Good afternoon. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everybody to the CoStar Group Third Quarter 2022 Earnings Call. [Operator Instructions]. Now Cyndi Eakin, Head of Investor Relations, will read the safe harbor statement. Cyndi, you may begin.

Thank you, Bailey. Good evening, and thank you all for joining us to discuss the third quarter 2022 results for 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 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 the 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 measure of non-GAAP financial measures discussed on this call include EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP net income per diluted share and forward-looking non-GAAP guidance are also shown and detailed in our press release issued today, along with the definition of 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, Cyndi. Good evening, everyone, and thank you for joining us for CoStar Group's Third Quarter 2022 Earnings Call. This is our 97th consecutive earnings call. Total revenue for the third quarter grew 13% year-over-year on a constant currency basis to $557 million, coming in at the high end of our guidance range and above consensus estimates. We delivered exceptional results in the third quarter with annualized net new sales bookings of $76 million, a 62% increase over the same quarter in 2021. This is our second highest quarterly net sales bookings number ever. Adjusted EBITDA was $153 million for the quarter, exceeding the high end of our guidance range and consensus estimates. As a result, we're raising our full year outlook for both revenue and adjusted EBITDA. Apartments.com surged, turning in the highest sales month ever in September and its second highest sales quarter. Year-to-date, net new sales for Apartments.com are up 192% over the prior year. Apartments.com revenues were $190 million in the third quarter, increasing 11% over the third quarter of '21. We are now back to double-digit revenue growth and expect the growth rate to improve in the fourth quarter. Tight multifamily market conditions have been a headwind for Apartments.com, but are now shifting and may, in fact, become a strong tailwind. Vacancy rates rose to 6.1% in the third quarter, an increase of 40 basis points from the last quarter. This is the fourth consecutive quarterly increase in the vacancy rate, and we are now only 40 basis points below the historical long-term average vacancy rate. Unit absorption rates dropped to 52,000 units in the third quarter from 67,000 units in the second quarter. This is the lowest absorption rate in the past 11 quarters. At the same time, though, unit deliveries increased from…

Thank you, Andy. I sounded great today. I'm not sure if it's the microphone, but I hope you're in as good a voice in the Q&A session. Well, third quarter certainly was another great quarter, a great way to start our first earnings release in the S&P 500. I definitely agree, we're well positioned strategically and financially regardless of economic volatility and the external market conditions. Certainly encouraged by our strong performance across all of the information and marketplace products in our portfolio. Let's start with CoStar as the product revenue grew 17% on a constant currency basis in the third quarter and 16% in total after considering the devaluation of the British pound. Over half of our revenue growth in CoStar is from new customers, which speaks to the success of the new product introductions that Andy talked about. CoStar product revenue has grown at least 15% every quarter this year, and we expect 15% revenue growth to continue in the fourth quarter, which is 16% on a constant currency basis. Multifamily revenue growth in the third quarter was 11%. The number of properties on our platform is growing, and we also see positive underlying trends in our ad sales mix. Customers upgrading to higher value ad packages is once again outpacing the value of properties downgrading to lower-priced ads. With strong sales momentum and an improving economic backdrop for advertising on Apartments.com, we now expect multifamily revenue growth of 16% in the fourth quarter and 10% for the full year of 2022. LoopNet revenue grew 13% in the third quarter on a constant currency basis, in line with our guidance expectations. We expect fourth quarter revenue to grow, to trend similarly to the third quarter at 12% to 13%, with full year revenue growth of 11% to 12%.…

I'm actually going to turn it back over to the conference operator, so they can introduce the question.

Sounds like a plan. Over to you, Bailey.

[Operator Instructions]. Our first question today comes from the line of Peter C. Christiansen from Citigroup.

And congrats guys on inclusion in the S&P, that's great. I got to ask the question. Any preliminary thoughts on investment spending for '23 for residential? Any sense of outpacing there would be helpful.

Thanks, Pete. Good to hear from you. So yes, you noticed that we've been much more efficient this year on the residential investment spend. So I think that's good news. The other good news is it doesn't mean that all of that spending gets pushed into next year, because like I said, we have a lot more efficiency in the content generation, and we don't need to spend as much marketing for the traffic we're getting. So we're not yet ready to give guidance on to the 2023 investment levels. We're working on those now. But we will keep you posted, and be confident that we are still on track to our 5-year numbers that we communicated previously on both the residential and the long-term growth and profitability of the business.

The next question today comes from the line of Jeffrey Meuler from Baird.

So just on net bookings, obviously, up big year-over-year. I think it's typically seasonally weaker in Q3 than Q2, which was the case this quarter. But normally, I think that's due to apartments, and apartments it sounds like had a record sales month in September. So if you could just kind of like help reconcile what drove the sequential decline. And if you think the record sales in what is typically not the seasonally strongest month is the reflection of kind of the end market trends picking up with net absorption and builds and all of those stats to give us.

Yes. So it's a question of we're growing the apartment sales team. The sales force departments are at the highest productivity levels we've ever seen in any sales force across the company. We have been doing a better job at managing our price per lead and keeping that number fair for both us and our clients. And just the quality of our traffic and the strength of the platform has remained strong. So we're moving up to some really impressive production numbers. Scott, do you want to add anything there?

Yes. Jeff, there was 1 other issue that I talked about briefly around the fees for the subscriptions on some of the home Pro access that triggered the $16 million write-off I mentioned. That comes out of the sales numbers. If we had not done that strategic decision, our sales would have been over $80 million for the quarter. And any other variation relative to the second quarter is really just normal quarterly fluctuation amongst the other businesses. But really the standout, as we pointed out, was that apartments for really the first time had a third quarter that was stronger than the second, which is a great testament to both the sales team and the momentum we're seeing back in the apartments advertising space. When we acquired Apartments.com, third quarter used to be no growth and fourth quarter used to be a decline. So it's great to see it same records in the third quarter.

The next question today comes from the line of Ryan Tomasello from Stifel.

I guess it'd be helpful if you could provide an update on how you're thinking about the residential site traffic milestones that you've laid out previously. Have those changed at all in terms of the magnitude and timing? And how are you prioritizing the different levers there in terms of marketing campaigns, SEO and SEM and any other levers that you outlined previously? And then from there, if you have any updated thoughts on the timing of the monetization strategy, when you decide to turn that on and what products you might intend to lean into first?

Sure. So I believe that we are on target, on plan for growing that traffic and are comfortable with the sort of $25 million, $50 million traffic levels we had laid out, unique visitor levels we have laid out. And yesterday, I was looking at a traffic chart that compared Apartments.com and Homes.com in the first 18 months after we began rebuilding them, and they matched perfectly. So the growth we're seeing right now is on target, but it's still early days. We just did a major switch over about a month ago. And we're seeing Google crawl the site at a great rate, which is good to see. But it's a marathon, not a sprint, not a 5k, not a 10k, it's a marathon. And we just continue to layer -- bring layer and layer in to try to grow that traffic on SEO functionality, referrals and the like. I am encouraged by the fact that we are seeing the average number of visits to visitor go up significantly. That's telling me that people coming to the site are like in the experience, the fact that we have a fast performing site, the fact that we're actually showing who actually has the listing. That's uncluttered and it's clean. Now we are not going to -- we're really focusing on the content, the quality of the experience and SEO. At this point, we are investing in SEM, but we're not investing aggressively in SEM. We're also not investing aggressively in consumer marketing. We are going to begin to ratchet up those levers once we are satisfied that we will have the optimal ROI for that investment based on the number of the sets of functionality we've delivered, the effectiveness of the SEO, the site performance. So that will likely begin to ramp up going into '23. But we're on target for where we expect to be. And I look forward to another one of our incremental releases on the product coming out later this week.

The next question today comes from the line of John Campbell from Stephens.

Congrats on the continued momentum. I just wanted to revisit Ten-X. I mean, it does seem like there's a pretty meaningful revenue opportunity there, just, I guess, with rising distressed activity. On my math, I'm getting you guys kind of near $70 million or so of Ten-X, but I'm curious about kind of how to size up that opportunity over time. I think nationally, I think the distressed level is still like way less than 5% of the mix. If that gets back to, I don't know, like 10% or 25% or so of kind of the range we saw in 2012, like 2014, what could that look like for Ten-X? And then maybe as a side question there, maybe if you could provide what Ten-X kind of peaked out on revenue during kind of the heart of the crisis.

Do you want to hit the...

Yes. Yes, I'll take that. Back in the heart of the last crisis, Ten-X peaked out, I believe it was between $100 million and $110 million of revenue, all of which was on distressed properties. And so you can clearly see there's significant potential. Whereas today, we are only between 15% and 20% of our revenue in Ten-X is coming from distressed. So it gives you some sense of based on your numbers of $70 million, take that distressed and then consider we could get to those historic levels, depending on the size of this downturn, then there's a big wave of opportunity there on the distressed from the historical revenue side. And remember that the '08 distress didn't show up, the dislocation I didn't show up until '14 in full force. And that was really residential, not commercial. And so commercial like you could see comparable levels of the stress. I do believe that this time around, Ten-X is a much stronger product. The product is now integrated with LoopNet and CoStar. It is much more automated. The sales force is approaching twice the size of the sales force that they had at the last cycle, and it's very scalable. So 2 things could happen together over the -- like just before I say that, we are building Ten-X to be a performing asset product so that, that has a core foundation of performing sales going forward. But there's no denying that it does really well in distressed environments. So you'll eventually see an end to the buyer/seller expectation disconnect, and they'll connect, you'll see trade rates go back up, and you could see distressed levels quadruple over the next 2 or 3 years. And that would just -- I think Scott's alluded to it, that could get you, I believe, well above the peak of the last cycle.

The next question today comes from the line of Stephen Sheldon from William Blair.

Really strong trends in multifamily this quarter. It sounds like the backdrop is becoming even more favorable. And your sales capacity and productivity continues to improve. So curious how you're thinking about the potential growth there, especially heading into the first half of 2023 and the potential for continued acceleration with any visibility you have at this point?

Sure, Stephen. Thanks for the question. We're sort of giving any guidance, of course, at this stage for the next year. But you clearly noticed the trends in growth for multifamily have gone from a trough of 6% year-over-year, up to 11%. Now we expect it to be 16%. And based on the strength of this last quarter's sales, then we would expect that to continue north. We've always talked about getting back to those 20% growth rates in multifamily delivered a few years ago. And the way we think of it now is that we have certainly price moving north as the number of leads we produce in the platform have dropped the price per lead for our customers. So those are resonating well. We're starting to see volumes come back into the platform, which we believe can deliver a good mid- to upper single-digit growth range for the business. And then like I mentioned, we're starting to see upgrades, outpace downgrades, which prior to the pandemic, that impact was typically in the 8% to 10% range a quarter. So I think we have 3 really strong levers each to have capability of delivering high single-digit growth rates. I can't call which of that mix is going to happen in which quarter next year, but I think that's the measures we're looking at. And as Andy mentioned, our goal of doubling that sales force to get us to penetrate the other half of the large-scale market we haven't reached, and the vast majority of the mid-market that we haven't reached, there seems to be a great platform for us to extend into the market. So hopefully, that color gives you a little sense of the progression we'll see next year and into the future..

The next question today comes from the line of Ashish Sabadra from RBC.

I wanted to focus on the M&A pipeline, particularly with the $750 million of equity raised. I understand it was opportunistic, but also should we assume that was that something is imminent? And then obviously, you've shown intent in the past to do some transformational deal on residential side. Is that an area that you would continue to focus on?

Yes. So we obviously have a great balance sheet now approaching $5 billion in cash on the balance sheet and continue to be strongly cash flow positive. So our primary new initiative is residential. So we are looking at all the opportunities out there in the residential space. And right now, we're in an environment where things are shifting very rapidly to a buyer's favor. And the question is, how rapidly and when is the right time to move on certain things. So we're very active in looking for M&A opportunities, but we're also monitoring market conditions and want to get the best results for the shareholders moving at the right time. Not being too greedy, but trying to observe a rapidly shifting environment right now to our favor.

The next question today comes from the line of Mayank Tandon from Needham & Company.

Andy and Scott, congrats on the quarter. I wanted to focus for a moment on CoStar Suite. Could you maybe just peel back the growth from new accounts, logos versus increased penetration within the installed base and then the impact of pricing? I think, Scott, maybe you referenced that in your prepared remarks, but maybe a little bit more details around the underlying drivers of that segment specifically would be helpful.

Yes, sure. Thanks for the question, Mayank. Yes, I did mention that a little over half of our growth is coming from new customers, and it's -- as we've added so many good platforms with hospitality and with lender and now the fund information that's coming out, CMBS data, it's a broad customer set that our sellers are having a lot of success in. So new customers are a strong part of our growth. As you know, we are continuing to move more and more of our customer base onto the global CoStar platform that provides all the data and the product capabilities. That continues, and that's still providing a few basis points of growth or a few percentage points of growth across the platform, which is really, I consider a strong mix increase of around 3% to 4%. And then the remaining parts of those growth are split between increases in our renewals year-over-year, as well as existing customers then expanding their licenses or expanding their user numbers on the platform. So those are the -- if you look at the top 4 areas that are driving the CoStar growth, you see those rise to the top in this quarter. It may shift a bit from quarter-to-quarter, but I think that gives us a strong platform to continue that size of growth going forward.

The next question today comes from the line of Andrew Jeffrey from Truist.

It's Scott stepping on for Andrew. So my question is end market health. Could you kind of discuss what you're seeing with customer sales cycles? How has that changed as the years progressed?

Can you repeat that first part of the question? You're looking at -- we lost the first part of the question there.

Sorry. Could you talk about end market health for your customers and just how the sales cycle is behaving as it kind of gotten elongated as we get further into the year?

End market health. That's what you said. It's clear.

Yes. So at this point, at this point, we are not seeing any of our customers in materially diminished health. Obviously, individual owners of properties may be experiencing levels of distress with high vacancy rates or disadvantageous refinancing on properties that may have been pro forma at lower interest rates. But those individual owner situations don't tend to impact us. Even if somebody is having refinancing difficulties, they may -- they would still want to keep those properties filled. They would still want to understand what's happening in the markets. So at this point, we are not seeing anything negative on sales cycle or any real significant customer distress. And we continue to operate in an environment where we would expect that -- I expect and believe that as you did see end market distress, you have offsetting countercyclical factors that also kick in.

The next question today comes from the line of George Tong from Goldman Sachs.

I wanted to ask the M&A question a little differently. With respect to your residential strategy, can you discuss whether your 5-year target assume M&A? Or are you able to get there organically? And if there is M&A assumed in resi, is your focus more on acquiring residential data or residential online traffic?

George, this is Scott. Thanks for the question. And just to clarify, in our long-term guidance, we gave the 5-year outlook, it did not include any M&A. Those are all organic numbers and any M&A would either supplant organic or be on top of organic in those outlooks. So hopefully that will clarify at least the assumptions we had in that outlook. And then Andy, do you want to take the...

Yes. And the answer to the second part of the question is we would consider either both or neither. So we're comfortable acquiring and integrating unique content that helps build a more vibrant residential product. We are also experienced with and comfortable with acquiring traffic. And if we can't find the right company at the right price, we could achieve our goals organically. I think it's more likely than not, however, that there will be a number of opportunities over the next 5 years. It would be really hard to believe that there are not. And I am spending probably 20%, 25% of my time right now engaging in those opportunities. The price is too high.

[Operator Instructions]. The next question today comes from the line of Jeff Silber from BMO.

This is Ryan on for Jeff Silber. Just 1 question on the CoStar Suite. What has been the feedback from customers on the transition over to the global solutions package? And then how did you expect that transition to flow through to average selling price?

What was the last part of that question?

That was around flowing through the average selling price.

That's correct.

Yes. So the feedback has been very positive. We track Net Promoter Score, so we survey our clients extensively after any sort of interaction with them to understand how they're reacting to our products and services. We have seen a significant uplift in Net Promoter Score as people go from the local CoStar or the 1 or 2 modules of CoStar to go into the global suite. And so that's really nice when you're out there achieving significant price uplifts and end up with a happier customer would, I believe, more likely to renew after you have gotten a price uplift. And it's sort of common sense because if you're just buying one of our modules for given cities, say, comps or just property, when you buy multiple modules and; multiple cities, it becomes a dramatically more powerful product with a lot more to offer the customer. And at the end of the day, the price for our products, while they're not cheap, are not the primary factor. Most successful commercial real estate players can afford the product, and it's a very small percentage of their expense structure. So what they're much more interesting is the functionality and what it does for them. And so we're getting a very positive reaction from folks as they upgrade, and I think it will show higher renewal rates over time. And it definitely is lifting the ASP. Scott probably has some specific data on that.

Yes. If you look at the increases on the upgrades that we've done so far, the average upgrade has been about 20% to 25% of the price being paid prior to the upgrade. So that's really good value accretion. But keep in mind, this isn't a significant number of our overall subscribers on CoStar. So the effect of the total growth rate is only 200 to 300 basis points or so.

Thank you. There are no further questions at this time. So I'll turn it back to Andy to wrap up.

Well, thank you very much, Bailey. I would like to thank everyone for joining us for our third quarter 2022 earnings call, and we look forward to speaking with you again in our year-end call on February 21, 2023, which will be our 98th consecutive earnings call with me having the honor being at the helm. And you can imagine, we're going to make a big deal about our 100th earnings call. But until then, stay safe, and thank you very much for participating.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.