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

Thank you very much, operator, and good morning, everyone, and welcome to our call. Before I turn the call over to Andy, I have some really important facts for you to hear, so please listen carefully. 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 on our July 23, 2014 press release on our second quarter results and in CoStar's filings with the SEC, which include our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q, in each case, under the heading Risk Factors. All forward-looking statements are based on information available to CoStar at 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 on www.costargroup.com, where you'll find the new CoStar Investor Relations page since our recent rebranding. The replay will be available approximately 1 hour after this call concludes and will be available for approximately 30 days. To listen to the replay, call 1 (800) 475-6701 within North America or (320) 365-3844 outside of the U.S. The access code is 331329. And we'll put this up shortly after the call today. Just one procedural note before we go on. I just want to let you know that we want to take all of your calls or your questions during the call and are happy to stay past the hour to do so, as we've proven time and time again. [Operator Instructions] So without further ado, I'd like to turn the call over to Andy Florance. Andy?

Thank you, Rich. I guess that 1-question rule is to help my feeble mind keep each question in mind. Compound questions, too complicated. Okay. Welcome, and thank you for joining us. I'm very pleased with our team's performance over the first half of 2014. Revenue for the second quarter of 2014 was $148 million, which is an increase of approximately 36% over the second quarter of 2013. For the same period, EBITDA was $38 million, up 49% year-over-year. In the second quarter 2014, we achieved net new sales subscription services on annual contracts of approximately $16 million, which is an increase of 9.2% over the first quarter 2014 and is basically in line with the same quarter prior, which was a phenomenal record quarter for us. The core CoStar product lines show accelerating sales growth, achieving $9.7 million in the second quarter, which is up 17% quarter-over-quarter and 6% year-over-year. In May 2014, we recorded our all-time highest net new sales month. Through the first half of the year, we have added over $30 million of annualized net new sales on our annual subscription business. Our annual subscription businesses continue to enjoy a very high renewal rate of over 92%. During the quarter, we raised $529 million in net proceeds from our successful equity offering, had a chance to visit with a number of you, and we intend to use that for investment purposes, general capital and continued growth of the company and to better position ourselves for potential strategic acquisitions. I'll take a moment to comment on the commercial real estate market economics right now that we're operating in. The recovery continues to improve and is showing signs of strengthening. For the most part, we're enjoying a healthy operating environment in commercial real estate. Investor demand for U.S. real…

Thanks, Andy. And thank you again to Andy Thomas and his team out here doing a great job for allowing us to borrow their conference room. As Andy mentioned, we're very pleased with our performance in the second quarter of 2014. CoStar's organic business continues to show strong growth, while EBITDA margins continue to expand. Second quarter 2014 is the first quarter to include financial results with Apartments.com's numbers, which closed on April 1, 2014. We're making great progress integrating Apartments.com into our existing business while continuing to pursue growth drivers in our core business through sales force staffing and productivity, as well as ongoing product development efforts. Now let's get started with CoStar Group's results for the second quarter of 2014. The company reported $147.7 million of revenue, an increase of approximately 36% compared to $109 million revenue in the second quarter of 2013. This growth was driven by strong information services performance and from strong growth across all of our marketplaces, including LoopNet.com and Apartments.com. On a pro forma basis, our year-over-year revenue growth was 13.5% for the year-to-date 2014 compared to pro forma 2013 adjusted to include Apartments.com's revenue; therefore operating in the 12% to 15% revenue growth range. EBITDA increased from 12.3% to -- $12.3 million to $37.6 million in the second quarter of 2014, up from $25 million or 49% in Q2 of last year. Also, we reported adjusted EBITDA of $45.3 million in the second quarter, which is an increase of $12.7 million or approximately 39% compared to the second quarter last year. Adjusted EBITDA margins increased to 30.7% in Q2 of 2014, again, up from last year. Non-GAAP net income in Q2 of 2014 was $23.5 million or $0.80 per diluted share, which is a 37% increase from the second quarter of 2013.…

[Operator Instructions] And our first question will come from the line of Sara Gubins with Bank of America.

In the first quarter, you saw your net new sales increase throughout the quarter. Did you see similar improvement during the second quarter? And could you talk about your expectations for net new sales in the second half?

Yes, in the second quarter, the volatility from quarter-to-quarter and from month-to-month, it has a certain random element to it. It will have a volatility month-to-month. In the second quarter, May was our best month ever and -- but not by some sort of runaway trend difference between June and July -- between June and the other 2 months. That was sort of -- it was fairly level. We would expect that more and more of the salespeople approaching their first anniversary or their ninth month with the company would be beginning to see higher productivity, as well as half the managers in the sales force are also approaching their first anniversary. So fundamentally, we would expect to see some tailwinds in productivity as we move through the year. And just to put a little more on that, if you looked at the increase in the sales force, it really came at the end of the third quarter and mostly in the fourth quarter last year. So we're pretty pleased, being that last Q2 of last year was a high watermark, that we essentially were on par with that, and of course, it was up 9% over the first quarter. So we feel pretty good that later in the year, we should start seeing those productivity gains.

And our next question will come from the line of Andrew Jeffrey with SunTrust.

When we look at the price gains that you've gleaned from going direct in the Apartments.com business, could you just talk about sort of how much progress you've made versus the potential for converting the indirect business to direct, and also the types of units or apartment buildings, I should say, that have been the focus? In other words, are they the 100-plus type apartment buildings, 100-plus type unit buildings? Is there any characteristics that inform sort of the ramp and the visibility to ongoing price gains and synergies over the next year or so?

Sure. So in terms of what type of properties, I would say it is the traditional sweet spot of the Apartments.com business, which is in the 130-unit-plus category. So it's very smooth across it. There's no nuance about what converted from wholesale to direct by unit size. We've converted about 75% to 80% of those wholesale customers to direct, which is something I was very pleased the sales force pulled that off. My goal was to get that done by the end of this year, so to be at 75% to 80% in July hugely exceeds our expectation. And I felt that there was some risk around that conversion process. I'd say that risk for me is now gone, so we feel very happy about that. But there have been some prior market conversions from wholesale to direct in the past for Apartments.com, and what normally happened was that you would have a slight drop in market revenue as you did the conversions. And then, in the years that followed, you'd have an acceleration of revenue growth in those markets. And the reason that is, is that the newspaper sales teams were typically selling all sorts of things. They're selling car advertisements, residential, multifamily, and this is just one thing that they were carrying in their bag. Our Apartments.com sales force, this is what they do. We can control the process much -- in a much more effective way. We can add resources to markets where we think there should be resources added. So normally, you see an ongoing lift in growth in these conversion markets for quite some time. Some big markets that were really impacted here were Washington, D.C., Chicago, Phoenix, Indianapolis and a couple of others.

And so just to add to that, Andrew, so I have put this in my sort of revenue range for the year. It's great to actually sort of lock it in early. So it's sort of a onetime step-up in the sales, and then I think the sales will be pretty steady moving forward. Now just like with LoopNet, I know you covered them -- the apartment renting season, advertising season's pretty in full force in the second quarter. You get into late in the year and especially in Q4, it's a tougher comp. And of course, the majority of their customer base is not annual subscription. So just like with LoopNet, we're going to go through the same process, where we're going to start moving those over in the long term to annual agreements, but I've accounted for all that in my guidance range, so...

And next, we'll go to the line of Bill Warmington with Wells Fargo.

All right. The real question I want to ask is if you could talk a little bit about the organic growth calculation. I mean, if you just kind of back out $25 million of revenue, you end up with a figure that sounds like it's below the pro forma level. So I was hoping you could give us maybe a bridge, if you will, from the reported to the organic level, not a Brooklyn Bridge but just a growth bridge.

Yes. So to give you some color on that, so all we did was we pro forma-ed sort of the year, so far the 6 months ended June. The business would have done, on a pro forma basis, about $289 million of revenue for '14 versus $254.7 million in 2013. So all as we did was take their numbers and our numbers on a pro forma basis. So it's grown about 13.5%. So we're sort of growing, again, plus or minus, on a bigger broad range, 12% to 15%. And I think that's a pretty good range that will be in here over the coming quarters as, again, which will relate to the sales force maturity and productivity. Now remember, you got the -- basically, the combined business -- the CoStar business before, 50% of them new, and now the Apartments business will go through the same thing, which actually might even be lagged by a few -- 2 or 3 quarters from the -- our core business. So that will -- again, those productivity gains will come in sort of at the back half of this year, Q4, and then really roll through to 2015, just sort of you're up, I would say, on more of a full run rate in 2016. But for people that were -- have listened to the calls and been around the meetings with Andy and I, I mean, realistically, the productivity gains actually continue to go up for 5 years. But obviously, you'll see the biggest increase in those first 24 months. So we're pretty excited. I think we're in a good position. We look forward to it.

And our next question comes from the line of Michael Huang with Needham & Company. Michael Huang - Needham & Company, LLC, Research Division: Just a quick question for you guys. So obviously, the revenue synergies around Apartments.com stems from the conversion of wholesale to direct. I was wondering, I mean, could you talk about the activity and any early success that you're seeing selling CoStar information services into the Apartment.com customers? I mean, are we too early to see any benefit from that yet?

Michael, the answer is -- I can give you some good color around that. We are too early to have anything around that. So just like LoopNet, we focused on certain components and sequence. So to me, the very most important component was securing the wholesale revenue and then secondarily, making some immediate improvements to the site and then having everything in the bank for the plans for the next-generation sites. We've got all that behind us. We've also ramped the sales force. The phase of beginning the cross-selling with information is later in the year. I'll tell you that I met with a very small handful of customers, significant customers who I have come across in various functions. And I was excited to show them our plans for the next generation of the marketing website for Apartments.com. And I was thrown off by the fact that 100% of their focus went to what we could do for them on the information side. So I would sit in a presentation with some reasonably intelligent client for Apartments.com, and you show them this great marketing solutions, you're doing for 45 minutes, a lot of passion, they say, "Man, that information potential's fantastic. When can you help me with that?" So we think there's -- we know that there's a lot of potential there. Some of our very biggest customers have invited and solicited follow-up meetings on the information component, even though that's not in the first cycle for us. So we are going to be talking about that over the course of the next year or so, and I think it'll end up being similar to LoopNet in that you'll have a very strong information and marketing back and forth. And it will help, I think, to strengthen the relationship with these clients and build more meaningful long-term relationships, not the -- they're a great -- Apartments.com already has great relationships with its customers, but even stronger, real multilevel business relationships.

And just to remind everybody, just like LoopNet, I don't think we really started getting into that until 3 to 4 quarters into it. So as you guys listen to all the things that we've done in just the first 3 months, we're off to a pretty fast start. But it is a moment for self-reflection when you're disappointed that you're not paying enough attention to your marketing and they may want to buy. I can tell you about buying your information. Okay, guys. I'm not translating information, but I will. But I will, if you want.

And our next question comes from the line of Brandon Dobell with William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: If you were to look at the group of experienced sales reps, I think you called out 118 that have more than 1 year, they're doing $420,000-plus of annual gross sales. What did that number look like, I don't know, a year ago, 6 months ago? I guess what I'm trying to get at is your experienced guys, do they continue to see growth in that annual gross sales on a per capita basis?

I'll be giving you a somewhat anecdotal or an educated estimate of what that number would look like, but I'm fairly certain that it would be flat or down, and it would not be about competitive positioning, product value or economic. It would be more around disruption in the sales force associated with that level of growth. So managers are focusing on hiring, training, on-boarding, in many cases, learning the products themselves, meeting new customers. And some are -- and you get some number of salespeople start to fall through the cracks. So some of our very top producers -- Joe Pascal is still doing fantastic. But you get some folks in the middle who start to fall through the cracks when you have a much bigger sales force, and then you'll be able to -- they'll catch up with productivity and get back on their curves. So if you look at a 5-year continuous productivity gain, this throws a wave in that line, sort of growth throws a wave in that line, but you expect it to come back once you have everyone's sort of more grounded and has their sea legs.

And, Brandon, just to add to that, we're setting up calls with analysts for after the meeting and I think Rich or somebody was scheduling a 4:30 call, and they said, "Well, are you sure you guys will be done with your earnings call by then?" So the investor that e-mailed that knows who they are. So -- and just to add to Andy, so essentially, I do think that the cohorts of people that spill over each year, and obviously, we have a fairly high retention with people that have been here for over a couple of years, those cohorts do continue to get productivity gains over a 5-year period. And I think we've sort of shown that and talked about that, so. But obviously, right now, you just have a huge cohort and a new area that'll just continue to move. So this is going to be something again that's going to -- the big hiring push happens sort of late 20 -- or Q3. In the Q4, we are ramped up by the end of the year, and I think you're going to start seeing those gains. It'll really carry all the way through 2015 and so we're pretty excited. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Should we expect to get those metrics, those inexperienced and experienced, I guess, numbers of reps in their annual gross sales on future conference calls?

Yes, I mean, I think just like we do here, we try to give relevant -- we give some consistent metrics all the time, but we'll give relevant metrics each quarter based on what we're doing. I don't know that we're going to give it every single quarter, every detail number, but we're obviously going to be giving you guys insights on every call on how the sales force is doing, so...

[Operator Instructions] Our next question will come from the line of Peter Lowry with JMP Securities.

I know it's still early, but can you sort of discuss some of the high-level similarities and differences between your experience with Apartments.com so far versus LoopNet?

Sure. Well, the businesses are extremely similar. Obviously, there are more players in the apartment sector, more competitors in the apartment sector. However, I would say that the apartment sector is probably more sophisticated, and their sense of their need for these sorts of products and services is more focused and more intense. So again, you have these professional investors with $200 million, $300 million assets, with hotel -- more hotel-like booking needs than a retail property that leases up for 10 or 20 years at a time. So the demand is very clean and clear. The customers are sophisticated. I would say there are many more similarities than differences, so SEM, SEO, site design, content advantages, information, marketing. A lot of the mistakes we've made over the last 28 years apply. That can give you some sense here what you should and shouldn't do. A lot of the sales force planning is very similar. And I'd say that through the last several months, my enthusiasm has climbed for the new space that we're in, and you see an awful lot of opportunity here. And realistically, it's an industry that has sort of, in my mind, fallen into a little bit of a pattern, and there's a lot of opportunity for innovation.

And our next question comes from the line of Brett Huff with Stephens Inc.

I hate to burn my question on just a clarification, but I want to make sure I get it, so I'm going to do that. So you all said that there were $16 million of net new annualized subs, and you said it was basically the same as 2Q last year. But I recall that it was more like $14.4 million last year. Are my numbers wrong, or is there something that I'm missing on that?

Yes, I mean, I think we sometimes give several metrics, but the consistent metric, it was $16.1 million last year. It's $16.1 million this year. Just like we sort of gave a little color around the core CoStar family of brands this time, but the consistent metric is $16.1 million versus $16 million, so they're very similar. The $16 million was actually $16.043 million, almost rounded up to the same $16.1 million, but it was pretty close.

And last year, it was $16 million.

And I'll give you another question because that really was just a clarification.

The question I have is on the Apartments.com property, one of the questions that we've got, and it seems like the advantage that you all will have in addition, Andy, to the work you're doing on the website design and the SEO and the conversion from wholesale to direct and et cetera is, obviously, your information advantage. And I recall that Apartments.com had -- was it 4 million units in their kind of research inventory? If I recall, you had something like 16 million or 17 million. I'm not sure those numbers are right. What -- how many of those incremental units over the 4 million that they have versus the 16 million or 17 million you have, when does that data go into the site? And is that one of the things you're going to use to draw more eyeballs to the site?

Yes, so for -- I'm sure that I've got a dozen fine competitors on the call listening, and greetings to all of you today, and welcome to the CoStar earnings call, but the -- it is something that, from a consumer -- the industry, I think, historically, has really focused everything around how do I develop my business relationship with the property owner. And I think there needs to be more focus on what does the consumer want and the experience. I think that's a huge opportunity here. And the content we have, I think, will allow us to provide a much better experience to consumer. I think that it'll be a very similar game to -- if you look at what I was talking about with -- starting out with 31% of listings monetized at LoopNet acquisition, now moving that to 50%, continue to move that on up. I think it will be a similar kind of game where you'll have a mix of monetized and unmonetized, and you'll just try to move it to more and more monetized over time. But we believe that we can give a better consumer experience by using our research capabilities. And in terms of when we do that, I can't tell you.

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

I was just hoping you could talk a little bit about how you view debt in the capital structure. You've obviously got debt there today, but overall, it's a net cash position. And what would you like net debt-to-enterprise value to be over the long term for the business?

Yes, sure. I mean, obviously, we're looking to optimize the capital structure. We believe that we sort of put the $400 million term loan to L plus 2%, and that drops over time with leverage ratios. Plus we have a $225 million revolver. So it's a combination of long term -- I believe, with the significant cash flow that we have, that we can have a slug of long-term debt and I think in the 2 to 4 turns range. We could flex up higher right after certain acquisitions because of the cash flow, but I think long term, we'll have 2 to 4 turns on there because of the high cash flow. And again, it'll move around based on strategic acquisitions and different things that we're doing, but I think we're pretty comfortable in that 2 to 4 range in the long term, again, having ability to flex up, keeping our options open with revolvers like we have. So I think that's a pretty good place for the company to be. It will give us opportunities to take advantage of strategic opportunities similar in size to LoopNet and apartments that we've done. You take the $466 million plus $225 million, you can see in our cash flow, we've got quite the capacity to do more strategic deals.

[Operator Instructions] Okay, we do have another question from the line of Todd Lukasik.

Back again. Just following up on that and some of the earlier comments you made with regards to acquisitions. It felt like after the LoopNet deal that you guys were on pause for a little while with all the time that that was taking to integrating, get it to where you guys wanted it to be. Is there a similar situation with Apartments.com? Or if another large deal came around today, would you guys have the bandwidth to take that on?

Well, it would depend upon what kind of deal that was. So I think right now, the only way we would consider a transaction and something that we already did not have significant management expertise in would be as if it was a very unique opportunity. So we would likely be somewhat conservative in what we do in acquisitions that stretch management bandwidth. However, there are always opportunities to do acquisitions where the acquisition is more consolidation or something that is already well within our management competency all the way through our ranks so that the integrations occur at a level other than the C-suite. So to answer your question, it is -- there are a lot of things out there right now. We're looking at everything. Some are very interesting, but we prefer to focus on the great opportunities we have in LoopNet, CoStar, Lands of America, BizBuySell, Apartments.com, the debt and equity space. We've got a lot of good things to focus on, and we really only want do to things that support those core areas. Thanks, Todd. And I appreciate everyone. I think we just crossed the noon hour, so we're over our time limit. And I think AT&T is charging us about $1,000 a minute, so we appreciate everyone's time on the call today.

And that does conclude the conference for today. Thank you for your participation and for using AT&T's Executive Teleconference Service. You may disconnect your line.