CoStar Group Inc (CSGP) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CoStar Group's third quarter 2010 conference call. (Operator Instructions). As a reminder today's conference is being recorded. Speaking on today's call, CoStar Group founder and Chief Executive Officer Andrew Florance, Chief Financial Officer Brian Radecki, and Communications Director Tim Trainor. At this time I will turn the conference over to Mr. Trainor. Please go ahead.

Thank you, and good morning, everyone. Welcome to CoStar Group's third quarter 2010 conference call. Before I turn the call over to our CEO Andrew Florance, let me state that certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include but are not limited to those stated in our press release on CoStar's third quarter 2010 results and in CoStar's filings with the SEC, including its Form 10-K for the year ended December 31, 2009, and Form 10-Q for the period ended June 30, 2010, under the heading Risk Factors. All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements.

As a reminder, today's conference call is also being broadcast live over the Internet at www.costar.com/corporate/investor, and are play will be available on our website one hour after this call concludes. Thank you for joining us. I will now turn the call over to Andy.

Thank you very much, Tim, and welcome to CoStar Group's third quarter 2010 conference call. I'm pleased to report to you that during this past quarter, CoStar observed improving commercial real estate market conditions, and in that environment we achieved raising sales and extremely high renewal rates.

One of the key headlines for CoStar Group this quarter is that we can now report that both the US office vacancy and availability rates have clearly stopped climbing and are now improving. These key fundamental industry indicators historically are highly correlated with our sales growth and renewal rates.

During the third quarter of 2010, CoStar Group posted $57.1 million in quarter revenue, an increase of 2.3% or $1.3 million over our second quarter 2010 revenue of $55.8 million. Revenues increased $3.6 million or -- over third quarter 2009 revenues of $53.6 million. $57.1 million is the highest quarterly revenue level that CoStar Group has yet achieved.

Net new sales during the past quarter reached the highest level seen since the second quarter 2008. This is the fourth consecutive quarter in which we are reporting increasing sales productivity. For the third quarter 2010, Company-wide quarterly net new sales totaled $4.6 million, a nearly $1 million improvement over second quarter new sales of approximately $3.7 million. The third quarter net new sales of $4.6 million is a $3 million improvement over the first quarter of 2010 net new sales figure of $1.6 million. We're obviously very pleased to be age to report that net new sales in the third quarter of 2010 nearly tripled over the net new sales in the first quarter of 2010. Our core product, the US CoStar property professional information suite, was the biggest driver of our strengthening third quarter organic revenue growth.

Our great progress in sales this past quarter was only possible because of the Company's continued success in retaining customers. Our 12-month trailing renewal rate for subscription based services increased approximately 2% quarter-over-quarter climbing to a very impressive level of approximately 90%. The end quarter renewal rate increased 7% year-over-year. A 90% renewal rate is the highest level we have enjoyed since the second quarter of 2008.

During the third quarter the renewal rate for clients that have been our customers for five years or more remained very strong at 96%. The third quarter 2010 renewal rate for firms that have been our clients for less than five years also remained very high at 87%, and very much improved from the 74% we were experiencing one year ago. I believe the great improvements we see in our renewal rates are the direct result of the hard work and talents of CoStar's sales force and a clear indication that our core customer base is returning to financial health.

Commercial brokerage firms in particular have been very active recently, and we continue to see strong demand from one of our largest client segments as tenants return to the market and leasing activity increases. Many brokerage firms have added users or subscribed to additional service in markets recently, including one of our largest clients, Grubb & Ellis, which recently signed a major contract extension for additional services during the third quarter.

We believe that a 90%, 12-month trailing renewal rate for our subscription-based services, combined with the fact that subscription-based revenue accounted for 94% -- approximately 94% of the Company's total revenue the third quarter makes CoStar Group an exceptionally solid and attractive company. Our Company's solid balance sheet, with $232 million in cash, cash equivalents and investments on hand at the end of the third quarter, with no long-term debt and a mortgage rate Class A office building to boot, all serve to enhance CoStar Group's sterling financial position.

The total number of subscription client sites increased by 211 during the quarter to 16,508 Company-wide. And that's in comparison to 16,297 in the second quarter. The total number of individual subscribers also increased by 486 during the third quarter to 86,803.

CoStar continues to see strong demand from investors, the banks and other financial services firms. We also continue to take advantage of cross-selling opportunities with our subsidiary Property Portfolio Research, or PPR. One example of successful cross-selling to institutional clients was our third quarter subscription sale to Wells Real Estate Funds. One of the largest private REITs in the US, Wells agreed to purchase CoStar's suite and PPR's performance service. I understand our combined solution was chosen over several other good competitors. Allstate Investments, an affiliate of the Good Hands People, was also a major combined CoStar-PPR effort this past quarter.

Banks have also continued to be another good major source of sales. Our sales force has made a concerted effort to target banking firms, and we've been tremendously successful in introducing and expanding CoStar's services to this sector. So far this year, 66 banks have become new subscribing clients. A strong regional bank called BB&T became a subscriber in February of this year, initially purchasing just a two-user license. By the third quarter this year, BB&T had increased its subscription to a 40-user license.

Partially reflecting the increase in sales to larger clients, our third quarter 2010 average new contract value increased 18% to $8,292 over the second quarter 2010 average new contract value of $7,031. Our sales organization and our sales management has performed exceptionally well throughout this downturn in driving usage, retaining clients and winning new business. They are now a better-trained and more experienced team than ever, and they are looking forward to winning more new business as the economy recovers. At the end of the third quarter we had a total of 181 sales reps, down slightly from 194 on staff at the end of the second quarter 2010. This includes 118 US subscription sales reps, seven US advertising sales reps, 34 in-house sales reps, 16 UK field sales reps and six sales represents for PPR and Resolve. We expect sales head count to return to mid-year levels as a new sales training class moves into production.

Given the continued strong demand we are seeing in almost all areas of our business, I am very excited about our current position. With the initial recovery underway in the commercial real estate economy, I believe that CoStar's tremendous research advantage and expanding platform will continue to drive strong sales growth in our sales and revenue.

I would like to take a moment to discuss current improving commercial real estate market conditions in a bit more detail. In our last call I stated that our research had confirmed that office vacancy rates have stabilized in the second quarter of 2010 after nearly three years of steep increases. In the third quarter we confirmed the major news that US office vacancy rate and availability rate has now reversed course and begun to decline and improve. This important market inflection point comes after two consecutive quarters of positive net absorption of commercial office space and almost complete shut off of new supply. We believe this improvement is the first in a series of steps towards overall improvement in the commercial real estate market.

While this is certainly welcome news, we are still very early in the recovery phase. It will take time before the recovery gains momentum and becomes widespread throughout the market. We will know that recovery has occurred when no one is talking about recovery anymore. Job growth is a key driver of commercial real estate recovery, and the job growth we're seeing now is painfully slow. Although job growth has remained sluggish, there continue to be strong leading indicators of future job growth, including positive GDP, increasing corporate profits, strong productivity gains, and a lot of temporary hiring. The US has posted two consecutive quarters of positive office employment growth. Economy.com and others are continuing to forecast strong job growth over the next several years.

Although weak, the job growth we have seen was strong enough to allow the US office market to post two quarters of positive net absorption, with 7 million square feet of office space absorbed during the third quarter. This is a 2 million square feet increase over the 5 million square feet of office space absorbed in the second quarter. While this is not a large amount of absorption given the total size of the US office market, it is significant because new commercial real estate construction, as I mentioned, remains at an all-time low. So the positive absorption activity we're seeing is effectively working away at the excess space in the market.

Recovery in the capital markets tends to lag recovery in the leasing markets. It's always been so. This is certainly the case in the market now, as the capital markets and commercial real estate sales remain unsettled. Sales volumes remain well off their overheated peaks but have nearly returned to historical averages for commercial real estate before the bubble of 2004-2007. Reflecting a market in transition, we're seeing different trends occurring in different segments of the market. Cap rates are up while sales volumes and prices are down across most second and third-tier markets. In contrast, cap rates are declining while sales volumes and prices are up in first-tier markets or leading cities such as New York, Washington DC, Boston, San Francisco and Los Angeles.

Institutional-grade properties are beginning to show value appreciation after they may have perhaps overcorrected in response to the collapse of the CMBS market and the complete lack of debt or funding for that kind of high-end asset. This is driven by the current flight to quality investment strategy among commercial real estate investors, especially among REITs and other large institutional investors with access to equity. What's interesting is that they all appear to be targeting the same core high-quality buildings and CBDs that are well leased to credit tenants.

The competition for these buildings is phenomenal, with actual bidding wars breaking out in some cases. Last week I made a presentation at the recent Urban Land Institute Conference here in Washington DC, and CoStar also sponsored the keynote panel where the discussion centered on this very issue. One panelist described the current investment sales market as an inch wide and a mile deep with all the major potential buyers targeting the same select group of assets. Another panelist agreed, adding that this is part of a global search for yield among large investors. In the current market, with debt being relatively inexpensive, high-quality core real estate assets stack up quite well in terms of yield compared with the equity and fixed income markets.

We believe the path to market recovery is clear but modest. Our forecast for the office market calls for continued positive net absorption, with a national average vacancy rate declining to under 12% in 2012. We believe that this renewed market activity is great news for our clients and also supports CoStar's revenue growth prospects over the next several years.

There is one down side to the emerging recovery. Each time the commercial real estate market crashes, CoStar tends to pick up counter-cyclical crash-related businesses, much of it focused on loan default workouts. I have to say this is a great attribute or the CoStar business, the fact that we generate new business in down cycles makes us a little less cyclical. In due course though, when the market recovers, that business goes away, or at a minimum, may be reduced. Fortunately the loss of any workout business we pick up during a downturn tends to pale in comparison to the new business generated in a recovering market.

I believe I previously provided the example of CoStar picking up the Resolution Trust Corporation as a major client in the 1990s. The RTC's mission was completed, and it wound down it operations once all the S&L assets had successfully been divested. Once they closed up shop, we lost that contract, and there was not much to be done about that. This recent cycle has been no different and won't be different in the future.

Last year PPR was selected as a subcontractor under the Term Asset-Backed Securities Loan Facility, or TALF, to provide analytics and forecasting services in support of this important program, which was under the operation of the Federal Reserve Bank of New York. Roughly a year later, the legacy CMBS portion of the TALF program is considered a success by almost every measure, which is certainly good news for the market as a whole. We were pleased to win the contract and assist the TALF program. Now having largely served the purpose it was set up to do, the program is no longer issuing new loans, therefore our services are no longer needed, and our contract has ended. Our support to TALF over the past year has been invaluable as we continue to develop our products and market position in the area of credit risk analytics. We are now seeing strong sales momentum in this area, which is helping to offset the loss of this business.

In the third quarter of 2010, CoStar's research team remained focused and effective, adding more than 160,000 new listings. For the year to date, our research team has added nearly half a million new listings. Not only do these listings represent half a million new opportunities for our customers today, they also provide the added value of half a million new comparable sale and lease transactions that provide our customers such tremendous value. We now have approximately 1.5 million listings offered in our service. That's a lot of listings. And for the first time, our for-sale listing count grew to more than half a million listings during the third quarter of 2010. We now track 3.9 million properties combined in the US, UK and France. It won't be long before we reach a 4 million property milestone. We believe this is the largest proactively researched or proprietary commercial real estate database ever built and that it represents a huge competitive advantage in the market place.

SHOWCASE continued to perform well during the third quarter. Our online marketing service now has 10,889 subscribers in both the US and UK, which is a 53% year-over-year increase compared to the third quarter of 2009. SHOWCASE is now generating approximately $6 million in annualized revenue. The introduction of SHOWCASE in the United Kingdom this year has gone exceptionally well, as we already have 510 paying UK subscribers, successfully capturing significantly get share in a very short period of time.

And I hope you recall, CoStar purchased a Class A office building in downtown Washington DC in the first quarter of 2010 for $41.25 million. This building will serve as our new headquarters, and today the earnings call is being broadcast from that new headquarters. This headquarters has replaced our leased headquarters of the past 11 years in nearby Bethesda, Maryland. The city of Washington invested considerable effort in crafting mutually beneficial tax incentive legislation enabling CoStar to move into the District of Columbia. That legislation requires CoStar, among other things, to increase by net 100 the number of District residents CoStar Group employs before we'll be eligible for millions of dollars of potential tax-abatement incentives.

I'm pleased to report that CoStar Group has both completed the move to our new Washington headquarters, and we have reached the important milestone of 100 net new District residents employed. This achievement should clear the path for us to pursue our significant potential tax abatements from the city. In fact, we now have 458 employees working at our Washington headquarters. I believe morale is extremely high in this new HQ. We are exceeding our recruiting goals in our new facility, and we appear to have improved employee retention. 50 of the 458 employee working in our new HQ transferred from our Columbia and White Marsh, Maryland, research offices. I think that these transfers bring an influx of talent and great energy into our new HQ.

The Company did offer move allowances to dozens of employees in order to quickly staff the new HQ and retain talent. We have incurred a number of non-recurring expenses associated with our move to the new HQ, including move costs, double rent, employee incentives and recruiting expenses. We are no longer paying rent on our Bethesda HQ, thank God, and most of these one-time expenses should slow going forward.

In a related development we are pleased to receive an award this month from the Washington Downtown DC Business Improvement District for strengthening and diversifying the city's employment base. According to the Downtown DC Business Improvement District, CoStar's relocation from Bethesda, Maryland, is the largest move into the district by a public or private company in 2010 and ranks among the largest such moves by a private employer in the past decade.

We couldn't be happier with our decision to move this new HQ. This is a fantastic building and a great location that is capable of accommodating our expected growth for many years to come. We intend to invest in completing the build out of our new HQ over the next nine months so we could eventually house close to 720 staff in the HQ facility.

As if our facility and IT staff was not busy enough during the third quarter, we also consolidated our three Boston offices into one facility at 33 Arch Street. With Resolve, PPR and CoStar all literally right under one nice roof, you can see progress picking up speed towards building some amazingly powerful, fully integrated software tools between these companies. I think some of the most valuable and impactful commercial real estate information analytic and forecasting tools ever built will be built in our new laboratory at 33 Arch Street. We expect that both our new headquarters and the new Boston office will be LEED Platinum. I believe that both of these new facilities are bringing our human capital together into a more productive, consolidated facilities. I expect that these moves will increase retention, increase productivity and ultimately reduce our long-term costs.

Let me close my remarks by saying that I am very pleased with our Company's performance during the third quarter. Increasing sales, higher renewal rates and accelerated revenue growth clearly demonstrate renewed strength in our business. With commercial real estate markets now in initial recovery mode, we fully expect to achieve additional high margin revenue growth through the fourth quarter and well into 2011 and beyond. Thank you. I will now turn the call over to Brian Radecki, our CFO, so he can discuss our quarter's financial results in more detail.

Thank you, Andy.

You're welcome.

As Andy mentioned, we're very pleased with the third quarter 2010 results. We achieved accelerating organic revenue growth for the fourth consecutive quarter and saw positive momentum continue in almost all areas of our business. Today I'm going to principally focus on the sequential results of the third quarter 2010 compared to the second quarter of 2010, and also on our outlook for the fourth quarter and full year 2010. We believe the sequential trends offer the most insight into the performance of our business as we continue to progress through the current economic and commercial real estate cycle.

Our third quarter revenues came in stronger than anticipated at $57.1 million, an increase of $1.3 million over the second quarter of 2010 and an increase of $3.6 million compared to the third quarter of 2009. A record revenue performance during the quarter was primarily driven by strong net new subscription sales for our core CoStar suite service offerings, as well as the high renewal rates for our subscription services.

International revenue on a functional currency basis was approximately GBP3.1 million in the third quarter of 2010, essentially flat compared to the second quarter of 2010. International revenues were approximately 8.4% of the Company's total revenues in the third quarter.

Subscription revenues for the third quarter accounted for approximately 94% of our total revenues, with our 12-month trailing renewal rate, which as everyone knows is a measure renewing subscription revenue, was approximately 90%. We believe this is a very important measure for the strength of our business and are very excited to see the 12-month trailing renewal rate move back to our historical average of 90%. And let me remind everybody this is two to three-quarters ahead of where we originally projected. As I publicly stated on earnings calls for over two years, we expected that 12-month trailing renewal rate to decrease into the mid 80s during the downturn and then begin to recover in 2010.

Our in-quarter renewal rate for the third quarter was again high in the low 90s, and I'm pleased to report that the renewal rates continue to trend in the right direction. Please note that in-quarter renewal rate, which is a measure of subscription dollars renewing, will fluctuate from quarter to quarter by plus or minus approximately two percentage points. Therefore, the overall trends on the 12-month trailing renewal rates are very important. We believe that moving from the low 80s into the 90s all within a year is extremely positive news. Over the next few quarters we continue to expect that 12-month trailing renewal rate to be in the high 80% and low 90% range.

Now turning to gross margin. Gross margin was $36.4 million in the third quarter of 2010 and was up approximately $900,000 compared to Q2 of 2010. In addition, gross margin percentage increased [from 63.7% to 63.5%] from the second quarter of 2010 due to the higher revenue and leverage in our model.

Moving down the income statement, total operating expenses in the third quarter of 2010 decreased by $800,000 to $30.2 million compared to $31 million in the second quarter of 2010. Third quarter 2010 does include expenses of $1.3 million associated with the consolidation of the former PPR, Resolve and CoStar offices in Boston in the single facility, which ran through the G&A line. We believe having those teams together in the new Boston office will facilitate the integration, product development and cross-selling initiatives we've been discussing with you for the past several quarters. Selling and marketing expenses was essentially flat in the third quarter.

Looking at profitability net income for the third quarter of 2010 was $3.4 million or $0.16 per diluted share, and our non-GAAP net income was $6.9 million or $0.33 per diluted share, both above our previous guidance range. Quite simply we're very happy with the results on both a GAAP and a non-GAAP basis, which basically reflects our stronger revenue and stronger operating results.

Third quarter 2010 headquarter transition charges, which Andy spoke of earlier, were approximately $1.3 million. We now expect those costs to be in the $2.7 to $3 million range, which is slightly lower than what we originally expected for the year.

EBITDA for the third quarter of 2010 was $9.4 million, an increase of $1.6 million compared to the second quarter of 2010. And adjusted EBITDA for the third quarter was $13.8 million, or approximately 24% of revenue. Reconciliation of non-GAAP net income EBITDA and all non-GAAP financial measures discussed on this call to their GAAP basis results are shown in detail, along with definitions for those terms, in our press release issued yesterday, which is available on our website on the Internet at www.costar.com.

Turning to the balance sheet, we ended the third quarter of 2010 with approximately $232 million in cash, cash equivalents and investments, no long-term debt, and a shiny new building.

I will now discuss our outlook for the fourth quarter and full year 2010. Our guidance takes into account recent trends, revenue growth rates, renewal rates, which all may be impacted by the economic conditions in commercial real estate or by the overall global economy. Our forward-looking guidance reflects our current expectations as of October 21, 2010. We expect revenue for the fourth quarter 2010 to be in the range of $57.1 million to $58.1 million, and for the full year of 2010 we are once again raising the high end of our annual guidance range by $2 million as we did last quarter to approximately $225.1 to $226.1 million. Continued strong demand for our services demonstrated by our 12-month trailing renewal rate moving back to the historic 90% average, combined with consistent accelerating revenue growth in 2010, gives us a lot of confidence in our higher annual revenue outlook.

Our guidance on the impact of foreign currency exchange fluctuations on our top line results remain consistent. We do not attempt to predict the foreign exchange rate fluctuations, and our guidance assumes little to no volatility in the current rate. The average exchange rate for the third quarter of 2010 was $1.55 to GBP1, and the remainder of our 2010 guidance assumes the rate of $1.5.

In terms of earnings we expect a fourth quarter 2010 fully diluted net income per share of approximately $0.15 to $0.18 and non-GAAP income of $0.28 to $0.32. For the fourth quarter outlook for GAAP net income for diluted share we expect about $300,000 to $500,000 of remaining costs related to the transition of our new corporate headquarters in Washington DC in October, and approximately $2.5 to $2.7 million in equity compensation charges.

We expect the fourth quarter tax rate to be approximately 49%, while again our annual rate we still expect to be 44%.

For the full year 2010, we expect GAAP net income per diluted share of approximately $0.61 to $0.64 and non-GAAP net income per diluted share of approximately $1.20 to $1.24. We expect to achieve our annual earnings outlook even with the short-term dilution in net income resulting from the legal settlements, costs associated with our ongoing effort to reduce our facilities by moving our headquarters into a corporate-owned facility and consolidating and moving our Boston and UK offices.

For annual guidance range we are increasing the earnings projections based on the expectations for the increased revenues we discussed above. For the full year 2010, we expect approximately $2.7 million to $2.9 million of costs related to the transition of our new corporate headquarters, and that is approximately $300,000 lower than what we provided last quarter. Additionally, we expect to close 2010 with approximately $1.3 million of the lease restructuring charge and $8.3 million to $8.4 million of equity [comp] expense. Costs in 2010 related to the acquisition and transition for the corporate headquarters, as Andy said was primarily overlapping costs incurred to the end of the Bethesda lease term and the carrying costs with the building prior to our move. The Bethesda headquarters lease expired October 15, and we completed the move to that facility last week. We continue to believe we have created significant long-term value with the move to our new headquarters facility in Washington DC.

In closing, we're very pleased to -- with our record revenue results and momentum we're seeing in our business. Our business model remains strong based on the 94% subscription-based business model with a 90% renewal rate, our unique proprietary database, market leading position, strong balance sheet, no debt and very high operating cash flow. Based on the results we've seen in the past few quarters we believe we are well back on our way to a more normalized organic revenue rates and expanding margins that we have enjoyed over the past decade in the near future.

Now that we are essentially through the majority of the consolidation of office space and operations in 2010, we believe we're well-positioned to enjoy the revenue and earnings growth similar to what we enjoyed in the period of -- the second quarter of 2007 to the third quarter of 2008, which was the last completion of our expansion investment phase. CoStar's management team believes there's significant opportunity for additional high margin revenue following the investments we have made and believe in our long-term goal of $1 billion of commercial real estate information revenue at a 40% to 50% margin. We continue to look forward to reporting that progress to you. And with that, I open up the call for questions.

So the at this point we're ready to take any questions we've got in the queue. (Operator Instructions). Our first question is going to come from the line of Jon Maietta with Needham & Company. Please go ahead.

Thank you. The question -- first question I had was around your expectation for growth. And, Andy, maybe you could talk a little bit about where you would expect it to come from. So obviously you'd have a portion from the existing client base, who will start to add seats as that business improves. You'll see a piece from the new services, incremental services, and then you'll have a piece obviously that comes from brand-new client logos. I was just hoping you could help me think about that mix.

Sure. Thank you. I actually look at this and I think the greatest driver for the next five years -- four to five years, will be new logos. There is an awful lot of customer base to go -- prospect base to go after here in the United States. So we still have north of 10,000 meaningful brokerage firms to sell our products and services to here in the United States. We've got thousands of retailers to sell our products and services to. There's 7,000 plus banks with commercial real estate assets in their portfolio. Our successful COMPS product has only sold about 25 some units. We've got several hundred on the CoStar property side, but you still have thousands to go there. And I think the institutional space is one of the biggest opportunities for our business over the next five years.

So big picture, as the economy recovers and these prospects are more open to considering new effective investments, we think we'll be able to pick up traction in new logos organic growth. There certainly is a lot of opportunity for cross-selling in existing customer base. That's always been half of our sales activity. And I expect that to continue to be the case. As you know, we have begun to institute some minor price increases that keep us abreast or keep us apace with any CPI activity that's going on. But the main thing we're focused on is that we know that there are thousands of good companies out there that would benefit from our products, and it's a penetration story. It's a story of going after those names and those companies.

Got it. Okay. And could you just remind us where you are in terms of you had talked about the lower-end bundling on the quarterly call last quarter. Just maybe where we are in that cycle. And what you're kind of seeing there early days.

Sure. The program that began last quarter focusing on bundling our suite of services to these -- like the fourth-tier markets and some of the smaller firms out there, so providing them with a tremendous value proposition for relatively low-cost. And not doing that through our field sales force but instead using our centralized, lower-cost headquarter-based sales force. That has gone well. It is -- I know that we're picking up I believe hundreds of people at that lower level. And that group is -- internal sales group is a strong contributor to our sales growth right now. But that is a blocking and tackling thing, something we're doing. But our real focus is probably at the middle to upper end of the marketplace; the institutional marketplace, the banks, the leading brokerage firms. That's where the most of the revenue dial is going to be pushed.

Okay. That's helpful. And then Brian, just last question from me, if you could -- I don't know if you have the number -- but operating cash flow on the quarter, and the CapEx number as well.

Sure. Yes. The CapEx number was about $6 million for the quarter. It's about $10 million for the year. Obviously we have a lot of CapEx related to our new facilities. And I believe the operating cash flow is about $27 million for the year. I think it was around the $7 million mark for the quarter.

Got it. Thanks very much.

Thanks, John.

Thank you.

Next question comes from the line of [Tim Connor] with William Blair. Please go ahead.

Hi, guys. A couple of questions. First off just wanted to ask about price impact on renewals and on new business.

The best of my knowledge, there's been zero impact. I have not heard a single comment from anyone in our sales organization about any pushback whatsoever on any of these price increases. I think the CoStar Group took a very, very client-focused, consecutive stance going into the downturn when we proactively immediately stopped any price increases anywhere, even ones that we could contractually take. So I think the customers are comfortable with our pricing policies. And for us to reinstitute price increases that just get us back to CPI from the last year or so, I think there's zero pushback. I haven't heard a single thing. I don't think Brian has heard anything, either. No pushback?

No, none at all.

It's going well.

Would you say that's just their improving business, or is it something else?

I think it's a function of -- I think it's definitely a function of their improving business and the fact that CoStar Group is -- CoStar Group services are a really really important tool for them to be able to productively go do what they do and make money. So what they pay for our services is relatively small compared to the value they're getting from it. And as long as they -- as long we have a reputation of being fair in the marketplace, you're not getting pushback. And we've been doing this for a long time now. So I think that we have a good sense of when the customers are going to feel they're getting pushed. And they're not feeling they're being pushed right now.

Okay. Thanks. And then one more customer question. So DSO trends, how far do you think those can continue? And anecdotally what are you seeing?

I'm sorry. Repeat that again?

So customer payment behavior, DSO trends have been improving? How far do you think you see those coming, and do you have any anecdotal stories on that?

Sure. I think that the payment trends continue to improve. DSOs continue to improve. Our aging has just -- I mean, I compare it to last year, it's like night and day. And it really just goes to the overall health of the clients in the business. And really, as we talked about in prior calls, the clients that were unhealthy we really lost them in the past year. And I think now that's why you see the renewal rates going up, you see improved collections, our bad debt is half of what it was last year. So I would continue to expect that to move in a positive direction. I don't see anything on the radar screen right now unless something significant changes in the global economy to really move the dial there over the next few quarters there. So very positive.

I think he's sandbagging. Any CFO worth his salt can get DSOs to four days.

And then staffing levels. Are you comfortable with these? And then do you have plans in the future on this?

Right now we are comfortable with our staffing levels. I think we're reasonable stable in our research staffing levels. We might have one or two relatively minor initiatives, which would represent single-digit percentage increases in research staff in order to pursue so a few new initiatives. The -- over 2011 we might become a little bit more aggressive with some software development initiatives. But we're by and large fairly comfortable with where we are right now. And there's some big trends toward some cost efficiencies as we get rid of these multiple facilities and so on and so forth.

And I think on the sales side -- Andy mentioned this before -- we have training classes in the 10 to 20 range. So we happen to be at the end of the quarter -- actually as we moved we actually pushed the training class into the next quarter. So that's why you saw that dip a little bit. So I think you'll see that go back up, and we'll see that continue to be around the 200 mark plus or minus a little bit pretty consistently moving forward.

Okay. Thanks. And then one final one. Analytics programs, PPR integration and putting that on top of the database, just -- could you discuss just generally what the plans are for that going forward?

Sure. Someday I want to be more like Steve Jobs and only talk about new product when I'm on the stage and we actually have them and they're shipping tomorrow. But it's going well. Again, getting everyone under one roof in Boston is great because you've got a great technology team over at Resolve, you've got a very innovative group at PPR. And then being able to pull everyone to one facility, it's much easier to work on this product integration. So we're pursuing a deeply integrated set of products between everything we're doing, from COMPS to Portfolio Maximizer to Request to DCF to analytics and forecasting and in granular property data. We envision something that is highly integrated, one interface for the customer, one look and feel, one log in. And that's what we're going to be pursuing. And we're not -- we're probably not going to give a lot of color on specifically what we're doing until we actually are delivering the product to our clients.

Okay. Thank you.

Just for competitive reasons.

Sure. Thanks.

Next question comes from the line of Jim Wilson, JMP Securities. Please go ahead.

Thanks. Good morning, guys.

Good Morning, Jim.

Andy, I was wondering if you could give a little more color on the Wells Fargo deal, mainly what -- I know you won't tell a dollar amount probably, but what changed and what was added from the last contract you had with them.

Well, this is actually Wells Real Estate I think. Wells Fargo I believe is a client. But the one we specifically mentioned was Wells Real Estate, and that would have been a new customer acquisition. That would be something where they would have been I believe using a different competing service for their analytics information, their market forecast. And when they looked at being able to get the highly granular detailed data that CoStar provides coupled with the great market analytics and write-ups and forecasts that PPR provides, they felt that was a more effective soup to nuts solution. So they basically are a new logo add for us.

Okay, I see. All right. And then maybe the other one would be you're working to both cross-sell the analytics and then what you will produce on the combined desktop. Could you may be describe a little or highlight the couple two, three main things that customers tell you, boy, this is what we really want from you, can you do this, will you do this, or when will you be able to do this?

Okay. So I think two things I would -- I would focus on three things. One is the customer who is attending our PPR conference in the Cape and have been getting high-level overviews of forecast and vacancy rates and rental rates and discussions of which matrix to be investing in commercial real estate want to be able to access that information online, be able to customize that information, very high-level analytics on macro-macro trends in US commercial real estate. But they want to be able to go from there down to the asset level and see what's actually happening in specific assets. So these people have assets, they'd like to look at how directly competing assets are performing compared to their assets, and they want that to all be in the same system where their macro economics resides. And they want to be able to go back and forth between the two.

The other thing is they want to get to more granular economic analytics and economic forecasts. They want to be able to get very specific analytics and breakouts on how one submarket or micromarket is likely to perform compared to another micromarket. So it's not good enough to talk about what's happening in office space in midtown Manhattan. You need to be talking about what's happening in the Plaza district, distinctly different from what's happening in the Grand Central area. So that -- getting into greater granularity, and that's part of our initiatives to put economists in each local market and really get into the detail there. We think there's a huge market there. There are more than 100, 200, 300 developers and owners who have multibillion dollar portfolios only at the local level, and that appeals to them in particular.

The other thing I think is very interesting is being able to take the customers' information -- the customers have a wealth of information about their portfolios from accounting information to lease management systems to forecasting systems. Being able to take that information, help them organize it, but then present and mine the relevant information in our databases, analytics and forecasts and set against what's relevant and important to them based upon their data and help them sort through this billions of pieces of data to find out which ten pieces of data is important to them.

So those are the three big trend we're going at, and we're having a blast doing it. It's a fun project. It's very ambitious. But that's what the customers are saying, and we're very happy to pursue a solution that matches what the customers are asking for. I guess we're nerds.

Okay, great. Thanks a lot.

You're welcome.

Our next question comes from the line of Chris Mammone with Deutsche Bank. Go ahead.

Hi, this is [Asah Goghul] for Chris. Can you talk about what excess capacity or install bases clients might have currently in terms of unused subscription IDs, and how that may impact an incremental spend with an [outline basis aimed more] towards the recovery?

Like the CoStar shadow vacancy rate or something. It's actually relatively low. Our sales force is compensated fairly heavily, and we actually shifted our compensation structure at the beginning of the downturn to incentivize our sales force to proactively pursue inactive user IDs and try to make them active. We call it going -- creating green bar users. So in our internal tracking system, if you're using our product heavily, you're a green bar user. They have earned hundreds of thousands of dollars if not millions of dollars in commissions over the last two years going after these dormant IDs, these people who have the legal -- who are subscribers but don't use our product, and getting them to use the product.

So we're probably in the history of our Company at one of the better places we've ever been in terms of having these high percentage of user IDs active. And actually the sales people actually get -- lose commissions on new sales as they have a high ratio of dormant IDs. So they're right on top of it. And the empirical positive evidence of that effort is the fact that these new customers, these customers that have been our customers less than five years right now, they jumped from 74% renewal rate to -- what was the number, 87%? 87% in the course of one year. And that's because we chased down the dormant IDs. So I think the Company from the strongest place it's ever been in terms of the percentage of active user IDs.

Thanks. And just as a clarification, if there's a head count reduction at any of your broker clients, does that ID go away or are they still paying for it and they might have a backlog of that which they might need to use before they start buying new IDs from CoStar?

Well, that was really the story from last year and the year before when people were reducing brokerage head count. So as we went into the downturn, like third quarter of '07, '08, '09, brokerages were reducing head count, there were -- many of the brokerage firms were actually probably a little bit over their authorized allotment. So there was a lot of -- what do we call it -- write-downs in '08 and '09 associated with downsizing them to the right number of IDs. I don't expect that to be a major factor going forward. I think we're now moving into an expansion phase in brokerage. And I think that we're probably -- as I understand it from our sale management team, we're seeing a lot of seat adds right now, not a lot of seat reductions.

Great. Thanks very much.

(Operator Instructions). Our next question comes from the line of Bill Warmington, Raymond James. Please go ahead.

Good morning.

Good morning. How are you, Bill?

All right, thank you. A question for you on the adjusted EBITDA margins. You saw some improvement quarter to quarter and year over year there. From time to time the number of 30% achievable target has come up. And my question for you would be, how shall we think about that margin going forward? What kind of a time frame should we have for getting to a 30%-type number, and how shall we think about the incremental operating margin between now and there?

Sure. Hey, Bill, it's Brian. I think that we obviously aren't giving guidance on next year this call. But I think we're very, very well positioned to see expansion in that number. I think -- I kind of point people back to that 2007 all the way through the end of the third quarter 2008 time period, which that time period was right after we completed a major expansion, and pretty much every quarter you saw revenue dropping from the top line to the bottom line. Sometimes at 50%, sometimes at 70%, sometimes at 100%. So I think we are starting to move back into that phase.

We've had a lot of things we've done this year with the acquisition of PPR and Resolve, the integration of those businesses, the moving of the headquarters. We still have some of that noise come through in the fourth quarter, and maybe just a tiny bit in the first quarter. But I believe as you get to the middle, to the end of next year, I think you'll see that number expand. And I think it will look a lot more similar to that 2007, 2008 time period. I think if we continue at the rates that we're at we can get to a 30% margin I believe fairly quickly. And I guess I'll just point everybody back to that time period and you can figure it out based on your own revenue growth projections.

Right. The other question for you is how the acquisition pipeline is looking.

The acquisition pipeline is robust. There area number of potential things out there. We are at any given time dialoguing with half a dozen different companies. And there's no lack of potential deals out there. I think realistically the consolidation of the headquarters, all the Boston offices, Resolve, PPR has kept us a little busy. As well as software planning. So probably we're moving into a season with a little bit of accelerated operational activity.

Okay. And I wanted to also ask about that -- what you think that shiny new building is worth today versus what you paid for it. And whether you had any plans to unlock that value.

Yes. It's always difficult, I think -- it's always difficult -- unless you actually have a transaction, you don't really know. You are just speculating. I guess we paid $41.25 million for it or $230 per square foot. It does not -- it's got a long-term land lease under the property. There has been a trend towards institutional investors really wanting to find yield, and they look at Class A assets and first-tier cities as being good alternatives to low-yielding debt instruments, because you're pretty much picking up a bond from a company backed by high-quality real estate. So we've seen some deals. We picked up this building $230-something a foot, $240-something a foot. We've seen some deals within a couple blocks of here in the $600, $700 range. We are not long-term investors in commercial real estate. We provide services to people who do that. So we're always open to unlocking the value in that and deploying the capital and other -- probably other uses that are probably more core to our business. So was that a good nonanswer?

I don't know. I figure it's at least worth a couple bucks per share in cash. But anyway, thank you very much.

Thank you very much.

Thank you, Bill.

Our next question comes from the line of Toni Kaplan, Morgan Stanley. Please go ahead.

Hi, guys. Thanks for taking my question. Just a quick question on your traction in the retail market, how it's progressing and any initiatives you have to up the customer base in that market. Thanks a lot.

Thank you for the question, Toni. We have had some good traction there. So we now have a lot of recognizable retailers as customers using our services for both valuing their properties and also opening new stores. We now have I believe in the relatively short period that we've been in the retail information zone I believe we have ten of the top ten --

Nine.

Nine of the top ten retail owner-developers now as customers. So that's been very successful. To be honest with you, I think we're overdue for some product enhancements and upgrades. So we've been extraordinarily successful in this space. We have been successful in gaining the trust of the industry, and they're using our platform to communicate their offerings, listings, properties for sale, and they're doing it -- and I guess we've seen multi-100% growth in the number of listings moving through our system. So I think we're at the early stages of developing a product for the retail community. And as we get version two, three and four, I think we'll be able to get some really solid growth in that space. So we want to get to next year's ICSC with I think some product upgrades, responsive with what we now know about the industry and what we can do for them. These are not real expensive upgrades by the way, I should say. This does not involve hiring hundreds of people. It involves a couple of software developers.

Great. Thanks a lot.

Thank you.

Thanks, Toni.

At this time we have no further questions in queue.

Okay. And at this point I'd like to thank you all for joining us for the third quarter call. And we look forward to -- I guess next call will be year end results numbers. And we're really glad to be in a strong market with some traction in sales. And we hope all your other earnings calls go as well. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Today's conference will be available for replay. It will be available starting today at 2PM Eastern going through November 4, 2010, at midnight. You may access the AT&T replay system by dialing 1-800-475-6701 and entering the access code 173086. International participants may dial into the United States and then 320-365-3844. Those numbers again, 1-800-475-6701, and international is 320-365-3844 with the access code 173086. That does conclude the conference. I want to thank you for your participation. You may now disconnect.