CoStar Group Inc (CSGP) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2018 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, operator. Welcome to CoStar Group's Third Quarter 2018 Conference Call. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Scott Wheeler, our CFO, I'd like to share some interesting and important items that can actually make your day.

Certain portions of our discussion today may 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 today in our CoStar Group October 23, 2018 press release of third quarter results and our company outlook and CoStar filings with the SEC, including our most recent annual report on Form 10-K and our subsequent quarterly reports on 10-Qs, 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. Reconciliation to the most directly comparable GAAP measure to all of the non-GAAP financial measures discussed on this call including, but not limited to, non-GAAP net income, EBITDA, adjusted EBITDA and forward-looking non-GAAP guidance, are shown in detail in our press release issued today along with definitions for these terms. And you could also find that press release on our website located at costargroup.com.

As a reminder, today's conference call is also being broadcast live and in color on our website. So please refer to today's press release on how to access the replay of the call. Remember, 1 question. Make it a good one.

I'll now turn the call over to Andy Florance. Andy?

Rich, on behalf of all of our shareholders, I want to thank you for those inspirational words.

You're welcome.

Thank you for joining us for our third quarter 2018 earnings call. We achieved another excellent quarter of solid revenue growth, exceptional margin expansion and continued strong net bookings. Revenue for the third quarter 2018 was $306 million, an increase of 23% compared to revenue of $248 million for the third quarter of 2017. I'm excited to report that we flew past our first $300 million quarter. Our annual revenue run rate now exceeds $1.2 billion.

We had strong CoStar Suite revenue growth of 19% in the third quarter of 2018 compared to the same period last year. Some of that growth was attributed to converting LoopNet Premium Searchers and heavy searchers to CoStar Suite. To date, we have worked through approximately 1/4 of the initial 100,000 leads we identified and have seen approximately 11,200 conversions. We have now reached $64 million in annualized revenue from this conversion list. Earlier this quarter, we identified an additional 30,000 commercial real estate professional leads from LoopNet that were previously not on our active lead list.

As we have seen time and again since the LoopNet acquisition closed in 2012, LoopNet is a great source for identifying and refilling our lead list of commercial real estate professionals that we can sell CoStar Suite to. I still believe that over time, we can generate hundreds of millions of incremental annual subscription revenue by up-selling LoopNet users to CoStar Suite.

Apartments.com grew 45% year-over-year in the third quarter of 2018 as we continue to expand our leadership position in this space. Our multifamily annual revenue run rate is now $420 million, and we expect to continue to achieve solid organic revenue growth in the fourth quarter and through all of 2019. I should clarify, I mean, the fourth quarter of 2018.

Our profitability continued to expand in the third quarter of 2018. Net income increased 72% year-over-year in the third quarter to $59 million. We generated our best EBITDA quarter in our history as EBITDA jumped 42% sequentially in the third quarter of 2018 versus the second quarter of this year. Our adjusted EBITDA was $110 million in the quarter, up 29% over the prior quarter, reaching a 36% adjusted EBITDA margin, so close to 40%. We are confidently on our way to surpassing our goal of 40% adjusted EBITDA margin in the fourth quarter of 2018.

Lest you do not know, about 4 years ago, we set a long-range goal of reaching a $250 million revenue quarter by the fourth quarter of this year and adjusted EBITDA margin of 40%. Clearly, with a $306 million quarter this quarter, we are on track to smash through the revenue goal. And with the strong margin expansion, we're showing we're clearly on track to beat our profitability goals. Should we beat our fourth quarter financial target, as we fully expect to, we plan to set brand-new, equally spectacular and inspiring next-gen long-range revenue and margin targets designed to delight our investors.

Company-wide net new bookings were $40 million in the third quarter of 2018, an increase of 16% year-over-year over the $34 million we generated in the third quarter of 2017. While net new bookings are up 16%, the number understates the true sales productivity achieved in the quarter.

During the quarter, and for most of the year, our Apartments.com sales force, which is about 1/2 our sales force, spent most of their time, vast majority of their time, transitioning over 7,100 new ForRent customers to the Apartments.com network. The large amount of revenue we added when we acquired ForRent never appeared in our net new sales numbers, but the previously communicated and expected reduction of duplicative spend between the 2 sites was counted as a negative net new sales in this quarter's bookings numbers. So while we're adding a lot of great revenue and picking up humongous strategic advantages here, the results show up as somewhat misleading slower bookings. We finished the majority of conversion work. So going forward, we expect the sales booking numbers will reflect true productivity.

There's been a significant accomplishment in the CoStar sales organization this year. Historically, our field sales force sold CoStar predominantly in a combination of an inside sales team, and a separate field sales team sold the LoopNet ads. The clients really expressed dissatisfaction with so many different points of contact. There's no good reason for doing it this way. It's just how the go-to-market strategy evolved historically from the merger of LoopNet. It was a huge learning and behavior shift for the traditionally info sales force, but it's worked out spectacularly. In total, gross LoopNet sales bookings contribution from the CoStar sales force was up 2.8 million for Q3. That's year-over-year. This is up 216% -- I'm sorry, 261% year-over-year. On a per rep basis, gross LoopNet sales bookings contribution from the CoStar sales force was 39,000 for Q3. This is up 249% year-over-year. So they are learning some new things, focusing on customer service, selling LoopNet but still yielding good productivity, and we're aligning the sales force where we want it to be long term.

We announced earlier this month that we had acquired Realla Ltd., the U.K.'s largest public portal specializing in commercial property. It’s got the largest collection of publicly available property listings in the United Kingdom. Combining Realla with the CoStar information solution is expected to offer the best of tools for marketing properties, valuations and facilitating transactions. Realla's business value focuses on providing brokers a broad range of channels to market their listings. Using Realla, a broker can create a microsite, generate a PDF, do a blast e-mail distribution, syndicate their listings on various sites, report leasing progress to owners and market to millions of potential lessees or buyers on realla.com (sic) [realla.co]. We are very impressed with these tools and Realla's strategy for very cost efficiently gathering and managing large volumes of listings. We intend to incorporate a significant amount of Realla's technology into CoStar across Europe and North America.

Overall, our Apartments.com numbers are extremely impressive and getting better. In the third quarter of 2018, we generated our best traffic quarter ever with the most unique visitors and leads in a quarter. Our leads, which have proven to be the highest-quality leads in the industry, are up 50% year-over-year, which translates into more leases and a better return on investment for our advertisers on the Apartments.com network. According to comScore, the average monthly unique visitors year-to-date are up over 37% of the Apartments.com network. This excludes the Move network from both periods.

During that same time period, RentPath's average monthly unique visitors are actually down. Let me repeat: their unique visitors are actually down, and then one can assume so is the return on investment for their advertisers. As a standalone site, Apartments.com had more unique visitors than Zillow rentals in August and September of 2018. Even more impressive, Apartments.com network year-to-date visits sit at 404 million, according to comScore, up 105 million from 2017, again, excluding Move network during both time periods. We have increased the Apartments.com network visits gap over RentPath by almost an additional 100 million to a gap of 239 million visits for the first 3 quarters of 2018.

On October 5, Moody's Investors Service downgraded our primary competitor RentPath. They took the rating to Caa1, and it's probably a fault -- default rating to Caa1-PD. Moody's also downgraded the company's senior secured first line credit facilities to B3 from B2. The second lien term loan was downgraded to Caa3 from Caa2. They revised the outlook for RentPath from stable to negative. Moody's said that the downgrade reflected challenging competitive dynamics in the apartment rental market and a material increase in marketing spend required to compete against a larger and better capitalized competitor. I assume and hope Moody's is referring to Apartments.com there. They also stated they expected the December 17, 2019 maturity of $15 million in the undrawn revolving credit availability will further pressure the company's financial position if competition remains challenging.

In contrast, Apartments.com has exciting and robust plans for next year and beyond. The outlook for Apartments.com is positive and moving to very positive. The profit contribution from Apartments.com continues to gain strength. Incremental direct profit from our Apartment business in the third quarter is up 60% year-over-year. We expect total profit contribution from the Apartments business to be up approximately 100% year-over-year. This is double the expected year-over-year revenue increase of 40% to 45%.

Listing detail views are up 32% year-over-year, and each listing is being viewed 69% more times year-over-year. With LoopNet, our primary priority remains building higher impact Power Ad opportunities for clients who have very valuable properties and want to drive more leads or create a stronger brand presence than our basic ads offer. The new Power Ad placards that drive increased exposure went live in Q3 with significant power ad updates ahead in Q4. Typically, these ads are sold to the owners of the properties who have a much greater stake in the economics and are wanting to pay a higher price.

We have introduced new market-based pricing that correlates pricing to the value of the real estate in a given market and, to some extent, also the demand for the ad space. You might find a vacancy in Manhattan with a total lease value as high as $0.5 billion. Yet in Toledo, the largest vacancy might be worth 1/100th of that. Accordingly, a top ad in New York might sell for $6,500 a month, while an ad in Toledo might price at $450 a month. Sort of common sense, but we think it'll help us optimize revenue.

This fall, we plan to roll out market base pricing as well on Premium Lister, our basic advertising placement. Some markets are oversold or saturated, and we want to actively manage our inventory. In fact, in Southern Florida, 82% of all office properties from small to large now advertise. The price for a paid listing on LoopNet increased to $46 in Q3 of 2018 versus $31 in Q3 of last year, a 48% increase year-over-year. This has been a result of our proactive price management on LoopNet.

CoStar Real Estate Manager continues to be a tour de force, growing revenue 141% in the third quarter of 2018 compared to the third quarter of last year. Is that number actually correct, Scott, because it seems really high?

No, it's big. It's correct.

Okay, good. With the continued strong growth and huge potential of Real Estate Manager, the President of Real Estate Manager, Andy Thomas, now reports directly to me. We believe that there are a number of very interesting opportunities to accelerate the momentum of Real Estate Manager and expand the scope of this very impactful and successful business.

In August 2018, we completed the closing of our research centers in Glasgow, Scotland and Columbia, Maryland. Our centers in London, Richmond, Washington and San Diego have absorbed the workload and the transition has been very smooth. We continue to see more and more brokers and owners entering quality data directly into CoStar's self-service Listing Manager. During the quarter, approximately 36% of the millions of updates made were made directly by the broker or owner listing the property. We estimate this represents more than 100 researchers worth of work saved. This trend has the potential to materially reduce the amount of labor we need to invest in order to keep our databases current. In July, Listing Manager was also released in the U.K.

Today, most of our revenue from commercial real estate is -- most of our revenue is from commercial real estate investors, operators and lenders. Our single largest client is now an owner that used to be a large brokerage firm. A number of our top 10 clients are now investors or owner-operators. These clients need accurate and timely data with powerful models to help them understand market opportunities and risks. We are completing an important cultural shift at CoStar, improving our approach to best serving this massive opportunity. Historically, a large component of our analytics solutions were consulting-based. We would meet one-on-one with large investors or lenders and one-off provide them with analytics. This process engaged costly personnel, could not be scaled in any way and was not a material contributor to margin and never would be.

We have completely restructured and clarified the leadership and mission of our analytics team. Jay Spivey, who has been in leadership with us for 25 years, now leads all of our analytics solutions. We have a clear mission now to devote our best talent to building leverageable, digital analytics solutions that serve tens of thousands of clients or millions of clients rather than just a few. My hope is to see an exponentially growing suite of analytics solutions providing insights into risk, CMBS, REITs portfolios, underwriting valuation, pairing geospatial trends, benchmarking capital markets and more.

We just held a 3-day analytics leadership summit at our Richmond research headquarters. About 50 of our best and brightest gathered to plan our potential product road map to best serve the industry through innovation. We were focused on solutions that can be delivered during calendar year 2020 or before. Appropriately, we called the session Vision 2020. Participants led 30 presentations focusing on key opportunities for CoStar. I think it'd be helpful to share with you some of the wrap-up survey quotes from the Survey Monkey that our participants did.

One said, "A lot of confidence that this team of people can make some amazing advancements between now and 2020." Another, "Excitement and appreciation for a talented team, understanding of growth opportunities, path to grow in revenue from $1 billion to $5 billion-plus." Another, "The motivation to create and build these products is a full 360 cycle, i.e. owner portfolio, lender analytics, investment transaction platform, property valuation. There is so much opportunity. A sense that I'm not working for a 30-year-old company but a new start-up with its best years still in the future." "Complete awe at the talent across CoStar. We have some of the greatest individuals in commercial real estate." Another noted, slightly less helpfully, "I gained 5 pounds this week." And another more productive comment, "Excitement. Huge potential for CoStar across many areas and markets. Impressed by the quality of the team, happy to be part of the team." Another quote, "Huge appreciation for the amazing talent we have at CoStar." And another one, "Enthusiasm, optimism, commitment and energy." Another one, "Great optimism for the future. We have some amazing talent here. This was an incredible opportunity to share ideas, check on what the other groups were working on and build relationships with key stakeholders involved in improving the CoStar product. The passion that everyone brought to the meeting was tangible and infectious and helps reinforce why we're far and away the leader in our field." And the best quote, "Now the real work begins."

I want to update you on the commercial real estate economy. First, the good news: CoStar has very limited exposure to trade issues with China. 20-foot equivalent units are not an important factor in our business. The third quarter of 2018 ended with commercial vacancies near all-time lows. Prices and rents are at all-time highs and leasing and transaction volumes setting new records. The ongoing health of the asset class is a result of a durable national economy that 10 years into the third longest post-war expansion continues to reliably add 200,000 jobs per month despite a 3.7% unemployment rate; a low yielding investment environment of which historically, low cap rates offer attractive relative value; and restraint, very importantly, restraint on the part of developers.

Recent rate hikes by the fed have yet to dent commercial real estate's relative value proposition, though CoStar's analysts and clients are closely watching interest rate movements. And CoStar data shows some pricing weakness in gateway markets. Industrial continues to outperform other property types in terms of rent growth and price appreciation, thanks to national economy and an ongoing shift to consumption patterns towards e-commerce. This disruption in consumption patterns has weakened demand somewhat for traditional retail space, and rent growth and retail sectors lag the other property types. However, there's very limited development of new retail space, and that's kept retail fundamentals broadly in balance, in fact, really quite healthy.

Trends in the multifamily sector have also been positive, thanks to shift in home ownership patterns, below trend production of housing units in aggregate and strong employment growth. Apartment rent growth remains above inflation, and multifamily product remains in high demand with deal volumes set to reach a new record this year despite really aggressive pricing.

With office vacancies at record lows and rents at record highs, the rate of office absorption has slowed and rent growth has decelerated, particularly in coastal markets. Investors are growing more cautious and are seeking higher-yield deals in secondary markets. Still, capital's plentiful and despite industry rate increases by the Fed, cap rates have held steady at record lows across all property types. The path of interest rates will likely determine the fate of the cycle. High interest rates may erode the relative attractiveness of the asset class, especially for highly priced low cap rate assets in gateway markets. Moreover, tightening by the Fed has always -- generally, will always herald the end of economic expansions, and slower growth or outright recession will reduce demand, particularly for office, retail and industrial space. For the multifamily sector, however, rising mortgage rates will keep many would-be homebuyers out of the home ownership market and in rental units.

CoStar base case forecast calls for minor weakness in rent growth and price growth, but still growth, as demand falters and interest rates rise. [Barring] capitals markets cataclysm, however, we do not anticipate severe rental price losses, and we expect commercial real estate to broadly hold its appeal as an alternative asset class.

My favorite early warning gauge on market cycles in commercial real estate looks at the thousands of submarkets for the aggregate percentage with increasing vacancy. Above 50% represents a commercial real estate recession and concern. The average value of the last 17 years is 48%. The most recent reading is 41%, and that puts us in the lowest quartile of values in the last 20 years. All major sectors and aggregate numbers are strong. This is surprisingly good data. In fact, it's probably about the best commercial real estate fundamentals I've seen in my career.

So in conclusion, I'm really pleased with our financial and operational results for the 3 quarters of 2018. I am excited about getting close to reaching our 4-year goal. Our team is committed to constant innovation and deployment of new technology for the commercial real estate industry. We approach the business by putting the needs of our clients and users first and then work hard to service them by continually enhancing our comprehensive platform. The good news is, the most exciting part of the call is about to begin as I turn it over to our CFO, Scott Wheeler.

Why thank you, Andy.

You're welcome.

Quite a nice buildup. Although I must say talking about the numbers, it just doesn't get any better than this.

Yes, I'm just the warm-up, actually.

Well, it's good to hear that none of the tariffs are affecting our revenue nor our outlooks.

I keep watching those TEUs.

No trade war here. All right. So another strong revenue growth quarter, improving profitability and continued solid operational execution in the business. And as Andy said, we're entering the fourth quarter -- we're increasingly confident that we'll exceed our 40% adjusted EBITDA goal, which we committed to investors 4 years ago, way back in 2014, well before my time.

As Andy noted, we delivered a solid sales quarter with $40 million in net new bookings, which were up 16% from the third quarter of 2017. All told, we now have 3 of the last 4 quarters in which we've achieved net bookings of $40 million or higher.

During both the second and third quarters of this year, a significant amount of our sales force time was expended on converting the ForRent customers to combined Apartment contracts. We took our sales teams' focus away from new sales. As a result of these conversion efforts, we saw a reduction in net bookings of almost $4 million in the third quarter, which represents net sales erosion upon conversion to the combined contracts. Thankfully, with substantially all our conversion efforts complete, we believe the related drag on net bookings is now behind us.

The LoopNet Marketplace sales were strong in the quarter, which is the result of our continued efforts to improve the product, to increase our market coverage through the CoStar field sales force and eliminate historically discounted price levels. As a result, gross sales for the LoopNet Marketplace grew 45% in the third quarter of 2018 compared to the third quarter of 2017. Overall, as Andy mentioned, when we look at our bookings and our net sales, it's good to see that we don't see any connection to these numbers with the commercial real estate market, which remains strong.

Switching over to our revenue results. Our growth rate was 23% in the third quarter of 2018 over the third quarter of 2017, coming in at the midpoint of our guidance range. For the year, we expect the consolidated revenue growth to continue at approximately 23%.

Looking at revenue by services, CoStar Suite revenue growth was an outstanding 19% in the third quarter of 2018 versus third quarter of 2017, a significant increase from the 14% annual growth rate we reported just a year ago. In the fourth quarter, we expect the CoStar Suite revenue growth rate to moderate to around 15% year-over-year as we start to lap the accelerated revenue growth period in the fourth quarter of 2017 from the LoopNet conversions and the Xceligent bankruptcy.

Accordingly, we expect the growth rate for full year 2018 for CoStar Suite to be approximately 18%. Revenue growth rates in Info Services were negative 6% in the third quarter of 2018 as expected. This was due to the shutdown of the LoopNet Information Services in the first quarter this year. Excluding the LoopNet Information Services, our Real Estate Manager and other services in this group grew a stunning 64% in the third quarter over the third quarter of 2017.

With the shutdown of LoopNet Premium Searcher substantially complete and the strong growth in Real Estate Manager, we expect Information Services revenue in the fourth quarter to be in line with Information Service revenue from the fourth quarter of 2017, in other words, flat. That's an improvement. For the full year 2018, we expect Info Services revenue to decline at a rate of negative 10% to negative 12%, which is a modest improvement from the negative 12% to 15% range we forecast last quarter.

Multifamily revenue grew 45% in the third quarter of 2018, including the impact of the ForRent acquisition. Third quarter multifamily revenue of $105 million was essentially unchanged from the revenue of $105 million in the second quarter of 2018 as revenue from the new sales was offset by the planned reduction of certain legacy ForRent services. As Andy mentioned, we made significant progress on both sales and technology integration in the third quarter and now expect to complete this integration by the end of the year. Our expectations for full year growth and multifamily revenue remain in the range of 40% to 45% for the year.

Rounding out our services performance, commercial property and land grew 12% year-over-year in the third quarter of 2018, which is consistent with the commercial property and land organic revenue growth rate from the second quarter of this year. We are now more than a year passed the acquisition of LandWatch, so the total growth rate and the organic growth rate for commercial property and land are now the same. LoopNet sales remained strong, and we expect organic growth in the commercial property and land sector in the 13% to 15% range for 2018.

Turning to profits. Our gross margin came in at 76% in the third quarter of 2018, broadly in line with last quarter. Gross margins in the fourth quarter of 2018 are expected to improve following the closures of our Columbia, Maryland and Glasgow, Scotland research facilities in the third quarter. Our outlook also includes some modest savings in facilities and staff costs associated with these closures.

Operating expenses of $163 million for the third quarter of 2018 were below our estimates and down from $186 million in the second quarter of 2018, primarily on lower third quarter marketing spend. Net income for the third quarter of 2018 of $59 million increased to an impressive 72% compared to Q3 2017. Our effective tax rate in the quarter is 24%.

Third quarter adjusted EBITDA was $110 million or 36% of revenue. This was approximately $4 million above the top end of our guidance range and 175 basis points above our projected margins. We're pleased we were able to maintain these high level of adjusted EBITDA margins throughout the third quarter.

Non-GAAP net income for the third quarter of 2018 increased 70% to $79 million or $2.16 per diluted share and include adjustments for stock-based compensation and acquisition-related expenses. Non-GAAP net income for the third quarter assumes a tax rate of 25%.

Now we'll take a look at some of the performance metrics for the quarter. At the end of the third quarter of 2018, our sales force totaled 733 people. The decline from the 775 salespeople at the end of the second quarter is primarily related to attrition in our multifamily sales team. We expected increased turnover following the integration of the ForRent sales force and are now actively hiring in both the Apartments and the CoStar field sales teams.

The renewal rate on annual contracts was 90.2% in the third quarter of 2018, slightly below the 91% rate in the third quarter of 2017. The renewal rate for customers who've been subscribers for 5 years or longer was an impressive 96%. Subscription revenue on annual contracts accounts for 80% of our revenue in the quarter, up from 77% last quarter as we successfully migrated many of the ForRent customers to annual subscriptions, which we have done with prior acquisitions.

So I'd like to provide a little more operational color on the ForRent integration. As I noted earlier, we continued to make great progress converting ForRent customers to the Apartments network service, thereby stabilizing the acquired revenue base. We've converted approximately 7,100 customers this year. And as expected, we lost some revenue in the process. In addition, we continued to wind down some legacy ForRent services we're no longer selling.

While bookings are difficult to project, we expect to see multifamily bookings move back up later this year and into 2019 as we get past the integration and refocus our teams on new sales.

In terms of cost synergies, to date, we have reduced approximately $30 million in annual costs, which include staffing reductions of approximately 290 people and elimination of other duplicative operating costs.

In addition to cost elimination, we successfully migrated the ForRent customer database and fulfillment systems to CoStar's platform during the quarter. We accomplished this in less time than it took to connect our previous multifamily Marketplace acquisitions. Our database of information is now feeding and fulfilling all our multifamily Marketplace sites, and every one of our sites is feeding critical data, like availabilities and rents, back into our database. This is a very important step in the integration process, and we're thrilled to have completed it so quickly.

Back in September of last year when we announced the acquisition of ForRent, we said we expected the acquired revenue to stabilize in the range of $75 million to $85 million with long-term EBITDA margins of approximately 45% to 55%. I'm happy to report that despite having to delay the closing of the acquisition in order to get through the FTC regulatory review, we expect to achieve all of our acquisition objectives at/or ahead of schedule.

As Andy mentioned, we completed the acquisition of Realla earlier this month, which we expect to be an important strategic addition to our U.K. business. While we have big plans for the platform, we don't expect meaningful revenue contribution in the fourth quarter. We anticipate we'll add approximately $1 million to $2 million of operating costs in the fourth quarter as we begin some early marketing efforts, all of which are included in our outlooks.

I will now discuss our outlook for the full year and the fourth quarter of 2018. Based on strong revenue and sales results of the first 3 quarters, we're narrowing our revenue guidance range for the full year to $1.183 billion to $1.189 billion. The midpoint of the range is in line with our prior guidance. This revenue range implies an annual revenue growth rate of approximately 23% compared to 2017.

We expect revenue in the fourth quarter of 2018 in the range of $307 million to $313 million, representing top line growth of around 22% at the midpoint. In terms of earnings, we're raising our guidance range for the full year of 2018 by $0.14 at the midpoint to a range of approximately $7.95 to $8.03 for non-GAAP net income per diluted share. This is based on 36.5 million shares.

We expect adjusted EBITDA to be in the range of $404 million to $408 million for the full year of 2018, an increase of $6 million compared to our previous outlook. The midpoint of the outlook implies an adjusted EBITDA margin of 34% for 2018, which is an impressive increase of 500 basis points compared to 2017.

For the fourth quarter of 2018, we expect non-GAAP net income per share in a range of $2.48 to $2.56 and adjusted EBITDA in a range of $125 million to $129 million. Our guidance range implies an adjusted EBITDA margin of 41% for Q4, ahead of our stated 40% goal for the quarter.

Overall, I believe the strong results and operational improvements position us well going into the fourth quarter and into 2019.

With that, we'll now open up the call for questions.

(Operator Instructions) And our first question will come from the line of Andrew Jeffrey with SunTrust.

Lots of moving parts, pretty much all positive. Now ForRent's behind you, and you've made good progress on the LoopNet integration and cross-sell. And Andy, appreciate, as always, the macro comments on the CRE market. Just stepping back, maybe big picture, given all that, do you think you can give us a sense of what you think the sustainable organic revenue growth is at CoStar as the business sort of stands today?

Just to clarify, are we talking long range, short range?

Yes. I mean through the -- I guess, through the cycle, recognizing that we are in a bit of an elongated cycle perhaps by historical standards.

I would say more of the same. There is no shortage of people to sell to. There's no shortage of product opportunities. We have the capital to support our initiatives. So we aren't seeing any sign of saturation anywhere. So we're just working the levers of growing the sales force, improving product, optimizing our pricing. I think that word's a euphemism. And so I think it's sustainable more of the same. And in the 32 years I've been doing this, I think 98.5% of the quarters we've grown. We anticipate more of the same. Scott, do you want to add something to that would seem more specific?

No, the only variability is how fast we can deploy the capital and build a team, grow internationally and then when we get those acquisitions that come in, [see the] integration and then be able to grow on the backs of those, but I mean, those are a little more cyclical and lumpy. But we have plenty of opportunities to go after and we just need to keep working.

And then another thing to just remind everybody is that when we acquired ForRent, I sat down and had chance to talk to the President of ForRent. We'd really been negotiating with Dominion, not with the leadership of ForRent directly. And I asked the President of ForRent, what is it -- what is it like? I've never been a cycle running a large ILS. And I said, "What is it like when you are in a negative cycle?" And he was surprised and he said, well, Andy, we are in negative cycle. You just don't see that because you guys are killing it. When vacancy rates are low, ILS spending is down. When the vacancy rates are high, ILS spending goes up. So there's some degree. There could be some cyclicality that's inverse on the apartment side and especially when you look at the fundamentals. But looking at like, say, Atlanta, Georgia, interest rates coming up. The Case-Shiller for Atlanta has housing prices up 76% in 5 years. Like, it's going to the multifamily. So we feel really quite good about it with a lot of legs to go. We're more worried about black swan thing you can't anticipate.

Maybe some countercyclicality in multifamily helping out.

Yes.

Next, we go to the line off George Tong with Goldman Sachs.

You've redirected your CoStar Suite sales force to focus more on existing clients rather than focus just on the LoopNet conversion. Can you talk about how you envision LoopNet conversions progressing from 3Q levels? And then the flip side of that, your progress was engaging with your existing customers to prime them for a future pricing increase?

Well, here we are in this public call. So yes, so we have -- it's really just -- it's not so much dramatic change. It's focusing on some of the fundamentals that worked well for us for a long time. I think the 1 big change is that we had to make a fundamental decision: we're going to have 2 different large national sales forces meeting with exactly the same customers. So the people that buy ads from LoopNet are commercial real estate brokers and commercial real estate owners. Buying an ad from LoopNet is fairly basic. We generally can hire a new salesperson and get them up and running and successfully selling LoopNet the vast majority of the time within a matter of months. So the clients expressed to us that really, we don't like being called by 15 different people. And it makes sense that we just have 1 point of relationship management. So we shifted our sales efforts to teach the CoStar sales force to sell LoopNet into that CoStar customer base rather than having 2 different sets of people calling in. The CoStar sales force would naturally be in a better position to price more effectively and to sell the higher end ads. And as the numbers show, it's working out well. The other thing is at that you're always tweaking. You never want to take your customer base for granted. And when we are in a very strong market, sometimes there's a temptation for the sales force to just be looking to churn the next piece of business and it's a huge industry but it's a small industry, and it's important that our sales force continues to build relationships with our clients. And my experience in the industry is that the salesperson that builds relationships long term, sells twice as much net as the person that doesn't. So we're really just sort of optimizing the sales force and this positions us for sustained, long-term growth and good client satisfaction. We do not run every quarter to how can we get the single highest booking this quarter because I'll be gone next quarter. Since I've been here for darn long, I tend to think the next year, the next year and the long-term right answer. So sometimes we do the hard right instead of the easy wrong.

Makes sense. And then the LoopNet conversion piece?

How are we going to proceed with that? Well, we are going to I mean, the numbers are obviously, spectacular so far. They keep -- I guess, if you take the first and the second round, Rich, would this be about 160 some million of upsell? And as fast as we up-sell these things, they seem to replenish themselves. So that well, we've been doing a number of initiatives with our marketing department, building some online videos where we try to figure out who we're targeting and then we present value propositions to them based on who they are so we're doing a little more digital selling and preparation. But we're continuing to focus on it. And as we stated earlier, I think it is a multi-year effort. I think it's something that will be working this LoopNet conversion list for at least another 3 years, and then it'll move into a long-term sustainability where 5 million people coming in at a given month often. And some percentage of them, they'll begin their customer journey with us in the LoopNet interface. And then when they keep returning, we can identify the market to them and then migrate them up to CoStar. 99.5% of the people coming to LoopNet never see any upgrade messages, any up-sell messages. They don't know there's a CoStar because they're end-users. We want to keep it that way. And we really are sort of laser targeting the folks we really think are consuming at a level that they should move up to the professional product. So I hope that answers the question.

Next, we'll go to the line of David Ridley-Lane with Bank of America.

Was wondering if you could discuss the reasons for the deceleration of the multifamily revenue growth? Maybe if you could quantify the revenue drag from the products discontinuing within ForRent. Just trying to get a little bit more clarity on that?

Yes, obviously, the -- let's just keep our bearings here. Obviously, the growth is excellent in the multifamily space and continue to be very strong and exceptional. It's like historic, all-time highs for anyone in the space. And we anticipate that we've got a lot of exciting stuff for years to come here. As we brought in ForRent, we bring in that revenue slug upfront. It does not pass through our sales bookings numbers. We -- upfront, when we acquired them, we never had any expectation that we'd retain 100% of the revenue. Often you'll have someone buying a top paid at a top-level ad on both sites. And if someone -- they will -- we expect that there'll be some churn-off where they won't buy top-level ads on 2 sites from us. We can retain a lot of that but not all of that, and we've sort of anticipated that. And as that burns off, you have -- it comes down to our sales booking. So it goes in silently but it comes out in the sales booking number. So that creates a $4 million some drag in the quarter against the multifamily bookings, roughly. And then the other thing is that when you're bringing in 2 sales forces and taking your message out there, your #1 goal is to solidify the revenue and solidify the relationships. You want to get out there and make sure that you are visiting every one of these new customers coming to Apartments.com network and that you have them in there. And I don't have the exact cancellation numbers for ForRent, but I would imagine they were probably 400% or 500% higher than ours.

Definitely higher than ours. Yes.

And so we want to take that revenue, bring it in and bring it long term into the super low, industry-leading cancellation rates or the super high renewal rates we enjoy. So that's what this -- as they do all that, they're not going to simultaneously be out, go into another customer base at the same productivity level. So now we move into the fourth quarter, they've got all that stuff behind them large. I think there's 200, 300 left out of 7,100. But now they'll be focusing back out on the opportunity. And again one of the big opportunities right in front of us is there are still, I guess, 7,000 some firms that are buying only product from RentPath, which is a huge opportunity for us. And then the order thing that these firms have been losing share to us have shown us and that we've learned is that there is a ton of share below 100 units. And that's where most of the market is and so we're focusing on that opportunity. So positive outlook. Feeling good about it.

Next, we'll go to the line of Bill Warmington with Wells Fargo.

Since I only get 1 question, I have to make sure I'm -- let you know that I'm expecting spectacular, inspiring and NexGen answers from you on that question.

A compound question coming.

So the $40 million bookings, you alluded to $4 million in ForRent revenue that went

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way for the quarter. I want to make sure that -- because I believe that was also one of the offsets in Q2 that was about $4 million in ForRent revenue and about $1 million in LoopNet Premium Searcher cancellations that netted against last quarter's figure. I wanted to just get a sense for whether there -- that $4 million is in this quarter? And then if there any other offsets that are worth highlighting for this quarter?

Yes, so Bill, you've definitely got the facts straight there. We had about $4 million of this erosion that we saw as we're converting it in each quarter. No other offsets or add-backs. The LoopNet info, our run-off is down a negligible amount. It's not really enough to talk about. So nothing really left for there. I think what you're seeing, too, is a little bit what we saw last year in Q3 where in the CRE business, you come into July and August and you just see a slowdown in activity and slow down of flow-through, which you saw last year in the CoStar and some of the LoopNet bookings. So you saw that again in the third quarter this year. And when you dig under that and you look at what the sales force is selling, to some of those stats that Andy gave, we're encouraged that their, year-over-year, their salespeople are selling 35% more this year in net than what they were selling last year in commercial real estate as CoStar LoopNet combined. We simply need to get some more of them in-house so we can keep selling more. And we did see, as you heard the sales force numbers were down slightly sequentially here, a lot in Apartments, but some in CoStar as well. So we'll need to keep pushing those back into the sales force and that'll help us continue on the good productivity pace that we're seeing. I think you got the add-backs right there.

Next, we go to the line of Pete Christian (sic) [Christiansen] with Citi.

Andy, I want to compare kind of your M&A thoughts from 2 or 3 quarters ago. It seemed like you thought valuations were a little unjustified and we kind of thought the M&A was going to be put off for a while. And I know the Realla deal isn't that large, but just wanted to see where you are right now in terms of thinking M&A? Are there more opportunities perhaps overseas versus domestic? Just a sense would be helpful.

It's a good question because probably the temperature's changing little bit here. And so we did the Realla deal. And that's an example of a deal that is not a big deal. It's not the size of an Apartments.com. It's a much, much smaller deal. But what we're interested in there is the technology, the people and the positioning. And there are -- we probably have 10, 12 deals right now that we're very interested in. And so it's probably a little bit more aggressive now than it has been. But if you are, in particular, if you're looking at some of these companies that bring technology that we -- that are operating at a relatively small basis that you can leverage into a much bigger platform, the relative value is the issue, not where you are in the cycle. So when you do a deal like Realla, it's doesn't matter if you're at the top of the cycle or the bottom of the cycle. The cycle is the cycle. And you probably -- where we are in the cycle probably matters more when you're looking at $1 billion deals. And there, we have to think hard and carefully, but we still consider those. So we're not seeing again, to reiterate, there's -- I look at our younger commercial estate analysts and economists and they talk about rent growth slowing is a disaster and I'm like, "You should see what it's like when rent growth falls. This is actually a really good environment. The best it's ever been." So we don't see anything falling off right away. So we continue to look at, very aggressively, at smaller deals right now, and we probably will have news there and probably at a much greater pace than you've seen in the last year or so.

Next, we'll go to the line of Brett Huff with Stephens Inc.

Bookings question part 2. I know a couple of you were asked about this. General question is, one of the reasons I think investors, at least have told us, have told us they really like how things are going is that the bookings kind of have quarterly annualized net new, have just kind of gone up in a pretty steady fashion and that's driven confidence in the future organic growth. Can you articulate to us kind of the mean, 5, 6, whatever the number is, the reason you're thinking the net new bookings will be up next year or year after, whatever it is? That's the main thrust of my question. And the second this, Scott, you mentioned that there were 35% more sales going on and I just wanted to make sure I understood what you meant for that. And I'll leave you guys there.

So I think people sometimes look for, obviously, this is a great business with a strong track record and continues, and has the ability to sustain these high-growth rates for a huge period of time. Why? Because it is a $50 trillion, $70 trillion global asset class, and we're the largest player in that space. And we're just a bit early days at creating the solutions. And clearly, we've shown that we're able to build compelling products that have a huge advantage, that have just a huge advantage over some of slower competitors. So now we -- if we just kept going up every single quarter like clockwork, you might say, "Hey, are these Madoff returns?" But they're not. There's some volatility and we do things periodically like buying ForRent that created noise in the number and so and so forth. But the market's strong. Our competitive advantage is unquestioned. We have shared some news with you that should be exciting to you on other competitive fronts and I don't want to do schadenfreude, but it's reality. And then we have a really robust product pipeline. We -- there're a lot of opportunities out there. There's also a lot of M&A opportunities out there. And virtually, everything we're looking at in M&A is not about picking up the revenue of the company we're buying. It's about building out the platform. It's about picking up one of these companies and building a solution that reaches a much broader audience and also is a interconnective solution so that the inputs already exist in our system and the outputs feed another part of our system. So there's just a -- there's a lot of good stuff here. It's a great company. And while bookings -- sequential stairstep precision in the bookings growth is important, it's not everything. So.

And then to your question on the 35%, Brett. When you look at it on a per rent basis for the CoStar sales force, now that they're selling both CoStar and LoopNet on a year-over-year basis in the third quarter, on a per rent basis, they're selling 35% more in net bookings than they were selling last year. The biggest piece of that growth is at LoopNet, is where they've been directed in selling a lot more and still growth in CoStar, low double digits on individual productivity and the rest is in LoopNet.

Next, we'll go to the line of Sterling Auty with JPMorgan.

I wanted to circle back to the ForRent item because I wasn't clear. And some of the questions, it was referred to as a $4 million hit to bookings. Another question was it was a hit to revenue. I just want to clarify and make sure I understand. Was it a hit to both bookings and revenue in the quarter? And if so, did you guys realize it was going to be that magnitude when you gave the guidance coming into the quarter? And how do we think about kind of the bounce back as you've kind of converted? So in other words, is there a kind of a de-bounce in that productivity so you get maybe some tailwind here in the fourth quarter?

Yes. Let me clarify the pieces there. The $4 million drag that we talked about was a bookings drag that was in the net new sales bookings number. There is a parallel drag, I'll call it to revenue, and that has to do more with the products that were sold by ForRent previously that we chose not to continue. Those we never count in our bookings at all. Those are revenue that comes with the acquired company that will attrit off over the course of the year and it will offset the growth in our bookings. So that's why when you saw the revenue in the Apartments multifamily growth rate slow in Q3 because you picked up a bigger chunk of that in Q2 right after the acquisition, and then this sort of non-bookings revenue that we're not selling anymore that erodes as people's contracts come up. So that's the revenue drag, which goes parallel to this bookings conversions issue. So hopefully that clears what those 2 pieces are. And yes, we did expect that to happen early in the quarter. The bookings came out fairly strong. We were happy with how the sales force actually sold a great amount of new product even while they were doing the conversions. So we were happy with how the ForRent and the Apartments' combined forces are selling together and they are working together in their own individual territories and now the former ForRent sales folks are ramping up their productivity and are about 75% to 80% as productive as our historical Apartments' reps in selling the business. So we've seen really good progress there.

Yes, and it's really important that people keep their eye on the big picture, which this acquisition has exceeded our expectations. And it's difficult to put a precise revenue number on what revenues actually attributable to for ForRent today. But our sense is, is that this deal was a -- ultimately ends up being a single-digit EBITDA acquisition, multiple EBITDA acquisition that has tremendous strategic advantage to the company. So these are the kinds of deals we love, and they set the stage for long-term growth of the company. So as we beat the expected burn-off revenue numbers, it would be a mistake for people to take those as negative.

(Operator Instructions) We'll go to the line of Mayank Tandon with Needham & Company.

Andy, does the acquisition in the U.K. set the stage for more of a focus on the international market? And if so, could you maybe give us a sense of how do you view the expansion? Is it going to be more organic, more M&A, a combination of both and, of course, the time line on any future expansion internationally?

Sure. So yes, I think it does show our willingness and our commitment to continue growing the platform. I don't want to get into too much detail for competitive reasons on exactly what we plan to do. But we do think that there is opportunity to expand our footprint internationally pretty quickly using some technology and methods that reduce the initial cost of going to a market reduced initial risk. So we think it's possible to take a couple hundred people and add 50 countries with some footprint. So we're looking at that. We're looking at companies that would support that. I do feel that the more I'm in the business, the more you're out there looking at the different players. You do feel that a company that's building up all these different software sets and models and customer bases and interactions between these different components, this is a game of software and software's about scale and it's global scale. So I think the future is providing us at international level. We don't want to be measured about it because our EBITDA growth in the United States is awesome. And you want to keep harvesting your EBITDA in the United States. But then keep our eye on the fact that 10 years from now, we could have 1/2 of our EBITDA being global and we would never want to give that up. It's just very similar to when we were making a lot of money in Washington and New York, there was some skepticism about taking it out to the whole country. And the numbers in the secondary markets of the United States in the early years as we expand out in New York and Washington, we're de minimis, but they're not de minimis now. So and we're excited about -- technology's changing a little bit and the market's changing a little bit, opening up some new opportunities for us.

We'll go to the line of Stephen Sheldon with William Blair.

I wanted to ask about margins by business. You noted, I think the profit in multifamily will likely be up, I think you said close to 100% in 2018, which is pretty significant. So I guess, can you help us frame where adjusted EBITDA margins and multifamily could roughly end up this year and how you're thinking about continued margin expansion in that business over the next few years post kind of ForRent integration?

We're pretty happy to see the expansion that we're seeing now, especially when you go into a big integration like that, and the acquired business was making little, if any margin. And so we took on a big slug of costs and had to rationalize that and keep the revenue at the same time. When you look at the

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through the year, it's really improved, obviously, as we've taken those out. And then when you look at the [associated] the average margin for the business in the fourth quarter, you see that multifamily is going to be right there broadly in line with where the total business is going to be the fourth quarter. Now you could say, "Okay, yes, but that's your lowest marketing spend," which is true so that business is still not going to be in the profitable range of the entire business for the year. But I think when you see us, at least, hitting 1 quarter now, on average, we had more of those as time goes on. We still believe that the margin profile of multifamily can be equivalent to the average margin of the entire business on an overall basis. And we've got to scale a bit more.

Take a look at like a LoopNet margin or a big buy-sell margin or those sorts of margins, they're much higher. And that's where this business naturally goes...

Those are in the 50 to 60...

The difference is this business does that and goes through $1 billion.

Yes, very high scale. So hopefully that gives you some clarity. We're happy with the way we're pacing and the business is performing well.

Next, we'll go to the line of Pat Walravens with JMP Securities.

Can I go back to pricing around the CoStar Suite? I would love to understand better -- I hear this concept of waiving the escalations. And just -- does that ring a bell, by the way?

We are familiar with all these terms as they...

Did someone waive your escalation?

Yes.

What's that? That's not happening to you.

So before this year, what -- how are you thinking about that and what were you doing this year and sort of in 2019 and beyond, how's it going to work?

Sure. When we started this back at the very end of the first quarter, beginning of the second quarter, we really eliminated the discounting in any forms. Some of it was in bundled discounts. Some of it was in just manager discretionary discounts. Some of it was in just selling partial products, which really resulting in discounts and somewhere in

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annual escalations that we had, which resulted in

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discounts. So this has all happened at the same time in early second quarter where we said, "We're done with the discounting programs anymore." All of those go away. And now we manage the business to a very defined rate card. We have very defined escalations on an annual basis. And then now we're starting to take some of the very deepest of the discounts on a combined product basis, and go back to those clients, look at the value proposition, and those that have strong value propositions are now signing up for 3 years escalations or 3-year increases to get up to rate card over a multiyear time frame. And we probably did about 30-or-so of those deals in the last month and a half to start to get our feet wet on that. So those are all part of this: first, firm up your pricing, firm up your rate card and now go start to take the deeper discounts historically and move them up to rate card because you've seen the investment we put in the product with all the analytics, with all the new research centers and all these things over time. And we're seeing clients are willing to step up to that as they recognize that value.

I just can't help but chime in here. The word "waiving escalations" is completely foreign to me and I don't understand it. So the -- we went through a phase where you had all these LoopNet folks who were getting a really marginal product and paying very little and you want to bring them over to the CoStar platform and we stretched down in pricing to include them in the business. Then you had Xceligent out there operating for an extended period of time. And we estimate that for every dollar they were charging someone, they were spending $5 to produce it. So they created this artificial price point out there. And again, I'm trying to bring people into the system. We extended discounts for a period of time. The reality is, is our products on the commercial real estate side provide owner or broker an appraiser, irreplaceable huge value. And they are a major bargain. And our renewal rates would instruct any economist that we are underpricing these products and the difference between -- only a junior salesperson who doesn't understand the market sells these lower-priced things. You have the more senior salesperson who comfortably signed a much higher point. So over time, you would expect to see the pricing grow to continue to reflect the value we're providing folks. And the ROI on investment in our products, behalf of our clients is phenomenal no matter what we do with escalations of a couple points each year or more. So the era of trying to meet Xceligent's pre-bankruptcy pricing is behind us. And enough said. We feel strongly about that one. And let's get Pete in here for a cheating second question.

We'll go back to the line to Pete Christian (sic) [Christiansen] with Citi.

Very quick question. I promise I won't hold up anyone much longer, but you talked about headcount going down attrition and then you're actively hiring. Just generally, how's hiring going? Has it been tougher lately?

That's a good question because you will always -- you expect at 3.7% unemployment, you'd get some problems. I am very grateful that we move to Richmond with a research center when we did because that's probably where a lot of competition would occur. We went into like the engagement surveys and Richmond showed that, that center's working really well. Folks are pretty happy there. I think it's great feeling energy down there. That offsets our huge sort of research hiring needs. I would not want to be hiring in some -- researchers in some U.S. cities right now. On the sales front, I think our -- I've no indication that our hiring is not going well. It is just a question of we've been really busy and a lot of change and we're not afraid of change. So you put 2 big competing sales forces together and the apartment [mystery]. We're experienced enough to fully expect churn and reactions and we manage that to the best we can. And then you just deal with it and keep on hiring. I think we communicated that earlier. The other thing is that I always believe it's good to be real straightforward to sales force about what the expectations for the job are. And it's to sell the correct solutions to the right people and to maintain a good positive relationship with those customers, and we don't yield on that. And if that causes 10 people in the CoStar sales force to leave, we'll be better off next year. And so it's on track. And I think we probably need to continue to sort of tweak the organizational structure to be able to do with the growth but it's -- I would say it's going well. And next year's probably easier than this year in terms of the number of changes happening in the sales force, which, even when no change occurs 1 year in the sales force, all sales forces believe lots of change is occurring.

And so with that, I think we will conclude the earnings call and please stay tuned. The suspense is palpable. Will CoStar reach its 40% margin goal and adjusted EBITDA margin goal in the fourth quarter? Please stand by and we'll talk to you at the year and earnings call. Thank you.

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