CoStar Group Inc (CSGP) 2013 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the CoStar Group third-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Instructions will be given during at time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Rich Simonelli. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to CoStar Group's third-quarter 2013 conference call coming from our headquarters in Washington, DC. We are delighted you have joined us.

Before I turn the call over to Andy and Brian I have some important facts for you. 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 23, 2013 press release on third-quarter results, and in CoStar's filings with the SEC including our Form 10-K for the period ended December 31, 2012, as well as our Form 10-Q for the period ended June 30, 2013. In each case, under the heading risk factors. All forward 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 also being broadcast live and in color over the Internet on www.costar.com. A replay will be available approximately an hour after the call and available until November 28 of this year. So this is the replay call -- 1-800-475-6701 within the US or Canada; or 320-365-3844 outside the US and Canada. The access code is 304716. Replay will be available on our website soon after the call concludes.

I'll now turn the call over to Andy.

Good morning and thank you, everyone, for joining us today.

Our third quarter 2013 financial results were very strong. Revenue grew to $112 million for the third quarter, a 17% year-over-year increase. Our annualized net new sales of subscription services in the third quarter were $13.7 million, an increase of 47% year over year. We added nearly 1,200 new CoStar information subscription customers during the quarter, bringing the total number of new clients to 4,900 over the last 12 months. This represents a 58% increase in the acceleration of new customers compared to the previous trailing 12-month period.

EBITDA increased 52% year over year to nearly $30 million for the quarter. I think this margin expansion is all the more impressive when you consider that we are investing so aggressively right now into important initiatives that we believe will enable us to sustain these impressive revenue growth rates for many years to come.

In prior calls and meetings, we've briefed you on the years of planning our product design development engineering teams have invested into building the next generation of our flagship products, CoStar Suite and CoStarGo. At times we refer to this next generation of CoStar as Fusion. We call this next platform Fusion because it blends our valuable in-depth data, our historical datasets, the power of our subsidiary company software and their solutions, together with our client's own data. We believe that this next generation platform moves CoStar into the realm of workflow solutions, decision support, creates communication channels, and yields predictive analytics. We in turn believe that this increases the utility of our services, gives us additional competitive advantage, and will fuel our long term growth.

The scope of our plans for Fusion is very ambitious, so we intend to build the platform in a series of segmented lower-risk product releases over the course of several years. Last week we launched the first of these planned software releases with 5 major product enhancements to the CoStar Platform. The 5 enhancements include a new map-based interactive search tool based on the popular search tool that we had in our mobile platform CoStarGo. We've had in depth coverage of the US multi-family marketplace. We've expanded the property and market analytics capability of the product. And we integrate in a lease valuation and comparison tool. And finally, we released an upgrade to our very popular CoStarGo products, giving it mobile analytics capabilities.

The release was first made available in Maryland, Virginia, and the District. The release went very smoothly in those areas, so we launched it in the United Kingdom and a few days later in the Northeastern United States. The release is still progressing very smoothly and we plan to roll it out to the rest of the country over the course of the next 2 weeks. The initial reaction is positive across the board and client activity in the first phase of our release has been fantastic. In just 10 days, as of about two minutes before the call, we solved 1.13 million searches in the platform and there were almost -- actually not almost -- there were 1,030 lease analysis financial models created in basically the first week. So we're very pleased with the level of activity from this limited rollout in the Mid-Atlantic, Northeast, and UK.

We've met with over 100 firms in the first 10 days in order to understand how clients are reacting to the new product. The following anecdotal feedback gives you a flavor of the sort of feedback we're receiving overall. Tom Edgar, of GBR Phoenix Beard in the United Kingdom, told us -- not to quote -- the upgraded CoStar suite has massively improved the user's experience. It now offers an easy-to-navigate, user-friendly interface which mirrors the fantastic CoStarGo app for its iPad, and offers great functionality. The extra time spent on further development of the product is clear to see.

So -- end quote -- in order to get an accurate gauge in our client's reaction to this major product upgrade, we hired an independent third-party market research firm called Market Connections to survey the initial Mid-Atlantic users. They received completed surveys from about 500 clients. They also asked for written comments and most of the respondents gave us valuable feedback. These participants were asked to comment on their view of the features for each of the 5 enhancements, and overall, how the new release compared to the previous CoStar tool. The researchers asked our clients to rate the new features as either not at all appealing, not very appealing, somewhat appealing, or very appealing.

For simplified reporting we confined the responses, somewhat appealing and very appealing, into one category of appealing, as an indication of positive feedback. So the results showed that 93% of those surveys found the new map search appealing. 92% of our response found the new multi-family information appealing. 94% found the new analytics appealing. 93% found the CoStar LeaseAnalysis appealing. Finally, 94% of our respondents found CoStarGo analytics appealing.

So I would be so bold as to say that sounds like straight As on the release. And in general, over time, I found that people really hate to see any change to software they've grown accustomed to and that they use every day; and for sure the improvements to the software have to far outweigh the inconveniences you create by changing the software someone is used to using. If you don't, clients' industry will typically react very negatively to anything other than a really significant improvement of overall functionality. I think with this release we really have avoided the problem of clients being resistant to the change. On average, only 1.5% of the respondents found that the various enhancements were not at all appealing. That 1.5% negative response was overwhelmed by the average positive response of 93%. So we're running at a 63-to-1 positive on the release.

So let's take a closer look at what we are offering with this new release. Real estate's about location. The faster more intuitive map-based search enables customers to visualize their search results on a map as they build their search. The client sees the search as it happens. This makes CoStar Suite more user-friendly. We believe that this will result in more usage, higher renewals, and increased sales.

Again, here are some of the quotes from our clients that are useful. [Vanette Conna], REIT Analyst with Capital One Securities says -- The map search is so intuitive. I love having all the search criteria on one page. Patrick McCormick from Jones Lange Lasalle told us -- The new map features are extremely appealing to me. I'll be able to use them in presentations.

Next, we launched our comprehensive coverage of multi-family properties with information analytics that we believe will increase our penetration with brokers, banks, owners, and institutional investors. Multi-family is a $2 trillion asset class in the United States and currently the hottest in commercial real estate. In the past year, over $95 billion of transactions were completed in this sector. We have built a database that far exceeds other firms' multi-family information offerings. We are now tracking information on nearly 300,000 apartment communities with five or more units for a total of 16 million apartments. Our nearest competitor tracks 6 million apartments. So we cover two to three times what they do.

We even offer multi-family specific sub-markets that provide greater granularity than any of our competitors. We have lost competitive sales in the analytics arena in the past to competitors because we did not have information on multi-family properties. But what was once our weakness is now our strength. We are capturing information such as building details and quality, effective rents, concessions, occupancy levels, ownership, property sales, unit size and mixes, images and many other details. This data can be queried, analyzed in the product to provide valuable analytic information on market trends, give you great reports on what's happening in the marketplace. Trent Smith from Insight Property Group said -- The multi-family data is impressive. My head is spinning with all the possible applications of the multi-family analytic data. Sam Sherwood from Integra Realty Resources told us -- The multi-family detail views are a huge improvement on what was previously available. I particularly like these specialized multi-family sub-market geographic definitions.

Third, we've added analytics to provide users customizable property and market statistics that give our clients vivid charts and graphs to analyze vacancy rates, rental rates, absorption, leasing activity, and more. For example, an owner will be able to compare her building to other similar buildings in the city and can use the data price releases competitively and have a better understanding of the probable amount of time it will take to lease up for a building's vacancies. Tom Herd at Cushman & Wakefield says -- I love the new analytics feature which updates the math as I search new entries. Harold Burr at CBRE says -- As a research analyst, the new analytics and report capabilities are very helpful in my daily duties. The new [layout] capabilities seem very easy to use and make my job easier and more time efficient.

The fourth major and most significant element of the release is CoStar LeaseAnalysis. This was made possible by CoStar's acquisition of Resolve several years ago. Without the technology team at Resolve taking the lead, there would be no lease analysis in CoStar Suite today. I believe this is a truly transformational tool. It gives better visibility into the true cost of a lease, and we believe will enable brokers to get a signed lease much more quickly, which is their commissionable event. It is an integrated workflow tool that allows brokers and owners to do intensive lease analysis incorporating CoStar information with their own data. Rather than manually entering all the data they need to build a financial model for a lease into a spreadsheet, they can now instantly load all the information from CoStar into a pre-built integrated lease model. This has many benefits, including time savings and accuracy.

The user never has to leave CoStar in order to access the tool, build the model, perform the analysis, and create client-ready reports. The reality is that many brokers did not do this analysis work before because of work involved, or they handed this work off to an analyst in their back office. CoStar LeaseAnalysis is not intended to be a back office tool. Now it's much easier and faster to build a model. The broker can now work with their clients face to face, discuss terms and possible scenarios, and compare several properties and models side by side, realtime.

We also believe that brokers negotiating on opposing sides will use the tool realtime with a what-if analysis capabilities as a key negotiating tool. CoStar LeaseAnalysis allows clients to generate reports that summarize the information for their clients' senior management. These are professional, high-quality Board of Director reports that take highly complex information and presents it in an easy to understand document that lets users compare multiple lease options. We believe CoStar LeaseAnalysis will become industry standard for the financial analysis of leases.

This is just the start for this product genre and we feel that we have a very robust and promising product roadmap for integrated financial modeling. Again, I think our clients can say it best. William Schwartz at the Meyer group said -- the lease analysis is amazing. This is more cohesive and easier than Pro Calc, plus its modeled with CoStar data already has, so you have a head start. Elizabeth Harvey at Cresa said -- It's amazing; the presentation output is excellent. Lisa Banusiewicz at Transwestern said -- It is less daunting than Argus or even building something simple in Excel. The sensitivity analysis features are very helpful to see what little tweaks need to be made to hit the targets. Mark [Wiscourage] at Akridge said -- critical, very important and game changing. Nikki Arena of Guardian Realty Investors said -- The lease analysis feature is also very cool. It takes a lot of guesswork out of the lease.

Fifth, we released CoStarGo 2.0, which is the upgrade for CoStar iPad app. This new version now has customizable analytics, which means brokers can work directly with clients in the field using powerful property market analytics. They'll get instant insight, charts, graphs, absorption trends in the market area they're sitting in, or anywhere else they want to steer their iPad. Mike Hetchkop with Cresa remarked -- I like the fact that analytics just pop up. I like the ones that come up automatically so you don't have to create anything, especially because most of the time using CoStarGo on the go and presenting in front of a client.

All in all, we're very pleased with the reaction of these enhancements and are optimistic they will have a positive impact on 2014 sales. These products allow our sales force to meet with existing clients, provide an opportunity for more cross-selling of the LoopNet users. Can't help it, I'm going to share just two more comments. Jonathan Gardner at Caldwell Banker Elite said -- I just like the evolution of the interface and what shows is attention to detail from user input. There's obviously strong communication links between the company and its clients, which will keep accounts alive and growing; very reassuring. I especially like that, instead of just sharpening existing tools, the commitment to excellence from CoStar has extended to lease analysis. Usability has reached another level. Thank you.

And then Steve Romer who is president of Westrock Appraisal Service says -- he's one of the smarter guys I know -- said -- I have been waiting for this my whole life. Okay, he may be a little over-enthusiastic. Okay. So all in all, a very solid product release and exceeding our expectations.

So turning to LoopNet -- through the third quarter 2013, the CoStar sales force has now achieved nearly $36 million of revenue synergies from our acquisition of LoopNet. Through September 30, 2013, we have cross-sold our products between LoopNet and CoStar client bases to over 6,400 real estate firms after completing nearly 19,000 cross-selling demos. As we expected, this is an increase in the close rate to approximately 34%, up from 31% in the second quarter of 2013. I believe we can continue to increase the close rate through training of our sales force and very valuable technology tools that we're using to assist the selling process. I spoke last quarter of a comparison tool within CoStarGo for our sales force to use with LoopNet users who think they're seeing the whole market on LoopNet. The tool appears within CoStarGo and demonstrates that CoStar has significantly more listings in a given area than what is available under a user's LoopNet subscription.

In addition to that very important tool, we have just launched an automated LoopNet to CoStar upsell tool that appears within LoopNet's website. Once one of our salespeople downloads a LoopNet to CoStar information upsell prospect, we automatically turn on an automated comparison of the results of a CoStar versus LoopNet search every time the prospect searches within LoopNet. So if a LoopNet user who we think should be using CoStar goes into Santa Monica and looks for office buildings for sale, it will pop up. It will say there's 30 buildings that answer this criteria in CoStar and there are 15 in LoopNet. If you want to see the whole markets, upgrade to CoStar.

So this is a very effective way -- and those numbers are hypothetical, but typical -- it's a very effective way to bring home to the LoopNet user the clear advantage between the different price point products we offer. So it's a very cost-effective way to stay top of mind with the prospect and convince them that while they need LoopNet for marketing, they need to invest in CoStar to get a professional-level information tool and have more information than their client. In the first week this tool has already resulted in new sales, more appointments; and the LoopNet user is calling our sales force to buy. After one day, one LoopNet user sent an eMail saying -- Please turn off the popup, I'll buy.

As we have previously discussed, we're preparing to launch a broker advertising option on LoopNet by the end of the year, enabling brokers to market their services to tenants or buyers linked to properties in areas they specialize in. This will be a completely new revenue source for us and I expect it can be quite significant when you consider that on the residential side, companies like Zillow, Move, and Trulia, they earn tens of millions of dollars annually from similar advertising opportunities for their brokers.

I am very pleased with how we continue to grow revenue in LoopNet's Premium Lister product. In the third quarter of 2013, the sequential growth over the second quarter of 2013 was 5.6%. Since the third quarter of 2012, we have grown Premium Lister revenue by 25.8%. So it's growing much faster than the business overall. We are also increasing the ratio of paid to free listings in LoopNet. We have increased the number of for-lease paid listings all the way up to 49% of total listings, up from just 32% at the point we closed the acquisition. For the for-sale paid listings, they're now up at 39%, up from 31% at the time of the acquisition.

Membership growth continues to be very robust in LoopNet as we added nearly 360,000 additional registered members in the third quarter and we now have 7.7 million registered members in total. I think 10 million is coming here soon. We increased premium membership average revenue per user of new sales 57%, from $56 in the third quarter of 2012 to $88 in the third quarter of 2013. Overall, premium membership average revenue per user, is up from $66 to $76, which is a 16% year-over-year increase. In the third quarter of 2013, 48% of all premium memberships were sold on an annual basis and 27% were quarterly. The average contract term has gone from one month prior to the merger to nearly seven months now; and the average new LoopNet contract value has moved from $56 as of completion of the merger, to over $600 today.

Now I'd like to update you on our activities in the United Kingdom. We're making excellent progress in London as our release of CoStarGo and CoStar Suite has resulted in a strong uptick in sales there. September 2013 was our best ever sales month in the United Kingdom and we've had 4 of our highest ever sales months for the UK during the first 9 months of the year. Today we have nearly 300 firms subscribing to CoStar Suite in the UK.

In addition, we've achieved an average of 40% price increases in subscription fees from existing FOCUS subscribers upgrading to CoStar Suite and Go, and nearly 35% of the clients upgrading to Suite and Go have done so on multi-year contracts. We signed some excellent clients in the UK in 2013, including, Wells Fargo, Standard Life, and Europa. Historically, the vast majority of our sales came from brokers in the UK, but now with CoStar Suite we're generating a high volume of sales to investors, owners, and lenders.

CBRE is one of a dozen major brokerage firms in the UK; and in fact, is the largest of the majors there. CBRE and many of the majors subscribe to our low-end, low-cost legacy UK product called FOCUS. The cornerstone of our strategy in the UK has been to upsell these brokerage firms in the significant additional value they can gain from our UK CoStar Suite of products. After two dozen meetings with CBRE and a 9-month sales cycle, I am extremely delighted that the leader in the market has made a significant investment by upgrading to a multi-year contract for CoStar Suite. This is a major milestone for us and it demonstrates that our investment to integrate the US and UK is starting to pay off. We believe it's only a matter of time before other top UK commercial real estate firms will follow CBRE's lead in order to not feed a competitive advantage to them.

I'd like to briefly update you on what we're seeing in the commercial real estate markets. The markets are continuing to show signs of recovery; both investor and tenant demand for real estate is currently increasing. Year-to-date net absorption of office, retail, and warehouse space is averaging more than 50% higher than the same period last year, and department demand alone is up 28%.

Furthermore, the third quarter of 2013 had the strongest net absorption so far this year for each property type. We continue to see capital flow into real estate investment, and year-to-date sales of all commercial property are running 19% higher than 2012. Many formerly distressed suburban office markets, such as Orange County, Phoenix, Sacramento, and Atlanta, have registered over 2 million square foot of net absorption each in the past year. Strong apartment sector fundamentals pushed vacancies to a record low of 4% in the quarter. This record low vacancy is driving two trends -- first, rent growth is very strong at 5.4% annualized rate. Second, net completions are up more than 150% year to date to 186,000 units. The apartment market strength is broadly based and rent has grown by 2% to 8% in nearly every major market.

The industrial sector is very healthy overall. Expanding internet retailers and housing recovery-related demand growth has caused year-to-date industrial net absorption to spike up by 40% compared to the same time last year. That's propelled industrial vacancy to decline by 80 basis points to 8.4%, which is the greatest year-over-year vacancy decline for any of the property types. Retailers are stronger today than they've been in years. In particular, they have mostly shed underperforming stores and have ridden a rebound in retail spending to record profits. Retail net absorption has more than doubled from last year.

So in conclusion, we generated exceptional financial results for the first three quarters of 2013. We believe that the enhancements to our existing products, the strength of the commercial real estate recovery, as well as the continued growth of the size of our sales force, positions us to be able to maintain mid-teens revenue growth while expanding margins for the foreseeable future. I believe that this quarter further demonstrates that we're on our way to reaching our goal of $800 million in revenue with high margin as we exit 2017.

Okay, at this point I will now turn the call over to Brian Radecki, our Chief Financial Officer, as long as he promises to make no sound effects.

I promise, Andy. Thank you.

You're welcome.

As Andy mentioned, we're very pleased with the financial performance in the third quarter and year to date 2013. CoStar's information, analytic, and marketing services continue to show strong revenue growth, and the successful integration of LoopNet continues to be a big contributor to the growth in revenue and earnings. EBITDA margins continue to expand driven by mid-teens revenue growth.

Additionally as Andy discussed, revenue synergies for the LoopNet acquisition continue to ramp up, have increased to $35.8 million since the acquisition. So this is where Andy is really excited because I get all the points -- point this, point that in there. So I'm really excited, so let's talk some numbers, guys, right, Rich? Are you ready? Are you with me? All right, everyone's with me. Here we go.

Starting with CoStar's results for the third quarter 2013, the Company reported $112.3 million of revenue, an increase of $16.3 million or 17%, compared to $96 million in the third quarter of 2012. This growth is driven by solid core information services performance, continued cross-selling efforts, as well as impressive growth from the LoopNet marketplace. The third quarter 2013 is the first year where we had a full quarter of LoopNet revenue in the year-over-year comparison. As I discussed at the time of the acquisition, our 2012 results were impacted by the purchase accounting adjustments included, which reduced LoopNet's deferred revenue. Normalized, these adjustments our year-over-year revenue growth in the third quarter of 2013 remains a strong 15% compared to the third quarter of 2012, or in the mid-teens. More than 75% of the purchase accounting adjustments were recognized in the first two quarters last year after the acquisition. So the impact on growth rates in the future is fairly minimal.

EBITDA was $29.8 million in the third quarter of 2013, compared to $19.6 million in the third quarter of last year, an increase of 52%. As reported, adjusted EBITDA of $37.7 million for the third quarter of 2013, an increase of $12.1 million, or approximately 47% compared to $25.6 million in the third quarter of 2012. Adjusted EBITDA margins increased to 33.6% in the third quarter of 2013 from 26.7% in the third quarter of 2012. Our results, and these margin results are consistent with what was -- I think it was our medium- or long-term goal, but now it's coming closer, of achieving $500 million run rate with 30% to 35% adjusted EBITDA margins by the end of 2014.

We think it is clear that we are well on our way to these goals which we've been discussing for a few quarters. I'm happy to note that we achieved the margin goal beginning last quarter, 6 quarters earlier than we expected. While adjusted EBITDA margins may move around a little bit due to timing of marketing and other investments throughout the year, our second- and third-quarter 2013 results demonstrate the potential for continued strong earnings growth and expanding margins for many years.

Gross margin was $80.6 million in the third quarter of 2013, up compared to $65.1 million in Q3 of 2012. Gross margin percentage was 71.8% in the third quarter of 2013, a 4% increase compared to last year, which is fairly massive. Net income increased to $11.1 million in the third quarter of 2013, compared to $6.8 million in the third quarter of 2012, and non-GAAP net income in the third quarter of 2013 was $20.2 million or $0.71 per diluted share, which is a 54% increase from the third quarter of 2012. Reconciliation of all non-GAAP net income, EBITDA, adjusted EBITDA, and non-GAAP financial measures discussed on this call, to their GAAP basis results, are shown in detail along with definitions for those terms, on our press release issued yesterday, which is available on our website at www.costar.com or you can just call Rich Simonelli.

Cash and investments totaled $244.6 million as of September 30, up $32.8 million. Hold on. $32.8 million from $211.8 million last quarter. Obviously cash flow remains very strong. Cash and investments now are $87 million higher than our total debt of $157.5 million. Obviously our balance sheet's in great shape.

At this point, I'm going to give some additional color on a few metrics to highlight our strong performance in the third quarter. We achieved $12.2 million in annualized net new sales in the second quarter based on our ongoing success of driving our information sales and analytics; also LoopNet's Premium Lister products and our cross selling efforts. I'd like to point out that this sales number, which is the older one that we were reporting for years, actually understates our success. As Andy noted earlier, the net new sales of subscription services on annual contracts is higher at $13.7 million, up 47% compared to the third quarter of 2012.

The higher sales of annual subscription reflects our efforts to replace the short-term LoopNet agreements with higher-value, longer-term agreements. Moving forward to eliminate any confusion, we're just going to provide the net new sales metrics of annual subscriptions, which we believe is the most important and relevant metric. Revenue from subscription services on annual contracts was up $83.8 million for the third quarter 2013, or 74.6% of total revenue, up from 71.2% a year ago. For the trailing 12 months ended September 30, 2013, subscription revenue from annual contracts totaled $311.9 million, or up 19% from $261 million for the 12 months trailing period 2012.

At this point, approximately 75% of our revenue is coming from annual subscriptions. The remaining 25% is primarily made up of marketing services, including LoopNet's Premium memberships, which are on monthly or quarterly agreements, and CoStar's showcase as well as some advertising revenue across both platforms. As we continue to make progress upselling LoopNet subscriptions to one year contracts, we continue to expect the increasing amount of marketing revenue will be included in the subscription revenue metric. The renewal rates for annual subscription revenue remained high during the third quarter of 2013. The 12-month trailing renewal rate for CoStar subscription-based services was 93.3% in the third quarter of 2013, as this metric ticked down slightly from 93.7% in the prior quarter.

As we've been discussing for the last few quarters, the introduction of more annual LoopNet contracts into our subscription base is expected to cause the 12-month trailing renewal rate to edge down slightly over time. The small decline to date is about what we've expected. We may see that number continue to move a little bit, a percent or two, over the next few years. The renewal rate for CoStar subscribers who have been with us for 5 years or longer, continued high and remained at approximately 98%.

Last quarter, Andy discussed in detail our plans to continue to evolve our sales force. We're continuing to focus on expanding our field sales force, which now includes 190 field sales reps, an increase of 60 from the time of the LoopNet acquisition. It will continue to add more reps there. Hopefully, we should be over 200 by the end of the year.

So now I'll talk about my outlook for the fourth quarter and full year 2013. Our guidance takes into account recent trends, revenue growth rates, renewal rates which may be impacted by economic conditions in commercial real estate, or the overall global economy. We do not attempt to predict foreign exchange rate fluctuations, so our guidance assumes little to no volatility for the current rate. Actual results may vary from these results. If you're not sure, call John Coleman or your doctor.

Based on continued strong revenue earnings and margin momentum, and the expectation for continued growth in our core information services and cross-selling initiatives, we're raising both the revenue and earnings guidance for 2013. For the full year we now expect revenue in the range of $438 million to $440 million, which is a $3 million increase at the midpoint compared to prior guidance. It was consistent with our mid-teens revenue growth we've been discussing, and also accounts for the expected LoopNet marketplace seasonality which occurs every fourth quarter.

Also, due to continued cost and revenue synergies related to LoopNet acquisition and our ability to grow revenue at high incremental margins, we expect 2013 full non-GAAP income per diluted share of approximately $2.51 to $2.54 based on 28.2 million shares. This is an increase of approximately $0.19 at the midpoint with our prior guidance. For the fourth quarter of 2013 we expect non-GAAP net income per diluted share of $0.72 to $0.75, based on 28.4 million shares.

As we look forward to Q1 2014 we're extremely excited about the new product enhancements Andy discussed earlier. To support the launch of these enhancements and to drive continued revenue growth in 2014 and beyond, we plan to reinvest some of the benefits of our recent strong performance into sales, marketing, and branding initiatives totaling $0.10 to $0.12. We plan to align these initiatives with selling, beginning late Q4 2013 with the majority impact happening in Q1 2014. Any Q4 2013 spending is incorporated into my guidance.

As we plan for next year, we have a lot of moving parts which will affect my guidance, including marketing to support the product launches, some decisions about deemphasizing or discontinuing certain services, finishing the back-end integration of our databases to gain research efficiencies, and completing the build-out of our sales team. Sounds like a lot. Currently we're in the budget process for 2014, and we believe we can continue to grow both revenue and earnings nicely compared to 2013, while also investing to further build out our platform and sales force to drive long-term growth -- not just for one year, but for the next decade. Once we finish the budget process, I'll be ready to give out much more detailed 2014 guidance in our next earnings call. Until then, we expect to operate in that 30% to 35% margin range most of next year and exiting at the run rate of $500 million of revenue or possibly better. As we move into 2015, 2016 and 2017, we believe that business will continue to grow and eventually operate in the 40% to 50% margin range.

In summary, I'm very pleased with the CoStar financial results for the third quarter of 2013, which clearly show the strong revenue growth and margin expansion. We continue to believe the Company is operating in a multi-billion dollar potential market and we are focused on executing our plan to capture that opportunity. We also remain focused on the longer term goal I shared with you earlier this year of doubling the business over the next 5 years, continuing our mid-teens revenue growth to an $800 million annualized revenue run rate, exiting 2017 at even higher margins, in the 40%-plus range. As our track record shows, we believe we have the size of market, market position, competitive remote platform, strong cash flow, and management team to execute on our vision and take advantage of this massive opportunity.

As always I look forward to sharing our progress with you on these goals in the coming quarters; and with that, I'll open it up for questions.

(Operator Instructions) And the first question comes from Brandon Dobell from William Blair.

Quick one on salesforce. First, you mentioned getting over 200, I want to make sure I understand where the 190 or how the 190 looks right now. Are those truly all field salesforce people? Are there still some in that number that are hybrid between field and inside? Or if it's not, then how do the inside salesforce stack up right now?

It's all 100% traditional field now. So they're basically out in our -- we designed a new territory structure to handle 220 some territories in the field, responding to where the demand is in the market, and so there's 195 of these territories being filled, and they're not HQAE's traveling, sort of hybrid inside sales, and this is not an insignificant effort.

So we have -- we are doubling the number of managers out in the field, and we've been hiring at a pretty good clip there, some internal promotions. And then we also have been conducting the most training I think we've ever conducted for our salesforce over the last three or four months. So both LoopNet cross-selling techniques, PL selling techniques, training around the new products and the new financial modeling, and then also, just bringing in the new folks, new managers and getting them up to speed. But big picture, we're marching towards the goal and that feels pretty good.

Brandon, I'm just reiterating what Andy said. The 190 is pure in the field. The overall sales number is over 350, which would include all the other pieces, the verticals, inside sales and all that. So that number continues to move up. We expect it to be over 200 by the end of the year, and again it's all part of the plan we've been discussing the last few quarters.

Got it, okay. And back, Andy, to your comments about the five new enhancements those kinds of new rollouts, did that impact how you are pricing? Did it impact how you are looking at what types of customers may make sense? Just trying to get a feel for other than just the anecdotes about how useful the product is. How else -- is there an effort to monetize all the efforts you put into those enhancements, or is it just let's just make it better so we keep our renewal rates high?

No. I do want to get those five-year renewal rates back over 99%.

That's a good goal.

A little soft, 98%. Our key growth areas, lenders, banks, institutional directors, owners, we're still single digit penetration, retailers still single digit penetration. This is really building a dramatically better product in order to capture more LoopNet up-sales, capture more penetration of these new market areas, something like multi-family information opens up a whole new segment for us.

So prior, if you were a major lender, it was a pretty big hole in the CoStar offering that they didn't cover apartment buildings. And we've now got that box checked and that opens us up to a lot of new business we couldn't really go for before.

The lease analysis tool is something that creates some interesting opportunities down the road. So, the more of the user content you can manage, and the closer you can get from, as you move from being a data source, or an information source to actually being a platform that your customers are using to negotiate on, changes the dynamic and also moves you up the line of realtime data, and just gives you a much stronger product, which I think will give us a much more valuable product for owners and institutions to use. And a whole range of things you can charge for down in the future. But right now we want to get a platform that we can get massive adoption on.

So if we can pick up half of the brokers in the industry using our financial modeling tool it becomes a standard, and then that allows you to move into other areas from a standard bearer position. So, it's really penetration into new markets and setting the platform for new revenue opportunity, like completely new products you'll sell.

Okay. And then final one for me, as we think about the net new subscription sales number you gave us that 13.7. How do we think about the productivity from that 190 salespeople. Is that number driven by a small subset? Is it the 80/20 rule? Is it more broad based? I guess I'm trying to get at your comfort or confidence around increasing productivity from the salesforce, based on the numbers you've seen in the past couple quarters.

Well, you certainly don't increase productivity when you double your salesforce in the short term.

Fair point.

So you --you know, we strongly believe in what we're doing doubling the salesforce. Like it would be negligent not to build a larger salesforce to deal with the opportunity we have here, but the process does not increase your productivity.

All these new people coming in, come in at a much lower productivity level than the established salespeople. And as you promote some of your best performers into some management roles or above average performers into management roles, and as you also move into mentoring roles, your productivity would expect to move sideways for two quarters, three quarters where you get to the goal of 225.

But big picture, you know, as I look at the numbers on individual performance you still have a remarkably stable production level. We have maybe five super performers in the company and then probably 75% of our sales or 80% of our sales are coming from 50%, 60% of the salesforce. It's unusual for salesforces. It's actually remarkably balanced with these new salespeople dragging the tail down, as we would expect and we've seen in the past.

So, Brandon, just to add onto that yeah, so clearly productivity per rep is going to be sideways or down, I think, for most of the year because we're going to be continuing to add people through the end of the year. We'll be continuing to add field sales people next year. But, obviously, what that does is it gives us the opportunity, obviously, to grow, to continue to grow that net new by adding people.

And then the following year as you move into 2015 and 2016 then to continue to have more net new because then your productivity should then be moving up as you stabilize that move forward. So, I think it gives you a two or three year window, what we're doing, sort of at the end of this year and into next year. It drives things for another two or three years.

Got it. Okay. Thanks, guys, appreciate it.

Absolutely.

Our next question comes from the line of Andrew Jeffrey from SunTrust. Please go ahead.

Hey, good morning, guys. Thanks for all the color. The question I have is regarding these newer solutions which, about which you sound really enthusiastic, and obviously you're putting a lot of marketing weight behind them. You're doing 15% or so organic revenue growth now, and continuing to drive really good LoopNet cross-sale success. Presumably these newer solutions are going to be additive to growth. To the extent you're continuing to talk about 15% or mid-teens, does that mean that we're nearing a slowdown in the LoopNet cross-sell productivity, or are you just being conservative? How should we think about the interrelation of those two things?

Well, I would emphatically say that I don't think we're nearing any sort of a slowdown of LoopNet cross-selling activity. That I expect close rates to go up, and I expect to be able to keep that going at a stable pace for another two years at least. So it is solid, and we're just now really getting our salesforce really to the productivity level to be able to do that sale and delivering the technology tools they need to assist them in it, and we really haven't yet brought the salesforce to bear on the full potential of the PL side of LoopNet business, which is the marketing and advertising side of their business. So I think we are in the 2nd inning of the whole LoopNet thing and that might be easily 2nd inning.

Yeah. And I'll just add onto that I think what it's tied to is what we've been talking about. We have a big enough salesforce. So now we close the deal a year and a half later we've done 19,000 demos. So we've gone out once and demoed 19,000 people and we talk about 100,000 to 140,000 prospects, we just don't have enough salespeople. So I think everything is sort of tied together, we need to continue to grow the field salesforce. It's quite a process to actually take the field salesforce and double it, because then you have to redistrict everything. And I think we're in the process of doing that. So I expect that cross-sell to continue for, honestly, a decade. I mean think about it, it's been a year and a half we've gotten through 19,000 of 140 or whatever, 20,000, you know, potential prospects. I think that goes for a very, very long time.

Okay. So I know one of the things you alluded to, Brian, in your remarks you've talked about potentially moving away from some legacy LoopNet offerings perhaps early in 2014. I'm just trying to get a sense of cadence. You gave us a little color on, obviously, the investments and what they might mean to EPS mostly in the first quarter. But would you expect in early 2014 that there might be a slowdown below that mid-teens growth rate as you twilight some of those older products? Is that something you're thinking about?

Yeah. I think nothing has changed. I've been talking about it three or four quarters.

Okay.

So nothing has changed there. My view is taking that out, you know looking at Q2, Q3, Q4, yeah, we'll be growing mid-teens sort of year-over-year, you know, and again factoring in whatever the seasonality numbers are. You know actually the LoopNet business better than anybody, so when I talk about Q4, you know basically from Thanksgiving to the end of the year, the LoopNet marketplace is just slow. It has been every year for the past X amount of years, and then comes back stronger in Q1. So, I think sort of ex some of the things that we --

However, we did manage them to their best fourth quarter ever last year.

Yeah, Andy is correct we did. Last year fourth quarter was unbelievable. So anyway, I think that next year is --I think it's a pivotal year from product development, finishing the back end integration, salesforce, but you look at we're still planning on growing revenue and earnings very nicely next year while completing what I think is a lot of significant things. Which really set the company up for -- like I said it's not just about one year, it's about 2014 -- it's about 2015, 2016, 2017, and being able to run in that double-digit mid-teens growth. And I'm not just thinking about 33.6% margin this quarter, I'm not just thinking about the first quarter of 2014. I'm thinking about getting to 40%, I'm thinking about getting to 42%, I'm thinking about getting to 46%. We're definitely thinking long-term.

Okay, that's helpful. One last one for me maybe you can just take a stab at it Andy. By how much do you think -- and if you can't put it in dollar terms specifically, because I know it's a hard thing to nail down. But maybe proportionally, how much do you think some of the newer solutions, lease analytics, multi-family et cetera, how much do you think those expand your TAM?

How much do they expand our TAM? You know, I'm looking at the same market. So I'm looking at, in the last two years we went from 2.6% of the retailers buying our product to 3.6% of the retailers buying our -- and we added hundreds of them. Our owner penetration rate went from 5% to 10% -- 5% to 7%. So, I always have believed that you're talking a multi billion dollar opportunity and what these products do is just better position us to get the kind of penetration rates we think are possible in these just really attractive solid markets like the lender banking, institutional owner, the retailer, even corporate America.

So, we've achieved 80% penetration rates among the biggest brokerage firms, or the large brokerage firms, or mid to large size brokerage firms and we're moving the dials on these other four or five segments, but we haven't begun to move them like we moved the brokerage, and that's what this is really all about. So, you know, potentially you add $100 million plus by moving solidly into the multi-family. And the financial modeling tools is a --easily $100 million there, but again the real thing is, you know, we know what this market opportunity looks like. We have very -- we have great growth rates, very low penetration in, you know, four sectors we think are huge and it's going to move us down the line faster.

Thanks a lot.

And again address the problem of the 98% renewal rates with customers five years or over.

Our next question comes from the he line of Michael Huang from Needham. Please go ahead.

Thanks very much. Great quarter, guys. Quick question. So first of all, so, Brian, youhad reiterated kind of your comfort level and confidence in this annualized $500 million target as we exit next year. And I think you threw in there, and possibly more. And I can't remember or recall if that was the first time you said it or not. But I was just wondering as you walk through or think about what are the potential upside drivers to that target? Help me understand where that might be coming from. Is that just better than expected sales productivity? Is that better than expected uptick of these new products? Walk me through what are the upside drivers to that target?

Sure, yeah. I think it's a lot of things we've been talking about on the call. Obviously, you're significantly increasing the size of the salesforce, so you know, as most people know I'm fairly conservative in my numbers. I'm a show me guy. I want to see productivity from some of these first. So I think that there could definitely be upside from the salesforce and how we execute on that. Obviously, the better we execute, the higher the revenue I think we can be.

I also think there could be upside on a lot of these releases that we talked about. And I think there could be upside from, Andy talked about broker ads. I've said this fairly clearly on prior calls, and I'll say it again, I'm not putting very much revenue or actually I'm not putting any revenue in my models for broker ads. I'll probably put a little bit, but not a lot. And the reality is until I see the first contract in dollars come in the door, I'm not going to be throwing a bunch of revenue in my model for that. So, I think as that rolls out, and we start to see some revenue in the first quarter, second, third quarter, that could provide upside as we move along the year, and hopefully we can do better than we thought.

The reality is it still won't be a big number for next year, but then it can, obviously, be much bigger as we see success there in 2015, 2016 and 2017. That as Andy mentioned, you got Zillow, Trulia, HomeAway. You have got a lot of marketplaces out there that do hundreds of millions of dollars in those areas, you know, and I think over the next five years we can see that. But I'm going to be conservative. I'm not going to start putting -- I've always said this, I'm not going to start putting revenue dollars in guidance for products that haven't released yet. I learned the hard way on that one.

So, I haven't talked to Brian about it, but I believe his numbers for next year probably include below average production levels for the 225 field salespeople. So, the way you get upside is that the field salespeople perform at average.

Okay. That's great. And then it's great to see the improvement on the conversion rates as the loop consolidates. Was wondering you know as you think about kind of what that upper bound of those close rates and what it could be over time. Did you have some thoughts around that? Maybe I missed it, but did you give us the number of what that qualified loop lead-base looks like as we exited Q3? I think it was 140,000 last quarter.

Correct, and it's a modeled number. We look at these leads, and we run assumptions against them and say what do we think the real addressable folks are in that market? So, the number is over 100,000. It was 140,000 using the same consistent model we've been using over time. The important take-away is that despite the fact that we were able to cross-sell so many people into CoStar, the size of the pool of prospects grew on us. So we weren't upselling them as fast as we were getting new ones, which is probably a result of the recovery. You've got more people reentering commercial real estate, and so we're not able to upsell them. Again, it's part of why we're growing the salesforce.

Okay. Great and last question and I think you touched on this a little bit. But in terms of the mechanics of the fusion pricing you know is it Ala carte? Are there some of those things that you could buy piecemeal, or do you have to buy the entire platform? If you're a Suite customer what's the ARPU gains you get as you move to the broader Fusion platform? Thanks.

Well, the Fusion platform, so we historically have had an awful lot of customers who are buying just COMPS or just Tenant or just Property or Property Express, or even look at LoopNet as a continuing of our product line, so LoopNet Premium Searcher. What Fusion does is it creates more and more reason for these folks to step up to the Suite level and as they do that, you know, they're coming up 50%, 75% in pricing.

So the pricing schedule, obviously based on number of shops, national, local. It's just incredibly -- it's too complex to have a quick answer that's one size fits all answer. But typically you're going to get a lot more accounts going up 50%, 75% as they go from buying one of our products to buying the Suite, the Suite application. And then the other thing that's occurring here is this release is probably the last release that is generic, one size fits all CoStar Suite.

The next release, will probably have a system diverge into a one product that's addressed towards brokers, and then another product which looks very similar but has different functionality, that's addressed to lenders and owners. So this is the last generic release or, you know, one size fits all release. When that owner institution release comes out, it will probably be at a --an ARPU of 4X the average of the broker version.

Got you, great, very helpful. Thanks, guys.

Yup.

Our next question comes from the line of Ian Corydon from B. Riley & Company. Please go ahead.

Thank you. I think you just partially answered my first question, which was do your PPR subscribers have access to the new analytics in CoStar or are they meant for a different customer? And then, when does that owner-user interface come out? Is that 2014?

That would be definitely 2014 and no, --somewhat --probably 80% of the [people in our] customer base subscribes to CoStar already, and I'm going to just guesstimate that the 20% that do not, they're multi-family players. So now they will be an audience that will probably want to subscribe to CoStar property. When we launch the owner version of CoStar, we will be bringing the capabilities of the PPR web product into merge it with the CoStar product and there will be a one-stop shop, which we hear from our customers they like to see.

They like to be able to get the forecasting analytics, screen tools, in the same environment as they get the micro-detailed data and leasing proposals, and so on, so forth. So we'll be --the CoStar owner product will not include the advisory services, the access to analysts, the briefings, but it will have the same functionality as the PPR website integrating the CoStar website.

Perfect. That makes sense, and that's kind of what I figured. And then am I reading the guidance right that Q1 adjusted EBITDA might be a little below 30% and then for the rest of the year you'll be kind of in that 30% to 35% range?

Yeah. I mean, I think we'll generally be in the 30% to 35% range. Q1 including the marketing and all that, it will be around there. Obviously it depends on where we end up in the fourth quarter. But yes, it will be close.

Okay. Thank you very much.

Thank you.

Our next question comes from the line of Todd Lukasik from Morningstar. Please go ahead.

Hey, guys, nice job again with the continued business improvements.

Thank you, Todd.

Had a couple of questions on margin. I think, Brian, you mentioned last call it's a business model where $0.70 to $0.80 of every incremental revenue dollar can fall to the bottom line. I think I had you at about a 74% incremental adjusted EBITDA margin for this quarter year-over-year. I think slightly less than that for the first three quarters. But I'm just wondering, is that the range that you expect to stay in, in terms of an incremental adjusted EBITDA margin, that 70% to 80% range that you mentioned?

Yeah. If you look at the gross margin, it's at over 71% now. I think it's up four points over last year. So yes, I would continue to expect that you're going to drop, you know, $0.70 to $0.80 through that line. I think that will continue to grow, you know, over time, you know, on a long-term model basis. And then yes, I think that if you look at where we're going, obviously when you're doing that balancing, I'd say different than five years ago or ten years ago. We're able to continue to grow and balance growing EBITDA earnings as you've seen all this year.

I think we can do that all next year and then I think in the following years we can continue to push up the overall EBITDA margins into the 40%, 50% range. I don't think we're limited you know -- I actually don't even think the top end of that range is limited in a longer term model. You know, we've seen for years some of our larger markets doing 60%, 70%. So, right now I'm sticking to talking about the next three, four, five years. But, you know, I don't think by any means we're sort of bound by a 40% or even a 50% margin long term.

Okay. Got you. And you mention 40% to 50% that's just to clarify that's adjusted EBITDA margin that adjusts, adds back the stock-based compensation expense, as well?

Yup.

Okay. And then I was just wondering, I know you probably don't want to talk about pricing for particular clients, but I was wondering with the Transwestern deal, how a deal like that impacts the net new sales numbers that you talk about. So, if the total value of that client, with all the dozens of contracts that were out there was 100, and the one, you know, national contract that you signed the value is 120, what's the impact of that on net new sales? Is it 20 or is it 120?

It's 20. If you're going from 100 to 120?

Yup.

It's 20.

All right. Got you.

We're very net-new focused. Thanks, Todd.

Thank you very much.

And there are no other questions in the queue.

Well, thank you everybody for joining us today and we look forward to updating you on our progress in about three months, 3 1/2 months. Thank you very much, everybody.

Thank you. That does conclude our conference for today. Thank you for your participation in using AT&T executive teleconference service. You may now disconnect.