CoStar Group, Inc. (CSGP) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Rich Simonelli. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to CoStar Group's Third Quarter 2013 conference call coming from our headquarters in Washington, D.C. We are delighted you have joined us. Before I turn the call over to Andy and Brian, I have some important facts for you. 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 23, 2013, press release on third quarter results and in CoStar's filings with the SEC, including our Form 10-K for the period ended December 31, 2012, as well as our Form 10-Q for the period ended June 30, 2013, in each case under the heading Risk Factors. All forward statements are based on information available to CoStar on the date of this call, and then 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 also being broadcast live and in color over the Internet on www.costar.com. A replay will be available approximately an hour after the call and available until November 28 of this year. To listen to the replay, call 1 (800) 475-6701 within the U.S. or Canada or (320) 365-3844 outside the U.S. and Canada. The access code is 304716. A replay will be available on our website soon after the call concludes. I will now turn the call over to Andy.

Good morning and thank you, everyone, for joining us today. Our third quarter 2013 financial results were very strong. Revenue grew to $112 million for the third quarter, a 17% year-over-year increase. Our annualized net new sales of subscription services in the third quarter were $13.7 million, an increase of 47% year-over-year. We added nearly 1,200 new CoStar information subscription customers during the quarter, bringing the total number of new clients to 4,900 over the last 12 months. This represents a 58% increase in the acceleration of new customers compared to the previous trailing 12-month period. EBITDA increased 52% year-over-year to nearly $30 million for the quarter. I think this margin expansion is all the more impressive when you consider that we are investing so aggressively right now into important initiatives that we believe will enable us to sustain these impressive revenue growth rates for many years to come. In prior calls and meetings, we've briefed you on the years of planning our product design development and engineering teams have invested into building next-generation of our flagship product, CoStar Suite and CoStarGo. At times, we refer to this next generation of CoStar as Fusion. We call this next product platform Fusion because it blends our valuable in-depth data, our historical data sets, the power of our subsidiary companies' software and their solutions together with our clients own data. We believe that this next-generation platform moves CoStar into the realm of workflow solutions, decision-support, creates communication channels and yields predictive analytics. We, in turn, believe that this increases the utility of our services, gives us additional competitive advantage and will fuel our long-term growth. The scope of our plans for Fusion is very ambitious, so we intend to build a platform in a series of segmented lower risk product releases over the course of several years. Last week, we launched the first of these planned software releases, with 5 major product enhancements to the CoStar platform. The 5 enhancements include a new map-based interactive search tool based on the popular search tool that we had in our mobile platform, CoStarGo. We've had in-depth coverage of the U.S. multifamily marketplace. We've expanded the property and market analytics capability of the product, and we integrated in a lease valuation and comparison tool. And finally, we released an upgrade to our very popular CoStarGo products, giving it mobile analytics capabilities. The release was first made available in Maryland, Virginia and the District. The release went very smoothly in those areas, so we launched it in the United Kingdom and a few days later, in the Northeastern United States. The release is still progressing very smoothly, and we plan to roll it out to the rest of the country over the course of the next 2 weeks. Initial reaction is positive across the board, and clients' activity in the first phase of our release has been fantastic. In just 10 days, as of about 2 minutes before the call, we solved 1.13 million searches in the platform, and there were almost -- actually not almost, there were 1,030 lease analysis financial models created in basically the first week. So we're very pleased with the level of activity from this limited rollout in the Mid-Atlantic, Northeast and the U.K. We've met with over 100 firms in the first 10 days in order to understand how clients are reacting to the new product. The following anecdotal feedback gives you a flavor of the sort of feedback we're receiving overall. Tom Edgar of GBR Phoenix Beard in the United Kingdom told us to quote, "The upgraded CoStar Suite has massively improved the user's experience. It now offers an easy to navigate user-friendly interface, which mirrors the fantastic CoStarGo app for iPad and offers great functionality. The extra time spent on further development of the product is clear to see." In order to get a accurate gauge on our clients' reactions to this major product upgrade, we hired an independent third-party market research firm called Market Connections to survey the initial Mid-Atlantic users. They received completed surveys from about 500 clients. They also asked for written comments and most of the respondents gave us valuable feedback. These participants were asked to comment on their of view the features for each of the 5 enhancements and, overall, how the new release compared to the previous CoStar tool. The researchers asked our clients to rate the new features as either not at all appealing, not very appealing, somewhat appealing or very appealing. For simplified reporting, we combined the response somewhat appealing and very appealing into 1 category of appealing as an indication of positive feedback. So the results showed that 93% of the surveys found the new map search appealing, 92% of our response found the new multifamily information appealing, 94% found the new analytics appealing, 93% found the CoStar lease analysis appealing. Finally, 94% of our respondents found CoStarGo analytics appealing. So I would be so bold as to say that sounds like straight As on the release. And in general, over time, I found that people really hate to see any change to software they've grown accustomed to and that they use every day. And for sure, the improvements to the software have to far outweigh the inconveniences you create by changing the software someone's used to using. If you don't, clients in the industry will typically react very negatively to anything other than a really significant improvement of overall functionality. I think with this release, we really have avoided the problem of clients being resistant to the change. On average, only 1.5% of the respondents found that the various enhancements were not at all appealing. That 1.5% negative response was overwhelmed by the average positive response of 93%. So we're running at a 63 to 1 positive on the release. So let's take a closer look at what we are offering with this new release. Real estate's about location. The faster, more intuitive map-based search enables customers to visualize their search results on a map as they build their search. The client sees the search as it happens. This makes CoStar Suite more user-friendly. We believe that this will result in more usage, higher renewals and increased sales. Again, here are some of the quotes from our clients that are useful. From [indiscernible] a REIT analyst of Capital One Securities says, "The maps are just so intuitive. I love having all the search criteria on one page." Patrick McCormick [ph] from Jones Lang LaSalle told us, "The new map features are extremely appealing to me. I'll be able to use them in presentations." Next, we launched our comprehensive coverage of multifamily properties. With information analytics that we believe will increase our penetration with brokers, banks, owners and institutional investors. Multifamily is a $2 trillion asset class in the United States, and clearly, the hottest in commercial real estate. In the past year, over $95 billion of transactions were completed in this section -- sector. We have built a database that far exceeds other firms' multifamily information offerings. We are now tracking information on nearly 300,000 apartment communities, with 5 or more units for a total of 16 million apartments. Our nearest competitor tracks 6 million apartments, so we cover 2 to 3x what they do. We even offer multifamily specific submarkets that provide a greater granularity than any of our competitors. We have lost competitive sales in the analytics arena in the past to competitors because we did not have information on multifamily properties. But what was once our weakness is now our strength. We are capturing information such as building details and quality, effective rents, concessions, occupancy levels, ownership, property sales, unit sizes and mixes, images and many other details. This data can be queried, analyzed in the product to provide valuable analytic information on market trends, give you great reports on what's happening in the marketplace. Trent Smith from Insight Property Group said, "The multifamily data is impressive. My head is spinning with all the possible applications of the multifamily analytic data." Sam Sherwood from Integra Realty Resources told us, "The multifamily detail views are a huge improvement on what was previously available. I particularly like the specialized multifamily submarket geographic definitions." Third, we've added analytics to provide users customizable property and market statistics that give our clients vivid charts and graphs to analyze vacancy rates, rental rates, absorption, leasing activity and more. For example, an owner will be able to compare her building to other similar buildings in the city and can use the data price releases competitively and have a better understanding of the probable amount of time it will take to lease up her buildings' vacancies. Tom [indiscernible] of Cushman & Wakefield says, "I love the new analytics feature, which updates the map as I search new entries." Harold [indiscernible] at CBRE says, "As a research analyst, the new analytics and report capabilities are very helpful in my daily duties. The new layout and capabilities seemed very easy to use and make my job easier and more time efficient." The fourth major and most significant element release is CoStar Lease Analysis. This was made possible by CoStar's acquisition of Resolve several years ago. Without the technology team at Resolve taking the lead, there would be no lease analysis in CoStar Suite today. I believe this is a truly transformational tool. It gives better visibility into the true cost of a lease and we believe, will enable brokers to get a signed lease much more quickly, which is their commissionable event. It is an integrated workflow tool that allows brokers and owners to do intensive lease analysis, incorporating CoStar information with their own data. Rather than manually entering all the data they need to build a financial model for a lease into the spreadsheet, they can now instantly load all the information for CoStar into a prebuilt integrated lease model. This has many benefits, including time savings and accuracy. The user never has to leave CoStar in order to access the tool, build the model, perform the analysis and create client-ready reports. The reality is that many brokers did not do this analysis work before because the work involved, or they hand this work off to an analyst in their back office. CoStar Lease Analysis is not intended to be a back-office tool. Now that it's much easier and faster to build the model that the broker can work -- the broker can now work with their clients face to face, discuss terms and possible scenarios and compare several properties and models side-by-side, real-time. We also believe that brokers negotiating on opposing sides will use the tool real-time with the what-if analysis capabilities as a key negotiating tool. CoStar Lease Analysis allows clients to generate reports that summarize the information for their clients' senior management. These are professional, high-quality board of director reports that take highly complex information and present it in an easy-to-understand document that lets users compare multiple lease options. We believe CoStar Lease Analysis will become the industry standard for the financial analysis of leases. This is just the start for this project genre, and we feel that we have a very robust and promising product roadmap for integrated financial modeling. Again, I think our clients can say it best. William Schwartz of the Meyer Group said, "The lease analysis is amazing. This is the most -- this is more cohesive and easier than ProCalc, plus it's modeled what CoStar data already has, so you have a head start." Elizabeth Harvey at Cresa said, "It's amazing. The presentation output is excellent." Lisa Banusiewicz at Transwestern said, "It is less daunting than ARGUS or even building something simple in Excel. The sensitivity analysis features are very helpful to see what little tweaks need to be made to hit the targets." Mark [indiscernible] at Ackridge [ph] said, "Critical, very important and game changing." Nikki Arena [ph] of Guardian Realty Investors said, "The lease analysis feature is also very cool. It takes a lot of guesswork out of the lease." Fifth, we released CoStarGo 2.0, which is the upgrade for CoStar iPad app. This new version now has customizable analytics, which means brokers can work directly with clients in the field, using powerful property market analytics. So it gives instant insights, charts, graphs, absorption, trends in the market area they're sitting in or anywhere else they want to steer their iPad. Mike Hetchkop at Cresa remarked, "I like the fact that analytics just pop up. I like the ones that come up automatically, so you don't have to create anything, especially because most of the time using CoStarGo on the go and presenting in front of a client." All in all, we're very pleased with the reaction to these enhancements and are optimistic they will have a positive impact on 2014 sales. These products allow our sales force to meet with existing clients to provide an opportunity for more cross-selling of the LoopNet users. Can't help it, I'm going to share just 2 more comments. Jonathan Gardner at Coldwell Banker Elite said, "I just liked the evolution of the interface and what shows as attention of detail from user input. There's obviously strong communication links between the company and its clients, which will keep accounts alive and growing. Very reassuring. I specially like that instead of just sharpening existing tools, the commitment to excellence from CoStar is extended to lease analysis. Usability has reached another level. Thank you." And then Steve Romer, who is president of Westrock Appraisal Services, is one of the smarter guys I know, said, "I have been waiting for this my whole life." Okay, he may be a little over enthusiastic. Okay, so, all in all, a very solid product release and exceeding our expectations. So turning to LoopNet. Through the third quarter 2013, the CoStar sales force has now achieved nearly $36 million of revenue synergies from our acquisition of LoopNet. Through September 30, 2013, we have cross-sold our products between LoopNet and CoStar client bases to over 6,400 real estate firms after completing nearly 19,000 cross-selling demos. As we expected, this is an increase in the close rate to approximately 34%, up from 31% in the second quarter of 2013. I believe we can continue to include -- increase the close rate to trading of our sales force and very valuable technology tools that we're using to assess the selling process. I spoke last quarter of a comparison tool within CoStarGo for our sales force to use of LoopNet users, who think they're seeing the whole market on LoopNet. The tool appears within CoStarGo and demonstrates the CoStar has significantly more listings in a given area than what is available under a user's LoopNet subscription. In addition to that very important tool, we have just launched an automated LoopNet to CoStar upsell tool that appears within LoopNet's website. Once a person -- once one of our sales people demos a LoopNet to CoStar information upsell prospect, we automatically turn on an automated comparison of the results of a CoStar versus LoopNet search every time the prospect searches within LoopNet. So if a LoopNet user, who we think should be using CoStar, goes into Santa Monica and looks for office buildings for sale, it will pop up and will say, there's 30 buildings that answer this criteria in CoStar and there are 15 in LoopNet. If you want to see the whole market, upgrade to CoStar. So this is a very effective way, and those numbers are hypothetical but typical, it's a very effective way to bring home to LoopNet user the clear advantage between the different price point products we offer. So it's a very cost-effective way to say -- stay top of mind with a prospect and convince them that while they need LoopNet for marketing, they need to invest in CoStar to get a professional level information tool and have more information to their client. In the first week, this tool has already resulted in new sales, more appointments and the LoopNet users calling our sales force to buy. After 1 day, one LoopNet user sent the email saying, "Please turn off the pop-up, I'll buy." As we have previously discussed, we're preparing to launch a broker advertising option on LoopNet by the end of the year, enabling brokers to market their services to tenants or buyers looking for properties in areas they specialize in. This will be a completely new revenue source for us, and I expect that it could be quite significant when you consider that on the residential side, companies like Zillow, Move and Trulia earns tens -- they earn tens of millions of dollars annually from similar advertising opportunities for their brokers. I am very pleased with how we continue to grow revenue in LoopNet's Premium Lister product. In the third quarter of 2013, the sequential growth over the second quarter 2013 was 5.6%. Since the quarter -- since the third quarter 2012, we have grown Premium Lister revenue by 25.8%, so it's growing much faster than the business overall. We are also increasing the ratio of paid to free listings in LoopNet. We have increased the number of for lease paid listings all the way up to 49% of total listings, up from just 32% at the point we closed the acquisition. For the for sale paid listings, they're now up to 39%, up from 31% at the time of the acquisition. Membership growth continues to be very robust in LoopNet as we added 360,000 additional registered members in the third quarter, and we now have 7.7 million registered members in total. I think 10 million is coming here soon. We increased Premium Membership Average Revenue Per User of new sales 57% from $56 in the third quarter of 2012 to $88 in the third quarter of 2013. Overall, Premium Membership Average Revenue Per User is up from $66 to $76, which is a 16% year-over-year increase. In the third quarter of 2013, 48% of all premium memberships were sold on an annual basis and 27% were quarterly. The average contract term has gone from 1 month prior to the merger to nearly 7 months now. And the average new LoopNet contract value has moved from $56 as of completion of the merger to over $600 today. Now, I'd like to update you on our activities in United Kingdom. We're making excellent progress in London, as our release of CoStarGo and CoStar Suite has resulted in a strong uptick and sales there. September 2013 was our best ever sales month in the United Kingdom, and we've had 4 of our highest ever sales months to the U.K. during the first 9 months of the year. Today, we have nearly 300 firms subscribed in the CoStar Suite in the U.K. In addition, we've achieved an average of 40% price increases and subscription fees from existing FOCUS subscribers upgrading to CoStar Suite and Go, and nearly 35% of the clients upgrading to Suite and Go have done so on multiyear contracts. We signed some excellent clients in the U.K. in 2013, including Wells Fargo, Standard Life and Europa. Historically, the vast majority of our sales came from brokers in the U.K., but now with CoStar Suite, we're generating a high volume of sales to investors, owners and lenders. CBRE is one of the dozen major brokerage firms in the U.K. and in fact, is the largest of the majors there. CBRE and many of the majors subscribe to our low-end, low-cost legacy U.K. products called FOCUS. The cornerstone of our strategy in the U.K. has been to upsell these brokerage firms on the significant additional value they can gain from our U.K. CoStar suite of products. After 2 dozen meetings with CBRE and a 9-month sales cycle, I am extremely delighted that the leader in the market has made a significant investment by upgrading to a multiyear contract for CoStar Suite. This is a major milestone for us, and it demonstrates that our investments to integrate the U.S. and the U.K. are starting to pay off. We believe it's only a matter of time before other top U.K. commercial real estate firms will follow CBRE's lead in order to not cede a competitive advantage to them. I'd like to briefly update you on what we're seeing in the commercial real estate markets. The markets are continuing to show signs of recovery. Both investor and tenant demand for real estate is currently increasing. Year-to-date, net absorption of office, retail and warehouse space is averaging more than 50% higher than the same period last year, and the department demand alone is up 28%. Furthermore, the third quarter of 2013 had the strongest net absorption so far this year for each property type. We continue to see capital flowing to real estate investment and year-to-date sales of all of commercial property are running 19% higher than 2012. Many formerly distressed suburban office markets such as Orange County, Phoenix, Sacramento and Atlanta have registered over 2 million square feet of net absorption each in the past year. Strong apartment sector fundamentals push vacancies to a record low of 4% in the quarter. This record low vacancy rate is driving 2 trends: First, rent growth is very strong at 5.4% annualized rate. Second, net completions are up more than 150% year-to-date to 186,000 units. The apartment market strength is broadly based and rent has grown by 2% to 8% in nearly every major market. The industrial sector is very healthy overall. Expanding Internet retailers and housing recovery-related demand growth has caused year-to-date industrial net absorption to spike up by 40% compared to the same time last year. It has propelled industrial vacancy to decline by 80 basis points to 8.4%, which is the greatest year-over-year vacancy decline for any of the property types. Retailers are stronger today than they've been in years. In particular, they have mostly shed underperforming stores and have written a rebounded [ph] retail spend into record profits. Retail net absorption has more than doubled from last year. So in conclusion, we're generating exceptional natural results for the first 3 quarters of 2013. We believe that the enhancements to our existing products, the strength of the commercial real estate recovery as well as the continued growth of the size of our sales force positions us to be able to maintain mid-teens revenue growth while expanding margins for the foreseeable future. I believe that this quarter further demonstrates that we're on our way to reaching our goal of $800 million in revenue, with high margin as we exit 2017. Okay. At this point, I will now turn the call over to Brian Radecki, our Chief Financial Officer, as long as he promises to make no sound effects.

I promise, Andy, thank you.

You're welcome.

As Andy mentioned, we're very pleased with the financial performance in the third quarter and year-to-date 2013. CoStar's information, analytic and marketing services continue to show strong revenue growth and the successful integration of LoopNet continues to be a big contributor to the growth in revenue and earnings. EBITDA margins continue to expand, driven by mid-teens revenue growth. Additionally, as Andy discussed, revenue synergies for the LoopNet acquisition continue to ramp up, have increased to $35.8 million since the acquisition. So this is where Andy gets really excited because I get all the points, point this, point that on there. So I'm really excited, so let's talk some numbers guys, right Rich? You're ready? Are you ready?

I'm ready.

Are you with me? Jon, are you with me?

I am.

All right, everyone's with me. All right, here we go. Starting with CoStar's results for the third quarter 2013, the company reported $112.3 million of revenue, an increase of 16.3% or 17% compared to $96 million in the third quarter of 2012. This growth was driven by solid core information services performance, continued cross-selling efforts, as well as impressive growth from the LoopNet marketplace. The third quarter 2013 is the first year that we had a full quarter of LoopNet revenue and a year-over-year comparison. As I discussed, at the time of the acquisition, our 2012 results were impacted by the purchase accounting adjustments included, which reduced LoopNet's deferred revenue. Normalize these adjustments, our year-over-year revenue growth for the third quarter of 2013 remains a strong 15% compared to the third quarter of 2012, or in the mid-teens. More than 75% of the purchase accounting adjustments were recognized in the first 2 quarters last year after the acquisition, so the impact in growth rates in the future is fairly minimal. EBITDA was $29.8 million in the third quarter of 2013 compared to $19.6 million in the third quarter of last year, an increase of 52%. As we reported, adjusted EBITDA of $37.7 million for the third quarter of 2013, an increase of $12.1 million or approximately 47% compared to $25.6 million in the third quarter of 2012. Adjusted EBITDA margins increased to 33.6% in the third quarter of 2013 from 26.7% in the third quarter of 2012. Our results and these margin results are consistent with what was I think it was our medium or long-term goal but now it's coming closer of achieving $50 million -- $500 million run rate with 30% to 35% adjusted EBITDA margins by the end of 2014. We think it is clear that we are well on our way to these goals, which we've been discussing for a few quarters. I'm happy to note that we achieved the margin goal beginning last quarter, 6 quarters earlier than we expected. While adjusted EBITDA margins may move around a little bit due to timing of marketing and other investments throughout the year, our second and third quarter 2013 result demonstrates the potential for continued strong earnings growth and expanding margins for many, many years. Gross margin was $80.6 million in the third quarter of 2013, up compared to $65.1 million in Q3 of '12. Gross margin percentage was 71.8% in the third quarter of 2013, a 4% increase compared to last year, which is fairly massive. Net income increased to $11.1 million in the third quarter of 2013 compared to $6.8 million in the third quarter of '12. And non-GAAP net income in the third quarter of 2013 was $20.2 million or $0.71 per diluted share, which is a 54% increase from the third quarter of 2012. Reconciliation of all non-GAAP net income, EBITDA, adjusted EBITDA and non-GAAP financial measures discussed on this call to their GAAP basis results, are shown in detail, along with definitions for those terms, on our press release issued yesterday which is available on our website at www.costar.com, or you can just call Rich Simonelli. Cash and investments totaled $244.6 million as of September 30, up $32.8 million -- hold on, $32.8 million from $211.8 million last quarter. Obviously, cash flow remains very strong and cash and investments now are $87 million higher than our total debt of $157.5 million. Obviously, our balance sheet's in great shape. At this point, I'm going to give some additional color on a few metrics that highlight our strong performance in the third quarter. We achieved $12.2 million in annualized net new sales in the second quarter based on our ongoing success of driving our information sales and analytics, also LoopNet's Premium Lister products and our cross-selling efforts. I'd like to point out that this sales number, which is the one -- the older one that we were reporting for years, actually understates our success. As Andy noted earlier, the net new sales of subscription services on annual contracts is higher at $13.7 million, up 47% compared to the third quarter of 2012. The higher sales of annual subscription reflects our efforts to replace the short-term LoopNet agreements with higher-value, longer term agreements. Moving forward, to eliminate any confusion, we're just going to provide the net new sales metrics of annual subscriptions, which we believe is the most important and relevant metric. Revenue from subscription services on annual contracts was up to $83.8 million for the third quarter 2013 or 74.6% of total revenue, up from 71.2% a year ago. For the trailing 12 months ended September 30, 2013, subscription revenue from annual contracts totaled $311.9 million, or up 19% from $261 million for the 12-month trailing period 2013 -- or 2012, sorry about that. At this point, approximately 75% of our revenue is coming from annual subscriptions. The remaining 25% is primarily made up of marketing services, including LoopNet's Premium Membership, which are on monthly or quarterly agreements and CoStar showcase as well as some advertising revenue across both platforms. As we continue to make progress upselling LoopNet's subscriptions to 1-year contracts, we continue to expect the increasing amount of marketing revenue will be included in the subscription revenue metric. The renewal rates for annual subscription revenue remained high during the third quarter of 2013. The 12-month trailing renewal rate for CoStar's subscription-based services was 93.3% in the third quarter of 2013, as this metric ticked down slightly from 93.7% in the prior quarter. As we've been discussing for the last few quarters, the introduction of more annual LoopNet contracts into our subscription base is expected to cause the 12-month trailing renewal rate to edge down slightly over time. The small decline to date is about what we've expected. We may see that number to continue to move a little bit, a percent or 2, over the next few years. The renewal rate for CoStar subscribers who have been with us for 5 years or longer continued high and remained at approximately 98%. Last quarter, Andy discussed in detail our plans to continue to evolve our sales force. We're continuing to focus on expanding our field sales force, which now includes 190 field sales reps, an increase of 60 from the time of the LoopNet acquisition and we'll continue to add more reps there. Hopefully, we should be over 200 by the end of the year. So now I'll talk about my outlook for the fourth quarter and full year 2013. Our guidance 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. We do not attempt to predict foreign exchange rate fluctuations, so our guidance assumes little to no volatility for the current rate. Actual results may vary from these results. But if you are not sure, call Jon Coleman. Based on continued strong revenue, earnings and margin momentum, and the expectation for continued growth in our core information services and cross-selling initiatives, we're raising both the revenue and earnings guidance for 2013. For the full year, we now expect revenue in the range of $438 million to $440 million, which is a $3 million increase at the midpoint compared to prior guidance. It was consistent with our mid-teens revenue growth we've been discussing. It also accounts for the expected LoopNet marketplace seasonality, which occurs every fourth quarter. Also, due to continued cost and revenue synergies related to LoopNet acquisition and our ability to grow revenue at high incremental margins, we expect 2013 full non-GAAP net income per diluted share of approximately $2.51 to $2.54 based on 28.2 million shares. This is an increase of approximately $0.19 at the midpoint with our prior guidance. For the fourth quarter of 2013, we expect non-GAAP net income per diluted share of $0.72 to $0.75 based on 28.4 million shares. As we look forward to Q1 2014, we are extremely excited about the new product enhancements Andy discussed earlier. To support the launch of these enhancements and to drive continued revenue growth in 2014 and beyond, we plan to reinvest some of the benefits of our recent strong performance into sales, marketing and branding initiatives, totaling $0.10 to $0.12. We plan to align these initiatives with selling beginning late Q4 2013, with the majority of the impact happening in Q1 2014. And the Q4 2013 spending is incorporated into my guidance. As we plan for next year, we have a lot of moving parts, which will affect my guidance, including marketing to support the product launches, some decisions about deemphasizing or discontinuing certain services, finishing the back end integration of our databases to gain research efficiencies and completing the buildout of our sales team. Sounds like a lot. Currently, we are in the budget process for 2014, and we believe we can continue to grow both revenue and earnings nicely compared to 2013, while also investing to further build out our platform and sales force to drive long-term growth, not just for 1 year, but for the next decade. Once we finish the budget process, I'll be ready to give out much more detailed 2014 guidance on our next earnings call. Until then, we expect to operate in that 30% to 35% margin range, most of next year, and exiting at the run rate of $500 million of revenue or possibly better. As we move into 2015, '16 and '17, we believe the business will continue to grow and eventually operate in the 40% to 50% margin range. In summary, I'm very pleased with the CoStar financial results for the third quarter of 2013, which clearly showed the strong revenue growth and margin expansion. We continue to believe the company's operating in a multibillion-dollar potential market, and we are focused on executing our plan to capture that opportunity. We also remain focused on a longer term goal, I shared with you earlier this year, of doubling the business over the next 5 years, continuing our mid-teens revenue growth to an $800 million annualized revenue run rate exiting 2017 at even higher margins in the 40% plus range. As our track record shows, we believe we have the size of market, market position, competitive moat, platform, strong cash flow, and management team to execute on our vision and take advantage of this massive opportunity. As always, I look forward to sharing our progress with you on these goals in the coming quarters. And with that, I'll open it up for questions.

[Operator Instructions] And the first question comes from Brandon Dobell from William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Quick one on sales force. First, you mentioned getting over 200. I want to make sure I understand where the 190 -- or how did the 190 I guess looks right now? Are those truly all field sales force people? Are there still some in that number that are kind of hybrid between field and inside? Or if it's not, then, how do the inside sales force stack up right now?

It's all 100% traditional field now. So they're basically out and -- we designed a new territory structure to handle 220-some territories in the field, responding to where the demand is in the market. And so there's 195 of these territories being filled. And they're not HQ AEs traveling sort of hybrid inside sales. And that -- this is not an insignificant effort. So we have -- we are doubling the number of managers out in the field, and we've been hiring at a pretty good clip there, some internal promotions. And then we also have been conducting the most training, I think, we've ever conducted for our sales force over the last 3 or 4 months. So both LoopNet cross-selling techniques, PL selling techniques, training around the new products and the new financial modeling and then also just bringing in the new folks and new managers and getting them up to speed. For big picture, we're marching towards the goal and it feels pretty good.

Yes, and Brandon, that -- I'm just reiterating what Andy said. The 190 is pure in the field. The overall sales number is over 350, which would include all the other pieces, the verticals, inside sales and all that. So that number continues to move up. We expect it to be over 200 by the end of the year. And again, it's all part of the plan we've been discussing the last few quarters. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Got it. Okay. And then back, Andy, your comments about the kind of the 5 new enhancements, those kinds of new rollouts. Did that impact how you guys are pricing? Did it impact how you guys are looking at what types of customers may make sense [ph]? Just trying to get a feel for other than just the anecdotes about how useful the product is, and how else [indiscernible] to monetize all the efforts you put into those field [ph] enhancements or is it just, let's just make it better so we keep our renewal rates high?

No. I mean, I do want to get this 5-year renewal rates back over 99%. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: That's a good goal.

[indiscernible] Now the -- on our kind of our key growth areas, lenders, banks, institutional investor, owners, we're still single digit penetration, retailers, still single digit penetration. So this is really building a dramatically better product in order to capture more LoopNet upsells, capture more penetration in these new markets, something like multifamily information opens up a whole new segment for us. So prior, again, if you were a major lender, there was a pretty big hole in the CoStar offering that didn't cover apartment buildings. And we've now got that box checked and that opens us up to a lot of new business we couldn't really go for before. The lease analysis tool is something that creates some interesting opportunities down the road. So the more of the user content you can manage and the closer you can get from -- as you can move from being a data source or an information source to actually being a platform that your customers are using to negotiate on, changes the dynamic and also moves you up the line of real-time data. And this gives you a much stronger product, which I think will give us a more valuable product for owners and institutions to use and a whole range of things you could charge for down the future. But right now, we want to get a platform that we could get massive adoption on. So if we can pick up half of the brokers in the industry using our financial modeling tool, it becomes a standard. And then that allows you to move into other areas from a standard bearer position. So it's really a penetration into new markets and setting the platform for new revenue opportunity, like completely new products you'll sell. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Okay. And then final one for me. As we think about the net new subscription sales number you gave us, that $13.7 million, how do we think about the, I guess, let's call it productivity from that 190 sales people, is that number driven by a small set? Is it the 80-20 rule? Is it more broad based? I guess I'm trying to get at your comfort or confidence around increasing productivity from the sales force based on the numbers you've seen in the past couple of quarters?

Well, you certainly don't increase productivity when you double your sales force in the short term. So you -- we strongly believe in what we're doing, doubling the sales force like -- it will be negligent not to build a larger sales force to deal with the opportunity we have here. But the process does not increase your productivity. All these new people coming in come in at a much lower productivity level than the established sales people. And as you promote some of your best performers into some management roles or above average performers to the management roles, and as you also move into mentoring roles, your productivity would expect to move sideways for 2 quarters, 3 quarters where you get to your goal of 225. But big picture, as I look at the numbers on individual performance, you still have a remarkably stable production level. We have maybe 5 super performers in the company and then, probably 75% of our sales or 80% of our sales are coming from 50%, 60% of sales force. It's unusual for sales force, it's actually remarkably balanced, with these new sales people dragging the tail down as we would expect and we've seen in the past.

And so, Brandon, just to add on to that. Yes, I mean, so clearly, productivity per rep is going to be sideways or down, I think, for most of the year, because we're going to be continuing to add people through the end of the year, we will continue to add field sales people next year. But obviously what that does is it gives us the opportunity, obviously, to grow, continue to grow that net new by adding people and then the following year as you move into '15 an '16, then to continue to have more net new, because then your productivity should then be moving up as you stabilize that and move forward. So I think it gives you a 2- or 3-year window what we're doing, sort of at the end of this year and into next year, it drives things for another 2 or 3 years.

Our next question comes from the line of Andrew Jeffrey from SunTrust.

The question I have is regarding these newer solutions, which -- about which you sound really enthusiastic and, obviously, you're putting a lot of marketing weight behind them. You're doing 15% or so organic revenue growth now and continuing to drive really good LoopNet cross-sell success. Presumably, these newer solutions are going to be additive to growth, to the extent you're continuing to talk about 15% or mid-teens. Does that mean that we're nearing maybe a slowdown in the LoopNet cross-sell productivity? Or are you just being conservative? How should we think about the interrelation of those 2 things?

Well, I would emphatically say that I don't think we're nearing any sort of a slowdown in the LoopNet cross-selling activity. That -- I expect close rates to go up and I expect to be able to keep that going at a stable pace for another 2 years, at least. So it is solid, and we're just now really getting our sales force really to the productivity level to be able to do that sale and delivering the technology tools they need to assist them in it. And we really haven't yet brought the sales force to bear on the full potential of the PL side of LoopNet business, which is the marketing and advertising side of their business. So we're -- I think, we are in the second inning of the whole LoopNet thing, and that might be easily second inning.

Yes. And I will add on to that, I mean, I think that what it's tied to is what we've been talking about. We didn't have a big enough sales force. So now we closed the deal, 1.5 years later, we've done 19,000 demos. So we've gone out once and demoed 19,000 people and we talk about 100,000, 140,000 prospects. We just don't have enough sales people. So I think it's -- everything is sort of tied together. We need to continue to grow the field sales force. It's quite a process to actually take this field sales force and double it because then you have to redistrict everything. And I think we're in the process of doing that. And so I expect that cross-sell to continue for honestly a decade. I mean, think about it, it's been 1.5 years. We've gotten through 19,000 of 140,000 or whatever, 120,000 potential prospects. So I think that goes for a very, very long time.

Okay. So I know one of the things that you alluded to, Brian, in your remarks. You've talked about potentially moving away from some legacy LoopNet offerings, perhaps early in '14. I'm just trying to get a sense of cadence, you gave us a little color on this is the investments and what they might mean to EPS mostly in the first quarter. But would expect in early '14 that there might be a slowdown below that mid-teens growth rate as you twilight some of those older products? Is that still something you're thinking about?

Yes. I mean, I think nothing has changed. I've been talking about it for 3 or 4 quarters. So I mean, I think nothing has changed there. But my view is taking that out, I mean, looking at Q2, Q3, Q4, yes, we'll be growing mid-teens sort of year-over-year. And again, factoring in whatever the seasonality numbers are, I mean, you know actually the LoopNet business better than anybody. So like when I talk about Q4, you know basically from Thanksgiving to the end of the year, the LoopNet marketplace is just slow. It has been every year for the past x amount of years. It then comes back stronger in Q1. So I think sort of x some of the things...

However, we did manage them to their best fourth quarter ever last year.

Yes, Andy is correct. We did. Last year, fourth quarter was unbelievable. So anyways, I think that next year is a great -- I think it's a pivotal year from product development, finishing the back end integration, sales force. But you look at, we're still planning on growing revenue and earnings very, very nicely next year while completing what I think is a lot of significant things, which really set the company up for, like I said, it's not just about 1 year, it's about '14 -- it's about '15, '16, '17 and being able to run in that double-digit mid-teens growth and not just -- I'm not just thinking about 33.6% margin this quarter, I'm not just thinking about the first quarter of 2014. I'm thinking about getting to 40%, I'm thinking about getting to 42%, I'm thinking about getting to 46%. So we're definitely, we're thinking long-term.

Okay, that's helpful. One last one for me. Maybe you can just take a stab at it, Andy. By how much do you think and if you can't put in dollars terms specifically, because I know it's a hard thing to nail down but maybe proportionately, about how much you think some of the newer solutions, lease analytics, multifamily, et cetera, how much do you think those expand your TAM?

How much do we expand our TAM? It's -- I'm looking at the same market. So I'm looking at, in the last 2 years, we went from 2.6% of the retailers buying our product to 3.6% of the retailers buying our -- and we added hundreds of them. Our owner penetration rate went from 5% to 10% -- 5% to 7%. So I always have believed that you're talking a multibillion dollar opportunity and what these products do is just better position us to get the kind of penetrations, rates we think are possible in these, just really attractive, solid markets like the lender banking, institutional owner, the retailer, even corporate America. So we've achieved 80% penetration rates among the biggest brokerage firms, or the large brokerage firms, or mid-to-large brokerage firms. And we're moving the dials on these other 4 or 5 segment, but we haven't begun to move them like we move the brokerage. And that's what this is really all about. So potentially, you add $100 million plus by moving solidly into the multifamily. And the financial modeling tools is a -- easily $100 million there. But again, the real thing is, we know what this market opportunity looks like. We have very -- we have great growth rates, very low penetration in 4 sectors we think are huge. And it's going to move us down the line faster. And again, address the problem of the 98% renewal rates for customers 5 years or over.

Our next question comes from the line of Michael Huang from Needham. Michael Huang - Needham & Company, LLC, Research Division: First of all, Brian, you had reiterated kind of your comfort level and confidence in this annualized $500 million target as we exit next year. And I think you threw in there and possibly more, and I can't remember or recall if that was the first time you said it or not. But I was just wondering, as you walk through or think about what are the potential kind of upside drivers to that target, maybe just kind of help me understand where that might be coming from. Is that just better-than-expected sales productivity? Is that better-than-expected kind of uptake of this new product? Maybe just kind of walk me through, what are the upside drivers to that target?

Sure, yes. I mean, I think it's a lot of things that we've been talking about in the call. Obviously, we're significantly increasing the size of the sales force. So as most people know, I'm fairly conservative in my numbers. I'm a show-me guy. I want to see productivity from some of these first. So I think that there could definitely be upside from the sales force and how we execute on that. Obviously, the better we execute, the higher the revenue, I think, we can be. I also think there can be upside on a lot of these releases that we talked about. And I think there could be upside from -- Andy talked about broker adds. I've said this fairly clearly on prior calls. I'll say it again. I'm not putting very much revenue -- or actually I'm not putting any revenue in my models for broker adds, I'll probably put a little bit but not a lot. And the reality is, until I see the first contract in dollars come in the door, I'm not going to be throwing a bunch of revenue in my model for that. So I think as that rolls out and we start to see some revenue in the first quarter, second, third quarter, that could provide upside as we move along the year, and hopefully we can do better than we thought. The reality is, it still won't be a big number for next year. The but then, it can obviously be much bigger as we see success there in '15, '16 and '17. That, as Andy mentioned, you can get Zillow, Trulia, HomeAway, you got a lot of marketplaces out there that do hundreds of millions of dollars in those areas. And I think over the next 5 years, we can see that. But I'm going to be conservative. I'm not going to start putting -- I've always said this, I'm not going to start putting revenue dollars in guidance for products that haven't released yet. I learned the hard way on that one.

So I haven't talked to Brian about it, but I believe that his numbers for next year probably include below average production levels for the 225 field sales people. And so the way you get upside is that the field sales people perform at average. Michael Huang - Needham & Company, LLC, Research Division: Okay, that's great. It's great to see kind of the improvement on the conversion rates as the Loop consolidates. I was wondering, as you think about kind of what that upper bound of kind of those close rates and what it could be over time, did you have kind of thoughts around that? And maybe I missed it, but can you give us kind of the number of kind of what that qualified Loop, lead base looks like, as we exited Q3? I think it's 140,000 last quarter.

Correct. And it's a modeled number. I mean we look at these leads, and we run assumptions against them and say, what do we think the real addressable folks are in that market? So the number is over 100,000. It was 140,000 using the same consistent model we've been using over time. The important takeaway is that despite the fact that we were able to cross sell so many people into CoStar, the size of the pool of prospects grew on us. So we weren't upselling them as fast as we were getting new ones, which is probably a result of the recovery. You get more people reentering commercial real estate, and so we're not able to upsell them. Again, it's part of why we're growing the sales force. Michael Huang - Needham & Company, LLC, Research Division: Okay, great. And last question, and I think you kind of touched on this a little bit, but in terms of the mechanics of kind of the Fusion pricing, is it a la carte? So are there some of those things that they could buy just kind of piecemeal or do you have to buy the entire platform? If you're a suite customer, like what's the ARPU gains you get as you move to kind of the broader Fusion platform?

Well, the Fusion platform suite, historically, we've had an awful lot of customers who were buying just COMPS or just Tenant or just Property or Property Express or even look at LoopNet as a continuum of our product line, so LoopNet Premium Searcher. What Fusion does is it creates more and more reason for these folks to step up to the suite level. And as they do that, you're -- they're coming up 50%, 75% in pricing. So the pricing schedule, obviously, based on number of shops, national, local, is just incredibly -- it's too complex to have a quick answer that's one-size-fits-all answer. But typically, you're going to get a lot more accounts going up 50%, 75% as they go from buying one of our products to buying the suite application. And then the other thing that's occurring here is this release is probably the last release that is a generic one-size-fits-all CoStar Suite. The next release will probably have the system divergent to a one product that's addressed towards brokers and then another product, which looks very similar but has different functionality, that's addressed to lenders and owners. So this is the last generic release or one-size-fits-all release. When that owner institution release comes out, it will probably be at an ARPU of 4x the average of the broker version.

Our next question comes from the line of Ian Corydon from B. Riley & Co.

I think you just partially answered my first question, which was do PPR subscribers have access to the new analytics in CoStar? Or are they meant for a different customer? And then when does that owner user interface come out? Is that 2014?

That will be definitely 2014. And know that someone at -- probably 80% of the people of our customer base subscribes to CoStar already. And I'm going to just guesstimate that the 20% that do not, they're multifamily players. So now, they will be an audience that will probably want to subscribe to CoStar Property. When we launched the owner version of CoStar, we will be bringing the capabilities of the PPR web product and to merge it with the CoStar product, and they'll be a one-stop shop, which we hear from our customers, they'd like to see. They'd like to be able to get the forecasting analytics screen tools in the same environment as they get the micro detailed data and leasing proposals and so and so forth. so we'll be -- the CoStar owner product will not include the advisory services, the access to analysts, the briefings. But it will have the same functionality as the PPR website integrated in the CoStar website.

Perfect. That makes sense. And that's kind of what I figured. And then am I reading the guidance right that Q1 adjusted EBITDA might be a little below 30%? And then for the rest of the year, you'll be kind of in that 30% to 35% range?

Yes. I mean, I think we're going to be generally in the 30% to 35% range, Q1 sort of including the marketing and all that, it will be around there. Obviously, it depends on where we end up in the fourth quarter. But, yes, it will be close.

Our next question comes from the line of Todd Lukasik from Morningstar.

I had a couple of questions on margin. I think, Brian, you mentioned last call, it's a business model, where $0.70, $0.80 of every incremental revenue dollar can fall to the bottom line. I think I had gotten you guys at about a 74% incremental adjusted EBITDA margin for this quarter, year-over-year, I think slightly less than that for the first 3 quarters. But I'm just wondering, is that sort of the range that you expect to stay in, in terms of an incremental adjusted EBITDA margin, that 70% to 80% range that you mentioned?

Yes. I mean if you look at the gross margin, it's at over 71% now and I think it's up 4 points over last year. So, yes, I would continue to expect that you're going to drop $0.70 to $0.80 through that line. I think that will continue to grow, over time, on a long-term model basis. And then, yes, I think that if you look at where we're going, obviously, when you're doing that, we're sort of balancing -- I'd say that this is different than 5 years ago or 10 years ago. We're able to continue to grow and then balance, growing EBITDA earnings. As you've seen all this year, I think we can do that all next year and then I think in the following years, and we can continue to push up the overall EBITDA margins into the 40%, 50% range. I don't think we're limited, I actually don't even think the top end of that range is limited in a longer term model. We've seen for years, some of our larger markets doing 60%, 70%. So right now, I'm sticking to talking about the next 3, 4, 5 years. But I don't think that by any means we're sort of bound by a 40% or even a 50% margin long term.

Okay, got you. And when you mentioned 40% to 50%, that's the -- just to clarify, that's adjusted EBITDA margin that adjusts -- adds back the stock-based compensation expense as well?

Yes.

Okay. And then, I just wonder -- I know you probably don't want to talk about pricing for particular clients, but I was wondering with the Transwestern deal, how a deal like that impacts the net new sales numbers that you talk about. So if the total value of that client, with all the dozens of contracts that were out there was 100 and the 1 national contract that you signed, the value is 120. What's the impact of that on net new sales, is it 20 or is it 120?

It's 20. If you're going from 100 to 120?

Yes.

It's 20. We're very net new focused.

And there are no other questions in the queue.

Well, thank you everybody for joining us today, and we look forward to updating you on our progress in about 3 months -- 3.5 months, perhaps more. Well, thank you very much, everybody.

Thank you. That does conclude our conference for today. Thank you for your participation and using the AT&T Executive Teleconference Service. You may now disconnect.