CoStar Group, Inc. (CSGP) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the CoStar Group's Second Quarter 2012 Earnings Conference Call. [Operator Instructions] And also as a reminder, this conference call is being recorded. And at this time, we will turn the conference call over to your host, Director of Investor Relations, Ms. Richards Simonelli. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to CoStar Group's second quarter 2012 conference call. We're delighted that you could join us. Before I turn the call over to Andy, I have some important facts for you. Certain portions of this discussion contains forward-looking statements which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that cause actual results to differ include, but are not limited to, those stated in CoStar Group's July 25, 2012 press release on second quarter earnings results and in CoStar's filings with the SEC, including our Form 10-K for the period ended December 2011, 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 no obligation to update these statements whether as a result of new information, future events or otherwise. As a reminder, today's conference call is being broadcast live over the Internet at www.costar.com. And a replay will be available approximately an hour after this call concludes and will be available until August 26, 2012. To listen to the replay, call (800) 475-6701 within the United States or Canada, or (320) 365-3844 outside of the United States. The access code is 252801. A replay of the call will also be available on our website soon after the call concludes. I will now turn the call over to Andy Florance. Andy?

Good morning, everybody, and thank you very much, for joining us today for this earnings call. As you might expect, this has been a very busy quarter for us. As you know, we've closed LoopNet transaction on April 30. Today, just a few months into integration, we know dramatically more about the potential of the 2 businesses in combination. What we have learned has not changed our investment thesis. In fact, it has strengthened our belief in it and our excitement about the scale of our potential upside here. I'm very happy the way our 2 organizations are approaching the integration process. Both LoopNet and CoStar Group have a very talented team of great professionals. Everyday, I've seen enthusiasm, open communication, hard work and commitment to strengthening our position as the #1 service provider to the commercial real estate industry. Our greatest strength in this combination is the expertise, professionalism and commitment of our 1,900-person-strong team. The core investment thesis behind the CoStar Group-LoopNet merger is that CoStar Group is a great information service and that LoopNet, a great marketing service. In combination, each service could be effectively cross sold to one another's huge client basis. The combined company is the clear #1 player in marketing commercial real estate on the Internet as well as the #1 go-to source of information for the commercial real estate industry. With common customer profiles and content, we believe the combined companies will enjoy significant cost synergies. I would like to begin today's call by telling you what we have learned so far. I will tell you how we expect to pursue the opportunity to upsell our LoopNet members, who are using LoopNet for information to CoStar's information products, while retaining them as LoopNet marketing customers. I will also tell you how we will encourage firms that have listings in CoStar to actively advertise them in the LoopNet marketplace. As you may know, LoopNet has over 100,000 unique paying members now, and over 6 million registered members. In our effort to find the best prospects in this universe to upsell CoStar information products to, we look at several factors. These factors include: Does the client already subscribed to CoStar? Are they marketing more than one listing on LoopNet? Have they been searching LoopNet repeatedly over both the past month and the prior 6 months and perhaps before? Are they subscribing to one of LoopNet's information products? Good prospects may include individuals who do not pay LoopNet to subscribe to a product but nonetheless, they're searching the LoopNet website for free. Right now, we have identified a group of about 130,000 LoopNet users who we believe are good prospects for CoStar Property, Tenant, or COMPS. I believe that 130,000 prospects is more than -- or I'm sorry, I realized the 130,000 prospects is more than the 100,000 paying subscribers at LoopNet, but we have identified many individuals that are using the free search feature of LoopNet as an information source. Overall, this is obviously the largest pool of prospects we've ever had the opportunity to sell to in any acquisition we have ever done in the past. The number is staggering to me and quite motivating. The number of potential sites, clients, or users could differ slightly from the 130,000. In a handful of cases, we might find 3 of these leads working together in 1 company, so if they began subscribing to CoStar, they will become 1 client with 3 users. In some cases, we could find a few LoopNet leads from 1 company to a site, where there are actually might be dozens of potential CoStar users there. Now that we have merged with LoopNet, we have accessed the data in their systems. This is important because we know the names and contact information of these prospects, as well as their search histories. This means we can approach them with a very targeted sales presentation that's relevant to them and educate them on the benefits they can receive from CoStar information products, and show them clearly how the same search done in CoStar provide more information and more depth of data. We can show these prospects the difference between complete and detailed information from CoStar versus a little less so from LoopNet, when you're using it as an information product. In order to learn more about these prospects, we selected and tested one representative market, Chicago. It's a diverse market and allowed us to get a good sample of industry professionals who know LoopNet. Our goal was to understand the scope of the opportunity, the profile of these prospects as well as their priorities, beliefs, needs and attitudes. Ultimately, we wanted them to -- ultimately, we wanted to understand the best way to market and sell CoStar information services to them. We retained a third-party market -- I'm sorry, we retained a third-party market research firm to survey hundreds of Chicago-based LoopNet users and what we learned was quite interesting. These prospects were foremost in retail real estate followed by apartments, office, industrial and then land. They come from both large and small shops, but most typically, they work in 3- to 10-person shops. The majority of them are full-time commercial real estate brokers, followed by investors and appraisers. What we learned is that these prospects are not dissimilar from the profile of clients we currently have. 86% of these LoopNet users said the information they access from commercial estate websites like LoopNet is critical to their success. 97% LoopNet users said that it's important that the website they use has the most accurate data on properties in their market. Not one respondent said that the accuracy of data was unimportant. The overwhelming majority said that it was important that the site they use have a complete list of properties for lease or sale in their market. The bottom line is clear, I believe, access to quality and complete commercial real estate information is critical to their success and they know its importance. According to the survey results, half the respondents stated that paying the lowest price possible for access to a commercial real estate website was not an important factor. They value the quality of information over the price they paid for it. One of the respondents summed up the opportunity perfectly by saying, "As a commercial real estate consultant, it's necessary to have the most information available. Our top priority is to provide quality consultation to our clients. The fees are an afterthought." So they're looking for the highest quality information and price is not the most important factor. So my clear takeaway is that half the LoopNet users are using LoopNet is an information source because they believe it to be the highest quality source available, or at least roughly as good as other sources out there but at a slightly lower price. I believe that in many cases, they believe that CoStar might be the best source for certain areas whether they're in commercial real estate market but in the area that they work and they believe that LoopNet has higher quality information. Only 20% of LoopNet users surveyed believe that LoopNet has less listings for Chicago than CoStar does. For those where retail real estate is their primary practice area, only 11% believe that LoopNet is -- doesn't have as much information as CoStar, or more. Not one of the principally land-focused LoopNet users thought LoopNet had less listings than CoStar. In other words, the majority of LoopNet users surveyed believe that LoopNet is a more comprehensive, or at least as comprehensive, information source as CoStar. For most LoopNet users, we believe the misperception that LoopNet has more information than CoStar is an important decision for them to start subscribing to use LoopNet as an information source rather than CoStar. Are these LoopNet users correct? Does LoopNet have a more comprehensive database of listings for Chicago than CoStar does? Before LoopNet and CoStar merged, that was very difficult for anyone to answer with any real certainty. Now, 3 months post merger, our respective teams have jumped right in and connected and cross-references the databases and we can clearly demonstrate the differences in the databases. CoStar has the most listings by far. As of today, our research team has successfully completed a massive effort to comb through the LoopNet database and find any commercial estate listings that were in LoopNet's database but not in CoStar's database. The connections made as a result of cross-referencing the databases have allowed our researchers to strengthen the relative information advantage that CoStar has. They examined more than 225,000 LoopNet listings that our systems teams could not automatically match to our database, and in the process they found and added 50,000 new listings to the CoStar database. In addition to adding just listings, they've also found thousands of new people with listings to initiate regular contact with. So let me clarify the facts and how the 2 databases compare. Remember, that LoopNet's primarily a marketing system and predominantly relies on user input for all their listing content. CoStar, in sharp contrast, has a staff of just about 1,000 engaged in proactively collecting commercial real estate information. So not surprisingly, but contrary to what most LoopNet users believe, our CoStar database has roughly twice as many commercial real estate listings in the U.S. as our LoopNet database does. Beyond that, CoStar has dramatically more depth of data on these properties and listings. In every one of the 200 largest U.S. cities, CoStar's database has significantly more properties than LoopNet's database does. Remember that only 20% of the surveyed Chicago LoopNet users thought that CoStar had more listings than LoopNet in Chicago. The majority of LoopNet users surveyed think that LoopNet has more listings in Chicago, or the same as CoStar does. And it's now clear that majority is absolutely completely wrong. CoStar has 34,730 listings in the Chicago CBSA and LoopNet has 17,848. That means that someone using LoopNet has an information source that's missing nearly 17,000 listings, or roughly half of all listings. Obviously, that's unacceptable for someone making a living showing clients all the possible listings for their requirements. Many LoopNet users surveyed, or interviewed in great depth in various focus groups we conducted, really believed that LoopNet had many more retail listings, for-sale listings, small-building listings or land listings. That may or may not have been true in the past but certainly not now. CoStar has 218% more for-sale listings, 206% more retail listings, almost 300% more listings in buildings smaller than 15,000 square feet and 273% more land listings than our LoopNet database for Chicago offers. Most importantly, every valid listing in LoopNet will be in CoStar. For years, we've heard from many clients and prospects and focus groups in meetings that they would really love to have a one-stop shop for a complete listing data that combine the listings in LoopNet and CoStar into one place. Now, we can credibly offer them exactly what they want and need. Most importantly, at the end of our survey, we also told the Chicago LoopNet users that CoStar has twice as many listings than our LoopNet service does and we asked them, knowing the information, how likely would they now be to subscribe to CoStar for their commercial real estate needs. 56% stated that they would now be very likely, or likely, to subscribe to CoStar. 29% stated they were unsure, so that they would need some selling to subscribe to CoStar's information service. Only 15% stated they would be unlikely to subscribe. We believe that our survey suggests that the 130,000 LoopNet prospects in theory, somewhere in the neighborhood of about 70,000 would be likely to subscribe to CoStar for their information needs if they really came to believe that CoStar contained twice as much information on their market than the LoopNet service they've been using for information. We are focusing our immediate efforts across the U.S. on them. Time and again, in focus groups, we have learned it is hard to change long-held beliefs about the relative quality of these databases, especially if accepting a different view might imply that the broker have provided incomplete information to their clients over an extended period of time. Now that the 2 companies have merged, we believe it will now be dramatically easier to change their minds and get them to accept and internalize a belief that CoStar provides a dramatically more complete picture of the market. Last month, we took what we learned from linking our listing and client databases, our surveys and focus groups and we set 24 demos in Chicago over a 2-day period with LoopNet users who have used LoopNet as an information service and did not subscribe to CoStar. Our goal was to see how effectively we could sell CoStar information services to these LoopNet prospects. In the demo, we confirmed for them that LoopNet is the most heavily-trafficked website for commercial real estate, and that it was a critical resource for them in marketing their properties to large Internet audience of tenants and investors. LoopNet users viewed millions of detailed profile views in Chicago over the prior year, and that could generate leads for their listings. We then explained to them that all the listings on the LoopNet service would be in CoStar and that there were nearly 17,000 additional listings in CoStar added by our research department that they could not find in LoopNet. We went through comprehensive comparisons between the 2 databases looking at retail office, land for sale, for lease, so on and so forth. I did 4 of those demos and on 2 of my demos, we were able to get a contract right there and then. Another demo we did was to a large brokerage firm, about 30-some brokers, and while it did not close on the spot, which I would not expect to happen with a large brokerage firm, I believe it will close within a month or so. One of the sales I was involved with was to a 2-person brokerage shop that have been paying LoopNet $159 per month on a month-to-month basis. They entered into an annual contract for CoStar information and LoopNet marketing with us for $730, a month, a 359% monthly increase. They increased their contract commitment from $159, to $8,760. The second 2-man shop I was involved with, signing up that day, increased their monthly payment by 900%. The large 30-broker firm I mentioned is paying LoopNet $187 a month on a month-to-month basis and our proposal would be in the $8,000 to $10,000 a month range on an annual contract. Of the 24 demos we conducted on these 2 days, 13 have already signed annual contracts and the majority of cases, it was for both LoopNet for marketing and CoStar for information. So we were gaining CoStar revenue and not losing LoopNet revenue. So in total, 54% of our demos resulted in a signed contract within 2 weeks of the original demo. That far exceeds any close ratio, or time to close, we normally experience. We believe that eventually, approximately 80% of those 24 demos could close. What's interesting to me is when I compare that to that survey question of, if you were to learn that CoStar has twice as many listings, would you be likely need some time -- likely to subscribe to CoStar or need some time to think about it or not? Our results here actually matched that survey, which is really quite promising consider that implies across the whole country. In total, we've converted 15 LoopNet users in Chicago this month, taking them from an approximate aggregate LoopNet fee of $1,425 a month on a month-to-month basis, to $8,873 a month with combined LoopNet and CoStar purchases on an annual commitment. We increased our monthly yield on these accounts by 500%, and we increased our contract value by 7,000%. Interesting to note and important, 6 of the 15 converted LoopNet users were not paying LoopNet anything at all prior to conversion, they were free basic users searching heavily but not paying for premium service. Within a week of our successful Chicago experiment demos, we brought 200 LoopNet and CoStar sales people together in Dallas for a sales conference and training session, so that we can begin to scale our Chicago trial to a nationwide cross-selling effort within the next month or so. In addition to signing LoopNet users CoStar information products, we will also be approaching firms to encourage them to advertise their properties in loopnet.com. As we mentioned, LoopNet's the most heavily trafficked website in commercial real estate. Yet surprisingly, only about 17% of the listers in the United States for commercial real estate pay for listings on loopnet.com, leaving 83% as the potential target market. There are about 500,000 listings that CoStar was aware of that were not in LoopNet that opened up a whole new prospect universe for LoopNet to sell advertising to. LoopNet built a great brand and a successful product by selling advertising contracts on a monthly basis, one broker at a time. It's effective, but it results in much higher churn rates. We can believe that we can grow LoopNet even larger by selling premium lister, at the firm level, on annual contracts rather than just in individual-basis subscription. So we think that those annual contracts will decrease customer turnover. We are very bullish on the revenue potential across signing LoopNet and CoStar products so we intend to increase our investment in marketing for the second half of this year. I'm very proud of both the LoopNet team and the CoStar team, as their hard work continues to move us rapidly towards realizing the full potential of this merger. Post merger, we have restructured the LoopNet senior management team to best realize the potential of the merger. LoopNet executives, Fred Saint, Mike Handelsman, Bryan Smith and Wayne Warthen have all been key contributors with LoopNet for many years and have taken charge of several key areas of the company as follows: Fred Saint as President of the LoopNet Marketplace, responsible for the company's product, marketing and business development. As we already know, with approximately 3.6 million unique visitors a month, loopnet.com is a powerful force in commercial estate marketing. Working closely with me, Fred oversees product roadmap and product development at the LoopNet Marketplace. Fred joined LoopNet in 2007 with the acquisition of cityfeet.com which he founded in 1999 and successfully led from startup to profitability and its eventual acquisition by LoopNet. Mike Handelsman is President of LoopNet Marketplace Verticals, and is responsible for the Business For Sale and Land sectors, including BizBuySell, bizquest.com, Lands of America and Land and Farm. He's also responsible for our CRM system RE [ph] applications. Mike joined LoopNet as General Manager of bizbuysell.com in 2006, he is responsible for growing each of these verticals. Bryan Smith is President of LoopNet Sales & Customer Service, and is responsible for overseeing and managing LoopNet's significant sales and service teams. He's responsible for overall sales and service strategies, as well as leading the advertising sales business. He's working closely with myself and John Stanfill who, as you know, is the Head of Sales and Customer Service for CoStar. Bryan joined up the LoopNet team in 2003. Wayne Warthen is LoopNet's Chief Technology Officer and Senior Vice President of Information Technology. Wayne joined LoopNet in 1999 and directs LoopNet's data center and network operations, and oversees design and development of the company's web and software applications. Wayne is working closely with our team, Frank Simuro, our Chief Information Officer. All 4 of these executives are doing a fantastic job and it's a great honor and pleasure to work with them. In addition to LoopNet, I'd like to update you on other important company initiatives. While we've been doing the LoopNet merger and integration, we've made tremendous progress towards our goal of converting our U.K. operations and clients from an antiquated U.K. technology base into our much more powerful and efficient and attractive U.S. product and technology platforms. As of last month, our entire United Kingdom database, which contains 20 years of information, has been migrated from the U.K. input system to our U.S. technology platform. And at this point, the U.S. technology platform is backfeeding the content into the legacy U.K. information products. We've also converted their fulfillment and CRM systems to our U.S. technology platform. Now all U.K. researchers are inputting and updating data using our U.S. enterprise platform. Before the London Olympic closing ceremonies are done, we expect to have CoStarGo U.K. up and running. We anticipate the rest of the CoStar U.K. product suite will be complete by early fall. This is a culmination of 12 months of intense and excellent effort by 40 of our best software people in the U.S. and in U.K. and our 110 researchers in Glasgow. We'll do a CoStarGo rollout in the fall in the U.K. From a sales perspective, the U.K. business reported nearly $1 million in annualized sales for the first 6 months of the year. We believe that we can upsell U.K. clients this enhanced technology platform and achieve significant acceleration of revenue growth in the U.K. in the latter half of this year, next year and beyond. Back in the U.S., we have a couple of noteworthy initiatives. Our recent acquisition, Virtual Premise, is expected to release 2 significant product enhancements this fall. First, we expect to bring Virtual Premise's tenant retail and real estate management software platform to mobile and tablet devices, increasing the visibility of portfolio and lease information for its retailer bank and corporate real estate customers. Second, we expect to deliver the first phase of integration of CoStar data into Virtual Premise. We've gotten a very positive reaction to that from our clients there. It will enable customers to see relevant CoStar data side-by-side with their own portfolio data. This is only the beginning of putting more information, decision-making power in the hands of the Virtual Premise customer base and exactly what we intended to do when we purchased Virtual Premise last fall. In the fourth quarter 2012, PPR expects to launch a multifamily data and analytics service based on research developed with CoStar's research team. We believe that we have now surveyed the more apartment communities than anyone else in the business, and that we have the largest and most comprehensive database for the apartment industry. Demographic analytics such as population income combined with unit-level asking in effective rents and vacancies will provide unparalleled source bar [ph] for such things as lender underwriting, apartment rent setting, redevelopment and ground-up feasibility studies. We also expect to launch CompassFLEX, which is a customizable analytic tool. It enables users to find custom credit scenarios from a selection of economic forecasts, confidence levels and mortgage risk parameters to model loan level defaults losses and related recoveries, as well as interest shortfalls that may impact cash flows to certain bonds within CMBS deals. FLEX gives users more control to evaluate bonds across multiple scenarios and it provides a more accurate projection of the timing of cash flows which is essential for appropriately evaluating the risk return proposition of both safer premium bonds and the riskier discounted bonds in CMBS. In the second quarter 2012, Resolve released a new dashboard for REQUEST. With the industry's heightened focus on data visualization, Resolve's new dashboard has more attractive graphics, more end user capabilities and improved drill-down to underlying detailed capabilities. Let's touch on commercial real estate conditions briefly, which right now are looking fine for CoStar and actually -- are actually pretty solid. The office market improved in the second quarter of 2012 with vacancy down 20 basis points to 12.6%. Net absorption of 18 million square feet for the quarter was double the 9 million square feet in the prior quarter. The 62-million-square-feet absorption for the year were running fairly close to long-term averages. We expect demand to remain positive at 10 million square feet to 25 million square feet of net absorption per quarter, and to show more growth as fears about the current economy recover diminish over the next few years. The steady demand is very good for brokers. Although office rents have been flat in many markets for the first time since the recession, we're seeing a small, just under 1-point, rise in asking rents year-to-date, with technology market showing the highest rent growth. At San Francisco, rents are up roughly 16% in the past year. The office sector has significant upside in rents relative to most other property types, which in part represents past distress and a low level of rent versus replacement cost rents. Office sales have also returned to normal levels, and as of the second quarter of 2012, sales were on pace to match 2011. Annual office sales volume reached $75 million -- billion, b, with a billion, for 2011 which is near the $80 billion, 10-year average. Improved financing conditions have allowed for the return at large building in portfolio sales for the first time since late 2007. So in conclusion with second quarter revenue increasing 37% year-over-year to $85.2 million, 96,096 paying CoStar subscribers with a 94% renewal rate and 100,507 paying LoopNet subscribers, I believe it's clear that our business is healthy, growing and has great prospects. As we continue with the integration of LoopNet throughout the second half of 2012, we are more than excited about our prospects in 2013 and beyond. We believe that our employees, clients and shareholders will benefit from our larger, stronger combined company as we continue to expand. Before I turn the call over to our Chief Financial Officer, Brian Radecki, I would like to congratulate said Brian Radecki, for becoming -- being named as Chief Financial Officer of the Year, large company category. He was honored to be the CFO of the Year, I was honored that it was in a large company category. And you'll be glad to hear that Mr. Radecki still remains humble and focused on his work. In fact, he's working out here in Glendora this summer and he has selected a modest office space here. As I looked around for Mr. Radecki yesterday, I found him in his office, which is labeled Accounting Storage 2. And the office manager was really quite dismayed that the CFO of the company wanted to work in an interior storage room, she insisted on removing the cabinets. But I just thought if he had an ego, he'd be in Accounting Storage Room 1, not in Accounting Storage Room 2. So with that, I'll now turn it over to our Chief Financial Officer, Brian Radecki.

Thank you, Andy, and appreciate the kudos, which I think I've said before, it's really a team effort, the entire team at CoStar, so I accept the honor on behalf of the entire team. As Andy mentioned, we are very pleased with our performance in the second quarter of 2012, we closed LoopNet acquisition at the end of April. It had included 2 months of LoopNet's financial results as well as some significant acquisition and integration related cost in the second quarter of the consolidated financial statements. Today, I'm going to primarily focus on year-over-year comparisons for the second quarter, on our outlook for Q3 and the remainder of the year and a peak into how we think the next few years will develop. Now to review CoStar Group's results for the second quarter of 2012 beginning with revenue. The company reported $85.2 million of second quarter 2012 revenue, an increase of $23.1 million, or 37.2% compared to revenue of $62.1 million in the second quarter of 2011. CoStar's organic growth rate continue to steadily accelerate in the first half of 2012 compared with the organic growth rates we witnessed throughout the 4 quarters of 2011, which were in the range of 8% to 12%. CoStar's revenues increased 13.8% from the second quarter of 2011, continued by strong sales performance and a small one-time revenue item in the quarter. LoopNet annual revenue on a pro forma basis, before any adjustments, grew 10.7% year-over-year for the second quarter of 2012, which is relatively consistent with their 2011 reported annual growth rate. Therefore, the combined business is currently growing in the approximate 11% to 13% range in a pro forma basis, before any accounting adjustments. We believe that we can continue to accelerate revenue growth rates with the cross-selling and synergy opportunity Andy discussed. We reported a net loss of $6.7 million, or a negative $0.25 per diluted share during the second quarter of 2012 based on 26.5 million shares. These results reflect $9.5 million of acquisition and integration-related expenses incurred in the second quarter as well as an unusually high tax provision of $5.6 million, driven by the costs related to the LoopNet acquisition that reduced GAAP earnings but are nondeductible for tax purposes. I highlighted this expected high tax provision last quarter and also alluded to our favorable tax position on a cash basis. Specifically, as a result of the lost carrybacks, we received a tax refund of approximately $9 million during the second quarter and we expect to receive another refund of approximately $3.5 million in the back half of the year. Additionally, we expect to receive further tax benefits which we estimate will result in approximately $16 million in cash tax savings at the back half of 2012 and the first half of 2013. Pretty nice. Non-GAAP net income increased $3.2 million or 43% year-over-year to $10.5 million or $0.39 per diluted share in the second quarter of 2012 from non-GAAP net income of $7.3 million or $0.33 per diluted share in the second quarter of 2011. Adjusted EBITDA for the second quarter of 2012 was $20.4 million, an increase of $6.1 million, or 42% compared to adjusted EBITDA of $14.3 million for the second quarter of 2011. Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA and all the non-GAAP financial measures discussed on this call, to the GAAP basis results are shown in detail, along with definitions for those terms in our press release issued yesterday, and will be available on our website at www.costar.com. The company had $129 million in cash and investments and $173 million in debt as of June 30, 2012. This represents a modest level of leverage given the strong cash flow generation of our business. At this point, I'm going to give some operating metrics for CoStar and the LoopNet businesses, which demonstrates that both businesses performed very well in the second quarter. As we integrate the businesses, we do not expect to continue to give all these separate metrics and may introduce some new combined metrics. Net new sales from existing CoStar businesses, totaled $8.2 million, an increased of 16% year-over-year, sold by approximately 209 sales reps. The acquisition of LoopNet adds 117 sales reps to our existing sales force for a total sales headcount of 326. This combined sales force has begun to focus their combined energy on the exciting cross-selling opportunities we see in the front of us, and Andy discussed earlier. Our existing CoStar customers continued to renew at very high rates during the second quarter of 2012. The 12-month trailing renewal rate for CoStar subscription business increased to $93.7 million, which matched our all-time high for this important metric, which was back in Q1 and Q2 of 2006. This is a 1.5% improvement over the 92.2% from 1 year ago. The renewal rate for subscribers who have been with us for 5 years or longer was a remarkable 99%.

Seriously?

Seriously, all-time high. I wasn't sure it was possible. I had the Yinger Group check it 5 times. The in-quarter renewal rate was 94.3%, just above last quarter's 94%, up from 93.2% in the second quarter. As discussed in prior quarters, one of our large customers, Grubb & Ellis, now Newmark Grubb Knight Frank, filed for bankruptcy in the first quarter of 2012. We expect that contract will be renegotiated. However, if the contract is eventually terminated, it would have a significant impact on our short-term renewal rates, reducing the in-quarter renewal rate by up to approximately 5 percentage points. And the annualized renewal rate by 1 to 2 percentage points. We believe our revenue guidance for this year adequately accounts for the uncertainty related to this customer. Additionally, we received a termination notice from RMS, a DMGI-owned company, that has a data license with CoStar. In connection with the closing of the LoopNet merger, and as mandated by our consent order with the FTC, LoopNet sold its interest in Xceligent to DMGI and has now become one of our primary competitors. The termination is expected to have a one-time impact in our in-quarter renewal rate in the fourth quarter of 2012 of approximately 1%. At the end of the second quarter 2012, the existing CoStar business had 96,096 paying subscribers while the LoopNet business had 100,507 paying subscribers, so one or more of LoopNet's commercial real estate_ related services. Both subscriber numbers increased compared to the first quarter of 2012 and the second quarter of 2011. In the quarter, CoStar products featured 1.5 million listings while the LoopNet commercial real estate marketplace included 823,000 active listings. As Andy discussed earlier, we're making great progress in aligning the CoStar and LoopNet databases in an effort to ensure our information services provides customers visibility with respect to all available listings and to enhance the value we provide our customers. For all the Loopsters on the call, a few Loop numbers. LoopNet premium numbers increased to 77,279 compared to 75,829 in the first quarter of 2012, and average revenue per premier member, ARPU, increased to 66.04 compared to 65.59 last quarter. Profile views in the LoopNet marketplace totaled 107 million for the second quarter of 2012 and LoopNet registered members, including both basic and premium users, totaled 6.1 million as of June 30, 2012. Total unique visitors to LoopNet-owned websites tallied nearly 5.6 million according to Google Analytics. Essentially, our early insight into the LoopNet marketplace gives us confidence that we can drive significant additional value by introducing long-term CoStar customers to the marketplace, increasing sales at the firm level and focusing on long-term subscription agreements. I will now cover results from our income statement for the second quarter and also provide our outlook for the third quarter and full year. Gross margins were $57.1 million in the second quarter of 2012, up compared to $39.7 million in Q2 of '11. Gross margin percentage was $66.9 million, a 3 percentage point year-over-year increase over the second quarter of 2011. We expect to see gross margins expand further for the remainder of the year. Total operating expenses in the second quarter of 2012 was $57.1 million, an increase of $21.3 million compared to the $35.8 million in the second quarter of 2011, primarily due to 2 months of LoopNet expenses in the quarter. Additionally, as I mentioned earlier, we recorded $9.5 million in acquisition- and integration-related costs. Most of these costs will impact G&A expenses, but some of the other lines were impacted as well. Turning to our outlook for the third quarter of 2012. Following outlook reflects the current expectations as of today, takes into account recent trends, revenue growth rates, renewal rates, which may be impacted by economic conditions in commercial real estate or the overall global economy. Actual results may vary for these estimates. Is that good, Jon? Got it? Okay. As we continue the LoopNet integration process, we will consider alternatives for certain services from the 2 companies that overlap or create confusion among customers. We may reduce new sales efforts in some areas, or discontinue certain services within the boundaries established in our consent decree with the FTC. We would undertake such changes only if we believe they are accretive to the business in the long term but this could lead to negative short-term impacts in revenue or earnings. We believe the revenue and earnings guidance we are providing account for these possible changes. Based on the continued strong trends in sale and revenues, we are increasing the low end of our 2012 revenue guidance range to a range of $345 million to $349 million. Remember, we just put that out 2.5 months ago, we're increasing the bottom. For the third quarter 2012, we expect approximately $94.5 million to $96 million in revenue. While we are pleased with the strong sequential revenue growth rate so far this year, we do expect a more moderate rate in the fourth quarter, mostly due to the seasonally weaker Q4 for LoopNet, and in part due to termination notice I mentioned earlier. Consistent with strong revenue trends, we're also raising the low end of our 2012 estimates for non-GAAP net income per diluted share to a range of $1.40 to $1.52 per share based on 26.9 million fully diluted shares, which includes the additional marketing spend in the second half of the year. For the third quarter, we now expect non-GAAP earnings per diluted share of approximately $0.38 to $0.42. As Andy discussed earlier, we plan on launching a substantial cross-selling initiatives that we believe will drive considerable long-term growth benefits for both CoStar information services and the LoopNet marketplace, although the exact timing of these marketing initiatives may vary. We are planning to reinvest the benefits of our strong year-to-date performance in the form of those significant marketing initiatives in the third and fourth quarters to support these critical sales initiatives. We estimate the impacts of these initiatives on our non-GAAP earnings to be a couple of pennies in the third quarter and again, total $0.10 to $0.12 for the year. If we execute on all the marketing initiatives being considered, we expect to be in the bottom half of our non-GAAP net income diluted share range for the year. Also included in earnings guidance, as we discussed last quarter, the company continues to invest in development of CoStarGo and CoStar Suite in the U.K., which Andy mentioned. But we expect to incur costs to successfully launch these services in the U.K. market in the fourth quarter of 2012. We expect the launch of these products in the U.K. to be accompanied by approximately $700,000 in marketing spend. While this will impact the profitability in our U.K. segment in 2012, we expect these new products to accelerate revenue growth in the U.K. and begin to drive improvement in U.K. EBITDA margins in 2013. In summary, I'm very pleased to be able to share with you the strong second quarter results included with the combined CoStar and LoopNet businesses for the first time. While the results included some significant acquisition-related items in a partial quarter for LoopNet, the underlying business remained very strong and we have been able to maintain the momentum in both businesses as we began integration efforts. Additionally, we have begun to take actions that we believe will deliver the $20 million in annualized cost synergies, we expected when we announced the deal and remain confident in our ability to achieve these synergies within 24 months of the merger close. More importantly, based on our early cross-selling success, we believe more than ever in the revenue opportunities that are achievable by integrating these 2 great businesses, and introducing both customer bases to the outstanding value available by subscribing to both our information in analytic services as well as the industry's leading marketing solutions. CoStar is engaging with customers along the full spectrum of commercial real estate marketplace from mom-and-pop shops to the biggest names in the industry, and across the wide range of customers from brokers to owners, investors, banks, retailers, appraisers, just to name a few. We see an enormous opportunity for growth as the industry leader with the most complete and growing set of products and services to support this varied customer base. Based on the current health of the business, potential synergies and opportunities in front of us as the result of the LoopNet merger, which closed 2.5 months ago, we want to set a goal of $500 million in run-rate revenue by the end of 2014 with adjusted EBITDA margins in the low- to mid-30% range. We believe that this is an achievable benchmark that sets us on a realistic path towards our long-term goal of $1 million in high margin revenue. And with that, hopefully it was worth the wait, I'll open up the call for questions.

[Operator Instructions] And we'll take our first question in queue from Bill Warmington from Raymond James.

The -- a couple of housekeeping questions, the -- I wanted to ask what the CoStar, or are they actually the LoopNet revenue contribution was? I wasn't sure if I caught that on a stand-alone basis.

I don't think we've put it on a stand-alone basis, but we gave you the pro forma before adjustments, it grew year-over-year at about 10.7%. I think the businesses are combined so we're going to continue to report a combined number.

Okay. So is there a way to get to the CoStar revenue without Loop, is what I'm trying to back into...

I think we gave the year-over-year growth rates on that, too, on an organic basis, so I think that was 13.8%.

And then it's important to note that going forward, there's going to be a lot of revenue moving back and forth between these entities. So if we're taking somebody from $89 of information or in product in LoopNet over to $509 of CoStar-ran revenue, you're going to see -- it'd be difficult for it to track what's happening there and what's actually original LoopNet revenue, what's original CoStar revenue. So it will get very blurred pretty quickly. What will be more relevant is probably total marketing revenue and total information revenue.

What I can tell you, Bill is that when we announced the combined company's guidance, I gave a range of the CoStar's business to $70 million to $71 million, I can tell you we came in much above that number. And then, you get back in the Loop number, they came in much above the guided number, too. So both businesses, it wasn't like one did better than the other, they both were above the guided range, which is you can see the combined numbers of 85.2, well above the guided range. So that's...

Got you. On the marketing spend, the -- it looks like it's about $2.2 million to $2.7 million, I want to make sure that, that number is right, does that include the $700,000 in the U.K.? And I just was going to ask how you plan on -- some detail on how you plan on spending the incremental marketing spend?

Yes. I'll answer the first part and I'll let Andy answer the second part of it. The marketing spend -- now the U.K. is a separate number but again, it's all included in the guidance. I think your number is a little bit low, you'd have to sort of divide by the number -- you have to multiply by the number of shares and divide it by sort of the non-GAAP EPS tax rate of 38%. So your numbers are probably a little bit low, but the U.K. is not included there, but of course both of them are included in the guidance number. The timing -- we're working through the timing of that now so it might be late in Q3, it might push into Q4, it might push in a little bit next year, I think there'd be a big push in Q4 for sure. So that's why it's a pretty big range and the majority of it will hit in the fourth quarter. And so that will depend on where we end up in sort of our guidance range. And I'll let Andy talk about sort of what his thoughts are around the details of the marketing.

Sure, I'd be happy to. So in the U.K., obviously it's a much smaller number of cities, a smaller economy. It will be a rollout of the CoStarGo app similar to the one we did in the United States with event-based marketing but just a much smaller scale because it's a smaller country. And that was very successful for us here in the U.S. So it's just a repeat of that. Then you have to consider those 130,000 leads and you're going to want to communicate with them with at least 4 pieces of direct mail along with supporting electronic initiatives. And then on the LoopNet side, creating -- we want to create awareness among the million listers in the -- million listings universe of CoStar for -- we want to let them know about the opportunity to generate greater awareness that are listings in the general business community, investor community through again a series of direct mail campaigns. We retained an agency in San Jose, that's done a great job putting together a campaign. We're going to be communicating with the people who broker the listings as well as the owners behind the listings. And we're going to do one marketing event that I'm not going to talk about and you couldn't imagine it in your wildest dreams, you'll see it on YouTube, I think you'll agree it's sort of funny and useful and effective. So we just believe that the opportunity is there. There's never -- if I'm a broker in San Diego working for CB Richard Ellis, it doesn't have any listings in the LoopNet systems, I don't think that person's ever considered trying to generate more leads for their listings using LoopNet. They've never received a direct mail piece from LoopNet, they've never received any sort of marketing from LoopNet, so I want to -- I mean any sort of traditional marketing media from LoopNet, so we want to break that ground quickly.

Okay, Well now the Chicago tests sound very promising and I wanted to ask, what -- a couple of things. One is your thoughts on what it is -- and we went through some real detailed statistics but conceptually, what it is that has kept people from switching over from LoopNet to CoStar in the past and how are you going to overcome that? And then the -- also how you plan on attacking the markets? You'd go after the larger ones, smaller ones, how do you plan to do that?

We'll definitely do a staggered lead system. We're going to migrate more people from our centralized operations into field operations to try to scale the number of people we've got in the field to deal with the opportunity. We'll definitely pursue some of the more likely leads based upon search activity, intensity of search activity, tenure inside the LoopNet system, and we will allocate out these leads to sales people, based upon their success in closing the leads they do receive. We feel comfortable with -- I mean we spent a fair amount of time and effort in researching how to present the products to these prospects. We -- I mean the reason they weren't considering it before is because LoopNet and CoStar Group were not one company, neither company could make the promise of having a one-stop shop where all the listings were in one place. Neither company could effectively communicate what was happening in a multimillion record databases that were changing by the hundreds of thousands every day, just it was too complicated. Now with one uniform back end, you can clearly communicate it, your message is completely credible, because they know that your briefcase has both LoopNet and CoStar. And so we're pretty excited about it. I described it briefly -- coming out that day in Chicago, I have described it briefly as the most exciting day of my life.

Our next question in queue will come from the line of Brandon Dobell with William Blair.

A couple of things. First, I guess if I were to add up all the different metrics you guys have given us the past several quarters, it would be like 1,012. I'm trying to get an idea on a go-forward basis, are we going to get some consistent metrics like LoopNet used to provide on paying premium subscribers, that kind of stuff, so we can start to model this thing a little bit more accurately, if I guess on both the CoStar side, and the LoopNet side? Or how should we think about what metric should be the ones that we should be paying attention to that you guys are going to give us.

Yes. So Brandon, it's Brian. So actually, if you went through the call, the reason why there's so many metrics because I gave pretty much almost every metric that CoStar had been giving in addition to every metric that LoopNet has been giving, so if you go back through it, you'll see all of them. And so we didn't really take any away, we gave the premium member number, we gave what they call ARPU, average revenue per member, we pretty much gave -- we gave the CoStar bookings number, I mean, we gave every number that each company always does. So it has been only 2.5 months, so we are looking at which -- how do we sort of combine these. We're obviously going to skinny it down and not give so many numbers. It's sort of funny, some people want more data and metrics and then other people want it streamlined. So we are going to streamline it, that's what I was saying. I think that -- obviously continue the renewal rate and the CoStar bookings numbers, are going to be is relevant because 75% of the business is still sort of CoStar, core CoStar information services. And I think that the LoopNet stuff will sort of be toned down a little bit, but we'll also come up with some new combined numbers. So next quarter I think we'll give you a little bit more clarity on some of those numbers. But if you go back through it, we gave you all of them.

And Mr. Dobell, another thing that's going to be a little tricky is we don't want to spend too much time and energy focusing on the total LoopNet premium customers and the number of CoStar users. Because over the last -- over the next 12 months, I think that number will be a little deceptive because you don't quite understand the overlap in the duplicate level. Within -- our goal will be to try to integrate -- for exactly that reason, we're going to try to integrate the back ends of LoopNet and CoStar Group on an expediated basis. We'll make it a higher priority for the company. And the benefit, among other benefits -- one of the benefits will -- is that we'll be able to give you a -- just a unique customer number for the combined company that will actually allow you to effectively measure how we are doing in terms of capturing the scope of the opportunity. But when you're looking at LoopNet premium and CoStar members, that's going to have duplicative -- it's going to have overlap.

Okay. And then Brian, I wanted to clarify something in your remarks about the run rate. Exiting '14, you said low- to mid-30s adjusted EBITDA margins, is that for the whole of 2014? Or should we think of that as a fourth quarter -- potential range for 2014?

Yes. I think both numbers are sort of an exiting run rate. And I think that's sort of the goal we're putting out there today. Obviously, Andy and I are very competitive, we like to beat goals, but the goal of $500 million run rate at a low- to mid-30% range exiting '14, which I think is a pretty good number. And that's really with all the things that we've talked about today sort of organically. So I think that again -- Andy and I obviously will do our best to do better.

Right. And then final question. Organic growth rates at both companies, a little bit faster than we thought we'd see it at CoStar, but pretty much in line with LoopNet. The CoStar organic growth rate, maybe some color on the puts and takes as we think about the next couple of quarters? You mentioned the Grubb and the DMGI termination in Q4 as potential noisy bits. But what else is out there that could move that organic growth rate around? And/or I guess in the back half of the year, are you assuming any material difference in those organic growth rates within your guidance? .

Yes. I think last year we were anywhere from 8% to 12%, so it's fairly, steadily accelerating. Obviously you can see, we continue to accelerate for the first half of this year. LoopNet's, obviously, running at lower growth rates. So as a combined company, it obviously brings down the combined number. There are -- there is lots of noise in the back half of the year, accounting adjustments, deferred revenue adjustments. I did talk a little bit about -- we are evaluating various services that the company has that we might deemphasize or decide not to do anymore. We factored all that into there. So there is going to be a lot of noise in those numbers. But I think the 11% to 13% range, factoring in all that noise, is sort of a good range. And then obviously, as we see how those cross-selling goes -- I mean it's obviously going to be a big topic of conversation on the next couple of calls, what kind of results we see. Then, we can then give a little more clarity for next year. But clearly, I don't -- talking about all of those numbers, there's a good range out there for next year. And as we get more clarity in the cross-selling, hopefully, again, we can do better. But there is a lot of noise in the back half of the year, and I think I mentioned here, the fourth quarter typically -- again, I mean, everyone on the call has been following LoopNet, too. It's typically seasonally low for them. So again, we have to factor a lot of that noise in. But I think we're feeling very, very good about '13 and '14 based on the prospects. There are several important days in there.

Our next question in queue will come from Brett Huff with Stephens.

Congrats on a nice quarter and giving us some longer-term guidance, guys.

You're very welcome, we're glad to do that.

As you guys think about uses of capital, it seems like you're -- it's just all piling back into the business. And when you guys are doing that, give us a sense of how you make those decisions? I mean you've outlined them a little bit, you have a lot of levers that it seems that you can pull and invest in, and you've chosen a $0.10 to $0.12 lever with the cross-sale. How do you guys internally manage how you allocate that money, is it ROI-driven? Or -- what's the kind of process because it seems like there's a lot of choices that you could make?

Well, it's ROI-driven, I would say. So there are a lot of choices you could make. We obviously -- you know we are -- we would have a 5-hour conference call -- earnings call, if we were to go through all the different things that are going on in the business. So when you look at all the opportunities out there, like we didn't touch on our French operations, our residential information product in Paris. So we look at things like -- the cross-selling opportunity to us, and to our board, is obviously the biggest ROI. And it has, in addition to having a what we perceive to be, or believe to be a very high ROI, it also has a real strategic urgency to it. You'd like to create the single stop-shop as quickly as you possibly can and get brand recognition for it. So that's what we're thinking about. It's the things that we believe are the "unconscionable if you don't do them" things.

And Brett, there's so much leverage in the model. As everybody knows, going after this opportunity and then you talked about on the cross-selling and synergies is extremely high margin. Obviously, you're paying out some commissions on that, but we know -- we talked about having a 300-plus person combined sales force now. You have a large sales force, you have this large opportunity and ease dollar that you get in there is significantly high margin dollars. So I think clearly, when you look at the ROI and the potential for that, right now, it's -- I mean I think it's easy to say it's #1. I mean, it's the #1 opportunity for the company.

Okay, it's helpful. And then in terms of small cities, I know you all have -- were building the CoStar-based product to small cities, right, kind of as the recession started. LoopNet, I think, has probably better penetration there, and even Xceligent has some better penetration in the smaller cities. But I think that's -- to me, it seems like low-hanging fruit. Can you be fairly specific or give us a sense of what the small city strategy is from here? You know, is it CoStar Suite, I think, is what you call a particular product that might work there? Kind of where are we on that strategy?

Sure. I would not begin my answer with accepting your characterization that Xceligent has achieved meaningful penetration in a small way, in small cities or anything of that nature. So in fact, we've actually done extremely well over the last 2 years in penetrating those smaller markets. So in the bottom 200 cities, we've seen phenomenal year-over-year growth and through our fly teams, which are based in DC and periodically travel in to certain targeted markets, they got -- they had great growth over the last 2 or 3 years. So these markets are now -- I would say, as a group, the smaller markets are profitable for us and are doing well. I would actually say that LoopNet's client base -- so you take Corpus Christi, Texas, LoopNet might have 100 customers there, 150 customers there, and that is more than CoStar has there. However, what I'm more focused on is the fact that LoopNet has 11,500 customers here in Los Angeles that we don't have. So the small markets today are successful and profitable for us. There is no market anywhere in the United States that I'm aware of, where anyone has any more penetration than we do. So the smallest market, biggest market, we got more penetration. But the story -- that smaller set's profitable and you can't walk away from them because they do make money, and -- but the real story is going to be Texas, Florida, California, the New York Tri-State area, that's just overwhelming, it's just stunning. Like if you -- we now have 19,000 users here in Los Angeles County. And that is just -- that's an amazing number. And so up selling that group is still just the 800-pound gorilla.

Our next question in queue will come from Ian Corydon with B. Riley & Company.

I wonder if you could just provide an update in CoStar Fusion and the analytical products that you have under development.

Sure, I'd be happy to. We -- those hit the cutting room floor last night at Page 20 and 25. So we are making it -- the absence of discussing, I don't want anyone to think that we're not working on that. We -- I spent all day, Monday and Tuesday, with a combination of senior software execs from LoopNet and CoStar, and private design people from CoStar who are working on that. And I believe the specification for Fusion is now over 2,400 pages long. And we viewed and discussed the designs covering maybe only 700, 800 screens, Monday, Tuesday. And I am blown away by what the analytic side of our design team has produced, as led by a guy named Jay Spivey who came to us from -- the analytics side is led by a guy name Jay Spivey, who came to us from Jamison acquisition back in 1998, '99, been with us for a while. He did a phenomenal job, it was just stunning. It takes what we're doing in the analytics up 5 or 6 levels. In addition, our R&D quantitative team based at PPR has been working on some very interesting initiatives that will keep confidentiality part of that new analytic release. So it's very impressive stuff, it will not -- there's no chance that it will release anytime in the next 2 or 3 quarters and we will likely -- well, we'll be developing it. We will prioritize integration, we'll likely prioritize integration of the LoopNet, CoStar database first and foremost, because once you do that, it gives you more stability in the platform, it gives you better intel, better communication with shareholders, better marketing capability. It also frees up a lot of development resources to work on one common set of goals. So it's alive and well, it's fantastic, it will blow your mind when you see it, but it's of a scale and the scope that's quite significant.

Our next question on queue will come from Marc Fuller with Needham.

Just a question on the Chicago cross-selling. I'm kind of wondering, can you give us any more color on kind of how many regions outside of Chicago by the end of the year you might be penetrating or kind of selling into? And how many users -- end users does this kind of represent?

Well, what we're going to do is -- we are now in a process of taking what we learned in Chicago. And initially, we have given a day of training to the sales force, we're going to do a follow-up training with them. We are, today, working on our strategy for utilizing an additional 40 of our salespeople, who've initially have worked in our centralized sales role to go out and hit the opportunity which is too big for our current field sales force to fully cover. Our first priority will be to go after the biggest cities. These massive pockets in California, Texas, and the like. So that will be the priority for the first 2 quarters or so. And then we'll be fanning out to cover the Corpus Christis and Albanys in 2013. And the number of users that this impacts, again, both LoopNet and CoStar, probably 80-plus percent of our users are in the top 100 MSAs, which is where we initially focus. And probably 80-plus are in the top 50 MSAs. So that's where the user accounts are, initially.

Got you, got you. And then I'm not sure if I missed this, but did you say kind of how many -- what percentage of your bookings is from new users versus up sells?

In Chicago?

No, overall.

Overall. It was approximately where it's always is, in the 50-50 percent range. I think some of the things that Andy was talking about was pretty much a couple of weeks ago.

2 weeks ago.

So -- yes. There was really no impact at all in the second quarter. And obviously we'll have a lot more color on our next quarter's call for you guys.

Cool. And then last question, did you mention how many CoStarGo users were added in Q2?

We did not. Do we have that number?

CoStarGo users. We do not have that in front of me but it's has continued to trend up.

We're still getting -- we're still on year 1, I guess, probably a 10-year product life cycle on that and getting great feedback.

Our next question in queue will come from Todd Lukasik with MorningStar.

Just a question on, let's say, the integration and the synergy. It sounds like you guys are still comfortable at sort of the $20 million in expected expense synergies.

That's correct, yes.

And given the initial information you have from the Chicago market, are you guys -- can you share with us a number that you're thinking about for potential revenue synergies? Or maybe just ballpark, I mean, no greater than or less than expense synergy expectations?

Well, without any doubt, dramatically greater than -- orders of magnitude greater than the expense synergies. So if you -- I don't know, if you took the -- what was the average sale so far? If you take the 15 units in Chicago and divide them into -- divide with it $8,800 sold so far. And then assume it's a 500% increase and then run that against the $130,000 against the 54% that said they would upgrade, the number's stupid big and we won't even say it. So it's orders of magnitudes larger than the synergies side.

Okay, got you. And then just with regards to the listings, are those -- did you say whether they are being integrated now, so anything that was in the LoopNet system but was not into CoStar, is now also in CoStar now? Or is that a future enhancement?

No, that's done. We didn't waste any time there. It completed today, basically. So the systems ran today. And they've gotten through the listings. I think there were a handful of calls out still that were not in there, but basically they moved through the whole file. It's over 50,000 listings, several thousand new listers. And that was done in a combination of -- with Wayne and his team and Frank and his team connecting the databases automatically on a one-time basis, sort of in an automated fashion, one-time basis. And then taking out all of the exceptions to the research department, who then reached out and had conversations with those 50,000-some-odd listings over the last 2 weeks, 3 weeks. And -- but long term, we want us to be automated which is why we're going to integrate the back end, so that when you enter a listing in LoopNet, it's basically entered into CoStar automatically. It will go through a verification process but it gets -- it's basically the same database. So it will be technically impossible to have a valid listing in LoopNet that's not in CoStar. And ultimately, I think it will -- like initially, it actually increased our cost of research because your adding 50,000 listings, making hundreds of thousands of phone calls. Longer term, I think it will reduce our costs when it's automated.

Right, okay. But all of that, sort of, user-generated content is still going to be verified by your researchers?

That's come across loud and clear in the focus groups with our customers that they are -- that's a top priority to them and it will.

Okay. And by your expectation is that -- that doesn't -- and you're not going to need more researchers to do that? You can do that with the current staff?

I would guess we're going to get a significant productivity gain here, especially after we connect the databases and for a number of different reasons. You still have a trend, which I think that the coming together of LoopNet and CoStar Group will accelerate that trend, because now you have an even clearer picture in the industry of what the main clearing house is. And that trend is, people are creating more and more listings. So that prior -- putting a building up for sale was done with a lot of forethought and it was done less frequently. People are putting their buildings up for sale more and more frequently. So if I go back to 10 years ago in Washington DC, approximately 1% of the buildings in Washington DC were marketed for sale. Today, I believe the number is closer to -- 12% of all properties in Washington DC are being marketed for sale. So -- and against a database that's more than 50,000 properties in Washington DC. That's significant growth. So you've got people using CoStar or LoopNet as a clearing house more aggressively. That's good news, big picture for our role in the industry, the utility of the company and our potential revenue, it does put up a pressure to continue to grow the scope of people dealing with all of these people selling their buildings. But I think the 2 will balance out, and I think you'll get continued productivity gains and you get continued accelerations with the amount of content coming at us.

Right, okay. And then with regards to the sort of the year-end 2014 goals, $500 million run rate in annual revenue. I'm assuming that's based on an expectation of organic growth as opposed to unannounced acquisitions at this point?

That's correct. I think, that should be clear, that's based on what we've talked about here today. So with, sort of, the product services, geography, things that we've talked about.

Yes, I guess you guys will be busy with the LoopNet stuff for a while. And then just with regards to the adjusted EBITDA margin, I mean as the low-30s to mid-30s that you gave there, is it safe to assume that the only adjustment between reported EBITDA and adjusted EBITDA, that the expectation for that will be stock-based compensation expense at this point?

Yes, I mean it's the same -- to say the same adjustments. So if we were to be doing other acquisitions or anything else down the road, which would be on top of those numbers, those -- it would be the same adjustments that we always have. But so barring any of those, yes, it's the same adjustments, nothing new.

At this time, we have no additional questions in queue. Please continue.

And with that, we'll conclude the call. Thank you all for joining us and we appreciate your support. And we look forward to talking to you next quarter.

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