CoStar Group Inc (CSGP) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group fourth quarter earnings call.

(Operator Instructions).

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

Thank you operator. Good morning everyone and welcome to CoStar's fourth-quarter 2013 conference call, broadcast live from our headquarters in Washington, DC. We are delighted you have joined us, and before I turn the call over to Andy, I have some really important information for you.

So, certain parts of this discussion contain forward-looking statements which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that could cause actual results to differ include, but are not limited to, those stated in our February 19, 2014 press release of fourth-quarter and year-end results, and in CoStar's filings with the SEC, including our Form 10-K, for the period ended December 31, 2013, as well as our Form 10-Q for the period ended September 30, 2013. In each case, under the heading of risk factors.

All forward-looking statements are based on information available to us on the date of this call, and CoStar assumes no obligation to update these statements, whether as a result of new information, future events, or otherwise. As a reminder, today's conference call is being broadcast live and in color over the Internet at www.CoStar.com, and a replay will be available approximately one hour after the call until March 28, 2013.

To listen to the replay please call 1-800-475-6701 within the US or Canada, or 320-365-3844 outside the United States and Canada. The access code is 318994. It is also available on our website right after the call.

So without further ado, I turn it over to Mr. Andy Florance.

Good morning everybody and thank you for joining us today. 2013 was clearly the best year in CoStar's history. We had an exceptionally strong year in all aspects of the business and we believe we are positioned to continue to grow at high margins for many years to come.

I am very pleased with our outstanding financial results, which are the direct result of our entire organization of 2,000 plus professionals, working hard to create valuable products for the huge community of commercial real estate professionals we serve.

We increased revenue by $91 million they 2013, growing it to $441 million for the year. We continue to grow the top line in the mid-teen as our fourth quarter revenue was nearly $116 million, which is approximately 16% year-over-year growth. EBITDA for 2013 was $94 million. This is a 56% increase over 2012, and by far the most EBITDA we have generated in our history.

Adjusted EBITDA margin accelerated to over 35% for the fourth quarter of 2013. In the fourth quarter of 2012, adjusted EBITDA margin was 25%. Margin expansion continued throughout 2013, while we continued to aggressively invest in the Business. Our 12-month trailing renewal rate was 93%, and 98% for customers who have been with us for five years.

In 2013, we added nearly 4,800 new CoStar information subscription customers, which is the most we have ever added in one calendar year. Our annualized net new sales of subscription services in the fourth quarter was $15.8 million, an increase of 15% over the third quarter of 2013, and a 46% increase year-over-year.

Our fourth quarter 2013 subscription-based revenue reached $87 million for nearly a 21% year-over-year revenue growth rate. So, we are really quite pleased with our revenue momentum and our earnings momentum.

The LoopNet acquisition integration has been extremely successful and beneficial for customers and shareholders alike. We have now achieved $50 million of cross-selling revenues since the merger.

At this point, I think it is clear that we have exceeded the expectations set for both cross-selling between LoopNet and CoStar customer bases, and we have exceeded the initial expectations for cost synergies that could be created by combining the two companies. So it has taken us about 20 months since the close of LoopNet to get to this $50 million cross-selling point; and at this point, we feel that it is going to be a little more difficult to accurately report on this number, and it will become a little less meaningful, so we are going to stop reporting on the cross-selling number going forward. So at $50 million, we are no longer counting.

The commercial real estate recovery is continuing. 2013 was one of the best years for commercial real estate since 2007, as measured by the fundamentals of demand, occupancy, and rent growth. For example, in 2013, real estate net absorption of the four principal real estate sectors tracked by CoStar, increased by more than 30% versus 2012.

This absorption supports a broad base above inflation rent growth ranging from 1.9% for retail, to 4% for industrial. We continue to see capital flowing to real estate investment as sales of commercial property ran 19% higher last year than 2012. In fact, at $439 billion in property sales, 2013 had the highest sales volume since 2007.

Net absorption of office space was up 24% in 2013, to 59 million square feet. A post-recession record 64% of office submarkets, recorded vacancy declines in the fourth quarter of 2013, which is a very important indicator that the broad geographical base of commercial real estate is improving, and is showing good fundamentals. I think that is probably one of the single most important indicators.

Strong apartment sector fundamentals allowed vacancies to remain near record lows at just 4% as of year end. For 2013, apartment net absorption expanded 29% over net absorption in 2012. Clearly, increased job growth and reduced home ownership rates continued to boost apartment demand. A doubling in the amount of new construction has provided alternatives for tenants, and the near future will probably lead to a period of slightly rising vacancies.

In many respects the industrial sector is the healthiest of the property types because it benefits from technological changes, in particular e-commerce and limited new supply. Net absorption of industrial space was 37% higher in 2013 than in 2012, and allowed the sector to achieve one of the highest demand growth rates among the four major property types.

Retail sales are now up by more than 13% from 2006's peak levels, driving up retailer profitability and encouraging new store openings. While the market remains plagued by empty retail space, in higher-quantity centers landlords have been able to push rents aggressively. In short, 2013 was a good year for retail. All in all, all the sectors appear to be giving us a favorable environment for a successful 2014.

All this valuable intelligence on what is occurring in commercial real estate markets, is only made possible by the insightful dedicated efforts of our more than 1,200 commercial real estate researchers, economists and software developers supporting their work. Over the course of 2013, that team kept CoStar firmly positioned as the leading commercial real estate research organization in the world. They conducted 5.4 million research calls, drove 1.6 million miles inspecting properties, captured 719,000 new listings, added 1 million new tenants, and in total, made 31 million updates to our market coverage.

Turning now to the United Kingdom, we entered the UK in 2003 with a purchase of small commercial real estate Company called Focus, and I believe its corporate name was Property Intelligence. Over the several years that followed we acquired several more small companies in the United Kingdom and France. None of these companies had sophisticated software, nor did they have comprehensive or adequate information.

Our first challenge was to cost effectively research the UK market so we could deliver comprehensive current and accurate information on the UK market. We initially acquired a small UK research team with only a dozen or so researchers, based in an extremely high-rent area of central London. This group was only tracking a fraction of the market with about 25,000 commercial listings in the UK. With that spotty coverage of the market, the service was not considered an indispensable utility to our clients.

We estimated we needed over 100 researchers to track the market properly. In order to do this cost effectively, we closed our London research center and opened a much larger research center in Glasgow, Scotland, ultimately, employing over 150 researchers there. Under the leadership of Simon Law, our UK director of research, the team took our database from 25,000 listings to over 156,000 listings, so 6 times increase, and we believe that is the most comprehensive coverage the UK market ever built.

Despite achieving recognition from the our clients for now delivering high quality research for the UK, until recently, we were still delivering that data through the old unsophisticated software solutions we had initially acquired. In 2011, through to the beginning of 2013, a large international team of software developers, led by Jason Butler, Vice President of Software and Development, modified our successful US CoStar software solution to handle the UK data model, and we migrated the UK data into our successful CoStar software environment.

Our plan is to upsell existing subscribers to the new enhanced platform, with an average price increase that we are seeing of approximately 37%. In addition, we believe the new service has greater appeal to new customer segments such as owners, banks, and others, which should accelerate our acquisition of new customers. In fact, we are seeing owners and banks sign up at about three times the rate we historically were picking up that sort of segment, since we released the new software.

During the course of 2013, 386 UK firms upgraded or purchased our new UK CoStar platform, and those subscriptions are covering 2,000 users. One of our more notable transactions in 2013 UK was our multi-year contract with the largest surveyor in the UK, CB Richard Ellis. Revenue growth has accelerated in the UK, and in fact it increased 5.5% from Q3 in 2013, to Q4 in 2013.

As we completed the enhancement of our UK database, and the migration into our CoStar suite platform, our costs in the UK fell dramatically; and in the fourth quarter of 2013 the UK was profitable with $781,000 in EBITDA at a 14.1% EBITDA margin. Congratulations to the UK team.

Giles Newman, the managing director who leads CoStar in the United Kingdom, Matthew Green, our finance and operations director in the UK, and their full teams have done an outstanding job and have made CoStar the clear number-one provider in the UK. 97 of the top 100 brokerages in the United Kingdom subscribe to one of our services now.

We have thousands of client firms potentially upselling in the UK, in addition to many completely new prospects. We anticipate significant revenue growth in the UK for some time to come. Our results in the UK clearly demonstrate that the CoStar business model can be successfully implemented internationally.

And with that, let's turn to Toronto. With our successes in the UK now freeing up a little bandwidth to allow us to focus our efforts up in Canada, we are now focused on beginning to deliver that product and bringing the Canadian operations into profitability as soon as possible.

After two years of research in the Toronto market, and building a database of 60,000 properties, I am pleased to announce that we are beginning to sell CoStar services covering Toronto. I recently spent time up there with our local sales team visiting the top 15 firms in the market. Feedback we received was overall very, very positive, very welcoming.

In half of my meetings, clients asked why it had taken so long to bring the product to Toronto. Didn't really have a great answer. Many had, had US associates call over the years and ask for the CoStar reports for Toronto, which they could not deliver.

While it is still very early on, we have had a number of significant prospects indicate buying interest, and we are now actively negotiating contracts with multiple brokerage firms. I believe that there is great potential for decades of profitable growth in Toronto and Canada overall.

As we discussed in earlier conference calls, we invested throughout 2013 to build a much larger direct field sales force throughout the US. We believe that we can deliver higher levels of profitable growth with a larger sales force. We believe that the size of the opportunity we are addressing and enjoy right now requires a larger field sales force to fully capture it and get the value that we have here.

It takes six months to a year, for a new salesperson to become fully productive, so in the short-term, sales force growth reduces EBITDA. In addition, the lower productivity of new salespeople, and higher initial training requirements of these salespeople, temporarily reduces our per salesperson productivity across the board. It actually causes a little bit of dip in existing established salespeople's productivity, and we have seen this several times in the past when we grew.

Salespeople with three months of experience, tend to generate approximately $10,000 in gross annual recurring revenue bookings each month. By the time a new salesperson is in his or her 12th month with the Company, the monthly production number is typically climbed to approximately $14,400 per month. A fully trained field sales AE with several years of experience typically produces significantly more, at $30,000 per month.

In the beginning of the first quarter 2013, we had 124 field sales reps in the US, by July 2013 we had 140, and by year-end we had 212. That's an increase of 71% over the course of the year, really quite significant. This is the largest field sales force we've ever had in place.

In order to provide optimal management support to this larger sales force, we added 10 senior sales managers with relevant backgrounds from great companies such as: Thomson Reuters, JLL, PR Newswire, ADP, LexisNexis, Paycheck, EMC, [Informa], XO Communications, and others. The hiring of these individuals, reconfiguration of the sales territories, and building a stronger sales management team, was indeed a temporary disruption, particularly in the second half of 2013, but we believe it was necessary to ensure long-term growth. I am proud of the commitment to excellence our sales force delivered during this time, and they did so while producing solid, topline growth.

We recently held our annual sales conference, and the positive energy in the room was really great. We are really excited about the upcoming year. With our larger sales force and new sales territories, we plan to drive sales at a more local level, which we believe will increase sales and increase retention rates. You have to worry about that at 93%, 94%. It will take some time for our new sellers and sales management to come fully up-to-speed, but I expect to see the full impact of the recent growth in sales force in our net new numbers as we get into the later part of the year and into 2015.

We launched five CoStar product enhancements in the fall of 2013. These enhancements included new lease analysis tools, mobile analytics, enhanced web analytics, a new map search, and comprehensive multifamily information. On LoopNet, we released a new advertising opportunity brokers could use to reach prospective clients that are likely searching for properties on LoopNet.

Since our October 2013 release, our clients have successfully executed 28 million searches on the new CoStar suite, and they have built over 11,000 lease financial models in the new CoStar lease analysis tool. We continue to be very pleased with the positive reaction we are receiving to the product.

One important area of success I want to highlight though in this new release, is the new multifamily, or apartment, information analytic tool we released. We have been collecting partial information on apartment properties for decades now. Now with this new release, we have dramatically increased the breadth and depth of coverage.

One of our most experienced research executives, David Porter, has led a people of several dozen researchers, assisted by over 100 field researchers and a number of overseas researchers, on a multi-year effort to build the premier information source on US multifamily properties. We believe that we have built, by far and away, the most comprehensive database of apartment buildings ever assembled.

We you now have information on 326,000 apartment buildings, representing more than 17.5 million apartment units. With those words, competitors are out hiring researchers, trying to catch up.

We have hundreds of thousands of images, details on construction type and quality, amenities, unit mixes, rents, sales prices, asking prices, concessions, and more. We are also tracking details on 0.75 million apartment units that are proposed or under construction currently. We believe we have information on 740% more properties than the second closest information provider, and 24 times more properties than the number six player in that space.

US multifamily properties have an aggregate value of approximately $2 trillion. We believe this is a very important component of commercial real estate, and an area we have not historically fully addressed. We believe that there are very significant revenue opportunities that could be achieved by meeting the full information and marketing needs of the multifamily industry.

In the same way CoStar has successfully met the information needs of the office, industrial, and retail real estate industries, we believe we can additionally meet the needs of the multifamily industry. We have been meeting some of their needs, but we believe we can meet a much broader set of their needs.

The same way CoStar Group has shown through BizBuySell, LandsofAmerica, LoopNet, and other marketplaces, that we can meet the marketing needs of the office, retail, industrial, business for sale, land, and farm brokers, we believe we can meet the needs of multifamily leasing agents. We began making significant investments in this area several years ago and we'll continue to do so.

Since we released the enhanced multifamily service in October 2013, clients have executed 800,000 multifamily specific searches, and users have viewed close to 1 million detailed pages on multifamily properties. Client surveys suggest that our multifamily enhancements were the most popular element of our fall product enhancements. We intend to execute aggressively on additional product initiatives in 2014 to capture what we believe are very significant revenue opportunities in providing multifamily information and marketing services.

Our marketplace products are some of our fastest growing product offerings, and we are delivering product enhancements in this area as well, too. I mentioned the broker advertising opportunities we just released. This is basically with large audiences of people coming to our website looking to potentially lease or buy properties, our broker clients are interested in presenting ads to these people offering their services to help them with that process. We just released this, and we have began selling it, we are having some good success, and we hope to be able to report more on that next quarter.

Over the last six years, we have accumulated an enormous amount of experience building, running, and growing marketplaces. In fact, we run the top three commercial real estate marketplaces in the industry. We also run the top marketplaces for businesses for sale and farms for sale.

With LoopNet.com, we operate the clear, number-one commercial real estate marketplace in the United States. Since the close of the acquisition at the end of April 2012, we have really reinvigorated LoopNet, and it is growing stronger than ever before.

LoopNet.com draws by far the most traffic in commercial real estate, with an average of 4.8 million monthly unique visitors. This is up 37% from 3.5 million monthly uniques back just before the acquisition closed. In that time, we grew the number of registered loop net users almost 40%, from 5.8 million to 8.1 million.

In the 20 months since the close of the LoopNet transactions, we have increased revenue for Premium Lister 38%, and that stands in stark contrast compared to the 8% growth for the 20 months prior to the acquisition. It is one of our faster growing areas now in the Company overall.

The LoopNet acquisition also gave us the second most trafficked commercial real estate marketplace called CityFeet, and that joins our original marketplace SHOWCASE, which is now number three. So we built the first-, second-, and third-ranked marketplaces for commercial real estate on the web, based on site traffic, and likely, revenue.

We also own and operate several industry-leading marketplaces in other verticals. LandsofAmerica, LandAndFarm, are number one and number three industry sites for rural land, based on revenue and clients. They are the number two and three sites by traffic, and are showing strong growth in that area.

In 2013, total visitors increased 20% and 41%, respectively, for each site. LandAndFarm now averages 1 million monthly visitors, while LandsofAmerica has 1.5 million average visitors. 2013 revenue grew 17% for LandsofAmerica over 2012 revenue, and revenue for LandAndFarm grew 18% over 2012 revenue.

Our industry leading business marketplace verticals are BizBuySell and BizQuest. They facilitate the sale of small businesses and are the number-one and number-two websites in this important space.

In 2013, BizBuySell grew total visitors by 27% year-over-year with an average of 1.2 million monthly visitors. Total leads delivered to business sellers grew by 25% year-over-year. BizQuest grew monthly total visitors 48% year-over-year, and total leads delivered to business sellers increased by 31% year-over-year.

In 2013, we have averaged over 9 million unique monthly visitors in aggregate for all of our sites. Our marketplaces add to the depth and breadth of our offering, and add large communities of users who come to CoStar. This increases the network effect and allows for enormous cross-selling opportunities, which we believe lead to high sustainable growth.

2013 was our most successful year yet. We believe we are in excellent position to maintain mid-teens revenue growth, while expanding margins for the foreseeable future. We expect the introduction of new services, especially in the apartment sector, enhancements to our existing services, continued growth and development of our sales force, as well as the strength of the commercial real estate recovery, will create an even more successful 2014.

We continue to believe that we are on our way to reaching our goal of $800 million in revenue with 40% margin, as we exit 2017. I will now reluctantly turn the call over to our CFO, Brian Radecki, who will do a fantastic job running through the numbers.

Thank you, I think, Andy. I am pretty impressed, Rich, you kept him under three hours.

So, as mentioned, we are very pleased with our performance during the fourth quarter and full-year 2013. CoStar's information, analytic and marketing services continue to show strong revenue growth, and the successful integration of LoopNet continued to be a big contributor to our growth in revenue and earnings. EBITDA margins continue to expand, driven by mid-teens revenue growth.

Today, I am going to principally he focus on the year-over-year comparisons for the fourth quarter of 2013, and then also on our outlook for 2014 and beyond. Starting with CoStar Group's results for the fourth quarter 2013, the Company reported $115.6 million of revenue, an increase of 15.5% compared to $100.1 million last year.

Full year revenues were $440.9 million, an increase of $91 million, or 26% over revenues of $349.9 million for 2012. This revenue growth was driven by the core information service performance, and the continued progress on cross-selling LoopNet efforts, as well as strong revenue from the marketplaces.

EBITDA increased 54% year-over-year, to $31.5 million for the fourth quarter of 2013, up from $20.5 million in the prior year. EBITDA for the 12 months ended 12/31/2013 was $94.2 million, which is an increase of 56%, or $34 million from EBITDA of $60.2 million in Q4 of 2012.

We reported adjusted EBITDA of $40.8 million for Q4 2013, which is an increase of $15.7 million, or approximately 63%, compared to $25.1 million last year. Adjusted EBITDA margins increased significantly to 35.3% in the fourth quarter of 2013, from 25.1% in the fourth quarter 2012.

You want me to repeat that, Rich? Okay. Adjusted EBITDA margins increased significantly to 35.3% in the fourth quarter of 2013, from 25.1% in the fourth quarter 2012.

So when you look at the flow-through from incremental revenue down to earnings, one can sort of understand what happened here, and how significant the earnings leverage is in our business. I think we have talked about this for years, but if you think about that flow-through, it is fairly significant.

Net income for the fourth quarter of 2013 was $12.8 million, or $0.45 per diluted share, which is an increase of $8.1 million from $4.7 million, or $0.17 per diluted share, in the fourth quarter of 2012. Non-GAAP net income for the fourth quarter of 2013 was $22.2 million, or $0.78 per diluted share, which is a 76% increase from $12.6 million, or $0.46 per diluted share from the fourth quarter of 2012. Amazing.

Reconciliation of all non-GAAP net income, EBITDA, adjusted EBITDA, or any of the non-GAAP financial measures discussed on this call to their GAAP basis results, are shown in detail along with definitions for those terms in our press release issued yesterday; and are available on our website at www.CoStar.com. Or you can just e-mail RichSimonelli@CoStar.com if you have questions.

Cash and investments increased $33.3 million to $277.9 million, as of December 31, 2013, up from $244.6 million at the end of the third quarter of 2013. Cash and investments exceeded total short and long-term debt of $153.1 million as of December 31, 2013.

Cash flow from operating activities was very strong at $35.5 million for the fourth quarter of 2013, and was $108.3 million for the 12 months ended December 31, 2013, which demonstrates, again, the strong cash flow characteristics of our business model. So $108.3 million of cash flow from operations. Phenomenal.

At this point I am going to give some additional color on a few metrics to highlight the strong performance in the fourth quarter. We achieved $15.8 million in net new sales of subscription services on annual contracts in the fourth quarter, as a result of the ongoing success of driving sales of information analytics, marketplaces and lead generation, all coupled with the successful cross-selling efforts. This represents a 46% increase in net new sales of subscription services on annual contracts, compared to the $10.9 million during the fourth quarter of 2012.

Revenue from subscription services and annual contracts was $87.1 million for the fourth quarter of 2013, or 75.3% of our total revenue, up from only 72% a year ago. The trailing 12 months ended December 31, subscription revenue from annual contracts totaled $326.9 million, up 21% from $271.2 million for last year.

At this point, approximately 75% of our revenue is coming from annual subscriptions, and the remaining 25% is primarily made up of our marketing services, including LoopNet premium memberships, on monthly or quarterly arrangements, along with CoStar SHOWCASE, as well as revenue from advertising across both platforms. As we continue to make progress upselling LoopNet subscribers onto annual contracts, we expect to increase the amount of revenue included in our subscription annual metric.

The renewal rates for annual subscription revenue remained high during the fourth quarter, the 12-month trailing renewal rate for CoStar subscription-based revenue was $93.1 million in Q4 of 2013, as this metric ticked down slightly, as expected, from $93.3 million in the prior quarter. As we have discussed for a few quarters now, as we continue to introduce more LoopNet contracts into our subscription base, we will expect this 12-month trailing renewal rate to edge down slightly.

The small decline to date is about what we expected, and we do expect to continue to see it move down a little bit, 1% or 2% over the next you few years, as we get more and more people signed up for annual contracts, then eventually that will turn around and will start to increase. Renewal rates for CoStar subscribers who have been with us for five years continues to be strong at 98%, and pretty consistent the past several quarters.

As Andy discussed earlier, we continued to see great progress on cross-selling LoopNet and CoStar services through the end of 2013. Total cross-sells were $46.8 million, and earlier this month we achieved $50 million, as noted in our press release.

I think we have clearly demonstrated that the revenue synergies from this acquisition have been a powerful growth catalyst for the Business, and exceeded expectations and will continue to be for years to come. I believe the progress selling into the LoopNet lead list will continue to be evident in the sales and revenue numbers we report moving forward.

At the end of 2013, we had 379 total sales reps, a modest increase from 355 at the end of 2012. Today, our total sales reps in the field, sort of core field sales rep, as Andy mentioned, is 212. We have 109 inside reps, 14 in the UK, and a handful supporting the various subsidiaries.

On previous calls, we have talked about how we are going to be pushing to make the move to get more people selling in the field. As Andy noted, we are making great progress expanding that core field sales team, which is now 212. We started 2013 with 124 core field sales reps, which does not include inside sales, ad sales, HQAE or trainees, and et cetera. Therefore, we increased our core field sales rep by 88 people, or 71%, in the past year, with the majority in the last few quarters. Including the impact of, sort of, normal turnover, as of the end of the year, about half our reps had been with us less than a year.

As Andy noted, we have also added about 10 new managers to our team to support the growth in sales territories. We are now very focused on training and developing all these new managers and sellers, bringing them up the productivity curve as quickly as possible. As Andy mentioned, it usually takes 6 to 12 months to bring a new rep up to historical productivity levels, so essentially, half our sales force, with experience, is training the other half, which is brand-new. Therefore, while we are training and developing these news reps, I would expect to see sales trends in the first half, and sales metrics in the first half of 2014, to be somewhat lower than prior year, and then begin to ramp up in the second half of the year, and into 2015, as we reach full productivity increases.

This expected lower productivity in the first half of the year, while ramping into the second half of the year and into 2015, is factored into my revenue guidance range. Throughout the year, and last year we continued to deliver solid sales numbers while undergoing this transformation, and I expect to see solid sales numbers and strong returns from these efforts as we start moving into the back half of the year.

I will now discuss outlook for the first quarter and full year. Our guidance takes into account all these trends, growth rates, renewal rates, which may be impacted by economic conditions in commercial real estate and the overall economy, among other things.

The guidance takes -- our guidance on the impact on foreign currency exchange fluctuations on the topline remains consistent. We do not attempt to predict foreign exchange rates or fluctuations, and our guidance assumes little or no volatility to the current rates. Actual results may vary from these estimates.

We are providing outlook reflecting our current expectations as of today, February 20, 2014. We expect revenue for the first quarter 2012 to be in the range of $116 million to $118 million. For the full year, we expect revenues of approximately $490 million to $498 million.

In calls last year, I discussed our plans to de-emphasize or discontinue certain redundant services, which we expect to have an impact on 2014 of approximately $10 million to $12 million, which is included in our revenue and earnings guidance for the year. So, we have taken that into account.

In terms of earnings, we expect the first quarter 2014 fully diluted non-GAAP net income per share of approximately $0.62 to $0.66, based on 28.6 million shares. For our Business, the first quarter expenses include seasonally higher costs related to our annual sales conference, annual standard increases for personnel, as well, this year, planned investments in marketing and branding in the first half of the year.

If you look back over the past decade, you will see typically our earnings decline from Q4 to Q1 in most years, due to these seasonal expenses that are typically incurred in the first quarter, followed by increases in earnings and margins in subsequent quarters. We currently assume a 38% tax rate in order to approximate our long-term effective corporate tax rate, which, I believe, was 37.5% last year.

For the full year 2014, we expect non-GAAP net income per diluted share of $2.92 to $3.02, based on 28.8 million shares. Additionally, we expect to continue to invest on improving our service, marketing and branding initiatives, as we discussed earlier, and further evolving our sales force throughout the year.

In the middle of 2012, shortly after the LoopNet acquisition, I introduced a financial goal of achieving $500 million in run rate by Q4 2014, with adjusted EBITDA margins in the low to mid-30%s, which would have included, essentially, mid-teens growth rate. The revenue and earnings ranges I shared today highlight that we fully expect to meet and possibly beat these goals. I think there is little doubt on that.

In summary, I am very pleased with CoStar's financial results for the fourth quarter and full year 2013, which clearly shows strong revenue growth and margin expansion in cash flow. We believe the Company is operating in a market with multi-billion dollar revenue opportunity potential, and we are focused on executing our plan to capture that opportunity. We also remain confident and focused on the longer-term goal I shared with you last year, of doubling the Business again over the next five years, and continuing our mid-teens revenue growth to $800 million in annualized revenue run rate exiting 2017, at even higher margins in the 40%-plus range.

We believe the size of the market opportunity, our position in that, our competitive platform, strong cash flow, and management team execute on that goal, and take advantage of this massive opportunity. As always, I look forward to sharing the progress with you in the coming quarters, and I will now open it up for any questions.

(Operator Instructions).

We'll begin with the line of Andrew Jeffrey with SunTrust. Please go ahead.

Hi, guys. Good morning. Nice job.

Good morning.

Couple questions. First of all, and I appreciate the success you have had with LoopNet cross-sell, and the fact that it is no longer quite as relevant as a call-out metric, but it looks like we got some nice acceleration in the fourth quarter. Are you still thinking about the potential LoopNet cross-sell in the same context that you have before, somewhere between $120 million and $150 million opportunity? Has anything changed in that regard?

No. It still remains a massive cross-sell opportunity. In fact, December was an unusually high month of CoStar property subscriptions, I mean, real surprisingly so. There was lots of different revenue drivers in the business, but if you look at a chart of new CoStar subscribers on the information side month by month, December stood out like Everest.

So it is not going away. It's still there. We still have 50,000 to 100,000 people to try to sell our information, who are not yet buying CoStar property or suite.

That remains a very important audience for us to sell to. Conversely, we are also very focused on selling the LoopNet marketing to the CoStar audience. As a metric now, it refers back to the acquisition. I want to get the salespeople a little more focused on total revenue, not on a metric around an acquisition. So I'm just trying to -- then also, it is a metric that is driving sales force behavior, in a way that, I think, we want to pull them back from a little bit.

So I assume some of the LoopNet cross-sell strength is reflected in the good net new growth against what was a pretty tough comp versus the third quarter?

That's 100% correct.

Yep.

Okay. And with regard to the 2014 revenue growth guide, I appreciate, call it, 200, 300 bps of headwind from some of these discontinued legacy LoopNet solutions, on one hand. On another hand, it sounds like you have got a bolus of new salespeople that should really become much more productive as the year goes on, perhaps as early as sort of late 2Q, early 3Q.

Following their ramp, could we expect CoStar to grow above trend line at some point for some period of time? You have added a lot of new salespeople as you have noted, who are probably below trend line productivity right now.

They are below trend line productivity. They are where we expect them to be, which is below trend line productivity. And their productivity over the next two to three years can grow typically 300%.

And then again, I was looking at a chart last night that shows, when we add a large number of new salespeople to the mix, the existing salespeople who act as mentors also come down a little bit. So I would expect them to begin to pick up their productivity as we move into the second, third and fourth quarter. But even if they pick up their productivity in the third quarter, those are bookings, that is not going to really move the dial aggressive -- meaningfully on the revenue side.

So I look forward to the point at which they are beginning to take effect, but we have been through this two or three times in the past, as we grew from 10 to 30, and went from 30 to 70, and from 70 to 120. Each time we do that, you put that expense out there, some anxiety around the two quarters, where you are not seeing an immediate return, and then you begin to see a new higher level of production. I would stick with what we really talked about, to stay reasonably conservative.

And just to add on to that, to answer your question, simply, the answer is yes. As you exit a 2014 into 2015, I think, we are setting up the back half of this year, the end of the year, and going into 2015 I think should be a strong year. And obviously, each quarter we are going to be reporting on the sales force and, sort of, productivity.

As I said, if you look at the majority of the sales force was added, sort of, towards the tail half of last year. We actually at the sales conference were talking to people that actually had not started yet, but came to the sales conference anyways.

So I think the reality is, you're going to spend the majority of the first half of this year with all your experienced people training all the other half of the sales force, which is inexperienced. I feel really good about as we exit this year and you go into 2015, I definitely think we should be seeing increasing growth rates there. So, I feel pretty good about it.

That helps a lot. Thank you. Maybe a quick housekeeping question, perhaps for Rich. Could you just tell me the number of subscription client sites you had at year-end?

Yes, Rich.

That's a good question.

I put you on the spot, Rich.

It's about 20,000 --

22,838.

22,838.

Just off the top of my head.

Thanks a lot.

And next we will go to the line of Brett Huff with Stephens, Inc. Please go ahead.

Good morning, guys and congrats on a nice quarter.

Thank you, Brett.

You, Brian, in your, sort of, long-term outlook, and Andy you mentioned this too, of doubling the $800 million number, one of the questions we get a lot is, can you give us a little bit more color on the total addressable market, so we can feel comfortable how you all get there? And you have you addressed pieces of this over time, multifamily and et cetera. Could you just give us a quick tour through the addressable market, and the rough sizes as you see them, or whatever color you can give us on that, so we have sort of a holistic view on that?

Sure. How about if I will give you something I was looking at last week, which is a slightly nerdy answer to your question?

But we took -- I took longer-term revenue trends for Washington, LA, Baltimore, Boston, Charlotte, just a number of sort of prototypical markets for us, and I took those revenue streams -- subscription revenue streams, and LoopNet revenue streams, and I divided that revenue by the number of people in the particular city we were serving with that revenue stream. And then I set the starting point, not to a calendar date, but to quarter 1, quarter 2, quarter 3, quarter 4, and then did a polynomial regression on the revenue growth path of those different cities; and it is really quite amazing.

So, like if you look at a Los Angeles, it grows at 0.004X squared, which X is the quarter that you are in, as a revenue per person and population. So we are reaching -- and our -- squaring that is 0.994, and you get basically a 0.94 on doing the Washington the same way. So you get a really tight, sort of, polynomial on these revenues, and you get exactly the same formula in several of these older markets.

So what's that mean? That means that Washington is now generating about $4 per person, per year in the population. And a newer market like a Charlotte, might be doing $1 or $2 per person of the population; but it is following the exact same curve.

Now, if I take all the markets, which range from very young, like Toronto, which is -- we may have a contract at this point, which would make it day zero, and an oldest market like Washington, DC, and you just accelerate them on this curve. You take where they are, and you accelerate it from this curve, it implies a market size of 2.4 billion in revenue in 2024; which is really quite optimistic, but that is basically just an empirical analysis of very consistent long-term market by market trends.

So, the longer we are in a market, the more revenue per person of the population we are getting. And perhaps there is some met cast law operating there, perhaps we are creating more opportunities for people to earn brokerage commissions by making the business more profitable; a lot of different ways you can analyze that.

So that, for me, I can give you a hypothetical size of market, looking at penetration rates, I can say, gosh, we are 16% penetrated to brokers, we are probably, I am guesstimating, 4% or 5% penetrated to owners, I could say. And, obviously, we have the biggest players in these markets, we have all the CBREs, and the JLLs, and the top retail owners and so on, and so forth; but there are still 100,000-plus people who make a living -- 100,000-plus firms that make a living each and every day around commercial real estate that are not yet our customers, that we believe will become our customers. And, for the 150,000-plus who are customers today, there is no shortage of additional products and services we believe we can sell these people.

So, if you ever are suffering from really debilitating insomnia, I would invite you to come spend some time with me, and we can run some polynomial regressions against our historical revenue trends, because they are really, really quite predictable.

Sounds like a blast.

As Andy goes to come up for air, I will add about 30 seconds to it. I will keep it short.

When you look at the fact we are approaching, essentially, with my guidance, close to $500 million of revenue this year, and you go back to something he said at the end, where we have a chart in our slide deck that shows what percent for brokers, single-digit for owners, single-digit for retailers, everybody else. You are just -- you are, sort of basically looking that the overall market is less than 10% penetrated.

If you are already doing $500 million, you are already selling into all those, obviously 10% into $500 million, gives you a $5 million market. Then that is for the products and services we have today, with the people we know about, already selling into those groups, so it is not fictitious numbers, or we are not selling into these groups, it is what we are doing today.

And then of course, if you said, globally, it is two time to three times that, obviously, we will be plucking off Toronto, and again, slowly over a couple decades we will pluck off other cities internationally, you can multiply that by two time to three times. And to me, that is the opportunity with, sort of, where we are today. And then of course, you know we like to do things to expand that opportunity.

So we have no -- in my view, that is a very simplistic way I look at it. There is no shortage of opportunity at $500 million, I think, to get to $1 billion or $2 billion over the next decade, two decades is very reasonable, and won't even approach half of what the opportunity is today here in the US, and where our platform is today. And of course, you could always multiply that globally.

That is sort of my one minute add-on to Andy's.

That's helpful.

Intuitively, typically, information is about 1% of an asset class. You can say global commercial property is approximately $50 trillion. You can do the math from there, and it would clearly indicate that the size of the market opportunity is larger than our current meager revenues.

That is helpful. One follow-up question. On field sales, you mentioned a bunch of different numbers, Brian, on the field sales, what it was, what it is.

Yes.

What I am trying to get to is, if the average person who is three months in, Andy, I think you said, is $10,000 in bookings a month, and goes over, call it three years, whatever the number is, to $30,000 of bookings a month. And I am trying to do the math where I can multiply that times -- are there 50 people who are sub-3 months in the field sales?

No, it's 80 or 90. If you look at it, I will give you the numbers again. We have 212, sort of, core field reps today. It was versus 124 last year. So, if you apply a modest turnover to the 124, you figure out we are at 212 now.

Essentially, half our sales force has been here -- has experience, and half is in the first quarter or two. So that will ramp up over the next -- I think as you start to get through the back half of this year, and then I think we should be going into 2015 with a fairly strong ramp on the sales productivity. And then of course, that will continue to ramp through a2015 and into 2016.

So, I think, the increase in size of the sales force will really carry us to the back half of this year, and in through 2015 and 2016, and I think there is plenty of opportunity for upside with the productivity in the sales force. Obviously, the better job we can do to get them up-to-speed faster, the better the numbers can be.

I want to give you the exact formula. It is revenue per person of the population, equals 0.0004X squared, where X is the quarter, how ever many quarters you have been in the market; and then there is an intercept adjustment, which is not really relevant.

Thanks, appreciate it.

Next we will go to the line of Bill Warmington with Wells Fargo. Please go ahead.

Good morning, everyone. Congratulations on a strong quarter.

Thank you. Hello, Bill, welcome back.

Well thank you very much. Thank you. Good to be back.

So a couple questions for you. On the $10 million of sunsetting of the old products, should we just -- obviously, on an annual basis, you back that out from the base of 2013, and that gives you about a 14% to 16% growth rate for 2014. But, should we think about that being spread ratably across the quarters to an [acclimate] a quarter, are you going to give us that adjustment each quarter?

I think it is spread throughout the year. I am not going to -- I think I probably won't talk about it the rest of the year. I prepped everybody last year, I gave it to you guys this quarter, now we will just move forward.

It is spread pretty ratably. Essentially what it is, is we have zero people in our sales force selling two or three or four different products that we believe are redundant. So those will just sort of burn off throughout the year.

These are monthly and quarterly contracts that have high churn. They are old stuff, it is redundant. I am probably not going to talk much about it. It will be spread pretty much throughout the year.

Not only that, these products are not just redundant, these products are products that are -- we provide -- we feel they provide less value to the customer and they are -- have a substitution effect against higher priced, more valuable products to the customer.

On annual contracts.

We believe that all this revenue we give up this year comes back in later time periods, with a better client relationship, higher renewal rates, at a higher price point.

Got it. Now, should we think about it having some EPS drag as well over those products that were, basically, not contributing a lot to the bottom line?

Yes. And I basically factored all that in. I factored both the revenue and the earnings in my guidance. I think it is pretty much now will be spread throughout the year and, I think, you won't really see much of it after that.

On the selling of the commercial real estate broker advertisements on the LoopNet sites, how should we think about that in terms of potential revenue? How many territories are you thinking about?

Initially, what are you able to charge per month? It seems like it could be significant.

Depending on what the client is buying, it is basically a share of voice or they are buying a percentage of the searches in a particular zip code that they might be interested in. If you are a New York broker, you might be buying office searches in 10019.

So that ranges from a couple hundred dollars a month for some zip codes, on up to thousands of dollars a month for another zip code. You can buy, in that case, you are buying anywhere from 10% to 100% of the share of voice. The more share of voice sold, the price grows goes up in that particular zip code.

I believe this is comparable to the main revenue drivers for a Zillow, or Trulia, a Move. So, I believe that this is something that has well over $100 million of revenue potential. It is -- only a handful of people in our sales force are selling it today.

We are basically opening up a software and providing the basic training required to the rest of the sales force, to begin to enable them to sell it; and then we will be looking at selling it from inside sales teams as well. So, it will take us probably six months to really get this ramped up to everyone selling it, and folks beginning to figure out what their particular sales pitch is around the product.

To add a little color to that, Bill, I think that when you look at that, sort of funny, I look back at some of these companies like Trulia and Zillow, they had 1 million, 2 million in their first year, year and-a-half. I have less than 1 million in my model. The fact that we are sort of going to -- be right now it is basically being tested with a handful of people, it really won't be fully rolled out, as Andy said, for six months or so.

I think this is something that comes in the back half of this year, where could there be some upside from that, and the answer is yes. Obviously, I would expect in 2015, 2016, 2017, this could be a long driver of revenue for years to come.

And on the sales force hiring, you have had a big surge of hiring, and I had a couple of questions there on that. The first is, once you get through this surge as you kind of think out to 2015, 2016 and beyond, what are you thinking about in terms of how much you would like to be growing the sales force? And then the other question is, have you been looking at hiring some more experienced salespeople who would be able to hit the ground running for some of the other segments that you are developing?

So I believe fairly confident that the rate of addition for the existing core business will absolutely come down. We will not be growing 70% next year.

Okay.

Or 70% the year thereafter.

I figured.

We will continue to grow at a slower pace -- more measured pace, and while we may be able to hire folks who may have more experience with the advertising side, for specifically something like a Trulia or Zillow, it is more -- our Business is fairly unique and there is not a lot of salespeople who have experience in what we sell, so unfortunately there is not a readiful of folks who know how to sell this particular set of products to this particular audience. It is probably a dozen or so not working for CoStar.

Bill, just to add a little bit more color to that too, is that, if you actually looked at this, we talked about this pretty extensively last year, we were changing out the plumbing in the hotel while we were still selling the rooms. Our total sales headcount that I gave you guys is only up 5% or 6%.

It wasn't like we added a lot to the total amount. But we had to carefully move them, and in a lot of cases, replace, to increase that field sales force. We talked about this pretty extensively, actually, for the past four or five years.

So we did that, and if you look at the sales numbers, with putting up some pretty strong sales numbers, I think -- I feel good about -- that was a very careful, sort of, moving of numbers. So, the total salespeople, which we went back to and looked at that position, we said, hey, in total we have enough, we just don't have them in the right areas.

I think we did a good job of, essentially, doing what we told people we were going to do. Now we have to get them up to speed. I would like, as we move into 2015, 2016 and beyond, to continue to see the field sales force growing, the core field sales force, which is driving the core of the business up, those numbers up 10%, 15%, 20% for years and years to come, because of the size of the opportunity. I think, obviously, we have to swallow this down this year.

But again, that doesn't mean the total size of the sales force has to grow that much. Again, it is just moving them into the right places. I feel pretty good about where we are entering this year, and I think by the end of the year, we will all feel pretty good about the productivity.

Thank you very much for the insight.

And next we will go to the line of Michael Huang with Needham.

Thanks very much.

Hello, Michael.

Just a couple quick ones for you and then we'll wrap this up, hopefully. So, I apologize if I missed this. With respect to fusion, was wondering if you could kind of help us understand how fusion may you be impacting ASPs and sales cycles and maybe close rates; and what are your assumptions kind of around how fusion has kind of been perceived in the marketplace?

Remember fusion, the concept of rebuilding the overall product suite and eventually integrating a lot of these acquired components into one integrated software suite, is a multi-year effort. And we think it is probably five major product releases, each time putting out five major product enhancements, is sort of a rough approximation of the way I think about it.

And so, what we released recently was just round one. So we have got -- we're 20% of the way there. We have got a fair amount of work to go and a number of years to do it.

I believe it is shortening the sales cycle. I believe it is increasing the close rate. We are still in a mode where we are keeping our pricing somewhat aggressive to try to get additional share and convert more people in from the LoopNet information side, where they were paying pretty much 1/5, 1/10 of what they were paying for the CoStar side.

When you look at the CoStar property only, renewal rate running in the 94.5% range, something like that, I think, that it is contributing to a higher renewal rate. So when I look at cancellations, it is -- I think it is helping there, which contributes to overall net growth. And more importantly, our clients like it. Our clients are just really quite happy with the product, and you feel better about the business when the clients are happy.

And I just got one note, that someone just slipped in to me. We got our first Canadian contract, JLL just signed up for our Toronto service. Revenue in Canada.

We have revenue in Canada.

Great, great congrats on that. Just final question from me. And I am not sure if I missed this one.

As you were thinking about LoopNet and some of the cross-sell activity that you saw there, I think in the past maybe you had provided what the close rates were kind of around some of the opportunities you were going after. I was wondering how you did exiting the year, given the strong contribution from that, and what is your assumption around that going forward? Thanks.

I do apologize, because I do not have that particular number. What I can guesstimate is that it did continue to track as we thought it would; because, again, the surprising -- based upon the surprising increase in CoStar subscriptions in December, it was an unusual number, I cannot believe that the rate did not continue to move upward. So it is probably approaching that 40%.

We also invested a lot of time and effort in the third and fourth quarter in training managers and salespeople on how to effectively do the cross-selling of LoopNet to CoStar on the information side. So, I think that drove the conversion rate up, and I think that is what caused that higher surge in the core business in December.

Thanks, guys. Appreciate it.

Thanks, Michael.

And next we will go to the line of Todd Lukasik with Morningstar. Please go ahead.

Great job again with the business this quarter.

Thank you, Todd. Good morning.

Good morning. Congratulations.

Good afternoon. Still good morning for you.

Still good morning for me. Congratulations also on the Canada deal. I guess we are going to get to see Canada operations broken out next quarter like you do the UK.

Thank you for that. I appreciate that. You just made more work for he me and my team.

Along those same lines, I did have a question about international markets. And, Andy, you mentioned potentially more markets eventually in Canada, you talked about the acquisition you made in France. I am just wondering if you could give any more color there about where you might look to go next, and when we might expect to hear a definite announcement about that.

Sure. So I would like to see us get to profitability and a respectable margin in Canada, dramatically faster than we got to the profitability in the new platform in the United Kingdom.

The United Kingdom, I believe, was unusually complex, because it is one of the most sophisticated commercial real estate markets in the world, and we had eight little companies we were integrating. And that just made -- modifying the data model across all those were a little more complicated. I think Canada we'll get profitable quicker there.

We would like to see the United Kingdom, and potentially Canada, at the 30% margin range before we really consider aggressive additional international expansion. One of the things on future international expansion is we would probably do that expansion in closer alignment with our biggest international customers.

So, we have conversations from time to time with our biggest international customers about how we might be able to meet their needs on -- their needs to have Internet marketplaces to generate leads for their listings globally. If we were to do a more LoopNet-like product internationally, I believe that is much lower investment cost with a faster return. You could begin to generate revenue in markets, learn the nuances of the markets, and then later come in with the more expensive, heavy investment commitment CoStar property, traditional, full information model.

So bottom line is, do not look beyond Canada. Do not look for any sort of EBITDA dilution in the near term from international expansion. You'll see more -- you will see more domestic initiatives and significant domestic initiatives; and -- but we want to -- we still want to be able to show the investors the proof point of this is international business, and we will really be able to deliver on that promise in intermediate term.

My translation of that is what I have been saying, I think, for the last year or so. Over the short term, the next new years, there is no significant international plans; but definitely in the five, six, seven year, as you get to the bigger models, clearly, we are demonstrating this business can do very well internationally, hence the two times to three times the current opportunity.

Got you. Okay. Thanks. That is helpful.

And then, Brian, you mentioned the high incremental margin on the incremental revenue. I think if I calculated the incremental adjusted EBITDA margin in the quarter, it was actually over 100%. Is there anything in particular about 2014 where the incremental adjusted EBITDA margin, we should expect that to be lower than what the potential long-term run rate is?

Yes, so I will answer this quickly. Then I think we will wrap it up after this question.

So, yes, I mean, if you look, I have got that question -- I have always said, historically, if you look at our gross margin line, we are actually over 72% now, 72.5%, something like that; it was in the low 60%s prior to LoopNet. Each incremental dollar, you pay out a little commissions, you have some costs, but essentially you are dropping $0.70 to $0.80 to the bottom line.

Obviously, because of the acquisition, over the past two years, we have been working synergies out in the business, it appears like you are getting over 100%, which is awesome. Nobody can argue with that.

So, I think that this year, and if you look at the long-term, clearly, we feel good about that 30% to 35% range we set out last year; and I feel very good about the long-term of being over 40%. We talked about this year in the first quarter and the first half of the year, if you just look at every year, our EBITDA margins are lower in the first half of the year than the second half of the year

I expect them to be where my guided range was for Q1, and I expect to see them slowly increase throughout the year. Obviously, we are still investing some piece into the Business, it is not a pure 100%.

I don't think I can run at a 100%-plus forever, but I feel pretty good; and I have said it for years, we can drop $0.70 to $0.80 to the bottom line, still invest in the Business and really grow this thing. And I mentioned it, when you look at the significant growth in that, and you look at the significant operating cash flow, this is the business model we operate in. And it is unbelievable.

All right. Great. Thanks, guys. Thanks for taking my questions.

Thank you very much. I appreciate all of you joining us for this year-end conference call. We look forward to updating you on our progress shortly. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.