CoStar Group Inc (CSGP) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CoStar Group third quarter earnings conference call. At this time all participants are in a listen-only mode and later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Director of Investor Relations, Mr. Richard Simonelli. Please go ahead, sir.

Thank you. Ladies and gentlemen, welcome to the CoStar Group's 2012 third quarter conference call. On the call today are CoStar Group's founder and Chief Executive Officer, Andy Florance; Chief Financial Officer Brian Radecki; and myself.

During today's conference, all participants will be in a listen-only mode and later there will be a question and answer session as well. Certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties that can cause actual results to differ materially from such statements.

Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's October 24, 2012, press release on the third quarter results and in CoStar's filings with the SEC, which include our annual report on Form 10-K for the period ended December 31st, 2011 and our quarterly reports on Form 10-Q under the heading Risk Factors.

All forward-looking statements are based on information available to CoStar on the date of this call and CoStar assumes no obligation to update these statements whether as a result of new information, future events or otherwise.

As a reminder, today's conference call is being broadcast live and in color on the internet at www.CoStar.com. A replay will be available approximately one hour after the call today is completed and will be available until November 25th, 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 266046. 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 all for joining us. I'm very pleased to bring you news this morning of solid financial performance in the third quarter. Driven by both strong organic growth, along with the acquisition of LoopNet, CoStar's revenue for the third quarter increased 50% year over year to $96 million. Third quarter EBITDA increased 227% year over year to $19.6 million. I would love to be able to say that every earnings call.

In the third quarter, we added 948 new subscription customers, which is the largest number we have added in any quarter. So that's organic sales. This is a result of our sales team ramping up to take advantage of the opportunity to cross-sell CoStar into the LoopNet client base.

Following our successful acquisition of LoopNet on April 30 of this year, our single greatest priority as a company right now continues to be aggressively integrating the resources of LoopNet and CoStar together to capture what we see as a once in a lifetime opportunity. The combined Company now has nearly 2,000 employees and I believe that they see the potential these combined companies have. And they and we are all very excited about it.

The commercial real estate industry is massive with over $10 trillion in assets in the US and the scale we need to address this opportunity is great. One of the best things about the merger with LoopNet is that it has enabled us to team up with several hundred new gifted colleagues who have the skills we need to succeed in our mission.

I think it is safe to say that we all feel pretty lucky to be here in this company right now with this opportunity. And that's a good thing, because right now we have an awful lot of work to do here. Prior to the merger, these two great companies were structured top to bottom to optimize the ability of each company to succeed, given the environment that existed before the merger.

With this merger, that environment has been turned upside down and inside out for the better. But that means that our staff has to embrace a tremendous amount of change in order to ensure that we put the right talent in the right place doing the right job.

I'm really proud to say that our team is doing a great job embracing that change and working through the inherent challenges in order to build the best company to serve the industry. I think it is remarkable how quickly this integration is coming together. I've seen a dozen plus mergers up close and this one is progressing at a faster pace than just about any I have seen before.

A lot of credit for that definitely goes to a great leadership team on the LoopNet side. I have the entire LoopNet team to thank for supporting the vision of the inspiring potential of this combined company. Let me give you just a few examples of the level of integration occurring.

LoopNet had perhaps two dozen researchers tasked with finding commercial real estate listings to load into the LoopNet marketplace in an effort to drive greater participation. After the merger, that task made no sense because CoStar already had the vast majority of those listings in our database and there was no need to collect data twice.

The LoopNet research team spent several weeks in training, both in Washington and California, learning how to do research to support the CoStar information products. In addition, several experienced CoStar managers and researchers have moved to LoopNet's offices in California to further train and support these former Loopsters as they begin doing CoStar research.

This was not easy or a completely painless transition for all involved but it has happened and is working. The Company has eliminated around $1 million of redundant costs in this area alone, has retained good talent, and is improving our products in doing so.

Over the past quarter, the entire research team, with the support of our software team, has combed through the entire LoopNet database and added 50,000 listings to the CoStar information products that had been missing prior. This should make our products even more valuable to our customers.

Total listing count grew to 1.6 million in the third quarter from 1.5 million in the prior quarter. The newly combined companies now have significant telephone customer service teams in London, Washington and San Francisco. Each separately can effectively service customers in an eight-hour window, given that two of these centers support five time zones.

We are integrating these three customer service teams into one virtual call group and are cross-training the teams. This means that a Chicago client will be able to reach a good customer service -- help -- from 2.00 in the morning their time until 9.00 at night their time. Our goal is to have that six days a week.

In addition, by increasing the pool you need less stand-by staff to handle call surges. This means that through attrition we can have fewer customer service reps providing higher quality support over greatly expanded hours.

CoStar has a multi-year pipeline of detailed product development specifications that we believe will become industry leading tools that will drive even higher sales results in the future. Now that the companies have merged, LoopNet will be devoting even greater software resources to its innovative and profitable internet marketing solutions, but will not need as many resources working on fledgling, redundant information products. Both LoopNet and CoStar developed in the dot net environment and have very similar technology stacks. More importantly, both companies have top flight software talent and management.

Our technology teams have spent many hours post-acquisition briefing one another on how our respective companies' technology solutions are built. I think it's probably not hours. I think it's probably days and weeks of briefings. This has been a great two-way learning experience for the staff.

This also means we can use some of the LoopNet software teams to bring CoStar products to market faster and vice versa. Several weeks ago, I was attending a regularly scheduled half-day CEO software briefing session when it dawned on me all of a sudden that I was listening to a LoopNet senior executive, Jerry Rogers, brief me on the timing of the next major CoStar product release. So in several short months, people have taken cross-responsibilities across the companies. It was a great briefing.

Another area where I believe we are realizing extraordinary value is in the integration of our sales teams. Remember that we have very roughly about 80,000 to 100,000 good prospects currently using LoopNet that we want to cross-sell CoStar information products to. We have just started on that effort but in addition we have a similar scaled task of cross-selling LoopNet internet marketing solutions to CoStar users. Any way you look at it, we need a very large sales team to take advantage of this large opportunity.

When we closed the deal, we had just over 200 CoStar sales reps and now combined with LoopNet's team, we have almost 350 sales reps. The problem is that most of these salespeople were not tasked with selling the cross-sell products, the highest value products, which have the highest revenue potential post-merger.

LoopNet was devoting a large number of sales resources to selling Premium Searcher Property Comps and Property Facts on monthly terms to individuals. These products have lower renewal rates and lower price points. So each unit sold is ultimately worth only several hundred dollars. That stands in sharp contrast to sales of CoStar information products, which have higher price points; firm level purchasing instead of individual purchasing; annual contracts instead of monthly; and extraordinarily low cancellation rates.

We believe that each subscription of CoStar Property sold can be ultimately worth approximately $50,000 to the Company over time. Some of LoopNet's Premium Lister plans can be worth several thousand dollars per unit sold. I believe that LoopNet's Premium Lister plans sold on annual contracts at the firm level might approach tens of thousands of dollars in value per unit sold. It may have made sense to devote resources selling low priced products to individuals when the companies were stand-alone, but it makes no sense now when we believe that we have tens of thousands of potential sales with long-term values approaching $50,000 per unit.

Obviously, it is a great opportunity to shift sales resources from the lower value products to higher value ones. Often within merging cultures -- that is much easier said than done, though. In this case, I think our sales organization is committed to doing the right thing and is making phenomenal progress. LoopNet has a number of strong sales professionals and we have already promoted approximately 20 of them from selling these lower priced subscriptions to field sales where they are selling CoStar and LoopNet Premium Lister at the firm level on annual contracts. In order to bring them up to speed as quickly as possible, we teamed them with senior CoStar sales professionals across the West Coast.

We believe LoopNet Premium Lister has a higher value per unit sold than Showcase, so we have trained 24 Washington-based salespeople on selling LoopNet Premium Lister and that is their primary role today. This is really significant because we are now successfully selling LoopNet from CoStar headquarters in Washington as well as LoopNet's headquarters in San Francisco and their Glendora office, and throughout the field, too.

We have also promoted an additional 21 sales staff from our centralized group in HQ to field account executives and teamed them up with East Coast account executives where they're now -- more senior east coast account executives who've been in the field for a while. And they're now focusing on cross-selling our higher value products.

We have 15 advertising salespeople who prior to the merger only focused on selling enhanced marketing exposure within our CoStar products. They have now been trained in selling LoopNet Premium Lister and are selling it on annual contracts at the firm level. In total, more than 100 CoStar and LoopNet salespeople have seen their sales responsibilities change significantly since the merger closed six months ago so that we could take advantage of the higher potential we have in cross-selling LoopNet and CoStar services.

So with that, let's talk about actual cross-selling results to date in these first number of months. In August, we began distributing LoopNet user lists to our sales team for cross-selling. Of the approximately 100,000 information cross-sell leads we're focusing on, we have only distributed about 16,000 to date. The sales force has made contact only with a portion of those first leads, but they have already closed 723 deals selling CoStar information products to LoopNet users.

Most of the LoopNet users we converted to CoStar contracts were freemium users. They were paying nothing to LoopNet. The others, which were the minority, were paying LoopNet a total of $37,000 a month for various combinations of information and marketing services that they in essence could drop at any time. They were not annual contracts. These people are now purchasing CoStar information services and LoopNet marketing services for $381,000 a month on annual contracts. That is a monthly billing increase of 930%, which is clearly a home run. Go, Giants.

These clients' prior commitments was -- their prior commitment was only to pay LoopNet $37,000. Now they have committed to annual contracts with us with an aggregate commitment of $4.6 million. You can do the math; it's about 120-fold increase in contracted revenue from these users -- much more stable, predictable revenue. The $381,000 of monthly revenue was comprised of $58,000 of LoopNet Premium Lister and $323,000 of CoStar information services. I have participated in a number of these sales and these new customers appear to be very pleased with these new combined services.

We are just in the beginning phase of this effort. We currently expect the number of demos will increase significantly in the fourth quarter of 2012 and beyond. I know that we already have 500 plus scheduled out into the future.

The Company's sales force spent much of the third quarter of 2012 training, developing sales tools, reorganizing the sales force and forming new teams by adding HQ AEs. We look forward to reporting a full quarter of cross-selling activity in the fourth quarter that we expect will improve on these initial numbers. Just to put some pressure on our sales management.

While we have put a lot of focus into selling CoStar information products in this quarter, we also believe we have significant growth ahead in LoopNet Premium memberships. LoopNet's core business is performing extremely well in the quarter with Premium memberships up 2,783 during the third quarter to 80,062 Premium members.

That is the strongest membership growth LoopNet has seen since the third quarter of 2007. The growth in members is a 91% increase quarter over quarter and 112% increase year over year. I think one of the exciting things happening here is that for each of the 723 LoopNet users we upsold, we replaced them with three new ones that perhaps could be future upsell opportunities. It is a gift that keeps on giving.

Historically, LoopNet experiences significant sales cycles, with the first quarter being the best. And then each successive quarter moves downwards until the fourth quarter is normally LoopNet's most challenging quarter. And that's sort of the long-term pattern with LoopNet. This quarter's result is significant, though, because we broke that historical downward trend in the third quarter. CoStar salespeople and Washington HQ-based centralized sales helped achieve that upward trend, along with the LoopNet traditional sales team.

But that HQ team that was prior selling Showcase in Washington, along with some of these CoStar field sales reps, sold 555 Premium memberships -- LoopNet Premium memberships in the quarter that would not historically have happened for LoopNet. And the pace of that contribution is picking up. On top of the 555 units sold in the third quarter, CoStar salespeople have already sold an additional 369 units in the first weeks of this month. LoopNet turned in its best ever August, based on gross sales, and best since the market's 2007 peak, based on net sales growth.

We are now only selling CoStar's traditional internet [CRE] marketing platform Showcase as a bundled add-on to LoopNet's Premium Lister product. The LoopNet Premium Lister product will be our lead product going forward in this area. So Showcase is being packaged with LoopNet and City Feet and National Newspaper Distribution plan, which includes 225 publications like the Wall Street Journal and the New York Times. So this becomes the LoopNet Premium Lister Gold Package, or combination package.

24% of our new Premium Lister subscribers are now subscribing to the enhanced bundle, which we only very recently started selling. Overall, we believe we are very well positioned to continue to drive sales and conversions of LoopNet and CoStar customers.

I am really, really pleased to be able to announce a major milestone in the UK. We have now completed the migration of our UK property database into the same research system we use in the US. And we have now completed building CoStar Property, Tenant, Comps, and CoStarGo for the UK and will have completed it before the tenth anniversary of our being in the United Kingdom.

This is a completely new product offering for the UK market and we believe it'll be a huge competitive advantage for CoStar that will drive penetration of new customers and will lead to upgrades and increased retention among existing clients. We are doing a two-stage launch of the product in the UK with the first release occurring in a two-week series of marketing events across the UK starting November 5th.

The first release is a soft preview release available to 2,000 users at our high revenue clients and is available to them at no cost. We're giving away a large number of iPads, as we did in the US, in order to spur fast adoption and create buzz for the broader market. The official complete national launch will be on January 2nd, 2013. At that time, our remaining 10,000-plus users can upgrade from our existing Focus software platform to the new CoStar platform by paying a reasonable premium to their current monthly price.

We believe that this release of our integrated international CoStar software platform will enable us to significantly accelerate our revenue growth rates in the UK and move us towards profitability there.

In other news, in September we launched our Multi-family product, or apartment product. Multi-family is PPR's number one property type by number of page views and report downloads, indicating that there is a lot of interest in this sector. It is one of the biggest asset classes of commercial real estate.

We have dedicated approximately 40 research analysts to the Multi-family team. The database includes over 50,000 multi-family properties with effective rent data and it's growing really quickly. We have hundreds of thousands of apartment buildings in our database that we're enhancing with this current rent data, vacancy data, et cetera.

We believe that this is significantly more properties than anybody else in the space offers by a wide margin. The potential target market for this product at both the CoStar and PPR levels is vast. We believe this offering will give us deeper penetration with current and prospective clients, including banks, government agencies, CMBS investors, investment managers, REITs, municipalities and many others. We expect to release the enhanced multi-family data in our CoStar platform as well and in that sales channel in the first part of 2013.

For the past two years, we have had research resources canvassing buildings in Toronto, Canada. In total, they have thoroughly documented 38,000 commercial properties for a total of 1.7 billion square feet of Canadian inventory. We have met with the major players in Toronto and when they saw the technology we had to offer, they were very impressed. We are fairly confident, we do not believe -- we're extremely confident and we do not believe there's anything comparable covering commercial real estate in Canada. We believe we will launch the Toronto service in the first quarter of 2013.

I want to stress we have no current plans to expand to any other markets in Canada or outside the US right now. And we do not believe the Toronto expansion will materially negatively impact our margin expansion. This is a controlled expansion.

Current commercial real estate market conditions remain positive for CoStar and most of our clients. While the economic recovery remains weak and we have not gained back all the jobs we lost in the downturn, office job growth is up over 2%, better than the overall economy and it's positive for commercial real estate. Gross leasing activity is high due to inexpensive office space out there.

Overall, the third quarter of 2012 looked very similar to the second quarter of 2012. In the office market year-to-date net absorption has been focused on top quality buildings. It is still running fairly close to long-term averages. Net absorption for the quarter was 15 million square feet, which is in line with the current trends in the market.

Across the nation, rents are only up 1% from the bottom and actually showed a slight downward trend in the quarter. However, rents in some markets are up significantly, particularly in technology and energy cities. San Francisco rents, as an example, have risen by 20% from the bottom, which is accelerating from last quarter's 16% increase.

Overall, the commercial real estate economy is creating an acceptable business environment in which we can pursue our top priority of cross-selling CoStar products to LoopNet users and LoopNet tools to CoStar clients. The cross-selling opportunities from the LoopNet acquisitions are now proven to be real and are driving significant new customer sales.

As we move towards the end of the year and into 2013, we expect to continue to see the benefits of the LoopNet acquisition continue to unfold. We believe that our employees, clients -- most importantly, shareholders -- will benefit as we continue to integrate the two companies, grow profitably and move towards our goal of $500 million of revenue and 30% or more adjusted EBITDA margins as we exit 2014.

I will now turn the call over to our Chief Financial Officer, Brian Radecki. Whew, have to take a breath.

Thanks, Andy.

You're welcome.

We're very pleased with our performance in the third quarter of 2012. This is the first full quarter we have LoopNet included in our consolidated financial statements and the progress we are making on integration has already translated to synergies showing up in both our revenue and earnings.

Today I'm going to principally focus on year over year comparisons for the third quarter 2012 and also on our outlook for the remainder of the year and into next year. Now to review the results of the third quarter, beginning with revenue.

The Company reported $96 million of revenue in the third quarter of 2012, an increase of $32.2 million or 50% compared to revenue of $63.8 million in the third quarter of 2011. CoStar's organic revenue growth remained strong in the 12% to 13% annual growth range during the third quarter of 2012, while the LoopNet business, excluding purchase accounting adjustments, continued to achieve year over year revenue growth in the 10% to 11% range. Therefore, the combined businesses are operating in the 11% to 13% range.

We're excited about the performance of the combined business and continue to look for ways to maximize our future revenue growth as we re-prioritize our sales efforts and aggressively pursue cross-selling opportunities.

Our non-GAAP net income earnings reached an all-time high in the third quarter for several key metrics we report, including EBITDA, adjusted EBITDA, and non-GAAP net income. We believe the earnings potential for the combined business is evident, and expect to see strong earnings growth year over year as we take further actions to capitalize on synergies from both -- the LoopNet acquisition.

EBITDA increased 227% year over year to $19.6 million in the third quarter, up $6 million -- up from $6 million in the third quarter of 2011. Adjusted EBITDA of $25.6 million for the third quarter of 2012, which is an increase of $11.6 million, or 83%, from the third quarter of 2011. Adjusted EBITDA margins increased to 26.7%, up from 21.9% in the third quarter of 2011.

Non-GAAP net income for the third quarter of 2012 was $13.1 million, or $0.47 per diluted share, which is an increase from $7.2 million in the third quarter of 2011, or 82% year over year. Net income increased to $6.8 million in the third quarter of 2012, or 196% year over year.

Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA and all non-GAAP financial measures discussed today to the GAAP basis results are shown in detail along with definitions for those terms in our press release issued yesterday that is available on our website at www.CoStar.com. And if you have any questions on those in detail, you can e-mail RickSimonelli@costar.com.

Cash and investments increased $22.7 million to $151.8 million as of September 30th, 2012, up from $129 million at the end of the second quarter. Cash flow from operating activities was very strong at $26 million for the third quarter of 2012, and $56.6 million for the nine months ended September 30th, which demonstrates the strong cash flow profile of our business. Short- and long-term debt totaled $170.6 million as of September 30th, 2012.

At this point, I'm going to give some operating metrics for the combined business, which highlight our strong performance in the third quarter. As we further integrate the businesses, we may adjust or introduce some new combined metrics.

Annualized net new subscription sales totaled $9.3 million in the third quarter of 2012. We have slightly refined this metric to include only net new subscription sales from annual contracts. It does not include the monthly or quarterly sales.

Revenue from subscription services on annual contracts in the quarter was $68.3 million for the third quarter 2012 or 71.2% of our total revenue. This represents an increase of 14.2% organically from the $59.8 million in the third quarter of 2011. If you looked at it on a trailing 12 months basis ended September 30th, 2012, subscription revenue would've totaled $261 million, up 14.3% from $228 million for the 12 months ended September 30th, 2011.

Renewal rates for annual subscription revenue remained very high during the third quarter. The 12-month trailing renewal rate for annual subscription revenue increased to 94%, actually up 0.3 percentage points from the 93.7% during the second quarter, which is a new record. The 94% is also a 1.4% improvement from one year ago.

The renewal rate for CoStar subscribers who have been with us for five years or longer re-- remained at a remarkable 99%, matching that all-time high we reported last quarter. As we discussed previously, we expect the cancellation of the RMS contract, a DMGI-owned company, to have a one-time impact on our revenue and renewal rate of approximately 1% in the fourth quarter of 2012. In addition, the ultimate resolution of the Grubb & Ellis contract -- currently still in bankruptcy court -- may impact our revenue or renewal rate as we've discussed over the past few calls.

At the end of the third quarter, the CoStar business had approximately 95,568 subscribers, up from 91,010 in the third quarter of 2011, and down slightly compared to the second quarter of 2012.

While subscribers to our US-based information services increased in the quarter, the small decline quarter over quarter is primarily attributable to the change in Showcase subscriptions. As Andy mentioned, we have combined our marketing services, are no longer selling Showcase as a stand-alone service.

We are now providing Showcase as a part of the expanded national distribution option for the LoopNet Premium Lister subscribers and we expect the former and existing CoStar Showcase subscribers to migrate into the subscriber counts of the LoopNet marketing subscriptions as we upsell them to this premium bundle.

As we have discussed on prior calls, we expect to continue to make some moves to rationalize our combined portfolio, and this decision to stop marketing Showcase on a stand-alone basis is an example of that. The former Showcase sales force is now selling LoopNet Premium Lister both on a stand-alone basis and bundled with Showcase or national distribution.

At this point, we have approximately 71% of our revenue coming from one-year subscriptions, while the remaining 29% is primarily made up from marketing services, including LoopNet's Premium membership, CoStar Showcase, as well as revenue advertising across both platforms. As we continue to make progress cross-selling some of the LoopNet subscribers onto one-year contracts, as Andy talked about, we expect an increase in the amount of marketing revenue to be included in our subscription revenue metric.

For all the Loopsters on the call, the LoopNet marketplace continues to be the premier website for marketing commercial real estate. The number of LoopNet Premium members during the quarter -- third quarter of 2012 increased to 80,062, up approximately 6,800 compared to the third quarter of 2011. The average revenue per paying subscriber, or ARPU, per subscriber was approximately $65.91 for the third quarter of 2012.

Unique visitors to each of the LoopNet-owned websites tallied 5.9 million during the third quarter of 2012 according to Google Analytics, up approximately 30% from 4.6 million in the third quarter of 2011. LoopNet registered users, including basic and premium users, totaled 6.4 million as of September 30th, up 22% from the third quarter of 2011.

I will now provide the outlook for the fourth quarter and the full year 2012. Our forward-looking outlook reflects current expectations as of today, takes into account recent trends, growth rates, renewal rates, which may be impacted by economic conditions in commercial real estate or by the overall economy. Actual results may vary from these results. Call your doctor if you have any issues.

As discussed last quarter, throughout the LoopNet integration process we plan to consider alternatives for certain services from the two companies that overlap or create confusion among customers. We may reduce sales efforts in some areas or discontinue certain services within the boundaries established by our consent decree.

We would undertake these changes only if we believe they are accretive to the business in the long-term, but this could lead to some negative impacts in the short-term. The change to our Showcase marketing services is one service and we intend to continue to evaluate other services like LoopNet Property Comps and Property Facts. We believe the revenue and earnings guidance we are providing accounts for these possible changes.

Based on strong earnings results in the third quarter of 2012, we are raising our estimates for non-GAAP net income per diluted share to a range of $1.59 to $1.64 for the year. This increase in guidance range is a $0.16 increase from the previous midpoint. $0.16.

We are clearly seeing the benefits of integration activities associated with the LoopNet acquisition translate the cost synergies as reflected in our higher non-GAAP net income. For the fourth quarter of 2012, we expect non-GAAP net income per diluted share in the range of $0.40 to $0.45.

The marketing programs accompanying our ongoing cross-selling activities I discussed last quarter are still expected to be in the -- to have an impact range of $0.10 to $0.12 on our non-GAAP net income per diluted share. However, the timing of these activities has changed slightly. We expect to align these marketing activities with our cross-selling activities from the sales force throughout the fourth quarter and into the first quarter of 2013.

The first quarter of 2013 non-GAAP net income per diluted share is expected to be lower than the fourth quarter as a result of the marketing activities as well as seasonal higher expenses in the first quarter, which we always see. After the first quarter of 2013, we expect earnings to increase at a healthy pace moving forward.

We expect to publish more detailed guidance for 2013 as we discuss our 2012 year end results. And we expect to continue to grow earnings year over year each quarter on our path to 30% plus adjusted EBITDA margins by the end of 2014.

Included in our earnings guidance as we discussed last quarter, the Company expects to launch CoStarGo and CoStar Suite in the UK in the fourth quarter and we expect to incur launch-related costs in the fourth quarter of 2012, and as Andy mentioned, into the first quarter of 2013. While this is expected to impact profitability in our UK segment for the next two quarters, we expect these new products to accelerate revenue growth in the UK and to begin to drive improvement in the UK EBITDA margins in 2013.

In terms of revenue, we are raising the low end of estimates for our range to approximately $347 million to $349 million for the full year. For fourth quarter 2012, we expect $97 million to $99 million in revenue. While we are pleased with the strong sequential revenue growth rates so far this year, we do expect a more moderate growth rate in the fourth quarter, mostly due to the seasonally weaker sales quarter that LoopNet has seen for years and years, coupled with the expected impact of RMS and the Grubb contracts, which we have discussed.

In summary, I'm very pleased with the third quarter results, which include the first full quarter of LoopNet operations that begin to provide insight into the strong earnings potential of this combined business. With our integration activities already directly contributing to earnings, we are well on our way to delivering the synergies we expected when we announced the deal.

More importantly, based on our early cross-sell success and realignment of the sales force, we remain confident in the revenue opportunities that are achievable by integrating these great businesses. We see an enormous opportunity for growth as the industry-leading platform with the most complete and growing set of services for commercial real estate.

Based on the revenue and earnings results for the quarter, I believe we are well on our way to achieving the medium-term goal we introduced last quarter of $500 million in run rate revenue by the end of 2014, with adjusted EBITDA margins in the low- to mid-30% range.

More now than ever we believe it is an achievable benchmark that sets us on a realistic path towards our long-term goal of $1 billion in high margin revenue. As always, I look forward to sharing this progress with you in coming quarters. And with that, I'll open up the call for questions.

Thank you. (Operator Instructions) Bill Warmington of Raymond James.

So I wanted to ask first if you could talk to us about where you are relative to the cost synergies for the merger. We've been talking about a $20 million target over a 24-month period. It sounds like you're probably running ahead of that.

Hey, Bill, it's Brian. Yes. I think clearly shown in the numbers -- we're just barely six months into the integration but I think we're probably ahead of where we thought we would be. And you're seeing that directly in our earnings numbers and us raising earnings guidance, along with still being able to invest in the marketing for the cross-sell.

So I think we're extremely happy where we are on that metric. And I think we're, again, well on our way to getting there, more than half way. And I think that, you know, we've -- already have other things in place, that we believe we will be there on time or sooner.

Okay. And then I wanted to just ask if -- you were very helpful last time in terms of -- last quarter in terms of giving some color around the organic growth. I know you gave some figures on the subscription-based portion specifically. If you look at it for total growth there, I know that you have some adjustments there for the LoopNet revenue in terms of deferred revenue write-offs. How do you look -- how do you manage those pieces in terms of what you calculate for organic growth for the third quarter? And then how does that play out in the fourth quarter?

Yes. I tried to give everybody a little bit of clarity on that. I mean, if you were to look at the CoStar business, you know, we're sort of in the 12% to 13% range. If you looked at LoopNet sort of taking out all the adjustments, they're sort of in the 10% to 11% range. So, again, I'm sort of giving a range of 11% to 13% for the business.

I gave a new metric -- you know, people will go back and look at the transcript this time of what the subscription-based revenue is. You know, it's now about 71% quarter over quarter. And that's growing at 14%. So what does that tell you? It tells you the other 29% is growing at below 14%. You know, and sort of the one-off marketing stuff.

So, you know, obviously, one of the big goals is to -- as Andy talked about -- is to constantly go out there and sell people annual contracts for those marketing services, moving them over to that bucket. So I would expect to see that 71% grow next year, which, you know, as that grow, you'll see higher growth rates.

So I think until then you're going to sort of be in that 11%, 12%, possibly 13% range. I'd probably be a little bit more conservative in there as we combine the two companies.

Any specific thoughts on the fourth quarter organic?

Sure. Yes, I mean, I think -- you know, we talked about in the fourth quarter, if anyone goes back and looks at LoopNet's numbers they've always had -- that's always sort of been their worst quarter. So it's always a seasonally weak quarter for them. So I think obviously that will moderate sort of our organic revenue growth. And we do have the RMS contract and the Grubb & Ellis, which is still in bankruptcy court. It keeps getting extended. That -- you know, we don't know.

So I would actually expect to be in the middle of the revenue range. Now, again, there's a lot of factors. We reversed the trend last quarter; there's a lot of other things that can happen. But I think with their seasonally weak quarter, knowing that these other contracts are definitely coming out in the fourth quarter, I'm expecting sort of a mid-range -- you know, in the middle of the range of where we're at. And then I expect, obviously, to move back to what we've been seeing prior to that in the first quarter.

Got you. And then I wanted to ask, where are you seeing -- it sounds like you're seeing a lot of success with the cross-selling. I just wanted to know if you could give us some color in terms of particular market sizes, particular geographies, particular firm sizes, type of product, something that -- where you're having particularly strong success.

Sure. I mean, it's a good question. And I would actually say that at this point, a couple markets stand out. Like the California markets are doing extremely well, in particular Los Angeles where both LoopNet and CoStar Group have very large customer bases down there. And some salespeople are having some great success there.

But another area would be Chicago, where they've seen a lot of success. But I actually think that the biggest determinant of the kind of numbers we're seeing and where they're coming from is individual sales professionals' skill set and what they've learned, and how they approach the upsell or conversion sale.

So I'm seeing individuals who clearly get it and are -- I think we've got individuals who've done 20 to 30 upsells on their own. And then we have other individuals who haven't yet figured it out and we are providing continuing ongoing training support to help them figure out how this sale works.

And I guess that's ultimately good news because eventually we'll get everyone up to speed and it should be fairly consistent. But over the short-term, it's Chicago where we first started to trial the process and those salespeople, got a lot of exposure to the cross-selling. Southern California where we just have a bunch of good salespeople and they've got a big pool to work.

But over the intermediate term, it will probably be heavily focused in California, Texas and Florida but with a lot of activity everywhere else in the country. And the other thing we've seen is that in the initial rounds we've done extremely well with the one- to five-person shop at LoopNet. So someone with just a handful of brokers, a relatively small shop, which has never historically been CoStar's greatest strength. And now this merger's given us that entryway there. And that's doing really well.

The 35- or 40-person shop who might have been using LoopNet before, they're facing a very significant cost increase to go from LoopNet to CoStar. So where the two-person shop may be paying $400, $500 more per month and they can do that, the larger shop may be facing $10,000-plus more per month. And I think that is a longer sales cycle.

So we'll see those start to kick in later in the process. But the typical size of the leads we're looking at, or that LoopNet users we're looking at, are three to ten users in the shop. And I'm encouraging the sales force to, you know, work that sub-ten list. Because if we have a lot of success in the sub-ten list, that'll just give us a stronger position in the plus ten user area over time.

Also, the biggest misperception out there in the marketplace prior to the merger, which we're now able to correct that we've merged and we can actually compare databases and show that to people and people take it at face value when you share it with them. The biggest misconception is the relative strength of the CoStar retail product versus the LoopNet retail information service.

And a lot of retail-oriented brokers area going -- wow, you know, CoStar's got a phenomenal retail database. And so we're getting a lot of little retail shops coming over, which is good news. Now, so far the -- we really, to be honest, have not achieved what our potential's going to be in the selling LoopNet Premium Lister to the CoStar clients. And that's just a function of training. It's just -- we tried to do a lot, as you can tell, really quickly.

And probably at our annual sales conference in January we'll start putting a lot more effort into cross-selling the other way where we start selling LoopNet subscriptions to the CoStar information clients. And I actually think that that is going to be -- I'm very optimistic about the potential for that because I think it just -- it makes so much sense for these firms to be marketing their listings on LoopNet. And many of them just aren't taking advantage of it.

And I think we'll get dramatically better economics when we start selling the LoopNet Premium Lister to firms with collections of brokers and annual contracts rather than, you know, one-off monthly contracts to individuals. So all that bottom line is a way of saying it looks good. We're moving really fast. I'm very impatient for the future. So.

Well, excellent. Thank you very much for the color.

Yes.

Thank you. Brett Huff at Stephens. Please go ahead.

Good morning, guys, and congrats on a nice quarter.

Thank you, Brett.

One quick follow up to what you said before, which was very helpful, Andy. Sort of the three to five person target and they were paying it sounds like an incremental $400 or $500. Is that -- I'm assuming that's per month?

That's per month.

Okay.

So the average deal size is -- I mean, you can calculate it but somewhere in the $500 a month is the average deal size there.

And is that -- that's the incremental? Or is that the new bundle that replaces the $60 a month on average or whatever -- maybe $100 or $120 month on average.

Actually -- and I haven't done the math on the numbers I have. So these numbers are moving pretty quickly. Like, it's ramping up, sort of moving quickly here. But what I've been observing is that when someone was paying LoopNet, you know, $80 for some combination of marketing information services, they're typically now paying us about $500 a month for CoStar information services alone. And then they're paying a little bit more in addition to get pure LoopNet marketing services.

So we're, you know, not in every case but in overall, we're capturing a little more LoopNet revenue, but it's all in the marketing side in annual contracts. And we're getting about $500 -- average -- for CoStar information services, again on annual contract.

Okay. That's helpful. And then of the -- I think 948 was the new sales. Congratulations on that, by the way.

Thank you. And I -- you know, I didn't -- I was trying to pull the number together but I didn't get it fast enough. One of the significant things there that -- the sort of catch in there is we've gone for about 10 or 15 years with a 50-50 balance between selling to new customers and existing customers. So, it's been 50% adding additional services to existing customers, 50% find new customers.

For the first time in these last six months we've shifted dramatically to the new customer side. So we're picking up -- I heard different numbers during the quarter but it was moving towards the 70-some-percent.

Correct. Yes. Moving towards 70%.

Wow, that's helpful. And then the 948 number -- that's net new sales. Is that just new customers -- or new customer sites? Or is that additional modules to existing customers?

That's new customer sites.

Okay. And then of those --

And part of the surprise here for us is that the people who are upgrading the fastest in the LoopNet world are the people that weren't paying anything at all.

That's interesting. So of the 948, in that 948 are you counting people who were Loop users and who are now buying this $500 CoStar on average? Is that count in the 948? Or is it -- are Loop customers now existing customers and so don't count in the 948?

They don't count in the 948. So they -- they've got to be a new customer.

Okay.

But if they were a freemium LoopNet user -- it would count.

Correct.

[If] they were just using the LoopNet site.

The question is that -- were they paying or not? And I think what Andy was saying before is that the surprising thing is that it's, quote-unquote, freemium, more heavily weighted towards freemium people that actually weren't paying anything. They were using the LoopNet system but they weren't paying -- that we're signing up here. And I think that mix will change. But I think that's, to me, almost an -- it's an amazing statistic.

And then -- last question on the 948. Can you tell us how many were those kind of upgrades or the freemium type deals, freemium to paid?

I'm giving you a ver-- I looked at it and I'm giving you, sorry, a recollection from memory, so it could be wrong. But it was, I believe, somewhere in the 400 to 500 were freemium.

Okay. That's helpful. And then lastly -- the $1 billion goal that you all have talked about for a while -- could you give us an update on the broad strokes of which segments or products or however it's easiest to divide that up, what percentage of that $1 billion kind of comes from different things? Like, for example, I know Loop is a big cog in that wheel in terms of marketing services. But can you -- is there any sort of granularity you can give us on what the split might look like in various products once you get to $1 billion?

You know, it's -- I'm sure a lot of things will evolve and we'll see the world differently over the next several years. But we often look at it by -- not so much by specific but by industry segment. So if you look at -- in the most simplistic way, if you look at brokerage firms, owners -- and owners are really just institutions. They could be debt equity, private, public, whatever.

And then banks who are more towards the regulatory side. And, you know, it's a little different there. And then other. We believe that the potential in the banking side of the business -- remember, these banks keep a very large percentage of their commercial real estate on their books. So they're particularly sensitive to it and try to evaluate, understand it, look at credit risk , default, and the like.

And we were meeting with the CEO of Wells Fargo earlier in the week. And he was talking about how the fact that in the residential world he's presented with a lot of very hard numbers and quantitative analysis on what's occurring. And historically in commercial real estate it feels much more like an art and an opinion.

So we think that on the banking side there is a $200 million plus opportunity. And currently that is probably something in the $20 million to $30 million range for us. So we think that could grow tenfold plus over time. And then we also think that we are relatively lightly penetrated in the owner segment. And we see, you know, in some cities among owners that we think are of a certain scale, we might be 17% penetrated plus -- in the older cities. And then newer cities we're, you know, single digit. So we think that's also another couple hundred million plus segment.

And then you can just mechanically look at -- one of the things that the LoopNet merger has done is it has clearly, in very vivid color, reinforced for us the size of the brokerage community out there doing deals, making a living in commercial real estate. And we feel like half of them are using LoopNet marketing as a solution, half are using CoStar information. And you can cross-sell both.

And we believe that's, you know, several hundred million of potential. So I sort of look at it as those three legs of the stool. And then I'm sure the other category will be really fascinating. All the bizarre, never expected uses of the information products from cellular towers to taxi dispatch to package routing to power planning, so on and so forth.

But I don't see that ever being, more than a $50 million, $100 million space, the other category. Except I was thinking the other day that Apple could use some help with their maps. (laughter) I hope that gives you some help.

And, Brett, just to put that in context. I mean, you know, by the first quarter of 2013, we're going to be in the $100 million range for a quarter. So we'll be in the $400 million plus range. We've set a $500 million target out there by '14. So I think if you sort of add up -- I mean, Andy's doing this off the top of his head, but $200 million here, $100 million there, $200 million there, you sort of quickly get from the $500 million to the $1 billion.

So I think that gives people a pretty good road map. I also think in there, you know, you're going to have a couple hundred million dollars from just marketing across all the platforms. So, I think it's a pretty clear path to the $0.5 billion. I think people can see the clear path on the earnings side, too, which is for me really exciting. And then I think from there a run to $1 billion.

Okay. And then last question is on how the comp works for the cross-sale. Andy, I know you pay a lot of attention to how your sales force is working and have in the past. What kind of insights can you give us on how you're incenting your folks during these trainings and sort of reprioritizing? What's the -- sort of what's the key comp sort of driver?

Right. You just made Brian hit the floor laughing.

(laughs) I was trying to keep it to myself.

So it's probably a little bit of a view into how the sausage is made. May not be terribly interesting. But the reality is that you've got a couple of salespeople here who are putting in some really good numbers on this cross-selling, who, once they figure it out, they're doing extremely well. And it's just a traditional sales plan there. And the other salespeople are responding to that.

But the other key here is that we've initiated this teaming effort where we're taking more junior account execs and more senior account execs and building teams. Where the juniors are keeping the demo flow going and handling installations, the more seniors are handling presentations and close activity.

We have set a number of incentives at different tiers, where if someone gets their first $120,000 of cross-sell annualized, they get a bonus that might be $10,000. And then there's some bigger prizes -- they could escalate up to the $100,000 mark for the teams and individuals that hit these volume goals, escalating volume goals.

And then the one thing we've done in the last two years is we have given a market goal to the sales teams that has a very low seven-digit number to it that a team of 10 or 12 people split up. So you get both team and individual focus on trying to win these prizes as well as just the traditional commission plan, which is quite adequate. On the flip side, in the UK we're focusing the rest of the year very heavily on deployment on usage objectives. And then in 2013 they'll be on the same plan as the US.

On the LoopNet side we have made some pretty significant changes. And I really, again, stress I'm very pleased with the way they've sort of seen the big picture and are working forward on this.

But we are now -- it used to pay -- in doing some calculations and looking at the lifetime value, as I mentioned, of selling Premium Lister to someone versus selling Property Comps, these were dramatically different lifetime values to the Company. And yet they often paid very similar commission values.

We have dramatically shifted the commission plans to reward the sales team for selling the Premium Lister products which we think have longer staying power and are more solid revenue. And we've kept stagnant or softened the commission on the -- or actually we completely eliminated commission on things like Property Comps and Property Facts. So there's a fair amount of movement in all kinds of areas here occurring.

That's helpful. Thank you for your time.

Thanks, Brett.

Michael Huang at Needham. Please go ahead.

Thanks very much. Just a quick follow up on the 948 customers you added in the quarter. You know, was there anything one-time in nature here? And how should that trend kind of going forward and, you know, absent some seasonality that you might see in Q4?

Well, it's a good question. The beautiful thing about this is -- you know, I've probably seen, I don't know what I've -- maybe 20 of these sales? I'm not sure. But I've seen a lot of them where I've gone in just different parts of the country and gotten a feel for what we're -- what it's like. And overwhelmingly, I mean, my view, these are absolutely real career commercial real estate players.

And when you migrate these players into CoStarGo and they adopt an inventory system with dramatically higher quality content, research-verified, much more comprehensive, I believe that this is very sticky revenue. And I would expect that it would be in the same 90% renewal area.

And so there's -- it's not that -- I have seen no indication that any of this stuff is one-time in nature. And, you know, some of the sales that you're seeing are things like Resolve, Virtual Premise -- in other areas. And that by its nature is extremely sticky. You know, where you're doing lease management and portfolio management and with big implementation costs. So this is a continued philosophy of the Company to pursue the long-term stable revenue, and swear off things like telecom and vendor revenue which comes and goes with the wind.

So would it be unrealistic to kind of see that number trend up kind of through 2013? I mean, so could we see another record in terms of customer adds as we --

I would be disappointed if we didn't.

Okay. Great. And then, you know, in terms of the UK, I think you had kind of touched on how growth rates could accelerate on the heels of some new products launched out there through next year. So what actually would be the kind of range of expectation for 2013 in terms of growth rates, you know, out of that region? And, you know, maybe help us kind of understand what that could look like as you exit next year.

Well, this is -- it's difficult to give you any sort of precise number, just because the situation is new. And we would be able to give you a clearer view of this after the first couple of months of selling activity. But, you know, in the simplest terms the product that's being offered in the United Kingdom is basically -- it's called Focus. It is described by the UK leadership as deeply unsexy.

It is based upon, I believe, Cold Fusion. It was designed and built in late 1990s, early 2000. And I've, you know, been struck by what a piece of garbage it is. And so we're taking -- that's what people are going to be on. That's what people are on right now. And we're basically coming in with the iPad app, which some of our clients describe as a love -- use the word love in their relationship with CoStarGo.

And so we've got, you know, book ends of product here. You've got radically different products. And so we're going to go in there and we're going to look for -- you know, they typically are paying dramatically less per person in the UK for our services, this old Focus system, than we are able to capture in the United States.

And we're not going to try to get the US pricing. If we did, we would be wildly profitable in the UK. I mean, like, you know -- we have very good penetration there. But we're trying to get reasonable, not overly aggressive, upgrade prices. And we'll be able to report the end of the first quarter. When we report first quarter numbers we'll have some really good color on that. But I'm expecting a good result. But we need to see, you know, what it looks like with actual experience on the ground.

And just to add just a few things to that. I think that, you know, as Andy said, we're actually going to be focusing on training in the fourth quarter. So you -- we would sort of not expect to see a lot from the UK on the sales side in the fourth quarter.

You know, and again, as you said, as we start selling in the first quarter you'll get a better shot at what that looks like in the second quarter. But just to give you some rough numbers, you know, the UK has traditionally for the last two, three, four years has run behind the CoStar Group in sort of growth rate percentages.

So in 2010 and '11, you know, they were flat or up or down just a tiny bit. In 2012 they're sort of in single digits where CoStar's grown in double digits. So, you know, our goal for 2013 for the UK is to get them up to double digits. I mean, one thing we've been doing -- and so it -- it's, you know, in the UK it's looking at the marketing services which is growing at, you know, smaller growth rates at 10% to 11% versus the subscription businesses in the higher percentage rates.

Is to look at all the pieces of the business and say -- how do we get that -- how do we get all the other pieces up to sort of where the big subscription thing is? So that applies to the UK. So my goal for the UK -- Paul Marples and Nat Green, if you're listening -- is double digit revenue growth, which we haven't seen in years. You know, and then obviously to continue that moving forward.

And it's the same thing. I want to get the marketing piece up. I want to get the land sites and the biz-by-sell. And, I mean, there's a bunch of smaller pieces of our business -- Virtual Premise -- and I want to get them all up to sort of the higher growth rates. So anyways, hopefully that gives you a little more color.

Awesome. And just last question for you. So I think you had mentioned that you've only distributed kind of 16,000 of those LoopNet leads to your sales team. And they've only contacted a portion of those. So, when would you expect to kind of distribute out the balance of those leads and kind of contact, you know, that broader audience? I mean, and what does that imply to sales head count growth through next year? Thanks.

Well, what you'll see is probably more of a shift in resources from head count being allocated to -- you know, shifting head count allocation from products that may have lower value to products that have higher value.

So, 350 salespeople is still a pretty significant number. We will accelerate the distribution of those leads, particularly to those people who get it and are closing, converting them to sales. We'll accelerate those through the year but realistically, there's no conceivable way that the sales force can actually get to all these people over the course of the next three years.

And there will be also -- I mean, you can take your traditional Geoffrey Moore -- Crossing the Chasm kind of adoption curve. You're going to have your innovators, early adopters, the early horde, that kind of thing. And it's going to be a three-year process, I think, to sort of move through these things, at the very best.

Great. Thanks very much, guys.

Thanks, Mike.

Okay, thank you. Brandon Dobell of William Blair. Please go ahead.

Brian -- on a go-forward basis have you guys kind of narrowed down what the kind of consistent metrics are going to be that you're going to give us? Sounds like there's going to be a subscription revenue number. But in terms of, you know, users added or user count or things like that, you guys narrowed it down to what we should kind of expect and how we can start to build a model with a little more granularity?

Yes. And I think, you know, again, that's what -- I think we're still evolving that but I think you guys heard some of the metrics, you know, here in this one. And it definitely will be on a subscription basis. It'll be on Premium members. You know, so we're going to continue to give some metrics as, you know, some of the other metrics. But as they evolve, we'll evolve more.

But I think that that's where you look at -- you know, 71% of the business is about the subscription base services. And we want to move more of it there. So, I mean, I want to see that number increase to 75% or 80% over the coming years. So I think those'll be the metrics that we'll focus on.

But we will still give user metrics and explain, okay, well, here's what's happening in those user metrics. For example, the CoStar numbers and what we're doing with Showcase, we explained that. So I think -- I always tell people -- you have to understand what's happening in the metrics based on the decision we're making. I wouldn't necessarily take the metrics at face value.

The other thing, just to point out -- I'm glad to see that I'm not the only one up at all hours of the night, when I saw your note there. But that I was pretty clear, I mean, as far as the revenue range goes. I actually do think we're going to be in the middle of revenue range. I know I saw your note that said -- hey, they should be in the high end because they always beat it.

You know, we give a range so that we can be in the range. And we definitely -- you know, when you look at LoopNet historically, Q4 has always been very tough for them. You know, we do have some things that we know about, as far as RMS and some other things. So we actually do believe we'll be in the middle of the range and, you know -- so that should be the expectation for people. I just want to throw that one in there because you're on the line.

Yes. Fair enough. I appreciate that.

Did you think that was directed to someone?

It seems like it but I -- again, I've got to go back and -- listen to it again. (laughter) Brian, your comments about the transition from Q4 of this year to Q1 of next year and then expectation for EPS to increase, I think you said, at a healthy pace going forward. I want to make sure I understand, you know, the semantics between quarter on quarter or year over year and that increase at a healthy pace. Should we expect every quarter have a greater EPS number than the first quarter? And kind of, you know, that --

Well, I --

-- that stair up. That stair step up.

-- I haven't given 2013 guidance but, you know, maybe I'll try to be a little more clear on that. Is that, you know, we gave $0.40 to $0.45 in the fourth quarter. If you look at it, eight of the nine or eight of the ten qua-- for CoStar Group transitions from Q4 to Q1, Q1's always down. And that's because we do the annual sales conferences, that's when everyone gets raises, you have all the high benefits.

So that's sort of a given. So if we're at -- if my range is $0.40 to $0.45 for the fourth quarter, people can expect it to be lower by a few pennies in the first quarter, in addition to the marketing services that we had. That should still be up and I expect that to be up year over year when you compare it. And I expect each quarter next year to be up year over year. And I definitely expect going from Q1 to Q2, as I said, at a healthy pace expect to see growing --

Okay.

-- you know, net income. But the first quarter, you know, if you just take -- if someone just says here's my number for the year and I divide it by four, you're going to be off in the first quarter because of that seasonality. So I was purposely pointing that out because I noticed models where people sort of just divided the number by four. I think that the annual numbers are -- you know, I think people are sort of getting there but I think that that first quarter I was trying to purposely point that out to people.

Okay. And then pro--

Just dealing with the revenue on the LoopNet, if people weren't paying attention, they would say -- gee, why does Q4 look, you know, softer? You know, and it's not. It's just it's a seasonality thing that's in their business. So I'm just trying to point those out to people.

Okay. And then I guess in a similar fashion from the kind of staging perspective. The UK business -- how far away are you guys from profitability? You know, is there a timeframe in which to say, you know, we're 100% certain we're going to get there. Or is there kind of a range of where it starts to make a difference so we can see in the model? And I guess as the add-on there -- can this business be as profitable as the US business? Or is it just a scale issue so it's not going to get there?

So the business -- now, remember that we acquired it, it was a pretty small bus-- we acquired a number of very small businesses. There was a long period where we were migrating multiple software platforms together into one common UK platform. And then we embarked upon investing -- and the business was profitable. It was sharing good margins in the UK.

And then we made the investment to quadruple the research in the UK, quadruple the investment research in the UK in order to get it up to the same standards of product we produce in the US. And then the next phase was to transition the old tired software into the much more competitive, consistent international US software platform with CoStarGo.

Those were two very significant investments which did not have an immediate return post-Lehman Brothers. And so now what happens is you launch this new product. You're going to begin to get -- you would expect -- you certainly would expect to get accelerating revenue.

You also get declining expenses now because you have a surge of research that was occurring. You had dozens of additional researchers surging. And that temporary staff starts coming off. And then you also have dozens of software developers who are allocated to the UK that start phasing off. And we would expect to have a very clear picture of the road to profitability as you move halfway through the year -- we could start talking about it.

And it would happen -- and you're familiar with the company over time. Often when these things switch from investing mode to margin expansion mode, it surprises everyone how fast it goes. And I would absolutely expect the UK to have the same margin potential as the United States. It is a very sophisticated, intensely focused commercial real estate industry over there.

And they're -- I don't -- despite the fact that's a $2 trillion-some GDP and this is a $14 trillion, $15 trillion GDP, you know, your scale is in your software. And it becomes, you know, sort of like a California operation. And so I think it'll have -- I still believe it'll have good potential in the long run.

And just to throw some numbers on that, Brandon, I think that, you know -- if you sort of looked at the nine months ended with allocations, you know, we're at $6.6 million loss versus $2.8 million. I think once we release the product in the fourth quarter, we get through some of the marketing in the first quarter, I would expect to see the losses half over the next four quarters, which will at least give everybody a little something to model to. And then I think obviously based on the revenue growth we'll be giving people more clarity on what the target date of break-even.

And, yes, just like Andy said, I thoroughly believe it can be just as profitable as the US. And that's what we expect. I expect nothing less. So, I mean, we will definitely put a time period on that, you know, probably -- we'll have more clarity by the end of next year. But I think once we've sort of finished these initial marketing things, I think you'll see the costs get cut in half for the following few quarters, just because product development sort of rolls off of that. And then we'll give you guys clarity on the rest.

Okay. Good. Appreciate the color. Thanks a lot.

Thanks.

Todd Lukasik with Morningstar.

Just following up on the UK there. The corporate allocation of $2.3 million in the last quarter, is that literally just corporate overhead? Or does that include the cost of, you know, you mentioned dozens of developers allocated to the UK to transition the technology.

Yes, it is. It -- there's a lot of development allocation in there. And so once that stops at the end of this year, obviously those loss numbers will be pared back fairly quickly. We do have some marketing that we've talked about that is going to be happening there. But that's why I would definitely expect by the time you get in the second quarter, third quarter, fourth quarter, those numbers will be half of what you saw this year. And I think improving with revenue growth.

Okay.

You [won't] also have temporarily transferred personnel and increased travel expenses.

Correct.

Got you. Okay. And then I just wanted to go back and revisit the numbers you mentioned earlier, Andy, with regard to the cross-sales results to date -- 100,000 leads, 16,000 distributed. Some of those have received demos and 723 deals closed for I think a monthly contract value of $381,000.

Right.

Is that $381,000 attributable to all of the 723 closed deals, or just the portion of the 723 that had prior monthly commitments with LoopNet?

That is the -- that's the entire set.

Okay. All right. And then I was curious about the 100,000. Do you have a break down in terms of the number of those leads that are paying LoopNet something now versus sort of the freemium category that you guys mentioned?

Sure. We actually have analyzed that list to death. So you start out with a 6 million sum. And you filter down to the 100,000 that you're focused on. So we developed a whole -- we built and re-built that database, added all kinds of fields to it, characteristics, usage patterns, the sorts of listings they had, the dollar value of the listings, estimated their commission earnings. All that kind of stuff.

We developed scoring systems -- where for consistent, continuous use plus having listings plus time periods between accessing the system. All kinds of things. Came up with a scoring system. We scored them from negative -- they ended up getting scores from -- 6 million from negative 20 to positive 50. Positive 50 being the most promising.

And we were just focusing on -- the 100,000 are really the ones that are in the -- I -- make it exactly. But I think maybe 6 plus or 5 plus category. And of those I think it's about 50-50, roughly 50-50, that are paying something or who have paid something over time. And the leads we've been distributing to the sales force are random.

So we have not been -- we have intentionally not distributed the ones we scored 20s, 30s, the higher score ones, because we want them to confront the 5s and 10s and 11s and 12s first and learn what they're doing, and then start to go to the higher value ones.

Okay. So if I understand correctly what you just said, there may be a greater yield opportunity in the leads that you tackle next year or the year after that, the year after that.

Yes. And that's a combination of just continuing to put out more of these higher score leads, plus the salespeople figuring out how to do it.

Okay. And then -- so the $381,000 that you have on the monthly contracts, I think the incremental annual revenue opportunity there is somewhere around $4.1 million, if I did the math correctly.

Right.

Is it fair to assume that there's about $1 million in, you know, LoopNet cross-sale revenue synergies baked into the fourth quarter revenue guidance?

You know, you're sort of plucking that out of the air. Obviously, all the sales numbers -- I mean, as Andy said, a lot of the core people were spent sort of training and cross-training and putting people on teams. And so by the time they sold it, I would say it was in the back half of the quarter. So of course you'd only get, you know, the back half of the quarter revenue on that. So that number maybe seems a little bit high to me.

Okay.

But, you know, you're sort of plucking that one out of thin air.

Okay. All right, well, thanks a lot, guys.

Absolutely. Thank you, Todd.

Thanks, Todd.

Thank you. Toni Kaplan of Morgan Stanley.

So G&A was a little bit lower than I had expected. And probably included a portion of the $2 million of integration costs. So I was just wondering if we look at, you know, $18 million plus or minus per quarter excluding seasonality, is that sort of a sustainable run rate for G&A? Or was there a reason that this quarter was lower?

Yes. No, I think it's sustainable. And obviously the goal is to continue to get more synergies and to obviously improve upon that. I do have the general counsel sitting next to me, so, you know, with the caveat as long as there's no lawsuits coming in the future. But -- because that's where all the legal costs would go. But, yes, I think it's --

^ We'll do our best.

He's laughing at my comment. But, yes, I mean, I think obviously -- you know, synergies -- you know, we're definitely -- somebody asked -- I think Bill started out with that question. You know -- we're doing much better on synergies than we anticipated. We're moving much faster on things. So obviously we're seeing positive results that we think will continue, again, unless something else comes up that we're not aware of.

Okay, great. And you mentioned that the -- some of the marketing that you plan to do on cross-selling will be pushed into the first quarter of '13 instead of doing it all in the fourth quarter. And I just wanted to find out what -- like, what was the decision making behind the delay? Thank you.

A number of different factors. We have done several waves on -- like, one of the things we're trying to do upfront is we're trying to differentiate -- begin to re-educate the industry on what the key attributes of the brands are. So we're trying to re-identify LoopNet with marketing and CoStar with information.

We did a series of marketing pieces. We're done several marketing pieces on the LoopNet side, some good pieces. But we just decided that the pace at which we could do all these changes of the sales force -- we wanted to time some of the marketing programs closer to when they would actually be able to go out and meet with people and demo people.

So we -- the information branding pieces are being staged to go out just before the salespeople contact them to try to do the upsell, rather than all at once in the fourth quarter. Also, we shifted a major marketing event from 2012 to early 2013 just because of -- schedules weren't working out and we wanted to make it a little more efficient. So there's nothing -- it's more a shift of several months.

And, again, Toni, I think what it was was aligning it -- exactly what Andy said -- it was aligning it with the sales activity. So we talked earlier about, you know, we have 350 salespeople that are -- and Andy talked about moving over 100 of them to doing new things that they hadn't done before. Teaming people up and training them.

So I think, you know, the idea is obviously to have the marketing pieces going out and making sure that the salespeople are in place to capitalize on those activities. You know, versus just sending a bunch of marketing out but you're still then re-organizing sales forces and teaming people up.

So it's just -- I think it's aligned to -- and obviously we think you'll see a much higher IRR and return on those investments by having the two aligned.

Okay, great. And just lastly on that point of the sales reps shifting. How long do you think it takes for a full ramp up? You know, obviously they're in training now. But in order for people to get to sort of the full run rate capacity, how long does that normally take? Thank you.

Yes, the vast majority of the people we're talking about here are already experienced commercial real estate information or marketing services salespeople. So it's more a question of them picking up new roles. And I would say that that's probably a three- to six-month time period to really get to the point where they're really up to speed and optimized.

Great. Thanks. Nice quarter.

Thank you.

Thank you very much.

And we have a follow up from the line of Brett Huff at Stephens.

Just one thing, I missed this earlier in the call. What was the average new rev per customer site, that number you guys usually give?

$8,314.

Thank you. That's what I needed. I appreciate it.

Great. Thanks, Brett.

Thank you. And a follow up from Bill Warmington at Raymond James.

A quick question on the -- I just wanted to make sure I followed the math on the initial costs -- the uplift you got this quarter, third quarter, from the cross-sales.

I don't think there was math. I think Todd asked the question that -- if we thought there was $1 million in there. And I don't think we actually know the exact number. But as we talked about, you know, the majority of the quarter was reorganizing the sales force and cross-training them. So I think, you know, a lot of the sales came in towards the back half of the quarter, which would've mean only a small portion of the revenue would have came in then, too.

Got you. So the -- but the annualized revenue for the 948?

The annualized for the 948. Yes.

$7 million?

Yes, $7 million or $8 million. Somewhere in that range.

$7 million or $8 million. So you could figure probably a couple million next quarter from that group?

Correct.

All right. That was it. Thank you very much.

Thanks, Bill.

Great.

Thank you. And there are no further questions in queue.

Thank you. And with that, we will conclude this call. And thank you for joining us. And we look forward to hosting you on the next earnings call, which I believe is our -- CoStar Group's 50th earning call. So look forward to talking to you then.

Thank you. And ladies and gentlemen, this conference will be available for replay after 1.30 PM Eastern time today, running through November 25th at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code of 266046. International participants may dial 320-365-3844, again with the access code of 266046. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.