Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter and 2018 Earnings Call. At this time, everyone joining by phone is in a listen-only or muted mode. And then, later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, the conference is being recorded. And I’ll now turn the meeting over to our host, Rich Simonelli. Please go ahead.

Thank you, operator. Welcome to CoStar Group’s fourth quarter and year-end 2018 conference call. Before I turn the call over to Andy Florance, CoStar’s CEO and Founder; and Scott Wheeler, our CFO, I've some really interesting and important items for 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 press release today on February 26th for our fourth quarter and year-end earnings as well as the Company's outlook and in CoStar's 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 on the time of this call. CoStar assumes 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 the non-GAAP financial measures discussed on this call including, but not limited to non-GAAP net income, EBITDA, adjusted EBITDA and forward-looking GAAP guidance are shown in detail in our press release issued today along with definitions for these terms. The press release is available on the Press Room section of our website located at costar.com. As a reminder, today's conference call is being broadcast live and in color on our website we can also find CoStar’s Investor Relations page. Please refer to our press release on how to access the replay. Remember one question, so make it a good one. I'll now turn the call over to Andy. Andy?

Rich, that was authentic and moving. Thank you.

You are welcome.

Thank you all for joining us for CoStar Group's fourth quarter 2018 and year-end earnings call. First number I want to focus on is our adjusted EBITDA margin in the fourth quarter, which was 44%. By achieving that strong margin, we have successfully accomplished an important financial goal. Five years ago in 2014, we set two key long-range financial goals for 2018, one was to achieve $1 billion in annual revenue; and the second was to reach 40% adjusted EBITDA margin for the fourth quarter of 2018. Today, five years later, with $1.2 billion in revenue for the full year 2018 and a 44% adjusted EBITDA margin in the fourth quarter, our team is pleased to have solidly delivered on both of those goals. Delivering this sort of consistent growth is on target with our long-range record of good growth. Since 2011, we've achieved a 25% compound annual revenue growth rate, which is in line with our 20-year compound annual growth rate of 25%. For the full-year 2018, our adjusted EBITDA margin was 35%, over 600 basis points of improvement over 2017. EBITDA in 2018 was $351 million, an increase of 48% compared to $237 million for 2017. Net income was $238 million in 2018 compared to $123 million in 2017, a 94% increase. The past five years have proven that we can grow the top-line, expand margins and still make significant growth investments into the business. Some of those recent investments include the Richmond Research Center, expanding and marketing the Apartments.com network, growing our sales team, integrating the CoStar and LoopNet databases, and expanding our Canadian and European businesses. Our most significant growing investments are products and software development. Those investments have allowed us to build powerful, profitable businesses with strong leadership positions with CoStar Suite, the Apartments network,…

Thank you, Andy. It's a great introduction, feeling very accomplished today. Let me go raise my chair a little. I feel better up here. Great. Yes, 2018, what a great year we had for CoStar, very strong growth, we acquired three businesses, we invested for our future and we expanded our margin over 600 basis points. On top of that, I, for one, am happy, we can put these old tired long-term goals behind us and move on to multibillion land next. All right. Let me start with some insights on our revenue results, which in the full year of 2018 increased 23% over 2017 while our growth rate in the fourth quarter of 2018 was 24% versus the prior year. Looking at our revenue performance by services. CoStar Suite revenue growth was 18% for the full year 2018, as expected and 16% in the fourth quarter of 2018, coming in slightly above our 15% guidance range. CoStar Suite sales were very good in the fourth quarter as we continued strong conversion of our LoopNet users to CoStar and we completed the long-term contract renewals with all CBRE and Marcus & Millichap Andy mentioned. As we head into 2019, we expect the CoStar Suite growth rates to moderate sequentially as they did in the fourth quarter of 2018 and settle in, in the range of 11% to 13% for the year. There are a couple factors converging here to note. First, we fully lapped the very-high revenue growth quarters that followed the LoopNet integration and the Xceligent bankruptcy. Second, we have a sale substitution effect here as our CoStar sales force is focused on selling more LoopNet to accelerate the growth of that marketplace. In total, the team is delivering more-combined sales, in fact 20% more in 2018 than in…

Good afternoon. Thanks for the question. Andy, there's been some deal activity in Europe recently. And I don't want to point to one deal specifically. But -- and there's also some startup activity in Asia, similar models as CoStar, which I think is the testament to your financial model. But, the things like this, I'm not pointing to one deal specifically, change the calculus in terms of when and how CoStar is thinking about making international more of an investment priority.

Well, thanks, Peter. We are putting a significant amount of effort into our international operations. You'll see that when you look at our outlook, we have significant capital going into our European and Canadian operations. We think that some of the deals, I believe you're referencing, are interesting, but they're not direct parallels to what we're doing. So, they don't really shift the competitive picture in any which way. There we’re watching that and if something came up, that was really interesting we would participate in that. But we're going to continue to be aggressive but measured internet our international operations. But to it, I'll be over there next week. So, we're watching it and continue to build the operations there. We are -- I think at this point we have eight of the top 10 firms in Canada as clients now. And I think we are 9 or 10 of the top 10 in the United Kingdom. So, we’re doing well and Germany is continuing to do well, France and Spain continue to build there. So, we're watching it but not dramatically shifting.

Thank you. And we have a question from Andrew Jeffrey with SunTrust. Please go ahead.

Hey, guys. This is Oscar Turner on for Andrew. My question is on the incremental investments. I was wondering if you can quantify the incremental investment towards a couple of the top initiatives you talked about? And then, how should we think about the incremental revenue growth that those investments can drive and timing of the growth acceleration in, and LoopNet and Apartments?

Yes. Let me cover a bit on the investment side and then we can talk a little bit on the outlook from. The bigger ones we’re really focused on this year really the marketplace build-outs both for LoopNet in the U.S. and then the marketplace in the UK, which is the backbone of our Realla business. We think we'll probably have between $20 million to $25 million of investment that will go in to building those platforms out, which includes marketing and other capabilities. Then, we have the independent owners investment that Andy mentioned, which you already have a decent amount of investment going in currently and I think we'll ramp that up by another $10 million or so next year. And then, the build-out of the CoStar platform with owners, lenders, promoting some of the listing manager work we're doing in software with -- along with some more marketing in CoStar, we think those probably another $10 million to $15 million of costs and investments there. When you look at our cost growth, we figured it a little bit less than half of our cost growth. It really has to do with investments we made in 2018 that annualized in 2019, or labor increases, inflation, those types of things. So, little less of the cost growth is for year-over-year and normal business operations and the rest really I think going into new investments that really benefit the future years and future revenue growth. I don’t Andy if you want to talk about the revenue outlook -- estimate?

Yes. I think that the revenue return on LoopNet is a reasonably short cycle. There’ll be a pretty aggressive focus on that product are investment, that product over ‘19 and ‘20 but we think we’ll see results coming from them in the back half of ‘19 and ‘20 and then ongoing. And then, with the IO market, that's probably the more meaningful results there are probably in 2020. And then, for the increase in the Appartments.com budget, we think that while we are taking share and leading the market, we want to keep the pressure up and accelerate to keeping share to widen them out and increase the lead. So, it's a range of different outlooks on these. And we feel pretty solid about all of them.

Our next question is from the line of George Tong with Goldman Sachs. Please go ahead.

Hi. Thanks. Good afternoon. You’ve outlined goals of reaching $3 billion and run rate revenues by the end of 2023, which implies at least mid-teens annual revenue growth. Can you discus how much pricing will contribute to these growth rates, given your previously discussed plans to eliminate discounting in CoStar Suite and potentially increase rate cards in the multifamily segment?

Sure. Don't believe the majority -- the substantial majority of this will be price increases. We think that across Europe and Canada and the United States, there are a lot of new revenue opportunities, new customers, additional modules to be purchased, increased purchasing. So, we think a lot of this is share gain and share of wallet. The pricing increases on places like LoopNet, you're shifting your priority from selling a basic ad to a broker for $50, $60 to selling a -- it certainly looks more like an Appartments.com ad with really impactful presentation, sort of the top with more features, and you're selling it to an owner with a lot of economics at stake. And office can be different properties in that mix. And then, new price could go from $60 up to $6,000 a month. So, there is sort of shift in the budget, shift in the priority or shift in the target audience, shift in the priority. We don't anticipate getting the $3 billion in revenue by simply increasing the same customer’s price for the same product.

And we have a question from David Ridley-Lane with Bank of America. Your line is open.

Good afternoon. Can you talk a little bit about the details of the LoopNet site relaunch, whether or not you consider launching a separate brand to differentiate between the up-market and the down-market there? Thank you.

That's a good question. And it'll be a little challenging to go into too much detail on it. We have thought about that. We don't think we need to do that. We actually are going to initially go to market really focusing on the branding of CoStar marketing network. Because if you own a say -- expected of new office building in Washington D.C., we're actually providing our customers with a whole range of marketing solutions. We enable that owner to reach the professional community by carrying these ads into the CoStar network. We're carrying them into CityFeet, into Showcase into CoStar, we also power websites through LoopLink. We also have email marketing campaigns through CDX direct, our direct email marketing product. And then, we've got tactical and analytical support where we can produce analysis on the amount of demand and supply for the particular kind of products you're producing and where you may want to position the product and pricing or how you may want to subdivide it, or what terms you may want to consider. And then, we're also uniquely providing the biggest end user audience through LoopNet. So, we can -- and there's two or three other items. But as we put all this together, we're going to simplify it into a network sale, the way we simplify Apartments.com into a network sale. And LoopNet is just one component of this whole range of very valuable marketing solutions for getting a property lease at the best price in the shortest timeframe on huge economics. And then, we think that over time as we shift the way LoopNet looks and feels and it goes -- it becomes much more polished, has more breadth of data, has a lot of content, articles that demystify some of the leasing process and investing process. As we shift it from industry jargon to more plain English, as we add in a lot more sort of exciting shopping characteristics, stuff like where are the best places to eat launch at this particular property, what your community’s going to look like all that kind of stuff. We think the LoopNet brand itself will be a good brand to carry because it's already super well-known. And what we're doing is just moving it more up market and targeting a slightly different audience while continuing to target the original audience. So, we think we're pretty happy with the CoStar marketing network at this point.

And our next question is from the line of Brett Huff with Stephens. Your line is open.

Good afternoon, guys. My question is on the Suite mix in sales. I think, one consequence of having Suite sales people also sell LoopNet was a little bit of extra juice for LoopNet and a little bit less growth in sales for Suite. We get some questions sometimes about penetration rates of Suite and are we getting to a point where those are starting to trickle off. Can you illuminate kind of how do we know that the mix of sales is a result of just kind of effort level being different versus maybe reaching the harder to reach TAM areas of that market?

Well, when you ask has CoStar reached the saturation point, all I can say is, huh! So, yes, I mean, absolutely not. There are so many different ways that the CoStar product is growing and adding more value. In preparing for this earnings call last night, I was just curious about some of those apartment stats and what the mix of units are different. And I was like, well to go into CoStar and pull some of this data according to company estimate. And man! What a phenomenal product. The ability to like -- actually get a really good data on the mix of apartment units of different sized community, it didn't exist in the product a couple years ago is invaluable. I can't imagine someone investing in the apartment sector without that information. I've been at this -- as we mentioned, I guess since we went public were approximately 25% compound annual growth rate. At the point we went public, there was a lot of discussion about the fact that CoStar was saturated, and five years before that there was discussion around CoStar saturated. I spent my entire career hearing about CoStar is saturated pretty much from the really the first or second year we launched CoStar. In my view, not a chance, not even a chance. Unfortunately, if I work another 20 years like my dad, I will not outlive the potential to saturate the CoStar market. But, it's just one man's wishy-washy opinion, but solidly no.

Our next question from the line of Mayank Tandon with Needham & Company. Please go ahead.

Thank you. Andy or Scott, I just wanted to kind of dig in a little bit on the EBITDA trajectory for 2023. Maybe, Scott, you said, they won't be linear which was always to be expected. But, if you could just talk about the various levers that get you to that 40% target, and maybe you could talk about it by segment in terms of where you think the profitability will come from across the three different business lines?

Yes. So, the margin accretion, clearly you can throttle it pretty rapidly as we just showed this last year. We had 600 basis points. And then, the year, for example, in 2017, when we did the research investments, we slowed it back down and had modest margin growth. It's not inconceivable to see 100 to 200 basis points margin growth a year pretty simply, and still have room like we have in this plan for 2019 to make significant investments for future growth. So, that's all pretty stable from an organic perspective. And I can see us getting -- if nothing else changes and you keep driving this organic growth, you certainly can get over that 40% margin in the business, can capably do that in the five years. The real wildcard in some of this is the amount of acquisition we're going to be doing, the margin profiles of acquisitions that we buy, how that dilutes over time. And so you heard us be a little bit cautious in saying it's 40% plus, and that really depends on what happens with the acquisition path, what those look like, and the timing of them and then how long it takes to move the margins of the businesses we acquire up to our natural margins. When we look at the margins of the different product sectors that we’re in, our marketplaces typically run the very highest margins that are 50% plus margin profiles in the marketplaces and then now with CoStar being in that historically 30% to 40% range, depending on the investments we make, you're going to see both sides of the business grow pretty substantially. I think, you'll see apartments obviously will outpace CoStar in a couple years, given our current growth trajectories. And so, I think you'll get that information in investment side of things coming in the 30%, 40% margins, see the marketplaces as they really continue to scale rapidly, moving up in those 40%, 50% plus margins.

Furthermore, CoStar is not in any way saturated.

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

Good afternoon, everyone. So, I’m a history major, so sometimes I need a little help with my math. So, I wanted to run some math by -- and you could tell me what I'm doing wrong. If you look at CoStar Suite and how that was about 18% last year, and if you look at -- if you kind of back out 15 to $20 million of revenue from what you did this -- during the fourth quarter, that would seem -- but then, I don’t you don't you know specifically break out, but if you assume that and that would seem to imply something in the upper teens is the organic growth for the quarter. And then, if you look at the net bookings coming in about $50 million in Q4 versus a tough comp and you average that out into 2019, that would be about $200 million for the year, which versus 169 would be up about 18%. I guess what I'm getting at is that the leading indicators on the revenue side seem to be pointing to something closer to 18%, mid-teens going to the upper teens. And I just wanted to run that math by you and see if that was the same math you guys are getting.

Bill, as I do that math, I start to think that Scott is somewhat conservative.

You have a lot of selling to do this year, people….

Always got -- the climbing you’ve been doing has been on a mountain of sand, right?

Pick up the pace.

We had a better crystal ball on the quarterly sales numbers, Bill, and we watched this for so long. You see how they bounce up and down. $5 million swings quarter to quarter isn't unheard of depending on what we're focused on, what part of the business we're generating, timing of renewals on contracts. So, we always want to make sure that we don't get too far ahead of ourselves when we have a lot of plans for the year. And we'll continue to start the year that way and hopefully we'll get to the point where you can do our forecasting for us, because your numbers will be a lot better than mine, I'm sure as we keep going. But we did have a good quarter in the fourth quarter, but those bounce around between quarters. So, we'll give ourselves time to sell out from under those in the first two quarters of this year.

And we have a question from Sterling Auty with J.P. Morgan. Please go ahead.

Yes. Thanks. Hi, guys. I was just wondering if CoStar's opportunity is saturated?

Would you like to have a different question?

Yes. Actually, I would, I would. I wondered actually, I think the comment in the call around the investment in sales headcount increase is that they'd be modest in 2019. So, I'm curious where the focus of those added heads will go. And when you think about -- you talked about some of the other increases in budgets and investment. What's going to be the focus of it? I imagine multifamily, you talked about the marketing campaign, but just to wrap our heads around the structure of the investments in 2019?

Yes. They run broadly in line with the numbers I gave a bit earlier on I think someone asked one of the other questions of how much we're spending in the different investments. And those are broadly people driven. The marketing side will be concentrated clearly more on the apartments in the LoopNet side, that's where the marketplace is set. But we are adding a decent amount of resourcing into to LoopNet, into technology. And then, when we say modest for sales, I consider that's less than 10%, which is still -- could be 50 to 75 people easily for sales force of that size. So, our big area of research, we're finding that they're getting so much good productivity, that's one area we don't need to add a lot of people as our Listing Manager products are freeing up resources that we then deploy on to owner and lender products and into helping support LoopNet. So, it's not going to be in the research world, it's going to be mostly in technology and the resources going into the building those investments and in the international marketplaces and independent owner space.

I have to say that if I were to look at my wish list from beginning of 2018 on the sort of structural improvements, we would like to complete on our sales force, we have -- I feel that we've accomplished a lot of those goals. We have one or two things to do in terms of go-to-market strategy on major accounts in CoStar. But over the years, I don't think I've been to place where I feel like our sales force is more stable than it is now. We've got a good Appartments.com sales team led by Paige Forrest who is a very-experienced sales professional. We got Max Linnington doing a fantastic job. What's happening now is really tweaking a strong group. And we're still probably a year out from anything that would be a major structural change, driven by a change in our acquisition or some other significant change. So, we're in pretty stable place.

And we have a question from Stephen Sheldon with William Blair. Please go ahead.

Hi. Good evening. So, you talked about building out software platforms to integrate more in the rental leasing process and moving past leads with Appartments.com to more the execution side, which appears to include Cozy. It makes a lot of sense but I also wanted to ask about how this could impact your ability to extract data from the rental cycle. So, beyond just alleviating pain points, is this also about getting and integrating more and better data into your core database?

That's one of the nice things that we love about the marketplaces. The fact that you're in the data business helps you to perform much more effectively in the marketplace and the fact that you then do well in the marketplace feature data business with some really exciting and valuable data. And it keeps your costs lower overall than if you were in just one or the other of the markets. So, we're able to afford to get data and content that we otherwise probably couldn't afford. We can provide consumers with information and marketplaces that we normally would never pay for, if we didn't have an offsetting revenue stream and information. So, yes, success in the IO market will generate a massive amount of real time and accounting grade data. It also gives you really interesting data or you can understand pricing and relationship to credit and risk and you also will be -- it also could have a potential of generating new sorts of credit information that's very valuable to independent owners. And the independent owner data, the data that you generate from the independent owner side is equally valuable to the institutional players because the renters move back and forth between the different markets. And so, it's all very interesting to both those groups, and certainly a Greystar property that offers a lot in a given market, it also -- its pricing is driven by what's happening in the IO market all around it in the neighborhood. There is high substitution between those two segments. So, yes, if you're data nerd, pretty exciting data coming out of the project on success.

We have a question from Scott Buck with B. Riley FBR. Please go ahead.

Hi, guys. I was curious of the $1 billion plus you have in cash on the balance sheet, what do you actually need to run the day to day operations? And to the extent that you're carrying a fair amount above that, would that suggest an appetite for doing a larger transaction within the next couple of years? Thanks.

So, I’ll let -- take that and flip it around. I’ll say that highly likely that we would do -- continue to do acquisitions as we've done successfully for 20 years. And the size of acquisitions we do, we continue to do smaller deals and mid size deals, but we keep gradually escalating the scale of some of the deals we do. So, we believe it's quite likely that we'll use that buying power to do transactions in a reasonably short timeframe. In terms of how much we…

On the cash side, we’re going to get about $400 million of free cash coming out this next year. So, we'll be adding to our cash piles unless we're doing large acquisitions…

We need new carpet.

New carpet, $399 million, $10.5 million we’ll generate this year. I think we had $300 million of free cash flow in 2018, it will go to $400 million next year. So, we definitely don't need all that to run the business. We need to get out there and keep adding new capabilities and bigger ones too.

I think with that we are done with the Q&A period. And thank you all for joining us. And don't forget, CoStar is not saturated. I'm excited about the many tens of thousands, if not hundreds of thousands of additional future clients we have ahead of us. Thank you for joining us.

Ladies and gentlemen, this conference call will be made available for replay that begins at 7:30 p.m. Eastern Time today running for one month until March 26th at midnight Eastern. You can access the AT&T Teleconference Replay System by dialing 1-800-475-6701 and entering replay access code 463809. International participants may dial 1-320-365-3844, the replay access code 463809. That will conclude our teleconference. You may disconnect.