CoStar Group, Inc. (CSGP) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, the conference is being recorded. I'll now turn the meeting over to our host, Vice President of Investor Relations and Communications, Mr. Richard Simonelli. Please go ahead, sir.

Thank you very much, operator, and thank you, and welcome to CoStar Group's first quarter 2018 conference call. Before I turn the call over to Andy Florance, CoStar CEO and founder; and Scott Wheeler, our CFO, I have some very interesting and important items for you to consider. Certain portions of our discussion today may contain forward-looking statements, which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that could cause actual results to differ include, but are not limited to, those stated in our hot-off-the-press April 23, 2018, press release on our earnings and in our filings with the SEC, including our most recent annual report on Form 10-K and our subsequent quarterly reports on Form 10-Q under the heading Risk Factors. All forward-looking statements are based on information available to CoStar as of the date of this call, and we assume no obligation to update these statements whether as a result of new information, future events or otherwise. Reconciliations to the most directly comparable GAAP measure to all of our non-GAAP financial measures discussed on this call, including, but not limited to, non-GAAP net income, EBITDA, adjusted EBITDA, forward-looking non-GAAP guidance are shown in detail on our press release issued today, along with definitions for those terms. The press release is available on our site at costargroup.com. As a reminder, today's call is being webcast live and in color on our website, where you can also find CoStar's Investor Relations page. Please refer to our release on how to access that. And remember, as usual, one question, so make it a good one. I'll now turn the call over to Andy Florance. Andy?

Thank you for joining us today for our first quarter 2018 earnings call. We have begun 2018 with a very strong first quarter, growing revenue 21% year-over-year. Net income grew 136% year-over-year to $52 million in the first quarter. We expanded margins for the [first quarter 2018] adjusted EBITDA margins at 31%, nearly 300 basis points above Q1 2018 level. We are on pace to generate almost as $400 million in adjusted EBITDA in 2018. We are confident that we will achieve our 40% adjusted EBITDA margin for the fourth quarter of 2018. CoStar Suite revenue accelerated to a growth rate of 19% year-over-year as revenue reached $130 million of first quarter 2018. In the last 12 months, the number of individual subscribers for CoStar Suite in the United States alone grew by over 20,000 to approximately 126,000 as we continued to drive revenue growth across broker, owner, lender and institutional sectors. Multifamily revenue was $88 million for the first quarter of 2018, an increase of 37% compared to the first quarter of '17. On an organic basis, multifamily revenue increased 23% in the first quarter of '18 year-over-year. Commercial property and land marketing revenue grew 19% in Q1 '18 year-over-year and has grown to an annual run rate of $160 million. This group generated highest ever bookings number as sales were strong for LoopNet, our land sites and business for sale. Bookings were up 29% Q1 '18 versus Q1 '17. We are very excited about the strong growth and high-margin potential of these businesses. Companywide bookings continue to be exceptionally strong in Q1 2018 as we achieved our highest ever sales quarter generating $54 million. Given the tremendous strength in our business, we made a decision to accelerate the LoopNet CoStar upsell conversion processes. A number of the legacy LoopNet information customers have told me they would buy CoStar when we wind down Premium Searcher, and some have even questioned me to why we've not already done the sale, so we did. We originally planned to discontinue LoopNet information revenue over the next 12 to 18 months. As we told you, instead we execute the wind down completely in the first quarter. This created a $19 million reduction in our first quarter bookings but also means we'll not be taken as cancellations in later quarters and we'll be on a much stronger sales position going forward. We did this because we believe it will help us drive more CoStar upsell revenue in 2018. We did this from a clear position of strength. The ongoing conversion of upsell LoopNet information users is clearly contributing to the growth of both CoStar subscribers and LoopNet marketing subscribers. Since our Phase II LoopNet conversion push began in October of 2017, we have converted approximately 7100 LoopNet customers to CoStar and/our marketing contracts at an average price of approximately $528 per month. On average, these LoopNet users were paying $54 per month for an average monthly price lift of $474 per month or $5688 annually. The 7100 includes 5200 conversions to CoStar at $555 per month and 1900 sales of LoopNet marketing subscriptions at $458 per month. At this point, we have generated $40 million in annual incremental contract revenue for the Phase II LoopNet conversion. Our initial Phase I push lasted about 18 months and generated in excess of $100 million of incremental revenue. Phase II is expected to last at least 18 months, and I believe it can generate significantly more than $100 million in revenue. There are approximately 88,000 discontinued LoopNet Premium Searchers or heavy LoopNet searchers, and we're still pursuing them all and are confident about our ability to do that. They remain a primary focus, and we are targeting a series of sales and marketing wave throughout the year to upsell them to CoStar. One way we're doing this is by carefully targeting high-potential broker prospects still using LoopNet for information with a special version of LoopNet that highlights the information advantages CoStar offers. When these targeted brokers search for listing in a given area, they see the listings marketed LoopNet on the map as red pens, and the many more CoStar abilities they cannot access because they're not CoStar subscribers as blue pens. When you look at the map it's a sea of blue pens with just a handful of red pens. When the conversion target clicks to see the details behind the blue, CoStar user only pin, they only see an upsell message. It's a very concrete illustration to the LoopNet heavy searchers just how much more value they can get with our professional version CoStar. It also has a powerful emotional effect or a fomo that drives people to action. The integration of the CoStar and LoopNet database has really been a tremendous success with an integrated easier-to-maintain database, our data products have never been better. We continue to proactively update 92% of every 1 million active listings every 30 days. As we mentioned previously, brokers now have the ability to update their own listings using a CoStar listing feature made available October 2017 and has seen widespread adoption. Of the 307,000 new commercial real estate listings added to our database since October, 136,000 or 44% were directly entered into listing manager. In that period, they were also 1 million listing updates and amazing 663,000 were added directly by users. In the month of March alone, users added just under 500,000 listings. At our typical research to listing ratio, they represent a shift of several hundred FTEs of researcher labor from us to our clients. We believe many of our clients prefer to add their listings themselves, so we're improving the product and potentially saving significant money. At this early phase, the new listing manager, our researchers are closely watching the listings users are editing. But once we're confident in the quality of this data, our research workload may drop significantly. We are dramatically expanding our commercial real estate news in coverage CoStar. We now have a team of 15 journalists breaking news stories and creating original content for our subscribers. We're looking to further expand to build upon our established reputation as a trusted and sizable news resource for commercial real estate. Our goal is simple: make CoStar the industry's most read and most respective source for commercial real estate news. CoStar contains a wealth of information, but the user has to work to search it out the product. With quality CoStar news, we proactively serve up our information to the user and engage them more deeply in the product. Not only does this make the product stickier by adding more value, it provides an even better platform for which we can support very valuable advertising revenue. We recently hired Dan Beyers, as Executive Editor and Vice President of CoStar News. Dan is an excellent business journalist and was a successful long-time news editor for The Washington Post. In a recent independent survey of 2000 commercial real estate professionals, 98% stated that they either rely on LoopNet or CoStar for commercial real estate information. We have invested heavily for decades to rebuild such a strong value number products such as 98% of market will use them. 2018 marked a turning point for CoStar and that moving forward we intend to be much more diligent in maintaining a strong and consistent pricing integrity. We license our services on an enterprise-wide regional site basis. We have tens of thousands of CoStar clients that are paying well below our list price. This has occurred for any number of reasons, but one of the most common is that a client grows and adds users but their CoStar pricing does not increase or reflect the new additional users. I believe these discounts could be an aggregate worth tens of millions of dollars to more than $100 million. I can give you just a few of these month's examples. Evaluation firm in New York City was licensed for 14 appraisers but actually had 23 using the product, so they agreed to an annual fee increase of $27,000. A banking client in San Diego took the negotiating position that only pay us $18,000 annually for 6 additional users. But when we walked from the deal, they agreed to pay $31,800 more annually. An asset management firm in Glendale, California, was a former client of Xceligent's, attempted to sign up for just 1 user but eventually agreed to the correct 5-person enterprise license, which is an increase of $14,510 annually. We are now rejecting more contracts from under-pricing and/or under licensing than we ever had before. We have, in fact, turned away large but under-priced contracts this quarter. No doubt this means we're forgoing some business. In intermediate longer term, however, we are confident that consistent pricing is fair to all our clients, will drive more revenue and drive better shareholder returns. Many of our CoStar sales people will have decline learning curve on pricing integrity, but I'm confident they will and the result will be much better. We invested significant legal fees and efforts over the past 2 years to bring Xceligent best of our product to a complete stop. We're now turning our attention to identifying the many people using CoStar without a valid license. We intend to find these freeloaders to strongly encourage them to purchase a valid license. We believe that there is as many as 10,000-plus people and perhaps 2 to 3 times that number illegally accessing CoStar. We are employing an increasing array of theft detection and prevention technologies. We are now contacting the first batch of 1000 firms we believe are stealing access to CoStar. We communicate the ethical problem with engaging in theft, give them an amnesty period to pay back fees and sign up. And if those efforts failed to correct the problem, we plan to seek monetary judgments. We're pretty good at that. We never want to litigate, but it is the reality of our business You may know that our case against Xceligent brought us to the jungles of the Philippines where a company called [Avion] was hired by Xceligent to steal our data. In our investigation, we discovered massive volumes of evidence that Avion was also linked to child pornography, prostitution, human trafficking and back page editorial sex website. We provide the evidence to the FBI and cooperated with half a dozen other law enforcement agencies. The site and its affiliated websites have been seized and shut down by a joint enforcement action by the FBI, the U.S. Postal Inspection Service and the IRS investigation division. A 93-count indictment was issued against 7 individuals for doing very bad things. In addition, following publicity surrounding our Philippines discovery Section 230 of the Communications Decency Act, which provide a legal safe haven for the back pages amended to make it less likely that others will follow back pay pages footsteps in the future. Orders to serve mostly credit for finding this chapter of human and child sex trafficking, but we are glad we could help and make a difference. Moving back to LoopNet. We've clearly defined brands in the industry. We can now promote CoStar as the best information service for professionals and LoopNet as the best marketing service to attract end-users such as tenants and investors. We can also focus on making the LoopNet marketing experience even better, and we're working to give our advertisers even more value for their marketing spend. With the integration, we have eliminated free listings and are limiting most deeply discount legacy listing plans because. These free and nearly free listings were watering down the exposure value of our best clients adds. In total, we discontinued approximately 60,000 low-cost LoopNet adds or price of an average of about $6.09 per month. We are shifting our focus to selling high-value, high-impact larger top-sorting for owners with the highest needs of price points in the thousands of dollars a month. In the first quarter, clients advertise more than 5000 properties in these upper end power ad levels at an average prices ranging across tiers from $220 per month to $1054 per month. These power ads are basically the equivalent of the tier ad that we sell at apartments.com successfully. Historically, a particularly reported purchase LoopNet, LoopNet target marketing products to brokers with low-end properties. By doing so, LoopNet was effectively focusing on solving their $10,000 problems. In commercial real estate, there are plenty of $100 million marketing problems that need to be solved. We are repositioning LoopNet that's a better focus on solving these high-value needs for owners who have much more at stake and much larger budgets. We are demonstrated the owners that with the massive broker audiences we have in CoStar that read our newsletters, use CoStar and massive end-user audiences at LoopNet, we can help them migrate leasing risks and expensive multimillion dollar vacancy loss problems. It's an exciting project to reposition LoopNet as a higher value marketing site. We're giving top advertisers on LoopNet, bigger advertisements, higher placement and search result, videos exposures in the form of 3D virtual walk-throughs, villa montages, drone footage and much more. Historically, to sell lower-end commercial real estate advertising, we relied on e-commerce and inside sales team and a very ad sales team in the field. As we move up markets, more important to have field sales force to market the higher price points advertising opportunities just as we do so successfully with apartments.com. To accomplish this quickly, we have restructured the CoStar sales forces incentive plan to include a significant quota for LoopNet sales. CoStar sales force is well positioned to sell more LoopNet as they are already meeting with this target audience and these prospects have expressed a desire to have single points of contact. We expect that a significant change like this will initially slow sales productivity for a few months but you can see will yield greater results over the course of the next year. We believe that opportunity to have if we have an expanding LoopNet as a marketing site as a total addressable market in the hundreds of millions of dollars. Apartments.com continues to strengthen its lead as the #1 apartment Internet listing service. Our apartment’s network achieved all-time highs in visitors in traffic in the quarter. During the first quarter, the network averaged 40 million visits per month, up 40% and 15.6 million unique monthly visitors, an increase of 38% year-over-year as reported by comScore. The addition of ForRent strengthens our network. In the first quarter of 2018, ForRent averaged 3.7 million unique visitors and 6.4 million visits monthly. Our network produced 33% more leads in the first quarter of '18 than we did a year ago during the same period. And since we believe we have the best leads in the industry, this should make a listing on our Apartments.com even that much more valuable. In March 2018, we had nearly 90% more unique visitors in our network than the RentPath network according to comScore. And we increased that GAAP each month in the first quarter of '18. We continue to maintain an even bigger lead in total visits according to comScore. Our new 2010 advertising campaign with Jeff Goldblum is in full swing, and we believe it's our best campaign yet. We plan to run ads on primetime television, radio, streaming and outdoor, and we expect to reach 95% of all U.S. households with our new campaign. Even more positive is our exploding traffic trend being generated from organic search. We exceeded 75 million organic visits in the first quarter 2018, an increase of 71% year-over-year and a 50% sequential increase in Q1 '18 versus Q4 '17. We now have 72.5% share of top organic rankings for apartment rental keywords on Google, which is 12 times the [indiscernible] network and 18 times the RentPath network. In a striking and positive development, the number of landlords who have a small property or two are increasingly marketing these properties on Apartments.com. These landlords typically add under listings directly into Apartments.com, the number of these listing grew 96% year-over-year from Q1 '17. The most active markets included New York, Los Angeles, Chicago, Boston and Miami. I think it's a really important and significant trend to watch. With the additional ForRent, we added close to 5400 non-duplicative apartment community customers to take us to nearly 47,000 advertised apartment communities on our network. We closed the ForRent acquisition about 60 days ago. And as we always do, we're moving quickly to integrate. We are already ahead of our original schedule and are running a playbook that we've incorporated previously with Apartments.com and Apartment Finder. We're moving full speed ahead in the tech integration of ForRent into Apartments.com network back end and anticipate the completion of this work, as well as some user experience improved as to complete, be complete by the end of the year. We have already realized significant cost synergies ahead of schedule. Since the acquisition of ForRent, we have eliminated 158 positions for the combined multifamily organization. 136 of those came from ForRent and 22 came from the legacy apartment’s team. This encompasses over $12.5 million in annual compensation across all departments in the company. We continue to uncover considerable additional cost savings with elimination of duplicative contracts and services. We look forward to reporting our continued progress in this area in the months ahead. We are working closely with the ForRent salesforce with just one goal of securing existing revenue. That's our first goal. Just after the close of the acquisition, we asked the ForRent salesforce to meet everyone of the unique customers 2 times as soon as they could and they delivered. The Net Promoter Scores for these visits were similar to the NPS for the Apartments.com sales team, from about 9.6 on a 10 points scale. Obviously, very positive feedback to the integration of the two companies. We believe this will lead to a significant decrease in cancellations as the ForRent customers see the benefits of having a great network that generates more quality leads. We have offered ForRent customers more exposure on the Apartments.com network at no additional costs at our silver level. This has resulted in a 70% increase in the quantity of leads these communities would have received had they remained only on the ForRent website. And while this increase in leads was provided to our customers with no additional costs, we believe there is an excellent chance that many of these customers will self-select a higher price add packages just like our existing clients have done. While we only have ForRent as part of Apartments.com network for a very short period of time, we have already made a couple of important changes in ForRent lead generation practices to bring us site in line with best practices. We are discontinuing ForRent's practice of buying leads from third-party publishers, did a practice of listing syndication. This change not only eliminates the generation of poor quality leads for our customers. It also protects the high-quality apartment listing data that can only be found on Apartments.com by discontinuing the share of the state with competitor sites. In addition, we have also made important changes to ForRent's onside lead conversion process. These changes eliminate any co-registration or shot-gunning to help ensure the lease produced for the Apartments.com network customers are only of the highest quality. Our ForRent sales people are now moving to a full production mode as we fully integrate them in the Apartments.com sales team. We now have over 300 highly seasoned and trained professionals selling the Apartments.com network across the United States, which we believe will result in higher sales and revenue as the year progresses and beyond. ForRent also brings us a strong social reputational management product. We believe it may have the potential to provide good value to our clients and high-margin revenue to us. We are evaluating rolling it out to our entire Apartments.com network. Recently, I think because of [Zales] recent announcement, I feel a number of questions so what or not we might prevent begin flipping commercial buildings to drive revenue. While to be clear, that even after successfully buying our Washington DC company headquarters for $41 million in 2010 and selling it a year later for $100 million of sale-leaseback, we're not going to become flippers. We recognize that flipping is completely different process from building marketplaces or Information Services. It's lower margin, its lower quality revenue and has horrific cyclically and balance sheet risk. Instead, we expect this balance sheet with strong financial position to make strategic acquisitions and make sound investments to develop a broad myriad of great high-margin growth opportunities we see ahead of us. A prolonged slower economic expansions to low cost of capital driven the U.S. commercial real estate market the very healthy levels with strong performance. The market is very competitive and in most segments, it is the landlords and sellers who have pricing power. In the office sector, vacancy is continued to hold a 10.3% for four consecutive quarters. This is a very healthy reading for the national office market and very similar to what we saw at the peak of the last cycle in 2006 and 2007. Construction is subdued compared to previous economic cycles to expect the national office market to remain healthy overall. The apartment market has entered a fifth year of a great cycle with strong demand and strong supply. While 2017 was a big year for completions, 2018 is shaping up to be at least as strong particular. That said, while current development activity may seem extreme, it's quite modest relative deliveries seen in the 1970s and '80s with the U.S. had 100 million fewer people. Most of the new space continues to absorb, the national vacancies are at 6.4%. The homeownership rate, which had created millions of households early in the cycle, seems to be reversing to create potential headwinds for the top end of the market especially the five star apartment communities. All of this, though, is good news for Apartments.com as market competition and turnover lead to more ad spending. Total investments sales has exceeded $340 billion in 2017. Those are slight decline from $364 billion peak in 2016. Fears of inflation and rising interest rates are expected to continue to create volatility in the stock market. Comparatively, the commercial real estate market is expected to offer sense of stability even if returns come down to levels seen in the last few years. So we've gotten off to an extremely good start in 2018. Strong revenue growth, margin expansion and the strong sales are indications that our investments and execution are strong. At this point, I will now turn the call over to our extremely confident CFO, Mr. Scott Wheeler of California.

Thank you, Mr. extremely competent CFO, Andy of Washington DC.

The mutual admiration society.

So, yes, we did had a strong start in 2018, and we're excited about the trajectory of the business certainly moving forward for the rest of the year. So as Andy mentioned, our revenue in the first quarter of 2018 increased 21% over the prior year, coming in any slightly above the high end of our guidance range. Organically, our revenue growth rate in the first quarter was 16% with all of our service areas performing at or above our forecast. ForRent contributed approximately $8 million of revenue in the first quarter. Our strong revenue performance is a result of our strategic investments primarily in two areas. First, the investments we've made in research in the CoStar LoopNet integration that positioned CoStar as a premier information solution for commercial real estate professionals. Second, it's our continued investment in and an expansion of our multifamily market places, which continues to deliver outstanding revenue growth. Looking at our revenue performance by services. CoStar Suite revenue growth was 19% in the first quarter of 2018, a significant increase from the 13% annual growth rate that we reported in the first quarter of 2017 and the 15% growth rate we reported in the fourth quarter of 2017. The conversion and upset of LoopNet information customers to CoStar Suite since October and sales to former Xceligent clients are significant driver of the accelerated growth. At the same time, the sales team continues to close new business with owners, financial institutions and other customer types. As previously discussed, the revenue growth rates for CoStar Suite is expected to be in the 18% to 20% range for 2018. Revenue growth rate and Information Services were negative 18% in the first quarter of 2018. As expected due to the shutdown of the LoopNet information products. The remaining services in this Information Services grouping grew 30% in the quarter driven by continued strong performance in our CoStar Real Estate Manager business over the first quarter of 2017. With the shutdown of LoopNet Premium Searchers substantially complete, we expect Information Services revenue to decline at a rate of the negative 15% to negative 20% on a year-over-year basis in 2018. Multifamily organic revenue growth for Q1 remains strong at 23% over the first quarter 2017 while one month of acquired ForRent revenue increased to total growth rate to 37% in the quarter. Going forward, our integrated multifamily sales force will only sell an integrated network product. Accordingly, we will longer be able to identify specific revenue as either organic or acquired. Going forward we will only report on multifamily revenue and the related growth in total. Regardless, our revenue expectation remains unchanged. With the addition of ForREnt, we expect multifamily revenue growth of 40% to 45% for the year. Rounding out our services performance, commercial property and land grew 19% year-over-year in the first quarter 2018, slightly above the 18% revenue growth we reported in the full year of 2017. Organic revenue growth normalizing for the May 27 acquisition of [indiscernible] was 12% in the first quarter of 2018. We continue to expect organic growth in commercial property and land in the 12% to 14% range in 2018. Our gross margins came in at 77% in the first quarter, in line with the fourth quarter of 2017. The reported gross margins are expected to be lower in the second and third quarters of 2018 due to the purchase intangible asset amortization that's associated with the acquisition of ForRent. When you exclude these non-cash dramatizations, gross margins are expected to remain in line with the first quarter of 2018 throughout the rest of the year. Operating expenses of $158 million for the first quarter were well below our expectations and reflect the heightened focus on cost efficiency and margin improvement as we progress through the year. Approximately $4 million of the expense favorability into our forecast was related to the late timing in some of our marketing spend within the year, while the balance related to resource savings and efficiencies across the business. Our first quarter adjusted EBITDA of $84 million was approximately $12 million above the midpoint of our guidance range, resulting from the strong revenue results and the operating expense favorability I mentioned. The resulting adjusted EBITDA margins of 31% is 400 basis points above the midpoint of our guidance range and 300 basis points above the 28% margin we achieved in the first quarter last year. The impact of ForRent on adjusted EBITDA was approximately negative $3 million in the quarter as is expected. Net income for the first quarter of 2018 of $52 million increased 136% or $30 million compared to Q1 of 2017. Income from operations was up 42% year-over-year while interest income increased and interest expense decreased as a result of our strong cash position and the debt restructuring that we completed in the fourth quarter of 2017. To top it off, our effective tax rate was only 6% in the first quarter, reflecting benefits from the federal tax law changes and the incremental tax benefits on share-based payment transactions that happened in the quarter. Non-GAAP net income for the first quarter increased 75% to $60 million or $1.65 per diluted share and includes adjustments for stock-based compensation and acquisition related expenses. The non-GAAP net income assumes the tax rate of 25% which is not included the discrete items such as the impact of share-based payment transactions. Finally, in the first quarter, we completed our exciting implementation of the new revenue recognition standard know as ASC 606, which primarily affects our accounting for sales commissions. You will notice now that we have a nice bright shining new $75 million deferred commission cost asset in our balance sheet. In the first quarter of the year, our commission expense was approximately $4 million lower than it would have been under the previous accounting. We estimate for the full year 2018, our commission expense will be approximately $11 million to $13 million lower most of which was already included in our previous forecast. Now let's take a look at some of our performance metrics for the quarter. The end of the first quarter, our sales force totaled approximately 905 people, including the addition of the ForRent team. Following some staff reductions earlier this month related to the integration of the apartments sales force, the current total is about 855 people. We delivered $54 million in net bookings related to ongoing services in the first quarter of 2018. The negative net new bookings from eliminating the LoopNet Information Services results in companywide total net bookings of $35 million in the quarter. Adjusting for the onetime reduction in LoopNet Information Services in both comparative quarters, the net bookings have grown going services increased 48% in the first quarter of 2018 versus the first quarter of 2017. Sales and CoStar Suite in commercial property and land both showed strong year-over-year growth in the fourth quarter. Renewal rates on annual contracts was 91.3% in the first quarter of 2018, up from 90.3% in the first quarter of 2017 and unchanged from the renewal rate achieved in the fourth quarter. Renewal rates for customers have been subscribers for 5 years or longer was an impressive 97%. Subscription revenue and annual contracts accounts for 79% of our revenue in the quarter, up slightly from 78% this time last year. I'll now discuss our outlook for the full year and the second quarter 2018. Based on strong first quarter revenue and sales results, we are raising our 2018 revenue outlook by $2 million in the midpoint from our previous guidance. Our new 2018 revenue outlook is expected in the range of $1.174 billion to $1.190 billion. This revenue range implies an annual growth rate of 22% to 23% total growth compared to 2017. We expect revenue for the second quarter of 2018 in the range of $292 million to $295 million, representing top line growth of around 24% at the midpoint. In terms of earnings, we are raising our guidance range for the full year of 2018 by $0.43 at the midpoint to a range of approximately $7.44 to $7.64 for non-GAAP net income per diluted share based on 36.6 million shares. We expect adjusted EBITDA to be in the range of $380 million to $390 million for the full year of 2018, an increase of $15 million compared to our previous outlook and a 120 basis point improvement in adjusted EBITDA margins for the year. Year-over-year, we expect adjusted EBITDA growth of approximately 35% to 40%. For the second quarter of 2018, we expect non-GAAP net income per share in the range of $1.25 to $1.34 and adjusted EBITDA in the range of $66 million to $70 million. We expect the second quarter to be the low point for adjusted EBITDA margins for the year as we increase our marketing spend for the start of the peak apartment rental season. Margins are expected to increase sequentially to the third and fourth quarters, and we expect to exit 2018 achieving our stated goal of 40% adjusted EBITDA margins. Overall, I believe the strong start to 2010 positions us to continue our revenue growth trajectory, and we plan to continue to manage cost and investments for margin expansion. I look forward to updating you on our progress throughout the year. With that, we can know open up the call for questions.

[Operator Instructions] And our first question from the line of George Tong with Goldman Sachs. Please go ahead.

Hi, thanks, good afternoon. Your EBITDA came $12 million ahead of the midpoint guidance for the quarter and you're reading full year EBITDA by $15 million. You touched on the $4 million of delayed timing of marketing spend. Can you elaborate on the remaining sources of upside surprising the quarter? And what areas you feel more confident in for the rest of the year?

Yes, George, thanks for the question. Yes, what we're seeing really is that refining good efficiencies across a number of our areas, all related primarily to the resourcing levels. So we don't need to add as many resources to get some of the productivity. You heard Andy mentioned the productivity we're seeing in research, and we also saw some good productivity across some of the different marketing programs we run. And the last area as I said we look at the synergies we're going to get out of the ForRent business and we are ahead of what we expected at this time regarding the headcount reductions that we just talked about, and so that's also helping us feel more confident about we're going with the cost for the rest of the year.

Thank you. And our next question from the line of Peter Christiansen with Citi. Please go ahead.

Good evening. Thanks for the question. Nice trends guys. The sales force here - the CoStar sales force has got a lot of going on here. You obviously - pricing integrity initiative, moving in marketing, Xceligent transition, LoopNet conversions and then the normal day job. What's your expectation here for - how this could impact, I guess, organic activity? And what do you think the timing is until you could see some of these initiatives kind of taper off?

Okay. So and I left out another one, which was a focus on more face-to-face meetings with existing clients for a better service course. So you're right, there's a lot going on. And the reason there's a lot going on is because we have a lot of opportunity. So all these things are good things. And realistically, we're looking at where we are and the business has never been stronger. So we're thinking about things optimize the business longer term, intermediate term, and we are doing some important moves like watching the pricing, being more aggressive with the pricing, making sure we're driving both LoopNet sales and the CoStar sales of these clients. So I anticipate that over the course of the next three to four months, five months, that will create a little bit of churn. But that's a great sales force. They'll pick it up. They'll be a limited change added as it goes but we'll come out of it with an even more productive sales force. Even external productive but this will bring us what I think is optimizing our revenue opportunity. So looking out, it's probably in the fall, where you start to see a real traction pick up from it, maybe late summer.

Thank you. We'll go to Andrew Jeffrey with SunTrust. Your line is open.

Hi, guys. Thanks for taking the question. Impressive performance on the Xceligent and across all efforts in the lift and resulting with pricing. Andy, can you maybe frame up what the tail on that is? In other words, I'm assuming some of those customers are smaller, maybe on average than existing suite customers. And as a consequent over time, they could grow via source against I guess same-store sales growth as it where. Is that sort of layering effect over time that you can think about?

Yes. So a lot of folks are going after. I mean, one of the things we really want to stress is that when we - that pool of 80,000 is still there. It's still an enormous, enormous opportunity and that five person, three -person, 10-person shot category, and that separate these things from the opportunity continue to sell the bank's owners and institutional players. So that broker segment is massive, and we are very confident that they haven't gone anywhere. We're in the process of either getting them to stop stealing and pay for it or just converting them and selling them up. As we do bring them on, you can see from the comments that we have two distinct really valuable products for these people. One is the information service CoStar and we're also getting additional seals on those LoopNet subscriptions for marketing and lead generation. These same brokers are the folks that can set up introductions for us to the owners they represent who tend to buy higher end ads, which I think has a lot of traction. So it is - it's really a gift that keeps on giving and it's a lot of opportunity for same-store sales going forward.

Thank you. Our next question from Brett Huff with Stephens. Please go ahead.

Good afternoon, guys. Can you hear me okay?

Yes.

Great. Congrats on a nice quarter. Andy, I want to circle back to something you said. You kind of sized up the overall annualized revenue opportunity from the Loop upsell as well as the Xceligent, I guess, called opportunity now that they're largely gone. Can you remind us of what you think those numbers are, kind of conservative to more optimistic range, make sure that we're all kind of thinking about this over the next couple of years correctly? Thank you.

Sure. So I would say that Xceligent is more largely gone. They're gone in the large way. But there's an intersection between the LoopNet and the Xceligent audience. So probably, 50%, 60%, maybe 70% is Xceligent customers were also using LoopNet. They start of fill gaps back and forth between them. And so there is a universe of 80,000 we look at, and that to me, I'm very comfortable that audience represents well over $100 million of incremental high-margin revenue. And we are taking our time to make sure that we price that correctly and that we're not rushing and that we're optimizing that opportunity. So it's - you can see the price points we've been achieving, just under 500 level, and again, the folks were coming in at typically $54, they're paying us $54 on average. They're coming in close to $500 net increase, so it's a huge, huge opportunity.

We'll go to Bill Warmington with Wells Fargo. Please go ahead.

Good afternoon, everyone.

Hi, Bill.

So a question for you on the growth in net bookings number. You talked about $54 million growth bookings less the $19 million in cancellations, giving you $35 million net. So my question is, how much of the $54 million was from Premium Searcher users converting to the Suite users? And I'm trying to get a sense for what the normal cancellation level is going to be like going forward and what the normal conversion level is going to be like going forward.

So most of that -- I would say that the impact of the 1.9 million cancellation is going to - I think most of that is future opportunity. So as you - I would say that occurred what, in what month exactly as Scott? Was it February?

In January…

And they really got noticed in March.

Now, February is when we got them all shut off you're referring to.

Yes. So it's really - we didn't see any much impact to the positive from that shut down. We expect that to happen over the next 9 months or so. And I guess it would be about, what, 1,000 to 2,000 loops in up-sells in the current …

Yes.

But probably half of that was unrelated.

Yes, and we didn't see shutdowns coming in the quarter so much. Those coming following quarters really from the things we've notified previously in the Xceligent from the last quarter.

So it's more geared towards Xceligent side.

Yes.

And other opportunities, which probably majority driving it. Does that answer the question?

One moment please.

Yes, thank you very much. And I have this, normally do this on Thursday, I wanted to say have a good weekend but then I realize it's only Monday night.

Yes, someone sign me up on a keynote speech on Thursday at 11 so sure to get jammed up this week, so we're doing it Honolulu time this week.

Okay. All right. Thanks.

And we'll go to David Ridley Lane with Bank of America Merrill Lynch. Please go ahead.

Sure. So some Apartments.com competitors are offering new different pricing models such as cost for lease type of pricing. Curious if that's something you'd be willing to explore. And if I could sneak in another, with the increase in organic search Apartments.com, how does that play into your longer-term or medium-term thoughts on advertising costs on the apartment side? Thank you.

Okay. So, yes, there are number of people who are working cost per lease models. Generally, those are folks who have a weaker value proposition to the apartment communities. So if you're the clear leader in this space, people look at you as the primary source of filling up their property. They're willing to have a fixed subscription amount with this. And that is the preferential - that's a better situation to be in. If my traffic or my lead flow is lower, then I say, hey, guys, look, if I can't deliver anything, if I can't deliver anything to you, you don't have to pay anything. So you just pay me if I can show you get a lease. So it's something that we might consider as a low-end but not at the institutional end. At the institutional we're driving a consistent steady flow, the primary flow of leads some of these big communities that would only make sense for us at the mom-and-pop level. And I've spoken to some of the folks you're talking about whether are doing that cost per lease models and they're pretty frank about saying we wish we could do subscription pricing but we're not as strong as you are so we had to do cost per lease. The organic traffic is obviously mind-boggling. The keyword share we have now, the organic keyword share is mind-boggling and really strong. So congratulations to Fred Saenz and his team for producing that. I don't think that changes much on the advertising spend. That's one of the reasons why we do so well there is we have a good duration, a little people up to click on it, so when it served up, it's often a successful serve up which then reinforces our organic ranking. So I think the two work off of each other, and it's a good thing. With growing margins, we're going to keep working to see more of it.

Thank you. And our next question comes from the line of Mayank Tandon with Needham end Company. Please go ahead.

Thank you. Good evening. Maybe for Scott. Scott, in terms of long-term margins, if you could just give some thoughts around how you're thinking about it directionally, especially given that we'll see these synergies from ForRent, the high-income incremental margins from the LoopNet upsell and, of course, the inerrant leverage in the business of the business. So what other puts and takes we should be considering as we model up the long-term margins for CoStar?

So clearly, we're focused on getting through this year with the margins getting up to the 40% by the end of the year. And as you've seen, it's a combination of strong operating leverage as we drive revenue, and the operating leverage requires that we make significant investments in future growth of the business often to the P&L that come ahead of obviously when the growth comes up. So as we're thinking further out, we're looking at one of those investments we need to keep making. Like the research investment, like the apartments investments I mentioned. Those are driving significant revenue growth, although they're a year or two sometimes lagging when we make the investment. So as we start to plan for 2019, we're going to look at all those opportunities for investments and will they drive revenue growth. And then once we get that spent together, we will start to talk about where we see the margins going further. What we're doing at this time is putting out another big margin target like we did with the 40%. We're going to evaluate where we are as we got further in the year and then give you some further guidance as we get later in the year.

And we only have two margin - big margin goals simultaneously running. We'd rather achieve 1, get the trophy and then set another goal.

More to come.

And our next question from Mike Crawford with B. Riley FBR. Please go ahead.

Thanks. Furthering your earlier comments regarding greater research productivity, is there anything you're investing in from a technology or analytics standpoint that we should look out for?

Sure. I mean, I would say that it's next to impossible to beat the performance of listing managers so far. So I think that was a big - that was a decent sized technology effort. We put a lot of effort into the UX to make sure that it was a seamless experience. It was intuitive. We'll continue to do that, and that technology investment has led to something that could save us well north of $10 million a year ongoing, may be even more than that. And at the same time has increased the quantity of data and client satisfaction. We're doing - we do have a slightly different structure now. We have a dedicated software team down in Richmond for supporting our research operations. We're doing across the whole system. We're seeing some really interesting potential in research product that comes out of technologies, so things like we're starting to learn more about what customers want from their search behavior and that actually becomes data in and of itself. So for instance, if you're conventional list says that [people 16 over] want two bedrooms. Well, Apartments.com now showing us that's free, that's actually people want one bedroom based on the subjectivity we're seeing. We're doing more robots to scrape websites and serve up content there and observe content. So we have, any given point a dozen to two dozen initiatives in technologies for our research operations. But the silent - the emerging big decade-old winner is listing manager and impact on our bottom line that is going to have is really, really hard to beat in the same quarter.

And our next question from the line of the Sterling Auty with JPMorgan. Please go ahead.

Thanks. Hi, guys. This is Jackson Ader on for Sterling tonight. A question from our side. It sounds like the opportunity to go after some of these is pretty large but can you size maybe the annual spend that's going to be required to get some of these guys to start paying you?

I think we've found - you're right. The prior audience is pretty big. And the fact that we were spending so much time and effort with Xceligent probably diverted our attention away from these folks a bit. We did invest about a year ago in building our technology, our own facial recognition, pattern scanning, device recognition. We did invest a lot about a year ago in technology tools that are available now, which will support this effort. Typically, when you approach someone with really compelling clear evidence that we know they have been receiving the product, nine out of 10 or 19 out of 20 just want to, like you caught me, I'll pay up. And so you're typically only litigating one in 20, which would still be a lot. But I think that if you just show people who read that they just can't get away with this, I think you can move your ratio up to 49 out of 50 will work something out with you. So it had to be able to share that you're willing to litigate the lots support your side, which it clearly does. Someone that is using CoStar illegally and producing reports and printing out photos, subjecting themselves to potentially hundreds of thousands of dollars of damages under the law. So we think it'll cost a little bit but nothing like we spent last year in Xceligent.

And our next question from the line of Stephen Sheldon with William Blair. Please go ahead.

Hi, guys. Thanks for taking my questions. I guess just at the midpoint for the second quarter it looks like the guidance only calls for about 30 basis points of margin expansion on an adjusted EBITDA basis. I think you talked about increasing marketing spend and multifamily. So I guess just any color on the planned incremental spent on that, and is there anything else to point out that will impact margin expansion in the second quarter?

Yes. Two big things for second quarters, like you pointed out, the marketing spend. So we do have the most significant second quarter marketing spend that we've - we'll ever had in the second quarter, so that definitely does cause and effect. And then the second is we've got the first full quarter of the ForRent cost coming into the second quarter. So that's going to dilute a little bit more in the second quarter and is going to show these cost moving sequentially. Obviously, as we continue to do our integrations and those will moderate over time, but those are the primary drivers in the second quarter for us.

Thank you. And we'll go to Patrick Walravens with JMP Securities. Please go ahead.

Okay, congratulations. So I feel lucky that I get to ask the strategic acquisitions question towards the end year…

Acquisitions we're not really…

You talked about the whole $50 billion real estate opportunity. What - can you share with us in terms of your sense for timing? And is the market receptive? And sort them which area you see most interesting?

Well, we are actively looking at and considering a whole range of opportunities, and it is a broad and significant range of opportunities for sure. There are some things we're a little more excited about than others right now, and I think it's a combination of what is the most strategic and important initiative we could engage in about resources too as a company coupled with at what price can we acquire those assets. So we are looking to - right now, I could roll-off 12 companies that I think will be a great acquisitions for CoStar, but they are great acquisitions for CoStar at the right price on the right terms. So we are patient investors, and we will continue to churn away at finding that next opportunity, but we're not going to be just jumping because we have cash on hand and balance sheet on hand. And we also for another two to three months want to not take ForRent for granted as the largest acquisition we've ever done by revenue and one of the largest ever that we've done by staff. So we want to make sure we do that right. Has there been anything larger by staff?

None.

Yes. So when you got a big 1, you should never eat anything larger than your head. As I want to make sure we get this 1 done properly. But we're busy. We are busy. We have not changed our stripes. We just haven't pounced yet.

So thank you very much. I think those are a great group of questions, and thank you for being flexible as we approach our 20th anniversary as a public company for the first time, we changed to a Monday evening. We will try in the future to not let people schedule speeches for me on the same time as the earnings call. Thank you very much.

Thank you. And, ladies and gentlemen, this will conclude our teleconference for today. We thank you for your participation and for using AT&T Executive Teleconference Service, and you may now disconnect.