CoStar Group, Inc.

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. If you should require assistance during today's conference call, please press star followed by zero. and an operator will assist you offline. 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 Florence, 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 23rd, 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. Reconciliation is the most directly comparable gap measure to the non-gap financial measures discussed on this call, including but not limited to 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 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 to 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 to this one again. So look up the recall number. Just remember, one question, so make it a good one, I'll now turn the call over to Andy Florence. 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 of the 50th anniversary of the Apollo 11 moon landing, a slightly more impressive feat than our second quarter earnings. 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 the 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. For the second quarter of 2019 of 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 and is operating at the highest productivity level we've ever achieved. We expect to reach half a billion dollar annualized revenue run rate milestone for Apartments.com next quarter. There's 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 have over 150,000 individual subscribers to CoStar Suite. Net new bookings were up 26% from Q1 of this year. Our quarter-over-quarter U.S. CoStar Suite revenue growth of 3.5% and our year-over-year U.S. CoStar Suite revenue growth of 15.1% are right in line with our five-year averages. I find it valuable to look at the revenue generated by our core U.S. Salesforce, our CoStar Salesforce, which is U.S. CoStar Suite combined with LoopNet Premium Lister subscriptions. The quarter-over-quarter growth for this combination was 3.7%, and the year-over-year was 15.7%. The 3.7% quarter-over-quarter growth rate is exactly our five-year average. The year-over-year growth number is above the five-year average of 15.5%. We are growing the CoStar Salesforce, which we believe will support future acceleration in bookings. We entered 2019 with 213 reps in production, We now have 262, and we hope to reach 300 reps selling CoStar and LoopNet by the end of the year. We've hired approximately 50 additional sales reps that are going into production over the next three months. We believe that they will impact sales results about nine months after going into production. We saw strong sales of LoopNet Premium Lister product in the second quarter, with net new bookings up 46% quarter over quarter. Real estate manager net new bookings dropped 40% quarter over quarter and 6% year over year because the booking increases of the prior year had reached so high a level at 400%. Overall revenue growth was great for real estate managers. Total subscription revenue climbed 75% year over year and 24% quarter over quarter. Net new bookings for our land business was up 27% quarter over quarter and net new bookings for our business for sale marketplaces was up 36% quarter over quarter. It's important not to overlook the tremendous value of these smaller or mid-sized businesses, CoStar, Real Estate Manager, Lands, and BizBuySell. This quarter, five years ago, those three businesses combined had annualized revenue of $28 million. This quarter, they had combined annualized revenue of $108 million. They've grown at a really impressive compound annual growth rate of 31% for five years. They're very profitable, and they have more than seven or eight times the revenue that CoStar had in total the year we went public. We continue to focus on prioritizing and selling subscription-based services with high renewal rates over selling one-off services with non-recurring revenue. Subscription-based revenue has grown to comprise 82% of our overall revenue. As of the second quarter of 2019, our trailing 12-month subscription revenue grew 25% year-over-year, which is faster than our revenue growth overall. And for the first time, we crossed $1 billion of subscription revenue on a trailing 12-month basis. We continue to show strong growth and profitability. Net income for the second quarter of 2019 was $63 million, an increase of 44% over net income of $44 million for the second quarter of 2018. EBITDA for the second quarter was $94 million, an increase of 45% versus EBITDA of $64 million for the second quarter of 2018. With strong cash flow, our balance sheet is stronger than ever with $1.3 billion in cash and no debt. As reported by Comscore, Apartments.com continues to pull further away from the competition as we increase our industry-leading position among internet listing services by achieving all-time highs in unique visitors and number of visits. In the second quarter, the Apartments.com network had 175 million visits, up 21% year-over-year. The huge runner traffic we have built there is very valuable, particularly the clients with newly constructed properties in the lease-up phase. Today, 70% of apartments that have delivered in the last two years are advertising with us. But some properties need more exposure and are willing to pay an additional fee to sort even higher up on our site to get more leads. To meet this demand, we have recently begun selling a new higher-tiered advertising level called Diamond Plus. Very creative naming. This ad package guarantees the advertiser placement in the top three search results in a given sub-market. In the second quarter, we sold 6 million in Diamond Plus ads at an average of approximately $3,600 per month, with apartment communities in some markets paying as much as $7,500 per month. That's a new exciting price point for us. This stands in sharp contrast with our primary competitor, RentPath, who began advertising $99 a month ads if you bought social media with them. That price is 175th of our Diamond Plus price point. I think that tells you everything you need to know about the competitive landscape. Given the success of our Diamond Plus offering, we have decided to introduce a Plus option in each of our Platinum, Gold, and Silver categories. We plan to offer the Plus ads at fixed price with little to no discounting. In June, we purchased Off-Campus Partners, a leading online multifamily marketplace service for student housing in the United States. There are over 17 million college students in need of housing near universities, and they're paying approximately $100 billion in rent annually. Often their parents assist with these rent payments. We believe Apartments.com has a unique opportunity to develop a long-lasting connection with these students as they move into other stages of their lives and become renters off-campus. Off-Campus Partners enters into exclusive subscription agreements with universities to provide an off-campus housing listing service used by students, parents, faculty, and staff. Currently, it has existing contracts with approximately 130 universities servicing over 2 million off-campus students. These university partners include the likes of University of Michigan, Harvard, VCU, Clemson, Berkeley, University of Pennsylvania, and most importantly of all, an exceptional University of Princeton. We believe that this massive market with tremendous opportunities for us to partner with more universities attract more advertisers, especially small independent owners. The majority of off-campus partners advertisers are independent owners who are excellent candidates for our new online leasing features such as screening, applications, digital leases, and payments, which we plan to offer next quarter on Apartments.com. We are also planning to release a student housing upgrade to our CoStar multifamily analytics solution. We believe this additional information will be very valuable to student housing investors, property managers, lenders, and developers. We had a strong Apartments.com sales success at the National Apartment Association Annual Conference in Denver this year, held in May. It was attended by over 10,000 property managers who are our prime targets and prospects and clients. Once again, Apartments.com was front and center with an amazing presence, and we attracted more than 4,000 visitors to our booth. The Apartments.com sales force met with 916 property managers over the course of the two-day conference in Denver. As I mentioned, we bought Apartments.com in 2014. We had approximately 17,000 paying properties. Nearly 90% of those properties were from communities of 100 units or more. Today, we have just over 50,000 paying communities and nearly 13,500 of those properties are in a smaller 1 to 99 unit property size range. We have successfully grown our annual multi-family revenue from 86 million in 2014 to a run rate that we expect to reach 500 million later this year. During that time, we increased our penetration rate of the market six-fold, from 2% to approximately 12%, or an average penetration growth of about 200 basis points per year. This has truly been an amazing success story as we lead the industry in revenue, lead generation for our clients, and traffic. In the last 18 months, our Apartments.com sales have been accelerating as we added more salespeople. From the beginning of 2018 to today, we went from roughly 220 Apartments.com sales reps to 265, a 20% increase that generated a staggering 122% increase in net bookings year-over-year in the second quarter. This Salesforce is on fire and they have set all-time high bookings in the last three quarters in a row. We want to build on that incredible momentum and plan to reinvest some of our outstanding performance or our out performance back into the business to capture more market share more rapidly. With the current size of the Apartments.com Salesforce, they spend approximately 85% of their time with existing clients and only have about 15% of their time available to prospect for completely new clients. As a result, we estimate that our sales force has only made contact with 3.5% of our good new business prospects in the past 12 months. This means there are hundreds of thousands of apartment communities we could sell to that our sales team has not yet had the bandwidth to reach. We believe that we can dramatically increase our 12% penetration and add billions of revenue by, among other things, growing the sales force. It's obvious to us we need more salespeople, so we plan to add another 100 apartment salespeople into an outbound sales team based in Richmond, effectively increasing the size of our apartment sales team by nearly 40%, too, about 370 people. We do not believe this will require significantly more investment. We have offset most of the additional headcount costs by eliminating 120 researcher positions this month from Atlanta. Those researchers were community callers and were tasked with finding properties with availabilities that we would place on Apartments.com for free. They added tens of thousands of units a year. This was great for the property managers who didn't have to pay for these ads. Given the enormous amount of traffic on Apartments.com, these free ads, which would sort below our paid ads, would often generate more leads to these non-paying property managers than those property managers would see from their paid ads on competing internet listing sites. When we first relaunched Apartments.com, we needed to include this free content to draw renters in. But at this point, we've grown our content and traffic many times over and now no longer need to spend so much money giving valuable advertising away. We believe by adding 100 salespeople, we will add tens of thousands of paid community ads maintained by the advertisers rather than by researchers. In effect, we are exchanging researchers for salespeople, and we think we'll end up with more data and more revenue. We believe the opportunity is gigantic. There are 345,000 mid-sized apartment properties in that 5 to 99 unit size range, and we estimate that we have less than 4% penetration in these properties. The opportunity is virtually untapped. The good news is that we've been successfully selling at this level, so there's a proven demand for our advertising solution. We feel that the online leasing tools we plan to offer will further the appeal of Apartments.com to these midsize apartment communities. Intensified marketing is the second area where we intend to reinvest our outperformance back into Apartments.com in order to accelerate our market share capture. We see a clear path to providing even dramatically more lead flow to the industry than our competitors, And by doing so, we expect to achieve a compelling ROI and build a durable, long-term leadership position. Our primary competitor's balance sheet is the polar opposite of our balance sheet. RentPath has more than half a billion dollars of debt and is handcuffed with tens of millions of dollars in interest payments, so they do not have the ability to invest to drive more leads to their clients the way we do. According to DebtWire, their first quarter 2019 adjusted EBITDA cratered as it dropped 34.5% and it underscored their liquidity pressures. Their second lien has been trading below 20 cents on the dollar. Given roughly an 11% coupon on that second lien, yielding about 11 cents a year, a likely go-away payment would be achieved in a default or bankruptcy from the first lien holders paying the second lien holders 5 to 10 cents. And you add that with some option value, and a number of people believe that the RentPath second lien debt holders think there's about a year until RentPath could default. But who knows? But it seems like a good time to accelerate our investment in order to increase competitive pressure and capture more market share. LoopNet remains the clear number one site in commercial real estate for advertising properties for sale or for lease. In the second quarter, we averaged 5.8 million unique visitors per month, up 19% year-over-year. Historically, LoopNet has not materially monetized premium ads the way Apartments.com does. We're hard at work deploying to LoopNet a number of valuable, successful lessons we've learned from Apartments.com. We believe that in the future, these significant enhancements to LoopNet will allow us to dramatically accelerate our revenue growth there. We are making our premium gold, platinum, and diamond ads even more valuable. We're adding maps, demographic information, local transportation, and more. We're also giving prominence and exclusivity to the listing broker and her firm. Visually, we're featuring the premium ads with excellent photography, 3D walkthroughs, and video. In addition to our efforts from our 160 field researchers who create visual content for LoopNet listings, we're in the process of adding a number of highly skilled professional architectural photographers who will bring these buildings to life in our ads. Our portfolio research team is helping to promote the LoopNet listings by adding original written content about the properties and the neighborhoods they're located. The landing pages continue to improve in functionality, appearance, and content. We're adding content we believe will be valuable to LoopNet's target audience of tenants and small investors. You should head over to LoopNet in a few months as new enhancements roll out over the course of the next year. I've been fortunate to witness firsthand an amazing transformation in the commercial real estate industry over the past 30 years. Digital marketing has moved from being virtually non-existent to being an absolutely essential necessity, a real critical part of selling or leasing properties. The good news for CoStar is that we own the most valuable digital real estate at the crossroads of commercial real estate and digital marketing. We have the largest audience of potential tenants and investors on LoopNet and the largest audience of brokers on CoStar. The commercial real estate professional needs to market their properties where this audience is. In the past, our researchers' primary value proposition to our clients was the information they gathered for them. While the data we gather is still the foundation of our business, the marketing opportunities our platform affords is becoming the prime value proposition we offer industry professionals. We used to reach out to brokers to collect most of our information. Now it has flipped, and many brokers come online and bring listings to us. Brokers continue to adopt our CoStar Listing Manager tool, allowing them to update listings directly into the CoStar database. It has been nearly two years since we initiated Listing Manager, and usage continues to increase. 52% of all spaces were added online by users in the second quarter of 2019. We now have over 41,000 power users who are updating their listings monthly. CoStar Listing Manager is providing greater convenience to our clients and at a much lower cost to us than our historical data collection methods. Our move to Richmond has been an amazing success in us transforming how we collect and present data. We're having more collaborative and productive conversations with our clients. This increases the quality of our data immensely and builds stronger relationships with our users. As a result, one of the recent changes we've made in the research department is updating the researchers' titles to better reflect our marketing focus and expertise. The researcher job title is now Marketing Research Advisor. Additionally, as we further establish Richmond as our marketing researcher headquarters, all East Coast research opportunities are being consolidated into our Richmond office. We believe this will lead to better collaboration and synergies among the research teams and significant cost savings. In addition, since the development teams that build our research systems are in Richmond, This consolidation creates more opportunities for our marketing research and technology teams to work hand-in-hand to build the most efficient back-end systems. We believe this will also create additional career growth opportunities for our marketing research advisors. As a result, we are relocating the 145 marketing research advisor positions currently in Washington, D.C., and the multifamily research positions in Atlanta to Richmond. We will soon have close to 950 people based in Richmond. Commercial real estate activity continues to grow. Leasing volume and investment activity in the second quarter of 2019 rank among the strongest quarters on record. We believe the high level of interest to be justified given the sector's sound fundamentals. Vacancy rates are in single digits across all sectors, and supply remains limited. And compared to low prevailing interest rates, returns in commercial and multifamily real estate offer compelling relative value. The U.S. economy at large set a post-war record in the second quarter of 2019, reaching 105 months of consecutive job growth, and recent data releases show ongoing strength. In turn, U.S. commercial real estate has enjoyed 36 quarters of positive demand among the longest periods on record. In the property markets, apartment rent growth has accelerated once again, posting gains above 3%. We believe the ongoing health of the apartment sector relates to the broad and growing shortage of housing in the United States. In particular, insufficient supply of new for-sale housing units has limited home buying and led to the unprecedented level of apartment demand. In response to this demand, the apartment construction has risen to levels not seen since the 80s. CoStar tracked about 300,000 units delivered over the past 12 months, and we're tracking nearly 675,000 apartment units under construction. The large majority of these developments rely on Apartments.com to market those units. In the office sector, the national vacancy rate has fallen below 10% for the first time since 2000. In spite of the limited space available, leasing has consistently set new records as the large tech firms continue to expand beyond their Silicon Valley and Seattle footprints. New office construction has been limited but impactful. Mega projects at Hudson Yards in New York, the Seaport in Boston, South of Market in San Francisco, and the 8th Street and Noma Corridor in D.C. and the West Loop in Chicago have upended gateway markets and forced landlords of traditional CBD product to compete for signature tenants. As a result, rent growth has trended at just 2% despite the single-digit vacancy rates. This has not deterred investors. Deal volume last quarter could set a second quarter record. In the industrial sector, demand remains at historically high levels driven by the ongoing trend towards same-day delivery, which requires regional and local distribution close to population centers. However, vacancy rates appear to have bottomed out amid heavy supply and have edged higher from the 5% low. Rent growth continues to trend above 5%, and investment continues to favor the industrial sector in no small part for the development or redevelopment potential for infill product. Based on our property level value estimates, we believe industrial prices rose by 7% year by year, leading all property types. In the retail sector, negative headlines around store closings and a shrinking share of brick-and-mortar sales obscures the sector's superb fundamentals. We estimate retail vacancies are below 5%. the lowest across the property types, and construction underway amounts to less than 1% of current stock. We expect the record levels of interest in commercial real estate and multifamily real estate to continue. To meet the complex needs of the industry, CoStar Group offers products and services designed to help owners, lenders, brokers, investors, and property managers realize successful outcomes in any economic climate. We've had a tremendous start to 2019 with an exceptional second quarter. I'm extremely excited about the rest of this year as we continue to execute in our long-term vision within a great company. At this point, I will turn the call over to our CFO, Scott Wheeler, who will, among other things, hopefully reiterate that net income for the second quarter was $63 million, an increase of 44% over the second. Our balance sheet is strong with $1.3 million in cash and no debt. And Very importantly, that we had our best sales quarter ever with $59 million in bookings. But what co-star investors ever get tired of hearing about all of that?

That's a great story. Thank you, Andy. We certainly did 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 2018. 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. The 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 and 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 continue 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 percent on a year-over-year basis in 2019, which is 400 basis points above the growth rate range we indicated last quarter. Multifamily revenue growth for the second quarter remains strong at 15 percent over the second quarter of 2018, slightly higher than our expectations. As mentioned last quarter, we expected a lower growth rate in the second quarter as we have fully lapped the anniversary date of our for-rent acquisition. And we have a negative effect of certain duplicative revenues and discontinued products from for rent that were evident in our 2018 results. With the strong sales results this quarter, I'm increasingly confident that the multifamily revenue growth rate in the third and fourth quarters of 2019 will meet or exceed 20%. The full year 2019 revenue growth rate for multifamily is expected in the 20 to 21% range. Commercial property and land revenue grew 16% year-over-year in the second quarter of 2019. All of our marketplace businesses, including LoopNet, Lands, and Business for Sale, are delivering solid growth in the mid to upper teens, which we expect to continue and increase in the second half of the year. Accordingly, we expect year-over-year organic growth in commercial property and land in the 17% to 19% range for 2019. Gross margins came in at 79% in the second quarter of 2019, slightly increasing from 78% gross margins we achieved in the first quarter of 2019. This is a result of very strong cost leverage. Our revenues increased $15 million in the second quarter of 2019 compared to the first quarter, but our costs of revenue only increased $1 million sequentially. We now expect our overall gross margins of approximately 79% for the full year of 2019. Our operating expenses were $197 million for the second quarter of 2019, which was in line with our expectations, including the higher seasonal marketing spend we experienced in the second quarter. Our second quarter adjusted EBITDA of $110 million represents a 29% increase compared to adjusted EBITDA of $85 million in the second quarter of 2018. Second quarter adjusted EBITDA was approximately $8 million above the top end of our guidance range. Stronger revenue is the main driver of the positive variance. The resulting adjusted EBITDA margins of 32% is 220 basis points above the midpoint of our guidance range and 340 basis points above the 29% margin we achieved in the second quarter of 2018. Net income for the second quarter of 2019 of $63 million increased 44%, or $19 million compared to Q2 2018. Our effective tax rate in the quarter was 21%, reflecting benefits associated with share-based payment transactions and R&D credits. Non-GAAP net income for the second quarter increased 35% to $82 million, or $2.23 per diluted share. It includes adjustments for stock-based compensation, acquisition-related expenses, and some restructuring costs associated with the organizational changes in Apartments.com and research that Andy mentioned. Non-GAAP net income for the second quarter assumes a tax rate of 25%, which does not include discrete items, such as the impact of the share-based payment transactions. We acquired off-campus partners in June for approximately $16 million, subject to standard post-closing adjustments. We're currently working our product integration plans with Apartments.com, as well as business and financial integrations. Although strategically important, the impact of the acquisition to our financial statements for 2019 is not material. Now we'll look at some of the performance metrics for the quarter. As Andy noted, we absolutely crushed it in sales this quarter, with net new sales of $59 million. That's for Andy to talk about. This was exceptionally strong in multifamily. Also contributing to the big sales numbers this quarter were our two biggest industry conferences of the year, the ICSC Real Estate Conference and the NAA Apartments Conference. Both were in the second quarter. As you know, we don't provide guidance on future sales, given seasonal and other fluctuations quarter to quarter. but we're very focused on reinvesting for long-term sales and revenue growth. Suffice it to say, we're very happy with the sales results across the business and the direction in which we are heading. At the end of the second quarter of 2019, our sales force totaled approximately 779 people, reflecting growth in the CoStar Suite field sales force that we talked about last quarter. We expect to continue growing the CRE sales force this year with productivity of new sellers typically ramping up over the next nine months or so. The renewal rate on annual contracts for the second quarter of 2019 was in line with the same rate we achieved in the first quarter of 2019 at 90%. The renewal rate for the quarter for customers who have been subscribers for five years or longer was 95%, slightly below the renewal rate of 96% in the first quarter. This is the first quarter that we've included multifamily five-year subscribers, which is a reason for the modest dilution from Q1. Subscription revenue on annual contracts accounts for 82% of our revenue in the second quarter, up from 77% this time last year. The improvements are primarily the result of successfully migrating the for-rent customer base to our Apartments.com network, strong sales, and annual contracts. I'll now discuss the outlook for the year in the third quarter of 2019. Based on the strong second quarter revenue and sales results, we're raising our revenue outlook for the year by $11 million at the midpoint. to a range of $1.382 billion to $1.390 billion for the full year of 2019. This outlook reflects revenue growth for the year between 16 and 17%, up from the 15 to 16% we indicated last quarter. We expect revenue for the third quarter of 2019 in the range of $350 million to $354 million, representing top-line growth in the range of 15 to 16%. We expect adjusted EBITDA to be in the range of $498 million to $505 million, for the full year of 2019, which is relatively unchanged from our previous guidance. As Andy discussed, the exceptionally strong results and the market position of our multifamily business has us convinced that now is the time to reinvest the increased revenue back into the business. Correlating, we increased our marketing spend in the forecast for Apartments.com in the second half of 2019 by approximately $10 million. Consistent with our previous guidance, we expect adjusted EBITDA growth of approximately 20% year-over-year, adjusted EBITDA margins for the year of approximately 36%, up around 110 basis points in the midpoint of the range. For the third quarter of 2019, we expect adjusted EBITDA in a range of 123 to 127 million. Margins are expected to increase sequentially in the third and the fourth quarters. In terms of earnings, we expect full-year non-GAAP net income for diluted share of $10 to $10.14, based on 36.6 million shares. Certainly great to see the $10 per share numbers coming into view this year, which, if achieved, would present compounded EPS growth of over 30% per year since 2016. For the third quarter of 2019, we expect non-GAAP net income to dilute in share in a range of $2.44 to $2.52, based on 36.6 million shares. Overall, our CoStar team delivered a phenomenal first half of 2019. We're very well positioned to continue our strong revenue growth trajectory, to increase the level of growth investments for the future, and continue to expand margins. For that, we will now open the call for questions.

Ladies and gentlemen, at this time, if you would like to ask a question, please press star followed by one. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. One moment for the first question. Our first question is from Peter Christensen, Wood City. Please go ahead.

Good afternoon. Thanks for taking my question. And, Rich, you were right about that replay. I had a question about, Andy, I think you were talking about There's 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? Or 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, properties over 100 units. And as we started building up more and more content, more and more traffic, we started eliminating free ads above 200 units and above 150 units and 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'll be trying to build up that inside sales force quickly enough to be able to pursue the lead that that generates. So it'll be flexible, but it'll be six to 12 months to eliminate the freeze below 100. Now, we'll continue to carry the very small communities for free for quite some time, so the condo for rent, the house for rent, the real small stuff. And I also wanted to reiterate that our second quarter had $59 million in bookings.

And our next question is from Brett Huff with Steffens. 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, you know, the bookings should kind of trend higher. You know, 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, you know, in the out years. How should we think about the sustainability of this 59 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 are? 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'll be exciting. and will repeat successful results throughout the earnings call. But there are a number of different things that give you tailwinds as you go in to try to achieve those higher numbers. We obviously don't know small fluctuation nuances from quarter to quarter, so the bookings next quarter could go up a little bit, go down a little bit, and it's not necessarily terribly material which way it goes in slight increments, but the trend I feel comfortable with expectations that it goes up. Again, growing the CoStar Salesforce materially is a big driver. There's 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 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'll increase the lead flow. And then, you know, looking at the numbers, our ability to successfully sell product to 200 unit communities, 100 unit communities, 75 unit communities, 50 unit communities, 40, 30, 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 biz-by-sell business, and CoStar Real Estate Manager continues to hit on all cylinders. So there's 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. Hi, Bill. 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's that going, and then what will the Q4 rollout look like?

Thank you, Bill. So I'm actually on my way up to Chicago. I'm just in from Tokyo. You can't tell that I'm a little jet lagged. But 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 product. So that new product is providing an end-to-end leasing solution within Apartments.com where someone marketing their property, 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 a 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'll 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 application, 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're going to be looking at how that reaction is going, but it's early. We're just rolling it out this quarter. I'll know more after the focus groups. One of the things that 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'll be sold through our inside, the new inside sales force, where they'll be really aggressively going after that sector. So it's rolling out in four, I think we added one more market, so I think it's rolling out 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 there's enough people participating in the program that that renter application portability between multiple communities has enough scale and mass that's particularly valuable. But, you know, we'll tell you more. We'll report in on the third quarter call and the year-end call, and we'll have more color on it. It's still a little early. But, man, it was a lot of work.

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

Hi, 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 sales outlook, George, is still strong, you know, for the LoopNet business.

The difference is you're talking about, you know, you only move the forecast a million or two in any quarter and you get a percent change, you know, in this business because the numbers aren't really that big. What we're still seeing is really good sales through the CoStar sales force for 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 those 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 and 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 that will be upside.

Our next question comes from Tom. I'm sorry, Ryan Tomasello 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 right-sized following the year-to-day growth? And if there are perhaps any efficiencies in partnering with your existing broker clients for a sales effort to align interests and more quickly reach this very valuable owner-client?

Sure. So one of the things I did not mention, go into detail on, was we have been reorganizing the CoStar Salesforce a bit in order to get ready for selling these premier LoopNet owner-oriented ads, these sort of upper-end ads. And what we've done is we've identified about 65 salespeople across our network who are the more senior folks, and we're assigning the top owner prospects to them We're pulling them together for a couple of days of training. So far, 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'll get adoption or the specialist salespeople will pick this up pretty quickly. And we'll really be relying on them to take that forward. 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 to those 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 to 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 to Graystar, Graystar 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 Graystar, 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 – it'll 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 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.

Hey, guys. Good afternoon. Good afternoon. I missed that bookings number. It was 59 to me offline.

Thank you for asking. Just under 60, so we're not saying.

Okay. In all seriousness, one of the things that strikes me is the success you've had building out your sales force without, from what we can tell from the outside looking in, 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 simple products, I would think. It's a fairly sophisticated sale. 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. 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, doing online leasing, refocusing the info sales people 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 heavy lifting, and that's probably our single biggest gating item. I was Meeting with a couple of tech people yesterday, CEOs of 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 in the CoStar side. And then I also, you know, we're going to be in 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 meeting our hiring requirements there. So, you know, we're always looking to try to improve our sales training and, you know, try to give them more experiences in developing ongoing training. But we like the productivity numbers we're seeing. The productivity numbers per salesperson at apartments.com is exceptional right now. And if we can keep that 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 co-star teams into separate management lines. That's the main challenge.

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

Great, thanks. This is actually Josh Lamerson for Steven.

Hello, Josh.

Hey, there. Over the last few quarters, you guys have provided some helpful data points on the apartments upsell and the LoopNet 2.0. But I was hoping you could frame for us what you view as the bigger opportunity over the next two 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.

Yeah. I would like, you know, when you ask which of my children are my favorite, that's a tough one. So I'd like to say that Apartments.com is awesome and LoopNet's awesome and they both have tons of upside. But you have to say, you know, 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 upsell 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're just delivering the traffic and the lead flow. We've got massive traffic and lead flow. It's working. And we're hearing, like in a focus group I was in two, three weeks ago in Dallas, uh, property managers who are building a lot of new product, uh, putting a lot of new units out there, uh, are finding that everybody in say Dallas uptown is now buying our diamond dad and it's hard to stand out like, and they're looking to spend more to stand out more when they're in, you know, lease up. And, and so with so many people buying an apartments.com, people with higher demand are willing to pay more. When you think about what's at stake for them as they launch a $200 million community into lease-up, they don't really care if our ad costs $1,000 or $10,000. They're in a nine-month lease-up period and we're the source for the majority of their community. 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 up money. So the upside is, you know, we are this 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'll, 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 is still in development. It's still early days. But, you know, 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 Audie with JPMorgan. Please go ahead.

Yeah, thanks. Hi, guys. Sterling. Excuse me. We really appreciate all the detail that you gave on the call, so thank you very much. The 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 uh there's a slight increase in average price point per uh 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 to list but bringing up a little closer list so I'd say the mix is shifting a little bit between price point and a little bit more of that than there's 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.

Yep.

Our next question is from Pat. Wall Robins with JMB Securities. Please go ahead.

Hi, this is Joe Goodwin on for Pat. Hey, Jim. Hey, guys. Just a quick question. Andy, how is 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 the M&A environment look like? So we're, you know, it's very active. There's a lot going on there. We are, you know, 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's some larger things in the pipeline. But, again, they don't occur until they occur because we have a great track record across, you know, 20, 30 acquisitions of not having any big goofs. And we – we'll 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 in through 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 do that. Right now we're not considering any share buybacks or dividends as there's still so much opportunity in this growing digital marketplace transformation that it's better to be holding it for some of the near term and then using it. when we have those opportunities.

And if there are any further questions, please press star followed by one.

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.