Ladies and gentlemen, thank you for standing by, and welcome to the CoStar Group Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Director of Investor Relations, Mr. Richard Simonelli. Please go ahead, sir.

Thank you. Ladies and gentlemen, welcome to the CoStar Group's 2012 third quarter conference call. On the call today are CoStar Group's Founder and Chief Executive Officer, Andy Florance; Chief Financial Officer, Ryan Radecki; and myself. [Operator Instructions] 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 Group's October 24, 2012 press release on the third quarter results, and in CoStar's filings with the SEC, which include our annual report on Form 10-K for the period ended December 31, 2011; and our quarterly reports on Form 10-Q, 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 and in color on the Internet at www.costar.com. A replay will be available approximately 1 hour after the call today is completed, and will be available until November 25, 2012. To listen to the replay, call (800) 475-6701 within the United States or Canada; or (320) 365-3844 outside the United States. The access code is 266046. A replay of the call will also be available on our website soon after the call concludes. I'll now turn the call over to Andy Florance. Andy?

Good morning, everybody, and thank you all for joining us. I'm very pleased to bring you news this morning of solid financial performance in the third quarter. Driven by both strong organic growth, along with the acquisition of LoopNet, CoStar's revenue for the third quarter increased 50% year-over-year to $96 million. Third quarter EBITDA increased 227% year-over-year to $19.6 million. I would love to be able to say that every earnings call. In the third quarter, we added 948 new subscription customers, which is the largest number we have added in any quarter, so that's organic sales. This is the result of our sales team ramping up to take advantage of the opportunity to cross-sell CoStar into the LoopNet client base. Following our successful acquisition of LoopNet on April 30 this year, our single greatest priority as a company right now continues to be aggressively integrating the resources of LoopNet and CoStar together to capture what we see as a once-in-a-lifetime opportunity. The combined company now has nearly 2,000 employees, and I believe that they see the potential these combined companies have, and they and we are all very excited about it. The commercial real estate industry is massive, with over 10 trillion in assets in the U.S. and the scale we need to address this opportunity is great. One of the best things about the merger at LoopNet is that it has enabled us to team up with several hundred new gifted colleagues who have the skills we need to succeed in our mission. I think it is safe to say that we all feel pretty lucky to be here in this company right now with this opportunity. And that's a good thing because right now, we have an awful lot of work to do here. Prior to the…

You're welcome.

We're very pleased with our performance in the third quarter of 2012. This is the first full quarter we have LoopNet included in our consolidated financial statements, and the progress we're making in integration has already translated to synergies, showing up in both our revenue and earnings. Today, I'm going to principally focus on year-over-year comparisons for the third quarter of 2012 and also on our outlook for the remainder of the year and into next year. Now to review the results for the third quarter, beginning with revenue. The company reported $96 million of revenue in the third quarter of 2012, an increase of $32.2 million, or 50%, compared to revenue of $63.8 million in the third quarter of 2011. CoStar's organic revenue growth remains strong in the 12% to 13% annual growth range during the third quarter of 2012; while LoopNet business, excluding purchase accounting adjustments, continued to achieve year-over-year revenue growth in the 10% to 11% range. Therefore, the combined businesses are operating in the 11% to 13% range. We're excited about the performance of the combined business and continue to look for ways to maximize our future revenue growth, as we re-prioritize our sales efforts and aggressively pursue cross-selling opportunities. Our non-GAAP net income earnings reached an all-time high in the third quarter for several key metrics we report, including EBITDA, adjusted EBITDA and non-GAAP net income. We believe the earnings potential for the combined businesses is evident, as I expect to see strong earnings growth year-over-year, as we take further actions to capitalize on synergies from both the LoopNet acquisition. EBITDA increased 227% year-over-year to $19.6 million in the third quarter, up $6 million -- up from $6 million in the third quarter of 2011. Adjusted EBITDA of $25.6 million from the third quarter of…

[Operator Instructions] Our first question will come from the line of Bill Warmington of Raymond James.

So I wanted to ask first if you could talk to us about where you are relative to the cost synergies for the merger. We've been talking about a $20 million target over a 24-month period. It sounds like you're probably running ahead of that.

Bill, it's Brian. Yes, I think clearly shown in the numbers that we're just barely 6 months into the integration, but I think we're probably ahead of where we thought we would be. And you are seeing that directly in our earnings numbers and us raising earnings guidance along with still being able to invest in the marketing for the cross-sell. So I think we're extremely happy where we are on that metric. And I think we're, again, well on our way to getting there, more than halfway. And I think that we've already held other things in place that we believe will be there on time or sooner.

Okay. And then I wanted to just ask if -- you were very helpful last time in terms of -- last quarter, in terms of giving some color around the organic growth. I know you gave some figures on the subscription-based portions, specifically. If you look at it for total growth there, I know that you have some adjustments there for the LoopNet revenue in terms of deferred revenue write-offs. How do you look -- how do you manage those pieces in terms of what you calculate for organic growth in the third quarter? And then how does that play out in the fourth quarter?

Yes. I try to give everybody a little bit of clarity on that. I mean, if you were to look at the CoStar business, we're sort of in the 12% to 13% range. If you look at LoopNet, sort of taking out all the adjustments, they're sort of in the 10% to 11% range. So again, I'm sort of giving a range of 11% to 13% for the business. I gave a new metric. People will go back and look at the transcript this time of what the subscription base revenue is, it's now about 71% quarter-over-quarter, and that's growing at 14%. So what does that tell you? It tells you the other 29% is growing at below 14% and sort of the one-off marketing stuff. So obviously, one of the big goals is to, as Andy talked about, is to constantly go out there and sell people annual contracts for those marketing services and moving them over to that bucket. So I would expect to see that 71% grow next year, which, as that grows, you'll see higher growth rates. So I think until then, you're going to sort of be in that 11%, 12%, possibly 13% range, probably a little bit more conservative in there as we combine the 2 companies.

Okay. Any specific thoughts on the fourth quarter organic?

Sure. Yes. I mean, I think we talked about -- in the fourth quarter, if anyone goes back and looks at LoopNet's numbers, they've always had -- that's always sort of been their worst quarter. So it's always a seasonally weak quarter for them. So I think, obviously, that will moderate sort of our organic revenue growth. And we do have the RMS contract and the Grubb & Ellis, which is still in bankruptcy court that keeps getting extended, but we don't know. So I would actually expect to be in the middle of the revenue range. Now again, there's a lot of factors. We've reversed the trend last quarter. There's a lot of other things that can happen. But I think with their seasonally weak quarter, knowing that these other contracts are definitely coming out in the fourth quarter, I'm expecting sort of a midrange, in the middle of the range of where we're at. And then I expect, obviously, to move back to what we've been seeing prior to that, into the first quarter.

Got you. And then I wanted to ask, where are you seeing -- it sounds like you're seeing a lot of success with the cross-selling. I just want to know if you can give us some color in terms of particular market sizes, particular geographies, particular firm sizes, type of product, something that where you're having particularly strong success.

Sure. That's a good question. And I would actually say that, at this point, a couple of markets stand out, like the California markets are doing extremely well. In particular, Los Angeles, where both LoopNet and CoStar Group have very large customer bases down there, and some salespeople are having some great success there. But another area would be Chicago, where they've seen a lot of success. But I actually think that the biggest determinant of the kind of numbers we're seeing and where they're coming from is individual sales professionals, skill set and what they've learned and how they approach the upseller conversion sale. So I'm seeing individuals who clearly get it. And our -- I think we've got individuals who've done 20 to 30 upsells on their own. And then we have other individuals who haven't yet figured it out, and we are providing continuing ongoing training support to help them figure out how the sale works. And I guess that's ultimately good news because, eventually, we'll get everyone up to speed, and it should be fairly consistent. But the -- over the short term, in Chicago, where we first started to trial the process and those salespeople did a lot of exposure with the cross-selling. Southern California, where we just have a bunch of good salespeople, and they've got a big pool to work. But over the intermediate term, it will probably be heavily focused in California, Texas and Florida. And a lot of activity everywhere else in the country. And the other thing we've seen is that in the initial rounds, we've done extremely well with the 1- to 5-person shop at LoopNet. So someone with -- just a handful of brokers, a relatively small shop, which has never historically been CoStar's greatest strength and now,…

We'll go next to the line of Brett Huff with Stephens.

One quick follow-up to what you said before, which is very helpful, Andy, sort of the 3% to 5% target, and they were paying it sounds like an incremental $400 or $500. Is that -- I'm assuming that's per month?

That's per month. So the average deal size is -- I mean, you can calculate it, but somewhere in the $500 a month is the average deal size there.

And is that -- that's the incremental? Or is that the new bundle that replaces the $60 a month on average or whatever or maybe $100 or $120 a month on average?

Actually -- and I haven't done the math on the numbers I have. So these numbers are moving pretty quickly, like it's ramping up, so they're moving quickly here. But what I've been observing is that the -- when someone was paying LoopNet $80 for some combination of marketing information services, they're typically now paying us about $500 a month for CoStar information services alone, and then they're paying a little bit more in addition to get pure LoopNet marketing services. So we're -- not in every case. But in overall, we're capturing a little more LoopNet revenue, but it's on the marketing side, on annual contracts, and we're getting about $500 average for CoStar information services, again, on annual contracts.

Yes, that's helpful. And then of the -- I think, 948 was the new sales. Congratulations on that, by the way.

Thank you. I was trying to pull the number. I didn't get it fast enough. One of the significant things there that you should catch in there is we've gone for about 10 or 15 years with a 50-50 balance between selling to new customers and existing customers. So it's been 50% adding additional services to existing customers -- find new customers. The first time in the last 6 months, we shifted dramatically to the new customer side. So we're picking up -- I heard different numbers in the quarter, but it was moving towards a 70-or-some percent.

Correct. Yes, moving towards 70%.

Wow, that's helpful. And then the 948 number, that's net new sales. Is that just new customers or new customer sites? Or is that additional modules to existing customers?

That's new customer sites.

Okay. And then of those...

And part of the surprise here, for us, is that the people who are upgrading the fastest in the LoopNet world are the people who weren't paying anything at all.

That's interesting. Of the 948, in that 948, are you counting people who were Loop users and who are now buying this $500 CoStar on average? Is that counted in the 948? Or is it -- are Loop customers now existing customers, and so don't count in the 948?

They don't count in the 948. So they've got to be a new customer.

But if they were a premium LoopNet user, it would count. They were just using the LoopNet site.

The question is that, were they paying or not? And I think what Andy was saying before is that the surprising thing is that it's "premium," more heavily weighted towards premium people that actually weren't paying anything. They are using the LoopNet system, but they weren't paying, that were signing up here.

And I think that mix will change. But I think that's, to me, almost -- it's an amazing statistic.

And then last question on the 948, can you tell us how many were those kind of upgrades or the premium type deals, premium to paid?

I'm giving you a very -- I looked at it, and I'm giving you sort of a recollection from memory, so I could be wrong. But it was, I believe, somewhere in the 400 to 500 were premium.

That's helpful. And then lastly, the $1 billion goal that you all have talked about for a while, could you give us an update on the broad strokes of which segments or products or however it's easiest to divide that up, what percentage of that $1 billion kind of comes from different things? Like for example, I know Loop was a big cog in that wheel in terms of marketing services. But can you -- is there any sort of granularity you can give us on what the split might look like at various product once you get to $1 billion?

It's -- I'm sure a lot of things will evolve, and we'll see the world differently over the next several years. But we often look at it by not so much by specific product, but by industry segment. So if you look at -- in the most simplistic way, if you look at brokerage firms, owners -- and owners are really just institutions. They can be debt, equity, private, public, whatever, and then banks, who are more towards the regulatory side, and it's a little different there, and then other. We believe that the potential in the banking side of the business, remember these banks keep a very large percentage of their commercial real estate on their books. So they're particularly sensitive to it and trying to evaluate, understand and look at credit risk, default and the like. And we were meeting with the CEO of Wells Fargo earlier in the week, and he was talking about how the fact that in the residential world, he's presented with a lot of very hard numbers and quantitative analysis of what's occurring. And historically, in commercial real estate, it feels much more like an art and an opinion. So we think that on the banking inside, there is a $200 million-plus opportunity. And currently, that is probably something in the $20 million to $30 million range for us. So we think that could grow tenfold-plus overtime. And then we also think that we are relatively lightly penetrated in the owners segment. And we see, in some cities, among owners that we think are a certain scale, we might be 17% penetrated plus in the older cities; and then newer cities, we're single digit. So we think that's also another couple of $100 million-plus segment. And then you can just mechanically look at -- one of the things that the LoopNet merger has done is it has clearly, in very vivid color, reinforced for us the size of the brokerage community out there doing deals, making a living in commercial real estate. And we feel like 1/2 of them are using -- LoopNet marketing as a solution, 1/2 are using CoStar information, and you can cross-sell both. And we believe that's several hundred million of potential. So it's -- I sort of look at it as those 3 legs stool. And then I'm sure the other category will be really fascinating. All the bizarre, never expected uses of the information products, from cellular towers to taxi dispatch, to package routing, to power planting, so on and so forth. But I don't see that ever being more than a $50 million, $100 million space, the other category. Except I was thinking the other day that Apple could use some help with their maps. I hope that gives you some help.

And Brett, just to put that in context, I mean, by the first quarter of 2013, we're going to be in $100 million range for a quarter. So it will be in the $400-plus million range. We set out a $500 million target out there by '14. So I think, if you sort of add up -- I mean, Andy is doing this off top of his head, but $200 million here, $100 million there, $200 million there, you sort of quickly get from the $500 million to the $1 billion. So I think that gives people a pretty good road map. I also think in there, you're going to have a couple of hundred million dollars from just marketing across all the platforms. So I think it's a pretty clear path to the $0.5 billion. I think people can see the clear path on the earnings side, too, which is, for me, really exciting, and then I think from there, a run to $1 billion.

Okay. And then last question is on how the comp works for the cross-sell, Andy. I know you pay a lot of attention to how your sales force is working and have in the past. What kind of insights can you give us on how you're incenting your folks during these trainings and sort of reprioritizing? What's the -- so what's the key comp driver?

You just made Brian hit the floor laughing.

I was trying to keep it to myself.

So the -- it's probably a little bit of a view into how the sausage is made. It may not be terribly interesting. But the reality is that you've got a couple of sales people here who are putting in some really good numbers on this cross-selling. Once they figure it out, they're doing extremely well. And it's just the traditional sales plan there, and the other sales people are responding to that. But the other key here is that we've initiated this teaming effort, where we're taking more junior accounting execs and more senior accounting execs and building teams, where the juniors are keeping the demo flow going and handling installations, and where seniors are handling presentations and close activity. We have set a number of incentives where -- at different tiers where someone gets their first 120,000 of cross-sell annualized. They get a bonus that might be $10,000, and then there's some bigger prizes. They could escalate up to the $100,000 mark for the teams and individuals that hit these volume goals -- escalating volume goals. And then the one thing we've done last 2 years is we have given a market goal to the sales teams that has a very low 7-digit number to a set of team of 10 or 12 people split up. So you get both team and individual focus on trying to win these prizes, as well as just the traditional commission plan, which is quite adequate. On the flip side, the U.K., we're focusing on the rest of the year very heavily on deployment and usage objectives. And then in 2013, they'll be on the same plan as the U.S. On the LoopNet side, we have made some pretty significant changes and I really, really, again, stress I'm very pleased with the way they've sort of seen the big picture and are working toward this. But we are now -- we used to pay -- we did some calculations. And looking at the lifetime value, as I mentioned, selling premium lister to someone versus selling property comps. These are dramatically different lifetime values for the company, and yet they've often paid very similar commission values. We have dramatically shifted the commission plans to reward the sales teams for selling the premium lister products, which we think have longer staying power and more solid revenue. And we've kept stagnant or soft in the commission on the -- or actually, completely eliminated commission on things like property comps and property facts. So there's a fair amount of movement in all kinds of areas here occurring.

We'll go next to the line of Michael Huang at Needham.

Just a quick follow-up on the 948 customers you added in the quarter. Was there anything onetime in nature here? And how should that trend kind of going forward absent from the seasonality you might see in Q4?

Well, it's a good question. The beautiful thing about this is -- I'm probably seeing, I don't know, maybe 20 of these sales, I'm not sure. But I've seen a lot of them where I've gone in just different parts of the country and gotten a feel for what we're -- what it's like. And overwhelmingly, in my view, these are absolutely real career commercial real estate players. And when you migrate these players into CoStarGo and they adopt an inventory system with dramatically higher-quality content, research-verified, much more comprehensive, I believe that this is very sticky revenue. And I would expect that it would be in the same 90% renewal area. And so it's not that I have seen no indication that any of this stuff is onetime in nature, and some of the sales that you are seeing are things like Resolve, Virtual Premise in other areas. And that, by its nature, is extremely sticky, where you're doing lease managements and portfolio management with big implementation cost. So this is a continued philosophy of the company to pursue the long-term stable revenue and swear off things like telecom and vendor revenue, which comes and goes with the wind.

So would it be unrealistic to kind of see that number trend up kind of through 2013? I mean, so could we see another record in terms of customer adds as we...

I would be disappointed if we didn't.

Okay, great. In terms of the U.K., I think you had kind of touched on how gross rates could accelerate on the heels of some new products launched out there through next year. So what actually would be the kind of range of expectation for 2013 in terms of growth rates out of that region? And maybe help us understand kind of what that could look like as you exit next year.

Well, this is -- it's difficult to give you any sort of precise number just because the situation is new, and we would be able to give you a clear view of this after the first couple of months of selling activity. But the simplest terms, the product that's being offered in the United Kingdom is basically -- it's called FOCUS. It is described by the U.K. leadership as deeply unsexy. It is based upon, I believe, cold fusion. It was designed and built in late 1990s, early 2000, and I've been struck by what a piece of garbage it is. And so we're taking -- that's what people are going to be on. That's what people are on right now. And we're basically coming in with the iPad app, which some of our clients describe as they love -- I use the word "love" in that relationship with the CoStarGo. And so we've got book ends of product here. We've got radically different products. And so we're going to go in there, and we're going to look for -- they typically are paying dramatically less per person in the U.K. for our services, this old FOCUS system, than we are able to capture in the United States. And we're not going to try to get the U.S. pricing. If we did, we've would be wildly profitable in the U.K., I mean, like with very good penetration there. But we're trying to get reasonable, not overly aggressive, upgrade prices, and we'll be able to report the end of the first quarter. When we report first quarter numbers, we'll have some really good color on that. But I'm expecting a good result, but we'd see what it looks like with actual experience on the ground.

And just to add just a few things to that. I think that, as Andy said, we're actually going to be focusing on training in the fourth quarter, so we would certainly not expect to see a lot from the U.K. on the sales side in the fourth quarter. Again, as we said, as we start selling in the first quarter, you'll get a better shot of what that looks in the second quarter. But just to give you some rough numbers, the U.K. has traditionally, for the last 2, 3, 4 years has run behind CoStar Group at sort of growth rate percentages. So in 2010 and '11, they were flat or up or down just a tiny bit. In 2012, they're sort of in single digits, where CoStar has grown in double digits. So our goal for 2013 for the U.K. is to get them up to double digits. I mean, one thing we've been doing -- and so it's -- in the U.K., it's looking at the marketing services, which is growing at smaller growth rates at 10% to 11% versus the subscription businesses in the higher percentage rates. It's to look at all the pieces of the business and say, "How do we that? How do we get all the other pieces up to sort of where the big subscription thing is." So that applies to the U.K. So my goal is for the U.K. -- Paul Marples and Matt Green, if you're listening, is double-digit revenue growth, which we haven't seen in years and then, obviously, to continue that moving forward. And it's the same thing, I want to get the marketing piece up. I want to get the land sites and the BizBuySell. I mean there's a bunch of smaller pieces of our business, Virtual Premise, and I want to get them all up to sort of the higher growth rates. So anyways, I hope that gives you a little more color.

Awesome. And then just last question for you. I think you had mentioned that you've only distributed kind of 16,000 of those LoopNet leads to your sales team and have only contacted a portion of those. So when would you expect to kind of strip it out that the balance of those leads and kind of contact that broader audience? I mean -- and what does that imply to sales headcount growth through next year?

What you'll see is probably more of a -- about shifting resources from headcount being allocated to -- shifting headcount allocation from approximately have lower value to approximately higher value. So 350 salespeople, still a pretty significant number. We will accelerate the distribution of those leads, particularly to those people who get it and are closing -- converting them sales. We'll accelerate those through the year. But realistically, there's no conceivable way that the sales force can actually get to all these people over the course of the next 3 years. And there will be also -- I mean, you can take your traditional Geoffrey Moore, Crossing the Chasm kind of adoption curve. You're going to have your innovators early, early adopters, the early whore, that kind of thing. And it's going to be a 3-year process, I think, to sort move through these things at the very best.

And the next question comes from the line of Brandon Dobell of William Blair.

Brian, on a go forward basis, you guys kind of narrowed down what the kind of consistent metrics are going to be that you're going to give us. It sounds that there's going to be a subscription revenue number. But in terms of users added or user count or things like that, you guys narrowed it down to what we should kind of expect and how we're going to start to build the model. A little more granularity?

Yes. And I think -- again, it's a -- I think we're still evolving that, but I think you guys heard some of the metrics here in this one. And it definitely will be on a subscription basis. It will be on premium members. So we're going to continue to give some metrics as -- some of the other metrics. But as they evolve, we'll evolve more. But I think that's where you look at -- 71% of the business is about the subscription-based services, and we want to move more of it there. So I mean, I want to see that number increase to 75% or 80% over the coming years. So I think those will be the metrics that we'll focus on, but we will still give user metrics and explain, "Okay, well, here's what's happening in those user metrics," for example. The CoStar numbers and what we're doing with Showcase, we explain that. So I think -- I always tell people, "You have to understand what's happening in the metrics based on the decision we're making. I wouldn't necessarily take the metrics at face value." The other thing, just to point out, I'm glad to see that I'm not the only one up at all hours of the night when I saw your note there. But that -- I was pretty clear, I mean, as far as the revenue range, though I actually do think we're going to be in the middle of the revenue range. I know I saw your note that said, "Hey, they should be in the high end because they always beat it." We give a range so that we can be in the range and we definitely -- when you look at LoopNet historically, Q4 has always been very tough for them. We do have something that we know about as far as our RMS and small things. So we actually do believe we'll be in the middle of the range, and so that should be the expectation from people. I just want to throw that one in there because you're on the line.

Yes. Fair enough. I appreciate that.

Did you make that like it's directed to someone?

It seems like it but I got to go back and listen to it again. Brian, your comments about the transition from Q4 this year to Q1 of next and then expectation for EPS to increase, I think you said, at a healthy pace going forward. I wanted to make sure I understand the semantics between quarter-on-quarter or year-on-year and that increase at a healthy pace. Should we expect every quarter have a greater EPS number than the first quarter and kind of be at that stair step up?

I haven't given 2013 guidance. But maybe I'll try to be a little more clear on that is that we gave $0.40 to $0.45 in the fourth quarter. If you look at 8 of the 9 or 8 of the 10 for CoStar Group transitions from Q4 to Q1, Q1 is always down and that's because we do the annual sales conferences. That's when everyone gets raises. You all have the high benefits. So that's sort of a given. So if my range is $0.40 to $0.45 in the fourth quarter, people can expect it to be lower by a few pennies in the first quarter in addition to the marketing service that we had. That should still be up, and I expect that to be up year-over-year when you compare it. And I expect each quarter next year to be up year-over-year. And I definitely expect going from Q1 to Q2, as I said, a healthy pace, expect to see growing net income. But the first quarter, if you just take -- if someone just says, "Here's number for the year," and I divide it by 4, you're going to be off in the first quarter because of that seasonality. So I was purposely pointing that out because I noticed models where people sort of just divided the number by 4. I think the annual numbers are -- I think people are sort of getting there. But I think that, that first quarter, I was trying to purposely point that out to people.

Okay. And then...

It's similar with the revenue on the LoopNet. If people weren't paying attention on SIG [ph], why does Q4 look softer and it's not just -- it's a seasonality thing that's in their business. So I'm just trying to point those out people.

Okay. And then, I guess, in a similar fashion from a kind of staging perspective, the U.K. business, how far away are you guys from profitability? And was there -- is there a timeframe in which you'd say we're 100% certain we're going to get there? Or is that kind of the range to where it starts to make a difference so we can see in the model? And then, I guess, as the add-on there, can this business be as profitable as the U.S. business? Or is it just a scale issue so it's not going to get there?

So the business -- I remember that we acquired -- it was a pretty small business. We acquired a number of very small businesses. There was a long period where we're migrating multiple software platforms together into one common U.K. platform. And then we embarked upon investing -- and as the business was profitable, we're sharing good margins in the U.K. And then we made the investments to quadruple the research in the U.K. -- quadruple the investment research in the U.K. in order to get up to the same standards of products we produce in the US. And then the next phase was to transition the old, tired software into the much more competitive, consistent international U.S. software platform with CoStarGo. Those were 2 very significant investments, which did not have an immediate return post Lehman Brothers. So now what happens is you launch these new products, you're going to begin to get -- you would expect -- you certainly would expect accelerating revenue. You also get declining expenses now because you have a surge of research that was occurring. You had dozens of additional researchers surging, and that temporary staff surge is coming off. And then you also have dozens of software developers who are allocated in the U.K. that start phasing off. And we would expect to have a very clear picture of the road to profitability. As you move halfway through the year, we can start talking about it. And it would happen -- and if you're familiar with the company over time, often when these things switch from investing mode to margin expansion mode, it surprises everyone how fast it goes. And I would absolutely expect the U.K. to have the same margin potential as the United States. It is a very sophisticated, intensely focused commercial real estate industry over there. And I don't -- and despite the fact that's $2 trillion-some GDP and there's a $14 trillion, $15 trillion GDP, your scale is in your software, and it becomes sort of like a California operation. And so I think it will have -- I still believe it will have good potential in the long run.

And just to throw us some numbers on that trend, and I think that if you sort of look at the 9 months ended with allocations, we're at $6.6 million loss versus $2.8 million. I think once we release the product in the fourth quarter, we get through some of the marketing in the first quarter. I would expect to see the losses 1/2 over the next 4 quarters, which at least gives everybody a little something to model to. And then I think, obviously, based on the revenue growth, we'll be giving people more clarity on what the target date of breakeven. And yes, just like Andy said, I thoroughly believe it can be just as profitable as the U.S. and that's what we expect. I expect nothing less. So I mean, we will definitely put a time period on that. Probably, we'll have more clarity by the end of next year. But I think once we've sort of finished these initial marketing things, I think you'll see the cost get cut in 1/2 the following few quarters, just because product development sort of rolls off of that. And then we'll give you guys clarity on sort of the rest.

We'll go next to the line of Todd Lukasik with MorningStar.

Just following up on the U.K. there. The corporate allocation of $2.3 million in the last quarter, is that literally just corporate overhead? Or does that include the cost of -- you mentioned dozens of developers allocated to the U.K. to transition the technology?

Yes, it is. There's a lot of development allocation in there. And so once that stops at the end of this year, obviously, those loss numbers will be paired back fairly quickly. We do have some marketing that we've talked about that's going to be happening there. But that's why I would definitely expect by the time you get to the second quarter, third quarter, fourth quarter, those numbers will be 1/2 of what you saw this year. And I think improving with revenue growth.

You only have temporarily transferred personnel and increased travel expenses.

Got you. Okay. And then I just wanted to go back and revisit the numbers you mentioned earlier, Andy, with regards to the cross-sell sales results to date. 100,000 leads, 16,000 distributed. Some of those have received demos, and 723 deals closed for, I think, a monthly contract value of $381,000. Is that $381,000 attributable to all of the 723 closed deals or just the portion of the 723 that had prior monthly commitments with LoopNet?

That's the entire set.

Okay. All right. And then I was curious about the 100,000. Do you have a breakdown in terms of the number of those leads that are paying LoopNet something now versus sort of the premium category that you guys mentioned?

Sure. We actually have analyzed that list to death. So you start out with a 6 million sum and you filter it down to 100,000 you're focused on. So we developed a whole -- we built and rebuilt that database, added all kinds of fields, doing characteristic usage patterns, the sorts of listings they have, the dollar-valued listings, estimate their commission earnings, all that kind of stuff. We developed scoring systems where -- for consistent, continuous use, plus having listings, plus time periods between accessing the system, all kinds of things, campus scoring system. We scored them from negative -- they ended up getting scores from -- the 6 million from negative 20 to positive 50, positive 50 being the most promising. And we were just focusing on the 100,000 are really the ones that are in the, I can't think exactly, maybe the 6-plus or 5-plus category. And of those, I think it's about 50/50, roughly 50/50, they're paying something or who have paid something over time. And we -- the leads we've been distributing to sales force to date are random. So we have not been -- we have intentionally not distributed the ones we scored 20s, 30s, the higher score onces, because we want them to confront the 5s and 10s and 11s and 12s first and learn what they're doing and then start to go to the higher value ones.

Okay. So if I understand what -- correctly what you just said, there may be a greater yield opportunity in the leads that you tackle next year or the year after that and the year after that?

Yes. And that's a combination of just continued to put more higher -- more of these higher scored leads, plus the salespeople figuring out how to do it.

Okay. And then -- so the $381,000 that you have on the monthly contracts, I think the incremental annual revenue opportunity there is somewhere around $4.1 million, if I did the math correctly. Is it fair to assume that there's about $1 million in LoopNet cross-sale revenue synergies baked into the fourth quarter revenue guidance?

You're sort of plucking that out of the air. Obviously, all of the sales numbers -- I mean, as Andy said, a lot of the core people were spent sort of training and cross-training and putting people on teams. So by the time they sold -- and I would say it was in the back half of the quarter so, of course, you'd only get the back half of the quarter revenue on that. So that number, maybe it seems a little bit high to me, but you're sort of plucking that one out of thin air.

Our next question comes from the line of Toni Kaplan of Morgan Stanley.

So G&A was a little bit lower than I had expected and probably included a portion of the $2 million of integration costs. So I was just wondering, if we look at $18 million, plus or minus, per quarter, excluding seasonality, is that sort of a sustainable run rate for G&A? Or was there a reason that this quarter was lower?

No. I think it's sustainable. And obviously, the goal is to continue to get more synergies and to obviously improve upon that. I do have the general counsel sitting next to me. So with the caveat, as long as there's no lawsuits coming in the future, but -- because that's where all the legal costs would go. But yes, I think -- he's laughing at my comment. But yes, I mean, I think, obviously, synergies, we're definitely -- somebody asked -- I think Bill started out with that question. We're doing much better on synergies than we anticipated. We're moving much faster on things. So obviously, we're seeing positive results that we think will continue, again, unless something else comes up that we're not aware of.

Okay, great. And you mentioned that some of the marketing that you plan to do on cross-selling will be pushed into the first quarter of '13 instead of doing it all in the fourth quarter. And I just wanted to find out what -- like what was the decision-making behind the delay.

A number of different factors. We have done several ways on -- like one of the things we're trying to do upfront is we're trying to differentiate or begin to reeducate the industry on what the key attributes of the brands are. So we're trying to reidentify LoopNet with marketing and CoStar with information. We did a series on marketing pieces. We've done several marketing pieces on the LoopNet side, some good pieces. But we just decided that the pace at which we could do all these changes to the sales force, we wanted to time some of the marketing programs closer to when they would actually be able to go out and meet with people and demo with people. So we -- the information branding pieces are being staged to go out just before the salespeople contact them to try to do the upsell rather than all at once in the fourth quarter. Also, we shifted a major marketing event from 2012 to early 2013, just because of -- schedules weren't working out. We wanted to make it a little more efficient. So it's nothing -- it's more a shift to several months.

And again, Toni, I think what is was is aligning it. Exactly what Andy said, it's aligning with the sales activity. So we talked earlier about we have 350 salespeople, and Andy talked about moving over 100 of them to doing new things that they hadn't done before, teaming people up and training them. So I think the idea is, obviously, to have the marketing pieces going out and making sure that the salespeople are in place to capitalize on those activities versus just setting a bunch of marketing it out. But you're still then reorganizing sales forces and teaming people up. So it's just -- I think it's aligning the 2. And obviously, we think we'll see a much higher IRR and return on those investments by having the 2 aligned.

Okay, great. And just lastly, on that point of the sales reps shifting, how long do you think it takes for a full ramp-up? Obviously, they're in training now. But in order for people to get to sort of the full run rate capacity, how long does that normally take?

Yes. The vast majority of the people we're talking about here are already experienced commercial real estate information and marketing services salespeople. So it's more a question of them picking up new roles. And I would say that's probably a 3- to 6-month time period to really get where they're really up to speed and optimized.

And we have a follow-up from the line of Brett Huff at Stephens.

Hey, guys, just one thing. I missed this earlier in the call. What was the average new rev per customer site, that number you guys usually give?

8,314.

And a follow-up from Bill Warmington at Raymond James.

A chance to bookend the call here.

You guys are competing. He just thought he had you, too.

A quick question on the -- I just wanted to make sure I follow the math on the initial cost that the uplift you got this quarter, third quarter, from the -- for the cross-sales.

I don't think there was math. I think Todd asked the question if we thought there was $1 million in there, and I don't think we actually know the exact number. But as we talked about either the majority of the quarter was reorganizing the sales force and cross-training them. So I think a lot of the sales came in towards the back half of the quarter, which would mean only a small portion of revenue when they came in then, too.

Got you. But the annualized revenue for the 948?

The annualized revenue for the 948. Yes, it looks -- $7 million or $8 million, somewhere in that range.

So you can figure, probably a couple of million next quarter from that group.

Correct. Correct.

There are no further questions in queue.

Thank you. And with that, we will conclude this call, and thank you for joining us. And we look forward to hosting you on the next earnings call, which, I believe, is our CoStar Group's 50th earning call. So we look forward to talking to you then.

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