Andy Florance - Chief Executive Officer, Founder Scott Wheeler - Chief Financial Officer Sarah Spray - Investor Relations

Ladies and gentlemen, thank you for standing by, and welcome to the CoStar, Fourth Quarter Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. Also, today’s conference call is being recorded. I would now like to turn the conference over to your host, Sarah Spray, Investor Relations for the CoStar Group. Please go ahead.

Thank you. Good evening and thank you all for joining us to discuss the fourth quarter and full year 2019 results for the CoStar Group. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Scott Wheeler, our CFO, I would like to review the safe harbor statement which has some new language, so listen up. Certain portions of the 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 today in CoStar Group’s press release issued earlier today and in our filings with the SEC, including our most recent Annual Report on Form 10-K and 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. CoStar assumes no obligation to update these statements, whether as a result of new information, further events or otherwise. Reconciliation to the most directly comparable GAAP measure to the non-GAAP financial measures discussed on this call, including EBITDA, adjusted EBITDA, non-GAAP income and forward-looking non-GAAP guidance are shown in detail in our press release issued today, along with definitions for these terms. The press release is available on our website, located at CoStar Group under Press Room. As a reminder, today's conference call is being webcast and the link is also available on our website under Investor Relations. Please refer to today's press release on how to replay this call. Over to you operator. No, sorry – actually, what am I saying? Actually, I would like to now turn the call over to our CEO, Andy Florance. Andy.

Thank you very much Sarah. We are joined… [Technical Difficulty].

I am sorry we are now turning over to Andy Florance who is the CEO. Apologize for the short delay.

Thank you, Sarah. Good evening.

Sorry, this is the AT&T operator. We do not hear any sound.

I'm sorry.

Can you hear us?

Can you hear us now?

Yes.

Okay, please let's continue.

Okay, we’ll get going here. So good evening and thank you for joining us in CoStar Group's fourth quarter and 2019 yearend earnings call. I'm very pleased that CoStar continued to deliver outstanding growth throughout 2019. CoStar Group’s total revenue grew 17% to $1.4 billion for 2019, adding $200 million of revenue in the full year. We generate strong double digit growth across all our primary businesses with multi-family leading the way with 21% year-over-year growth. Fourth quarter revenue of $375 million was up 19% over the fourth quarter of 2018. The fourth quarter includes results from STR for the first time, which contributed $9 million of revenue since our late October 2019 close. Net income for the year was $315 million, an increase of 32% over full year net income of 2018. Our adjusted EBITDA crossed over the $0.5 billion mark this year and reached $507 million, an increase of 21% over the full year of 2018 with adjusted EBITDA margins improving to 36%, a 110 basis points increase over adjusted EBITDA margins in 2018. If you like nice round numbers that you can remember long after the call, our fourth quarter revenue annualized was $1.5 billion and our fourth quarter EBITDA was $500 million or $500 million on $1.5 billion growing. We grew our earnings and profitability during the year, while continuing to invest for future growth. In 2019 we increased the size of our CoStar field sales force by 20% and added 40 new midmarket sales positions in Richmond for multifamily. We increased the level of spending in digital marketing later in the year to grow our traffic and the lead flow of Apartments.com. Our product teams completed new signature ad packages in LoopNet, as well as the new digital tools for small property owners in multifamily,…

Thank you, Andy. Give me just a second. Before I take the microphone, I must disinfect it with this little wipe which I have here to display my concern of the virus and other issues. Alright, we had a great year in 2019. We reached $1.4 billion in revenue, exceeded $500 million in adjusted EBITDA and delivered over $200 million of net new bookings for the year. In addition, we acquired STR and off-campus partners in 2019 and we recently announced an agreement to acquire RentPath. It’s great to see that we continue our very successful strategy of both double digit organic growth, coupled with highly synergistic acquisition programs. We certainly don't see either of these growth strategies slowing down any time soon. Our fourth quarter 2019 revenue was $375 million growing 19% year-over-year and coming at $9 million above the high-end of our guidance range. Revenue growth in the fourth quarter excluding STR was 16% year-over-year. STR contributed $9 million in revenue in the fourth quarter, which exceeded the $3 million to $4 million of STR revenue expected. This is primarily the result of favorable outcomes from the deferred revenue purchase accounting adjustments. We've included the revenue from STR as part of our information services revenue sector. Looking at our revenue performance by services, CoStar Suite revenue growth was 13% for the full year of 2019 as expected, and 14% in the fourth quarter of 2019 versus the fourth quarter of 2018. As we head into 2020 we anticipate CoStar Suite revenue growth will moderate somewhat as we have shifted the focus of our sales teams to ramp up sales of the net signature asset that Andrew mentioned. The revenue growth rate for CoStar Suite in 2020 is expected to be approximately 11%. As Andy discussed, it's important that…

So, we’ll now turn over to the operator who will give you instructions for logging on, but we would also ask that you limit your questions to one question per person. If we have time, we’ll cycle the queue back around. Operator, you may proceed.

Thank you. [Operator Instructions] And our first question comes from Ryan Tomasello with KBW, please go ahead.

Good evening everyone. Congrats on the strong finish to the year! I wanted to ask about apartments.com. You know clearly the platform continues to see strong momentum and it seems that the push into the middle market and the low end of the market held its promise, but I was hoping Andy that you can give us some color on your thoughts around how you frame the risk of competitive pressures in the market for lead generation. You know I think on the RentPath call you alluded to the position that Google has in that market in controlling renter traffic. So I was wondering you know if you see the risk of them increasing their stake in this market as a threat similar to what they've done in the online travel booking world.

Sure. So certainly Google has a full position on controlling renter flow, the majority of renter flow. In the online travel world the OTA’s like Bookings.com or Expedia has spent – invested large sums of money to build direct traffic that are independent of Google intermediation. You know frankly, while they have – those hotel OTA’s have taken a bit of a hit, they still have outstanding margins and very profitable businesses. So you know we think that Google is a competitive factor there, growing revenue in the apartment space. People do make a decision between spending the money directly with Google or spending the money with apartments.com, but we believe we offer a number of advantages, have some strong client loyalty and we will continue to grow and thrive. And while we look at Google as providing a competitive element to the company, we also look at them as a very important partner and we believe that our investments into Google keywords and other initiatives with them has been very fruitful. So you know nothing in life is without some risk, but we feel comfortable with it.

Our next question comes from Sterling Auty with JPMorgan, please go ahead.

Hey, thanks. Hi guys, this Jackson Ader on for Sterling tonight.

Hello Jackson.

My question is on the middle market sales. Now that that sales team is kind of up and running, how should we or how are you guys thinking about the unit economics for that particular segment?

I believe it's running about an average of $320 per unit, something like that.

That was definitely in the Silver Ads and overall it's about $440 million what we sold so far and the largest mix of ads as we mentioned was in the silver level within some gold segments and platinum and diamonds then sold by the team.

But don't get excited, because there’s only tens of millions of opportunities down there in that segment.

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

Hi, thanks, and that was a lot of detail. Andy, you know there was a brief comment in your prepared remarks that you plan to accelerate international growth this year, so I wanted to get some more detail on that. I know you've been gathering data in the U.K., I think Spain, Germany and France and have Realla in the U.K. that you've talked about using to gather public data and parts of Europe, but I guess first, do you have an update of scale internationally to more meaningfully monetize it at this point. And second, is the plan here to accelerate; I guess data gathering maybe with STR's international footprint in EMEA and APAC.

Yes, so STR does have a really strong international footprint you know leading with their leadership team then for HVAC and the 9Vietnam. It’s a strong group and it's a great foundation to grow in. You know what we're thinking about in 2020, I do not believe we’ll have a huge, negative financial impact to drag on earnings or a material one. What it's really about is acknowledging the fact that we now have 500 staff and tens of thousands of users outside of the United States in multiple and dozens of different countries. I think we have users in probably 60, 70 some countries at this point and so a lot of it is how we're thinking about providing the product and the service and delivering it. So as we pull STR and CoStar together, it's going to be important that both of those platforms support users in dozens of countries. We want to continue the work we began with apartments.com and make all of our products polyglot [ph] ideally supporting both the English language and the local language in those products. We also want to make the movement between viewing data in various countries as seamless as possible. So today a user in London or a user in Madrid may look at our product as being very local to that town, and we believe there would be value in just opening up that system. If they are subscribing to their local country, we would let them see the international network. So that would be a pretty big change when an investment broker in London can see and compare a property in London, Edinburgh to a property in Toronto or Vancouver or New Mexico or Madrid. And so that will be the first big change and we think it will have a pretty positive impact. That's the way Bloomberg has segmented their products. If you are a Bloomberg client you can see all over the world. We want to go that way, so people don't evaluate us as a single city player anywhere and that they can work in their native language. That's particularly valuable in investment sales area and in the analytics area where we think we can provide a lot of value.

Our next question comes from Mario Cortellacci with Jefferies. Please go ahead.

Hi, thanks for the time. Because you're shifting the sales force focus from going from CoStar Suite over to LoopNet, could you just update us on how many CoStar customers are using LoopNet and vice versa or maybe just give us a little more a quick update on how much runway still exists there.

So in particular you are talking about – we were talking about the runway for both of them. I was talking about the runway for CoStar and the runway for LoopNet. I plan to live for a very, very, long time and I will not live long enough to ever see the end of runway for either CoStar or LoopNet. So we just have – you know I’m back in the place where I'm feeling like our CoStar sales force is smaller than the opportunity they're selling into, because that CoStar sales forces is a CoStar and LoopNet sales force. There is very high overlap between the people who we’re trying to sell CoStar to and to the people who would be – would benefit from marketing on a LoopNet. So very, very high overlap both ways. I would think I don't have a hard number on that, but I would believe it’s the majority. Now, some of the new particularly valuable customers to us for CoStar – so an important area for us in CoStar is selling to owners that you know we are in the early stages of penetrating that opportunity, they have high value, they pay higher numbers for CoStar, but a great avenue to reach them is to provide a marketing solution for them in LoopNet that's unique, and new and different and allows us to build a relationship with them, and then ultimately to expand that relationship to ride them information analytics. We believe that our offering is incredibly compelling to that owner universe on both sides. So I really mean that. I think it's a huge market. By the time we sell everybody in Czechoslovakia the CoStar subscription, we’ll be in like 2320.

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

Good evening guys.

Hello Brett.

My question is, it seems that the guidance implies organically about 15% growth and Scott I think you give us that number, and by my math I think you guys end up the year pretty close to that in ‘19 give or take. First of all, correct me if I’m off at all, but I think I’m close. My question is, given that the ad spend is going ramp pretty dramatically through the year, why wouldn't we expect to see more revenue growth, especially in the back half of the year than we did say in 2019.

I was asking Fred Saint and Paige Forrest the same question, but go ahead Scott.

You’re correct, we have about a 15% organic growth rate scheduled out for the year. We certainly see solid growth starting into the year. We had a great year selling in apartments you know at the end of last year. We'll start to get the ramp-up in the marketing stand. It starts in the mid to late March time frame and that's when our broadcast advertising will kick in, and then by the time we hit mid to late summer, we’ll start to advertise more around the use of our one-click you know digital rental tools that Andy was mentioning. So we've built in really this year, we’ve built in a – the 20% growth is almost entirely from our large directions field sales team in large Apartments. The amount of revenue that we're forecasting right now on the inside sales team is very small and we're really forecasting nothing coming from the value in the market place. So what we're doing this year is really building the brand, building the momentum, building the sales forces and those capabilities in mid-market and building the network in the small property space, with really revenue on to come. We’d love to see those develop rapidly in the first half and really take off in the second, but at this stage we're planning on really taking the large market and decent momentum into the mid-markets, but really much beyond that in our forecast right now.

Our next question comes from Pete Christiansen with Citi. Please go ahead.

Thank you, good evening; great momentum guys. I just want to follow-up on that last question. I know you don't provide an outlook for bookings, but how should we think about the cadence throughout the year? Is it something that starts picking up in 2Q, 3Q and just building from there or is it more of a hump? I know there’s a lot of moving pieces hiring and all that other stuff, but how should we think about the cadence?

I think the starts to really advise the cadence, particularly with the combined CoStar LoopNet sales force, and then later in the year your building that mid-market sales force. That's really what's different than maybe what we’ve seen in the past. Otherwise you know we typically see, second quarter be a very strong sales quarter, third quarter a little bit less than that, and I think like we saw this year, fourth quarter which we just proved in the LoopNet we can actually sell advertising in the fourth quarter which hadn't really been the case in the past. I think both in Apartments and LoopNet you’ll see fourth quarter strong quarters, and I think technically it would be our second strongest quarter in Apartments. So the bill will go in the sales headcount in general and then the others regular seasonality patterns will hold up for the year.

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

Hi, thanks. Good afternoon. You're going after the middle-market and I/O subsegments of the multifamily space this year. You talked about launching tools, targeting smaller properties, building out your Richmond sales team and then also accelerating investments into Apartments marketing. Can you discuss how you plan to phase in these initiatives? How much growth acceleration in multi-family in general you expect from these initiatives, and then how your strategy aligns with your proposed acquisition of RentPath?

Sure, so I don't think anyone ever taught me about phasing, we just do it all at once. Phasing is now. Sure, I’ll go on now. I mean we've been working on the I/O initiative for a long time, so that's been a year and a half or more of software development acquisitions and research. So we ran the first focus groups on that I/O product over two years ago in tweaking and adjusting the business model. Now it's in the markets, its national and we're seeing great traction. We are seeing revenue growth from it, because people are opting in a really good clip to e-commerce purchase of Advertising theses individual properties, buying an add-on on apartments.com. So that will track through the year. We are going to watch it really closely and grow it. I have been out talking to a lot of leaders, the biggest clients in the multifamily industry over the last couple of weeks and I have been surprised by their interest in those leasing tools, and participating in those programs. So we are going to also focus this year on potentially enabling more of our larger customers to put the leasing tools on apartments.com, so people can initiate a lease from apartments.com directly into our clients’ back-end system. So that would make that tool work throughout the spectrum. That would have a good impact on revenue throughout the year. One of the highlights for me last week was I was meeting with one of our biggest customers, the President of one our biggest customers, who manages hundreds of thousands of units. He just bought a very small 10 unit property for himself, as a gaag I guess, I don’t know, and he said he was shocked at when we got this property. He had…

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

Hey, good afternoon guys. I appreciate you talking the question. Andy, when you look at STR and the revenue you're generating this year, I think you said on the call when you bought it that you ultimately can – that you can double the revenue growth there. When I look at the information services segment, this year STR looks like it might be down a little bit. I wonder if you can comment Andy or Scott on that and then sort of what that total segment growth should look like over time as STR ramps up?

Yeah, let me cover the numbers on that sector. What you're seeing, which has been the fuel under info services has been real-estate manager for the last couple years. You may recall that that is comprised of both subscription revenue and then when they took all those big orders over the last 18 months they had a bunch of implementation revenue. Right now the implementation revenue is running down since we're past that wave, and the subscription revenue is growing. So underlying, we're expecting to see anywhere between 15% and 20% continued growth in information services sector after we get past that run off, which I think by the end of 2020 we will be, so that is sort of STR. But when we look at STR on a standalone basis, on a global enterprise they are growing around this 10% year-over-year, similar to what it was doing just before we bought it, and as you pointed out, we expect we’ll be able to grow that revenue 20% or more. We’ll need the year to get the technology integration that Andy mentioned done and just start rolling out some of the new products in a more meaningful way and so post 2021 is when we’ll start to see that revenue ramp up, go higher in STR. Now, keep in mind when that starts to happen and it's integrated into a CoStar Suite platform that those revenue growth will show up in CoStar Suite and not in info services. So info services will continue in this 15% to 20% growth range with real-estate manager, risk analytics and a few other businesses powering that over the longer term and STR will start growing above 10% to 20%, but that that will shift up into CoStar Suite.

So we’ve had a bit of time now to really get into the hood and work with the STR team, to really understand the opportunity better, and I think the product strategy is very clear and concise now. So STR has built a fantastic company, focused intensely on their relationships with the major hoteliers around the world, as well as the accuracy clean list and privacy of the benchmarking and the quality of how they do the benchmarking. And where there's a tremendous opportunity is to take a whole set of the spare tools that STR provides and pull them together into one seamless login, one interface, one system using a lot of technology that CoStar Group already has available to us, and also integrate that with the analytics, market analytics, market search functions, forecasting, property level data that CoStar Group has, put into one solution and you know as I look at that opportunity, I am very confident that when we go through that process, that technology path, we can produce a product that the customers will love, that will be an absolute next generation solution and hospitality information. How and when we monetize that exactly will evolve, but if you build a great product, that it’s magnitude of order is more powerful and useful, it will pay off. But one just you know tactical thing is, we'll be able to sell to the non-hospitality world, analytic solutions for people trying to appraise property, buy and sell hotels, great quality market data and our CoStar sales force will be able to carry that product, and there is just a lot of people in the CoStar sales force, so with just a lot more bandwidth that is a doubling factor right there. But I feel very good about what we have right now there, but it’s just a lot work and we don’t mind that.

[Operator Instructions] And we have a question from Mayank Tandon from Needham. Please go ahead.

Hey, good evening. It’s actually Kyle Peterson on for Mayank. Thanks for talking the questions. So it's great to hear about the LoopNet bookings, the momentum in 4Q; definitely impressive sequential growth there. I just want to see if you give us any color on kind of how the bookings momentum has been in January and February, just to kind of tease out, kind of how the momentum is – can you…

Hello, we lost our good friend Mayank.

I think we knew where he was going. He wanted to know if we had any insights on the booking momentum in the first quarter. Unfortunately we can't talk about booking or booking momentum in the first quarter until our first quarter conference call, which will be the third week or fourth week of April, Tuesday evening 5:00 PM and we’ll be happy to update it then. Sorry, can't say much more than that.

Alright, I'm going to let the cat out of the bag, we didn’t sell in that. We did sell in that – we solid some in January and we are still selling stuff in February. Okay, let's get our last question operator.

And our final question is from Bill Warmington with Wells Fargo. Please go ahead.

Wow! Under the wire there.

Very, close. Hello Bill!

How are you guys doing today?

Great! How are you doing today?

I'm doing okay, I'm doing okay. Is that the Andy, the operator Florance. Hey, I thought it was, I thought it was – so what's up? 54 minutes of prepared remarks. You can't come up with another six minutes of material of make it – round it out to an hour, what's up with that?

We are getting old.

Alright, so a two part question if you will. So one is to ask if you could give us a little color on the sales incentives, specific sales incentives that you're giving for the LoopNet sales for us in 2020, a little color there; and then also if you could talk about how far you are from being able to actually score a lead for the Apartments owners and managers.

Okay. So in terms of how we incent the CoStar sales force on LoopNet production, I will take a shot at that. Its approximately 20% of their billing book, so whatever they've got billing in a given month they get approximately 20% of it. And they get an accelerator towards their rate that they earned on their CoStar side once they cross – I think it's 20,000 of monthly bookings and so that motivates them, that motivates them to quickly get to that base point. And, I think it doesn't count towards Presidents Club and things like that, but it's enough, it's an interlinked systems that’s pretty attractive to them, and they'll be able to do quite well with it and as the do well, we’ll do well too. And then the second question, it was not authorized to ask, but we'll answer it anyhow as we always do; leads scoring well. At this point we are – you know one of the elements that we initially pursued with the online leasing tools was the fact that we could do better lead scoring. I think that is a long term investment for us. As we see more and more renters goes through our online application process and more and more people participate, we can help people understand right off the bat as they fill out their application, which other properties they are likely to qualify for or not qualify for. Just say, several at a time and help someone get to the right solution faster. And then you know that's sort of a win-direct way by educating the renter of scoring the leads coming in. And untimely enough people are participating in this, especially as we meet the needs of millions of college students using off-campus partners and we try to bring these tools into that environment as students come out of university and began renting their first off-campus housing. We’ll build up a fair amount of information about those leads as they go into our clients’ inbox. So the capabilities are there, but we're taking the long term on it.

And there are no further questions in queue. Please continue.

Bill, do you want to get back in line? With that we’ll end the conference call. Thank you very much for joining us. Next time we're hoping to get a 60 minute prepared remarks or maybe a 45 minute. Thank you very much.

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