Good afternoon. My name is Matt, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CoStar Group Fourth Quarter and Year End 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Now Cyndi Eakin, Head of Investor Relations will read the Safe Harbor statement. Cindy, you may begin.

Thank you, Matthew. Good evening and thank you all for joining us to discuss the fourth quarter and full year 2022 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 first quarter and full year 2023 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 work. That was fantastic Safe Harbor. Good evening, everyone, and thank you for joining us for CoStar Group's fourth quarter 2022 earnings call. Total revenue for the full year of 2022 was $2.2 billion or 12% year-over-year growth coming in at the high end of our guidance range and above consensus estimates. Our fourth quarter revenue grew 13% on a constant currency basis over the fourth quarter of 2021, up to $573 million. This is our 12th year in a row with double digit revenue growth. We had a phenomenal year in sales. We delivered the highest net new sales ever with 2022 sales reaching $305 million or 41% growth over the net new sales in 2021. We delivered exceptional sales results in the fourth quarter as well with annualized net new sales bookings of $77 million. This is a 15% increase over the same quarter in 2021 and our second highest quarterly net sales bookings result ever. Apartments.com had their highest sales quarter ever exceeding their prior record set in the second quarter of 2020 by 25%. So a shout out to [Page Forest] (ph) and her entire team at Apartments.com. We substantially increased the size of our sales force in 2022, adding almost 300 people net. We had a very strong profit performance in 2022 as well. Our full year adjusted EBITDA was $672 million, which was also above the high end of our guidance range and consensus estimates. Overall, we had an exceptional year with both strong sales and profit performance, while continuing to invest and grow the business. Apartments.com revenue was $198 million in the fourth quarter, increasing 16% over the fourth quarter of 2021 and $740 million for the full year was a 10% increase over the prior year. Apartments.com delivered…

Thank you, Andy. I think I'll get through about 83% of my script, and then I'll turn off the mic, how's that Tim. Actually, I think you are probably increasing or you brought down our turnover rate given your tenure here at the company. So thank you for that contribution. So as Andy talked to a lot of this, so that 2022 is certainly a very strong year for the business, particularly in light of all the economic uncertainty we've had with inflation and higher interest rates, continued fears of recessions. You've seen so many technology companies, particularly property technology companies that have seen steep revenue declines and their cost cutting in this past year. But fortunately, that certainly is not our CoStar situation. We've pointed this out many times before over the years, but it's certainly worth repeating. Our business model is extremely resilient to economic and transactional fluctuations. We have mission-critical information, countercyclical marketplaces, a disciplined subscription revenue model with 90-plus percent renewal rates, and we have a monstrous balance sheet. All in all, we're coming out of 2022 stronger than ever. It's important and strategic, I believe, at this time for us to continue to invest in our biggest growth opportunities. As similar to our strategy in 2015 when we increased investment levels to build Apartments.com which we believe is now the undisputed leading rental marketplace in the United States and soon Canada. More on that later. So financially, in the fourth quarter and in 2022, we certainly crushed it all around. We beat our revenue goals every quarter, topping the high end of our guidance range once again in the fourth quarter. Our $2.18 of revenue for the year is well above the initial forecast that we communicated at the beginning of 2022. Our organic revenue…

[Operator Instructions] Your first question comes from the line of George Tong of Goldman Sachs. Your line is now open.

Hi. Thanks. Good afternoon. Your guidance assumes significant EBITDA margin contraction this year to 21% at the midpoint. And you touched on some of your growth investment priorities. Can you elaborate on where the bulk of your investments are going, as well as what margins will be this year in your nonresidential businesses and what the path to 40% EBITDA margins by 2027 would look like? .

George, thanks for the question. So yes, we do have a significant investment plan for the year. And as I listed the investments that we're working on in 2023, I listed those in priority and size order. So as you can expect, our investment into residential will be the biggest increase that we will have in 2023. To your question about the commercial businesses, I said we almost reached the 40% margin that we set out for this year, and we expect to continue to deliver that same margin level next year in our commercial business. as we really focus on getting productivity out of our sales resources and the rest of the teams and the commercial side of the business. So we'll be at the about the 21% margin rate next year Interestingly enough, and this wasn't planned that way, but when we made the Apartments.com investment back in 2015, our margins also went to 21% at that point and have moved up nicely since then, and we are in a market with residential that's at least 2 to 3x the size of the Apartments.com opportunity. So I think that gives you a sense of where our focus is for investment and why we think now is the right time to make that investment ahead of the growth that we're going to get up into 2027. We're not providing any margin guidance right now past 2023. So stay tuned as we'll move throughout time. We'll give you more guidance there.

Got it. Thank you.

Your next question comes from the line of Peter Christiansen with Citigroup. Your line is now open.

Thanks for the question. Good evening. Nice results. Andy, now that we've moved past move and considering the considerable firepower you still have on the balance sheet. Just trying to think where is your head now as -- and I mean, do you still see opportunities for M&A in the residential side or maybe you're leaving more now towards commercial, the existing segment. Just wondering if you can give us some color on how you're thinking about M&A these days. Thank you.

Sure. So there are -- as we have been in exploring different opportunities, there have been other opportunities in the wings, and we assess each one for its potential ROI complexity and risk. So there are additional opportunities out there in both commercial and in residential. And we're also looking at that we're also looking at the buy versus build scenario continuously. So you could use a you could use a real estate analogy, you could buy an existing property or you could build a property. And there are different seasons for each where you get a better ROI on one or another. So right now, you can see some of the success we're having in traffic growth. And we see some of the positive feedback we're getting on the approach we're taking to the market. And so we feel that we have a unique offering on the organic side that no one else is offering out there. And so we're a little more focused on that and acquisitions that might support an organic, inorganic -- a more organic strategy on building out the opportunity. It's important to remember that in the residential portal space, the vast majority of residential agents don't buy anything from the leading portals. So I believe that maybe 97% of active residential agents aren't buying anything from the existing portals. And so we think there's a very attractive organic opportunity there. And we think that there are acquisitions that help you reach that goal. And then there are also less directly related acquisition opportunities. So -- it's a changing landscape and you're making judgments as you go and making sure that you believe it's the best ROI for the investors.

Your next question comes from the line of Heather Balsky with Bank of America. Your line is now open.

Just going back to the M&A question. with regards to your balance sheet and you guys are sitting on a lot of cash. I guess if -- it sounds like you're thinking organic, you're thinking organic investment, you're thinking, it sounds like maybe some sort of acquisitions that sound like might be tuck-in or you may do something transformational. I guess, in the meantime, how are you thinking about your balance sheet and the cash sitting on your balance sheet?

Yes. Thanks for the question. The continued view of our strategy is to focus on acquisitions and adding meaningful scale to the company through that vehicle, which is why we raised the capital over the last few years. And in the meantime, obviously, we'll try to maximize the returns from the capital that we have. It's helpful that interest rates have gone up to help us a bit with that. And of course, we'll always keep open other alternatives for that capital as time goes on. But that's how we're thinking about our capital still today, and we have many other acquisition opportunities in the pipeline that we hope to deploy that capital against in the near future. .

And I apologize, may I just squeeze in what -- in terms of the investment spend for residential in 2023? Okay. Sorry about that.

No, no, no, go ahead. Go ahead.

Okay. Just the actual dollar spend, specifically for residential in 2023, would you guys mind sharing that?

Yes. No, we haven't provided that information in 2023. And let me explain, I'm sure everyone is wondering, Matt, that now that we've integrated Homesnap, we've integrated Homes.com. They're all in our combined technology stacks with the rest of the things that Frank Simuro runs in our marketplaces. We also have significant resources in our research team now embedded under Lisa Ruggles, working on residential as well as the research for CoStar Apartments.com, LoopNet. And so as they deploy folks out into the field to do media shoots and other property information, those resources go all across the different property types that we have and they produce information. And so we don't spend the time to go back and track time sheets or record what everyone's working on in a way that would say, hey, we're going to track margins by each of our businesses. And as you know, we have not provided margins by businesses in the past, and we don't intend to do that because of the integrated nature of the business we run. So what we found out this year was that as we go into this more integrated residential strategy that comes a lot of work and difficult to break that out. Now in broad sensors, I think you can get to roughly what that looks like given the commercial growth, the commercial margins, and we do give revenue breakouts by the different businesses. So hopefully, that will allow everyone to get a sense of where we're going. And you can tell how important this residential strategy is to us by the amount we're willing to invest, again, knowing that we've got a phenomenal opportunity in a few years for the revenue to get to that $1 billion or so in residential that we spoke about before.

And there is competitive elements here where you don't want to be terribly transparent on every detail, and you want, we believe investors and analysts can figure some of the stuff out, but we don't want to put it in an earnings call script to make it that easy.

Okay. Thank you very much.

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

Hey, thanks. So it seems like you're ramping the residential investments pretty heavily this year. And Andy, I think you said that you could start to see some better monetization of content, et cetera, later in 2023. It doesn't seem like you've assumed that really in the residential revenue guidance that you laid out, Scott. So just curious to get some more detail on when you'd expect to see residential monetization really improve? And do you think that 2023 could be the peak drag or disconnect, however you want to frame it between residential revenue and operating expenses.

So I believe we met with a number of investors and discussed a point where we begin to do the first levels of monetization at 25 million uniques. And in January, we were at 24 million uniques. So we're a little ahead of our plan there. And so we are focusing on the back half of the year to build out that product or to build out that offering and apply sales resources to it. It would be no way that it would be meaningful revenue in 2023, just because of the timing of the ramp-up. I think that the question of where you see peak investment includes a psychological element to it. So I think where the point at which you are an investor is not yet seeing the first stage of monetization or seeing traffic strategy or unique positioning of a product. From that perspective, I would say that 2023 is probably the peak psychological negative operating margin time period. And we would hope to be showing signs of success of 24, 25. So we've done this a number of times. This is if you use the analogy of building a building and you're building out first year, you're acquiring the land, design the property second year, you're getting the permits, bidding out the work, third year you're building out, if you're leasing it up. We've built a number of buildings just like this before. And so typically, when people see the groundbreaking in year two, three and the buildings start to come up, they can begin to imagine it. And we're still in the early phases. We're near two really of this initiative. But eventually, people get pretty excited because they realize as a digital building and it has a fixed cost, and you can lease it up repeatedly and repeatedly, repeatedly to make a lot of money on it. So I think 2023 is a substantial investment year. I would anticipate that there would be investment in 2024, but with more KPIs that the world could see and appreciate.

Makes lot of sense. Thank you.

Thank you. Your next question comes from the line of Ryan Tomasello with Stifel. Your line is now open.

Hi. Thank for taking the question. Switching over to the commercial business. Maybe you can talk about the puts and takes beyond what you mentioned in your prepared remarks, Andy, around the current backdrop, in CRE specifically as it relates to CoStar Suite and LoopNet. I guess for Suite with the step down in growth you're contemplating this year in guidance, is that including any modest headwind from the core broker base in terms of attrition there. And in terms of LoopNet, nice to see the acceleration in growth for 2023, albeit I guess, back-end weighted, but would be helpful to understand what gives you confidence in your ability to execute on the growth initiatives there at LoopNet in this environment, particularly for the significant -- for the owner focused advertising product.

Sure. So on the CoStar side, the renewal rates are fantastic. And we are not seeing any sort of friction with brokers in any way, shape or form. You had a bit of a surge with -- you had a bit of a surge there with a global platform sale over the last year. But one of the things we do now is we've got our sales force began to focus on some other initiatives that we think are equally valuable on the lender side, the corporate real estate side and the owner side. So we feel that there's more than ample opportunity to continue that growth rate in CoStar. I think I've made that same comment and been right about it for about 140 earnings calls. And on the LoopNet side, we're at a really important junction there where we are actually building up a sales force that is capable of going after this opportunity at a national level, first time we've ever had a dedicated sales force for LoopNet at that level. We did an extensive set of focus groups earlier this earlier very tail end of last year, and we spoke with our market researchers, collective information from owners, from brokers and from corporate real estate users. One of the things that really was impactful was 10 for 10, all the Fortune 1000 real estate folks we were talking to we're using the heck out of LoopNet to select and find their facilities, which leads me to believe that LoopNet is the single most important marketing vehicle in commercial real estate. And in that context in a game -- and not a game in a situation where, in some sectors, particularly say, office, it's a game of musical chairs where the person with the tenant wins big…

Great. Thanks for [indiscernible]

Thank you for your question. Your next question comes from the line of Jeffrey Meuler with Baird. Your line is now open.

Yes. Thank you. I know you don't have like formal subsegments or product level margins. But the 39% flattish margins for nonresi, I just want to confirm that, that includes the investment in sales force as well as Apartments.com and LoopNet marketing and other initiatives. And then, so that's just the first part. And then second, can you help us with the Q1 margin guidance? Is that the Apartments.com marketing? Or are you starting to market Homes.com significantly more aggressively this early in the year as well?

Yes. So Jeff, to the first part of your question, the margins I referenced on the commercial information marketplace businesses. Yes, includes CoStar, LoopNet Apartments.com, all of the investments that we make in those platforms. So it's everything outside of the residential marketplace. And then I think more notably in the first quarter of the year is the hiring that we did in the second half of the year, last year, along with the increases we give for wages in the first quarter, which we do want to keep our employee base ahead of inflation. It's more of those impacts that roll into the first quarter as opposed to any acceleration of marketing spend across the company in general. So that's what we're seeing -- and then we -- like I mentioned before, we won't be hiring as many of those sales forces this year or other resources that will moderate that increase, flatten it out as we go through the year.

Okay. Thank you.

Thank you for your question. Your next question comes from the line of John Campbell with Stephens. Your line is now open.

Hi, guys. Good afternoon. Thank for squeezing in my question. Just sticking on the M&A conversation. Andy, when you talk about the build versus buy, is it safe to assume that you're now, I guess, fully committed to building the traffic based on an organic basis versus acquiring it? Or should we not necessarily roll that out with it maybe just coming down to whether you can get the right price for the right asset?

I don't think you can rule anything out like it's a flexible thing. And I think you described it accurately. I think we are fortunate to have a very viable organic path. And again, there are -- there are many, I would say, going into this year or going into the fall, it felt almost sometimes if there were too many M&A opportunities out there. So there are a number of things. But as you know, we're not at liberty to discuss these kinds of things typically in detail.

Understood. Thanks, Andy.

Thank you. The next question is from the line of Ashish Sabadra with RBC. Your line is now open.

Thanks for taking my question. I just had a broader question about the guidance and the conservatism that's baked in. Last year, we saw a pretty like expectation for a pretty upfront resi investment, and we saw numbers being beaten and raised as we went through the quarters. Is that something similar this year as well where we have taken some conservatism around these growth investments? Thanks.

Yes, I appreciate the question. As we really started to make progress into our investments last year, we gave a much broader range of outcomes when we the year, I think our EBITDA range was $40 million, which when you look back in time, we've never really provided that kind of range. It sort of spoke a little bit to the uncertainty that we had coming into last year when we were really initiating some of our uptick in the investments, particularly around content and other parts that we were focused on. So fortunately, we were able to spend less in those areas. And I think what you saw this year is that we've tightened up the range that we go out for the beginning of the year, which would let you know that we have a little bit better line of sight the progress we're making. We're a year further into it, we can gauge our investments more. But that being said, the marketplace changes quarter-to-quarter, and we see the opportunities or the challenges and we'll adjust appropriately, and we're always looking for where do we minimize investment at the right time so that we are building at pace, but not spending too much, but then when it does come to the point where we launch products and we see ramp-ups in revenue, and it's time to put in more investments, then we definitely include some of those in our forecasting. So I think -- I think we have a better line of sight this year. But as you would expect in the early stages and in an investment cycle, you have to be ready for changes along the way. I hope that provides you a little bit of guidance there.

That’s very helpful. Thanks.

Thank you. Your next question is from the line of Andrew Jeffrey with Truist. Your line is now open.

Hi. Good evening, guys. Thanks for taking the question. Appreciate it. Recognizing, Andy, that the company has a very good track record, as you pointed out, of identifying big opportunities, investing against them and putting up outsized revenue growth and in light of the fact that you're asking investors to sort of stomach another year of down margins as you do that in residential. Can you maybe give us a little bit of a sneak peak of what you think the business looks like on the other side? Can this be as you start to monetize residential, should we think about this being a mid-teens organic revenue growth business? Are there some trade-offs? I recognize you have these 27 targets out there. Just sort of wondering kind of what a post investment in CoStar growth profile looks like?

Well, I think Apartments.com probably gives you a good view of what that would look like. It is -- it is something that has, I believe, like post establishing a platform with a unique value proposition and a significant presence I think that you have multiple decades of growth that follows on that and there's ample precedent for that around the world and also in Apartments.com and CoStar and LoopNet. So it definitely is a multibillion-dollar revenue opportunity. And in my mind, it is a north of $1 billion EBITDA opportunity. And it is obviously a multitrillion dollar sales market, it is a vast opportunity. So it does take investment to build out the platform as it took investment to build out the CoStar platform as it took investment to build out the LoopNet platform as it took investment to build out the apartments platform. But the other side of it, you get predictable high-margin growth for decades, similar to building a building. So -- but not similar to build and building because you never lease up. You can just keep selling more and more of it once you get there. So yes, and I would say that we're further into the process. Our confidence in the clarity grows a little bit, which leads to some of our positioning today.

Okay. Thank you.

Thank you. Next question is from the line of Jeff Silber with BMO. Your line is now open.

Thanks so much. You talked about moderating the hiring of sales force, but you're still going to make some investments. I'm just curious, given what's going on in the market, especially in the real estate area. Is it easier to find salespeople than it was maybe six to 12 months ago?

Yes, I would think so. Yes, we -- on a number of elements. One is that we've been through a large hiring stage. And so our own processes and ability to identify the right candidates has increased. I think the candidate pools that are seeing tightening up in other sectors and reductions in staff and other sectors are helping us find good quality candidates. And anyone that's selling digital products can be effective for our sales forces on the information side. And then, we're getting better at not only the Canada identification, but then the onboarding and the training and the coaching as we bring in these cohorts. So starting from the market side, all the way through the pipeline, it's getting easier. And so adding another, let's say, 100 folks in 2023 versus the 300 we added last year seems like a layup for us now, but there's still a lot of work to do to onboard and make sure all of the 300 are getting to be productive and contributing members to that strong revenue growth and then to replace the ones that inevitably, there are some that won't be able to pass that hurdle and we'll know that within about six months and then we replace and move on. We're definitely in a place where we can be selective, and we definitely are a place where we're able to meet our hiring goals. And it's not just on the sales side, it's in the software development side. It's in the research side. It's in -- throughout the company, we're seeing it's much easier to hire now. At the same time, we're retaining people simultaneously. So that's a good place to be in because we are able to put together the absolute highest quality team that you'd want to put together with the ability to hire and the ability to retain right now.

Okay. I appreciate the color. Thanks.

Thank you. Next question is from the line of Stephanie Moore with Jefferies. Your line is now open.

Hi. Good evening. Thank you for the question. I wanted to actually just -- I wanted to touch on – it might be helpful to hear what you're seeing maybe from some of your end customers, what you're seeing in terms of customer sales cycles, if that has changed at all as the year progressed and into this year. Thanks.

I think that the sales cycle in Apartments.com has gotten faster as the markets eroded. I think that the sales cycle and CoStar is a mix because you're selling to so many different sectors when you're selling into lenders or to big corporate users, that tends to be a more deliberate longer sales cycle process. The ownership side is similar on the LoopNet side. I think that it's not so much about sales cycle. It's more about it takes about six to nine months before the LoopNet salespeople really get their sea legs and understand digital marketing and commercial real estate. So it's more of a ramp-up thing, but the sales cycle itself in that -- in LoopNet, I think, is pretty fast. So we're not seeing anything in the -- the only place we're seeing something change fundamentally in sales cycle as apartments and it's shortening.

Understood. Thank you so much.

Thank you. Your next question is from the line of Joe Goodwin with JMP. Your line is now open.

Great. Thank you so much for taking the question. I guess, Andy, when you set up investment in Apartments.com in 2015, that business was at a larger scale than the residential business is today. It took you around six, seven years to get to north of $700 million in revenue for apartments. Your 2027 target calls for at least $700 million of residential revenue on an organic basis, I believe. So I guess just other than the residential market being larger, what are some of the other elements or factors in the residential market that gives you the confidence that the residential business will effectively outperform farmers.com business?

Sure. So the market -- the revenue was actually roughly the same, the revenue in place that we had. So I think I don't know 75 -- were roughly 75 last year. So it was roughly the same revenue. The market itself in residential is dramatically larger. Also, our experience with operating digital marketplaces has continued to grow and the number of resources we have to bring to bear in both sales talent, SEO, SEM marketing, software development, the whole range is broader. Also, I believe there is some level of synergy across these platforms. So because you have a strong presence in apartments or LoopNet, there is or land or in any of these areas, there is -- there's a little bit of an accelerating effect across the platforms. But I would say I would go back, one of the things is that people forget, but that in -- with Apartments.com, there was a lot of competition that was better established than we were. So there were 4 or 5 players from Craigs list to Zillow to apartment guide to Rent.com to for rent to apartment finder all bigger than us that we were competing up against. And back then, when you looked around at apartment communities, most we're buying from one or more or several of these different players. There's something very different happening in residential real estate, which is the vast majority of players in residential real estate aren't buying from any of the of the established larger residential portals. The vast majority of people aren't buying anything from them. Our number one competition in my mind is the United States Postal Service. So I feel very comfortable competing against the United States postal surface. In fact, I don't know what your mailbox looks like, but about the last thing in my mailbox is residential ads. So I collect them all from every place have a mailbox and I bring them all and I throw them at a conference table in our office here in the product design studio. Just as a reminder of how much money residential real estate is spending on marketing properties very little of it with who you would consider to be the entrenched real estate portals.

Great. Thank you.

Thank you for your question. [Operator Instructions] There are no further questions at this time. So I will turn it back to Andy to wrap up.

Okay. Well, I appreciate everyone joining us for this fourth quarter 2022 earnings call. We're -- in 2023, we expect to deliver accelerating revenue growth and strong margins, very strong margins in the commercial business. while continuing our careful, thoughtful, responsible investment into the residential market opportunity. The strong performance of our core commercial real estate products support that contained investment into Homes.com. And back -- going back to the analogy of 2015, we invested tens of millions of dollars into marketing Apartments.com, and that brought our margin down a little bit. But today, that business has become a multibillion-dollar asset for our shareholders with an incredibly attractive ROI, not dissimilar to what the investments we made in CoStar and the incredible ROI there. So we believe that our focus and investment in the residential sector will yield an equally attractive, if not superior return through time. So we look forward to speaking with you again on our first quarter call on April 25 at 5:00 Eastern Center time until then, stay safe. And thank you very much for participating in the call, except for the competitors listening.

This concludes today's conference call. You may now disconnect your lines.