CoStar Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the CoStar Group's second quarter 2020 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Sarah Spray, Investor Relations. Thank you. Please go ahead. Thank you.

Good evening, and thank you all for joining us to discuss the second 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 our State Harbor Statement. Certain portions of the discussion today may contain forward-looking statements, including expectations for the third quarter and full year 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 those stated in CoStar Group's press release issued earlier today and in our filing for 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, future events, or otherwise. Reconciliation to the most directly comparable gap measure up to the non-GAAP financial measures discussed on this call, including EBITDA, adjusted EBITDA, non-GAAP net income, and forward-looking non-GAAP guidance, are shown in detail in our press release issued today, along with definitions for those terms. The press release is available on our website, located at costargroup.com, under Press Room. As a reminder, today's conference call is being web-tapped, and the link is also available on our website under Investors. please refer to today's press release on how to access a replay of this call. And with that, I would like to turn over to our founder and CEO, Andy Florence.

Thank you, Sarah. Good evening, and thank you for joining us today for CoStar's second quarter 2020 earnings call. A caveat, I see a large thunderstorm rolling into my position, so if I get disconnected, Scott Wheeler, our CFO, will pick up my script and deliver it not quite as well as I do, but he'll muddle through. So, going into the second quarter, it has been one of the most difficult to predict quarters in my decades of experience. It'd be hard to ever imagine the scale of this location our country's experiencing. Yet, despite the challenges we've faced so far, our team here at Coast, our group, has performed exceptionally well, turning in one of our strongest quarters ever. We grew revenue 16%, increased adjusted EBITDA 17%, set a record sales month, raised $2.7 billion in equity and debt into the equity and debt markets, and acquired 10X, all while working 100% from remote locations. Traffic to our apartments.com and movement marketplaces rose to new record levels, exceeding pre-pandemic levels. We had 62 million monthly unique visitors on our platforms in the second quarter, an increase of 13% over our record traffic levels of 55 million monthly unique visitors reached in the first quarter of 2020. I hope you can agree with me that these results indicate that our business is not only resilient but is, in fact, countercyclical. Our business, like I believe most businesses, was slowed in the first part of the quarter as people adjusted to the new normal. This progressed back in each month this quarter, eventually reaching our best sales results ever in June. CoStar, LoopNet, Apartments.com, Lands of America, BizBuySell, Real Estate Manager, Risk Analytics, and SDR all showed positive growth in the month of June. In a world of social distancing, our digital marketplaces uniquely enabled our clients to continue their mission-critical leasing efforts. While many were debating whether recovery would be V-shaped, CoStar Group's recovery to date looks more like a checkmark. While I believe the challenges from the pandemic are far from over, The progressive improvements in our operating results each month throughout the second quarter gives us greater confidence in the positive outlook for our business. CoStar Group's total revenue grew 16% year-over-year to $397 million. Across the second quarter, our sales force brought in $35 million in net bookings, with $22 million of that being in June alone. Our marketplace businesses delivered strong revenue growth, with Apartments.com growing 21% and LoopNet growing 18% year-over-year in the second quarter. Our net income was strong at $60 million. Our overall EBITDA was well ahead of expectations at $109 million, an increase of 17% year-over-year. And our non-GAAP net income per share of $2.34 was up 5%, well ahead of expectations, regardless of the 2% dilution from our equity raise in May. Apartments.com was truly the countercyclical standout in Q2, hitting new records throughout the quarter. Net new sales were up 33% against our previous record set in the second quarter of 2019. In fact, every single month this quarter, our sales hit a new record high. In the true and accurate words of Paige Forrest, our head of multifamily sales, every single benchmark was blown away. We had a series of all-time record high traffic numbers for our apartments network sites during the quarter, including 23 million average monthly unique visitors, up 6% year-over-year, and 200 million visits, up 16% year-over-year, according to Comscore. Our apartments.com sales force logged a 58% increase in quality meetings and interactions with our clients, delivering critical service to our customers at a time of significant challenges for their business. Apartments hit a new quarterly record revenue of 146 million. This June, the largest annual multifamily industry conference, the National Apartment Association Conference, was postponed due to the pandemic. This conference is a significant customer event for apartments.com and typically makes June our best sales month of the year. Without the possibility of meeting in person, we organized and produced a two-day virtual summer showcase event conducted entirely with video meetings. We lined up speakers from top tech, digital media, and advertising companies along with our own research staff and economists to speak on a range of topics from local market updates to marketing in anxious times, all in support of our customers. The event was a resounding success. Over 3,200 customers participated, resulting in connections to over 1,000 new customers. The customer response was tremendous and contributed to a record June in terms of net new sales, nearly 20% above the previous record and for less than 5% of the cost of the annual in-person event. We saved $4 million going digital. As announced last year, we've increased our marketing expense and we've increased our marketing investment in Apartments.com by nearly 50%. We plan to continue our increased investment in marketing despite the pandemic because we believe that we can still generate an outsized ROI on that investment even in this environment. Based upon our results this quarter, we think we're in fact seeing an excellent ROI on that increased investment. Our Q2 marketing campaign highlights start with the launch of our new broadcast ads featuring the iconic Jeff Goldblum as Brad Belfour, the inventor of the apartment internet. These ads hit the airways at the end of March with an increase of 12% more ads over our 2019 campaign, airing across an even wider variety of digital and streaming video platforms. This year, we also increased marketing via paid social and media and retargeting ads, as well as addressable TV through personalized advertising based on household composition. We raised our SEM spend significantly, leading to a higher frequency of number one positioning in a broad range of search terms. Overall, these paid initiatives led to a 57% increase in impressions. Paid advertising isn't the whole story either. Our continuous investment in the functionality of and content on our site helped to continue to fuel organic site traffic growth of 16% in Q2. We were also rewarded by new highs in unaided brand awareness, an important measure of the reach and effectiveness of our campaigns. And we are now leading the pack with Zillow in second place and Craigslist and Rent.com tied for third. We believe that strong and improving levels of consumer awareness is the key to our ultimate success in penetrating the broader rental markets, and the timing and magnitude of our investment is clearly paying off. The strength of our business is evident in that we can make these aggressive investments in growingapartments.com while still generating 109 million of EBITDA in the quarter. We're focused on accelerating our sales penetration across all categories of rentals from the largest apartment buildings to midsize apartment communities to single-family homes, condos, and townhouses. In late 2019, we added an inside sales team based in Richmond, Virginia to focus on selling apartments.com solutions to owners of mid-sized and smaller apartment buildings and single-family dwellings. Nine months into launching this under 100-unit sales force, we're seeing great results. This quarter, we grew our net new sales in the under 100-unit segment nearly 70% versus Q1 2020. Over the last 12 months, half of all advertisers we added, 2,400 properties, were in the sub-100 unit category. When we acquired Apartments.com in 2014, little to no effort was made selling to apartment communities with under 100 units. Now, 16% of Apartments.com revenue comes from properties with under 100 units. This means that today we have more revenue in the previously overlooked below 100-unit communities than Apartments.com had in total when we bought them. Clearly, there's demand for Apartments.com in rentals of all types, big and small. But as much as we have sold, we are still less than 1% penetrated into the sub-100-unit segment. We are excited about the amazing multi-billion-dollar scale of the opportunity we have here, and plan to continue to build out the marketing efforts and sales teams to fully monetize our leading position. Don't costs get behind us. On June 9th, the bankruptcy court signed off on Rent Pass Chapter 11 plan and our acquisition proposal as part of the plan. So, the remaining hurdle is the FCC process. On April 29th, we received a second request as part of the FTC approval process for our proposed acquisition of RedPak. This was anticipated and we are responding quickly to the request. Should we get approval to close the transaction, it would be completed within a 3 to 12 month timeframe that we gave in February. In the meantime, we continue to compete aggressively in the market as always. We believe that we're continuing to take significant market share away from Redpath because we offer vastly superior traffic, more exposure, and thus more leads and leases. Over this past quarter, we began integration of our successful lender risk analytics solutions into CoStar Suite. Productizing these solutions into the larger platform will allow CoStar to expand its reach from the top tier of CRA leaders to the many thousands of institutions that could greatly benefit from analytics only available with CoStar data. For over a decade, our highly experienced risk analytics team has been a trusted source to lenders, providing credit risk models for portfolio stress testing and loan loss reserves used in regulatory reporting, examinations, and for internal risk management. By leveraging curated costar property data and market research, we can provide up-to-the-minute information on a lender's collateral, allowing them to perform real-time performance surveillance. This is a capability unmatched in the industry. We think combining these time-proven models with costar data in a scalable platform creates exceptional growth opportunity in the lending market. LoopNet finished the quarter on a strong note, overcoming the market disruption that began in March and April caused by the pandemic. Monthly unique visitors are now tracking over 7 million, which is an all-time high, being the record set earlier this year. Net new sales improvement followed the improvement in traffic, finishing June with net new sales up 91% year over year. To keep this momentum going, we have really leaned in with significant product enhancements and marketing efforts. We position LoopNet diamond and platinum level signature ads to property owners as powerful digital marketing innovation that generates unprecedented and differentiated marketing reach, frequency, and branding for their valuable properties. Beginning in April, we dramatically expanded our use of broad retargeting to further increase the frequency, reach, and brand enhancements that our top signature advertisers enjoy on LoopNet. With over 7 million unique monthly visitors, LoopNet is by far and away the most heavily trafficked commercial real estate website, so we believe we have the best insights into who is currently in the market for commercial real estate. Once we identify a prospective tenant or buyer on LoopNet, we retarget them across the internet, thereby increasing the critical frequency of views for our top signature ads by 600% above the great performance they're already getting. In addition to driving up the frequency of valuable exposure for our advertisers, this retargeting investment has the benefit of bringing a significant number of LoopNet visitors back to LoopNet for further re-engagement. In addition to retargeting, we've launched a new program to leverage our database of 6 million tenants and digitally target them across the web and social media to bring these tenants to our advertisers' properties digitally. We've also added video conference-enabled co-touring to LoopNet this quarter. This allows registered LoopNet users to invite colleagues to virtually tour potential spaces together. At the end of June, we closed our first virtual M&A deal with our acquisition of 10X. 10X is the leading innovator of online commercial real estate options, having completed more than $24 billion in property sales online. In the few weeks since we closed the deal, 10X has held two auctions transacting an aggregate value of $50 million. We have approximately $400 million in aggregate value going to online auction over the next two weeks. 10X has been used by all the major broker terms in America to transact properties online and close deals faster. While 10X is used to transact both performing and distressed properties, it was born out of the Great Recession and the need to liquidate a high volume of distressed properties quickly. We believe that 10X is highly countercyclical. If there's an increase in distressed commercial properties in the cycle, we believe that 10X will see an increase in auctions and revenue. We are starting to see tangible signs of financial distress in the commercial real estate market, the first being delinquencies, which are clearly on the rise. This month, 30-day delinquencies jumped five percentage points versus June 2019. This is only two percentage points lower than the peak of the Great Recession, and this time around, delinquencies are driven primarily by retail and lodging. In June of this year, we saw 7% of CMBS go 30 days delinquent, which could translate into over 3% of CMBS defaulting over the next few months. You may remember that one of the key synergies of the 10X acquisition is that we can leverage our millions of LoopMed visitors and global co-star users to increase awareness of properties going to auction at 10X, and thereby dramatically increase the potential bidder pool for properties. Auctions with three or more engaged bidders are much more likely to transact above the reserve than are auctions with just one or two bidders. More bidders drive more closed auctions, which we believe will, draw more properties for sale, which in turn draws in more bidders. And all that generates more commissions for our brokers. One of the first steps we've taken is to move 10X auction candidates to the top of LoopNet and CoStar and present them as enhanced diamond placements with enhanced retargeting, which will dramatically increase their exposure to potential bidders. We will continue to invest in harvesting our unique data sets of millions of potential buyers and their search activities on our sites that digitally target them and draw these potential bidders to 10X. We're very excited about the enormous potential of this acquisition. This quarter, the SPR business model has clearly proven its resilience in what must sadly be the darkest days of the hospitality industry in modern times. Remarkably, STR generated positive net new sales in Q2 and a recovery in ad hoc revenues that was a positive surprise. In April of this year, 19% of hotels in the U.S. were closed, but by this month, only 7% were closed. Looking elsewhere, in April, 98% of Spanish hotels were closed, but in contrast today, only 3% of the hotels in China remain closed. Globally, the hotel industry is slowly recovering from the bottom, although more recently occupancy and demand have started to decline again in the U.S. But as long as hotels are open, STR is essential. With global occupancy rates in the mid-40s, 40%, and little hope of a quick recovery of business travel, it is very probable that we will see many hotels restructuring and changing hands. But lenders, investors, and new owners will also need SDR data in order to accomplish those transactions. As you know, our strategies combine SDR hospitality data with CoStar's complimentary building set in order to create new products that provide a full view of building data, income, and occupancy information, sales comps, and for sale information. We're making good progress on this step and hope to launch within the next year. We had two successful capital raising events in the quarter. In May, we issued $1.7 billion in equity. In June, two of the three rating agencies awarded our initial debt issue with an investment grade rating wisely. As a result, we were able to issue $1 billion of 10-year debt with a coupon of 2.8% on July 1. Including our cash generation this quarter, this leaves us with a current cash balance of approximately 3.8 billion. This, combined with our undrawn revolver of 750 million, gives us over 4.5 billion of firepower and growing. As we move forward to grow this business aggressively, we're positioned with a phenomenal balance sheet and are well prepared to take advantage of what we expect could be significant opportunities in the coming years. I'm grateful for the confidence of our investors, grateful for the confidence that our investors have placed in us. Our investors are the 12th player in the CoStar football team and one of our company's greatest strengths. We have a long, successful history of acquisition integration, having made over 30 acquisitions since CoStar was founded. A number of our great acquisitions have been made during down cycles. Examples include Comps.com, which we purchased in 2000 at a 60% discount to the pre.com premium, and LoopNet, which we acquired in 2012 at a 40% discount to its pre-great recession premium. In total, acquisitions have provided about 30% of our revenue growth since our IPO, but it is how we integrate them and how they accelerate our organic growth that's more important. Taking the two examples above, comps.com now brings in eight times its acquisition level revenue and LoopNet four times. It's this kind of discount and development potential that we aim to exploit in the coming years and why we view market stress as an opportunity rather than a concern. Over 7,000 PropTech companies have emerged over the past decade or so. Probably 500 or so have truly viable business models that are interesting that create plenty of future M&A opportunity for CoStar Group. CoStar Group is the largest prop tech company with the strongest balance sheet and the most experience in successful M&A. So, we believe we are well positioned to make a number of accretive acquisitions in the prop tech space in the years to come. We are very patient and have always waited for the right opportunity. Digital real estate consolidation is clearly a very hot space right now. I think the proof point is Bill Foley's Tenet and Senator launching a $7 billion hostile takeover bid for CoreLogic in the midst of the global pandemic. I'm very familiar with CoreLogic since decades ago. As a young software engineer starting CoStar Group, I invented the first ever version of their flagship digital public records product. Perhaps my first M&A success for our investors was declining an offer from CoreLogic's predecessor company to acquire the fledgling CoStar Group for $250,000 in our first year of operations. I had thought we were aggressive in acquiring 10X in a friendly deal during a lockdown, but I must say that even leaving aside the clear antitrust issues, Foley has one-upped us with the aggressiveness of seeking to operate a company acquired in a hostile takeover in the midst of a pandemic.