CoStar Group, Inc.

Good day. Thank you for standing by and welcome to the fourth quarter 2021 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 keypad. Please be advised that this conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Bill Warmington, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Blue. Good evening, and thank you all for joining us to discuss the fourth quarter and full year 2021 results of the CoStar Group. Before I turn the call over to Andy Florence, CoStar Group CEO and founder, and Scott Wheeler, our CFO, I would like to review our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the company's financial outlook and expectations for the first quarter and full year 2022 based on current beliefs and assumptions. 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 filings with the SEC, including our most recent annual report on Form 10-K and 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 measures of 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 webcast and the link is also available on our website under Investors. Please refer to today's press release on how to access the replay of this call. And with that, I would like to turn the call over to our founder and CEO, Andy Florence.

Thank you, Bill. Good evening, everyone, and thank you for joining us for CoStar Group's fourth quarter 2021 earnings call. Total revenue for the full year 2021 was $1.94 billion, which is a 17% year-over-year growth rate and above the high end of our guidance range given in late October. Fourth quarter revenue grew 14% year over year to $507 million, crossing through an important milestone of a $2 billion run rate for the first time. December 2021 was our best sales month ever. November, December, and January were three of our four strongest sales months ever. Net bookings of 67 million in the fourth quarter of 2021 were a new all-time high for us, up 37% year-over-year and 43% sequentially. Our trailing 12-month bookings in the fourth quarter was 217 million, growing 18% year-over-year. This is a significant acceleration from the trailing 12-month bookings growth of 6% year-over-year in the third quarter of 2021. Our profit performance in 2021 was also very strong adjusted ebitda for the full year was 647 million, an increase of 17% and 27% above the high end of our guidance. 2021 was a solid year of growth and expansion for CoStar Group. We made significant investments in the CoStar product and our unified platform overcame significant overheated apartment market challenges at apartments.com. We expanded our LoopNet and Tenex businesses and established a solid foundation in the residential property sector. Our addressable market continues to grow every year and our estimation now approaches 100 billion TAM globally. A couple of weeks ago, I ran across our TAM estimate from the year 2003. and that indicated a global TAM of 1.6 billion. At that point, our total revenue was under 75 million. What a difference we've seen in 20 years, as our revenue is now bigger than we estimated the total TAM global to be in 2003. It took us 16 years to go from zero to 100 million revenue run rate in 2003, another 14 years to get to 1 billion annualized revenue in 2017, and only four years to surpass 2 billion revenue run rate. 5 billion, here we come. CoStar revenue was $723 million for the full year 2021, up 9%. CoStar's year-over-year revenue growth accelerated throughout 2021. We started the year with a 4% year-over-year growth in the first quarter of 2021, and it climbed until we exited at 13% in the fourth quarter. The strength is coming from a combination of record sales rep productivity, continued product upgrades, price escalations on subscription renewals, and strong renewal rates. Net bookings in the fourth quarter of 2021 grew 3x versus the fourth quarter of 2020 and matched our all-time high quarter in the third quarter of 2021. The CRE sales team is firing on all cylinders delivering all-time high productivity in 2021, up almost 40% versus 2020. In 2021, we began upgrading the 18,000 accounts who were using subsets of CoStar's full product offering. This program is very popular with our customers, and by the end of January, we have converted about 5,700 accounts to the full global CoStar product. Our original estimate was that the upgrade program would contribute 30 to 40 million in incremental revenue over a 12 to 18 month period. The adoption rate, however, has been stronger than we expected, so we expanded the number of accounts to upgrade to include appraisers, owners, government agencies, and many others. This raises the number of upgradable accounts from 18,000 to 21,000. As a result, we believe our original estimate that the upgrade opportunity would generate 30 to 40 million is likely now to exceed $50 million. After having suspended price increases on CoStar subscription renewals during the pandemic, we restarted normal renewal rate increases in the third quarter of this year. Even at these higher price points from annual renewals and upgrades, clients continue to see strong value in the CoStar product, and we see that in multiple metrics. Our accelerating revenue growth, for example, is coming from a combination of both volume and price. We're finding that as we upgrade accounts, we're often increasing their number of users, and our user count is now over 170,000 subscribers. In addition, our renewal rate for CoStar remains very strong, 94% in the fourth quarter of 2021, well above the historic average of 92.4%. Our sales team has put a significant effort into strengthening our relationships with our clients. We see that effort pay off as our net promoter score has been increasing, and as it does, so does our renewal rate. We believe that the launch of our new lender product on February 8th sets up another long-term growth driver for CoStar. Feedback, while the product's in beta, has been extremely positive. It's a truly revolutionary product that reverses a traditional flow of data in the industry. In the past, most lenders pulled data manually from multiple sources. CoStar Lender, in contrast, automatically connects their loan portfolio to CoStar's industry-leading research market analytics and our proprietary Compass credit default model. The Compass credit default model is the most mature in the industry. And this makes this solution unique as the best source for portfolio surveillance, concentration risk, stress testing, current expected credit loss , supporting loan originations, and underwriting. So we're very excited about this new product. We have a dedicated and trained sales team that will be focused on upgrading CoStar's over 1,000 existing lender clients and engaging 6,000 other prospective lenders across the industry. With FASB's second round effective date for CECL fast approaching in January of 2023, we feel our solution is well-timed. There are literally thousands of institutions in the U.S. without an answer for CECL in place with this deadline approaching. Because CoStar offers lenders a range of solutions, it positions us favorably versus the competition. We continue to invest in long-term growth opportunities for CoStar, and that includes international expansion. To support our growth across Central Europe, we've begun hiring managers and teams of photographers for Spain, France, and Germany. These teams will be supporting both our CoStar and Marketplace assets as we begin the process of deepening our industry data in the largest European markets. Overall, I feel very good about our growth momentum for CoStar and expected revenue growth in 2022 to move above the historical 12 to 14% growth range to around 15% year over year. I believe CoStar has a 10 billion global market opportunity in which we are less than 10% penetrated today. Apartments.com sales bookings rebounded sharply in the fourth quarter, climbing $20 million over the third quarter, driven by improved sales execution and price realization in the face of a continued ultra-low vacancy market. Apartments.com generated $675 million of revenue in 2021, up 13% year-over-year. Revenue growth in the fourth quarter was 6%, in line with our guidance of mid-single-digits growth. 2021 was a good year for apartments.com franchise. Average monthly unique visitors in the fourth quarter of 2021 were 25 million, up 17% year over year. That is 2.5 times rent pass average monthly unique visitors in the fourth quarter of 21, 10 times apartment lists, 17% higher than Zillow's rental network, and 11 times the Zumper. Leads delivered by apartments.com grew 46% in 21, and 27% in the fourth quarter. To keep this marketing momentum going, in the first quarter of 22, we will be releasing a new ad campaign featuring Goldbloom in five new TV spots and eight new social video campaigns. When you see these new campaigns, these new spots, I think you'll agree with me that it's some of the best work our team has produced to date. I look forward to having them out there. 2021 was a great year for our multifamily customers with record rent growth of 11.3% and a vacancy rate of only 4.6%, the lowest ever recorded. 2022 is expected to have rent growth of 6.5%, which would be the second best year on record with higher but still very low vacancy. The strong industry backdrop for apartment owners combined with superior advertising value demonstrated through site traffic and leads position departments.com to execute on our new pricing strategy as a result cost per lead has begun to improve and we saw a significant improvement in net bookings in the fourth quarter 21 over the third quarter of 21. client losses have been minimal the strong net bookings momentum combined with modest improvements in the macro backdrop gives us confidence that multifamily will be able to return to double digit organic revenue growth in the second half of 22. We estimate multifamily is a $7 billion revenue opportunity for us in the US. And we believe that apartments.com is well positioned to pursue that opportunity through unit penetration and demonstrated pricing power. 21 was a very successful year for the LoopNet franchise. Full year revenue of $208 million in 21 grew 15%. The Space for Dreams campaign delivered 2.2 billion media impressions in 21. Unique visitors globally grew 22% year-over-year in the fourth quarter of 21, and the LoopNet CRE network traffic was 10 times the level of the network nearest competitor. Signature ad growth continued to be very strong, up 21% year-over-year in the fourth quarter of 21. We continue to focus on expanding our sales distribution strength and are currently very close to our year-end 21 sales headcount goal of 50 and continue to aggressively recruit salespeople for LoopNet. In 22, we plan to continue the Space for Dreams campaign, supporting the industry and driving exposure for our advertisers. We expect LoopNet's revenue growth to continue in that 10% range for the first half to 22 while we continue to build out a dedicated LoopNet sales team. I feel confident that we have never had stronger leadership, a better product roadmap, more innovative marketing, stronger technology, and better traffic than we have now. That is why I believe that LoopNet is well positioned for strong growth going forward. We remain excited that LubeNet has the industry leading position and what we believe is in the early days of a four to $5 billion revenue opportunity. 10X had a strong year in 2021. The division's first full calendar year as part of CoStar Group. 10X sold 2.2 billion in gross merchandise value in 2021, up 47% year over year, and the company's best since 2016. In the fourth quarter of 21, 10X sold $727 million in gross merchandise value, up 39% year over year, the company's best quarter since the fourth quarter of 15. Full year of 21, revenue of $57 million grew 7% year over year. While total sales in the platform is climbing, it does not translate as quickly to revenue because we've lowered our fees to drive more high margin volume and to play an industry role at greater scale. We're investing in significant site and process automation to be able to process these higher volumes at high margins. 10X continues to sell more and close more. Trade rate, which is total assets sold as a percentage of the total assets brought to the platform, has improved from 54% in 2019 to 66% in 20 and 73% in 21. And this has happened while we've been expanding the buyer base significantly. We estimate that 10X is a $4 billion revenue opportunity. To pursue that TAM, we're aggressively growing 10X's sales team currently up to 54 people. These new salespeople have been incredibly productive. In the first quarter of 21, new sales reps didn't add any deals in the quarter. In the second quarter, they delivered 5% of the deals. In the third, they delivered 20%. In the fourth, they delivered almost a third of the deals. In addition, the research team in Richmond, which is in constant contact with brokers and principals who can benefit from 10X, has begun to contribute deals to the 10X pipeline. We've opened round one of the Battle of Bids 2022, a gamification of the 10X bidding process in which people can guess the price at which a real estate property will be sold with a chance to win up to $3 million in cash prizes. Our goal is to drive broad brand awareness and platform participation. We think we've created a really fun gamification of the CRE sales process that will bring the 10X story alive and engage tens of thousands of key prospects. 21 was our first full year in the residential property sector. We generated $75 million of revenue. HomeSnap revenue grew 52% year-over-year on a pro forma basis in 21, driven by our larger direct sales force of 60 people. In the fourth quarter of 21, HomeSnap grew registered users by 12% year-over-year to 786,000 agents. And its HomeSnap ProPlus paying subscribers grew 29% year-over-year to 68,000. Our acquisition of homes.com in May of 21 was very popular with agents as we implemented a your listing, your lead product approach and doubled the site traffic year over year in the fourth quarter of 21. That's right, we doubled the site traffic in the fourth quarter of 2021. Sounds familiar. Our strategy for transforming this massive TAM into revenue involves three phases, grow, monetize, and scale. By grow, I mean first we're going to focus on increasing traffic and engaging buyers and sellers in our platform. By monetize, I mean we'll begin to introduce paid ads, which increase visibility for the clients and provide enhanced product features. And by scale, I mean moving into the phase where we stratify ad offerings to provide additional flexibility for agents and continue introducing more product features. Phase one, growing traffic, is our focus today. We have a track record of success in building organic SEO in our marketplaces, including Apartments.com, LoopNet, Riala, Biz by Cell, Bellbecs, and Lands of America, and more. How do we do it? By building easy-to-use technology with sound SEO structures and with features and content that people value. For Homes.com, that means building a system that breaks down the wall between real estate agents and homebuyers. 93% of home buyers shop for their home on the Internet, and 90% of home buyers use an agent to help find a home. Agents and buyers need to share information and feedback about home listings, but that's difficult today because they operate in two separate, essentially closed and disconnected systems. Agents use their local MLS, which buyers have limited or no access to. Buyers use various real estate portals, but those portals are generally trying to get those buyers to use the portal's small group of agents, so they're not effectively open buyer-agent collaboration tools across the industry. In fact, in essence, the structure was designed specifically to prevent transparency and collaboration. After watching hundreds of hours of interviews and focus groups, I can tell you that the thing that consumers and agents want that they're not getting And then what we can provide is collaboration. HomeSnap is going to change that by enabling agents and buyers to share listings and feedback about those listings. By empowering agents with professional collaboration tools, we think it's possible to bring millions of buyers into our platform. The other takeaway from our interviews with consumers and agents is they want to be able to research the neighborhoods and parks that are important to them when they're considering a new home. We'll be creating powerful and professionally produced rich media and content of neighborhoods, parks, and condo buildings across the United States. The other thing that homes.com will do is support your listing your lead by enabling potential home buyers to easily contact the listing agent at no cost to that agent. We believe that sending these free leads to listing agents will increase the usage of homes.com and HomeSnap by all agents, and provide a dramatically better user experience for buyers out there shopping. We expect phase one of the product will be ready to go at the end of 2022 with a full launch in the first quarter of 2023. That said, you won't need to wait until end of 2022 to see our residential strategy in action. You will see a microcosm of our residential strategy when we launch CitySnap in New York in July. In October, we announced a partnership with the Real Estate Board of New York to create the first-ever consumer-facing search website and mobile app for New York City's residential listing service. Similar to Homes.com, CitySnap will connect potential buyers and renters with listing agents consistent with our Your Listing, Your Lead philosophy and make collaboration possible through access to HomeSnap's suite of tools. It will also feature promoted listings for residential real estate for the first time, similar to what we do with Apartments.com and many other real estate portals in other countries do. We believe that residential is a huge opportunity for CoStar Group, so in large, in fact, that we believe our residential revenue will one day eclipse the revenue we generate in the commercial property sector. We estimate the U.S. opportunity for residential is $72 billion. The global opportunity is $210 billion. Not $200 billion, $210 billion. Three times the U.S. opportunity. We believe that we can grow our residential revenue to $1 billion over the next five to seven years as part of our new long-term revenue goal of $5 billion in revenue by the end of 2027. At that scale, we would expect our adjusted EBITDA margins to be at or above our five-year target of 40% based on the success of similar residential marketplace businesses around the world. In order to achieve this goal, we plan to increase our level investment in the residential business by approximately $200 million in 2022. The majority of this investment is funded by the significant cash generation of our existing business, As we still expect to generate over 605 million in adjusted EBIT in 22 net of that residential investment. I'm excited to make I'm excited to make significant progress this year and believe we have a unique opportunity to add another $1 billion revenue platform plus to our portfolio. In December, we announced plans to build a two-building, 750,000-square-foot corporate campus by the James River in Richmond, Virginia, to be completed by 2024. Richmond is a vibrant, growing, affordable city with a great quality of life and 10 colleges and universities in the area that are both our research partners and our talent pool feeder. At CoStar Group and Enrichment, we're proud to employ amazing people who create and provide the best products, information, analytics, and marketplaces that power the real estate industry. We strive to set the standard for accuracy and precision in everything we do because our clients rely on this data to conduct hundreds of billions of dollars in transactions. This type of exacting standard requires discipline, determination, commitment, and people of CoStar Group take great pride in their ability to deliver at this level. We provide our people with world-class industry training, enable them to advance professionally, and enjoy long, rewarding careers with CoStar Group. It does involve measuring our performance in our work and having KPIs like any organization should have. Like any company, we have people who decide the demands of our environment is not for them, and that's fine. For most who choose to leave, they're able to leverage the CoStar Group fundamental training, go on to enjoy productive careers in commercial real estate in other industries, or continue their education. The real estate industry attrition rate in 21 was 32.8%, but our attrition was slightly higher at 36.6%, about 300 basis points or so. The key difference between CoStar Group and the rest of the industry is is that we achieved a 99% employee vaccination rate, and our employees have returned to working safely back in the office. As you know, that's very rare. Our staff is more productive back in the office, collaboration and innovation is stronger, and training is much more effective. We do have a tiny vocal minority of disgruntled former employees who do not want to return to work, but despite that, we would take the same responsible, long-viewed direction again. Now that we're back in the office, our attrition rate has returned to normal and over the past few months has in fact settled below the industry average. As hard as it was to return to the office, we're glad we've done it and feel for the companies that still have to cross that challenging bridge. We continue to believe that Richmond is a great center of excellence from which to grow our talent employee base that is supporting the real estate industry around the U.S., and across the world. Earlier today, we published our first sustainability report, which you can find in the investor relations section of the CoStar Group website. It's a very exciting piece. Thank you, Bill. At CoStar Group, we're committed to supporting ESG principles both inside and outside of our company. Inside CoStar Group, we have quietly been a leader in sustainability for decades. converting our fleet of nearly 200 research vehicles from gasoline to hybrid, then eventually to electric. We select LEED certified or Energy Star rated buildings for most of our 800, I'm sorry, our 80 plus offices, and reducing total annual data center energy consumption despite significant company growth. Outside of CoStar Group, we help millions of consumers and real estate professionals achieve their sustainability goals. We pioneered creating transparency around building energy consumption when we were the first to widely publish building rate energy ratings. The CoStar Information Analytics product provides all subscribers with data on green rate buildings so they can identify locations that are ENERGY STAR, BREEAM, and LEED certified. In addition, we funded the Journal of Sustainable Real Estate to support academics who study the value of building and investing in sustainable real estate. My colleagues and I, have authored academic articles analyzing financial benefits from building and leasing in sustainable buildings, and those papers have been recognized with best paper awards. The United Nations estimates that buildings in construction account for 36% of global final energy use and 39% of energy-related carbon dioxide emissions. We believe CoStar Group is part of the solution to that problem, and we're focused on that. Our Apartments.com, Homes.com, LoopNet, and Lands Marketplaces enable people all over the world to digitally visit properties for lease or sale without the environmental impact of physically driving to them. As you're aware, the economic recovery persists, but concerns about the virus inflation, the prospect of raising interest rates, weigh on the near-term outlook. Supply chain constraints and labor shortages are also prevalent, which is further challenging business operations, driving costs and prices higher. As a result, consumers are facing decades-high inflation, which is weighing on sentiment and potential spending. But in an inflationary environment, real estate can be a safe haven. In hospitality, leisure demand continues to drive the U.S. hotel recovery. Key metrics including rooms, sold, occupancy, ADR, and rev car are all either at or slightly above pre-pandemic levels, which is great news. George Munro, Business Travel meanwhile remains constrained as conferences are hampered by the latest variants of coronavirus. George Munro, Transaction volume at the year at record levels, a signal of investors long term optimism for hospitality recovery. George Munro, In retail strong consumer spending continues to support a resurgent retail environment foot traffic and physical locations has rebounded, especially in open air shopping centers not surprising. Retailers have responded to the increase in consumer spending and leasing volume is back to pre-pandemic levels. Notably, store openings outpace store closures, helping to drive net absorption to its highest level since 2017. As a result, rents grew by 2.8%, the strongest pace seen in over a decade. Headwinds for the sector do remain, including waning fiscal support and higher inflation, supply chain disruption, labor shortages. as well as an overhang of retail supply in certain segments. In industrial, that sector continues to benefit from the boom in consumer spending and the heightened need for enhanced supply chain networks. Expansions among e-commerce and big box logistics firms continue to fuel record leasing activity, which is up 60% from pre-pandemic levels. Despite a record amount of speculative supply under construction, there's little risk of overbuilding given such strong demand. Vacancy hit a record low of 4.2%, propelling rent growth to a record 8.6%. In the office sector, uncertainty is still the prevailing theme of the sector. But after two straight quarters of improving leasing activity and slight positive net absorption, the national office market is starting to stabilize. We're showing signs of stabilization. as likely in the early stages of recovery. However, significant headwinds and questions remain. The glut of sublet space remains a drag on the office market's recovery, though office users are increasingly turning to sublet leases for their space needs. It's still a tenant market, and while we've seen marginal increases in occupancy and face rents, such an improvement masks the higher concessionary environment which is weighing on owner revenue. LubeNet could help those owners get a great lease now. The national multifamily market is expected to normalize in 2022, but the sector remains in a historically strong position. Search activity at apartments.com reached record levels in 2021 thanks to pent-up demand and regional shifts in migration in favor of Sunbelt markets. Record-setting demand is pushing vacancy rates to new lows, In turn, multifamily owners and managers are benefiting from record-setting rent growth. Developers are working to deliver new product to meet unrelenting demand, especially in the Southeast. Commercial real estate investment across the board is hitting record levels led by unquenchable interest in multifamily and industrial assets. Retail and office volume is making traction approaching pre-pandemic levels. Meanwhile, volume was up in virtually every major metropolitan area. Pricing is trending higher in all property types. Distressed sales remain a small portion of overall activity, underscoring the prevailing health of the CRE industry. At this point, I'm going to turn the call over to our brilliant Chief Financial Officer, Scott Wheeler.