Good day and thank you for standing by. Welcome to the Q2 2021 CoStar Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to hand the conference over to your host, Mr. Bill Warmington, Vice President of Investor Relations. You may now begin.

Thank you, Chris. Good evening and thank you all for joining us to discuss the second quarter 2021 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 our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the company’s outlook and expectations for the third 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 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 report on Form 10-Q under the heading Risk Factors. All forward-looking statements are based on information available to CoStar on the date of this call. 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, include 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 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 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. Good morning to our Asia-Pac employees. And thank you for joining us for CoStar Group’s second quarter 2021 earnings call. Total revenue for the second quarter of 2021 grew 21% year-over-year to $480 million, ahead of the $470 million high-end of our guidance range. Net bookings of $51 million were up to 47% year-over-year and adjusted EBITDA of a $150 million was well above the $135 million high-end of our guidance range. CoStar Group saw a substantial increase in the demand for the information on our marketplace as evidenced by a 47% year-over-year increase in unique visitors. In total, almost $30 million more people visited CoStar Group websites in the second quarter of 2021 than did the same quarter a year ago. We believe that growth in marketplace audience is a leading indicator of future growth in marketplace subscription revenue. Leading the results, CoStar Suite had its strongest new bookings quarter in years. CoStar Suite bookings in the second quarter of 2021 grew 19% sequentially and were almost 10 times last year’s level at the start of the pandemic. As a result, we expect CoStar Suite organic revenue to return to double-digits by the fourth quarter of this year, well ahead of our expectations just 6 months ago. The commercial real estate economy is a tale of two cities, with examples of both strengths and weaknesses in key indicators. Overall, it feels like the heat economy is driving solid demand for CoStar Suite. CoStar Suite’s quarterly renewal rate for the second quarter of 2021 reached an impressive multiyear high at 94.5%. That’s extraordinarily high. This high renewal rate is all the more impressive, because it does not exclude the solutions of commercial real estate firms as principals and companies normally retire, cease operations. I…

Hmm. I think that’s the mystery we might just have to leave unsolved for the remainder of this call. Then maybe I’ll decide to answer that one. I’ll keep you guessing. All right, well that was a lot of ground to cover in just a short call. Great summary. And that seems like we keep having increasing opportunities with every new component that we add to this business. Fortunately, it’s easy to summarize financially. We delivered another strong set of results this quarter, with revenue, adjusted EBITDA and sales bookings, all growing in the strong double-digit. Our results include a short period of results for Homes.com in the second quarter, which are not material to the overall revenue or profit for this quarter. Revenue in the second quarter of 2021 increased 21% over the second quarter of 2020, coming in above the high-end of our guidance range, with CoStar, Ten-X and Homesnap all exceeding our expectations. Organic revenue growth for the second quarter was 13%, improving from the 11% in the first quarter on the strength of both CoStar and the LoopNet growth improvement. The product, which we now simply will call CoStar, grew revenue 7% in the second quarter of 2021 versus the second quarter of 2020. Improving from 4% growth in the first quarter and exceeding our forecast of 5% to 6%. With very strong sales results, improved renewal rate, the launch of the single CoStar product upsell program, and the planned return of annual renewal price increases in September, the outlook for CoStar continues to improve. We now expect CoStar revenue growth to improve to around 9% in the third quarter and return to double-digit growth in the fourth quarter of this year. This improves our full-year revenue growth outlook for CoStar, on 6% that we talked…

Thank you, Scott. Chris, would you please assemble the questions for the Q&A session?

Yes, sir.

And please limit yourself to one question and make it a good one.

[Operator Instructions] Your first question comes from Sterling Auty of J.P. Morgan Chase. Your line is open.

Yeah, thanks. Hi, guys. First of all, my guess on Scott T. Wheeler is I’m going to go with T for Thomas. Am I close?

Wow. Timothy would be good.

He knows how to use Google very effectively for this question. I’m not sure what – good job, Sterling.

Thank you. And for my one question, the most popular question I get is, everyone, sees the investment that you’re looking to make in residential. And I think they agree with the opportunity. But they don’t know how to think about that investment in the context of your previous 2023 margin target of 40% for EBITDA. Can you maybe give us an update on how we should think about it? And is that target is still viable?

Yeah, good to hear from you, Sterling. Question comes up frequently, with the investments, we just talked about, additional resources and some marketing, as we build this platform out, we are still online to hit our 2023 targets. And we still consider those the marching orders for the business. And so, we need to get through the integrations, watch the site improvements. Andy mentioned the traffic, via visitors, improvements in the site. A lot of these things are going to depend on what happened for the rest of the year in our integration program. And then, we’ll decide what next year’s plan look like relative to investment in residential versus our other platforms. So no change to our 2023 guidance. Right now, all our plan is for residential. We’ve just talked about. We can still make those numbers and intend to, based on what we have so far. And if that changes or new estimates come our way, we will let you know.

And I would want to deflate the question a little bit, by pointing out that 100%, the core business of CoStar Group is solidly on target for that goal. And should there be a clear opportunity to invest in what would be a significantly different business, we’ll communicate that at the point that we are doing that. But the fundamental business is definitely on track for those goals. And it’s performing really well. So it’s probably a little bit hyperbolic. I don’t know what that means, but it sounded good.

That sounds like backend loaded to me, but I just want to make sure. All right.

Thank you.

You bet.

It sounds like [indiscernible] Thomas.

Thanks, [Colin] [ph].

Your next question comes from Pete Christiansen of Citi. Your line is open.

Good evening, guys. Thanks for the question. I was just wondering if we could dig into the LoopNet performance a little bit more here. Obviously, the sales growth there is clearly coming from the Silver Ads. And you did point out, obviously, the CoStar Suite guys are doing double duty here, which is likely making an impact. But, I guess, I would presume that, A, you have an easy comp and real estate activity is improving quite dramatically. I’m surprised that the Silver Ads are decelerating so much. I was just wondering if you could put a little bit more color on, maybe I don’t understand the relationship exactly to what’s going on in the sales-force and what’s going on in the broader market. That would be helpful. Thank you.

Sure. So a couple of core issues. One is, I mean, so you’re correct to point out that the economy is great. The product is performing really well. The product looks really good. The traffic is fantastic. The marketing is well received. We are limited by how fast we can scale that sales-force. And as you listen to the earnings call, you hear we’re adding salespeople in this bucket and that bucket, and we’re clearly hiring a lot of sales people. And that’s great news, because we have opportunity for them. Our primary focus is on those upper end ads. We don’t want to just keep on selling the low-end ads forever. And we would like to within the next year, come up with a more optimal way to sell those entry-level ads where we don’t charge the same price for all properties in all geographies. And we’d rather shift to a more demand-based pricing algorithm on those on the Silver Ads. So we are holding off driving a lot of activity in there until we can do that. There are some areas where we want to reduce our prices on Silver Ads, and many others where we want to significantly increase our prices on Silver Ads. So if you look at Apartments.com, the average Silver Ad is probably 8 times the average LoopNet Silver Ad. And we want to basically move towards a way of rebalancing that while reducing the prices on some, and then increasing on some other areas, where people wouldn’t notice that even happened. So it’s more of an evolving dynamic. But the fundamental marketplace is super strong, and we’re hitting the things we’re trying to hit with that right now.

And, Pete, if I can just add a couple of the numbers on top of that. The Lister revenue that you mentioned, Silver Ads is about 75% of the revenue for LoopNet. And it’s still growing, it’s growing at mid-single digits. And with Signature Ads growing 70%, we talked about that, mixes into that 18% growth rate for the second quarter. So it’s still growing. It’s just at a smaller level right now. It’s not the primary focus.

Your next question comes from David Chu of Bank of America. Your line is open.

Hi, thanks, guys. So, bookings have clearly rebounded off like the COVID lows, just wondering what it takes to get back to like the prior peak, which I think was in second quarter 2019 of like, 59 million. Is it really a recovering Apartments? And then, just based on the macro environment, when do you think this will be achievable?

I think the quarter you mentioned, all cylinders were cranking. So you had a great quarter for Apartments, LoopNet. Apartments, LoopNet and CoStar, we also have other contributors now like Homesnap and Realla, Belbex, BizBuySell, CoStar Real Estate Manager, Thomas Daily, Land, are all cranking. Say, you have a lot of different things happening here. I think there is – you are in an organizational flux or trying to get past us a return to work or return to normalcy. There is a lot of adjustments going on. And we’re getting back into a growth mode, and you want to have all your sales-forces lined up, and you want to get your price per lead numbers, right. But I think that could happen, in the next 2 quarters. We have a lot of good things going on, and all the products are really solid. So I think it’s just a question more of transition and friction in this environment right now.

And, David, when you look at where we are now, and the bookings, sales, like we said the CoStar/LoopNet sales-force produced the highest level for quite some time. So those are very strong and we talked about this. The multifamily piece, if multifamily sales go up to this and, say, the average we were doing in 2019, we would have had our best quarter ever in bookings. And the other thing that Andy mentioned, the Ten-X and Homesnap are 2 brand new businesses that we have. And they’re not accounted in the subscription metrics, because Ten-X is all transactional and Homesnap as a large piece of other we considered transactional at this stage, before we convert our residential offerings to subscription style businesses. So right now, we have about 91% of our revenue is subscription. And that typically had been up in the 95%, 96% plus range. So there is a growth element we have right now in our business, it’s coming from Ten-X and Homesnap that you’re not going to see in the bookings right now until we convert those to subscription. So you get a little lift out of that versus the numbers we talked about. But really it’s the price we talked about in multifamily that should return that to better sales numbers, and that would move us upward.

Your next question comes from John Campbell of Stephens Inc. Your line is open.

Hey, guys, good afternoon.

Good afternoon.

Hey, just back to the residential side, Andy, I’m guessing there’s a way to, I guess, more meaningfully build out the traffic there without relying solely on the ad spend to get you there. But, I think you might have submitted that in the commentary around the kind of even split of investments in across the marketing and content in the back half. But, I know for competitive reasons, you guys aren’t going to fully show your hand there; but, Andy, to what extent you can maybe just provide a kind of high level peak into that strategy?

You’re right about not wanting to show our hand. So thank you for the opportunity. But you know what we’re offering is really quite simple, really brutally simple, which is 90% of the real estate transactions in the United States; a buyer collaborates with an agent. And if you look at our website right now, Homes.com, it’s all of a month old, so it’s not going to be a masterpiece. But if you look at that website, it’s got something really unique. It’s the only website that I’m aware of the United States where you can actually look at a property for sale and see – clearly see the name and phone number, the agent, push a button and contact them. So, that puts a million real estate agents on our site. And those million real estate agents are involved in 90% of all transactions and communicate regularly with our clients. So we’re excited about that opportunity. We love the fact that it’s so simple, most people can’t understand it. And we’re not afraid to work, if we think there’s a fantastic ROI that have a fantastic return for our shareholders. We’re not afraid to invest in it, but we are – right now, we’re working on the software, and the fundamental structures, which are not wildly expensive. And as I mentioned, 4 weeks of work and the lead flows up 70%. So that’s the first stare of many, but I think that as it evolves, and we can talk more with analysts, investors about the progress we’re making and the vision we have for it, I think that people will support our initiatives. But it’s still, we don’t have some secret magical plan that we’re laying out for 2022 or 2023, right now, we’re dealing with orders of magnitude, we’re more focused on software and strategy right now.

Your next question comes from George Tong of Goldman Sachs. Your line is open.

Hi, thanks. Good afternoon.

Good afternoon.

Apartments.com revenue growth decelerated in the quarter, because in the effective reduction in price per lead, can you elaborate a bit more on initiatives to help reverse this trend? And when you would expect to return to 20% plus multifamily revenue growth?

Well, that’s an excellent question, George. I think that’s the question. The lead per ad at the lowest level was unimaginable. If I had told someone 4 years ago or 5 years ago, the number of leads the site is generating at the lowest ad level, it would have been implausible, no one could have believed that. So we are helping some very large properties generate a lot of revenue for very little money. And what we’ve done is worked with the leadership team at Apartments.com, and we are rolling out a new pricing strategy. And we’re also adjusting the lead flow, the nature of the product and how it throws lead to meter them more effectively to the upper end ads. And we’re also doing more strata in the price and structure between the 80 unit property, the 100 unit property, the 200 unit property, the 300 unit property more appropriately reflect the value of one of these super high lead generating ads. So it’s pretty easy to go after and it will take, we’re not – it will be something that rolls out in the course of 12 months, and it begins rolling out as early as next month, so you’ll see an advantage there. But this is fundamentally really good news, I mean, this is – there’s 2 kinds of things you could have, problems you could have, one is you don’t have the traffic, don’t have the leads; and the other issue of way too many leads, and clearly our competitive position has gotten very strong recently. And it’s been getting stronger and stronger, but it’s gotten really strong over the last couple of quarters. So we will throw more power to the dynamo will take more friction off the engine and throw more power to the wheels, the next couple of quarters and you’ll see us return to those growth rates as we go into 2020 and it’s sustainable for a long time.

Your next question comes from Ryan Tomasello of KBW. Your line is open.

Thanks for taking the question. I guess, just following up on Apartments.com. I’m curious, how you’re – Andy, how you’re thinking about the growth outlook there beyond the near-term disruption and say over the next 3 to 5 years of backlog forms growth [Technical Difficulty] plus unit category and understanding the comments around the right sizing of the effective price rallied. But how are you thinking about managing the business as growth at the high end inevitably starts to slow? And in particular, when you expect the middle market business really start to bridge that gap? How large of a business do you think that could be and what types of growth rates are you investing for in that piece of the market over the next few years.

So, I actually don’t think the high-end slows for many, many, many, many years, if not decades. We still are 50% penetrated the high end, and we have many products and services we can provide, if you see us getting into more, more actively facilitating the actual leases. If you look at a price per lead that at the lower end was as little as $2 to $3, or if you were to say 1 to 7 ratio lead the lease, $14 per lease. I would not say that we’re within decades of maxing out the value of those leads. And those leads as we can bring to the table where as many as hiring communities are paying a month rent or 2 weeks rent, or $300 or $500 per lease, and we’re charging $14 to $15 per lease. So we’re not going to max out the high end, but it’s really exciting, what’s available in the middle and lower end, we’re successfully selling a lot of properties at the 5 unit level, the 4 unit level, the 20 unit level, the 50 unit level, and we’re in single-digit growth or single-digit penetration all those areas. So it’s a question of continuing to grow the salesforce to go after that opportunity, but then also to build out our e-com capabilities to capture without having to have manual intervention. So it’s a great place to be, and we – and the demand side came out as harder than we ever would have anticipated in the last 2 quarters. But that’s good news. It does have to change the model a little bit. So I think you’ve got a decade plus of good solid 20% growth.

And Ryan, when you look at the universal properties out there over 100, right now, they’re growing faster than we can add them to our portfolio just given the growth in the general universe that we watched. So actually, our presentation into the upper end has stayed at 50% or 51% for like 5 or 6 quarters despite our growth, just because of the growth in the universe of properties out there. So we’ve got a long ways to go just to penetrate the top one, let alone move up those penetrations in the lower one.

Your next question comes from Mario Cortellacci of Jefferies. Your line is open.

Hi, guys, thanks for the time.

Hi, Mario.

Hi, thank you. On CoStar suite, I guess, just how much closer are we getting to turning pricing back on there. Obviously, I know, you’re very focused on the upsell, I mean, you have the global product, and there’s a lot of opportunity there. But I believe that you guys talked about looking for the ability within the commercial real estate market before kind of looking that pricing switch. So maybe you can just talk about what timing looks like there. And then how much price is being baked into the 2021 guide for CoStar suite.

Okay. So when are we going to begin normal price escalations on CoStar suite, wait for it now. Yeah, so we’re doing that now. You have to – there’s a notice period on these contracts so that you have a delay. But clearly the conditions are right for it right now with renewal rates moving in 94.5%, 5-year clients up over 97%. And all the functionality we’re putting into the product and all the functionality we’re going to put in the product over the next couple of years. We absolutely should be accelerating our pricing at least in line with inflation. And I think it’ll be 200 to 300 basis points above that number. And so, I’m not sure what Mr. Thomas has baked into the guidance, but I’ll let him handle that.

Yeah, thank you. Yeah, the start of the increases that go in the next couple of months, go in on renewals, obviously, so it takes a little while to layer them in. So that’s about 100 basis points, I think to the growth in the fourth quarter, but then it really starts to build in next year. But keep in mind that we’re doing the conversions to the full CoStar product, and so 18,000 of our clients will be getting those increases, which are larger than the renewal price increases, until then the other clients will get the renewal price increases. So, in aggregate, we’re looking at some pretty good pricing lift going into next year.

Yeah, we’re not increasing those 18,000 people’s prices. We’re offering them incredibly attractive terms to expand their purchasing with us.

Actually, they like – they look at it as a decrease in price…

Yeah, it’s a decrease in price.

The price of CoStar nationally, previously was much higher. So they’re like, “Wow, let’s go get this. This is a good bargain.” So it’s actually working pretty well so far.

[Operator Instructions] Your next question comes from Stephen Sheldon of William Blair. Your line is open.

Hi, thanks. I want to ask a little bit more about the CoStar suite, and that upselling process. I think that you talked about from modules to the full global suite. I guess, how aggressive do you plan to be in that upselling motion? And would you also plan to sunset the module, I guess, pricing with existing customers at some point. And then, I think you also noted $30 million to $40 million in potential incremental revenue. Can you provide some more detail on that number? Is that the potential revenue uplift at all of your suite customers move to that full solution? Just any more detail there.

Yeah, so the $30 million to $40 million, I think is some modeling that our VP of Sales has done, and it assumes the cancellation rate is just gone after that 18,000. It’s assuming an average price increase. So I wouldn’t have the act, the details of the model I’ve reviewed and seeing that model. In terms of how aggressive we would be with it, I would look at some of our prior efforts to move people onto a common platform. And in those prior efforts, we sell very aggressively for 12 to 18 months. And once we’ve had success in moving the majority of the revenue into the unified platform, then we typically sunset the prior platform, because at that point, you’re spending money. You’re spending money that really isn’t adding value anybody to maintain 2 separate platforms. So our goal is to focus on intensively for 12 to 18 months, and then streamline the product and have one version of the product. And that’s sort of somewhat similar to what a Bloomberg does? We’re not buying Bloomberg by geography and a bunch of different modules, you’re getting one terminal. As we go more international, we think it differentiates us against any sort of competitor and provides a very unique value proposition having one platform.

Your next question comes from Jeff Meuler of Baird. Your line is open.

Yeah, thank you. So, I guess I’m still struggling a little with the magnitude of the deceleration and Apartments’ revenue going into Q3. I guess, can you just maybe first comment on Apartments.com client retention, specifically, I caught the overall retention, but it sounds like that’s pulled up by really good results in Suite. And then, if retention is stable, I guess, does it come to a head now, because Q2 is seasonally when you normally see clients trade up, and then that trade-up just didn’t happen? And when it doesn’t happen, it’s kind of the season that you expected. That’s why you have the meaningful deceleration going into Q3.

Yeah, so to be clear, the renewal rate on Apartments.com is the highest it’s ever been. It is extremely high. Scott will have the number. I think I threw it in there, I’m not sure. But I believe it is 1/10th of the cancellation rate on a monthly basis from where we started in 2015. So, the churn is down 90%. And during the pandemic, it wasn’t really an environment to jack prices aggressively. And so, you sort of came out of pandemic after the first quarter, and after vaccinations really got out there. And then, the markets lit on fire. So it’s a question of how fast you can respond to that. And we will respond very quickly. But I think that I don’t think it’s really just a one quarter of upsell, that doesn’t happen again. I think that, I believe that as people go into the churn, as people have to migrate back to where they were before to return to work, and as people churn, as these price increases continue to crank in these apartment buildings. And as eviction moratorium relieves, our customers are making good money and need more lead flow than ever. And I think there is plenty of opportunity to capture value next quarter, the following quarter, the quarter after that and ongoing from there. So it’s more of a, if you’re playing the game for the long haul, you don’t want to jack people’s prices during the pandemic. But we’re well positioned to capture that value now.

And just the renewal rates 94% for the quarter on multifamily, which is the highest it’s ever been. And then to your point, you recall last year, we had the surge in the second quarter of sales in Apartments to these record levels given the pandemic. And so, that second quarter surge annualizes off in the second quarter this year. So you have a little bit of a cliff effect when you hit the third quarter, because all that weight of those sales goes away. And we haven’t repeated that same sales level in any quarter since then. So you’ll have some of that on annualizing before you then look at the upsells that weren’t as strong in the second quarter of this year. So it’s the difference in the growth rate in the second – in the third quarter it’s around $6 million to $7 million, which on an annualized basis is around difference in that sales level between Q2 this year and last year. So that’s mathematically how it all works.

And the number one thing to focus on, if you’re looking at a business like this is that 47% year-over-year growth in unique visitors, that is basically your leading indicator of future revenue.

Yeah. And, of course, the whole platform is still adding more volume. New people are still coming on time from Apartments. And then fortunately, when you have these issues that we work through that we’ve got a great portfolio, where Ten-X and Homesnap, the rest of the business does remarkably well, we ended up holding, if not, increasing slightly our revenue guidance for the year on an aggregate basis, which is obviously what we want to do and continue to do.

I am showing no further questions at this time. I would now like to turn the conference over back to Andy. You may proceed.

Thank you. So we appreciate you joining us for the second quarter call today. I hope you share our enthusiasm for the abundance of growth drivers in our business. As we’ve discussed, CoStar Suite in a strong rebound and growing record net sales. Apartments’ record traffic growth and lead flow puts us in a position to begin to share more of the value we’re creating for our customers. LoopNet is growing traffic, revenue and our primary goal of driving revenue signature ads is happening and happening well. Ten-X is really fantastic, gaining great traction. And Homesnap and Homes are well on their way in the process of transforming how agents, consumers buy and sell residential real estate. We didn’t have time to talk about Realla, Belbex, BizBuySell, CoStar Real Estate Manager, Thomas Daily, Land, they’re all doing fantastic as well. And I wish one day they’d give me 2 hours for the call. As we move to the second half of 2021, we’re working towards 2 important milestones. One is our goal of reaching $1 billion of annualized revenue run rate in our marketplaces by the end of the year. And the second is we’re going to run through our $2 billion revenue run rate overall. So some good milestones on our way to much larger numbers. But we’re clearly strong in our core business right now as evidenced by our amazing traffic growth, our amazing renewal rates. And we’re focused on building that core business, but also working to triple our addressable market opportunity through investments in residential and international expansion. So we look forward to meeting with you again for our third quarter call in October 26. And until then, stay safe. Thank you.

This concludes today’s conference call. Thank you for your participation and have a wonderful day. You may now disconnect.