CoStar Group Inc (CSGP) 2011 Q4 法說會逐字稿

Thank you for standing by. Welcome to the CoStar Group's fourth quarter 2011 conference call.(Operator Instructions). I would like to turn the conference over to Richard Simonelli. Please go ahead.

Ladies and gentlemen, welcome to CoStar Group's fourth quarter and year end 2011 conference call. On the call today are CoStar Group's Founder and CEO, Andrew Florance, CFO Brian Radecki, and myself. We are delighted that you all could join us today. Before I turn the call over to Andy, I have some very important facts for you. Certain portions of this discussion contain Forward-looking statements which involve many risks and uncertainties that could 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 February 22, 2012 press release on the fourth quarter and year end 2011 results, and in CoStar's filings with the SEC, including our form 10-K for the year ended December, 2010, and Form 10-Q for the period ended September 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 assume no obligation to update these statements. As a reminder, today's conference call is being broadcasted live and in color over the Internet at costar.com. A replay will be available approximately one hour after the call and will be available until March 23, 2012. 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 235325. A replay will be available on our website soon after the call concludes. So without further adieu, I turn the call over to Andy Florance.

Thank you, Rich. Thank you all for joining us on this call to discuss CoStar Group's year end and 2011 results. Again, I am happy to announce that we had another strong quarter and outstanding year overall in 2011. Here are some of the highlights of 2011. We achieved our best year ever, our best quarter ever, and our best monthly sales results ever. We had record revenue exceeding a quarter of a billion dollars for the first time and a 13.7% year-over-year growth rate. We launched CoStarGo a revolutionary new product that puts our industry leading information on to a mobile platform into the field where our clients need it most. CoStarGo generated nearly $5 million in annualized sales after being available for only two quarters in 2011. It has been a key driver of sales to new and existing clients, and we expect that trend to continue in 2012.

We announced the agreement to acquire LoopNet, which we believe will be a very positive potential combination of two industry leading complimentary and innovative companies that could better serve the industry and provide excellent cross-selling opportunities in efficiencies and cost savings. We raised $250 million in equity to help finance the potential purchase of LoopNet, and we recently signed an agreement for a $225 million credit facility that would be used to help fund that transaction. We completed the sale lease back of our Washington DC headquarters at $60 million above our original purchase price from a year after buying the building. The purchase was recognized as the office deal of the year for 2010 and maybe the sale lease back will get similar recognition in 2011. I believe we received a huge branding benefit within our industry since we used CoStar database and the PPR Analytics to capture that opportunity.

We achieved a key milestone in the integration of profit PPR Analytics and forecasting division, replacing the very limited data previously used for analytics in forecasting with CoStar's more comprehensive and much more granular data. We believe this will provide PPR clients with a much more timely and precise understanding of the market, which we expect will give PPR a tremendous competitive advantage in the analytics space. We completed the acquisition of Virtual Premise, a leading provider of fast-paced leased-management tools. By matching CoStar's strong information and product design capabilities with Virtual Premise's lease management products, we believe we can bring significant value to our combined client base and create another strong platform for growth. Our balance sheet is very strong.

We ended 2011 with $573 million in cash and investments. We expect to use some cash on hand along with the addition of a manageable amount of debt upon the possible closing of the LoopNet transaction. I am particularly proud of this year's 98% renewal rate with clients that have been with us for five plus years. We now have approximately 93,396 paying subscribers, the most we have ever had. This demonstrates that we are row providing very high quality products and outstanding value to our clients. Overall, I am very pleased with what we have accomplished in 2011, and I am excited about where we are going as we continue to deliver leading-edge innovation in the commercial real estate information space. Let me walk you through some of the details of the quarter and where we are heading in 2012. Annualized net new sales for the fourth quarter 2011 were $8.7 million, an increase of 86% year-over-year.

There is no need to adjust the sound on your TV sets. You heard that correctly, 86% year-over-year. We have increased our sales in each of the last nine consecutive quarters. We are laid to across the quarter billion dollar mark in revenues this year, and we believe it is an important milestone on the was to achieve our stated goals of generating $1 billion in revenues.. We still believe we are only scratching the surface. We believe our current penetration is less than 20% of the potential markets of users of commercial real estate information products. There is still a lot of runway out ahead of us. We are charging ahead with CoStarGo, and other new software initiatives in 2012, which we believe will have equally high potential.

As a mentioned, CoStarGo has been a key driver of our recent record sales. CoStarGo integrates information from CoStar's Comprehensive Property, Tenant, and comparable sales databases into a powerful but simple app. on the iPad. CoStarGo was released in the middle of the third quarter of 2011 following a 34-city tour to introduce our new app to approximately 3,000 of the most active and influential commercial real estate brokers in the US. in the fourth quarter, we implemented an aggressive marketing campaign consisting of direct mail, e-mail marketing, print and online advertising and social media, and our sales people conducted over 4,500 demos and training in CoStar go. The results, total annualized sales net new sales associated to CoStarGo as of the fourth quarter 2011 was $4.9 million, up from an annuallized rate of $2.2 million in the third quarter, up basically zero in the second quarter because we had not launched it yet.

Essentially, we have all ready recognized a return on the earnings we reinvested to launch this game changing product. CoStarGo has been the catalyst for long time customers who previously bought one or two products to upgraded to the full suite of CoStar products. These are companies like Cassidy Turley BT Commercial in San Francisco and we are thrilled to have on board, Collier's International and C & W Commerce in Seattle and Studley. We also added new customers like Collier's International in Columbus, Ohio, Desco Group in St. Louis, and Flagstar Bank in Detroit. We believe we have developed a tool that is creating a sea change in how commercials and professionals in the field operate and access data.

Already, 8,000 clients have downloaded the app and logged in. There is more everyday coming in. When we launched CoStarGo, our customers told us it was amazingly fast and worked very well, but we were not satisfied with very well. We wanted to create an application that was exceptional. So we stayed close to the users, listened to their suggestions, and stepped up the development, and put our senior development team intensely focused, along with our product designers to create an even better user experience. The result was 1,600 software enhancements to the product between the launch in August 15, 2011 and now. And that is just the beginning. But at 1600 enhancements is an amazing number. We plan to continue to make additional updates on a regular basis with new features and enhancements that will make CoStarGo an even more effective tool for the CRE professional. I believe that we will benefit from the medioric of the iPad in the mainstream and its increasing acceptance as a business tool. It is hard to believe that the iPad is just two years old.

It was only released in January of 2010. Gardner Group estimated that annual iPad sales will grow from 47 million units in 2011 to 148 million in 2015. Doubtless, many of these unit also be going to commercial real estate professionals. We believe as more brokers get iPads, more brokers will use CoStar go. In fact, we notice this as a mini trend during the Christmas season. As our clients received iPads for the holidays, our log ins to CoStarGo jumped 15% in the week following Christmas. The iPad 3 is due out this Spring, and we believe it will have 4G LT Speed, higher screen resolution, and a higher resolution camera overall. We believe as the volume of iPads shipped climbs, this will drive usage and the expected iPad improvements will further increase the utility of the product we have designed for this device. Since the launch of CoStarGo, we have seen a 20% increase in the usage of our web-based products. More than 1,300 clients who have never used our web products themselves began using our iPad product when it became available and 57% of those new users also started using the web-based product as well.

Many of these new users are top producers and senior brokers who may have thought it was uncool to do research on a desktop or laptop computer, but they appear to find the mobile product very attractive, assessable, and cool. We believe this will continue to positively contribute to higher customer retention. CoStarGo is not a one-off product for CoStar. It defines a powerful new method we are using in our product development going forward. In the past, our software design function resides within our software development group. While that may have worked, it tended to focus product design on the engineering of the product rather than the customer experience, the value proposition, the visual appeal of the product. Last year we created an independent design team that is compromised of extraordinarily talented graphic artists, staffed with thousands of hours within experience with our customers, former CoStar sales executives, former CoStar researchers, commercial real estate tech entrepreneurs, even former clients.

This group reports directly into me. Since they are not all software engineers, they do not focus on how hard it will be to be to build something rather they simply focus on designing an innovative, highly refined, and perfected awesome product experience. I think our engineer teams like this process better because they recognize that this gives them the opportunity to work on more innovative, exciting, better designed challenging new products. All in all, I believe this new process will reduce our development cost on a per project basis, while delivering more compelling products and more products overall. With that in mind, we are in the process of reimagining our current web product. It is about to undergo a series of major upgrades and design enhancements that will have a incorporate host of new features.

This next generation project is called CoStar Fusion. This will be a new product that brings together CoStar Suite, and Analytics from PPR, Financial Tools, Customer Data, and we expect eventually Virtual Premise and Resolve. We expect this to be a premium product that could become a significant revenue driver for CoStar in 2013. Switching over to the other side of the pond, for those in the United States, we are nearing a completion of a project to integrate our UK sales research and fulfillment processes and data into our more powerful US backend software systems. We believe that we can complete this phase in April. We are working on modifying our iPad product to work in the UK, and we expect to complete and release CoStarGo UK this summer. We believe we will see a solid revenue uplift from the release of CoStarGo in the UK. By the end of 2012, we expect to release the rest of the US product suite in the UK market, again with the expectation of generating revenue uplift. We believe that these initiatives will take the UK to profitability by year end 2013 and continue to grow the margin there on out.

This will be a significant upgrade for the UK commercial real estate market, and will give the professional access to comprehensive information that is not previously been available in the UK. Another place we have been innovating is on the research side of the business. We notice that our industry was hampered by a lack of effective building quality ratings, which in turn made it difficult and impractical to effectively analyze market movements and investment opportunities. The only system out there has been Ad hoc ABC Rating System used for office buildings only. There have been no definitions of really what distinguishes an A office building from a B office building, and so certainly no consistency from market to market on these ratings, and just three categories cannot cover the range and quality of buildings we encounter everyday. The ABC systems often relied on the broker trying to sell the building, rating it himself, making the credibility of that rating system completely suspect.

Finally, the system ignored retail, industrial, multifamily land properties, which is the vast majority of the value of commercial real estate in the United States. This backdrop was a perfect opportunity for CoStar Group. In 2011, we introduced the CoStar Five-Star Building Rating System under the direction of Anthony Guma. Anthony holds a Masters of Science in Real Estate and Master of Architecture from MIT. He has practiced and studied architecture in Europe, and he gained a solid understanding of rating systems while he worked in developing products at USB and Building Council. This new rating system provides more detail and consistency in comparing property assets across markets then the old ABC rating system. The CoStar Billing Rating System also covers all property types. We are working hard to make this new system objective and responsive to the industry's needs. Since the launch we have been speaking to and meeting with hundreds of industry professionals.

We are winding up a 20-city tour of major cities all over the US where we have been reaching out to owners, brokers and research directors for feedback to learn how we can refine the ratings and make them more accurate, relevant, and to increase transparency in the process. The launching of the rating system has helped us to improve the accuracy and quality of some of the listings in our database as owners are even more inclined to proactively share information about their properties in order to meet our criteria and ensure the highest possible rating.

Overall, this feedback from clients on this initiative has been very positive. During the third quarter of 2011, we completed the integration of PPR's Best in Class Analytics and Forecasting Tools with CoStar's Comprehensive Commercial Property Database, and in November of 2011, we began to supply PPR clients with analytics and forecast based on CoStar's research verified platform. One of our priorities in 2011 for PPR was to ensure we continue to invest in and continue to grow our accomplish team of thought leaders at PPR.

We believe that PPR's thought leadership was already undisputed, but adding segment specialists was even more of a value-add for our clients and prospects. So we added [Walter Page] to lead the office sector team. Walter was previously VP of Research and Lasalle Investment Management.

We also welcomed [ Rene Sirk] who comes to PPR with 15 years of experience as Market Strategist and Real Estate Economist at Grubb and Ellis and First Industrial Real Estate Realty Trust. Mark Berry joined us in New York. Mark brings more than 20 years of experience as a Portfolio Manager and Analyst. He most recently was Portfolio Manager for Deutsch's Bank Commercial Real Estate Collateralized Debt Obligations. Prior to joining Deutsch Bank, he was a Senior Analyst with Green Street Advisers. We have also hired and accomplished multifamily economist who we expect to join the team soon and will be able to announce shortly. I know many of you on the call are with institutions that are PPR customers and my hope is that your firms will benefit from our new colleagues insights. Turning to some other minor news. Let us touch on the LoopNet acquisition. We are working diligently in an effort to bring the LoopNet acquisition to a conclusion.

We are in ongoing discussions with the FTC staff in an attempt to reach a mutually acceptable consent order, and we feel that the process has been productive, but as of yet, we have not reached a mutually acceptable agreement. We remain hopeful that these discussions might allow this deal to close in the not too terribly distant future. In the event that we reach an agreement with the FTC staff in the near future, we have recently secured the debt portion of financing needed to complete the LoopNet acquisition by entering into a credit agreement. that provides for $175 million term loan facility and a $50 million revolving credit facility. Our CFO, Brian Radecki, will give you more details on this in a few minutes. At the time of the announcement of the acquisition of LoopNet, we were confident that the proposed combination of CoStar and LoopNet was good for our clients, the industry and our shareholders. After nine months, our confidence that our investment piece is sound has grown. We believe even more now that the cross-selling opportunities, greater efficiencies and combined innovation efforts will be great for the commercial real estate industry and our shareholders.

While some may interpret my comments as optimistic, I think it is important to remind our shareholders that even in a scenario where despite our best efforts this deal might or could not close, we believe that this Company, CoStar, as always would absolutely have a great future going forward on a stand-alone basis. We believe that the Company would continue to deliver innovative products, grow revenue and profitability for many years to come. I also believe the reciprocal is true at LoopNet. In the meantime, we continue to make our very best efforts to work cooperatively with the Federal Trade Commission and any other relative partners to reach a equitable and workable basis to move forward on. Finally, I want to present a brief summary of commercial real estate market conditions and how I believe their creating and improving a positive environment for our business moving forward and potentially for some number of years to come.

Coming out of its recession, commercial real estate rents for high quality properties were well below and are still well below, long-term inflation adjusted averages while at the same time employment in many sectors is growing and corporate profits continue at record levels. This is resulting in some of the strongest leasing activities we have seen in years. Leasing activities drives leasing commissions and is the best indicator of our core client basis' financial health. That observation of office space had its seventh consecutive quarter of positive increase led by top-tier US cities. At the same time, commercial real estate construction activity and hence deliveries of new supply is at all times extreme historic lows. Because of this, vacancy rates continue to decline the vast majority of US cities and will likely continue to do so which will ultimately drive rents upward. This recovery is broad with two-thirds of all US submarket vacancy rates continue to move lower. This is the best we have seen this benchmark in the last ten years.

This creates some justified optimism with commercial real estate investor who believe that net operating incomes and properties will continue to improve creating even more attractive yields compared to the very low yields available from alternative investments. Building sales volumes in 2011 were up over 40% versus 2010 volumes. Increased volumes means increased commissions. Sales commissions are the next largest revenue driver for many of our clients, and this potentially bodes well for CoStar. Values for larger investment grade properties stopped falling, began stabilizing, then climbed over the prior year. Now in the past two quarters, values for general commercial real estate or smaller properties around the country, those values stopped falling and are now beginning to climb back up. We believe that LoopNet's business has more exposure to that economic sector, the smaller properties, and so I believe this is a very important positive indicator for their business environment.

I continue to believe that the commercial real estate markets are stable and improving at a pace that helps the outlook for CoStar Group in 2012 and beyond. In summary, we are extremely proud of our financial performance in 2011, and I have never been more excited about the prospects for this business than I am now. I believe that we will continue to bring a series of innovative and viable products to market, drive sales into these massive market opportunities, and grow earnings as we move towards our $1 billion revenue goal. I will now turn the call over to our Chief Financial Officer and treasurer, Brian Radecki.

Thank you, Andy.

You are welcome.

We are very pleased with our performance in the fourth quarter of 2011. Once again, we delivered strong revenue growth and earnings while continuing to invest in our business. Today I am going to focus on sequential results, year-over-year trends, and also on our outlook for the first quarter and full year 2012. The Company reported $66.2 million of fourth quarter 2011 revenue, an increase of $2.4 million or 3.7% compared to revenue of $63.8 million in the third quarter. Revenue for the fourth quarter of 2011 increased $8 million or 13.7% compared to last year.

Full year revenues were $251.7 million, an increase of approximately 11.2% over revenues of $226.3 million for the full year of 2010. Sequential and year-over-year revenue growth was primarily attributable to growth in subscription revenues from our core suite of services, CoStar properties, COMPS and tenants which were supercharged by CoStarGo. We also reported $5.2 million in net income or $0.20 per diluted share during the fourth quarter of 2011 based on 25.4 million shares, compared to 2.3 million or $0.09 per diluted share in the third quarter of 2011 based on 25.3 million shares. This reflects the impact of approximately $3.1million expenses associated with the proposed LoopNet merger, a decrease of $2.7 million compared to the third quarter. Adjusted EBITDA for the fourth quarter of 2011 was $16 million, compared to adjusted EBITDA of $14 million in the third quarter of 2011, an increase of $2 million or 14.3%. Adjusted EBITDA increased $2.6 million or 19.4% over the fourth quarter of 2010.

Non-GAAP net income was $8.4 million or $0.33 per diluted share in the fourth quarter of 2011 compared to non-GAAP net income of $7.2 million or $0.28 per diluted share in the third quarter of 2011. Reconciliation of non-GAAPnet income EBITDA, adjusted EBITDA, and all of our non-GAAP financial measures discussed on this call to the GAAP basis results are shown in detail along with definitions of those terms in our press release issued yesterday.

It is available at our website at www.costar.com. If you have any further questions on those, e-mail Rich Simonelli. The Company had $573 million in cash and investments at December 31, 2011, a decrease of approximately $10 million since last quarter. We used approximately $15 million cash to complete the acquisition of Virtual Premise in the quarter. As previously reported, last week we entered into a credit agreement that provides for $175 million term loan facility and $50 million revolving credit facility, each with a term of 5 years. Draw down of these facilities is subject to the closing of the LoopNet acquisition and the proceeds of the term loan facility are expected to be used along with the net proceeds of CoStar's June 2011 equity offering to pay a portion of the merger consideration and transaction costs. The credit facility includes a group of six banks with JP Morgan Chase Bank as the administrative agent and sole lead arranger, and effectively replaces the fully committed term loan and revolving credit facilities disclosed at the time of the merger announcement. This credit agreement carries a rate of LIBOR plus 200.

This $225 million term A facility will save the Company 3% to 4% in interest costs for approximately $20 million over the duration of the loan versus the term loan B structure as indicated in the initial merger announcement. By the way, my title is actually just Chief Financial Officer. I want to thank [Charlie Colligan], our treasurer, who we hired last year and his team and the finance team and accounting team and legal team that worked tirelessly to get this done. It is a tremendous agreement. The term loan facility amortizes beginning with 5% in year one and gradually increases to 50% in year five. The entire amount of the revolving facility is available through its 5-year term. Our customers continue to renew subscriptions at a very high rate during the fourth quarter of 2011. The end-quarter renewal rate exceeded 93%, which is an improvement from 91% from one year ago.

Additionally, the 12-month trailing renewal rate for subscription-based revenue remained at approximately 93%, which is an improvement from approximately 91% from one year ago. The renewal rate for clients that have been our customers for 5 years or longer held constant at an outstanding 98% for the fourth quarter, an increase of 2% points in the same period in 2010. The renewal rate for firms that have been clients for less than five years is approximately 86%, which is consistent with 2010.

Subscription based revenue accounted for 94% of the Company's total revenue in the fourth quarter. During the fourth quarter of 2011, the average annual new contract value is $9,277, up 4% from the third quarter of 2011, and our sales headcount totaled 209 sales rep, a 5% increase from 199 on staff at the end of the third quarter. Total number of paying subscribers increased to 93,396 in the fourth quarter of 2011, a net increase of 2,386 over the last quarter, which is just great. The total number of subscription clients increased by 286 during the fourth quarter to 18,183.

I will now quickly cover other results from our income statement and fourth quarter 2011 and also provide the outlook for the first quarter in full year. Gross margin was $44.2 million in the fourth quarter of 2011, up approximately $1.5 million compared to $42.7 million in the third quarter. This performance resulted in a 3.3% year-over-year improvement in gross margin percentage from the fourth quarter to 66.7%. We expect gross margins to be slightly lower in the first quarter due to the seasonal expenses, then grow thereafter.

Total operating expenses in the fourth quarter 2011 was $36.4 million, a decrease of $3.3 million compared to $39.7 million in the third quarter of 2011. As we indicated in the last quarter's call, the fourth quarter 2011 sales and marketing expenses were expected to decrease as the third quarter included the launch of CoStarGo, these are partially offset by higher commissions which resulted from our record sales quarter. G&A expenses were $15 million, which included $3.1 million expenses associated with the LoopNet merger, which was down $2.7 million compared to expenses in Q3.AS you are probably aware one of our clients, Grubb and Ellis recently filed for bankruptcy. This is not a material event for CoStar and will not significantly impact our financial results. No one client represents over 5% of our total revenue and Grubbs annual revenue was significantly below that number. We have been in communication with the senior management of Grubb since we were made aware of the financial uncertainty, and the impact of these events is all ready reflected 'in our published 2011 financial results.

We expect to continue to pride services Grubb, and will be paid for those services on a priority basis going forward in bankruptcy unless our contract is terminated as apart of the bankruptcy process. If the contract were to be terminated, the impact would be approximately a 5% point drop in our end-quarter renewal rate in that quarter, and our reported annual renewal rate would drop by about 1.5%. While there are many possible outcomes related to Grubb and Ellis' bankruptcy proceedings that I previously mentioned, we believe our revenue guidance range adequately accounts for all of these scenarios. I will now discuss our outlook for the first quarter and full year 2011, our guidance takes into account the recent trends, growth rates, renewal rates which may all be impacted by the economic conditions in commercial real estate or the overall global economy. Our outlook concludes Virtual Premise, but does not include the impact of LoopNet or costs that are contingent on the closing of the acquisition as we are not able to reasonably forecast whether or when acquisition-related certain costs may take place.

Therefore, we are providing outlook on a standalone basis reflected as our current expectations as of today. Our guidance on the impact of foreign currency fluctuations remain consistent. We do not attempt to predict foreign currency exchange rates fluctuations and our guidance assumes little to no volatility on that rate. The average rate in fourth quarter of 2011 was $1.57 US dollars to One British Pound, our 2012 assumes a similar rate for the remainder of the year. We expect revenues for the first quarter of 2012 in the range of $66.7 million to $67.7 million, and for the full year 2012 we expect revenue of approximately $281 million to $285 million. The continued strength of our core information sales over the past several quarters gives us a lot of confidence in our annual revenue outlook.

In terms of earnings, we expect the first quarter 2012 fully diluted non-GAAP net income per share of approximately $0.27 to $0.31 based on $25.4 million shares. For our business, as I mentioned earlier, first quarter expenses traditionally include seasonally higher costs related to our annual sales conference, and just increased personnel, payroll taxes and benefit costs in the first quarter. We currently assume a 38% tax ratein order to approximate a long-term effective corporate tax rate. For the full year 2012, we expect non-GAAP net income per diluted share of approximately $1.27 to $1.39. As Andy discussed earlier, we expect to continue to make incremental investments to improve our exiting services as we launch new product offerings. We expect to invest an additional $3.5 million to $4.5 million in 2012 to develop the CoStar suite of products for the UK market, including CoStarGo, iPad app which is expected to accelerate revenue growth in the UK.

We plan to increase our investment in new products in the US by approximately $3 million to $4 million and expect to support these new product initiatives with some marketing programs later in the year. We are extremely excited about this robust pipeline of new products, and we believe these investment will provide a basis for continued strong revenue growth and even stronger earnings growth next year and beyond. In summary, I am very pleased with our reported revenue results and strong earnings growth. The business model remains strong based on the fact that we have a 94% subscription-based business, coupled with a 93% rate for renewal rate for our services

The unique proprietary database market leading positions, strong balance sheet, and very high operating cash flow. As Andy mentioned, we crossed a quarter-billion in revenue this year, which is a great milestone with momentum and we are operating at a very large multi-billion dollar space. I believe with the sales trends we are seeing in the investments we are making in our industry-leading products, CoStar's position to continue to progress toward our previously stated goals of billion dollars of revenue at 40% plus adjusted EBITDA margins. I look forward to that progress in reporting to you each quarter, and now will open up the call for any questions.

Thank you. (Operator Instructions). And our first question comes from the line of Bill Warmington from Raymond James. Please go ahead. Bill Warmington, your line is open.

Thank you. Good morning, everyone, and congratulations on a strong quarter.

Thank you.

A question for you on the 2012 guidance. Just wanted to ask what kind of EBITDA guidance you are implying in that? I just want to make sure I'm doing the calculation correctly.

Sure, Bill. I think we are giving the non-GAAP EPS numbers but in the back of the press release, I will not spend on the call going through every line, we detail out the reconciliations of the guidance. So you will see exactly what we are sort of forecasting for the year for DLC's everything like that. We put a detailed reconciliation in there.

Got it. It sounds like it is going to be weighed, the expense, the 6.5 to 8.5 would be weighted out throughout the year. Sounds like the $3 million to $4 million would be more towards the second half for the US?

Yes, we are starting hiring right now for all of those positions. So anybody, developers anywhere in the country, please e-mail us, let us know. We are looking for a lot of great developers here. In the first quarter I think it is just typical seasonality. You have higher payroll taxes and benefits, then we will be ramping up pretty evenly throughout the year after that. Yes, we are definitely looking to see ramp-up development this year, that is the main focus.

Okay. And then ask another housekeeping question. On the contribution from Virtual Premise in the quarter, I know it was probably small, but just wanted to check that.

Yes, it was pretty small. That was pretty small, then as far as this year goes we have just incorporated their numbers into our ours. They were on about a $7 million run rate, that is prorated, we also lost about $2 million to $3 million in purchase accounting of the deferred revenue. So the number ends up to be fairly small. I think with the Grubb and putting the range in there they sort of offset each other. All of that is pretty much incorporated in the guidance. I think the 11.5% to 13% range is a very comfortable range for us. Obviously, we feel great about it.

For the fourth quarter contribution you are looking at less than 50 basis points to the growth?

Yes.

Okay. And then I wanted to ask about the expansion into the UK. Whether you guys have the data in place there to support a CoStarGo-type product?

I would say two things. One is, I believe we do. It is not in the exact same format as the US data structure, but it was probably four years ago that we shut down the 15-person research operation in London and opened a hundred plus operation person operation in Glasgow to get to the same level an nature and quality in the United Kingdom that we have in the United States. So there is no material anticipated ramp up in the United Kingdom around research. The UK Research team will be working very hard this year as they are tweaking the data to move it from the UK Research System. UKR, into the US Enterprise System, but that has been to-date surprisingly well managed and looks like it is going smoothly. When we actually released the product, when we see it the first time in the UK I am sure we will see things that will be some gaps in the teeth that do not look quite right, but we will fix those quickly. Then ultimately this is not really an expansion of costs. It is something that should reduce our costs in the UK. We were pretty optimistic about it, and we are glad we are on the track that we are on.

Got it. Then last question. If you could comment on the strength that you are seeing in multifamily and whether that creates an opportunity for you guys?

I think we are seeing strength across most all the sectors. I think multifamily is getting a little more media attention, a little more hype than the other sectors. Actually, I am pretty jazzed about all of the sectors. We have been collecting more and more data on multifamily. We are definitely climbing a curve there, and we do provide multifamily advisory services and economic forecasting through PPR which is being well received.

Well, thank you very much.

Next question goes to the line of [Brian] Huff from Stephens, please go ahead.

Good morning, Andy, Brian and Rich.

Good morning.

Congrats on a nice quarter.

Thank you very much.

Couple of questions. Want to make sure what is in and out of the guidance. I guess, Brian, this is for you. The additional marketing spend you talked about, is that in the 3.5 to 4.5 and/or the $3 million to $4 million that you called out in the release, or is that in addition to? Second question related to that is, whether in or out of that number, is it contemplated, is the additional marking spend contemplated in the guidance?

Sure, the numbers that I talked about, the 3 and a half to 4 and a half and 3 to 4, those are pure development numbers. So that is really the investment in the development group with further being a big piece in the UK and US. The UK piece that number that I outlined there is not just development, there are some other costs in there, but I would say the majority of it is develop. The US piece is almost all development. The guidance does include some marketing spent this year. So we have got some numbers in there. Clearly we will keep evaluating things. A lot of it depends on when the timing of the marketing spends is all gonna depend on when the products are released and when they come out. Some of it is a little bit hard to predict, but I think overall we are trying to account for all of that. It just depends on the timing.

Ok, and then you mentioned again the long-term 40% plus proforma EBITDA margin, and I think that was a combined Company goal. Is that still right?

That is correct, but I think it is obviously a CoStar Group goal, too, but it would be if the proposed merger closes a combined Company goal.

Any thought on the -- one of the things that I think we and investors try and fuss out is how much you need to invest in order to continue your nice top line revenue growth. Can you give us more color on how the spend you have recently announced just yesterday, is that going to be ongoing? Does it stop? How does it figure into that 40 plus goal?

Well, we look at this investment as more opportunistic. As we look at some of the prior concepts that we have developed and things that we want to do and bring to market, we think we have a number of very compelling, potentially very high margined products we can bring to market, and we do not have to bring those things to market. We can continue to grow without bringing those things to market, but we think they are very compelling, and that we should bring them to market. So we are basically reinvesting into high margin initiatives. They are optional only in that we would feel stupid in not building on if we can.

Then last question for me, the gross margins, Brian, you mentioned a little, obviously they were very good, much better than we thought. Can you tell us what is driving that? Is this just the business or is there something going on there? You mentioned they would come down a little bit in 1Q, but then continued to grow. What kind of expansion can we expect assuming standalone basis?

Clearly, when you are growing revenue, we have always talked about when you have a relatively fixed cost structure in sort of the research area, each year we do invest a little bit more there, but essentially you are going to see margins grow. The first quarter is always just a function of the fact that you have got a lot of seasonality and payroll benefits and that, and the thousand researchers in there obviously a big chunk of all of that seasonality ends up showing up in that line. In general, the first quarter is always gonna be a little lower seasonality-wise, and then the expectation is when you are growing revenue you are going to be growing the margin line. So I would expect it to be lower in the first quarter. I think Q4 was exceptionally strong. We had a couple of expenses that did not happen there that might flow over to Q1. I general I think you will continue to see gross margin expansion after the seasonality in the first quarter based on strong revenue growth.

Okay, that's what I needed. Thanks again for your time.

Thanks.

Thank you. (Operator Instructions). Next we will go to the line of Michael Huang from Needham & Company. Please go ahead.

Thanks. Very much. Just a few questions for you guys. First of all, I believe you mentioned that you did $4.9 million of CoStar go related bookings in the quarter. How much of that was from new customers and how much was from upsell? Then wanted to clarify your comments around the holiday season, the iPad shipments. Was the strength of this at all due to that, and as a consequence, how should we assume the level of this type of booking in Q1?

I am going to take an educated guess and if Brian wants to provide different color, that is great. My feeling that has been, that CoStarGo associated sales have been a relatively even combination of completely new customer acquisitions and existing customer upsales. Maybe a little skewed slightly to existing customer upsales, but it is probably in the 60/40 range there. I do not know that we have specifically an immediate revenue enhancement from the holiday season iPad shipping.

What we saw was more of a usage jump, but it was material and clear. It was watching the line, it just stair stepped up to a new level following the holiday season. I think ultimately it will definitely result in more revenue, and if there is a very popular iPad launch in March, I would expect another stair step in two things. One, slight limitation of the current product is the 3G speed LTE speed would definitely make it a better client experience, looking at photos and aerials and maps on a high resolution screen would be an even better customer experience. An increase of volume of units is if the new iPad three comes out along with the better customer experience, I think ultimately will drive sales, but also it is a little frustrating to me. Like we have a number of customers who are bringing home a half million in commissions a year who are slow to open up their wallet and drop their $700 on probably the most important business tool they could get, but with the iPad three coming out we imagine they will probably reduce prices on iPad 2 significantly which will dramatically increase volumes.

We think all of that this spring is good, good, and better to keep the sales going for the CoStarGo.This is not a product that taps out in two quarters. I think this product will be driving revenues for eight quarters, ten quarters solidly because we are only at -- we are not even at 10% yet of our customer base on this.

And just to make an add-on to that and make one clarification. It was $5 million in annualized sales for the two quarters that it was out. So it was not $5 million in the fourth quarter. My comment on sort of bookings and where can those go, I think I said this last quarter and the quarter before, and I will say it again now. It is hard to predict breaking records every single quarter. The fourth quarter also tends to be seasonally one of our strongest quarters. So I think you get a combination of obviously growing momentum, iPad, and then seasonality. My expectation in the first quarter probably will not be as high as the fourth quarter, but I believe growing all year long and then of course overall great growth rate for the year, we are projecting up to 13% even factoring in for something like the Grubb, so it could be even higher on that. I would not expect Q1 bookings to be the same, but again overall I think we are in for a great sales year.

Great. I know it is early around CoStarGo. How have you seen this impact, cost of acquisition for these new subscribers and length of sale cycle? Have you seen any notable changes that you could share with us?

Yes, I do believe it is a shorter sales cycle. You are bringing a piece of technology that frankly is sexy, and if all sales are emotional, this is definitely a faster sale cycle. Some of the bigger ones may not be that much faster, but the smaller ones definitely.

Okay. Last question. Given CoStar's Fusion in the launch in the UK, what would you expect that to do to growth rates in 2013? I know you have no formal guidance around that, but could we see acceleration from 2012 levels assume no material change in the end commercial real estate market? What is your first blush thought on what this could do?

Well, let us take the two separately. I think with the UK, I think that even if the UK were to triple its growth rate or quadruple its growth rate, I do not think it would materially move the dial for CoStar Group overall because it is a relatively small percentage of our revenue. It is more of a proof of concept that we are looking for there is to be able to show that we can do a 30% margin, grow revenue in an overseas market. The much more meaningful revenue would be from a major enhancement to our US product suite in the United States. That is the juggernaut where no matter how fast these other initiatives grow, the core initiative grows at any pace is outgrowing the others. This goes right to that core market.

While it is extremely early, we are sitting here in the first part of 2012 and this is be a product that would about the first quarter of 2013, I am extremely enthusiastic about the way this product looks, and if it is well-executed, I think it will have a material and significant impact on our per sales person productivity throughout 2013. It will certainly reenergize any kind of momentum we have from CoStar go.

To follow-up on that. The UK people can look at the separate financials, and they are presented in US dollars, but if you convert them back, they have been actually relatively, generally relatively flat or low growth the last few years compared to CoStar which has been growing, and one of the things we have identified there is it is because of the software. We believe we have great data. I think the investment in the UK, will generate higher revenue growth in the UK as you rollout CoStarGo this summer and into the fall, and then the full suite of products by the end of the year, early next year. As Andy mentioned, the UK is 8%, 9% of our business.

If we were to close proposed merger with LoopNet, it would drop to 4%. It is not a huge piece of our business, but clearly we are focused on getting their revenue growth rate up to ours in is the US or higher and also getting them up to profitability and the way do that is to invest in the software which we have not done yet. That is the UK piece. The US piece, I think it is a little too early to predict growth rates, but clearly the way we invested in CoStar go this past year we are now investing in some new products in the US to obviously release and hopefully then keep the momentum going on growing revenue into next year. So obviously where we sit today we feel pretty good. As the year goes on, we will obviously have a better feel for that as we know when the products come out and we see what the reactions of those are.

Great, thanks very much.

Thanks, Mike

Next we will go to the line of Brandon Dobell from William Blair. Please go ahead.

Thank. Good morning, guys.

Good morning.

Couple of quick ones. Comparing sale cycles in new markets verses that is kind of mature markets these days. Are you seeing any impact either from CoStarGo or just with the improving environment of commercial real estate? Are you seeing any shortening of the sales cycles or is it still about what you have seen in the past couple of years?

We are seeing something I think very materially different in the newer markets. The newer markets I would say is, I would call newer markets that last round of 200 we entered after the 80 big ones. So if I am looking at the established ones being New York, Washington, Baltimore, Philadelphia, Phoenix, so on and so forth, those are doing well moving along. When I was preparing for this year's sales conference and reviewing the sales number in some details, I saw one thing that really shocked me, and that was our performance in tertiary markets. I was looking at numbers like our Buffalo, New York, our Lubbock, Texas, our Boise, Idaho numbers, and while they do not move the about in the whole Company that quickly, I was sort of shocked at how well those markets are doing.

The markets like a Buffalo, we could be -- we were doing very little revenue, now we are doing $100,000 to $200,000 in revenue. What is driving that is a successful centralized selling model, so people selling into these markets with a cleaner, simple product offering from our centralized call center in Washington, and then also having a career path where people revolve out of our centralized calling center selling center into a sort of periodic visit to these secondary markets. It is a pretty good trend. I think if that holds up and that keeps going, we are going to feel very good about our decision to go into those tertiary markets. They look really, really high inertia right now.

During the third quarter something came up between you guys and CBRE about the power broker rankings, maybe a little color on what those rankings actually are, and if there is an issue this between now guys or if that has gone away as the quarter regressed.

I don't recall what you are talking about. No. No, we, CB and CoStar Group have a very important, mutually symbiotic relationship through the years, and we provide a lot of value to them, and they are a very, very important customer to us. They have had a -- they have a policy of -- that changes from time to time where they do not want comparable sale data getting out to the market because they believe it -- or comparable leasing against the market because they believe it gives their competitors some advantage and neutralizes their scale.

Right.

it is inconsistent, and, you know, that -- I think a short paragraph piece or two came out in Washington Business something about it. And it had sort of blown over. We had a very good productive meeting with my friend who is the Michael Feet who is the President pf CB over in Dallas last week, and I would say things are on a very good footing.

And since nobody has asked the big elephant in the room question, I guess I will be the guy to ask it, about the LoopNet transaction.Maybe I'm reading too much into the words, but should we assume that the transaction process is at this point or has taken this long because the FTC did not like the deal? So they thought there was something there they did not like, either market concentration or what have you? Or I guess asked another way, if the transaction does go forward, should we expect it to look like you guys thought it would back when you announced it midyear 2011.

I have a lot to tell you about that. And I want to open up and tell you everything.

That would be fantastic.

I will let John Coleman answer that for you.

Unfortunately we are going to have to stick to what the disclosure is we have given. Andy said it best. We are working extremely hard to bring this to a close. The conversations have been very productive, and we are hopeful to wrap this up in the near term, but we cannot really get into more specifics than that at this point.

I think what he said was wau, wau, wau, wau.

Yeah, that is pretty much what I heard. Maybe more of a process question. Is there something that we should look for -- let us call it, quote unquote, restart the clock for a final run of discussions, or could the next data point be, hey, we got it completed or we did not get it completed? Is there some interim step that gives us a better timeline for how this may play out, just from a pure process perspective, or is there some part of the FTC process that we need to be aware of that you guys need to tell us about?

As we disclosed there is this 45-day period.

Right.

And we would likely tell you if that 45-day trigger was pulled. If that happened, you would certainly hear about that. But otherwise hopefully the thing you hear is that we have gotten to where we are all trying to get to.

I can tell you that they do not offer coffee in their conference rooms.

I would have thought they would have offered coffee, but bad coffee like one of those bad cop show movies. That would have been more appropriate for me. Then final question, how do we think about research and sales force headcount additions in 2012? I think Brian you talked about a 5% uptick this year for sales force? Are we talking about the same kind of number this year? Or are you guys happy with how the headcount looks right now?

Yes, I think as far as sales and research goes, sales we are always adding a little bit, 5%, 7% each year. So I would expect to see similar range there, nothing significant, but we obviously as the revenue base grows we continue to grow the sales force a little bit. Very similar with research, a very -- minor adds in research. So again, nothing significant there, and this goes to the conversation of gross margin growth. The first quarter is seasonal and after that with revenue growth we would continue to expect to grow gross margins. So some minor investments on both of those, but essentially, we think we have great teams there.

Thanks, guys. Appreciate it.

Thank you.

(Operator Instructions). Now we will go to the line of Toni Kaplan from Morgan Stanley. Please go ahead.

Hi, thanks for taking my question.

Oh, no problem.

I was wondering are you having success in selling to customer (inaudible) or it is sort of geared towards the larger, sort of broker segment, and I know brokers are the largest sort of client type that you have, but just wanted to hear if there was any surprising success with other customer types as well?

It is a good point, because I think we tend to - - we are right things. We tend to always focus on the broker side of it. And definitely the brokers have responded very well to this product. I actually think that we are getting an equal and potentially even greater reaction from both retailers and institutions.

So if you think about retailers, if you are a regional manager for a Starbucks, you are traveling all over the Southwest going to different sites and actually having all of that data in your hand is pretty valuable, and much more earnest than having it in your office. One of the things we hope to do is eventually integrate the Virtual Premise leases that a lot of these retailers- - the software that a lot of these retailers use to house their leases directly in to The Costar go application. So when one of these retail acquisitions folks are in the fieldthey can see their existing leases, plus all of our data wherever they are going on a location-centric interface.

Also, some of the heaviest users of the product are some of our institutional customers. So our very best customers each year come to our PPR conference up in the Cape. Institutional customers, and we show them the iPad Application, CostarGo and we actually gave the attendees an iPad, and I was looking at usage, and the heaviest usage I am seeing are from some of those attendees.

And these are not brokers these are folks who manage a $50 billion/ $100 billion, $50billion portfolio. So they actually find a lot of value -- because they are from Sioux City and being able to look up local market conditions is of interest to them. We have probably done you a disservice on not focusing and talking about all the different segments that are using it. It is being used across the board.

We also have an upgrade coming to it, which is pretty cool, and I know for competitive purposes I shouldn't be blabbing, but Steve Jobs would look down on me -- but we have a cool thing coming where you can -- if you are in a sub market in Austin, Texas and you are looking at investment there, you can actually zoom into the neighborhood, and it is real time calculating statistics on vacancy absorption, price trends and the like in the area you are actually in. Which for the commercial real estate world pretty mind boggling. So that is something we think we can bring out later this year.

Okay. Great. And then once someone has the required suite for getting the iPad application, what is the upselling opportunity from there?

Well, the -- so if someone has purchased the iPad application -- stepped up and are now purchasing all of the items to get the iPad application, the next up-sell opportunity would be depending on the customer, additional geographies, it could be Virtual Premise, it could be Resolve, it could be PPR, there are a whole range of other services. Almost nobody in our client base is buying everything we have got. We should actually look into that, but I doubt there is anybody buying anything, and should that day occur, we will develop something new.

That makes sense. Okay. Thanks very much. Thank you.

Thank you.

Thank you. And currently we have no further questions. Please continue.

Well, at this point I would like to thank everyone for joining us for this year-end fourth quarter conference call, and we look forward to updating you on our progress on all of the issues we are pursuing at next quarter's conference call. Thank you.

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