Ladies and gentlemen, thank you for standing by and welcome to the CoStar Full Year and Fourth Quarter 2020 Group Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to your speaker today Mr. Bill Warmington. Please go ahead, sir.

Thank you, Angela. Good evening and thank you all for joining us to discuss the fourth quarter and year end 2020 results of 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 our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the company's outlook and expectations for the first quarter and full year 2021. Forward-looking statements involve many risks, uncertainties, assumptions, estimates and other factors 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 CoStar's press release issued earlier today and in our filings with the SEC including our most recent annual report on Form 10-K and subsequent quarterly report 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, future 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 net income and forward-looking non-GAAP guidance are shown in detail in our press release issued today along with definitions for those terms. The press release is available on our website located at costargroup.com under Press Room. As a reminder, today's conference call is being webcast and the link is also available on our website under Investors. Please refer to today's press release on how to access the replay of this call. And with that, I would like to turn over to our Founder and CEO, Andy Florance.

Well done, Bill. You really did that preamble beautifully. I'm reflecting that in your career you've probably listened to easily 10,000 earning call and now you're actually reading the preamble. So hang in this. This is a big day for you. Okay, well. Good evening and thank you for joining us today for CoStar Group's fourth quarter and full year 2020's earnings call. And I just assume all of you are as excited as I am to be here tonight, so welcome. Total revenues for the full year 2020 were $1.66 billion, which is a 19% year-over-year growth and $9 million ahead of the top end of our guidance range given in late October. Quarterly sales booking were a solid $49 million with second half bookings rebounding 24% versus the first half of 2020. Our profit performance was equally strong delivering full year 2020 adjusted EBITDA to $553 million, an increase of 9% year-over-year and $23 million above the high end of our guidance given in October. What I believe is even more impressive despite the severe disruption of our customers and our teams caused by the pandemic in March, is that our financial results are either in line with or exceed the initial full year guidance forecast we've provided in February of last year. CoStar Group is absolutely a resilient business. In addition to the strong financial performance of our businesses in 2020, over the course of the year we've raised $1.7 billion in equity and launched our initial $1 billion bond offering with an investment grade credit rating. Our marketplace businesses particularly Apartments.com network hit record highs across all of our metrics. We've also closed three important acquisitions in 2020, Ten-X, Emporis, and Homesnap. Ten-X positions us with nearly perfectly countercyclical business and an opportunity to leverage digital…

Thank you for that introduction.

You're welcome.

I'll try and display my youthful vigor as I march through my comments today. Thank you, Andy. So 2020 was a great year for CoStar both strategically and financially and personally I find it much easier to sleep at night with $3.8 billion in the bank, a negative leverage and a shiny new investment grade debt rating sitting on my nightstand. Now we certainly staged a great come back rally after the - pandemic scrambled our plans this past year and we managed to beat the original 2020 profit guidance that we gave way back in February. I think it's a great compliment to the strength of our business model, the value of our product and the execution focus of our leaders and all of our teams. Of course you throw in a few exciting acquisitions along the way and 2020 starts to feel like a typical year here in CoStar Group. As Andy mentioned in his comments, we're excited for potential opportunities to add CoreLogic to our business. But I won't be providing any financial comments nor will take any questions on this topic during the Q&A session. So onto some color on the results. So revenue here, Andy talked about was nicely in the fourth quarter margins were also improved in the fourth quarter. Our adjusted EBITDA grew over the year and from the third quarter and we ended up outperforming the high end of our guidance by $23 million, which is a fantastic outcome even as we continue to invest to support our future growth which involves the marketing investments, we've made this year for Apartments.com and increased marketing that will began later in the year for LoopNet. Before I go through our sector results, you noticed that our EBITDA and our net income results for the…

Thank you, Scott. Two items before we start the Q&A this evening. First, one question per participants, so make it an exceptionally insightful or probing one. And second, a reminder that we will not be taking any questions about our bid to acquire CoreLogic. Angela, would you please assemble the questionnaires for the queue.

[Operator Instructions] our first question is from the line of Sterling Auty with J.P. Morgan. Please go ahead.

So in terms of the marketing investment that you're making across the business, what gives you the comfort that now is the right time that you can actually lift the gas pedal on spending for Apartments for the multi-family segment?

I would say that we got the pedal down pretty firmly. We're well over $200 million some million there on that. We're not increasing it, we're easing it off a little bit. But we're still there at a very aggressive pace. So with a little bit of net new investment into Ten-X and LoopNet. But we think we need to balance those investments across the whole portfolio and we think the ROI in LoopNet and Ten-X will be more impactful over the next two to three years in a similar investment Apartments.com. That's not to say anything negative about Apartments.com but we've had the pedal down pretty hard there for a while.

Your next question is from the line of Pete Christiansen with Citi. Please go ahead.

Andy, obviously outside of CoreLogic how are you feeling about the M&A environment. Are there other potential assets out there that are of interest and how are you feeling about the valuations for potential acquisitions?

Sure. So other than that $6.9 billion or $7 billion deal up here. There actually are other things out there that we are engaged with and developing. We have definitely - and so that is not the only thing occurring - there are things occurring. They all have a similar theme right now for us. They're all going - supporting the kinds of directions you're already familiar with, they're just strategic building blocks on the same theme. The valuations I would say that I have certainly seen a couple of deals going by at valuations that left me very, very comfortable not to participate. I took my hat off this [indiscernible] and said, wow, good work that's a heck of valuation. But there are couple things recently and usually my scepticism on some of the valuations I've seen in some places recently are around the total addressable market relative to the valuation. So maybe performing well in their context or in their field. But their field is relatively small, it doesn't have a long-term growth. There's [indiscernible] frothiness out there but there are also some real value place out there that we're focused on.

Your next question is from the line of Ryan Tomasello with KBW. Please go ahead.

Andy, I was hoping you could dive a bit deeper into your strategy for entering the residential portal space. There's obviously a lot to talk about there. But I think one key question, is how you intend to cost effectively build consume traffic considering the existing well branded competition in that space. What traffic synergies do you think the existing Apartments.com audience can provide? And is there any competitive advantage that Homesnap's strong user base of agents can bring to help you build that consumer traffic on the residential side?

Yes so, we're not - but we've obviously been thinking about this and building that strategy and we believe there is a pathway to build organic traffic very cost effectively. We're not in a position to share our thinking on some of that right now for competitive reasons. I think that these things building traffic does not happen overnight. I mean these things you build this up through time. We obviously know how to build up traffic through time, we've done that. Anytime we enter into a new space and try to build traffic there's generally scepticism that you can build traffic in that space through time and we've proven we can do that. And in particular, we entered the apartment space seven years after Zillow had made a significant priority and we ultimately were clearly more successful in doing that. I think one of the important considerations as you build a marketplace or build a traffic on a marketplace is what if your revenue model and how strong is that revenue model and will that revenue model fund investments to continue growing traffic or is your revenue model actually drag on your ability to grow traffic? And I think we see those conditions existing in the home sell market. Definitely Homesnap is a useful component in this and there's one or two other useful components that we're looking at. There's no guarantees on any of these things but we're pretty excited to get working on it and we have a pretty clear view as to where we think we can take it and how we can get it. And I'm sorry, I can't give you more detail and stuff. But I want to have success in telling you about it. We'll make it less likely.

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

Commercial property and land saw step up in organic revenue growth this quarter as you continue to sell higher tier ads in LoopNet and you're guiding the further acceleration in 2021. How much of your client base do you believe you penetrated with higher tier ads in LoopNet and how sustainable is 15% to 20% plus organic growth in commercial property and lands?

I really appreciate that question. I really do. So we have just I mean it is really early, early days on these higher tier ads. So we've been very successful with that standard ad placement. In fact in some markets we have too much penetration. In Southern Florida, we might be 87% penetrated which I think is too high. But I think we're less than 1% penetrated in these higher tier ads and that's because we've just begun to really focus on bring them out as you remember. We acquired LoopNet. We separate out the information site from LoopNet, upselling to CoStar and then began developing more fully potentially LoopNet marketplace. We began aggressively bringing the Apartments.com style tiered advertising levels into LoopNet, last year was the first time we began doing this. So this is really the first year of doing that properly and aggressively and you have I think there's - if we have 1,000 or 75,000 we're keeping an eye on. But you have two components moving. One is, penetration into which properties want to move up that prominence level of LoopNet and the other is, what people are willing to pay for that top position and both those items are moving. So it's sustainable for a decade or more, I feel comfortably that we could sustain this for a long, long time.

Your next question is from the line of Jeff Meuler with Baird. Please go ahead.

On the opportunity to upsell existing comps and tenant module clients into suites and that's where the innovation is going. Can you just help size up how big of an opportunity that is, like how much of the revenue base for that line item is still for comp or tenant module clients? How much uplift do you typically see when they transition over to Suite, etc? Thanks.

Sure. So I'm going to be giving you, these are not precise numbers. I'm just going to give you numbers that are an educated guesstimate in order to give you a feel. I believe probably 15%, 20% of that customer base is not on the full Suite. And I think that typically it is a doubling as they go into the full Suite. And anytime you do something later, that's when it's time for us to do this and I think it's an opportunity that on reflection maybe we should have done it last year. But now as we bring in the CMBS and the international and the STR and we think we have another three or four innovations coming into and they're equally powerful. As we keep doing this, we need to - it's time to leave behind these partial solutions. This just doesn't represent our brand well - it actually saves us money to stop supporting these lesser modules. So I think it's in the tens of millions of potential revenues comfortably. And I think, more importantly, I think when it's done. I think the customer is happier. I think they appreciate a much more powerful product and they just - [indiscernible] don't know what they don't have.

Your next question is from the line of Brett Huff with Stephens. Please go ahead.

My one question is, Scott you mentioned the TTM retention rate. I think you said it was 90 this quarter versus 89 last quarter. That's a question that we've gotten a lot and we obviously paid a lot of attention to that. Could you unpack that a little more? Is that small brokers not maybe going out of business as much as we thought? It is large brokers spending more? Is there a lever in there that could give us more comfort in the resilience of that in the face what could be a pretty tough CRE market? Thank you.

Yes, sure Brett. The concerns as we went through the first to second quarter downturn was where were these renewal rates bottom out and if you recall, they went from 90% down to into the low 80s in the last recession and so we watched closely really by customer type and customer size. Large customers all stayed with us. There was really increase at all in drop off rates from anyone that was five or six brokers or more or in the owner categories. It was the small brokers that dropped out over the summer time which also led to a little bit increase in our bad debt. We saw in the later part of the year that certainly has trickled off and stabilized. We're seeing all property - all customer types as well as customer sizes now are back [indiscernible] the renewal rates that we were seeing in the beginning in the year at the end of last year. So it feels like, those that were going to drop out have dropped out and the rest are operating in a stable way and our sales are picking up. So momentum is good. Direct of travel is good and we think that will continue into 2021.

Your next question is from line of Mario Cortellacci with Jefferies. Please go ahead.

Maybe even with sort of continue with that thought on retention and actually maybe can you talk more about your sales cycle, during Q2 last year that was more or less frozen, the decision making based [indiscernible]. And I just wanted to see, do you think some of the success in the back half of the year was just some of that Q2 being pushed to the right or is it more or less sustainable going into 2021 and even maybe with a ramping in GDP in economic activity in 2021. Is there a lot of room for you guys to beat your guide based on that?

When we saw the response in mid 2021 especially in the marketplaces with the online traffic going to record levels and then the sales accelerating. We assumed, one there's clearly pandemic effect in there and then there's I think a continued longer-term adoption that will stick from that in that experience both from a customer perspective and our sales effectiveness perspective. So certainly there's more online eyeballs, there's more effectiveness to the online advertising and the effectiveness of our media that our customers can use to tour properties. Clearly are big hit in the year. On the other side our sale effectiveness in our Apartments.com salesforce able to effectively and professionally connect with our customers and prospects through Zoom and remote working. They actually produce thousands of more effective customer meetings and maintain their same high NPS scores throughout the year. Allowing them to generate more sales per person than they have it [indiscernible] before. So we don't see either of those trends backing down either as we come out at the end of this year or going into next year. and with the momentum we have building our midmarket salesforce which we will increase, the growth we're starting to see in the IO [ph] property space and then the translation of those same effects into LoopNet as we build our separate salesforce in the LoopNet marketplace. I think we're going to see that same strength and that same momentum building throughout the year and we'll still have the CoStar salesforce selling the LoopNet marketplace products as well until that LoopNet force is built up to full speed. So I think we have a lot of momentum behind us, add a good bit of marketing to LoopNet and the future is certainly bright with our sales efforts as I assume.

And Nathan [ph] it doesn't make it, we'll take it out with Ten-X.

And your final question comes from the line of Stephen Sheldon with William Blair. Please go ahead.

On Ten-X, you talked about not investing heavily yet on the supply side. Have you seen any momentum on the supply side I guess in the second half of 2020 with momentum you had bringing in more bidders? And then related to Ten-X, any update on what you see in terms of distress property sales and have you assumed any pick up in distressed activity in the 2021 or would that be potential upside?

Okay, so starting with the second question first. We have not assumed any pickup and distressed, that maybe possible that will happen. Especially as a return to normalcy some folks will at that point calculate, it just doesn't work anymore - their property income sheet doesn't work anymore, their LTV doesn't work anymore. So I think there could be but it's not in our forecast. We actually are - so we closed that in June.

Yes.

So it hasn't been long. So we really jumped into this with both feet and we're really just on the demand side because that's the first component you got to build. And it's really a bit early to really expect any movement on the supply side because we're just now beginning to turn in results. I was wandering through my neighbour the other day I saw two guys drinking a lot of beers and chipping golf balls in their front lawn. I stopped and say hello to them. We chatted a little bit. [Indiscernible] had just bought four multi-family properties to Ten-X that he didn't expect to sell and he was really kind of blown away, they sold with the number of bidders. I love the fact that a neighbour was surprised with how many bidders we had. I think actually he was visiting a neighbour. So that story gets around. He's going to tell people. He's with a big brokerage firm that will get around. But some of the - that's slower. That's what we're making in marketing in 2021 I think absolutely will drive the supply side. So the broad media campaigns about the value, don't auction it. Ten-X it. Don't sell it. Ten-X it. That will reach a lot of the supply side. Our performance numbers that we can use as sales demonstrations are fantastic and those will be very compelling. Also the gamification of the product where we hope to bring in hundreds of thousands of players on the supply side and educate them in the platform while they're having fun and winning some prizes. I think that will drive the supply side. We're educating Lisa Ruggles massive team in Richmond, Virginia to educate the people. They talk to all the time when they first bring…

That is correct.

And so I think we can wrap up the call and we certainly Scott, Bill and I certainly appreciate you joining us for this fourth quarter year-end earnings call and we look forward to updating you on more interesting developments in earnings calls in the near future and I apologize for our robustness today. There are few more extra things going on.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines.