Good day. Thank you for standing by, and welcome to the Fourth Quarter 2021 CoStar Group Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Bill Warmington, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Blue. Good evening and thank you all for joining us to discuss the fourth quarter and full year 2021 results of the CoStar Group. Before I turn the call over to Andy Florance, CoStar Group'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 financial outlook and expectations for the first quarter and full year 2022 based on current beliefs and assumptions. 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 subsequent quarterly reports on Form 10-Q under the heading Risk Factors. All forward-looking statements are based on information available to CoStar on the date of this call. 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 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, and thank you for joining us for CoStar Group's fourth quarter 2021 earnings call. Total revenue for the full year 2021 was $1.94 billion, which is a 17% year-over-year growth rate and above the high end of our guidance range given in late October. Fourth quarter revenue grew 14% year-over-year to $507 million, crossing through an important milestone of a $2 billion run rate for the first time. December 2021 was our best sales month ever. November, December and January were three of our four strongest sales months ever. Net bookings of $67 million in the fourth quarter of 2021 were a new all-time high for us, up 37% year-over-year and 43% sequentially. Our trailing 12-month bookings in the fourth quarter was $217 million, growing 18% year-over-year. This is a significant acceleration from the trailing 12-month bookings growth of 6% year-over-year in the third quarter of 2021. Our profit performance in 2021 was also very strong. Adjusted EBITDA for the full year was $647 million, an increase of 17% and 27% above the high end of our guidance. 2021 was a solid year of growth and expansion for CoStar Group. We made significant investments in the CoStar product, and our unified platform overcame significant overhead apartment market challenges Apartments.com. And we expanded our LoopNet and Ten-X businesses and established a solid foundation in the residential property sector. Our addressable market continues to grow every year and our estimation now approaches $100 billion TAM globally. A couple of weeks ago, I ran across our TAM estimate from the year 2003 and that indicated a global TAM of $1.6 billion. At that point, our total revenue was under $75 million. What a difference we've seen in 20 years is our revenue is now bigger than we…

Excellent. Thank you, Andy.

You’re welcome.

I thought I’ve achieved a brilliant category today. Hope you think so after reading all these numbers. Certainly appreciate the comments and the great performance of the business in 2021. And obviously, it sounds like there’s no shortage of great opportunities ahead of us. Actually, I particularly enjoyed your throwback charts that you sent me from that 2020 sales conference when you have that itty-bitty TAM from 20 years ago of $1.6 billion. That had grown to – in 2016, when I joined, it was $6 billion we thought it was at that point. And now only five years later, we’re talking about $100 billion TAM size. So I think that’s pretty amazing. Anyway, enough of that giant global TAM mumbo jumbo, let’s talk some financials. So fourth quarter revenue and adjusted EBITDA results were better than expected, both ahead of our consensus. $4 million ahead for revenue and $28 million beat on profit. That was a great way to end the year. Our fourth quarter adjusted EBITDA margin was 38%, demonstrating the strong operating leverage inherent in our business. Our overall organic revenue growth rate was 11% for 2021, continuing a trend of 10 straight years of double-digit or greater organic revenue growth. CoStar revenue grew 13% in the fourth quarter and 9% for the full year of 2021, in line with our previous guidance. Our many product enhancements and our successful shift to a global CoStar platform has resulted in increased demand and improved pricing. We anticipate that this positive growth trend will continue and expect both first quarter and full year 2022 revenue growth of 15% for CoStar. Multifamily revenue grew 6% in the fourth quarter and 13% for the full year of 2021, also in line with the guidance we provided on our last call. As…

$217 million.

$217 million, that’s great. Our sales force totaled approximately 825 people at the end of the year, and they certainly had an exceptionally productive fourth quarter with that record sales result. The fourth quarter number is down approximately 25 compared to the third quarter of 2021 as a result of attrition in the Homes.com sales team that joined us in mid-2021. With increased confidence in our ability to train new sellers and visit our customers in person this year, our 2022 outlook includes expansion plans across all of our major sales teams. In January of 2022, we added over 35 new sellers to the ranks, so we’re off to a strong start. Our contract renewal rate was 92% for both the fourth quarter and full year of 2021, unchanged from the third quarter of 2021. The current renewal rate is 200 basis point improvement over the fourth quarter of 2020, with both CoStar and LoopNet improving year-over-year. Renewal rate for the fourth quarter of 2021 for customers who have been subscribers for five years or longer was 97%, up 200 basis points from the fourth quarter of 2020 and consistent with the second and third quarters of this year. Subscription revenue on annual contracts was 77% for both the fourth quarter and the full year 2021, slightly below the fourth quarter of 2020, but slightly higher than the third quarter of this year. These modest fluctuations are a result of improvements in Multifamily, along with increased residential and LoopNet signature ad revenue, which tend to have shorter duration subscription contracts. Now for our 2022 outlook. We expect 2022 revenue to range from $2.145 billion to $2.165 billion, an increase of approximately $210 million at the midpoint of the range, implying an annual growth rate of 11%. Organic growth, excluding the…

Thank you, Scott. Blue, would you please assemble the queue for Q&A? [Operator Instructions] Thank you. Go ahead, Blue.

[Operator Instructions] Your first question comes from the line of Sterling Auty from JPMorgan Chase & Co. Your line is now open.

Yes. Thanks. Hi, guys. I was just curious, in terms of the investment in residential, help us understand in 2022, how much of that’s going to go into sales and marketing? How much is going to go into R&D? And how that mix will morph as you move towards that 2027 goal? Thank you.

So the majority of that investment in 2022 is content. So it’s in our wheelhouse. It’s one of our core strengths. It’s collecting content for residential real estate to create a favorable environment for SEO and scaling our traffic to our site. A smaller part of that investment later in the year is towards marketing for the launch of the new site. There’s also a significant component for software development and R&D. Do you want to add anything to that?

Sure. Yes. So Sterling, the content portion is over half of the incremental investment, which is I gave a range of $200 million to $220 million. And then the other portion, which is a little less than half, is probably 60% marketing, but as Andy said, it’s more later part of the year as we get ready for broader product rollout. And then the rest is the technology development and software component, which may seem a little low, but as you know, we have a number of software teams in-house now that shift over and help us develop these new products as will happen with our research teams as well. So we'll expect these things to switch places as we go into 2023. As we'll have most of the content development piece behind us, then we'll shift more into marketing and product launch I would expect in the next year or two.

Your next question comes from the line of Ashish Sabadra from RBC Capital Markets. Your line is now open.

Thanks for taking my question. Maybe a quick question around the Multifamily. Again, pretty strong bookings there. Discussion around mid-single-digit growth in the first half and double digit in the back half. I was just wondering how much visibility do you have regarding the acceleration in growth in the back half? Thanks.

Yes. Thanks for the question. We definitely were encouraged when we saw it in the fourth quarter that things came off of the – what we call the bottom in the third quarter, which – as you know, when we run the subscription model out, that low third quarter will affect us in the first and second quarters of 2022. So just by the fact that you get past that and we move into the first half of 2022 into the stronger rental season, I think those natural growth numbers will advance in the second half. Now right now, the success of the team in putting in our new list prices and executing on price increases is pretty much driving all the growth we saw in the fourth quarter. And so we're starting to see signs of increased upgrades and volume coming in to this next year. And assuming that continues, and we'll see those growth rates lift in the second half. So it's still a ways away. We like to keep things a little bit close and cautious as we go into New Year's and let those first couple of quarters play out. Then we'll have a much better site for in the second half.

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

Hi, thanks good afternoon. The $300 million to $320 million in investment spend in residential is a significant step-up. And you mentioned the majority is going into content. Can you elaborate on what kinds of content you're investing in that you currently don't already have in residential that warrants this level of step-up?

Sure. So it's $200 million incremental investment beyond the baseline of operating Homesnap at Homes that's currently in place. So that content – the area where we're adding a lot of content, if you think about the home shopping experience, there are a number of things that are not about the specific home but are about the place, or in the case of a condominium building, about the community, not about the specific unit. Those are very cost-efficient places to collect valuable content, so neighborhoods, parks, schools, condos. And it creates good SEO drivers, and it creates a good shopper experience that we have tested with the markets and gotten very solid feedback on. One of the things we like about that investment is that while it's a lot of hard work and is aggressive, clearly, it's in our wheelhouse. We have visited millions and millions of buildings across many countries and been able to do that effectively and efficiently. The other thing that's good about that investment is it doesn't just benefit Homes. It benefits Apartments. It benefits LoopNet. It's a pretty broad initiative, strengthening our content across the platform. So we think in comparison to the scope of the TAM and the opportunity and the competitive advantage we perceive we can achieve, we feel it's a very reasonable investment. And was there a second part of that question?

I don't think so, but I'll add a second part of an answer. How is that?

Let's do that, Scott. Stump the chops.

The content creation that we talked about in the early years, a number of that is onetime gathering of data and media that you've seen us do successfully across many different commercial platforms and markets. And so you would expect that level of investment to drop back in the next year as you then focus more to the marketing and the sales generation on the platforms. So again, considering the size of the market that we're talking about with residential, that's sort of an upfront investment is pretty small compared to the opportunity we see ahead.

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

Good evening guys. Thanks for the question. Andy, there's some helpful comments on M&A during the pandemic, and it sounds like CoStar is now geared more organically going forward from here. But as you think of the potential landscape for M&A going forward, particularly in residential, are there opportunities out there do you believe that could accelerate your scaling up on the resi side here? Thanks.

Yes. Definitely. We do have irons in the fire. We are looking at things. And there are opportunities to scale and accelerate that. So obviously, as usual, we can't talk about anything until they're real. But there's some pretty significant – there are some significant things out there that we're really focusing as much as anything on strategic, things that we feel will give us valuable content that will help us build the most heavily traffic site over time. And we're not looking to buy revenue per se.

Your next question comes from the line of Andrew Jeffrey from Truist Securities. Your line is now open.

Hey guys, pardon me. Thanks for taking the question. Andy, for those of us, at least for me, speaking for myself, it might be a little bit answered – slower on the uptake. I think one of the things I'd love to hear you articulate-in as concisely as you can, especially in the context of this big stepped up resi investment. What exactly is this – what is the strategy, right? I mean I just want to understand who you're going, again I realize it's a big TAM, right? We all get that. Who are you going up against? How do you plan to monetize? How do you plan to displace competitors, which I assume are companies like Zillow and Redfin and Zumper[ph]? I mean I think just really concisely, I think investors want to know why you're spending all this money on and not what you're spending and what the return can be and how you get from point A to point B?

Yes. So in terms of what you're investing in, we have been – at the core, we have gotten clear market research that says there's demand for collaboration. It's really simple. Today, agents and buyers really exist in two disconnected ecosystems, though they have to collaborate in the overwhelming majority of deals. So we're building platforms where they can share content back and forth. When a buyer favorites a property, their agent can see it. When an agent must recommend a property, goes into the favorite list of the client, pretty straightforward. We've tested that with consumers all over the country and agents all over the country, gotten very positive feedback, along with a number of other software components and features. So that's one of – that's a big theme. So working with the industry rather than working to just intermediate the industry. And that's something that worked well for us in the apartment industry. It's worked well for us in the in the LoopNet side of the business, CoStar, Lands of America. So it's a proven model, and it's unique in the residential space. We're the only ones doing it where you work with the industry rather than more towards a disintermediation. In terms of SEO and content, we asked consumers what's really important to them, what they care about in the site, what they're looking for when they select a new home. You wouldn't be surprised to find out that for couples from the age of 25 to 40, schools are important. And in a focused group, they all lean forward when you show them pictures of the neighborhood school. And leaning forward to a focused group is good. That's something we like to get people to do. So we have tested and tested and tested, and we…

Your next question comes from the line of...

I'm sorry. I'll just add one more thing. How you monetize it? Pretty straightforward. And it should mystify people. You monetize it just the way we monetize Apartments.com or LoopNet or Lands of America. People will pay for enhanced exposure to generate more leads or more activity on properties they're selling. That's the single biggest revenue opportunity in real estate. The second way to monetize it is by letting people market their agency services in a way that is not repugnant to the industry, in a way that is supportive of the industry instead of repugnant to the industry. So that's pretty straightforward. And the question of how we compete against other people, CoStar Group has a track record of competing against other people effectively, and I think we'll rest on our record.

Your next question comes from the line of Mayank Tandon from Needham. Your line is now open.

Hey, good afternoon. This is actually Kyle Peterson on for Mayank. Thanks for taking the quesiton. Just wanted to see if there was any notable seasonality that we should keep in mind for particularly the residential bucket given that there's some runoff from Homes.com, but then also little bit of seasonality in the resi real estate industry and also some pretty strong organic growth in a lot of the core underlying businesses that you guys highlighted.

Yes. Sure. We do see seasonality not too much different than what we saw when we first jumped into the apartment space where you have apartments as a rental season in the spring and the summer months that would then cool off after kids went back to school. In the residential side, you see a similar pattern where things will start off, I'll say, at a moderate level in – to start the year. And then it picks up in the spring and the summer months, and then by the time we get to the end of the year, the fourth quarter is going to be the weakest as far as new engagement and involvement in the industry. So we think second and third quarter is the biggest. Fourth quarter is the lightest, and first quarter falls somewhere in between. We also expect that's where our investment focus will also follow that pattern when you talk about marketing and being able to collect valuable content during nicer months of the year than versus snowy cold wintery months of the year.

You could actually look storage on our servers, and you can tell the weather by how many terabits we're putting into the system. So you can actually see the weather in our storage.

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

Good evening, thanks for taking the questions. I was hoping you can put a finer point on some of the drivers the guidance for Multifamily growth this year, specifically what you're contemplating for the mix of pricing increases versus new community count growth as well as any potential color around the revenue mix among the different segments of the market, 100-plus unit mid-market and the landlord – independent landlord long tail. I know in the past, you provided growth rates around those different buckets. So it'd be helpful to understand how all of that is layering up into your outlook for this year. Thanks.

Sure. So in the early part of the year, we expect the revenue growth really from the list price and the pricing initiatives that we've implemented. The sales force is doing a great job of getting around to the customers. And as we mentioned in the comments, we are not seeing people drop off the platform. We certainly see some of the fuller buildings in the market, like we commented, I think, last quarter, that might rotate off while other buildings rotate on within a customer's portfolio. So you see a few less properties in total, but you definitely see people staying on the platform. And the pricing initiatives have been very successful. So I expect all the growth in the first half of the year is pretty much from pricing. And then as you get more volumes into the spring and summer season, those volumes will carry over, and you'll start to see, I think, more upgrades, fewer downgrades and a little more volume in the second half to get us back to that double-digit growth.

And we're still focused on – we're still definitely focused on increasing penetration to new roofs in institutional and the multifamily, the mid-market and the independent owners. There is still significant penetration opportunity there. We plan to continue to grow the sales force to be able to basically touch more of those prospects, and we believe we can do that well. The pandemic was a slow time for being able to grow. And more importantly, train sales forces is getting a lot easier. And we just finished up our first in-person sales conference in two years down in Miami, Florida. And as the guy who spends the first four hours up on stage talking to the sales force, I will tell you without a question, we have a much bigger sales force today than we did two years ago. It is getting quite large. And I'd say that group is very motivated and very positive right now and is producing at some of the highest levels they produced at to – with the record quarter. And so adding into that group, we think, is going to be possible to be able to go for more penetration. But Scott is really forecasting more off of pricing. And one thing about the pricing, we are providing more and more value to our customers. As our traffic success grows, our leads grow. And as our leads grow, our price per lead naturally goes down when we're pricing at the community level. So there's lots of room to get recognition from our customers for the additional value we're providing them, an increased lead flow. In essence, they're getting better and better values on lead flow. Their pricing per community might be going up. So a share shift to us from – possibly from other marketing vehicles.

Your next question comes from the line of Stephen Sheldon from William Blair. Your line is now open.

Hey, thanks. So I guess on the sales force side, it seems like some of the sales force build-out have been a little slower than expected and are weighing on growth, especially looking at LoopNet. So I guess at a high level, is there anything you need to do better to hire and retain sales resources across the company as you think about 2022 in the next few years?

Yes. I think we are having – I think we need to – like the most important part of the equation is it's great to have geese that lay golden eggs. What's even better is to have geese that lay golden eggs. So those are recruiters. And one of the things we're doing is we're looking within our own sales force for people that want to evolve their careers or – into moving in the recruiting space. And I think our training programs are pretty darn good at this point. And our onboarding is getting – our success rate as people come on board is getting better. But our sales force is getting pretty large. Again, as you sit there and look at 1,000 people at our sales conference, it is growing. With LoopNet in particular, that is something – just like Apartments.com is following that same trajectory where initially, Apartments.com was sold by the CoStar Group. And eventually, we built our stand-alone sales force to sell Apartments. LoopNet is in that same phase, and we're having some success. As I look at the individual metrics of people going into LoopNet, the salespeople going into that group, stand-alone sales force, they're producing at much better numbers that we saw during the pandemic as we tried to onboard people. And in fact, there's some real success stories in that group. So there's – I think our number 2 producer – number 1 producer, I believe, started with us like just – like two years ago. So – and then we have David Malley, [ph] who just joined us from Homes.com who's an experienced operations executive, now running the LoopNet Group, which is good leadership. And Mark Mathis, who actually started with CoStar many years ago, was a senior player at Realtor, running their sales org, has been with Homes, who's now running the LoopNet team. So we're beginning to bolt the group up, and it's a process. It will be another two or three years before we have a robust several hundred person large LoopNet sales team, but we will get there just like we did with Apartments.

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

Hey guys. Thanks for taking my question. Just a quick one here. I mean I think on the sizable residential reinvestment cycle, I mean, I think that was a pretty common fear factor shared across the investor base. The push and pull around that is, I think, partly behind – the stock is on a 52-week low here. But your core business, it seems to be in a great spot. You've got this big bet on resi, kind of being more of an offensive move by you guys. You guys do sound pretty convicted you've got framework around eventually driving up those returns. So I mean, obviously, with things progressing as you guys expected, you've got kind of stock that's kind of dislocated here. I'm sure you guys are eventually waiting for this question, but you've got nearly $4 billion of cash on the balance sheet. It sounds like M&A is maybe a little bit less of a focus in favor of the core. But just give us your latest views on the buyback and how that might change if there's any further dislocation in the stock. Thanks.

I think that's a great question, and I will turn that over to Scott Wheeler.

Yes, Andy. We certainly saw a period here in the last – well, it's really only been a year. We just raised a bunch of that capital in mid-2020. So we're really only 1.5 years since money came on board. And certainly a period of high multiples and valuations have weighed a little bit on the pace of our acquisitions. I wouldn't go so far to say that we're not focused on acquisitions anymore. So we definitely are still very seriously focused on acquisitions. And our initial thesis when we brought in the capital is it's going to take probably about five years for us to burn through that as we do deals across the platform. So I think we're still committed to that strategy right now. Obviously, if this continues up for another year, year or two pace, we might have a different conversation. But for now, that's still our direction, and we're focused on putting that money to work first in acquisitions. And then to the extent we need it on organic, we'd do that as well. But like you said, our organic commercial business is producing pretty significant cash flow now. And that's very helpful when you look at our ability to invest in residential and still return – we're still going to do almost $600 million of EBITDA next year even with, as you put it, a big offensive investment. So we're pretty comfortable with the math and the balance of where we are.

Yes. And when you look at our past track record, we are an acquisitive company. And we've acquired Homesnap, Homes, STR recently. There are things out there, but we are value-sensitive. And I would imagine that over the course of the next three years, four years, we would probably use a lot of that capital and acquisitions.

Your last question comes from the line of Jeff Mueler from Baird. Your line is now open.

Yes, thanks for putting me in. So I appreciate the confidence in the strategy working out over the next several years. But just help investors understand like what are the KPIs as you think about keeping incremental spend through the three stages of your strategy. And then on, I guess, monetization lagging, I understand the new product phase of it spooling up as products launch starting in early 2023. But on the existing resi revenue, I think you said $70 million in 2022, and you had over like $20 million or around there of Homesnap revenue in Q4, so you're already run rating above that. If you could just help us understand why there's not better monetization on – or a better ramp on that existing monetization.

Yes. So we're really going for the billions, not the hundreds of millions is what it is. And so the most important role Homesnap plays to the company is growing the participating agent user base and getting deeper engagement with those users. So we – you see us up in the 770,000 agents registered. You see us growing the number of folks paying for the premium version. We have multiple products we can sell over at Homesnap. We can sell sort of retargeting and Facebook ads and Instagram and Waze and all kinds of stuff. Those are the higher dollar value things, but they're less strategic. Like getting an agent to buy the $30, $40, $50 a month premium version of Homesnap is much more valuable to us and that they use and engage in the product more. The agents are the key to the supply side of the real estate industry, and we want to be the first place they go when they have a new listing or when they approach the market or when they want to distribute content to their customers. So on the – so that – we're – we are going for the big win not the second or third quarter. And in terms of KPIs, if you go back to that three-step process of grow, monetize and scale. Grow is where we are, and grow is where we will be into 2023. And that is growing content, growing users, growing unique visitors, growing engagement and relevancy. So we do not believe that we should pull the monetizing lever when you haven't scaled traffic. So you are – if you try to pull the monetizing lever before you scale traffic, you're going to be setting price points well below what you could set a year…

There are no further questions at this time. I will now turn the call back over to Andy Florance, Founder and CEO.

Well, thank you, everybody, for joining us for the – for our fourth quarter 2021 earnings call. We're excited about the initiatives we've got going on here. We're very excited about the residential initiative. Our core business is obviously showing great momentum. We're very proud of what we've accomplished. And I want to congratulate our sales leaders, Marc Swartz, Paige Forrest, Brandon Lu, Tim Condon, David Gibson, Joe Valero, and others and their teams who just turned in our best bookings quarter ever with our best – with November, December and January being three of our four strongest sales months ever. Look forward to them continuing to turn in a great result throughout 2022. We believe that the market conditions in residential sector, combined with our strength in our core business, makes this the right time to accelerate our investment in residential and lay the foundation for growth that will enable us to reach our new five-year financial goals. So with our expansion into the residential properties sector, I believe that our investments will yield $5 billion in revenue for CoStar Group in 2027. I'm confident in our ability to scale our information and marketplace business to deliver attractive returns with adjusted EBITDA margins at or above 40% when we achieve that $5 billion in revenue. We look forward to meeting with you again in our first quarter call on April 26 at the same time, on the same channel. Until then, stay safe, and thank you very much for participating. Thank you, Bill. Thank you, Scott. Enjoy doing this earnings call with you.

Yes. Thank you. Great.

Thank you. Good night, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.