Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Richard Simonelli. Please go ahead.

Thanks, operator. It's wonderful to be here. Welcome to CoStar Group's Second Quarter 2017 Earnings Call. We hope you enjoy the call. Before I turn the mic over to Andy Florance, CoStar's CEO and Founder; and Scott Wheeler, our CFO, I have some very interesting and important items for you to consider. Certain portions of our discussion today may contain forward-looking statements, which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that could cause actual results to differ, but are not limited to, those stated in our July 2016 -- or 26, 2017, press release, on our second quarter results and at CoStar's filings with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q 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 whether as a result of new information, future events or otherwise. Reconciliation to the most directly comparable GAAP measure to all of the non-GAAP financial measures discussed on this call, including but not limited to, non-GAAP net income, EBITDA, adjusted EBITDA and forward-looking non-GAAP guidance are shown in detail on our press release issued yesterday, which is also available on our website located at costargroup.com. As a reminder, today's conference call is also being broadcast live and in color on our website where you can also find CoStar's Investor Relations page. Please refer to yesterday's press release on how to access the replay of this call. Remember, one question, make it a good one and you can always re-queue if we have time at the end. I'll now turn the call over to Andy Florance. Andy?

Thank you, Rich. Thank you for joining us today on our second quarter earnings call. We achieved an excellent first half of 2017 as our investments into the business, along with tremendous execution on all levels by the CoStar team, resulted in remarkable increases in sales and revenue growth. We have excellent momentum heading into the second half of this year. We delivered strong performances across the board as revenue in the second quarter of 2017 accelerated to $237 million, which is an increase of 15% year-over-year. For the second quarter in a row, we generated our best sales quarter in our history. Company-wide net bookings were $37 million, a 39% increase compared to the second quarter of 2016. CoStar Suite sales bookings were the strongest they've ever been, with a 23% year-over-year increase. Overall, CoStar Suite turned in solid revenue during Q2, with a growth rate of 13% year-over-year. Revenue growth in commercial property and land rose 17% year-over-year. Multifamily revenue was up 24% over the second quarter of last year. We are particularly pleased with that strong growth in the second quarter with mid-20% growth rate of Apartments.com. Apartments.com sales climbed for the third consecutive quarter as we reached our second best multifamily sales quarter. We continue to reap the rewards of our investments in our advertising campaign and strong presence at last month's National Apartment Association Conference in Atlanta. We once again set company records for both booth visits, leads captured, demos delivered and client appointments. More importantly, millions of dollars of net new sales came from this important annual event. We had an excellent quarter in commercial property and land as the sales team turned in second-best quarter of sales. We have a robust sales of LoopNet Premium Lister, tiered advertising sales to owners and excellent…

Thank you, Andy.

You're welcome.

Certainly, had a strong first quarter. Thanks for those highlights. Great to see the benefit of our investments showing up really in a big way in our results this quarter. So as Andy mentioned, the revenue in the second quarter of 2017 increased 15% over the prior year. Organically, our revenue growth rate in the second quarter was 14%. This is after normalizing for the acquisitions of WestsideRentals and LandWatch, both of which closed earlier this year and the THOMAS DAILY acquisition, which we completed in the mid-second quarter of 2016. The second quarter organic revenue growth increased from 13% in the first quarter, reflecting continued strong momentum in sales, particularly in our online marketplace businesses. Looking at our revenue performances by services. CoStar Suite revenue growth was 13% in the second quarter of 2017 versus second quarter of 2016. Because of our strong sales performance, we expect CoStar Suite growth rate to continue at 13% through 2017, which is at the upper end of the 12% to 13% range we previously discussed. Revenue growth rates in information services remain negative in the second quarter of 2017, as expected. So we continue to wind down the LoopNet information products ahead of the planned integration with CoStar Suite. The revenue decline from the LoopNet information products in the second quarter was moderated a bit by strong double-digit growth in our other information services areas, which includes portfolio strategies, real estate manager and our THOMAS DAILY operations in Europe. We've no change to our expectations, Information Services revenue will decline at low double-digit rates in the second half of the year. This will leave us with expected full year revenue and Information Services declining around 8% to 11% for the year. We had a very strong second quarter in multifamily as revenue…

[Operator Instructions] Your first question comes from the line of Brett Huff from Stephens.

My question is on Spain. This sounds like the first sort of major ramping up of investment following, I think, you guys did a small inorganic deal and kind of thrown some effort behind that. It seems like it is both a LoopNet-like expansion as well as a curated research-type expansion. Can you kind of walk us through, if that's true? And if this is going to be a model - if Madrid is going to be a model for other cities across Europe? And give us a tenure for that kind of investment?

Sure. So from your perspective in terms of any impact in next two to three years, I think the impact is de minimus on our EBITDA expansion. So it might involve the addition of 20, 25 staff something like that for Madrid. But what we're doing is, it's a robust and significant market. There is, in our mind, no material competition. There is a huge opportunity. It's a trillion dollar economy. And the market needs information on what's happening in commercial real estate. The brokerage firms there don't have as big a presence as they do in other countries. I mean, they're there, but they're not as prevalent, don't have the same market penetration. So what we've seen is that the owners there are bigger drivers of what's happening in the market. And that's true in Germany as well. So we think there is a lot of potential to sell advertising to owners who take real pride in their properties and are more motivated to spend marketing dollars to try to bring in tenants. We will - we think it's also less expensive from a sales and marketing perspective, if we start with just generating - a marketplace, generate a lot of eyeballs that drives content. And then, as we watch the content grow and the buyers will see the marketplace grow over the course of a couple of years, we'll build up analytic histories that are quite valuable, and we'll build up those research relationships, and then, we'll migrate into a CoStar platform. So it's something that we'll - we're going to watch it here in Spain. And if it goes the way we want it to, we'll use that model in other markets. I think it makes sense, and - I think in the first three or four months - three months of Belbex, we got a 0.25 million visits to the sites. So actually, it's working well. We're getting some good traffic there so - and I also believe, we're now the #1 information source for - we're the best information for Madrid and that will be worth something at some point.

Your next question comes from the line of Bill Warmington from Wells Fargo.

So one question. I was really trying to decide whether to ask about revenue or the safe harbor statement. So I think I'm going to go with the revenue.

Well, thank you for asking about our safe harbor statements first up because, as you noticed the Beatles references, Bill.

Well, the - so I wanted to ask my question about the conversion up-sell and how that's going to work? Meaning that, of the 715 sales reps, how many of those are actually going to be working on the leads? How many leads are they going to get each month? What kind of close rates should we think about? And how long does it take for the bookings to basically flow through?

I would - I'll give you some general guidelines, you know, plus or minus. But the - it will really be the focus of the CoStar field sales team, the customer relationship managers and the inside CoStar sales team. So that is roughly a little more than half of the sales force, 350, 375, something like that. And initially, we will not give them the better leads. We'll - we will target some of the - unfortunately, one of the - I won't name the company, but one of the best prospects I was the most excited about converting signed up last month and so I didn't even get to move them through the ringer. So - but we're not going to give them the best - I mean, I'm actually very excited about it, but it was supposed to happen during the integration process. But the - we're going to initially give the salespeople about ten leads per month per rep - ten leads per rep. And then we'll gauge how effectively they work those. The leads are - these leads are pretty valuable, and we want to give them time to work them properly. There is no rush. There's nothing about these two months versus those six months or this year. We want to do it properly, want to handle our communications with them well, answer their questions, move them into process - move them through the process at the right pace. But right now, it feels like about ten per month per rep and I think - and then we might pick that up a little bit. We will again start with the intermediate priority ones and then we'll - later in the year, we'll ramp up to the higher priority ones and into 2018, we'll approach the higher priority ones. Was there another component to that question?

Bookings effect?

Bookings effect. Yes, so probably more material in the fourth quarter, first, second, third quarter of next year.

And we haven't assumed a significant amount of bookings in this year, Bill, in our outlook.

Your next question comes from the line of Brandon Dobell from William Blair.

As we think about the progression of net new through the balance of the year, maybe some color around the puts and takes versus last year? As well as how some of these - as a lot of efforts going on here on a lot of different products, how those are going to flow through into it, the balance of this year?

Yes, so when you look at the strength we've seen in the second quarter, obviously, we've got a great quarter in CoStar and multifamily, strong. And commercial property and land is very strong as well. We expect those trends to continue into the second half of the year. We'll have a seasonality that will decline a little bit in multifamily as the rental season declines, but that's difficult every other year. When we talk about the LoopNet CoStar integration, as that thing starts to come on board, we should see more bookings move into the CoStar Suite factor of the business and decline faster in the info services component. But that's - there'll be a net wash over time as those come along. And then really in commercial property and land, like I mentioned, we expect that to continue strong for the rest of the year, and we're focusing a lot on adding sales force there on the sales-to-owners, we're seeing that become very effective. So that mid- to high double-digit rate that we're going now, we expect that to be sustainable as we go forward with commercial property and land. Any other color, Andy, you want to add to that?

I think that covers it.

Your next question comes from the line of Sterling Auty from JPMorgan.

This is Jackson Ader on for Sterling. Question from our side. How much of the shift in OpEx - and I guess, more specifically the sales and marketing expenses - were directly due to the pushing out of the LoopNet integration versus maybe some other factors?

I'll take a shot at it. But I think it's nominal. I just checked with the CMO this morning and I think we pushed $1.3 million of marketing expenses over the quarter with CoStar [mill] at $2.7 million. So it's $1 million or $2 million pushed into the next quarter. So it's not that much.

We also had some - in the launch of Belbex, we had some marketing in the second quarter for that, which we decided to actually save and spend a little later in the year. And then, we also had such favorable results in Apartments that some of our SEM spend, we decided to save a little bit for the next part of the year. And so those were a couple other small components giving us about $4 million favorable in total in the quarter that we'll expect to spend later in the year. I once heard a wise saying from my son, Abe, says, "Dad, you are really aggressive accountant, but you got to save some stuff for the second half though. Please hold back and be ready to spend as something comes up." I listen, sometimes.

Your next question comes from the line of Peter Christiansen from Citigroup.

Thanks for the cash flow statement. I appreciate that.

Somebody noticed, and you're welcome.

So two things real quick. I think you called out 25% of the multifamily growth was attributed by existing customers. Any sense if that's pricing or lifting volume or vacancy rate kind of related or not? And then, my follow-up would be in the last quarter, I guess, multifamily kind of just started to break even, I was just wondering if you could comment on the trajectory of profitability there if the trend is continuing?

I think a big part of that 25% is basically people who are looking for more lead flow or pushing their ad priority up higher, so they're going from a gold ad up to a platinum ad or diamond ad. So that's something - that's - a nice thing about that business is people are constantly cycling up, looking for - the more ads we sell, the more firms that need higher lead flow, need to spend more to be more prominently featured on our site. So I think that's the single biggest driver of that. And I guess - and that could be related to some vacancy growth. And then the second part of the question is...

What was second part of the question?

Multifamily profitability?

Yes, multifamily profitability. We mentioned in the last quarter that we swung the profitability in multifamily and when we've moved in that business, it moves a material amount, so we're in double-digit profitability is expected in the multifamily business already by the second half of this year. So it really does swing quickly once we move into that territory. So we expect that to continue in the second quarter when we spend a bulk of our marketing, obviously, that dips down but for the rest of the year, we expect it to be pretty strong.

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

So it sounds to me like the investment you've made in research is really paying off in a meaningful way. I wonder, Andy, if you could comment a little bit on sort of the next step is? I heard your world-class IR guy, Rich, tell it, in terms of allowing brokers to perhaps begin entering some of their own data into maybe a combined CoStar LoopNet front-end, enhancing or maybe in some ways outsourcing the research gathering function. Does that provide potential scale, revenue growth opportunities? I'm going to be just kind of frame that out for us.

Sure. So what's happening here is, for the - in the fall, for the first time, people will be able to - brokers, owners will be able to edit some of their information on our system directly. So if they want to change their rent, put a new suite on, they will do it directly. It's really going to be something that's available to known listers, people that we know who they are and we know that they're legitimate. As they do that, we think they'll be at the positive customer relationship benefit because very often they wanted to do like, make a simple quick change themselves, they don't want to have to have a conversation with the researcher. At the same time, focus group after focus group, lots of market research says that the industry really wants those researchers curating that data and being aware of what is being placed out there and making sure it accurately reflects and positions their properties to their prospective customers. So there will be a combined role there. We think it will allow us to accelerate the velocity of data through our system. It will be a little bit of a learning process because we're going to have to learn how we interact with those brokers. As we're doing some of the research, they're doing some of the input. But it creates the opportunity to reduce our research costs, accelerate our update frequencies and quality of our data. I think it - but I think the biggest impact will just be improved data and faster response times. And I think that's going to be a pretty positive thing. I think it will have more positive impact than we're prepared to talk about now because we just want to know more about any unknowns before we start counting the benefits real loudly.

Your next question comes from the line of Pat Walravens from JMP Securities.

Great and congratulations on the new bookings, guys. Can I ask about this Xceligent litigation? And I know there is going to be some real limits on what you can say given that it's live, but how long will this level of spending go on? And then, maybe, Andy, at a high level, why is it so important that you're willing to spend this kind of money?

I am so excited to answer that question. I'm going to turn that over to Jon Coleman, our General Counsel.

Thank you, Andy.

You're welcome, John.

So the case is ongoing. It's at the relatively early stages. We're about seven months in. And we don't have - beyond 2017, we don't - are not really giving any information on the budget, but - I mean, we expect - we don't have a trial date, and we expect it to go well into 2018. So we expect the spend to continue as it's been going. And what was the other part of the question?

So why is it important that you're willing to do that?

Well, I mean, we think it's extremely important to protect our intellectual property, and we think it's just not fair that Xceligent has - we have evidence that we think demonstrates that they've been stealing our content on an industrial scale. We believe when we filed the lawsuit that we had extremely strong evidence that, that was occurring and that evidence has only gotten stronger as we've gone forward. As for the counterclaims that they filed, we think that they are smokescreen and an entirely predictable reaction to our lawsuit. We think that they're extremely weak and have absolutely no merit. If anything, we think their recent filing is more of an admission of guilt that helps our case as opposed to anything else. So the update on the Xceligent case is that we very much look forward to proving our claims in court.

Your next question comes from the line of Mike Crawford from B. Riley.

This is Sameet on for Mike. So a quick question on the - and thanks for the statement of cash flow. A quick question on M&A. I think it looks like from your statement of cash flow that you provided, you spent about $30 million on acquisitions in Q2, which I'm guessing is for LandWatch. I know it's still pretty early, but you could talk about how that acquisition has been going so far? And part two of the question is, given that you have $574 million cash in the balance sheet right now, like what's the view on potential future M&A?

Sure. So LandWatch is still - so first of all, is it just LandWatch, it's also...

Just LandWatch?

Yes, so it's still early, but we're basically executing on the business plan we had laid out prior to the acquisition of LandWatch, which is integrated in the two platforms, rationalizing where the staff is and how many folks we have. Our goal is to eventually flow all the content of all these various sites into a new URL that we own, land.com. But at this point, we think we're capturing about 57% of the search traffic on the Internet around that land in real land space of those companies that are actually engaged in that. So this gives a real strong market position. And again, it's two months in, but it's going well and going as expected. So it's an exciting beginning for us. In terms of the balance sheet and other M&A activity in potential, there - there remains an awful lot of opportunities out there. We are, at any given point, looking at a dozen companies and looking at potential combinations that will move our platforms forward, either giving us more scale in one of our core areas or a parallel area where we think we would be competitively advantaged because the assets we have in information, our sales force or software. So there is a lot out there, and it's good to have a strong balance sheet, so we can approach those opportunities and be constantly ready to move for the right acquisition. But we are cheap we're looking for good values.

And at this time, there are no further questions.

Well, thank you very much for joining us for the second quarter earnings call, and we look forward to updating you on our progress in the third quarter. And again, congratulations to the sales team on a fantastic acceleration in sales bookings and to our research management team for quadrupling the number of contacts with our customers year-to-date. Thank you.

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