CoStar Group Inc (CSGP) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to CoStar Group's third quarter 2011 conference call. On today's call we have Founder and CEO Andrew Florance, Chief Financial Officer Brian Radecki, and Director of Investor Relations, Richard Simonelli. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to Mr. Richard Simonelli. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to CoStar Group's third quarter 2011 conference call.

Before I turn the call over to Andy and Brian, 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 third quarter 2011 results and in CoStar's filings with the SEC, including its Form 10-K for the year ended December 31, 2010, and its Form 10-Q for the period ended June 30, 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 and in color over the Internet, at www.costar.com. A replay will be available approximately one hour after this call concludes and will be available until November 27, 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 219866. 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. Andy?

Good morning and thank you, Rich. Thank you all for joining us on CoStar Group's third quarter 2011 conference call.

I'm very pleased to report that for the eighth consecutive quarter we can report another record quarterly revenue result. For the third quarter of 2011, we had $63.8 million in revenue. This is a $6.7 million increase over the same quarter in 2010 and an 11.7% increase, year-over-year.

Building upon momentum that has been increasing throughout the year, in the third quarter we also recorded our best quarter ever of net new sales. Annualized net new sales for the third quarter of 2011 were $7.7 million, an increase of 68% year-over-year. In addition, we had our strongest quarter ever of cross selling services to existing customers. The fact that this record quarter came in the midst of a generally weak economic environment is especially encouraging and we believe it a testament to the exceptional value that our products and services delivered to our customers.

Our in-quarter renewal rates remain very high at 93%. The renewal rate for firms that have been clients for more than five years remains exceptionally strong at 98%.

Over the past year, we have also seen a steady increase in the renewal rate for clients that have been with us for less than five years. The rate is the highest it's been since the second quarter of 2010, at 88%. We were very pleased to have added 2,430 net new subscribers for the third quarter. That is a particularly impressive number given that 2,431 net new subscribers is more than we added in the last four quarters combined. This was driven by a rapid acceleration of U.S. subscribers.

This is our fifth consecutive quarterly increase in the number of subscribers. We now have approximately 91,000 subscribers, which is the most we have had in the last four years, yet we believe we are just getting started. We believe that our 91,000 subscribers represent less than 20% of the potential market of users of commercial real estate marketing and information products on the Web.

Our cash position grew by $3.0 million in the third quarter and we now have $583 million in cash, cash equivalents and investments, which includes $248 million that we raised in our June equity offering and earmarked to fund a portion of the acquisition of LoopNet.

One of the key drivers of the record sales we are achieving is the recent release of CoStarGo, CoStar's new mobile application for the iPad. When I spoke to you at the end of July, we had just completed the third stop on a thirty-four-city launch tour to introduce this exciting new tool to customers and prospects. During that rollout we had the opportunity to meet face-to-face with almost 3,000 of the most active and influential commercial real estate brokers around the United States. We have followed that tour with an aggressive direct mail, email marketing, advertising, and social media campaign and we have conducted over 100,900 demos and trainings.

CoStarGo integrates CoStar's comprehensive information from our property, tenant, and comparable sales databases into a single location-centric mobile interface. The CoStarGo app is free for our clients that subscribe to CoStar Property Professional, CoStar Tenant and CoStar COMPS. Since the nationwide release of CoStarGo in mid-August, we have seen a significant increase in new sales to existing subscribers, including both one and two product upgrades.

We have predominantly seen current property subscribers adding COMPS, Tenant, or both to take advantage of the unique insight get from the way these datasets are combined in the CoStarGo app, along with a powerful mobility provided by the iPad. CoStarGo is providing brokers from all sized firms the opportunity to be more productive and the ability to impress their clients with rich content.

Brokers at the large firms, like CBRE, Jones Lange Lasalle, Kutcher Wakefield, Cassidy Turley, and Colliers, tell us the love CoStarGo, because it allows them to spend more time in the field where they make their money, and gives them a tool they can use to engage more directly with their clients.

We think that, historically, brokers might have spent as little as a third of their time at the office in front of their computers, able to access information like CoStar provides. The rest of the time they're out in the field, often with clients. This is a time and place they need access to the information the most. Before CoStarGo, real estate professionals relied on paper reports they created before they went out in the field and more often than not, they headed out without access to information at all and risked looking bad in front of their clients.

CoStarGo changes all that. CoStar allows the CRE professional to take the information with them and provides them access to the most current data, out in the field, in front of the client were and when they need it the most. Our clients are telling us that they're relieved to have a tool that now supports them whenever, wherever.

We said from the outset that we believe CoStarGo would be a truly transformational platform for the industry and the feedback we have received, commercial real estate professional from small to large firms all over the country are using words like "game changing", "awesome", "incredible" and "amazing" to describe it. It's becoming a must-have tool in the field and we believe it will become as important to the commercial real estate professional as their cell phone is. That was a mouthful.

I have heard directly from dozens of brokers who say they do not leave the office without their iPad and CoStarGo. In fact, I was in a meeting with about two dozen brokers yesterday, an unrelated matter, and I was pleased to notice that about six of them had their iPads with them and CoStarGo up.

We're hearing from commercial real estate professionals that CoStarGo is making them almost instantly more productive, more efficient and helping them to make more money. Across the board, CoStarGo has created substantial positive buzz in the industry. And we have heard, anecdotally, of firms and individuals rushing out to purchase iPads for their entire teams in places like Phoenix, Arizona, Fort Collins, Colorado, San Jose, California, and Gaithersburg, Maryland. We believe this is the beginning of a sea change in the commercial real estate information arena.

Last quarter we announced that we would invest between $3.5 million and $4.0 million to fund the aggressive rollout of CoStarGo. We spent approximately $3.4 million in the third quarter and we're seeing an immediate return on that investment. Plus, we have a lot of frequent flier miles. The result was a new record for gross sales into our existing U.S. customer base in the third quarter, surpassing the previous quarterly high by 23%.

Even with our sales force focused heavily on adoption within our current subscriber base, sales to new customers also were strong. The amount of net new sales for those clients who said that CoStarGo was a significant factor in their purchase decision totaled approximately $2.2 million, on an annualized basis, and consisted of 190 new deals with an average deal size of just under $12,000 on an annual basis.

These sales came from existing and new customers. Keep in mind that the product only became available in our markets on August 15th. One major brokerage firm in Seattle upgraded their subscription without even seeing a formal demo.

Our three biggest new clients included two brokerage firms, NAI Avant, with 41 users in Charleston and Columbia, South Carolina; and Hilliker, a 17-person shop in St. Louis. Another large new client was Sooner Management, an owner with operations in Dallas, Houston, and Montgomery, Alabama.

Included in the sales highlights was a new national agreement with EGL Services, one of the largest tenant rep brokerage firms in the United States. EGL Services previously subscribed to Property and Tenant in 27 offices throughout the U.S. Its 300 professionals now have access to CoStar COMPS and CoStarGo, giving them a more complete understanding of the market and the powerful mobility advantage of Go.

Another good early trend we're excited about is that we are seeing an increase in direct usage by top producers and senior brokers at large firms. We have always struggled to get these top professionals to be more hands on with our products, as they frequently relied on support teams to run searches and analytics from CoStar Property, print the information, and use paper as a base to conduct tours with clients.

CoStarGo is so easy to use that top professionals increasingly are using this tool when sitting with their clients or out touring properties. We believe increased engagement and direct usage from these senior brokers will contribute to even better stickiness for CoStar services, which we expect will be reflected down the road in even stronger renewal rates.

Since we released CoStarGo in the third quarter, we have seen 5,851 clients log in for the first time. Already, overall usage of CoStar's U.S. information products is up 30% in just the first three quarters of 2011.

We are working diligently in an effort to bring the LoopNet acquisition to conclusion. As you know, on June 30, 2011 CoStar and LoopNet each received a request for additional information commonly referred to as a "second request" from the U.S. Federal Trade Commission. CoStar and LoopNet have been working cooperatively with the FTC in connection with its review of the acquisition of LoopNet and expect to certify substantial compliance with the FTC's second request for additional information, shortly.

At the FTC's request, CoStar and LoopNet have agreed to extend the waiting period imposed by the Hart-Scott-Rodino Act from 30 the 60 days, after the date of substantial compliance for the second request. While we remain hopeful that the FTC will complete its review in a timeframe that would permit the merger to close by the end of 2011, the current timing is such that it may not close by such time. As we reported when we signed the merger agreement in April, we believe that this proposed combination will bring together the benefits of the industry's leading information platform on the Internet with the industry's leading marketing solution on the Internet.

We previously told you and still believe the efficiencies by creating -- by integrating the content between both websites will improve the quality, timeliness, and usability of that content, while simultaneously recording the cost that both CoStar and the commercial real estate communities incur to maintain that content.

CoStar's and LoopNet's respective product offerings significantly reduced commercial real estate professionals' costs, saves them time, helps them to market their properties more effectively, helps them better understand the market and empowers them to better serve their customers.

We believe that the majority of CoStar's customers are prospects for LoopNet's marketing and lead generation solutions and that the majority of LoopNet's customers are prospects for CoStar's information solutions. We believe this creates a tremendous cross selling opportunity that, in turn, will help both companies win many more customers and make the customers more efficient.

We have communicated, after announcing our acquisition agreement with LoopNet, that we would continue to consider smaller but important strategic acquisitions. As announced last night, we have acquired Virtual Premise, a leading SaaS provider of real estate lease management solutions, SaaS being "Software as a Service". The all-cash transaction is valued at $17 million, net of cash required in the transaction.

Virtual Premise is based in Atlanta and has been in business since 1999. The company develops and hosts real estate lease and project management software and provides the lease extraction services for over 250 major corporations, commercial real estate brokerage firms, retailers and property owners.

Virtual Premise's subscription base of clients uses SaaS solutions to increase the efficiency of real estate management processes, reduce occupancy costs, and improve utilization of real estate assets. Virtual Premise's lease administration module helps clients manage and monitor their lease expirations, rental payments, renewal options, transactions and projects. Virtual Premise's software manages almost $1.0 billion in rent payments each month.

I want to clarify one thing that this transaction is not. CoStar will not use any of the information Virtual Premise hosts for its clients in any of CoStar's information, products, or services. The lease data hosted by Virtual Premise is hosted separately in a secure, offsite facility and will remain strictly confidential. The absolute security and confidentiality of that data is a core value proposition and premise of the Virtual Premise service.

Andy Thomas, the Company's president and COO, will continue to lead the Virtual Premise team of approximately 50 professionals in Atlanta as a division of CoStar. Andy has been with Virtual Premise since 2001 and has over 20 years of commercial real estate technology and management experience. Andy and his team have built impressive real estate information management solutions that we believe will become even more powerful when connected to CoStar's strong information and product development platform.

Virtual Premise clients enter thousands of leases into Virtual Premise, but they do not have a practical way to connect that lease information with the sort of current property and market information CoStar provides, which could make their lease information much more valuable and actionable. We envision a product that allows Virtual Premise's clients to see pictures, maps, aerials, and floor plans of the properties they have leases in.

We think it would useful to Virtual Premise's clients and their brokers if they could see availabilities and market trends surrounding their properties right next to their lease information. This could make it much easier to manage their expansion, disposition, and budgeting requirements. It would also simply just make the lease information more colorful. We believe that by matching CoStar's strong information and product design orientation with Virtual Premise's leading lease management products, we can help our brokerage clients be more efficient and conduct more transactions. Make more money.

We believe that the addition of Virtual Premise to the line of services CoStar offers will bring significant value to our large base of commercial real estate brokerage clients who, in turn, can pass these enhanced lease management services on to their clients. Virtual Premise currently has approximately $7.0 million in revenue. We believe that we can drive Virtual Premise's revenue growth much more aggressively by adding CoStar's sales force of approximately 200 professionals in over 30 locations to Virtual Premise's current sales team of 7 individuals in 2 locations.

Our strategy of acquiring companies with products that can benefit from CoStar's commercial real estate content and for whom we can enhance their sales channel has proven very successful for CoStar Group in the past. Since CoStar acquired Property Portfolio Research in 2009, their revenue has grown 31.6% from $18.7 million to $24.6 million. At the time we acquired PPR, they had a 3.6% EBITDA margin and they now have a 30% EBITDA margin.

When we acquired Resolve, also in 2009, they had reoccurring revenues, as opposed to consulting and reoccurring revenues, just the reoccurring revenue component was $1.7 million and that has now grown to 88.2% to $3.2 million of reoccurring revenue.

We see a tremendous growth opportunity in the lease management space, generally. We believe that the lease management business is currently highly fragmented, with over two dozen participants all with less than approximately 5.0% market share.

Frank Carchedi, CoStar's Senior Vice President of Corporate Development, will be overseeing the integration of Virtual Premise, as he has done most recently with our PPR and Resolve acquisitions. We plan to combine Virtual Premise with CoStar's Atlanta-based research and sales operations, eventually growing our Atlanta presence to nearly 100 employees.

Turning back to existing integration efforts, our PPR division experienced solid organic growth in the third quarter. Our financial services group sales team, a highly trained team focused on banks and financial institutions, is getting good traction of cross selling CoStar and PPR services across our combined client base.

Earlier this month we hosted PPR's Annual Client Conference on Cape Cod, attended by over 70 institutional investors and banks and regulatory agencies. We had a series of excellent discussions on the major economic trends impacting the commercial real estate industry. I had the chance to speak in detail on the contribution third party information has had in helping the commercial real estate industry grow and become more efficient. We also previewed the lease discounting cash flow feature that we expect to add to CoStarGo in 2012 and to our Web products. We received very positive feedback from these large institutional owners on the information and technology product roadmap we presented.

During the third quarter, we completed the integration of PPR's best in class analytics and forecasting tools with CoStar's comprehensive commercial property database. Beginning in November, clients will get the benefit of analytics and forecasts based upon the CoStar research platform. This integration is expected to result in a dramatic increase in the precisions, accuracy and timeliness of PPR's analytics and forecasting, along with a significant increase in geographic coverage to 210 CBSAs in approximately 5,000 submarkets.

At its core, PPR's value proposition is thought leadership that the PPR team provides their commercial real estate clients. We are committed to investing in and growing our team of industry-leading economists in Quant at PPR. In the effort, we recently promoted Hans Nordby to Managing Director of PPR. Hans has been with PPR since 2002 and has been involved in both forecasting and advisory services.

In addition, Walter Page joined the PPR team earlier this month as Director of U.S. Research, leading the office sector team. He previously was Vice President of Research at Equity Office at LaSalle Investment Management and a Managing Director at American Reality Advisors. We plan to add additional senior level appointments to PPR's research and quantitative teams with an emphasis on strengthening property sector specialization.

On the other side of the big pond, we are beginning to see a slight recovery in the UK market, with the number of deals increasing in the third quarter of 2011. We have begun allocating technology resources from the U.S. to London to prepare the technology base to support the launch of CoStar Property, Tenant, and Comps and CoStarGo in the UK and expect a timeframe of next summer. We believe the enhanced product offering will create a significant opportunity for future revenue growth in Europe and the latter half of 2012 and beyond.

Finally, I would like to briefly update you - if that's credible from me - I'd like to briefly update you on the current commercial real estate market conditions and how I believe they impact our business.

As you know, GDP growth is weak, consumer confidence has risen to new lows and employment growth, which is so important to commercial real estate, remains anemic. On the bright side, corporate profits are at record levels and that's generally correlated with business investment including real estate investment.

Despite all that, key indicators of commercial real estate are relatively positive. In my mind, they're more positive than the overall generally economy. I will use the office market is an example. In most markets, rents have stopped falling and are stable and in some case, in some markets, are rising. Rents remain 10% below long-term inflation adjusted averages, so we believe it's a relatively good time for corporations to lock in their long-term occupancy costs at these relatively low levels.

Because of this, leasing activity is very strong right now and has been growing. Leasing activity generates the commissions that make our brokerage clients and prospects thrive. At 19 million feet, net absorption of office space was stronger last quarter than the employment picture seemed to justify. Nonetheless, vacancy rates and availability rates in the U.S. are consistently falling because there is relatively speaking no new supply of office space coming online.

We do not expect that picture or trajectory to change in the near-term, so we expect vacancy rates to continue to fall and an upward pressure on rents. I think the biggest risk factor is any significant cut in federal spending or federal job cuts, which could happen.

Sales volumes in 2011 have already surpassed total 2010 volumes for commercial real estate and are already well beyond the sales volumes of commercial real estate in 2009. This, again, is a strong indicator of the commission revenue our clients and prospects may be enjoying right now.

The highest four- and five-star quality buildings are moving up in value, especially in the top U.S. cities. Investment grade properties are now stable and general commercial real estate, or smaller property values, are showing some signs of stabilizing and, in fact, picking up. Again, I think the commercial real estate markets are remarkably stable right now, given the general weakness in the overall economy.

I had the opportunity to speak with David Martin, one of my Scottish work colleagues, this morning on the occasion of his last day with CoStar as he goes into retirement after 45 years of service with CoStar and the Scottish Property Network, which is a firm we acquired from the Scottish government and University of Paisley a number of years ago.

David is a real visionary and he reminded me that when he started in the business many, many years ago they kept one leather-bound book with brass rings in their office and they would hand write comparable sales for commercial real estate into the book. Clients would come into the office to access these comps from the one book.

David has helped lead us from that point to where we are putting terabytes of data into thousands of clients' hands and the field of a sleek iPad. It really makes you wonder how much farther the industry will advance over the next two decades. It should be pretty exciting. Thank you for your service, David.

In summary, we're proud of our financial performance in the first three quarters of the 2011, especially in light of the overall weakness in the economy in the U.S. and abroad. We expect that strong performance to continue. Life at CoStar remains fast-paced and exciting. In the short-term, we're working hard to move the LoopNet acquisition to a hoped for successful conclusion.

Over the longer-term, we remain focused on our pursuit of what we believe is a billion-dollar market opportunity. I look forward to updating you on our continuing progress at our upcoming 2011 year-end conference call. Sorry for going so long, Brian. At this point I'll turn the call over to our Chief Financial Officer, Brian Radecki.

We've seen a couple earnings calls where we had to shorten back, but Andy's back to the usual stuff. Somebody told me he stole all my thunder, so I apologize if some of my numbers are repetitive. Thanks, Andy.

(Inaudible - multiple speakers).

As Andy mentioned, we're pleased with the performance in the third quarter of 2011. Once again, we delivered strong revenue growth and earnings while continuing to invest in our business. Today I'm going to principally focus on sequential results for the third quarter of 2011 compared to the second quarter and also on our outlook for the remainder of the year. We believe the sequential trends offer the most insight into the performance of our business.

Now, to re-review CoStar's results for the third quarter of 2011 for anyone who got on the call late. Beginning with revenue, the Company reported $63.8 million in revenue for the third quarter of 2011, an increase of $1.7 million or 2.7%, compared to revenues of $62.1 million in the second quarter. Revenues for the third quarter of 2011 increased 6.7 million or 11.7 [sic - see press release] compared to last year. Revenue growth was primarily attributable to CoStar's growth in core services, CoStar Property, COMPS and Tenant subscription revenues, sequentially and year-over-year.

We also reported $2.3 million in net income, or $0.09 per diluted share, during the third quarter of 2011, based on 25.3 million shares; compared to $2.6 million, or $0.12 per diluted share in the second quarter of 2011, based on 22.4 million shares, reflecting the impact of approximately $5.8 million in expenses associated with the LoopNet merger in the third quarter, an increase of $800,000 compared to second quarter.

Non-GAAP net income was $7.2 million or $0.28 per diluted share in the third quarter of 2011, compared to non-GAAP net income of $7.3 million or $0.33 per diluted share in the second quarter of 2011. Adjusted EBITDA for the third quarter of 2011 was $14 million, compared to adjusted EBITDA of $14.3 million for the second quarter.

Reconciliation of non-GAAP net income adjusted EBITDA and all the 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 at our website at www.costar.com. If you have any other detailed questions on it, just email Andy@costar.com.

The Company had approximately $583 million in cash and cash equivalents at September 30, 2011, an increase of $3.0 million since last quarter. The Company currently has no short-term or long-term debt.

As Andy noted earlier, market reaction to CoStarGo, the innovative new iPad app has been extremely positive and was the key driver of the Company achieving the highest quarterly net new sales and the highest quarterly revenue in our history. Annualized quarterly net new sales were a record of $7.7 million in the quarter, which is also up 10% from last quarter. As we projected in Q2, we invested approximately $3.4 million in the third quarter to support the launch of this important new app.

Our customers continued to renew subscriptions at a very rate during the third quarter. The in-quarter renewal rate remained high at 93% and the twelve-month trailing renewal rate for subscription-based revenue increased to 93%, which is an improvement from 92% last quarter and approximately 90% one year ago.

The renewal rate for clients that have been customers for five years or longer held constant at 98% in the third quarter of 2011 and the renewal rate from firms that have been clients for less than five years increased 3.0 percentage points to approximately 88%, up from 85% in the second quarter. Phenomenal.

Subscription-based revenues accounted for 94% of the Company's total revenue in the third quarter, up from last quarter. As we indicated in last quarter's calls, non-subscription revenue was higher than normal in Q2 and came back down to a more normal in Q3. Our core subscription business continued to grow at a solid pace at 3.3%, quarter over quarter, and continues to drive the overall revenue performance.

During the third quarter of 2011, the average annual contract value was $8,948, up 9.0% from the second quarter of 2011 and our sales headcount totaled 199 sales reps, a small increase from 195 on staff at the end of the second quarter of 2011.

The total number of paying subscribers increased to 91,010, Andy - not 91,000 - in the third quarter of 2011, a net increase of 2,431 over last quarter, as Andy highlighted earlier. The total number of subscription client size increased by 334 during the third quarter, to 17,897 company-wide.

As announced yesterday and as Andy discussed earlier, CoStar acquired Virtual Premise, a leading independent provider of SaaS-based real estate information management solutions for approximately $17 million net of cash. Virtual Premise generates approximately $7.0 million in annual revenue and it's about breakeven for earnings.

I will now quickly cover the results from our income statement for the third quarter of 2011 and also provide some color on the outlook for the fourth quarter and full year.

Gross margin was $42.7 million in third quarter of 2011, up $3.0 million, compared to $39.7 million in Q2 2011, resulting in a 2.9% quarter-over-quarter improvement in gross margin percentage to 66.8%. The increase in gross margin was mainly due to increased revenue and, in part, to some favorable expense items in the third quarter. Moving forward, we continue to expect the cost of revenues to return to more consistent levels with the first and second quarter.

Total operating expenses in the third quarter of 2011 were $39.6 million, an increase of $3.8 million, compared to $35.8 million in the second quarter of 2011. Sales and marketing expenses associated with the CoStarGo launch of $3.4 million were the primary driver of the increase in operating expenses, quarter over quarter. We do expect the sales and marketing expense to decline somewhat in the fourth quarter of 2011as we reduce the level of marketing spend, but that will be partially offset by some expected higher commissions on our record high sales.

General and administrative expenses of $16.6 million in the third quarter of 2011 included $5.8 million in expenses associated with the LoopNet merger, which were up approximately $800,000 over Q2.

We also recorded approximately $1.5 million in restructuring charges related to the consolidation of our White Marsh, Maryland office, as we disclosed last quarter. These costs were partially offset by approximately $1.2 million of income from an adjustment to deferring consideration associated with the 2009 Resolve Technology acquisition.

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

Let me reiterate that our outlook does not include the impact of the acquisition of LoopNet or costs that are contingent on the closing of that acquisition, as we are not able to reasonably forecast whether or when certain acquisition-related costs may take place. Therefore, we are providing our outlook on a standalone basis, reflecting our current expectations as of October 27, 2011.

Based on the continued strong trend in sales and revenue, we once again raising the revenue outlook range for the year, taking the high end of our 2011 annual revenue outlook up by approximately $1.5 million. Our new outlook range for 2011 revenue is now approximately $250.5 million to $251.5 million.

I'm happy to note that we have raised the high end of our revenue outlook for the year by $7.5 million, from $244 million when we first issued our 2011 outlook on the February earnings call. For the fourth quarter of 2011, we expect approximately $65 million to $66 million in revenue. And let me just thank John Stanfill and the sales force for a tremendous quarter and John, you got to do better again next time.

In addition to the increase in our revenue outlook, I'm pleased to announce that we are ranging the high end of our outlook for non-GAAP net income by $0.09 per diluted share for the year. For full year 2011, we now expect non-GAAP net income in the range of approximately $1.18 to $1.22 per diluted share and we expect fourth quarter non-GAAP net income of approximately $0.28 to $0.32.

The acquisition of Virtual Premise is included in the Company's estimates and is expected to reduce non-GAAP net income per diluted share by approximately $0.01 to $0.02 in the fourth quarter of 2011. This is primarily due to acquisition-related purchase accounting adjustments to deferred revenue, which results in a lower recognized subscription revenue, and subsequently, earnings. The acquisition is not expected to significantly impact the Company's fourth quarter revenue, due to the timing of the acquisition within the quarter and the reduction in deferred revenue.

In summary, I'm very pleased with our year-to-date performance. We've continued to deliver strong revenue, earnings and cash flow even in a soft economy. We are pleased to raise our non-GAAP net income outlook by $0.09 for the year, while we also continue to invest in new products and services, like CoStarGo, and strategic assets like Virtual Premise.

We continue to believe the short-, medium-, and long-term growth prospects for the Company are outstanding and we look forward to discussing our continued progress with you and providing our 2012 outlook early next year.

And with that, I'll open it up for any questions.

(Operator Instructions) Bill Warmington, Raymond James & Associates

Good morning, everyone.

Good morning, Bill.

And congratulations on a strong quarter.

Thank you very much.

So I wanted to ask the question you'll probably receive many times, but I figured I would start with it in terms of asking what the significance of the 30-day extension on the Loop acquisition is and maybe it would help if you kind of put that in context in terms of how these procedures normally evolve?

Sure and since Jon Coleman, our general counsel, has been enjoying this process more than most, I'll let him answer the question.

Thank you, Andy. So having been through this process for the first time, this is all new to us, but our understanding of the FTC's request for the additional time to review the transaction is nothing unusual. Our view of this transaction hasn't changed. We remain hopeful that we're going to get the deal closed, but we can't control the process. All we can do is work through the process and obviously we'll update you as things progress or as other developments come about.

Okay.

Okay.

The -- I wanted to ask, on Virtual Premise, what's the current run rate revenue of that?

Approximately $7.0 million.

Yes. Bill it's approximately $7.0 million and as I said in my script, it'll be a partial quarter for them and then you immediately lose the deferred revenue when you go to the purchase accounting. So there won't be much of an impact in the fourth quarter and then you lose the deferred revenue, so it'll take a little while to build that back up next year. So they're at about $7.0 million today and I'm sure we'll build that back up next year. When we update guidance for '12, we'll give you guys some more specifics on that.

Got you and then I just want to ask for an update on the Resolve product and if you can maybe tell us a little bit about the product, or what you think the target market's going to be for it and when you plan to launch it?

Okay. The -- I'm going to keep some of it confidential, just for competitive reasons.

No problem.

We actually presented some of our concepts and thinking around the product at the investor conference, so, when I was talking about presenting the product roadmap, it wasn't just for PPR. It was for PPR and Resolve, who just happened to actually co-locate in the same office in Boston. And one of the core original concepts was to simply surround the client data, this data warehouse, in the Resolve product with CoStar data, making the product more useful and more colorful to their clients, similar to what we're going to do with PPR.

The way we're doing that is we are providing the Resolve developers, as well as we'll do it with the Virtual Premise developers, we're providing them access to the same software toolkit that's used to power CoStarGo. So they'll be able to actually write CoStar content right into their products on their own.

And in addition, one of the things that we think is really interesting, was really sort of a lot of fun at the PPR conference, is we used those clickers where you can instantly survey the audience and so the audience was a group of individuals who probably own, managed or financed at the current point between $0.5 trillion and $1.0 trillion of commercial real estate.

And we asked them what they used for some of their core assumptions in their financial modeling. In the survey, they all said exactly six months for release time. They all said 75% probability of renewal. And then we showed them what the actual values were across a half a million transactions and they were shocked to see that they're radically different to what they use in their models.

So, one of the things we think we can do to provide a lot of value to the Resolve customer base to it make the product very attractive is to allow people to feed the actual data into these financial models they use for discounting cash flow and portfolio budgeting and management.

And while it may give them answers that may not fit with what they've been thinking for a while, it will at least give them more accurate answers and hopefully it's actionable; it can help them to improve their returns. So we got a very, very favorable response to it and now it's -- we're in the process of actually executing on and building those tools.

Great. Well, thank you very much.

Thanks, Bill.

Thank you, Bill.

Brett Huff, Stephens, Inc.

Good morning, Bret.

Good afternoon.

Good morning.

Good morning, I guess. One question on the Loop deal and then a couple of others. Just, can you give you sense of why the length to actually certify compliance? I mean, it just seems like it's taking quite some time. Any thoughts on that?

Well, the reality is that we -- I think we're producing several hundred thousand documents, internally, from CoStar and it's a voluminous production and we just have taken a while to get through it, but -- and I think that is some indication why the FTC has asked for. And it's then it's not unusual that they would need thirty extra days to sort of get through and complete their review.

Okay, that's helpful. Thanks for that color. And then, Brian, I think this is a question for you. Can you walk us through what changed in the COGS and the sales and marketing and I'm talking the sales and marketing ex the $3.4 million of the iPad app, the CoStarGo spend that made those meaningfully better, sequentially? I think you talked about COGS as having some favorable items. Could you just detail those a little bit and then maybe the same in sales and marketing?

Yes. I mean, I think in general, in sales and marketing, when you're doing the iPad app and spend $3.4 million there, you're not marketing other things, but also we had some other sort of favorable variances that hit both those line items. We have some lower benefits, like health insurance. We had some lower taxes, some other lower operating expenses. So, I think, in general we just had -- we had just favorable expense variances across the board in all the lines.

It's kind of hard to see it in the G&A. You can also see it in the software development line, the G&A. It's hard to see it because of all the deal costs that are coming through there, but all the lines sort of had a favorable variance. Some of those, I think, are permanent. Some of those are, I think, are just a good quarter on that side. I think clearly it sort of shows as we're adding revenue, as we have the ability to drop a significant portion of that down to the bottom line. And I think people have seen that in the past and I think you're starting to see that now.

So, I think moving forward into the next quarter and adding the cost of sales line, we continue to expect to invest in research like we always have, so I would expect that to go back to sort of a more normalized level in the first and second quarter.

Again, with the selling and marketing line, I would expect that to reduce because of the CoStarGo/marketing expenses being reduced, but there will be somewhat offset for that when you have -- every time when you have record sales, you have to pay commissions out. So there'll be a little bit of an offset there, but definitely continue to expect to be converting revenue to the bottom line as we move forward.

Okay, that's helpful, too. And then the -- in terms of -- Andy, you gave us some really stats on the CoStarGo app, but I -- and I'm not sure I heard this one, but I'll ask it and tell me if I missed it, the uptake of the iPad or the Go app in the less and five-year-old cohort and the more than five-year old cohort, relative to cross sales. Did you give you that stat?

That's a great question, but no, we did not give you that stat and I would have to say that we probably focus more -- our efforts this summer were really focused around some of the more senior industry leaders and so we pushed particularly hard in that area. So we're looking for the folks who are -- we're trying to connect with the people who are in the top 10% of production in each U.S. city.

If you think about the iPad app, it's a tremendous opportunity to get someone to pay you to walk around town with a CoStar sandwich board. So, when a million-dollar producer goes out and they're sitting there in front of other landlord reps with this CoStarGo on the iPad, looking things up in front of clients, we think that's just a wonderful billboard. So that's where we put our efforts.

I don't have the information broken down and the thing that really made a big impact on me was that we were getting folks who -- I mean, had a number of folks who I've known over the years who are big producers who sheepishly admitted to me, like I didn't know, that they never logged into CoStar on the Web but they were actually going to use this, themselves, directly. So that was a highlight.

So, I would think at this point it's more with the plus five-year clients and less with less than five-year clients, except for these -- a lot of these new clients coming onboard just because they're so impressed with this technology.

Okay, that's helpful and then this is a bigger picture question. As we look out into '12, aside from the Loop deal and just looking at your business sort of standalone, is there anything that we should expect that should change the way incremental margins happen? Not just in your base business, but it seems like PPR and Resolve continue to get a little bit better and a little bit better each quarter, but just overall? Are the incremental margins dropping to the bottom line, which I think this quarter was something like 50% EBITDA, if you exclude the marketing spend? Is that -- should they be higher than that, lower than that, or can you just give you some color?

Yes, Brad, it's Brian. Hey, we haven't come out with 2012 guidance. We plan on doing that fairly early next year to give people more color on that, but, I mean, I think obviously the general premise of our business is 94% subscription-based information services with high renewal rates. I think I would see the business model as where we obviously can drop a lot of that to bottom line.

So we haven't come out with specific guidance for next year. We will. I think it's always a balancing of investments and earnings and I think we plan on doing that, so I definitely believe that we'll be dropping earnings to the bottom line, but I'm sure there'll be a few small investments. Obviously Virtual Premise, there'll be a small investment in that. They're not huge numbers, but I think we will continue to balance both.

Okay.

And we're not adding any additional U.S. cities, because we're in them all.

That's good news. Well, thank you for your time. I appreciate it and congrats again on a nice quarter.

Thank you.

Michael Huang, Needham & Co.

Thanks very much. Good morning, guys.

Good morning.

I have a few questions for you. So, first of all, in terms of the strong net ad growth in the quarter, was any of this onetime in nature or are we seeing a step-up in volume that could be sustainable, as you look out over the next several quarters?

I believe it was almost entirely reoccurring revenues, so it's all -- it should be highly sustainable and again, you could look at that, the cross selling number, which is the bigger component. You'd attach that to that upper 90% renewal rate and then the new client acquisition, you attach that to that lower 88% renewal rate. So, that's mostly cross selling into established clients on reoccurring revenue product and I don't -- I think you have to pry the iPad out of some of these brokers' hands.

Okay. Now, I just wanted to clarify. I think I caught it. So, did you say that $ 2.2 million of the net new bookings was driven by CoStarGo, or at least influenced by that? And then was wondering, I mean was some of that just pent up demand for this type of app, or will those actually trend up as we get into Q4 and beyond, with some increasing maturity and reference ability of the app?

That's correct. Its $2.2 million, or $2.196 million or something like that, of annualized reoccurring revenues in that from August 15th to now. I think we're in the phase where it's right now this is -- a lot of this is basically our efforts to the initial introduction marketing and through our marketing campaigns and direct sales efforts. My hope is that we will get additional referential business going into the first quarter, maybe the fourth quarter.

And I hate to say this, but something as silly as Apple sells an awful lot of iPads around Christmas. It's hard to imagine these well-salaried or high earning brokers waiting for Christmas to get --the holiday season to get an iPad to turn around and buy our $12,000 a year product, but it's actually true.

And so pent up demand? I think probably, as much as anything, I just sort of think this captured a lot of people imaginations. I mean, I think there's a real -- for these brokers, there's actually some anxiety when you're out in the field in front of a client and you're supposed to know everything and you simply don't and your worst nightmare is being a broker and having to look across the street and dial the phone number on a leasing sign for the ability to ask them a question when you're supposed to be an expert.

So, I think just emotionally this product connects to the brokers, because it reduces their anxiety in the field and it makes them feel more confident in their business. So I think that's what they're responding to and we hope to see referential sales pick up in 2012.

Okay and so, I guess, to just kind of relate it to that a little bit, I know you've talked about being at a level where $6.0 million to $7.0 million of net new sales is certainly kind of reasonable where you are now. But, I mean, does some of the uptake around CoStarGo, I mean, are we going to -- do you feel confident that we're in the $7.0 million to $8.0 million range? Or should we just be modeling going forward $6.0 million to $7.0 million and be hoping for some upside?

Hey, it's Brian.

I would answer that, but Brian won't.

Yes. I think it goes back to Bret's question. You know we haven't given 2012 guidance. We will be fairly early next year, to sort of give people, I think. One thing, this was brand new product that was just released, so I think after we get a nice full quarter of it and as we close out the year, we look at the economy and see all those different things, I think we'll be able to give everybody a lot better answer on what we think '12 looks like.

Obviously, right now, we had a great quarter, a great product, really, so we're feeling great about everything. So I think we'd like to get sort of a little more clarity and information in the fourth quarter before we start giving '12 guidance on sort of where we think things are going to be. But obviously we feel very, very good from sort of initial, out thoughts.

Great. Thanks very much.

Brandon Dobell, William Blaire

Thanks. Hey guys.

Hi.

I wonder if we could focus for a second back on just let's call it the core business for lack of a better term and maybe the markets that you added in the past couple of years, let's talk to the market's 50 through 100 on the MSA scale? What's the new sales trends and the renewal trends been like there and are you seeing any issues with the pace of business or pace of interest relative to kind of muddling through on the job numbers in the capital markets that we all keep hearing about?

Yes, the odd thing is that the capital markets and the (inaudible - background) job growth number, obviously I'm well aware of that and I watch that closely, because we provide that (inaudible - background) for our customers. But our business isn't really in synch with that pane and it seems to be operating a little independently, a little differently from what we're reading about in the papers.

In -- I don't have specifics right here on markets 50 through 100. I can tell you, anecdotally, I had a conversation with the manager that runs our fly team. And the fly team is a group based out of Washington, DC that is centralized in Washington, DC, that will handle some of these markets 50 through 100, or 50 through 150, and they'll basically spend two days a week flying out to Albany or Syracuse or wherever that might be.

He's doing extremely well as a manager. He's beating his numbers, his goals. I think he's producing well above his quota. I -- he was at the President's Club last year for top performance and he's very confident he will make President's Club this year. So, as a sort of a barometer, the fact of that manager who's responsible for that area is doing very well, personally, is a good indication.

Okay and then --.

Brandon, this is Brian. I mean, I'll add to that. I mean, it's anecdotal and sort of like with Andy's, but yes. I mean, from what I'm seeing, and I don't have the numbers in front of me either, I think those markets are growing and renewing, I think, at very similar paces. If you look at the revenue growth for the Company, I mean, I sort of mentioned in my script, it's coming from the core property comps and tenant.

Obviously CoStar goes driving cross sells and up sells, but I mean, renewal rates are high everywhere. They're higher in markets in 1 n to 50. They're high in markets 50 to 100. Revenue's growing in markets 1 to 50. Revenues are growing in markets 50 to 100. So, I mean, I'm sure there's probably more or less in some very specific markets, but my general sense in looking at the numbers is that we're just doing very well sort of on all fronts right now.

Okay and then taking that into a direction on the customers type, any particular outliers? Are the brokers contributing? I can imagine with the iPad app they are, but beyond the iPad app are the brokers contributing the majority of the growth? Are we seeing any material traction from the customer bases that are a lot smaller than the brokers for you guys?

I think that the sales force always wants to start running back to the institutional players and the larger owners and larger banks. So, actually, that's the ongoing trend. The CoStarGo app probably pulled them back towards the brokers a little bit more. There's a -- I believe the number is out of 14,000 firms only 9 -- only 4,000, roughly 4,000 have Property COMPS, and Tenant, so it's such a big pool of a traditional client base you can go after.

Right.

To try to upsell them additional modules I connection with CoStarGo. So I think that's where they're moving to a little bit and it's small, medium, and large firms -- I'm sorry. It's probably medium to larger firms that they're focusing on.

Now the other thing I should mention is that we do have a huge sales incentive contest going on right now with some big potential commission dollars in the fourth quarter, which would have a big skew of mid-sized to smaller firms. So the fourth quarter will probably see a little more activity there as well, as these people try to win some of these commission dollars.

Okay and then a final question. How does the extended process, or let's say just the process around LoopNet, how does it impact your thought process around going beyond the U.S. and kind of tackling the UK or Western Europe more or less? Or do you think you want to open the U.S. market with LoopNet first? Or do you think you can do both at the same time?

We -- I would say we are very, very well aware of a tremendous potential here in the United States and a lot of its surrounding integrating a lot of different product values or propositions into this network of information. So Virtual Premise is a perfect example of that and that kind of investment is software, product development-oriented. It's highly leveraged. It's really valuable to our customers and there's a dozen examples of what you can do there.

That's very attractive to us and that's what we want to focus on. And obviously, LoopNet would -- represented a significant software opportunity, and has some great upside for the Company. Now, having said it, so we're very U.S. or North America focused. The UK, however, we've got a great position in the UK. I mean, we've done a great job in upgrading the research there. We're producing really high quality information. We've got a good team. We have picked up a lot of share in the United Kingdom.

What we need to do is finish the integration of the software and get CoStar Property Tenant, COMPs, and Go available in the United Kingdom and come up with a more common platform. We believe that if we do that, we can get to what we want to see, which is a 30% margin there in the UK, so we can show the same profitability there as we show in the United States.

Until we're doing that, we're not terribly interested in anything else. That's a good goal that lets us get to the $100 million EBITDA mark and beyond that, it takes us away from our core goals. So, we do have a little operation in France. We want to keep that healthy, but we're not terribly interested in investing big in Greece, right now.

Are there any buildings left in Greece (inaudible - multiple speakers)? I wasn't sure there was anything left. Alright guys, thanks a lot, appreciate it.

Thanks. See you, Brandon.

Yep.

Michael Smith, JMP Securities

Hey guys, good morning to you. Nice quarter. I just (inaudible - multiple speakers)

(Inaudible - multiple speakers)

Most of the stuff has been kind of answered, but I do have a question on where do you see software development spend going over the next few quarters? I mean, it ticked up a little bit this year and I'm wondering if part of that has to do with the iPad app and if you see that continuing to go up, as you guys try to leverage more of the database by putting on more sort of frontend products and doing more of the software stuff? And I'm also kind of thinking that because of the acquisition you announced yesterday. If you're going more in that direction, if you'll see that spend start to tick up meaningfully over the next few quarters?

Yes. Hey, Michael, it's Brian. Yes. I think Andy and I talked, I think about a year ago, about one of the most leveraged investments we can do is really in the software development for multiple reasons and Andy just talked about some of them. It's highly leveraged, that investment, and where you're releasing a product like CoStarGo or an app like CoStarGo that leverages over the whole client base. So we did talk about a year ago about increasing that number. I think that number will continue to increase.

In dollars, it's actually pretty small. When you look year-over-year it's up $800,000, which is not a lot, but I would continue to expect softness off our software development line to continue to creep up. We are hiring developers. If anybody has a good resume and you're Apple developer, feel free to send it to me personally. I'll forward it on to our recruiting group. But we are continuing to invest in the development area.

You can't have the referral fee.

I can't have the referral fee? Oh, man. Darn it! But so we are going to continue to invest there. I just don't think the numbers are significant enough, but that is definitely an area of investment and again, it's a very highly leveraged, so.

And as well, closing the LoopNet deal would be extremely helpful there, because one of the things that's very attractive about LoopNet is that they've got a large staff of experienced, confident software developers who know commercial real estate working in the same languages. They're in Southern California where we have a large software development presence and that would give us a huge shot in the arm in our ability to accelerate our software development efforts. So that's another big factor outside just organic hiring.

Okay and then another and just to follow-up on the gross margin question from earlier. Brian, you went through some of the kind of onetime items that might be in there that helped on the expense side. I'm wondering as far as just the gross margin line, is it that you think all of the -- I mean, it was a pretty significant increase quarter-over-quarter and year-over-year. Is all of that attributable to onetime items? Or are there some underlying factors there that could cause some gross margin expansion going forward, even if it's not going to be as kind of eye popping as it was this one particular quarter?

Yes. No, I mean, I think if you look at the cost of revenues line, it's been running about $22.5 million for a few quarters now, I mean, plus or minus a couple hundred thousand dollars. It was down to 22 -- or I'm sorry, $21.2 million where it just was a lower quarter in expenses, which we'll always take. Again, we had some favorable variances in health benefits and some other areas.

So, I mean, we continue to expect that number to be in the $22 million, $22.5 million range moving forward. So we continue to invest in research. That is, CoStar is number one in research, so we'll continue to do that. So, again, I mean, I think it will -- that number will be relatively fixed. Obviously we'll have cost of living escalations next year built into there. There will be a little bit -- you know we just closed the Virtual Premise acquisition. I was down in Atlanta last week.

There will be little increases in cost of revenue, softer marketing, softer around the G&A and all from the acquisition when we pull them in. We haven't finished all the purchase accounting, so I'll let you guys know what those numbers are. But we definitely continue to maintain that cost of revenues line, which is research and again, it's relatively fixed, so when you're adding a couple million dollars of revenue a quarter you will see sort of the drop through and flow through to the gross margin percentage line, but it's always great to come into a quarter and say we had favorable cost variances.

Yes. Okay, great. I appreciate that, Brian. Thanks.

Thanks.

Suzi Stein, Morgan Stanley

Hi. I'm just curious. What are your plans as far as hiring sales people over the rest of the year, or actually really over the next 12 months and has the CoStarGo changed these plans? And also, does the timing on the Loop acquisition impact this?

This is Brian. Hey, Suzi. I think we've been plus or minus, if I look at the numbers, between 190 and 200, probably much all year long and I think we said in the beginning of the year we were grow that line a little bit. It's like software development and you definitely -- we're going to probably be adding 10-15 people a year, sort of in that area, just as the business grows. Obviously we just added 7 people to the acquisition.

So, again, they're not eye popping numbers that are going to make significant variances. The thing that moves the selling and marketing like is, obviously, when you do a big marketing program like CoStarGo. Or, if you have record sales, you're going to have some increased commissions coming through. But I would continue to expect that number to be around 2000 and I think, again, just gradually over time we'll increase it a little bit.

Okay and I just wanted to confirm that the request that you've gotten in terms of more information from the FTC has not given you a better idea of whether or not there's a specific issue with you? It's your belief that it's just simply the volume of data that you're giving them that's holding up the deal?

Yes, I mean, we're not -- we haven't really heard anything from the FTC that indicates for us that there's an issue one way or the other. I mean, again, it's just sort of this process that we have to go through. The same request getting in compliance with that has taken longer than we had hoped and is costing more than we had hoped, as both Andy and Brian remind me every day.

But we really -- we don't really know much at this point other than that the FTC is doing their jobs and are looking at this transaction and we just -- we're cooperating with them and really working as hard as we can to get through the process.

I can report one very good piece of news on this front and that is that we are walking distance to their offices, so we can get there in approximately 10 minutes?

Yes. (Inaudible - multiple speakers).

Which is -- it sure beats being in L.A. for this process.

It's the only favorable piece of the budget is that travel is down related to this.

Alright. Thanks, guys.

Thank you very much.

Thank you very much.

And there are no more questions in queue at this time. I'll turn it back to you for any closing remarks.

Well, thank you very much for joining us for the third quarter call and we look forward to updating you on the year-end numbers in the not-too-distant future.

Ladies and gentlemen, that does conclude your conference for today. A replay will be available from one-thirty p.m. today through November 27th. You may access the replay system at 800-475-6701 or international customers 320-365-3844 with the access code of 219866. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.