CoStar Group, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Third Quarter Financial Results Conference Call. At this time, everyone joining by phone is in a listen-only or muted mode, and then later we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, you may press star then zero on your phone keypad. As a reminder, the conference is being recorded online, I'll now turn the conference over to our host, Mr. Rich Simonelli, Investor Relations. Please go ahead.

Thank you, Operator, and welcome to CoStar Group's third quarter 2019 conference call, everyone. Before I turn the call over to Andy Florence, CoStar CEO and founder, and Scott Wheeler, RCFO, I'd like to share some important facts. Certain portions of our discussion today may contain forward-looking statements which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated today in CoStar Group's October 22, 2019 press release on our third quarter results, and the company's outlook and then CoStar's filings with the SEC, including our most recent admin report on Form 10-K, There are 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. 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 non-GAAP net income, EBITDA, adjusted EBITDA, and forward-looking non-GAAP guidance are shown in detail In our press release issue today, along with definitions for these terms, and they can also be found on the press release on our website, which is located at costargroup.com. As a reminder, today's conference call is being broadcast live and in color on our investor relations website, so please refer to today's press release on how to access the replay of this call. Remember, one question, and if we have time permitting, we'll re-cue, but I'll now turn the call over to Andy Florence. Andy? Andy? Thank you, Rich.

That was extremely well done. Thank you. Thank you for joining us for CoStar Group's third quarter 2019 earnings call. CoStar Group's total revenue was $353 million in the third quarter of 2019, an increase of 15% year-over-year. During the second quarter of 2019, CoStar suite revenues moved through the $600 million annualized run rate mark. In the third quarter, Apartments.com moved past the $500 million annualized run rate mark and did so with a 20% year-over-year growth. This is outstanding sustained growth considering we're in the sixth year of owning Apartments.com. But we expect there's much more to come. Multifamily is a huge opportunity. We estimate the total addressable market in multifamily is somewhere between $8 and $10 billion. This is four to five times bigger than we initially estimated the multifamily opportunity was when we entered the space in 2014. Net income for the third quarter of 2019 was $79 million, an increase of 34% over net income of $59 million for the third quarter of 2018. EBITDA was very strong for the third quarter of 2019, coming in at $113 million. an increase of 24% versus EBITDA of $91 million for the third quarter of 2018. Adjusted EBITDA margin moved to 37%, and we achieved 80% gross margin in the third quarter. Our balance sheet remains strong, and we expect to have over $1 billion in cash at year-end and no debt even after the closing of the STR acquisition earlier today. We continue to show strong growth and profitability while we continue to invest in the future growth of the company. I'm delighted with our ability to consistently deliver on both fronts. There's a massive opportunity in both the United States and abroad in information, analytics, and marketing for commercial real estate. While I'm pleased that we are approaching 1.4 billion in revenue in 2020, we believe there are billions of dollars of opportunity not yet realized, so continued investment is optimal. We had another excellent sales quarter, generating $50 million in company-wide net bookings and increased 27% year-over-year in the third quarter. Our average net new sales of $52.5 million per quarter year-to-date in 2019 is 32% higher than the comparable period in 2018 when the average net new sales per quarter was $39.8 million. On the multifamily side of the business, the larger sales force we deployed in 2018 has delivered in a big way. In fact, both the CoStar Suite and Apartments.com sales team each achieved more than 30% growth in net new sales in the third quarter of 2019 compared to the third quarter of last year. I'm optimistic that our sales levels will continue to be strong for the remainder of 2019 and can improve in 2020 as we are proactively increasing the size of our sales force, offering new products and services, and and continue to grow share in our huge addressable market. We now have 280 field sales reps in production for CoStar Suite and LoopNet, and we look to enter 2020 with about 300. In the third quarter of 2019, we identified and distributed a list of 17,000 CRE owners as strong sales leads to our sales force. Each rep has a target owner list. We have been aggressively preparing our sales force to target and sell owners both LoopNet signature listings and more CoStar Suite. I'm pleased to announce that we have closed on the acquisition today of STR for $450 million. Founded in 1985, the STR team has created the global industry-leading benchmarks and analytics that are the primary information tools hotel management investors rely on to monitor and optimize their assets. It provides the foundation for daily hotel and lodging pricing strategies. This is an extraordinary company that's a valuable partner with the hotel industry. Ultimately, the cash flow intelligence STR provides is the fundamental value driver in the $3 trillion hospitality sector of commercial real estate. The industry needs information to effectively develop, finance, appraise, and transact hospitality properties. We are bringing together the leading provider of commercial real estate information, analytics, and online marketplaces with a gold standard global hospitality industry for premium performance, benchmarking, and revenue forecasts. We are excited to add this world leader as it extends the depth and reach of our comprehensive CoStar platform. SDR aggregates data from over 65,000 hotels worldwide, representing 9 million guest rooms in over 180 countries. Hotels electronically submit their revenue and occupancy data to SDR on a weekly basis. CoStar currently provides building information on 80,000 hotels, 45,000 hotel sale comparables, and 4,500 hotels currently offered for sale. We plan to integrate the SDR data with CoStar to create exciting new products that provide hotel building data, aggregate income and occupancy information, sales comps, and for sale information. STR has expanded our global footprint. CoStar now has over 4,400 employees in 19 countries, with over 600 working outside the United States. For the first time, CoStar now has staff in Singapore, Australia, China, Colombia, Brazil, UAE, Indonesia, Italy, India, South Africa, and Japan. Just imagine the air miles. Smith Travel brings an unrivaled reputation within the global hospitality industry for their data integrity, reliability, and strict confidentiality. And we look forward to continuing to build on those core values in the next chapter of Smith Travel's growth. CoStar has extensive experience segregating and protecting highly confidential client information, such as accounting data, leases and lease abstractions, major deals in progress, payroll data, and sensitive banking data. Integration of STR to the CoStar product will maintain absolute confidentiality while also allowing property owners, investors, and service providers in the hospitality sector a more holistic, aggregated view of the industry at market levels. I've already had the chance to meet with the STR team in London. It's a great group. And tomorrow, I will be in Hendersonville, Tennessee, to welcome hundreds of new employees to the CoStar team. I'm looking forward to working with our outstanding management team, including Amanda Height, CEO. Hello, Amanda. Elizabeth Winkle, Chief Strategy Officer, Robert Rossman, Managing Director, and many other strong leaders. That was just a guess there. We believe that combining STR's superior hospitality service offering combined with the CoStar platform will benefit all industry participants as we work together to create valuable new and improved tools. I'm very pleased to report that one of the world's leading property companies, JLL, has renewed its contract with CoStar with a five-year deal and a two-year renewal option. As you know, JLL recently completed its acquisition of HFF. Our contract for the combined entity is larger than two firms who are paying individually, since now all the brokers at JLL will add access to the national CoStar suite data and analytics. We saw a similar phenomenon in Grub and Ellis combined with Newmark Knight Frank confirming that consolidation and CRE can be beneficial to CoStar revenues, particularly when the combined entity expands their access to CoStar services. I want to update you on LoopNet and where we are with that. Office billings for lease have historically been marketed from broker to broker via print brochures or emailed brochures. An owner seeking to lease up their building would hire a broker who would then distribute a few hundred flyers to other local brokers announcing the broker's availability. The landlord's broker will generally affix a sign to the building announcing the space offered for lease, but that will only reach prospects who are already at the building. Given that some of these leases can be worth more than $150 million, this strikes me as a primitive way to market space. It's understandable in a historical offline context since there were severe limits of the methods available to market office space. There could be tens of thousands of tenants within five miles of a typical office building availability with hundreds of thousands of potential decision influencers. Additionally, 20% to 40% of the tenants searching for space in a market are coming from outside that MSA. The size, distribution, and changing nature of the prospects have made it impossible for owners to build effective direct mail or email marketing lists. Running national TV, radio, and newspaper campaigns for a year or so it takes to lease a property is prohibitively expensive. Hence, the industry has relied on marketing through a double middleman model. On a $150 million lease, an owner might pay $9 million in commissions, $7 million in free rent concessions, and $14 million in tenant improvements for a total marketing cost of $30 million. Even after investing that much money, we estimate that office owners lose approximately $40 billion annually to excess vacancy. Smaller tenants occupy about 35% of the U.S. office space, so most owners cannot pay a mortgage without them. Yet, commission brokers are less motivated to pursue small deals. Therefore, owners relying on the Doppler broker model face greater challenges marketing to small tenants. While WeWork has not been a complete success, One of its growth drivers has been that it has met the massive unmet need for connecting smaller tenants to space. The Internet has created transformative opportunities to market commercial real estate online, and LubeNet is fortunate to be a ground zero for that opportunity. LubeNet and its related sites are now generating 6.6 million unique visitors per month, as reported by Google Analytics. This is a 16% year-over-year increase. No other CRE marketplace comes close to LoopNet. No other CRE website comes close to LoopNet. According to Hitwise, LoopNet has almost 2,000% more traffic than the second most heavily trafficked website, WeWork.com. Of the 22,000 CRE keywords we prioritize, LoopNet holds the number one SEO position on Google 86% of the time. The fact is that today millions of tenants look for office space online. We believe that LoopNet is the most effective way to market commercial space today because it offers unprecedented reach, strong frequency, and elevates a property's brand. We know LoopNet is effective at marketing because tens of thousands of brokers pay to market their listings on LoopNet in order to reach tasks and users. We believe we can significantly expand a property's reach, frequency, and branding by sorting to the top of LoopNet and CoStar, just as we do at apartments.com. This increases the ad size content, and by repeating across our websites, it's growing that reach and frequency. We call these signature ads, and we already can see they work. By tracing IP addresses, we can see major tenants viewing signature ads on LoopNet, followed later by their brokers viewing the same ads or content in CoStar, and then we see the tenant's leased space in the property we believe that the tenant originally found on LoopNet. We see specific deals in the range of half a million feet, so we see some huge deals this way. The owners of an office building have a much greater stake in its economics than their broker, so we're focusing our sales force on selling these ads to owners directly in harmony with the brokers at price points above $2,500 a month. We have recently put in place more training incentives to drive sales to this goal. We have made great strides in improving the website over the past year to better fit our clients' branding goals. We have created richer content on signature listings, including photography, reviews, bios, and graphics. The signature ads can have a hugely positive impact on marketing and building for as little as a few cents to a few dimes per square foot, when the owner could already be investing $100 a foot in traditional costs and methods to lease up their space. So we're talking a point or two on the additional cost to make the program more effective. We believe that marketing commercial real estate online will be a multibillion-dollar opportunity, and that CoStar Group is well-positioned to capture a major share of that opportunity. We expect that LoopNet will be a significant contributor to our 2020 sales growth. Turning to Apartments.com. Apartments.com is doing very well. Apartments revenue is up 20% year-over-year. Net sales are up 30% year-over-year. And profit contribution has been growing rapidly as we continue to grow revenue. In July and August, the Apartments.com network reached an all-time high in unique visitors according to Comscore. We had nearly 60 million visits in August 2019, an increase of 8 million over August 2018. The Apartments.com network continues to pull further away from the competition by growing unique visitors 10% year-over-year to 18.9 million in September, as reported by Comscore. At the same time, RentPath saw a decrease of 4% in the same period. Our network had more than nine times the number of visits that ApartmentList had and 2.6 times the visits that RentPath had. The Apartments.com network had more visitors than did the Zillow Rental Network. We have just begun beta testing Apartments.com's digital tenant screening, lease documents, and rent payment system. Our first two markets are Santa Monica and Atlanta. It's only been two weeks, so it's still very early, but the initial reaction exceeds our expectations. 36% of the landlords who added a listing on Apartments.com in the test period elected to use our digital leasing tools. I'm really happy with that number. We've already begun processing applications, screening renters, and executing leases and collecting rent payments. Some of the owner comments have included, it shows me the level of overall quality of the specific tenant, especially compared to other potential tenants in terms of reliability, trustworthiness, responsibility, et cetera. Another owner said, it was more thorough than what I was expecting. Another said, I felt it was user-friendly and takes a holistic approach. It covered every detail we needed and was quick and easy to use for both myself and my potential tenant. Finally, another owner said, very easy and fast. Some of the renter comments were really quite simple. One, application, it was much easier than expected. Another one, it was extremely simple and felt secure submitting my information. And finally, it was fairly easy. I think it's good that the comments are so short. We expect to continue rolling out the tools throughout the rest of the year and into next year. There are hundreds and thousands of mid-sized and smaller apartment communities that we're now successfully selling to. To fully capture this opportunity, we are significantly expanding our apartment sales force by building a 100-plus person team in Richmond focused on this middle market opportunity. I had a chance to meet with the first team of 17 reps and managers last week. It's a very promising, highly motivated group with excellent support from our Richmond technical and administrative infrastructure. I'm very excited about the growth prospects that the expanded sales force can deliver going forward. During last quarter's earnings call, we reported that we thought we could provide our advertisers with more value, enhance our competitive advantage, and generate a good ROI with more aggressive marketing investment behind Apartments.com. On our last earnings call, We announced that we were increasing our marketing spend for the second half of 2019 by $10 million. We did that, and we increased the investment in the third quarter alone. We have analyzed the results, and we have achieved our desired outcomes. Beginning in August, we roughly doubled our investment in certain categories of Google keywords. And not surprisingly, we more than doubled our apartment rental click share compared to other top Internet listing services, moving from 32% click share to 67% click share, according to HitWise. During the same time period, RentPath click share plunged from 35% to 17%. RentPath has been making up for weak SEO by buying SEM traffic. During the trial, Redpath moved from having more click share than Apartments.com to having one-fourth of Apartments.com's click share. ApartmentList had 24% of click share before we began, and their share dropped in half to 12%. We've also increased the number of times we were in the number one position in Google by nearly 600%. During the trial, we appeared in the top four Google SEM positions 95% of the time in our targeted neighborhoods. Given the success of the trial, the only humane thing to do is to immediately suspend the trials and widely deploy the increased investment to help millions of additional renters find a great apartment soon. That is me channeling Brad Belfort. We plan to continue to sustain an elevated level of SEM spending in the fourth quarter. By the end of the year, we will have increased our SEM spend by a total of $20 million in 2019 over our initial budget at the beginning of the year. We acquired apartments in 2014, and since that, we've grown profitable revenue organically and acquisitively. We expect to achieve a five-year compound annual growth rate of 38% based on our 2019 forecast. We have grown from serving just over 17,000 apartment communities to serving well over 50,000, in fact, about 52,000. In an industry that has historically only monetized large apartment communities, we are very successfully selling marketing solutions to large, medium, small communities, and even single-family rentals, of which there are tens of millions. That shows this is a massive, massive opportunity. We are clearly in the lead position in the industry. We absolutely want to cross a billion dollars in revenue at Apartments.com soon and go well into the billions of dollars of revenue. Ultimately, we would like to generate a billion plus of EBITDA from the apartment sector alone. In 2015, we showed our commitment to the industry with an unprecedented $100 million investment into marketing Apartments.com to the 100 million plus runners in the U.S., It was not initially very popular with everybody, but it clearly worked. It helped us grow our revenue from $85 million to $500 million. In the third quarter of this year, we've tested a more aggressive marketing investment, and we like the returns. As we move into 2020, we plan to take Apartments.com to the next level again. We expect to increase our investment in marketing from approximately $150 million in 2019 to to $250 million in 2020. That's a $100 million incremental increase in our marketing spend. This will bring our 2020 margin down, but we believe in the future this investment will drive our revenue and margin up well beyond the investment we're making in 2020. Our $250 million 2020 Apartments.com marketing budget is expected to consist of much more aggressive search engine marketing, more aggressive TV and digital video marketing, with the goal of moving our unaided awareness from the 26% to 33% range to the 50% plus unaided awareness range. We also plan to invest in marketing programs to support our digital leasing initiatives. Make hay while the sun is shining. The sun is shining brightly, and we intend to make a spectacular amount of pay. I have a legal update for you on intelligence, if you remember that. CoStar shareholders have invested billions of dollars to enable CoStar Group to build and acquire robust information systems and marketplaces that are invaluable to the commercial real estate industry. CoStar's ability to protect its intellectual property from misappropriation is a critical factor in our success. Over the course of those last several years, Accelgen, as former officers and directors, instructed contractors and employees to circumvent our security systems protecting CoStar Group's websites in order to steal an enormous volume of intellectual property from CoStar Group. They repackaged and sold that content as their own. This represented a fundamental threat to CoStar Group, and we had to stop it. We relied on the protections of the U.S. copyright law in terms of use for websites, among other legal tools. We sued Acceligent and their contractors, As a smokescreen, Acceligent complained to the FTC and countersued, complaining anti-competitive behavior. Faced with an ironclad case against Acceligent for massive copyright infringement, in November 2017, Acceligent's parent company, DMGT, wrote down its investment in Acceligent to zero after losing somewhere around $150 million in investments in Acceligent. Acceligent was bankrupt. On the day DMGT announced the write-down and loss of $150 million, its shares suffered a 23% drop, hitting a five-year low. I do not believe that DMGT was aware of the scale of the illicit things that Excelligent was doing. DMGT was just a string of investors in Excelligent over the course of the 20-plus years that lost millions, tens of millions, or $100 million. We welcomed an investigation, including an audit authorized by the Federal Trade Commission to determine whether CoStar content was improperly added to Accelagant systems or vice versa. The massive investigation led by the FTC-approved monitor concluded that Accelagant improperly derived took nearly 38,500 images from CoStar's data brace. We believe this is a complete vindication of CoStar's allegation of Accelagant's unlawful activity. The Department of Justice appointed a trustee to manage the now bankrupt state of Acceligent. After the results of the FTC monitor's investigation, along with other overwhelming evidence of willful copyright infringement perpetrated by Acceligent under its CEO, Doug Curry, The trustee has agreed to the entry of a judgment of $500 million against Exelogen in favor of CoStar Group for copyright infringement. This $500 million judgment would be the largest copyrighted image judgment in history and the third largest copyright judgment of any kind. The judgment is awaiting approval of the bankruptcy court overseeing Acceligent's bankruptcy and the court overseeing CoStar copyright suit. Because Acceligent is bankrupt and virtually without sellable assets, the total amount CoStar will cover under the judgment is only $10.75 million, which will be paid to us by Acceligent's insurers. Of course, I never put the word only in front of $10.75 million. The trustee has also agreed that Xelligent's countersuit against CoStar would be dismissed with prejudice. In connection with Xelligent's massive illegal operation, the directors and executives of Avion, Xelligent's foreign contractor in the Philippines, have been charged and indicted on cybercrime charges brought by the Philippine prosecutors. In his papers, the Philippines DOJ stated that Avion acted in concert with Acceligent Management to commit the classic example of computer crime. In final judgment entered in an Indian court in favor of CoStar, Acceligent's other foreign contractor, Maxwell, stated it was misled by Acceligent and its executives and managers, including Acceligent's CEO, Doug Curry, who personally visited the operation in India to supervise their work infringing CoStar's copyrights. Shortly after intelligence bankruptcy, Doug Curry started another competitive CRE information business called Intrepid that failed within a few weeks of launch. Apparently after that, Doug has started another CRE information business with several million dollars of funding from Moody's, a company you may have heard of. The scale of intelligence copyright infringement is unprecedented. It's sort of a history marker, and CoStar Group is very grateful for the thorough efforts of the FTC-appointed monitor in completing the massive audit of the copyright violations. I believe our investors will give us credit for aggressively defending their investment in CoStar against intellectual property theft. We have ultimately achieved favorable findings or judgments in this defense in federal court in the U.S., coming up on two in federal court, in court in India, before the Philippines Department of Justice, from a U.S. Department of Justice-appointed trustee and a monitor appointed by the Federal Trade Commission, which sums up to five wins and zero losses in a pretty challenging case. A special thanks to our trial attorney, Nick Boyle, who did a fantastic job in the entire teams at Williams & Connolly. Quick look at the commercial real estate economy. Despite growing concerns around the economic outlook, commercial real estate activity continues to pose strong totals for leasing and investment volume. We believe this is justified given the sector's sound fundamentals. Vacancy rates remain near historic lows across all sectors, and supply is generally limited. And the recent drop in treasury yields makes returns on commercial real estate and multifamily real estate all the more compelling. Investors may also view real estate as a defensive investment as trends in capital market and economic indicators have increased the probability of a near-term slowdown. In particular, we note disruptions in trade following manufacturing output and business investment slowing demographic growth. Despite these headlines, however, GDP growth and job gains have yet to show any meaningful slowdown and continue to support demand for commercial and multifamily real estate. The property market's apartment rent growth once again topped 3% nationally. We believe the ongoing health of the apartment sector relates to the broad and growing shortage of housing in the United States. In particular, an 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, apartment construction has risen to levels not seen since the 1980s. CoStar tracked just over 300,000 units delivered over the past 12 months, and we're tracking about 650,000 apartment units currently under construction. The large majority of these developers rely on the Apartments.com advertising platform to market those units. Investors continue to favor U.S. multifamily assets. Investment in the sector set a third-quarter record this year, topping $40 billion. In the office sector, leasing has consistently set new records despite single-digit vacancy rates and limited supply. Large tech firms have driven the demand as they expand beyond their Bay Area and Seattle footprints. Rent growth, however, has turned at just around 3%, well below typical gains in the past periods of expansion. Unlike past expansions, however, supply has limited at less than 2% of current inventory and concentrated a handful of markets. New York also stands out with 25 million square feet underway. WeWork, unfortunately, will leave New York a little bit vulnerable since they're heavily concentrated in New York, but we don't think it's a big issue. We believe that measured rent gains and low supply risk in the office sector help insulate the market from potential economic reversal, and our base case forecast calls for steady rent gains. In the industrial sector, ongoing changes in how consumers shop continue to generate record levels of demand for industrial space, despite vacancy rates around 5%. Developers have responded. A record amount of industrial space is under construction, but rent growth continues to post gains of about 5% year-over-year. The best among major property types and investment in the sector is on pace to set another record. Disruptions to trade pose some risk to the sector, but we expect fast-growing demand for local distribution space and provide same-day delivery of goods will help offset any slowdown. In the retail sector, negative headlines around store closings and e-commerce obscure 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. The shortage of space has resulted in low leasing absorption levels, but demand for retail space from grocers, Discounters, fitness clubs, and experiential retail is offsetting move-outs from department stores and big box retailers. We expect the record levels of activity in commercial and multifamily real estate to continue. We expect the demand for CoStar Group's products and services to grow as we help owners, lenders, brokers, investors, property managers make quality choices and realize successful outcomes in any economic environment. We continue to generate strong momentum in 2019 and make important investments. I am extremely excited about the rest of the year as we continue to execute our long-term vision with a great company. At this point, I will turn the call over to our CFO, Scott Wheeler, and he'll give you more detail on our earnings and our planned investments. Thank you, Andy.

Well said. Thank you. It really didn't seem like we took a break this summer. The third quarter, delivering another great financial outcome, while initiating and closing our acquisition of SGR, took less than 12 weeks. But who's counting? Well, Andy mentioned a number of highlights in our third quarter results, including our second consecutive quarter of net new bookings of $50 million or more. We also had strong double-digit revenue growth, 50% year-over-year, which, by the way, is 10 straight quarters of revenue growth of 15% or more. And for all you EBITDA lovers out there, another fun fact, over the trailing four quarters, we amassed over $500 million in adjusted EBITDA. That's one half a billion. Certainly a significant achievement for all of us here at Coastal. So starting off with revenue, which came in above the midpoint of our guidance range for the third quarter at 15%. And for the year, we expect consolidated revenue growth of approximately 16% to 17%. Looking at revenue performances by services, CoStar suite revenue growth was 12% in the third quarter versus the third quarter of 2018. Revenue growth rate for CoStar suites expected to be approximately 13% for the full year of 2019. Revenue in our information services sector grew 11% year over year in the third quarter of 2019, primarily as a result of CoStar real estate manager revenue growth of 19% year over year. As we get further past the lease accounting standard adoption dates, real estate manager results include subscription revenue growth of 44% year-over-year in the third quarter and a 20% drop in one-time implementation revenues. We expect information services revenue to grow at a rate of 20 to 21% on a year-over-year basis in 2019, which includes approximately $3 to $4 million of STR revenue. More on our STR outlook a little later in the call. Multifamily revenue growth for the third quarter remains strong at 20% over the third quarter of 2018. The full year 2019 revenue growth for multifamily is expected in the 20 to 21% range. Commercial property and land revenue grew 17% year-over-year in the third quarter of 2019. Our LoopNet marketplace, which represents approximately 75% of the revenue in the commercial property and land sector, is seeing continued strong growth numbers even as we reposition LoopNet into the premium advertising solution for property owners. There's a lot of work going on behind the scenes to implement our plans for LoopNet, as Andy mentioned, and this includes discontinuation of certain legacy products and contracts that are not in line with our strategy. Excluding these one-time impacts of discontinued products and contracts, the third quarter revenue growth rate of LoopNet would have been over 20%. We expect year-over-year organic growth in the commercial property and land sector to be about 16% for the full year of 2019. We're looking forward to stronger growth rates from LoopNet as we continue to build that sector of our company. Our gross margins came in at 80% in the third quarter of 2019, slightly increasing from 79% gross margins we achieved in the second quarter of 2019. This was a result of strong cost leverage. Our revenues increased $9 million in the third quarter of 2019, compared to the second quarter of 2019, but our cost of revenues remained relatively unchanged sequentially. We now expect overall gross margins of approximately 79 to 80% for the full year of 2019. Operating expenses of $187 million for the third quarter of 2019 were slightly below our estimates and down from the $197 million in the second quarter of 2019 as a result of seasonally slower marketing spend in the third quarter. As mentioned during our last financial update in July, we increased our planned levels of marketing spend in the third quarter, which we expect to continue through the end of the year. Our third quarter adjusted EBITDA of $129 million represents an 18% increase compared to adjusted EBITDA of $110 million in the third quarter of 2018. It was approximately $2 million above the top end of our guidance range. Favorable personnel expenses were the main reason for the positive variances. The resulting adjusted EBITDA margin of 37% is 80 basis points above the 36% margin we achieved in the third quarter of 2018. Net income for the third quarter of 2019 was $79 million, an increase of 34%, or $20 million compared to the Q3 of 2018. Our effective tax rate in the quarter was 21%, reflecting benefits associated with our share-based payment transactions and R&D credits. Non-GAAP net income for the third quarter increased 21% to $96 million compared to Q3 2018, or $2.61 per diluted share. Includes adjustments for stock-based compensation, acquisition expenses, some restructuring costs associated with the organizational changes in Apartments.com and research that we discussed last quarter. Non-GAAP net income for Q3 assumes a tax rate of 25%, which does not include other discrete tax adjustment items. Cash and investment balances were approximately $1.4 billion as of September 30th, 2019, up approximately $91 million since last quarter. And as you know, we closed on the FTR acquisition today, so we expect our cash balance to be approximately $1 billion and around that at the end of 2019. Now let's take a look at some of our performance metrics for the quarter. We had another strong bookings quarter with net new sales of $50 million, an increase of 27% year-over-year for the third quarter. The sequential decline from the $59 million of bookings in the second quarter is a result of seasonal sales patterns, primarily in our online marketplace businesses. At the end of the third quarter, our sales force totaled approximately 820 people, up about 40 people from last quarter and up almost 90 people from the third quarter of 2018. Most of this growth is in our commercial real estate sales team, which is focused on selling CoStar and LoopNet. We expect to continue growing the commercial real estate sales force during the remainder of this year, along with the ramp-up of our mid-market sales team in Apartments.com. At this point, our sales team will grow to an approximate range of $880 to $890 by the end of 2019. The renewal rate on annual contracts for the third quarter of 2019 was in line with the rate achieved in the second quarter of 2019 at 90%. The renewal rate for the quarter for customers who've been subscribers for five years or longer was 95%, also in line with the renewal rate of 95% in the second quarter of 2019. Subscription revenue on annual contracts now accounts for 82% of our revenue in the third quarter, up from 80% this time last year, and flat compared to last quarter. I'll now discuss our outlook for the full year and the fourth quarter of 2019, beginning with the outlook for the STR acquisition. We expect that STR will contribute between $3 to $4 million in revenue in the fourth quarter of 2019. Our revenue estimate is impacted by the negative accounting effect of deferred revenue that was on STR's books at the time of acquisition. STR's deferred revenue balances are quite significant relative to other acquisitions we've completed in the recent past. This is because STR bills and collects the full year amount for annual subscriptions in the first quarter of the calendar year. This is a practice I'm particularly quite fond of, but it does reduce the accounting revenue post-acquisition. Similarly, our estimate of adjusted EBITDA for STR in the fourth quarter is negatively impacted by the accounting adjustments for deferred revenue, as well as the impact for integration costs. We expect a negative impact to adjusted EBITDA of approximately $5 to $6 million in the fourth quarter as a result of the acquisition. These estimated impacts to revenue adjusted EBITDA from the acquisition of STR are included in the revised outlook for 2019. As we look towards 2020, the results for STR will continue to be affected by the negative accounting adjustments for deferred revenue. For example, the current annual revenue run rate for STR of approximately $64 million would be reduced by an estimated $10 million of deferred revenue that carries over to 2020. This would result in a revenue outlook of approximately $55 million for STR in 2020 before any anticipated growth or integration changes. Similarly, the deferred revenue effects in 2020 flow through to the EBITDA for STR. We'll need time to develop a detailed plan for STR and the integration in 2020, but at this stage, we expect the acquisition to become accretive in the second half of the year and contribute positive EBITDA for 2020. Of course, these are all accounting results for STR, which and in no way impact the economic attractiveness of combining CoStar and STR, which we've discussed previously. We continue to expect, as we said in the press release for the acquisition, that within the next three to four years, our investments in new products and our focus on growth of the combined businesses will generate annual revenue growth above 20%, which is approximately two times STR's current growth rate, and profit margins in line with CoStar's long-term goal of 40% plus adjusted EBITDA margins by 2023. Now I'll discuss the combined outlook for the company. We're raising our revenue outlook slightly to 1.385 billion to 1.391 billion for the full year of 2019 to include the estimated revenue from the STR acquisition. The outlook reflects revenue growth for the year between 16 and 17%. We expect revenue for the fourth quarter of 2019 in the range of 360 million to 366 million, representing top line growth in a range of 14 to 16% for the quarter versus Q4 2018. We expect adjusted EBITDA to be in a range of 494 million to 500 million for the full year of 2019, which is relatively unchanged from our previous guidance, except for the inclusion of the estimated STR results mentioned previously. We expect full-year adjusted EBITDA growth of approximately 19% year-over-year, with an adjusted EBITDA margin for the year of approximately 36%. up approximately 70 basis points at the midpoint of the range compared to 2018, despite the negative short-term impacts of the STR acquisition. For the fourth quarter of 2019, we expect adjusted EBITDA on a range of $129 million to $135 million. Included in our outlook for fourth quarter adjusted EBITDA are the impacts of the STR acquisition, along with the increased level of marketing spend for apartments.com. As Andy discussed, we've seen outstanding results from the increased spend levels, and expect to continue investing in Apartments.com marketing at a higher level. The net result, the fourth quarter after considering other cost offsets, is an incremental spend of approximately $5 to $6 million for the fourth quarter of 2019. In terms of earnings, we expect full-year non-GAAP net income per diluted share of $9.90 to $10.02, based on 36.6 million shares. For the fourth quarter of 2019, we expect non-GAAP net income for diluted share in the range of $2.52 to $2.64, based on 36.7 million shares. Looking ahead, we believe that 2020 is the right time to increase our investment in marketing to rapidly expand our multifamily business. Although it's too early to provide detailed guides for 2020, we expect overall adjusted EBITDA margins to decline by approximately 400 basis points in 2020 from the adjusted EBITDA margin outlook for 2019. In dollar terms, we would need to generate approximately $65 million of incremental profit to recover those 400 basis points. To put that in perspective, in 2019, we expect to add approximately $80 million of adjusted EBITDA. We believe that by increasing our marketing investment in 2020, the results in the form of increased revenue growth will improve our ability to reach our long-term goal of $3 billion in run rate revenue and 40% plus adjusted EBITDA margins in 20 to 23. I'd like to add additional financial perspective to this investment, which is similar in size to the initial marketing investment we made when we launched Apartments.com back in 2015. As many of you may recall, after we bought Apartments.com, We placed a big bet by investing $100 million in marketing to go after what we believed at the time was a $2 billion addressable market opportunity. Looking back now, it's hard to argue with the results, which indicate that this bet has clearly paid off. Since we launched Apartments.com, our multifamily revenues have grown from $160 million in 2015 to almost $500 million in 2019, an increase of 310%. During that same period, our annual apartments marketing spend has grown from $130 million in 2015 to only $150 million in 2019. That's an increase of only 15% in total over four years. So revenue has grown 20 times faster than the marketing spend. I think that's pretty good leverage, although some might argue that we've actually underinvested in marketing as we've grown this business. This year, As opposed to 2015, we're in a much stronger position to increase marketing spend, both operationally and financially than ever before, which increases our chance for even greater success. Our direct sales force is much larger and continues to deliver record sales levels each year. Our site traffic leads the industry, our data content is massive, and the addressable market opportunity that we see now is $8 to $10 billion, which is four to five times the size it was back in 2015. Also, back in 2015, our marketing costs represented 80% of the multifamily revenue. Now, in 2019, they're only 30% of multifamily revenue. With this potential increase in our marketing budget of $100 million, we estimate that marketing would represent approximately 40% to 45% of multifamily revenue in 2020. CoStar is now big enough and growing fast enough to absorb investments of this size. If our growth continues in 2020 at the same rate as 2019, we could potentially add $200 million in revenue next year, which would be two times the potential increase in marketing. To summarize, now is the time to increase our Merle Flett family investment. We believe the market opportunity is bigger and much easier to see than before. We have more assets at our disposal and more experience to leverage these for success. The investment required is actually much smaller than before relative to our size and scale. and we believe their turns will be bigger and faster than in 2015. Overall, I believe our strong results and operational improvements have us well positioned for the fourth quarter and beyond. We're happy to have closed the STR deal so quickly, and once again, we want to welcome everybody at STR to the CoStar team. With that, that was a mouthful. We'll now open the call for questions.

And ladies and gentlemen, if you would like to ask a question... please press star then one on your touchtone phone. You'll hear a tone indicating you've been placed into queue, and you can remove yourself from the queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, press star then one at this time, and it's been requested that you limit yourself to one question, and then if time permits, we'll be able to take additional questions. Our first question from the line of Brett Huff with Stevens. Please go ahead.

Good afternoon, guys. Hello, Brett. Scott, thank you for the sort of thoughts and justifications around the additional ad spend. That's super helpful. Can you just go through that one more time for me and then talk a little bit about – Where does ad spend go from there? Andy, you mentioned right after you guys did the first Department of Steel, people were worried about it. I think the worry was that this business, in order to grow, would require incrementally even more ad spend. Just give us your thoughts as you go forward. That 20 times return is compelling, but just explain how you guys think about that long-term. Thank you.

All right. Okay, Bryce, let me walk through that one more time, sort of the financial perspectives around this thing. So, So back when we did the initial investment in marketing in 2015, $100 million, we had a report out that said the marketplace was $2 billion in size. And then, as you know, we've worked through the large end of that marketplace. We've seen the opportunity in the mid-market. We've seen now the opportunity in the I.O., large tail market. And we know that that estimate has now grown to between $8 billion to $10 billion opportunity. So we think the $100 million to go after $2 billion was a great move. We think the $100 million to go after the next $8 billion is an even better move. So that was one important note. The other is that the time when we made that investment, the total company multifamily was not nearly as big or as strong as we are now. So we had $130 million marketing spend, and that was 80% of the revenue. Clearly, we've grown that now to be almost $500 million in revenue, and so an incremental $100 million in spend against that fast-growing business is much less a portion of the business and much less of a bigger bet. The other thing I think is important to notice is that we've now grown a sales force that's much bigger than it was before and produces at a very high level. The site traffic has grown significantly. The amount of data we have, the amount of electronic feeds, you know, all the strength of that site there to leverage into this next size of the market will make that $100 million even much more effective. They're like softening up, you know, the beachhead before the troops all go in on the attack. And then, you know, I think when you look at just the ability of the company now when we're growing as rapidly at $1.4 billion in revenue, we had, you know, a couple hundred million in revenue in a year at our current growth rates. We've added over $110 million, $150 million in costs this year. So adding investment and costs, they're going to be bigger numbers. They scare people a bit because they're big. But when you look at the relative size of the company, these are the bets we should be making to keep increasing the scale and the growth on the top line. So that's what I'd probably comment on.

Yeah, and Brett, you sort of expressed concern from the 2014 period where, will we have to continuously invest and increase these investments in marketing? One of the things that is unique about this industry is we are one of the only aggregators out there investing any material money into the industry. So this is not something where we are doing it in a zero-sum game trying to keep up with some other competitor. What we're doing is we are seeing that when people are aware of our products and services, they're tending to buy them and renew at a high rate. And with an unaided awareness in the 20s to the 30s, there's a lot of people that are not aware of the product, and we want to make more people aware of the products and services so that we can sell to more people. We also perceive there's a strategic advantage of investing ahead of the pack. We want to be that we are confident and believe that we will be turning through a billion-dollar revenue mark on apartments at some point and going beyond there. We want to be investing into that size of company, not into what the industry was doing a couple years ago. So this is really driven by the fact that we now have much better numbers, metrics, ROI analysis, SEM analysis. We have a good handle of what we can sell and who we can sell it to at what price points. And we just want to go capture the opportunity. It's a relatively small investment compared to what we think the upside game is. And some people think that there's a big opportunity in the apartment sector. That would be one of us. And some people think there's not a big opportunity in the apartment sector. But we believe there's a big one. So we're investing in it. We're not being driven by by an escalating tit-for-tat with a bunch of head-to-head competitors. You know, we're not in the beer business or the car business or the insurance business. We're all alone in a, you know, in a multi-trillion dollar asset class. So we're pretty excited about it. We think it's good.

And our next question from Andrew Jeffrey with SunTrust. Please go ahead.

Hi, guys. Good afternoon. Lots to absorb as usual. Hi. One of the things I think you touched on, Andy, in LoopNet is the changing behavior of commercial property owners and managers and more of a focus on online. What if you could provide a little texture around that and why you think we're at a tipping point and what specifically you're doing at LoopNet to capture that opportunity? It may not get as much their time or attention is the big marketing spend in multifamily, but it sounds like a structural change in the market you're addressing.

Yes, it is. So I've had the good fortune to spend a couple decades in the industry, and I was there back in a completely offline side. Then you see it move into... unsophisticated online where there was an era where online marketing and commercial real estate meant that you saved 55 cents on a stamp when you sent your flyer as a PDF to the brokers in town. But really what's happened is we can see it clear as day is you look at the traffic coming into Lugnet. Lugnet's got 80-some percent share of the folks looking for commercial property coming through. And through reverse IPs and through Google Analytics, we can get an idea of who these folks are, and they're pretty much the Fortune 100. They're Walmart. They're Amazon. It's McDonald's. It's all the major techs. It's the big law firms. Just like people are using the Internet and everything from dating to buying a house to buying a car to buying insurance, everything they do, People are looking for commercial real estate. And it should not, you know, Facebook is a client of ours. It should not surprise anybody that Facebook goes on the Internet to look for commercial space. You know, duh, right? But it does surprise the industry because the industry is sort of trying to figure out, is locked into a historical marketing mindset of you can't market to end users. There's just too many of them. and it's just not possible in traditional methods to do it. But, you know, the whole digital folks searching out on the Internet, rather than you going out and trying to market to them, they come to you, and we're producing the tools where the owners can be visible when they come looking for them. So, you know, I'm very bullish on it. I think it is just an identifiable mathematical certainty that it's occurring. And so we're going to push that, and we're going to create awareness with folks how it's happening. And I think it's a pretty interesting opportunity because the broker-to-broker model is pretty good at the 30,000-foot, 50,000-foot size, but it doesn't work so well when you get below 10,000 feet, and that's where the majority of transactions are. We're going to push on it. I believe we'll see success in it, and I'm pretty excited about it, but it doesn't happen overnight. We're rebuilding LoopNet, and you can see it when you go look at the site. You can look at some office buildings for lease in certain cities. You'll see that we're no longer presenting the data like just simply a Craigslist where you're just presenting raw data. We're now paying attention to how the buildings are branded online and the image they present, the image of the architect, the image of the owner, the image of the brokers. And so we're not just presenting them. We're controlling the kind of frequency they get by controlling where they sort, the size of the placard. We're controlling the branding, the reach. And so I think we're producing... what will be the most powerful marketing tools the industry has ever seen, and I think it's going to be an exciting revenue opportunity. And that's pretty much what I think about about half the day.

Thanks. We'll go to Bill Warmington with Wells Fargo. Please go ahead.

So congratulations on closing the STR deal.

Thank you very much, Bill.

So the question I have for you is on... on LoopNet. Maybe you could talk a little bit about the pricing as it's being applied to the real estate brokers and then the pricing as it applies to the owners. And you gave an update on the PAM for multifamily at $8 to $10 billion. I was hoping we could get an update on LoopNet's PAM as well.

So, yes, so the... Again, the way LoopNet was historically marketed, it was geared to brokers just because LoopNet, when it was a standalone company, had no research department and needed to get content via the broker ad. So they would sell buckets of ads to brokers at super low prices. Brokers have a relatively small economic interest in the transactions. They Typically, the LoopNet ads were purchased by a broker who was pulling 1.5% of the economics themselves. And unlike an owner, the actual price achieved in a sale or a lease transaction isn't nearly as leveraged for the broker as it is for the owner. So brokers have small budgets. Remember when we first picked up LoopNet, probably the average ad price was $6 a building. We are now seeing owners who have 95% of the deal economics and who are willing to pay to sort to the top, have videos that walk through the building, willing to pay for drone videos, willing to pay for larger placards. Those folks are willing to pay price points to the $5,000, $6,000. Remember, we were selling ads to owners in print. We were up at $12,000 and up to $50,000 a building. So we're migrating. And it's not something we're doing in conflict with the brokers. The brokers like what we're doing because the brokers get promoted since they're the ones representing these buildings. So the owners paying to promote their building get broader reach for the building and frequency and exposure and branding. And that also carries, that lifts the brokers too. So it's sort of fun when you can be raising prices by shifting to a different segment with a different value proposition for what you're producing and not alienate anybody. So that's what we're doing. In terms of the TAM, you know, we haven't really recalculated that, but, you know, we're under $200 million now on that. We're roughly about 160.

Yeah, and the last calc we did on this was between $2 and $2.5 billion at the top of the envelope version. So we haven't updated that lately. But as we get further into the selling and we see the take rates and the full sales force behind the products that we launch over this next few months, we'll probably be able to update that as we get into the mid-part of next year.

And that's just looking at the marketing side of it. There's... There are a number of things we perceive the industry would find valuable, like reducing their workload and sub-2,000-foot leases. So, anyhow, we're comfortable that it's a pretty big TAM and that we have the lead on it.

We have a question from George Tong with Goldman Sachs. Please go ahead.

Hi, thanks, good afternoon. You're planning to increase your apartments.com marketing spend by 100 million in 2020, which amounts to about 600 basis points of margin headwind. You mentioned earlier that you expect margins to decline by about 400 basis points next year. So can you discuss where you expect positive margin offsets to come from, whether it's from productivity gains or cost cutting elsewhere in the business?

Yeah, there's a certain amount, you know, George, that we'll spend each year, you know, outside of marketing that, you know, is natural to business. You know, hits we've added this year, salary increases, those things. They'll go on into next year, but they won't go as fast as, you know, these increases in marketing. So, you know, our forecast now looks at around a 36%, you know, margin at the midpoint for 2019. So if you take into account extra $100 million in in marketing. And then the rest of those costs, we'll just say personnel costs and related, will grow nearly as fast. And so that will provide a bit of an offset. So in the end of the day, we'd expect to have about that 400 basis point drop off the 36 as a rough guide. Now, obviously, there'll be some variety around that when we get into specific planning, and we'll share that in February. But that's really where we are. We don't see that there needs to be a bunch of cost cuts out there. It's more of managing, after we've done a nice bit of investing this year, our cost base into next year.

Our next question will be from Pete Christensen with Citi. Please go ahead.

Good afternoon. Thanks, guys. Andy, how can you – it's obviously a huge step up in marketing spend here. It makes sense to lean in at this time. But how can you ensure you get the right efficiency when you're trying to target the independent owner category versus the broader category? How do you ensure that you get that efficiency? What's the strategy there? Yes.

That's a really good question, and that is right on target. It's something I think a lot about. And I sort of have a simple answer, which is we're not targeting the I.O. strategy. We are – we can look – we're targeting general awareness. We're targeting – We're targeting making sure that we're capturing increasing percentage and share of the renter's hidden Internet, regardless of whether they go to an institutional property or to a low-end property. That creates value, and it's hard to – it's really not that easy to mess up on that. We have a – experienced, strong team on handling our SEM on apartments. We have a good sense of what the good keywords are, good neighborhoods, and the like. So that one is a pretty safe investment. That's driving demand to our clients. Secondarily, you know, we've broken open on this middle market opportunity. So we have gotten great penetration at the larger sites. Properties, really good institution. It's 100 unit plus to 200 unit plus. But we are selling 10,000 plus ads in an area that folks never really knew existed, which is the five unit to 100 unit community. So we are just trying to create general awareness for the person that's got a 30 unit apartment building and softening the road for the... the hundreds of folks we've got in the apartment sales force selling exactly the same thing we've been selling successfully. So it's just creating awareness in the same way for the same folks. Now, as a derivative of that, it has a side benefit of supporting our I.O. effort because as they become aware of the site, you see that pickup rate where someone puts an apartment onto apartments.com for lease, they select the renter tools. At this early stage, we're seeing 36% opt-in. So just awareness, general awareness of the site will support the I.O. initiative. And when we run focus groups, We're getting positive feedback from both the renter and the small owner on what we're offering. We're getting extremely positive feedback from the renter. And so our primary concern is just to make sure that we have a large pool of owners opting into the tools so that the renters can take advantage of them. You know, we're thinking a lot about it. A lot of it is, you know, very basic blocking of tackling, blocking tackling with low risk. And then what we're doing is we're fine-tuning the messaging, creating awareness amongst the 300,000 folks with apartment buildings that we haven't sold to and we hope to sell to over the next couple of years. It's a lot of money.

And we'll go next to Ryan Tomasello with KBW. Your line is open.

Hi. Good evening, everyone. The revenue profile of the business has obviously evolved a lot over the past few years, and it seems like that will definitely continue to be the case. You know, as Apartments.com's reach expands, the prospect, the LoopNet owner initiative seems strong, and, of course, the push into hospitality with SDR continues. So, Andy, I was hoping you could provide us with your updated thoughts on the resiliency of the business model through a downturn as these new businesses grow and how your efforts to manage the revenue quality of the business are perhaps governing your decisions with respect to new investments across the CoStar platform.

Sure. So, I mean, it's an important question. We are – obviously in a very mature cycle. I went through the market economics for CRE right now, and when you say they can't get better, they get better, and then they get better. So we're not seeing any weakness in the CRE industry. However, just common sense says that we're not at the end of cycles. So, you know, one of the things I do like is that if you look at the COSTAR information revenue stream, A lot of that revenue is now coming from banks and major owners, and when you go into a cycle, banks step up their buying typically. They don't reduce it. So that is a stabilizing influence. We are... We continue, having gone through 2008, we continue to discourage salespeople putting a lot of energy into plant watering companies and moving companies and other companies that evaporate in a cycle. And we put effort into major owners, banks, investors who tend to have more demand in a cycle. We operated Showcase, and we can observe LoopNet in a cycle, and there's a little bit of countercyclicality there where when you've got a $150 million bill that loses a tenant, you are willing to spend thousands a month to try to replace that vacancy. And what we hear from people who have operated the apartment business through cycles is that this is actually the worst cycle to be in right now. These are so low, and when they can increase, people's budgets go up for marketing apartments. That makes sense. You do, in a cycle, get complete bankruptcies, but then that's quickly followed by someone picking up the asset with an unlimited marketing budget, which is a wonderful thing to see. The STR revenue, we believe, is very resilient. The renewal rates there are shockingly high, so we think there's some resilience there. And it's a basic operating metric being used by the hotels from their sales manager, general manager, to the flag, to the brand, to the investors. It's something that is a utility, and it's not something that they have the optionality to shut off in a down cycle, unless they just simply don't exist anymore. We've done well in past cycles. We don't, you know, I think we dropped, CoStar itself dropped 3% in 2008, which is remarkable given the scope of it. And I think we're pretty diversified and pretty resilient when the next one comes. And there's the offsetting thought, which is, When you go into a cycle, it's a wonderful time to buy really good companies at a big discount, which we always look forward to.

We'll go next to Mayank Tandon with Needham & Company. Please go ahead.

Thank you. Good evening. I know you gave the margin guidance, but could you at least qualitatively talk about the revenue outlook for next year, just in the context of should we expect the growth to accelerate given the investments, or will that be more of a 2021 scenario? And then should we look at the 19 growth rates across the different product lines as maybe a baseline for 2020?

Yeah, thanks, Mike. It's always a tricky spot when we're in the third quarter and we don't have our specific guidance ready or forecast or budget prepared for 2020. I alluded in my comments to continuing growth next year like we've seen this year, which is certainly what we've been planning for and investing for. and we expect certainly with the increased investments in marketing to help underpin that. What we more looked at was, you know, we gave that five-year outlook previously, and obviously when you make the new marketing investment, you want to be sure that the business one can absorb it, make it invested effectively, and then the outcomes of that will get us more assurance that we'll hit those goals. And I think as we work through that exercise, you can see just – just by the scale of the business, where now you can invest $100 million, and you may take a bit of a margin drag on that. But with the size and the speed of our growth, you could recover that margin drag within a year and then go back on top of it quickly in the second year out. Now, these are all financial models. They're not plans or budgets yet, so I don't want to get out ahead of ourselves on what that means. But we certainly expect that these investments will continue the growth rates where we are, and we want them to move us forward into the mid-later part of next year and really see the benefits of them into 2021. And so we have to invest now to get that to happen. Hopefully that helps give you some direction on how we think about it.

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

Yeah, thanks. Hi, guys. Thanks, Sterling. Hi. Good evening. On the marketing, Andy, you've said a number of times that this actually is the tougher time of the multifamily cycle where occupancy rates are so high, vacancies are so low. So is the incremental investment more tied to just where you think the competitive position is so you can just take a disproportionate amount of market share because of the healthier competitors and it's not about the cycle? Or is it in preparation for, hey, if vacancy rates rise in 2020, not only the competitive position, but maybe you get a little bit of a tailwind from the cycle as well?

Well, Tony, it's... The primary driver is not an upcoming sense of a cycle, though that is true. You'd want to have greater awareness and broader share. It's more the first thing you said, which is it's an open field. There is a clear, massive transition from offline to online for the apartment industry that We're the leader, and each time we gain more information about what the market looks like, we think it's bigger than we anticipated, and we want to, you used the word, get disproportionate share. We don't believe in the word disproportionate share. We believe in the word a lot of share, and nothing's disproportionate. We just want to get a lot of share in it, and we just think it's the... relatively speaking, it is a period or a time in the evolution of the industry where you can buy it at the cheapest price you can possibly buy it. Just because no one's bidding for it really aggressively, no one's fighting for it really aggressively, we're sort of alone in this space right now. Or we're not alone in this space right now, but people don't seem to be investing in it, even though there are lots of players out there.

And we have a question from Steven Sheldon with William Blair. Please go ahead.

Great, thanks. This is actually Josh. I'm for Steven. Hey, Josh. Hey, just want to get your quick thoughts on the delayed timeline of AFC 842 and how it might impact real estate manager results for the rest of the year. And then is there anything else that you guys are watching that could act as a headwind or tailwind to the adoption of that product over the near term? Thanks.

Yeah, sure. The... The delay in the adoption certainly gives you a little bit of a trough now, as people may back off a bit. We think that'll pick back up next year when more of the requirements come in. The effect of them now is really losing that implementation revenue that the one-time stuff is going backwards. It's nice to see the subscription piece still growing over 40%. We expect that it will all moderate out into the 15% to 20% growth range over time. And then it's really the future growth for that business will be less dependent on the accounting teams and what they do and more around how we integrate it with CoStar and we provide more services and tools for their clients to use the rest of CoStar in managing their real estate portfolios. And that should fuel the growth of Real Estate Manager much longer and more effectively than the near-term effects of the accounting teams.

Great. With that, I believe we have no more questions. And thank you very much for joining us for the third quarter earnings call. And we look forward to updating you on our progress at the year end. At the year end call in February. It's a big thing. It's exciting.

Happy holidays, everyone.

Thank you, everyone, for joining us. And we won't see you until you're through Thanksgiving and the holidays, December holidays, Christmas holidays. New Year's and everything else, but we'll see you soon.

Thank you. Ladies and gentlemen, this will conclude our teleconference for today. We thank you for your participation and for using AT&T Executive Teleconference Service. And you may now disconnect.