Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Richard Simonelli. Please go ahead.

Thank you very much, operator, and good morning, everyone. Welcome to CoStar Group's third quarter 2016 conference call. Thanks for joining us. Before I turn the call over to Andy and Scott, I have some important facts for you to consider. Certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties that could 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 CoStar Group's October 26, 2016 press release on our third quarter results and in our filings with the SEC, including our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q under the heading Risk Factors. All forward-looking statements are based on information available to CoStar at the time of this call, and we assume no obligation to update these statements whether as a result of new information, future events, or otherwise. Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA and all the non-GAAP financial measures discussed on this call to their GAAP basis results and reconciliation of forward-looking non-GAAP guidance discussed on this call to the most directly comparable GAAP measures are shown in detail. As a reminder, today's conference call is also being broadcasted live and in color over the Internet on www.costargroup.com where you can also find our Investor Relations page. A replay will be available almost an hour after this call concludes and will be available for the next 30 days. And to listen the replay, call 800-475-6701 within the U.S. or Canada, or 320-365-3844 outside the U.S. The access code is 403281. I'll now turn the call over to Andy Florance. Andy?

Thank you very much, Rich, and thank you, everyone, for joining us for our third quarter 2016 financial results call. We had another strong quarter with profitable revenue growth. Revenue in the third quarter grew 12.5% year-over-year to $213 million. On a pro forma basis in the quarter, revenue grew 14% year-over-year. CoStar Suite revenue in the quarter was up 13% year-over-year with multifamily revenue in the quarter growing 22% on a pro forma basis. We continue to see tremendous momentum in our business, and our services continue to lead in each of their respective verticals. During the quarter, you can clearly see that we've made significant progress growing margins as we emerge from successful investments we made in 2015. EBITDA margin was 27% in the third quarter of 2016 versus 12% in the same quarter last year, more than double. Adjusted EBITDA margin expanded 32% in the third quarter of 2016 compared to 19% in Q3 of 2015. I – sorry, Scott. I stole the next sentence from you. We generated $58 million of cash during the third quarter – I just had to say that.

Good one.

Sales continue to be strong. For the sixth quarter in a row, we achieved net bookings of greater than $25 million, adding $26 million in the third quarter of 2016. The first three quarters of 2016 are the best three quarters we've ever had selling CoStar Suite. Year-to-date, we are outpacing CoStar Suite sales in the same period of 2014 and 2015 by 52% and 33%, respectively. One of the factors behind acceleration in CoStar sales is that we have invested in growing our original sales team over the past few years. When we acquired Apartments.com, we let some of these CoStar salespeople to Apartments.com. Recently, we have shifted their focus back from Apartments.com to CoStar. This means we have more experienced producers selling CoStar in this year than last. But it also means we have fewer experienced salespeople signing Apartments.com advertising than we did this time last year. One of the things we're doing is getting prepared for the intensive selling efforts next year around the integration on the information sales. So, going back to Apartments, today, we believe we are approximately 30% penetrated in apartment properties with 50 units or more. 50 units or more are generally our core target market. This means we have a significant opportunity to grow our share in the apartment industry. We believe that we have the best product offering to market apartments online and that we could capture significantly more revenue if we're going to invest in growing our apartment salesforce. Our goal is to grow from the 100 or so apartment salespeople we had at the time of the acquisition of Apartments.com to a field sales team of approximately 240. We expect 200 of those salespeople to be account executives managing relationships with our existing customers, and 40 will be focused…

Thank you very much, Andy...

You're welcome.

...for that very informative and comprehensive update.

Is it tomorrow yet?

It will be soon. So, as Andy mentioned, we're pleased with our performance in the third quarter of 2016. So let me provide a bit more color around the results in addition to what we already communicated in the third quarter press release which we issued yesterday. And my comments will focus on the financial results, performance metrics, and then our outlook for 2016. With regard to our financial results, revenue in the third quarter of 2016 was up 12.5% over prior year, which translates into a 14% growth rate on a pro forma basis. The pro forma results include the revenue from Apartment Finder for 2015, which is net of the revenue streams that we eliminated such as FinderSocial. Breaking down our revenue performance by services, we're very pleased with the growth in CoStar Suite of 13%, which is 14% year-over-year excluding the effects of foreign currency movements.

I hope you don't mind, but I was so excited with that growth that I arranged for sirens to be sounded.

Yeah. Celebration outside.

In constant currency terms, this is 200 basis points higher than the comparable year-over-year growth rate of 12% in the third quarter of 2015 and a full 300 basis points higher than the comparable growth rate of 11% we achieved in CoStar Suite in the fourth quarter of 2015. This acceleration of the growth rate in 2016 is a result of continued strong sales of CoStar Market Analytics and the shift in focus of our 200 plus person info salesforce back to selling information products following the Apartments integration that Andy mentioned. With this strong performance, we believe CoStar Suite will continue growing towards the upper end of the 12% to 14% range that we've communicated for the fourth quarter. The information services revenue which is approximately $19 million per quarter, grew in the low single digits in the third quarter as expected. You recall that information services includes the revenue from our LoopNet information products which we are not actively selling in advance of our planned integration of LoopNet and CoStar. Accordingly, we expect the revenue growth rates in information services to turn negative in the fourth quarter of this year. In multifamily, our revenue increased 17% year-over-year, which is 22% on a pro forma basis in the third quarter, adjusting for $2 million of discontinued revenue from 2015. For the full year, multifamily revenue growth is expected to be in the 20% to 25% range that we previously communicated. For the fourth quarter, we expect the multifamily revenue growth rate to be slightly below 20%, primarily as a result of lower multifamily sales in the second and third quarters of 2016 as we work through the sales force transitions and increases that Andy mentioned. Going forward, we expect the long term sales levels to improve in multifamily as…

Thank you, Virginia.

Our operating expenses are down $5 million year-over-year as a result of previously announced plans to reduce marketing and advertising spend and from lower head count levels as a result of the integration of Apartment Finder. Seasonal marketing expenses are expected to decline further in the fourth quarter partially offset by higher personnel cost in the areas of sales and customer service. As a result of our continued strong revenue growth and cost management, our third quarter adjusted EBITDA reserves are favorable to the third quarter guidance range we've provided in July by $5 million at the midpoint. Now, let's take a look at some performance metrics for the quarter. At the end of September 2016, we had 665 salespeople, an increase of around 80 people from the end of June 2016 and up 155 people from March of 2016. We added sales resources across all of our major service areas; the largest increase in our apartment sales force. We expect these higher sales staffing levels will produce a positive tailwind in net bookings in the coming quarters. As Andy mentioned, we added $26 million in net bookings in the third quarter of 2016 along with annualized net new sales on annual subscriptions of $24 million. We continue to see strong net booking levels in the CoStar Suite while net bookings in Information Services are down year-over-year consistent with the second quarter of 2016 as we prepare to sunset the LoopNet information product in 2017. We expect these headwinds will continue through the rest of 2016 and into the first part of 2017. Our cross-selling efforts of LoopNet users to CoStar is expected to result in increased bookings in the second half of 2017 with the resulting revenue contributing to growth beginning in 2018. I'll now discuss our outlook for…

Okay. Your first question comes from the line of Andrew Jeffrey from SunTrust. Please go ahead.

Hi. Good morning, guys. Thanks for taking the question. I appreciate it.

Absolutely.

I guess I'd like to understand a little bit, Andy, sort of the sales force refocus, if you will, the shift of some of those resources back to Suite. What – can you just talk a little bit about the rationale behind that and your confidence in the ability to hire, train, and drive productivity of some of the new hires within the Apartments sales force, and I guess as a corollary, whether or not you think the path toward sort of market dominance is defined by more than 50% share has changed at all?

Sure. So when we acquired Apartments.com, they had the smallest sales force in that industry. And it was – and relative to the investment and the improvements we were making in the software and the branding of Apartments.com, it was too small to be appropriate for what we were doing. So we leveraged a very strong CoStar sales force and pulled them in, and they began leading a lot of the sales efforts for Apartments.com. But that means you are, to a certain degree, robbing Peter to pay Paul. You're taking people – good resources off of your flagship products and move in Apartments, and we were able to continue growing both while we're doing that. But as we begin to stabilize, and as we've begun to build up our dedicated Apartments resources that are not coming from CoStar, we wanted to move the CoStar sales team back out of that Apartments focus in preparation for what we think is going to be the huge selling event for the next several years, which is the LoopNet and CoStar integration. And so we are – as a sales organization, we are probably a little more intense than the average sales organization. And so we're in the process of building up an Apartments team that's a little bit more in our mold of folks that want to earn more and work harder, and that's a transition period. We're achieving it. We've now built up a much more robust management team then was there when we acquired these companies. We are having no trouble hiring people. We are filing up these slots very quickly. And I have confidence that we will enjoy the benefit of two strong sales forces, two strong relatively independent sales forces in 2017, one that is completely adequately staffed to capture the opportunity on the Apartment side and one that's prepared to executing the opportunity on the LoopNet up-sell and that makes me feel very optimistic. So – and we're not – growing sales forces is not new to us. We're – that's one of our core competencies and we're just executing on that.

Your next question comes from the line of Bill Warmington from Wells Fargo. Please go ahead.

Good morning, everyone.

Good morning, Bill.

Hi, Bill.

And congratulations on formally achieving the number one rank in the apartment space.

Thank you very much.

You mentioned the figure of 430,000 users or frequent users of LoopNet, who would make prime prospects for the conversion to CoStar Suite. So, you guys have been at this now for let's say four years. So what is the data now in terms of your ability to convert those users?

Okay. So, let's just look at this as phase one and phase two. Phase one, and phase one began immediately after we acquired LoopNet several years ago. That was the first time we were able to see who some of these very intensive users of commercial real estate information were that we, prior to the acquisition, did not know about. So we put a lot of focus on our sales force to go in and try to upsell those high-value users. And we were extremely successful. We upsold, I believe, about 10,000 users $80 million. The typical upsell was about 500% what they were paying for LoopNet versus what they would pay for CoStar. So it was very successful, and it really delivered for us for a while, and it really exceeded investor expectations. At the end of phase one, it became clear that the next phase, in order to optimize what you could pull from this revenue opportunity, you really need to create that one database. You need to make sure that there was nothing in the LoopNet system of value that someone wouldn't get if they spend significantly more to go into CoStar. That is no small feat, that integration effort. You're dealing with millions and millions of properties that you have to resolve and integrate. And in addition, we wanted to be very respectful of every element or potential element of our FTC agreement, so we wanted to wait until after that first three-year period before we really started to do that. And at the end of that period, the opportunity with Apartments.com came up, and we frankly shifted our focus on software – put a lot of software resources on what has clearly been an outstanding investment. As we have completed the integration of Finder and…

Your next question comes from the line of Brandon Dobell from William Blair. Please go ahead. Brandon B. Dobell - William Blair & Co. LLC: Thanks. Scott, just to make sure I understand how you guys are talking about margins in 2017 and the phasing of some of these expenses as we go through. Maybe just a little more color on how we get to minimum margin expansion, what minimal may mean for you, guys. It could be zero or it could be a couple hundred basis points. Just help us understand how you're getting from where you're going to finish out 2016 to that 2018 exit target and what that curve may look like? Thanks.

Yeah. Sure, Brandon. As we go through our planning process, which we're doing now and we'll finalize our specific 2017 plans as we get into December, we'll definitely have a lot more to share with you in February on what that curve looks like. I think what we wanted to do today was, as we've obviously pushed very hard on the margin pedal this year and seeing that major growth, that we need to do some of these investments to underpin the growth rates in the future. So we don't want the expectation to be that's going to be this straight line between here and the 40% at the end of 2018. Now what we do expect is that the seasonal margin pattern that we see in the business, particularly driven by marketing and advertising, will continue next year where you have your highest margins in the fourth quarter, you have your lowest margins in the second, then on the first and the third, end up somewhere in between that. We think the margins we've achieved this year are certainly sustainable with the investments we plan to make. We think they will probably move forward a little bit next year. Exact basis points, we haven't set that number. But we just wanted to make sure that there wasn't the straight line between where we are today and there and that we're going to pause that straight line and reduce it a bit into next year and then we'll see a return to accelerated margin improvement in 2018.

Your next question comes from the line of Sterling Auty from JPMorgan. Please go ahead.

Yeah. Thanks. Let's follow-up on that line of thinking. So, it would seem to me that in order to hit the 40% EBITDA target exiting 2018, based on the commentary, it really looks like you'll have to cut expenses, so we'll see operating expense declines in 2018 over 2017 in order to get there. Is that correct? And when should we see – it sounds like some of the nuance to your revenue target was at least $1 billion. So are you suggesting that either in 2017 or the beginning of 2018 the trajectory of growth would improve because you're making these investments in what should be revenue-yielding assets?

I'd love to – so, Sterling, I think you could achieve it on the revenue side, but I do want to remind everybody that CoStar has shown again and again and again that we are able to reduce costs after an investment initiative. We are very good at that. I think we get credit for that. So it is possible that costs could come down post-integration. But that isn't necessary in order to achieve that 40%. But given what we're doing, our number one priority is we're going to move any and all ammunition required up to the front and to support the offensive next year is what we're doing. And then we would expect to complete it next year and then move on to the next thing. And then the second part of his question? It's horrible when asked compound questions to avoid the one-question rule, and then I forget the second one, do you remember the...

We'll have him repeat the second part this time. We have an exception to the rule.

If you can still hear me...

Yes, I can.

...it was really around the revenue acceleration from...

Yes.

...these investments, so the timing of it. So if you're saying you can get there based on revenue without expense cuts, the market is obviously reacting negatively to the comments around margins, but if there's near-term visibility that you're going to get pay back on those investments, I think that might be a different reality than just saying, hey, the margin expectations were out of whack.

Right. Well, thank you. What you said, yeah, for sure, right? So the reason we are making the investments we're making is because we believe that they have outsized returns. And we would expect that as that sales force grows on the apartment side, that trailing maybe six months of deployment at a new hire steady state, you would see material – you'd see increases in sales associated with those folks. So per person productivity is really quite good there. On the LoopNet integration side, we clearly believe and are reiterating and saying for everyone to hear that we believe that you'll get really significant sales off that upsell. We think that is what's going to happen. But we also know that as you discontinue the low dollar sales to replace them with high dollar sales, the discontinuation is upfront and then the upsells are trailing that. So, yes, we certainly – someone would have to have a complete lack of imagination if they were to think that we are just shifting our margin expectations for the business. We're not.

Your next question comes from the line of Brett Huff from Stephens. Please go ahead.

Hi. This is Blake on for Brett. Thanks for taking my question.

Hi, Blake.

Hey, if you're using the midpoints for 2016 revenue, you guided the top end just down a little bit, and so that maybe reduced the midpoint down by $0.5 million or so. Is that the right math? And then I'm just wondering ex these increased investments you now expect, was there anything maybe fundamentally you're seeing differently in the market that's maybe the reason for that little bit of weakness into 4Q, and any of that would trickle over into next year? Thanks.

Yes. So when you look at the guidance, as we said, we're tightening up the range for the rest of the year. As this business continues to grow bigger and bigger, we look at $0.5 million movement around the midpoint, up, down, in the middle. I just don't think we should read much into that as you look at the pace and the growth of the business. The strength that we're seeing in CoStar, we obviously expect to continue, and that's a very positive thing. We'll see the revenue rates that I mentioned in the fourth quarter of apartment slightly below 20%, and then a bit of the headwinds from info solution. So you're going to see a little bit of lumpiness in there like we've talked about last quarter over the next quarter or so, but we're still very confident about the long-term trajectory of the growth of the business, and the improvements that we're making are going to deliver that type of revenue growth.

Your next question comes from the line of Patrick Walravens from JMP Securities. Please go ahead.

Oh, great. Thank you. Andy, I'd love to hear sort of how you're thinking about M&A at this point with the projects you currently have on your plate. I mean, what's your appetite for it, and where would you be interested in doing it?

Well, there is a lot of M&A potential out there. There are probably a dozen different opportunities that we are tracking and watching and engaging with. But realistically, we're interested in doing things at a little more scale. And given the efforts we've got going right now with the LoopNet integration, we wouldn't want to be distracted from that effort. We want to complete that before we do larger deals. But there are, just like Apartments.com had a lot of intersections and parallels vertical to the things we were doing and we're good at, there are many other opportunities similar to that. But again, like right now at this very moment we've got 110 software developers working on the LoopNet integration. So that we're sort of focused on that. We're focused on that.

Your next question comes from the line of Mayank Tandon from Needham & Co. Please go ahead. Mayank Tandon - Needham & Co. LLC: Thank you, good morning. I'm sorry if I've already missed this, but I wanted to just clarify the LoopNet revenue that is tailing off to $40 million or so over the next couple of years. How does that trend over the next two to three years? And then how do you offset that with the incremental revenue that I think you've talked about, the $100 million to $150 million that is coming from the free searchers transitioning over to the CoStar Suite product?

Sure. So some of that, about $10 million, $11 million is Property Comps, Property Facts which is a service we're just going to discontinue in 2017. So that's something where people are paying as little as $20 a month to have a product that we normally – that's a low quality comparable sale product that would compare with something that we normally charge several hundred dollars a month for. So that $10 million will disappear pretty quickly, and we anticipate that we'll be able to recapture most of that in the course of the following 12 months or so into CoStar Suite subscriptions. The other revenue on Premium Searcher, which is close to the $37 million will not immediately tail off because we will continue to provide those Premium Searchers with access to a little bit more content in the LoopNet site. And much of that revenue will tail off in the process of a conversion sale. So, if someone's paying $70 a month for Premium Searcher, that Premium Searcher will discontinue when we move them into a CoStar property subscription, typically a $500-and-some a month. So that revenue will sort of – we'd like to see most of that revenue be one-to-one upgrade to activity. So that should be a little smoother. But the property comps and property facts drop-off will be a little more immediate in that $10 million in the second quarter.

Yeah. And that'll happen in midyear, so you'd expect half of that revenue and half in next year and then half kicks over in the following year of 2018.

And at this time, there are no further questions.

Great. Well, thank you very much for joining us for the third quarter earnings call, and I look forward to updating you at, wow, year-end. Thank you very much.