CoStar Group, Inc.

Thank you for standing by and welcome to the CoStar Group to report financial results for first quarter 2022. 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. If you require any further assistance, please press star 0. I would now like to hand the conference over to Gene Boxer, General Counsel of CoStar Group. Thank you. Please go ahead.

Thank you, Blue. Good evening, and thank you all for joining us to discuss the first quarter 2022 results of the CoStar Group. Before I turn the call over to Andy Florence, CoStar CEO and founder, 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 outlook and expectations for the second quarter and the full year 2022 based on current beliefs and assumptions. Forward-looking statements may 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 10K under the heading Risk Factors. All forward-looking statements are based on information available to COSTAR on the date of this call. COSTAR assumes no obligation to update these statements whether as a result of new information, future events, or otherwise. Reconciliation to the most directly comparable GAAP measure of the non-GAAP financial measures discussed on this call, including EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP net income per diluted share, 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, Gene. You did that brilliantly. I think everyone on the call is left inspired. So good evening, everyone, and thank you for joining us for CoStar Group's first quarter 2022 earnings call. We had a really strong start to 2022 with our highest ever quarterly sales booking at $68 million, which increased 31% year-over-year in the first quarter. Both revenue and profit are ahead of forecast. Our CoStar product turned in its best sales quarter ever, driving our overall outperformance and is expected to grow at or above 15% year-over-year for the rest of 2022. Apartments.com delivered great sales results with net new sales bookings up 36% compared to the fourth quarter of 2021. Total revenue for the first quarter of 22 was $516 million, representing a 13% year-over-year growth rate. Our profit performance was equally strong with adjusted EBITDA of $178 million in the first quarter, an increase of 12% year-over-year, and $18 million above the high end of our February guidance. As a result, we are raising our full year 22 revenue adjusted EBITDA and EPS guidance. Mr. Wheeler will give you more details on that. CoStar flagship product produced $199 million in revenue in the first quarter. The CoStar sales team grew annualized net sales 96% over the prior year. This latest sales performance makes the last three quarters of CoStar sales the top three sales quarters for CoStar on record. Our CoStar sales team has never been more productive. In the first quarter, we achieved the highest CoStar net sales output per person in our history. We added 20 new sellers to the team so far this year and intend to continue expanding our sales teams in the U.S., Canada, and the United Kingdom. I look forward to the day when we'll be able to tell you about hiring CoStar salespeople in Germany, Spain, and France, not space, before long. We are building dedicated industry experts within the broader CoStar sales group to focus exclusively on banking and hospitality clients, two sectors that each hold hundreds of millions of dollars of revenue potential. Our upgrade program to the full CoStar product continues to perform well, and we're now approximately one-third of the way through the campaign. We have completed approximately 7,100 customer upgrades, which we expect will generate about 22 million in annual revenue. We estimate the program has the potential to generate over 50 million in revenue and will continue for the next 18 months or so. We released our new CoStar lender product in February and are seeing a very positive response from the market. In the short time since we launched the product, we've added over a million dollars in annual revenue and the operating pipeline is building rapidly. I must modestly say our clients are referring to the solution in terms of best in class, the gold standard, and even, modestly, the best product we've ever seen. The lender solution's early success can be attributed to its unique ability to connect the client's loan portfolio to CoStar's industry-leading property information, market analytics, and to Compass, one of the most mature credit default models in the industry. The system delivers a live look at institutions' loan concentration risk, current expected credit losses, and stress testing, among many other functions. The result is an unmatched, more efficient platform for strategic lending decisions and risk management. Our initial banking customers have found the product very straightforward, simple, and easy to use. The ability to generate sophisticated stress testing results with just a few clicks saves almost a week of work. Customers tell us they love all the loan concentration charts because the analytics are so much better and fully automated when compared to lesser competitive products. Of course, we're in the very early days of introducing the lender product, but I'm very encouraged with the market reception results so far. We are currently operating with a dozen or so specialized dedicated sales team members, and we fully intend to expand our sales and product implementation teams in the months ahead. With at least 6,000 potential customers in the U.S. alone, we have a long way to go to realize what we see as a market opportunity for CoStar of well over $300 million. I believe our impressive CoStar results are built on a well-balanced combination of new product innovation, proprietary data and research, and a highly productive sales team. Our customers are enjoying the expanding capabilities that we add to CoStar every year and continue to renew subscriptions at rates above our long-term historical averages. We continue to work hard on expanding our international business. Earlier this month, we completed the acquisition of Business IMO, France's premier real estate news service. En français, you say Business IMO. Business IMO is known for its impactful online real estate news that attracts over 300,000 unique visitors each month. The publication boasts over 2,000 subscribing companies and 100,000 followers on social media. Business IMO's product portfolio also includes training, education, and industry conferences. Business IMO is an important addition to CoStar Group's growing global news team, which offers daily coverage across the United States, Canada, United Kingdom, Germany, and Hotel News Now, our international hospitality industry news service. With over 235,000 subscribers and 19,000 articles published in 2021, CoStar's award-winning news is one of the largest international real estate news networks in the world. Business IMO reaches a large professional audience in France of brokers, developers, owners, and the like. And Bureau Loco reaches the tenant audience in France. By combining these two audiences into one premium media buy, we believe that we can capture a large and meaningful share of the property markets advertising spend in France. France is one of the most important real estate markets in the world with an estimated $40 billion in annual investment transaction value. And I believe the number will ultimately prove to be a lot larger than that. With the acquisition of Business IMO this year alongside the Bureau Loco Property Marketplace, which we purchased last year, We're very excited about the potential this market holds for us. These two well-respected online property websites, combined with Belbex in Spain, Riala in the UK, CoStar in the UK, and Thomas Daly in Germany, directly support our goal of building out the premier online European marketing solutions and information solutions. We remain focused on offering both CoStar and LoopNet integrated and seamlessly across the UK, Germany, France, Spain, and eventually other European markets. In the first quarter, we launched the first international version of LoopNet, rolling out LoopNet.ca in Canada. LoopNet.ca delivers a tailored and localized Canadian search experience, including custom Canadian content, French-Canadian language capability, and acceptance of Canadian currency. Most importantly, acceptance of Canadian currency. We are seeing strong traffic growth in Canada. with LubeNet.ca reaching traffic levels almost twice that of the nearest competitive site after less than two months in the market. LubeNet Canada is only the beginning, as the site architecture and international capabilities of the Canadian version of LubeNet will be the foundation of a first-ever pan-European, pan-America's commercial real estate marketplace. Apartments.com sales picked up strong momentum with bookings up 36% sequentially in the first quarter of 22. Revenue for Apartments.com was $175 million in the first quarter, growing 6% year over year with strong margins. Properties advertising on our platform increased in March over February, which is the first sequential increase in advertised property volumes since about the middle of 21. This increase, along with rising vacancies and improving pricing, makes me increasingly confident that we've turned the corner over last year's high-occupancy headwinds. As you might recall, last year we saw demand for apartment rentals surge, and then vacancy rates suddenly dropped to a 20-year record low of just 4.8%. Absorption was 700,000 units in 2021, which is extremely high, and it's more than double the five-year pre-pandemic average. The dramatic drop in vacancy rates pushed national rent growth to a record high of 11% on a year-over-year basis in 21, made it a tough environment to sell advertising, though we still sold a lot of advertising. In the first quarter of 22, absorption moderated dramatically from 187,000 units 12 months ago to 54,000 units during the first three months of this year. At the same time, deliveries of new units increased, resulting in the first quarter vacancy rates rising 10 basis points to 4.9%. Current projections for 22 show demand dropping to pre-pandemic levels, with new rental unit deliveries expected to exceed demand. Vacancy is therefore expected to rise past 5% by the end of this year, resulting in more modest annual rent growth, about 6%, 7%. This is still elevated by historical standards, but we see the supply of new units continue to grow during the year 2023, which we expect will create excellent high-value advertising opportunities for Apartments.com. Search activity on Apartments.com continues to trend near record levels, indicating a robust spring and summer rental season. Traffic in the first quarter increased 13% over the first quarter of last year, which is the strongest first quarter traffic on record for the Apartments.com network. Not only did traffic increase, the quality leads generated for advertising clients increased 18% on a year-over-year basis in the first quarter. Our sales team is doing a great job selling and renewing businesses at higher price levels, resulting in a cost per lead for the first quarter of 22 coming in at about the same level as it was in the first quarter of 21. Apartments.com continues to attract more and more renters, while our market data indicates the traffic declined year over year for a number of our competitors. With tighter market conditions putting pressure on revenue for our smaller competitors, we believe that the marketing budgets and SEM of those competitors are shrinking and will negatively impact their traffic. We believe this will result in fewer leads for their advertising customers, which will make Apartments.com a more attractive advertising alternative. In early April, we launched Apartments.com's most comprehensive marketing plan ever. Jeff Goldblum returns for his eighth year as the apartment internet founder, Brad Bellflower, with great new TV and social video spots that play off of recent cultural headlines with themes such as billionaires going up into space. Our ads also focus on what matters most to renters that want to add more space, change location, or change lifestyle to fit their post-pandemic situations. In total, we expect the campaign will deliver over 10 billion media impressions. We'll run 20,000 commercials on top prime time shows, premieres and finales, as well as major sporting events. Importantly, we know now more than ever that renters are cutting the cord and consuming media primarily through streaming video and audio platforms. with a little less on Netflix recently. As such, we're doubling our investment in video-on-demand streaming, audio, and social media with a huge presence on top platforms such as HBO Max, Paramount, Hulu, Peacock, YouTube, iHeartRadio, Spotify, Pandora, and many others. With a new campaign, Apartments.com will also connect with renters like never before through custom content and unique creative-developed specifically for renters' favorite social and digital video platforms, including TikTok, Instagram, Snapchat, YouTube, and Facebook. We plan to launch several new social series developed in partnership with top-tier influencers across all renting categories, including DIY projects, pet life, apartment tours, apartment living tips, and tricks, and more. Our advertising is increasing in its effectiveness, as we are able to deliver our highest first quarter levels of traffic and unaided brand awareness, while proactively managing our spend below prior year levels. In the first quarter of this year, our field sales team delivered their highest net sales productivity since the end of 2020, with our mid-market sales team Also, having their highest productivity on record in the first quarter, so the sales teams are doing really quite well, I mean very impressive work there. I believe our ability to once again meet safely with customers and prospects face to face is also fueling our sales success. The first quarter of 2022 our field sales team conducted over 40,000 separate in person meetings. With a great first quarter to start the year in Apartments.com, I believe the combination of our leading brand position, improving market environment, better pricing, and a growing, productive sales force puts Apartments.com in great shape to deliver double-digit revenue growth in the second half of this year. And the fact that we have Paige Forrest makes it a slam dunk. LoopNet first quarter revenue was $54 million, up 11% over the prior year. We saw record traffic in the quarter with more than 11 million average monthly unique visitors to the LoopNet network. March was our highest traffic month ever with 11.8 million unique visitors. User engagement on LoopNet is also increasing with users reading more than 250,000 articles on LoopNet in January, another new high watermark. The continued increase in users and engagement on LoopNet demonstrates the value of the marketplace, the quality of our content, and the effectiveness of our marketing programs. Our LoopNet marketing activities produced inbound sales leads up 76% in the first quarter compared to the fourth quarter of 21. The Space for Dreams marketing campaign that we developed in 21 continues uninterrupted into 22. In the first quarter of 22, the campaign delivered an estimated 93 million impressions across linear TV, social media, and direct digital channels. The Space for Dreams campaign runs through the end of September and is expected to deliver more than 400 million impressions. I'm confident our marketing program this year will keep LoopNet top of mind with tenants and investors when they search for a space which underpins our substantial competitive traffic advantage. We continue to increase our dedicated loop at Salesforce, and we added 25 new sales professionals so far this year. 10X's revenue was up 42% year over year in the first quarter. Seasonally, the first quarter tends to be lower in terms of property transactions. However, this year, the value of properties brought to the platform was up over 90%. 10X sold approximately $575 million in assets in the first quarter of 22, the best first quarter performance in over five years. For the fifth quarter in a row, the critical trade rate, which is total assets sold as a percentage of total assets brought to the platform, came at an impressive 70%. One of the successful strategies contributing to the sales growth is the new pricing structure we introduced a little over a year ago. The new tiered pricing model lowered the transaction fee on asset sales as the value of assets increased, but preserved strong margins. As a result, in the first quarter of this year, the average size of assets sold on the platform increased 32%, with the value of the property sold at $10 million or more increasing four times to the prior year level. In addition, the volume of assets sold on the platform increased 37% in the first quarter of 22. Together, the property size and volume improvements account for almost 70% of the traffic of the revenue growth. We continue to build out the 10X sales team with a number of sales reps increasing by 20% since the end of last year. Our goal is to grow the team by another 50% by the end of 22. We launched our 10X marketing program for 22 called Battle of the Bids in the first quarter. Battle of Bids is a gamification of the 10X bidding process in which people can guess the price at which a real estate product will be sold on the platform with a chance to win millions of dollars in cash prizes. Our goal is to drive broad brand awareness and platform participation. The first round of competition was played during our April 11th to 13th 10X auction and with 6,800 registered players participating. Since we launched marketing for the first round, active web sessions on 10X are up 22%. The promotional campaign generates 7.3 million impressions all over a month. New 10X accounts are up 32% year-over-year in the first quarter. With round two starting tomorrow, registered participants are already 30% higher than round one. Overall, we are well on our way to building a highly effective digital transaction capability with 10X that I believe will become the preeminent global digital trading platform. This year, we are on track to grow revenue by 20%. And we believe by the end of next quarter, we will have fully integrated the 10X platform into the CoStar environment, giving us additional scalability. Our residential business is performing very well to start the year. We're successfully growing subscription sales and revenue and building out the residential products vision we shared with you earlier. First quarter revenue in residential was 18 million, an increase of 63% compared to the first quarter of 2021. It's a small number, but you have to start somewhere and we see growth in the future. Revenue from our ProPlus product increased approximately 60% year over year, while our concierge ProPlus product was approximately four times higher this year versus the first quarter of last year. The direct sales team selling our ProPlus product is delivering excellent results as our first quarter net new sales bookings for ProPlus subscription is up 120% over the first quarter of 21. We intend to continue growing our ProPlus sales team to approximately 100 sales reps by the end of the year, in order to increase our agent penetration and engagement on the HomeSnap platform. Our product design and development teams are building the product capabilities that will, for the first time, directly connect home buyers and sellers to their agents, enabling great online collaboration. Using the Your Listing, Your Lead approach, we are building tools that will directly connect interesting buyers to selling agents, along with complete agent directory for potential home buyers to use and selecting the right agent for them. Behind the scenes, we intend to relaunch the Homes.com website in June on top of a modern integrated technology platform. Although not directly visible to Homes.com users, this is an important step that brings the best technology for traffic scalability and speed to Homes.com. We are leveraging the success from Apartments.com and other high-performance marketplaces to make this possible. Our research team is busy building the proprietary content around neighborhoods schools and parks and other features that consumers told us are important to them when they're shopping for the best place to live. So far we've produced hundreds and hundreds of videos with 10s of thousands of more in the works. We believe this rich content will produce significant organic search results and will be highly informative engaging to consumers as they research the best place to live. Traffic to Homes.com improved significantly in the first quarter of 22, with monthly visitors growing 55% compared to the first quarter of 21. Even more encouraging, site visits improved over 70% since we acquired Homes.com, increasing at a much faster rate than Apartments.com did during the same post-acquisition period. Unique visitors to our overall residential network, including both Homes.com and HomeSnap, increased 125% from the first quarter of 2022 over the first quarter of 2021. We are preparing to roll out CitySnap at the end of this year as part of our arrangement with the Real Estate Board of New York. CitySnap will provide consumers a powerful home search app and website customized for New York City. along with connectivity to our HomeSnap suite of tools for property agents. For the first time, New York renters and buyers and their brokers will have a single real-time source for all available listings in the city. We have partnered with a leading New York advertising agency to develop a marketing campaign for CitySnap with messaging that will reinforce the unique joys of living in Manhattan and highlight how CitySnap addresses the pain points of finding a place to live in New York. You will soon see CitySnap all over New York City as we have designed our marketing plans to deliver hundreds of millions of media impressions across streaming video, audio, social, and physical media. We anticipate millions of visits to CitySnap's site and app as a result of our media campaign. Overall, I'm very happy with the progress of our residential initiatives, and we remain on track for a full launch of the new homes.com marketplace in 23. Winding up by a quick look at the economy, the CRI economy, the office market does continue to struggle with vacancy rates at all times highs, anemic absorption, rental rates at all time real dollar lows, sales volumes are low and cap rates are rising. Doesn't sound rosy, but our LoopNet product is well positioned to help loan owners and brokers reach tenants and buyers in this tough market. 10X is well positioned to help owners and lenders exit the investments they must exit in this tough market. And the new CoStar lender product is an excellent tool to help lenders navigate the risks they may encounter in this tough market. The apartment market is beginning to cool with demand moderating, vacancies rising, rent growth is still strong, but with new construction booming, Rent growth is going to slow into next year with further increases in vacancy rates, which sets a stage for a strong sales environment for apartments.com. Retail leasing is rising as store openings are outpacing closures, allowing vacancy rates to compress to lower and lower levels. Retail property owners have much reason to remain confident as net absorption, rent growth, and investment activity are building on momentum from last year. The national industrial vacancy rate fell to a record low in the first quarter, fueled by strong leasing activity as tenants rapidly expand their distribution networks to accommodate increasing consumer demand for faster home delivery. Speculative construction continues to rise in competition for limited spaces, driving record rent growth. The hefty construction pipeline offers fertile ground for additional LoopNet revenue as more developers seek to maximize their marketing exposure during lease up. We set some of our highest price points ever for LoopNet marketing in 2021 and 2022 for industrial speculative properties. The industrial market right now is white hot. In the hospitality sector, leisure and weekend demand continue to act as the main drivers for the U.S. hotel sector recovery. Room rates are trending at an all-time high as occupancy and rev par are recovering. Business travel demand is gaining momentum. So with that, I'm going to turn the call over to our chief financial officer, the man you all respect and rely on, Scott Wheeler.