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

Thank you, operator, and good morning, everyone. Welcome to CoStar Group's Third Quarter 2013 conference call coming from our headquarters in Washington, D.C. We are delighted you have joined us. Before I turn the call over to Andy and Brian, I have some important facts for you. Certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties 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 October 23, 2013, press release on third quarter results and in CoStar's filings with the SEC, including our Form 10-K for the period ended December 31, 2012, as well as our Form 10-Q for the period ended June 30, 2013, in each case under the heading Risk Factors. All forward statements are based on information available to CoStar on the date of this call, and then CoStar assumes no obligation to update these statements, whether as a result of new information, future events or otherwise. As a reminder, today's conference call is also being broadcast live and in color over the Internet on www.costar.com. A replay will be available approximately an hour after the call and available until November 28 of this year. To listen to the replay, call 1 (800) 475-6701 within the U.S. or Canada or (320) 365-3844 outside the U.S. and Canada. The access code is 304716. A replay will be available on our website soon after the call concludes. I will now turn the call over to Andy.

Good morning and thank you, everyone, for joining us today. Our third quarter 2013 financial results were very strong. Revenue grew to $112 million for the third quarter, a 17% year-over-year increase. Our annualized net new sales of subscription services in the third quarter were $13.7 million, an increase of 47% year-over-year. We added nearly 1,200 new CoStar information subscription customers during the quarter, bringing the total number of new clients to 4,900 over the last 12 months. This represents a 58% increase in the acceleration of new customers compared to the previous trailing 12-month period. EBITDA increased 52% year-over-year to nearly $30 million for the quarter. I think this margin expansion is all the more impressive when you consider that we are investing so aggressively right now into important initiatives that we believe will enable us to sustain these impressive revenue growth rates for many years to come. In prior calls and meetings, we've briefed you on the years of planning our product design development and engineering teams have invested into building next-generation of our flagship product, CoStar Suite and CoStarGo. At times, we refer to this next generation of CoStar as Fusion. We call this next product platform Fusion because it blends our valuable in-depth data, our historical data sets, the power of our subsidiary companies' software and their solutions together with our clients own data. We believe that this next-generation platform moves CoStar into the realm of workflow solutions, decision-support, creates communication channels and yields predictive analytics. We, in turn, believe that this increases the utility of our services, gives us additional competitive advantage and will fuel our long-term growth. The scope of our plans for Fusion is very ambitious, so we intend to build a platform in a series of segmented lower risk product releases over…

I promise, Andy, thank you.

You're welcome.

As Andy mentioned, we're very pleased with the financial performance in the third quarter and year-to-date 2013. CoStar's information, analytic and marketing services continue to show strong revenue growth and the successful integration of LoopNet continues to be a big contributor to the growth in revenue and earnings. EBITDA margins continue to expand, driven by mid-teens revenue growth. Additionally, as Andy discussed, revenue synergies for the LoopNet acquisition continue to ramp up, have increased to $35.8 million since the acquisition. So this is where Andy gets really excited because I get all the points, point this, point that on there. So I'm really excited, so let's talk some numbers guys, right Rich? You're ready? Are you ready?

I'm ready.

Are you with me? Jon, are you with me?

I am.

All right, everyone's with me. All right, here we go. Starting with CoStar's results for the third quarter 2013, the company reported $112.3 million of revenue, an increase of 16.3% or 17% compared to $96 million in the third quarter of 2012. This growth was driven by solid core information services performance, continued cross-selling efforts, as well as impressive growth from the LoopNet marketplace. The third quarter 2013 is the first year that we had a full quarter of LoopNet revenue and a year-over-year comparison. As I discussed, at the time of the acquisition, our 2012 results were impacted by the purchase accounting adjustments included, which reduced LoopNet's deferred revenue. Normalize these adjustments, our year-over-year revenue growth for the third quarter of 2013 remains a strong 15% compared to the third quarter of 2012, or in the mid-teens. More than 75% of the purchase accounting adjustments were recognized in the first 2 quarters last year after the acquisition, so the impact in growth rates in the future is fairly minimal. EBITDA was $29.8 million in the third quarter of 2013 compared to $19.6 million in the third quarter of last year, an increase of 52%. As we reported, adjusted EBITDA of $37.7 million for the third quarter of 2013, an increase of $12.1 million or approximately 47% compared to $25.6 million in the third quarter of 2012. Adjusted EBITDA margins increased to 33.6% in the third quarter of 2013 from 26.7% in the third quarter of 2012. Our results and these margin results are consistent with what was I think it was our medium or long-term goal but now it's coming closer of achieving $50 million -- $500 million run rate with 30% to 35% adjusted EBITDA margins by the end of 2014. We think it is clear that we…

[Operator Instructions] And the first question comes from Brandon Dobell from William Blair. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Quick one on sales force. First, you mentioned getting over 200. I want to make sure I understand where the 190 -- or how did the 190 I guess looks right now? Are those truly all field sales force people? Are there still some in that number that are kind of hybrid between field and inside? Or if it's not, then, how do the inside sales force stack up right now?

It's all 100% traditional field now. So they're basically out and -- we designed a new territory structure to handle 220-some territories in the field, responding to where the demand is in the market. And so there's 195 of these territories being filled. And they're not HQ AEs traveling sort of hybrid inside sales. And that -- this is not an insignificant effort. So we have -- we are doubling the number of managers out in the field, and we've been hiring at a pretty good clip there, some internal promotions. And then we also have been conducting the most training, I think, we've ever conducted for our sales force over the last 3 or 4 months. So both LoopNet cross-selling techniques, PL selling techniques, training around the new products and the new financial modeling and then also just bringing in the new folks and new managers and getting them up to speed. For big picture, we're marching towards the goal and it feels pretty good.

Yes, and Brandon, that -- I'm just reiterating what Andy said. The 190 is pure in the field. The overall sales number is over 350, which would include all the other pieces, the verticals, inside sales and all that. So that number continues to move up. We expect it to be over 200 by the end of the year. And again, it's all part of the plan we've been discussing the last few quarters. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Got it. Okay. And then back, Andy, your comments about the kind of the 5 new enhancements, those kinds of new rollouts. Did that impact how you guys are pricing? Did it impact how you guys are looking at what types of customers may make sense [ph]? Just trying to get a feel for other than just the anecdotes about how useful the product is, and how else [indiscernible] to monetize all the efforts you put into those field [ph] enhancements or is it just, let's just make it better so we keep our renewal rates high?

No. I mean, I do want to get this 5-year renewal rates back over 99%. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: That's a good goal.

[indiscernible] Now the -- on our kind of our key growth areas, lenders, banks, institutional investor, owners, we're still single digit penetration, retailers, still single digit penetration. So this is really building a dramatically better product in order to capture more LoopNet upsells, capture more penetration in these new markets, something like multifamily information opens up a whole new segment for us. So prior, again, if you were a major lender, there was a pretty big hole in the CoStar offering that didn't cover apartment buildings. And we've now got that box checked and that opens us up to a lot of new business we couldn't really go for before. The lease analysis tool is something that creates some interesting opportunities down the road. So the more of the user content you can manage and the closer you can get from -- as you can move from being a data source or an information source to actually being a platform that your customers are using to negotiate on, changes the dynamic and also moves you up the line of real-time data. And this gives you a much stronger product, which I think will give us a more valuable product for owners and institutions to use and a whole range of things you could charge for down the future. But right now, we want to get a platform that we could get massive adoption on. So if we can pick up half of the brokers in the industry using our financial modeling tool, it becomes a standard. And then that allows you to move into other areas from a standard bearer position. So it's really a penetration into new markets and setting the platform for new revenue opportunity, like completely new products you'll sell. Brandon Burke Dobell - William Blair & Company L.L.C., Research Division: Okay. And then final one for me. As we think about the net new subscription sales number you gave us, that $13.7 million, how do we think about the, I guess, let's call it productivity from that 190 sales people, is that number driven by a small set? Is it the 80-20 rule? Is it more broad based? I guess I'm trying to get at your comfort or confidence around increasing productivity from the sales force based on the numbers you've seen in the past couple of quarters?

Well, you certainly don't increase productivity when you double your sales force in the short term. So you -- we strongly believe in what we're doing, doubling the sales force like -- it will be negligent not to build a larger sales force to deal with the opportunity we have here. But the process does not increase your productivity. All these new people coming in come in at a much lower productivity level than the established sales people. And as you promote some of your best performers into some management roles or above average performers to the management roles, and as you also move into mentoring roles, your productivity would expect to move sideways for 2 quarters, 3 quarters where you get to your goal of 225. But big picture, as I look at the numbers on individual performance, you still have a remarkably stable production level. We have maybe 5 super performers in the company and then, probably 75% of our sales or 80% of our sales are coming from 50%, 60% of sales force. It's unusual for sales force, it's actually remarkably balanced, with these new sales people dragging the tail down as we would expect and we've seen in the past.

And so, Brandon, just to add on to that. Yes, I mean, so clearly, productivity per rep is going to be sideways or down, I think, for most of the year, because we're going to be continuing to add people through the end of the year, we will continue to add field sales people next year. But obviously what that does is it gives us the opportunity, obviously, to grow, continue to grow that net new by adding people and then the following year as you move into '15 an '16, then to continue to have more net new, because then your productivity should then be moving up as you stabilize that and move forward. So I think it gives you a 2- or 3-year window what we're doing, sort of at the end of this year and into next year, it drives things for another 2 or 3 years.

Our next question comes from the line of Andrew Jeffrey from SunTrust.

The question I have is regarding these newer solutions, which -- about which you sound really enthusiastic and, obviously, you're putting a lot of marketing weight behind them. You're doing 15% or so organic revenue growth now and continuing to drive really good LoopNet cross-sell success. Presumably, these newer solutions are going to be additive to growth, to the extent you're continuing to talk about 15% or mid-teens. Does that mean that we're nearing maybe a slowdown in the LoopNet cross-sell productivity? Or are you just being conservative? How should we think about the interrelation of those 2 things?

Well, I would emphatically say that I don't think we're nearing any sort of a slowdown in the LoopNet cross-selling activity. That -- I expect close rates to go up and I expect to be able to keep that going at a stable pace for another 2 years, at least. So it is solid, and we're just now really getting our sales force really to the productivity level to be able to do that sale and delivering the technology tools they need to assist them in it. And we really haven't yet brought the sales force to bear on the full potential of the PL side of LoopNet business, which is the marketing and advertising side of their business. So we're -- I think, we are in the second inning of the whole LoopNet thing, and that might be easily second inning.

Yes. And I will add on to that, I mean, I think that what it's tied to is what we've been talking about. We didn't have a big enough sales force. So now we closed the deal, 1.5 years later, we've done 19,000 demos. So we've gone out once and demoed 19,000 people and we talk about 100,000, 140,000 prospects. We just don't have enough sales people. So I think it's -- everything is sort of tied together. We need to continue to grow the field sales force. It's quite a process to actually take this field sales force and double it because then you have to redistrict everything. And I think we're in the process of doing that. And so I expect that cross-sell to continue for honestly a decade. I mean, think about it, it's been 1.5 years. We've gotten through 19,000 of 140,000 or whatever, 120,000 potential prospects. So I think that goes for a very, very long time.

Okay. So I know one of the things that you alluded to, Brian, in your remarks. You've talked about potentially moving away from some legacy LoopNet offerings, perhaps early in '14. I'm just trying to get a sense of cadence, you gave us a little color on this is the investments and what they might mean to EPS mostly in the first quarter. But would expect in early '14 that there might be a slowdown below that mid-teens growth rate as you twilight some of those older products? Is that still something you're thinking about?

Yes. I mean, I think nothing has changed. I've been talking about it for 3 or 4 quarters. So I mean, I think nothing has changed there. But my view is taking that out, I mean, looking at Q2, Q3, Q4, yes, we'll be growing mid-teens sort of year-over-year. And again, factoring in whatever the seasonality numbers are, I mean, you know actually the LoopNet business better than anybody. So like when I talk about Q4, you know basically from Thanksgiving to the end of the year, the LoopNet marketplace is just slow. It has been every year for the past x amount of years. It then comes back stronger in Q1. So I think sort of x some of the things...

However, we did manage them to their best fourth quarter ever last year.

Yes, Andy is correct. We did. Last year, fourth quarter was unbelievable. So anyways, I think that next year is a great -- I think it's a pivotal year from product development, finishing the back end integration, sales force. But you look at, we're still planning on growing revenue and earnings very, very nicely next year while completing what I think is a lot of significant things, which really set the company up for, like I said, it's not just about 1 year, it's about '14 -- it's about '15, '16, '17 and being able to run in that double-digit mid-teens growth and not just -- I'm not just thinking about 33.6% margin this quarter, I'm not just thinking about the first quarter of 2014. I'm thinking about getting to 40%, I'm thinking about getting to 42%, I'm thinking about getting to 46%. So we're definitely, we're thinking long-term.

Okay, that's helpful. One last one for me. Maybe you can just take a stab at it, Andy. By how much do you think and if you can't put in dollars terms specifically, because I know it's a hard thing to nail down but maybe proportionately, about how much you think some of the newer solutions, lease analytics, multifamily, et cetera, how much do you think those expand your TAM?

How much do we expand our TAM? It's -- I'm looking at the same market. So I'm looking at, in the last 2 years, we went from 2.6% of the retailers buying our product to 3.6% of the retailers buying our -- and we added hundreds of them. Our owner penetration rate went from 5% to 10% -- 5% to 7%. So I always have believed that you're talking a multibillion dollar opportunity and what these products do is just better position us to get the kind of penetrations, rates we think are possible in these, just really attractive, solid markets like the lender banking, institutional owner, the retailer, even corporate America. So we've achieved 80% penetration rates among the biggest brokerage firms, or the large brokerage firms, or mid-to-large brokerage firms. And we're moving the dials on these other 4 or 5 segment, but we haven't begun to move them like we move the brokerage. And that's what this is really all about. So potentially, you add $100 million plus by moving solidly into the multifamily. And the financial modeling tools is a -- easily $100 million there. But again, the real thing is, we know what this market opportunity looks like. We have very -- we have great growth rates, very low penetration in 4 sectors we think are huge. And it's going to move us down the line faster. And again, address the problem of the 98% renewal rates for customers 5 years or over.

Our next question comes from the line of Michael Huang from Needham. Michael Huang - Needham & Company, LLC, Research Division: First of all, Brian, you had reiterated kind of your comfort level and confidence in this annualized $500 million target as we exit next year. And I think you threw in there and possibly more, and I can't remember or recall if that was the first time you said it or not. But I was just wondering, as you walk through or think about what are the potential kind of upside drivers to that target, maybe just kind of help me understand where that might be coming from. Is that just better-than-expected sales productivity? Is that better-than-expected kind of uptake of this new product? Maybe just kind of walk me through, what are the upside drivers to that target?

Sure, yes. I mean, I think it's a lot of things that we've been talking about in the call. Obviously, we're significantly increasing the size of the sales force. So as most people know, I'm fairly conservative in my numbers. I'm a show-me guy. I want to see productivity from some of these first. So I think that there could definitely be upside from the sales force and how we execute on that. Obviously, the better we execute, the higher the revenue, I think, we can be. I also think there can be upside on a lot of these releases that we talked about. And I think there could be upside from -- Andy talked about broker adds. I've said this fairly clearly on prior calls. I'll say it again. I'm not putting very much revenue -- or actually I'm not putting any revenue in my models for broker adds, I'll probably put a little bit but not a lot. And the reality is, until I see the first contract in dollars come in the door, I'm not going to be throwing a bunch of revenue in my model for that. So I think as that rolls out and we start to see some revenue in the first quarter, second, third quarter, that could provide upside as we move along the year, and hopefully we can do better than we thought. The reality is, it still won't be a big number for next year. The but then, it can obviously be much bigger as we see success there in '15, '16 and '17. That, as Andy mentioned, you can get Zillow, Trulia, HomeAway, you got a lot of marketplaces out there that do hundreds of millions of dollars in those areas. And I think over the next 5 years, we can see that. But I'm going to be conservative. I'm not going to start putting -- I've always said this, I'm not going to start putting revenue dollars in guidance for products that haven't released yet. I learned the hard way on that one.

So I haven't talked to Brian about it, but I believe that his numbers for next year probably include below average production levels for the 225 field sales people. And so the way you get upside is that the field sales people perform at average. Michael Huang - Needham & Company, LLC, Research Division: Okay, that's great. It's great to see kind of the improvement on the conversion rates as the Loop consolidates. I was wondering, as you think about kind of what that upper bound of kind of those close rates and what it could be over time, did you have kind of thoughts around that? And maybe I missed it, but can you give us kind of the number of kind of what that qualified Loop, lead base looks like, as we exited Q3? I think it's 140,000 last quarter.

Correct. And it's a modeled number. I mean we look at these leads, and we run assumptions against them and say, what do we think the real addressable folks are in that market? So the number is over 100,000. It was 140,000 using the same consistent model we've been using over time. The important takeaway is that despite the fact that we were able to cross sell so many people into CoStar, the size of the pool of prospects grew on us. So we weren't upselling them as fast as we were getting new ones, which is probably a result of the recovery. You get more people reentering commercial real estate, and so we're not able to upsell them. Again, it's part of why we're growing the sales force. Michael Huang - Needham & Company, LLC, Research Division: Okay, great. And last question, and I think you kind of touched on this a little bit, but in terms of the mechanics of kind of the Fusion pricing, is it a la carte? So are there some of those things that they could buy just kind of piecemeal or do you have to buy the entire platform? If you're a suite customer, like what's the ARPU gains you get as you move to kind of the broader Fusion platform?

Well, the Fusion platform suite, historically, we've had an awful lot of customers who were buying just COMPS or just Tenant or just Property or Property Express or even look at LoopNet as a continuum of our product line, so LoopNet Premium Searcher. What Fusion does is it creates more and more reason for these folks to step up to the suite level. And as they do that, you're -- they're coming up 50%, 75% in pricing. So the pricing schedule, obviously, based on number of shops, national, local, is just incredibly -- it's too complex to have a quick answer that's one-size-fits-all answer. But typically, you're going to get a lot more accounts going up 50%, 75% as they go from buying one of our products to buying the suite application. And then the other thing that's occurring here is this release is probably the last release that is a generic one-size-fits-all CoStar Suite. The next release will probably have the system divergent to a one product that's addressed towards brokers and then another product, which looks very similar but has different functionality, that's addressed to lenders and owners. So this is the last generic release or one-size-fits-all release. When that owner institution release comes out, it will probably be at an ARPU of 4x the average of the broker version.

Our next question comes from the line of Ian Corydon from B. Riley & Co.

I think you just partially answered my first question, which was do PPR subscribers have access to the new analytics in CoStar? Or are they meant for a different customer? And then when does that owner user interface come out? Is that 2014?

That will be definitely 2014. And know that someone at -- probably 80% of the people of our customer base subscribes to CoStar already. And I'm going to just guesstimate that the 20% that do not, they're multifamily players. So now, they will be an audience that will probably want to subscribe to CoStar Property. When we launched the owner version of CoStar, we will be bringing the capabilities of the PPR web product and to merge it with the CoStar product, and they'll be a one-stop shop, which we hear from our customers, they'd like to see. They'd like to be able to get the forecasting analytics screen tools in the same environment as they get the micro detailed data and leasing proposals and so and so forth. so we'll be -- the CoStar owner product will not include the advisory services, the access to analysts, the briefings. But it will have the same functionality as the PPR website integrated in the CoStar website.

Perfect. That makes sense. And that's kind of what I figured. And then am I reading the guidance right that Q1 adjusted EBITDA might be a little below 30%? And then for the rest of the year, you'll be kind of in that 30% to 35% range?

Yes. I mean, I think we're going to be generally in the 30% to 35% range, Q1 sort of including the marketing and all that, it will be around there. Obviously, it depends on where we end up in the fourth quarter. But, yes, it will be close.

Our next question comes from the line of Todd Lukasik from Morningstar.

I had a couple of questions on margin. I think, Brian, you mentioned last call, it's a business model, where $0.70, $0.80 of every incremental revenue dollar can fall to the bottom line. I think I had gotten you guys at about a 74% incremental adjusted EBITDA margin for this quarter, year-over-year, I think slightly less than that for the first 3 quarters. But I'm just wondering, is that sort of the range that you expect to stay in, in terms of an incremental adjusted EBITDA margin, that 70% to 80% range that you mentioned?

Yes. I mean if you look at the gross margin, it's at over 71% now and I think it's up 4 points over last year. So, yes, I would continue to expect that you're going to drop $0.70 to $0.80 through that line. I think that will continue to grow, over time, on a long-term model basis. And then, yes, I think that if you look at where we're going, obviously, when you're doing that, we're sort of balancing -- I'd say that this is different than 5 years ago or 10 years ago. We're able to continue to grow and then balance, growing EBITDA earnings. As you've seen all this year, I think we can do that all next year and then I think in the following years, and we can continue to push up the overall EBITDA margins into the 40%, 50% range. I don't think we're limited, I actually don't even think the top end of that range is limited in a longer term model. We've seen for years, some of our larger markets doing 60%, 70%. So right now, I'm sticking to talking about the next 3, 4, 5 years. But I don't think that by any means we're sort of bound by a 40% or even a 50% margin long term.

Okay, got you. And when you mentioned 40% to 50%, that's the -- just to clarify, that's adjusted EBITDA margin that adjusts -- adds back the stock-based compensation expense as well?

Yes.

Okay. And then, I just wonder -- I know you probably don't want to talk about pricing for particular clients, but I was wondering with the Transwestern deal, how a deal like that impacts the net new sales numbers that you talk about. So if the total value of that client, with all the dozens of contracts that were out there was 100 and the 1 national contract that you signed, the value is 120. What's the impact of that on net new sales, is it 20 or is it 120?

It's 20. If you're going from 100 to 120?

Yes.

It's 20. We're very net new focused.

And there are no other questions in the queue.

Well, thank you everybody for joining us today, and we look forward to updating you on our progress in about 3 months -- 3.5 months, perhaps more. Well, thank you very much, everybody.

Thank you. That does conclude our conference for today. Thank you for your participation and using the AT&T Executive Teleconference Service. You may now disconnect.