CoStar Group, Inc. (CSGP) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the CoStar Group First Quarter 2017 Earnings 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. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to the conference over to our host, Mr. Rich Simonelli. Please go ahead, sir.

Thank you very much, operator, and welcome to CoStar Group’s first quarter 2017 conference call. We are glad you're joining us today. Before I turn the call over to Andy Florance, our CEO and Founder; and Scott Wheeler, our CFO, I have some new and important facts to convey to you. Certain portions of our discussion today may 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 April 26, 2017 press release on our first quarter results and in our filings with the SEC, including our most recent Annual Report on Form 10-K under the heading Risk Factors. 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. Reconciliation to the most directly comparable GAAP measure to all of the non-GAAP financial measures discussed on this call, including but not limited to non-GAAP net income, EBITDA, adjusted EBITDA, and forward-looking non-GAAP guidance are shown in detail in our press release issued yesterday, which is also available on our website located at costargroup.com. As a reminder, today’s conference call is also being broadcast live and in color on our website, where you can also find CoStar's Investor Relations page. Please refer to yesterday's press release on how to access the replay of this call. Also during the question and answer session, you will get one question, so make it a good one. Time permitting, you could always requeue. And this time I would now like to turn call over to Andy Florance. Andy?

Thank you, Rich. That was some riveting content. I'm sure our listeners will be talking about it for days. Good morning and thank you for joining us for our first quarter earnings call. We have got some numbers to report to you today. Revenue in the first quarter of 2017 was $227 million, up 13% versus the first quarter of last year. Brexit had an unfavorable foreign currency impact on our revenue growth, and if excluded our revenues were up 14% year-over-year in local currencies. Our flagship product, CoStar Suite turned in solid organic revenue growth of 13% year-over-year. Multifamily revenue was up 22% over the first quarter of last year. Revenue growth in commercial property and land accelerated to 13% year-over-year. With all of our key growth drivers turning in very strong results, we accelerated to our best quarterly sales bookings ever. Net new bookings rose 18% from the prior quarter to $35 million in the first quarter. Our sales team has now reached 718 strong, up 40% from the first quarter last year. The commercial property and rural land advertising sales teams have seen the most dramatic growth in the past year. Those sales teams now have 135 sales professionals, up 73% from a year ago. As a result, the commercial property and land sales bookings number increased 77% year-over-year to reach $7.3 million in the quarter. Sales bookings for the quarter in Europe and Canada increased 67% year-over-year to $1.2 million. We added 81 customer relationship managers this past year. Our investment in CRMs is creating more time for our field sales team to hunt for new sales and cultivate clients with the most upside potential. Our relationship managers are aggressively meeting with our existing clients and have reached 36,000 clients this past year. These visits are directly resulting in more usage of our services. For example, we have seen a 24% increase in the creation of lease analysis models after training, and clients produced 13,000 more market analytics reports in the quarter. More usage is great for renewals. This new group of CRMs will play a key role in cross-selling LoopNet to CoStar clients and CoStar to LoopNet clients. When we acquired Apartments.com, we introduced a new tiered advertising plan that has been very successful in driving revenue growth. We offer silver, gold, platinum and diamond ad levels. The advertisement sort by their ad level and the ad level also determines the size of the ad along with various other advantages. Diamond ads receive orders of magnitude more exposure than do silver ads. Accordingly, a diamond ad might cost five times what a silver ad costs. We recently introduced tiered advertising pricing for advertisers listing properties on LoopNet. The early returns are in and they are really quite good. In the first quarter of 2017 we generated approximately 3 million of net new bookings from tiered ads on LoopNet. In the first quarter 2017, our family of websites drew an all time high of 33 million average monthly unique visitors. That is up 24% from the prior quarter, and that is more than triple the traffic we were drawing just three years ago. Our investments in the multifamily space over the past 2.5 years have transformed Apartments.com into a very strong business with fantastic traffic. The competition is reeling and we are capitalizing as we continue to generate more revenue and take more share in multifamily advertising than any other competitor. Our annual multifamily revenue run rate is now approximately $260 million. We believe we are the clear number one apartment Internet listing service based on a combination of traffic, SEM traffic, SEO, total advertised communities, leads delivered, brand recognition and revenue. In the first quarter of 2017, visits and unique visitor traffic reached all-time highs for Apartments.com and our multifamily network as we continue to expand our lead over the competition. We increased visits 26% year-over-year in the first quarter to nearly 42 million average monthly visits. For the Apartments.com network, average monthly unique visitors increased 21% year-over-year to 23 million. According to comScore, Apartments.com has been number one in visits for 25 months and unique visitors for 21 months. We are beginning our third consecutive year of our major national Apartments.com marketing campaign; our investment in these three years well exceeds $300 million. We have been highly successful in building a nationally recognized brand with this investment and you can see the traffic results. As we begin the 2017 campaign, we feel we are going to get more value for the same advertising dollars. We are getting more efficient. We plan to run approximately 10,000 TV spots along with major digital campaigns and aggressive SEM campaign. We expect to run nearly twice the number of commercials we ran last year, spending roughly the same dollars. We are also planning to continue to advertise on major TV networks for 20 weeks in 2017 compared to 14 weeks in 2016. In 2017, we expect to reach 90% of US households, delivering over 5 billion impressions. Recently we commissioned an independent third-party research firm to conduct a survey of 500 property managers and advertising decision-makers involved in marketing apartment properties. This survey revealed a number of positive figures. When asked to list the top of mind listing services on an unaided survey, two thirds of property managers named Apartments.com as the place to advertise their apartments for rent. At 66% we had the highest unaided awareness of all the apartment marketing websites. We had risen from 54% in the prior year to 66%. At 66%, our unaided awareness score was higher Apartment Guide’s 38%, For Rent 31%, craigslist 38%, and Zillow’s 29%. Our score as the most effective site was the highest, nearly twice the second highest score and more than five times the fifth placed site score. Our net promoter score from property managers tripled from last year to a score of positive 30. Every other competitor had a negative net promoter score, and most of them were double-digit negative. Final proof that our ad campaign is driving B2B awareness is measured by the fact that nearly 70% of the property managers surveyed knew our slogan, Change Your Apartment, Change the World. In February 2017, we launched Apartamentos.com, a professional Spanish language version of Apartments.com. We initiated a national TV campaign to promote the site on Telemundo and Univision, combined with local TV in primetime in the top 10 Hispanic markets running over 50 spots per week. We have also used digital channels including social media, display and retargeting ads in SEM support. We have also benefited from very positive coverage in the major Latino media. So far the site has received over 1 million visits and 5 million property views. As of April 17, 2017 in the top 30 Hispanic markets in the United States, we moved into the number one search position for organic searches on Google using the keyword Apartamentos. This is another value add that we are offering our clients and it is great news for the 32 million Hispanics who rent in the United States, and who make up approximately 20% of the US rental market. The client reaction to our Spanish site has been very positive. Since closing on our acquisition of Westside Rentals in Southern California in January 31, we have added all of the Westside Rentals availabilities to Apartments.com making this site even more comprehensive and valuable to renters searching our site in Los Angeles. Conversely paid advertising from Apartments.com is being displayed on the Westside rentals site. Organic Westside Rentals listings are up sharply by 25% since we closed the deal, and up over 100% including the Apartments.com listings. Our primary objective is to increase our share of rental traffic in the valuable Southern California market. The Los Angeles market is the largest apartment market in the country based on either searcher traffic or the number of apartment buildings. Since we closed the acquisition, we have seen visits to Apartments.com from Los Angeles climb over 46%, which is almost twice the growth pace of Apartments.com in the rest of the US. Finally I can share with you today a piece of news that illustrates the transformative impact of Apartments.com on our business. For the first time in 31 years as of the first quarter of this year, our single largest client is no longer a commercial real estate brokerage firm. Our new largest client is a leading apartment owner property manager. None of these leading clients is individually more than 2% of our revenues. As we stated previously, we continue to make significant investments in building even higher quality content and analytics in CoStar to capture greater market share and support the LoopNet, CoStar cross-selling activity we are expecting to focus on later this year. First over the past year and a half we have dramatically improved and expanded our analytic capabilities. We have added 40 new analysts to attract analyze and write sub-market and market reports. This team is doing a great job and has enabled us to increase the number of written market analyst reports from 1,250 to 2,400. So it basically doubled. We have moved from quarterly updates of market conditions to daily updates with all reports and forecasts updated every day to reflect the latest market conditions. We have decreased the amount of time it takes to produce our 18,000 forecasts from three weeks down to three days. We have also decreased the amount of time it takes to update our market reports from six weeks to a few hours. We have gone from producing historical apartment data in quarterly increments to daily increments. We have engineered a same-store rent series that allows us to report true rent growth versus changes in rents that could be due to changes in the mix of what is being reported. Finally we are now harnessing the billions of user searches we have to define via collaborative filtering, which buildings are truly competitive with one and another. Our white paper on same-store rent series and collaborative filtering was recognized by the American Real Estate Society as a best paper this year. Our authors of the paper were also recognized for the Association’s [Scholar Practitioner Prize]. We expanded our research operations by opening our new global research headquarters in Richmond, Virginia, on December 1, just five months ago. We expected that it would take us 18 months to take this center to 500 staff. To a tremendous team effort, we have reached that level one year ahead of plan. Richmond is now one of our top performing centers and one of our largest centers, and is making a major contribution to building the highest quality CoStar products possible. The esprit de corps, enthusiasm and morale enrichment is very strong. I firmly believe that this center will be pivotal to our success in capturing the full potential we have to up sell LoopNet information users to CoStar information services. We now have 1068 researchers supporting the CoStar product, up from 701 staff and 50 contractors back in December of 2015. The 304 additional headcount give us the capabilities we need to convert the LoopNet database, improve our data quality, increase our update frequency and improve our tenant tracking databases. More importantly, our productivity gains in the past year are remarkable. We are conducting a 144% more direct broker interviews than we were back in December of 2015. The average researcher is conducting 122% more daily interviews than in the prior time period. This means we are cycling and updating our massive property database at three times the frequency we were in December of 2015. More importantly – much more importantly, we are capturing 172% more new listings a month in aggregate than we were at the end of 2015. This translates to hundreds of billions of dollars of additional potential deal value to our clients. So we are creating real value in the product that we believe we will be able to monetize. The establishment of our Richmond center is enabling us to build a much more accurate, comprehensive and timely database of tenants in the market occupying commercial space. This information is valuable to people analyzing market demand drivers to owners looking for tenants to lease their buildings, and brokers looking for new clients. We have replaced our outsourced contract tenant researchers with 178 full-time employee staff in Richmond. Our in-house team is collecting broader data, but more importantly they're on pace to interview and verify 2.8 million tenants in a year. This is an increase of 240% over what the outsourced team had produced. I firmly believe that we have never had better content quality than we do right now. We are going to continue to improve, but I'm very happy with the progress we have made. You can imagine how hard those researchers worked to cycle these massive databases, and I want to give them a big thank you – a big thank you goes out to the best research team in the world. Our software teams are working hard to integrate the LoopNet and CoStar databases into one unified database on the back-end. That work is going really well. We recently launched a new iPhone mobile app for CoStar in the first quarter this year, and 16% of our users have already downloaded the new app. Brokers are raving about the new app. We plan a similar release for android in the second quarter of 2017. We are about to initiate our planned LoopNet information to CoStar conversion. I estimate that we will begin the main cross-selling effort late in the summer or early fall. We remain confident about this pacing and have a detailed go to market strategy in place, including a combination of in-product marketing, in-product result comparisons, retargeting, direct mail and direct sales. I believe the opportunity to sell CoStar information to LoopNet only clients along with the opportunity to sell LoopNet marketing to CoStar only clients is massive. Today only 18% of the CoStar client base is utilizing LoopNet’s industry-leading marketing service premium lister. Conversely, only 26% of LoopNet’s paying client-base is subscribing to CoStar’s industry-leading information service. This means there are 153,000 cross-selling opportunities within our client base. In addition, there are hundreds of thousands of prospects that use LoopNet without paying anything for the service that we can prospect as well. We believe that there is a revenue opportunity of hundreds of millions of dollars here. That is why we are investing so much time, effort and money into building up the quality of our content to improve our capture of this opportunity. We feel we have one solid crack at it and we want to make sure we do it right. I am proud that we could report a 32% year-over-year increase in net income while at the same time making such significant investments in our sales force, our research team and our continued marketing blitz. Rural land is a multi-trillion dollar real estate asset class in the United States. It is actually about 95% of the country. CoStar currently owns and operates two of the leading for sale sites in this space, LandsofAmerica.com and LandandFarm.com. We believe this is a huge area with lots of future potential and we are taking steps to increase our leadership position. Earlier this month, we signed a definitive agreement to acquire LandWatch, another top online leader in marketing rural properties and land for sale, including hunting land, timberland, farms and ranches. The acquisition of LandWatch solidifies our position as the number one online network of marketplaces for rural real estate as we believe the addition of LandWatch will nearly double the scale of our existing land marketplace business in terms of revenue, leads and SEO footprint. The deal is expected to close in May of 2017. In fact, I am so excited about the potential for these land businesses, for these farm businesses that I in fact went out and bought a farm. Why? I don’t know. Have been looking at too many farms in our land business. Once again, we have recently successfully defended our intellectual property and have prevailed against theft of our data. As we previously announced at the end of March, we obtained a permanent injunction in litigation against Apartment Hunters. The judge ordered Apartment Hunters, which owns apartmenthunters.com to pay damages of $10,000 per stolen listing and $10,000 per infringed image for a total of $760,000, which we have now received. The courts continue to come down pretty harshly on data stealers. A couple of weeks ago Craigslist, I would say justifiably, a couple of weeks ago Craigslist won a $60 million judgment against RadPad in a copyright and breach of contract suite with Craigslist, alleging unlawful collection of Craigslist’s apartment data by RadPad and its third party agents. RadPad had hired scrappers in India to harvest listings and contact data from Craigslist. After litigation began, RadPad wound up ceasing operations. We believe that there are similarities with cases we are involved in. You will recall we are suing Xceligenet because we have uncovered tens of thousands of instances of their copyright infringement of our content. We have also brought suite against its agent MaxVal in India, and its agent Avion in the Philippines. We have collected more than a 100 TB of evidence in connection with the case, which we believe significantly strengthens our case against them. We believe that the evidence clearly shows that Xceligenet and its agents willfully and illegally stole massive volumes of valuable content from CoStar and LoopNet. When faced with industrial scale theft of our content we take all reasonable steps to protect our shareholders and clients’ interest. We anticipate incurring significant costs in connection with this litigation over the course of the next two years. We believe it is a vital and prudent investment. The commercial real estate markets are at a healthy level with strong occupancy rates across the apartment, office, industrial and retail property types. That said, new construction is on the rise and it is beginning to make an impact on property market fundamentals in the apartment sector and office markets. Also recent job growth has been strong, which bodes well for commercial leasing activity as well as the apartment household formation that drives the apartment sector. Fortunately, CoStar is an integral part of the leasing and marketing program for building owners and managers. Therefore the combination of a healthy economy and the need to lease space is good situation for us. In the office sector, vacancy rates were essentially stable at 10.3%, up slightly from 10.2% in the fourth quarter of 2016 with absorption of 10 million square feet. This level of office leasing was lower than the previous three quarters, which may stem from the fact that some of the companies have pushed off leasing decisions until after the presidential election. At 19 million square feet, deliveries of new space for hire with an average of 15 million over the previous four quarters. That makes sense as many markets now have rents that support new construction activity. With the rise of construction, rent growth has slowed to 2.3% from market cycle peak near the 5% level in most of 2015. So we are tracking around inflation now. As we reported in prior quarters, apartment markets are showing signs of becoming increasingly competitive, effective rent growth has dropped to 2.3% from 4.4% a year earlier, and lease up on new construction is slowing somewhat. The slowdown stems partly from the 225,000 new units delivering over the past 12 months, which is 50% more than the ten-year historical average making apartments the only real estate sector in which construction is outpacing the short-term historical supply. The supply numbers we are seeing now are well below supply levels we saw in the 60s and 70s. And there is also a little bit of bifurcation there, where there is an abundance of supply in the upper end of the market and a real shortage in the lower end. Fundamentally, when you look at household formation and new home deliveries and new apartment construction, we have a housing shortage if anything. The rush of deliveries has pushed vacancies up from 6.1% to 5.6% a year earlier, since increased apartment advertising, spending is highly correlated with weaker apartment markets, a more competitive apartment market would be very good news for Apartments.com to add sales. Investment sales activity declined slightly in the first quarter, reflecting a trend that started in 2016 with annual real estate trading volumes down about 10% from a year earlier. Investment sales activity is still at a high level compared to long-term average about 40% above the average of the past 10 years. We are off to a tremendous start in 2017 in all aspects of our business. We remain committed to reaching $1 billion in revenue as we [reach] 2018, Scott might say, for the year, and reaching our 40% target margin numbers. But to give you more color and detail on this, I'm going to turn the call over to our ever confident CFO, Scott Wheeler.

Thank you, Andy. It seems like that farm purchase has really got you confident.

You got to be committed to your business. You've got to be committed. I'm a farmer now.

We can't wait to see it. So we certainly had a strong start to 2017 and we are definitely excited about the trajectory of the business as we go into the year. As Andy mentioned, the revenue for the first quarter increased 13% over the prior year, 14% excluding the impact of foreign currency movements. Sequentially our revenue increased $8 million in Q1 versus the fourth quarter of 2016 fueled by our strong multifamily sales results in both the fourth quarter and the first quarter of 2017. This compares to an average sequential quarterly increase of $6 million for the year in 2016. Looking at our revenue performance by services, CoStar Suite revenue grew 13% in the first quarter of 2017 versus the first quarter of 2016 and 14% on a constant currency basis. As we previously discussed, we expect CoStar Suite growth rates to continue within a 12% to 13% range throughout 2017. Revenue growth rates in the information services sector remained negative in the first quarter of 2017 as expected as we continue to wind down the LoopNet information products ahead of the planned integration with CoStar Suite. We expect information services revenue to decline at mid to high single-digit rates in the second quarter of 2017, and in the low double-digit rates in the second half of the year. We expect full-year revenue in information services to decline in the 9% to 11% range as we communicated in February. We had a great first quarter in multifamily, as revenue increased 22% year-over-year. This is consistent with our 2016 full year pro forma growth and is at the high-end of our guidance range. Revenue contributions from Westside Rentals of approximately $0.5 million in the quarter was not material as expected, and this will wind down as we complete the transition of Westside Rentals to the Apartments.com advertising model. Based on our very strong sales performance, we are raising our full year 2017 growth expectations for multifamily revenue to a range of 21% to 23%, up 100 basis points from our previous guidance. Rounding out our service performance, commercial property and land grew 13% year-over-year in the first quarter of 2017, which is an increase above the 11% revenue growth we reported in the full year and in the fourth quarter of 2016. The improved growth rate is a result of our investment in additional sales resources that Andy mentioned, and they are focused on selling our LoopNet premium lister and our tiered advertising products to property owners. We expect the growth trajectory in this business to continue to accelerate organically to a range of 12% to 14% for the full year of 2017, an increase from our previous guidance range of 10% to 12%. When we include the revenue from the pending acquisition of LandWatch, we expect the commercial property and land sector to now grow in a range of 15% to 18% for the year. Our gross margin came in at 77% in the first quarter down from 79% in the fourth quarter of 2016 and slightly above our expectations. The vast majority of our cost of revenues relates to our research operations, which we continue to expand with our new research center in Richmond, Virginia. The improvements in our research performance have been impressive, and we expect to reach our research staffing goals by the end of the second quarter. Accordingly, we expect gross margins to moderate in 2017, within the 75% to 78% range that we communicated previously as we scale up our team in Richmond. Operating expenses for the first quarter were in-line with our expectations and reflect the continued investments we are making in the business. This includes the cost of our expanded sales force, additional technology resources focused both on our products and research processes, and the addition of operating costs for Westside Rentals. Now, let's take a look at some of the performance metrics for the quarter. As Andy mentioned, our sales force delivered $35 million in net bookings in the first quarter of 2017 despite continued negative net bookings from information services. We are making great progress towards our planned integration and cross sell efforts of LoopNet and CoStar, which we expect to commence in late summer or early fall. Consistent with the guidance we provided in February, the cross-selling of LoopNet users to CoStar is not expected to have a material impact on our 2017 sales and revenue results, but represents a huge opportunity for the business going forward. The renewal rates on annual contracts was 90.3% in the first quarter of 2017. This was up slightly from the 90.1% in the first quarter of 2016, and 10 basis points below the renewal rate achieved in the fourth quarter of 2016. We expect the renewal rates to moderate slightly in future periods due to the increased scale of our multifamily products, which currently have a lower renewal rate as compared to CoStar Suite contracts. The renewal rates for CoStar Suite remain strong, and continue to perform at a high 93% to 94% rate, very consistent over time. The renewal rate for customers who have been subscribers for five years or longer was an impressive 97.4%. Subscription revenue on annual contracts accounts for 78% of our revenue in the quarter and this is up from 74% at this time last year. I'll now discuss our outlook for the full year and the second quarter of 2017. Based on the strong sales and revenue performance in the first quarter, along with the expected LandWatch acquisition, we are raising our top line outlook by $10 million. We now expect revenue in the range of approximately $945 million to $955 million for the year, representing an increase in the expected growth rate to 13% to 14%. This revised outlook includes an organic revenue increase of $5 million and an increase of approximately $5 million in revenue associated with the expected LandWatch acquisition. Our guidance estimates assume the acquisition closes in May. We expect revenue for the second quarter of 2017 in the range of $233 million to $235 million, representing top line growth of around 13% at the midpoint. This outlook includes approximately $1 million of LandWatch revenue for a partial quarter. In terms of earnings, we are raising our guidance range for the full year 2017 to approximately $4.30 to $4.40 for non-GAAP net income per diluted share. This is based on 32.7 million shares. This includes an increase of $0.10 per share related to the strong organic revenue increase, substantially all of which is converting to earnings. Also included in the increase is an additional $0.02 per share for the expected LandWatch acquisition. For the second quarter of 2017, we expect non-GAAP net income per share in a range $0.58 to $0.64, and adjusted EBITDA in a range of $40 million to $43 million. We expect the second quarter to be low point for adjusted EBITDA margins for the year, as we increase our marketing spend for the start of the peak apartment rental season. As in prior years, our marketing spend fluctuates from quarter-to-quarter, and we expect total marketing cost for the year to be in line with the guidance we gave in February, and similar to our marketing spend in 2016. Margins are expected to increase sequentially through the third and fourth quarters and we expect to exit 2017 with adjusted EBITDA margins above 35%, and above the Q4 2016 margins. Costs associated with the Xceligent litigation were approximately $3 million in the first quarter. We continue to expect costs in a range of $10 million to $20 million for the year. Our guidance ranges have not changed from what we communicated in February, and it includes $15 million in legal costs for the year and $4 million in the second quarter related to this matter. Overall, I'm very pleased with the pace of our sales improvements and the success of our investment programs in the first quarter of 2017. We certainly remain on track to reach our stated goal of achieving a 40% adjusted EBITDA margin exiting 2018. With that I will now open the call to questions and start searching for my own farm.

[Operator Instructions] And we will go to the line of Bill Warmington with Wells Fargo. Please go ahead.

Good morning everyone.

Good morning Bill.

Hi Bill.

So, from my one question I wanted to ask about the apartment market, in two parts, the first being you had this theory that the slower apartment market would be positive for advertising and I wanted to see whether you actually were seeing a pick up in spend as vacancies go up. And the second was, you are sitting on almost $600 million in cash, are you thinking about deploying it into the apartment market?

Can you say it one more time? The first one Bill, I think keeping it all in context, so yes, we see correlation. We have looked at it in different ways and we have seen correlation where when occupancies are weak in apartments, people spend more to market them. What they are spending to market their apartment communities is de minimis relative to the value [Indiscernible] and you need to keep those occupancy levels in order to make your mortgage commitments and you will be pretty aggressive to make sure you drive lead flow in a soft market. So, we do feel there is a correlation. However, putting this in context over the last 30 years the apartment market is still very, very robust. The vacancy levels we are talking about now are very low. They are well below long-term averages, and I actually think that we bring new inventory in at the top of the market, then it filters down to the lower income units over time. And the rates at the lower income end of the market are climbing at 5% year-over-year right now, and the vacancy rates, they are very, very low. So I think that we are also – I think we are delivering about 0.6 housing units across a single home and multifamily right now for every household formed. So I think we are still in a pretty significant housing shortage overall. So, while you see some softening, it is really de minimis. In terms of our belief if there is more value for us in the multifamily industry? Absolutely. We are thinking we are at the very beginning of this opportunity and we have made some investments. We think they have paid off. We do have $600 million in cash and we would look for ways to take advantage of our strong market position, enhance that position, add more value on top of that or solidify it. And it is something we keep an eye on.

And our next question in the queue will come from Andrew Jeffrey with SunTrust. Please go ahead.

Hi, good morning guys. Thanks for taking the question.

Good morning Andrew.

It sounds Andy, like you are pretty bold up and rightly so on the returns you think you can get from the Richmond Research Center and the investments you have made there. Could you just talk a little bit about sort of whether or not we have seen any of those benefits to date in bookings. I think you touched on a little bit, and how that might progress in ’17 and into ’18, just in the core business even forgetting about the cross sell opportunity. I'm just wondering standalone, how you think about the returns on that investment and what it might mean for growth?

Sure. So, yes, I do. So, as I have been looking at some of the really strong sales results we have had in the last quarter or so, I can’t definitively create a formula that proves that X resulted in Y but I have thought on multiple occasions that this dramatically better research quality, which has come with an investment has resulted in these higher sales. And one of the things that is happening is just the volume of communication our researchers are having with people in the industry and the higher quality training they have and the better job they do at branding the value of our market places, just positions CoStar and LoopNet higher in the minds of these prospects, which I think translates to sales. So, our research operations, when they are having these conversations with people about how they can put their listings in front of the biggest market of buyers and lessors of real estate ever created, it sparks the imagination of that person with a listing and I believe that shows up in those people buying product from either LoopNet or CoStar down the road. So I think our research department is not a research department, I think it is actually a marketing department of some nature. And when we go into ’17 and ’18 – when we go into the latter half of ’17 and ’18, I still think it can't be separate from the LoopNet CoStar cross-sell opportunity. These folks build relationships with people in commercial real estate. They will help position our products for the cross-selling. We can quickly adapt any positioning we need to do overnight with tens of thousands of communications a day to that research department. And then ultimately when we present to someone who has been using LoopNet as an information pack for years with a strong value proposition to upgrade now to CoStar information, having just infinitely better information that CoStar product, with really good tenant information, I believe will result in dramatically higher sales. So, did that – was there a second part of the question I missed there? I get so excited about our research department I start joining on.

No, that was the question. Thank you.

Okay.

And our next question in line will come from Sterling Auty with JP Morgan.

Great, thanks, this is [Jackson] on for Sterling this morning.

Hi [Jackson].

Good morning. You guys mentioned that the integration between LoopNet and CoStar in the back-end is going well. Can we just quickly get some more detail on that, and what has already been done? What still needs to be done and any kind of time frame you can put around what needs to be done?

Sure. The most to me – the most important thing show there is a technical component, where everything in the LoopNet product has to be rewritten to address the new backend database. There are hundreds of routines and systems that have to be rebuilt to look at a common system. You had to come up with methodology standardization between what was in LoopNet and CoStar. That is a pretty big technical load. We are through the majority of that. One of the more challenging things we had to do, not to just do the integration, but to do the integration really well and capture as much value as possible is we had to increase our research firepower, and make sure that we went into that conversion, that the quality of the product the people were evaluating was as good as possible. So I think the biggest accomplishment is having nearly triple the research flow by hiring hundreds of new people, setting up new centers, negotiating tax breaks, multiple leases, so on and so forth that was a lot of work. We have interviewed thousands and thousands and thousands of people to build that team. So that one is in place and I think that you will get the peak value of that research investment and quality, we will start to get to where we want to be -- in June of this year is where you really hit the full stride of that investment. You probably want to cycle for a month or so at that level before you really unleash the sales force to go have 50,000 demos. And we also have built the CRM system, the CRM team, which is important to do the integration and trainings that we expect will happen, and then we have gotten the sales force up dramatically in scale to be able to address the opportunity. We are adding some additional features CoStar to make the product even more attractive to people considering investing more to get the CoStar information solution. We have probably completed – we will complete a significant amount of the marketing required to support it and we are going to do a little bit more there. We are in a place where there is nothing magical about April 30th or June 10th or July 5th, this is a once-in-a-lifetime opportunity to try to pull together two major ecosystems of commercial real estate and design it as such that you have the best possible outcome and we are more concerned with doing it really, really well than doing it really, really quickly. So, we are editing now basically. We are not authoring, we are editing. And we are editing. In good writing, you should know be editing and editing and editing. So that is where we are.

And the next question will come from Brandon Dobell with William Blair. Please go ahead, sir.

Thanks. Good morning guys. Focusing on the information for the core business for a second, given the net new momentum and recognizing the currency headwind, what is to stop that business from seeing an acceleration in organic growth as you work through the year, and I guess maybe include that little broader just to keep the combination of information services and kind of the core suite business and see an acceleration in work through this year and the next year.

I love the way you say net new momentum. We call it the NNM.

Nice acronym.

Yes. The nice thing is we are getting this increase in momentum before we launch the main effort, right. So this is in advance of what we felt would be the real net new momentum driver, which is the formal LoopNet integration execution. So, if that integration is successful you could see some momentum gains, but in addition, you also there is a pretty big landmark here that now an owner is our biggest client rather than a broker. So as that trend continues and as our analytics improve and we get deeper penetration in owner audiences, lender audiences, investor audience, that also is a potential accelerator.

And just putting some context to the financial side Brandon, in the second quarter last year the currency started to move, so we won't see much movement in Q2, but obviously that drops away for Q3 and we will pick up that percentage point, and so the wholebusiness will then see momentum in the back half as we start to doing cross-sell, although we really haven't built in any cross sell uplift at all in the numbers in the back half, and we are going to let the business get the software done and ready to go and in the market, and then we will see what happened to the fourth quarter.

And if Brexit occurs, we have de minimis exposure to the [French].

And the next question will come from Brett Huff with Stephens. Please go ahead.

Good morning guys. Thanks for taking my question.

Good morning.

Hi Brett.

I have a bigger picture question on margin, one of the things in talking with investors that some of the folks are trying to figure out is what happens to the 40% pro forma EBITDA margin give or take exiting 4Q ’18, as we go forward, as folks are trying to work on their DCFs, there is some debate as to whether or not that remains at 40%, if it goes up a little bit, if it goes down a little bit, depending on investments, but I think that is one of the things that folks are really trying to get their head around and I'm wondering if you guys could just give us some color on it or maybe even more precise answer? Thanks.

I would be happy to take a shot and let Scott also address it, but the natural state of the business, if you look at every component of the business we are addressing right here is very high incremental dollars of EBITDA or margin dollars on each sale. So as we add another ad contract, as we add another information subscription, the super high margin sales. So the natural state of the business, when you are at that 40% margin in ’18, that margin would naturally grow to 50%, 60%, 70% and higher. I am not sure – we by no means have run out of things to do in the business or ways to reinvest that capital and create more value. So, we would be looking for good investment opportunities with the margin growth above that 40%. I don't think this is a time to sort of stop and we are a third of the way through the opportunity and clip coupons. But at the same time, the scale of the margins we are talking about at 40% the spread between 40% and 45% margins gives you an awful lot of firepower to invest in the business, and I will let Scott say something completely different.

Of course, we haven't laid out our investment or spending plans for 2018 yet, and that will come down the road, and of course I haven't done anything for 2019. But you certainly can expect that the seasonal pattern of margins will continue given the size and scale of apartments business, we will continue to grow. And so you will always see this lower margins in the first quarter, dropping in the second and then picking up to the latter half of the year. So, after the 40% hits in Q4, you would expect it would naturally go down a couple of quarter and come back up even if we kept the average for the year the same. As Andy said, there is a lot of levers that will come through when you're growing $120 million in revenue a year with very high drop-throughs and you will have a lot of acquisition firepower from the cash that brings in or else we can continue to invest organically. So, we will lay those plans out. We will let but there is certainly potential to let margins continue after that or if we feel there are great investments either organically or acquisition-wise we will talk about those and make sure everyone understands why they are more valuable for us in the long-term than trying to sustain the margin for the short-term.

And the next question will come from Peter Christiansen with Citi. Please go ahead.

Good afternoon. Thanks guys for taking my question. I was wondering if you could give us a sense in the multifamily side if we look at revenue growth there, how much of that is – given the occupancy trends is that revenue per building versus actually attracting new buildings onto the platform, and then as a follow-up, given the fact that you are taking quite a bit of market share in recent times, have you seen any changes in behavior from some of your competitors as it relates to pricing?

When you look at where that growth is coming from, I would say first and foremost that traffic advantages we have right now over other sites – that traffic advantages are huge and the change that has occurred in the last five years, three years, two years is dramatic. So, Apartments.com has more than double, triple those traffic. So people have large budgets assigned to or allocated to marketing solutions that are no longer the best value for their dollars. So I think a lot of what is happening is basically shifting from older, less effective solutions over to Apartments.com, and there is a lot – there is tens of thousands of properties that are still back spending more money to get less exposure. I do think that puts downward pressure on pricing, competitors pricing, and when you look at the exact maths for us it is about the 22% year-over-year organic growth, 15% is volume, people switching from older, less effective solutions to Apartments.com and 7% of that growth is price mix, people bringing up the exposure level of their property and trying to drive more leads in the door. So, it is about 66 or two-thirds share gain and one-third price gain. I think that will continue for a while.

And our last question we have in queue at this time will come from Mayank Tandon with Needham & Co. Please go ahead.

Thank you. I had a quick question on the apartments, sort of higher level,if Andy, if you could just talk about where you are in terms of penetration today, whether it is in terms of number of units or in dollar value terms. And first, in light of the fact that you now have presence in the smaller units segment, what does that mean in terms of market share for you today?

Sure. You get me rolling on a really certain – a nerdy discussion of penetration at each level, but some real important trends here. When we acquired Apartments.com 98% of their revenue was from properties with 130 units or more, which is the upper, upper half of the apartment industry. So if you have 44 million units out there, 17 million – I am sorry, 24 million might be institutional, maybe 12 million are in that larger unit mix size. So traditionally the businesses because they had that print history of expensive fixed cost of print, the industry really addressed the 130 unit plus area. We are seeing tremendous growth in the – all the way down to the 40 units, 30 units, and that is a huge piece of the market. So, I was looking at some stats the other day where, a lot of our growth was in that lower area, and I think we can be successful all the way down to 10 units, 15 unit properties. So that will go for a long time, and that doubles the size of the market ultimately. The other thing is that as we get deeper penetration in the apartment space, and we have a bigger and bigger share of that institutional market, say the 100 units plus, we have a fantastic opportunity to layer additional services on top of that user flow. So if you have – we now have a very significant share of apartment hunters in the United States using our product to find their apartment. Millions and millions of people are finding their apartments on Apartments.com. That is 110 million Americans and growing. That is $700 billion plus of spending. Folks are in the market every 18 months typically to find a new apartment. There is a lot we can do with that traffic in that position. That doesn't require us to sign up new apartments, though I am pretty confident we will continue to sign up lots and lots of new communities over the years to come.

And currently we have no further questions in queue.

Great. Well, thank you everyone for joining us for this first-quarter earnings call, and we look forward to updating you on our progress next quarter.

And that does conclude our conference for today. Thanks for your participation and thanks for using AT&T Executive Teleconference service. You may now disconnect.