CoStar Group Inc (CSGP) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CoStar Group's Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions) Also as a reminder, this conference call is being recorded. At this time we will turn the conference call over to your host, Director of Investor Relations, Mr. Richard Simonelli. Please, go ahead, sir.

Thank you, Operator, and good morning, everyone. Welcome to CoStar Group's Second Quarter 2012 conference call. We're delighted that you could join us.

Before I turn the call over to Andy, I have some 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 material from such statements. Important factors that cause actual results to differ include but are not limited to those statements.

In CoStar Group's July 25, 2012 press release on second quarter earnings results and in CoStar's filings with the SEC, including our Form 10K for the period ended December 2011, under the heading Risk Factors. All forward-looking statements are based on information available tot CoStar on the date of this call and CoStar assumes no obligation to update these statements whether as a result of new information, future events, or otherwise. As a reminder, today's conference call is being broadcast live over the internet at www.CoStar.com and a replay will be available approximately an hour after this call concludes and will be available until August 26, 2012. To listen to the replay, call 800-475-6701 within the United States and Canada or 320-365-3844 outside the United States. The access code is 252801. A replay of the call will also be available on our website soon after the call concludes. I'll now turn the call over to Andy Florance. Andy?

Good morning, everybody, and thank you very much for joining us today for this earnings call.

As you might expect, it's been a very busy quarter for us. As you know, we closed the LoopNet transaction on April 30. Today, just a few months into the integration, we know dramatically more about the potential of the two businesses in combination. What we have learned has not changed our investment thesis. In fact, it has strengthened our belief in it and our excitement about the scale of our potential upside here.

I'm very happy the way our two organizations are approaching the integration process. Both LoopNet and CoStar Group have a very talented team of great professionals. Every day I've seen enthusiasm, open communication, hard work, and commitment to strengthening our position as the number one service provider to the commercial real estate industry. Our greatest strength in this combination is the expertise, professionalism, and commitment of our 1,900 person strong team. The core investment thesis behind the CoStar Group-LoopNet merger is that CoStar Group is a great information service and that LoopNet, a great marketing service. In combination, each service could be effectively cross-sold to one another's huge client bases.

The combined Company is the clear number one player in marketing commercial real estate on the internet as well as the number one go to source of information for the commercial real estate industry. With common customer profiles and content, we believe the combined companies will enjoy significant cost synergies. I would like to begin today's call by telling you what we have learned so far. I will tell you how we expect to pursue the opportunity to up sell our LoopNet members who are using LoopNet for information to CoStar's information products while retaining them as LoopNet marketing customers. I will also tell you how we will encourage firms that have listings in CoStar to actively advertise them in the LoopNet marketplace.

As you may know, LoopNet has over 100,000 unique paying members now and over 6 million registered members. In our effort to find the best prospects in this universe to up sell CoStar information products to, we look at several factors. These factors include does the client already subscribe to CoStar? Are they marketing more than one listing on LoopNet? Have they been searching LoopNet repeatedly over both the past month and the prior six months and perhaps before? Are they subscribing to one of LoopNet's information products? Good prospects may include individuals who do not pay LoopNet to subscribe to a product but nonetheless they're searching the LoopNet website for free.

Right now we've identified a group of about 130,000 LoopNet users who we believe are good prospects for CoStar property, tenant, or comps. I believe a 130,000 prospects, there's more than -- I'm sorry. I realize that the 130,000 is more than the 100,000 paying subscribers at LoopNet but we have identified many individuals that are using the free search feature of LoopNet as an information service. Overall this is obviously the largest pool of prospects we've ever had the opportunity to sell to in any acquisition we've ever done in the past. The number is staggering to me and quite motivating.

The number of potential sites, clients, and users could differ slightly from the 130,000. In a handful of cases, we might find three of these leads working together at one Company. So, if they began subscribing to CoStar, they would become one client with three users. In some cases we could find a few LoopNet leads from one Company or site where there actually might be dozens of potential CoStar users there.

Now that we have merged with LoopNet we have accessed the data in their systems. This is important because we know the names and contact information of these prospects as well as their search histories. This means we can approach them with a very targeted sales presentation that's relevant to them and educate them on the benefits they can receive from CoStar information products and show them clearly how the same search done in CoStar provides more information and more depth of data. We can show these prospects the difference between complete and detailed information from CoStar versus a little less from LoopNet when you're using it as an information product.

In order to learn more about these prospects, we selected and tested one representative market, Chicago. It's a diverse market and it allowed us to get a good sample of industry professionals who know LoopNet. Our goal is to understand the scope of the opportunity, the profile of these prospects as well as their priorities, beliefs, needs, and attitudes. Ultimately we wanted to understand the best way to market and sell CoStar information services to them.

We retained a third-party market research firm to survey hundreds of Chicago-based LoopNet users and what we learned was quite interesting. These prospects were foremost in retail real estate followed by apartments, office, industrial, and then land. They come from both large and small shops, but most typically they work in three to ten person shops. The majority of them are full-time commercial real estate brokers, followed by investors, and appraisers. What we learned is that these prospects are not dissimilar from the profile of clients we currently have.

86% of these LoopNet users said the information they accessed from commercial real estate websites like LoopNet is critical to their success. 97% of LoopNet users said that it's important that the website they use has the most accurate data on properties in their market. Not one respondent said that the accuracy of data was unimportant. The overwhelming majority said that was important that the site they use have a complete list of properties for lease or sale in their market. The bottom line is clear, I believe, access to quality and complete commercial real estate information is critical to their success and they know its importance.

According to the survey results, half the respondents stated that paying the lowest price possible for access to commercial real estate websites was not an important factor. They valued the quality of information over the price they paid for it. One of the respondents summed up the opportunity perfectly by saying -- As a commercial real estate consultant it's necessary to have the most information available. Our top priority is to provide quality consultation to our clients. The fees are an afterthought. End quote.

So, they're looking for the highest quality information and price is not the most important factor. So, my clear takeaway is that half the LoopNet users are using LoopNet as an information source because they believe that they're getting the highest quality source available or at least roughly as good as other sources out there, but at a slightly lower price. I believe that in many cases they believe CoStar might be the best source for certain areas within the commercial real estate market but in the area they work in they believe that LoopNet has higher quality information.

Only 20% of LoopNet users surveyed believe that LoopNet has less listing for Chicago than CoStar does. For those where retail real estate is their primary practice area, only 11% believe that LoopNet doesn't have as much information as CoStar or more. Not one of the principally land-focused LoopNet users thought LoopNet had less listing than CoStar. In other words, the majority of LoopNet users surveyed believe that LoopNet is a more comprehensive or at least as comprehensive information source as CoStar. For most LoopNet users, we believe the misperception that LoopNet has more information than CoStar is an important decision for them to start subscribing to use LoopNet as an information source rather than CoStar.

Are these LoopNet users correct? Does LoopNet have a more comprehensive database of listing for Chicago than CoStar does? Before LoopNet and CoStar merged, that was very difficult for anyone to answer with any real certainty. Now, three months post-merger, our respective teams have jumped right in and connected and cross-referenced the databases and we can clearly demonstrate the differences in the databases.

CoStar has the most listings by far. As of today, our research team has successfully completed a massive effort to comb through the LoopNet database and find any commercial real estate listings that were in LoopNet database but not in CoStar database. The connections made as a result of cross referencing the databases have allowed our researchers to strengthen the relative information advantage CoStar has. They examined more than 225,000 LoopNet listings that our systems teams could not automatically match to our database and in the process they found and added 50,000 new listings to the CoStar database. In addition to adding just listings, they also found thousands of new people with listings to initiate regular contact with.

So, let me clarify the facts on how the databases compare. Remember that LoopNet's primarily a marketing system and predominantly relies on user input for all their listing content. CoStar, in sharp contrast, has a staff of just about 1,000 engaged in proactively collecting commercial real estate information. So, not surprisingly, but contrary to what most LoopNet users believe, our CoStar database has roughly twice as many commercial real estate listings in the US as their LoopNet database does. Beyond that, CoStar has dramatically more depth of data on these properties and listings. In every one of the 200 largest US cities, CoStar's database has significantly more properties than LoopNet's database does.

Remember that only 20% of the surveyed Chicago LoopNet users thought that CoStar had more listings than LoopNet in Chicago. The majority of users surveyed think that LoopNet has more listings in Chicago or the same as CoStar does and it's now clear that majority is absolutely, completely wrong. CoStar has 34,730 listings in the Chicago CVSA. And LoopNet has 17,848. That means that someone using LoopNet has an information source that's missing nearly 17,000 listings or roughly half of all listings. Obviously that's unacceptable for someone making a living showing clients all the possible listings for their requirements.

Many LoopNet users surveyed or interviewed in great depth in various focus groups we conducted really believe that LoopNet had many more retail listings, for sale listings, small building listings, and land listings. That may or may not have been true in the past but certainly not now. CoStar has 218% more for sale listings, 206% more retail listings, almost 300% more listings in buildings smaller than 15,000 square feet and 273% more land listings than our LoopNet database for Chicago offers.

Most importantly, every valid listings in LoopNet will be in CoStar. For years we've heard from many clients and prospects and focus groups in meetings that they would really love to have a one-stop shop for complete listing data that combines the listings in LoopNet and CoStar to one place. Now we can credibly offer them exactly what they want and need.

Most importantly, at the end of our survey, we also told the Chicago LoopNet users that CoStar has twice as many listings than the LoopNet service does and we asked them, knowing this information, how likely would they now be to subscribe to CoStar for their commercial real estate needs. 56% stated that they would now be very likely or likely to subscribe to CoStar. 29% stated they were unsure and they would need some selling to subscribe to CoStar's information service. Only 15% stated they would be unlikely to subscribe.

We believe that our survey suggests that of 130,000 LoopNet prospects in theory, somewhere in the neighborhood of about 70,000 would be likely to subscribe to CoStar for their information needs if they really came to believe that CoStar contained twice as much information on their market than the LoopNet service they've been using for information.

We're focusing our immediate efforts across the US on them. Time and again in focus groups we've learned it is hard to change long-held beliefs about the relative quality of these databases, especially accepting a different view might imply that the broker had provided incomplete information to their clients over an extended period of time. Now that the two companies have merged, we believe that it will be dramatically easier to change their minds and get them to accept and internalize the belief that CoStar provides a dramatically more complete picture of the market.

Last month, we took what we learned from linking our listing and client databases, our surveys and focus groups, and we set 24 demos in Chicago over a two day period with LoopNet users who used LoopNet as an information service and did not subscribe to CoStar. Our goal was to see how effectively we could sell CoStar information services to these LoopNet prospects.

In the demo we confirmed for them that LoopNet is the most heavily trafficked website for commercial real estate and that it was a critical resource for them in marketing their properties to a large internet audience of tenants and investors. LoopNet users viewed millions of detailed profile views in Chicago over the prior year and that could generate leads for their listings. We then explained to them that all the listings on LoopNet's service would be in CoStar and that there were nearly 17,000 additional listings in CoStar added by our research department that they could not find in LoopNet.

We went through comprehensive comparisons between the two databases looking at retail, office, land, for sale, for lease, so on and so forth. I did four of those demos. And then on two of my demos, we were able to get a contract right there and then. And the other demo we did was to a large brokerage firm that had 30-some brokers and while it did not close on the spot, which I would not expect to happen with a large brokerage firm, I believe it will close within a month or so.

One of the sales I was involved with was to a two person brokerage shop that had been paying LoopNet $159 per month on a month to month basis. They entered into an annual contract for CoStar information and LoopNet marketing with us for $730 a month, a 359% monthly increase. They increased their contract commitment from $159 to $8,760. The second two man shop I was involved with signing up that day increased their monthly payment by 900%. The large 30 broker firm I mentioned is paying LoopNet $187 a month on a month to month basis and our proposal would be in the $8,000 to $10,000 a month range on an annual contract.

Of the 24 demos we conducted on these two days, 13 have already signed annual contracts and in the majority of cases, it was for both LoopNet for marketing and CoStar for information. So, we were gaining CoStar revenue and not losing LoopNet revenue. So, in total, 54% of our demos resulted in a signed contract within two weeks of the original demo. That far exceeds any close ratio or time to close we normally experience. We believe that eventually approximately 80% of those 24 demos could close.

What's interesting to me is when I compare that to that survey question of if you were to learn that CoStar had twice as many listings, would you be likely to subscribe to CoStar, need some time to think about it, or not, our results here actually match that survey which is quite promising when you consider what that implies across the whole country.

In total, we've converted 15 LoopNet users in Chicago this month, taking them from an approximate aggregate LoopNet fee of $1,425 a month on a month to month basis to $8,873 a month with combined LoopNet and CoStar purchases on an annual commitment. We increased our monthly yield on these accounts by 500% and we increased our contract value by 700%. Interesting to note and important, six of the 15 converted LoopNet users were not paying LoopNet anything at all prior to conversion. They were free basic users searching heavily but not paying for premium service. Within a week of our successful Chicago experiment demos, we brought 200 LoopNet and CoStar sales people together in Dallas for a sales conference and training session so that we can begin to scale our Chicago trial to a nationwide cross-selling effort within the next month or so.

In addition to selling LoopNet users CoStar information products, we will also be approaching firms to encourage them to advertise their properties on LoopNet.com. As we mentioned, LoopNet is the most heavily trafficked website in commercial real estate. Yet surprisingly only about 17% of the listers in the United States for commercial real estate pay for listings on LoopNet.com, leaving 83% as a potential target market. There are about 500,000 listings that CoStar was aware of that were not on LoopNet but opened up a whole new prospect universe for LoopNet to sell advertising to.

LoopNet builds a great brand and a successful product by selling advertising contracts on a monthly basis one broker at a time. The fact is that it results in much higher churn rates. We can believe that we can grow LoopNet even larger by selling premium listers at the firm level on annual contracts rather than just on an individual basis subscription. So, we think that those annual contracts will decrease customer turnover. We are very bullish on the revenue potential across LoopNet and CoStar products and so intend to increase our investment in marketing in the second half of this year.

I'm very proud of both the LoopNet team and the CoStar team as their hard work continues to move us rapidly towards realizing the full potential of this merger.

Post-merger we have restructured the LoopNet senior management team to best realize the potential of the merger. LoopNet executives Fred Saint, Mike Handelsman, Bryan Smith, and Wayne Warthen have all been key contributors in LoopNet for many years and have taken charge of several key areas of the Company as follows.

Fred Saint is President of the LoopNet marketplace, responsible for the Company's product, marketing, and business development. As we already know, with approximately $3.6 million unique visitors a month, LoopNet.com is a powerful force in commercial real estate marketing. Working close with me, Fred oversees the product roadmap and product development of the LoopNet marketplace. Fred joined LoopNet in 2007 with the acquisition of Cityfeet.com which he founded in 1999. I'm sorry -- yes. And successfully led it from start to profitability and its eventual acquisition by LoopNet.

Mike Handelsman is President of LoopNet marketplace verticals and is responsible for the business for sale and land sectors, including BizBuySell, BizQuest.com, Lands of America, and Land and Farm. He's also responsible for our CRM system, RE applications. Mike joined LoopNet as general manager of BizBuySell.com in 2006. He is responsible for growing each of these verticals.

Bryan Smith is president of LoopNet sales and customer service and is responsible for overseeing and managing LoopNet's significant sales and service teams and is responsible for overall sales and service strategies as well as leading the advertising sales business working closely with myself and John Stanfill who, as you know, is the head of sales and customer service for CoStar. Bryan joined up with the LoopNet team in 2003.

Wayne Warthen is LoopNet's Chief Technology Officer and Senior Vice President of Information Technology. Wayne joined LoopNet in 1999 and directs LoopNet's data center network operations and oversees design and development and the Company's web and software applications. Wayne is working closely with our team, Frank Simuro, our Chief Information Officer.

All four of these executives are doing a fantastic job and it's a great honor and pleasure to work with them.

In addition to LoopNet, I'd like to update you on other important Company initiatives. While we've been doing the LoopNet merger and integration, we've made tremendous progress towards our goal of converting our UK operations and clients from our antiquated UK technology base into our much more powerful and efficient and attractive US product and technology platforms.

As of last month our entire United Kingdom database which contains 20 years of information has been migrated from the UK input system to our US technology platform. And at this point this US technology platform is back feeding the content into the legacy UK information products.

We've also converted their fulfillment and CRM systems to our US technology platform. Now all UK researchers are inputting and updating data using our US enterprise platform. Before the London Olympic closing ceremonies are done, we expect to have CoStarGo UK up and running. We anticipate the rest of the CoStar UK product suite will be complete by early fall. There's a culmination of 12 months of intense and excellent effort by 40 of our best software people in the US and UK and our 110 researchers in Glasgow. We'll do a CoStarGo rollout in the fall in the UK.

From a sales perspective, the UK business reported nearly $1 million in annualized sales for the first six months of the year. We believe that we can up sell UK clients to this enhanced technology platform and achieve significant acceleration of revenue growth in the UK in the latter half of this year, next year, and beyond.

Back in the US we have a couple of noteworthy initiatives. Our recent acquisition of virtual premise is expected to release two significant product enhancements this fall. First, we expect to bring Virtual Premise, tenant, and retail real estate management software platforms to mobile and tablet devices, increasing the visibility of portfolio lease information for its retailer, bank, and corporate real estate listers.

Second, we expect to deliver the first phase of integration of CoStar data into Virtual Premise. We've gotten a very positive reaction to that from our clients there. It will enable customers to see relevant CoStar data side by side with their portfolio data. The result is beginning of putting more information and decision making power into the hands of the Virtual Premise customer base and exactly what we intended to do when we purchased Virtual Premise last fall.

In the fourth quarter 2012, PCR expects to launch a multifamily data and analytic service based on research developed with CoStar's research team. We believe that we have now surveyed more apartment communities than anyone else in the business and that we have the largest and most comprehensive database for the apartment industry. Demographic analytics such as population income combined with unit level occupancy and effective rents and vacancies will provide unparalleled horsepower for such things as lender-owner renting, apartment rent setting, redevelopment, and ground up feasibility studies.

We also expect to launch Compass Flex, which is a customizable analytic tool that enables users to find custom credit scenarios from a selection of economic forecasts, confidence levels, and mortgage risk parameters to model loan level defaults, losses, and related recoveries as well as interest shortfalls that may impact cash flows to certain bonds within CMBS deals. Flex gives users more control to evaluate bonds across multiple scenarios and then provides a more accurate projection of the timing of cash flows which is essential for appropriately evaluating the risk return proposition of both safer premium bonds and the riskier discounted bonds in CMBS.

In the second quarter 2012 Resolve released a new dashboard for requests with the industry's heightened focus on data visualization, Resolve's new dashboard has more attractive graphics, more end user capabilities, and improved drilldown to underlying detail capabilities.

Let's touch on commercial real estate conditions briefly which right now are looking fine for CoStar and are actually pretty solid. The office market improved in the second quarter 2012 with vacancies down 20 basis points to 12.6%. Net absorption of 18 million square feet for the quarter was double the nine million square feet in the prior quarter. With 62 million square feet of absorption for the year, we're renting fairly close to long-term averages. We expect demand to remain positive at 10 million square feet to 25 million square feet of net absorption per quarter and to show more growth as fears about the current economic recovery diminish over the next few years. This steady demand is very good for brokers.

Although office rents have been flat in many markets, for the first time since the recession we're seeing a small, just under a one point rise in asking rents year to date with technology markets showing the highest rent growth as San Francisco rents are up roughly 16% in the past year. The office sector has significant upside in rents relative to most other property types which in part represents past distress and low levels of rent versus replacement cost rents. Office sales have also returned to normal levels and as of the second quarter 2012, sales were on pace to match 2011. Annual office sales volume reach $75 billion. For 2011 which is near the $80 billion ten year average. Improved finance conditions have allowed for the return of large building portfolio sales for the first time since late 2007.

So, in conclusion, with second quarter revenue increasing 37% year over year to $85.2 million, 96,096 paying CoStar subscribers with a 94% renewal rate and 100,507 paying LoopNet subscribers, I believe it's clear that our business is healthy, growing, and has great prospects. As we continue the integration of LoopNet throughout the second half of 2012, we are more than excited about our prospects in 2013 and beyond. We believe that our employees, clients, and shareholders will benefit from our larger, stronger, combined Company as we continue to expand.

Before I turn the call over to our Chief Financial Officer, Brian Radecki, I would like to congratulate said Brian Radecki for becoming -- being named Chief Financial Officer of the Year, large Company category. He was honored to be the CFO of the Year. I was honored that it was in the large Company category. You will be glad to hear that Mr. Radecki still remains humble and focused on his work. In fact, he's working out here in Glendora this summer and he has selected modest office space here. As I looked around for Mr. Radecki yesterday, I found him in his office which is labeled Accounting Storage Two. And the office manager was really quite dismayed that the CFO of the Company wanted to work in an interior storage room. She insisted on removing the cabinets. But I just thought if he had an ego he'd be in Accounting Storage Room One, not in Accounting Storage Room Two. So, with that, I'll now turn it over to our Chief Financial Officer, Brian Radecki.

Thank you, Andy. I appreciate the kudos which I think I said before, it's really a team effort, the entire team at CoStar. So, I'll accept the honor on behalf of the entire team.

As Andy mentioned, we're very pleased with our performance in the second quarter of 2012. We closed the LoopNet acquisition at the end of April and have included two months of LoopNet's financial results as well as some significant acquisition and integration related costs in the second quarter on the consolidated financial statement.

Today I'm going to primarily focus on year over year comparisons for the second quarter, on our outlook for Q3 and the remainder of the year and a peek into how we think the next few years will develop.

Now, to review CoStar Group's results for the second quarter of 2012, beginning with revenue, the Company reported $85.2 million of second quarter 2012 revenue, an increase of $23.1 million or 37.2% compared to revenue of $62.1 million in the second quarter of 2011. CoStar's organic growth rate continues to steadily accelerate in the first half of 2012 compared to the organic growth rates we witness throughout the four quarters of 2011 which were in the range of 8% to 12%. CoStar's revenues increased 13.8% from the second quarter of 2011, continued by strong sales performance and a small one-time revenue item in the quarter.

LoopNet annual revenue on a pro forma basis, before any adjustments, grew 10.7% year over year for the second quarter of 2012 which is relatively consistently with their 2011 recorded annual growth rate. Therefore, the combined business is currently growing in the approximate 11% to 13% range on a pro forma basis before any accounting adjustments. We believe that we can continue to accelerate revenue growth rates with the cross-selling and synergy opportunities Andy discussed. We reported a net loss of $6.7 million or a negative $0.25 per diluted share during the second quarter of 2012 based on 26.5 million shares. These results reflect $9.5 million of acquisition and integration related expenses incurred in the second quarter as well as an unusually high tax provision of $5.6 million driven by the costs related to the LoopNet acquisition that reduced GAAP earnings but are non-deductible for tax purposes.

I highlighted the expected high tax provision last quarter and also alluded to our favorable tax position on a cash basis, specifically as a result of the loss carry backs we received a tax refund of approximately $9 million during the second quarter and we expect to receive another refund of approximately $0.5 million in the back half on the year. Additionally, we expect to receive further tax benefits which we estimate will result in approximately $16 million in cash tax savings at the back half of 2012 and the first half of 2013. Pretty nice.

Non-GAAP net income increased $3.2 million or 43% year over year to $10.5 million or $0.39 per diluted share in the second quarter of 2012 from non-GAAP net income of $7.3 million or $0.33 per diluted share in the second quarter of 2011. Adjusted EBITDA for the second quarter of 2012 was $20.4 million, an increase of $6.1 million or 42% compared to adjusted EBITDA or $14.3 million for the second quarter of 2011. Reconciliation of non-GAAP net income EBITDA, adjusted EBITDA, and all the non-GAAP financial measures discussed on this call to the GAAP basis results are shown in detail along with definitions for those terms in our press release issued yesterday and will be available on our website at www.CoStar.com.

The Company had $129 million cash and investments with $173 million in debt as of June 30, 2012. This represents a modest level of leverage given the strong cash flow generation of our business.

At this point I'm going to give some operating metrics for CoStar and the LoopNet businesses which demonstrate that both businesses performed very well in the second quarter. As we integrate the businesses we do not expect to continue to give all these separate metrics and may introduce some new combined metrics.

Net new sales from existing CoStar businesses totaled $8.2 million, an increase of 16% year over year, sold by approximately 209 sales reps. The acquisition of LoopNet adds 117 sales reps to our existing sales force for a total sales headcount of 326. This combined sales force has begun to focus their combined energy on the exciting cross-selling opportunities we see in front of us and Andy discussed earlier. Our existing CoStar customers continued to renew at very high rates during the second quarter of 2012. The 12 month trailing renewal rate for CoStar's subscription business increased to 93.7% which matched our all-time high for this important metric which was back in Q1 and Q2 of 2006. This is a 1.5% improvement over the 92.2% from one year ago. The renewal rate for subscribers who have been with us for five years or longer was a remarkable 99%.

Seriously?

Seriously. All-time high. I wasn't sure it was possible. I had the group check it five times.

The end quarter renewal rate was 94.3% just above last quarter's 94%, up from 93.2% in the second quarter. As discussed in prior quarters, one of our large customers, Grubb & Ellis, now Newmark Grubb Knight Frank, filed for bankruptcy in the first quarter of 2012. We expect that contract will be renegotiated, however if the contract is eventually terminated, it would have a significant impact on our short-term renewal rates, reducing the end quarter renewal rate by up to approximately five percentage points and the annualized renewal rate by one to two percentage points. We believe our revenue guidance for this year adequately accounts for the uncertainty related to this customer.

Additionally, we received a termination notice from RMS, a DMGI-owned Company that has a data license with CoStar. In connection with the closing of the LoopNet merger and as mandated by our consent order with the FTC, LoopNet sold its interests in Xceligent to DMGI and has now become one of our primary competitors. The termination is expected to have a one-time impact on our end quarter renewal rate in the fourth quarter of 2012 of approximately 1%.

At the end of the second quarter 2012, the existing CoStar business had 96,096 paying subscribers while the LoopNet business had 100,507 paying subscribes to one or more of LoopNet's commercial real estate related services. Both subscriber numbers increased compared to the first quarter of 2012 and the second quarter of 2011. In the quarter, CoStar products featured 1.5 million listings while the LoopNet commercial real estate marketplace included 823,000 active listings. As Andy discussed earlier, we're making great progress in aligning the CoStar and LoopNet databases in an effort to ensure that our information services provide customers visibility with respect to all available listings and to enhance the value we provide our customers.

For all the Loopsters on the call, a few Loop numbers. LoopNet premium members increased to 77,278 compared to 75,829 in the first quarter of 2012 and average revenue per premium member -- RPU -- increased to $66.04 compared $65.59 last quarter. Profile views in the LoopNet marketplace totaled 107 million for the second quarter of 2012 and LoopNet registered members, including both basic and premium users, totaled 6.1 million as of June 30, 2012. Total unique visitors to LoopNet-owned websites tallied nearly 5.6 million according to Google Analytics.

Essentially our early insights into the LoopNet marketplace gives us confidence that we can drive significant additional value by introducing long-term CoStar customers to the marketplace, increasing sales at the firm level, and focusing on long-term subscription agreements.

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

Gross margins were $57.1 million in the second quarter of 2012, up compared to $39.7 million in Q2 of '11. Gross margin percentage was 66.9%, a three percentage point year over year over the second quarter of 2011. We expect to see gross margins expand further for the remainder of the year. Total operating expenses in the second quarter of 2012 was $57.1 million, an increase of $21.3 million compared to $35.8 million in the second quarter of 2011, primarily due to two months of LoopNet expenses in the quarter. Additionally, as I mentioned earlier, we recorded $9.5 million in acquisition and integration related costs. Most of these costs will impact G&A expenses but some of the other lines are impacted as well.

Turning to our outlook for the third quarter of 2012, the following outlook reflects the current expectations as of today, takes into account recent trends, revenue growth rates, renewal rates which may be impacted by economic conditions in commercial real estate or the overall global economy. Actual results may vary from these estimates.

As we continue the LoopNet integration process, we will consider alternatives for certain services from the two companies that overlap or create confusion among customers. We may reduce new sales efforts in some areas or discontinue certain services within the boundaries established in our consent degree with the SEC. We would undertake such changes only if we believed they were accretive to the business in the long-term but this could lead to negative short-term impacts on revenue or earnings. We believe the revenue and earnings guidance we are providing account for these possible changes. Based on the continued strong trends in sales and revenue, we are increasing the low end of our 2012 revenue guidance range to a range of $345 million to $349 million. Remember, we just put that out 2.5 months ago. We're increasing the bottom.

For the third quarter of 2012, we expect approximately $94.5 million to $96 million in revenue. While we are pleased with the strong sequential revenue growth rate so far this year, we do expect a more moderate rate in the fourth quarter, mostly due to the seasonally weaker Q4 for LoopNet and in part due to the termination notice I mentioned earlier. Consistent with strong revenue trends, we're also raising the low end of our 2012 estimates for non-GAAP net income per diluted share to a range of $1.40 to $1.52 per share based on 26.9 million per diluted shares which include the additional marketing spend in the second half of the year.

For the third quarter we now expect non-GAAP earnings per diluted share of approximately $0.38 to $0.42. As Andy discussed earlier, we plan on launching a substantial cross-selling initiative that we believe will drive considerable long-term growth benefits for both CoStar information services and the LoopNet marketplace. Although the exact timing of these marketing initiatives may vary, we're planning to reinvest the benefits of our strong year to date performance in the form of the significant marketing initiatives in the third and fourth quarters to support these critical sales initiatives. We estimate the impact of these initiatives under non-GAAP to be a couple pennies in the third quarter and again total $0.10 to $0.12 for the year. If we execute on all the marketing initiatives being considered, we expect to be in the bottom half of our non-GAAP net income diluted share range for the year.

Also included in earnings guidance, as we discussed last quarter, the Company continues to invest in development of CoStarGo, a new CoStar suite in the UK which Andy mentioned. We expect to incur costs to successfully launch these services in the UK market in the fourth quarter of 2012. We expect the launch of these products in the UK to be accompanied by approximately $700,000 in marketing spend. While this will impact the profitability of our UK segment in 2012, we expect these new products to accelerate revenue growth in the UK and begin to drive improvement in UK EBITDA margins in 2013.

In summary, I'm very pleased to be able to share with you the strong second quarter results included with the combined CoStar-LoopNet businesses for the first time. While the results included some significant acquisition-related items and a partial quarter for LoopNet, the underlying business remains very strong and we have been able to maintain momentum in both businesses as we began integration efforts. Additionally, we have begun to take actions that we believe will deliver the $20 million in annualized cost synergies we expected when we announced the deal and remain confident in our ability to achieve these synergies within 24 months of the merger close.

More importantly, based on our early cross-selling success, we believe more than ever in the revenue opportunities that are achievable by integrating these two great businesses and introducing both customer bases to the outstanding value available by subscribing to both our information and analytics services as well as the industry's leading marketing solutions.

CoStar is engaging with customers along the full spectrum of the commercial real estate marketplace, from mom and pop shops to the biggest names in the industry and across a wide range of customers from brokers to owners, investors, banks, retailers, appraisers, just to name a few. We see an enormous opportunity for growth as the industry leader with the most complete and growing set of products and services to support this varied customer base.

Based on the current health of the business, potential synergies, and opportunities in front of us, as a result of the LoopNet merger which closed 2.5 months ago, we want to set a goal of $500 million in run rate revenue by the end of 2014 with adjusted EBITDA margins in the low to mid 30% range. We believe that this is an achievable benchmark that sets us on a realistic path towards our long-term goal of $1 million in high margin revenue.

And with that, hopefully it was worth the wait, I'll open up the call for questions.

Thank you. (Operator Instructions) We'll take our first question in queue from Bill Warmington with Raymond James. Please, go ahead.

Good morning, everyone. And congratulations on the strong quarter, first one together.

Thank you very much.

Thanks, Bill.

A couple of housekeeping questions. I wanted to ask what CoStar or actually what the LoopNet revenue contribution was? I wasn't sure if I caught that on a standalone basis?

I don't think we put it on a standalone basis but we gave you the pro forma before adjustments grew year over year at about 10.7%. I think the businesses are combined, so, we'll continue to report a combined number.

Okay. Is there a way to get to the CoStar revenue without Loop? That's what I'm trying to back into.

I think you gave you the year over year growth rates on that too on an organic basis. 13.8%. And then it's important to note that going forward there's going to be a lot of revenue moving back and forth between these entities. So, if we're taking somebody from $89 of information or a product at LoopNet over to $509 of CoStar oriented revenue, you're going to see it will be difficult to track what's happening there and what's actually original LoopNet revenue and what's original CoStar revenue. So, it will get very blurred pretty quickly. What will be more relevant is probably total marketing revenue and total information revenue. What I can tell you, Bill, is that when we announced the combined companies' guidance, I gave a range of the CoStar businesses, $70 million to $71 million. I can tell you we came in much above that number and then you could back into the Loop number. They came in much above the guided number too. So, both businesses, it wasn't like one did better than the other. They both were above the guided range which is you can see the combined number of $85.2 million, well above the guided range.

Got you. On the marketing spend, it looks like it's about $2.2 million to $2.7 million. I want to make sure that number is right. Does that include the $700,000 in the UK? I was just going to ask how you plan on -- some detail on how you plan on spending the incremental marketing spend?

I'll answer the first part and let Andy answer the second part of it. The marketing spend, now the UK is a separate number. But again, it's all included in the guidance. I think your number is a little bit low. You'd have to sort of divide by the number -- multiply by the number of shares and divide by the non-GAAP EPS tax rate of 38%. So, your numbers are probably a little bit low. But the UK is not included there. But of course both of them are included in the guidance number.

The timing -- we're working through the timing of that now. So, it might be late in Q3. It might push into Q4. It might push a little bit into next year. I think there will be a big push in Q4 for sure. So, that's why it's a pretty big range and the majority of it will hit in the fourth quarter. And that will depend on where we end up in sort of our guidance range. And I'll let Andy talk about what his thoughts are around the details of the marketing.

Sure. I'd be happy to. In the UK, obviously it's a much smaller number. It's a smaller economy. It will be a roll out of the CoStarGo app similar to the one we did in the United States with event-based marketing. But just a much smaller scale because it's a smaller country. And that was very successful for us here in the US, so it's just a repeat of that.

Then you have to consider those 130,000 leads and you're going to want to communicate with them with at least four pieces of direct mail along with supporting electronic initiatives and then on the LoopNet side, we want to create awareness among the million listers and the million listings universe CoStar, we want to let them know about the opportunity to generate greater awareness of those listings to the general business community, investment community through a series of direct mail campaigns.

We retained an agency in San Jose that's doing a great job of putting together a campaign. We're going to be communicating with the people who broker the listings as well as the owners behind the listing and we're going to do one marketing event that I'm not going to talk about. You couldn't imagine it in your wildest dreams. You'll see it on YouTube and I think you'll agree it's sort of funny and useful and effective.

So, we just believe that the opportunity is there. There's never -- if I'm a broker in San Diego working for Richard Ellis, doesn't have any listings in the LoopNet system, I don't think that person has ever considered trying to generate more leads for their listings using LoopNet, they never received the direct mail from LoopNet. They never received any sort of a marketing from LoopNet, any sort of traditional marketing media from LoopNet. We want to break that ground quickly.

The Chicago tests sound very promising. I wanted to ask a couple things. One is your thoughts on what it is -- you went through some real detailed statistics but conceptually what it is that kept people from switching over from LoopNet to CoStar in the past and how you're going to overcome that and then also how you plan on attacking the market to go after the larger ones, smaller ones, how you plan to do that.

We'll definitely do a staggered lead system. We're going to migrate more people from our centralized operations into field operations to try to scale the number of people we've got in the field to deal with the opportunity. We'll definitely pursue some of the more likely leads based upon search activity, intensive search activity, tenure inside the LoopNet system and we will allocate out these leads to sales people based on their success in closing the leads that they're received. We feel comfortable with -- we've spent a fair amount of time and effort researching how to present the products to these prospects.

I mean, the reason they weren't considering it before is because LoopNet and CoStar Group were not one Company. Neither Company could make the promise of having a one-stop shop where all the listings were in one place. Neither Company could effectively communicate what was happening in a multimillion record databases that were changing by the hundreds of thousands every day. It just was too complicated. Now with one uniform backend, you can clearly communicate it, your message is completely credible because they know that your briefcase says both LoopNet and CoStar and we're pretty excited about it. I described it briefly coming out of that day Chicago, I described it briefly as the most exciting day of my life and a number of my friends reminded that I should no longer say that because my wife will here and I'll pay for it later.

(laughter) Alright. Thank you very much for the insight.

Thanks, Bill.

Thank you. Our next question in queue will come from the line of Brandon Dobell with William Blair. Please, go ahead.

Gentlemen, how are you?

Good. How are you doing?

Not too bad. A couple things. First, I guess if I were to add up all the different metrics you guys have given us the past several quarters, it would be like 1,012. I'm trying to get an idea on a go forward basis, are we going to get some consistent metrics like LoopNet used to provide on paying premium subscribers, that kind of stuff so we can start to model this thing a little bit more accurately? I guess on both the CoStar side and the LoopNet side? Or how should we think about what metrics should be the ones we should be paying attention to that you guys are going to give us?

Brandon, it's Brian. Actually if you went through the call originally, there are so many metrics because I gave pretty much almost every metric that CoStar had been giving in addition to every metric that LoopNet had been giving. So, if you go back through it, you'll see all of them and so we didn't really take any away. We gave the premium member number, we gave what they call RPU, average revenue per member. We pretty much gave -- we gave the CoStar bookings number. We gave every number that each Company always does. So, it has been only 2.5 months. So, we're looking at which -- how do we sort of combine these. We're obviously going to skinny it down and not give so many numbers. It's sort of funny. Some people want more data metrics and other people want to streamline it. We're going to streamline it. That's what I was saying. I think obviously continue the renewal rates and the CoStar bookings numbers are going to be relevant because 75% of the business is still sort of core CoStar Group information services. I think the LoopNet stuff will sort of be toned down a little bit. But we'll also come up with some new combined numbers. So, next quarter I think we'll give you a little bit more clarity on some of those numbers but if you go back through it, we gave you all of them and I figured I'd try to confuse you as much as I could because I appreciate you stealing my thunder this morning.

(laughter) I'm easily confused.

And then it's going to be a little tricky. We don't want to spend too much time and energy focusing on the total LoopNet premium customers and the number of CoStar users because over the next 12 months I think that number will be a little deceptive because you don't quite understand the overlap and the level. Our goal will be to try to integrate for exactly that reason. We're going to try to integrate the back ends of LoopNet and CoStar Group on an expedited basis, make it a higher priority for the Company and among other benefits, one of the benefits is that we'll be able to give you a unique customer number for the combined Company that will actually allow you to effectively measure how we are doing in terms of capturing the scope of the opportunity. But when you're looking at LoopNet premium and CoStar members, it's going to have duplicative -- it's going to have overlap.

And then, Brian, I wanted to clarify something at the end of your remarks about the run rate exiting '14. You said low to mid 30% adjusted EBITDA margins. Is that for the whole of 2014 or should we think of that as a fourth quarter potential range? For 2014?

I think both numbers are sort of an existing run rate. And I think that's sort of the goal we're putting out there today. Obviously Andy and I are very competitive. We like to beat goals. But the goal is a $500 million run rate at a low to mid 30% range exiting '14 which I think is a pretty good number. And that's really with all the things that we've talked about today, sort of organically. So, I think that again, Andy and I obviously will do our best to do better.

Then, a follow-up question, organic growth rate at both companies, a little bit faster than we thought we'd see at CoStar Group, but pretty much in line at LoopNet. The CoStar organic growth rate, maybe some color on the puts and takes as we think about the next couple of quarters. You mentioned the Grubb and DMGI termination in Q4 as a potential noisy bit but what else is out there that cold move that organic growth rate around and-or I guess in the back half of the year are you assuming any material difference in those organic growth rates within your guidance? Thanks.

I think last year we were anywhere from 8% to 12%. So, it's fairly steadily accelerating and obviously you can see it continue to accelerate in the first half of this year. LoopNet's obviously running at lower growth rates, so as a combined Company, obviously it brings down the combined number. There is lots of noise in the back half of the year, accounting adjustments, deferred revenue adjustments. I did talk a little bit about we are evaluating various services that the Company has. We feel that we might deemphasize or decide not to do anymore. We factored all that into there. So, there is going to be a lot of noise in those numbers but I think the 11% to 13% range, factoring in all that noise is sort of a good range and then obviously as we see how this cross-selling goes, it's obviously going to be a big topic of conversation on the next couple of calls. What kind of results we see. Then we can give a little more clarity for next year.

But clearly, talking about all those numbers, there's a good range out there for next year and as we get more clarity on the cross-selling, hopefully again we can do better. But there is a lot of noise in the back half of the year. And I think I mentioned the fourth quarter typically again, everyone on the call that's been following LoopNet too, it's typically seasonally low for them. So, again, we have to factor a lot of that noise in. We're feeling very, very good about '13 and '14 based on the prospects. Not only is Andy's wife probably not too happy, I'm sure his kids aren't happy either. There's several important days in there.

Thanks, guys.

Thanks, Brandon.

Thank you.

Thank you very much. Our next question in queue will come from Brett Huff with Stephens. Please, go ahead.

Congrats on a nice quarter and giving us some longer-term guidance, guys.

You're very welcome. We're glad to do that.

As you guys think about uses of capital, it seems like it's all just piling back in the business. When you guys are doing that, give us a sense of how you make those decisions? You've outlined them a little bit. You have a lot of levers that it seems like you can pull and invest in and you've chosen a $0.10 to $0.12 level with the cross-sell. How do you guys internally manage how you allocate that money? Is it ROI driven? What's the kind of process because it seems like there's a lot of choices that you could make.

It's ROI driven, I would say. So, there are a lot of choices you could make. We obviously -- we would have a five year conference call -- earnings call if we were to go through all the different things that are going on in the business. So, when you look at all the opportunities out there -- like we didn't touch on our French operations, our residential information product in Paris. So, we look at things like the cross-selling opportunity to us and to our Board is obviously the biggest ROI and if it has in addition to have what we perceive to be or believe to be a very high ROI, it also has real strategic urgency to it. You'd like to create the single stop shop as quickly as you possibly can and get brand recognition for it. So, that's what we're thinking about. It's the things we believe are the unconscionable if you don't do them things.

And, Brett, there's so much leverage in the model, as everybody knows. Going after this opportunity, Andy talked about it. The cross-selling and synergies is extremely high margin. Obviously you're paying out commissions on that but we talked about having a 300 plus person combined sales force now. You have a large sales force, you have this large opportunity and each dollar that you get in there is significantly high margin dollar. So, I think clearly when you look at the ROI and the potential for that right now, I think it's easy to say it's number one -- it's the number one opportunity for the Company.

That's helpful. And then in terms of small cities I know you all were building the CoStar based product in small cities kind of as the recession started. LoopNet I think has probably better penetration there and even Xceligent has some better penetration in the smaller cities. But to me it seems like low-hanging fruit. Can you be fairly specific or give us a sense of what the small city strategy is from here? Is it CoStar suite I think is what you called a particular product that might work there? Where are we on that strategy?

Sure. I would not begin my answer with accepting your characterization that Xceligent has achieved meaningful penetration in the small wave, small cities, or anything of that nature. In fact, we've actually done extremely well over the last two years in penetrating those smaller markets. So, in the bottom 200 cities, we've seen phenomenal year over year growth and to our fly teams which are based in DC and periodically travel into certain targeted markets, they had great growth over the last two, three years.

So, these markets are now I would say as a group those smaller markets are profitable for us and are doing well. I would actually say that LoopNet's client base -- you take a Corpus Christi, Texas, LoopNet might have 100 customers, 150 customers there and that is more than CoStar has there. However, what I'm more focused on is the fact that LoopNet has 11,500 customers here in Los Angeles that we don't have.

So, the small markets today are successful and profitable for us. There is no market anywhere in there United States that I'm aware of where anyone has any more penetration than we do. So, the smallest market, biggest market, we've got more penetration. But the story, the smallest that's profitable and you can't walk away from them because they do make money and -- but the real story is going to be Texas, Florida, California, New York tri-state area. That's just the overwhelming -- it's just stunning. We now have 19,000 users here in Los Angeles county and that is just an amazing number. And so up selling that group is still just the 800 pound gorilla.

Okay. That's helpful. Thanks for your time and congrats again.

Thank you very much. Thanks, Brett.

Thank you. Your next question in queue will come from Ian Corydon with B. Riley & Company. Please, go ahead.

Thank you. I wonder if you could just provide an update on CoStar Fusion and the analytical products that you have under development?

Sure. I'd be happy to. Those hit the cutting room floor last night at page 20 and 25. So, we are making -- the absence of discussing it, I don't want anybody to think that we're not working on that. We spent all day Monday and Tuesday with a combination of senior software executives from LoopNet and CoStar and product design people from CoStar who are working on that. And I believe the specification for Fusion is now over 2,400 pages long. And we viewed and discussed the design covering maybe only 700, 800 screens on Monday and Tuesday.

And I am blown away by what the analytic side of our design team has produced as led by a guy name Jay Spivey who came to us from the Jamison back in 1998, '99. He's been with us for awhile. He did a phenomenal job. It was just stunning. It takes what we're doing in analytics up five or six levels. In addition, our R&D quantitative team, based at PPR has been working on some very interesting initiatives that we'll keep confidential as part of that new analytic release. So, it's very impressive stuff. It will not -- there's no chance it will release anytime in the next two to three quarters. And we will likely be developing it -- we will prioritize integration, we'll likely prioritize integration of the LoopNet-CoStar database first and foremost because once you do that it gives you more stability in the platform, it gives you better intel, better communication with shareholders, better marketing capability. It also frees up a lot of development resources to work on one common set of goals. It's alive and well. It's fantastic. It will blow your mind when you see it. But it's of a scale and scope that's quite significant.

Got it. Thank you.

You're welcome.

Thank you very much. Your next question in queue will come from Marc Fuller with Needham. Please, go ahead.

Hey, guys. Great quarter. Just a question on cross-selling. Kind of wondering, can you give us any more color on how many regions outside of Chicago by the end of the year you might be penetrating or selling into? How many end users does this represent?

What we're going to do is we're now in the process of taking what we learned in Chicago and initially we given a day of training to the sales force. We're going to do a follow-up training with them. We are today working on our strategy for utilizing an additional 40 of our sales people who traditionally worked in our centralized sales role to go out and hit the opportunity which is too big for our current field sales force to fully cover. Our first priority will be to go after the biggest cities, these massive pockets in California, Texas, and the like. So, that will be the priority for the first two quarters or so and then we'll be fanning out to cover Corpus Christi and Albany in 2013. And the number of users that this impacts, again, both LoopNet and CoStar probably 80% plus of our users are in the top 100 MSAs which is where we initially focus and probably 80% plus are in the top 50 MSAs. So, that's where the user counts are initially.

Got you. And then I'm not sure if I missed this but did you say kind of what percentage of your bookings is from new users versus up sells?

In Chicago?

No. Overall.

It was approximately where it always is in the 50% range. I think some of the things Andy was talking about was pretty much a couple weeks ago.

Two weeks ago.

So, there was really no impact at all in the second quarter. And obviously we'll have a lot more color on next quarter's call for you guys.

Cool. Thanks. And then last question, did you mention how many CoStarGo users were added in Q2?

We did not. Do we have that number?

CoStarGo users? I do not have that in front of me but it's continued to trend up.

We're still in year one I guess of probably a ten year product life cycle on that and getting great feedback.

Cool. Thanks. I appreciate it.

Thank you. Our next question in queue will come from Todd Lukasik with Morningstar. Please, go ahead.

Thank you, guys. Nice job on the quarter again and thanks for all the detail on the early integration efforts.

I'm glad there was someone out there I didn't put to sleep.

(laughter) I'm still here. Just a question on the integration and synergy. It sounds like you guys are still comfortable with the $20 million in expected expense synergies?

That's correct. Yes.

And given the initial information you have from the Chicago market, can you guys share with us a number that you're thinking about for potential revenue synergies or maybe just ballpark, greater or less than expense synergy expectations?

Without any doubt, dramatically greater -- orders of magnitude greater than the expense synergies. So, if you -- I don't know. If you took the -- what was the average sales so far? If you take the 15 units in Chicago and divide them into $8,800 sold so far and then assume it's a 500% increase and then run that against 130,000 against the 54% that said they would upgrade. The number's stupid big. We won't even say it. So, it's orders of magnitude larger than the synergy side.

Got you. And then with regards to the listings, did you say whether they're being integrated now? So, anything that was in the LoopNet system but was not into CoStar is now also in CoStar now or is that a future enhancement?

No. That's done. We didn't waste any time there. It completed today basically. The systems ran today. They'd gotten through the listings. I think there were a handful of calls out still that were not in there but basically they moved through the whole pile, added over 50,000 listings, several thousand new listers, and that was done in a combination of Wayne and his team and Frank and his team connect the databases automatically on a one-time basis, in an automotive fashion on a one-time basis and then kicking out all the exceptions to the research department who then reached out and had conversations with those 50,000 or some listings over the last two weeks, three weeks. Long-term we want that to be automated which is why we're going to integrate the back end.

So, when you enter a listing in LoopNet it's basically entered into CoStar automatically. It will go through a verification process but it's basically the same database. It will be technically impossible to have a valid listing in LoopNet that's not in CoStar and ultimately I think initially it actually increased our cost of research because you're adding 50,000 listings, making hundreds of thousands of phone calls. Longer-term I think it will reduce our costs when it's automated.

Right. Okay. But all of that sort of user generated content is still going to be verified by your researchers?

That's come across loud and clear in the focus groups with our customers. They are -- that's a top priority to them. It will.

But your expectation is you're not going to need more researchers to do that. You can do that with the current staff?

I would guess we're going to get a significant productivity gain here, especially after we connect the databases and for a number of different reasons. You still have a trend which I think that the coming together of LoopNet and CoStar Group will accelerate that trend because now you have an even clearer picture in the industry of what the main clearinghouse is. And that trend is people are creating more and more listings so that prior to putting a building up for sale was done with a lot of forethought and was done much more frequently. People are putting their buildings up for sale more and more frequently. If I go back to ten years ago in Washington DC, it was approximately 1% of the buildings in Washington DC were marketed for sale.

Today, I believe the number is closer to 12% of all properties in Washington DC are being marketed for sale. So, against a database that's more than 50,000 properties in Washington DC, that's significant growth. So, you've got people using CoStar-LoopNet as a clearinghouse more aggressively. That's good news, big picture for our role in the industry, the utility of the Company and our potential revenue. It does put a pressure to continue to grow the scope of people dealing with all these people selling their buildings but I think the two will balance out and I think you'll get continued productivity gains. And you get continued acceleration of the amount of content coming at us.

Right. Okay. And then with regards to the year end 2014 goal, $500 million run rate and annual revenue -- I'm assuming that's based on an expectation of organic growth as opposed to unannounced acquisitions at this point?

That's correct. And I think that should be clear. That's based on what we've talked about here today. So, with sort of the product services, geography, things we've talked about -- that's a little bit like asking a woman who just gave birth to triplets whether she wants to have another child while she's still in the delivery room?

(laughter) Yes. I guess you guys will be busy with the LoopNet stuff for awhile. And then just with regards to the adjusted EBITDA margin, is it the low 30% to mid 30% that you gave there, is it safe to assume that the only adjustment between reported EBITDA and adjusted EBITDA, the expectation for that would be stock-based compensation expense at this point?

Yes. It's the same adjustments. So, if we were to be doing other acquisitions or anything else down the road which would be on top of those numbers, it would be the same adjustments that we always have. So, barring any of those, yes, it's the same adjustments, nothing new.

Okay. Great. Thanks a lot, guys,

Thank you very much.

Thank you. At this time we have no additional questions in queue. Please continue.

With that we'll conclude the call. Thank you, all, for joining us and we appreciate your support and look forward to talking to you next quarter.

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