Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 CoStar Group Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Bill Warmington, Vice President of Investor Relations. Please go ahead.

Thank you, Gabriel. Good evening, and thank you all for joining us to discuss the first quarter 2021 results of 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 our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the company's outlook and expectations for the second quarter and full year 2021. 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, those stated in CoStar's press release issued earlier today and in our filings with the SEC, including our most recent annual report on Form 10-K 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, future events or otherwise. Reconciliation to the most directly comparable GAAP measures of 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 those terms. The press release is available on our website located 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 Investors. Please refer to today's press release on how to access the replay of this call. And with that, I would like to turn the call over to our Founder and CEO, Andy Florance.

Thank you, Bill. Good evening, everyone, and thank you for joining us for CoStar Group's first quarter 2021 earnings call. We had a strong start to 2021 with both revenue and profit ahead of forecast. CoStar Suite had its best sales quarter since 2019 and is positioned for accelerating revenue growth into 2022. Apartments.com delivered its seventh sequential quarter of revenue growth above 20% year-over-year. Our Q1 marketing campaigns for LoopNet and Ten-X are hitting the ground running, with both businesses showing good traction. In residential, Homesnap's first quarter pro forma revenue grew over 40% year-over-year as paid subscribers more than doubled and subscription revenue grew 68%. Two weeks ago, we announced our agreement to acquire Homes.com, the next incremental step in building out our differentiated residential strategy. Overall, we remain highly confident in our ability to continue to deliver double-digit organic growth revenue for many, many years to come. Total revenue for the first quarter of 2021 was $458 million, which is a 17% year-over-year growth rate and $3 million ahead of the high end of our guidance range given in February. Quarterly sales bookings were a solid $52 million. Our profit performance was equally strong with adjusted EBITDA of $160 million, an increase of 29% year-over-year and $15 million above the high end of our February guidance. As a result, we are modestly raising our full year 2021 revenue, adjusted EBITDA and adjusted EPS guidance. But you'll hear more about that interesting news from our CFO, Scott Wheeler. CoStar Suite had its best net new sales quarter since 2019, and we appear to be moving past the pandemic disruption. We believe the combination of renewals returning to the high pre-pandemic levels, new product introductions with CMBS, STR international and Lender and the global CoStar upselling effort positioned CoStar…

Thank you, Andy. I'll be using my 3D voice today. So hopefully, you'll notice the difference, all of you who are listening. Last year, I used my 2D voice. But yes, I think that the last part is the best news of all of everything you talked about: going back to our offices, rolling out vaccines to protect our teams and their families and getting to welcome our friends and our team members back to our offices every day. It really is super fun. And we had a great first quarter financially. I'll call it hitting through the cycle with double-digit growth in sales bookings, revenue, adjusted EBITDA and non-GAAP EPS. We included Homesnap, currently in their rookie season with CoStar, in our financial results for the first time this quarter, and they were great. And we also signed up a strategically important prospect in the online residential spaces, Homes.com. So onto the results. Revenue in the first quarter 2021 increased 17% over the first quarter of 2020, which is above the high end of our guidance range. The organic revenue growth in the first quarter, which excludes Homesnap and Ten-X, was a strong 11% year-over-year as we've come around to 1 year after the start of the pandemic. Going forward, we expect organic revenue growth to improve to approximately 12% to 13% for the second quarter and for the remainder of the year. CoStar Suite revenue grew 4% in the first quarter of 2021 versus first quarter 2020, at the high end of our expectations. As we begin to lap the low sales months that began in March 2020 as a result of the pandemic, we expect to see CoStar Suite revenue growth improve sequentially, CoStar Suite sales in the first quarter of 2021, along with contract renewal rates,…

Well, thank you very much, Scott. [Operator Instructions] Gabriel, would you please assemble the questioners for the queue.

[Operator Instructions] Your first question will come from Andrew Jeffrey of Truist Securities.

I guess I'm going to have to accept being 2D for now. Andy, residential, obviously, has grabbed a lot of attention, right, just last quarter or 2, what was CoreLogic and all. Could you elaborate, I guess, a little bit beyond the relatively small deals you've done, albeit important, in terms of how you intend to build that out? Do you need to buy data? Do you need to buy a database? Are you going to build the database? Just trying to think about how you get from Point A to Point B in that big TAM.

Yes. So we already have -- Homesnap already gives us a very solid seat at the table. It connects us with hundreds of thousands of important players, also leaders in the industry who can set up the access we need. We already subscribe to a wide array of residential information sources, but we think we can work with Homesnap and Homes and put together a very interesting strategy. And we think we'll get a lot of support from market participants for that strategy. So the first-generation models operate at scale for an extended period of time, and they never really ever produce any meaningful profits. We think there's the ability to actually build a much more profitable, lower-risk models by adopting a different business model, not trying to take the agent fees but actually facilitating the power of the Internet, the reach of the Internet, to find buyers with greater certainty and greater speed. So we're going to develop that plan a bit over the months to come. We're beginning to do retreats around that and build out that business plan, and we'll be rolling that out later in the year. I'm -- there's not a specific additional company we need to buy today to execute that strategy. I'm sure that things will come up that will help and support our strategy. We are -- I think we're comfortable with what we're doing without any involvement from the CoreLogic acquisition. And I don't want you to worry that if that deal were on the table, the CoreLogic shareholders will be getting $101, we're not reinstituting that. There's nothing happening there. We're happy with the strategy we have with a very affordable Homes.com. So we did overpay for it, Rusty, as a joke, that's just to the guy, the seller. We're negotiating with them all-time, he's tough to negotiate with.

And your next question will come from Sterling Auty of JPMorgan.

Andy, you outlined a lot of growth initiatives in your prepared remarks. And I guess what I need to better understand, or help me better understand, how do each of those ramp in the timing because it seems like there's a lot of opportunity where I think investors are going to wonder are you going to accelerate that organic growth and to what extent and over what time frame?

Yes. So a lot of the stuff is somewhat dependent. I know you have kids, some of them probably are -- been homeschooling for a while, not as effective as actual in-person schooling, especially not when you're starting a new school. It's been hard to build sales forces effectively during this whole thing. And as we start to get back to a little bit more normal, I'm very much looking forward to being able to effectively build some of the sales forces. So the opportunity to accelerate growth in Apartments has been there. We've got the marketing engine that's just cranking. We have the opportunity at the middle and lower end that's really proving effective. And just it needs some more sales resources behind it. The LoopNet product is proving effective, and it needs -- just needs -- it can accelerate growth with more resources. It's already accelerating growth, but it can accelerate more with some more sales resources. I'm very excited about this sort of centralized, advanced virtual selling opportunities, of what we can do with technology and so on and so forth. I think that's going to be pretty cool. The CMBS launch is out there. The global launch is going to start hitting next quarter, meaningfully next quarter. The apartment launch is out there -- I mean the hospitality launch is out there. Ten-X is also -- we nailed the demand side. We're seeing what we want to see there. We're getting those 13 registered bidders up from 5 -- or 4 or 5 whatever it was. We're getting the flow there. And now we need to just bring more supply. That's where more revenue comes from. We've begun to train the researchers on generating those leads, and we've got an excellent training program in place. And we're going to build out the sales force there, which should bring an acceleration to that one. So it's all sort of coming together here as we come to the middle of the year. And I love Pfizer. I love Moderna. I love J&J. Just getting back to actually growing the teams to support this effort. So Scott, is there anything that's like I'm missing in terms of when these -- I mean I think that the one thing that is not this year is CoStar Lender. Excellent product there, excellent product potential, great product team there. [John McKaron] is running that group. That will be a great product. In the script, it said fourth quarter of 2021. I bumped it to first quarter of 2022. It's a complicated product, but it's pretty cool. I think it will be very compelling. So that one is more of a 2022.

Our next question will come from George Tong with Goldman Sachs.

CoStar Suite had its best sales quarter since 2019, and that was helped by new product enhancements. Can you talk about what the sales strength reflects in terms of whether it's new institutional customers that are being brought on versus penetration among brokers versus increases in pricing that's coming back?

Yes. So there's -- I don't believe there's any material impact of pricing increases. There are no pricing increases occurring right now. Going forward, later into the year, I think there will be -- not price increases, but there will be average purchasing amount increases. So people, I believe, will step up from 1 module to 3 modules as they go to the global suite. So that's effectively more revenue per customer. But so far, what it is, is higher renewal rates. People aren't -- the cancellation rate coming down has a big impact as people feel more secure about their businesses, and they see a light at the end of the tunnel. And then it is I think more seats from some existing institutional owner players. The CMBS data is now really valuable in our product. The STR data is extremely popular with anybody who is doing work in hospitality. Our rationale for acquiring STR was -- we can see it was a great product valued by the actual operators of hospitality, investors in hospitality. But we could see that STR did not have a distribution channel into those people appraising and brokering hotel sales and developing hotels and we could bring their product to market quickly. And that's been a big benefit to us, bringing the STR data in there. Would you want to add anything to that?

Yes. I think, George, when you look at the stats on CoStar usage right now, as far as subscriber numbers, this is the first quarter we went over 160,000 subscribers. So certainly, after the dip in the second quarter last year, it's been coming back well. And as Andy said, clients are adding seats and adding users, particularly to take advantage of some of the new information. When you look at the number of sites that are using CoStar, that's also at a high level now that we hadn't hit before, over 38,000, 171 sites, it's right up at the top of where we've been. And then when you look at the number of new subscribing firms coming on, this quarter was as big as it was right after we did Xceligent, that was in bankruptcy. So like the second quarter of 2018 after that first peak, we had some pretty high levels, but now we're adding again at those levels at average contract sizes that are probably 30% higher than what they were back then. So you just kind of look at whether it's sites, whether it's subscribers or whether it's users, all of them are rising across these different customer sets.

Our next question will come from Pete Christiansen of Citi.

Really nice trends here. Andy, I really appreciated the Homes.com-Apartments.com comparison. I thought that was pretty interesting.But certainly, looking back to that era, Apartments.com acquired a ton of marketing investment, and I think it was $150 million in its first year. Should we expect that type of aggressiveness in scaling Homes.com at some point?

We are not at a place today where we have any sort of specific plan of that nature. There's nothing on Scott Wheeler's desk that analyzes those sorts of investments. We obviously are exploring the broad opportunity. I'll tell you that looking at the residential opportunity for me feels an awful lot like rinse and repeat. We've got a bunch of these information back-ends that support the front-end marketplace in real estate, and we've been doing this for a number of years. And as LoopNet crosses over $200 million, as Apartments becomes the biggest segment of our business, it is sort of like what we've been doing for a while here. And as you do, do that, you do make investments in marketing. So right now, if you're watching Squawk Box, you might see a Ten-X ad. Shortly thereafter, you see a LoopNet ad. That evening, after you switch over to Peacock, you might see Apartments.com. I think that's part of our formula. And you do usually invest in the marketing -- you do invest in the marketing ahead of revenue. So as we go after an opportunity, which I believe could generate, over time, billions of dollars of incremental additional EBITDA, it does take our shareholders' capital to open up that wonderful opportunity. So it's possible we might use the weapons our shareholders have given us someday. But we'll -- it's a multiyear effort. And the first component is generally software, which doesn't really show up as anything terribly visible to the analysts or shareholders.

And your next question will come from David Chu of Bank of America.

So you mentioned that signature ads were up about 50% in the quarter. I think that was about similar to 2020. So do you expect the new marketing campaign and the step-up in the sales force to accelerate growth this year? Just wondering, besides the marketing campaign and the sales force additions, what are the other key levers to accelerate this?

Yes. So we do expect that LoopNet year-over-year sales number to start moving around the 20% zone again pretty quickly. And if we're more successful with adding salespeople that know how to do it, and if the trend with the existing large CRE sales force, they keep on selling both CoStar and LoopNet, yes, we'll get some good acceleration. I think that we are getting real buy-in from the high-end folks. They used to view LoopNet as being something where people predominantly marketed lower-end properties, suburban properties, industrial properties for sale. These marketing campaigns really don't leave those smaller apartments behind but really sort of focus on branding super high-end, $1 billion properties. And I think that will open up a lot of opportunities at the high end, which is really where we're trying to go because if I take our high-target prospects, 50-some thousand high-target prospects who are multi-thousand a month opportunities, we're only 3.8% penetrated into that segment. And moving that number up to 20% on some sales-first growth and some -- and marketing that talks to that audience, I think, would have a huge impact on revenue acceleration. So we have a winner, it's just sort of tuning the different components.

Your next question will come from Mayank Tandon of Needham & Co.

A question to margins. Given the investment priorities and the growth initiatives, what are some of the levers you have to increase margins and get that 40% targeted goal by 2023 and how you're taking change in terms of that target and how you even get there, given the change in the cost structure in the midst of the pandemic?

Yes. So as we go forward to 2023, we've got organic growth coming back up, primarily with CoStar hitting its low quarter first quarter and then rising the rest of the year. So organic revenue growth would increase. We'll continue to add revenue in modest places as we have with acquisitions. And then our cost profile right now is pretty well a decision -- an investment decision profile every year. So we can still grow our cost 8%, 10% or a little more percent over the next couple of years, and that revenue growth will just bring that margin up. So it's all about the fixed cost leverage, maintaining that organic and increasing that organic revenue growth, which is the investments we put in place over the last year and then in this year that are creating these opportunities, so we've got the right fuel in there to get that revenue growth up, and then as a matter of monitoring that cost growth, again, between the 8% to 12% range over the next couple of years, and we'll hit that 40% so -- which is nice, we've been able to increase this year big ad campaigns for Ten-X and LoopNet. Last year we did it for Apartments. But still, even with big increases in marketing every year, we can still grow our margins. So the scale of the business and the leverage profile of the business now is really helping us do things that in the current or future environment -- years ago would be scary and take a lot of our profit. Now they don't they don't impact it nearly as much, and it gives us a lot of firepower in all these sectors we're in.

Our next question will come from Ryan Tomasello of KBW.

Just in terms of M&A, it's hard to ignore the cash balance and the balance sheet. So you said publicly recently that you intend to focus on acquisitions in areas which CoStar does not directly compete meaningfully today. And it's clear that residential is going to be a part of that playbook. But maybe you can elaborate on other areas of the business that you see as potentially being synergistic with the broader CoStar portfolio. For example, I believe, in the past, you've referenced areas like workflow and facilities management software as examples.

Sure. So I guess we are 3 deals into this year, roughly. Yes, so we've done 3. And I anticipate we'll continue to -- like, we are constantly evaluating deals that are out there. And they do come from a range of different sectors. Facilities, sure, that's a zone we look at. We're looking at a range of different things in residential. Most of them are domestic. And ForRent was a small exception to that. And these things are generally sort of tough-to-discuss specifics before they happen. And lately, they've been relatively smaller deals. So there are things out there that were kind of -- like, we're probably talking about 20 deals at any given moment. There are 20 things on the radar screen in any given moment. But just the last couple we've done have been small. There was one you may have noticed that was potentially massive. But we're resetting and focusing on a lot of opportunities. So there's zero chance that CoStar won't continue what it's done consistently for 30 years. And they'll be similar to what we've done before, which is closely related to what we're already doing but generally, strategically, additive to some broader theme we're trying to pursue. And as you go into residential, that's a pretty big theme with a lot of opportunities. I have to tell you that the flow of deals is absurd at this point. I think I probably have 3 of my LinkedIn a day. So -- but it's more of the same, more measured, continued flow there. Do you want to add anything to that or not really?

As you say, the residential pipeline has thrown everything at us right now. We still see things coming in the apartment sector quite frequently and commercial real estate and small information plays. There will still be others internationally that are coming at us. So all the things we've talked about before are still very active. But residential has just added another dimension and higher volumes, a lot to sift through.

Your next question will come from Mario Cortellacci of Jefferies.

So I wanted to talk about the new salespeople you're adding. And maybe you can just talk about the timing to productivity for these new salespeople. You're building out the middle market team, the LoopNet team, Ten-X. I mean we've heard other companies within the information services space talk about, say, a 3-year time line. And so they hit their max productivity. Do you guys have an idea of what that looks like for these new hires? And then also, because of what we're seeing in the labor market with the government support and stimulus, there's been commentary from a lot of other companies saying that it's been hard to hire, basically competing against the government. Is that a concern of yours at all? And does that create any type of wage inflation or an increased labor expense or comp expense for you?

Yes. Well, your observation on competition with the government for employees is accurate. That tends to be a little bit more in the restaurant industry and some of the service industries where, yes, I hear about folks who can't hire because they earn more working for -- not working for the government. But whatever. There's definitely -- so in terms of hiring, I am definitely focused on particular -- I'm focused on the centralized sales effort. We have a great field sales team with Apartments. We have a great field sales team with CoStar, the CRE team there. For the Ten-X effort and for the mid-market Apartments effort and for the LoopNet effort, I am looking at a centralized effort. I have been able to recruit some very experienced trainers and leaders to Richmond where we think that we have the ability to compete aggressively for talent there. And our training -- we're investing a little bit more in our training programs than ever before. So we are looking at 6- and 12-week training programs but with a -- expecting a much higher success rate of deployment. On LoopNet, we believe that people can get onboard and start selling within 3 months. With Ten-X, it might be 6 months. With Apartments, we think it's 3 months. And then in terms of peak efficiency, they probably start to get up to -- I think that LoopNet, Apartments, probably, we would expect them to climb up at about 18 months to sort of full production level, and Ten-X might be 24 months. But if we can get them onboard in the first 3 to 6 months, we have a good idea of what that ROI looks like for those salespeople. And it's strong. And the situation we have here is this is a -- we have the prospects in our database. We know what their economic need for marketing is. There are many, many, many of them. There are more of them than we can reach with the existing team we have. So we have the benefit of -- and there's not a lot of competition for what we're selling. So our offering is highly differentiated. Our intelligence on who to sell to is excellent. And so yes, I think that answers that. But I would -- I do look forward to the time when there's less competition from the government for the sales force.

Your next question will come from Stephen Sheldon of William Blair.

On the CoStar Suite, the global platform, I guess, what percentage of your CoStar Suite subscriber base do you think could be interested in this? And what could the revenue uplift potentially look like over the next years if you're able to drive meaningful adoption?

Yes. So there's two things happening there -- there's 3 things happening there. One is, for the first time, really focusing on module upsell. So someone buying just information on the properties, getting the tenant the comps and more functionality overall for the city they're already operating in. That is thousands and thousands of upsell opportunities. The next one is someone operating, getting the data -- the most common thing is someone just getting the data for the city they operate in. At this point, the way commercial real estate works, that's kind of silly because 30%, 40% of your clients are coming in from out of town, you really should know what they're doing outside your market. That one is pretty straightforward. Going up to -- when you go to global, that's going to move more into private equity firms, institutions and investors who are cross-border. So if I'm looking at a New York or London, if I look at institutional properties, 50% plus of the capital for those bigger and higher-end properties crossing borders, we think we'll be able to offer that group a unique offering. So it's like from the small all the way up to the gigantic. And I think it also is something -- so it's hundreds of millions of potential revenue. But it's also a transformational positioning of CoStar Group where, today, if I am a commercial real estate professional in London or Toronto or Madrid, I sort of look at these -- our current solutions as being a London solution. I might even -- yes, a London solution as opposed to even a U.K. solution. I'm just used to thinking of it as how we service our local needs. I don't think it will be that hard for us to build out a fairly robust pan-European product. And I think that pan-European product will change the game as to how people view our product in -- at the local level. And I think that will be pretty powerful. If I think about if I go back 10 years, 20 years and I think about how -- 20 years ago, how people viewed CoStar when we were really just servicing a handful of U.S. cities, our value proposition might have been a 50 on a scale of 100. Once we were serving all the major U.S. markets, we went to 100. There was an exponential value growth to the consumer, the professional, to user, when we covered their entire investment footprint, which is generally multinational. So we're focusing heavily on investment sales tools, selling tools, comparable sales tools, news on international. And I think that will change the way we're viewed and how we're positioned. So I don't know if I answered your question at all, but I threw out a random stream of consciousness on international and suite upsell. It's exciting. It's pretty cool.

Your next question will come from Jeff Meuler of Baird.

It sounds like a lot of the consolidated net bookings growth was in Suite. I caught a lot of metrics on Apartments' traffic and lead quality and revenue, but I don't think I caught Apartments' net bookings trends, so would love some detail on that or, if not, maybe just a random stream of consciousness on something else.

Do you want to do a random stream of consciousness?

Yes, it's my turn. Yes, we didn't talk specifically about Apartments' sales. But I mean you can do the math on our total sales numbers and kind of assume if CoStar goes up quite a bit, we're going to have like other sectors that will come down a bit. LoopNet stayed strong. Information Services stayed strong. And I'll say the volatility in Apartments is within the range of volatility it does every quarter. So it happened to be down a bit this quarter. But if you look back over the last 10 quarters of Apartments sales, which appreciate, Jeff, we don't give these numbers because of this fact, because they are volatile, Apartments net bookings move up and down, on an average, $5 million between each quarter. So you'll see this kind of up and down in the pattern. But over time, the growth obviously is there because we're still pushing the thing at 20% revenue growth. So we had such good quarters mid- to late 2020 in Apartments. I think property owners have used a lot of budget then. They trimmed them back a little bit in the first quarter, waiting for the second quarter season mostly, and then seeing where they're going to be positioned when we come back to these moratoriums, the eviction moratoriums. So you saw a little hesitancy, I think, in property owners in the first quarter, which moderated the Apartments side a bit. But CoStar picked up the slack.

And to be clear, Apartments.com is rocking. Like, January is not the most exciting time for renting apartments out there, never has been. Historically, it was probably -- before we owned Apartments.com, it was a period in which the revenue actually fell very often. But the eviction moratorium is also a wet blanket, so we anticipate there'll be much more enthusiasm coming into the spring and summer. And again, I think the marketing campaign we've got going right now, when we're the only ones really doing it, is just super strong. So -- and then spiring up the mid-market. So the fluctuation Scott talks about is there and goes up, goes down. But overall, it goes up, up, up.

We have the last question from Joe Goodwin of JMP Securities.

On the payments -- the rental payments that are occurring through Apartments.com, can you just talk about the economics that CoStar gets from those payments? And then is that a -- will that develop into a larger opportunity? Is that more just the tool set that you're offering to these folks?

Yes. I'll let -- do you want to hit -- it's just like a credit card we're getting.

Yes, we get a few small percentages off of the cards. We don't get anything else to ACH-type payments. So you get a little bit of margin off of the payment tools. And it keeps people on the platform month-to-month, which is what's really important when they filled up their units. It's not intended to be a primary revenue driver for us but one of the tools that drive the advertising and the other services.

As it gets up into tens of billions or to $100 billion, it would become much more meaningful. We do offer an ACH acceleration that has a fee on it, too, but that's -- only a portion of the audience takes that. The real value there for us by a mile, the real value for us is these folks, the owners who are liking our applications and our payment and our renewal tools tend to open up their wallet to purchase a $200, $300 online ad to get higher up in the presentation. And that tends to dwarf the credit card earning sort of ACH acceleration fee, so that revenue potential of them buying the overall bundle of all the services we offer. The independent owner is a multibillion-dollar revenue opportunity at higher margins. So that's where we're focused. Not to dismiss the revenue potential of that significant growing payment, but we're really trying to get the membership, the overall membership in our platform going. And also feeds, content, so the more participation we get in the marketplace, the more robust that marketplace is, which brings more renters in, which brings more advertisers in. So it's part of the whole cycle. We've long ago felt we needed to provide a broad range of services to that independent owner, which does not have the scale to really serve -- to really do it in-house or implement things in-house.

And we have no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

Well, we appreciate you joining us for this first quarter 2021 earnings call, and we look forward to updating you on our progress. We obviously have a lot of stuff going on. And I think we may be appearing optimistic, and that is how we are. So thank you very much for joining us. We look forward to talking to you again.

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