CoStar Group Inc (CSGP) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CoStar Group second quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Richard Simonelli, Head of Investor Relations. Please go ahead, Sir.

Thank you very much, Operator. Good morning, everyone, and welcome to our call. Before I turn the call over to Andy, I have some really important facts for you to hear, so please listen carefully. Certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties that can call 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 our July 23, 2014 press release on our second quarter results, and, of course, our filings with the SEC, which includes our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q. In each case, under the heading Risk Factors.

All forward-looking statements are based on information available to CoStar at 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 on www.costargroup.com, and where you'll find the new CoStar Investor Relations page, since our recent rebranding. A replay will be available, approximately, one hour after this call concludes and will be available for, approximately, 30 days. To listen to the replay call 1-800-475-6701, within North America, or 320-365-3844 outside the U.S. The access code is 331329. And we'll put this up shortly after the call today.

Just one procedural note before we go on, just want to let you know that we want to take all of your calls, or your questions during the call, and are happy to stay past the hour to do so, as we've proven time and time again, but we ask that you limit yourself to one question. And that means like one-part question, not eight-part questions. And unlike the lunch line in middle school- you can get back in line to ask other questions if you want to.

Without further ado- I would like to turn the call over to Andy Florance. Andy?

Thank you, Rich. I guess that one question rule is to help my feeble mind keep each question in mind, compound question is too complicated. Okay. Welcome and thank you for joining us.

I'm very pleased with our Team's performance over the first half of 2014. Revenue for the second quarter 2014 was $148 million, which is an increase of approximately 36% over the second quarter of 2013. For the same period, EBITDA was $38 million, up 49% year-over-year. In the second quarter of 2014 we achieved net new sale subscription services on annual contracts of approximately $16 million, which is an increase of 9.2% over the first quarter of 2014, and is, basically, in line with the same quarter prior, which was a phenomenal record quarter for us.

The core CoStar product lines show accelerating sales growth, achieving $9.7 million in the second quarter, which is up 17% quarter-over-quarter, and 6% year-over-year. In May 2014, we recorded our all-time highest net new sales month. Through the first half of the year, we've added over $30 million of annualized net new sales on our annual subscription business.

Our annual subscription business is continuing to enjoy a very high renewal rate of over 92%. During the quarter, we raised $529 million in net proceeds from our successful equity offering, and had a chance to visit with a number of you, and we intend to use that for investment purposes, general capital, and continued growth in the Company, and to better position ourselves for potential strategic acquisitions. Take a moment to comment on the commercial real estate market economics right now that we're operating in. The recovery continues to improve and is showing signs of strengthening. For the most part, we're enjoying a healthy operating environment in commercial real estate. Investor demand for U.S. real estate remains healthy, liquidity is strong, with year-over-year sales up 10% from one year ago.

Trading volume is, now, well above historical averages and nearly back to 2007 peaks. For our brokerage clients, this means commission levels are high, which is a positive for CoStar's revenue growth. Construction remains focused on a handful of markets. Demand growth is strong enough to heal fundamentals, but not strong enough to lure developers back into market en masse with aggressive building. Specifically, new construction inventory is about half about the pace of demand and the supply growth is 20% to 40% of what occurred from 2006 to 2008. So, it's a very quiet construction environment.

Office market fundamentals are improving at a steady pace. National vacancies have fallen steadily for four years straight and are closely aligned with 2005 levels and long-term averages. Net absorptions have past 75-million square feet for the past 12 months, ending the second quarter, and 20-million square feet for the second quarter 2014. This was the largest annualized increase in six years.

Industrial market fundamentals are the tightest they have been since 2001, with a 7.2% vacancy rate, while the retail market is returning to normal, with vacancies back in line with long-term averages, while rents and incomes are growing. Apartment market performance was solid in the second quarter, as millennials have helped to absorb newly-built units. A total of 202,000 apartment units have been added to the market stock over the past year, up a very significant 60% from one year earlier. Despite the surge in construction, net absorption at 173,000 units was only 30,000 units short of completions, and is nearly unchanged from a year earlier. Since the market cycle low in 2013, vacancy has risen by 20 basis points to 5.4%.

So while supplies picked up, apartment fundamentals of supply, demand, and rent are benefiting from housing trends that favor renting. I believe the strong leasing activity and slightly increased vacancy is creating good tailwinds for our apartments' products. I want to take a moment to update you on LoopNet. Our LoopNet marketplace continues to show vibrant growth, with 44.2 million profile views in the quarter, excluding bots, and that's up 18% year-over-year.

LoopNet marketplace revenues for the second quarter 2014 were $27.5 million, growing 6.2% over the first quarter of 2014, so really good growth there. The LoopNet premium membership revenue grew, approximately, 20% in the second quarter over the prior year. Migrating clients from month-to-month contracts to annual subscriptions remains a priority, and we are achieving great results with LoopNet annual subscription revenue, growing 148% year-over-year, to $41.3 million annualized in the second quarter.

We continue to make very good progress increasing our average revenue per LoopNet customer. Average revenue per premium member climbed 18%, to $86.34 in the second quarter of 2014, compared to $72.90 the prior year. Average revenue per premium lister grew 14% year-over-year to $101.74 in the second quarter.

We continue to pursue what we believe is a huge opportunity to sell CoStar information solutions to nearly 100,000 higher potential prospects that use LoopNet for information rather than just using it for marketing. We have now raised the entry price for a single user upgrading from LoopNet information to CoStar information from $29 per month to $395 per month. When we closed the LoopNet deal in April 2012, only 31% of the listings on LoopNet were paid and the remainder were free listings.

We have made it a priority to increase our monetization of those free listings. We have succeeded and 50% of the listings on the site are now paid. We have 278,200 paid listings, up 26% year-over-year, and up 65% since closing the merger in April of 2012, when we only had 168,400 paid listings. While we have made a lot of good progress, we believe we have significant additional revenue potential in the 587,000 listings in the CoStar database that are not yet advertised or paid on LoopNet. In addition, we have significant additional potential to monetize various enhanced listing opportunities throughout the site.

Our sale of spotlight ads has proved to be very successful. We plan to continue to add new levels in areas of placement and larger ad sizes for our advertisers who need additional exposure for the listings and are willing to pay a premium for it. Now, I want to turn to give you an update on the first quarter of operating Apartments.com. So, as you know, in second quarter 2014, we closed our acquisition of Apartments.com, one of the leading internet apartment marketplaces. We moved very quickly with real focus and are well-ahead of planned schedule, having already achieved several key goals. We have achieved 5.2 million revenue synergies by converting 2,700 clients from indirect wholesale purchases to direct sales.

Prior to our acquisition of Apartments.com, newspapers owned by Apartments.com owners in certain cities purchased advertising exposure on Apartments.com and used their sales force to retail it directly. So, newspaper sales forces were selling space on Apartments.com. Upon closing the acquisition, we made it our top priority to add 40 sales people into these indirect sales markets, and convert them from wholesale to direct sales of Apartments.com.

Typically, Apartments.com would receive $130 per month for an apartment community, advertised at wholesale price, and $445 per month for apartment communities advertised directly. This conversion from wholesale to direct sales had a very significant impact, driving an overall 15% increase in average revenue per apartment community. And that's across all the apartments being marketed on our site, not just the ones converting from wholesale to direct.

This allowed us to already achieve, approximately, $5 million in contracted revenue and, approximately, $875,000 in monthly sales, post acquisition. Wow. We believe we have already significantly improved the Apartments.com website. We improved the mapping capabilities. We have cleaned and simplified the look and feel, and increased the professional presence of the advertised communities. We have eliminated unrelated banner advertising on the site, which we believe cheapened the presentation of our advertiser's properties. This meant foregoing, approximately, $3 million in annualized revenue. But we believe that investment which pay off in the short term.

We achieved a much higher growth rate in the quarter for Apartments.com, despite terminating banner revenue. We have, also, significantly increased our investment in search engine marketing. We believe that all these improvements have resulted in a 27% quarter-over-quarter increase in leads generated for our clients, which delivers more value to our clients, as with LoopNet we have quickly accelerated revenue growth at Apartments.com, post-acquisition, and we are not done. In the second quarter of 2014, Apartments.com revenue growth accelerated from growing 11% year-over-year to 15.7% year-over-year, at the end of the second quarter. We will continue to make important incremental improvements to the apartments website, but we also completed a comprehensive new product design for the next generation of Apartments.com's website.

That next generation product is now in our Software Development Team's hands and work is well under way on building a new product offering that we believe will be an industry game changer that will enable us to take significant new market share. I'm very appreciative of the fantastic job Brad Long, President of Apartments.com, and his Team have done in coming out of the gate so quickly and focusing intensely on successfully converting these thousands of customers from wholesale to retail, thereby driving this revenue surge. I have strong confidence in Brad's sales leadership as we move forward.

We're very pleased with our continued strong results in, both, the United Kingdom and Toronto, Canada. CoStar and the United Kingdom had our highest-ever sales result in the second quarter of 2014, coming in 32% higher, when measured in British pounds, than the same quarter in the prior year. Our sales results in the U.K. have now accelerated to a level that matches the U.S. sales levels on a pro-rata GDP basis, which has been a long-term goal of mine.

CoStar Suite growth is strong. It is becoming the single largest revenue stream in the United Kingdom, surpassing our legacy-focused product in monthly revenue in the month of June. We have now signed 600 U.K. clients to CoStar Suite in 600 days. Half of the major eight major U.K. brokerage firms have now upgraded to the benefits CoStar Suite offer. After a period of investment, the U.K. business has now achieved positive EBITDA on a trailing 12-months basis, with 1.1 million EBITDA year-to-date. We believe the U.K. will continue to stay positive going forward. And we know Matt Green will watch the costs.

I could not be more pleased with the good work Giles Newman and his Team are doing in Europe. In Toronto, Canada, we continue to sign on additional brokers, investment companies, and owners. We now have more than a dozen leading Canadian companies subscribing to our flagship product, CoStar Suite, and we have a phenomenal Sales Team up there to exploit that opportunity.

Give you a little bit of an update on sales, I think a couple of you are interested in sales force growth and productivity -- no, let's skip that. No, okay, let's do that. We believe that the addressable market for commercial real estate information and analytics in the U.S. is in the billions of dollars, and that we have penetrated only a fraction of that opportunity to date. In order to better and more quickly address the market, we have made significant investments in growing our sales force over the past three quarters.

We now have, approximately, 500 sales people on staff. The most dramatic organic growth in that sales force is in our U.S. CoStar LoopNet field sales team, where we've added 75 net new sales people over the past year, for an increase of 50%. We know from experience that when you grow a sales force dramatically, per sales person productivity drops significantly across the sales force as these new sales people ramp up. We have not expected to see significant revenue growth gains from that sales force until the later half of this year. The first part of the process is all about investing in work. We have, approximately, 99 U.S. CoStar LoopNet sales people with one year or less of experience.

On a rolling three-month average, they're averaging [$196,800] in annualized gross sales. We have 118 experienced LoopNet field sales people with more than one year of experience. In contrast, they're averaging $422,640 in annualized gross sales, on a three-month trailing basis. That's 114% more, experienced people are selling 114% more than the inexperienced sales reps, and that's not a surprise to us at this point. It's, also, important to note that your cancellation level is, roughly, fixed, so your gross production is more dramatic of a difference. So, you know the first half, what a salesperson sells is there and is pretty much past the cancels. So, as you climb in productivity, you have a leveraged increase in net production.

Anecdotally, I noticed on today's metric report, that four sales reps, Maxx Mantooth, Brett Reed, Charles Tappen, and Keith Wells just reached their first anniversary in our sales force, and they are now averaging $337,700 in annualized production. Congratulation to these guys on their strong performance. Of course, we, also, have some rookies who are hitting home runs, and maybe even grand slams on their first at-bats.

Thomas Valenzuela has a financial sales background and has been selling debt and equity solutions for us in Orange County for less than a year. On a three-month trailing basis, he has sold on an annualized basis $986,000 in new business. Just as some of these new salespeople are making positive contributions to our sales team, so, too, are some of our new managers making a big difference. John Toomey joined us less than a year ago. He has a background in commercial real estate and software sales. When he joined us his region was at 42% of target for the past two months in a row, he now has that region to 104% of target.

In order to help us achieve our target productivity gains across our larger sales force, we have made an important leadership change at the top of the sales organize. Max Linnington has joined us as Executive Vice President of Sales. While leading North American sales for Bloomberg, Max demonstrated ability to create a culture of success and accountability across a 700-person sales organization. He is, now, responsible for leading all of our North American sales operations, including the sales team of all CoStar, LoopNet, Apartments.com, and our marketplace verticals. And one of my favorites, Lands of America.

Max's expertise in selling services at the institutional level will be extremely valuable, as we develop an even better strategy for penetrating lucrative verticals, such as banks, institutional investors, and owners. As we begin to stabilize the sales force of the new larger size, we're happy to have found some very valuable new additions to the team. We're, also, realistic about those sales people and managers, who have not reached our expectations, and we will continue to upgrade in those positions until we reach our historical productivity levels at a larger scale team.

Finally, I would like to update you on our recent successes, really strong successes at CoStar Real Estate Manager; in particular, since I'm in the Atlanta office today and I'll be talking to the Team later, I really want to give them good kudos. Subscription revenue for CoStar Real Estate Manager grew by over 22% in the first half of 2014, compared to the same period in 2013.

Formally known as Virtual Premise, CoStar Real Estate Manager had its highest ever level of net new sales for Q2 2014 since we acquired the Company in October 2011. The Team is doing a fantastic job, and they are a pleasure to work with. Some significant new client wins in the quarter include; American Airlines, Stanley Black & Decker, and Schlage Lock Company. United Parcel Service also extended and expanded their client relationship with us. So, a lot of exciting things happening there.

I'm very excited about the prospects for the rest of this year and beyond for CoStar. Revenue, EBITDA, and sales are strong, and we made investments that we expect will continue to see us move towards our goal of becoming a $1 billion revenue company with 40%-plus margins in 2018.

We're going to take a brief 15-minute intermission before I begin the second half of my presentation. No, just joking. I'm going to go ahead and turn the call over to Brian Radecki. Brian, we used up all our jokes.

Thanks, Andy. And thank you, again, to Andy Thomas and his Team out here, doing a great job for allowing us to borrow their conference room.

As Andy mentioned, we're very pleased with our performance in the second quarter of 2014. CoStar's organic business continues to show strong growth, while EBITDA margins continue to expand. Second quarter 2014 is the first quarter to include financial results with Apartments.com's numbers, which closed on April 1, 2014. We're making great progress integrating Apartments.com into our existing business, while continuing to pursue growth drivers in our core business, through sales force staffing and productivity, as well as ongoing product development efforts.

Now, let's get started with CoStar Group results for the second quarter of 2014. The Company reported $147.7 million of revenue, an increase of, approximately, 36%, compared to $109 million in revenue in the second quarter of 2013. This growth was driven by strong information services performance, and from strong growth across all of our marketplaces, including LoopNet.com and Apartments.com.

On a pro forma basis, year-over-year, revenue growth was 13.5% for the year-to-date 2014, compared to pro forma 2013, adjusted to include Apartments.com revenue; therefore, we're operating in the 12% to 15% revenue growth range. EBITDA increased from 12.3% to -- $12.3 million to $37.6 million in the second quarter of 2014, up from $25 million, or 49% in Q2 of last year.

Also reported, adjusted EBITDA of $45.3 million in the second quarter, which is an increase of $12.7 million or, approximately, 39%, compared to the second quarter of last year. Adjusted EBITDA margins increased to 30.7% in Q2 of 2014. Again, up from last year. Non-GAAP net income in Q2 of 2014 was $23.5 million, or $0.80 per diluted share, which is a 37% increase from the second quarter of 2013.

Gross margin was $108.2 million for the quarter, or 73.3% of our revenue. This is an increase from, approximately, 70% Q2 of 2013, reflecting the continued strength in growth of our business model. Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA, and all 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 at our newly-rebranded website at www.costargroup.com. Stay tuned.

Cash and investments was $466.5 million at of June 30, 2014. and short- and long-term debt totaled $395 million as of June 30, 2014. We had a lot of movement in our capital structure during the quarter, to fund the $585 million acquisition of apartments, we entered into a credit agreement that provided $400 million term loan facility and a $225 million revolving credit facility. We, initially, drew $150 million under the revolver and, subsequently, repaid that amount.

Additionally, we issued $3.45 million shares of common stock, for net proceeds of $529.4 million. Therefore, we currently have access to the $466.5 million of cash investments, along with the $225 million revolving credit facility that are available to fund future, potential future, strategic acquisitions to finance the growth of our business, or working capital, or other general corporate purposes.

At this point, I'm going to give some additional color and a few metrics to highlight the strong performance in the second quarter. We achieved $16 million in net new sales of subscription services on annual contracts in the second quarter of 2014, as a result of our ongoing success driving sales of information analytics, services, and marketplaces, lead generation, cross sale with LoopNet, you name it. To be clear, this sales metric is consistent with what we reported in recent quarters and does not include sales from Apartments.com, so it's a consistent metric. Apartments.com standard contracts have annual terms that have cancellation rights after six months, therefore, we did not include them the annual subscription sales metric.

The $16 million is on par with our highest sales result in the Company's history in the second quarter of 2013. We are pleased with this result, in light of all the changes we made late in 2013 and the first half of 2014, including the increase in sales headcount, as well as the change if leadership at the top of our organization. For those investors who are new to CoStar metrics I want to be clear that our net new sales metric reflects incremental future revenue, flat net new sales does not mean flat revenue.

Every dollar of net new sales grows our subscription revenue base. In prior calls, Andy and I spoke at length about the great progress we're making expanding the sales force and our road map for moving these reps up the productivity curve. Maturing the sales force will take time, but we believe it will keep delivering upside over the next few years. As we previously stated, we expect to begin seeing the productivity increases later this year, and all throughout 2015; so, 2016 will be sort of low impact.

Remember that half the sales force is new and learning from the other half with experience. It takes time and energy for the whole sales force. As Andy noted earlier, we have, approximately, 500 total sales people across the company. Of that total, 215 are in the U.S. CoStar field sales reps, which would be up from the 140 we had reported a year ago, and 123 at Apartments.com field sellers up from 80 -- approximately 80 at the time of the acquisition. Additionally, we have about 100 inside sales reps across CoStar Loop and Apartments, 22 in the U.K., and about 40 across our other market verticals and businesses. Revenue from subscription services and annual contracts was $95.4 million in the second quarter of 2014, or 64.6% of our total revenues including Apartments.

For the trailing 12 months ended June 30th, subscription revenues from annual contracts totaled $357.8 million, up 21%, from $296.4 million for the twelve-month period, ended June 30, 2014. If we look at the pre-apartments business subscription revenue, and annual contracts would have comprised 78% of total revenue, up from 71%, right after the LoopNet acquisition, reflecting the solid growth in the annual subscriptions.

Just like with LoopNet, our long-term goal is to move as many clients from all of our services and marketplaces over to annual agreements over time. The renewal rates for annual subscription remained very high during the quarter. The 12-month trailing renewal rate for CoStar subscription services was 92% in the second quarter; as we've discussed the last few quarters, the introduction of more annual contracts crossed LoopNet in our subscription base is expected to cause a 12-month renewal rate to edge down slightly, possibly a percent or two over the next year or so.

The renewal rate for CoStar subscribers who have been with us for five years or longer was, approximately, 98%, which remains phenomenally high and consistent with prior quarters. As noted in our press release, and Andy stated, revenue from LoopNet marketplace was about [$27.5 million] in the second quarter of 2014, which represents all the services available at LoopNet.com, but does not include revenue from the other businesses that came along with it, like the market verticals, if you're trying to figure that out.

Since the apartment business does not conform to our annual subscription revenue metrics we provided historically, I would like to give insight in how the business performed in the quarter. Apartments.com revenue for Q2 2014 was $25 million. Since the acquisition, we made a strong push, as Andy said, to expand the apartment sales force and we successfully added 40 new sales reps to their field sales force. So, that's a 50% increase, again, for them. So, they've, also, got significantly new staff.

This staffing allowed us to achieve the $5.2 million in revenue synergies by expanding our presence in the markets that used to be serviced by the newspapers that previously owned Apartments.com. And as Andy stated, we converted 2,700 apartment communities from indirect wholesale purchases to direct. Our previously published revenue ranges outlook planned for the successful transition of these markets over three or four quarters, therefore, we were able to seize this opportunity faster than anticipated, which helped contribute to our on strong quarterly results. We've, also, achieved approximately $5 million in annualized cost synergies so far. As we suggested at the time of the deal, we believe we can realize $20 million of annual synergies over 24 months following the deal and we are already halfway to that goal after just three months.

During the quarter, we started to implement product enhancements at Apartments.com, aiming to improve the consumer experiences Andy mentioned, which is expected to have short-term impact on the revenue results, as we discontinue noncore revenue-producing services. We already eliminated banner ads from the website and are moving forward with other strategies that are expected to make the site easier to navigate and more appealing to consumers that visit in search of a new apartment.

The impact of eliminating these revenues generating non-core offerings, as I stated last time, is approximately [$2 million] to $3 million in 2014, with a [$4 million] to $5 million potential run rate going into 2015. As we move forward, we'll relook at these metrics we currently provided in order to make sure we give appropriate insight into the newly-acquired apartments marketplace, as we gain more information.

Now, I'll discuss my outlook for the third quarter and full year 2014, our guidance takes into account recent trends, revenue growth, revenue renewal rates, which all may be impacted by economic conditions and commercial real estate, or the overall global economy, among other things. Our guidance on the impact of foreign currency exchange rate fluctuations at our top-line results remain consistent. We do not attempt to predict foreign currency exchange rate fluctuations, and our guidance assumes little or no volatility for the current rate. Actual results may vary from these estimates. If you're feeling dizzy or lightheaded right now, call your doctor, or John Coleman at 301-452-4673. Again, John Coleman at 301-452-4673.

We're providing our outlook reflecting our current expectations as of today, July 24th, 2014. Based on strong revenue and earnings results in the second quarter, we are raising both our revenue and earnings guidance outlook for the year. For the full year 2014, we now expect consolidated revenue of, approximately, [$565 million] to $571 million, which is an increase of $3 million at the mid-point, with a revenue range compared to our previous guidance. This revenue range considers our sales performance to date, synergies at apartments, and fourth quarter seasonality, which will be associated with both LoopNet and apartments marketplaces, along with the elimination of some of the services that we discussed at apartments.

Apartments, if people that used to track LoopNet will remember, they had tough Q4s, the apartments business very similar without annual contracts in the fourth quarter, so we've accounted for that. We expect revenue in the third quarter of 2014 in the range of $149 million to $151 million. As I mentioned earlier, we issued an additional 3.45 million shares in our June follow-on offering, which resulted in a reduction of our non-GAAP EPS of about $0.20 for 2014. We now expect non-GAAP income per diluted share in the range of $3.05 to $3.10. For the full year 2014, based on 30.7 million shares. This represents an increase of $0.17 per diluted share at the mid-point of our range, after adjusting for the impact of the shares. We, currently, assume a 38% tax rate in order to approximate a long-term, effective corporate tax rate. Details of my outlook are in the guidance tables at the back of our press release. Line-by-line.

For the third quarter of 2014, we expect non-GAAP net income per diluted share of, approximately, $0.77 to $0.80 on 32.2 million shares, versus 29.5 million shares in the second quarter of 2014. These additional shares result in, approximately, $0.07 of delusion in the third quarter.

In summary, I'm very pleased with CoStar's financial results for the second quarter 2014, which clearly shows strong year-over-year organic revenue growth and increasing margins, while adding Apartments.com. As Andy mentioned several times in the past, we believe the opportunity in the multifamily space is massive and we believe we can make investments in the business now that will drive further growth and market share gains moving forward.

We continue to believe the Company is operating in a market with multibillion dollar revenue potential, and we are focused on executing on that plan to capture the opportunity. Operation of the Company is making great progress towards the integration of apartments and achieving the $20 million in annualized synergies that we expected at the time of the acquisition. Product development pipeline looks great across many of our digital real estate services and marketplaces, our Sales Management Team is focused on driving steady improvement and sales productivity and increased focus on many of the customer verticals, [we're] currently have low penetration. I'm confident these combined efforts will continue to drive consistent year-over-year sales growth in the quarters ahead.

Based on the growth trajectory and the combined businesses, as well as the expected synergies, I continue to believe we can reach our long-term goal of achieving the run rate of $1 billion in annual revenue sales and 40+plus percent adjusted EBITDA margins in 2018, based on the platform we have today. As always, I look forward to sharing our progress towards these goals with you in the coming quarters. And now we'll open it up for questions.

(Operator Instructions). And our first question will come from the line of Sara Gubins with Bank of America. Please go ahead.

Hi, thank you. In the first quarter, you saw your net new sales increase throughout the quarter. Did you see similar improvement during the second quarter; and could you talk about your expectations for net new sales in the second half?

Yeah. In the second quarter, the volatility from quarter-to-quarter, from month-to-month, it has a certain random element to it. It will have a volatility month-to-month. In the second quarter, May was our best month ever. And -- but not -- not by some sort of runaway trend difference between June, July. Between June -- the other two months. So, it was fairly level. We would expect that more and more of these sales people approaching their first anniversary, or their ninth month with the Company, would be beginning to see higher productivity, as well as half the managers in the sales force are also approaching their first anniversary. So, fundamentally, we would expect to see some tailwinds in productivity as we move through the year.

Just to put a little more on that, if you looked at the increase in the sales force, it really came at the end of the third quarter and mostly in the fourth quarter of last year. So, we are pretty pleased, you know, being that last Q2 of last year was the high watermark, that we were essentially on par with and it was up 9% over the first quarter. So, we feel pretty good that later in the year we should start seeing the productivity gains.

Thank you.

Thanks, Sara.

And our next question will come from the line of Andrew Jeffrey with SunTrust. Please go ahead.

Hey, guys, good morning. I can't tell if you're having fun or not there. When you look at the price gains that you've gleaned from going direct in the Apartments.com business, could you just talk about how much progress you've made versus the potential for converting the indirect business to direct? And, also, the types of units, or apartment buildings I should say, that have been the focus? In other words, are they the 100-plus type apartment buildings? 100-plus type unit buildings? Are there any characteristics that inform the ramp and the visibility to ongoing price gains and synergies? Over the next year or so?

Sure. So, in terms of what type of properties, I would say it is the traditional sweet spot of the Apartments.com business, which is in the 130 unit-plus category. So, it's very smooth across it, there's no nuance about what converted from wholesale to direct by unit size. We converted about 75% to 80% of those wholesale customers to direct, which is something that's very pleased the sales force pulled that off. My goal was on get that done by the end of this year, so it will be a 75% to 80% in July; hugely exceeds our expectation. And I felt that there was some risk around that conversion process. I had said that risk for me is now gone. So, I feel very happy about that.

But there have been some prior market conversions from wholesale to direct in the past for Apartments.com, and what normally happened was that you would have a slight drop in market revenue as you did the conversions and, then, in the years that followed, you would have an acceleration of revenue growth in those markets, and the reason that is is that the newspaper sales teams were, typically, selling all sorts of things. They're selling car advertisements, residential, multi-family. And this is just one thing that they were carrying in their bag. Our Apartments.com sales force, this is what they do. We can control the process much -- in a much more effective way. We can add resources to markets where we think there should be resources added.

So, normally, you see an ongoing lift in growth in these conversion markets for quite some time. The big markets that were really impacted were Washington, D.C., Chicago, Phoenix, Indianapolis, and a couple others. And so just to add to that, Andrew, you know, I put this in my sort of revenue range for the year, it's great to actually sort of lock it in early, so it's sort of a onetime step-up in the sales, and I think their sales would be pretty steady moving forward.

Now, just like with LoopNet, I know you covered them, you know, the apartment renting season, advertising season is pretty in full force, you know, in the second quarter. As you get into late in year, and especially in Q4, it's a tougher comp and, of course, the majority of their customer base is not annual subscriptions. So, just like with LoopNet, we're going to go through the same process where we're going to start moving those over, in the long term, to annual agreements, but I've accounted for all that in my guidance range. So.

Thank you.

And next we'll go to the line of Bill Warmington with Wells Fargo. Please go ahead.

Good morning, everyone.

Such pressure to ask a good question. I want to ask, what was that website address? No, no. Just kidding. I wanted to get John Coleman's phone number again. All right. The real question I wanted to ask is, if you could talk a little bit about the organic growth calculation? If you just kind of back out $25 million in revenue, you end up with a figure that sounds like it's below the pro forma level. So, I was hoping you could give us, maybe, a bridge, if you will, from the reported to the organic level. Not a Brooklyn Bridge, but just a growth bridge.

Yes, so to give you some color on that, all we did was we pro formaed the year so far, the six months ended June, you know, the business would have done, on a pro forma basis, about $289 million of revenue for [2014] versus $254.7 million in 2013. All we did was take their numbers and our numbers on a pro forma's basis, so it's grown about 13.5%. We've sort of grown, plus or minus, on a bigger range [12%] to 15%. And I think that's a pretty good range that we'll be in here over the coming quarters, as again, which will relate to the sales force maturity and productivity.

Now, remember, you got the, basically, the combined business, the CoStar business before, you know, 50% of new, now the apartments business will go through the same thing, which actually might be lagged by a few, two or three quarters from our core business. So, that will again, those productivity gains will come in, sort of the back half of this year, Q4, and then really roll through to 2015, so sort of, I would say, on more of a full run rate in 2016. But for people that were, you know, had listened to the calls and been around with Andy and I, the productivity gains continued to go up for five years. Obviously, you see the biggest increase in those first 24 months. We're pretty excited. I think we're in a good position. We look forward to it.

Thanks.

Thanks, bill.

And our next question comes from the line of Michael Huang with Needham & Company. Please go ahead.

Good morning, guys. Just a quick question for you. So, obviously, you know, the revenue synergies around Apartments.com stems from conversion from 0wholesale to direct. I was wondering, could you talk about the activity and any early successes that you're seeing, selling CoStar information services into the Apartments.com customers? Are we too early to see any benefit from that yet?

Michael, the answer is, I can give you some good color around that. We are too early to have anything around that, so just like LoopNet, we focused on certain components in sequence. So, to me, the very most important component was securing the wholesale revenue. And, then, secondarily, making some immediate improvements to the site and, then, having everything in the bank for the plans for the next generation sites. We've got all that behind us. We've, also, ramped the sales force.

The phase of beginning the cross selling, the phase of information is later in the year. I will tell you I met with a very small handful of customers, significant customers, who I have come across in various functions, and I was excited to show them our plans for the next generation of the marketing website for Apartments.com. And I was thrown off by the fact that 100% of their focus went to what we could do for them on the information side. So, I would sit in the presentation with some reasonable intelligent client for Apartments.com, and you're shown these great marketing solutions you're doing for 45 minutes, with a lot of passion, and they say, Man, that information potential is fantastic, when can you help me with that?

So, we know that there's a lot of potential there; some of our very biggest customers have invited and solicited follow-up meetings on the information component, even though that's not in the first cycle for us. So, we are going to be talking about that over the course of the next year and I think it will end up being similar to LoopNet and that you'll have a very strong information and marketing back and forth. And it will help, I think, to strengthen the relationship with these clients and build more meaningful, long-term relationships, not the -- you know, Apartments.com already has great relationships with its customers, but even stronger real, multi-level business relationships.

Just to remind everybody, just like [Loop], I don't think we really started getting into that until three to four quarters into it. You know, as you guys listen to all the things that we've done in just the first three months, we're off to a pretty fast start.

But it is a moment for self-reflection when you're disappointed that you're not paying enough to your marketing and they're talking about buying your marketing. And I'm like, Guys, I'm not translating information, but I will if you want.

But I will if you want.

Thank you.

Thanks.

And our next question comes from the line of Brandon Dobell with William Blair. Please go ahead.

My only question, Andy, is how did you get your prepared remarks under 45 minutes?

I have been significantly (inaudible) -- analyst that I deleted all of Rich's comments.

It only took you, what, five or six years? So, your synergy, I guess trajectory, is much better than your prepared remarks trajectory, so congratulations.

Question, sir?

If you were to look at the group of experience sales, I think you called out 118 that have more than one year, and they're doing 420,000-plus of annual gross sales, what did that number look like a year ago, six months ago? I guess what I'm trying to get at is, your experience guys, do they continue to see growth in that annual growth sales on a per capita basis?

I would be giving you a somewhat anecdotal or educated estimate of what that number would look like, but I'm fairly certain that it would be flat or down. And it would not be about competitive positioning, product value, or economic, it would be more around disruption in the sales force associated with that level of growth. So, managers are focusing on hiring, training, onboarding, and in many cases, learning the producing themselves, meeting new customers, and you get some number of sales people that sort of fall through the cracks. So, some of our very top producers, Joe Pascal is still doing fantastic, but you get some folks in the middle who start to fall through the cracks when you have a much bigger sales force, and you'll be able to -- they'll catch up with productivity and get back on their curve. If you look at a five-year continuous productivity gain, this throws a wave in that line, sort of growth throws a wave in that line, but you expect it to come back once you have everyone more grounded and has their sea legs.

Just to add to that, Brandon, we were setting up calls with and analysts for after the meeting and I think Rich, or somebody, was scheduling a 4;30 call and they said, Are you sure you guys will be done with your earnings call by then?

Good question.

And the investor that e-mailed that notice said they are. So, just add to Andy, I do think that the cohorts of people that spill over each year, and obviously we have a fairly high retention with people that have been here for over a couple years, those cohorts do continue to get productivity gains over a five-year period. And I think we've sort of shown that and talked about that. But, obviously, right now, you just have a huge cohort in the new area that will just continue to move. So, this is going to be something that's going to, you know, the big hiring push happened sort of late Q3, and Q4 we were ramped up by the of the year, and I think you're going to start seeing those gains. It will really carry all the way through 2015. We're pretty excited.

Should we expect to get those metrics, those inexperience and experienced, I guess, numbers of reps in their annual gross sales on future conference calls?

Yes. I think just like we do here, we try on give relevant -- we give some consistent metrics all the time, but we'll give relevant metrics each quarter, based on what we're doing. I don't know that we're going to give it every single quarter, every detail number, but we're, obviously, going to be giving you guys insights on how the sales force is doing.

Great. Thanks.

(Operator Instructions). Our next question will come from the line of Peter Lowry with JMP Securities. Please go ahead.

Thanks. Congratulations on a very nice quarter. I know it's still early, but can you sort of discuss some of the high-level similarities and differences between your experience with Apartments.com so far versus LoopNet?

Sure. Well, the businesses are extremely similar. Obviously, there are more players in the apartment sector, more competitors in the apartment sector; however, I would say that the apartment sector is probably more sophisticated in their sense of their need for these sorts of products and services, is more focused and more intense. So, again, you have these professional investors with [$200 million], $300 million assets, with hotel, more hotel-like booking needs than a retail property that leases up for ten or 20 years at a time.

So, the demand is very clean, clear. The customers are sophisticated. I would say there are many more similarities than differences. So you know, SEM, SEO, site design, content advantages, information, marketing, a lot of the mistakes we've made over the last 28 years apply -- that can give you some sense here what you should and shouldn't do. A lot of the sales force planning is very similar. And I would say that through the last several months, my enthusiasm has climbed for the new space that we're in, and you see an awful lot of opportunity here. And, realistically, it's an industry that has sort of, in my mind, fallen into a little bit of a pattern, and there's a lot of opportunity for innovation.

Great. Thanks.

Thank you.

And our next question comes from the line of Brett Huff with Stephens, Inc. Please go ahead.

Good morning, guys. I hate to burn my question on just a clarification, but I want to make sure I get it, so I'm going on do that. You all said there were [$16 million] of net new, annualized subs and you said it was basically same as Q2 last year, but I recall that it was more like $14.4 million last year. Are my numbers wrong or is there something that I'm missing on that?

Yeah, I think we sometimes give several metrics, but the consistent metric it was $16.1 million last year. It's $16.1 million this year. Just like we sort of gave a little color around the core CoStar family of brands this time, but the consistent metric is $16.1 million versus $16 million, so they were very similar. The $16 million was actually $16.043 million. Almost rounded up to the same $16.1 million, but it was pretty close.

And I'll give you another question, because that really was just clarification.

The question that I have is, on the Apartments.com property, one of the questions that we've got, and it seems like the advantage that you all will have in addition to the work you're doing on the website design, and the SEO and the conversion from wholesale to direct, and et cetera, is, obviously, your information advantage, and I recall you had something like $16 million or $17 million, I'm not sure if numbers are right. How many of those incremental units over the [4 million] that they have versus the [16 or 17] that you have, when does that data go into the site' and is that one of the things you're going to use to draw more eyeballs to the site?

Yes. I'm sure that I've got a dozen fine competitors on the call listening, and greetings to all of you today. Welcome to the CoStar earnings call, but it is something that from a consumer -- the industry I think, historically, has really focused everything around, how do I develop my business relationship with a property owner? And I think there needs to be more focus on what does the consumer want and the experience. And I think that's a huge opportunity here. And the content we have I think will allow us to provide a much better experience to consumer.

I think that it will be a very similar game to -- if you look at what I was talking about with starting out with 31% of listing monetized at LoopNet at acquisition, I'm now moving that to 50%, continue to move that on up, I think it will be a similar kind of game where you'll have a mix of monetized and un-monetized, and you'll just try to move it to more and more monetized over time. But we believe that we can give a better consumer experience by using our research capabilities. And in terms of when we do that, I can't tell you.

Thanks, Brett.

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

Next we'll go to the line of Todd Lukasik with Morningstar. Please go ahead.

Hi, guys, nice job with the continued development of the business, as usual. Thanks for taking my question. I was just hoping you could talk a little bit about how you viewed debt in the capital structure? You've, obviously, got debt there today, but overall it's in that cash position, and what would you like net-debt to enterprise value to be over the long-term for the business?

Yes, sure. I mean, obviously, we're looking to optimize the capital structure. We believe that we sort of put the $400 million term loan to L plus 2%, and that drops over time with leverage ratios. Plus we have a $225 million revolver. So it's a combination of long term -- I believe, with the significant cash flow that we have, that we can have a slug of long-term debt and I think in the 2 to 4 turns range. We could flex up higher right after certain acquisitions because of the cash flow, but I think long term, we'll have 2 to 4 turns on there because of the high cash flow. And again, it'll move around based on strategic acquisitions and different things that we're doing, but I think we're pretty comfortable in that 2 to 4 range in the long term, again, having ability to flex up, keeping our options open with revolvers like we have. So I think that's a pretty good place for the company to be. It will give us opportunities to take advantage of strategic opportunities similar in size to LoopNet and apartments that we've done. You take the $466 million, plus $225 million, you can see in our cash flow, we've got quite the capacity to do more strategic deals.

Okay. Thanks.

Great. Thanks.

(Operator Instructions). Okay. We do have another question from the line of Todd Lukasik. Please go ahead.

Hey, guys, back again. Just following up on that and some of the earlier comments we made with regards to acquisitions it felt like after the LoopNet deal that you guys were on pause for a little while with all the time, that that was taking to integrate and get it to where you guys wanted it to be. Is there a similar situation with Apartments.com or you know if another large deal came around today would you guys have the bandwidth to take that on?

Well, it would depend upon what kind of deal that was. So I think right now, the only way we would consider a transaction and something that we already did not have significant management expertise in would be as if it was a very unique opportunity. So we would likely be somewhat conservative in what we do in acquisitions that stretch management bandwidth. However, there are always opportunities to do acquisitions where the acquisition is more consolidation or something that is already well within our management competency all the way through our ranks so that the integrations occur at a level other than the C-suite. So to answer your question, it is -- there are a lot of things out there right now. We're looking at everything. Some are very interesting, but we prefer to focus on the great opportunities we have in LoopNet, CoStar, Lands of America, BizBuySell, Apartments.com, the debt and equity space. We've got a lot of good things to focus on, and we really only want do to things that support those core areas.

Thanks, Todd. And I appreciate everyone. I think we just crossed the noon hour, so we're over our time limit. And I think AT&T is charging us about $1,000 a minute, so we appreciate everyone's time on the call today.

And that does conclude the conference for today. Thank you for your participation and for using AT&T's Executive Teleconference Service. You may disconnect your line.