Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded. I'll now turn the conference to your host Richard Simonelli. Please go ahead.

Thank you, operator and welcome to the CoStar Group's second quarter of 2018 conference call. Before I turn the call over to Andy Florance, our CEO and Founder; and Scott Wheeler, our CFO, I like to share some very interesting and important items that can actually have a positive effect on your life. Certain portions of our discussion today may 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 today in our July 24, 2018, press release on our second quarter results and company's outlook as well as in CoStar's filings with the SEC, including our most recent annual report on Form 10-K and our subsequent quarterly reports 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 we assume no obligation to update these statements whether as a result of new information, future events or otherwise. Reconciliations 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 earlier. The press release is available on our Web site located at costargroup.com. As a reminder, today's conference call is being broadcast live and in color on our Web site, where you can also find CoStar's Investor Relations page. Please refer to the press release on how to access the replay of this call. Remember just one question, so make it a good one. I'll now turn the call over to Andy Florance. Andy?

Thank you for joining us for our second quarter 2018 earnings call. This month marks CoStar's 20-year anniversary as a public company making this our 80th earnings call. Congratulations to those of you who bought our stock on July 1, 1998 when we listed on NASDAQ at $9 a share. The only thing better than your 4000% gain is the thrill you enjoyed listening to more than one hundred hours of these excellent information packed CoStar Group earnings calls. On our IPO road show in 1998, we had less than $10 million in trailing full year revenue. Back then many investors expressed some skepticism to our claim that CoStar Group had a $100 million potential total addressable market. In June of 2018, we achieved our first $100 million revenue month and we're now at $1.2 billion revenue run rate. In the second quarter of 2018 our Apartments.com business alone generated its first $100 million revenue quarter. Revenue for the second quarter 2018 was $297 million an increase of 25% over revenue of $237 million for the second quarter of 2017, Year-over-year net income in the second quarter of 2018 doubled to $44 million and non-GAAP net income which excludes one-time costs associated with the acquisition of ForRent was up 114%. I strongly believe we will meet our 40% adjusted EBITDA margin goal for the fourth quarter of 2018. Our strong momentum in sales continues, bookings in the second quarter of 2018 were very strong as we generate $45 million an increase of 23% percent year-over-year versus the $37 million we achieved in the second quarter of 2017. Just one year ago that $37 million had been the best net new sales quarter we'd ever had. Our commercial property and land marketplaces had their best sales quarter ever in the second…

Thank you, Andy. Great list of highlights, I don't think I can top that. Yes, we are making great progress against our operating objectives for 2018 and we continue to deliver strong financial results. We certainly remain confident about the trajectory of the business moving forward. As Andy mentioned, we delivered outstanding sales this quarter with $45 million in net bookings, which exceeded our expectations overall and we're up 23% from the second quarter of 2017. We are particularly encouraged by these results as there are a number of initiatives currently underway across our sales team. Our commercial real estate sales force continues to convert former LoopNet customers to higher value CoStar and LoopNet marketing contracts at a solid pace. Through the end of the second quarter, we've converted approximately 9300 LoopNet customers to CoStar and our marketing contracts at an average price of approximately $527 per month. On average these LoopNet users were paying only $54 per month for an average monthly price lift of $473 per month consistent with our results last quarter. At this point, we have generated $53 million in annual incremental contract revenue from the LoopNet conversion. In addition, we initiated our pricing and licensing compliance program in the second quarter resulting in higher prices per user on new contracts. We expect that this effort along with our focus on client service will result in improved sales and customer value over the long-term. Our focus on LoopNet as a marketing site is certainly paying off. LoopNet sales were particularly strong in the quarter as the commercial real estate field sales team increased their LoopNet advertising sales over 250% compared to the second quarter of 2017. Our field sales team is becoming increasingly effective selling power ads in the second quarter, selling 7x the level that…

Thank you. [Operator Instructions] Our first question is going to come from the line of George Tong from Goldman Sachs. Please go ahead.

Hi, thanks. Good afternoon. You've converted 9300 LoopNet customers through the end of 2Q. Can you elaborate on the cadence of LoopNet conversions in the second quarter relative to earlier quarters and how you expect future quarters to compare with 2Q with respect to conversion speed, conversion rate and the amount of pricing lift?

Well, pricing lift is remaining about the same as constant from Q1 to Q2 and expect the [indiscernible] of Q3 and Q4. We are building out some new marketing initiatives that we have been working on for a while that will be rolling out in Q3, Q4, which might provide some acceleration for the conversion pace. We also have been building software to enhance the -- in LoopNet product up sell experience. And so we expect to continue at a good clip. And as we said before, we think we will be converting at this sort of clip for a little bit better around this area for two years plus out from here. So -- and then even after we've converted a number of the folks who were formerly premium searchers are heavily searched for long rate time, LoopNet will remain a really important pipeline for up selling people to CoStar. So it's a great way to identify folks who need commercial real estate information and do a highly targeted marketing message to them. So it was a good performance and it will I think remain strong and steady for quite some time now. The one exception -- one thing that makes me think about though is, we're feeling really good about some of the product enhancements we've got coming on the marketing side of LoopNet. So we've been investing in making sure the sales force is comfort with [fluent in sound] [ph] and LoopNet marketing solutions across the whole CoStar Group. So there's been a little bit of shift to folks selling the LoopNet marketing solution and that necessitates a little bit less of a focus on doing the information conversions. But all in all we're very happy with the result.

Thank you. Our next question is coming from the line of Brett Huff from Stephens Inc. Please go ahead.

Good afternoon, guys. Congrats on a nice quarter.

Great. Thank you, Bret.

On the bookings number of $45 million that's a focus some folks have had. Can you give us or I think it was Scott may have given us some kind of context around that vis-à-vis the -- there is still some LoopNet planned cancellations or shut down that negatively impacted that. Can you quantify that again for us? And number two, can you put a number or a ballpark on the pricing integrity negative impact on that $45 million. So I think that's a question we'll get a lot of. Thanks.

Yes. So Brett on the components last quarter, we took a large reduction in the LoopNet info I think we talked a lot about that. This quarter there's only about a $1 million of negative drag for LoopNet info. The other transition item in this quarter as we do for rent integration that we're seeing somewhere around $4 million or so of cancellations that come through as we work through the customer base and move the clients over to the network contract. So the pace and the revenue conversion ForRent is happening as expected. But as you expect there's this couple of quarters where you're going to see the cancellations to really solidify all the revenue there. So that pulls the number down just a little bit more. But I think as you look at what we've done really on the CoStar side and we talked about the LoopNet conversions, there are still strong. The CoStar field team is really put in some great effort now selling more of the LoopNet product in fact 25% of their output is now selling LoopNet marketing and it used to be 10% a year ago. So you see a little bit of shifting over to that commercial property and land which we talked a little bit about. And then, on the pricing side, the value increases there on the contract basis, I don't think we have a real slowdown in the quarter to talk through on pricing. I think it's more of the focus on the service initiative, the LoopNet cross sells, and then continuing the pace following the large discounting that that impacts the sales in the first quarter or the second quarter. So hopefully that gives you some context on the different pieces.

Yes. And again, the ForRent cancellation number, we are outperforming that number. So when you put together two or three marketplaces, you expect to get very significant cost efficiencies, you expect to get -- you expect to have some loss of redundant advertising dollars which we're seeing, but we're actually getting a better than expected result on that. So we're really kind of happy with the way it's come out.

Yes. Our net sales for the quarter came out ahead of what we expected. Obviously that's what allows us to raise our revenue guidance, it's in a few different buckets and what it may have been in the first quarter, but our sales are always volatile quarter-to-quarter. We're happy that we're in this mid 40s range this year, we're in the mid 30s range most of last year and we're happy with the momentum we have going forward.

Thank you. Our next question will come from the line of Andrew Jeffrey from SunTrust. Please go ahead.

Hey guys. Good afternoon.

Good afternoon, Andrew.

Like the same day conference call, it's turning into a tradition I guess.

No extra charge for that.

Much appreciated. With regard to cross-sell as you've seen this nice success with LoopNet. Any updates in terms of what you think the total cross-sell potential is. I know you've talked about Andy as much as a couple of hundred million dollars. Is that still a good long-term expectation, how can we think about that maybe nuanced or from a timing standpoint too?

Yes. So I absolutely still believe that number is a multi-hundred million dollar number. I consistently believe that to be the case. And as you know there will be two components sort of like that just looking at the number we have right now this quarter, relatively early on it's a pretty solid number for cross-selling. But you've got two really solid legs you're working here. One is the selling LoopNet to CoStar customers and the other is selling CoStar to LoopNet users or former customers. And they're both. I feel very optimistic about both. And it will naturally waiver up and down slightly, you will have some volatility from quarter-to-quarter, but it will be a real consistent message line for the next three years.

Thank you. Our next question will come from the line of Pete Christiansen from Citi. Please go ahead.

Good afternoon guys. Nice trend. Andy can you rank some of the key reinvestment areas that you're looking on again sort of the next 12 months.

Yes. I mean just generally, one of the key areas is transformational product initiatives. We're going -- we're working on at Apartments.com. We look at the apartment industry not just -- it's not just a lead generation opportunity for the institutional great properties are over a hundred units. We think there's a really exciting opportunity for us and generally facilitating the leasing of apartments from the individual unit on up to the 400 unit property. I don't want to get too specific into some of the issues we're working on, but we are cranking on some product initiatives that we're pretty excited about and I think they'll probably -- they're going to require some investment and they are taking some investment now and there will be something that maturate over the course of 18 months or so. But when we are ready to bring this to market in the beginning of '18, we'll talk about them more explicitly. There are -- we continue to feel that there -- like ones or continue to feel there's an awful a lot of opportunity in the owner lenders segment of our industry. We've got some very exciting products we're working on to enhance CoStar to make it more useful for our many banking clients and try to win deeper penetration there. And we also believe that there is a significant global opportunity so we continue to invest into Spain and we'll be doing some investments into France where you know we already have a footprint. And the United Kingdom will probably begin cash flowing a little bit more, so they'll be priced for transfer investment into Germany. And so it's -- those are some of our bigger initiatives. Something I forgot Scott that we're thinking about.

Certainly the LoopNet have marketplace.

So the LoopNet marketplace and you can see the numbers are really solid there. And you know that is becoming, I think that that has an opportunity, the LoopNet marketing commercials real estate on the internet, I believe is an opportunity on par with marketing apartments on the Internet. So we're going to invest behind that a little bit over the next two years. And then we might also do some additional investment into the businesses for sale areas at the tail end of that 12 month horizon. So we're exploring a number of different things there. Obviously, remaining sensitive to achieving our 40% margin goal and beating it the fourth quarter and then remaining somewhat consistent to that high margin level -- remaining consistent with high margin level ongoing and out year. So we're balancing reinvestment in the business would maintain the high margin levels. There is absolutely no shortage of potential investment initiatives just a question of prioritizing the really exciting ones upfront work and then in a -- in as fast a process as we can responsibly and efficiently run these initiatives.

Thank you. Our next question will come from Mayank Tandon from the Needham and Company. Please go ahead.

Thank you. Good evening. Scott, you touched on some of the pricing lift and obviously that has a lot to do with the LoopNet conversion. But could you just maybe parse out the growth rate that you expect going forward for '18, and then, maybe longer term as well as in terms of how it breaks down between increased penetration within the installed base adding new customers. And then, of course, any other pricing uplift beyond the conversion on LoopNet?

Yes. So the -- the growth rates going forward we still expect to get about half of our growth from existing accounts and further penetration or broader geographies and we expect to get about half from new business and getting new logos. We're seeing that pretty consistently it doesn't change a whole lot. And the other area now that we're seeing more growth is really not only the pricing in the CoStar side, but as we've done more pricing on the LoopNet side for unlimited lister contracts and now on our listing plans we're seeing good upward movement in pricing on the LoopNet side as well. But what we haven't called in really into the rest of the years is that the pricing right now has been on new contracts coming in -- for new customers. We have not begun our program on a scale basis to do repricing an existing contracts as they roll. And we expect that will -- will start to work its way into the rest of the year and become a bigger impact into next year.

And that last point that Scott was making is huge. So on our existing customer base, we have not had in place rigorous processes to evaluate each contract renewing and making sure that it's appropriately priced at the point of renewal. So there is a lot of potential value in -- particularly in firms that might have signed up many years ago have merged and grown about a lot of people have grown their footprint and our enterprise licensing hasn't kept up with that. So one of Scott's primary initiatives is setting up the systems around that to make sure we're capturing that appropriate revenue uplift. And then also making sure that our commission schedules support that but that could be in -- that alone over the next three years could be $100 million in uplift, right pricing those. So we'll continue to see this higher -- this higher average price point hold I believe. And then, just the mix shift of going from marketing products to brokers in LoopNet to marketing products to owners I think has an enormous net price uplift impact. So it'll be pretty significant for the next three years.

Thank you.

Thank you. Our next question will come from David Ridley Lane from Bank of America. Please go ahead.

Good evening. In the past you have shown the number of advertising multifamily properties, now that ForRent has come online. I wonder if I could get updated on that metric. And then, directionally what portion of those properties are on a premium level package versus a basic package. How much have you found that base already? Thank you.

Unfortunately the sheet that was printed on I removed from the conference room to go grab something, I took it from Rich half an hour ago, just before the meeting started. So we are at 42,147 on the Apartments.com before the ForRent came in. And the real impressive growth there is at the upper end with a 55% growth of our highest end ad, the diamond ad, and then, the silver ads only growing at 3% year-over-year. So the single highest growth category that people are buying is that that premium level ad. So that's good news. And the reason is, we're delivering a lot more leads and a lot more value and more value increase to the advertiser than the price is going up. And then overall it's 48,490 when you combine the ForRent apartments. Again, we will mark when we hit the 50,000 mark because that's like a hugely impressive feat of strength in the apartment marketing industry.

Thank you. Our next question will come from Stephen Sheldon from William Blair. Please go ahead.

Yes. Thanks. Good evening guys. How should we think about the factors that drove the adjusted EBITDA outperformance in the second quarter coming in at $85 million versus guidance, I think $66 million to $70 million? You talked about the $3 million push out of advertising expense, but how much of the outperformance was driven by ForRent. What other factors may have driven it. And did you adjust your profit assumptions for ForRent over the remainder of the year.

Yes. You mentioned the marketing piece which was the part that shifts out the rest of the outperformance was all from a strong cost management and then a few million dollars of extra revenue that we that we had over our expectation. Yes, there's probably $2 million or $3 million of better than expected cost from the ForRent integration in the quarter. And so we expect that those benefits continue, we flowed the full $15 million of outperformance on EBITDA through to the guidance for the year. So we're confident that the things we're doing outside of the push in the marketing have to do with managing resources tightly as well as accelerating the ForRent integration and watching every other operating costs that we have, which we get a lot of duplicative marketing and other contracts that you find as you go through these integrations and those we were able to get out the door quicker than what we expected. So it's a solid performance managing headcount closely and taking out those duplicative cost gave you that outperformance.

And Scott overlooks completely the single biggest factor which is we said 100% of all the senior executive teams bonuses for the year on feeding the 40% EBITDA margins -- adjusted EBITDA margin target for the fourth quarter. And I have reminded them at every single executive meeting that it's either make the target or not…

That's true. You know that, every meeting.

Thank you. Our question will come from the line of Bill Warmington from Wells Fargo. Please go ahead.

Good afternoon, everyone.

Hello Bill.

So, 100 hours of calls, I can say it only feels like half of that. And also before I forget it, just wanted to wish good luck to Rich on his less than a month left of bachelorhood.

Thank you. Angela will appreciate your mention.

My question has to do with what -- one of those figures you threw out in terms of 41% more leads and higher quality better conversion rates. And so my question is, what are you doing to better demonstrate the higher quality to the potential buyers? And also then, what are you doing to better monetize those leads. And can you -- in some way use that $1 billion in cash that you're sitting on to somehow accelerate that process?

Bill I always appreciate your question. They are very helpful. Yes. So it's interesting the one of the ways at NAA, we partnered with two of the major players that provide lead tracking services for the apartment industry. One of them, LeaseHawk has sampled that 10 million incoming leads into apartment communities. That service shows that not only are we producing by far and away with the highest volume of leads, but they're also the most -- had the highest conversion rate dramatically higher conversion rates than any of the other lead sources, which is important to our customers because each lead is an opportunity for them, but it's also a significant cost item for them they have to process the lead and walk them to the apartment everything else. So we've been making it with these third parties that we're partnering with to communicate this information along with the tracking numbers we provide to our customers and the lead tracking tools we provide to them. They're very aware of the tremendous advantage we're providing them. And we've been hearing from them that they used to require two or three services to keep the lead flow they need. And that today they're getting 100% lead flow they need by just advertising with the Apartments.com network. So we're getting credit for it. I would say that in -- 30, 40 conversations I had with clients almost all of them told us straight out we measure it, we monitor it and absolutely without a doubt you guys get credit for the most leads and the highest quality lead. So that's a solid story we don't need to really -- I think we're effectively pushing it. However, you would expect that the clients get a great deal right now because while the lead…

Thank you. We have a question from the line of Sterling Auty from JPMorgan. Please go ahead.

Yes. Thanks. Hi, guys. Just one question on LoopNet conversions, of the 100,000 or so targets that you're going after, what percentage have you now kind of reached to do kind of the meetings and demos at this point to try to convert them?

I don't have an exact figure in front of me here, so I could only give you a guesstimate. And I would imagine it is 20% or so. But also remember that my experiences over the years has been that often that you'll have a quick sale cycle where you meet with one of those conversions and they close within 30 days. So your initial conversion rate -- initial close might be 50%. Your 3 year close rate might be 75%. So you have -- the first run of it and then those people often reconsider or eventually come around to it. So we have a motto here in our sales organization that eventually they all buy. It's just a question of when they see the light and they are ready to get a fantastic ROI for their investment in CoStar.

Thank you. [Operator Instructions] And we have a question from the line of Marc Wiesenberger from B. Riley. Please go ahead.

Good afternoon. Thank you. Are you seeing any trend in non-traditional users across any of your platforms? And if so does that impact future product releases and/or marketing campaigns? Thank you.

We've always had a couple of big sea changes like one is the growth of owners, used we are predominantly driven by brokers now overwhelmingly our biggest customers are our owners and that's a growing segment. So that's a big focus for our product releases. We always have a remarkable collection of unexpected users of our products like, you can delve into it, and when you look at 20 brands and you're like why in the world are they buying the product, and then there'll be some explanation about the need to measure the radio transmission blockage of buildings in order to calculate certain things. So there's always something going on like LA school district subscribed to CoStar in order to forecast their budgets and out years since they're funded by commercial property taxes. So there is always something going on there. I actually think that it's not a small -- it's not a sort of wild outlier. But the banking industry I think is the next big phase for us. So our ability to wrap our customers' loan portfolios with good surveillance and strong underwriting tools I think we can for relatively modest cost, we can invest there and build some really compelling tools to the banking industry. So we have some things in development there. Also we're providing some tools for CMBS investors, I think are pretty exciting where we're giving CMBS investors advance information on the economics of properties in the portfolio as well before the servicers report that content to the investors. So again, some information arbitrage there, I think those tools have a lot of legs. So we're now -- we're really more focusing on bigger blocks of opportunities to taking folks who are traditionally 4% of our revenues and saying can we grow them to 10%. And there's probably five or six of those.

Thank you. And at this time, we have no further questions in queue.

[indiscernible] batting cleanup. So thank you very much for joining us for our 80th CoStar earnings call. And we look forward to updating on our progress for the third quarter before long. And again, thank you very much for joining us.

Thank you. And ladies and gentlemen that does conclude our conference for today. We thank you for your participation for using AT&T Executive Teleconference. You may now disconnect.