their customers. Great folks to work with. But the potential here is that the impact of their work not be laid over 187 clients, but be laid over the potential universe that we think is out there of about 5,000 clients. So bringing the average price point down a little bit, creating more of a product and less of a consulting service.

So the products of PPR have a high touch component and often an almost unlimited consulting availability to the customers. We'll continue to provide that unlimited consulting capability, but we will price more appropriately for it. And we'll try and develop more of the product highs high touch where we're meeting with the clients directly, but it's a limited number of hours and it's tied with more software. And we believe by doing that over the course of the next several years, we can absolutely get PPR up to the 30%-plus margin and keep the essence -- the good things they represent and have.

On the Resolve side, they're a pretty small software company with a lot of products. And I noted that we said they've got two sales people. They sort of have 1.5 sales people. One of the people -- one of the sales people is really more involved in implementation with customers. The products that we'd like to see them move towards and develop are products that appeal to the mass market. And we think there are a number of opportunities for that.

So we've got this great big sales force. We've got 100,000 folks we can go talk to. We'd like to see Resolve's products laid across 10,000 folks rather than a couple hundred folks. And by doing that we'll get the software margins. This is a software company, Resolve. It's just smaller scale. It's got best-in-class products and cash flow analysis, and data warehousing for commercial real estate, accounting, information property, management information, leases and what not. We plan scale it and get really good margins out of it. It will hurt, though. It is painful in year one and two.

All right. Okay. All right, good. Thanks.

Thank you, Jim.

Thanks, Jim.

(Operator Instructions). Our next question from [Brandon Dobell] with William Blair.

Hey, guys. How are you doing?

Good.

Fine. How you are doing?

Good, good. Thanks. A couple of quick ones for you. Can you remind us of the seasonality of the bookings within PPR and Resolve. I guess mostly PPR. Just trying to figure out if there's anything different from how that sales rhythm works versus your core business?

I think PPR, as Andy just mentioned, Resolve is pretty small and I don't think will affect it much. PPR did just renew their largest client, which Andy talked about on the call, a couple million dollars recently. So after that, which just happened, it's pretty steady throughout the year.

Okay. Fair enough.

We got through that, and obviously we're very happy about that.

No doubt. If you look at your assumptions for organic growth being, let's call it flat, up a little bit. There's some implication in there either for cross-sell or lack thereof or some kind of renewal rates. Any color you can give us on what some of those major assumptions are for the organic part of the business for 2010?

A lot of it is uncertainty.

Okay.

So we're all sitting here wondering is this a double-dip recession? Is this a recovery? And if you get two more quarters of this positive office absorption we saw or office employment growth, then you've got upside in the model. But I would expect us to skip around on the bottom here for a quarter or two. So we're just trying to keep things realistic given the uncertainty in the market. I really, really look forward to the inevitable recovery that will come. It will be wonderful for the business. But right now we don't want to call it a bottom and assume positive employment growth right away.

Fair enough. More of a longer term question. Obviously with the recovery there comes a lot of benefits, just a number of people, a number of firms. Extra money to spend on value-added products. There's probably going to be some downside things, like maybe the government doesn't need as much information because they're less worried about stuff. Or perhaps a greater degree of clarity in certain markets requires less drain on their information. As you think about the recovery gaining more steam and clarity leaking into both investment sales and leasing markets, are there things that look in your customer base or your product base where you say we can see those not renewing at the same rate. Or we see those kind of customers falling off because they were driven by the need to generate information in a period of significant uncertainty. With more clarity comes less need for that information? Or do you think it's going to be a lot stickier than that?

I'm 97% confident that it's much stickier than that. You do have the possibility that the federal government could in the quarters to come get more active in trying to make sure commercial real estate isn't dragging down the banking system which could in the future create new revenue opportunities for us potentially, and I'm just speculating. And that could go away years in the future. So the Resolution Trust Corporation was a customer of ours, and two to three years after the recovery in the '90s occurred, they went away as a customer. And I was disappointed with that. But, big picture, any loss of an isolated customer here and there, which is really a customer around distress, will be swamped by brokers getting commission checks back in their pockets and coming and buying our services and products again. So --

And also I think this -- another couple good things here. There's some permanent sea changes that occur at the end of each one of these cycles, which position us well. One of the big sea changes here is the reintroduction of negative cycles into commercial real estate. So a lot of folks in the development, owning, lending, investing side forgot that you get down cycles. So after you had a 15-year run up in values, folks thought there was no down side. And our sales people spent a lot of time to people -- with people who were investing billions of dollars on debt or equity side, who asked the question why would we need information? Real estate only goes up in value. Those folks have now learned that real estate also goes down in value, and how it goes up in some markets and down in others. So I believe there is a permanent increase in the demand for analytic information now that a couple of folks have gotten burned fingertips.

Okay. Fair enough. And final one for Brian. I may have missed this in your remarks. (Inaudible) of the building purchase, how should we think about capital spending in 2010?

Building purchase, we will probably have about -- 1331 L Street will have its own P&L. Obviously it will be all consolidated, so the only thing you get is (inaudible--multiple voices) the non-GAAP, where we're kind of excluding costs some of the duplicative costs until we move in. It will have it is own P&L and buildout of $10 million to $15 million. The top four floors are raw space. The retail is raw space. So the building itself will have some CapEx associated with it. The normal business usually has about $5 million to $10 million in a year. I think this year we were about $10 million. So you'll have the normal business operations, but the building itself will have another probably 15 or so million in CapEx for the year.

Okay. Fair enough. Thanks, guys.

Thank you.

We have a question from the line of [Todd Lukasik] from Morningstar.

Hi, guys. Thanks for taking my questions.

No problem. I hope you're not mad at us for using your moat word.

No, I like to hear that. Sounds good. Just a question following on with the government as a client. Can you disclose how big they are, maybe in terms of top X number of clients or percentage of revenue?

Sure. I'm now prepared to say the federal government is huge. They are probably now in our top four customers.

That would be correct.

And they are a multimillion dollar customer.

Yes. We don't have any customer over 5% or even over 4%. But they would be top 5 customer, and obviously that's consolidating a lot of entities. (Inaudible -- multiple voices.)

So it could be FDIC, the Treasury, the Secret Service, the GSA, the IRS, the -- I guess -- and then -- as you know, with some of the financial monetary groups, it's confidential. But it's probably -- we did an analysis recently. I guess we have 65 different government entities buying from us in Washington DC.

Okay.

The second would be Los Angeles with 20-some government agencies buying from us.

Okay. That's helpful. And I wanted to make sure I understand the occupancy costs, particularly how they change in 2011. So the $1.5 million to $1.8 million in restructuring related to the consolidation of the offices in Boston, that's expected to be non-recurring. So it wouldn't show up again in 2011, is that correct?

That's correct.

And then there will be an additional $2 million in 2011 that you expect to save as well?

That's correct.

Okay.

And that's basically over more for the headquarters lease. You'll see the headquarters lease savings and, of course, the savings -- the write-off in Boston, there's a little bit of duplicative rent in the three buildings, but the majority of it will really be kind of the lease write-off and all the furniture and fixtures write-offs as we consolidate into one space.

Okay.

And we're also -- the other thing we're avoiding here is we don't think any of the leases are super cheap right now. We don't -- while we think the building was a very good, prudent deal, and we don't want to be in the real estate business, we would just as soon not own the building soon. But I think we are avoiding significant costs two years from now or three years from now, is what we're doing.

Yes. And that kind of goes too, Todd, so I think you'll see a couple million dollars savings in '011 off of the HQ building. And think also what Andy is eluding to. So when I talk about a $20 million or $25 million savings over a 10-year period. And since we own the building, I can go out in 15 or 20 years and come up with the huge numbers. That's really just kind of talking real dollars here. That's not talking about if we were actually leasing space, what rental rates will happen. The rental rates over the next five or 10 year or 15 years. So I really look at this if you're able to take a permanent piece of your cost structure out over a 10, 15, 20-year period. I mean, really it will significantly increase value to investors, in addition to getting the building at $0.45 on the dollar.

Right. In terms of the space in the building, do you all anticipate using all of the floors, and if not, do you plan to lease it out or just keep them vacant?

The -- given the cost of the space, it's pretty compelling to try to use almost all of it. So we've got four floors that have been built out to a very high standard. And by using those four floors, we can avoid $10 million in CapEx in other facilities down the road. And we'll take the raw floors and we'll build them out to an open floor plan, lower-cost layout. Still very nice layout. And we think there's some benefit to having future growth occur in a consolidated headquarter operation, not continue to open up different research centers all over the place.

So it will be -- we'll use the majority of it. There are long-term tenants on one floor. And since by chance one of the long-term tenants, General Council, is related to someone -- We will only have about 20% of the building occupied by outside third-party tenants.

Okay. And I know you guys still have quite a bit of cash on the balance sheet, but as you look at opportunities for acquisitions and so on and investment in the business. Do you think you would look at using the cash on the balance sheet for that and potentially taking out a mortgage on the building for incremental capital?

Definitely. If we -- first of all, there's a chance that at any given time that market stabilizes and we finish occupying -- figuring out what our footprint is in the building and occupying it, we don't want to keep our capital tied up in real estate long-term. So we might end up not keeping our capital tied up in real estate and convert to a lease position at some point. So we might remove the capital that way.

And if there was an attractive acquisition we wanted to make, we could readily -- we believe we could readily jump in there and do a mortgage. We just don't want to pick up a 5%, 6% mortgage with taxes and so on, so forth, on the transaction costs while we are earning quarter point on treasuries. So we'll leave -- we look at that as dry powder that's available when we need to use it.

That's helpful. Thanks for the call, guys.

Thanks, Todd.

Thank you very much. And I believe with that, we've taken this earnings call to a record length to go with our record revenue. We really appreciate everyone who is still actually on the call. 47 people listening and joining us for the earnings call. And we look forward to updating you on our progress for the next quarter. Have a good day.

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