Ladies and gentlemen, thank you for standing by, and welcome to the CoStar Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period. Instructions will be given at that time. [Operator Instructions] Also, today's conference call is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Rich Simonelli. Please go ahead.

Thank you, operator, and welcome to CoStar Group's second quarter 2019 conference call. Before I turn the call over to Andy Florance, CoStar CEO and Founder; and Scott Wheeler, our CFO, I'd like to share some very interesting and important items that can actually make your day. First of all, certain portions of our discussion 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 can cause actual results to differ include, but are not limited to those stated in our press release today, July 23, 2019, on our second quarter results and in our company's outlook and corporate 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 date of this call and 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 non-GAAP guidance, are shown in detail in our press release issued today, along with definitions of these terms. The press release is also available on our website located at costargroup.com. As a reminder, today's conference call is being broadcast live and in color on our website. So, please refer today's release to see how to access the replay of the call. I have a feeling, you're really going to want to listen this one again. So look up the recall number. Just remember one question. So, make it a good one. I will now turn the call over to Andy Florance. Andy?

Thank you, Richard.

You're welcome.

Thank you for joining us for CoStar Group's second quarter 2019 earnings call. In this, the week is the 50th anniversary of the Apollo 11 million landing, a slightly more impressive feat than our second quarter earnings, slightly. In the second quarter 2019, CoStar Group total revenue was $344 million, up 16% year-over-year. That's $7 million above the upper end of our guidance for the second quarter, so this is one of our biggest revenue beats. We had our best sales quarter ever, generating $59 million in the company-wide net new bookings, an increase of 32% year-over-year. The primary driver behind our exceptional sales result was a much better-than-expected Apartments.com sales. Apartments.com net new bookings alone increased 122% year-over-year in the second quarter of 2019. In each of the past three quarters, Apartments.com has beaten all prior sales records for a quarter, with the second quarter of 2019 and the first quarter, Apartments.com net sales bookings were up 44%. In my experience, there are very few times when you get the monthly sales close numbers and are stunned by how big the number is. And this was one of those quarters repeatedly. The Apartments.com sales team is performing exceptionally well, is operating at the highest productivity level we've ever achieved. We expect to reach $0.5 billion annualized revenue run rate milestone for Apartments.com next quarter. This is a major milestone for us, given that we purchased Apartments.com in 2014, with only $86 million of revenue there. From that point of acquisition five years ago to now, we have grown Apartments.com at over 40% compound annual growth rate. We believe that we have every opportunity to continue this exceptional growth rate. CoStar Suite revenue growth was strong and crossed the $600 million revenue run rate in the second quarter. We now…

That's a great story. Thank you, Andy. We certainly didn't have a terrific first half of the year, but I am going to try not to repeat that our net income for the second quarter was $63 million, an increase of 44% over the second quarter of '18. I also will not say again that our balance sheet is stronger than ever, with $1.3 billion in cash and no debt. And I'm certainly not going to tell people that we just turned in our best sales quarter ever with $59 million in bookings. That's your job. So, let me start with our revenue performance by services. CoStar Suite revenue growth remained strong at 14% in the second quarter of 2019 versus second quarter of 2018. Revenue growth rate for CoStar Suite is expected to be in the 12% to 13% range for the full year of 2019, modest improvement over our expectations we told you last quarter. Revenue in Information Services grew 33% year-over-year in the second quarter of 2019, primarily as a result of CoStar Real Estate Manager revenue growth of 57% year-over-year. This includes both the subscription revenue growth of 75% that Andy mentioned and the one-time implementation revenue growth of 25% for new customer implementations. The first half 2019 growth of Real Estate Manager exceeded our expectations, as companies continued to implement our solutions for the new lease accounting standards. As we move further past the lease accounting standard adoption dates, we expect growth rates for Real Estate Manager to slow in total for the second half of the year, as subscription revenues continue to grow but one-time implementation revenues will decline. Information Services revenue is now expected to grow at a rate of 15% to 17% on a year-over-year basis in 2019, which is 400 basis…

[Operator Instructions] Our first question is from Peter Christiansen with Citi. Please go ahead.

Good afternoon. Thanks for taking my question. And Rich, you are right about that replay. I had a question about the -- Andy, I think you were talking about, there is a portion of the Apartments.com network that is getting free ads, that is shutting off now, obviously, because of the success you've had on driving lead growth. Has that happened? Is that going to happen? And then when is that going to happen? What's the timeline? And what are you kind of expecting for those free ads turning into paid ads?

So it's happening in phases. Some of it has happened. When we first relaunched, we were running free ads for communities at all sizes on, up to 250 units, be it [indiscernible] properties over 100 units. And as we started building up more and more content and more and more traffic, we started eliminating free ads above 200 units at above 150 units, at 100 units. And we just keep on bringing that level down. And as we do that, a significant number of those folks decide to go ahead and sign-up for Apartments.com and not lose that lead flow. So the communities below 100 units, that will roll out over the course of the remainder of the year and we will be trying to build up that inside sales force fast quickly enough to be able to pursue the leads that, that generates. So it will be flexible, but it will be six months to 12 months to eliminate the freeze below 100. Now we won't -- we will continue to carry the very small communities for free for quite some time. So the condo for rent, to the house for rent, the real small stuff. And I also want to reiterate that our second quarter had $59 million in bookings.

And our next question is from Brett [ph] with Stephens. Please go ahead.

Good afternoon, guys. Congrats on a nice quarter.

Thank you, Brett.

Great to see the bookings power that can be generated. I know that this had some real positives in the conferences and things like that helping. But one of the questions we get a lot is, as we look forward, the bookings should kind of trend higher. They've been kind of around the $50 million range, up until this quarter. As you look out in order to sort of think about supporting the growth rate that you guys have talked about over your long-term guidance, the Street is sort of baked in what looks to be, you need maybe $65 million or so a quarter starting sometime next year in order to drive the kind of revenue in the out years. How should we think about the sustainability of this $59 million number? Or should we expect it to come down a little bit because it was particularly good? And then just continue to rise. And if it rises, can you tell us what the drivers of that? Because I know some sales, some pricing, give us some sort of view into how those bookings probably rise over time? Thank you.

Sure. So, I'm very excited about the Street expectations for bookings in the 60s next year, and I look forward to those earnings calls. It will be exciting. And we will repeat successful results throughout the earnings call. But the -- there are a number of different things that give you tailwinds as you go in to try to achieve those higher numbers. Like, we obviously don't know small fluctuation nuances from quarter-to-quarter. So the bookings next quarter, it could go up a little bit, it could go down a little bit. And it's not necessarily terribly material, which way it goes of slight increments. But the trend, I feel comfortable with expectations that it goes up. Again, growing the CoStar sales force materially, yes, it is a big driver. There is no shortage of opportunity. So, penetration rates for the advertising on LoopNet, new products in LoopNet, taking owner product out there, new multifamily product, student housing, analytics on the CoStar side, a lot of opportunity there. Adding a 100 salespeople to Apartments.com, the expectation is that they would sell something and that would also drive the opportunity. And as we increase the marketing, we will increase the lead flow. And then looking at the numbers, our ability to successfully sell product to 200 unit communities, 100 unit communities, 75 unit communities, 50 unit communities, 40 unit communities, 30 unit communities, 10 unit communities, means that we've got a huge marketplace to sell to, and adding additional salespeople is going to give us that ability to go address that opportunity. And then the land business, the BizBuySell business and CoStar Real Estate Manager continues to hit on all cylinders. So, there is a lot of good tailwinds there and so we're not really shy of those expectations next year.

Our next question comes from Bill Warmington with Wells Fargo. Please go ahead.

Good afternoon, everyone. So, I wanted to ask on the apartment side. If you could talk a little bit about the end-to-end digital solutions for the small landlords. Specifically, what services you're going to be providing there? The beta testing, how is that going and then what will the Q4 roll-out look like?

Thank you, Bill. So, we're -- I'm actually on my way up to -- I'm just in from Tokyo, if you can't tell that I'm a little jet lagged. Heading up to Chicago for focus groups on that over the next couple of days, we're going to be interviewing small landlords tenants on that whole new products. So, that new product is providing an end-to-end leasing solution within Apartments.com, where someone marking their property at Apartments.com can elect for online leasing, which means renters can apply directly, digitally using our applications on Apartments.com for an apartment. We screen them for credit, criminal and prior evictions. If the landlord wants to move forward with the tenant and wants to move forward, they can enter into a digital lease on Apartments.com and then we can facilitate the rent payments on Apartments.com. We believe this will be particularly appealing to the smaller landlords that don't have these sorts of solutions. We also think it will be appealing to the renters because our price points for doing an online application is typically half of what the normal fees are and we are providing portability to the applications. So, a renter who applies to one property on Apartments.com can use that same application nearly instantly for any other community within 30 days. So, it's pretty exciting and we are going to be looking at how that reaction is going. But it's early. We're just rolling it out this quarter. We'll know more after the focus groups. But one of the things that I'm -- we're looking at now is we think it will have a big impact not just on the folks running a single house or condo, but we think it will be really helpful in helping us to sell more advertising to the middle-market, the folks with 20 units, 40 units, 50 units. And that will be sold through our inside -- the new inside sales force where they'll be really aggressively going after that sector. So it's -- it's rolling out in four, I think we added one more markets. I think it's rolling in five markets in the third quarter. And based on that, we will gear it up to additional markets in the fourth quarter, but we haven't really finalized how many. And one of the things we want to do is build up that inside sales team. So, we really focus our energy on the markets we're rolling it out in intensely, so that the -- there is enough people participating in the program that, that renter application portability between multiple communities has enough scale and mass that's particularly valuable. But we will tell you more -- we'll report in on the third quarter call. On the year-end call, we'll have more color on it. It's still little early. But man, it was a lot of work.

Our next question comes from George Tong with Goldman Sachs. Please go ahead.

Thanks, good afternoon. Commercial property and land revenue growth in the quarter decelerated to 16% year-over-year from 17% in 1Q despite easier year-ago comps. Can you discuss reasons for this moderation and maybe elaborate on your efforts to go after the institutional customer channel at LoopNet marketplace?

So the -- so the sales outlook, George, is still strong for the LoopNet business. The differences you're talking about, we only moved the forecast to $1 million or $2 million in any quarter and you get a percent change on this business because the numbers aren't really that big. What we're still seeing is really good sales through the CoStar sales force or LoopNet, and Andy mentioned some of these Premium Lister sales that we're getting. And we continue to sell the signature ads. You get different fluctuations in cancels from quarter-to-quarter, which sometimes does get a little higher or then they back off. So depending on the timing of those, we tweak the forecast and tend to take a more cautious approach going out. But we're still very positive about the changes we're making and how that sales force can create momentum in the second half.

Also, our big initiative there, which is really the premium gold, platinum and diamond levels, has not effectively rolled out and that will be coming in the next couple of quarters. So, we're having a big conference pulling together. Our senior sales leaders are beginning to walk through the sales process for selling those Apartments.com like ads on LoopNet. And you're not seeing any revenue associated with that right now and that's a future revenue stream, so there will be upside.

Our next question comes from Tom -- I'm sorry, Ryan [ph] with KBW. Please go ahead.

Hi, everyone. Thanks for taking the question today. Andy, just in terms of LoopNet rebranding on your recent comment and the owner focus, can you give us some color on what the go-to-market strategy will be in the education process? Will this be more of a gradual education process, or are you targeting more of a focus launch. And if so, do you think that the sales force is rightsized following the year-to-date growth? And if there are perhaps any efficiencies in partnering with your existing broker clients for a sales effort to align interest and more quickly reach this very valuable owner client?

Sure. So, one of the things I did not mention, going into detail on was, we have been reorganizing the CoStar sales force a bit in order to get ready for selling these premier LoopNet owner-oriented ads, the sort of upper end ads. And what we've done is, we've identified about 65 sales people across our network, who are the more senior folks and were assigning the top owner prospects to them. We're pulling them together for a couple of days of training. So far we haven't really -- we haven't done that. We're just beginning that process. It's relatively straightforward. The value proposition is pretty straightforward. And I think that we will get adoption or the sales force will pick, the specialist salespeople will pick this up pretty quickly and we really be relying on them to take that forward. I would expect that over time with success there, we'll feel that 65 is not quite the right number and we'll probably want to grow that team a little bit. But I think we'll take one step at a time. A little bit of success with the 65 people would be a lot of success to our bookings numbers. The second part that you mentioned there about partnering with our broker clients is exciting. In the past, we have partnered with our broker clients to basically wholesale or resell advertising to their owner clients and allow them to offer discounts and give them some rebates for volume. And we've had some discussions with some of our brokerage clients about allowing them to resell those LoopNet ads owners. It's a win-win for everybody, the broker, the owner and us. And it is similar to what happens with Apartments.com. So, often when we're selling an advertisement for an apartment community, Greystar, Greystar is acting on behalf of an owner who we don't really know who they are. But they're just authorized to make the purchase and Greystar through volume gets a better price for their owner. So, we'd be looking for the same thing to happen in CoStar, LoopNet, but it will be something that would be happening next year. But we've gotten really positive feedback from folks like CBRE and some others on that opportunity. And it's not unprecedented. Again, not only on the Apartments.com side, but also CoStar Real Estate Manager where a lot of our sales there are -- is white labeling from folks like JLL and CBRE and Cushman & Wakefield, who basically steer their clients into CoStar Real Estate Manager.

And thanks for joining us, Ryan. Glad to have you. Thanks for starting coverage.

Our next question is from Andrew Jeffrey with SunTrust. Please go ahead.

Good afternoon. I missed that bookings number. So…

It was $59 million.

We'll get to the offline.

Thank you for asking. Just under $60 million. So, we're not saying.

Yes. In all seriousness, one of the things that strikes me is the success you've had building out your sales force without -- from we can tell from the outside looking at really sacrificing productivity. Can you speak a little bit about what the gating items are to continuing to build sales? I mean, we're in a full employment economy. These are not sort of simple products as I would think. It's a fairly sophisticated sale. I mean, kind of what's the secret sauce and what do you worry about in terms of being able to continually expand the sales organization?

Well, for me, my primary concern is typically, we are an organization that changes a lot. So, as we -- we don't stay the same. Most sales organizations do exactly the same thing for 10 years in and out. They don't change a lot. Things like refocusing the sales team against the smaller communities to an online leasing, refocusing the info salespeople towards a new ad opportunity in the LoopNet side, that's a lot of change and that requires a big organization to adopt change. And that's just -- that's heavy lifting, that's probably our single biggest gating item. I was meeting with a couple of tech people yesterday. We were at CES and some other companies and they were talking about having challenges hiring salespeople. Knock on wood, we've been able to keep a really good pipeline of high-quality salespeople coming in the door and we have not seen problems with being able to find those folks. So, you can see that in the 50 plus recent hires on the CoStar side. And then I also -- we're going to be -- and hiring in Richmond. I feel confident there. We invest a lot into the Richmond marketplace. We have a big brand there and we've been successful in meeting our hiring requirements there. So, we're always looking to try to improve our sales training and try to give them more experiences and developing ongoing training. But we like the productivity numbers we're seeing, the productivity numbers per salesperson. Apartments.com is exceptional right now. And if we can keep that through -- going through an inside sales team, we'll be really happy with that result. So the main issue is just continuously reshaping the organization, things like dividing the Apartments and the CoStar teams into separate management lines. That's the main challenge.

Our next question comes from Stephen Sheldon with William Blair. Please go ahead.

Great, thanks. This is actually Josh [ph] on for Stephen. Over the last few quarters, you guys have provided some helpful data points on the Apartments upsell and LoopNet 2.0. But I was hoping you could frame for us what you view is the bigger opportunity over the next two years or three years. And if there's time, what you see are kind of the main factors driving demand for the higher-priced ads in a high occupancy environment? Thanks.

Yes. I would like -- and you ask, which of my children are my favorite and that's a tough one. So, I'd like to say that Apartments.com is awesome and LoopNet is awesome and they both have trends of upside. But you have to say, you have to respect Warren Buffett. And one bird in the hand is better than two in the bush. And Apartments.com is on fire right now and it's happening. What's driving demand for the up-sell, when you see folks adopting rapidly, price points at $3,600 and $7,500 a month where the average had been $770, what's going on there is we are just delivering the traffic and the lead flow. We've got massive traffic in lead flow. It's working. And we're hearing, like in a focus group, I was in two weeks or three weeks ago in Dallas, property managers who are building a lot of new -- putting a lot of new units out there are finding that everybody in say, Dallas Uptown is now buying our Diamond ad and it's hard to stand out. Like in -- they're looking to spend more to stand out more when they're in lease-up. And so with so many people buying in Apartments.com, people with higher demand are willing to pay more. And when you think about what's at stake for them as they launch a $200 million community in the lease-up, they don't really care if our ad cost a $1,000 or $10,000. They're in a nine-month lease-up period and we are the source for the majority of their communities. So, we've kept our -- frankly, we've kept our pricing very aggressive and our price per lease and our price per lead is very low. And they're very happy with it. And if they want more, they're willing to fork out money. So the upside is, we are -- these plus categories where within silver, gold, platinum and diamond, we're going to enable people to pay to sort higher within the categories, I think we will generate a lot of revenue. And then again just bringing out the online leasing tools and going after the mid-market will be big. LoopNet, I'm highly confident about, but it's -- it is still in development. It's still early days. But we're very familiar with everything about that LoopNet area and feel like it's a clear opportunity and remain very optimistic about it.

Our next question comes from Sterling Auty with J.P. Morgan. Please go ahead.

Yes. Thanks. Hi, guys. And -- we really appreciate all the detail that you gave on the call. So, thank you very much. Quick question on the CoStar Suite. When you look at the growth year-over-year, how would you characterize? I know you gave us a rough estimate of the number of subscribers. But how much of that growth is coming from increases in user count versus maybe the best way to put it is increase in average revenue per subscriber?

Most of it is new subscribers. There is a little bit more. There is a slight increase in average price point per user. So, we're getting -- we're being a little more thoughtful about looking at some of the dramatically underpriced accounts and bringing them up a little bit closer, not all the way in the list, we are bringing up a little closer list. So, I'd say the shift is mixing -- the mix is shifting a little bit between price point. It's a little bit more of that than there has been in the past but nothing crazy. We're talking about instead of 3% average price increase, it might be 6% or 7%.

Got it. Thank you.

Our next question is from Pat Walravens with JMP Securities. Please go ahead.

Hi, this is Joe Goodwin on for Pat. Just a quick question. Andy, how's the environment for CoStar to do more M&A? Any commentary you can provide us there. And then I have another question after that.

So the question was what does M&A environment look like? So, we're -- it's very active. There's a lot going on there. We are -- at any given point, we're looking closely at probably a dozen companies. We are being selective, continue to be selective. So if valuation doesn't appear to be rational to us, we're not doing any sloppy deals that way. But we do have a pipeline and we are working through it. And some of it is smaller deals like Off Campus Partners and then there is some -- there are some larger things in the pipeline. But again, they don't occur until they occur because we have a great track record across 20 acquisitions, 30 acquisitions of not having any big goose. And we will continue to be very careful as we go forward. But we're not going to change our ways of continuing to make good acquisitions.

Our next question is from Scott Buck from B.Riley FBR. Please go ahead.

Good afternoon, guys. A bit of a follow-up there. I'm watching the cash balances continue to climb quarter after quarter, how are you prioritizing uses? And will we see at some point maybe some repurchase activity or a potential dividend? Thanks.

Thanks, Scott. Our priorities right now are the acquisition pipeline that we just talked about, putting money back into organic spend as much as possible. Clearly, we're still going to generate net positive cash, but our intention is to put that back into acquisitions. We'd love to see some more rational price discussions in the marketplace on deals right now. But we know they're out there and they're big enough to use that cash. So, it's just a matter of time, I think we'll do that. Right now we're not considering any share buybacks or dividends as there is still so much opportunity in this growing digital marketplace transformation, that it is better to be holding it for some of the near-term and then using it when we have those opportunities.

[Operator Instructions]

Great. Well, thank you all for joining us for the second quarter call and we look forward to getting together with you again in the third quarter. And thank you very much.

And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T. You may now disconnect.