CoStar Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the CoStar First Quarter Financial Results Call. At this time, all lines are in a listen-only mode, and later we will conduct a question-and-answer session with instructions being given at that time. And if you should require assistance during the call, please press star, then zero, and an operator will assist you offline. And as a reminder, today's call is being recorded. I would now like to turn the call over to our host, Rich Simonelli. Please go ahead, sir.

Thank you very much, operator, and welcome to CoStar Group's first quarter 2019 conference call. Before I turn the call over to Andy Florence, our CEO and founder, and Scott Wheeler, our CFO, I'd like to share some very interesting and important items that could actually make your day. Certain portions of our discussion today may contain forward-looking statements which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include but are not limited to those stated in COSAR Group's April 23, 2019 press release on our first quarter earnings and our company outlook and our COSAR filings with the SEC, including our most recent annual report on Form 10-K and our subsequent Q reports on Form 10-Qs under the heading Fast Search Risk Factors. All forward-looking statements are based on information available to COSAR on the date of this call, and COSAR assumes no obligation to update these statements whether as a result of new information, future events, or otherwise. Reconciliation is the most directly comparable gap measure to the non-gap financial measures discussed on this call, including non-gap net income, EBITDA, adjusted EBITDA, and forward-looking non-gap guidance are shown in detail in our press release issued today, along with definitions for those terms, long definitions. The press release is available on our website, located at costargroup.com. As a reminder, today's conference call is being broadcast live and in color on our new investment-approved investor relations website, Please refer to our press release today to how to access this call going forward. Remember, one question, so make it a good one. And I'll now turn the call over to Andy.

Thank you, Rich. Well, let's move through this call quickly so that we can all get to those long definitions of key financial terms in our press release. Thank you for joining us for CoStar Group's first quarter 2019 earnings call. It was just eight weeks ago that we reported superb year-end results, and we were pleased to be back so soon, reporting another strong quarter with solid revenue growth and even stronger profitability growth. In the first quarter of 2019, CoStar Group total revenue was $328 million, up 20% year-over-year. We generated $55 million more revenue in the past quarter than we did in the same quarter one year ago. Apartments.com led the way with 30% year-over-year revenue growth. LubeNet's revenue increased 17% year-over-year. CoStar Suite revenue grew 13%, which was at the upper end of our guidance. Our rural lands marketplaces grew 21%. and our business for sale marketplace revenues grew 12% year-over-year. CoStar Real Estate Manager continues to be a tour de force and major contributor with 95% year-over-year revenue growth. With high incremental margin on each dollar sold, our strong revenue growth continues to translate into even higher earnings growth. In each of the last two quarters, we've generated the highest quarterly net income in our history. Net income increased to $85 million in the first quarter, up 63% from $52 million in the first quarter of 2018. We generated $113 million of EBITDA and $125 million of adjusted EBITDA in the quarter. When annualized, that's consistent with our expectations of generating half a billion dollars of adjusted EBITDA in 2019. Our $55 million year-over-year increase in revenue in the quarter generated a $43 million year-over-year increase of EBITDA. Effectively, 78 cents of every incremental dollar sold translated into EBITDA. In the first quarter of 2019, adjusted EBITDA margin was 38%, an increase of 700 basis points compared to the first quarter of 2018. Company-wide net new bookings grew 36% year-over-year to 48 million in the first quarter of 2019. For the second consecutive quarter, Apartments.com generated our best bookings quarter ever as our sales force continues its strong momentum with a 40% increase in net new bookings year over year. Last year, we communicated that our entire apartments sales force was investing a significant amount of time and effort into the important job of converting the newly acquired for-rent contracts into apartments network contracts. That investment yielded great results, but it also meant that they had less time available to generate net new sales last year. Now that we have completed the four-rent conversion and have more time, you can clearly see that the apartment's sales force's productivity is surging. These results are more impressive because of the quality of customer service the apartment's sales force is delivering while also delivering great sales numbers. During the first quarter of 2019, the Apartments.com sales force conducted 80,000 sales meetings and earned an audited net promoter recommendation score of 9.8 out of 10. That is clearly outstanding customer satisfaction. Lumenet net bookings were up 27% in the first quarter of 2019 over Q1 of 2018. In the first quarter of 2018, we achieved record CoStar sales results when thousands of stranded Accelgent clients rapidly migrated to CoStar. Not surprisingly, while CoStar sales were strong this quarter, the bookings did not rise over the Q1 2018 exceptional high watermark. We have grown the CoStar sales force by 6% from the fourth quarter of 2018 to the first quarter of 2019. We intend to continue to grow the CoStar sales force by approximately 30% overall from Q4 2018 to Q4 2019. We have a robust product pipeline for CoStar, CoStar Analytics, and the LoopNet Marketplace, so we want to grow our sales force to meet the scale of our future opportunity. As we add salespeople, they typically have material revenue impact about a year after they join us. We attribute a big part of our Apartments.com sales success to the priority we place on customer service. Our CoStar sales commission plans over the past year now reflect these same values. As a result, our salespeople are spending more face-to-face time with our clients and prospects. CoStar sales meetings were up 43% year-over-year, from 30,000 in the first quarter of 2018 to 43,000 in the most recent quarter. On a per-salesperson basis, meetings were up 33%. Net promoter recommendation scores for the CoStar Salesforce have climbed to 9.02 on a 10-point scale. I believe this is a leading indicator of client retention and future sales growth. Apartments.com continues to increase our industry-leading position among Internet listing services and by achieving all-time highs in unique visitors and number of visits, as reported by Comscore, for both the month of March and the first quarter of 2019. In the first quarter of 2019, the Apartments.com network had 162 million visits, up 35% year-over-year, an average 20 million unique monthly visitors, an increase of 30% year-over-year. According to Comscore, the Apartments.com network hit an all-time high of 61 million visits in March. That's an increase of 18 million visits over March of 2018 and is up 40% year-over-year. We have been the number one most visited apartment network for the past 41 months. Also, according to Comscore, as a network, we had twice the number of monthly visits, and monthly unique visitors that the Rent Path Network had in the first quarter of 2019. On a site basis, Apartments.com had four times the number of monthly visits that Apartment Guide had. Wow. Apartments.com tracks a list of 10,000 apartment keywords that we believe are important for marketing multi-family communities online. As of today, We hold the number one organic position in Google's core results for 93% of those keywords when compared to other listing sites. Our primary competitor, or RenPath, only holds 2% of them. We continue to pull further away from the competition, and I believe that in 2019, we will see a strengthening continuation of that trend. We launched our 2019 Apartments.com marketing campaign, which focuses on the reality that the apartments you choose will change the future you. We have four new TV spots of the highest production quality of special effects we've ever produced. Of course, they feature Jeff Goldblum as our spokesperson, Brad Bellflower. We've already gotten great feedback from our clients, from renters and the media on the campaign, and we're excited that the heaviest portion of our media plan kicks in during the second quarter to support peak rental season. We're also excited to announce that tomorrow we plan to launch a completely redesigned ForRent.com website just in time for peak rental season. The new site has a completely redefined renter search experience. Key features include a beautiful new design, lightning-fast performance, and optimization to rank in the top of Google searches. It is the first site in our network of 11 sites that offers renters more of a focus on the independent or smaller properties by returning them mixed in to the very top of our search results. It will give renters the feeling that this is really a condo, small home, small independent owner website, as well as having large institutional properties. We plan to support the new site launch with aggressive levels of marketing support, including paid search, display advertising, social media, email marketing, and a strong push by our direct sales team. We look forward to the new site delivering even more traffic leads and leases to our advertisers. We have identified a need that some advertisers with properties in lease-up, low occupancy, and highly competitive market environments have to drive additional leaser communities even beyond our existing top-level advertising prior top-level diamond package. In response, we have introduced a newer, higher-tiered advertising level called Diamond Plus. We're really creative with that name, which guarantees advertiser placement in the top three search results in a given sub-market. The Diamond Plus ads average approximately $4,050 per month or nearly $2,500 more per month than the old basic Diamond ad. We believe Diamond Plus ads will continue to positively impact our net new bookings throughout 2019 and beyond. In March, LoopNet visits grew 23% year-over-year, and we had nearly 6 million unique monthly visitors coming to the site. We are steadily rolling out a number of enhancements for LoopNet as we continue to focus on improving the user experience. This is similar to the strategy we successfully deployed with Apartments.com Marketplace. We continue to show strong success with sales of higher-priced power ads to owners on the LoopNet platform, and these remain a major part of our growth strategy. We had nearly $3 million in annualized net new sales of power ads in the first quarter, and the highest-priced diamond-level ad sales showed the strongest growth at 87% compared to the first quarter of last year. In the premium Lister product, we continue to focus on raising the quality of the listings, eliminating unlimited listing plans, which were steeply discounted, and increasing prices on many of the older underpriced listing plans. Average price per listing for this product was up 49% compared to the same quarter last year. Riala is our United Kingdom emerging version of LoopNet. I'm very excited about the potential of that product, and in fact, we have seen a 346% year-over-year growth in unique visitors on Riala. Belbex is our version of Loop Med for Spain, and its organic unique visitors are up 163% year-over-year. Right now, we're in an investing phase on these sites, building out the traffic, but we intend to begin monetizing them later next year. We continue to deliver a steady stream of enhancements to the CoStar products. Dozens of these enhancements are new commercial real estate analytic tools. These include tools for accessing the probability of selling and leasing in various timeframes, animated weather map-like time-based market trends laid over digital markets maps, market overview videos from our team of analysts and economists, daily rental rate detail, new statistical exports, retail property underwriting reports, and much more, soon to be followed by even more enhancements. We recently announced a strategic relationship with Fort Worth-based Buxton. Buxton is an industry leader in retail site analytics. They analyze and model a retailer's successful stores, competitive threats, and store-to-store cannibalization, among other factors, and then determine ideal potential new locations that are likely to achieve above-average sales. Now, Buxton clients who are also CoStar clients will be able to search CoStar for properties that are within ideal trade zones Buxton has identified. This combines the best strengths of each company to provide greater convenience and value to our mutual customers. Both firms intend to cross-sell to one another's client bases. In the first quarter of 2019, CoStar Real Estate Manager revenue was up 95% year over year. It continued its strong performance with an increase of 15% on net new bookings in the first quarter of 2019 compared to the same strong quarter last year. CoStar Real Estate Manager continues to add Fortune 1000 customers such as HP, Archer Daniels, Campbell Soup, AECOM, Aramark, and many others. CoStar Real Estate Manager has staked out a leadership position in the lease accounting software market, and Q1 represents the first quarter of reporting under the new ASC 842 standard. Continued opportunity exists with later reporting public companies as well as the full slate of large private companies. We expect to continue to leverage this market leadership position throughout the remainder of 2019. As we continue to add more institutional and analytic services to CoStar Suite, we've begun to enhance our research coverage of REITs, CMBSs, and institutional investors. In the first quarter, we completed an audit reconciliation of more than 12,000 REIT-owned properties, which encompassed 1.6 billion square feet. We added nearly 4,000 true owners to current or formerly owned REIT properties. We reconciled CMBS filings back to 2015 and stayed current on 2019 filings, adding thousands of new lease comps, rental points, and new deals. Brokers using Listing Manager continue to be solid contributors to the database. In the U.S., more than 40% of our listings are edited each month by our users, and new users are steadily joining the ranks of Listing Manager. We plan to market Listing Manager to encourage more use of this service. We believe that the listing manager function in CoStar and LoopNet will help us to deliver higher quality data, more effective marketing benefits, greater convenience to our clients, all at a much lower cost than some of our historical data collection methods. Commercial real estate continues to attract unprecedented levels of interest from investors. Total deal volume has set new records in each of the past few years, and pricing continues to rise. The high level of interest in commercial real estate is justified by sound fundamentals characterized by strong leasing, consistent demand, limited supply, and the lowest vacancy rates since 2000. The robust health of the sector has benefited the industry at large, including brokers, appraisers, underwriters, owners, and lenders. And the multifamily sector, high levels of construction have been boosting advertising revenues for platforms like Apartments.com, which is a near necessity for communities in Lisa. Barring any surprises, the U.S. economy will set a record in July 2019 for the longest post-war expansion on record, with 102 months of consecutive job gains. We see no obvious imbalance threatening this remarkable streak in the commercial real estate markets, and consensus forecasts and CoStar's house viewers' growth continuing into 2020, albeit at this lower pace. International concerns around Brexit and China may dim growth slightly, but may also perpetuate the flood of international capital that has fueled U.S. asset price gains, including in commercial and multifamily real estate. The slow and steady growth of the past few years has produced consistent demand and rent gains across all property types. Apartment rent growth accelerated last year, posting 3% gains for the first time since 2016, despite increasing supply. But a broad shortage of housing, especially a for-sale product, has produced unprecedented demand for a new rental product. And transaction volume continues to set new records as investors clearly believe in the multifamily story. The office market features enviable fundamentals and limited supply, at least outside of major markets, which are undergoing wholesale reinventions like Hudson Yards in New York, the Boston Seaport, Amazon's HQ2 in Crystal City, Lake League Union in Seattle, and South of Market in San Francisco. but single-digit office vacancies have delivered only mediocre rent growth at just 2% over the past year. Perhaps the most remarkable feature of the office market is the consistency of rent growth. Eight years of slow, steady increases. A welcome departure from the boom-bust cycles of 1999 and 2007, or throw in there 1986 or 1981. I think those are roughly right. The outlook calls for more steady, if modest, rent gains thanks to low vacancy levels, even if demand weakens. Demand for industrial properties remain at historically high levels driven by the growing trend towards online purchasing and same-day delivery. Still, vacancy rates appear to have bottomed out amid record-setting deliveries. Persistent rent growth of more than 5% has drawn record-setting sales volume resulting in price appreciation exceeding 10% year-over-year. The growing economy has yet to reverse lackluster dynamics for retail sector, though, as structural changes in the industry weigh on demand for physical space. While well-located properties continue to perform well, historically low vacancy rates are still mainly a result of limited construction and have yet to fuel significant rent gains. We expect the record levels of interest in commercial and multifamily real estate to continue. Across all property types and any economic outcome, CoStar Group offers products and services that are essential to owners, lenders, brokers, investors, and property managers alike as they participate in commercial real estate's increasingly competitive, ultra-high-stakes marketplace. It's been a great start to a new year for CoStar, and I'm extremely excited about the rest of the year, and particularly the coming decade, as we continue to execute on our long-term vision. At this point, I'm going to liven up the call by turning it over to our CFO, Scott Wheeler.