CoStar Group, Inc. (CSGP) Q4 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group Fourth Quarter Earnings Call. [Operator Instructions] And as a reminder, this call is being recorded. I'd now like to turn the conference over to Rich Simonelli. Please go ahead.

Thank you, operator, and good morning, everyone, and welcome to CoStar's Fourth Quarter 2013 Conference Call broadcast live from our headquarters in Washington, D.C. We're delighted you've joined us. And before I turn the call over to Andy, I have some really important information for you. So certain parts of this discussion contain forward-looking statements, which involve many risks and uncertainties that can cause actual risk -- 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 our February 19, 2014, press release on fourth quarter and year-end results, and in CoStar's filings with the SEC, including our Form 10-K for the period ended December 31, 2013, as well as our Form 10-Q for the period ended September 30, 2013, in each case, under the heading of Risk Factors. All forward-looking statements are based on information available to us 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 over the Internet at www.costar.com. And a replay will be available approximately 1 hour after the call until March 28, 2013. To listen to the replay, please 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 318994. It's also available on our website right after the call. So without further ado, I'd turn it over to Mr. Andy Florance.

Good morning, everybody, and thank you for joining us today. 2013 was clearly the best year in CoStar's history. We had an exceptionally strong year in all aspects of the business, and we believe we are positioned to continue to grow at high margins for many years to come. I am very pleased with our outstanding financial results, which are the direct result of our entire organization of 2,000-plus professionals working hard to create valuable products for the huge community of commercial real estate professionals we serve. We increased revenue by $91 million in 2013, growing it to $441 million for the year. We continue to grow the top line to mid-teens, as our fourth quarter revenue was nearly $116 million, which is approximately 16% year-over-year growth. EBITDA for 2013 was $94 million. This is a 56% increase over 2012 and, by far, the most EBITDA we've generated in our history. Adjusted EBITDA margin accelerated to over 35% for the fourth quarter of 2013. In the fourth quarter of 2012, adjusted EBITDA margin was 25%. Margin expansion continued throughout 2013 while we continued to aggressively invest in the business. Our 12-month trailing renewal rate was 93% and 98% for customers who've been with us for 5 years. In 2013, we added nearly 4,800 new CoStar information subscription customers, which is the most we've ever added in 1 calendar year. Our annualized net new sales of subscription services in the fourth quarter was $15.8 million, an increase of 15% over the third quarter of 2013 and a 46% increase year-over-year. Our fourth quarter 2013 subscription-based revenue reached $87 million for nearly a 21% year-over-year revenue growth rate. So we're really quite pleased with our revenue momentum and our earnings momentum. The LoopNet acquisition integration has been extremely successful and beneficial for customers and shareholders alike. We have now achieved $50 million of cross-selling revenue since the merger. At this point, I think it's clear that we've exceeded the expectations set for both cross-selling between LoopNet and CoStar customer basis, and we've exceeded the initial expectations for cost synergies that could be created by combining the 2 companies. So it's taken us about 20 months since the close of LoopNet to get to this $50 million cross-selling point. And at this point, we feel that it's going to be a little more difficult to accurately report on this number and it will become a little less meaningful, so we're going to stop reporting on the cross-selling number going forward. So at $50 million, we're no longer counting. The commercial real estate recovery is continuing. 2013 was one of the best years for commercial real estate since 2007, as measured by the fundamentals of demand, occupancy and rent growth. For example, in 2013, real estate net absorption of the 4 principal real estate sectors tracked by CoStar increased by more than 30% versus 2012. This absorption supported broad-based, above-inflation rent growth ranging from 1.9% for retail to 4% for industrial. And we continue to see capital flow into real estate investment, as sales of commercial property ran 19% higher last year than in 2012. In fact, at $439 billion in property sales, 2013 had the highest sales volume since 2007. Net absorption of office space was up 24% in 2013 to 59 million square feet. A post-recession record 64% of office submarkets recorded vacancy declines in the fourth quarter of 2013, which is a very important indicator that the broad geographical base of commercial real estate is improving and is showing good fundamentals. And I think that is probably one of the single most important indicators. Strong apartment sector fundamentals allowed vacancies to remain near-record lows at just 4% as of year end. For 2013, apartment net absorption expanded 29% over net absorption 2012. Clearly, increased job growth and reduced homeownership rates continue to boost apartment demand. A doubling in the amount of new construction has provided alternatives for tenants, and the near future will probably lead to a period of slightly rising vacancies. In many respects, the industrial sector is the healthiest of the property types because it benefits from technological changes, in particular, e-commerce and limited new supply. Net absorption of industrial space was 37% higher in 2013 than in 2012 and allowed the sector to achieve one of the highest demand growth rates among the 4 major property types. Retail sales are now up by more than 13% from 2006's peak levels, driving up retailer profitability and encouraging new store openings. While the market remains plagued by empty retail space in higher-quality standards, landlords have been able to push rents aggressively. In short, 2013 was a good year for retail. All in all, all the sectors appear to be giving us a favorable environment for a successful 2014. All this valuable intelligence on what is occurring in commercial real estate markets is only made possible by the insightful dedicated efforts of our more than 1,200 commercial real estate researchers, economists and software developers supporting their work. Over the course of 2013, that team kept CoStar firmly positioned as the leading commercial real estate research organization in the world. They conducted 5.4 million research calls, drove 1.6 million miles inspecting properties, captured 719,000 new listings, added 1 million new tenants, and in total, made 31 million updates to our market coverage. Turning now to the United Kingdom. We entered the U.K. in 2003 with a purchase of a small commercial real estate company called FOCUS, and I believe its corporate name was Property Intelligence. Over the several years that followed, we acquired several more small companies in the United Kingdom and France. None of these companies had sophisticated software nor did they have comprehensive or adequate information. Our first challenge was to cost-effectively research the U.K. market so we could deliver comprehensive current and accurate information on the U.K. market. We initially acquired a small U.K. research team with only a dozen-or-so researchers based in an extremely high-rent-area, Central London. This group was only tracking a fraction of the market, with about 25,000 commercial listings in the U.K. With that spotty coverage of the market, the service was not considered an indispensable utility to our clients. We estimated we needed over 100 researchers to track the market properly. In order to do this cost-effectively, we closed our London research center and opened a much larger research center in Glasgow, Scotland, ultimately employing over 150 researchers there. Under the leadership of Simon Law, our U.K. Director of Research, the team took our database from 25,000 listings to over 156,000 listings, so a 6x increase. And we believe that is the most comprehensive coverage the U.K. market ever built. Despite achieving recognition from our clients for now delivering high-quality research for the U.K., until recently, we were still delivering that data through the old, unsophisticated software solutions we had initially acquired. In 2011 through to the beginning of 2013, a large international team of software developers, led by Jason Butler, Vice President of Software Development, modified our successful U.S. CoStar software solution to handle the U.K. data model, and we migrated the U.K. data into our successful CoStar software environment. Our plan is to upsell existing subscribers to the new enhanced platform with an average price increase that we're seeing of approximately 37%. In addition, we believe the new service has greater appeal to new customer segments such as owners, banks and others, which should accelerate our acquisition of new customers. In fact, we are seeing owners and banks sign up at about 3x the rate we historically were picking up in that sort of segment since we released the new software. During the course of 2013, 386 U.K. firms upgraded or purchased our new U.K. CoStar platform, and that -- those subscriptions are covering 2,000 users. One of our more notable transactions in 2013 U.K. was our multiyear contract with the largest surveyor in the U.K., CB Richard Ellis. Revenue growth has accelerated in the U.K. and in fact, it increased 5.5% from Q3 in 2013 to Q4 in 2013. As we completed the enhancement of our U.K. database and the migration into our CoStar Suite platform, our costs in the U.K. fell dramatically. And in the fourth quarter of 2013, the U.K. was profitable, with $781,000 EBITDA at a 14.1% EBITDA margin. Congratulations to the U.K. team. Giles Newman, the Managing Director who leads CoStar in the United Kingdom; Matthew Green, our Finance and Operations Director in the U.K. and their full teams have done an outstanding job that have made CoStar the clear #1 provider in the U.K. 97 of the top 100 brokerages in the United Kingdom subscribe to one of our services now. We have thousands of client firms potentially upsell in the U.K. in addition to many completely new prospects. We anticipate significant revenue growth in the U.K. for some time to come. Our results in the U.K. clearly demonstrate that the CoStar business model can be successfully implemented internationally. And with that, let's turn to Toronto. With our successes in the U.K. now freeing up a little bandwidth to allow us to focus our efforts up in Canada, we're now focused on beginning to deliver that product and bringing the Canadian operations into profitability as soon as possible. After 2 years of research in the Toronto market and building a database of 60,000 properties, I'm pleased to announced that we're beginning to sell CoStar services covering Toronto. I recently spent time up there with our local sales team visiting the top 15 firms in the market. The feedback we received was overall very, very positive, very welcoming. In half of my meetings, clients asked why it had taken so long to bring the product to Toronto. I didn't really have a great answer. Many have had U.S. associates call over the years and asked for the CoStar reports for Toronto, which they could not deliver. While it's still very early on, we have had a number of significant prospects indicate buying interest, and we're now actively negotiating contracts with multiple brokerage firms. I believe that there is great potential for decades of profitable growth in Toronto and Canada overall. As we discussed in earlier conference calls, we invested throughout 2013 to build a much larger direct field sales force throughout the U.S. We believe that we can deliver higher levels of profitable growth with a larger sales force. We believe that the size of the opportunity we're addressing and enjoy right now requires a larger field sales force to fully capture it and get the value that we have here. It takes 6 months to a year for a new sales person to become fully productive, so in the short term, sales force growth reduces EBITDA. In addition, the lower productivity of new sales people and higher initial training requirements to these sales people temporarily reduces our per-salesperson productivity across the board. It actually causes a little bit of dip in the existing established salespeople's productivity. And we've seen this several times in the past when we grew. Salespeople with 3 months of experience tend to generate approximately $10,000 in gross annual recurring revenue bookings each month. By the time a new sales person is in his or her 12th month with the company, the monthly production number typically climb to approximately $14,400 per month. A fully trained field sales AE with several years of experience typically produces significantly more at $30,000 per month. In the beginning of the first quarter 2013, we had 124 field sales reps in the U.S; by July 2013, we had 140; and by year end, we had 212. That's an increase of 71% over the course of the year and really quite significant. This is the largest field sales force we've ever had in place. In order to provide optimal management support to this larger sales force, we added 10 senior sales managers with relevant backgrounds from great companies such as Thomson Reuters, JLL, PR Newswire, ADP, LexisNexis, PayCheck, EMC, Informa, XO Communications and others. The hiring of these individuals, reconfiguration of sales territories and building a stronger sales management team was indeed a temporary disruption, particularly in the second half of 2013. But we believe it was necessary to ensure long-term growth. I am proud of the commitment to excellence our sales force delivered during this time, and they did so while producing solid top line growth. We recently held our annual sales conference, and the positive energy in the room was really great. We are really excited about the upcoming year. With our larger sales force and new sales territories, we plan to drive sales at a more local level, which we believe will increase sales and increase retention rates, if you have to worry about that at 93%, 94%. It will take some time for our new sellers and sales management to come fully up to speed, but I expect to see the full impact of the recent growth in the sales force and our net new numbers as we get into the later part of the year and into 2015. We launched 5 CoStar products enhancements in the fall of 2013. These enhancements included new lease analysis tools, mobile analytics, enhanced web analytics, a new map search and comprehensive multifamily information. On LoopNet, we released a new advertising opportunity brokers can use to reach prospective clients that are likely searching for properties on LoopNet. Since our October 2013 release, our clients have successfully executed 28 million searches on the new CoStar Suite, and they have built over 11,000 lease financial models in the new CoStar lease analysis tool. We continue to be very pleased with the positive reaction we are receiving to the product. One important area of success I want to highlight, though, in this new release is the new multifamily or apartment information analytic tool we released. We have been collecting partial information on apartment properties for decades now. Now with this new release, we have dramatically increased the breadth and depth of coverage. One of our most experienced research executives, David Porter, has led a team of several dozen researchers, assisted by over 100 field researchers and a number of overseas researchers, on a multiyear effort to build the premier information source on U.S. multifamily properties. We believe that we have built, by far and away, the most comprehensive database of apartment buildings ever assembled. We now have information on 326,000 apartment buildings, representing more than 17.5 million apartment units. With those words, competitors are out hiring researchers trying to catch up. We have hundreds of thousands of images, details on construction type and quality, amenities, unit mixes, rents, sales prices, asking prices, concessions and more. We are also tracking details on 0.75 million of apartment units that are proposed or under construction currently. We believe we have information on 740% more properties than the second closest information provider and 25 -- 24x more properties than the #6 player in that space. U.S. multifamily properties have an aggregate value of approximately $2 trillion. We believe this is a very important component of commercial real estate and an area we have not historically fully addressed. We believe there are very significant revenue opportunities that could be achieved by meeting the full information and marketing needs of the multifamily industry. In the same way CoStar has successfully met the information needs of the office, industrial and retail real estate industries, we believe we can additionally meet the needs of the multifamily industry. We've been meeting some of their needs, but we believe we can meet a much broader set of their needs. The same way CoStar Group has shown through BizBuySell, Lands of America, LoopNet and other marketplaces that we can meet the marketing needs of the office, retail, industrial, business for sale, land and farm brokers, we believe we can meet the needs of multifamily leasing agents. We began making significant investments in this area several years ago, and we'll continue to do so. Since we released the enhanced multifamily service in October 2013, clients have executed 800,000 multifamily-specific searches and users have viewed close to 1 million detailed pages on multifamily properties. Client surveys suggests that our multifamily enhancements were the most popular element of our fall product enhancements. We intend to execute aggressively on additional product initiatives in 2014 to capture what we believe are very significant revenue opportunities in providing multifamily information and marketing services. Our marketplace products are some of our fastest-growing product offerings, and we're delivering product enhancements in this area as well, too. I mentioned the broker advertising opportunities we just released. This is basically with large audiences of people coming to our website, looking to potentially lease or buy properties, our broker clients are interested in presenting ads to these people, offering their services to help them with that process. We've just released this and we've begun selling it. We're having some good success, and we hope to be able to report more on that next quarter. Over the last 6 years, we've accumulated an enormous amount of experience, building, running and growing marketplaces. In fact, we run the top 3 commercial real estate marketplaces in the industry. We also run the top marketplaces for businesses for sale and farms for sale. With LoopNet.com, we operate the clear #1 commercial real estate marketplace in the United States. Since the close of the acquisition at the end of April 2012, we've really reinvigorated LoopNet and it's growing stronger than ever before. LoopNet.com draws by far the most traffic in commercial real estate, with an average of 4.8 million monthly unique visitors. This is up 37% from 3.5 million monthly uniques back just before the acquisition closed. In that time, we grew the number of registered LoopNet users almost 40%, from 5.8 million to 8.1 million. In the 20 months since the close of the LoopNet transactions, we have increased revenue for Premium Lister 38%, and that stands in stark contrast compared to the 8% growth for the 20 months prior to the acquisition. So it's one of our faster-growing areas now in the company overall. The LoopNet acquisition also gave us the second most trafficked commercial real estate marketplace called CityFeet. And that joins our original marketplace, SHOWCASE, which is now #3. So we've built the first, second and third ranked marketplaces for commercial real estate on the web based on site traffic and likely, revenue. We also own and operate several industry-leading marketplaces in other verticals. Lands of America, Land and Farm are #1 and #3 industry sites for rural land based on revenue and clients. They are the #2 and #3 sites by traffic and are showing strong growth in that area. In 2013, total visitors increased 20% and 41%, respectively, for each site. Land and Farm now averages 1 million monthly visitors, while Lands of America has 1.5 million average visitors. 2013 revenue grew 17% for Lands of America over 2012 revenue. And revenue for Land and Farm grew 18% over 2012 revenue. Our industry-leading business marketplace verticals are BizBuySell and BizQuest. They facilitate the sale of small businesses and are the #1 and #2 websites in this important space. In 2013, BizBuySell grew total visitors by 27% year-over-year, with an average of 1.2 million monthly visitors. Total leads delivered to business sellers grew by 25% year-over-year. BizQuest grew monthly total visitors 48% year-over-year, and total leads delivered to business sellers increased by 31% year-over-year. In 2013, we've averaged over 9 million unique monthly visitors in aggregate for all of our sites. Our marketplaces add to the depth and breadth of our offering and add large communities of users who come to CoStar. This increases the network effect and allows for enormous cross-selling opportunities, which we believe lead to high sustainable growth. 2013 was our most successful year yet. We believe we're in an excellent position to maintain mid-teens revenue growth while expanding margins for the foreseeable future. We expect the introduction of new services, especially in the apartment sector, enhancements to our existing services, continued growth and development of our sales force, as well as the strength of the commercial real estate recovery, will create an even more successful 2014. We continue to believe that we are on our way to reaching our goal of $800 million in revenue, with 40% margin as we exit 2017. I will now reluctantly turn the call over to our CFO, Brian Radecki, who will do a fantastic job running through the numbers.

Thank you, I think, Andy.

I was more inclined to keep talking.

I know. Yes, that was tough. I'm pretty impressed, Rich, you kept it under 3 hours. So as mentioned, we're very pleased with our performance during the fourth quarter and full year 2013. CoStar's information analytic and marketing services continue to show strong revenue growth, and the successful integration of LoopNet continue to be a big contributor to our growth in revenue and earnings. EBITDA margins continue to expand, driven by mid-teens revenue growth. Today, I'm going to principally focus on the year-over-year comparisons for the fourth quarter of 2013, and then also on our outlook for 2014 and beyond. Starting with CoStar Group's results for the fourth quarter of 2013, the company reported $115.6 million of revenue, an increase of 15.5% compared to $100.1 million last year. Full year revenues were $440.9 million, an increase of $91 million or 26% over revenues of $349.9 million for 2012. This revenue growth is driven by the core information service performance and the continued progress on cross-selling the LoopNet efforts, as well as strong revenue from the marketplaces. EBITDA increased 54% year-over-year to $31.5 million for the fourth quarter of 2013, up from $20.5 million in the prior year. EBITDA for the 12 months ended 12/31/2013, was $94.2 million, which is an increase of 56% or $34 million from EBITDA of $60.2 million in Q4 of 2012. We reported adjusted EBITDA of $40.8 million for Q4 2013, which is an increase of $15.7 million or approximately 63% compared to $25.1 million last year. Adjusted EBITDA margins increased significantly to 35.3% in the fourth quarter of 2013 from 25.1% in the fourth quarter of 2012. You want me to repeat that, Rich?

[indiscernible]

Okay. Adjusted EBITDA margins increased significantly to 35.3% in the fourth quarter of 2013 from 25.1% in the fourth quarter of 2012. So when you look at the flow-through from incremental revenue down to earnings, one can sort of understand what happened here and how significant the earnings leverage is in our business. I think we've talked about this for years, but if you think about that flow-through, it is fairly significant. Net income for the fourth quarter of 2013 was $12.8 million or $0.45 per diluted share, which is an increase of $8.1 million from $4.7 million or $0.17 per diluted share in the fourth quarter of 2012. Non-GAAP net income for the fourth quarter of 2013 was $22.2 million or $0.78 per diluted share, which is a 76% increase from $12.6 million or $0.46 per diluted share from the fourth quarter of 2012. Amazing. Reconciliation of all non-GAAP net income, EBITDA, adjusted EBITDA or any of the non-GAAP financial measures discussed on this call to their GAAP basis results are shown in detail, along with definitions for those terms in our press release issued yesterday and are available on our website at www.costar.com, or you can just email richsimonelli@costar.com if you have questions. Cash and investments increased $33.3 million to $277.9 million as of December 31, 2013, up from $244.6 million at the end of the third quarter of 2013. Cash and investments exceeded total short- and long-term debt of $153.1 million as of December 31, 2013. Cash flow from operating activities was very strong at $35.5 million for the fourth quarter of 2013 and was $108.3 million for the 12 months ended December 31, 2013, which demonstrates, again, the strong cash flow characteristics of our business model. So $108.3 million of cash flow from operations. Phenomenal. At this point, I'm going to give some additional color on a few metrics that highlight the strong performance in the fourth quarter. We achieved $15.8 million in net new sales of subscription services on annual contracts in the fourth quarter as a result of the ongoing success of driving sales of information, analytics, marketplaces and lead generation, all coupled with the successful cross-selling efforts. This represents a 46% increase in net new sales of subscription services on annual contracts compared to the $10.9 million during the fourth quarter of 2012. Revenue from subscription services on annual contracts was $87.1 million for the fourth quarter of 2013 or 75.3% of our total revenue, up from only 72% a year ago. For the trailing 12 months ended December 31, subscription revenue from annual contracts totaled $326.9 million, up 21% from $271.2 million for last year. At this point, approximately 75% of our revenue is coming from annual subscriptions, and the remaining 25% is primarily made up of our marketing services, including LoopNet premium memberships on monthly or quarterly arrangements, along with CoStar Showcase, as well as revenue from advertising across both platforms. As we continue to make progress upselling LoopNet subscribers' onto annual contracts, we expect to increase the amount of revenue included in our subscription annual metric. The renewal rates for annual subscription revenue remained high during the fourth quarter. The 12-month trailing renewal rate for CoStar subscription-based revenue was $93.1 million in Q4 of 2013, as this metric ticked down slightly, as expected, from $93.3 million in the prior quarter. As we've discussed for a few quarters now, as we continue to introduce more LoopNet contracts into our subscription base, we'll expect this 12-month trailing renewal rate to edge down slightly. The small decline to date is about what we expected, and we do expect to continue to see it move down a little bit, a percent or 2, over the next few years as we get more and more people signed up for annual contracts. And then, eventually, that will turn around and it will start to increase. Renewal rates for CoStar subscribers who have been with us for 5 years continues to be strong at 98% and pretty consistent for the past several quarters. As Andy discussed earlier, we continue to see great progress on cross-selling LoopNet and CoStar services. Through the end of 2013, total cross-sells were $46.8 million, and earlier this month, we achieved $50 million, as noted in our press release. I think we've clearly demonstrated that the revenue synergies from this acquisition have been a powerful growth catalyst for the business and exceeded expectations and will continue to be for years to come. I believe that progress selling into the LoopNet lead list will continue to be evident in the sales and revenue numbers we report moving forward. At the end of 2013, we had 379 total sales reps, a modest increase from 355 at the end of 2012. Today, our total sales reps in the field, sort of core field sales reps, as Andy mentioned, is 212. We have 109 inside reps, 14 in the U.K. and a handful supporting the various subsidiaries. On previous calls, we've talked about how we're going to be pushing to make the move to get more people selling in the field. As Andy noted, we're making great progress expanding that core field sales team, which is now 212. We started 2013 with 124 core field sales reps, which does not include inside sales, ad sales, HQ AE or trainees and et cetera. Therefore, we increased our core field sales reps by 88 people or 71% in the past year, with the majority in the last few quarters. Including the impact of sort of normal turnover, as of the end of the year, about half our reps had been with us less than a year. As Andy noted, we've also added about 10 new managers to our team to support the growth in sales territories. We're now very focused on training and developing all these new managers and sellers and bringing them up the productivity curve as quickly as possible. As Andy mentioned, it would take 6 to 12 months to bring a new rep up to historical productivity levels. So essentially, half our sales force with experience is training the other half, which is brand-new. Therefore, while we're training and developing these reps, I would expect to see sales trends in the first half, and then sales metrics in the first half of 2014 to be somewhat lower than prior year, and then begin to ramp up in the second half of the year and into 2015 as we reach full productivity increases. This expected lower productivity in the first half of the year, while ramping into the second half of the year and into 2015, is factored into my revenue guidance range. Throughout the year -- and last year, we continue to deliver solid sales numbers while undergoing this transformation. And I expect to see solid sales numbers and strong returns from these efforts as we start moving into the back half of the year. I'll now discuss outlook for the first quarter and full year. Our guidance takes into account all these trends, growth rates, renewal rates, which may be impacted by economic conditions in commercial real estate and the overall economy, among other things. The guidance takes -- our guidance on the impact in foreign currency exchange fluctuations on the top line remains consistent. We do not attempt to predict foreign exchange rates or fluctuations and our guidance assumes little or no volatility to the current rates. Actual results may vary from these estimates. We're providing outlook reflecting our current expectations as of today, February 20, 2014. We expect revenue for the first quarter 2012 to be in the range of $116 million to $118 million. And for the full year, we expect revenues of approximately $490 million to $498 million. In calls last year, I discussed our plans to deemphasize or discontinue certain redundant services, which we expect to have an impact in 2014 of approximately $10 million to $12 million, which is included in my revenue and earnings guidance for the year, so we've taken that into account. In terms of earnings, we expect a first quarter 2014 fully diluted non-GAAP net income per share of approximately $0.62 to $0.66 based on 28.6 million shares. For our business, the first quarter expenses include seasonally higher costs related to our annual sales conference, annual standard increases for personnel as well this year, planned investments in marketing and branding in the first half of the year. If you look back over the past decade, you'll see typically our earnings decline from Q4 to Q1 in most years due to these seasonal expenses that are typically incurred in the first quarter followed by increases in earnings and margins in subsequent quarters. We currently assume a 38% tax rate in order to approximate a long-term effective corporate tax rate, which I believe was 37.5% last year. For the full year 2014, we expect non-GAAP net income per diluted share of $2.92 to $3.02 based on 28.8 million shares. Additionally, we expect to continue to invest on improving our service, marketing, branding initiatives as we discussed earlier and further evolving our sales force throughout the year. In the middle of 2012, shortly after the LoopNet acquisition, I introduced the financial goal of achieving $500 million run rate by Q4 2014 with adjusted EBITDA margins in the low to mid-30s, which would have included essentially mid-teens growth rate. The revenue and earnings ranges I shared today highlight that we fully expect to meet and possibly beat these goals. I think there's a little doubt in that. In summary, I'm very pleased with CoStar's financial results for the fourth quarter and full year 2013, which clearly shows strong revenue growth and margin expansion and cash flow. We believe the company's operating in a market with a multibillion-dollar revenue opportunity potential and we're focused on executing our plan to capture that opportunity. We also remain confident and focused on the longer-term goal I shared with you last year of doubling the business again over the next 5 years and continuing our mid-teens revenue growth to $800 million in annualized revenue run rate exiting 2017 at even higher margins in the 40-plus percent range. We believe the size of the market opportunity, our position in that, our competitive mode [ph], platforms, strong cash flow and management team execute on that goal and take advantage of this massive opportunity. As always, I look forward to sharing the progress with you in the coming quarters and I'll now open it up for any questions.

[Operator Instructions] We'll begin with the line of Andrew Jeffrey with SunTrust.

Couple of questions. First of all, and I appreciate the success you've had with LoopNet cross-sell and the fact that it's no longer quite as relevant as a call-out metric. But it looks like we've got some nice acceleration in the fourth quarter. Are you still thinking about the potential LoopNet cross-sell in the same context that you have before somewhere between $120 million and $150 million opportunity, has anything changed in that regard?

No. It still remains a massive cross-sell opportunity. In fact, December was an unusually high month of CoStar property subscriptions, I mean really surprisingly so. I mean, there's lots of different revenue drivers in the business, but if you look at a chart of new CoStar subscribers on the information side month by month, December stuck out -- stood out like Everest. So it's not going away, it's still there. We still have 50,000 to 100,000 people to try to sell our information who are not yet buying CoStar property or suite. So that remains a very important audience for us to sell to. Conversely, we're also very focused on selling the LoopNet marketing to the CoStar audience. But as a metric now, it sort of refers back the acquisition, and I want to get the sales people a little more focused on total revenue, not on a metric around an acquisition. So I'm just trying -- and then also, it's 2 -- it's a metric that's driving sales force behavior in a way that I think we want to pull them back from a little bit.

So I assume some of the LoopNet cross-sell strength was reflected in the good net new growth against what was a pretty tough comp versus the third quarter?

That's 100%, correct.

Okay. And with regard to the '14 revenue growth guide, I appreciate call it 200, 300 bps of headwind from some of these discontinued legacy LoopNet solutions on one hand. On another hand, it sounds like you've got a bolus of new sales people that should really become much more productive as the year goes on, perhaps as early as sort of late 2Q, early 3Q, following their ramp, could we expect CoStar to grow above trend line at some point -- for some period of time, because you've got a lot of new sales people, as you noticed, you are probably below trend-line productivity right now.

They are below trend-line productivity. Like, well, they're where we expect them to be, which is below trend-line productivity. And their productivity over the next 2 or 3 years can grow typically 300%. And then again, I was looking at a chart last night that shows when we add a large number of new sales people to the mix, the existing sales people who act as mentors also come down a little bit. So I would expect them to begin to pick up their productivity as we move into the second, third and fourth quarter. But even if they pick up their productivity in the third quarter, those are bookings that's not going to really move the dial meaningfully on the revenue side. So, I mean, sure, I look forward to the point at which they are beginning to take effect, but we've been through this 2 or 3x in the past as we grew from 10 to 30 and then we went from 30 to 70 and from 70 to 120. Each time we do that, you put that expense out there, some anxiety around the 2 quarters where you're not seeing an immediate return and then you begin to see a new higher level of production. And I'd just stick with what we already talked about and stay reasonably conservative.

Yes, and I think, just to add onto that, to answer your question simply, the answer is yes. I think as you exit '14 into '15, I think we're setting up the back half of this year, at the end of the year and going into '15 I think should be a strong year. And obviously, each quarter, we're going to be reporting on the sales force and sort of productivity. As far as I said, if you look at it, the majority of sales force was ended -- or added sort of toward the tail half of last year. We actually at the sales conference, we're talking to people that actually had not started yet but came to the sales conference anyways. So I think the reality is you're going to spend the majority of the first half of this year with all your experienced people training all the other half of the sales force which is inexperienced. So I feel really good about it as we exit this year -- yes, as you exit this year and you go into '15, I definitely think we should be seeing increasing growth rates there, so I feel pretty good about it.

That helps a lot. And maybe just a quick housekeeping question, perhaps for Rich, can you tell me the number of subscription client sites you had at your end?

Yes, Rich.

Good question.

I'll put you on the spot, Rich.

It's about 20,000.

22,838.

22,838.

I just -- off the top of my head.

And next, we will go to the line of Brett Huff with Stephens Inc.

You, Brian, in your sort of long-term outlook and, Andy, you mentioned this to the doubling the $800 million number, one of the questions we get a lot is can you give us a little bit more color on the total addressable market so that we can feel comfortable how you all get there. And you've addressed pieces of this over time, multifamily and et cetera. Could you just give us a quick tour through the addressable market and the rough sizes as you see them or whatever color you can give us on that so we have sort of a holistic view on that.

Sure. I'll give you something I was looking at last week, which is a slightly nerdy answer to your question but we took -- I took longer-term revenue trends for Washington, L.A., Baltimore, Boston, Charlotte, just a number of sort of prototypical markets for us. And I look and I took those revenue streams, the subscription revenue streams and LoopNet revenue streams and I divide that revenue by the number of people in the particular city we are serving with that revenue stream. And then I set the starting point not to a calendar date but to quarter 1, quarter 2, quarter 3, quarter 4, and then did a polynomial regression on the revenue growth path of those different cities. And it's really quite amazing. So like if you look at Los Angeles, it grows at 0.004 x squared, which x is the quarter that's you're in as a revenue per person and population. So we're reaching and -- and our score on that is 0.994, and you get basically a 0.94 on Washington the same way. So you get a really tight, really tight sort of polynomial on these revenues and you get exactly the same formula on several of these older markets. So what's that mean? That means that Washington is now generating about $4 per person per year in the population. And a newer market like a Charlotte might be doing $1 or $2 per person per population, but it's following the exact same curve. Now if I take all the markets, if I take all the markets which range from very young like Toronto, which is -- we may have a contract at this point, which would make it day 0, and an oldest market like Washington D.C., and you just accelerate them on this curve. You take where they are and accelerate on this curve, it implies a market size of $2.4 billion in revenue in 2024, which is really quite optimistic. But that's basically just an empirical analysis of a very consistent long-term market-by-market trend. So the longer we are in a market, the more revenue per person in the population we're getting in, perhaps there's some Metcalfe's Law operating there. Perhaps we are creating more opportunities for people to earn brokerage commissions by making their business more profitable. A lot of different ways you can analyze that. So that, for me, I can give you a hypothetical size of market looking at penetration rates. I can say, gosh, we're 16% penetrating to brokers. We're probably, I'm guesstimating, 4%, 5% penetrated to owners, I could say. And obviously, we have the biggest players in these markets. We have all the CBREs and the JLL's and the top retail owners and so on and so forth. But there are still 100,000-plus people who make a living in -- 100,000-plus firms that make a living each and every day around commercial real estate that are not yet our customers that we believe will become our customers. And for the 150,000-plus who are our customers today, there is no shortage of additional products and services we believe we can sell these people. So if you ever are suffering from really debilitating insomnia, I would invite you to come spend some time with me and we can run some polynomial regressions against our historical revenue trends because they're really, really quite predictable.

As Andy goes to come up for air, I'll add about 30 seconds to it and I'll keep it short. But I think that when you look at the fact we're approaching, essentially with my guidance close to $500 million of revenue this year, and you go back to something he said at the end, where we have the charts and our slide deck that shows you what percent for brokers, single digit for owners, single digit for retailers, everybody else, you're just -- you're sort of basically looking at the overall market as less than 10% penetrated. If you're already doing $500 million, you're already selling into all those, obviously 10% in the $500 million gives you a $5 billion market. And then that's for the products and services we have today, with the people we know about already selling into those groups. So it's not fictitious numbers or we're not selling into these groups, it's what we're doing today. And then, of course, if you said globally it's 2 to 3x that, obviously, we'll be plucking off Toronto and again slowly over a couple of decades, we'll pluck off other cities internationally, you can multiply that by 2x to 3x. And to me that's the opportunity with the sort of where we are today and then, of course, you know we like to do things to expand that opportunity. So we have no, in my view, that's the very simplistic way I look at it. There's no shortage of opportunity at $500 million, I think to get to $1 billion or $2 billion over the next decade, 2 decades is very reasonable. It won't even approach half of what the opportunity is today here in the U.S. and where our platform is today. And, of course, you could always multiply that globally. So that's sort of my 1 minute add on to Andy's?

And intuitively, typical information is about 1% of new asset class and you can say global commercial property is approximately $50 trillion. And you can do the math from there and it will clearly indicate that the size of the market opportunity is larger than our current meager revenues.

That's helpful. And one follow-up question, on field sales, you mentioned a bunch of different numbers, Brian, on the field sales, what it was, what it is. What I'm trying to get to is if the average person who's 3 months in, Andy, I think you said is $10,000 in bookings a month and goes over, call it, 3 years, whatever the number is, to $30,000 of bookings a month. And I'm trying to do the math right where I can multiply that times. Are there 50 people who are sub-3 months in the field sales?

No, I think 80 or 90. If you look at it, I'll give you the numbers again. We have 212 sort of core field reps today. It was versus 124 last year so if you apply a modest turnover to the 124, you figure out we're at 212 now, essentially half our sales force has been here, has experience, and half is in the first quarter or 2. So that will ramp up over the next. Like I said, as you start to get through the back half of this year, and then I think we should be going into 2015 with a fairly strong ramp on the sales productivity. And then, of course, that will continue to ramp through '15 and into '16. So I think the increase in size of the sales force will really carry us through the back half of this year and then through '15 and '16. And I think there's plenty of opportunity for upside with the productivity in the sales force. Obviously, the better job we can do to get them up to speed faster, the better the numbers can be.

I just want to give you the exact formula. It is revenue per person to population equals 0.0004 x squared where x is the quarter, how many quarters you've been in the market, and then there's an [indiscernible] adjustment, which is not really relevant.

And next we will go to the line of Bill Warmington with Wells Fargo.

So a couple of questions for you. On the $10 million of sunsetting [ph] of the old products, should we just, I mean, obviously on an annual basis, you back that out from the base of 13, and that gives you about a 14% to 16% growth rate for 2014. But should we think about that being just spread ratably across the quarters, $2.5 million a quarter or are you going to give us an adjustment each quarter?

Yes, I mean, I think it just spread throughout the year. I'm not going to keep -- I think I probably won't talk about it the rest of the year, I mean I think we sort of gave you -- I prepped everybody last year, I gave it you guys this quarter. Now we'll just move forward. It's spread pretty ratably. I mean essentially what it is, is we have 0 people in our sales force selling 2 or 3 or 4 different products that we believe are redundant. So those will just sort of burn off throughout the year. These are monthly and quarterly contracts that have high churn, they're old stuff that's redundant, so I'm obviously not going to talk much about it but it will be spread pretty much throughout the year.

And only that these products are not just redundant, these products are products that are -- we provide -- we feel they provide less value to the customer and they are -- have a substitution effect against higher-priced, more valuable products to the customer.

On annual contracts.

We believe all these revenues we give up this year comes back in later time periods with a better client relationship, higher renewal rates at a higher price point.

Got it. Now can we think about having some EPS drag as well over those products that were basically not contributing a lot to the bottom line?

Yes. And I basically factored all that in and I factored both the revenue and the earnings in my guidance, so I think it's pretty much now will be spread throughout the year. And I think you won't really see much of it after that.

Got it. Now on the selling of the commercial real estate broker advertisements on the LoopNet sites, how should we think about that in terms of potential revenue? I mean how many territories are you thinking about initially? What are you able to charge per month, it seems like it could be significant.

So depending upon what the client is buying is basically a share of voice, or they're buying a percentage of the searches in a particular ZIP code that they might be interested in. So if you're a New York broker, you might be buying office searches in 10019. So that ranges from a couple hundred dollars a month for some ZIP codes on up to thousands of dollars a month for another ZIP code. You can buy -- in that case, you're buying anywhere from 10% to 100% of the share voice. And the more share voice sold, the price goes up in that particular ZIP code. This is, I believe, this is comparable to the main revenue drivers for a Zillow or Trulia or a Move. So I believe that this is something that has well over $100 million of revenue potential. It is only a handful of people in our sales force who are selling it today. We are basically opening up the software and providing the basic training required to the rest of the sales force to begin to enable them to sell it. And then we'll be looking at selling it from inside sales teams as well. So it will take us probably 6 months to really get this ramped up to everyone selling it and folks beginning to figure out what their particular sales pitch is around the particular product.

And to add a little color to that, Bill, so I think that when you look at that sort of funny I looked back at some of these company like Trulia and Zillow, I mean they have like 1 million, 2 million in their first year, 1.5 years. So I have less than 1 million in my model. The fact that we're starting to be -- right now it's basically being tested with a handful of people really won't be fully rolled out, as Andy said, for 6 months or so. Again, I think this is something that comes in the back half of this year where because there -- could there be some upside from that? And the answer is yes, then obviously I would expect in '15, '16, '17, I think this can be a long driver of revenue for years to come.

Okay. Now on the sales force hiring, you've had a big surge of hiring and I had a couple of questions there on that. The first is, once you get through this surge, as you kind of think out to 2015, 2016 and beyond, what are you thinking about in terms of how much you'd like to be growing the sales force? And then the other question is have you been looking at hiring some more experienced sales people who would be able to hit the ground running for some of the other segments that you are developing?

So I believe the -- fairly confident that the rate of addition for the existing core business will absolutely come down, we will not be growing 70% next year, 70% the year thereafter. We'll continue to grow at a slower pace, more measured pace. And while we may be able to hire folks who may have more experience with the advertising side, specifically something like a Trulia, a Zillow, it's more -- our business is fairly unique and there are not a lot of sales people that have experience in what we sell, so unfortunately, there is not a ready pool of folks who know how to sell this particular set of products to this particular audience. It's probably a dozen or so not working for CoStar.

Bill, just to add a little bit more color to that, too, is that if you actually looked at this, we talked about this pretty extensively last year. We are changing out the plumbing in the hotel while we're still selling the rooms. So we are -- the total sales headcount that I gave you guys is only up 5% or 6%. It wasn't like we added a lot onto the total amount but we have to carefully move them and in a lot of cases, replace it to increase that field sales force, right. And then we talked about this pretty extensively actually for the past 4 or 5 years, so we did that. And if you look at the sales numbers, we are putting up some pretty strong sales numbers. So I think I feel good about -- that was a very careful sort of moving of numbers. So the total sales people, which we went back to the LoopNet acquisition, we said, hey, in total, we have enough, we just don't have them in the right areas. So I think we did a -- I think we did a good job of essentially doing what we told people we were going to do, now we have to get them up to speed. I would like, as we move into '15, '16 and beyond to continue to see the field sales force growing, the core field sales force which is driving the core of the business up, those numbers up 10%, 15%, 20% for years and years to come because of the size of the opportunity. I think obviously we have to swallow this down this year. But again, it doesn't mean the total size of the sales force has to grow that much because I think, again, it's just moving them into the right places. So I feel pretty good about where we're entering this year. And I think by the end of the year, we'll all feel pretty good about the productivity.

And next we will go to the line of Michael Huang with Needham. Michael Huang - Needham & Company, LLC, Research Division: Just a couple of quick ones for you and then we'll wrap this up, hopefully. So I apologize if I missed this, so with respect to Fusion, I was wondering if you can kind of help us understand how Fusion may be impacting ASPs and sales cycles and maybe close rates? And what are your assumptions kind of around how Fusion kind of has been perceived in the marketplace?

Sure. So remember, Fusion, the concept of rehabilitating the overall product suite and eventually integrating a lot of these acquired components into 1 integrated software suite is a multiyear effort. And we think it's probably 5 major product releases each time, putting out 5 major product enhancements is sort of a rough approximation of the way I think about it. And so what we released recently was just round 1. So we've got 20% of the way there, we've got a fair amount of work to go and a number of years to do it. I believe it is short in the sales cycle. I believe it's increasing the close rate. We are still in a mode where we are keeping our pricing somewhat aggressive to trying to get additional share and convert more people in from the LoopNet information side where they were paying pretty much 1/5, 1/10 of what they were paying for the CoStar side. I think it is when you look at the CoStar-property-only renewal rate running in the 94.5% range, something like that, it's -- I think that it is contributing to a higher renewal rate. So when I look at cancellations, it is -- I think it's helping their, which contributes to overall net growth. And more importantly, our clients like it. Our clients are just really quite happy with the product and we feel better about the business when the clients are happy. And I just got one note that someone just slipped into me, we got our first Canadian contract, so JLL just signed up for our Toronto services. So we now have revenue in Canada. Michael Huang - Needham & Company, LLC, Research Division: And just as a final question for me. And I'm not sure if I missed this one, so as you were thinking about LoopNet and some of the cross-sell activity that you saw there, I think in the past maybe you have provided what the close rates were kind of around from the opportunities you were going after, I was wondering how you did, exiting the year given the strong contribution from that and what's your assumption around that going forward?

I do apologize because I do not have that particular number. What I can guesstimate is that it did continue to track as we thought it would because, again, the surprising -- based upon the surprising increase in CoStar subscriptions in December, it was an unusual number. I cannot believe that the rate did not continue to move upward, so it's probably approaching that 40%. We also invested a lot of -- I mean a lot of time and effort in the third and fourth quarter in training managers and sales people on how to effectively do the cross-selling of LoopNet to CoStar on the information side. So I think that drove the conversion rate up, and I think that's what caused that higher surge in that core -- in the core business in December.

And next, we will go to the line of Todd Lukasik with Morningstar.

I guess we're going to get to see Canada operations broken out the next quarter like you do the U.K., Brian. Kind along those same lines, I did have a question about international markets and, Andy, you mentioned potentially more markets eventually in Canada. You talked about the acquisition you'd made in France, I'm just wondering if you can give any more color there about where you might look to go next and when we might expect to hear a definite announcement about that?

Sure. So I would like to see us get to profitability and a respectable margin in Canada dramatically faster than we got to profitability on the new platform in the United Kingdom. The United Kingdom, I believe was unusually complex because it's one of the most sophisticated commercial real estate markets in the world and we had 8 little companies we were integrating and that just made the -- and modifying the data model across all of those were a little more complicated. So I think, Canada, will get profitable quicker there. We would like to see the United Kingdom and potentially, Canada, at the 30% margin range before we really consider aggressive additional international expansion. One of the things on future international expansion is we would probably do that expansion in closer alignment with our biggest international customers. So we have conversations from time to time with our biggest international customers about how we might be able to meet their needs on -- their needs to have Internet marketplaces to generate leads for their listings globally. If we were to do a more LoopNet-like product internationally, I believe that is much lower investment cost with a faster return. You can begin to generate revenue in markets, learn the nuances of the markets and then later come in with the more expensive heavy investment commitment CoStar property traditional full information model. So bottom line is do not look beyond Canada, do not look for any sort of EBITDA dilution in the near term from international expansion. You'll see more domestic initiatives -- and significant domestic initiatives. And -- but we want to -- we still want to be able to show the investors the proof point that this is an international business, and that we'll be able to deliver on that promise intermediate term.

And just to add to that, so I mean, my translation to that is what I have been saying, I think, for the last year or so that over the short term, the next few years, there's no significant international plans but definitely in the 5, 6, 7 year model -- as you get to the bigger models, clearly we're demonstrating this business can do very well internationally, hence the 2x to 3x the current opportunity.

Got you, okay. That's helpful. And then, Brian, you mentioned the high incremental margin on the incremental revenue. I think if I calculated the incremental adjusted EBITDA margin in the quarter, it was actually over 100%. Is there anything in particular about 2014 where the incremental adjusted EBITDA margin, we should expect that to be lower than what the potential long-term run rate is?

Yes, so I'll add to this quickly and then I think we'll wrap it up after this question. So yes, I mean, if you look -- I mean, I've got that question, I've always said historically, if you look at our gross margin line, we're actually over 72% now, 72.5%, something like that, it was in the low 60s prior to LoopNet. So each incremental dollar, you pay out a little commissions, you have some costs but essentially, you drop in $0.70 to $0.80 to the bottom line, obviously because of the acquisition over the past 2 years we have been working synergies out in the business though it appears like you're getting over 100%, which is awesome, right. I mean, nobody can argue with that. So I think that this year, and if you look at the long-term, clearly we feel good about the 30% to 35% range we set out last year. And I feel very good about the long-term of being over 40%. We talked about this year in the first quarter, in the first half of the year, if you just look at every year, our EBITDA margins are lower in the first half of the year, than in the second half of the year so I expect them to be where my guided range was for Q1, and then I expect to see them slowly increase throughout the year because obviously we're still investing some piece into the business, it's not a pure 100%. So I don't think I can run at a 100-plus percent forever but I feel pretty good when I -- and I've said it for years, we can drop $0.70 to $0.80 to the bottom line, still invest in the business and really grow this thing. And it goes -- I mentioned that, when you look at the significant growth in that and you look at the significant operating cash flow, this is the business model we operate in and it's unbelievable.

Thank you very much. And I appreciate all of you joining us for this year-end conference call. We look forward to updating you on our progress shortly. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.