Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 CoStar Group Earnings Conference Call. [Operator Instructions]. I would now like to hand the call over to your speaker today, Sarah Spray of Investor Relations. Please go ahead.

Thank you very much. Good evening and thank you all for joining us to discuss the first quarter 2020 results of the CoStar Group. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Scott Wheeler, our CFO, I would like to review the safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including expectations for the second quarter of 2020. Forward-looking statements involve many risks, uncertainties, assumptions, estimates and other factors that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include but are not limited to the duration and impact of COVID-19, the pace of recovery, customer usage and purchasing decisions, changes in investment strategy or plans, timing and success of acquisitions, those stated in CoStar Group’s press release issued earlier today and in our filings with the SEC, including our most recent Annual Report on Form 10-K and 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. CoStar assumes no obligation to update these statements, whether as a result of new information, further events or otherwise. Reconciliation to the most directly comparable GAAP measure to the non-GAAP financial measures discussed on this call, including EBITDA, adjusted EBITDA, non-GAAP net income and forward-looking non-GAAP guidance are shown in detail in our press release issued today, along with definitions for these terms. The press release is available on our website, located at costargroup.com under Press Room. As a reminder, today's conference call is being webcast and the link is also available on our website under Investor Relations. Please refer to today's press release on how to access the replay of this call. And with that, I would like to turn over to our Founder and CEO, Andy Florance.

Thank you, Sarah. It's a unusual milestone that has a safe-harbor statement, avoid that the rest of my life. So good evening and thank you for joining us today for CoStar's first virtual first quarter 2020 earnings call or virtual full management team. The first quarter was really a composite quarter with two normal months and one pandemic month. As with every business the COVID-19 pandemic is upended normal operations. The pandemic operations in CoStar's -- the pandemic hit operation in CoStar's Beijing office first giving us advance warning and I am starting getting a bunch of beeps here if we use teams and beeps in my ears, so I am sorry. The pandemic hit operations in CoStar's Beijing office first giving us advance warning and some time to prepare to transition 100% of our North American and European operations to a digital dispersed remote workplace. Employee safety and continuity of operations for the sake of our investors, clients and our employees was our top priority. As systems teams responded promptly working around the clock to execute our emergency contingency at our plants, we're very grateful for the diligent efforts. We believe that 95% of CoStar's staff has successfully transitioned to working remotely over the past six weeks at 90% productivity. These are stressful and discerning times for our employees and I'm also grateful to them for their resilience and continued focus on our professional responsibilities and it's okay if our employees' kids periodically duck their heads in our many video conference calls. We're consistently keeping our customers and mission-critical needs front and center. At the same time, we continue to build and innovate for CoStar's and our client's future action this disruption subsides. We believe that our products remain mission-critical to the vast majority of our clients even as…

Well done and thank you, Andy. Certainly it was unbelievable start to this year in so many ways that unlike anything I've ever seen that's for sure, but I'm thankful that are CoStar teams are safe and productive, our business is performing well and week by week we'll continue to navigate through all of these changes. Financially, we're in a very strong position. We maintain a very conservative balance sheet precisely for times like this. The time when we can continue to invest for the future and take advantage of new opportunities that come our way. We have $1.9 billion in cash. Our subscription revenue model is resilient and the services we provide are 100% digital, perfect for time when person-to-person contact has been practically eliminated. Our business is much more diversified than it was in the '08, '09 recession with 50% of our revenue now coming from online marketplaces as opposed to almost 100% from CoStar 10 years ago. On top of that owners, property managers, institutional investors and lenders now represent our largest customer base whereas we're much more heavily concentrated in the brokerage customer sector during the last outturn. But things are changing over the past month and a half, we have financially become very, very granular. We watch daily metrics on contracts, on sales, on customer inquiries, customer retention, cash receipts, purchases and payments This information although valuable does not tell us what the future holds but it certainly provides insight from the multiple revenue scenarios we create in our financial models of which even absolute the worst-case scenarios do not indicate any concerns with regard to liquidity or the ability to continue generating strong positive operating cash flows. Now on to some color on the results. We had a great start to the year with…

[Operator instructions] And your first question comes from Mario Cortellacci with Jefferies.

I hope all of you and all your families are healthy and staying safe. I was just curious, because we have limited insight into how Apartments.com has performed during the last downturn, obviously, it wasn't part of your financials. Just wondering if you can give us a little more insight into how that business reacted. And I guess, I think the expectation is that it's more of a consumer-type of business so it would likely be more impacted. But any extra color or any more -- or background.

Sure. I've asked Apartments.com or similar companies that we acquired in the last downturn and typically said that Apartments.com does better in a downturn than in a really healthy market. So higher vacancy rates mean there's more demand for leads and traffic into leasing offices and point of fact, many people, executives believe that a really healthy market like we had a year ago is a bad environment to operate Apartments.com. Consumer behavior here is fundamental. It's like having a roof over your head. So it's very resilient during a downturn.

Great. And then just more of a longer-term question. I think we've done a lot of questions around how the industry could structurally change on the commercial real estate side. I guess just the working from home environment, do you think that impacts demand for commercial real estate longer term? I think I heard you tossed out a number on just square footage of commercial real estate declining over the next two years. I didn't know if I heard that correctly or if maybe this has something to do with that. But do you think that this is a structural change in the industry that could happen longer term as more people work from home and there's just less demand for office space?

Well, forgive me, I don't want to sound flippant of having these sorts of discussions. I come across a little bluntly. I was an early cynic on the context that co-working would take over the world. I may [indiscernible] to want to continue working from home. And I actually think that -- I think there is a little knee-jerk where people say, "Oh gosh, everyone's going to work from home." I'm not seeing that. And in fact, I could actually make the argument that the potential downside of 0.25 billion square feet of demand going away in the office sector is really just driven by job losses, 1 person per 200 feet. But the demand for office space is very elastic to the price. So the amount of space per person in Houston is dramatically larger than the amount of space per person. Prices fall 28%. Overall demand may go up, especially when companies are trying to figure out potentially over -- sale over each other and want to spread out a little bit. But our staff in Beijing is thrilled to be back in the office. And I've never seen people like that happier.

Your next question comes from Peter Christiansen with Citi.

Andy, do you think this economic shock will -- will you think about changing any of your products or services, whether it be features or perhaps the way it's priced or packaged? Do you think CoStar will need to change any of its products because of this economic shock?

Yes. Yes. We are -- our product teams have probably initiated a dozen or more product changes to deal with the situation. If you go to LoopNet, you'll see a very prominent virtual tour button now on a home page. We now have an ability in LoopNet, where a broker can -- or 2 executives, a broker and a tenant or 2 executives can join each other on a LoopNet tour and actually initiate videoconferencing together in the LoopNet website as they view properties. We call that co-tour. There are probably a dozen or so of these sort of virtual leasing, more social distancing type things that we're doing. And we're also ratcheting up the marketing. This is the -- one thing that happens in any one of these disruptions is typically behavior changes permanently. And so we believe that there's a chance that people will come to value online marketing and real estate much more than they valued it before, and we're basically pulling all the strings and product features to try to capture that as quickly as we can. There's some other initiatives we're looking at, and maybe 1 or 2 acquisitions we're looking at, that are responsive to what's occurring right now and what we think will happen next year. So we're -- I think probably 30% of what we're doing in product is around this situation right now. I don't think there's a lot changing in pricing. I think we never increased prices when the market is in disruption. But beyond that, I don't think there's a bunch of -- no big need to change pricing. Too long an answer there, I'm sorry.

No. That's fine. And then have you seen any new use cases for CoStar products? Have there been new clients that have approached you? Interested if anything's popped up.

It's a little early for that, but I'm positive there will be. What you typically see is money on the sidelines looking to move in on distressed properties. So that's already starting to ramp up as usual.

Your next question comes from Stephen Sheldon with William Blair.

Andy, you made the comment that revenues could contract in the near term. So I know there's a lot of uncertainty out there. But generally, how much visibility do you have right now looking at potential revenue in the third and fourth quarters this year? Is there at least a meaningful likelihood that revenue in the second half of the year could be down organically? Or were you just saying that as a general possibility, but maybe not what we should expect at this point?

I would reiterate that there's a lot of uncertainty right here. We don't know if we're going to be fully back at work, when, how, but I would not be at all surprised if there wasn't -- I would expect softness in revenue. I have to say that when I saw the Apartment sales numbers, see the sales numbers coming in this month, I'm shocked and like, "Oh my gosh, the world is falling apart and we're selling a lot of online marketing." But yes, I have to assume that some elements of our business, as with other downturns, we'll see softness. Cancellations will go up. We've had a number of customers ask for forbearance on their bills. We've probably negotiated some deferrals on about 160 customers in CoStar. We probably eliminated some user headcount at some sites, on 100 or 200 some sites [technical difficulty]. Yes, we have to change the long-term course. We would expect to pick back up if there's softness shortly thereafter. And we're going to be trying to -- we're going to try to keep everything move in the right direction. But we certainly can't say that it won't go negative here or there. But again, when it went negative last time, only one-time ever in 34 years. On annualized calendar basis, it was 1% down. So I'll take that. If that's the hit we're going to take, I'll take that. But we're going to try to fight it.

Okay. And then secondly, you'd mentioned the potential global system that you plan to roll out in the third quarter for the CoStar Suite. Any thoughts on what that could mean for the CoStar Suite financially as we think about the next few years?

Yes. It's certainly not a pandemic-related investment. It's the long play. But you look at -- I think we -- when I look at the early days of CoStar, we were in a handful of cities. There was x demand for our products. As soon as we covered the majority of the United States, I felt that there was 4x the demand for our products because we were a way to transcend multiple markets and geographies in the United States. I believe that same opportunity exists on international level. Once we can start to stitch together our European point solutions into a consistent solution, along with the consistent solution in the United States and tie in some of our new assets in Asia into that same platform, I believe we'll be able to offer a lot more value. We will not be making massive investments in cycling up in Poland this year, obviously. But modest investments to start to build our network around the world. And we'll be doing things like if a customer subscribes to national data in the United States, they will automatically get global data. So someone in London will be able to search for sales opportunities in Toronto or in -- look at hotel information in Beijing, et cetera, etcetera. But we do think that we want to be well-positioned for what we think a drop in investment sale activity, multinational. And we want to really be able to build a -- really capture that global capital flow that's invested in commercial real estate. And it's making good progress. And we're lucky that our lead developer, Mike Fulkerson, there from -- my gosh, how could I possibly remember that #1 language software. What is it, Scott? If you're going to learn a new language?

That is a good question. Maybe C+?

Was that [indiscernible]. Thank you very much. Right. Okay. Thank you.

That comes from our General Counsel. Perfect guy to have running CoStar development as the guy who led development over at Rosetta Stone.

Sounds good. Appreciate the color.

We definitely have too many devices up on my screen on my desk. Now I have like Rosetta Stone popping up on 16 bubbles on 3 screens.

Your next question comes from Andrew Jeffrey with SunTrust.

Appreciate you taking the question and all the color as usual. And Andy, I know it's a super fluid environment, and I'm just trying to especially on the second quarter guide, which is pretty good, all things considered. And some of the qualitative commentary -- again, just acknowledge surprisingly strong sales on multifamily LoopNet. So if you continue to do well, given the investments in LoopNet and given the countercyclical aspects of multifamily, should we infer that to the extent the numbers sort of get much worse comparable to the worst part to the '08-'09 downturn, that most of the downside risk exists in suite? And I just wonder about the mechanics of that?

Yes. So we -- sadly, I really do expect to see a lot of bankruptcies. And I remember clearly in '08, you had thousands of companies that were clients going bankrupt. So I imagine you're going to see some bankruptcies, you're going to see folks at the end of their career decide to step out at this point. So you'll see that -- we'll see that hit the CoStar suite side, and that typically -- that will happen over X number of quarters, but you also see new buyers entering the market in the -- after a quarter or two, especially like vulture investors or opportunistic investors. You will see building owners go bankrupt. The only up -- silver lining there is that they tend to -- they have in the past, tended to maintain their marketing plans through bankruptcy. Bankruptcy courts tend to approve that because they don't want the revenue stream to erode during the bankruptcy process. And then the thing that I remember clearly from the last several cycles is that the new owners, $0.50 on the dollar, they are flushed with cash and much of it flows our way. So there are -- I think that there will be friction throughout the system, but probably a little bit more on the brokers who step out of the business to go -- or go bankrupt on the CoStar side.

[Operator instructions] Your next question comes from Mayank Tandon with Needham.

Andy or Scott, maybe one of you could answer this. In terms of the multifamily platform, I think, Scott, you mentioned that 11% of the growth last quarter came from some of the upgrades. Could you provide a little bit more color in terms of what those features are that the users are buying? And what does that mean for 2Q in terms of the contribution from the upgrade on the platform?

Yes, sure. What I was referring to in the growth in the quarter was that the -- our clients are choosing higher level ad packages to purchase, which cost more per package. You may recall, last year, we announced that we were putting a Diamond Plus level for sorting to the top of the Diamond section. And then this last year, at the end of the fourth quarter, we also introduced Platinum and Gold Plus tiers as well to sort of to the top to those levels. Now those aren't material parts of our sales right now. But there's just examples of when people want to get more exposure when they have additional vacancies they need to fill, then they can buy up to higher level ad packages to get more traffic and more leads. And we saw that in the first quarter, and that's what generated that 11% revenue growth from that price/mix effect.

Your next question comes from Bill Warmington with Wells Fargo.

So Signature Ads at LoopNet, that was a big focus of the sales conference in January. And the whole move from having LoopNet go from being a broker-focused, broker-driven to the owner-driven market, are you seeing uptake on those ads moving from the broker price point at $35, $40, $60 per listing per month up to the $2,000 to $3,000 level for the owners. Is that taking place? And is that going to continue to drive the revenue? Because it sounds like the revenue on that division is going from around 20%, 22% expected revenue growth, about 10% to 12% revenue growth?

Yes, that's right.

Yes. So before the pandemic hit, we saw some really good sales results in LoopNet Signature Ads. And then the pandemic hit and everything just basically stopped while people are figuring out what's going on. But the really good results of Signature Ads continues in January, February. And as much as anything, I think we saw some brokers who are more vulnerable pulling back some of their spending. And while it's -- there was a dip in search activity in LoopNet initially as we went into the pandemic in the United States, that activity has come back up and searches are now stronger than they were before. I think we need to clarify our message or evolve our message to the owners about the fact that they have -- the message is really solid for those folks. There will be hundreds of thousands to 1 million leases in the next year. There will be a contraction of overall demand. People are not driving by and seeing building signs, people not touring the buildings. We are continuously improving the immersive quality of marketing their buildings on LoopNet. And we think we will pick up revenue, and I think it will keep going. But we're being conservative right now because a lot of our revenue on LoopNet comes from small brokerage firms, and we think they will take an outside hit, but that's not really impacting the fact that we're going after a new market pretty aggressively, which is the larger institutional owners. And the amount of money they spend on an advertisement on a high-end movement ad relative to their vacancy loss is about as levered as you can possibly be. You're looking at a $100 million vacancy loss, and you're looking at an ad that costs a couple of thousand bucks. So I remain optimistic. I spent most of Sunday working on new marketing materials for LoopNet to try to adjust and focus, and I think we'll -- I'm still bullish about the potential there. But Mr. Wheeler, Dr. Wheeler, will be Dr. No [ph] because we're seeing the low and being conservative.

And Bill, we talked about the revenue per listing increasing in Apartments as people buy ads. In just Signature Ads alone, we saw from the fourth quarter, we were around $500 per ad in the fourth quarter, now we're a little over $700 per ad in the first quarter. And that's not price increases. That's people deciding to buy the Platinum and the Diamond level Signature Ads in more and more quantities as time is going on and as our sales force is really focused on those high-value properties. So it's starting to move up nicely from an average price perspective.

Your next question comes from Ryan Tomasello with KBW.

Regarding the expense base, can you talk about what levers you have to pull there going into the back half of the year and how willing you'd be to pull them depending on how this all plays out over the next few quarters? And particularly with respect to the apartment ad spend, can you clarify your comments regarding the intent to continue with that plan? Is that just with respect to 1Q, meaning the ad spend in the second half of the year could potentially be curtailed depending on how the environment unfolds?

We -- at this point, as we've mentioned, so there are a bunch of different levers we can pull on cost structure. We have a lot of optionality there, but don't have conditions that would merit contracting our spend dramatically. We actually have a lot of great growth drivers in the business and we are -- as we report this quarter, we're meeting our expectations. If things fell apart, certainly, we would react, but that's not what's going on. And when you look at the results we're having in Apartments.com, they're strong, and we believe that potential is still there. And we don't see a reason at this point to change our strategy. Our traffic to Apartments.com and our lead flow is at the highest level it's ever been. So across the board, almost all of our key sites are hitting the traffic numbers. And we think that there's a transition going on from more offline to more online. And this is an opportunity that we don't really want to change our course or our mission, given what the facts we have today. So we're anticipating continuing the same investment we originally planned unless something changes.

Your next question comes from George Tong with Goldman Sachs.

You withdrew your full year 2020 guidance and only guiding 1 quarter out for now. Can you discuss your confidence level in achieving your previously disclosed 2023 targets?

Those are always fun questions to ask, George, in the midst of an extremely uncertain environment. When we decided not to give 2020 guidance, George asks me for 2023 guidance. I kind of knew you were lurking out there, George. You can get to that. So right now, we -- like we said, we've gotten the second quarter is what we're seeing so far. And clearly, we are focused on growing back at our historic levels as quickly as possible and continue to invest so that can snap back, and continuing to pursue acquisitions, which will help fill any of those revenue gaps that might be created by a temporary slowdown. Certainly, you either have to buy more acquisitions or you're going to have to get that revenue growth rate running up further in the out years. But mathematically, we can still get there. Again, we didn't tell you know what the length and the duration of the downturn is. You can't say it for certain. But that's not all we know about it so far. And as pace and directions change, we'll obviously keep that in mind.

The uncertainty, clearly, is high right now. And -- but the -- and we don't have a reason to believe that it's not achievable at this point until facts change and there's -- or reasonably it's not achievable. I would actually say you could say if an element of that is organic, it would probably be more achievable to -- I'm sorry, or an element of that target is acquisitive for an acquisition, that may become easier to achieve those targets in this acquisition environment.

Your next question comes from Brett Huff with Stephens.

Good afternoon, guys, and glad you're all well. Andy, I want to follow up a little bit with you because I know you've been probably talking with a lot of your customers, and we've gotten a lot of questions on kind of the microeconomic decisions that, say, a multifamily owner or a commercial building owner who wants to sell or maybe is under duress or maybe wants to wait. Do you have any anecdotes that will help us get some insight into those decisions that folks are making and how, therefore, they're going to make decisions on whether they'll advertise on LoopNet or advertise in multifamily? You gave us a good example of the large multifamily owner with lots of vacancy risks, buying an ad for a few thousand dollars. But are there any more in the middle market or even any more for LoopNet that you could give us?

So in terms of -- I think there are two different questions there. One is the microeconomics and decision to market on LoopNet or Apartments.com. I think that math is really quite simple. Like if -- across the board, the economic trend is going to be just softness in leasing revenue. And when you hit softness in leasing revenues on big dollar items and traditional methods like broker parties or events or signs or people spinning the sign outside or walking through the building are all gone away, that beautiful print brochure is not going to be seen or touched by anybody. It's a no-brainer that the trend should be to digital marketing, virtual experiences, more Matterports, more drone videos and the like. That's a no-brainer. And on the other element about decisions, how people are using our tools to try to decide should they sell, should they -- I think those trends are tsunami-like. And I think that -- I hope our clients use our data aggressively and trust the numbers to set their pricing realistically quickly to win at the game of musical chairs, i.e., sit down first if the data says you should sit down first because having a chair is better than having no tenant at all. So I think that people should be using our data right now to really be realistic between -- and also to help coordinate between owner, lender and investor to make sure that they're all making that decision together with data as opposed to hope. And then on the part of investment sales, I feel that there's typically a big disconnect right now where it's going to be really difficult for people to -- sellers to reduce their expectations enough to meet where buyers are right now. So typically, that doesn't happen for a year to 18 months to 24 months. But we will build products and services to try to be there with strong offerings as that volume unleashes.

Your next question comes from Sterling Auty with JPMorgan.

So for my one question, I just want to go back to multifamily in terms of the comments that you made. Is it fair to say that you actually believe the bottom has already been put in, in multifamily? Or is there a potential that multifamily could see sequential contraction in the upcoming quarters?

I think there's two questions. One is our experience selling advertising to multifamily, and then secondly, rates and occupancy levels and asset prices in the multifamily world. I believe that just by the nature of our business, we are somewhat insulated as to what happens with occupancies. We may be inversely correlated to what happens with occupancies. I think we're relatively independent of what happens with the rent. The rent fall so far are not material. And I think we're independent of what happens to asset values. We may be somewhat negatively impacted by the fact there may not be a lot of new development over the next two years. But at this point, the sales are holding up strong because if you have tenants who are not paying rent and were paying rent the month before, and you anticipate they may not be paying rent again in the future, you need to begin to backfill them. If you just had a large property deliver and it's got a lot of vacancy, then you may have -- I need to really pick it up. So I don't -- again, we can't really see beyond next quarters to what's going to happen in the economy. But right now, we feel pretty good about what's happening from Apartments.com's perspective and our experience. It could change, but right now, it's -- it has surprised me materially to the upside. Shocked me.

Your next question comes from Joe Goodwin with JMP Securities.

Just one quick on comment on the revenue -- potential revenue growth going negative. Can you maybe just give some color on how you're thinking...

Joe. Joe, I'm sorry. Could you speak up a little bit? It's very dim. Could you try again?

Is that better?

Yes, much better.

Sorry about that. So on the commentary around the potential of your revenue actually going negative growth, could you maybe just give us some color around what quarter will likely be the bottom or at least how you're thinking about there?

I would look at -- we don't know, but I would just look back to the worst we ever experienced in 30 years was '08, '09. And we had two quarters where it really materially fell. So that would be a quarter or two out on the CoStar side, but we -- this is a different cycle, and we have no idea when -- it's just too hard to predict past the quarter. But it typically wouldn't be -- if you were just taking exactly what happened in '08 and stick it right here, it would be third, fourth quarter.

Yes. The other thing, people we're seeing -- and to keep in mind is that, if you recall back in the last recession, it started to build -- the negative momentum started to build through '08 and then dropped pretty heavily at the end of '08, early '09. And so it took a number of quarters for that to develop. What we're seeing happen here is things dropped quickly, and they dropped within a week down to the levels I mentioned, half of the levels of sales, et cetera, which never happened before in the '08, '09. And then when we see what's happened since then, as Andy mentioned, we've seen volumes move up in traffic and leads on both LoopNet and Apartments.com. Apartments.com is up where it was before the downturn. We've seen CoStar in the last 1.5 weeks, we've seen the contract pacing move up a bit in CoStar in the last 1.5 weeks. So we just saw this -- the cliff dropped quickly, and then it held there for a week or 2. And then we've seen some build underneath it. Now does that mean it's going to continue to build? Or is it going to drop again if something else happens in the economy? Or is it going to build faster? Like we don't know, but the pattern is very different in this shock than what happened in '08 as many lessons as we can from it and then just see how this thing develops in a different pattern.

There are no further questions at this time. I'll turn the call back to presenters for any closing remarks.

Thanks for the first quarter -- joining us for the first quarter earnings call. I look forward to updating you this summer on the second quarter. And I hope you're all staying safe and well, and appreciate you all joining us here on the call today.

This concludes today's conference call. Thank you very much for joining us. You may now disconnect.