Good day and welcome to the CoStar Group Fourth Quarter 2023 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 that today’s conference is being recorded. I would now like to hand the conference over to Cyndi Eakin, Head of Investor Relations to read the Safe Harbor statements. Cyndi, you may begin.

Thank you Abigail. Good evening and thank you all for joining us to discuss the fourth quarter and full year 2023 results of 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 of 2024, 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 any non-GAAP financial measures discussed on this call are shown in detail in our press release issued today, along with the 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.

Fantastic job, Cindy. Thank you. Good evening everyone and thank you for joining us for CoStar Groups fourth quarter and year-end 2023 earnings call Total revenue for the full year of 2023 was $2.46 billion, a 13% increase over the full year of 2022 Coming in above the high end of our guidance range and above consensus estimates. Revenue for the fourth quarter of 2023 was $640 million or 12% growth year-over-year. This is our 13th year in a row of double-digit revenue growth. We turned in another very strong year in sales in 2023 achieving our second highest net new bookings level ever of $286 million, this performance in the face of higher interest rates and demand shocks that kept property markets distressed in 2023 demonstrates the resilience of our business. Our full year 2023 adjusted EBITDA was $492 million and $130 million for the fourth quarter ahead of both the high end of our guidance range and consensus estimates. I'm proud to say that we achieved a major profit milestone in 2023 in our commercial real estate information and marketplace businesses as we deliver adjusted EBITDA margins of 40% for the full year. For the past three years thousands of our team members have worked with professionalism and committed focus to build the new homes.com the premier marketplace for buying, selling and renting homes in the United States. We've conducted dozens of focus groups across the country listening to hundreds of agents, homebuyers and home sellers learning why they were so dissatisfied with the legacy offerings and what they hope for in a better residential portal. We heard loud and clear that brokers, agents, sellers, buyers, and investors all dislike real estate portals that use agent’s listings as bait to draw in homebuyers and then sell them off…

Still here. Ready to go. Thank you for those brief remarks. Okay. So clearly 2023 was a very strong year for the company, but that sure feels like a long time ago, doesn't it? These last few weeks have really been like turning a page when you get into the launch of Homes.com, the advertising brand campaign, the selling efforts. I think 2024 is going to be a great year. I can already tell. But first, let's wrap up on 2023. The full-year revenue growth was an impressive 13% versus prior year, which was ahead of our guidance and forecast. What I found interesting was that 2023 was the 13th consecutive year of double-digit growth, and we grew 13%. Did you know that? And last year, when our 12th consecutive year of double-digit revenue growth, we grew 12%. I wonder what that means this year. We'll see. Let's not get ahead of ourselves, but we actually turned in a great revenue performance in 2023. Profit results also came in above expectations, with full-year adjusted EBITDA at $492 million and 20% margin, exceeding the high end of our guidance range. What I think most is impressive is that you can still see our core CoStar business delivering 40% profit margins and a record high, 45% in the fourth quarter, before you consider the investments we're making moving into the residential sector. I think it's important we keep an eye on the underlying strength of this business portfolio as we exit the investment phase of Homes.com particularly, and we'll expect profitability to increase, as Andy mentioned, once again as we move through 2024. So looking at our revenue by our different businesses, Apartments.com grew 23% in the fourth quarter and the full year, in line with our expectations. Apartments.com added twice the…

Thank you. [Operator Instructions] Our first question comes from Pete Christiansen with Citi. Your line is open.

Good evening. Thanks for the opportunity to ask a question here. Andy, I guess, top of mind here, I appreciate the sales blitz as you're dedicating the whole team here to get Homes.com onto a great footing. What are you looking towards, I guess, throughout the year to start migrating all the sales activity back to a dedicated sales force? And how are you thinking about cost of acquisition, ongoing cost to serve from a marketing perspective here as you attract new agents to the platform? Thank you.

Well, thank you for the question, Pete. I just wanted to update you since we came in here and began the call. We're now at $5.3 million. We've sold 58 more accounts.

You need to stop looking at that.

Yes, I think I've addicted to that meter. So the -- yes. So we will engage the entire sales force throughout 2024 on selling the product. To be honest with the whole sales force, I believe, wants to participate in selling the product, and I think it works best. So nothing sounds better than when you listen to a salesperson talking to a prospect and saying I'm a couple of blocks away. I just got another update, it doesn't look real. So the it really is effective when someone -- when we can sign these 500,000 accounts to people right in their own neighborhoods, the salesperson can say, Well, I'm 3 blocks away from your office, I come by tomorrow. That it works really well. So it will take us a full year to build up a dedicated Homes.com sales team. I do not believe that this has dramatically more. I think it will be similar to any other product in terms of service and support. It is like Apartments.com. You do have to touch base with the customers, make sure that they're well taken care of and that they understand the performance of their membership. But I would say that in 2025, you would begin to see the shifting back to the general group. But right now, we want speed of sales.

Great. Thank you.

One moment for our next question. Our next question comes from Heather Balsky with Bank of America. Please proceed with your question.

Hi, thanks for taking my question. I appreciate it. So I realize it's a big year. You're excited by the launch. I'm excited to hear the next update on the bookings for Homes.com. But can you help us better understand the spend from here? You talked about this being the year of peak spending. So what should we expect kind of as we move out into 2025, 2026, 2027? And the targets that you laid out for 2027, what are your thoughts on them today now that you've officially started to monetize Homes.com? Thanks.

Thanks for the question, Heather. I'll give you just some context there. Like I mentioned, the peak net investment this year. As we finalize resource growth, obviously, in sales, you'll see some of those costs annualized forward into 2025 off 2024. But the rest of the cost base is now in 2024 doesn't really move much in the years ahead. So that's really how we're thinking about it, and we think we have plenty of investment here to now be growing the Homes.com business for a long, long time at really strong rates. The update that you're looking forward to next quarter is going to be a fun one because we all want to start drawing those lines around the revenue growth for Homes and how that will perform, which obviously sets us on the track towards those 2027 goals. So I think we'll talk more about that next quarter, but we are still seeing traction towards 2027, and we're committed to still reaching those levels. Too early to tell yet on the revenue leverage rates for Homes.com, which make a big difference as you would expect.

With over a week of experience.

With only a week of experience. More to come, but thanks for the question.

Thank you.

One moment for our next question. Our next question comes from George Tong with Goldman Sachs. Please proceed with your question.

Hi, thanks good afternoon. You're investing approximately $1 billion in residential this year, which is nearly double the amount of spend from 2023. Can you discuss where the residential investments are going? And then from a margin perspective, we talked about how margins should improve in the back half. Could you give us a little bit more clarity on the margin cadence by quarter as you move through the year?

Sure, George. Let me take the margin cadence question. I mentioned that we'll be in the 12% to 13% in the second half. I think exiting the year, we'll be over 15%, probably 16% going out of the year. And then in the first quarter, we mentioned the minus $8 million to $12 million there, and then we'll take a step between first and third quarter in the second. So you see a steady sequential increase in the margin profile overall for the company. When you look at where the investment going for residential, we've added OnTheMarket and as you watched the announcements around what we're doing there, we committed to putting in around $50 million of marketing that right now has us moving up rather quickly with both listings, traffic and inching up closer towards the number two position. So that's proving to be very valuable right now. And then the rest of the investment is, as you would expect, it's in the Homes.com U.S. business, which is the biggest part is going to be our marketing investments and then followed by the teams that run our content research and technology. So those have been the biggest pieces all along. They'll continue to be the biggest pieces probably in that order as we go forward.

And we don't anticipate those growing in the out years. We anticipate them moderating. So we've probably been a bit more aggressive. We have been more aggressive in year 1 than we were with Apartments.com. Apartments.com took two, three years to build up this time we went right at it.

Got it. Very helpful, thank you.

One moment for our next question. Our next question comes from Alexei Gogolev with JPMorgan. Please proceed with your questions.

Thank you everyone. Just to clarify the previous comment, Andy. So do you feel like you are front-loading some of the investments that may have initially been planned for 2025 and 2026, you are front-loading it into 2024 in resi?

Well, given the fact that more than half of the investment is marketing between the United Kingdom and the United States. I think that's fair to say. So when you look back, I believe, in year one, we spent $40 million in marketing on apartments for branding. So I think we're a touch more aggressive this time around, and that's an understatement. But we are doing that with, I think, a pretty sober eye on the ROI and what we hope to achieve. And I think that it's only a week of sales. It gives you an idea that -- there's a market there. There's a product there, and we think it will enable us to move faster than any competitor expected us to move.

Understood. Perfect. And Scott, could you help us reconcile the net new bookings figure? I fully recognize that it was a record figure for the year, $286 million. But could you talk a bit more about the dynamic in the fourth quarter and whether there was any cyclicality in there?

Yes. Certainly, we see a little bit in the fourth quarter cyclicality on those numbers. I think that the $286 million this year was slightly behind the $300 million or so we made last year, still as you look at the components, Apartments.com is delivering the strongest performance given the vacancy levels in that industry and what that team is able to do. And then CoStar and LoopNet relatively softer in the fourth quarter than what we would have seen previously. And that really makes up the bulk of all of our net revenue. As we get into next year, you'll see less of a drag from the legacy residential products, which also helps us as we add Homes.com to get higher growth in our total company sales next year, which is something that we expect to happen with the sales force and the productivity they can give us right out of the gates here.

Perfect. Appreciate it. Got it, thank you.

One moment for our next question. Our next question comes from Ryan Tomasello with KBW. Please proceed with your question.

Hi, everyone. Thanks for taking the question. Understanding that the Homes brand campaign is still early innings of seeing how that plays out. But maybe you could elaborate on what flexibility you might maintain around investments this year, depending on how performance evolves? I'm curious if there are specific milestones or circuit breakers you've built in around agent adoption traffic, etcetera, to inform and revisit those plans as the year plays out, whether that's laying on the gas even more or perhaps pulling it back? Just trying to understand how set in stone the investment plans are this year.

Sure. From what I can see here in February with a relatively early view of traffic and sales. We're at the -- we're very -- I'm very pleased with our initial results and pleased what we think we see in traffic. So it exceeds -- or it meets and exceeds my best expectation for where we'd be at this point and frankly, pretty excited about it. I don't see a scenario where we accelerate the investment in marketing. I think we went to the -- we put the accelerator to the pedal to the floor and the floor is pretty tough. And I don't think there's any where to go from here. 80 billion impressions or 600 impressions per household is pretty aggressive. We think it will pay off. In terms of circuit breaker going the other way, becoming more conservative, again, we don't see early stage. We don't see any indication of a reason to pull back. We're exceeding our expectations right now dramatically. And so we could, and we do have significant flexibility. So if the unlikely were to happen, we could pull back dramatically but I don't anticipate that being the case. I think the bigger question is, do we moderate the level in 2025 or 2026 based on what we're achieving.

Great. Thanks for the color.

One moment for our next question. Our next question comes from John Campbell with Stephens. Your line is open.

Hey guys thanks for taking my questions. Good afternoon. So Andy, as much as I want to ask you if the Homes.com bookings meter has moved over the last couple of minutes, I'm going to hold off. I'm guessing we're going to get plenty of updates in the quarters ahead. But bigger picture question here, just on the industry kind of legal backdrop. Obviously, a lot of moving parts there. I think it's clear, at least from where I sit, that things seem to be progressing in the favor of Homes.com as far as the value proposition. But what is your take specifically on dual agency, whether you think that's where the market is heading and how you think Homes.com is uniquely positioned to capitalize on that?

Sure. So obviously, the legal situation is complex and there are going to be lots of angles and views on that. And we -- I will not be the leading expert on that, but certainly, things are in flux. I know the big broker terms are pursuing settlements. I know the major brokerage firms don't want to fight an extended protracted battle on whether or not sellers should be forced to compensate by our agents. I would not be surprised if there wasn't an outcome where buyers paid their own agent. They can finance that, I believe. I do believe that Homes.com is advantaged competitively for sure in that our revenue model is agnostic to whether or not there is a buyer/broker participation rule in place. Our product is generating buyer/agency leads. It's generating seller leads. It's helping people sell homes with more exposure and more lead generation. And this is unlike any of the competing models that rely on the seller agent having a pre-agreed split with the buyer agent. So if that worked, and again, I don't know what's going to happen, but if it were to shift to the buyer pay and the buyer agent, I would think that we would have significant advantage in funding our business moving forward. I think that some of the competitors have tried to begin to migrate their business to a world in which there's not a buyer broker participation rule, but I believe it requires a level of cannibalization that they haven't yet processed. And what they're doing is sort of half measure at best. So I think we're going to do well and win whatever happens, but I think it would create tailwinds if we ended up with a settlement that required buyers to pay their buyer broker commission. But people like their buyer broker. We're helping people. We are sending hundreds of thousands of leads for buyer brokers -- for buyer brokerage but we'll send seller listing leads. We'll send leads for people buying homes. We'll be here generating leads, and we're not on one side, just one side. We're more diversified than the competitors.

Okay. Makes a lot of sense. And then somewhat related to that, you mentioned sending free leads. When you guys refer to the Homes.com revenue model, you often refer to the term membership. I'm hoping if you could maybe unpack what exactly that means, maybe starting off with the base level of spend? And then what other products and services are kind of included in that “membership”?

Sure. Membership is pretty straightforward. It means that you're -- you as an agent, it sold to the agent, and it is priced based upon the sort of transaction volumes you historically do and the price point you operate in and will eventually be based on the market you're in. But it is very price competitive with what has been out there historically. When you are a member, your listings sort higher and have more agent branding on them. You have a number of your listing detailed pages, have more agent branding on it as well as your other listings. When you go to the agent director or the neighborhood page or the school page, the agents who are members sort to the top of those different neighborhood pages, school tenant zone pages, whatnot. We aggressively retarget traffic who are engaging with member listings and agent profiles. So to simplify or not simplify it, but you member might receive, on average, 1.3 million impressions a month for their listings and their agent bio. A non-member, while they get leads for free gets 5,000. So 5,000 versus 1.3 million impressions. There's a significant advantage in being a member. And right now, depending upon the firm, we're seeing an 8 to 14 times increase in lead flow for members if they're sorting to the top of these pages. Where they're getting the most dramatic increase in lead flow is on the agent bio pages. Home buyers will tend to go a couple of pages deep looking for the right home, but home buyers or home sellers are not willing to go past page one or two of agents that they might hire. That's where we see the highest advantage in winning selling listings and winning buyer agency on our site. The good news is it's working.

Very helpful. Thanks Andy.

One moment for our next question. Our last question comes from Ashish Sabadra with RBC Capital Markets. Please proceed with your question.

Thanks for taking my question. I just wanted to drill down further on the resi monetization, the commentary around $200 million annual recurring bookings continuing at this pace. I was just wondering, as we think about like the agent within that bookings, how are you thinking -- you talked about a wide range there from $100, $200 per month to as much as $7,400. Are there certain kinds of agents that you're targeting? Any color there would be helpful. Thanks.

Sure. So we are -- there's 1.6 million agents. I think we're initially targeting 540,000 agents. I think we set a floor -- I won't get the exact number, but I think $30,000, $40,000 annual earnings is what we -- or higher. So it's a pretty broad swath. Price points are from $100, $200 at the lower end, up to tens of thousands of dollars to $100,000 a month for one of these bigger teams with lots of agents on them. I've spent the last week monitoring sales calls, listening to the sort of reaction and the dialogue of the discussion. One of the things I'm very pleased with is that, I would say, overall, though the price points are different, the prospects and buyers have been pretty resonant with what we're doing. So I think we've dialed it in correctly and we'll be refining the strategy as we go through the year. Scott, would you add anything on that?

That's the initial population, of course, that we came out with the targets. And what we're seeing is that the inbound lead flow is very strong from all agents. So our sales force is going after their top prospects in the target list, but also responding to all the leads that are coming in as quickly as possible. And then on top of that, we have our e-commerce channel, which agents can go in and sign up with a few clicks and have all their information and they're ready to go. So all of those are performing well, and we'll continue to expand the group we target. But right out of the gate, we've got a lot to cover quickly.

10 more memberships, another 50,000.

Thanks for the color.

I would now like to turn the conference back to Andy for closing remarks.

Thank you. Appreciate that. So today, I've got more interested in concluding remarks that I normally have. So I have some news to share with you. Scott Wheeler joined us as our CFO 8 years ago or so. During those 8 years, he's done a fantastic job at the helm of our finance department. We've seen our revenues triple in that time period, and we've gone from strength to strength. I would count Scott more than just a valued colleague. He's become a good friend of mine. As you may know, Scott loves to climb mountains. He was the first father daughter team to summit the tallest mountain in every U.S. state. It wasn't much of an accomplishment in Florida. It was a much bigger accomplishment in Alaska. Scott has accomplished as much as anyone could wish to professionally. So now he's earned the opportunity to retire and pursue his climbing passion in the golden years ahead.

Golden? That was off.

Scott will remain with the company until June to facilitate a transition, and I will bring back the other two former CFOs to help in the transition as well. Scott is our third public company CFO with each of our prior CFOs also having served exactly 8-year tenure. We'll begin a search for our 2024 to 2032 CFO immediately. I would have let Scott announce his own retirement, but the last CFO to retire became for Clint when he announced his retirement so I wanted to avoid that awkwardness today. Scott leaves with no disagreements or issue, he simply wants to enjoy the fruits of his labor Godspeed, Scott, and thank you so much. I would like to thank everyone for joining us for our fourth quarter and year-end 2023 earnings call. We look forward to speaking with you again on our first quarter call on April 2023, 2024. Thank you very much for participating. Thank you, Mr. Scott Wheeler.

Thank you, Andy. I'll cry after the call.

You need a tissue, man?

That was kind of you.

This concludes today's conference call. Thank you for participating. You may now disconnect.