Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group's second quarter 2010 conference call. At this time all participants are in a listen-only mode, and we will conduct a question-and-answer session, instructions will be given at that time. (Operator Instructions) As a reminder, this conference is been recorded. I would now like to turn the conference over to your first speaker, Mr. Tim Trainor. Please go ahead.

Thank you, operator, and good morning everyone. Welcome to CoStar Group's second quarter 2010 conference call. Before I turn the call over to CoStar's CEO, Andrew Florance, let me state 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 CoStar's second quarter of 2010 press release issued yesterday and in CoStar's filings with the SEC, including CoStar's Form 10-K for the period ended December 31st, 2009 and CoStar's Form 10-Q for the quarter ended March 31st, 2010 under the heading risk factors. All forward-looking statements are based on information available to CoStar on the date of this call and CoStar assumes obligation to update these statements. You can find a webcast of this conference call on our website at www.costar.com/corporate/investor. Thank you for joining us. I will now turn the call over to Andy Florence.

Thank you Tim, and welcome everyone to CoStar Group's second quarter 2010 conference call. This is the first quarterly conference call we are making from our new headquarters building at 1331 L Street in Downtown, Washington DC. I am very pleased to report that the continued signs of stabilization in the commercial real state economy, CoStar group can report accelerating revenue growth and climbing renewal rates. Our sales bookings doubled quarter-over-quarter and our in-quarter renewal rate climbed to a very impressive annualized rate of approximately 92%. We posted another consecutive quarterly revenue record of $55.8 million, which is an increase of $5.7 million over second quarter 2009 revenues of $50.1 million. The company added $11.6 million in cash to the balance sheet during the second quarter. Our total cash, cash equivalents and investments on hand now totaled $230 million and the company continues to have no long term debt or mortgage debt because of 94% of CoStar revenues is subscription based and because we have historically higher renewal rates in the 90% plus range, we believe that CoStar group is not a highly cyclical business and it is generally a bit more defensive. Despite that fact, history shows that CoStar's revenues have grown dramatically faster during a stronger commercial real estate market than in a declining one. For that reason I would like to begin today's conference call by sharing with you in more detail some important and positive indication we continue to see emerging in the commercial real estate economy. Perhaps the most significant recent development is that office vacancies rates have stopped climbing and appeared now to have stabilized. After having experienced one of the most dramatic losses in US jobs since World War II. Job losses appear to have bottomed out and we are beginning to see…

Great. Thank you, Andy. As Andy mentioned, we are very pleased with our second quarter 2010 results. We achieved directed revenues for the third consecutive quarter and saw positive momentum continue in many, many areas of the business. Today, I am going to focus principally on sequential results for the second quarter of 2010 compared to the first quarter 2010 and also on our outlook for the third quarter in full year. We believe sequential trends offer the most insight into the performance of our business as they continue to progress through the current economic and commercial real estate cycle. Our second quarter revenues came in stronger than anticipated at $55.8 million, an increase of $700,000 over the first quarter and an increase of 5.7 million compared to revenues of $50.1 million in the second quarter of 2009. Our record revenue performance during the quarter was driven by strong organic company-wide net new subscription sales, and as Andy mentioned, based on the core CoStar suite. Subscription revenue for the second quarter accounted for 94.1% of total revenues. And on functional currency basis, international revenues was approximately 3.1 million pounds, essentially flat with compared to the first quarter of 2010. International revenues were approximately 8.3% of the company's total revenues in the second quarter. As of June 30, 2010, our 12 month trailing renewal rate which is a measure of renewing subscription revenue was approximately 88%. We are thrilled to see our 12 month trailing renewal rate move back towards our historical average of approximately 90%, as our customer retention efforts and company-wide contract bookings continue to improve. As I have publicly stated for at least two years now, we had expected our trailing 12 months renewal to decrease in the mid-80s during the downturn last year and then begin to…

Thank you ladies and gentlemen. (Operator Instructions) One moment for the first question. And we'll go to the line of Chris Mammone with Deutsche Bank. Please go ahead.

I think you said that Showcase platform was, you are earning about $6 million in annualized revenues, could you just give us what the in-quarter contribution was from Showcase or I guess the second quarter and also the first quarter?

Through our revenue or contribution margin?

Yeah. The quarterly revenue contribution from Showcase, you gave annualized numbers.

Yeah. We are not giving our quarterly numbers but annualized. It's approximately $6 million and obviously it's only been operating 18 months, so that's been growing each quarter.

You think growing towards that shouldn't be, we shouldn't assume that it's sort of 1.5 per quarter?

Yeah, it would assume that you are obviously at 1.5 or higher right now. That's correct.

Okay. And then similarly, I think you said that PPR was a bit ahead of plan. Is PPR the main source of the higher revenue guidance or is it a combination of things, could you maybe give us some more color there?

As we mentioned, the core acceleration is occurring in our traditional flagship products. So, close to our property professional. So it's basically reflecting economic recovery.

I guess you would characterize your higher revenue guidance as coming from no combination of the core and acquired or is it sort of weighted more one towards the other?

I think Chris, if you look at it, again the suite of service property constant tenant that we sell was a major driver this quarter, with PPR also continuing to drive, but again PPR is 10% of the business and UK is 8% of the business. So, again the 80% of the growth is coming from the core platform which is very positive, all subscriptions annual subscription contracts so it's very good high quality revenue.

Okay. And then, the in-quarter renewal rate looked pretty good. How high should we think that that number could get?

Wasn't it beautiful?

92%. I mean I know that your trailing renewal rate I think has topped out of sort of the 93-94% level in the past. Yeah, give us a sense for like how high we think, we can think of the in-quarter and also maybe where you think the last whole month renewal rate is heading as well?

I think it's definitely an impressive testament to the utility of the nature of the products, but we are very stringent on how to calculate that number. So, we've got a lot of clients who are small partnerships and if a partner passes away and the business is dissolved, that counts as a non-renewal or if someone retires or of someone goes bankrupt. So, there is only so high you can go unless your clients have life expectancy of say several hundred years. So, I think it maxes out that sort of historical level of 93%, 94%, and that 97% number, the five plus, is really quite phenomenal.

And Chris, I talked about that, I mean renewal rates can't continue to go up every single quarter. I do think that when you look at where we were in the 2005, 2006, 2007 we were always over 90% each quarter in the maxing out of the 93%, 94%. So, I think that the trailing 12 month is going to go up and I've said this pretty openly into high 80s, the closing the year in the high 80s and I believe we can get up into the 90s on the trialing 12 months into next year, which means you would quarters obviously continuing to post a 90 plus, between the 90% and 94%. But it will fluctuate a little bit in between quarters.

Okay. And is there way to get that rate, sort of what the renewal rate would be X to the Showcase platform?

The Showcase platform is spilt into two pieces, so one piece is subscription-based service for Showcase to firms and then there is the monthly individuals that go on and off each month. We do not count the monthly individuals. The renewal rate is on the 94% of the business as subscription-based services that would include those firms on a annual contract for Showcase. It's not the 6% of the business which we don't consider subscription based or somebody who would be on a monthly tenant, half of that is not.

It's advertising type…

Correct. That's right. It's the renewal rate for subscription based services.

Right. So it's only a portion of the Showcase platform?

That's correct.

It is a portion that is subscription-based in the Showcase. Is that helping to bolster the overall subscription rate? I mean is that one of the success stories that you would say to why the renewal rates have improved?

The core driver of the strength of businesses are traditional CoStar properties, CoStar comps, CoStar tenant, these products are, you know just real solid utility staples in the industry and as our clients are seeing some release on some cash flow, we are enjoying that benefit. So it's really about the core of the business.

Okay. I guess and my last question. In fact, first of my questions, I appreciate you taking them. Why did the sales headcount drop sequentially?

It's not material, what is a 2%, it's just a fluctuation, if someone went to graduate school, somebody got married. We moved offices, so we didn't have a training class, so it's not really a material. In general, Chris, we expect that sales number to be sort of in that range and it's not, it's at this quarter and in the first quarter, you know, for the foreseeable future. We are not anticipating on that number going up or down by 50, it's going to stay pretty much in sort of that range. It's a good healthy number.

You will go to the line of Brett Huff with Stephens. Please go ahead.

My first question, I want to make sure I am getting the EPS guidance right. I'll tell you what I think the math is, but then please correct me. You start out the original guidance, then you got to ding the number by what I am assuming is $2.8 million tax affected and divided by the share count and then you have to add back something in order to get to your new guidance, and I think that's about $0.06. Is that the right math to think about it?

Yeah, I mean for the quarter basically what you do is you essentially $2.8 million and you multiply it by the 44% tax rate versus the 30% and also to tell you, excluding those two items that we are well above the range for both GAAP and non-GAAP. And then for the year, the trick there is that the tax rate really will still essentially be the same for the year. So that $2.8 million is really what's sort of reducing the annual guidance range because the tax rate is really only a fluctuation between quarters. And of course, if you put $2.8 million and a 44% tax rate, you get more than the $0.02 we move the range and you get a lot more than that. Obviously, we are projecting some little upside on the revenue from what we originally projected. So we are sort of offsetting some of that. So again, I think the quarterly numbers are great, and I think that up in their revenue and then even the guidance range coming in where we are going to decide to take that sort of $2.8 million charges is very positive.

And sort of a follow-up question of that is, clearly revenue is getting better, but profitability is also getting better. What is the driver of that? Is it tight costs or is it reduction of expense on Resolve or can you give us a sense of what the drivers are?

No, we haven't reduced any expenses and as I talked about in the annual guidance in the beginning of the year, we actually will be investing in Resolve and the DCF and some of the things that we have been talking about. There are fluctuations in between quarters, there is a lot of noise going on moving the building, so I talked little bit about some costs that are shifting from first quarter to second quarter, some from the second quarter to the third quarter, but in general if you take out all those one-time items, the cost structure is essentially sort of flat this year and now we are starting to grow revenues. So that's why you are seeing improved earnings. It's the simple business model that people are seeing from the company for years. And it's important to remember, the investment activities here are pretty significant. So, we've invested into building that sales force ahead of that market turn. We are investing in several different software initiatives. We scaled the research team to make sure we maintain super high quality in the middle of this downturn. We did not get the research organization which would have been an easy thing to do. We grew the research organization which resulted in that 97% renewal rate. And then the other thing we are doing here which I'm sure someone will come with a creative writing exercise to make it like negative. But what we are doing on the real estate side is, in the United Kingdom I believe we've saved ourselves somewhere around $10 billion in real estate occupancy costs over a five year period by our research to Glasgow, consolidating several different offices together in London, and then by consolidating some operations into our headquarters building in Washington, while we are taking a hit for it now, ultimately it will be much more cost effective. In Boston, the consolidation of real estate is expensive these quarters, and it doesn't have a real big bang cost savings, but it's critical to operations as we bring together Resolve, CoStar and PPR in Boston. So, I think that we are over a 24 month period. We've got a number of good cost control initiatives that are playing out here. They certainly don't work in our favor this quarter.

That's helpful. And then on the CoStar, the new CoStar product that you mentioned targeted the secondary and tertiary markets. Can you remind us or give us a sense of; I am assuming it's the 50 or 60 expansion in markets primarily that have been three or four ago. Was that the right target to think of?

It's actually probably about 200 markets. And it's a decent size opportunity; it's tens of thousands of these very small firms across the country that we have not historically pursued as aggressively just because we've spent a lot of time flying field sales people out to Lubbock, Texas, and nothing against Lubbock, Texas. So, this is a way to do it, through telesales and keep our cost of sales low, and it's doing quite well. In the first month or so, you know, we sold well over a 100 units. This way I think we will be able to get some good traction here.

And last question related to that. Of those markets I do think probably a good number of them are, at least partial overlapped with the markets that you expanded into during your last investment phase. Can you characterize the revenue percentage of those “small markets” however you want to define it, both on a revenue and maybe a profitability point of the view. Can you give just even a qualitative sense?

Very challenging…

I'll try and address that. I think you know we obviously just expanded into those, so sales are actually, as everybody knows, we take about two years researching it before we even have a product. So, we really have only been starting to sell in those markets for short period of time, and as Andy said, in some of the very small markets like a Lubbock, Texas or a Syracuse, we weren't going to fly people in for the very small account, but those large accounts we would. I would say we are still very early on and I would say a low 5%, it's not huge numbers for CoStar, so as profitability goes, I think we are actually, not exact numbers but I think that we are probably approaching sort of a breakeven point in those and we will probably hit that over the next year or so. So, I think that it's very positive and things are going well in those markets. As people can remember, going into some of these smaller markets. It's much easier to do the research; it's not complex as the larger markets. So the overall cost to do these markets on sort of a per building basis is a lot less than it would be sort of our large core markets. One of the things that strikes me, so remember, markets that are three or four years old are not exciting in profitability over a 20-year history. Markets that are seven, eight years old, nine years old are very exciting for profitability. So you got an awful lot of markets in that young zone. What I would note is that as I look around all those different markets, I am pleasantly, I don't want to use the word surprised, but I will if I wanted a better word. I'm pleasantly surprised by the amount of revenue, little pockets of revenue coming from all these different markets that are again 300 some markets, and I am not shocked by any of them that you think there's nothing happening in here, like there is a lot happening in lot of these markets, but then rather remains for quite sometime that those 20 year old and 15 year old markets will be the big profit and revenue drivers in the business.

And just one final note on that is that when you go back sort of 2007 time period we are dropping revenue from the top line and the bottom line very consistently quarter-over-quarter. What I would always tell people was, remember that whether the markets are profitable or not, we've already put the investment and we already have cost structure baked in our cost of revenue for those markets. So, each dollar that you put on the top line, if I sell $1 or a $1,000 to Lubbock, Texas, I'm paying out some commissions and those types of things, but I'm dropping 70%, 80% of it to the bottom line. So, from here on out, it's very positive every sale on those markets that we get.

That's what I was trying to get at. I appreciate your time.

Thank you. We will go line of Jon Maietta from Needham & Company. Please go ahead. Jon Maietta - Needham & Company: First question I had was if you could just remind me, you've done a great job of getting those customers who have been with you for less than five years, getting that renewal rate up to 88% today. What is the big hurdle rate? Is it mostly attrition typically having within a year or within the first six month, if you could just remind me?

It historically occurred in the first three years with a really tough time. So, you had historically, you probably saw the economy slip. I think you were seeing in first year 20% drop rates, up to something like that. It had some noise and it fluctuated but the real danger zone was the first three years. What we did is we increased the commission structure, but we only paid it out based on pro-rata usage of the product in the first 12 months. So the sales people, if they couldn't get the people using the product in the first 12 months, they didn't get paid the full commission or much commission. As a result, the sales people really got in there and implemented the price right up front and that made the renewal rates climb and the sales drop, so it was a big success. Jon Maietta - Needham & Company: They say compensation changes behavior.

Yes. You know, coin operated. Jon Maietta - Needham & Company: And I guess the other question I had, Andy, around on the analytics front with regard to PPR in particular and as you'll productize that effort. Is there going to be a gestation period and then may be six to eight months from now we'll see a whole slew of modules coming out of PPR, or are you going to incrementally roll out services consistently overtime for the first two or three years.

Yes. I think there have been some minor new products that are not mega-revenue drivers. They are repeat sales index which will start being distributed through PPR as an example of something that only could happen with the merger of CoStar and PPR, our data and Ruijue Peng's mathematical skills. So, that will be a example of a small incremental sort of thing, but what we are doing is we are focusing on utilizing our sales and increasing marketing infrastructure you try to reach more of PPR's potential and hit the cross-selling opportunity. But we will probably be looking at a gestation period of a year or so, after which there is a significant product upgrade that we think will drive revenue in both, the CoStar and regional sort of local markets, as well as the PPR more institutional markets. So, I think we are going to put our head down and build what we think is a pretty good product, combining the strengths of both the companies, and realistically that's going to take a little bit of time and effort. We are not going to try to whip it out real quick, then do it right.

Thank you. We'll go to the line of Brandon Dobell with William Blair. Please go ahead.

Andy, may be some color on what the receptivity is these days to cross-sell or up-sell pitches in the sales force and others? Those things take a while to get traction, but with the improving market, I would think you'd be seeing some sort of letting indicators that people are more receptive, asking for a second callback, that kind of thing. I'm just trying to get a feel for how do I think about the trajectory for the cross-sell opportunity, either it was in the core products or between core analytics or the opportunity was moving to maybe Showcase as the customer last year, up to a bigger number?

Yeah, I think that definitely happens. So, one of the things going into a recession, you have good clients who maybe buying 5 or 6 modules and they shave that down to 3 modules that they really, really need. I anticipate that as we get some recovery, people began adding back modules and people dint have multiple module start picking up modules, and we are in fact seeing anecdotal evidence of that. We are seeing people add additional seats, we are seeing people add additional geographies again. Now, the reality of our business is that it tends to be usually half cross-sell, half new business and it moves up a couple of points, it moves down a couple of points. So, it might move up a couple of points. I am still very focused especially these analytic products on just completely net new customers. I think there is a huge potential for completely net new customers over the next three years in these analytic products. I think that will be a big story. So I hope cross-selling goes up, net new customer acquisition goes up and that 50-50 fight will continue to I guess the upper end. And one other thing is, you mentioned that Showcase thing. You mentioned that Showcase thing, I think our sales team did a great job of ramping that up from zero to 10,000 in about two years. In the process, we probably didn't do a good job as we could have in recognizing those customers weren't just Showcase customers, they were property potential customers. So, only one in seven of those individual Showcase customers are property information customers, leaving six out of seven as prospects for our broader information products. And so what I really want to try to focus the sales force on is going back and cross-selling that group on at the line. And that could double the revenue from that segment, and the head of our telesales group is really focusing on that now. So, I think you hit the nail on the head with that potential.

Okay. And then one quick one for Brian. Any change in terms of how customers are interacting with you guys from a cash flow DSO perspective, they are asking for better terms, longer terms, different terms or has stabilization in the market given the opportunity to come back and get better terms from them?

I mean I mentioned a little bit, but just everything overall is extremely positive and the health of the client base is just night and day compared to last year where clients are really looking to extend. They are making a payment every month, and of course as we go back to conference call scripts, you know, 80% plus of all the people we lost last year really just turned their lights out and shut the phones off into CoStar right before they left. So, really you know, and I sort of talked about that last year, I think once you serve, whoever was unhealthy in the client base was going to disappear and they pretty much did. So I think I look at, you know, bad debt is down, DSOs continue to approve each quarter, our AR is below consensus 2007, we've added two companies and we've added a lot of revenue. So, much improved conditions obviously $11.5 million of cash flow, people are paying us again. They are not extending credit as much, it is very, very positive, and again that was just some other major change in the overall economy, you know it can go up forever like that, but I expect those numbers to basically continue at these types of levels, sort of moving forward which again is very positive for the business.

Thank you. We'll go to the line of Ian Corydon from B. Riley & Company. Please go ahead. Ian Corydon - B. Riley & Company: The decline in the number of, sequentially that was caused by the UK. Is that expected to continue?

So the UK is relatively small part, I mean it's 10% of our business is, and their per unit pricing is lower over there. I think that I believe the big UK firms have now cycled renewals. So we've probably seen the reduction in headcount in subscriptions already and again the big difference in the UK and the US is the surveyors or brokers in the UK are on salaries. There is incentive for the firms to cut people. Here there are on commission. There wasn't incentive for the firms to cut people. So I think that's happened. The other thing is that just sort of tactically or on a noise level, you've got two things going on, you get this sales force in UK all of a sudden going after Showcase, and the real story is they signed up a thousand for our first new international product, but that doesn't translate to net new subscribers. So, you know it's sort of a question of are you using the metrics to manage the business or are you matching the business to achieve the metrics, and metrics are a tool, they are not what we are trying to do here. We are trying to grow the business. So I think this quarter with that I am glad they increased the, I am glad they launch the Showcase quite successfully over there. You know it didn't grow subscribers because they were cross-selling, and I understand tactically what our VP of Sales in the UK is doing, where he is trying to get the headcounts down as low as possible. So, as the UK firms begin to recover, he can charge them some incremental ads back again. So, the metrics you want to report positive metrics across the board everyday, but this time…

I mentioned that a little bit, it's really more just a transfer of costs between quarters. It's when the research training classes go. It's where we send out our ACS postcards. So, I think again kind back to my original guidance, I think it will come back up to those more normalized levels. Because of the size of research having 900 or 1,000 people, that number can fluctuate in the quarter, 500,000, 600,000 from quarter-to-quarter, but overall for the year, again, we are not making any significant reductions there. It will just be shifting across between quarters and when things happen.

Okay. And we will go to the line of Jim Wilson with JMP Securities. Please go ahead.

I guess, Andy, sort of answered my first question which was timing of when you think you complete and or roll out of the AVM product and your real estate valuation tools, but it sounds like sometime next year is most likely?

Yes. And I would probably give you better color on that over the next two quarters as we narrow down the specifications a little tighter. This is what I perceive to be one of our mutli-decadal timeframe. I think it is going to be one of our biggest flagship products. Well, the potential for what we can do here I think is tremendous. I am very optimistic about it. I think it will have a huge positive impact for our customers. And it is an ambitious construction project will take a lot of efforts. It's not something that's going to happen in around two or three quarters, it will be four, five quarters. But we will keep you updated on it as we get more information.

I agree on the prospect given what I've heard from banks, et cetera and the need for something like this. The other question then is just, I was wondering a little bit because I'm not sure I've been able to figure that math out of what average new signed contract values look like in the quarter, either I guess in general or versus the ones that roll off. I know they've been smaller new contracts for a while and I was just wondering if that was changing or evolving as things have gotten a little better.

Jim, I think a lot of things happened this quarter that are going to challenge the analysts to get that. I'll let Brian try to answer that

Yeah, real quick, Jim, on the average contract value, it has been running in the $7,000 to $8,000, $9,000 range and it popped up. Last quarter we talked about the fact that the average contract value for PPR went up to just over 100,000. The prior two quarters we owned and it was around 50,000 in sort of this quarter. It went back down more to a normalized level. So, we just some couple of nice very positive good big contracts come in there. We sold another $500,000 or so cross-sells that's still continuing to go well, but we are sort of back down to a more normalized level. The other thing that decreased just a little bit and I did talk about this on the last quarter. It's sort of like the renewal rates, you can't expect it to go up every quarter, a lot of it depends on the focus in the focus in that quarter of the sales force. As Andy mentioned, we sold over a hundred units of this new product which is a very low end product, and that we are starting to push and it is a subscription product on annual contracts. So it is counted in that number. That probably reduced the average by about 1,000 or 1,500 in the quarter. So, these are numbers that are good numbers to keep tracking. There will be reasons why they go up and down each quarter, depending on the focus of the sales force. But you know all positive reasons why it's going up or going down.

And you did you look forward in your guidance, maybe you would know if there was any big contracts on the horizon of PPR superbig, but is that sort of assuming 50,000 kind of normal rate for the rest the year on PPR contracts?

Yeah, I think we sort of always assume the normalized thing. Obviously, if you get something in that's large or big, you'd rather have that as sort of upside than sort of making assumptions for it and have it not come in. So, when you look at my guidance ranges, I mean obviously, people forget. It was literally only three quarters ago, revenue was dropping. So, I'm of course being cautious. So, I am assuming sort of average stuff and then if something comes in like that, its upside.

Well, with this we are going to go ahead and wrap up the second quarter earnings call and we appreciate you all joined us and we look forward to updating you on our progress next quarter and hope you join us and crossing your fingers that the economy continues to show strength. Thank you.

Thank you ladies and gentlemen. This conference will be available for replay after 1:45 pm today running through August 12th till midnight. You may access the AT&T replay system at anytime by dialing 1800-475-6701 or 1320-365-3844 and when prompted enter the access code of 163614. Those numbers again, 1800-475-6701 or 1320-365-3844, access code 163614. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.