CoStar Group Inc (CSGP) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CoStar Group fourth-quarter earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Mr. Rich Simonelli. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to our fourth-quarter 2014 conference call. We are delighted you joined us.

Before I turn the call over to Andy, you should know that certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in our February 25, 2015, press release on fourth-quarter and year-end earnings and in CoStar's filings with the SEC, including our most recent annual report on Form 10-K and 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 on the date of this call and we assume no obligation to update these statements, whether as a result of new information, future events, or otherwise.

As a reminder, today's conference call is being broadcast live and in color on the Internet at www.costar.com, and a replay will be available approximately one hour after the call concludes and will be available until the end of the month. To listen to the replay call 800-475-6701 within the US or Canada or 320-365-3844 outside the US and Canada. The access code is 352633 and a replay, as I say, will be available on our website as well.

In order to give everyone a chance to ask a question on the call, we just limit you to one question. You can rejoin the queue for additional questions. We will take as many as time permits.

I will now turn the call over to Andy.

Thank you, Rich. Appreciate it. Welcome and thank you for joining us on this snow day in Washington DC. I'm happy to have the opportunity to share our very strong financial results for the fourth quarter of 2014.

In 2014, our annual revenue increased $135 million over 2013 and we generated annual EBITDA of over $151 million. Our adjusted EBITDA for the year was $188 million. We achieved revenue in the fourth quarter of 2014 of $156 million, compared to $116 million in the fourth quarter of 2013 for an increase of 35%.

EBITDA increased 36% to $43 million in the fourth quarter of 2014, compared to $32 million in the fourth quarter of 2013. Non-GAAP earnings per share grew to $0.93 per share in the same period. Our annual subscription continues to enjoy a high trailing 12-month renewal rate of 92% with 98% renewal for those customers with us five years or longer.

Our investment in the expansion of our salesforce is going well. In 2014 we added over $63 million of annualized net new business. We achieved CoStar's highest-ever net new sales on annual contracts with $17.3 million in the fourth quarter 2014.

As we discussed last quarter, we signed a one-time, one-off $1 million advertising contract in Q4 of 2013, so when you adjust for that contract, our net new sales actually grew 17% year-over-year.

Our field salesforce continues to do an excellent job as the pace of net new sales for CoStar's core business accelerated 36% in the fourth quarter of 2014 over the third quarter of 2014 and 26% year-over-year. As we reach a new stable state with our larger salesforce, our sales reps will gain more experience and we fully expect to see an increase in per rep productivity and higher net new sales overall.

With successful service offerings like CoStar, LoopNet, and Apartments.com, our salesforce has absolutely no shortage of products to sell. Over time we plan to prepare most of our salesforce to sell all three services to streamline the relationship with our clients and prospects and maximize their efficiency.

We acquired Apartments.com less than a year ago in April of 2014. Before we had even closed the deal our product design team had put forth a Herculean effort and had redesigned the site from top to bottom.

While we felt that Apartments.com was a great company with a good product, we also knew the industry is highly competitive and changes rapidly, so we needed to ensure that our product would lead the industry. We understand that other competing sites with significant revenue were working in aging business models and that there was a unique opportunity to reinvent the space with a more renter-centric website. We believe that Apartments.com gives renters what they want and need, then we will be able to give our paying advertisers the quality leads they want.

We focused on building a site with more powerful and responsive mapping and searching tools. One of CoStar Group's core competencies is collecting and building content. We felt that renters really wanted a more comprehensive inventory of rentals, including condos and houses, with actual rents and availabilities, so they could narrow down their search for an apartment without having to call every other building in town.

We also learned from renters and apartment owners that they believed there was no prominent, trusted, clear branded website that stood out on the Internet for finding an apartment. After we closed the Apartments.com acquisition, our entire team from LoopNet, CoStar, and Apartments came together with a clear purpose to build the best apartment website ever built. After thousands of my colleagues worked countless intense hours, we believe that we have built the best website ever connecting renters with apartments and connecting owners with renters.

We relaunched the new Apartments.com 10 days ago to an incredibly positive reaction from both customers and renters and one or two investors. The site has dramatically more listings, vastly improved search tools, and user experience in state-of-the-art search engine optimization.

We are seeing early positive trends. It's obviously early, but we like what we are seeing initially. I am very pleased to report that we've seen a huge surge in organic traffic since the launch.

Year-over-year visits to Apartments.com are up a very impressive 74%. Since the launch, week-over-week visits are up 23%. For the important SCO keywords we track, 336 additional keywords for Apartments.com have moved up to the top five positions in Google for a total of 1,407 keywords in the top five organic positions. That is 47% more keywords in the top five organic positions than Zillow or Apartment Guide.

We also are holding the most prominent position in search engine marketing as well.

Telephone leads to our clients are up 56% year over year on the site. That's pretty material to our advertisers. I believe that that underestimates the benefit to our clients, though.

On our old site, a renter could not determine if an apartment building had a currently available unit for them without calling the community. At any given time, typically half the bedroom configurations are not available in the community, so we believe approximately half of the old telephone leads were a waste of the owners' time and a waste of the renters' time.

Now our site shows current availability, so it is more likely that when the prospective renter calls, they are calling to schedule a tour rather than to do an availability check. It's amazing how simple it is.

We know the site is more engaging because since the relaunch, the average length of a visit to the site is up 39% from that on the old site. Site performance is key to keeping renters on your site, so the speed of the site was one of our key engineering concerns in building new Apartments.com.

The average time to download a page on the old Apartments.com was exactly 639 milliseconds, but the new site -- I'm kidding, approximately 639 milliseconds. But the new site is 344% faster with an average download time of about 144/1,000 of a second, dramatically faster. And we're going to make it even faster still.

The relaunch of the site has confirmed the validity of a key element of our strategy for the new site, the site now allows landlords to list a property for free on the site and for increasing levels of investment they can achieve more prominent placement on the site. If you can list for free on the site, then paid placements better offer a significant advantage.

The good news, and I was really happy to see it, is that, now the site is live, it clearly appears that the advertising opportunities offer a huge advantage to our advertisers. The advertising levels are silver, gold, platinum, and diamond.

Since the relaunch, the silver ads have been viewed twice as many times per listing as the free listings. The gold placements are viewed 6 times more frequently as the free ones and the platinum levels have been viewed 13 times more often than free. And the diamond ads have been viewed 26 times more frequently than free.

The paid properties are receiving significantly more leads than the free properties and the premise is solid. This is basically the core premise of Google's revenue stream.

We believe that building the most trafficked site is key to building the most -- the highest revenue-generating site. I'm very proud of the enormous traffic gains our team has accomplished with the relaunch of the site, but what is even more impressive is that we have accomplished these impressive gains before our planned transformative consumer marketing campaign has even begun, featuring Jeff Goldblum.

The Apartments.com marketing campaign kicks off Sunday, March 1, with a placement of the very popular hit show The Walking Dead in the 9:00 to 10:00 PM slot. And I hope everyone will watch it, even though the show has a little bit of a gory side to it.

According to a study conducted by Kip Cassino of Borrell Associates, landlords will spend $1.5 billion in online advertising in 2015, up from $630 million last year. We believe our new website and aggressive branding campaign will give us a decisive competitive edge as we pursue a significant share of this $1.5 billion online advertising.

We believe the combination of CoStar and Apartments will position us to benefit from the significant information and marketing cross-sell opportunity we see in multifamily. Our rent comp reports will help property managers and owners set their rents with accurate, real-time information for their markets.

Because of the efforts we have invested to build great content for renters on Apartments.com, those who subscribe to CoStar information will now get even deeper, richer, faster information on the multifamily markets. We are confident we will be the only company that will be able to deliver to property managers and owners a marketing solution with comprehensive information and analytics for an exceptional price when we bundle these powerful resources together.

We had a phenomenal sales month for Apartments -- we had a phenomenal sales month in January for Apartments.com, even before the release of the new site. The month of February is more about customer service. The sales team's primary objective is to explain the features of the new site to our many, many clients for Apartments.com, rather than having the salesforce just focus on acquiring new customers. We want to make sure that existing customers are happy with what we are doing.

So we anticipate a modest February net new sales month in the Apartments.com space. We are very optimistic, though, about the potential for the March sales.

Despite our current customer service priority, we are already seeing some sizable cross-selling deals that we really like. Give you a couple examples; ValCap Group has been a CoStar customer for some time. I believe since 2013. A CoStar sales rep brought an Apartments.com sales rep to meet with them and the team sold them a competitive $7,000-a-month advertising contract covering 11 properties. And that contract was a share shift from one competing company to us.

Oculus Realty is an Apartments.com client based in Gaithersburg, Maryland, and owns 22 communities. We added CoStar information for $5,600 per month and took the business away from [Reece]. So in one case adding advertising to a CoStar customer, in another case advertising CoStar to an Apartments customer. In each case, sales reps from Apartments.com and CoStar worked together to secure these deals and we think the cooperation of those two teams and the joint efforts will be critical to a really great sales year.

If you have not yet visited the new Apartments.com, I really encourage you to do so. The site looks great and we have no shortage of great ideas to keep making the site even better throughout the years.

We've made a number of significant enhancements to CoStar's suite over the past year that have made the product more powerful and made accessing our content even easier. We have now integrated our portfolio's strategy web-based market analytics and forecasting tool into CoStar Property, giving our customers a great 30,000-foot view of the markets, right down to the very granular information, all in one integrated package. We will continue to build valuable information analytic tools on this new platform for commercial owners, lenders, and institutional investors and regulators.

This quarter we are releasing an important new feature within CoStar's suite called CoStar lease comps. In fact, we already have it in beta use with several big customers. Lease comparables are one of the most valuable assets that a broker and their firms have when dealing with their clients, but oftentimes the comps are only embedded in dispersed in-house Excel spreadsheets, which means they are very difficult to access or share and not integrated with other useful data and are often non-standardized.

CoStar lease comps functionality allows our subscribers to enter, manage share, and analyze all their proprietary lease comp information within CoStar's suite. With CoStar lease comps, brokers can leverage CoStar research to supplement and manage information on their own lease transactions by adding CoStar research lease comps to their information. This lets them build a bigger and more accurate picture of the market and allows them to help their clients make more optimized pricing decisions.

And ultimately think it will be very good for industry transparency and the health of the commercial real estate market.

We believe that CoStar's lease comps provide brokers and their firms the best way to manage, control, and protect their lease information. They can aggregate lease comps across multiple office locations or firms. It gives them the opportunity to have standardized lease comp collection across their firms and standardizes effective rent calculations across their firms.

It lets firms run their lease comps through our analytics and reporting engines. It's a win-win between CoStar and our clients. It gives our clients a much-needed timesaving productivity and intelligence tool. As these brokers put more and more of their content into the CoStar environment to get value from it, it makes the CoStar product even stickier.

As you know, LoopNet is, by far, the most trafficked website for finding office, industrial, and retail space for lease and for sale, and we continue to monetize that traffic growth. In the fourth quarter of 2014, average monthly unique visitors in LoopNet.com was approximately 5 million, up 12% from 4.4 million in Q4 2013. In January 2015 we experienced an all-time unique visitor total -- all-time high unique visitor total for LoopNet at 5.8 million unique visitors.

In fact, during January 2015, LoopNet.com, Cityfeet.com, BizBuySell.com, LandAndFarm.com each experienced all-time high unique visitor traffic. Revenue for the LoopNet marketplace grew approximately 20% in 2014 compared to 2013. This continues to compare very favorably to the single-digit growth rate LoopNet had prior to our acquisition of the Company.

Additionally, we continue to evolve our product offering, concentrating on giving our paying advertisers in LoopNet new and more differentiated ways to market their commercial real estate availabilities and properties for sale. As with Apartments.com, we are launching three differentiated advertising levels on LoopNet. These ad levels provide larger ads and more exposure to those advertisers that invest more marketing dollars with us.

We are offering those who pay us the most for listings the opportunity to sort to the top for relevant search results with large, prominent ads. We believe that will allow them to lease their properties more quickly, generate more leads, sell their properties more quickly, and it will have a positive impact on LoopNet's revenue. This enhancement, along with the ability to buy new, more flexible premium listing plans, targeted ads for brokers, properties, and company branding ads and property videos gives our advertisers fantastic opportunities to showcase both their properties and themselves on LoopNet.com and provides revenue growth for us.

In an effort to eliminate internal price competition between LoopNet's legacy information products and CoStar, we have significantly increased prices for new customers of LoopNet's suite of information products. LoopNet Premium Searcher is now listed at $444 a month. That's actually LoopNet Platinum Searcher is now listed for $444 per month on a month-to-month basis. If you buy it on an annual contract, it's now $395 a month.

That is close to a 500% price increase over what LoopNet was charging for a similar service effectively when we acquired the Company, so it's a significant boost in cost there.

Ultimately, we want to transition all of our information clients to one platform that would be the CoStar information platform. That will reduce cost and, we believe, increase the quality of the information platform overall by having greater participation in one community or one clearinghouse of information.

CoStar Real Estate Manager increased its net new sales by an impressive 58% in 2014 over the full year of 2013. Real Estate Manager also posted its highest quarterly net new sales in Q4 of 2014. In Q4 of 2014 and rolling into Q1 of this year, we were able to increase the number of customers capitalizing on the use of both CoStar Suite and CoStar Real Estate Manager.

Subscription revenues for CoStar Real Estate Manager grew 17% in 2014 versus 2013. In 2014 we experienced record growth in the number of new retailers, corporate tenants, and healthcare companies joining the CoStar Real Estate Manager customer base with 24 major new customer additions in 2014. Significant new customers in Q4 included Sunoco's retail stores, Kindred Healthcare, and [Amserv].

In Q4 we released the integration of select CoStar property information with the CoStar Real Estate Manager product, allowing retailers and corporate tenants to begin to see the power of CoStar information combined with their own lease and portfolio information. In 2015, designs are underway to allow retailer and corporate customers to view their own lease and portfolio information inside of the CoStar Suite environment, increasing the value of the CoStar's collection of products to this customer segment and offering a product that no other company, we believe, is out there can offer that kind of combined solution. We expect that this will continue to increase the opportunity for us to sell both products in this market.

CoStar in the United Kingdom has growing profitability and continues to convert clients and prospects to CoStar Suite. We added 700 customers to CoStar Suite in the first 700 days since the launch of the product there. Average subscription price increases have maintained the same high level as we achieved at the original launch date. The price increases have been averaging 39% as people upgrade from our old Focus product to our CoStar Suite product.

In the UK, the renewal rate has steadily increased during the past year, with the trailing one-year renewal rate moving from 90% at the start of 2014 to 91% at the end of the year. So with the conversion to CoStar Suite in the UK, we've seen a steady march up in the renewal rates over the last several years.

This has been helped by the number of multiyear contracts that we signed. 46% of UK CoStar Suite customers have signed either two- or three-year agreements.

December was a record-breaking month in the UK, achieving the highest-ever net new sales in the Company's UK history. And five of the top eight highest-ever sales months were in 2014. As a result, in 2014 our UK operation achieved the highest yearly net new sales ever and we expect strong momentum to continue in 2015.

EBITDA in the UK also improved to $5.4 million from $2.3 million in the prior year versus a loss of $3.1 million. I'm sorry, let me get that right. EBITDA improved $5.4 million to $2.3 million versus a loss of $3.1 million in 2013. That is a mouthful. We will have to try to use a simpler approach next time.

The bottom line is the UK is becoming more profitable and we believe it will continue to be more profitable.

Again, I want to congratulate our UK Managing Director, Giles Newman, and the entire UK team on a great performance this year. We are now advancing our plans to retire the older Focus product I mentioned completely from the market, and I expect to complete that before mid-2016. It would be great to be on one platform.

Our move into Toronto, Canada, has also been successful. We've signed over $1.2 million in annual new business, including important wins in the fourth quarter of [MPAC] and Avison Young. We closed the Toronto year at 250% of our internal sales goals. This makes Toronto one of the fastest-growing markets to attain this level of adoption in our corporate history.

In November, Toronto turned in the highest-ever sales month of any CoStar city ever, so that is quite an accomplishment. Clients in Canada have expressed a clear demand for nationwide Canadian coverage, so we expect to expand into other large cities in Canada during 2015.

The commercial real estate markets continue to show a broad level of strength in the fundamentals of rent, net absorption, and occupancy, and transaction volume. Overall demand, as measured by net absorption, was strong in 2014. The strong demand has been driven by a 2.1% rate of job growth and shrinking excess capacity within existing tenant spaces, which in the past had constrained the overall demand for space.

Rental rates rose an average of 3.6% across all property types in 2014, versus 2.2% growth a year earlier. Capital flows continue to remain at record levels. In 2014 we had a 10% increase in property sales to over $0.5 trillion, which is above the previous peaks in 2006 and 2007, when sales averaged $486 billion.

Looking at the apartments sector, performance was solid in 2014 with a 3.2% increase in rents for the year. After a cycle-low vacancy in 2013, the national apartment vacancy rate climbed to 4.8% in Q4 of 2014 versus 4.4% one year earlier. A significant 27% increase in apartment completions from 2013 was the primary reason for the rise and vacancy as net absorption for 2014 was similar to 2013's level. Apartment sales transactions reached the highest levels ever recorded in 2014, up 6% from one year earlier to $120 billion.

In the office sector we had 80% higher net absorption to 91 million square feet in 2014. This is nearly double the level of net completions, so vacancy fell by 70 basis points to 11.3%, which is very close to the long-term average. New supply in office remains at historically low levels.

Falling vacancy spurred a 30% year-over-year rise in the amount of office space under construction as of Q4 2014. Office sales volumes rose 11% in 2014 to $124 billion. Retail had an exceptionally strong sales year; the volume was up 22% to a record $100 billion. Clearly, the headwinds of Internet retail aren't preventing a flow of capital for the sector.

The industrial sector had results very similar to 2013, specifically market vacancies declined to the lowest level in 15 years, ending 2014 at 6.8% versus 7.4% a year earlier. This is significantly lower than the 7.6% low attained in 2007. We're getting very full utilization of a lot of our commercial real estate sectors right now.

2014 was an excellent and transformative year overall. I believe we are on our way to $1 billion in revenue and 40% margins in 2018. With our investment in Apartments.com as well as advances in CoStar Information Analytics and LoopNet, I believe that we are exceptionally well positioned for strong growth and financial successes for many years to come.

At this point I will turn the call over to our Chief Financial Officer, who you may know, Brian Radecki.

Did you take a breath, Andy?

No.

So what is that? Download times are down, what, 344% faster but the earnings call is up how many minutes, Rich?

Seven milliseconds.

Depends on how fast you read your script.

I was crossing out paragraphs as Andy was just reading off all my numbers. I was like, you know, well, I don't have to talk about that. I don't have to talk about that. But I will reread a couple of them just because I know you guys want to hear me talk (multiple speakers).

Did you hear about the new automated CFO robot?

Oh, that is right. Is his name Max Headroom or something? Okay.

Thanks, Andy. As Andy mentioned, we are very pleased with our performance in the fourth quarter and full year 2014. CoStar Group's organic business continues to show solid top-line growth while we grew earnings, all while we made exceptional progress integrating Apartments.com and investing for the long term. Our strong 2014 performance has created an opportunity for us to further invest in research and marketing in 2015.

As discussed on last week's call -- it seems like we're talking to these guys every other day -- we've begun to do so and we will continue to invest through 2015, which we believe will accelerate revenue growth for many years to come.

Starting with CoStar Group's results for the fourth quarter 2014, the Company reported $156.1 million of revenue, an increase of 35% compared to the fourth quarter of 2013. For the full year 2014, revenues were $575.9 million, an increase of $135 million, or approximately 30.6%, for the full year 2013.

We reported adjusted EBITDA $54.3 million for the fourth quarter of 2014, which is an increase of $13.5 million compared to the fourth quarter of 2013. Another way to look at it is that we had $217 million of Q4 annualized adjusted EBITDA with an adjusted EBITDA margin of 34.8% for the fourth quarter 2014. Now this is, again, all while we are investing in research as we discussed prior.

Adjusted EBITDA for the full year 2014 was $188.5 million, which is an increase of 37.8%, or $51.7 million, compared to the full year 2013. Adjusted EBITDA margins increased to an all-time high of approximately 33% for the full year 2014.

Net income for the fourth quarter 2014 was $13.9 million, an increase of $1.1 million from the $12.8 million in the fourth quarter of 2013. Non-GAAP net income for the fourth quarter of 2014 was $29.8 million, or $0.93 per diluted share, which is a 34% increase from 2013. Did you get that number? Okay.

Gross margins was $113.2 million for the fourth quarter, or 72.5% of revenue, which again includes the majority of the investments in research that we have discussed and is essentially unchanged from Q4 2013.

Reconciliation of all non-GAAP net income, EBITDA, adjusted EBITDA, and all the non-GAAP financial measures discussed on this call, to their GAAP basis results are shown in detail along definitions for those terms in our press release issued yesterday and are available at www.costar.com. Or, if you didn't catch that because I went too fast, just email GetRich@costar.com, Get Rich.

Rich Simonelli?

No, just GetRich@costar.com. It will go right to him.

Cash and investments increased $36.9 million to $544.2 million as of December 31, 2014, up from last quarter. Cash and investments exceeded total short- and long-term debt of $385 million as of December 31. Cash flow from operations was very strong at $47.9 million for the fourth quarter of 2014 and was $143.9 million for the 12 months ended December 31, 2014, which continues to demonstrate the very, very strong cash flow profile of our business.

Now I would like to give you some additional color on some metrics to further highlight our strong performance in Q4 2014.

As of December 31, we had approximately 504 total salespeople across the Company. Of that, 219 were sort of US CoStar field sales reps and 136 were Apartment field sellers, up from 80 at the time of the acquisition. Now after our February sales conference, all these reps are working together in the field under one management structure.

Additionally, we had approximately 87 inside reps across CoStar, LoopNet, and Apartments; 22 field reps in the UK; and another 40 across our other verticals and businesses.

Revenue from subscription services annual contracts was $103.4 million for the fourth quarter, or 66.2% of revenue. For the trailing 12 months ended December 31, subscription revenue from annual contracts was $389.7 million, up 19% for the 12-month period ended 2013, reflecting our continued success in growing these annual subscriptions faster than our non-subscription services.

The year-over-year growth in annual subscription revenue remained at approximately 19% to 20% for the past six quarters, which is pretty important to remember. We expect to continue to grow revenue from subscription services on annual contracts back up into the 70%s this year and eventually back into the 80% to 90% range of our total revenue as we move forward.

Renewal rates for annual subscriptions remained high during the quarter. The 12-month trailing renewal rate for CoStar's subscription-based revenue was 91.5% in the fourth quarter of 2014. As we've discussed the last few quarters, the introduction of more annual contracts at Loop and eventually at Apartments into our subsection base is expected to cause the 12-month renewal rate to edge down slightly, possibly a percent or two, over the next year or so. Therefore, we will expect it to be in the 90% to 91% range.

The renewal rate of CoStar subscribers who have been with us for five years, as Andy mentioned -- and never hurts to mention again -- is approximately 98%. Hotel California.

With the February 17 press release, that was last week, announcing the launch of the new Apartments.com site and the increased investment in marketing for the site, we provided 2015's guidance ranges for revenue and non-GAAP net income per diluted share. These outlook ranges already incorporated in the exact Q4 2014 results we released last night as well as the marketing investments we announced last week.

Not surprisingly, a week later there have been no changes to those projections, so I am reaffirming my guidance ranges for first quarter of 2015 and the full year. Our model has not changed and, therefore, I assume yours hasn't either. And I am not going to reread the results, even though my team wrote it, because Rich told me he was going to turn the music on.

So to summary, I am very pleased with the CoStar's financial results for the fourth quarter and full year 2014. Our strong cash flow profile and adjusted EBITDA margin improvements in 2014 is allowing us to continue to invest in the business to propel future revenue growth for many, many years.

We achieved a 35% adjusted EBITDA margin in the fourth quarter, an increase over the prior quarter, even with increased levels of research investment. Thanks, Frank Carchedi. With the investment in marketing for Apartments mostly weighted towards the first half of 2015, we expect margins to be back in the low to mid 30% range by Q4 this year.

Beyond 2015, the marketing spend for Apartments, as Andy mentioned, will be lower and is discretionary and will be based on our success in driving accelerated revenue growth and market share gains. I remain confident we can deliver mid-teens revenue growth all along the path to our $1 billion in annual revenue goal by 2018 with 40%-plus adjusted EBITDA margins.

And to AJ, who is down in North Carolina, on Twitter, Facebook, Pinterest, LinkedIn, Google Hangouts, and every other social media ever invented -- I'm not sure how the guy gets any work done -- he asks the question how are we going to do this? How are we going to get to $1 billion and 40%? Well, we are going to invest to build the best content, software, user experience of our products and services, and now we're going to tell everybody about it by marketing it.

As always, I look forward to sharing our progress towards these goals with you in the coming quarters, assuming we can dig out from the Snowmageddon here in DC. And with that, we will open it up for questions.

(Operator Instructions) Sterling Auty, JPMorgan.

It's actually Darren Jue on for Sterling. Just a question about research staff hiring. Just given that the cost of sales in the quarter came in a bit lower than we were expecting, just wondering if you made all of the hires that you had planned to make in the quarter. And did you end up seeing that, I think it was a $4 million to $5 million impact that you guided to last quarter?

Yes, this is Brian. So I think we did a great job. We added hundreds of researchers. Frank Carchedi and his group did an amazing job collecting the content.

We probably are at the low end of that range, so we definitely got the majority of the cost structure and people in the door that we wanted to. Probably a little bit more spills over in Q1 then I would expect, as you get into Q2 and forward, you will see the gross margins begin to climb again. So I would say we got the majority of it in there. There's probably maybe $1 million or so that will spill over into Q1.

Michael Huang, Needham & Company.

Thanks very much. Good morning, guys. It's great to see kind of the strength in unique visitors across LoopNet and your other properties. I was wondering are you guys doing something different on the marketing front, or is there some external driver here as well?

All the traffic we are talking about right now is pre the major B2C marketing spend. On the LoopNet side, there is no material change in our marketing spend. In fact, it's probably a slight reduction from prior year. It's basically better.

We are bringing a little bit more of an investment in search engine marketing this year in LoopNet, certainly a significant increase in search engine marketing in Apartments.com, a little bit of an increase in LandAndFarm and LandsofAmerica, but big picture is mostly effective SEO and content advantage.

Now that won't be true next quarter and the following quarter, I hope. I believe that then you will see organic traffic that is being heavily influenced by major B2C media spends on the Apartments.com side.

Sara Gubins, Bank of America Merrill Lynch.

Sure, so just wanted to be clear on your plans for the salesforce. You have made a big hiring increase last year. You have talked a lot about blending them and being able to cross-sell and cross-train the sales force.

So what, if you can speak to what your plan sales increase, sales headcount increases are for 2015, and maybe if it's even a relevant metric anymore to focus on, say, CoStar information field sales.

That's a good point. So I think you can just focus on total field salespeople because the vast majority of our salespeople are now -- whether they are Apartments or CoStar, they are focusing on selling annual contracts wherever possible with high renewal potential. So it's just basically field sales in the core product areas.

We are -- we feel that at this point, with the acquisition of Apartments.com, the growth that occurred in their salesforce since acquisition, and the growth that occurred in the CoStar field salesforce in the course of 2014, at this point we have a very large field salesforce. And you put them all together in one room at the sales conference and you can see we have a very large field salesforce.

Right now what is really important is training, productivity gains, teaming, effective segmentation of that salesforce, and I don't really feel like right now it's about headcount growth. It's about effective segmentation and cross training and teaming. Making sure that the most experienced reps in a particular area are handling the highest value opportunities in that particular area, and that's a lot of work to do during 2015. That is what we are going to be focusing on.

We might see some growth in a couple of areas that is going to be minor. It won't really move the dial. We are going to grow our field salesforce that is dedicated to only our rural land products. We still believe that is a diamond in the rough, maybe many diamonds in the rough.

And then we also may begin to build a little bit more of a dedicated farmer account management model in some of these much larger accounts like CB Richard Ellis or Bank of America. Some of these large groups where, as we deploy more and more software upgrades that we think will be very valuable to them, we want to make sure that they know how to use them and that they get deployed. And we can pay for that by selling LoopNet subscriptions to individuals as we go into those accounts. So we can actually fund our own account management process I think through LoopNet subscription.

I do not think that the headline of 2015 will be headcount growth in salesforce. It will have to be changing conditions in 2016 or 2017 that cause that.

Just to add to Andy's brief response, I gave both numbers because I believe most people have their model separated into two. But as I said my prepared remarks, we sort of look at them in one bucket now.

And as Andy said, we obviously have pockets of areas, whether it's debt and equity or in the other verticals, that we might add some. But I think in general we will be focused on productivity gains.

When you look out to your one -- your three-, five-year model, we will probably then go back to sort of increasing the size by 10% to 15%. But I think for this year there could be movements within the numbers, but it's going to be plus or minus that 500% or so number. So thank you.

Brett Huff, Stephens Inc.

Good morning, guys. Congrats on the nice quarter. My question is about the LoopNet price increase on the info biz and it's kind of a two-part question.

One is the $15 million to $20 million of sunsetting rev in that LoopNet info biz, is that driven by the price increases or is there some official turning off of some LoopNet products? Then number two, what is the take rate or cross-sell rate that you have seen or, if people move off the LoopNet info biz, characterize how they are moving on to the CoStar info biz? Thank you.

So good question, good spot. That was a line that you should notice and say, wow, that's a heckuva movement. So we are trying to -- we are certain that we want to migrate everyone from the LoopNet platform over to the CoStar information platform for so many reasons.

We are -- we obviously see huge revenue gains -- when we move someone from the LoopNet to the CoStar platform, see very significant price increases. We also see a more satisfied customer. We see higher renewal rates overall once we move them into the CoStar information platform.

We had wanted to stop selling LoopNet information products this year in the first quarter, but realistically, given all the opportunities in the apartment sector, we did not want our salesforce to be putting all their efforts into the LoopNet upsell right now. So we, rather than just shut off the e-commerce models of selling LoopNet information, we decided to bring the price up to parity with entry-level CoStar.

Now initially, as we do that, we are actually retaining about 80 -- with these very high price increases we are retaining 80% of the revenue we were seeing before, but we certainly are not going to be suffering the same sort of cannibalization effect. So I think we are seeing an over -- we will see an overall net increase of information sales without distracting the salesforce.

The other thing we want to do is, when we do sunset the LoopNet information, we want to make sure that we have integrated the back ends and that you have always, in every case, in any submarket, in any product type, higher-quality information in CoStar across the board and unified data entry. So that is something that is going to take us most of the year.

The goal is that in 2016 we will begin to sunset all that revenue and we believe that as we sunset that revenue of probably $40-some-million that we could over a several year period see up to $250 million of revenue coming to the CoStar side in an optimistic sense. And then you'd see a reduction in cancellations associated with people going to our bargain-basement product offering.

So, Brian, do you want to add anything?

So from German to English, what it means is that --.

You are cut off from caffeine.

We continue to test various things. We talked about the Orlando experiment. Essentially what we are doing here is that when we get to the end of the year, the $40 million will likely be less. With LoopNet that base is a high churn month to month. So as people are churning, we are not letting them come back in at a lower price. It's a bigger price, so clearly volumes are significantly down.

You don't know where those people go. The assumption is they will come back and our salesforce will sell them. What is that time period? Two months, six months, eight months, nine months, whatever it is.

The same sunsetting revenue of $14 million to $20 million, I haven't changed that, because essentially you are seeing a lot lower volume because people are churning out on the monthly side. We are picking up some of those, as Andy said, with higher contracts that are more on par with the CoStar information.

Essentially, you are getting the same result without having to sort of turn it off by doing price increases. So we continue, as we've mentioned in the past, to test various ways to carefully transition these people from one bucket to the other. But, ultimately, the financial result for this year is going to be the same, I believe within that same range, so we will just keep updating as we move forward.

And we remain very confident. As we look at granular level data in this LoopNet book, you've got tens of thousands of people who have been using LoopNet as an information product continuously for multiple years and intensely. We do not believe that those people will go away forever and we do not believe that those people will find a better value in some other information solution.

So we believe that we will capture a major piece of that client base at a higher price point with a higher renewal rate.

Andre Benjamin, Goldman Sachs.

Good morning. First, I just want to follow-up on the last one just to make sure I heard the math right, because there were a few numbers embedded in there.

I think I heard 80% of the revenue for LoopNet being retained as you increase the pricing, but then I also know that you had said something about actually being net up because these people are paying higher prices. I just wanted to make sure that I got the moving parts right there. Was it 80% of the customers are staying or is it 80% of the wallet?

I have to clarify that, Andre. On the e-commerce, which is the only place where we are currently selling LoopNet information products, as we increase the price dramatically to be on par with entering into a one-person, low-end CoStar information contract, the volume of the LoopNet sales goes way down, is going way down. But the price being up you are still retaining 80% of that revenue pace from the LoopNet e-commerce module. Higher price, lower volume.

Now, without a doubt, every time we sell -- in the past when we were selling a Premium Searcher account for $74 a month rather than $250 a month, you were getting a substitution effect against CoStar information, which would be priced at $250, $395 for one user in a secondary market. So with the increase in prices occurring on the LoopNet e-commerce information platform, you should see a reduction in substitution effect or cancellation against CoStar, so I believe that net-net your overall CoStar Group corporate headquarter umbrella information revenue is going up.

Roughly the same revenue coming in the LoopNet e-commerce model and a reduction in cancellations on the CoStar side. Or a reduction in loss to the CoStar side and more people opting to take the higher-quality CoStar information if the prices are about the same. Did I make that --? Is that about clear?

I will follow up with that. So, Andre, as far as the models go, the financial models, our model hasn't changed as far as the revenue range. You are still moving -- the goal is again to still move people from one bucket to the other. We're just testing different ways of doing it. And the price increases that we talked about have been less than a week, so again I am not changing my model and I wouldn't recommend anybody else's.

As we talked about on prior calls, we have the ability to pull the lever so we can obviously control that, but our goal is to, as quickly as we can, move everybody from one bucket to the other. When you do that you will have a bunch of people that drop out for two or three quarters, which will cause whatever the range was, $14 million to $20 million. But again we believe that, as you get into 2016 and 2017, you will pick all that up by multiples of 3, 4, 5x.

So financially modeling it ends up to be the same place. We are just getting there a little bit different way, which makes it easier on our salesforce. So thank you.

Peter Lowry, JMP Securities.

Thanks. What impact, if any, do you see from such a strong push on Apartments.com branding on CoStar branding? Thanks.

Okay, good question. I think that for people in the know, people in the industry, especially people who are operating in both office industrial and multifamily retail and multifamily, you will definitely get a halo effect over to the CoStar brands.

We did make the decision to streamline the branding in the campaign. We considered branding the commercials Apartments.com powered by CoStar Group, but we felt that it was much more important to keep a simple, clean message in the renters' mind, the simplest possible URL and just rely on the halo effect.

When the go out and talk to customers, remember that we are not just trying to sell advertising on Apartments.com. We are trying to sell an awful lot of information solutions on the CoStar side. So when people see -- we are seeing, when owners of commercial properties and apartment buildings see this branding campaign, Apartments.com and the acquisition of Apartments.com by CoStar Group, they attribute an attribute of much higher quality apartment information now in CoStar Group than anywhere else.

So we are getting -- they really latch on to that and we are getting a benefit from that. We will get a benefit from that and that one contract I mentioned is an example of that. We will see more of that.

Phil Stiller, Citi.

I guess I wanted to ask about Apartments.com. First, what was the revenue in the fourth quarter? And then maybe you could talk about the assumptions implicit in the 2015 guidance in terms of revenue from Apartments.com. Just trying to understand what benefits you're assuming from the marketing spend in the first half of the year.

Sure. So Apartments, the actual Q4 revenue was down slightly over Q3, which is sort of what's expected. It's sort of that -- sort of like LoopNet Q4 is always usually down from Q3 and then up in Q1. They did well year-over-year. I think it was again around a 15%, 16% year-over-year growth rate.

The expectations for this year, I think I was pretty clear on the last call, but I can clarify a little bit more, is that as we move from one side to the other in February there is small buckets of lost revenue. So their actual revenue for Q1 will probably be lower as you transition from one site to the other.

Then the marketing campaign starts in March and really runs through September, the heavy piece of it. Reality is I believe you will start to see the contracts -- we will obviously have contracts coming in by the next call, but I think we will be talking about that.

But I think the reality is a good cross-sell number and the bulk of it will really come in the July call where we will be talking about the success of the campaign. Because you are not going to have one month out there, you're going to have four months of activity out there. So I believe that you will get the actual GAAP revenue for that to start to come in in Q3 and really by Q4. And then Q1 of next year where you will see the acceleration out of the teens and as you get into next year into the 20%s.

So you are not going to see -- you could see it, but I think reality is you actually have to market it for three or four months. You have to go sell it and then you got to get it in your revenue, so there's not much expectations in the model for this year.

Brian, would it change your thinking at all if I were to tell you I just got a text from Adam Silverman that he just got a three-year deal with Paradigm, a great multifamily company, for advertising and CoStar information. Combined value 14,000 net new monthly, three-year deal. This is from an industry that historically only signed six-month contracts. Would that change your thinking at all?

It doesn't change my model, but I am awfully confident. So thank you.

Bill Warmington, Wells Fargo.

Good morning, everyone, or good afternoon at this point. A question on Apartments.com and the contract structure, because, as you mentioned, historically you have been selling under -- they were annual contracts but cancelable after six months.

As you are going to market now, are you using annual non-cancelable contracts? How have those been received and are you planning to stick to that? And what impact does that potentially have in terms of recognition in net new?

The industry had historically done a lot of six-month contracts. When you're dealing with a 250-unit building, you are never going to run out of the need to market that building, so I think the six-month contracts are more an artifact of the fact that no one was differentiating their brand in a material way.

When we go in there and we offer people a significant discount on an information product they are very interested in getting and we give them some flexibility to add and remove communities -- and we are talking about a 20-community owner -- we think we can do, like that contract that just came in, we think we can do annual deals because that makes sense. That's like they sign annual leases with their renters; why not do annual deals for marketing?

We will still take six-month deals in some instances. We pay a different commission rate to our salespeople. But remember when we did LoopNet, everything was month-to-month and we transitioned that to overwhelmingly annual deals and we think the same opportunity exists here. It gives you much more visibility in your revenue and you can do it.

Bill, just to add quickly on to that, it is a lot like LoopNet. The year -- they are cancelable after six months and they are essentially month-to-month after that, so this is an industry that is used to that. So we are going out with annual contracts, but just like with LoopNet, we have to prove that we can actually sell it.

Since this was rolled out a little bit over a week ago, we have texts and emails of individual stories, but the reality is we have to do it.

I'm fairly confident when you look at -- our goal always, our core business model is to -- and I talked about it earlier -- was we used to be 90%-plus subscription revenue. After LoopNet we dropped down to like 70%, then we got it back up to 80%. Now with this we dropped down to the low 60%s.

I think we will be -- I mentioned it in my prepared remarks; by the end of next year, I think will be back up into the high 60%s or 70%. And then in the following years I think we can get back to 80% and 90%, but it will take a little while.

I don't expect every single deal that is going to come in is going to be on an annual contract. We're not going to kick them out if they don't. It will take time to get the industry used to it, so it will happen over time. Thank you.

At this time I'll turn it back over to the host for closing remarks.

I want to thank everyone for joining us for this fourth-quarter 2014 earnings call and we look forward to updating you on the progress we are making in the business next quarter. Thank you all for joining us and sorry for running four minutes late. Brian, you owe them four minutes.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.