CoStar Group, Inc.

good afternoon my name is matt and i'll be your conference operator today at this time i would like to welcome everyone to the costar group for quarter and year end 2022 earnings call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session now cindy eakin head of investor relations will read the safe harbor statement cindy you may begin thank you matthew

Good evening, and thank you all for joining us to discuss the fourth quarter and full year 2022 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 safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the company's outlook and expectations for the first quarter and full year 2023. 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 this 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 those statements, whether as a result of new information, future events, or otherwise. Reconciliation to the most directly comparable GAAP measure of non-GAAP financial measures discussed on this call, including EBITDA, adjusted EBITDA, adjusted EBITDA margin, and non-GAAP net income, and non-GAAP net income per diluted share, and forward-looking non-GAAP guidance, are also shown in the detail in our press release issued today, along with the definition of 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 Fornes.

Thank you Cindy good work that was fantastic safe harbor good evening everyone, and thank you for joining us for costar groups fourth quarter 2022 earnings call. Total revenue for the full year of 2022 was 2.2 billion or 12% year over year growth coming in at the high end of our guidance range and above consensus estimates. Our fourth quarter revenue grew 13% on a constant currency basis over the fourth quarter of 21 up to 573 million. This is our 12th year in a row with double digit revenue growth. We had a phenomenal year in sales. We delivered the highest net new sales ever with 2022 sales reaching 305 million or 41% growth over the net new sales in 21. We delivered exceptional sales results in the fourth quarter as well, with annualized net new sales bookings of 77 million. This is a 15% increase over the same quarter in 21, and our second highest quarterly net sales bookings result ever. Apartments.com had their highest sales quarter ever, exceeding their prior record set in the second quarter of 20 by 25%. So a shout out to Paige Forrest and her entire team at Apartments.com. We substantially increased the size of our sales force in 22, adding almost 300 people net. We had a very strong profit performance in 22 as well. Our full year adjusted EBITDA was 672 million, which was also above the high end of our guidance range and consensus estimates. Overall, we had an exceptional year with both strong sales and profit performance while continuing to invest and grow the business. Apartments.com revenue was $198 million in the fourth quarter, increasing 16% over the fourth quarter of 21, and $740 million for the full year was a 10% increase over the prior year. Apartments.com delivered another outstanding quarter with a record in sales and an increase in net bookings of 177% over the same period last year. 2022 was an exceptional year for Apartments.com. Our efforts to attract talented sales professionals, give them world-class training, and get them into production paid dividends. We increased the sales force by 40%, adding over 100 sales representatives to the team. At the same time, we were able to increase our sales productivity with monthly net new sales up 187% as compared to 21. The team also conducted 450,000 quality meetings, both with existing clients and potential prospects, the highest number of meetings in our history. We maintained a very impressive net promoter score with our clients of 93%. The Apartments.com brand is stronger than ever. In 2022, we delivered over 1.2 billion visits to our platforms. Our award-winning marketing campaign featuring the wonderful and funny Jeff Goldblum as Brad Bellflower, inventor of the apartment internet, entertained audiences and delivered over 12 billion impressions across linear TV and our other 130 media channels. We continue to reach renters and potential renters where they consume the most content, including streaming video, audio, social media platforms, and through marketing influencers. Our investments keep proving successful with a new all-time high in unaided brand awareness in the fourth quarter and the number one ranking among our target audience. RentDynamics, a leading CRM platform for multifamily properties, conducted an analysis of over 500,000 rental leads submitted in the fourth quarter of 22. They determined that the Apartments.com network converted leads to leases at twice the rate of Zillow. To be clear, this data shows that a community would have to get twice as many leads from Zillow as from Apartments.com in order to provide the community with an equal number of leases. In fact, the same study showed that Apartments.com network provided communities with almost four times more leases than the Zillow rental network and over nine times more leases than rent period. As we look ahead, we are well positioned to penetrate the existing, the estimated $1.4 billion marketing opportunity in apartment buildings which have less than 50 units but more than five. In 22, we more than doubled our sales force dedicated to this opportunity and the fourth quarter, we introduced flexible listing plans. the perfect solution for managers who oversee multiple properties in this under 50-unit apartment category. The product allows managers the flexibility to swap properties they advertise at any time based on their current needs and upcoming availabilities. I'm proud to say we launched Apartments.com in Canada in the fourth quarter, marking the brand's first expansion outside the United States. Runners in Canada may now search Canadian geographies for apartments homes, condos, and townhomes for rent. Searches can be conducted in English or Francais. Some of the key clients in the United States have either already moved into Canada or have plans to move in 2023 and we're ready to support them. 42 of Canada's largest property management companies have already provided us with their data on their communities and we've acquired listing data from the Canadian Real Estate Association. This allows us to present rental listings for various Canadian MLSs on apartments.com. We have already experienced enormous traffic growth since our recent launch and are positioned at or near the top of organic spot for searches. We believe we are well positioned to penetrate this $600 million estimated Canadian apartment marketing opportunity with our strong brand and unique product offerings. The U.S. macroeconomic conditions continue to support an increase in the demand for advertising. U.S. multifamily vacancy rates rose another 50 basis points to 7.1% compared to the last quarter. The U.S. and Canadian market conditions, along with the strength of our brand and our sales force, give us confidence in our ability to return to 20% annual revenue growth. CoStar revenue was $837 million in 2022, up 16% over the prior year, making it an outstanding year. CoStar net new sales were record high and 16% more than our prior highest sales year. Both the North American and European sales teams delivered the highest net new sales ever. We added over 60 new sales representatives to the CoStar team this past year, which is an increase of almost 20% over 21. We're in the final stages of transitioning customers to the global CoStar platform, which to date has generated over $40 million in incremental revenue. We launched the CoStar Lender product, which generated almost $6 million already in net new sales and 140 new customers, and we're just getting started there. This quarter, we expect to complete the process of linking over 70,000 commercial properties to 12,600 investment funds or property investment funds, providing our clients with insights into these property fund portfolios. The product will allow a user to search for funds raising capital and those with dry powder to invest and gather insights into a fund manager's investment strategy, property type, target country, and or transaction history. We're about to deliver significant enhancements to our tenant product as well. In the past, our tenant product has provided our users with valuable details on over 5 million tenant locations. With the coming upgrade of tenant, we'll provide users with an aggregated roll-up of all of a given company's locations so that the user can better understand how the most important tenants utilize space across their portfolios and how our clients can best capitalize on these various tenants space needs. CoStar definitely had a tremendous year. I'm confident in our ability to continue to grow at double digit rates with the strength of our product capabilities, high renewal rates, and continued ongoing thoughtful investments. LoopNet fourth quarter revenue was 61 million, up 12% over the prior year. Net new sales bookings in 22 set a record for LoopNet, Net new sales in the fourth quarter were up 198% over the fourth quarter of last year, and trailing 12-month net new sales were up 56% over 21. We added over 100 sales representatives to LoopNet in 22, which almost quadrupled the size of the LoopNet sales team. With a successful launch of LoopNet in Canada and the UK, we now have a growing international offering. We have planned launches in France and Spain in 23. Our brand and our product remains strong with traffic to LoopNet network of sites, continuing to outperform competition dramatically, both domestically and internationally. LoopNet now ranks number one for 129,000 relevant commercial keywords on Google. And we have twice the number of keywords ranked in the top three positions than our next closest competitor. In 23, we'll continue to grow the Salesforce as well as our SEM investment along with our digital and broad-based media campaigns. The new marketing campaign will be focused on elevating LoopNet brand owners and brokers across a mix of multimedia channels, including linear, digital, and social platforms. These marketing efforts will drive leads to our expanded Salesforce and reinforce our position as the most popular place to find a space. Overall, I'm extremely pleased with the progress we've made building out the LoopNet team and its international platform, which gives confidence in our ability to achieve our target of 18 to 19% revenue growth in 23. STR's revenue growth accelerated from single-digit growth in the first quarter of 22 to 12% year-over-year growth in the fourth quarter of 22 on a constant currency basis. The hotel industry has recovered, and in the U.S., average daily rates and revenue per room are well ahead of pre-pandemic levels. Internationally, the industry isn't far behind. Current market conditions put us in a great position to launch our new benchmarking product, which we believe will provide incredible new value to hotel brands, operators, and owners around the world. Our new benchmarking product combines the very best of STR's deep hotel industry acumen and expertise with CoStar's innovative technology and industry-leading software. Users will find an interactive benchmarking platform with areas that preserve the familiarity of the STAR report whilst introducing new features and functionality in analytics, charts, and graphs to deliver additional insights into their hotel's performance. The deep proprietary performance data and user-defined competitive sets aggregates will be available for users to manage their properties, set rate and occupancy strategies, and optimize performance. CoStar now houses an inventory of more than a quarter million hotels, including 77,000 benchmarking participants in over 180 countries. with 175,000 unique users for that information. These users will access their performance data and industry data from 572 hospitality markets, 1,900 submarkets, and over 6,000 class segments in their selected currency. Owners will have clearer visibility into asset performance, market performance, and the competitive landscape. This insight is valuable for asset acquisition, repositioning, and disposition. Operators will have access to data and tools to better forecast, budget, yield, manage, and identify demand drivers and supply implications. OTEL brands will have a full suite to support development teams, franchise, and owner relationships and management contracts. During 23, we'll be migrating those 175,000 users including 900 corporate customers and 6,000 independent hotels to this new digital marketing platform based in CoStar. They've already begun to integrate the outputs with their workflows, and are experiencing significant productivity improvements. In short, we're on track to achieve our goal to effectively utilize a digital product that an entire – industry relies on and unlocks significant new value for our clients. These enhancements will help us to gain further share and penetrate the $300 million addressable hotel market. 10X brought $5 billion in assets to the platform for sale in 2022 for an increase of 42% year-over-year. That's the highest level we've seen on the platform since 2012. 10X closed $2.5 billion of those asset sales, which is up 16% over last year and the highest level since 2016. This performance was in the face of a significant slowdown in overall commercial real estate sales volumes, which had declined almost 55% compared to the fourth quarter of last year. We continue to see consistency in the percentage of non-distressed assets brought to the platform at approximately 80%, indicating that the volume of distressed sales has not yet picked up. Full year revenue for 10X grew 11% year over year. In 22, we made significant progress enhancing the platform. We've now fully integrated 10X with our CoStar and LoopNet platforms, and that's driving sales and operating efficiencies. We had our first buyer bid on a 10X property from within LoopNet last week, and they won the auction for that property. So they're really fully integrated now. With integration, 10X is now positioned to handle dramatically higher volumes. We've also doubled our 10X sales force since the last year. New 10X sales representatives with a tenure under 24 months are productive and brought 318% more assets to the platform in 22 than the prior year, and they accounted for 55% of total assets. The commercial property transaction market is in a period of disruption, with 93 billion of CMBS loans expected to come due in 23. Trade rates continue to reflect the spread in buyer and seller expectations. 10X continues to maintain a significant advantage off the old offline trade rates and we've exceeded those by 81% over the course of 21. So we're in a down market dramatically more effective. A digital platform that can close a transaction within 90 days as compared to the market average offline of approximately 300 days has a significant advantage and is well positioned for challenging market conditions. I'm pleased to report that we're making significant gains in building consumer traffic on homes.com. Unique visitors to homes.com climbed 130% year over year in January, according to Google Analytics. Our SEO traffic to homes.com increased 78% month over month in January. our SEO traffic to Homes.com increased 78% month over month in January. According to ComScore, January 23 over January 22, our Homes.com traffic increased 100%, while ComScore indicated Realtor.com was down 15%, Zillow was down 6%, and Redfin was relatively flat at about 6%. In total, our homes.com network had approximately 24 million unique visitors in January, according to Google Analytics. We still have a lot of work to do here, but we have a clear roadmap and have our heads down focused on building the best residential real estate portal in the United States. Our team is excited to be working on this. They're highly motivated and committed to the mission. We believe that given our progress in building traffic to date, we'll be in a position to begin monetizing Homes.com in the later part of this year. We now have over 1 million agents registered on our Homes.com platform, which is an increase of 33% over last year. During the year, we successfully integrated the back ends of Homes.com and HomeSnap platforms into one efficient residential technology stack. We're making significant progress executing on your listing, your lead strategy. While other sites are injecting their agents into the home buyer's search experience, somewhat awkwardly, we offer a friction-free environment connecting buyers directly to the listing agents who know the property and the home best that the buyer is interested in. we're also presenting consumers with hundreds of thousands of highly qualified potential buyer agents for free based upon those buyer agents' skills and experiences, rather based on how much the buyer agent's willing to give up in commission to the portal. We believe that we offer a dramatically better consumer experience than do sites that try and take a commission split from the inquiries buyers submit. I've used some of these competing sites myself and submitted leads on properties I'm interested in. The experience is remarkably awful. The moment you submit a lead and for months afterwards, you're bombarded with cold calls from countless agents who have questionable qualifications. We believe that homes.com offers a significantly improved consumer experience over that competition. Not only do we believe we offer superior consumer experience for buyers, we also believe we are much better aligned with real estate agents. The competing models use all the agents' listings in a market to funnel monetized leads to just a very small percentage of agents. So some of these competing models are diverting all the agents' leads to a small number of agents who are paying the portal. In their model, these few agents pay a huge fees and the vast majority of agents get little value, if not downright disadvantaged by these competitors. We believe that by respecting your listing, your lead, we can serve all the agents better. We are not just providing value to the agents with a listing, though. We're making it easier for buyers to find agents who have expertise and experience that are the best match for the needs of those buyers and facilitating connecting with them and collaborating with them without us trying to, again, inject ourselves in the process inappropriately. Our product development and research teams have now released a robust agent directory featuring hundreds of thousands of agents and extensive media to enhance their profiles. Our agent collaboration tools are up and running. We've had tremendous feedback from both agents and consumers. The interactive experience replaces the historically inefficient email and text communications back and forth between agents and homebuyers. We've successfully previewed this new homes.com at the National Association of Realtors Convention in November, where we demonstrate our product to close to 2,000 agents, and we received very positive feedback across the board. Revenue for residential segment was $74 million in 2022, which was roughly flat compared to revenue in 2021. As we mentioned in our last call, this is legacy home SNAP revenue, mostly selling social media and search engine advertising to agents. We believe that this revenue is less strategic and less sticky than the revenue we'll generate from a high-intent marketplace like homes.com. We have effectively transitioned most of our sales resources to other higher yield marketplaces. We continue to de-emphasize the HomeSnap products in favor of future Homes.com revenue. In the later part of the year, we'll begin to bring more sales resources back on to the residential segment in the Homes.com product. Our planned investment into marketing to drive traffic to Homes.com will increase later in the year, as we approach the point where we are ready to monetize Homes.com. As you've heard us say before, CoStar is always assessing opportunities to maximize shareholder value, including strategic acquisitions. And the discussions announced last month by News Corp with respect to a potential sale of Move Inc., the operator of Realtor.com, were part of that ongoing effort. While we typically do not comment on potential acquisition opportunities, in light of News Corp's prior announcements, we are confirming here at this point, CoStar Group is not acquiring Realtor.com. We have tremendous respect for the people behind Realtor.com and for the National Association of Realtors But again, I need to make it clear, at this point, CoStar Group is not acquiring realtor.com. We continue to believe that homes.com's business model and our principles are well aligned with the interests of NAR members and real estate agents generally. Turning to the real estate economy... The office sector continues to show weakness with vacancies up 13 of the past 14 quarters and now stands at 14.6%. Availability rates are much higher at 18.5%. Many second generation office properties are now in significant distress. We expect to see many of these owners with no choice but to hand the keys back to the bank. We're well positioned to assist in recapitalizing those properties on 10X as they come to market. I do believe that there's hope of recovery in the out years for office though. A recent Castle Index reading showed a possible shift in momentum as office usage climbed over to a 50% mark over the pre-pandemic levels. That means that for the first time since the pandemic, more people are working in an office than are working at home. I believe that's because people are more productive, efficient, and in touch when they work together in person. I also believe that teams who work together are more competitive. While we expect vacancies to continue to rise and office properties continue to be negatively impacted in the near term, we see the continued return to work trend as a positive sign for the office sector's future. With 1.3 million office-using jobs added since the beginning of the pandemic and negative 118 million square feet of absorption over the same time period, there may be significant pent-up demand for office space. The industrial sector posted a healthy fourth quarter, and the sector is seeing an unprecedented amount of new supply due to the high levels of demand for goods seen since the start of the pandemic. The sector's vacancies are at half of their long-term average. The retail sector exhibited the strongest fundamentals in the fourth quarter, and was the only asset class to see vacancies decline. Relatively strong demand and relatively low supply are both a continuation of trends we've seen since the beginning of the pandemic. Demand has outpaced new supply for seven consecutive quarters, leading to a fourth quarter of vacancy of 4.2%, the lowest retail vacancy rate ever recorded. So it would appear that the death of retail real estate was only a rumor. The residential housing market is continuing to see softness. Home prices soared during the pandemic due to cheap money, but now mortgage rates have climbed over 7%, as you likely know. In combination, this has resulted in terrible affordability issue levels not seen in more than 30 years. With buyers being priced out of the market and existing homeowners being discouraged from moving due to having financed at historically low rates, Existing home sales have fallen for the 11th consecutive mark month and an overall drop of 38%. We've recently celebrated our introduction to the NASDAQ 100 and the S&P 500. That's probably connected to the fact that we've now achieved 12 straight years of double digit revenue growth. 2022 was our highest net new sales bookings year ever and we now have over 1,100 productive sales representatives executing on many of our significant market opportunities. We published our second environmental and social and governance report, which you can find in the investor relations sector of our website, highlighting our ESG goals and accomplishments for 22. We are now reporting our baseline greenhouse gas emissions Inside CoStar Group, we continue to prioritize being a leader in sustainability. We have a hybrid or electric fleet of over 200 research vehicles. We select LEED certified or ENERGY STAR rated buildings for most of our 80-plus offices. We have facilitated over 30 million virtual tours through Apartments.com, LoopNet, Homes.com, and land marketplaces, thereby potentially avoiding massive amounts of carbon that would have been created by people driving for traditional physical property tours. We've also increased the transparency of our human capital disclosures, including publishing both our EEO-1 and pay gap analysis. I'm extremely proud of our diverse and equitable workforce. I'm encouraged by all that we've done and all that we're still poised to do in making CoStar Group as sustainable transparent, and a diverse company as can be. Our 2022 employee engagement scores climbed to a well above average 83%, which is the highest engagement scores we've ever obtained. We're also proud to have a highly engaged workforce, which is reflected in our low average monthly voluntary turnover rate of just 1.6%, which is way below the professional and business services industry rate of 3.3%. So with that, at this point, I'm going to turn the call over to our approximately 83% engaged Chief Financial Officer, Scott Wheeler.