Ladies and gentlemen, thank you for standing by, and welcome to the CoStar Group's Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. And later we will conduct a question-and-answer session with instructions being given at that time. [Operator Instructions] And as a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Rich Simonelli. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to the CoStar Group's third quarter 2015 conference call. Thank you for joining us. Before I turn the call over to Andy, I have some items for you to consider. 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 statements in our October 28, 2015, press release on our third-quarter results, and in our filings with the SEC. All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements, whether as a result of new information, future events, or otherwise. And given the last call, we anticipate that no executives will actually cry on this call. As a reminder, today's call is being broadcast live and in color over the Internet on www.costargroup.com, where you can also find our CoStar Investor Relations page. A replay will be available, and you'll be able to access that at 1-800-475-6701 within the US or Canada, and 320-365-3844 outside the US. The access code is 370580. It will be available about an hour after the call today, and it will be online for about a month. So I'd like to now turn the call over to Andy Florance. Andy?

Thank you, Rich. Good morning and thank you for joining us today for our third-quarter earnings call. We are reporting strong results and growing forward momentum in the business. We had exceptional sales performance in the third quarter. Our revenue in the quarter increased 24% year over year to $189 million in the third quarter of 2015 compared to $153 million in the third quarter of 2014. Net new sales on an annual subscription contracts were $31 million for the third quarter of 2015, a 102% increase over the third quarter of 2014, a doubling. Annual subscription contracts in the third quarter of 2015 increased nearly 22% sequentially from the second quarter of 2015. Through three quarters of 2015, we have added over $85 million in net bookings. We had more bookings in the second and third quarter of 2015 than the entire four quarters of 2014. While those numbers are very impressive, they understate the sales team's productivity. During the past two quarters, the Finders sales team signed an additional $30 million-plus of contracts, converting clients from print to pure digital apartment advertising business. But that was not net new revenue, so it would not be in the $85 million I mentioned. When those 110-strong Finders sales force comes back into focusing on pure, net new, having accomplished their conversion task, I expect to see a tailwind behind our booking numbers, our already strong booking numbers. With strong sales in both core CoStar services and in the Apartments products, we're very pleased with this growing sales momentum. Excluding the impacts of ApartmentFinder, our business grew organically at a very strong 4.2% sequentially in the third quarter over the second quarter. That is up from the Q2-over-Q1 sequential quarterly growth rate of 3.2%. In those numbers, you can see our…

I will now turn the call over to Scott Yinger, our very capable acting Chief Financial Officer.

Thank you, Andy. As Andy mentioned, we're very pleased with our performance in the third quarter of 2015. The service offerings we've introduced throughout the year, including CoStar Market Analytics and the relaunch of Apartments.com, accompanied by the national marketing campaign, are driving strong sales results and are contributing to top-line revenue growth in 2015 and beyond. In the third quarter of 2015, the company reported $189.1 million of revenue, an increase of 23.5% compared to the third quarter of 2014. The core business continues to grow at a consistent rate, while the Apartments.com revenue growth accelerated to 20% in the quarter and is expected to be in the range of 25% to 30% in the fourth quarter of 2015. Gross margin was $135.4 million in the third quarter or 71.6% of revenue, which includes expenses in the quarter related ApartmentFinder's print and distribution services, including a $1.7 million charge to terminate the ApartmentFinder print agreement. As Andy mentioned, we are no longer printing books and expect to be fully out of the print business before year end, when all remaining books and racks are collected from the markets. We've been very aggressive in transitioning away from print at Finder, and we expect the resulting cost savings to be evident in our gross margins in 2016 beginning in Q2 after seasonally higher expenses we always see in Q1. Adjusted EBITDA was $35.5 million, or 19% of revenue, for the third quarter of 2015, and non-GAAP net income in the third quarter was $17.2 million, or $0.53 per diluted share. Net income in the third quarter of 2015 was a loss of $5.4 million. As expected, we reported an increase in all of our earnings metrics in the third quarter of 2015 versus the second quarter, as marketing expenses began to…

[Operator Instructions] We will go to the line of Andre Benjamin at Goldman Sachs.

Thanks, good morning. My question's in terms of the math on the amount of spending at Apartments. There are the two buckets. I believe there's $75 million to $80 million in incremental marketing and branding spend. I think that's supposed to go down by $20 million next year. The rest of the costs on my math are about $150 million or so but that could be off. What should we be assuming that those costs do year-over-year? Would those be flat, down, or up, and any color on how much?

Yes, Andre, this is Scott. So I think what we're saying is that in total the Apartments marketing spend we should be able to manage down $20 million year-over-year. So as you said there are various components in there. There was roughly $80 million incremental spend that we announced around Apartments.com, and then we put some SCM spending behind ApartmentFinder as well. And in aggregate, we expect that we can bring the marketing budget down about $20 million year-over-year.

Thank you. We will go on to the line of Bill Warmington with Wells Fargo.

Good morning, everyone. So I wanted to ask about the very strong annual subscription net new number at $31 million. And we had been looking for something in the low 20s. And I just wanted to check because one of the beauties of the model is, of course, you get this net new, and you can just spread it out over the next four to five quarters in terms of the contribution. And so that works as long as -- but the only exception to that would be is if there's a component of that which is being converted from existing clients because then you already have that revenue in your model. And so that's my question is maybe you can give us a little detail in terms of that strong $31 million. How much of that represents net new business that was not previously revenue in some form within the revenue base?

Yes, Bill, so we net out in that number. We net out prior billing amounts. So if somebody was on a month-to-month contract and now moved to an annual contract, that's netted out of that number.

So in fact, it is as big and as impressive and as beautiful as you think it is.

All right. Well, that's helpful. And the other just this is a sort of note. Are you guys going to be dressing up for the Halloween party tomorrow? Because I heard a rumor that Andy was going as J.D. Tucker.

It's turning rough when the Washington Post writes an article about the fact that everyone in town should drop by and see our Halloween party because it's really good. That puts a lot of pressure on us and could possibly divert us away from our business. But it's really our field research team that does the really good Halloween party. So yes, I'll be participating in the spirit of it for sure.

Thank you. Next we go to the line of Sara Gubins with Bank of America, Merrill Lynch.

Hi, thank you. Sorry if I missed this earlier but what was the core CoStar growth in the third quarter, and how does that compare to the trend in the second quarter?

That's the 4.3% sequential.

4.2% is total growth. So --

Just on a year-over-year basis, if you have it?

On an annualized basis, the core business in the third quarter was running in that 10% to 13% range.

Yes, so 11% to 13% range. The core business continues to be in that range. I think absolute year-over-year was the low end of that range this quarter. And then as Andy pointed out in his comments, sequentially, if I'd strip out ApartmentFinder, the business was up 4.2% sequentially just organic growth quarter-over-quarter.

And the prior quarter Q2 over Q1 would be 3.2%. So it climbed from 3.2% to 4.2% sequential quarterly.

Okay. And then just a question on M&A. So now that you've done the ApartmentFinder deal, should we rule out more brands in the Apartments space? Or do you think that's a likely area of focus?

Well, on behalf on the 115 software developers who have been staying in various hotels north of Atlanta in Norcross, Georgia, for the last three months, I am not going to say we're about to do something else. They would like to have a little break after finishing this integration job. But I think that this probably has changed the calculus a little bit so that I think it would now look like we have been able to integrate in another good brand in the apartment space, get good reaction from the customers, retain the revenue, and achieve significant cost efficiencies. So I would definitely, as you look at other deals, they would obviously have to be priced correctly. We would want to capture the value for our capabilities ourselves, not give them to someone selling a business. But I would feel much more comfortable about our ability to do these deals and manage the risks of conversion. There are opportunities, but there's nothing specific right now.

Thank you. We will go next to the line of Andrew Jeffrey with SunTrust.

Thank you, good morning. Rich, actually, I was hoping to hear you cry on this call, but maybe next quarter.

There's still time.

I'm thinking then we'd all cry.

True. With regard to the EBITDA growth cadence and appreciate your color on 2016, as we think about the 2018 target of 40% exit margin, is it going to be pretty radical, the EBITDA growth improvement or the margin improvement, 2016, 2017, and 2018? Or would you anticipate more of a hockey stick as we get closer to the end of that three year period?

Well, this is Scott, Andrew. I think the guidance we just gave you I think will show you that we're making pretty steady progress next year. And exactly what the trajectory is beyond that, it's hard for me to give any detailed guidance on it. But I think it's fairly steady. Quarter-to- quarter it will vary based on the seasonality of the marketing and things like that. So I don't think every quarter it's up and to the right by a fixed percentage. But annually, I think we gave you a pretty good point. I think we -- I just said I thought we could be up 8% to 10% margin points next year. And I think if you plot that out over the next couple of years it gets you to that 40% exiting 2018.

Thank you. Next we go to the line of Sterling Auty with JPMorgan.

Yes, thanks, hi, guys. You gave a number of points around kind of macro supply et cetera. I just wanted to see if you could tie them together in terms of how do you feel where we are in terms of the cycle? And you talked about the plane flying over and isolating construction. But how do you see the timing of new construction coming in impacting 2016?

I think our thought is that, first of all, it's great news for Apartments.com and for ApartmentFinder to have that construction coming in because those folks tend to buy our most expensive ad packages, so that's a good driver there. There's definitely concerns out there about the amount of construction on the multifamily space specifically, and with incomes being relatively flattened down for a lot of the demand side, will we be able to continue to see rent growth with all the supply coming in? But realistically, the absorption is matching the supply still and our feeling is that you've still got 18 months to two years before you're really going to see any big problem develop. Things are obviously priced to perfection in a lot of areas. The office side is actually, $40 million in construction on the office side is nothing. The other sectors are pretty darned stable. And one metric that I put a lot of weight on, we've seen in two prior cycles, we've seen it be a good leading indicator, is the going down to the submarket level and counting the number of submarkets improving versus the number of submarkets degrading. And right now 65% of submarkets improving. We're still feeling that things look pretty solid. So let's call it a very rounded, flat mountaintop, a plateau mountaintop. Does that answer your question at all? No. Feel free to redirect if you think I didn't answer the question properly.

Thank you. And we go to the line of Mike Huang with Needham and Company.

Thanks very much and good morning, guys, nice quarter. So let me see if I could get you to give me a little color inside that bookings number. I mean great number. Were there any large deals in there? Maybe you could give us a flavor for deal sizes and how that might be trending. And then I'm not sure if you're prepared to answer a question like this yet, but given that you're going through your budgeting cycle now, but given the strength of bookings in the last couple of quarters, are we comfortable to call that a trend now? And how should we be thinking about bookings growth rates going forward? Thanks.

On the first question on this nature of the deals coming in, for sure we are seeing a wide array of deals that are significantly larger than the deals we traditionally see. But they're not like CBRE Richard Ellis scale deals or anything like that. They're just good, solid, $10,000 a month, $20,000 a month deals at the upper end of this. But the real bulk is $1,000 a month here, $1,000 a month there. But that is dramatically higher than doing LoopNet deals at $395 a month. So these ASPs are pretty good. There are a couple of things that are floating around out there that could move significantly above that number, but those are not really forecast pipeline or anything like that. And the ability to think that we have runway on this is high. So we have been like the ducks swimming smoothly across the water, the feet are churning under the water, we've been moving really quickly here, integrating these things, developing new software, switching teams around, blending teams, a lot of things happening here. We're now moving into having a little bit of the luxury to begin to refine and to optimize. And I am really struck and we just finished a round of focus groups with renters, small landlords and large landlords, property management companies in Dallas, Los Angeles, and Washington. And I have to say when I compare what those folks were saying to us two or three years ago, when we were researching prior to our move into Apartments.com, when I compare that to what they're saying now, you would be giddy to hear what they were saying. Like they love, like we really have good products here. They like the people who have CMA, our CoStar Market Analytics, are giving us…

We will go next to line of Brandon Dobell with William Blair.

Thanks. Andy, just so you know, I've raised $80 million to spend on marketing and I'm going to go after the things most likely to rent market for me, just myself, as a rental opportunity -- just me. Just so you know, you'll see that out there next year. I'm going to be that competitor for you guys. I guess I'd focus on the core for a minute, maybe some color around, Scott or Andy, your comments around that 11% to 13% being sustainable. But more importantly, how you get that to drift towards the 13% as opposed to letting it drift down to 9% or 10%.

Yes, sure. So it's a good question and we say the core at some point in the next couple of quarters, we're going to probably have to redefine what the core is. Because ultimately the core will probably be defined as LoopNet information products, CoStar information products, LoopNet marketing products, and then CoStar advertising products being one set the way to look at Apartments. So you've got to break out the CoStar Market Analytics targeting multifamily maybe. Okay so the core probably will ultimately involve LoopNet and CoStar. Now there's no question about when we made this commitment a year and a half ago to go into Apartments.com and to really try to expand our addressable market by taking share in this relatively new area, we definitely gave up the ability to get two or three extra points in our core business while it took your sales leadership, your software leadership, everyone to try to grow the scope of the long-term opportunity. So as you can tell from this call, we're feeling that we've made very good progress in this and there are like a bunch of different ways to measure that we're now number one. And you can see the ability to grow margin in it as well. So I think probably one of our highest priorities in 2016 is to go back and to strengthen the relationship between the LoopNet information products and the integration to LoopNet information products and the CoStar Information products and use that integration to dramatically strengthen the quality of the product and be able to take what is today two very large audiences who are very committed, one audience is very committed to CoStar, one audience is very committed to LoopNet information, and bring their resources and their eyeballs and their content into…

Thank you. We will go next to line of Brett Huff, Stephens Inc.

Good morning, guys. And thanks for the additional disclosures as we look into 2016. That's very helpful.

All you need is every analyst asking for it, and then we are very responsive.

We appreciate it. My question is just to dive a little bit more in the core number again; I wanted to make sure I understood what the 22% core info net new annualized sales bookings number comprised of. First of all, is that the right number that I'm referencing?

Yes, Brett, that's correct.

Okay. Second of all, that includes what we think of as the original database business as well as Loop as well as the cross sales of the new market analytics business all in there? Is that the right pieces?

The way we defined that, that did not have Loop in it. So that was basically the core information analytics. And it would include the new CoStar Market Analytics that we sell too.

Okay. So it's core info and then the new market analytics product. Can you give us the core analytics product, you said, grew $10 million in net new annualized year-over-year, Andy, you mentioned a number and I didn't quite get it. So can you just -- how much of that 22% was the old business, if you will, and how much of it was selling this new market analytics piece?

Well, the $10 million was just bookings this year on CoStar Market Analytics to apartment-oriented businesses. So it was specifically just that CoStar Market Analytics piece. The bookings in the quarter were roughly $14 million for the core business alone just in the quarter not for three years, not for three quarters of the year. So it's probably yes, so that number would be much larger than that $10 million you're talking about.

Thank you. We will go next to line of Peter Lowry, JMP Securities.

Great, thanks. Have you seen any changes in terms of strategy at RentPath since they hired their new CEO in July?

Who's RentPath?

Exactly.

No. It's a good question and we obviously watch that. We definitely observed the change of strategy on the part of their board when they put a new CEO in place. And you look back at their historical activity of, his historical activity of trying to migrate back end systems I believe from Autotrader into the front-end marketing systems. I think that's interesting, but I'm not sure the same parallel exists here, because the interaction between the property manager and the owner and the accounting systems and the variety of systems involved here and how heavy they are and how switching is so difficult. And you can look at RealPage, where they entered into MyNewPlace to try to get synergy between the back-end systems and the front-end systems. And I have a lot of respect for RealPage, but I would say, and they would probably agree with me, I'd say that MyNewPlace was decimated by that effort. So I don't see him executing the same strategy. The strategy that they've had year-to-date, I would say is really challenging because their Apartment Guide is where all the traffic is for them and all the customer goodwill is around Apartment Guide. Rent.com, I believe has much lower customer goodwill. I think somebody interested in URL names pushed the Rent.com moniker. The traffic is on Apartment Guide as well. So they've got to switch the customer loyalty from a well known and liked brand over many years to one that has been less liked by the industry and has less traffic. And again those numbers on unaided awareness so real and the traffic numbers of 3X on Apartments.com versus Rent.com are real. So I'd say they're going to have to think about some sort of reset. And I take them all very seriously.…

Thank you. And we will go to a follow up from the line of Andre Benjamin with Goldman Sachs.

Thanks. I have to jump back in there with the one question. So I'm wondering with the pricing on Apartments.com and ApartmentFinder, I was wondering how that's trending, both absolute and versus competitors such as you just mentioned, RentPath, ForRent and Zillow-Trulia. I'm really just trying to think about how that delta's trended over time and how we should think about you closing the gap, contributing to next year's growth versus the underlying traffic and customer growth.

Sure. Well, looking at Tilla first, no, teasing. So again, one of our factors in looking at what companies we were more inclined to acquire, one of the factors was we wanted to make sure we acquired a company that did not have a legacy pricing momentum from their print origins. So we many, many years ago, CoStar produced print commercial real estate directories, back in the early 1990s. And one of the things I noticed was that as we switched from print to digital ads, we carried the price schedule right from print into electronic. But ultimately the truth is, you've got less direct costs associated with the ad, so prices can drift down a little bit. And so we did want to -- we felt that there was probably some downward pricing pressure in some players in the industry, so we felt very comfortable going with Apartments.com, which was middle lower part of the pack for pricing. And right now we're comfortable with that. We feel that the pricing is one that will allow us to grow volume and volume grows our digital data flows, and it grows a stronger customer experience. So we're less interested in trying to nickel-and-dime each property manager as a client into getting a you know the whole thing where you used to literally, people used to charge $25 extra a month to say pets were allowed on the ad. We're not doing that. We're trying to get more volume so we can get broader and broader participation, we build a stronger network, and we like the fact that we have the wind at our back on pricing and that others have a headwind on pricing. And then the other thing is that we're not just trying to make the money on an advertisement. We're making the money on selling both the pricing information and comparable information and the marketing solution. So we can go in there and have bigger contracts overall but much better pricing. And I just like having the best product and the lowest pricing while we're trying to grow share. And I think the industry has suffered from having these little 5% share fiefdoms. The renters and even the owners would like to have a real clearinghouse here, and that's what we're trying to build. Bill, did you come in there and disappear? Well, at this point, if anyone has any other additional questions, feel free to give us a buzz this afternoon. I'm sure we'll hear from you anyhow.

Thank you for joining us for the call, and thank you, Brian, for joining us for the call. There was no crying. It was a very good call. And thank you very much. We look forward to updating you next quarter with a lot of exciting news. Thank you.

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