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…

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…

[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.