CoStar Group, Inc. (CSGP) Q2 2014 Earnings Report, Transcript and Summary

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 estate remains healthy. Liquidity is strong, with year-over-year sales up 10% from 1 year ago. Trading volume is now well above historical averages and nearly back to 2007 peaks. For our brokerage clients, this means commission levels are high, which is a positive for CoStar's revenue growth. Construction remains focused on a handful of markets. Demand growth is strong enough to heal fundamentals but not strong enough to lure developers back into market in mass with aggressive building. Specifically, new construction inventory is about half the pace of demand, and the supply growth is 20% to 40% of what occurred from 2006 to 2008, so it's a very quiet construction environment. Office market fundamentals are improving at a steady pace. National vacancies have fallen steadily for 4 years straight and are closely aligned with 2005 levels and long-term averages. Net absorptions surpassed 75 million square feet for the past 12 months, ending the second quarter at 20 million square feet for the second quarter 2014. This was the largest annualized increase in 6 years. Industrial market fundamentals are the tightest they've been since 2001, with a 7.2% vacancy rate; while the retail market is returning to normal, with vacancies back in line with long-term averages, while rents and incomes are growing. Apartment market performance was solid in the second quarter as millennials have helped to absorb newly built units. A total of 202,000 apartment units have been added to the market stock over the past year, up a very significant 60% from 1 year earlier. Despite the surge in construction, net absorption at 173,000 units was only 30,000 units short of completions and is nearly unchanged from a year earlier. Since the market-cycle low in 2013, vacancy has risen by 20 basis points to 5.4%. So while supplies picked up, apartment fundamentals of supply, demand and rent are benefiting from housing trends that favor renting. I believe the strong leasing activity and slightly increased vacancy is creating good tailwinds for our apartments' products. Now I'll take a moment to update you on LoopNet. Our LoopNet marketplace continues to show vibrant growth, with 44.2 million profile views in the quarter, excluding bots [ph], and that's up 18% year-over-year. LoopNet marketplace revenues for the second quarter 2014 were $27.5 million, growing 6.2% over the first quarter of 2014, so really good growth there. The LoopNet Premium Membership revenue grew approximately 20% in the second quarter over the prior year. Migrating clients from month-to-month contracts to annual subscriptions remains a priority, and we are achieving great results with LoopNet annual subscription revenue growing 148% year-over-year to $41.3 million annualized in the second quarter. We continue to make very good progress increasing our average revenue per LoopNet customer. Average revenue per premium member climbed 18% to $86.34 in the second quarter 2014 compared to $72.90 the prior year. Average revenue per Premium Lister grew 14% year-over-year to $101.74 in the second quarter. We continue to pursue what we believe is a huge opportunity to sell CoStar information solutions to nearly 100,000 higher potential prospects that use LoopNet for information rather than just using it for marketing. We have now raised the entry price for a single-user upgrade from LoopNet information to CoStar information from $29 per month to $395 per month. When we closed the LoopNet deal in April 2012, only 31% of listings on LoopNet were paid, and the remainder were free listings. We have made it a priority to increase our monetization of those free listings. We have succeeded, and 50% of the listings on the site are now paid. We have 278,200 paid listings, up 26% year-over-year and up 65% since closing the merger in April 2012, when we only had 168,400 paid listings. While we've made a lot of good progress, we believe we have significant additional revenue potential in the 587,000 listings in the CoStar database that are not yet advertised or paid on LoopNet. In addition, we have significant additional potential to monetize various enhanced listing opportunities throughout the site. Our sale of spotlight ads has proven to be very successful. We plan to continue to add new levels and areas of placement and larger ad sizes for our advertisers who need additional exposure for the listings and are willing to pay a premium for it. Now I want to turn to give you an update on the first quarter of operating Apartments.com. So as you know, in the second quarter 2014, we closed our acquisition of Apartments.com, one of the leading Internet apartment marketplaces. We have moved very quickly with real focus and are well ahead of planned schedule, having already achieved several key goals. We've achieved $5.2 million in revenue synergies by converting 2,700 clients from indirect wholesale purchases to direct sales. Prior to our acquisition of Apartments.com, newspapers owned by Apartments.com owners in certain cities purchased advertising exposure on Apartments.com and used their sales force to retail it directly. So newspaper sales forces were selling space on Apartments.com. Upon closing the acquisition, we made it our top priority to add 40 salespeople into these indirect sales markets and convert them from wholesale to direct sales with Apartments.com. Typically, Apartments.com would receive $130 per month for an apartment community advertised at wholesale price and $445 per month for apartment communities advertised directly. This conversion from wholesale to direct sales had a very significant impact, driving an overall 15% increase in our average revenue per apartment community. And that's across all the apartments being marketed on our site, not just the ones converting from wholesale to direct. This allowed us to already achieve approximately $5 million in contracted revenue and approximately $875,000 in monthly sales post-acquisition. Wow. We believe we have already significantly improved the Apartment.com website. We improved the mapping capabilities. We have cleaned and simplified the look and feel and increased the professional presence of the advertised communities. We have eliminated unrelated banner advertising on the site, which we believe cheapened the presentation of our advertisers' properties. This meant foregoing approximately $3 million dollars in annualized revenue, but we believe that investment will pay off in the short term. We achieved a much higher growth rate in the quarter for Apartments.com despite terminating banner revenue. We have also significantly increased our investment in search engine marketing. We believe that all these improvements have resulted in a 27% quarter-over-quarter increase in leads generated for our clients, which delivers more value to our clients. As with LoopNet, we have quickly accelerated revenue growth at Apartment.com post-acquisition, and we're not done. In the second quarter 2014, Apartments.com revenue growth accelerated from growing 11% year-over-year to 15.7% year-over-year at the end of the second quarter. We will continue to make important incremental improvements to the Apartments' website, but we also completed a comprehensive new product design for the next-generation Apartments.com's website. That next-generation product is now in our software development team's hands, and work is well underway on building a new product offering that we believe will be an industry game-changer that will enable us to take significant new market share. I'm very appreciative of the fantastic job Brad Long, President of Apartments.com, and his team have done in coming out of the gate so quickly and focusing intensely on successfully converting these thousands of customers from wholesale to retail, thereby driving this revenue surge. I have strong confidence in Brad's sales leadership as we move forward. We're very pleased with our continued strong results in both the United Kingdom and Toronto, Canada. CoStar in the United Kingdom had our highest-ever sales result in the second quarter 2014, coming in 32% higher, when measured in British pounds, than the same quarter in the prior year. Our sales results in the U.K. have now accelerated to a level that matches the U.S. sales levels on a pro rata GDP basis, which has been a long-term goal of mine. CoStar Suite growth is strong. It is becoming the single largest revenue stream in the United Kingdom, surpassing our legacy-focused product in monthly revenue in the month of June. We have now signed 600 U.K. clients to CoStar Suite in 600 days. Half of the 8 major U.K. brokerage firms have now upgraded to the benefits CoStar Suite offer. After a period of investment, the U.K. business has now achieved positive EBITDA on a trailing 12-month basis, with $1.1 million EBITDA year-to-date. We believe the U.K. will continue to stay positive going forward, and we know Matt Green will watch the costs. I could not be more pleased with the good work Giles Newman and his team are doing in Europe. In Toronto, Canada, we continue to sign on additional brokers, investment companies and owners. We now have more than a dozen leading Canadian companies subscribed into our flagship product, CoStar Suite, and we have a phenomenal sales team up there to exploit that opportunity. Give you a little bit of an update on sales. I think a couple of you are interested in sales force growth and productivity. Now let's get that -- no, okay, let's do that. We believe that the addressable market for commercial real estate information and analytics in the U.S. is in the billions of dollars and that we have penetrated only a fraction of that opportunity today. In order to better and more quickly address the market, we have made significant investments in growing our sales force over the past 3 quarters. We now have approximately 500 salespeople on staff. The most dramatic organic growth in that sales force is in our U.S. CoStar LoopNet field sales team, where we've added 75 net new sales people over the past year for an increase of 50%. We know from experience that when you grow a sales force dramatically, per sales person productivity drops significantly across the sales force as these new salespeople ramp up. We have not expected to see significant revenue growth gains from that sales force into the later half of this year. The first part of the process is all about investing and work. We have approximately 99 U.S. CoStar LoopNet field salespeople with 1 year or less of experience. On a rolling 3-month average, they're averaging $196,800 in annualized gross sales. We have 118 experienced U.S. CoStar LoopNet field salespeople with more than 1 year experience. In contrast, they're averaging $422,640 in annualized gross sales on a 3-month trailing basis. That's 114% more. The experienced people are selling 114% more than the inexperienced sales reps, and that's not a surprise to us at this point. It's also important to note that your cancellation level is roughly fixed, so your gross production is more dramatic of a difference. So the first half, what a salesperson sells is pretty much there and it's pretty much past the cancels. So as you climb in productivity, you have a leveraged increase in net production. Anecdotally, I noticed on today's metric report that 4 sales reps, Maxx Mantooth, Brett Reed, Charles Tappen and Keith Wells just reached their first anniversary in our sales force, and they are now averaging $337,700 in annualized production. Congratulations to these guys on their strong performance. Of course, we also have some rookies who are hitting home runs and maybe even grand slams on their first at-bats. Thomas Valenzuela has a financial sales background and has been selling debt and equity solutions for us in Orange County for less than a year. On a 3-month trailing basis, he has sold, on an annualized basis, $986,000 in new business. Just as some of these new salespeople are making positive contributions to our sales team, so too are some of our new managers making a big difference; John Toomey joined us less than a year ago. He has a background in commercial real estate and software sales. When he joined us, his region was at 42% of target. For the past 2 months in a row, he now has that region to 104% of target. In order to help us achieve our target productivity gains across our larger sales force, we've made an important leadership change to the top of the sales organization. Max Linnington has joined us as Executive Vice President of Sales. While leading North American sales for Bloomberg, Max demonstrated his ability to create a culture of success and accountability across a 700-person sales organization. He is now responsible for leading all of our North American sales operations, including the sales team of all CoStar, LoopNet, Apartments.com and our Marketplace Verticals and one of my favorites, Lands of America. Max's expertise in selling services at the institutional level will be extremely valuable as we develop an even better strategy for penetrating lucrative verticals such as banks, institutional investors and owners. As we begin to stabilize the sales force with the new larger size, we're happy to have found some very valuable new additions to the team. We're also realistic about those salespeople and managers who have not reached our expectations, and will continue to upgrade in those positions until we reach our historical productivity levels at a larger-scale team. Finally, I'd like to update you on our successes -- recent successes, really strong successes at CoStar Real Estate Manager. In particular, since I'm in the Atlanta office today and I'll be talking to that team later, I really want to give them good kudos. Subscription revenue for CoStar Real Estate Manager grew by over 22% in the first half of 2014 compared to the same period in 2013. Formerly known as Virtual Premise, CoStar Real Estate Manager had its highest-ever level of net new sales for Q2 2014 since we acquired the company in October 2011. The team is doing a fantastic job, and they're a pleasure to work with. Some significant new client wins in the quarter include American Airlines, Stanley Black & Decker and Schlage Lock Company. United Parcel Service also extended and expanded their client relationship with us, so a lot of exciting things happening there. I'm very excited about the prospects for the rest of this year and beyond for CoStar. Revenue, EBITDA and sales are strong, and we've made investments that we expect will continue to see us move towards our goal of becoming a $1 billion revenue company with 40%-plus margins in 2018. We're going to take a brief 15-minute intermission before I begin the second half of my presentation. No, just joking. I'm going to go ahead and turn the call over to Brian Radecki. Brian, we've used up all our jokes.

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. Gross margin was $108.2 million for the quarter or 73.3% of our revenue. This is an increase from approximately 70% in Q2 of 2013, reflecting the continued strength in growth of our business model. Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA and all 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 at our newly re-rated website at www.costargroup.com. Stay tuned. Cash and investments was $466.5 million at June 30, 2014, and short- and long-term debt totaled $395 million as of June 30, 2014. We had a lot of movement in our capital structure during the quarter. To fund the $585 million acquisition of Apartments, we entered into a credit agreement that provided $400 million term loan facility and a $225 million revolving credit facility. We initially drew $150 million under the revolver and then subsequently repaid that amount. Additionally, we issued 3.45 million shares of common stock for net proceeds of $529.4 million. Therefore, we currently have access to the $466.5 million of cash and investments, along with the $225 million revolving credit facility, that are available to fund future potential strategic acquisitions, to finance the growth of our business or working capital or other general corporate purposes. At this point, I'm going to give some additional color on a few metrics to highlight our strong performance in the second quarter. We achieved $16 million in net new sales of subscription services on annual contracts in the second quarter of 2014 as a result of our ongoing success driving sales information, analytics, services, marketplaces, lead generation, cross-sell with LoopNet, you name it. To be clear, the sales metric is consistent with what we reported in recent quarters and does not include sales from Apartments.com, so it's a consistent metric. Apartment.com's standard contracts have annual terms that have cancellation rights after 6 months; therefore, we do not include them in the annual subscription sales metric. The $16 million is on par with our highest sales result in the company's history in the second quarter of 2013. We are pleased with this result, in light of all the changes we made late in 2013 and the first half of 2014, including the increase in sales headcount, as well as the change in leadership at the top of our organization. For those investors who are new to CoStar and our metrics, I want to be clear that our net new sales metric reflects incremental future revenue. Flat net new sales does not mean flat revenue; every dollar of net new sales grows our subscription revenue base. In prior calls, Andy and I spoke at length about the great progress we're making expanding the sales force and our roadmap for moving these reps up the productivity curve. Maturing the sales force will take time, but we believe it will keep delivering upside over the next few years. As we've previously stated, we expect to begin seeing the productivity increases later this year and all throughout 2015, so 2016 will be sort of full impact. Remember that half the sales force is new and learning from the other half with experience. It takes time and energy for the whole sales force. As Andy noted earlier, we have approximately 500 total salespeople across the company. Of that total, 215 are in the U.S. CoStar field sales reps, which would be up from the 140 we had reported a year ago, and 123 at Apartments.com field sellers, up from 80 -- approximately 80 at the time of the acquisition. Additionally, we have about 100 inside sales reps across CoStar, Loop and Apartments, 22 in the U.K. and about 40 across our other market verticals and businesses. Revenue from subscription services of annual contracts was $95.4 million in the second quarter of 2014 or 64.6% of our total revenues, including Apartments. For the trailing 12 months ended June 30, subscription revenues from annual contracts totaled $357.8 million, up 21% from $296.4 million for the 12-month period ended June 30, 2013. If we look at the pre-Apartments business, subscription revenue on annual contracts would have comprised 78% of total revenue, up from 71% right after the LoopNet acquisition, reflecting the solid growth in the annual subscriptions. Just like with LoopNet, our long-term goal is to move as many clients from all of our services and marketplaces over to annual agreements over time. The renewal rates for annual subscription remained very high during the quarter. The 12-month trailing renewal rate for CoStar subscription services was 92% in the second quarter. As we've discussed the last few quarters, the introduction of more annual contracts across LoopNet and our subscription base is expected to cause the 12-month renewal rate to edge down slightly, possibly 1% or 2%, over the next year or so. The renewal rate for CoStar subscribers who've been with us for 5 years or longer was approximately 98%, which remains phenomenally high and consistent with prior quarters. As noted in our press release, and Andy stated, revenue from LoopNet marketplace was about $27.5 million in the second quarter of 2014, which represents all the services available at loopnet.com but does not include revenue from the other businesses that came along with it, like the market verticals, if you're trying to figure that out. Since the Apartment business does not conform to our annual subscription revenue metrics we provide historically, I'd like to give some insight on how the business performed in the quarter. Apartments.com revenue for Q2 2014 was $25 million. Since the acquisition, we made a strong push, as Andy said, to expand the apartment sales force, and we successfully added 40 new sales reps to their field sales force, so that's a 50% increase, again, for them. So they've also got significantly new staff. This staffing allowed us to achieve the $5.2 million in revenue synergies by expanding our presence in the markets that used to be serviced by the newspapers that previously owned Apartments.com. And as Andy stated, we converted 2,700 apartment communities from indirect wholesale purchases to direct. Our previously published revenue ranges outlook planned for the successful transition of these markets over 3 or 4 quarters, therefore, we're able to see this opportunity faster than anticipated, which helped contribute to our strong quarterly results. We've also achieved approximately $5 million in annualized cost synergies so far. As we suggested at the time of the deal, we believe we can realize $20 million of annual synergies over 24 months following the deal, and we are already halfway to that goal after just 3 months. During the quarter, we started to implement product enhances at Apartments.com aiming to improve the consumer experience, as Andy mentioned, which is expected to have short-term impact on the revenue results as we discontinue non-core revenue-producing services. We've already eliminated banner ads from the website and we're moving forward with other strategies that are expected to make the site easier to navigate and more appealing to consumers that visit in search of a new apartment. The impact of eliminating these revenue-generating non-core offerings, as I stated last time, is approximately $2 million to $3 million in 2014, with a $4 million to $5 million potential run rate going into 2015. As we move forward, we'll relook at these metrics that we currently provide in order to make sure we give appropriate insight into the newly acquired Apartments' marketplace as we gain more information. Now I'll discuss my outlook for the third quarter and full year 2014. Our guidance takes into account recent trends, revenue growth, revenue renewal rates, which all may be impacted by economic conditions in commercial real estate or the overall global economy, among other things. Our guidance on the impact of foreign currency exchange rate fluctuations at our top line results remain consistent. We do not attempt to predict foreign currency exchange rate fluctuations, and our guidance assumes a little or no volatility for the current rate. Actual results may vary from these estimates. If you're feeling dizzy or lightheaded right now, call your doctor or Jon Coleman at (301) 452-4673. Again, Jon Coleman at (301) 452-4673. We're providing our outlook reflecting our current expectations as of today, July 24, 2014. Based on strong revenue and earnings results in the second quarter, we are raising both our revenue and earnings guidance outlook for the year. For the full year 2014, we now expect consolidated revenue of approximately $565 million to $571 million, which is an increase of $3 million at the midpoint of the revenue range compared to our previous guidance. This revenue range considers our sales performance to date, synergies at Apartments and fourth quarter seasonality, which will be associated with both LoopNet and Apartments' marketplaces, along with the elimination of some of the services we discussed at Apartments. Apartments -- people who used to track LoopNet will remember they had some tough Q4s. The Apartments business, very similar without annual contracts in the fourth quarter, so we've accounted for that. We expect revenue in the third quarter of 2014 in the range of $149 million to $151 million. As I mentioned earlier, we issued an additional 3.45 million shares in our June follow-on offering, which resulted in a reduction of our non-GAAP EPS of about $0.20 for 2014. We now expect non-GAAP net income per diluted share in the range of $3.05 to $3.10 for the full year 2014 based on 30.7 million shares. This represents an increase of $0.17 per diluted share at the midpoint of our range after adjusting for the impact of the shares. We currently assume a 38% tax rate in order to approximate our long-term effective corporate tax rate. Details of my outlook are in the guidance tables at the back of our press release, line by line. For the third quarter of 2014, we expect non-GAAP net income per diluted share of approximately $0.77 to $0.80 on 32.2 million shares versus 29.5 million shares in the second quarter of 2014. These additional shares result in approximately $0.07 of dilution in the third quarter. In summary, I'm very pleased with CoStar's financial results for the second quarter 2014, which clearly show strong year-over-year organic revenue growth and increasing margins while adding Apartments.com. As Andy mentioned several times in the past, we believe the opportunity in the multi-family space is massive, and we believe we can make investments in the business now that will drive further growth and market share gains moving forward. We continue to believe that the company's operating in a market with multibillion-dollar revenue potential, and we are focused on executing on that plan to capture the opportunity. Operation of the company is making great progress towards the integration of Apartments, achieving the $20 million in annualized synergies we expected at the time of the acquisition. Product development pipeline looks great across many of our digital real estate services and marketplaces. Our sales management team is focused and driving steady improvement in sales productivity and increase, focused on many of the customer verticals where we currently have low penetration. I'm confident these combined efforts will continue to drive consistent year-over-year sales growth in the quarters ahead. Based on the growth trajectory of the combined businesses, as well as the expected synergies, I continue to believe we can reach our long-term goal of achieving the run rate of $1 billion in annual revenue sales and 40-plus percent adjusted EBITDA margins in 2018 based on the platform we have today. As always, I look forward to sharing our progress towards these goals with you in the coming quarters. And now we'll open it up for questions.

[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.