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…

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…

[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.