CoStar Group, Inc. (CSGP) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome the CoStar Group Fourth Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Rich Simonelli. Please go ahead, sir.

Thank you, operator, and good morning, everyone, and welcome to our fourth quarter 2014 conference call. We're delighted you joined us. Before I turn the call over to Andy, you should know that certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in our February 25, 2015 press release on fourth quarter and year-end earnings and in CoStar's filings with the SEC, including our most recent annual report on Form 10-K and 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 on the date of this call, and we assume no obligation to update these statements whether as a result of new information, future events or otherwise. As a reminder, today's conference call is being broadcast live and in color on the Internet, at www.costar.com, and a replay will be available approximately 1 hour after the call concludes and will be available until the end of the month. To listen to the replay, call (800)475-6701 within the U.S. or Canada or 320-36-53844 outside the U.S. and Canada. The access code is 352633 and a replay, as I say, will be available on our website as well. [Operator Instructions] I'll now turn the call over to Andy.

Thank you, Rich, appreciate it. And welcome, and thank you for joining us on this snow day in Washington, D.C. I'm happy to have the opportunity to share our very strong financial results for the fourth quarter of 2014. In 2014, our annual revenue increased $135 million over 2013. And we generated annual EBITDA of over $151 million. Our adjusted EBITDA for the year was $188 million. We achieved revenue in the fourth quarter of 2014 of $156 million compared to $116 million in the fourth quarter of 2013, for an increase of 35%. EBITDA increased 36% to $43 million in the fourth quarter 2014 compared to $32 million in the fourth quarter of 2013. Non-GAAP earnings per share grew to $0.93 per share in the same period. Our annual subscription business continues to enjoy a high trailing 12-month renewal rate of 92% with 98% renewal for those customers with us 5 years or longer. Our investment in the expansion of our sales force is going well. In 2014, we added over $63 million of annualized net new business. We achieved CoStar's highest-ever net new sales on annual contracts with $17.3 million in the fourth quarter of 2014. As we discussed last quarter, we signed a onetime, one-off $1 million advertising contract in Q4 of 2013. So when you adjust for that contract our net new sales actually grew 17% year-over-year. Our field sales force continues to do an excellent job as the pace of net new sales for CoStar's core business accelerated 36% in the fourth quarter of 2014 over the third quarter of 2014 and 26% year-over-year. As we reach a new stable state with our larger sales force, our sales reps will gain more experience and we fully expect to see an increase in per rep productivity and higher net new sales overall. With successful service offerings like CoStar, LoopNet and Apartments.com, our sales force has absolutely no shortage of products to sell. Over time we plan for -- prepare most of our sales force to sell all three services to streamline the relationship with our clients and prospects, and maximize their efficiency. We acquired Apartments.com less than a year ago in April of 2014. Before we had even closed the deal, our product design team had put forth a Herculean effort, and had redesigned the site from top to bottom. While we felt that Apartments.com was a great company with a good product, we also knew the industry is highly competitive and changes rapidly, so we needed to ensure that our product would lead the industry. We understand that other competing sites with significant revenue were working in aging business models and that there was a unique opportunity to reinvent the space with a more renter-centric website. We believe that if Apartments.com gives renters what they want and need, then we'll be able to give our paying advertisers the quality leads they want. We focused on building a site with more powerful and responsive mapping and searching tools. One of CoStar Group's core competencies is collecting and building content. We felt that renters really wanted a more comprehensive inventory of rentals, including condos and houses, with actual rents and availabilities, so they can narrow down their search for an apartment without having to call every other building in town. We also learned from renters and apartmenters that they believed there was no prominent, trusted, clear, branded website that stood out on the Internet for finding an apartment. After we closed the Apartments.com acquisition, our entire team from LoopNet, CoStar and Apartments came together with a clear purpose: To build the best apartment website ever built. After thousands of my colleagues worked countless intense hours, we believe that we have built the best website ever, connecting renters with apartments and connecting owners with renters. We relaunched the new Apartments.com 10 days ago to an incredibly positive reaction from both customers and renters and 1 or 2 investors. The site has dramatically more listings, vastly improved search tools and user experience and state-of-the-art search engine optimization. We are seeing early positive trends. It's obviously early, but we like what we're seeing initially. I am very pleased to report that we've seen a huge surge in organic traffic since the launch. Year-over-year, visits to Apartments.com are up a very impressive 74%. Since the launch, week-over-week visits are up 23%. For the important SEO keywords we track, 336 additional keywords for Apartments.com have moved up to the top 5 positions in Google for a total of 1,407 keywords in the top 5 organic positions. That is 47% more keywords in the top 5 organic positions than Zillow or ApartmentGuide. We also are holding the most prominent position in search engine marketing as well. Telephone leads to our clients are up 56% year-over-year on the site. It's pretty material to our advertisers. I believe that, that underestimates the benefit to our clients, though. On our old site, a renter could not determine if an apartment building had a currently available unit for them without calling the community. At any given time, typically half the bedroom configurations are not available in the community. So we believe approximately half of the old telephone leads were a waste of the owner's time, and a waste of the renter's time. Now our site shows current availability, so it is more likely that when the prospective renter calls, they are calling to schedule a tour rather than to do an availability check. It's amazing how simple it is. We know the site is more engaging because since the relaunch, the average length of the visit to the site is up 39% from that on the old site. Site performance is key to keeping renters on your site, so the speed of the site was one of our key engineering concerns in building the new Apartments.com. The average time to download a page on the old Apartments.com was exactly 639 milliseconds. But the new site -- I'm kidding, approximately 639 milliseconds. But the new site is 344% faster, with an average download time of about 144 thousandths of a second, dramatically faster. And we're going to make it even faster still. The relaunch of the site has confirmed the validity of a key element of our strategy for the new site. The site now allows landlords to list a property for free on the site, and for increasing levels of investment, they can achieve more prominent placement on the site. If you can list for free on the site, then paid placements better offer a significant advantage. The good news, and I was really happy to see it, is that now, the site is live, it clearly appears that the advertising opportunities offer a huge advantage to our advertisers. The advertising levels are silver, gold, platinum and diamond. Since the relaunch, the silver ads have been viewed twice as many times per listing as the free listings. The gold placements are viewed 6x more frequently as the free ones, and the platinum levels have been viewed 13x more often than free. And the diamond ads have been viewed 26x more frequently than free. The paid properties are receiving significantly more leads than the free properties and the business premise is solid. This is basically the core premise of Google's revenue stream. We believe that building the most traffic site is key to building the most -- the highest revenue-generating site. I'm very proud of the enormous traffic gains our team has accomplished for the relaunch of the site, but what is even more impressive is that we have accomplished these impressive gains before our planned transformative consumer marketing campaign has even begun, featuring Jeff Goldblum. The Apartments.com marketing campaign kicks off Sunday, March 1, with a placement on the very popular hit show, "The Walking Dead" in the 9:00 to 10:00 p.m. slot. And I hope everyone will watch it, even though the show has a little bit of a gory side to it. According to a study conducted by Kip Casino [ph] of Burrell Associates, landlords will spend $1.5 billion in online advertising in 2015, up from $630 million last year. We believe our new website and aggressive branding campaign will give us a decisive competitive edge as we pursue a significant share of this $1.5 billion online advertising. We believe the combination of CoStar and Apartments will position us to benefit from the significant information and marketing cross-sell opportunity we see in multifamily. Our rent comp reports will help property managers and owners set their rents with accurate, real-time information for their markets. Because of the efforts we have invested to build great content for renters on Apartments.com, those who subscribe to CoStar information will now get even deeper, richer, faster information on the multifamily markets. We are confident we will be the only company that will be able to deliver to property managers and owners a marketing solution with comprehensive information and analytics for an exceptional price. We have bundled these powerful resources together. We had a phenomenal sales month for Apartments. We had a phenomenal sales month in January for Apartments.com, even before the release of the new site. The month of February is more about customer service. The sales team's primary objective is to explain the features of the new site to our many, many clients for Apartments.com, rather than having the sales force just focus on acquiring new customers. We want to make sure the existing customers are happy with what we're doing. So we anticipate a modest February net new sales launch in the Apartments.com space. We are very optimistic though about the potential for the March sales. Despite our current customer service priority, we are already seeing some sizable cross-selling deals that we really like. Giving a couple of examples, the ValCap Group has been a CoStar customer for some time. I believe since 2013. A CoStar sales rep brought in an Apartments.com sales rep to meet with them, and the team sold them a competitive $7,000 a month advertising contract covering 11 properties. And that contract was a share shift from one competing company to us. Oculus Realty is an Apartments.com client based in Gaithersburg, Maryland and owns 22 communities. We added CoStar Information for $5,600 per month, and took the business away from Reese. [ph] So in one case adding advertising to a CoStar customer, and in another case, advertising CoStar to an Apartments customer. In each case, sales reps from Apartments.com and CoStar worked together to secure these deals, and we think the cooperation of those 2 teams and the joint efforts will be critical to a really great sales year. If you have not yet visited the new Apartments.com, I really encourage you to do so. The site looks great, and we have no shortage of great ideas to keep making the site even better throughout the years. We've made a number of significant enhancements to CoStar Suite over the past year that have made the product more powerful and made accessing our content even easier. We have now integrated our portfolio strategy, web-based market analytics and forecasting tool into CoStar Property, giving our customers a great 30,000-foot view of the markets, right down to the very granular information, all in one integrated package. We will continue to build valuable information analytic tools on this new platform for commercial owners, lenders and institutional investors and regulators. This quarter, we are releasing an important new feature within CoStar Suite called CoStar Lease Comps. And in fact, we already have it in beta use with several big customers. These comparables are one of the most valuable assets that a broker and their firms have when dealing with their clients but oftentimes the comps are only embedded in dispersed in-house Excel spreadsheets, which means they are very difficult to access or share and not integrated with other useful data and are often nonstandardized. CoStar Lease Comps functionality allows our subscribers to enter, manage, share and analyze all their proprietary lease comp information within CoStar Suite. With CoStar Lease Comps, brokers can leverage CoStar Research to supplement managed information on their own lease transactions by adding CoStar Research Lease Comps to their information. This lets them build a bigger and more accurate picture of the market and allows them to help their clients make more optimized pricing decisions. And ultimately, I think, will be very good for industry transparency and the health of the commercial real estate market. We believe that CoStar's lease comps will provide brokers and their firms the best way to manage, control and protect their lease information. They can aggregate lease comps across multiple office locations or firms. It gives them the opportunity to have standardized lease comp collection across their firms, and it standardizes effective rent calculations across their firms. It lets firms run their lease comps through our analytics and reporting engines. It's a win-win between CoStar and our clients. It gives our clients a much-needed timesaving productivity and intelligence tool. As these brokers put more and more of their content in the CoStar environment to get value from it, it makes the CoStar product even stickier. As you know, LoopNet is by far the most trafficked website for finding office, industrial and retail space for lease and for sale, and we continue to monetize that traffic growth. In the fourth quarter of 2014, average monthly unique visitors on LoopNet.com was approximately 5 million, up 12% from 4.4 million in Q4 2013. In January 2015, we experienced an all-time unique visitor total -- all-time high unique visitor total for LoopNet at 5.8 million unique visitors. In fact, during January of 2015, loopnet.com, cityfeet.com, bizbuysell.com, and landandfarm.com each experienced all-time high unique visitor traffic. Revenue for the LoopNet Marketplace grew approximately 20% in 2014 compared to 2013. This continues to compare very favorably to the single-digit growth rate LoopNet had prior to our acquisition of the company. Additionally, we continue to evolve our product offering, concentrating on giving our paying advertisers in LoopNet new and more differentiated ways to market their commercial real estate availabilities and properties for sale. As with Apartments.com, we are launching 3 differentiated advertising levels on LoopNet. These ad levels provide larger ads and more exposure to those advertisers that invest more marketing dollars with us. We are offering those who pay us the most for listings the opportunity to sort to the top for relevant search results with large, prominent ads. We believe that will allow them to lease their properties more quickly, generate more leads, sell their properties more quickly. And it will have a positive impact on LoopNet's revenue. This enhancement, along with the ability to buy new, more flexible premium listing plans, targeted ads for brokers, properties and company-branding ads and property videos gives our advertisers fantastic opportunities to showcase both their properties and themselves on LoopNet.com and provides revenue growth for us. In an effort to eliminate internal price competition between LoopNet's legacy information proxy and CoStar, we have significant increased prices for new customers of LoopNet's suite of information products. LoopNet Premium Searcher is now listed at $444 a month. That's actually LoopNet Platinum Searcher is now listed for $444 per month on a month-to-month basis. If you buy it on an annual contract, it's now $395 a month. That's close to a 500% price increase over what LoopNet was charging for a similar service effectively when we acquired the company. So it's a significantly -- significant boost in cost there. Ultimately, we want to transition all of our information clients to one platform, that will be the CoStar information platform, that will reduce cost and we believe increase the quality of the information platform overall by having a greater participation in one community or one clearinghouse of information. CoStar Real Estate Manager increased its net new sales by an impressive 58% in 2014 over the full year of 2013. Real Estate Manager also posted its highest quarterly net new sales in Q4 of 2014. In Q4 of '14 and rolling into Q1 of this year, we were able to increase the number of customers capitalizing on the use of both CoStar Suite and CoStar Real Estate Manager. Subscription revenues for CoStar Real Estate Manager grew 17% in 2014 versus 2013. In 2014, we experienced record growth in the number of new retailers, corporate tenants and healthcare companies joining the CoStar Real Estate Manager customer base, with 24 major new customer additions in 2014. Significant new customers in Q4 included Sunoco's retail stores, Kindred Healthcare and Ansford. [ph] In Q4, we released integration of select CoStar property information with the CoStar Real Estate Manager product, allowing retailers and corporate tenants to begin to see the power of CoStar information combined with our own lease and portfolio information. In 2015, designs are underway to allow retailer and corporate customers to view their own lease and portfolio information inside the CoStar Suite environment, increasing the value of CoStar collection of products to this customer segment, and offering a product that no other company, we believe, can -- is out there can offer that kind of combined solution. We expect that this will continue to increase the opportunity for us to sell both products in this market. CoStar in the United Kingdom has growing profitability and continues to convert clients and prospects to CoStar Suite. We added 700 customers to CoStar Suite in the first 700 days since the launch of the product there. Average subscription price increases have maintained the same high level as we achieved at the original launch date. The price increases have been averaging 39%, as people upgrade from our old FOCUS product to our CoStar Suite product. In the U.K., the renewal rate has steadily increased during the past year, with a trailing 1-year renewal rate moving from 90% at the start of 2014 to 91% at the end of the year. So with the conversion to CoStar Suite in the U.K., we have seen a steady march up in the renewal rates over the last several years. This has been helped by the number of multi-year contracts that we signed. 46% of U.K. CoStar Suite customers have signed either 2- or 3-year agreements. December was a record-breaking month in the U.K., achieving the highest-ever net new sales in the company's U.K. history. And 5 of the top 8 highest ever sales months were in 2014. As a result, in 2014, our U.K. operation achieved the highest yearly net new sales ever, and we expect strong momentum to continue in 2015. EBITDA in the U.K. also improved to $5.4 million from 2 point -- $3 million the prior year, versus a loss of $3.1 million -- no way, I'm sorry. Let me get that right. EBITDA improved $5.4 million to $2.3 million versus a loss of $3.1 million in 2013. That's a mouthful. We'll have to try to use a simpler approach next time. The bottom line is, the U.K. is becoming more profitable, and we believe will continue to be more profitable. Again, I want to congratulate our U.K. Managing Director, Charles Newman, and the entire U.K. team on a great performance this year. We are now advancing our plans to retire the older FOCUS product I mentioned completely from the market and expect to complete that before mid-2016. It'd great to be on one platform. Our move into Toronto, Canada has also been successful. We signed over $1.2 million in annual new business, including important wins in the fourth quarter of MPAC and Avison Young. We closed the Toronto year at 250% of our internal sales goals. This makes Toronto one of the fastest-growing markets to obtain this level of adoption in our corporate history. In November, Toronto turned in the highest-ever sales month of any CoStar city ever. So it's quite an accomplishment. Clients in Canada have expressed a clear demand for nationwide Canadian coverage, so we expect to expand into other large cities in Canada during 2015. The commercial real estate markets continue to show a broad level of strength in the fundamentals of rent, net absorption, occupancy and transaction volume. Overall demand as measured by net absorption was strong in 2014. This strong demand has been driven by a 2.1% rate of job growth and shrinking excess capacity within existing tenant spaces, which in the past, had constrained the overall demand for space. Rental rates rose an average of 3.6% across all property types in 2014 versus 2.2% growth a year earlier. Capital flows continue to remain at record levels. In 2014, we had a 10% increase in property sales to over $0.5 trillion, which is above the previous peaks in 2006 and 2007, when sales averaged $486 billion. Looking at the apartment sector. Performance was solid in '14, with a 3.2% increase in rents for the year. After a cycle of low vacancy in 2013, the national apartment vacancy rate climbed to 4.8% in Q4 of '14, versus 4.4% one year earlier. A significant 27% increase in apartment completions from '13 was the primary reason for the rise in vacancy, as net absorption for 2014 was similar to '13's level. Apartment sales transactions reached the highest levels ever recorded in 2014, up 6% from 1 year earlier to $120 billion. In the office sector, we had 80% higher net absorption to 91 million square feet in 2014. This is nearly double the level of net completions, so vacancy fell by 70 basis points to 11.3%, which is very close to the long-term average. New supply in office remains at historically low levels. Falling vacancies spurred a 30% year-over-year rise in the amount of office space under construction as of Q4 2014. Office sales volumes rose 11% in 2014 to $124 billion. Retail had an exceptionally strong sales year. The volume was up 22% to a record $100 billion. Clearly, the headwinds of Internet retail aren't preventing a flow of capital to the sector. The industrial sector had results very similar to '13, specifically market vacancies declined to the lowest level in 15 years, ending 2014 at 6.8% versus 7.4% a year earlier. This is significantly lower than the 7.6% low attained in 2007. We're getting very full utilization of a lot of our commercial real estate sectors right now. In 2000 -- 2014 was an excellent and transformative year overall. I believe we are on our way to $1 billion in revenue and 40% margins in 2018. With our investment in Apartments.com as well as advances in CoStar information analytics and LoopNet, I believe that we are exceptionally well positioned for strong growth and financial successes for many years to come. At this point, I will return the call over to our Chief Financial Officer, who you may know, Brian Radecki.

Did you take a breath, Andy. So what is that, download times are down, what? They're 344% faster? But the earnings call's up how many minutes, Rick?

7 milliseconds.

Depends on how fast you read your script.

I was crossing out paragraphs as Andy was just reading off all my numbers. I was like, "Well, I don't have to talk about that. Well, let's not talk about that." But I'll reread a couple just because I know you guys you want to hear me. Thanks, Andy. As Andy mentioned, we're very pleased with our performance in the fourth quarter and full year 2014. CoStar Group's organic business continues to show solid top line growth, while we grew earnings, all while we made exceptional progress integrating Apartments.com and investing for the long term. Our strong 2014 performance has created an opportunity for us to further invest in research and marketing in 2015. As discussed in last week's call, seems like we're talking to these guys every other day, we have begun to do so, and we will continue to invest through 2015, which we believe will accelerate revenue growth for many years to come. Starting with CoStar Group's results for the fourth quarter 2014, the company reported $156.1 million of revenue, an increase of 35% compared to the fourth quarter of 2013. For the full year 2014, revenues were $575.9 million, an increase of $135 million or approximately 30.6% for the full year 2013. We reported adjusted EBITDA of $54.3 million for the fourth quarter of 2014, which is an increase of $13.5 million compared to the fourth quarter of 2013. Another way to look at it, is that we had $217 million of Q4 annualized adjusted EBITDA, with an adjusted EBITDA margin of 34.8% for the fourth quarter 2014. Now this is, again, all while we're investing in research as we discussed prior. Adjusted EBIT for the full year 2014 was $188.5 million, which is an increase of 37.8% or $51.7 million compared to the full year 2013. Adjusted EBITDA margins increased to an all-time high of approximately 33% for the full year 2014. Net income for the fourth quarter 2014 was $13.9 million, an increase of $1.1 million from the $12.8 million in the fourth quarter of 2013. Non-GAAP net income for the fourth quarter of 2014 was $29.8 million or $0.93 per diluted share, which is a 34% increase from 2013. Did you give that number? Gross margins was $113.2 million for the fourth quarter or 72.5% of revenue, which again includes the majority investments as research -- in research that we've discussed and is essentially unchanged from Q4 2013. Reconciliation of all non-GAAP and income, EBITDA adjusted EBITDA and all 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 at www.costar.com. Or if you didn't catch that because I went too fast, just email getrich@costar.com. Get rich.

Rich Simonelli.

No, just get getrich@costar.com, it will go right to him. Cash and investments increased $36.9 million to $544.2 million as of December 31, 2014, up from last quarter. Cash and investments exceeded total short and long-term debt of $385 million as of December 31. Cash flow from operations was very strong at $47.9 million for the fourth quarter of 2014 and was $143.9 million for the 12 months ended December 31, 2014, which continues to demonstrate the very, very strong cash flow profile of our business. Now I'd like to give you some additional color and some metrics to highlight -- further highlight our strong performance in Q4 of 2014. As of December 31, we had approximately 504 total salespeople across the company. Of that, 219 were sort of U.S. CoStar field sales reps and 136 were Apartment field sellers, up from 80 at the time of the acquisition. Now after our February sales conference, all these reps are working together, in the field, under one management structure. Additionally, we had approximately 87 inside reps across CoStar, LoopNet and Apartments, 22 field reps in the U.K. and another 40 across our other verticals and businesses. Revenue from subscription services annual contracts was $103.4 million for the fourth quarter or 66.2% of revenue for the trailing 12 months ended December 31. Subscription revenue from annual contracts was $389.7 million, up 19% for the 12-month period ended 2013, reflecting our continued success in growing these annual subscriptions faster than our non-subscription services. The year-over-year growth in annual subscription revenue remained at approximately 19% to 20% for the past 6 quarters, which is pretty important to remember. We expect to continue to grow revenue from subscription services on annual contracts back up into the 70s this year and eventually back into the 80%, 90% range of our total revenue as we move forward. Renewal rates for annual subscriptions remained high during the quarter. The 12-month trailing renewal rate for CoStar subscription base revenue was 91.5% in the fourth quarter of 2014. As we've discussed the last few quarters, the introduction of more annual contracts at Loop, and eventually Apartments, into our subscription base is expected to cause the 12-month renewal rate to edge down slightly, possibly a percent or 2, over the next year or so. Therefore, we'll expect it to be in the 90% to 91% range. The renewal rate of CoStar subscribers who've been with us for 5 years, as Andy mentioned, and never hurts to mention again, is approximately 98%. Hotel California. With the February 17 press release, that was last week, announcing the launch of the new Apartments.com site and the increased investment and marketing for the site, we provided 2015 guidance ranges for revenue and non-GAAP and income per diluted share. These outlook ranges are already incorporated in the exact Q4 2014 results we released last night, as well as the marketing investments we announced last week. Not surprising, a week later, there have been no changes to those projections. So I'm reaffirming my guidance ranges for the first quarter of 2015 and the full year. Our model has not changed and therefore, I assume yours hasn't either. And I'm not going to reread the results, even though my team wrote it because Rich told me he was going to turn the music on. So in summary, I'm very pleased with the CoStar's financial results for the fourth quarter and full year 2014. Our strong cash flow profile and adjusted EBITDA margin improvement in 2014 is allowing us to continue to invest in the business to propel future revenue growth for many, many years. We achieved a 35% adjusted EBITDA margin in the fourth quarter, an increase over the prior quarter, even with increased levels of research investment. Thanks, Fred Carchedi. With the investment in marketing for Apartments mostly weighted towards the first half of 2015, we expect margins to be back in the low to mid-30% range by Q4 this year. Beyond 2015, the marketing spend for Apartments, as Andy mentioned, will be lower and is discretionary. It will be based on our success in driving accelerated revenue growth and market share gains. I remain confident we can deliver mid-teens revenue growth all along the path to our $1 billion in annual revenue goal by 2018, with 40-plus percent adjusted EBITDA margins. And to AJ, who's done North Carolina on Twitter, Facebook, Pinterest, LinkedIn, Google Hangouts and every other social media ever invented, I'm not sure how the guy gets any work done. He asked the question: How are we going to do this? How are we going to get it to $1 billion and 40%? Well, we're going to invest to build the best content software user experience of our products and services, and now we're going to tell everybody about it by marketing it. As always, I look forward to sharing our progress towards these goals with you in the coming quarters, assuming we can dig out from this snowmageddon here in DC. And with that, we'll open it up for questions.

[Operator Instructions] And our first question is comes from the line of Sterling Auty from JPMorgan. Darren R. Jue - JP Morgan Chase & Co, Research Division: It's actually Darren Jue on for Sterling. Just a question about research staff hiring. Just given that the cost of sales in the quarter came in a bit lower than we were expecting, I was just wondering if you were -- if you made all of the hires that you had planned to make in the quarter? And did you end up seeing that -- I think it was a $4 million to $5 million impact that you guided to last quarter?

Yes. This is Brian. So I think we did a great job. I mean, we added hundreds of researchers. Frank Carchedi and his group did an amazing job collecting the content. We probably were at the low end of that range. So we definitely got the majority of the cost structure and people in the door that we wanted to. Probably a little bit more spilled over in Q1 than I would expect. As you get into Q2 and forward, you'll see the gross margins begin to climb again. So I'd say we got the majority of it in there. There's probably maybe a million or so that will spill over into Q1.

And we do have a question from the line of Michael Huang with Needham & Company. Michael Huang - Needham & Company, LLC, Research Division: It's great to see, kind of the strength in unique visitors across LoopNet and the other properties. I was wondering, are you guys doing something different on the marketing front? Or is there some external driver here as well?

All the traffic we're talking about right now is pre the major B2C marketing spend. The -- on the LoopNet side, there is no material change in our marketing spend. In fact, it's probably a slight reduction from prior year. It's basically better -- we're bringing a little bit more of an investment in search engine marketing this year in LoopNet. Certainly, a significant increase in search engine marketing in Apartments.com. A little bit of an increase in Land and Farm and Lands of America. But big picture it is mostly effective SEO and content advantage. That won't be true next quarter and the following quarter, I hope. I believe that then you'll see organic traffic is being heavily influenced by major B2C media spends on the Apartments.com side.

And we do have a question from the line of Sara Gubins with Bank of America Merrill Lynch.

Just wanted to be clear on your plans for the sales force. You've made a big hiring increase last year. You've talked a lot about blending them and being able to cross-sell and cross-train the sales force. So what -- if you can speak to what your planned sales increase -- sales headcount increases are for 2015 and maybe if that's the -- if it's even a relevant metric anymore to focus on, say, CoStar information field sales.

I think the -- it's a good point. So I think that you can just focus on total field sales people, because the vast majority of our salespeople are now whether in Apartments or CoStar, they're focusing on selling annual contracts wherever possible with high-renewal potential. So it's just basically field sales in the core product areas. We are -- we feel that at this point, with the acquisition of Apartments.com, the growth that occurred in their sales force since the acquisition, and the growth that occurred in the CoStar sales field sales force in the course of 2014. At this point, we have a very large field sales force. And you put them all together in one room at the sales conference, and you see we have a very large field sales force. And right now, what's really important is training, productivity gains, teaming, effective segmentation of that sales force, and I don't really feel like right now it's about headcount growth. It's about effective segmentation and crosstraining and teaming, making sure that the most experienced reps in a particular area are handling the highest-value opportunities in that particular area. And that's a lot of work to do during 2015. That's where we're going to be focusing on. We might see some growth in a couple of areas, that's going to be minor. It won't really move the dial. We are going to grow our field sales force that's dedicated to only our rural land products. We still believe that's a diamond in the rough. Maybe many diamonds in the rough. And then we also may begin to build a little bit more of a dedicated farmer account management model in some of these much larger accounts like CB Richard Ellis or Bank of America, some of these large groups where -- as we deploy more and more software upgrades that we think will be very valuable to them, we want to make sure that they know how to use them and that they get deployed. And we can pay for that by selling LoopNet subscriptions to individuals as we go into those accounts. So we can actually fund our own account management process, I think, through LoopNet subscriptions. So I do not think that the headline of 2015 will be headcount growth in sales force. It'll have to be changing conditions in '16 or '17 that cause that.

And just add to Andy's brief response, the -- I gave both numbers because I think most people have their models, separated into two. But as I said in my prepared remarks, we certainly look at them in one bucket now and as Andy said, we obviously have pockets of areas, whether it's debt and equity or in the other verticals that we might add some. But I think, in general, we'll be focused on productivity gains. When you look out to, your one -- your 3-, 5-year model, I mean, we will probably then go back to sort of increasing the size by 10% to 15%. But I think, for this year, there could be movements within the numbers, but it's going to be plus or minus that 500 or so number. So thank you.

And we do have a question from the line of Brett Huff with Stephens Inc.

My question is about the LoopNet price increase on the info biz, and it's kind of a 2-part question. one, is the $15 million to $20 million of sunsetting rev in that LoopNet info biz, is that driven by the price increases? Or is there some official turning off of some of that product? And then #2, what is the kind of take rate or cross sale rate that you've seen, or if people move off the LoopNet info biz, characterize how they're moving on to the CoStar info biz?

Okay. So Fred, good question, good spot, that was the line that you should notice and say, wow, that's a heck of a movement. So we are trying to -- I mean, we're certain that we want to migrate everyone from the LoopNet platform over to the CoStar information platform, for so many reasons. We are -- we obviously see huge revenue gains when we move someone from the LoopNet to the CoStar platform. Just see very steady price increases. We also see a more satisfied customer. We see higher renewal rates overall, once we move them into the CoStar information platform. We had wanted to -- we wanted to stop selling LoopNet information products this year in the first quarter, but realistically, given all the opportunities in the apartment sector, we did not want our sales force to be putting all their efforts into the LoopNet up-sell right now. So we, rather than just shut off the e-commerce models of selling LoopNet information, we decided to bring the price up to parity with entry-level CoStar. Now initially, as we do that, we're actually retaining about 80 -- with these very high price increases, we're retaining 80% of the revenue we were seeing before, but we certainly are not going to be suffering the same sort of cannibalization effect. So I think we're seeing an over -- we'll see an overall net increase of information sales without distracting the sales force. The other thing we want to do is, when we do sunset the LoopNet information, we want to make sure that we've integrated the back ends, and that you have, always in every case, in any submarket, any product type, higher-quality information in CoStar across the board and unified data entry. So that's something that's going to take us most of the year. So the goal is that in 2016, we will begin to sunset all that revenue. And we believe that as we sunset that revenue of probably $40-some million, that we could, over a several-year period, see up to $250 million of revenue come into the CoStar side in an optimistic sense. And then you see a reduction in cancellations associated with people going to our bargain-basement product offering. So Brian, do you want to add anything?

Yes. So from German to English. What it means is that, we continue to test the various things. We talked about the Orlando experiment. Essentially, what we're doing here is that, when we get to the end of the year, the $40 million will likely be less by -- with LoopNet, that base is a high churn, month to month. So as people are churning, we're not letting them come back in at a lower price, it's a bigger price. So clearly, volumes are significantly down. So, you don't know where those people go. The assumption is, they will come back and our sales force will sell them, what is that time period, 2 months, 6 months, 8 months, 9 months, whatever it is. So the same sunsetting revenue of $14 million to $20 million, I haven't changed that because essentially, you're seeing a lot, a lot lower volume because people are churning out on the monthly side. We are picking up some of those as Andy said, with higher contracts that are more on par with the CoStar Information. Essentially, you're getting the same result without having to sort of turn it off by doing price increases. So we continue, as we've mentioned in the past, to test various ways to carefully transition these people, from one bucket to the other, but ultimately, the financial result for this year is going to be the same, I believe, within that same range. So we'll just keep updating as we move forward, so.

And we remain very confident. As we look at granular level data in this LoopNet book, you've got tens of thousands of people who've been using LoopNet as an information product continuously for multiple years and intensely. We do not believe that those people will go away forever and we do not believe that those people will find a better value in some other information solution. So we believe that we will capture a major piece of that client base at a higher price point with a higher renewal rate.

We do have a question from the line of Andre Benjamin with Goldman Sachs.

First, I just want to follow up on the last one, just to make sure I heard the math right. Because there are a few numbers embedded in there. I think I heard 80% of the revenue for LoopNet being retained as you increase the pricing. But then I also know that you had said something about actually being net up, because these people are paying higher prices. So I just want to make sure that, kind of got the moving parts right there. Was it 80% of the customers are staying, or is it 80% of the volume?

So I have to clarify, Andre. So Andre, so the -- so on the e-commerce, which is the only place where we're currently selling LoopNet information products. As we increase the price dramatically to be on par with entering into a 1-person, low end CoStar information contract, the volume of the LoopNet sales goes way down, is going way down, but the price being up, you are still retaining 80% of that revenue pace from the LoopNet e-commerce module. Higher price, lower volume. Now without a doubt, every time we sell a -- in the past, when we were selling a Premium Searcher account for $74 a month, rather than $250 a month, you are getting a substitution effect against CoStar information, which would be priced at $250, $395 for one user in a secondary market. So with the increase in prices occurring on the LoopNet e-commerce information platform, you should see a reduction and substitution effect or cancellation against CoStar. So I believe that net-net, your overall CoStar Group corporate headquarter umbrella information revenue is going up. So roughly the same revenue coming in the LoopNet e-commerce model. And a reduction in cancellations on the CoStar side or reduction in loss of the CoStar side. And more people opting to take the higher-quality CoStar information, if the prices are about the same. Did I make that -- is that about clear?

And I'll follow up with that. I mean, so Andre, as far as the models go, the financial models, our model hasn't changed as far as the revenue range. You're still moving -- your -- the goal is again, to still move people from one bucket to the other. We're just testing different ways of doing it. And the price increases that we talked about have been less than a week. So again, I'm not changing my model. I wouldn't recommend anybody else's. As we talked about on prior calls, we have the ability to pull the lever. So we can obviously control that. But our goal is to -- is quickly as we can, move everybody from one bucket to the other. When you do that, you'll have a bunch of people that drop out for 2 or 3 quarters, which will cause the, whatever the range was, $15 million -- $14 million to $20 million. But again, we believe that, as you get into 2016 and '17, you'll pick all that up by multiples of 3, 4, 5x. So financially modeling, it ends up to be the same place. We're just getting there a little bit different way, which makes it easier on our sales force. So thank you.

And we do have a question from the line of Peter Lowry with JMP Securities.

What impact, if any, do you see from such a strong push on Apartments.com branding on CoStar branding?

Okay, good question. I think that for people in the know, people in the industry, especially people who are operating in both office industrial and multifamily or retail and multifamily, you will definitely get a halo effect over to the CoStar brands. We did make the decision to streamline the branding of -- in the campaign. We considered branding the commercials, Apartments.com powered by CoStar Group. But we felt that it was much more important to keep a simple, clean message in the renter's mind, the simplest possible URL. And just throw on a halo effect. It -- when we go and talk to customers, remember that we're not just trying to sell advertising on Apartments.com. We're trying to sale an awful lot of information solutions on the CoStar side. So when people see -- what we're seeing when owners of commercial properties and apartment buildings see this branding campaign, Apartments.com, and the acquisition of Apartments.com by the CoStar Group, they attribute, an attribute of much higher quality apartment information now in CoStar Group than anywhere else. So we are getting -- they really latch onto that, and we are getting a benefit from that. We will get a benefit from that. And that one contract I mentioned is an example of that. We'll see more of that.

And we do have a question from the line of Phil Stiller with Citi.

I guess, I wanted to ask about Apartments.com. I guess, first what was the revenue in the fourth quarter? And then maybe you could talk about the assumptions implicit in the 2015 guidance in terms of revenue from Apartments.com. Just trying to understand what benefits you're assuming from the marketing spend in the first half of the year?

Sure, yes. And so, Apartments -- the actual Q4 revenue is down slightly over Q3, which is sort of what's expected, and sort of -- sort of like LoopNet, Q4 is always usually down from Q3, and then up in Q1. They did well year-over-year. I think it was again, around a 15%, 16% year-over-year growth rate. The expectations for this year, I think, I was pretty clear in the last call, but I can clarify a little bit more is that, as we move from one side to the other, in February, there's small buckets of loss revenues. So the revenue for -- their actual revenue for Q1 will probably be lower as you transition from one site to the other. And then the marketing campaign starts in March and really runs through September, the heavy piece of it. So reality is, I believe you'll start to see the contracts or, we'll obviously have contracts coming in by the next call, but I think we'll be talking about that, but I think the reality is, a good cross-sell number and the bulk of it will really come in the July call, where we'll be talking about the success of the campaign. Because you're not going to have 1 month out there. You're going to 4 months of activity out there. So I believe that you'll get the actual GAAP revenue for that to start to come in, in Q3 and really by Q4 and then Q1 of next year, where you'll see the acceleration, I think, out of the teens and, as you get into next year, into the 20s. So you're not going to see -- I mean, you could see it, but I think reality is, you actually have to market it for 3 or 4 months, you have to go sell it and then you got to get in your revenue, so there's not much expectations in the model for this year.

Brian, would it change your thinking at all if I were to tell you I just got a text from Adam Silverman, that he just got a 3-year deal with Paradigm, a great multifamily company for advertising and CoStar information combined value, $14,000 net new monthly, a 3-year deal. This is from an industry that historically only signed 6-month contracts. Does that change your thinking at all?

Doesn't change my model. But I'm awfully confident though. Thank you.

And we do have a question from the line of Bill Warmington with Wells Fargo.

The -- a question on Apartments.com, and the contract structure. Because as you mentioned, historically you've been selling under -- they were annual contracts but cancelable after 6 months. As you're going to market now, are you using annual, noncancelable contracts? Do you -- how have those been received, and are you planning to stick to that? And what impact does that potentially have in terms of recognition and net new?

So we -- the industry, had historically done a lot of 6-month contracts. When you're dealing with a 250-unit building, you're never going to run out of the need to market that building. So I think the 6-month contracts are more an artifact of the fact that no one was differentiating their brand in a material way. But when we go in there, we offer people a significant discount on information product they're very interested in getting. And we give them some flexibility to add and remove communities, and we're talking about a 20-community owner. We think we can do, like that contract that just came in, we think we can do annual deals. Because that makes sense. That's like baseline annual leases with their renters, why not do annual deals for marketing? We will still take 6-month deals in some instances, we pay a different commission rate to our salespeople. But remember, when we did LoopNet, everything was month to month, and we transitioned that to overwhelmingly annual deals. And we think the same opportunity exists here. It gives you much more visibility in your revenue. And you can do it.

Yes, so Bill, just to add quickly on to that. I mean, it is a lot like LoopNet. I mean, they're a year and they're cancelable after 6 months, and they're essentially month-to-month after that. So this is, sort of, an industry that's used to that. So we are going out with annual contracts, but just like with LoopNet, we have to sort prove that we can actually sell it, since this was rolled out a little bit over a week ago. We have texts and e-mails of individual stories. But the reality is, we have to do it. I'm fairly confident when you look at, our goal always, our core business model to, when I talked about it earlier, was we used to be 90% plus subscription revenue. After LoopNet, we dropped down to like 70%, then we got it back up 80%, and now with this, we dropped down to the low 60s. I think we will be -- I mean, I mentioned it in my prepared remarks, by the end of next year, I think we'll be back up into the high 60s or 70%, and in the following years, I think we can get back to 80% and 90%. But it'll take a little while. I mean, I don't expect every single deal that's going to come in is going to be on an annual contract. We're not going to kick them out if they don't. It will take time to sort of get the industry used it. So it'll happen over time. Thank you.

And at this time, I turn it back over to the host for closing remarks.

I want to thank everyone for joining us for this fourth quarter 2014 earnings call. And we look forward to updating you on the progress we're making in the business next quarter. Thank you, all, for joining us. I'm sorry for running 4 minutes late. Brian, you owe them 4 minutes.

And ladies and gentlemen, that does conclude your conference for today. Thank you for participation and for using the AT&T Executive Teleconference service. You may now disconnect.