CoStar Group, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 CoStar Group Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the call over to your speaker today, Sarah Spray of Investor Relations. Please go ahead.

Thank you very much. Good evening, and thank you all for joining us to discuss the first quarter 2020 results of the CoStar Group. Before I turn the call over to Andy Florence, CoStar's CEO and founder, and Scott Wheeler, our CFO, I would like to review the Safe Harbor Statement. Certain portions of the discussion today may contain forward-looking statements, including expectations for the second quarter of 2020. Forward-looking statements involve many risks, uncertainties, assumptions, estimates, and other factors that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, the duration and impact of COVID-19, the pace of recovery, customer usage and purchasing decisions, changes in investment strategy or plans, timing, and success of acquisitions, those stated in CoStar Group's press release issued earlier today and in our filings with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q under the heading Risk Factors. All forward-looking statements are based on information available to COSTAR on the date of this call. COSTAR assumes no obligation to update these statements, whether as a result of new information, further events, or otherwise. Reconciliation to the most directly comparable gaps measure to the non-GAAP financial measure discussed on this call, including EBITDA, adjusted EBITDA, non-GAAP net income, and forward-looking non-GAAP guidance are shown in detail in our press release issued today, along with definitions for those terms. The press release is available on our website, located at costargroup.com under Press Room. As a reminder, today's conference call is being webcast, and the link is also available on our website under Investor Relations. please refer to today's press release on how to access the replay of this call. And with that, I would like to turn over to our founder and CEO, Andy Florence.

Thank you, Sarah. That's an unusual milestone to have a pandemic-enabled safe harbor statement. Hopefully we could avoid that the rest of my life. So good evening and thank you for joining us today. for CoStar's first virtual first quarter 2020 earnings call for virtual food management team. The first quarter was really a composite quarter with two normal months and one pandemic month. As with every business, the COVID-19 pandemic has upended normal operations. The pandemic operations in CoStar's The pandemic hit operations in CoStar's Beijing office first, giving us advance warning. And I'm sorry, I'm getting a bunch of beeps here. If we use Teams, it beeps in my ears. So I'm sorry. The pandemic hit operations in CoStar's Beijing office first, giving us advance warning and some time to prepare to transition 100% of our North American and European operations to a digital dispersed remote workplace. Employee safety and continuity of operations for the sake of our investors, clients, and our employees was our top priority. Our systems teams responded promptly, working around the clock to execute our emergency contingency plans. We're very grateful for their diligent efforts. We believe that 95% of CoStar staff has successfully transitioned to working remotely over the past six weeks at 90% productivity. These are stressful and disorienting times for our employees, and I'm also grateful to them for their resilience and continued focus on our professional responsibilities. And it's okay if our employees' kids periodically duck their heads into our many video conference calls. We're consistently keeping our customers and mission-critical needs front and center. At the same time, we continue to build and innovate for co-stars and our clients' future after this disruption subsides. We believe that our products remain mission critical to the vast majority of our clients, even as they deal with pandemic-driven market disruptions. The commercial real estate industry will continue to operate, and to do so, we'll need to sign and renew leases, find investment opportunities, value properties, dispose of properties, analyze markets, and very importantly, market vacancies to generate much-needed revenue. In a time when people cannot readily visit properties in person, digital marketing becomes even more important. CoStar Group and our digital solutions are here to meet the industry's continuing need for high-quality data and highly effective digital marketing. In the immediacy of the initial phases of our crisis, our clients are trying to assess what it all means and are trying to de-risk. This means buying new information or marketing solutions sometimes is not their first priorities initially. The clients of our clients are also putting things on hold and that's disconcerting to our clients. As I have communicated consistently over the years in the initial phases of an economic disruption, let alone a global pandemic, our gross sales drop and cancellations rise initially. We are seeing some of that now. I want to stress that our business has always been really resilient through down cycles. In the 2008 recession, which was very hard on the commercial real estate industry, that was the only time our revenue ever contracted over even a quarter. And even then, our revenue only dropped 1% in calendar 2009, 1%. We experienced a flat sales quarter, followed by two quarters of declining sales, finishing with a slightly negative sales quarter after that cycle. Again, revenue dropped 1% in the worst year in our 34-year history. Sadly, in any economic cycle, some number of our clients' businesses will fail. Some clients will exit the business for good. Others will lose buildings to bankruptcy. We share their pain. They're deeply empathetic for any of our clients whose businesses succumb in this downturn. We have often seen clients going through bankruptcy organization now and continue to pay for our mission-critical services. As some building owners lose their buildings, these buildings remain valuable assets through bankruptcy, and new investors step in to buy them, and many of those investors purchase our services as they begin to operate their new purchases. The fact remains that every past cycle, the majority of our customers continued to operate their business and continued to rely on our services. Typically, sales of properties slowed dramatically for several quarters to a year or so, after a disruption like this. Fortunately, we're not as heavily impacted by the property investment sales cycle. Our broker clients tend to derive a lot more of their revenue from leasing commissions. In the cycle, leasing pauses initially for quarters or so, but tends to rebound sharply, like a sharp V. This is for the simple fact that any given time, The bulk of leasing activity is driven by leases expiring that need to be renewed. Lease expiration dates have no respect for an economic crisis, and most companies remain in business and continue to need their facilities, so they sign leases even in a down cycle. And as they sign those leases, our clients earn commissions. I've asked our economists to use the wealth of information we have on past cycles and to run Monte Carlo simulations to estimate expected leasing activity over the next 12 months. We believe there will be close to a million leases signed in the next 12 months. We believe that these will generate more than half a trillion dollars of leasing value and more than $20 billion of commissions. While leasing has initially seized up, eventually there's still a lot of business to be done in the back half of the year. This analysis refers to total leasing activity, not growth in demand. We expect there will be a significant contraction in demand overall, but the commissions are not normally impacted, or are normally impacted by that. Rates fall a little bit, doesn't really hit the commissions too hard. In fact, with high leasing values and some contraction of demand, there's something like a game of musical chairs for building owners going on. There's a lot of leasing activity, but every time the music stops, there are few owners left without a critical tenant income or, by analogy, a chair. Marketing commercial space and apartments becomes even more important when it becomes harder when a tenant met vital revenue in a shrinking pool of tenants. The pandemic and social distancing make this economic downturn harder than other downturns. The physical leasing process of prospective tenants driving by properties Being signed and touring through the buildings has, in most cases, ground to a halt. Just when owners desperately need to promote their buildings and tour tenants to fill growing vacancies, the physical inspection of properties are becoming impractical. The digital marketing departments.com, LoopNet, Riala, Belbex, Lands of America, or BizBuySell offer can become a critical replacement for the loss of the traditional physical leasing process. Prospective tenants can tour their options on apartments.com, see what the buildings look like, use aerial drone videos to understand the area, use Matterports to walk through the apartments virtually, and even potentially use our online leasing tools to apply, sign a lease, and pay the rent without ever exchanging stacks of paper with a stranger. If Fortune 500 executives are touring potential new office space and high-rise tower right now, I believe that it's much more likely they're in their PJs at home doing it on LoopNet rather than touring in person. It's much safer that way. I believe that this phenomena is why Apartments.com had its second best sales month ever last month. And in fact, if you exclude a convention sales month like NAA, it was our best sales month ever last month. Even if this happened, we achieved that best sales month last even after most of the country was locked down and our entire sales team was working from home. At this point in April, salesforapartments.com is pacing ahead of April of 2019. To be clear, we expect that revenues overall may contract in the near term, but we feel that there are a number of drivers that make our business resilient or even somewhat counter-cyclical over the course of the next year. With 34 years of experience running a company that provides economic insights through multiple cycles, there's no doubt that this pandemic has created more uncertainty than any other scenario I've seen. The pandemic has created too much tragedy for too many. It has created serious economic uncertainty. Good thinkers I respect hold diametrically opposed outlooks. So from where we stand today, it's essentially unrealistic to predict with the certainty we need what the detailed consequences of this pandemic will be on our business over the year to come. So we'll provide guidance for the next quarter, but not the full year. However, we continue to believe that our data, analytics, and marketing tools will be among the most valuable sources of information, leads, and potential traffic for our customers. Therefore, we remain very confident in our business model and the role we play supporting the CRE industry. We're maintaining our investments to strengthen our position, both from a brand as well as a product perspective, and believe that we will exit the present uncertainty in a stronger position than before. With that qualifying prologue, I want to continue and quickly review our Q1 results. I'm very pleased that the first quarter we delivered at the high end of our guidance range across the board. CoStar Group's total revenue grew 19% year-over-year to $392 million. Across all of our service lines, our revenue growth was ahead of expectations, with LoopNet revenues leading the pack at nearly 23% year-over-year growth. Barbers.com was strong with revenue growth just above 20%. In the context of significant investments we were making in the Departments.com brand, this quarter's net income was strong at $73 million. Majestic, but it was solid at $124 million. During the course of the first quarter, our sales team generated $48 million in net new bookings, despite the pandemic's disruptive impacts. Again, Apartments.com was the true standout, achieving its second-highest quarter ever of net new sales, up 34% versus the prior year quarter. Brad Saint, Paige Forrest, and the whole multifamily team delivered an amazing, resilient, and adaptive performance throughout the first quarter. They never missed a beat. LoopNet had an exceptional start to the year also, but the CRE industry slowed a little harder in March in reaction to the pandemic. Let's go into apartments.com a little deeper. In 2019, we invested approximately $150 million to market apartments.com to consumers. We continue to feel that apartments.com represents a huge market opportunity for CoStar Group and that we can achieve an outside return by increasing our investment in marketing apartments.com to our previously communicated level of $250 million in 2020. Our enhanced marketing campaign launched in March just as runners began quarantining at home, and they consumed unprecedented amounts of media. The initial results from the first month of the campaign were strong, with 1.5 billion impressions, nearly double that seen last year. The total visits to Apartments.com reached a new all-time high. Our unaided brand awareness also continues to climb with a new high of 35%. I believe Jeff Goldblum and RPA and the whole team did a fantastic job with the creative, and we're really happy with the whole series of ads we're going to be able to present to consumers over the course of the months to come. After a dip in March, as quarantine efforts across America began, leads have recovered substantially and are now trending above the levels we saw at the same time last year. So without a doubt, our marketing investment is paying off, and combined with the efforts of our sales force, we hope this will allow us to maintain good net new bookings levels. We continue to work diligently through all the required regulatory processes required before we can close on our acquisition of rent back. The bankruptcy proceedings are following the expected course. In late March, no auction was held. Okay, that's a virtual earnings call. When the kids call you in the middle of the call waiting to get your phone. Sorry. The bankruptcy proceedings are following the expected course. In late March, no auction was held because no qualified bidders came forward. From the public filings, we can see that the vast majority of the debt holders support the planned reorganization, which includes the contemplated sale to CoStar. The FTC review is ongoing, and we expect a second request. which will extend the review on a timeframe that is consistent with our previous estimates of 3 to 12 months from signing. As always, we respect the FTC process and will cooperate fully to provide the agency with all the information they need to perform their investigation. There is no additional information we can provide on the outlook for the process at this time. LoopNet started the year very dynamically, continuing the positive usage and sales trend that we saw in the fourth quarter. As we and the rest of the country transitioned to home in early March, we experienced a drop-off in daily average users that lasted for about a month. Over the past couple of weeks, we've seen a steady increase in users, just about back to last year's levels. More importantly, the number of searches now exceed last year's level, and that's what counts for our customers. As I mentioned, LoopNet sales dipped in March as people transitioned to work from home. LoopNet sales have not yet shown the same resilience that apartment sales have shown. I think one thing to remember is the digital advertising value proposition has been well understood for many years now in the multifamily industry, whereas we're in the early stages of adoption for the commercial real estate industry. Ultimately, we believe that the current situation will actually accelerate LoopNet adoption. but it may take more time. I'm a huge believer that LoopNet will be an essential virtual solution for owners looking to win an outsized and important share of the hundreds of billions in commercial leasing dollars that are likely to occur this year. Right now, industry participants really need to know what's going on. They need to have the best information available for forecasts, availabilities, listings, and the pricing information that CoStar provides. we remain committed to continuously improving our user experience and the utility of our CoStar product. For CoStar Sweden in particular, 2020 will be a year of significant product development initiatives. We are deeply engaged with the backend integration of the STR platform. As the year progresses, we plan to integrate STR into the CoStar product at the front end as well. While CoStar operates in dozens of countries around the world, our product is not yet one seamlessly integrated, multilingual system, multi-localized system. While in the short term, commercial property sales volumes will fall dramatically, we expect they'll surge again in a year or so. Much of that investment activity will be multinational. In order to provide the most value and capture the most value for that opportunity, we want to provide our clients with a truly CRE global transaction analysis and marketing platform. We're hard at work on that initiative and expect to release the first phases of our global system in the third quarter of 2020. We expect to support a dozen or so languages by the end of the year. Ultimately, a customer from one country will be able to use one platform to seek, analyze, and compare investments across multiple countries and cities. SDR's clients are clearly one of the hardest hit segments of our client base in this pandemic. Retailers definitely have had a hard time here. This downturn will be more damaging to them than 9-11 and the Great Recession combined. We expect STR will likely see the drop in revenue and profit, but we expect the fallout to be relatively or comparatively mild. For our STR subscriptions, we've been able to handle about 80% of the client financial assistance requests through payment deferrals. For the other requests, we have offered two- to three-month contract extensions that represent a total of $300,000 in annual revenue. We also have $54,000 in annual canceled product subscriptions. At this point, it's remarkable, but it suggests less than 1% of canceled revenue. STR subscribers are our key partners, and they're least likely to cancel their products. These are hotel operators that know that data is vital to understand the market and what is happening with their competitors as well. They also want to make sure they have continuity in reporting so they're able to track as soon as recovery is beginning in their market. Due to the number of hotel closures in some markets, especially outside the U.S., we have a plan to continue to provide value to these subscribers even if we cannot report on market numbers for some period of time. We are providing custom analysis such as a deep dive on the average daily revenue declines that uncovered the fact that ADR declines were not from hotels slashing rates but rather from a rapid shift in the mix of demand. The feedback from these clients in our exclusive content series developed for them has been overwhelmingly positive and underscores the importance and value of maintaining their contract with SDR. SDR is the most risk associated with the ad hoc revenues. Ad hoc revenues are off, but we expect the revenue will begin recovering in June. This is revenue that will come back. The industry will begin recovery and development activity will restart, which will result in trend sales. Or if we have a prolonged downturn, there will be trend sales happening with distressed assets or portfolio evaluations or dispositions. We are releasing for the first time tomorrow monthly profit and loss analysis for U.S. hotels. The data has continued to come in, even with so many hotels closed, and there's even more desire from hotels to see this profit-loss information. The entire industry is watching the recovery in China to hopefully shed light on what a recovery in their part of the world will look like. We have been reporting on China Weekly and have now added a video series focused on China recovery that we're producing both in English and Chinese. As of last week, 90% of the hotels in China are open, and we have a couple of markets that are inching towards 50% occupancy. Overall, though, occupancy in China is at 35%, and that's certainly nowhere near the normal 70% to 75% occupancy we would expect, but it's well up from the low of 10% occupancy a few months ago, slow but measured. recovery in a matter of months. I want to update you on the state of the commercial real estate economy overall. It's really still too early to empirically see the full and ultimate impacts of the pandemic on the commercial real estate industry. The data so far shows an unprecedented collapse in economic activity. Jobless claims over the past four weeks exceed 26 million, and this figure would likely be higher if it were not for the overwhelmed application websites and offices. Most high-frequency economic indicators are showing unprecedented declines from manufacturing output to poor traffic to retail sales to consumer confidence. Consensus forecasts are calling for a 4% decline in GDP in 2020 and for the unemployment rate to approach 20%, levels not seen since the Great Depression. We're already seeing the effects of the outbreak on commercial real estate. Continuing with the hotel theme, hotel revenue per available room is down more than 80%. We have simply never reported figures like that. The immediate impact is less profound than the other property types, though, thankfully. Our daily apartment rent series shows that asking rents have fallen by about only one percentage point since peaking on March 10th. That's not much compared to what we've been seeing in hotels. But normally, we'd expect apartment rents to be up about a percent over the same period. But all in all, given everything, you know, there's no problem there. But we believe that many Americans are actively looking for new apartments. And as we've seen, search activity at apartments.com is exceeding pre-outbreak levels. In the commercial sectors, leasing volume over the past few weeks has fallen to about half of typical levels. And we expect it will fall further in May before it begins rising again in June or July. We expect the retail sector to be the hardest hit, as many shops have closed due to social distancing measures. Demand for retail space has already turned negative so far this year. Many shops, restaurants, bars, and coffee shops sadly may never reopen. Our forecasting models predict occupancy losses of as much as 300 million square feet, and that vacancy rates could rise 350 basis points to levels well above the peak of the last downturn. Rent losses could reach 15%, topping the 10% losses in 2009. Outcomes for office at this point look less severe as vacancies are lower and construction is about half of the level in 2007. Still, we expect occupancy losses ranging from 100 million square feet over four quarters to a quarter billion square feet over the next two years, compared with just 57 million square feet over the seven quarters of the last downturn. Our models predict asking rent losses of 10 to 20% compared with 14% 2008. Declines in effective rents will be larger as landlords offer concessions and TI packages to retain tenants. Demand for industrial has held up better thus far. First quarter leasing set an all-time record. And while the pace of leasing has slowed mid-March, Amazon has leased more than 6 million square feet in April alone. Can't help it. I need to point out that Amazon is one of the single heaviest users of LoopNet. And we can see their staff looking at LoopNet at many of these properties they eventually lease. Need a commercial in there in the economic section to pay for the economics. Amazon has also announced that it's already hired 100,000 workers to cope with the demand and plans to hire 75,000 more. But even industrial will see occupancy losses and rising vacancies. Demand falls even in our upside scenario. So positive absorption returns quickly and rents resume trend growth by the middle of next year. With negative net absorption, will likely suppress the losses and last downturn. The 2008 experience also gives us some confidence that leasing activity won't fall by nearly as much. In 2008, total leasing volume across the commercial property types was down just 7% from the pre-recession average, and 2009 was down just 4%, even as occupied space fell by more than 300 million square feet. By 2010, leasing was up 10% from pre-recession levels. In the capital markets, it's too soon to know the effect on deal volume, but initial indicators suggest investment activity could be down by as much as 50%. In the last downturn, deal volume fell by 75%. Swift and unprecedented action by the Fed has shorted financial markets and thus far prevented the worst, but we expect prices to fall by at least 10%. And... potentially by as much as 30% or more. In the most dire outcome, prices remain at the depressed levels for the next decade. Our baseline scenario, though, predicts conditions start to improve next year. Whether this prediction comes to pass depends on containment of the outbreak and progress towards treatments and a vaccine, two variables that are almost impossible to predict and difficult to incorporate into economic models. We can say with some certainty that many firms will fail, rents will fall, and vacancies will rise. We also know that the day-to-day business of commercial real estate will continue as leases expire, tenants seek new space, brokers and landlords negotiate, borrowers refinance, lenders underwrite deals, appraisers determine value, and opportunistic buyers come in strong looking for bargains, and Americans continue to look for new apartments. CoStar Group is on a strong foundation as we face the full impact of this pandemic. With 19% year-over-year revenue growth, $73 million of net income in the quarter, and $1.9 billion in cash on the balance sheet, we had a great quarter in the overall context. Our staff has successfully transitioned to remote working. We believe that we will have a rich set of attractive acquisition opportunities ahead, and we're currently exploring a number of such opportunities. We continue to support our clients' mission-critical needs, and we're hard at work building the innovative products that will drive our future growth. At this point, I would like to turn the call over to our CFO, Scott Wheeler, for the much more interesting and entertaining section of the call.

Well done, and thank you, Andy. It certainly was an unbelievable start to this year in so many ways. It's unlike anything I've ever seen, that's for sure. But I'm thankful that our CoStar teams are safe and productive. Our business is performing well, and week by week, we'll continue to navigate through all of these changes. Financially, we're in a very strong position. We maintain a very conservative balance sheet precisely for times like this, a time when we can continue to invest for the future and take advantage of new opportunities that come our way. We have $1.9 billion in cash. Our subscription revenue model is resilient, and the services we provide are 100% digital, perfect for a time when person-to-person contact has been practically eliminated. Our business is much more diversified than it was in the 08-09 recession, with 50% of our revenue now coming from online marketplaces, as opposed to almost 100% from CoStar 10 years ago. On top of that, owners, property managers, institutional investors, and lenders now represent our largest customer base, whereas we were much more heavily concentrated in the brokerage customer sector during the last downturn. But things are changing, and over the past month and a half, we have financially become very, very granular. We watch daily metrics on contracts, on sales, on customer inquiries, customer retention, cash receipts, purchases, and payments. This information, although valuable, does not tell us what the future holds, but it certainly provides insight for the multiple revenue scenarios we create in our financial models, of which even the absolute worst-case scenarios do not indicate any concerns with regard to liquidity or the ability to continue generating strong, positive operating cash flows. Now on to some color on the results. We had a great start to the year with revenue in the first quarter up 19% over the first quarter of last year, while revenue growth in the first quarter, excluding the STR acquisition, was 15% year over year. CoStar Suite revenues grew 12% in the first quarter of 2020 versus first quarter of 2019, as expected. As the stay-at-home orders began in early March, we saw the daily sales and the new contract flow for CoStar decline, cropping to roughly half of the January and February levels by the third week in March. Coming into the last week of April, sales levels have stabilized and have improved slightly. We expect renewal rates to gradually soften in the month ahead, just as they did in the previous economic downturn. We discontinued all price increases in early March to our customers. Assuming these sales and renewal trends continue through May and June, we would expect the revenue growth rate for CoStar Suite to be in the 7% to 8% range for the second quarter of 2020. Revenue in our information services grew 72% year over year in the first quarter of 2020 to $32 million. And this includes our first complete quarter of results for STR. On a combined basis, STR and our real estate manager business represent approximately 80% of the revenue in information services. Both of these businesses have reoccurring subscription revenue as well as one-time transaction or implementation fee revenue. The subscriptions revenues, which were 80% of the revenue in the first quarter, are stable and, as Andy said, will continue to be stable and actually growing both year over year and sequentially into the second quarter. This is encouraging as the global hospitality industry is certainly one of the hardest hit by these recent travel restrictions. Now, the transaction and implementation fee revenues have declined as customers delay purchases and and planned implementations. Overall, we expect the reported revenue from information services to grow at a rate somewhere between 30% and 40% in the second quarter of 2020 compared to the second quarter of 2019. Multifamily revenue growth for Q1 remained really strong at 20% over the first quarter of 2019, which was exactly what we were expecting. Our revenue growth continues to be generated from both an increase in the number of properties that advertise with us, which was up 9% in the quarter, as well as growth in the average rate per property, which increased 11% in the first quarter as customers upgraded to higher-level ad packages. Despite the disruptive events that occurred in March, multifamily had a phenomenal first quarter with their second-highest-ever quarterly bookings. Digital marketing has never been more critical than right now. So far in April, we see continued strong sales levels, which, if sustained through the second quarter, would result in revenue growth of approximately 18% to 19%, for the second quarter of 2020 compared to the second quarter of 2019. Commercial property and land revenue grew 20% year-over-year in the first quarter of 2020. Our LoopNet marketplace, which represents over 75% of the revenue in this sector, grew 23% year-over-year in the first quarter. Following very strong LoopNet sales in January and February, we saw sales volumes drop roughly in half, consistent with what you saw in CoStarSuite in the second half of March and the remainder of that level pretty much through this time in April. With LoopNet user traffic and lead volumes improving week to week, we are optimistic that these sales levels could improve in the months ahead. We expect commercial property and land revenue growth rate to be approximately 10 to 12% for the second quarter of 2020 compared to the second quarter of 2019. Our gross margin came in at 80% in the first quarter of 2020 in line with expectations and we expect our gross margins to continue at that level in the second quarter. Our profitability was strong in the first quarter, with net income, adjusted EBITDA, and non-GAAP EPS results all ahead of the guidance we issued in February. Overall spending levels came in below our first quarter expectations as we rapidly adjusted to the business to respond to the stay-at-home orders and prepare for the anticipated negative effects in the economy. In some areas, our spending increased, included cleaning and sanitation of our offices, the technology costs for moving to remote environments. We also increased our bad debt reserves to reflect anticipated economic hardships in certain customer segments, such as hospitality, retail, and small brokerage shops. Our vacation accrual actually increased as time off was deferred by many of our employees. In other areas, of course, our spending decreased. This included travel, conferences, facility improvements, infrastructure-related initiatives that are not mission-critical, to support our customers and our products. We froze non-essential hiring and compensation at the beginning of March and we curtailed all discretionary spending. Our marketing spend increased year over year in the first quarter of 2020 by over $20 million as part of our previously announced multifamily growth strategy. It included higher levels of search marketing as well as the launch of our apartments.com brand advertising campaign. This represented a significant increase over prior year spending levels and total marketing spend in the first quarter was just modestly lower than planned, primarily due to the timing of the spend as some of the expected advertising events, such as the NCAA tournament, were canceled. In addition, we pulled back on certain types of marketing that would not be effective when our customers are working from home, such as direct mail or office visit gifts. As Andy mentioned, we intend to continue our increased investments in marketing as planned for the second quarter of 2020. Our digital marketplace tools are becoming more relevant and effective during social distancing, and now is not the time to pull back on marketing support for these investments. Cash and investment balances were approximately $1.9 billion as of March 31, 2020, up $857 million since the end of 2019. In March, we borrowed $745 million against our revolving credit line in order to pre-fund the expected rent path acquisition and and to increase cash reserves for other acquisition opportunities that could emerge in the near future. The remaining $120 million cash generated was due to strong cash from operations and other areas in the first quarter. Now we'll look at a few of our performance metrics. At the end of the first quarter, our sales force totaled approximately 800 people. That's up 45 people from the first quarter of 2019, and down approximately 40 people sequentially from the fourth quarter of 2019. As we stopped hiring in March, Salesforce attrition is not currently being replaced with new hires. The majority of attrition in the first quarter relates to inside sales roles. In addition, we shifted a number of our best field customer service people into direct selling roles, resulting in little impact to our direct field sales teams for CoStar and multifamily, whose levels are roughly equivalent to the fourth quarter with just a slight decline. The renewal rate on our annual contracts for the first quarter of 2020 was in line with the rate we achieved in the fourth quarter at 90%. The renewal rate for the quarter of customers who have been subscribers for five years or longer was 95%, also in line with the renewal rate in the fourth quarter of 2019. As a point of reference, during the last economic downturn in 2008 and 2009, renewal rates for CoStar declined gradually over the course of about six quarters, Similarly, we could see declines in our renewal rates in the months ahead. Our second quarter 2020 forecast assumes that our 12-month trailing renewal rate will decline around 200 basis points from the current levels. Subscription revenue on annual contracts accounts for 83% of our revenue in the first quarter, in line with the fourth quarter of last year. Now on to the outlook, and as indicated in our press release, and Andy mentioned, The uncertainty in the current environment, we're withdrawing full-year guidance, and we're not going to be issuing new annual guidance at this time. We expect to resume our practice of providing annual guidance at some point in the future. We are able to provide estimates for the second quarter of 2020 as our subscription revenue model provides a reasonable forecasting visibility for the near term. Our approach to the second quarter revenue outlook assumes that the overall sales results observed for the first three weeks of April continue relatively unchanged throughout the end of June. Accordingly, we expect revenue for the second quarter of 2020 in the range of $387 million to $392 million, representing top-line growth of around 13% at the midpoint compared to the second quarter of 2019. For the second quarter of 2020, we expect adjusted EBITDA in a range of $110 million to $115 million. This outlook assumes we will seasonally increase second quarter marketing spend in apartments and in loopheads. which will partially be offset by reduced spend levels in personnel and other operating expenses when compared to the first quarter. In the second quarter of 2020, we expect non-GAAP net income per share in a range of $2.02 to $2.12, based on 36.8 million shares. In summary, we delivered very strong financial results in the first quarter of 2020, and our business is on a very solid financial footing. Our teams are safe and productive, We believe our information, analytics, and online marketplaces will become increasingly valuable to our customers in the months and the years ahead. Thank you for all of your support, and I look forward to updating you on our progress in July. With that, we will now open up the calls to questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. And your first question comes from Mario Cortolacci with Jefferies. Please go ahead.

Hi, thanks for the time. I hope all of you and all your families are healthy and staying safe. I was just curious, because we have limited insight into how apartments.com has performed during the last downturn, obviously it wasn't part of your financials. Just wondering if you can give us a little more insight into how that business reacted. And I guess I think the expectation is that it's more of a consumer type of business. So it would likely be more impacted. But any extra color or any more background on the performance would be greatly appreciated.

Sure. I've asked executives who managed Apartments.com or similar companies that we acquired in the last downturn, and they have typically said that Apartments.com does – better in a downturn than in a really healthy market. So higher vacancy rates mean there's more demand for leads and traffic into leasing offices. So in point of fact, many people, executives, believe that a really healthy market like we had a year ago is a bad environment to operate apartments.com. consumer behavior here is fundamental. It's like having a roof over your head. So it's very resilient during a downturn.

Great. And then just more of a longer term question. I think we've gotten a lot of questions around how the industry could structurally change on the commercial real estate side. I guess just the working from home environment. Do you think that impacts demand for commercial real estate longer term? I think I heard you toss out a number on just square footage of commercial real estate declining over the next two years. I don't know if I heard that correctly or if maybe this has something to do with that. But do you think that this is a structural change in the industry that could happen longer term as more people work from home and there's just less demand for office space?

Well, forgive me, I don't want to sound flip, but after decades of having these sorts of discussions, I come across a little bluntly. I was an early cynic on the concept that co-working would take over the world. I'm a much bigger cynic on the fact that people are going to want to continue working from home. And I actually think that there's a little knee-jerk where people say, oh, gosh, I was going to work from home. I'm not seeing that. And, in fact, I could actually make the argument that the potential downside of a quarter billion square feet of demand going away in the office sector is really just driven by job losses, you know, one person for 200 feet. But the demand for office space is very elastic to the price. So the amount of space per person in Houston is dramatically larger than the amount of space per person in London. So as prices fall 20%, overall demand may go up, especially when companies are trying to figure out potentially over two years, three years, how not to be jammed all over each other and want to spread out a little bit. But our staff in Beijing... is thrilled to be back in the office. And I've never seen people like that here.

Great. Thank you so much. Yep. Your next question comes from Peter Christensen with Citi. Please go ahead.

Thank you, guys. Sarah, great to hear from you. Thanks for the opportunity to ask a question. Andy, do you think this economic shock is Will you think about changing any of your products or services, whether it be features or perhaps the way it's priced or packaged? Do you think CoStar will need to change any of its products because of this economic shock?

Yes. Our product teams have probably initiated a dozen or more product changes to deal with the situations. If you go to LoopNet, you'll see a very prominent virtual tour button now on the homepage. We now have an ability in LoopNet where a broker can or two executives, a broker and a tenant or two executives can join each other on a LoopNet tour and actually initiate video conferencing together and in the LoopNet website as they view properties. We call that co-tour. There are probably a dozen or so of these sort of virtual leasing, more social distancing type things that we're doing. And we're also ratcheting up the marketing. This is, you know, the one thing that happens in any one of these disruptions is typically behavior changes permanently. And so we believe that there's a chance that... people will come to value online marketing in real estate much more than they valued it before and we're basically pulling all the strings and product features to try to capture that as quickly as we can. There's some other initiatives we're looking at and maybe one or two acquisitions we're looking at that are responsive to what's occurring right now and what we think will happen next year based on this cycle. So we're You know, I think probably 30% of what we're doing in product is around this situation right now. I don't think there's a lot changing in pricing. You know, I think we never increase prices when the market is in disruption. But beyond that, I don't think there's a bunch of – there's no big need to change pricing. Too long an answer there. I'm sorry.

No, that's fine. And then have you seen any new use cases for CoStar products? Are there – Have there been new clients that have approached you? I'm interested if anything's popped up.

It's a little early for that, but I'm positive there will be. What you typically see is money on the sidelines looking to move in on distressed properties. That's already starting to ramp up, as usual. Great.

Thank you.

Your next question comes from Stephen Sheldon with William Blair. Please go ahead.

Hi, thanks. Andy, you made the comment that revenues could contract in the near term, so I know there's a lot of uncertainty out there, but generally, how much visibility do you have right now looking at potential revenue in the third and fourth quarters this year? Is there at least a meaningful likelihood that revenue in the second half of the year could be down organically? Or were you just saying that as a general possibility, but maybe not what we should expect at this point?

I would reiterate that there's a lot of uncertainty right here. We don't know if we're going to be fully back at work, when, how. But I would not be at all surprised if there wasn't, you know, I would expect softness in revenue. I have to say that When I saw the apartment sales numbers come in last month, I was shocked. When I see the sales numbers coming in this month, I'm shocked. I'm like, oh, my gosh, you know, a lot of online marketing. But, yeah, I have to assume that some elements of our business, as with other downturns, will see softness. Cancellations will go up. We've had a number of customers ask for forbearance on their bills. We've probably... negotiated some deferrals on about 160 customers on CoStar. We probably eliminated some user headcount, you know, 100 or 200 some sites roughly. But, yeah, we have to change the long-term course. We would expect to pick back up if there's softness shortly thereafter. And, you know, we're going to try to keep everything moving in the right direction, but we certainly can't say that it won't go negative here or there. But, again, when it went negative last time, only one time ever in three or four years on an annualized calendar basis it was 1% down. So I'll take that. If that's the hit we're going to take, I'll take that. But we're going to try to fight it.

Okay. And then secondly, you'd mentioned the potential global system that you plan to roll out in the third quarter for the CoStar Suite. Any thoughts on what that could mean for the CoStar Suite financially as we think about the next few years?

Yes. It's certainly not a pandemic-related investment. It's the long play. But, you know, you look at – I think we – When I look at the early days of CoStar, we were in a handful of cities. There was X demand for our products. In the United States, I felt that there was 4X the demand for our products because we were a way to transcend multiple markets and geographies in the United States. I believe that same opportunity exists on an international level. Once we can start to stitch together our European point solutions into a consistent solution along with a consistent solution in the United States and tie in some of our new assets in Asia into that same platform, I believe we'll be able to offer a lot more value. We will not be making massive investments in cycling up Poland this year, obviously, but modest investments to start to build our network around the world and We'll be doing things like if a customer subscribes to national data in the United States, they will automatically get global data. Someone in London will be able to search for sales opportunities in Toronto or look at hotel information in Beijing, et cetera, et cetera. But we do think that we want to be well-positioned for what we think always happens in a cycle, which is the drop in sale activity followed by a surge, which is multinational. And we want to really be able to build a – really capture that global capital flow that's invested in commercial real estate. And it's making good progress. And we're lucky that our lead developer, Mike Fulkerson there, actually came to us from – oh, my goodness. Gosh, how could I possibly remember the number one language software? What is it, Scott? If you were going to learn a new language, what would you use? Rosetta Stone. Thank you very much.

Right.

Okay. Thank you. That comes from our general counsel. Perfect guy to have. I have running CoStar Development as the guy who led development over at Rosetta Stone.

Sounds good. Appreciate the color.

Definitely have too many devices up on my screen now, on my desk now. I have like Rosetta Stone popping up on 16 bubbles on three screens.

Your next question comes from Andrew Drew-Dreffery with SunTrust. Please go ahead.

Hi. Good afternoon. Appreciate you taking the question and and all the color as usual. Andy, I know it's a super fluid environment, and I'm just trying to square the circle, I think, around the second quarter guide, which is pretty good, all things considered, and some of the qualitative commentary about how bad things could get. again, juxtaposed against what appear to be, I think you've acknowledged, surprisingly strong sales in multifamily and loop net. So if you continue to do well, given the investments in loop net and given the counter-cyclical aspects of multifamily, should we infer that to the extent the numbers sort of get much worse, comparable to the worst parts of the 08-09 downturn, that most of the downside risk exists in suite? And I just wonder about the mechanics of that.

Yes, so we, you know, sadly, I really do expect to see a lot of bankruptcies. And I remember clearly in 08, you know, you had thousands of companies that were clients going bankrupt. So I imagine you're going to see some bankruptcies. You're going to see folks at the end of their career decide to step out at this point. So you'll see that... You'll see that hit the CoStar Suite side, and that typically, it'll happen over X number of quarters, but you also see new buyers entering the market in the after a quarter or two, especially like vulture investors or opportunistic investors. You will see building owners go bankrupt. The silver lining there is that they tend to maintain, they have in the past tended to maintain their marketing plans through bankruptcy. Bankruptcy courts tend to approve that because they don't want the revenue stream to erode during the bankruptcy process. Really from the last several cycles is that's when they just bought the asset for 50 cents on the dollar. They are flush with the cash and much of it flows our way. So, you know, I think that, There will be friction throughout the system, but probably a little bit more on the brokers who step out of the business or go bankrupt on the CoStar side.

Going forward, in the interest of time, we ask that you please limit yourself to one question. Your next question comes from Mayank Tandon with Needham. Please go ahead.

Thank you. Andy or Scott, maybe one of you could answer this. In terms of the multifamily platform, I think, Scott, you mentioned that 11% of the growth last quarter came from some of the upgrades. Could you provide a little bit more color in terms of what those features are that the users are buying, and what does that mean for 2Q in terms of the contribution from the upgrade on the platform? Thank you.

Yeah, sure. What I was referring to in the growth in the quarter was that our clients are choosing higher level ad packages to purchase, which cost more per package. You may recall last year we announced that we were putting in a diamond plus level for sorting to the top of the diamond section. And then this last year at the end of the fourth quarter, we also introduced platinum and gold plus tiers as well to sort into the top of those levels. Now, those aren't material parts of our sales right now, but they're just examples of when people want to get more exposure, when they have additional vacancies they need to fill, then they can buy up to higher-level ad packages to get more traffic and more leads. And we saw that in the first quarter, and that's what generated that 11% revenue growth from that price mix effect.

Your next question comes from Bill Warmington with Wells Fargo. Please go ahead.

Good morning. I'm sorry. Good evening, everyone.

Did we start the call in the morning?

No.

That long.

It has. So signature ads at LoopNet, you know, that was a big focus of the sales conference in January. And the whole move from from having LoopNet go from being a broker-focused, broker-driven to the owner-driven market, are you seeing uptake on those ads moving from the broker price point at $35, $40, $60 per listing per month up to the $2,000 to $3,000 level for the owner? Is that taking place? Yes. Is that going to continue to drive the revenue? Because it sounds like the revenue on that division is going from around 20%, 22% expected revenue growth to about 10%, 12% revenue growth.

Yes. That's right. Before the pandemic hit, we saw – some really good sales results in LoopNet signature ads. And then the pandemic hit and everything just basically stopped while people are figuring out what's going on. But the really good results in signature ads continued January, February. And as much as anything, I think we saw some brokers who are more vulnerable pulling back some of their spending And while it's, you know, there was a dip in search activity in LoopNet initially as we went into the pandemic in the United States, that activity has come back up and searches are now stronger than they were before. I think we need to clarify our message or evolve our message to the owners about the fact that, you know, they have, you know, the message is really solid for those folks today. There will be hundreds of thousands to a million leases in the next year. There will be a contraction of overall demand. People are not driving by and seeing building signs. People are not touring the buildings. We are continuously improving the immersive quality of marketing their buildings on LoopNet, and we think we will pick up revenue there, and we think it will keep going. But we're being conservative right now because A lot of our revenue on LoopNet comes from small brokerage firms, and we think they will take an outside hit, but that's not really impacting the fact that we're going after a new market pretty aggressively, which is the larger institutional owners. And the amount of money they spend on an advertisement on a high-end LoopNet ad relative to their vacancy loss is about as levered as you can possibly be. You know, you're looking at a $100 million vacancy loss, and you're looking at an ad that costs, you know, a couple thousand bucks. So I remain optimistic. I spent most of Sunday working on new marketing materials for LoopNet to try to adjust and focus, and I think we'll, you know, I'm still bullish about the potential there, but Mr. Wheeler, Dr. Wheeler, will be Dr. No, because we're in the lull in being conservative.

And Bill, you know, we talked about the revenue per listing increasing in apartments as people buy ads. In just signature ads alone, we saw from the fourth quarter, we were around $500 per ad. In the fourth quarter, now we're a little over $700 per ad in the first quarter. And that's not price increases. That's people deciding to buy the platinum and the diamond level signature ads in more and more quantities as time is going on and as our sales force is really focused on those high value properties. So it's starting to move up nicely from an average price perspective.

Your next question comes from Brian Tomasello with KBW. Please go ahead.

Good evening, everyone. Thanks for taking the question. Regarding the expense base, can you talk about what levers you have to pull there going into the back half of the year and how willing you'd be to pull them depending on how this all plays out over the next two quarters? And particularly with respect to the apartment ad spend, can you clarify your comments regarding the intent to continue with that plan? Is that just with respect to one queue, meaning the ad spend in the second half of the year could potentially be curtailed depending on how the environment unfolds?

We, at this point, as we've mentioned, so there are a bunch of different levers we can pull on cost structure. We have... A lot of optionality there. But at this point, we don't have conditions that would merit contracting our spend dramatically. We actually have a lot of great growth drivers in the business, and we are, you know, as we report this quarter, we're meeting our expectations. If things fell apart, you know, certainly we would react, but that's not what's going on. And when you look at... And when you look at the results we're having in Apartments.com, they're strong, and we believe that potential is still there, and we don't see a reason at this point to change our strategy. Our traffic to Apartments.com and our lead flow is at the highest level it's ever been. So across the board, almost all of our key sites are hitting the traffic numbers. And we think that there's a transition going on from more offline to more online. And this is an opportunity that, you know, we don't really want to change our course or our mission given the facts we have today. So we're anticipating continuing the same investment we originally planned unless something changes.

Your next question comes from George Tom with Goldman Sachs. Please go ahead.

Hi, thanks. Good afternoon. You withdrew your full year 2020 guidance and are only guiding one quarter out for now. Can you discuss your confidence level in achieving your previously disclosed 2023 targets?

Those are always fun questions to ask George in the midst of an extremely uncertain environment. When we decide not to give 2020 guidance, George asks me for 2023 guidance. I kind of knew you were lurking out there, George. You could get to that. So right now, like we say, we've got the second quarter is what we're seeing so far. And clearly, we're focused on growing back at our historic levels as quickly as possible and continue to invest so that can snap back and continue to pursue acquisitions, which will help fill any of those revenue gaps. gaps that might be created by a temporary slowdown. Certainly, you either have to buy more acquisitions or you're going to have to get that revenue growth rate running up further in the out years. But mathematically, we can still get there. Again, until you know what the length and the duration of the downturn is, you can't say for certain. But that's not all we know about it so far. And as pace and directions change, we'll obviously keep that in mind.

Uncertainty clearly is high right now. And we don't have a reason to believe that it's not achievable at this point until facts change and there's a reason why it's not achievable. I would actually say you could say if an element of that is organic, it would probably be more achievable to, I'm sorry, if an element of that target is acquisitive or an act by acquisition, it may become easier to achieve those targets in this acquisition environment.

Your next question comes from Brett Huff with Stevens. Please go ahead.

Good afternoon, guys, and glad you're all well. Andy, I want to follow up a little bit with you because I know you've been probably talking with a lot of your customers, and we've gotten a lot of questions on kind of the microeconomic decisions that, say, a multifamily owner or a commercial building owner who wants to sell or maybe is under duress or maybe wants to wait. Do you have any anecdotes that will help us get some insight into those decisions that folks are making and how, therefore, they're going to make decisions on whether they're advertised on LoopNet or advertised on multifamily? You gave us a good example of a large multifamily owner with lots of vacancy risk, you know, buying an ad for a few thousand dollars. But are there any more in the middle market or even any more for LoopNet that you could give us? Thanks.

So in terms of – I think there are two different questions there. One is the microeconomics and the decision to market on LoopNet or Apartments.com. I think that math is really quite simple. Across the board, the economic trend is going to be to softness in leasing revenue. And when you hit softness in leasing revenues on big dollar items, And traditional methods like broker parties or events or signs or people spinning the sign outside or walking through the building are all gone away. That beautiful print brochure is not going to be seen or touched by anybody. It's a no-brainer that the trend should be to digital marketing, virtual experiences, more Matterports, more drone videos, and the like. So that's a no-brainer. And... on the other element about decisions, how people are using our tools to try to decide, should they sell? Should they, you know, um, I think those macro, I think those trends are, um, tsunami like, and I think that, um, I think that, uh, I hope our clients use our data, uh, aggressively and trust the numbers to set their pricing realistically quickly and, to win at the game of musical chairs, i.e. sit down first. If the data says you should sit down first, because having a chair is better than having no tenant at all. Um, so I think that people should be using our data right now to really be realistic, uh, between, and also to help coordinate between owner lender and, uh, uh, owner lender investor, make sure that they're all making that decision together with data as opposed to hope. And, um, And then on the part of investment sales, I feel that there's typically a big disconnect right now where it's going to be really difficult for people to – sellers to reduce their expectations enough to meet where buyers are right now. So typically that doesn't happen for a year to 18 months to 24 months. But we will build products and services to try to be there with strong offerings as that volume unleashes.

Your next question comes from Sterling Audie with JP Morgan. Please go ahead.

Yeah, thanks. Hi, guys. So for my one question, I just want to go back to multifamily in terms of the comments that you made. Is it fair to say that you actually believe the bottom has already been put in in multifamily, or is there potential that multifamily could see sequential contraction in the upcoming quarters?

I think there's two questions. One is our experience selling advertising to multifamily, and then secondly, rates and occupancy levels and asset prices in the multifamily world. I believe that just by the nature of our business, we are somewhat insulated as to what happens with occupancies. We may be inversely correlated to what happens with occupancies. I think we're relatively independent of what happens with the rent. The rent falls so far are, you know, not material. And I think we're independent of what happens to asset values. We may be somewhat negatively impacted by the fact there may not be a lot of new development over the next two years. But at this point, the sales are holding up strong because, you know, if you have tenants who are not paying rent and were paying rent the month before, and you anticipate they may not be paying rent again in the future, you need to begin to backfill them. If you just had a large property delivered and it's got a lot of vacancy, then you may have a need to really pick it up. Again, we can't really see beyond next quarter as to what's going to happen in the economy, but right now we feel pretty good about what's happening from Apartments.com's perspective and our experience. It could change, but right now it has surprised me materially to the upside. Shocked me.

Your next question comes from Joe Goodwin with JMP Securities. Please go ahead.

Joe, Joe, I'm sorry. Could you speak up a little bit? It's very dim. Could you try again? Is that better? Yes, much better.

Sorry about that. Thank you. So on the commentary around the potential of your revenue actually going negative growth, could you maybe just give us some color around what quarter will likely be the bottom or at least how you're thinking about that?

I would look at, you know, we don't know. but I would just look back to the worst we ever experienced in 30 years was 08-09, and we had two quarters where it really materially fell, so that would be, you know, a quarter or two out on the CoStar side, but we, you know, this is a different cycle, and we have no idea, you know, when, you know, it's just too hard to predict past the quarter, but it typically wouldn't be If you would just take exactly what happened in 2008 and stick it right here, it would be third, fourth quarter.

Yeah, the other thing people were seeing and that you need to keep in mind is that if you recall back in the last recession, it started to build, you know, the negative momentum started to build through 2008 and then dropped pretty heavily at the end of 2008, early 2009. And so it took a number of quarters for that to develop. What we're seeing happen here is that, you know, when we hit mid-March, things dropped significantly. quickly and they dropped within a week down to the levels I mentioned, you know, half of the levels of sales, et cetera, which never happened before in the 08-09. And then when we see what's happened since then, you know, as Andy mentioned, we've seen volumes move up in traffic and leads on both LoopNet and Apartments.com. Apartments.com is up where it was before the downturn. We've seen CoStar in the last week and a half. We've seen the contract pacing move up a bit in costar in the last week and a half so so we just saw this this you know the cliff dropped quickly and then it held there for you know a week or two and then we've seen uh you know some build underneath it now does that mean it's going to continue to build or is it going to drop again if something else happens in the economy or is it going to build faster like we don't know but but the pattern is very different in this uh this shock than than what happened in 08 or 09 But we try and take as many lessons as we can from it and then just see how this thing develops in a different pattern.

There are no further questions at this time. I'll turn the call back to the presenters for any closing remarks.

Well, thank you very much for joining us for the first quarter earnings call. I look forward to updating you this summer on the second quarter, and I hope you're all staying safe and well. I appreciate you all joining us here on the call today.

This concludes today's conference call. Thank you very much for joining us. You may now disconnect.