CoStar Group, Inc.

Good afternoon, and thank you for attending today's CoStar Group second quarter earnings call. My name is Austin, and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Cindy Aiken with CoStar. Cindy, please proceed.

Thank you, Austin. Good evening, and thank you all for joining us to discuss the second quarter of 2022 results of the CoStar Group. Before I turn the call over to Andy Florence, CoStar's CEO and founder, and Jack Wheeler, our CFO, let's 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 third quarter and full year 2022, based on current beliefs and assumptions. Forward-looking statements involve any risks, uncertainties, assumptions, estimates, and other factors that can cause actual results to differ materially from statements. Important factors that can cause actual results to differ include, but are not limited to, those in the CoStar Group's press release issued earlier today and in our filings of 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 the 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 of non-gap financial measures discussed on this call, including EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-gap net income, non-gap net income per diluted share, and forward-looking non-gap guidance, are also shown in detail in our press release issued today, along with the definition 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, Cindy. Good evening, everyone, and thank you for joining us for CoStar Group's second quarter 2022 earnings call. Cindy and Scott are in our Washington, D.C. office tonight, and I'm joining you from our London office a little bit later in the evening. We delivered outstanding results in the second quarter, setting our third quarterly sales record in a row. Annualized net new sales bookings were $84 million in the second quarter, a 66% increase over the same quarter in 2021. Our three main products, CoStar, Apartments.com, and LoopNet, all have exceptional sales quarters, growing a combined 81% on a year-over-year basis. Total revenue for the second quarter of 22 was $536 million, growing 12% year-over-year and coming in above the high end of our guidance range and consensus estimates. Our subscription revenue in the quarter grew to $428 million, and clients subscribing for five years or more renewed at 97.8%. As we ramp up our investment in our residential product strategies, we continue to deliver strong profit results with adjusted EBITDA of $159 million in the second quarter, well above the high end of our guidance range and consensus. As a result, we will raise our full year 2022 revenue adjusted EBITDA and adjusted EPS guidance. Revenue for our CoStar product was $207 million in the second quarter, representing a 17% increase over the same quarter a year ago. CoStar net new sales bookings increased by 60% in the second quarter, making the last four quarters the highest sales quarters on record. The trailing 12-month sales level as of June 30th is 145% greater than the same period 12 months prior. Our consistent, strong revenue and sales performance for CoStar is the result of a steady stream of product innovations that deliver expanded capabilities and increased customer value. Over the past few years, we've added hospitality data, integrated CMBS data and analytics, launched a new lender product, and opened up full multinational reach for our CoStar customers. We can continue to grow our subscriber base and now have 177,000 CoStar professional users. This quarter, we crossed over 40,000 subscribing sites. CoStar's ASP continues to climb as we transition more and more of our customers to our global solutions. Overall, I'm very confident in our ability to sustain our current levels of strong double-digit revenue growth for CoStar Group. I think I've been saying that for 30 years. Apartments.com turned in an outstanding performance in the second quarter with net new sales bookings up 138% compared to the second quarter of last year. This is the second highest quarterly sales ever for Apartments.com. Sequential growth in sales was 35% in the second quarter of this year, which makes this the third quarter in a row of improving sales results. Apartment vacancy rates have increased at a rapid pace throughout the first half of 2022, quickly climbing from the all-time low vacancy rates of the third quarter of 21 that were suppressing demand for apartment advertising. Vacancy rates for three-, four-, and five-star properties were up 60 basis points to 5.7% in the second quarter from that all-time low of 5.1% in the third quarter of 21. We're now only 80 basis points below the historic pre-pandemic vacancy rate average for that class of properties. We believe we'll be back to the historic average vacancy rates in the next several quarters. One of the drivers there is demand for apartments installed in the second quarter of 22 with absorption of only 67,000 units. That is a dramatic 74% drop from the 260,000 unit absorption level in the second quarter of 21. New apartment construction deliveries are expected to reach record levels this year. The forecasted 415,000 unit deliveries are on par with the highest levels recorded since the mid-'80s. Tampa and Phoenix, for example, will add over 25,000 units, while absorption in these markets is projected to be a third of new supply. The need to fill these newly constructed apartments building clearly increases demand for apartments.com. With raising vacancy rates, the number of properties advertising on Apartments.com increased sequentially in the second quarter of 22, continuing the positive trend that began in March of this year. In addition, cancellation rates have improved by approximately 20 basis points since the end of last year. Our Apartments.com sales force delivered outstanding results in the second quarter. Sales productivity per person increased 64% year-over-year, and is at an all-time high. With post-pandemic restrictions behind us, we're once again focused on in-person meetings with our customers and our prospects. In the second quarter of 22, our field sales team conducted an impressive 55,000 in-person meetings with our clients, and that's up 35% from the first quarter of this year. This has always been a relationship-based industry, and our in-person meetings are the most effective way to build customer satisfaction and demonstrate the value of our products. Traffic to our Apartments.com network improved sequentially as we ramped up our advertising campaign, starring Jeff Goldblum as Brad Bellflower, which delivered over 4 billion impressions in the second quarter alone. I am very happy with the outstanding results our Apartments.com team is turning in And I'm increasingly confident that our positive sales momentum will result in double-digit revenue growth in the second half of this year. Turning to CoStar Real Estate Manager, the product line continues to grow the Fortune 2000 and global customer base of CoStar, adding 23 major new customers in Q2. Subscription revenue grew 15% in the first half of 2022 over the same period in 2021. We're on path to have the real estate manager product integrated into CoStar by 2023. This will significantly increase revenue opportunity for CoStar by connecting the Fortune 2000 tenant-oriented customer base of real estate manager with the power of the CoStar network. Lands of America, our rural land marketplace, is focusing on three key growth initiatives. These initiatives include growing the field sales team, introducing signature ads, and launching land.com. We've grown our sales force at Lands by 16% year-to-date. Last year, Lands of America began offering gold signature ads similar to the differentiated signature ads that Apartments.com and LoopNet offer. This quarter, Lands launched platinum signature ads. Our standard ads cost $22.75 per month on average. Our gold ads average a much higher number, $359 per month. and the platinum ads averaged 599 per month. Since the recent launch, we've sold 932 signature ads. Growing the sales force and introducing premium exposure listings helped drive 23.4% year-over-year revenue growth this quarter in the Lands of America business. Later this quarter, we will redirect landsofamerica.com to our URL land.com to harness the power of the simple, memorable, and valuable domain. Lands.com will then join category definers like Apartments.com and Homes.com. LoopNet had the strongest sales quarter in years, with net new sales bookings growing 43% of the same quarter last year. Second quarter revenue was $56 million, up 10% over the prior year. I'm encouraged to see our efforts to build a LoopNet sales force are progressing well. Year-to-date, we've grown the dedicated LoopNet sales team by 95%. We've built a strong infrastructure with regional sales management team and a strong training program. Our training and onboarding process is much more effective now than we were able to train and onboard together in person. As a result, our new sales team is delivering 100% more sales in their six-month in production than when compared to the LoopNet sales team we onboard remotely during the pandemic. Traffic to our LoopNet network of sites remains strong in the second quarter, averaging approximately 12 million unique visitors per month. We have an order of magnitude more traffic than our closest competitor. That gap between LoopNet and our next closest traffic competitor widens by 1 million unique visitors during the second quarter. So we're pulling away even further. This demonstrates the effectiveness of our SEO, the quality of our content, the strength of our brand, the quality of site design, The performance of the site and the impact of our Space for Dreams advertising campaign was generated 253 million impressions in the second quarter. We believe that LoopNet will deliver significantly more value to customers, users, and shareholders as an international platform. Trillions of dollars cross many borders to invest in commercial real estate. An international platform has significant scale advantages in software development, both in functionality and cost per user efficiency. We recently invested to relaunch LoopNet in Canada under LoopNet.ca. The number of monthly unique visitors on the Canadian LoopNet network has surged 45% year over year. That investment has significantly widened our competitive lead in Canada against the next closest CRE site, spacelist.ca. According to SEMRush in June of 21, the LoopNet network had 48% more traffic than did spacelist.ca. This June, the LoopNet network has pulled away and has 233% more traffic than does spacelist.ca. So a four or five times advantage. We're now investing significant energy into launching LoopNet in the UK, France, Spain, and Germany, and the rest of Europe in that order. In fact, I believe our president of LoopNet, I just saw him on the video screen in France just now. We currently own leading Siri marketplaces across the UK, Europe, with Riala in the UK, and Biroloco in France, and Belbex in Spain. When we compete, we will have one code base for LoopNet globally and redirect, when we're complete with integration, we'll have one code base for LoopNet globally and we'll redirect traffic from our family of European platforms into LoopNet. Users will be able to use LoopNet to search for investments or properties to lease from Madrid to Paris to London to New York or San Francisco or Vancouver or more. A property owner with an industrial facility at Heathrow will be able to appropriately market to robust audiences that may need that warehouse from around the world with just one placement on LoopNet.com. Conventional wisdom is that real estate marketplaces are a local product and lack cross-border value or synergy. I believe this couldn't be further from the truth. It is just assumed because few have made the effort to try and do it. When we released CoStar in the UK in 2012 and rolled out our rolled our predecessor offering focus into CoStar, our revenues in the UK doubled in the years that followed. About half of CoStar users today now have global subscriptions and can easily access data across borders. 15,800 U.S. users accessed data on Canadian properties this year. 1,200 Canadian users are accessing data on U.S. properties. 7,600 U.S. users are accessing information on U.K. properties, and 2,300 U.K. users are accessing data on U.S. properties. In total, just under 20% of all users have accessed tens of millions of property views across borders with CoStar. We intend to release International LoopNet in the U.K. in the fourth quarter. I'm grateful to be a small part of such an exciting and challenging product with a great team executing this work. Our CoStar risk analytics business continue to gain momentum with strong growth driven by the recently released CoStar for Lenders solution. Since release in February, we've signed 66 clients of which 42 were added in Q2. We believe this growth rate will continue to accelerate with investment in our dedicated sales team, the next phase of product innovation, and marketing. The strategy behind CoStar for Lenders is to offer a highly scalable, fully integrated solution that is essential to market participants by supporting their risk management, regulatory requirements, loan production, strategic decision-making. The CoStar lender value proposition meets the requirements of our initial client base, which are diverse, including banks, credit units, dust lenders, private lenders, and life insurance companies, of which the CRE portfolios range from as small as $10 million up to huge $50 billion portfolios. BizBuySell, our leading business for sale marketplace, is having a great year. Revenue grew 27% year over year with investments in sales and marketing driving strong increases in listing supply and buyer demand. We are realizing tremendous synergy between LoopNet and BizBuySell. Business to BizBuySell subscriber listings displayed on LoopNet increased 54% in the first half of the year. Reported sold business comps increased 19% in the first half to 44,754 business comps. Thousands of business owners leverage these comps every month to get an estimate of their business's value. BizBuySell counts some of the largest franchise brands among its customers, including 7-Eleven, Nike Mufflers, the UPS Store, Jiffy Lube, Checkers, Jackson Hewitt, and many more. opened the door to deeper relationships across other CoStar real estate products. SDR continues to grow revenue and add new hotels, contributing data, while the hotel industry recovers from the global pandemic. SDR now has an all-time high of almost 75,000 hotels contributing data on a monthly basis. There are still 1,500 hotels that previously participated and are currently closed due to COVID, and half of those are in Asia. STR revenues year to date are up 10% year over year. When CoStar acquired STR at the end of 2019, subscription revenue was 60% of total revenues. With focused effort, subscription revenue year to date is now 77% of total revenues. STR is currently migrating its benchmarking product into the CoStar platform. Customer migration will begin at the start of 2023. At the conclusion of the product rollout, the expectation is to be in a position to double STR revenue through sales of benchmarking to new customers and upgrade existing customers. STR will also be better positioned to introduce CoStar to new hospitality customers once the benchmarking product is in the CoStar platform. That introduction has already begun with STR selling CoStar to hospitality companies such as Sonder, Hopper, Vista, Visit Indianapolis, Atrium Hospitality, and Highgate Hotels. TEDx continues to perform with high volume of assets being brought to the platform, which exceeded $2 billion in the first half of 2022, or 33% over the first half of 2021. and the highest level of activity since 2015. As mentioned last quarter, we launched our 10X marketing program for 22 called Battle of the Bids, which is a gamification of the 10X bidding process in which people can guess the price at which a real estate property will be sold on 10X and have a chance to win millions of dollars in cash prizes. Nearly 13,000 brokers and owners have played the game, adding approximately 12,000 new 10X accounts. The bidding power on 10X is reaching record levels. When a potential bidder registers to bid on 10X, we check to ensure that they have sufficient funds to buy the properties they bid on. The amount we approve for them is their proof of funds. In the second quarter of 22, total proof of funds reached $11.7 billion, up 144% from $4.8 billion in the second quarter of 20 when we acquired 10X. Our residential business continues to perform very well. Second quarter revenue in residential was $20 million, an increase of 40% on an organic basis compared to the second quarter of 21. Our HomeSnap business continues to focus on expanding agent engagement and sales of our ProPlus products while we develop our homes.com marketplace. Registered agents for our HomeSnap Pro product totaled $880,000 at the end of the second quarter, an increase of 17% over the same quarter last year. Revenue from our ProPlus product grew an impressive 46% year-over-year, while our Concierge ProPlus product grew 175% versus the second quarter of last year. Agents continue to spend more and more on our residential products, with average agent spend increasing 42% on a year-over-year basis. It's important that we continue to grow our sales force to reach more agents and prepare for the launch of our homes.com product next year. We've successfully established our direct sales force to support the ProPlus product, and I'm encouraged by the initial sales productivity of that team. We have plans to expand this team to over 100 dedicated sales representatives by the end of 22. In the second quarter, we grew that team by almost 50%, including adding field-based sales agents who are having some real success. Our research efforts are off to a good start as we build proprietary content for Home.com around playgrounds, neighborhoods, schools, and other features that are important to consumers. From a standing start, we have successfully engaged over 1,000 photographers, writers, editors, voice talent, and video editors across the country. So far, we have produced content on over 70% of the largest residential markets in the U.S. We expect our rich original data and media content will produce significant organic search results and will be a product differentiator from our competitors. We successfully launched CitySnap in June in coordination with our partners at the Real Estate Board of New York. For the first time, New York renters, buyers, and brokers now have a single real-time source for all available Real Estate Board of New York listings. Better yet, all of an agent's listings appear for free on CitySnap. The launch of CitySnap was well-received by the agent community in New York City, and in only a few short weeks, over 37% of the Real Estate Board of New York agents have registered to use CitySnap. CitySnap reached the number one spot on the top new category on Google Play and is off to a strong start. As with any new product launch, this is only the beginning, version 1.0, We're planning a regular pace of product releases focusing on optimizing user experience and adding more valuable content, which we feel is the key differentiator for CoStar Group. Yesterday marked the formal launch of our CitySnap consumer marketing campaign. Our marketing campaigns are designed to deliver hundreds of millions of media impressions across streaming video, audio, digital, social, and out-of-home media. Just before this call began, I got word that we reached our first 1 million users of CitySnap. To realize our many growth initiatives, it's imperative that we continue to attract and retain the best talent for CoStar Group, even Scott Wheeler. We've had tremendous headcount growth. I'll just check to make sure Scott's still listening. We've had tremendous headcount growth over the past six months, surpassing 5,400 team members for the first time in our company history. Our strategic goals of building our residential platform, international expansion, and growing our sales teams have been extremely successful. Over the first half of the year, we've welcomed more than 1,000 new team members across multiple areas and around the globe. A big contributor to our increased headcount as a creation of hundreds of new jobs in our residential business. Thousands of skilled photographers, drone pilots, and content writers have applied to CoStar Group with hopes of being able to take part in documenting their cities, parks, schools, and neighborhoods and beautiful homes as we prepare our homes.com relaunch later this year. Our new team members have listed a variety of reasons that they decided to come to CoStar Group, including our positioning as an innovative industry leader, our high-performing and fast-paced work environment, the opportunity to build new businesses and products and services for our customers. However, the top reason most new hires mentioned when joining CoStar is the people they get to work with and learn with here. While CoStar offers flexibility to our colleagues, we predominantly work on our mission together in the office, and we thrive in that environment. We believe that working together rather than on a remote screen is becoming competitive edge. For example, and an example of many, a very talented and valuable new colleague, Leslie Hall, joined CoStar Group in May to grow our HR business partner function after a successful 26-year career at an another very well-known and respected Washington-era company that is still all remote despite maintaining millions of square feet of empty premium office space. She said, I've built a career in HR because I love partnering with people solving business problems. She goes on to say, after two and a half years of remote working on Zoom, I miss the in-person collaboration and connection with business leaders and employees. You simply cannot maintain meaningful and sustainable relationships virtually over the long term. She was impressed with the caliber of people she met during the interview process and their commitment and enthusiasm for CoStar. We are thrilled to welcome Leslie and 1,000 other new colleagues to CoStar this year. When we first returned to the office last year, that was difficult for some of our colleagues, and initially our retention rate dropped. But surprisingly, now that we're back Together in the office, our retention rates are climbing to some of the highest levels we've ever seen. According to Castle Security, while many workers in the U.S. have returned to working together in the office, most have not. Many think that workers and companies that do not work with their colleagues in person do not form meaningful connections with their companies. According to the Bureau of Labor and Statistics, in this pandemic, induced great resignation. Overall private industry attrition trends remain very elevated, 3.1%. Real estate attrition is slightly lower, 2.8%. I'm pleased to report that we are experiencing the opposite. Our attrition rates continue to improve and are now the best they've been in years. In fact, our attrition rate is now less than half of the private sector's turnover rate. In the most recent 60-day trending, employee retention rate is an impressive 98.5%. We are retaining the best talent at CoStar Group. The average tenure for technology companies is three years. CoStar Group is a clear leader with an average tenure well above tech or real estate or private sector and is approaching an impressive five years. So five years compared to tech average three years. We're retaining employees 60% longer than the average company. We've been deliberate in our execution of employee retention initiatives, including leadership development programs, management training, career mobility, and promotions. In addition, we've enhanced our already strong suite of employee benefit offerings to adapt to the needs of our people in the current environment. Our approach is proving particularly successful with regard to our sales force, as we are simultaneously growing five different sales teams, all of which have the potential to add significant growth capability to the company. For the first half, we've grown our sales team by a net 150 sellers. That's the fastest we've ever grown, an increase of 18% since the end of 21, or the beginning of 22. This is the largest half-year organic growth and sales resource we've ever achieved, I'm carefully watching the growing productivity of these new salespeople we're onboarding. We have invested carefully in our training programs with talented and committed trainers. I'm pleased to report that while it does take time to ramp up these new salespeople to full productivity, we're exceeding our historic ramp-up success rate. Our commitment to in-person collaboration coupled with our investments in our people have us well positioned to continue to grow the business as well as execute our strategic objectives. The commercial real estate markets are entering a period of potential disruption as the U.S. economy adjusts to these higher levels of inflation, raising interest rates and lingering pandemic effects. With office vacancy rates climbing to 14%, we're now observing the highest nationwide vacancy rates in 30 years. The gap between future availability rate and current vacancy is growing, suggesting a bit more pain ahead in vacancy. Office leasing continues to lag pre-crisis levels. Central business districts are particularly challenged as more office space is being returned, contributing to slower recoveries. According to Castle Systems, the percentage of people returning to office has remained around 40%, with only modest increases in recent months. During this persistent softness in the office market, CoStar continues to outperform, and our LoopNet 10X products are counter-cyclical should the office market deteriorate further. Industrial properties are experiencing the opposite of office properties. Industrial properties are maintaining record occupancy, double-digit rent growth, and booming construction. Retail leasing held steady near post-pandemic highs in the second quarter, while new development remains sparse. The retail market is now reporting tighter conditions than prior to the pandemic as the amount of retail space available for lease fell to the lowest level in over a decade. Store openings are remaining on pace to significantly eclipse store closures this year. Transaction volumes for commercial real estate properties continue to reach new highs. Over $216 billion traded during the second quarter, leading to a second quarter record and a record decline. breaking the first half of the year. Price appreciation continues across all asset classes with industrial multifamily leading and retail and office lagging. So far this year, distressed commercial property sales remain low, encompassing only 1,300 assets representing less than 1.5% of all sales. CMBS delinquencies at 30, 60, and 90 days continue to decline in the second quarter. We anticipate that the rise in interest rates will create difficulties with loan maturities, and refinancing in the months and years ahead. According to a leading CMBS mortgage servicer, requests for loan extensions increased 38% and requests for loan restructuring increased 21% in the second quarter. An increase in delinquencies could represent a significant revenue opportunity for 10X. Well, after those brief remarks, I'm going to turn the call over to our Chief Financial Officer, Scott Wheeler.