CoStar Group Inc (CSGP) 2013 Q1 法說會逐字稿

Welcome to the CoStar Goup's, first quarter earnings call. (Operator Instructions). I would now like to turn the conference over to your host, Rich Simonelli. Please, go ahead.

Thank you, Operator, and good morning, everyone. Welcome to CoStar Group's first quarter 2013 conference call. We are delighted you could join us today. Before I turn the call over to Andy, I have some really important facts for you.

Certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties and can cause actual results to differ materially from such statements. Important factors include, but not limited to, those stated in CoStar Groups April 24, 2013 press release on the first quarter results and, in CoStar's filings with the SEC including our Form 10-K for the period ended December 31, 2012 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 weather as a result of new information, future events, or otherwise. As a reminder, today's conference call is being broadcast live, and in color, over the internet on www.costar.com. A replay will be available approximately one hour after the call concludes and will be available until May 28, 2013. To listen to the replay call 800-475-6701 within the US or Canada, or 320-365-3844 outside the US and Canada. The access code is 287842 and the replay will also be available on our website soon after the call concludes.

I would like to turn the call over to Andy Florence.

The day after tomorrow is the second anniversary of the announcement that CoStar had entered into an agreement to acquire LoopNet. In that announcement we stated that expected to achieve annual cost synergy's of approximately$20 million over the first 24 months following the close of the transaction. And we also stated that we saw the potential for significant revenue synergy's through the cross selling of each company's complementary services to the others client bases.

As you know, it took one year before we received permission from the Federal Trade Commission to close the acquisition. Tuesday of just next week is the first anniversary of our closing on the CoStar LoopNet merger and I'm very pleased to report that I believe the actual results of the merger have clearly met and exceeded those initial expectations.

We have achieved our goal of $20 million in cost synergy's from the acquisition in half the time we expected. We have eliminated redundant or unnecessary expenses and I'm confident the result is a more efficient and better managed company that is extremely well positioned for sustainable and profitable growth.

I believe the excellent results of the new LoopNet management team continues to deliver, prove that point. A sceptic might worry that these significant cost savings might hurt LoopNet's ability to perform. In the first quarter 2013 we achieved the highest quarterly revenue ever for LoopNet's premium membership.

Since the merger we have refocused LoopNet to it's core strength of marketing commercial properties on the internet and we have refocused on annual, rather than monthly contracts. We have improved the pricing of LoopNet's products relative to their value, and we have refocused on firm wide contracts rather than contracts with individuals.

The result is a 219% increase in the organic growth rate of LoopNet's premium membership revenue from 5.2% in the quarter before the acquisition to 16.6% in the first quarter of 2013. The fact is that LoopNet's operation is enjoying $20 million cost synergy's while turning in dramatically better results.

On the anniversary of the closing I believe you will agree with me the potential for significant revenue synergy's through cross selling of each company's complementary services has become a reality. Through March 31 we closed 3,067 cross selling deals between each other's client bases. These 3,067 deals cover over 7,000 users. These deals total $18.4 million in revenue synergy's which is a 26% increase from the $14.6 million I reported on our last investor call just six weeks ago.

I reported a lot in that earnings call. Our 90 minute call.

Here is how the $18.4 million in revenue synergy's breaks down. The pure cross selling of our two customer bases total $14.4 million which is approximately $12.4 million in CoStar information services to LoopNet members, and approximately $2 million LoopNet marketing services to CoStar customers.

During these sales calls we were also able to move LoopNet customers from monthly to annual contracts for LoopNet marketing and in many cases we added additional users at those sites. This resulted in an additional $3.9 million in new sales associated with cross selling.

The LoopNet customers previously only had a combined monthly commitment of $329,000 with LoopNet so the conversion to $18.4 million in annual subscriptions in a little more than seven months of cross selling is quite impressive and I think you I'll agree with that.

This cross selling activity has re-invigorated LoopNet premium lister revenue growth. After premium lister experienced a sharp 21% decline from its high in the third quarter 2008, and flat revenue performance in the two years prior to the acquisition, post acquisition it achieved a solid 15% increase from the first quarter 2012 to the first quarter 2013.

We believe we are just beginning to realize the potential cross selling opportunity with just over 3,000 deals closed off the initial lead list in excess of 100,000 LoopNet and CoStar users we considered to be best prospects. Additionally, the lead list continues to grow as we grow the number of CoStar subscribers, increase traffic on LoopNet.com, and grow the number of LoopNet members.

In March of this year we added a record number of new registrations to LoopNet and now have over 7 million registered users. In the year in which we upsold more than 4,000 LoopNet users to CoStar for information to still grow the net new number of LoopNet premium members by 8,000 year-over-year. So we are actually adding LoopNet premium members faster than we are converting them to CoStar which bodes well for future growth.

We raised prices on new sales of premium lister and premium searcher to better reflect the value these customers are getting for marketing and searching properties. We raised the new average sales price on premium searcher 57% from $47 per month in August of 2012 to $74 in March of 2013. So we just switched the digits there I guess.

We raised the average premium lister price from $75 per month in August of 2012 to $96 in March 2013. We have created and have been successfully selling premium lister with an option added feature known as national distribution which offers additional visibility for our clients listings on showcase.com and on over 200 newspaper websites across the United States.

In March of 2013, nearly four out of ten new subscribers to premium lister opted for this premium lister with national distribution. The average new sales price in March 2013 for the national distribution package was $116 per month which is 54% more than the $75 per month we averaged on premium lister sales in August of 2012.

At the same time we were increasing prices we are focused on driving down LoopNet's historically high cancellation rates. LoopNet has historically had cancellation rates well over 500% higher than CoStar's. I have heard from hundreds of LoopNet users who clear early value the leads LoopNet generates and have an ongoing need for the service. So that convinces me that the high cancellation rates are about sales strategy errors, not about any weakness in the service.

We believe that LoopNet has fantastic products but that its historic reliance on selling to individuals on month-to-month contracts has led to the high cancellation rates. Reducing LoopNet's cancellation rates was, is, and will be a high priority for management post merger. To reduce the rate we are focusing on selling our core rather than our weaker products,on annual contracts rather than monthly,and to firms rather than individuals.

When we closed the acquisition last year, the overwhelming majority, or about 95% of LoopNet's contracts, were month to month. By March 2013, only 25% of LoopNet's new contracts being sold were month to month. 75% of the new subscribers for premium membership were signing up for longer term contracts with 51% signing annual contracts and 24% signing quarterly contracts. These customers are typically marketing listings for year in year out so we found very little resistance to going to the longer term contracts.

As of March 2013 quarterly and annual contracts represented 26% of all premium lister subscriptions and 23% of premium searcher subscriptions. We believe our effort is already working. Cancellation rates on premium membership have declined 11.5% from 6.1% in March 2012 to 5.4% in March of 2013.

If everything else were to hold constant I expect LoopNet's cancellation rates to decline materially over the next 12 months. I believe that the most significant competitor to LoopNet's paid premium lister product is free LoopNet basic lister. Last year 69% of the listings receiving a marketing benefit on LoopNet were free listings and only 31% were paid.

Through a concentrated effort in marketing, sales, product development and more effective pricing plans we have dramatically improved that ratio within the first year. By March of this year we had increased the percentage of paid listings 23% year-over-year from 31% paid to 38% paid. We expect to continue to make good progress in this area.

After a strong first year of combined CoStar and LoopNet we are pleased to report our overall revenue for the first quarter of 2013 was $104 million, compared to $69 million in the first quarter of 2012 which represents an increase of 52% year-over-year in our revenues. In the first quarter 2013 we booked $13.8 million in annualized net new revenue which is the most in our history and an impressive 27% quarter-over-quarter increase from the $10.8 million booked in the forth quarter 2012.

That $13.8 million first quarter booking is a dramatic 64% year-over-year increase over the first quarter of 2012 booking of $8.4 million. March was our highest overall sales month of all time. We added 1,126 new CoStar information subscribers in the first quarter 2013.

This is the second highest number of new subscribers we have ever added and continues the positive trend of three consecutive quarters of adding record numbers of new customers.

Adjusted EBITDA for the first quarter of 2013 was $25.7 million, which is an increase of $10.4 million, or 68% year-over-year. Through the rest of 2013 and throughout 2014, I expect these margins to steadily improve and for us to reach our goal of 30% to 35% margins as we exit 2014.

We are now three months into the launch of CoStar Suite and CoStarGo into the UK. We already have 500 paying customers of CoStar Suite in the UK. We have also had very good adoption and usage among the initial customers of CoStar Suite in the UK. The average focus user is paying 35% more to upgrade to CoStar Suite and Go. We are advancing upgrade discussions with a number of our largest prospects in the UK and based upon our early positive results we expect to continue to report good growth in CoStar UK sales.

Turning to the commercial real estate economy. The demand for commercial space increased in the first quarter of 2013 from one year ago for all property sectors. Demand growth for the industrial sector was exceptionally strong and net absorption in the first quarter was more than double the year-ago levels.

Property sales volumes in the first quarter were are also up for all sectors, except for retail, which was down 17% from a year earlier and still suffering from a weak and uneven recovery in the growth of online shopping. Perhaps this sector will benefit from proposed internet taxes.

The office sector continued its long albeit slow march to recovery in the first quarter with [inaudible] declining 0.10% in the quarter and 0.05% over the past year to end at 12.2%. Over the past year demand was solid at 58 million square feet and increased by 11 million square feet from the previous 12 months.

That is real, positive, momentum for the office sector. This recovery is broadly based with nearly every major market except for Washington, D.C. and Los Angeles, recording positive net absorption in the first quarter.

Office rents rose by 1.2% year-over-year mostly in the metro's with high job growth rates and fairly low vacancies. Office sales volumes are up 19% over one year ago and the pace of sales is similar to 2005 and generally indicates a healthy market. A slow but steady commercial real estate recovery is exactly what I had hoped for as it creates a sustainable growth environment for CoStar.

This summer we expect to release five significant product enhancements to the CoStar suite of services. In order to preserve our competitive advantage I will not go into detail on the enhancements but I can say that I believe these are some of the most substantive product upgrades we made in my tenure at CoStar and they will further enhance out ability to drive LoopNet cross sales, UK sales, and accelerate organic US CoStar sales growth.

I expect these product releases will launch a new dimension for CoStar by providing advanced software tools that connect our user community more effectively and make our information more valuable. It has been a truly transformative first year working at the team at LoopNet and was made possible by the work of our over 2,000 employees especially the great team leading and driving fantastic results at LoopNet.

We have built and continue to expand the largest platform of information analytics and marketing services in commercial real estate servicing a huge client base with nearly 200,000 paying subscribers and approximately 10 million unique monthly visitors coming to our websites in aggregate. I continue to believe we are on our way to reaching our goal of $500 million annual revenue run rate with 30% to 35% margins when we exit 2014. The word for the day is going to be brevity, for me, and with that I will turn the call over to Brian Radecki, our Chief Financial Officer.

I think this is a record for sure. After we got charged extra from NASDAQ last time for going long. Maybe see if I can get a credit for that. Thanks Andy.

We are pleased with the performance in the first quarter of 2013. CoStar's information analytic services continued to show strong growth and the successful integration of LoopNet is a huge contributor to the revenue and earnings. We achieved over $20 million in annualized cost synergy's one year earlier than the 24 months we discussed at the time we announced the acquisition. Revenue synergy's continue to ramp up and have increased to $18.4 million at the end of the first quarter.

Let's talk some numbers. Starting with CoStar's results in the first quarter the Company reported $104 million of revenue, an increase of $35.4 million or 52% compared to $68.6 million in the first quarter of 2012.

As most of you are aware, prior to the acquisition LoopNet and CoStar was growing at approximately 10% to 11% respectively year-over-year. The pro -forma organic revenue growth for the combined Company continued to accelerate in 2012 for a total of 12% year-over-year and now is over 13% year-over-year in the first quarter of 2013.

As I have said many times, we believe we can maintain strong double digit organic revenue growth rates in this range or possibly higher and, of course, over a much larger and growing subscription base for many, many years to come for the next three to five years. Due to the massive cross sell opportunity we would expect it will be a sustained and consistent pattern of double digit organic revenue growth versus a short-term pop in the growth rate for a few quarters.

Moving to EBITDA. It was $7.6 million in the first quarter of 2013, compared to $11.9 million in the first quarter of last year. This is impacted by a $15.1 million increase in stock based compensation expense for the first quarter over the first quarter of 2012 mainly related to performance based stock awards.

In February 2012 the compensation committee for CoStar's board of directors approved grants of performance based restrictive stock that would vest upon achievement of $90 million of cumulative EBITDA over four consecutive quarters sustained earnings growth, folks. These awards support the committee's goals of aligning management's in incentives with increasing shareholder value by growing the Company's earnings and are consistent with the 2014 exit goals we have been sharing to investors for quite some time.

Based on the continued strong performance, the accelerated pace, and success of the LoopNet integration and management's increased confidence that it is probable the earnings goals will be achieved in 2014 the Company recorded a cumulative catch-up of stock based compensation expense in the first quarter.

We reported adjusted EBITDA of $25.7 million for the first quarter of 2013 which is an increase of $10.4 million or approximately 68% compared to $15.3 million for the first quarter of 2012.

Adjusted EBITDA margins increased to 24.7 in the from 22.3 in the first quarter of 2012.

Non-GAAP net income in the first quarter of 2013 it was $13 million, or $0.47 per diluted share, which is an increase of 59% from the $8.2 million or 32% per diluted share, in the first quarter of 2012. We are very pleased with the strong earnings we achieved in the first quarter and I should note that this is the first time since I think 2008 that non-GAAP net income per share increased from the fourth quarter to the first quarter because Q1 usually has seasonally higher expenses to start the year. Obviously the significant revenue growth helped us this year.

As a result of the cumulative catch-up of stock based compensation expense net income for the first quarter of 2013 was negative $2.4 million. Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA, and all our non-GAAP financial measures discussed on this call, to the GAAP basis results, are shown in detail along with definitions of those terms in our press release issued yesterday and are available on our website at www.coStar.com. Or if you have questions you can e-mail Jay Coleman at CoStar.com. JayColeman@CoStar.com.

Cash and investments totalled $189.1 million as of March 31, which is $22.8 million higher than the total short and long-term debt of the Company which is $166.3 million. So clearly our balance sheet is in great shape.

At this point I'm going to give some operating metrics that highlight our strong performance in the first quarter of 2013. As Andy spoke earlier we achieved a record high $13.8 million in annualized net new sales in the first quarter based on ongoing success of driving sales of LoopNet premium lister products and cross selling of CoStar information services to LoopNet customers.

I would like to point out we believe these are great sales numbers but actually understate the success. Net new sales of subscription services on annual contracts was even higher at $14.8 million. The higher sales of annual subscriptions reflect our efforts to replace the monthly short term LoopNet agreements with higher value, longer term quarterly or annual agreements.

In March, for example, approximately 51% of our premium member sales were annual up from essentially zero from last year. Revenue from subscription services on annual contracts was $76.1 million for the first quarter of 2013 or 73% of total revenue. Up from 72% and 71% in the fourth and third quarters so obviously a nice trend there we would like to continue to see. For the trailing 12 months ended March 31 subscription revenues totalled $283 million, up 16% from $243.9 million for the 12 months ended March 31, 2012.

Renewal rates for annual subscription revenue remained high during the quarter of 2013 the 12 month trailing renewal rate for CoStar subscription based revenue was approximately 94%, consistent with the all time high reported for the previous two quarters. Looking forward as we see more annual LoopNet contracts becoming a larger part of the subscription base it is possible, and I would expect to see, the 12 month trailing renewal rate edge down slightly over time. We will continue to give you clarity on trends as we move forward.

The renewal rate for CoStar subscribers who have been with us for over five years or longer was 98%, which is essentially flat with the first quarter of last year and down slightly from last quarter but still pretty remarkable number. At the end of the first quarter 2013 the existing CoStar had 100,864 subscribers, up 5,908, from 94,956 from the first quarter of 2012. An increase of 3,671 subscribers from the fourth quarter of 2012.

The total number of subscriber sites for the existing CoStar business increased to 20,868 in the first quarter of 2013, up from 18,507 in the first quarter of 2012 an increase of 657 sites over the fourth quarter of 2012.

The LoopNet marketplace continues to be the premier website for marketing commercial real estate. The number of LoopNet premium members during the first quarter increased to 83,943, up 8,114, compared to the first quarter of 2012.

The average revenue per paying subscriber, or ARPU, for premium members was $69.08 for the first quarter of 2013, up 5% from the first quarter of 2012. By comparison the average selling price for new premium customers in the first quarter of 2013 was approximately $75, up from $57 in the first quarter of 2012 reflecting the higher value site level agreements we are doing and the price increases we've implemented in the quarter.

As Andy said LoopNet registered members including basic and premium totaled $7.1 million as of March 31, up 22% from the first quarter of 2012. And field and HQAEs increased from 174 in Q4 to 179 in Q1 of 2013. Total reps, though, were down 17 from last quarter and totaled 338 at the end of the quarter. Mainly due to some lost inside sales.

Now, I'm going to discuss our outlook for the second quarter and full year of 2013. Our guidance takes into account recent trends, revenue growth rates, renewal rates, which all may be impacted by economic conditions in commercial real estate or the overall economy.

Our position on the impact of foreign currency exchange rates and fluctuations on top line remains consistent. We do not attempt to predict the foreign exchange rate fluctuations. Our guidance assumes little or no volatility to the current rates. Actual rates may vary from these estimates. Call your doctor if your head is feeling light headed or dizzy. Sorry, that was something else.

Based on the continued strong sales performance of core information, analytic and marketing services, we are raising our revenue and earnings guidance. We expect revenue for the second quarter to be in the range of $105 million to $107 million and for the full year we now expect $428 million to $432 million, an increase of $4 million from our prior guidance.

As I stated on the last earnings call we are taking steps to de-emphasize or continue certain products and services and the expected impact on this year is included in our revenue and earnings guidance. In terms of earnings we expect second quarter fully diluted non-GAAP net income per diluted share of approximately $0.50 to $0.53 on 27.9 million shares.

For the full year we expect $2.12 to $2.22,an increase of $0.04 compared with the prior guidance.

Rich is cheering me on as I'm taking a little coffee break because he is going for the record. He has the stop watch on.

As discussed earlier we recorded additional stock compensation expense in the first quarter mainly due to the performance based stock awards. Moving forward we expect to recognize approximately $7.5 million to $8.5 million per quarter in total stock comp expense which includes the additional expense associated with the performance based awards.

If the performance criteria for those awards is met, the actual number of performance shares issued will depend on a couple of factors based on share price, vesting date, taxes et cetera, et cetera. We estimate the outstanding share count will increase by 250,000 shares to 300,000 shares upon achievement of the performance goal and vesting of the shares which we currently expect to happen in 2014.

I would like to speak a little bit more in detail about our forward-looking revenue estimates. As we discussed on the past few calls we have been deemphasizing certain products and plan to stop selling others at the end of the year. Currently those offerings that would stop at the end of the year would impact Q1 of 2014 revenue taking that run rate down $2.5 million to $3 million or, that equates to $10 million to $12 million of annual revenue in 2014 which we we discussed on the last call. That is for the analysts, you need to take a look at your models in the first quarter 2012 revenue.

Recently I have been getting more questions about my longer term view on the business. It was funny, I was waking up in the middle of the night thinking about this the other night and as I look back on the growth rate organically and through the strategic acquisitions we have done, we have essentially doubled the size of the business over the past five years.

Fourth quarter of 2007 we were at about $50 million and the fourth quarter of last year which we just closed out we are at a $100 million run rate in revenue. Although the revenue base is much larger than it was five years ago I think it is reasonable to believe we can accomplish the same thing over the next five years as far as revenue growth rate goes.

This would put us at about a $200 million quarter by the fourth quarter of 2017, or annualized run rate of $800 million. Or $700 million annualized run rate in 2016 and again, I think we can do this at fairly high margins. While this seems like an aggressive goal I think it is achievable given the strong organic revenue growth we are seeing and any potential strategic accretive acquisitions that may be funded through our stable cash flow. However, as always, actual results can vary. If your head feels dizzy call your doctor.

We continue to believe the potential revenue opportunity for CoStar is massive and that our track record shows we have the operational depth, cash flow and market position to take advantage of these opportunities.

In summary, I'm very pleased, as you can tell, with the the first quarter of 2013 results which provides some insight into the revenue and earnings potential of the combined business moving forward. Revenue growth is strong and we expect to see margin expansion through the remainder of 2013 and into 2014.

Based on the revenue and earnings results for the first quarter I believe we are well on our way to the medium term goal we have shared with you on the previous call of a $500 million annual run rate,that's $125 million Q4 2014 revenue quarter, with adjusted EBITDA margins in the 30% to 35%.

As always I look forward to sharing that progress with youyou in the coming quarters. And now, if you think I will open it up for questions, Andy just signaled to me that he wants me to turn the call back over to him for a few more pieces of commentary. Andy?

We will turn it over to questions.

Okay. Questions. We are going to take questions.

(Operator Instructions). We will begin with the line of Michael Huang. Please go ahead.

Good quarter, guys. A couple of questions for you guys. First of all, I think you mentioned that March was the best month ever. Drill into that is a little bit. Is that due to ramp in sales productivity or something else that is driving that and how is April now, trending versus March? Are we going to see another record month on top of March?

Probably early to talk about April. For March I think what happened was the cross selling is doing well. CoStar property sales generally are doing well. And then across the broad array of subs we have everyone was performing reasonably well so it was basically the consistency of the production across resolve, our applications, virtual premise, lands of America, LoopNet, CoStar, the UK, everyone was performing well and that basically took us up to a fantastic number.

Great. And can you guys run through the sales headcount numbers again? I was slow in writing that down. And then, maybe, with respect to that, what kind of assumptions are you making around sales productivity ramp given the significant add that you are making around the field sales and what does that imply to annualized bookings growth rate through the year?

I'll start and give you the numbers again and then let Andy give a little commentary on that. From Q4 to Q1 we moved from 174 subscription field and HQ reps to 179. So, up five in the quarter. And obviously our goal is to continue to ramp that. And ramp down the inside sales. So inside sales is down about 17. So total for the quarter we were at about 338 total sales reps. The key number is we obviously want to continue to increase our field and HQ reps and that transition for less inside sales and more in the field.

Yes, so we will take it to about 215 in the field by the end of the year. And we have a lot of good quality sales reps on the inside, and we will continue to take advantage of that, and we also expect some improvement in productivity per rep as the year goes on because basically they are getting the hang of the LoopNet cross sell, the PL sell and we are continuing to give them training and support there and trying to get those close ratios up. So it is pretty solid right now.

We are also trying to look at some key markets where we may not have had a field sales presence in the past and our analysis shows we think it would be pretty productive to do that so areas like, just randomly, like Tampa, Orlando, have a lot of potential and we want to try to capture that.

And Mike, I think as you increase the field number I think we are seeing increased productivity from our current base but, of course, you are layering in some new Newbies so they are not producing as high. Think for this year we could see increased productivity but again that could be offset by some of the Newbies. I think it will help us as we continue to move along and into 2014 as the head count goes up and people start ramping up and continue to accelerate growth rates the way we have seen the last couple of years, prior to the acquisition, last year and even this year we continue to see acceleration.

Great. Thanks very much.

Thank you.

Next to the line of Bret Haas. Please go ahead.

Good morning. Can I dig in little bit to the cross sale numbers?In the past you have given helpful data on how many people you contacted, or reached out to of the 100,000,the number of contracts, or users, gone from buying CoStar from Loop prospects, and then vice versa. Can you run through those in sort of tandem? You have already given us the revenue numbers.

As we go the numbers on unique demos is getting a little more challenging as you demo different people in the same shop, but basically 8,000 to 11,000, in that range. Firm number would be 8,000 but there is probably contact occurring that we are not catching that moves above the 8,000 as high as 10,000 on up. The second part of your question was?

How many actual contracts have you sold CoStar selling CoStar stuff to the Loop prospects and then same number for Loop to CoStar to get the total 3,000 and some odd that you said.

So the total count?

Yes.

I don't have that right here. Do you have that?

We have to follow up with you on that. I don't have the breakout of the two but as you said you have the total numbers on those. I think what you are going to see on the cross sell is that we are going to continue to give those numbers but again as you move forward it gets harder and harder because is it a demo, was it originally LoopNet or a CoStar prospect. Different people in the shops. I think we will continue to give as much clarity on that. Clearly the 18.41 isa great number and we have a lot of clarity on that. As you move forward next year the following year and the following year it gets harder and harder to break out and label from one to the other.

Brett, I have got that number. So the sites with the CoStar sale but not purchasing a PL was 1,683. CoStar sale and a purchasing PL, these are LoopNet conversions info sales to LoopNet customers, was 584. So, that's the 1,683 plus the 584. A CoStar buying a PL site 51 and PL site alone is 749. I'm not sure that if clears that up a little bit. But it is mostly CoStar info sales in the 2,200 range.

That is the 1683 plus 584? And then the Loop to CoStar is 51 plus 749?

Basically, yes.

Okay. Does the 749 include the up-sell? Meaning, not selling Loop to CoStar but increasing the price, or extending the contract, on Loop? Or, do you have that number as well, or is that included in those?

I'm not certain. We will have to follow up with you on that.

Thank you for the detail. And quarter to date cross sales I don't think you talked about that. You told us mid February, and you told us to the end of Q2. In your commentary I didn't think I heard how are things looking in the past two months since the quarter closed?

I think the 18.4 is obviously the end of the quarter. I think we kept giving numbers as of the dates so trying to cut them off as the quarter closes. So you went from the 14 to the 18 in what is it six, seven week span. I think the pace is continuing to do well and accelerate. And then we are just going to give quarter end numbers now so that we are not giving you numbers as of February 20 and April 20.

There is nothing unusual about the pace from that number to now.

Okay. In terms of UK it sounds like things are going well there, and Andy, the number you gave us of 500, could you just explain what that is again?

Sure, remember we went out there and we seeded the market giving 10% of the customer base access to CoStar Suite at the higher end of the fee structure. So the people paying a reasonably fair price for focus, we gave them CoStar Suite and CoStarGo. We got a tremendous adoption of that service.

I don't have the exact number here but to give you an idea of roughly what it looks like I was checking it and of about a thousand some people given access to CoStar Suite they were running around 700 active two months after they had received it which means that is just phenomenal. That is better than the adoption I think we have ever seen here in the United States. So the sales people were not allowed to start selling the new product until January/February and because we wanted them to focus on that adoption.

They began doing that and they have sold 500 units of the CoStar Suite user licenses individual seats and that would be a combination of people who are using focus, paying on average 35% more to get CoStar software interface to analytics, the mobile platform, and brand new customers who had not prior been our customers signing up there. So we are getting a good take-up over there and we've got some new leadership over there which is doing quite well but the real story will work itself out over mid-year, third quarter, fourth quarter, that is when we should see results.

And are we still thinking break even sort of mid year 2014? I think that is what we had talked about.

Sure.

And this last question. Thinking a little bit further down the road, you guys have started talking about fusion a little bit and I think the strategy is to layer in modules or functionality over time. Are some of the five that you talked about but you didn't want to give us too much detail on this is summer fusion modules or how do we get comfort that fusion can be an additional revenue growth driver beyond Loop, and how soon will we get modules in the field and get data back from you that the uptake is good enough to keep driving revenue up?

First of all, to all my competitors get your pens out and start writing. They are relate to fusion and some of the things are things we have talked about but they are talking mid summer and you would expect to see some impact on our sales bookings numbers in the later part of the third quarter or fourth quarter. And I would expect they would have an overall impact on where we are going there. We will keep it kind of vague just to make sure that we keep the initiative on what we are doing.

Okay. Thanks for your time, guys.

Thanks, Bret.

Next to the line of Will Marks. Please go ahead.

Good morning, Andy, Brian, Rich. I don't think you mentioned mix of business in terms of brokers and others. Has that changed much since this LoopNet integration and additional selling to LoopNet customers?

Sure. I don't have specific numbers right here on that. What I will say is that we have put a lot of effort on these LoopNet conversions. We made that a priority. And those are going to be disproportionately brokerage and I have noticed that the initial phases of the cross selling we swung to an all time high in new customer pickup as opposed to the normal ratio of 50% up-sell, 50%new customer pickup.

So we are moving in that towards a lot of pickup of new brokerage firms which I'm very excited about. That sort of strategic customers who help solidify your information base. I know that we are still getting good traction in the banks but when you look at the big increases in the booking numbers those are going to be disproportionately brokerage. That shifts the ratio. I think banks are still moving at the same levels they have been moving at in the past.

Now, this too will change, and I would expect that in 2014 you would probably be shifting to back towards an even blend of banks and brokers as we bring more product to market that would appeal to folks doing financial analysis.

Okay. Thanks. That's helpful. One other question. On the guidance. You guys have consistently been raising guidance over the last year or so. Yet that goal of end of 2014 hasn't changed. So I hate to keep asking for more but is there upside to that? Probably not on the margin side but maybe on the revenue side?

Yeah, I will take that question. So, we put that goal out there and I just talked about maybe some new goals, of doubling the Company again over the next five years. They are aggressive goals and we put them out there two or three years ahead of time. We set aggressive goals so that we can reach to get there.

If you look at the trajectory and pace of where we are, again when I forecast ahead whether it is one year or two years or five years, obviously I don't forecast ahead with record sales numbers every single month like we had in March and I was is sitting around with the SVP of Sales, John Stanfield,last night talking about this. We project good achievable growth which I think is in the similar range to what we are at.

If you forecast ahead the quarters we are deemphasizing some products this year and a couple of products we plan on canceling at the end of the year which will have a $2 million to $3 million step-down in revenue in the first quarter next year and then go back to normalized growth rates, you're still going to get to something in that range. We are obviously running the business for the long-term.

You know I'm not going to expect to move that number. It is still a goal. I haven't given two years of guidance to people. One year of guidance which is 2013 and I think a goal to get to the end of next year which I still believe. We actually have to perform. If I talked to John Stanfield and tell him that he has to do 300 to 400 net news for the next eight quarters,that is not chump change. That is real work and to move your sales force from 170 to 215 in the field and increase your managers and everything that we have to do in the time period is real work. I think it is still an aggressive goal but.

I won't say what Andy said if you haven't heard it. I think it is still an aggressive goal but I'm not going to come off of it because if you actually look at it there is still a lot of work to get there but clearly with what we are doing in the cross sells and numbers we are currently doing, we are comfortable with that. Realistically I will come out with, that number is going to stay the same until I come out with my guidance for 2014. Guidance is guidance, and goals are goals.

Makes sense. Thank you.

Thank you.

Next to the line of Todd Lukasik. Please go ahead.

Thanks for taking my questions.

Hey, Todd.

Brian, I think in your commentary, well, in the press release I guess you have $13.8 million annualized net new sales. I think you also mentioned $14.8 million in your commentary?I was wondering what the difference was between those numbers?

Sure, yes, I told my VP of Finance that would be a question. The $13.8 million is sort of all in net new bookings for everything so that would include monthly services things we are canceling and stuff like that. The $14.8 million is just annual contract bookings so it doesn't include monthlies, doesn't include quarterlies,doesn't include the stuff we are deemphasizing and stuff like that. There is a drag and difference on that.

Once we get through the deemphasizing of some of these things and move to more and more subscription based the two numbers will get closer as we go into 2014 and into 2015. That's why there is a difference now. The main point for putting it out there is to highlight the fact we are moving more people. This is one of the main goals we talked about prior to the acquisition is that CoStar was at that point 93% or 94% subscription based services and LoopNet was zero, or close to zero.

This is highlighting how we are moving forwards that goal which will help improve their renewal rates. It could tick our renewal rates down a bit but overall I still expect 90% plus in strong renewal rates but this is just highlighting we are moving towards that goal which should be a very positive thing for both revenue and earnings moving forward. The more you have subscription based business the better your model is.

And lower volatility in the business.

Correct.

Question about deemphasizing the product and discontinuing products and services beginning early next year. $2 million to $3 million in quarterly revenue, you talked about. What is the margin associated with those products or should we be thinking about cost savings when that revenue comes out of the business?

Yes, I talked about in the last call I think. The numbers haven't changed for this year, like $5 million to $7 million with associated EPS impact on that. I didn't really give guidance for next year except I'm trying to make sure people know. I said again last quarter $10 million to $12 million, which is $2.5 million to $3 million in the quarter sort of stepped down because we plan to turn things off in the year that we already started to deemphasize.

Again, long-term, we actually think that we can then come back over the next few years and sell services to the people on subscription and annual contracts which are much higher renewing and more profitable and they will be on the right service. As I look out into as those things stop in 2014 and especially as you get out into 2015 and 2016 as you look to my longer term guidance I talked about of doubling the company, I think that, comes with much higher margins.

That is the goal there and the specific products we are talking about, they are not profitable today. And if they are profitable they are only marginally profitable and if you were to forecast them out over ten years they would require massive amounts of effort in order to get to de minimus profitability.

So when we shut them down we will not take team X and eliminate them and see an immediate cost savings. What is happening is the people that had been putting their efforts into those products have been re-tasked and are selling things like premium lister, which is a very profitable business, instead of focusing on selling something less profitable like property facts or property comps.

And the software development teams and product managers supporting the less profitable products are working on very important products enhancements to the core system that I think will be dramatically more profitable and are very high margin. It's a re-alignment of who is working on what and an avoidance of additional costs.

One more thing to note. In simple terms from the sales side if you are paying a sales person to do a sale every month versus to having them sell something on an annual subscription basis you are paying them, 12 times a year versus once-a-year and then, that gets into a 90 plus percent subscription thing. I think the longer term profitability impacts are where you see them over a five year period. When it initially happens you pull $2.5 million to $3 million out of your quarterly revenue and don't necessarily see a ton of costs coming off. In the longer term we've modeled this out. It is not even close. It is not even a close decision. It is very easy decision actually.

A caveman could make the decision.

Yes.

All right. Great. Thanks for the color on that. Last one from me. Could you just give us an update on Toronto? Is that a market that is still being researched and the database being constructed or is that a market you guys are actively selling in now and are there any plans for any other markets in Canada?

You must have a camera in my office because I have a post it note on my computer that says Toronto. I have been watching the data obviously it is a major North American market. It is no mean feat to get a high quality database for that market and I believe we are now approaching that point where we have the database that would be commercially successful up there.

Timins not precise but you sometime over the next three to six months we will begin rolling out the product in Toronto and we would expect to see some revenue in 2013 from that. If you have been around for awhile you know that when you open a new you market it doesn't move the dial for a year or two years. We are investing in that and some other initiatives which will eventually yield result.

Okay.

There is no plans right now for additional markets. Again, I think we have a very, very specific operational plan this year and financial plan this year and next year. Getting to these goals and targets that we laid out for people. So I think we are very focused on that. In the longer term five year time period there probably would be more but you right now we are focused.

Realistically, as you may know, I'm not very good at the boondoggle. I have been working at getting better at that. What I will probably do is launch Toronto in January just to make sure that it as miserable experience.

All right. Great. Thanks a lot, guys. Nice job with the business.

Thank you.

Thank you.

Thanks, Todd.

(Operator Instructions).

Okay, with that, we are almost at sub hour point here so we will go ahead and wrap up the call. Thank you very much for joining us and we look forward to updating you next quarter.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now you disconnect.