Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group's Fourth Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Richard Simonelli. Please go ahead.

Ladies and gentlemen, welcome to CoStar Group's fourth quarter and year-end 2011 conference call. On the call today are CoStar Group's Founder and CEO, Andrew Florance; CFO, Brian Radecki; and myself. We're delighted that you all could join us today. Before I turn the call over to Andy, I have some very important facts for you. Certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties that could 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 February 22, 2012, press release on the fourth quarter and year-end 2011 results and in CoStar's filings with the SEC, including our Form 10-K for the year ended December 2010, and form 10-Q for the period September 30, 2011, under the heading risk factors. All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements. As a reminder, today's conference call is being broadcast live and in color over the Internet at costar.com. A replay will be available approximately 1 hour after the call, and will be available until March 23, 2012. To listen to the replay, call (800) 475-6701 within the United States or Canada, or (320) 365-3844 outside the United States. The access code is 235325. A replay of this call will also be available on our website soon after the call concludes. So now, without further ado, I turn the call over to Andy Florance. Andy?

Thank you, Rich. Thank you all for joining us on this call to discuss CoStar's groups year-end and fourth quarter 2011 results. Again, I'm happy to announce that we had another strong quarter and outstanding year overall in 2011. Here are some of the highlights of 2011. We achieved our best year ever, our best quarter ever, and our best monthly sales results ever. We had record revenue exceeding a quarter of $1 billion for the first time and a 13.7% year-over-year growth rate. We launched CoStarGo, a revolutionary new product that puts our industry-leading information on to a mobile platform in the field where our clients need it most. CoStarGo generated nearly $5 million in annualized sales after being available for only 2 quarters in 2011. It has been a key driver of sales to new and existing clients, and we expect that trend to continue in 2012. We announced the agreement to acquire LoopNet, which we believe will be a very positive potential combination of 2 industry-leading, complementary and innovative companies that could better serve the industry and provide excellent cross-selling opportunities and efficiencies and cost savings. We raised $250 million in equity to help finance the potential purchase of LoopNet, and we recently signed an agreement for a $225 million credit facility that will be used to help fund that transaction. We completed the sale leaseback of our Washington D.C. headquarters at $60 million above our original purchase price from a year after buying the building. The purchase was recognized as the office deal of the year for 2010, and maybe the sale leaseback will get similar recognition in 2011. I believe we received a huge branding benefit within our industry since we used the CoStar database and PPR analytics to capture that opportunity. We achieved a…

Thank you, Andy. We're very pleased with our performance in the fourth quarter of 2011. Once again, we delivered strong revenue growth and earnings while continuing to invest in our business. Today, I'm going to focus on sequential results, year-over-year trends and also on our outlook for the first quarter and full-year 2012. The company reported $66.2 million of fourth quarter 2011 revenue, an increase of $2.4 million, or 3.7% compared to revenue of $63.8 million in the third quarter. Revenue for the fourth quarter of 2011 increased $8 million, or 13.7% compared to last year. Full year revenues were $251.7 million, an increase of approximately 11.2% over revenues of $226.3 million for the full year of 2010. Sequential and year-over-year revenue growth was primarily attributable to growth in subscription revenues from our core suite of services, CoStar property, COMPS and Tenant, which was supercharged by CoStarGo. We also reported $5.2 million in net income or $0.20 per diluted share during the fourth quarter of 2011 based on 25.4 million shares compared to $2.3 million, or $0.09 per diluted share in the third quarter of 2011 based on 25.3 million shares. This reflects the impact of approximately $3.1 million expenses associated with the proposed LoopNet merger, a decrease of $2.7 million compared to the third quarter. Adjusted EBITDA for the fourth quarter of 2011 was $16 million, compared to adjusted EBITDA of $14 million in the third quarter of 2011, an increase of $2 million or 14.3%. Adjusted EBITDA increased $2.6 million or 19.4% over the fourth quarter of 2010. Non-GAAP net income was $8.4 million or $0.33 per diluted share in the fourth quarter of 2011 compared to non-GAAP net income of $7.2 million, or $0.28 per diluted share in the third quarter of 2011. Reconciliation of non-GAAP net…

[Operator Instructions] And our first question comes from the line of Bill Warmington from Raymond James.

A question for you on the 2012 guidance. Just wanted to ask what kind of EBITDA guidance you are implying in that? I just want to make sure I'm doing the calculation correctly.

Sure, Bill. I mean, I think we're giving just the non-GAAP EPS numbers, but you can -- in the back of the press release, I won't spend on the call going through every line, the detail of the reconciliations of the guidance, so you'll be able to see all the different lines. So you'll see exactly what we're sort of forecasting for the year for DLPs and everything like that. So we put a detailed reconciliation in there.

Got it. And it sounds like it's going to be weighted, the expense, the 6.5 to 8.5 would be weighted how throughout the year? It sounds like the $3 million to $4 million would be more towards the second half for the U.S.?

Yes, I mean, we're actually starting hiring right now for all of those positions. So anybody, developers anywhere in the country, please e-mail us, let us now. We're looking for a lot of great developers here. But in the first quarter, I think, it's just typical seasonality, you have higher payroll, taxes and benefits, and then we'll be ramping up pretty evenly throughout the year after that. So we're definitely looking now to see a ramp-up development this year; that's the main focus.

Okay. And then I might also ask another housekeeping question on the -- the contribution of Virtual Premise in the quarter. That was probably small, but I just wanted to check that.

Yes, it was pretty small. That was pretty small. And then as far as this year goes, we've just incorporated their numbers in to ours. They were on about $7 million run rate, of course that's prorated; we also lost about $2 million to $3 million in purchased accounting of their deferred revenue. So the number end up being fairly small, and I think with the Grubb & Ellis putting the range in there, they sort of offset each other. So all that's pretty much incorporated in the guidance. I think the 11.5% to 13% range is a very comfortable range for us. Obviously, we feel great about it.

And so for the fourth quarter contribution, you're looking at less than 50 basis points to the growth?

Yes.

And then I wanted to ask about the expansion into the U.K. and whether you guys have the data in place there to support a CoStarGo type product?

I would -- in answering the question, I'd say 2 things; one is I believe we do. It's not in the exact same format as the U.S. data structure, but it was kind of 4 years ago that we shut down the 15-person research operation in London and opened a 100-plus person operation in Glasgow, so that we could get the same level in nature and quality of data in the United Kingdom that we have in the United States. So there's no material anticipated ramp-up in the United Kingdom around research. The U.K. research team will be working very hard this year as they are tweaking the data to move it from the U.K. [indiscernible] into the U.S. enterprise system, but that has been, today, surprisingly well managed and looks like it's going smoothly. When we actually release the product, when we see it the first time in the U.K., I'm sure we'll see things that -- there'll be some gaps in the teeth that don't look quite right. But we will fix those quickly. And then ultimately, this is not really an expansion of costs; this should ultimately reduce our costs in the U.K. So we're pretty optimistic about it, and we're glad we're on the track we're on.

Got it. And then for the last question, if you could comment on the strength that you're seeing in multifamily and whether that creates an opportunity for you guys.

Well, I think we're seeing strength across most all of the sectors. I think multifamily is getting a little more media attention, a little more hype than the other sectors. So actually, I'm pretty jazzed about all the sectors. We have been collecting more and more data on multifamily. We're definitely climbing a curve there. And we do provide a multifamily advisory service and economic forecasting through PPR, which is being well received.

Next question goes to the line of Brett Huff from Stephens.

A couple questions. One, just want to make sure I understand what's in and out of the guidance, and so I guess, Brian, this is for you. The additional marketing spend you talked about, is that in the 3.5 to 4.5 and/or the $3 million to $4 million that you called out in the release, or is that in addition to. And second question related to that is, whatever -- whether it's in or out of that number, is it contemplated, is the additional marketing spend contemplated in the guidance?

Sure. The numbers I talked about the 3.5 to 4.5 and 3 to 4, those are pure development numbers, so that's really the investment in the development group with sort of there being a big piece in the U.K. and the U.S. The U.K. piece, that number that I outlined there, is not just development; there are some other costs in there, but I would say the majority of this is development. The U.S. piece is almost all development. The guidance does include sort of some marketing spend this year, so we've got some numbers in there. Clearly we'll keep evaluating things; a lot of it depends on when the timing of the marketing spend is all going to depend on when the products are released and when they come out. So some of it's a little bit hard to predict, but, I mean, I think overall, we're trying to account for all that. Just depends on the timing.

Okay. And then you mentioned again the long-term 40-percent plus pro forma EBITDA margin, and I think that was a combined company goal; is that still right?

That's correct. And I think it's obviously a CoStar Group goal too. But it is also -- it would be if the proposed merger closes a combined company goal.

Any thought on the -- one of the things that I think, we, as investors, try to suss out is just how much you guys need to invest in order to continue your nice top-line revenue growth. Can you give us more color on how the spend that you've recently announced, just yesterday, is that going to be ongoing, does it stop, how does it fit or figure into that 40-plus goal?

Well, we look at this investment as more opportunistic. As we look at some of the product concepts that we have developed and things that we want to do and bring to market, we think we have a number of very compelling, potentially very high-margin products we can bring to market, and we don't have to bring those things to market. We can continue to grow without bringing those things to market. But we think they're very compelling and that we should bring them to market, so we're basically reinvesting into higher-margin initiatives. They're optional only in that we would feel stupid not building them if we can.

Got you. And then last question for me, the gross margins, Brian, you mentioned a little bit, obviously, they were very good; much better than we thought. Can you tell us what's driving that? I mean, is this just the business, or is there something going on there. You mentioned they'd come down a little bit in 1Q but then continued to grow; what kind of expansion can we expect assuming standalone basis?

Yes, I mean, I think that clearly, when you're growing revenue, I mean, we've always talked about it, when you got a relatively fixed cost structure in sort of the research area, I mean, each year we do invest a little bit more there, but essentially you're going to continue to see margins grow. I mean, the first quarter is always just a function of the fact that you've got, like I said, a lot of the seasonality and payroll benefits in that, and a thousand researchers in there, obviously a big chunk of all that seasonality ends up showing up in that line. So in general, yes, the first quarter is always going to be a little bit lower seasonality wise, and the expectation is, when you're growing revenue, you're going to be growing the margin line. So I would expect it to be a little lower in the first quarter. I think Q4 was exceptionally strong. We had a couple of expenses that didn't happen there that might flow over to Q1, but in general, I think that you're going to continue to see gross margin expansion after the seasonality in the first quarter based on strong revenue growth.

[Operator Instructions] And next we'll go to the line of Michael Huang from Needham & Company.

Just a few questions for you guys. So first of all, I believe you mentioned that you did $4.9 million of CoStarGo related bookings in the quarter. How much of that was from new customers and how much was from up-sell. And then just wanted to clarify your comments around the holiday season iPad shipments. Was the strength of this, at all, due to that? And as a consequence, how does that -- how should we assume the level of this type of booking in Q1?

I'm going to take an educated guess, and if Brian wants to provide a different color, that's great. But my feeling is this has been -- the CoStarGo associated sales have been a relatively even combination of completely new customer acquisitions and existing customer up-sells. Maybe a little skewed slightly to new customer up-sell, I mean, to existing customer up-sells, but it's probably in the 60-40 range there. I don't know that we have specifically an immediate revenue enhancement from the holiday season iPad shipping; what we saw was more of a usage jump, but it was material and clear. I mean, it was -- watching the line, it just stair stepped up to a new level following the holiday season. So I think ultimately it will definitely result in more revenue, and if there's a very popular iPad launch in March, I would expect another stair step in 2 things: One, slight limitation of the current price [ph] as that 3G speed, LTE speed, would definitely make it an even better client experience, looking at photos and aerials and maps on a high-resolution screen would be an even better customer experience. So an increase in volume of units as the new iPad 3 comes out along with a better customer experience I think will ultimately drive sales. But also, it's a little frustrating to me, like, we have a number of customers who are bringing home half a million in commissions a year who are slow to open up their wallet and drop their $700 on probably the most important business tool they could get, but with the iPad 3 coming out, we imagine they'll probably reduce prices on iPad 2 significantly, which will dramatically increase volumes. So we think all that this spring is good, good and better to keep the sales going for the CoStarGo. And this is not a product that taps out in 2 quarters. I think this product will be driving revenues for 8 quarters, 10 quarters solidly. Because we're only at -- we're not even at 10% yet of our customer base on this.

And just to make, add onto that and make one clarification, it was $5 million annualized sales for sort of the 2 quarters that it was out, so it wasn't $5 million in the fourth quarter. So my comment on sort of bookings and where can those go, I think I said this last quarter and the quarter before, and so I'll say it again now, I mean, you can't, it's hard to predict breaking records every single quarter. The fourth quarter also tends to be seasonally one of our strongest quarters. So I think you got a combination of obviously growing momentum, iPad and then seasonality. So my expectation is the first quarter probably will not be as high as the fourth quarter, but I believe growing all year long and then of course overall great growth rate for the year, we're projecting up to 13%, even factoring in for something like the Grubb, so it could be even higher on that. So I definitely would not expect Q1 bookings to be the same. But again, overall, I think we're in for a great sales year.

And I know it's still early around, kind of, CoStarGo, but how have you seen this impact cost of acquisition for these new subscribers and length of sale cycle. Have you seen any notable changes that you could share with us?

Yes, I do believe it's a shorter sales cycle. You're bringing in a piece of technology that frankly is sexy, and if all sales are emotional, this is definitely a faster sale cycle. Some of the bigger ones may not be that much faster, but the smaller ones, I think, definitely.

Okay. And my last question for you. So given CoStar Fusion and the launch in the U.K., what would you expect that to do to growth rate in 2013. I know you have no formal guidance around that, but could we see acceleration from 2012 levels, assuming no material change in the end commercial real estate market, or what's your kind of first flush thought on kind of what this could do?

We'll take the 2 separately. I think with the U.K., I think that even if the U.K. were to triple its growth rate or quadruple its growth rate, it doesn't -- I don't think it'll materially move the dial for CoStar Group overall because it's a relatively small percentage of our revenue. It's more of a proof of concept that what we're looking for there is to be able to show that we can do a 30% margin, grow revenue in an overseas market. The much more meaningful revenue would be from a major enhancement to our U.S. product suite in the United States. That's the juggernaut where, no matter how fast these other initiatives grow, the core initiative grows -- at any pace, it's outgrowing the others. So this [ph] go right to that core market. And while it's extremely early, we're sitting here in the first part of '12 and this is a product that would really be about the first quarter of '13, I am extremely enthusiastic about the way this product looks, and if it's well executed, I think it will have a material and significant impact on our per salesperson productivity throughout 2013. It will certainly reenergize any kind of momentum we have from CoStarGo.

And just a follow-up with that. So the U.K., people can look at the separate financials, and they're presented in U.S. dollars, but if you convert them back, they've been actually generally, relatively flat or low growth the last few years compared to CoStar, which has been growing, and one of the things we've identified there is it's because of the software. We believe we have great data. So I think the investment in the U.K., I believe will generate higher revenue growth in the U.K. as you rollout CoStarGo this summer and into the fall, and then the full suite of products by end of the year, early next year. As Andy mentioned, the U.K. is 8%, 9% of our business. If we were to close a proposed merger with LoopNet, it would drop to 4%. So it's not a huge piece of our business, but clearly, we're focused on getting their revenue growth rate up to ours in the U.S. or higher and also getting them up to profitability, and the way to do that is to invest in the software, which we haven't done yet. So I think that's the U.K. piece. On the U.S. piece, I think it's a little too early to predict growth rates, but clearly, the way we invested in CoStarGo this past year, we are now investing in some new products in the U.S. to obviously release and hopefully then keep the momentum going on growing revenue into next year. So obviously, where we sit today, we feel pretty good. As the year goes on, we'll obviously have a better feel for that as we know when the products come out and we see what the reactions to those are.

And next we'll go to the line of Brandon Dobell from William Blair.

Couple of quick ones. Have been comparing sales cycles in new markets versus, looks like kind of a more mature markets these days; are you seeing any, I guess, [indiscernible] impact either from CoStarGo or just with the improving environment in commercial real estate? Are you seeing any shortening of the sales cycles, or is it still about what you've seen in the past couple of years?

We are seeing something, I think, very materially different in the newer markets. So the newer markets, I would say, is, I would call newer markets that last round of 200 we entered after the 80 big ones, so if I'm looking at big establishments being New York, Washington, Baltimore, Philadelphia, Phoenix and so forth, those are doing well, moving along, but when I was preparing for this year's sales conference and I was reviewing the sales numbers in some detail, I saw one thing that really shocked me, and that was our performance in tertiary markets. So I was looking at numbers like our Buffalo, New York; our Lubbock, Texas; our Boise, Idaho numbers, and I was -- while they're relative, they don't move without the whole company that quickly [ph], I was sort of shocked at how well those markets are doing. So the markets like a Buffalo, where we could, just as an example, we could be doing, we were doing very little revenue before. We're now are doing $100,000, $200,000 in revenue, and what's driving that is a successful, centralized selling model. So people selling into these markets with a cleaner, simpler product offering from our centralized call center in Washington, and then also having a career path where people have [ph] centralized calling center into a sort of periodic visit to these secondary markets. So it's a pretty good trend. I think if that holds up and that keeps going, we're going to feel very good about our decision to go into those tertiary markets. They look really, really nice [ph] right now. [indiscernible]

During the fourth quarter, something came up with kind of, I guess, talk between you guys and CBRE about, I think it was the power broker rankings. Maybe a little color on what those rankings actually are and what this issue is, if there is an issue with this between you guys, or if that is kind of gone away as the quarter progressed?

I don't recall what you're talking about. No. CB and CoStar Group have a very important, mutually symbiotic relationship through the years. And we have, we provide a lot of value to them, and they're a very, very important customer to us. They have had a policy that changes from time to time, where they don't want comparable sale data getting out to the market because they believe that, or comparable leasing to get out to the market, because they believe it gives their competitors some advantage and neutralizes their scale. And it's inconsistent. I think a short paragraph piece or 2 come out in Washington business something about it, and it's sort of blown over. We had a very good and productive meeting with my friend, Mike Lafitte, who's the President of CB over in Dallas last week. And I would say things are on a very good footing.

Okay. Perfect. Since nobody's asked the big elephant in the room question, I guess I'll be the guy to ask you about the LoopNet transaction. Maybe I'm reading too much into the words, but, I guess, should we assume that the transaction process is at this point, or has taken this long, because the FTC didn't like the deals or they saw there was something that they didn't like, either a market concentration or what have you. Or I guess asked another way, if the transaction does go forward, should we expect it to look like you guys thought it would back when you announced it midyear 2011?

I have a lot to tell you about that, and I want to basically open up and tell you everything.

That would be fantastic.

[indiscernible] have John Coleman answer that for you.

Yes. Unfortunately, I mean, we're going to have stick to kind of what the disclosure is we've given. I think Andy said it best; we're working extremely hard to bring this to a close. The conversations have been very productive and we're hopeful to wrap this up in the near term and -- but I think we can't really get into more specifics than that at this point.

I think what he said was, "Wah wah wah."

That's pretty much what I heard, I think. And then maybe more of a process question, is there something that we should look for that, just call it "restarts the clock" for kind of a final run of discussions, or could the next data point just be, hey, we got it completed or we didn't get it completed. Is there some interim step that kind of gives us a better timeline for how this may play out? Just from pure process perspective, or is there some part of the FTC process that we need to be aware of that you guys need to tell us about.

I think, as we disclosed, there's this kind of 45-day period, and I mean, we would likely tell you if that 45 day trigger was pulled. So that would be, if that happened, you would certainly hear about that. But otherwise, hopefully the next thing you hear is that we've gotten where we're all trying to get to.

I can tell you that they don't offer coffee in their conference rooms.

And then final question. How do we think about research and sales force headcount additions in 2012? I think Brian's talked about a 5% uptick this past year for sales force; should we see about the same kind of number this year, or you guys happy with how the headcount looks right now?

Yes, I think as far as sales and research goes, sales, we're always adding a little bit, 5%, 7%, each year. So I would expect to see a sort of similar range there. I mean, nothing significant, but we, obviously, as the revenue base grows, we continue to grow the sales force a little bit. Very similar with research, very minor adds in research. So again, nothing significant there, and I think this goes to the conversation of gross margin growth. I mean, the first quarter is seasonal, but then after that, with revenue growth, we would continue to expect to grow gross margin. So some minor investments on both of those, but essentially, we think we've got great teams there.

[Operator Instructions] And now we'll go to the line of Toni Kaplan from Morgan Stanley.

I was wondering, are you having success in selling to [indiscernible] or, I mean it's sort of geared towards the larger or the broker segment, and I know brokers are the largest sort of client type that you have, but just wanted to hear if there was any surprising success with other customer types as well.

It's a good point because I think we tend to, when we write things, we tend to always focus on the broker side of it. And definitely the brokers have responded very well to this product. But actually, I think that we're getting an equal and potentially even greater reaction from both retailers and institutions. So if you think about retailers, if you're a regional manager for a Starbucks, you are traveling all over the southwest going to different sites, and actually having all that data in your hand is pretty valuable and much more interesting [ph] that you have in the office. One of the things we do hope to do is eventually integrate the Virtual Premise leases that allows retailers -- the software that allows retailers to house their leases directly into the CoStarGo application. So when one of these retail acquisitions folks are in the field, they can see their existing leases plus all of our data wherever they're going on a location-centric interface. Also some of the heaviest users of the product are some of our institutional customers. So our very best customers each year come to our PPR conference up in the Cape, the institutional customers, and we show them the iPad application CoStarGo, and we actually gave the attendees an iPad, and I was looking at usage, and the heaviest usage I'm seeing is from some of those attendees, and these are not brokers; these are folks who manage a $50 billion, $100 billion, $50 billion portfolio. So they actually find a lot value because they're from city to city, and being able to look up local market conditions, I think, is of interest to them. So we've probably done you a disservice on not focusing -- and talking about all the different segments that are using it, but it's being used across the board. We also have an upgrade coming to it, which is pretty cool, where -- and I know for competitive purposes, I shouldn't be blabbing, but, Steve Jobs would look down on me, but we have a cool thing coming where you can, if you're in a submarket in Austin, Texas, and you're looking at investment there, you can actually zoom in to the neighborhood and it is a realtime calculating statistics on vacancy absorption, price trends and the like on the area you're actually in, which is, for the commercial real estate world, pretty mindboggling. So that's something we think can bring out later this year.

Okay, great. And then once someone has the required suite for getting the iPad application, what's the up-selling opportunity from there?

Well, so if someone has purchased the iPad application -- stepped up and are now purchasing all the items to get the iPad application, the next up-sell opportunity would be, depending on the customer, additional geographies, it could be Virtual Premise, it could be Resolve, it could be PPR. There are a whole range of other services. Almost nobody in our client base is buying everything we've got. I mean, we should actually look into that. I doubt there's anybody buying anything, and should that day occur, we'll develop something new.

We currently have no further questions. Please continue.

Well, at this point, I'd like to thank everyone for joining us for this year-end and fourth quarter conference call. And we look forward to updating you on our progress on all of these initiatives we're pursuing at next quarter's conference call. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.