Good afternoon. My name is Hannah, and I will be your conference operator today. At this time, I would like to welcome everyone to the CoStar Group First Quarter 2023 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. Cyndi, you may begin.

Thank you, Hannah. Good evening, and thank you all for joining us to discuss the first quarter 2023 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 second quarter and the full year of 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 including 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 in detail on 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.

Good afternoon, and thank you for joining us for CoStar Group's first quarter 2023 earnings call. Revenue for the first quarter of 2023 was $584 million, or 13% growth year-over-year coming in at the high end of our guidance range and above consensus estimates. I'm very pleased with the growth of our commercial information and non-residential marketplace businesses, which delivered 15% year-over-year revenue growth in the first quarter. I'm also very pleased with the progress we're making in building the new Homes.com, which I believe will become the best online residential marketplace in the world bar none. We started the year strong with net new sales of $80 million, our second highest sales quarter ever and a 17% increase over the first quarter of the prior year. Apartments.com achieved the highest net new sales quarter for the second quarter in a row. LoopNet achieved outstanding results in the quarter with a 100% increase in net new sales over the first quarter of last year. We hit a new high watermark in traffic to our marketplaces in March. Monthly unique visitors totaled $94 million for the month with Apartments.com, Homes.com, LoopNet Lands, BizBuySell, Belbex, BureauxLocaux business in all of our marketplaces contributing up to tens of millions of unique visitors. Apartments.com continued its impressive run with another outstanding quarter. Apartments.com revenue was $211 million in the first quarter, climbing to 20% year-over-year for the first time since the first quarter of 2021. Net new sales bookings were at an all-time high breaking the record set just last quarter with an increase of 110% in over the first quarter of '22. Apartments.com while very successful has millions of apartments that do not yet advertise on the site. We are focused on continuing to grow our sales force to reach this huge potential…

Thank you, Andy. It's a great way to start the year, again. Financially, we are certainly on track, if not slightly ahead where we expected to be this quarter and for the year. With regards to revenue and our revenue growth outlook which is a 13% total revenue growth for 2023. Now, one of our sell-side analysts recently pointed out that we have logged 50 quarters in a row of double-digit revenue growth, although we actually just completed 48 consecutive quarters of double-digit revenue growth, but who's counting. I actually use my favorite AI tool which I call an Excel spreadsheet to go back and figure out how many actual quarters we had double-digit growth. So it was back in 2011. So I am applying AI here at CoStar to our financial results.

It might just be eye.

The question of my eye sometimes. So revenue by services, CoStar revenue grew 13% in the first quarter. It was in line with our guidance expectations. CoStar expansion into new customers remain strong with new business sales consistently or slightly above the levels we've seen since mid-2021 after the pandemic. The brokers are certainly facing a tough transaction and leasing environment, which dampened new broker sales and renewal rates primarily among the very small broker shops. We expect that our revenue forecast will reflect the current market conditions, which would have CoStar revenue growing at 10% for the second quarter and for the full year of 2023. For multifamily, we added more than $35 million in year-over-year revenue during the first quarter on our way to once again achieving 20% revenue growth. Our bigger sales team is giving us the capacity to reach more and more prospective customers that have never advertised for Apartments.com. The number of paid properties increased by 8% in the first quarter of 2023 on a year-over-year basis. This is the largest volume increase we've seen since the second quarter of 2021. In addition, we're seeing more and more customers upgrading to higher level ads versus those that are downgrading to lower level ads. This net revenue contribution from the positive ad level mix is now back to the levels we saw last during the pandemic surge, which was the second quarter of 2020, which were certainly good strong high levels. Looking ahead, we expect these trends to continue with rising vacancy rates and increased productivity from our recent sales force expansion classes. So we're now forecasting revenue growth as Andy said of 23% for multifamily for the year and for the second quarter up from our prior guidance of 20% revenue growth for 2023. LoopNet…

Of course. [Operator Instructions] The first question comes from the line of George Tong with Goldman Sachs. You may proceed.

Hi. Thanks. Good afternoon. You trimmed your CoStar Suite full year revenue growth guidance from 12% to 10%. How derisked is that outlook, given the current state of the commercial real estate market? And then related to that, you mentioned smaller broker weakness can you comment on the performance of your other customer types at CoStar Suite, as well as the latest pricing trends that you're realizing? Thank you.

Sure, George. Thanks, for the question. So, we do take a quick -- a close look at all of our different customer sectors and how we're performing. As I mentioned, the sales that we're making into the growth sectors, owners, investors, lenders are at if not slightly above the levels we've been doing, over the last four to six quarters. And you just really see this one isolated sector, that is the smallest broker shops that are being impacted by the downturn in transactions and reduction in effort and potential layoffs, in that industry. So, we've taken a close look at that. We reflect those trends. We think that, the second and third quarters, are going to be rough in the industry. I think those are pretty well known economically. And so, we ride along with that sort of expectation and would hope that it starts to get better in the latter part of the year. So, we build all that into our forecast and we see that reflected in the 10%. So with the number of sectors holding up as strong as we have, and with the bigger sales force, we don't see this as being something that would be as disruptive as what happened in the pandemic or anything previous for us. So, we're pretty confident with what we've got built in so far. And then, question on pricing. Yes, we're following -- we follow inflation level pricing. So our -- as inflation levels come down, then we reduce the increases that we put in for renewals to just stay at the rate of inflation. And that's all.

Very helpful. Thank you.

Sure.

Thank you, Mr. Tong. The next question is from the line of Peter Christiansen with Citi. You may proceed.

Good afternoon. Thanks for the question. Andy, just wondering can you elaborate, a little bit on how you're seeing the pipeline for Ten-X, the relationships that you've built, I guess since acquiring the asset -- and how you see that pipeline evolving, I guess, as potentially we hit more distress over the coming months, years. How do you see that evolving versus how Ten-X was prior to being acquired. Thank you.

So, surprisingly, still today, the vast majority of product that's trading on the platform is performing assets. So, we are it takes quite some time for when market conditions become adverse to when you actually see, effectively capitulation in people begin to exit investments that have gone south. So, we're still a performing asset platform at this point, but we're seeing less spread between buyer expectations and seller expectations. So, there's the trade rates are coming up. You can see the volume increasing this quarter, as that happens. And we would expect that to continue to climb up through the year. We have a much larger sales organization than we've had in the past, to be able to capture that opportunity. Plus, we've also completely integrated all of the systems of Ten-X into the CoStar and LoopNet platforms. So, we're dramatically more efficient, as we want to take on new assets. We also are more disciplined now on, making sure that we do not bring on any assets that the seller does not have realistic expectations for. So, our commitment committee on the Ten-X management team is very disciplined. So it's somewhat awkward. You don't want to see a flood of inventory coming into Ten-X, because it means that the market has gone really south. But with the federal government continuing to work from home, you'll probably see a lot of office assets go now.

Okay. Thank you.

Thank you, Mr. Christiansen. The next question is from Stephen Sheldon with William Blair. You may proceed.

Yes. Thanks. LoopNet, really strong booking trends there, so do you think you're at full stride there with the expanded sales force, or is there still a lot more to go I guess in terms of ramping productivity. And then can you talk about the demand environment in LoopNet given the trend in office vacancy rates? It seems like a great environment right now. But do you also think that you could be a point where vacancy rates trend too high, some property owners capitulate and just assume they're not going to find tenants and therefore reduce ad spend? And I guess essentially is there an optimal range for office vacancy rates from your perspective to maximize demand at LoopNet. And if so, what do you think that is?

Yeah. I don't think there's an upper-end. What we see in the past -- so we've been selling advertising solutions to commercial property owners for quite some time now from when it was in books to when it was in CD-ROMs to when it's on the Internet. And when the market conditions get really awful at the upper-end of high vacancy rates, what you find is that the assets recapitalized a new owner comes in at a much lower cost basis. The cost of our advertising is de minimis or relevant in the cost -- the context of the cost of the building and they're actually very aggressive in advertising. So the biggest advertising spends I've ever seen, is from owners who picked up bankrupt assets, new owners have picked up. And they're basically coming in there with lower price points than the than the remaining properties that hadn't yet gone under because they've got a lower cost basis. So I think there's no -- I don't believe, that there's any upper-end to vacancy rate and demand for our asset LoopNet. Obviously right when someone's going bankrupt they stop but it's made up for by now the new owner coming in aggressively. I actually think we have a lot of room to go. I look at one or two other businesses overseas and I look at what they're generating in revenue for commercial real estate advertising on the Internet. And just interpolate that by GDP and it suggests we have a doubling, tripling, quadrupling of revenue to go. So I'm looking forward to continuing to grow the LoopNet sales force and continue to optimize our pricing models and to increase the functionality, and I also think that moving LoopNet, Pan-European will have a huge benefit. I spent a lot of time listening to focus group interviews with corporate users and investors who move across borders. And as we provide a solution that crosses borders I think that will increase demand for assets marketed on LoopNet, which would be another positive demand driver. So if you can't tell I'm bullish on LoopNet and remain bullish on LoopNet.

As you should.

Though it was once a competitor.

Great. Thank you.

Thank you, Mr. Sheldon. The next question is from John Campbell with Stephens. You may proceed.

Hey, guys. Good afternoon. Thanks for taking our questions.

Sure.

The first one is -- I guess a two-part question here. So first off a great job on the Homes.com traffic ramp that was a really impressive early start for you guys. So first on the roughly $53 million of sequential -- up in sales and marketing how much of that was tied to resi?

Yes. So we haven't indicated how much residential marketing spend as you can appreciate, John. So I think you see every sequential quarter we'll get more and more marketing coming in total as all of our marketplaces get into the more of the rental and high-volume seasons in the second and third quarter. But we'll just keep the discussion to the overall company at this stage?

Okay. And I guess just broadly you're expecting that sales and marketing step up sequentially throughout the remainder of the year even in 4Q.

Yes. So I think what you'll see is our pattern will step up in second quarter. We're going to step up even more in third as we get closer to our product launch in residential then you'll see clearly we'll be preparing the market for that. And then I think what we'll see is the fourth quarter will be higher than most of our fourth quarters previously because we have an additional platform that we're doing brand marketing for now this year versus prior years. So you see a bit more of a spend that carries in later in the year than we've had before because of the addition of the new platform. So hopefully that helps.

But if you see anyone from -- that we're spending all the money in Madrid.

We'll do. And then Andy back, I guess, big picture question for resi. As you look out the next couple of quarters what would you offer up as key milestones you'd like to see the team hit.

Well for the next -- there's a lot going on. I mean it is a very full plate of initiatives and there's well over 1,000 people working on the initiative right now. I think that the traffic numbers remain a key metric that we're watching obviously. As we mentioned we plan to begin to monetize the platform at the very end of the year. And the first 1,000 customers on that platform are probably the most important customers that you may one day have hundreds of thousands or millions. The first 1,000 the most important. But I would stay with -- I would just stay with the simple traffic numbers. Now I believe that critical traffic numbers are what we talked about before 25 million which we've crossed 50 million which we're moving towards. Beyond that 50 million mark you really have what you need to produce some compelling marketing solutions for your clients and you can really begin to monetize. So I think the numbers correctly you correctly observed that I would say that one of the biggest risk factors for Homes.com has just been reduced with these results today if you're watching.

Lot of sense. Thank you, Andy.

Thank you, Mr. Campbell. The next question is from the line of Ashish Sabadra with RBC. You may proceed.

Thanks for taking my question. I just wanted to drill down further on the CoStar Suite. I was wondering if you can quantify what percentage of the revenue really comes from the smaller midsized brokers where you might potentially see any kind of headwinds. And then just to follow-up, Andy, on your comment around the prospects owners, lenders, and corporations, which represents a $1.4 billion opportunity. I was wondering how much percentage of the revenue comes from those right now? And how should we think about that trajectory for the rest of the year but also over the next few years? Thanks.

So let me take the first part of the question there, Ashish. When you look at our broker mix in CoStar, a little over 35% of our CoStar revenue is from the broker pool, and then about 25% of that group is representative of small, what we call the one or two broker set. So that gives you 25% or 35%. So it's roughly 8% of that pool. So it's pretty limited exposure for now in the small broker set.

And to be clear, they don't all go away. It's really having watched this a few times. It's the folks who are 67 years old, who decided to step out at the cycle point. So it's a subset of the group. And there's some -- obviously some other constituencies. So the majority of our revenue today is the owners, lenders and a smaller component is the corporate users. Obviously we have government in there. We have vendors. We have a whole number of other sectors. I believe that the -- while the brokerage side of our business continues to grow, I believe that those owner, lender, corporate user sectors are going to be by far the biggest growth driver and coupled with international demand over the next three to four years. So, I think this is a trend that's been going on for two decades now. So I think when we went public, 85%, 90% of our revenue was brokers, so while that revenues continue to grow. It's now only 35%. So as it continues to grow, I'd anticipate five years from now, it will only be 15% -- 10%, 15% of our revenue, something like that.

That’s great. That’s very helpful color. Thanks Andy and Scott.

Thank you, Mr. Sabadra. The next question is from the line of Mayank Tandon with Needham. You may proceed.

Thank you. Good evening. Andy, of the 15 countries -- or was it cities that you mentioned the focal point in Europe, is that going to be an organic initiative, or do you think you could buy assets in these regions that could help accelerate the traction there to be able to penetrate that $30 billion opportunity. And when should we expect meaningful revenue contribution from this initiative?

Yes. So, there definitely are acquisition opportunities in Europe. There are very few companies that in Europe that none that do exactly what we do in the CoStar information side, they're more on the marketplace side, they're more on the marketplace side, similar to LoopNet or to Homes.com. There's not a lot of Apartments.com players over there. But on the CoStar side, we really stand alone. One of the key initiatives is, to build the comprehensive information grid, by doing the field research and proactive research that is a two- to three-year process. So, then you see meaningful. You see, significant meaningful monetization on the CoStar side, really two to three years out. On the LoopNet side, or on the marketplace side, I think it would be a little bit sooner, probably 18 months or so. But we have our head down doing, what we've done many times before which is capturing the whole -- all the content, the core content. And the wonderful thing is, we seem to be the only people in the world, that like to go out and do something that hard and crazy, and then it becomes very valuable once we go and do it. We're pretty good at it. And the wonderful thing is, that technology has never been better, than it is today to do what we do when we build inventory. So, we can use machine vision now, to look at aerial photographs compare them to the millions and millions of other properties, and aerial photographs we've got. We can very precisely direct our field researchers, and make them very, very efficient as they move through these markets. So, it will be a good adventure and I think there'll be some great returns for it. And I remain convinced, that the market for the demand for Ten markets is 20 times the demand for…

That’s very helpful. Thank you.

Thank you, Mr. Tandon. The next question is from the line of Jeff Silber with BMO. You may proceed.

Thank you so much. This is I guess a follow-up from the prior question. You've obviously, got a sizable cash balance. It's great to see that you're generating more interest income off of there. But when do you think, you might put that cash balance to work? And where would that cash balance be working?

I think, we -- I believe that our organic initiatives, are not going to exceed our EBITDA generation or cash flow generation. We don't see anything like that at this point. So, it's really acquisition opportunities. We're -- we have been very patient. We believe that, there's better value opportunities. And as I listened to Scott described, $5.1 billion in cash. I believe it's a wonderful time to have a great balance sheet, as other companies may run into some troubles. And so, both in Europe and the United States, we believe there are opportunities. We continue to have conversations. You probably have read in the media about a number of conversations, we have had that were substantive. We did take a four-week holiday from -- after the latest round of media reports, but there's still a lot out there. And I have meetings this week, but you won't know where.

All right. Fair enough. Thanks for the color.

Thank you, Mr. Silber. The next question is from Heather Balsky with Bank of America. You may proceed.

Hi. Thank you. I appreciate you taking my question. I'd love to ask you about the residential piece. You talked about where you are on a traffic basis. There's less risk going forward. I know you're not kind of telling us specifically your sort of spending plans for this year and beyond this year. But if things continue to progress at the rate they do and the pace they do kind of how do you see things evolving at a high level? Can you just kind of help us kind of see your path between now and 2027? Thanks.

Heather, can you specifically talking about investments or combination of investments and traffic?

Well, I guess, the investment side and how it's tied to your thoughts around how sales progress.

Yes. So I think this -- the remainder of this year I believe is fairly predictable. People have a good idea of what we're doing in the remainder of this year. The wonderful thing is that we have pulled just a small percentage of the levers we have to grow traffic. So some of the things that I think are -- I think there's more traffic generation opportunities ahead of us this year that we -- than those that are behind us. So it makes me feel pretty good about our ability to hit our second traffic goal as the year comes to a close or just slightly thereafter, which mean way on schedule. I'm very excited about our simple monetization strategy at the tail end of this year. I think it's straightforward. I think it's compelling. And I think we can spin up a sales operation to support it pretty quickly. As we my hope is that as we can begin to show proof of concept against that sales initiative in the later part of the year going into 2024 than we can do what we did with Apartments.com where we are showing proof-of-concept and results and invest against that proof of concept and result into what is a huge market. So it's too early to say what we're doing in 2024, 2025, 2026 and 2027 for investments it will be a balance between what we're showing in revenue results versus what we're willing to invest into the business. So -- but it's probably 60%, 70% of my time right now. And I'm pleased with -- I'm pleased with where it's going. And it's a lot of work, but we have a great team and feel pretty good about it. But obviously, we're the underdog as we were in the early days of Apartments.com. And so you have to be coming up with some unique ideas and different strategies. And I think I feel pretty good about that what we've got going on.

Appreciate the color. Thank you.

Thank you, Ms. Balsky. The next question is from Ryan Tomasello with KBW.

Hi. Thanks for taking the question. Just a two-part one here. Clearly a lot of confidence in the resiliency of the business, but just given uncertainty that's out there around macro and CRU. It'd just be helpful to hear your thoughts around your willingness to pull expense levers under the scenario that the sales environment does weaken more than you're hoping. And as a follow-up on the Homes.com traffic trends, maybe you could elaborate a bit more Andy on what levers you've leaned on so far to drive that traffic growth in terms of I guess, SEO, SEM, synergies with apartments and what remaining levers you have to pull that you just alluded to? Thanks.

Yes. So, I don't think we want to go into too much detail on our traffic strategies right now, just for competitive reasons. I would point out that we have the greenest residential real estate portal around, because our load time with the homepage is ranges from four milliseconds to something like -- 24 milliseconds. So that gives us a BA [ph] on Google Analytics for performance time, which means you consume less electricity and generate less carbon and we only generate 0.22 grams per 10,000 loads. So, super efficient high performance is a key piece that we've done. And I hope that officiates what we're doing in strategy for traffic. But I think we've talked about some of those traffic strategies and some of it self-evident like what we haven't yet done, which we're going to be doing and the things that we've done in apartments that are in the past successfully that we've talked about today that have not yet been done with homes that are self-evident. So, yeah, there's more ahead than there is in the rearview mirror on the traffic performance. But congrats to Jerry Rodgers and his team for such great performance that benefits your SEO growth. So and our willingness to -- if the market continues to degrade significantly sure, we're always -- we're always responsive to any need to sort of pullback on initiatives where we're not seeing a market perform because of severe economic conditions. We are prepared to do cost containment efforts. But realistically, in the very worst markets over the last 35 years we've rarely seen -- I think the worst we ever saw was a 2%, 3% decline when we were only selling co-started brokers. We are so much more diverse now. And we have so many what I believe are countercyclical drivers whether it be lender or Ten-X or marketing for high-asset value items that I think it's unlikely that we'd be in a situation where we have to really pullback because of the economy. So, I'm quite impressed by this particular down cycle and the potential.

Yeah. Well, you noticed -- I mean, we look very closely at the last disruptions that happened, the pandemic in 2020 and the great financial crisis more than a decade ago. And as you proceed through each of those you noticed in the last down cycle that our revenue growth didn't slow at all and we see nothing even as disruptive of that this time. And you just look, what's happening with apartments and LoopNet proving to overbalance countercyclical that our revenue growth is not going to slow at this balance in a down cycle and we don't see that coming at all. And we do see a lot of clear data underneath as you might suspect on what's going on. So, our portfolio is much stronger as even three years ago and I think we saw that in the results that we announced today.

Thank you Mr. Tomasello. There are no additional questions waiting at this time. So I will turn the call over to Andy to wrap it up -- wrap the call up.

Wow. We finished seven minutes early. Well, I'd like to thank everyone for joining us for our first quarter 2023 earnings call. We look forward to speaking with you again in our second quarter call in July 25, 2023 at 05:00 p.m. Eastern Standard Time. So thank you very much for participating today, and have a good evening, or a good day, if you're in Asia. Bye-bye.

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