CoStar Group Inc (CSGP) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group's second quarter 2011 conference call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions with instructions being given at that time. (Operator Instructions). As a reminder, today's conference is being recorded.

On today's call, we have Founder and CEO Andrew Florance, Chief Financial Officer Brian Radecki, and Director of Strategic Communications and Investor Relations Richard Simonelli. At this time, I'd like to turn the conference over to our host Mr. Simonelli. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to CoStar Group's second quarter 2011 conference call. Before I turn the call over to our Founder and Chief Executive Officer Andrew Florance, let me state that certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements.

Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's press release on the second quarter 2011 results and in CoStar's filings with the SEC, including its Form 10-K for the year ended December 31st, 2010, and its Form 10-Q for the period ended March 31st, 2011, 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. A replay will be available approximately one hour after this call concludes and will remain available until August 28th, 2011. To listen to the replay, call 800-475-6701 within the United States or Canada or 320-365-3844 outside the United States. The access code is 209746. A replay of this call will also be available on our Website soon after this call concludes. I'll now turn call over to Andy Florance.

Thank you very much, and welcome, everyone, to CoStar Group's second quarter 2011 conference call. I'm pleased to report that we had strong results and a very productive second quarter.

The $62 million in revenue generated in the second quarter marked our highest quarterly revenue in CoStar's history. Not only does this represent an 11.3% increase over the same quarter in 2010, but we are seeing robust acceleration in our sequential quarterly revenue growth. The 4.2% revenue growth in Q2 over the first quarter was the highest organic sequential quarterly revenue growth we have seen since the second quarter of 2007. Company-wide quarterly net new sales for the second quarter of 2011 increased 90% year over year.

In spite of a mixed overall economic environment, we have seen a steady increase in revenue momentum as well as continued increase in US subscribers, a trend that began in earnest in the first quarter of 2010 and has held for six consecutive quarters.

As I mentioned our last quarterly call, the data indicates we are in the early stages of commercial real estate recovery with rents low, leasing activity is strong, and with no new supply and modest absorption.

Typically, when the high-end Class A commercial real estate market is performing well, CoStar revenues experience strong double-digit annual percentage growth. Leasing activity together with rising sales transaction volume represent commission opportunities for our clients. So, our revenue growth in the second quarter is not surprising to us.

As a result of this trend and a release of our new iPad application in CoStarGo, we are releasing our revenue outlook for the year by $4 million.

We added approximately 1,000 new individual subscribers in the US in the second quarter of 2011 as the upward trend in subscription levels that began in the first quarter 2010 continues. During the first half of 2011, we added US 2,317 subscribers. Our in-quarter renewal rates remained very high at approximately 93%. The renewal rate for firms that have been clients for more than five years was approximately 98%.

Our cash position has never been stronger with $580 million in cash, cash equivalents, and investments. This includes $248 million from our issuance of 4.3 million shares of common stock during the quarter. The proceeds of that offering are earmarked to fund a portion of the acquisition of LoopNet.

The strong cash position along with our strong and growing revenues provides the fuel for continued investment in the long-term health and growth of our business. The proposed acquisition of LoopNet is an excellent example.

I'm also very excited about the rolling release of CoStarGo, a new iPad app we've developed that we believe will be truly transformational for the Company. I'll talk about that a little later in the call.

CoStar continues to experience strong and stable growth despite the fact the US economic recovery has been somewhat mixed. Our economy can be summarized as the good, the bad, and the ugly. Although the recession was almost over two years ago, the recovery has been anything but smooth. Although corporate profits are above average, job growth remains choppy. Jobs equals absorption.

New jobs are barely positive and below what we need for stronger recovery in commercial real estate. The uncertainty regarding US debt adds to the concern. Overall, this kind of economy results in sideways movement for the commercial real estate industry with only a very slight trend upward.

This is an okay environment for CoStar, yet while we are not in full recovery for commercial real estate, the signs are good. If the job outlook improves and the debt ceiling can be adequately addressed, we could be poised for an even more positive move in commercial real estate.

By the way, don't believe everything you read in the Wall Street Journal when it comes to commercial real estate and absorption. The Journal continues to rely on incomplete sample data instead of CoStar's rich, deep, census-style data.

Absorption -- they reported the absorption in the US office market was falling. We believe that that's inaccurate. We are very confident that absorption is actually up slightly quarter over quarter. So we're actually seeing a different and more positive trend in the US commercial real estate market than reported in the major business media.

There's some positives in the commercial real estate market that are contributing nicely to CoStar's revenue growth. Sales volume of office and other commercial buildings is robust with a clear upward trend for the past several quarters. Vacancy rates are ticking down slightly as leasing activity improves.

Overall, we are experiencing slightly higher absorption rates, but Class A buildings are experiencing very solid net absorption. This is good news for our customers as lease deals on Class A space generate higher commissions on the same leasing volume than when activity is balanced across A, B, and C space.

When we announced the proposed LoopNet acquisition last quarter, we said that we might begin to see some improvement in the secondary markets, which would be a positive for LoopNet's customer base. We are now beginning to see initial indications of just that sort of an upward movement.

We are also seeing possible indications of a leveling of general commercial real estate values, which would be great news for LoopNet. So, we're encouraged by what we're seeing there.

Our acquisition of LoopNet is progressing, and we believe we will close the transaction by the end of this year. As I mentioned, we recently raised $248 million in an equity offering, which we expect to use to help fund the cash portion of the transaction. And LoopNet stockholders recently approved the acquisition.

We have also reached the proposed settlement of certain lawsuits brought by certain LoopNet stockholders, which is conditioned upon closing the merger, signing a formal settlement agreement, and court acceptance of that settlement.

Together with Rich Boyle and the LoopNet team, we have been working diligently over the past month to help the Federal Trade Commission, which is reviewing our planned merger, understand our complex marketplace and the differences between an information service, like CoStar, and a marketing service, like LoopNet, and how people use these products to solve different problems.

We are eager to complete the review and get to work on combining a great marketing solutions offer by LoopNet with the tremendous research capabilities at CoStar to create more opportunities for our customers and more efficiency for our operations. We believe that combining the forces of LoopNet will yield benefits for all industry participants, from small independent firms to the largest national players.

We believe that, as a result of the merger, we will dramatically improve the quality of our data for our existing customers for the same price. We know LoopNet is an effective way to generate leads for advertisers, but we believe that more than half the real cost of LoopNet's customers or half of the cost to LoopNet customers is the amount of time they have to spend entering data and uploading photos to the LoopNet system. We believe that by merging the two companies, we can among other things dramatically improve that process and reduce the real cost of advertising properties on LoopNet.

Innovation and leadership in commercial real estate have always been driving forces at CoStar. We listen to our customers and work to anticipate how we can better serve them. CoStar's long been at the forefront of introducing market-leading technology in the commercial real estate industry, from our original DOS-based desktop product to subsequent Windows versions and then the Web.

Today, more and more businesses are moving to a mobile platform. Gardner Inc. predicts that, by 2013, 80% of businesses will support a workforce using tablets. And by 2014, over 90% of organizations will support corporate applications on personal devices.

I believe the great success and rapid adoption of the iPad is accelerating this trend. It is a truly revolutionary device that combines mobile connectivity with graphical interface of a laptop and a viewing area large enough to be productive and effective.

The iPad has opened the door for a new level of enterprise-class applications. Commercial real estate brokers are ideal candidates for this technology since they spend a large or perhaps the vast majority of their time in the field.

CoStar's online suite provides real estate professionals with the most comprehensive information and powerful analytic tools but required constant connection through a laptop or a PC. CoStarGo untethers this data and enables brokers to take the power of CoStar with them whenever they go, wherever they go.

It means brokers will have all the information they need at their fingertips when they're out in the market with their clients. It means they can be more productive when they're away from the office. They can wow their clients with the depth of information and cutting edge technology they're employing on behalf of their customer.

The app we've developed is every bit as cool as the device it runs on. It is not simply CoStar on the iPad. It is a radically different experience, completely recreated from the ground up, both on the user interface and on the back end. It's very fast, it's intuitive, and it's actually incredibly addictive.

The CoStarGo app is free, but it does require a subscription to our professional suite of online products, CoStar Property Professional, CoStar Tenant, and CoStar COMPS.

The app is location aware, meaning that when you open it up, it instantly starts presenting you with information about the properties around your immediate location. Before CoStarGo, brokers needed to gather and print materials before heading out for property tours and had little recourse when a tenant would ask for information about another building down the street or in another submarket.

With CoStarGo, real estate professionals can look up buildings, access their saved surveys, review information on the spot with their clients, and e-mail reports from the field.

As we got into development, we knew we were onto something great, but it was only in recent weeks as we began showing it to brokers in beta that we've come to understand how game changing this app can be for our customers. We believe CoStarGo will change the way our customers do business.

Historically, many of the people who benefited most from our data often did not use our products directly as they relied on administrative assistants and research assistants to run surveys and prepare tour books for their space tours.

CoStarGo is a tool that these producers will take with them out in the field. Brokers will never again have to worry about when they're out in the field and a client asks -- what about that building? They'll be able to answer that question instantly and accurately, share the results immediately, and once planned updates are incorporated, they will even be able to run [discounted] cash flow comparisons on the fly when they're out in the market with their clients.

I believe many people will make CoStarGo their primary method for accessing and using CoStar information and that a significant number of our current users will use the iPad exclusively. And we believe many professionals who had subscriptions but didn't use them will now become heavy users of CoStarGo.

This is very powerful because it has a pass-along effect or a tomb stoning sort of effect. And having the most productive, highest-earning brokers out in the field using our product would be an excellent testimonial for our products.

In the words of one broker we showed it to -- most apps are something less than the original Website. CoStarGo is everything the Web product has and much more.

Another broker we showed it to described it as -- way cool, almost beyond belief.

We believe CoStarGo will drive new sales of CoStar Suite to new customers, generate significant upsell opportunities to customers who currently subscribe to just one or two products, and boost retention rates overall.

We are very excited about the potential for this important new product. And on Monday, we kicked off a national launch tour to introduce CoStarGo to top brokers and owners in the market and drive rapid adoption. Over the next three weeks, we'll be holding launch events in 34 cities, building to a national release on August 15th.

During these events, we are giving the most active and influential brokers an iPod preloaded -- iPad preloaded with the CoStarGo app. Given the excitement around this product, we believe this is the best way to achieve rapid adoption momentum heading into the second half of the year.

We've held events in Dallas, Atlanta, and New York this week, and the response we have received is simply overwhelmingly positive. People really seem to love the product.

There's a short video clip on our Website, costar.com, that shows you the reaction we've been hearing from clients over the last three days. I strongly encourage you to take two minutes and take a look at the clip and see what they're saying.

We expect to invest approximately $3.5 million to $4 million in incremental sales and marketing in the third quarter of 2011 to fund this aggressive rollout. And we believe this investment will drive the original revenue growth we're guiding to today. We also believe the investment we are making in CoStarGo will lead to faster penetration in competitive markets, where our penetration levels may not be as high as we want.

By reinvesting our recent revenue uplift in this manner, we believe we in effect are trading $4 million in current revenue or EBITDA for substantially more annuity revenue in the next four quarters.

We are also continuing to invest in development of our high-end analytic and forecasting tools. During the third quarter, we expect to complete the integration of PPR's best-in-class analytics and forecasting tools with CoStar's comprehensive commercial property database. This integration represents an amazing increase in the depth and breadth of data available for PPR analytics.

It also greatly improves PPR's geographic coverage from 100 metro areas and 952 submarkets to 210 CBSAs and approximately 5,000 submarkets. So, we're going from 952 submarkets to 5,000 submarkets.

Prior to being acquired by CoStar, PPR relied on a variety of different sources for its data. And while these sources were good, none offered the depth in granularity and accuracy CoStar provides. We are moving from the synthetic data that PPR previously used and many in the industry continue to use today to actual quantified data.

This upcoming integration was announced to PPR clients in the second quarter this year. And the reception has been very positive. When we acquired PPR, we believed that giving PPR's 45 real estate economists the depth and breadth of CoStar's research platform and the granularity of data of 79 billion square feet of inventory would be a powerful combination, one we expect will yield new insights and analysis for our clients.

This is the first major step in that planned integration, along with the integration of some of PPR's existing tools and applications into the CoStar platform and new tools that are being created through collaboration.

Our goal is to offer a globally consistent soup-to-nuts solution, allowing clients to pick and choose the modules they need from one trusted source.

As for the United Kingdom, in July, we launched CoStar News in the UK market. Our goal is to make CoStar UK the go-to place for integrated real-time news, information, analytic services in the UK property industry. This is a service that will provide breaking news, daily e-mail alerts, and weekly news bulletins.

Our UK news team is lead by Paul Norman, James Wallace, and Helen Roxburgh, seasoned real estate and financial journalists, and now supported by the whole research team in Glasgow and the PPR team in London.

We think this new service will generate incremental revenue and deliver more value to our customers in the United Kingdom.

We also made significant upgrades to our online products. From a product delivery perspective, all CoStar products are now available on two platforms, Mac and PC, and now support all browsers, all the major browsers, including Internet Explorer, Firefox, Chrome, and Safari. This is expected to greatly improve the experience of a growing number of customers that prefer to work on the Mac platform.

We also completed an upgrade of infrastructure and software that results in dramatic improvement in the speed for online users of CoStar Suite.

We have created an approximately 600% increase in speed and performance on searches and a 400% increase in overall navigation speed. This makes for an even better more efficient user experience.

I'd like to close by saying we are living in an exhilarating time at CoStar. We're working really hard. We're growing. We're expanding. We're all innovating in an effort to be the best source of information, analytics, and services for the commercial real estate industry.

But, even with record revenues, we believe we've only scratched the surface of the potential of this business model. We are committed to giving our clients the tools they need to succeed. We believe the investments we are making in LoopNet, CoStarGo, PPR, and other sectors of our business will position us to grow from a company with approximately $250 million in revenue to one that could be approaching $1 billion in revenue with solid, high-margin business.

At this point, I'm going to turn the call over to our esteemed Chief Financial Officer Brian Radecki.

Thank you, Andy. As Andy mentioned, we're pleased with our performance in the second quarter of 2011. Once again, we delivered strong financial results in addition to continuing to make progress towards closing on the LoopNet acquisition.

Now to review CoStar Group's results in the second quarter of 2011, beginning with revenue. CoStar reported $62.1 million of second quarter 2011 revenue, an increase of $6.3 million in quarterly revenue or 11.3% compared to revenue of $55.8 million in the second quarter of 2010.

Quarterly sequential organic revenue growth in the second quarter of 2011 was $2.5 million, or 4.2% compared to the first quarter, indicating an acceleration of revenue growth in the second quarter.

We also reported $2.6 million in net income during the second quarter of 2011 compared to $4.5 million in the first quarter of 2011, reflecting the impact of approximately $5 million in expenses associated with the LoopNet merger, which consists primarily of investment banking and legal fees.

Non-GAAP net income was $7.3 million, or $0.33 per diluted share, in the second quarter of 2011, an increase of $1.1 million compared to non-GAAP net income of $6.2 million, or $0.29 per diluted share, in the first quarter of 2011.

Adjusted EBITDA for the second quarter of 2011 increased $1.7 million to $14.3 million compared to adjusted EBITDA of $12.6 million for the first quarter of 2011.

I'm also pleased to announce that we've exceeded both the revenue and non-GAAP net earnings per diluted share above our range that we guided to for the second quarter.

Reconciliation of non-GAAP net income, EBITDA, adjusted 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 and will be available on our Website at www.costar.com.

Just to reiterate a second time, the Company added $255 million in cash to our balance sheet during the quarter, an increase of cash, cash equivalents, and investments on hand to $580 million at the end of the second quarter of 2011.

The large quarterly increase, as Andy mentioned, is primarily due to the $248 million in net proceeds from the equity offering completed during the quarter. We're very happy with the equity offering, expect to use most of this cash to fund a portion of the LoopNet acquisition later this year.

Last quarter reported that we had achieved the second-highest quarterly net sales in our history, and I'm happy to report that we exceeded that performance this quarter. Annualized quarterly net sales was $7 million in the quarter, up from last quarter, and now represents the second-highest net new quarterly sales in our history.

Our customers continued to renew subscriptions at very high rates during the second quarter. The in-quarter renewal rate remained high at 93%, and the 12-month trailing renewal rate for subscription-based revenue was stable at approximately 92%, which is an improvement from 88% one year ago.

Subscription-based revenue accounted for approximately 93% of the Company's total revenue in the second quarter.

The growth of our core subscription business remains strong and continues to drive overall performance. The renewal rate for clients that have been customers for five years or longer held constant at a phenomenal 98% in the second quarter of 2011. And the renewal rate for firms that have been clients for less than five years also remained high at 85%.

During the second quarter of 2011, the average annual new contract value was $8,237, up 9% from the first quarter of 2011. Our sales headcount totaled 195 reps, a slight increase from the 193 reps on staff at the end of the first quarter of 2011.

Total number of paying CoStar subscribers increased to 88,579 in the second quarter of 2011, a net increase of 256 over the last quarter, including an increase of approximately 1,000 subscribers in the US, which was offset by a reducing in UK subscriber counts as a result of a consolidation of services.

In the UK, we consolidated our Scottish property network service into our core UK service focus, which had an impact of reducing some UK subscriber counts but did not have much of an impact on revenue.

The total number of subscription client sites increased by 296 during the quarter of 2011 to 17,563 company wide.

I will now cover the results from our income statement and for the second quarter of 2011 and also provide outlook for the third quarter and full year 2011.

Gross margin was $39.7 million in Q2 of 2011, up $2.7 million compared to Q1 of 2011, an improvement of 1.8% to 63.9% of revenue.

Total operating expenses for 2011 was $35.8 million, an increase of $5.8 million compared to the $30 million in the first quarter of 2011. The majority of this increase consists consistently -- consists mostly of LoopNet acquisition costs, which totaled approximately $5 million in the second quarter. Sales and marketing expenses was also up slightly on higher commissions associated with higher sales.

The Company capitalized approximately $600,000 in software development costs associated with the development of the iPad app during the quarter, which reduced our software development expense by that amount.

Turning to the outlook for the third quarter and full year 2011, our forward-looking guidance reflects our current expectations as of today, takes into account recent trends, revenue growth rates, renewal rates, which may be impacted by the economic conditions and commercial real estate by the overall economy or the decisions of the US government.

Let me reiterate that our guidance does not include the impact of the acquisition of LoopNet and the costs contingent upon closing the acquisition as we are not yet reasonably able to forecast whether or when certain acquisition-related costs may take place. Therefore, we are providing guidance on a standalone basis, reflecting our current expectations as of July 28th, 2011.

Based on a strong trend in sales, we once again have raised our outlook for the year, taking the high end of our 2011 annual revenue guidance up by approximately $4 million. Our new guidance range for 2011 is now approximately $247 million to $250 million. And for the third quarter of 2011, we expect approximately $62.5 million to $63.5 million in revenue.

We have modified our outlook to reflect the 4.3 million additional shares issued as a part of our second quarter equity offering, which impacts non-GAAP earnings per share by approximately $0.13 for the full year 2011 and $0.04 for the third quarter of 2011.

For the full year 2011, we now expect fully diluted net income per share in the range of approximately $1.07 to $1.13, which is in line with our prior guidance after adjusting for the additional shares, with higher revenues expected to be approximately offset by the additional investments in sales and marketing.

We expect third quarter 2011 fully diluted non-GAAP net income per share of approximately $0.19 to $0.23.

As Andy discussed earlier, the Company is undertaking an aggressive nationwide launch of CoStarGo. As you can hear from the call today, we are very enthusiastic about the potential for this new app, as we believe it will drive additional growth in subscription sales and improved customer retention.

To support its marketing introduction, we plan to make a marketing investment of approximately $3.5 million to $4 million during the third quarter of 2011 in connection with the launch of this exciting new service.

Additionally, the company expects to incur approximately $1.4 million to $1.7 million of restructuring costs associated with the consolidation of its White Marsh, Maryland, facilities in the third quarter of 2011 as reported prior. This restructuring is expected to result in approximate savings of $1 million per year moving forward.

In summary, we believe CoStar has had a fantastic first half of 2011, and we are very pleased with the direction and trajectory of our business. I'd like to quickly recap some of the highlights for you. It's easy to forget how many things we've done since the beginning of the year.

In February, we announced the sale of our headquarters building for $101 million after purchasing it for approximately $41 million just one year earlier.

In April, we announced the agreement to acquire LoopNet, which we believe will bring more comprehensive information and marketing solutions to our respective customers in the industry as well as tremendous growth opportunities to the Company and our shareholders. To help finance this acquisition, we raised approximately $248 million in June of 2011 through a successful equity offering.

We've now delivered six consecutive quarters of outstanding sales growth while improving or maintaining renewal rates at their near historic highs. These trends have allowed us to raise our revenue estimates in 2011 twice, in the first quarter by $2 million and then again by $4 million this quarter.

Our current revenue guidance range now is expected to result in annual revenue growth approaching double-digit 10% compared to 2010, which is expected to be a great trend as we look into 2012.

Finally, as Andy and I have discussed earlier, the launching of CoStarGo, which we believe will offer an innovative best-in-class solution for our customers and drive continued growth for the Company moving forward. We're very happy with our track record so far this year. And we look forward to discussing our continuing progress with you next quarter.

And now, I'll open up the call for any questions.

(Operator Instructions). And our first question will come from the line of Suzanne Stein of Morgan Stanley. Please go ahead.

Hi. Thanks for taking my question. Do you expect there to be any impact on the commercial real estate market from the government tightening expenses, given that they're such a big player in the market?

When the United Kingdom did that recently -- and I don't have the exact numbers, but I heard it was approximately 1 million job cuts over in the United Kingdom -- we did see a little bit of headwind from that. We probably lost 500 seats from government users in the United Kingdom. So if the United States did something as aggressive as the United Kingdom did, you would have a little bit of noise on the government side, but we don't anticipate it being a significant factor.

So, for instance, if the General Service Administration uses CoStar Group for leasing and appraisal, that's not something they're going to stop doing, even if they cut 5 million workers. So, it would only be at the marginal.

And then additionally, the bigger impact in the United Kingdom came from state and local, where it's a little more marginal. So, Economic Development Agency United Kingdom had a real downturn and gave us some of the negative subscriber growth numbers out of the UK earlier in the year.

We're not seeing that as much in the United States, and that already would've been happening because state and local have already been cutting jobs and have already been cutting back.

So, while I'm obviously watching our leaders try to resolve this debt issue with some level of anxiety, at this point, we're not terribly concerned specifically about government cuts.

Okay. And thanks for all the color on the iPad application. I think you mentioned that it's free to subscribers. I guess, given how game changing it is, why not charge a premium for it?

Well, we believe that a couple big growth paths for us right now, the number one growth path is penetration. There are, we believe, 100,000, 150,000 additional commercial real estate professionals that we can sell our products and services to. We can more than double our subscriber base in the United States easily. And we're very focused on that because, each time we can add some new subscribers, we're going to get higher-quality content as well when people subscribe. They're more aware and in tune with what they're doing there.

And then secondly -- and so, that's a big revenue driver for us. Secondly, we are selling a lot of modules. So, each month, half of our sales are selling additional geographies or modules to our existing customers. I believe the average is something like 1.8 or 1.9 modules per customer.

By releasing this product, a lot of our existing customers, probably more than half, are only on one or two. And it will be a small incremental or reasonable incremental module purchase to get up to what they need to get to the full application to get CoStarGo.

The reason we did it that way was, if you wanted to build a really hot product that was -- a wow product like we're getting right now, it's much easier to do that if you're simply designing it around all the core modules and you're not worrying about turning on and off these different views. You just make it one design app optimized for one specific client.

So, we're looking for the growth from upsells, from all the clients that only get two modules or one module, and we're looking for the growth from -- we're looking for growth from picking up brand new customers. And at the same time, at the best-client category, it's a way of just saying -- here's a great upgrade. Thank you very much for going for the positive referral.

And on the road in Dallas and Atlanta and New York last three days, which felt a little bit like three weeks with the work involved there, but the -- out in the road, we invited in the top 3% of brokers. And one of the things we analyzed is we analyzed who has the most connectivity with other agents in the market? Who are involved with the most diverse number of deals, so actually sort of social network hubs within the commercial real estate industry?

We brought them in, show them the product, gave them VIP treatment, and already we are getting sales coming in off the feedback of -- people are buying the additional modules to get from two to three without even seeing CoStarGo, just hearing referrals. People are calling up, and yesterday in New York, after we did the 2.00 presentation, at 3.30, we had a contract in from someone who hadn't seen it, just they heard us from a referral.

So, we're going for module upsells, and we're creating a lot of goodwill with our core long-term power heavy-hitter clients.

And I think one more thing to add to that, too, is I do believe this will help our already extremely high renewal rates. This product is extremely sticky. As Andy mentioned, it's core brokers using it out in the field with clients, not just administrative assistants or researchers in the office. So, I do believe this'll drive improved renewal rates, even higher than we've seen in the past. And of course, improved renewal rates go directly to growth rates and directly to the bottom line.

One of the oddities out there of our industry is, because historically large brokerage firms pride themselves or use as a competitive advantage their scale to be able to create in-house research advantage against mid- or smaller-sized firms. Very often, they kept their use of CoStar products and services confidential, and they didn't really talk about the fact they used our services.

Well, one of the great things is, now, the very top producing brokers from the top markets will be running around with a really powerful application in the field, interfacing with 20 to 30 other brokers a week with an iPad application that starts up, launches up with a great big CoStarGo that fills the whole screen.

And so, we're -- the most effective marketing we've ever done is tombstone marketing. The most effective marketing is when we tell the other brokers -- hey, these leaders are using the product. The great thing is, now, these brokers are going to go out and tell the market directly face to face that they're using the product because, now, they're going to be bringing other non-client brokers into the actual experience of looking up data through our applications.

So, can you tell I'm a little enthusiastic?

Thanks for the color.

Okay. Yes.

Thank you. And next, we'll go to the line of Brett Huff of Stephens.

Good morning, and congrats on a nice quarter.

Thank you very much.

Thanks, Brett.

One question, is the guidance for 3Q on revenue and then the implied guidance for 4Q, given -- kind of doing the math on the full and the 3Q numbers you gave us implies I think a 1.3% sequential growth rate for each of the next two quarters. Given the strong growth rate in 2Q, can you just give us some color on what the thinking is there, why the deceleration?

Sure. This is Brian. So, Brett, it's not really a deceleration. I think what we're sort of forecasting is around $1 million to $1.5 million of organic growth each quarter and dollar wise. There could be upside to that. In the second quarter, we did have a very strong quarter for non-subscription sales, too. Our marketing was very high. Resolve, we had some consulting services that were high from some implementations for Prudential and some other large clients.

So, I think we're going into the summer quarter, so I'm being a little cautious. I don't think you're going to have the same high marketing in the summer quarter. And I think with all the uncertainty around the debt ceiling and a lot of stuff going on with the government, we're just being conservative. But, I would definitely expect to continue to see sort of that core organic revenue growth around $1.5 million a quarter. And I think there could be upside to that. But, I think I'm going to be cautious at this point projecting any upside with that until we sort of see how things clear out here.

Okay. And then the second question, on the guidance, I think you said that apples to apples you didn't -- you weren't raising EPS guidance. But, I just want to -- it seemed to me that you did. And I just want to make sure I'm understanding it. And just bear with me on these numbers. Your original guidance midpoint was $1.20, correct?

Yes.

And then you take a $0.13 hit for dilution. So, you need to subtract that out. And then -- .

-- Correct.

And then the incremental spend that you talked about that -- just kind of using the midpoint, 3.75, would be about $0.10?

Correct.

And then you beat by I think a nickel?

That is correct.

That would lead me to $1.02 kind of apples to apples. But, maybe I'm missing something in there. Maybe the spend that you announced wasn't all incremental.

Correct. I think the other thing, too, is that the range I had before -- I mean, actually, really what we did was we really brought up the bottom end of the range and tightened it up a little bit. And yes, we're probably over the overall range by a little bit also. So, really, obviously, as of halfway through the year, I know, obviously, we're going to be doing much better. So, we're really tightening up the range there.

So, once you adjust for the share count and some of the other things, you'd end up with a tighter range above where we were before.

Okay. And then lastly, just on the launch spend, I think people are looking to -- the combined company to deliver good margins, and so they're -- what is the thought on how contained the launch spend will be? Is it kind of a -- should we think about it as a unique project that happens during 3Q and then should go away or at least taper meaningfully into 4Q?

Yes, so, my belief is this is the best product CoStar Group's ever produced. And I think it's a real game changer. I think prior the best product was probably the Web product in '03, '02.

So, given the fact that the best product we've ever produced, we thought we would ramp up the aggressiveness of the initial rollout and set the seeds for sort of a viral word-of-mouth campaign. And that's why we're basically dragging ourselves around the country to 35 cities in three weeks and doing this.

So, it's a one-time launch to try to hit the market with as much momentum as we possibly can. And we do not see it that it couldn't -- it'd be tough to come up how you'd do a second launch or third launch or what the purpose of it would be.

Now, at some point, in '12 or '13 or '14, if we come up with some other sort of over-the-top awesome product, we might also make a similar judgment. But, we expect to see near-term offsetting revenue that makes it a really rational thing to do, so sort of a one-quarter expense that gives you a comparable annuity revenue at high margin with that sort of anywhere from 85% to 98% renewal rates on that revenue going forward.

So, it's a one-timer in response to an unusual product event and one that we know is something you can only do if you've got some sort of track record or trust with your investors.

And, Brett, just to follow on to that, so, the majority of the costs I believe will be in the third quarter. There could be a little slippage in the fourth quarter, but I think the majority of the cost will fall in the third quarter. So, I would expect selling and marketing then to come down in the fourth quarter by approximately that amount. Like I said, there could be a little bit of slippage over.

Obviously, the one thing people have to just remember as we continue to hit record revenues and continue to sell more and more, obviously, selling and marketing will go up because of commissions paid. But, you definitely will obviously see the offset in the fourth quarter. If it goes up by $3.5 million or $4 million, you'll see it reduced back down by $3.5 million to $4 million and then with some increases for increased sales for commissions.

And we definitely thing 2012, again, continues to be a -- earnings growth. It's not like this is a $4 million every quarter marketing investment.

And then last question for me, how are -- can you tell us about price increases and kind of how you guys are thinking about that?

Well, right now, we are basically running at maybe, I don't know, 100 basis points over CPI or so, something around there. Now, CPI recently is becoming a more interesting moving target. But, obviously, we'll probably do that ongoing. But, again, we're really -- we think we're in a good position to drive revenue through new customer acquisition and through selling additional modules to the existing customers. So, that's going to be the core focus for us. And we don't anticipate any material price increases because of this new product. We think that it's all about picking up new customers and more comprehensive coverage.

Great. I appreciate your time. That's all I had.

Thank you.

Thanks, Brett.

Thank you. And next, we'll go to the line of Bill Warmington of Raymond James. Please go ahead, sir.

Hi. This is Bethany Caster in for Bill Warmington. Congratulations on the great quarter and the CoStarGo release.

Thank you.

Let's see. Could you talk about what drove the 90% year-over-year growth in new sales bookings?

Well, increase in renewal rates was key, stability in the market for commercial real estate. So, you had the -- I think the -- well, rents were freefalling. Leasing activity fell in '09. And coming into '10, leasing activity came back up and along with sales volume became -- began to come back up. Even though the owners and lenders are still facing a very difficult time, the brokers are moving into a heyday time. They're moving into an optimal market. And so, we're really seeing that benefit in a significant way.

So, it was really just easing conditions for the brokerage community along with just solid execution without any big mistakes.

And if you look at it, a four or five percentage point improvement year over year in the renewal rate, you apply that to a $62 million quarter, it is millions of dollars of additional business because we're always reporting net numbers. So, the renewal rate is always one of the single biggest drivers of that, so high renewal rates. We've been talking about it for years, all the things we did as we went into the downturn with commissions to focus salespeople on implementation and getting people using the services.

I think the iPad is another example of things that we do thinking about the long term of the business and keeping those just incredible renewal rates, that's what's going to continue to drive revenue growth and earnings.

Okay. And then a similar question about your new guidance, how much of the $4 million are you -- or can you give some color on how much of the $4 million increase you would attribute to essentially the CoStarGo effect or the PPR upgrade or other products?

I think there are obviously -- those will contribute to the growth between here and the end of the year now because we're a subscription service. It'll contribute more to the bookings, and of course, that'll roll out. We'll actually end up picking up probably the majority of that money. We're already sitting here in August. So, you'll pick up the majority of that money going into next year, but definitely will be a big contributor to bookings. And obviously, we've factored that in for the $4 million.

Okay. And let's see. All right. I think that's all for me. Thank you.

Thank you.

Thanks, Bethany.

Thank you. And next, we'll go to the line of Brandon Dobell of William Blair. Please go ahead.

Hi, guys. Thanks. Maybe a little more color on what kinds of customers are driving the strength in new sales. You talking small new market customers, existing market customers, new verticals, just a little more color on where you're seeing some of the strength come from?

Sure. I would say that -- it's amazing, but it's a lot of brokerage firms. And it is actually both mid-sized, small, and large brokerage firms. We had one contract that came in this -- maybe three weeks ago that was particularly interesting. It was BT Commercial out in San Jose. It's one of the megafirms in the United States.

They've gone for 15 years without using CoStar property in San Jose. They signed up this quarter. And I believe that they probably saw some sort of sneak peak of the iPad prior to doing that. So, some of the sales are big brokerage firms like that, and there are a couple other examples that I've heard about and then just a lot of mid-sized and small brokerage firms coming in.

We've had a couple of good institutional accounts. I know Nomura just signed up for a pretty big account. So, it's actually just the traditional mix. And thankfully, it's across the board. And these are the kinds of folks who tend to get that 98% renewal rate. These are not telecoms. These are not incidental customers. These are core, core customers.

And just to add to that, I think you would definitely -- financial services, we've seen continued success with the PPR product, the analytic service in the quarter. I think we actually added more firms to the PPR service than we have -- I'd have to go back, but in the past four or five quarters or probably since we've owned them. So, financial services is definitely -- continue to sell well.

Okay. Shifting to -- .

-- also had one or two good months there as, too.

Correct.

Okay. Shifting to headcount for a second -- and if you covered this, I apologize. I just jumped on late. But where do you guys stand in terms of sales, headcount, both outside and inside, as well as research headcount and as we compare that to I guess two data points, one kind of start of the year, and where do you anticipate being end of the year, obviously, exclusive of what happened with LoopNet?

Sure. Total reps on the sales side was at 195. It was up a couple from last quarter. That number's been around 195 for four or five quarters. I think in the beginning of the year, Andy and I talked about it being plus or minus five headcount from 200. So, I think we'll be in the 200 range plus or minus five there.

Again, I think that group is a good group. And of course, longer term, as you continue to go on, you'll have to add some to that group. But, again, I think we're in a good range there. And we're seeing a lot of really good quality people in that group. It's been very stable. And obviously, they're really producing. The productivity continues to increase. People can see that in the company-wide net sales. So, I think that's a good number.

Research numbers have been very stable around the -- between 900 and 1,000. It depends on the time of the year and hiring. But, it's about 950 right now, so I think, again, fairly stable. We've added a few people for ratings, doing the building ratings. We've added a few people here or there but nothing significant. You can see the cost of sales line will be fairly stable around $22 million or so for the year for research.

So, I think headcount has been relatively stable. We have been adding headcount, if I'm just thinking down the P&L in product design and development, which is something that we talked about doing in the beginning of the year. So, we've definitely ramped that up. You can see that software development line increasing throughout the year. And that's sort of as expected, what we've talked about with people.

And if you haven't seen the iPad app yet, I would say, having been here for 14 years, and I'm usually the one that's probably the most critical, I'm not just saying it is the best app I've ever seen. When Andy and I were on the road show for the equity offering, we had a demo version of it then, which wasn't the final version. And it is a beautiful and spectacular application.

We literally were going around New York City and Boston. And with each meeting, we would pop it up. And there, lo and behold, it would pull us up in the building. We'd be looking at the other tenants in the building, their rental rates, the spaces that are available. And I'm probably talking too long, so I'll stop. But, it is truly an amazing product.

I have to say more amazing than that, that's the first time in 14 years I've heard Brian use the word beautiful.

All right. I won't even go down that path. A final question, have you guys thought about kind of how to showcase, evolve now with -- either with the iPad app or in the context of the LoopNet deal? What does that part of the business evolve into?

Sure. So, I think one of the things that we're showing in some mockups of future products or next-generation products is more feedback to the real estate professional about who's actually looking at their properties when they're in our information product.

So, be very useful to these folks if they could look at a given property and see what its exposure levels are on the Internet and see specifically who's looking at the property. Often, with reverse IP lookups, you can get corporate names. This is -- someone from Oracle has been looking at this property this many times, so on, so forth, as well as when people -- once you close the deal with LoopNet and you're able to integrate, being able to see the registered user names of who's looking at a product and use it, being able to see what's happening with that property on the marketing side would be very valuable on the iPad and on the desktop.

Also, very importantly, again, we estimate that a company like CB Richard Ellis spends about 50,000 man hours, woman hours a year putting listings into LoopNet and updating them. That is -- given the fact that they're top producers who are trying to run at $500 an hour, and even the administrative people, or very significant number per hour, that's a lot of cost to them. It's way beyond -- I believe it's way beyond what they actually spend in cash to buy the ads.

One of the things we want to be able to do is, in the future, we want to be able to have them use the iPad or the desktop. And if they're looking at a property they haven't marketed on LoopNet, they'll be able to just push a button to confirm the purchase and send it out with a low per-unit cost out to the Internet without doing any typing, any data entry. So, sort of in rough terms, I believe they will be cutting in half the real cost of marketing a property on LoopNet.

Now, what we do with showcases, one of -- we're not -- we haven't closed the deal with LoopNet. And we don't have access to the full sort of customer user profiles we need to make intelligent decisions. But, our hunch is that you have different people coming to showcase for slightly different reasons than you've got going to LoopNet. And some cross-visitation analysis we did with the comScore folks a couple years ago suggested that there was a very different Internet audience looking at things on LoopNet versus looking at things in CoStar.

Most of the CoStar traffic and showcase traffic is coming from SEO or from pay-per-click advertising dollars, where a lot of LoopNet's traffic comes from the fact they've got a phenomenal brand name among the tenant and small investor community.

So, if we see that they're different audiences, we'll keep them both in place to help our customers reach these different audiences. If we see there's tremendous overlap between the Internet audiences looking at the ads and the two sites, then we'll consolidate them for simplicity. And the stream could reduce costs and cut costs on the product.

So, we won't be able to make a final decision on that until we can study it with full and rich data.

Okay. And final question, since you guys are all up on the iPad, [Tim] wanted me to ask if you have an Android app or will you have an Android app? He's got to get a little techie on you guys for a second.

What's an Android?

There you go. That'll be my answer. All right.

Yes, exactly, if you look at the market share, if you look at the percentage of mobile browsing that's coming from the iPad versus other platforms, and especially if you look at the percent -- if you look at the -- you have the nine-inch screen, 10-inch screen platform or the 1024-768 platform which is required for an effective information application, the browser share is I'm guessing 20 to one, 50 to one.

And so, the cost involved in developing each one of these is significant. So, until we see a platform emerge with some significant share, we're going to focus on building something optimized for the iPad. And it's not that we aren't owning Apple stock or anything. So, however, it might be a better place to put our cash reserves than US treasuries right now.

But -- and that's a joke (inaudible) there. But, so, we're going on one platform. And we'll watch the Android. And we'd love to see competition in the area, drive the unit cost down for our customers.

Okay. Makes sense. Thanks, guys.

Thank you. Next, we'll go to the line of Michael Smith of JMP Securities. Please go ahead.

Morning, guys.

Morning.

Just a real quick question. I'm wondering, going forward, we're talking a lot about, obviously, the new iPad app and the LoopNet stuff. I'm wondering where analytics fits into all this as far as strategically how much focus you'll be putting on it over the next couple years. Do you see that at all taking somewhat of a backseat now in your growth prospects because of the LoopNet acquisition, or do you see them on co-equal footing, or how can you explain that to me?

I see it on co-equal footing. And it's an embarrassment of riches. We've got three great prongs here to work. The analytics opportunity is very real. So, the folks at PPR and a lot of the systems people at CoStar have achieved a pretty big accomplishment in the last six to nine months. They have taken all their analytical models that prior were stored in a lot of Excel spreadsheets and various SaaS applications, Cisco applications.

And they've taken them off of one dataset, and they've rebuilt all these forecasting models, income and return models and vacancy rate models, absorption rate models, supply models. And they've rebuilt them all using a completely different data source.

And that takes us to right now, where we have a whole new forecast set, where the forecast and the data PPR uses is perfectly in line and consistent with what CoStar's got. And that opens the door.

But, prior, when we first acquired PPR, you had the problem where PPR is saying that the vacancy rate in New York City is 16%. And CoStar Group is saying it is 11%. Now, obviously, that makes it tough for our salespeople to say -- hey, buy this product from us, and we'll tell you that the vacancy rate's either 11% or 19% based upon which screen you're looking at.

Now, fortunately, our competitors in this space are also saying the vacancy rate in New York is 17%. But, one source, CoStar Property, has 800 researchers and is a distribution medium for the real estate community. So, there's a real powerful motive for people to give us the data, so it's much more accurate than anything else out there.

The PPR folks have basically rebuilt their models, worked their customer relationships, explained to everyone what's going on. And we're going to be going forward with a combined, uniform dataset, which is going to unshackle our salespeople and allow them to go compete aggressively in the market on the fact that we believe we have the most accurate and quantified data.

So, we've invested a lot of money in that. We've moved a lot of people to Boston. We've been doing a lot of stuff to make that happen. This is probably one of the biggest milestones in the integration. This is the most -- this is the biggest milestone integration. It required both technical work and political and emotional work. So, for folks who have been selling one view to switch to another view is challenging.

The next phases there on that are probably a little bit easier. And they're funner. They're basically building integrated applications that go from granular data at CoStar to very sophisticated econometric models on forecasting the markets and in one environment.

That work, you will see concrete results from that over the next 12 months. And it's not getting a lot of -- it's not sexy on an earnings call to talk about your switching data sources on your econometric models. But, it actually is really important to the business. We're making good progress.

And I think the proof in that progress is the recent pickup in sales to financial services and the fact that we sold more PPR in the last quarter than we have since we bought them. So, I think we're already very quickly already seeing the results of that progress. So, I think it's quantifiable.

Yes, so, you put the CoStarGo app there in the hands of a couple of these multimillion-dollar producing brokers, and they say -- wow, that's amazing. That is so cool. No one is saying -- wow, it's amazing. It's so cool -- on your new econometric models. But, it's still nonetheless very important. And we're giving it equal priority.

Brian, you kind of touched on what my follow up was going to be with that. Are you starting to see -- and I know that -- I understand that this might grant more as we go on because of some of the milestones that you guys have been talking about. But, I'm wondering, how can we judge so far the success you guys are having in cross-selling the PPR and the other analytics tools and getting -- or is it more that you're actually bringing on new -- less about the cross-selling to existing subscribers and more about bringing on new subscribers because of the analytics capabilities? And then sort of that would be I guess one A.

And then one B would be, which you kind of answered, is that part of the reason why we saw such an uptick in revenue growth sequentially this quarter because of PPR and some of the analytics stuff?

I believe that is true. So, how you can judge, where revenues are -- .

-- Well, numbers wise, just to jump in -- sorry, Andy.

Yes, go ahead.

Numbers wise, we acquired them. They were doing just under $18 million in revenue. I don't have the exact number here, but I'm pretty sure it's $23 million, probably approaching $24 million now.

So, I think we -- number wise, we've added firms. We've added a lot of revenue growth there, both from cross-selling, both from new client firms. This past quarter, we talked about strong subscription revenue, but also we haven't mentioned but we also have strong resolve revenue during the quarter, which is a combination of their services as a partial subscription and then partial implementation and consulting services. So, they had a strong quarter doing a lot of work for Prudential, about $600,000 in the quarter of consulting work with Prudential being the majority of that.

So, I think we're seeing numbers wise -- it's not just anecdotal. You're seeing millions of dollars being added, very successful. And I think with each one of these milestones, that actually gives us the opportunity to have even stronger numbers moving forward.

And it's continuing. So, when I was -- .

-- Right -- .

-- In the New York City sales office yesterday, Nomura's an example. That was a case where we had cross-trained a CoStar salesperson to sell PPR products and services. They'd gotten in the door with Nomura. Nomura looked at both CoStar and PPR products and services. And they ultimately initially purchased our Compass Debt Analytics product. And then after they had gotten comfortable with that, they came back, and they purchased -- a substantial purchase of CoStar products yesterday. They added on another $200,000 annual contract for the (inaudible). So, that's sort of concrete sort of thing we're seeing from this cross-selling.

And that was what we were seeing when we were severely handicapped by two completely different views of the same reality. And now that we have the same view, we're just down to one view of reality, which is a good place to be, we'll have an easier time doing it.

Great. I appreciate it, guys. Thanks.

Thank you.

Thanks.

Thank you. And next, we'll go to the line of Michael Wang of Needham & Company. Please go ahead.

Thanks very much. Hey, guys.

Hi. How you doing?

Good. So, just a few quick ones here. So, first of all, as you look out 12 months from now -- and I know it's still preliminary here with CoStarGo, but how do you think that the CoStar influenced bookings could split between kind of new users and upsells of modules to existing customers? Any sense how this will play out?

Unfortunately, I think we're painfully boring. We always see -- we always have about anywhere from 48% to 52% of our sales each month are additional sales to existing customers. And then the inverse is going to just be the new customer acquisition. And I think that's what we're going to have 12 months from now. And this CoStarGo application's going to be 50-50.

But, the gross number will be, I think, getting larger, which is a pleasant thing for our investors and ourselves and our salespeople earning commission.

And I was going to say it a different way, but Andy just sort of at the end there dampened what I was going to say. But, I was going to say that I can -- I'd be very, very confident that we will sell -- absolutely do a lot more cross-selling 12 months from now than we are today from CoStarGo because CoStarGo was just released. And I can absolutely also say with a lot of confidence that we will have more clients subscribing because of CoStarGo. So, we'll -- and we'll have new client revenue from that because we just released it today.

So, I definitely think that we'll see improved both cross-selling and new. And, as Andy said, it will ultimately end up to look a lot like 50-50, but the numbers will be higher. So, we're very excited about the product.

Do you have a sense or do you have a target for number of CoStarGo users by either end of year or end of next year? Is there a metric that you think you're going to be able to provide us as we see the adoption curve?

Yes, I think we need to -- we need another month or two under our belt to really get a good feel for how it's running. I've been saying that, just very roughly, I think that 50% of the usage of our data products will go to mobile platform over the next two to three years. So, I think it'll be very significant.

Great. Okay. And then last question for you, so, I know how you touched on how CoStarGo could potentially help push up renewal rates, which are already trending pretty high, but what is that upper limit? Is it 95%? Is it 97%, any sense what you would be pushing up against structurally?

Well, on the five-year customers-plus, the limit's going to be two more percentage points to 100%. And the -- and if you see it go to 101%, you should probably ask some very pointed questions on that earnings call. And then on the overall average, I think you're probably maxed out at 94%, something like that.

Yes, I think if I go back in history, off the top of my head, I believe that the highest annual number we got for 12-month trailing was about 94%. My goal and hope would be that we could actually improve upon that. Realistically, once you get over 94%, 94.5%, or if you could get to a 95%, there is always cancellations from basically people just dying.

And also, I think that, as Andy said, our five-year customer number -- so, we do have vendors and other groups that don't have quite the same high renewal rates. But, my goal would be to actually improve upon -- if you can have a -- .

-- They put TVs in coffins.

Do they really?

Yes.

Are they flatscreens? Sorry. I think if you look at that high watermark of 94% for a 12-month trailing when the Company was that much smaller to actually -- if we are actually able to get back to that 94% or improve upon it with a much, much larger company and revenue base, I think that would be phenomenal. And that is our goal. And I actually think that we can do it. And I think something like CoStarGo could be something that could help drive us back up to that high watermark or above it. So, we'll see how that goes over the next three or four quarters.

Great. Thanks.

Thank you. And at this time, there are no further questions coming from the phone lines.

Well, unfortunately, with no more questions, we're going to decide to have to wind up the call. I want to thank you very much for joining us for the second quarter earnings call. And we hope to give you a lot of good information, some good progress when we talk to you again for the third quarter earnings call. Thank you very much.