Good day and thank you for standing by. Welcome to the Q3 2024 CoStar Group Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Rich Simonelli, Head of Investor Relations.

Hello, and thank you all for joining us to discuss the third quarter 2024 results of the CoStar Group. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Chris Lown, our CFO, I'd 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 fourth quarter and full year 2024 based on current beliefs and assumptions. Forward-looking statements involve many risks, uncertainties, assumptions, estimates and other factors that could 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 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, and 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 measure discussed on this call are shown in detail in our press release issued today, along with the definitions for these terms. The press release is available on our website located at costargroup.com under Press Room. As a reminder, and since many of you already logged in already, today's conference call is being webcast live and in color and the link is also available on our website under Investors. Please refer to today's 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 for joining CoStar Group's third quarter earnings call. Welcome back, Rich. I noticed you missed a few earnings calls.

Yes, I was enjoying myself on the Eastern Shore.

You were working remote?

Yes.

And now you're back working a real job?

Well, you should be when you're in the office business, you should be in the office.

That's right. Welcome back.

Thank you.

We achieved another strong quarter of financial results. Third quarter 2024 revenue was $693 million, an 11% increase year-over-year and in line with our guidance. This is the 54th consecutive quarter of double-digit growth for CoStar Group. Our core businesses are strong industry leaders. I'm extremely pleased that each of our billion-dollar businesses, CoStar and Apartments continued to grow revenue 10% and 16%, respectively. We are on track for 17% revenue growth in multifamily in 2024, a business that's now approaching $1.1 billion in run rate revenue. We grew net income in the quarter to $53 million, up from $7 million in Q1 '24. We grew EBITDA in the quarter to $51 million, up from negative $13 million in Q1 '24. Our adjusted EBITDA of $76 million in the quarter was well ahead of our guidance range of $47 million to $52 million. The early part of 2024 was our most intensive investment period into Homes.com. The profit margin of our commercial information and marketplace businesses remained strong, increasing to 43% in the quarter. Our average monthly unique visitors to our global websites reached 163 million in the third quarter of 2024, according to Google Analytics, which is up 28% year-over-year. Company net new bookings were $44 million in the third quarter of '24. We launched Homes.com earlier this year. And when we did, we only had 41 dedicated salespeople to selling Homes.com. At the scale of the product, we need a much larger sales force to take advantage of the opportunity. So we asked all the sales teams across CoStar Group to help sell the new Homes.com product. They did successfully sell a significant volume of Homes.com but it came at the price of selling less of their core product. The reality of pivoting the entire sales force to…

Thank you, Andy. Good evening. I'm happy to report that CoStar Group's, revenue grew 11% year-over-year in the third quarter, in line with our guidance and marking our 54th consecutive quarter of double-digit revenue growth. Net new bookings for the quarter were $44 million. As Andy mentioned, we began migrating the sales force back to their core brands late in the third quarter, and we expect sales reps to rebuild pipelines in the fourth quarter, and return to higher levels of productivity in early 2025. Our core business is strong, and the total addressable market is billions of dollars. Given the size of this opportunity, we have already begun to invest in increasing the size of our sales teams in CoStar, Apartments.com and LoopNet. Looking first at our CoStar product. Revenue grew 10% in the third quarter, in line with our guidance. We are maintaining our previous full year guidance of 10% growth. Importantly, we have grown our customer base through an incredibly challenging commercial real estate market, and have continued to enhance, develop and expand the product. A key example of this is our lender product. As the former CFO, of one of the largest real estate finance companies in the U.S. I believe CoStar's lender product is the most sophisticated products, for real estate lenders on the market today. Given its strong position and leading capabilities, Lender continued to see robust growth in the third quarter, posting impressive 36% revenue growth year-over-year. Apartments.com third quarter revenue growth came in at 16%, and we are maintaining our full year guidance of 17% revenue growth. LoopNet revenue grew 5% in the third quarter, in line with our guidance and we are maintaining our full year revenue outlook, for LoopNet of mid-single-digit growth. Residential revenue came in at $28 million in…

Thank you. [Operator Instructions] Our first question comes from Stephen Sheldon with William Blair. You may proceed.

Hi, thanks for taking my questions. It seems like your commercial real estate backdrop, is improving as we speak. So how are you thinking about the growth outlook in 2025, for businesses like the Suite and LoopNet? Should we be expecting some notable acceleration there, especially as you move past the Homes.com sales distractions this year, the sales capacity sounds like you're adding? And then, just given the more favorable backdrop, how are you generally thinking about it?

Yes. So as we continue to grow the product, so a couple of different approaches to that. One is, yes, we - it's remarkable that we've done as well as we have, in this sort of difficult market. And so, when the pressure starts to ease off a bit. And again, I'm observing these improvements in, say, the office market pretty early in the cycle. I think, it will become more evident in the next quarter or two. But that will switch that from a headwind to a tailwind, which should give us a benefit. When I look at our penetration rates into brokers, corporations, owners, institutions, banks, there is plenty of room to grow and that growth is going to be easier in a better market. I feel that LoopNet's growth is a little more neutral to that environment. But I think that the fundamentals in LoopNet of growing the sales force, improving the pricing model, that will all give us some headwind. As we've grown our revenue through the years, you have to keep growing your sales force at the same productivity level, in order to cover what would be a normal very low cancellation rate. So if you're only seeing 7% annual cancels in CoStar that, still is a nut you have to sell past to continue to grow subscription revenue. So as we grow the sales force, that will give us a little tailwind, too. So optimistic about how those all look in the year to come, barring any sort of external event that occurs that we can anticipate.

Thank you. Our next question comes from Jeff Meuler with Baird. You may proceed.

Yes. Thank you. So early in the call, you made a reference Andy, to starting to see an upturn as you reprioritize sales resources, back to their core responsibilities. Can you just go into more detail on what you're seeing? And maybe why was the distraction greater than you were kind of expecting? Because I think when you set out on this dual sales responsibilities, you tried to structure the comp plans to protect the core bookings? Thank you.

Sure. So we have seen an uptick in, say, CoStar sales in the most recent month, which is basically directly attributable to people putting more of their attention into their core product. So as they - as salespeople went into selling Homes.com inevitably, like them to keep selling both products, but I think they ended up spending a little more time in the home side. And they were not as experienced as selling that new product, the value propositions were not as clear to them. So, they pretty much were slowing down a little bit, as they moved into semi rookie status in a new product area. So I really appreciate their efforts in helping that Homes.com get off to a good start. But the reality is their time was just limited. And between the two, they couldn't maintain growth in homes, and the same level of production in their core products. So this is - this is one of the dilemmas of - that you always face when you're starting a major new product area that you hope to be a $1 billion business one day. You just don't have a sales force for a $1 billion product before you begin. So we're - the pace of ramping up the dedicated home sales force that we mentioned is ambitious. It's hard work, but I think that we're making really good progress for it. And I wish I could take you, on a tour through the sales floor in Richmond, where these hundreds of home salespeople are beginning to build a really highly energized, strong sales force. And I think they'll be able to grow, into carrying that load completely on their own. And by '25, 100% of the legacy core sales teams will be back focused on their products, and that will reenergize growth. So it's a price you pay, as you launch a new potential $1 billion product line. But I think it's well worth it. It's always painful when you're doing this, but it's worth it.

Thank you. Our next question comes from Pete Christiansen with Citi. You may proceed.

Good evening. Thanks for the question. Andy, I was just wondering if you could talk to the potential of the homes business, and the seasonality. I would imagine some of the shorter-term contracts, maybe the renewals part so great after six months, given the low in the season. Do you think that's going to be a feature of the business? And what can you do to save that off?

Pete, I don't really think that what - I think the primary issue there was that - as you put 1,300 people into selling a new product with a day or two of training, which is all you have when you're trying to move that many people into that product area. They were selling the product without - a solidly refined value proposition, as you want to see and they we're also not as experienced in providing follow-up sales training after - at the training after the sale, or product support after the sale. And so, there was a significant number of folks who thought they were buying a buyer agent lead diversion product, which is not what they were really buying, or they even though it wasn't sold that way in some cases, they perceived that's what they were buying, because that's all that you could buy in the industry for the last two decades. I feel very comfortable about the - what we're selling as a value proposition, which is the ability to win new listings in a competitive market, at a rate greater than you were before. And what we're showing is 50% improvement in win rate on new listings. That more than gives you an adequate ROI to justify the product. And when I mentioned that constantly improving NPS score, through the year on the product with members, that shows that members are beginning to understand that value proposition. It's resonating and we're getting better and better NPS scores. So, I believe that over time, people will look at this as an annual subscription. I don't think our product - I think for people that have consistent listings, and a lot of people do, like in residential real estate, you've got 1,000,006 folks, or where the number is, of which about 450,000 are actually in the business. And they're - and doing it full time to support themselves, and probably 400 and some thousand have a consistent inventory of listings. Those folks with a consistent inventory of listings, I think, are year round continuous high renewal rate subscribers to Homes.com. The folks who don't have any listings, many of them who bought into Homes.com early on. They're not going to get the same benefit from homes, just because they don't really win a lot of listings no matter what tools they have. So that - I think that's really more what happened early on, not cycle. That's too long a question. But Pete, didn't you like Chris' line about being CFO or CEO, whatever, of a major financial institution in loving the lender product. Yes, that was strong.

Very strong. Thank you.

Thank you. Our next question comes from Ryan Tomasello with KBW. You may proceed.

Hi, everyone. Thanks for taking the questions. Can you say what the revised annual guidance this year includes for residential spend, and the nonresidential EBITDA margin for the full year? And just given all the moving pieces, Andy, with respect to residential and Homes.com, I think it would be helpful if you were willing to provide some early indication of how next year's investment levels might trend at least relative to this year, just to give some folks reassurance around how that might impact margins, over the near term? Thanks.

So I'll answer the second part first, and then Chris can answer the first part second. So I think that we are already - we launched Homes.com, with a very aggressive investment level that, I think is appropriate for a product opportunity this scale and size. So the good news - the bad news is that was a big investment. The good news is, it's at a level that I think it sustains us. So I don't see a need to increase our investment in marketing, or in Homes.com as we go into next year. So I think that improvement in EBITDA you've seen through the year, is sort of indicative of the fact that we saw a low point in net investment, in the EBITDA associated with that investment. So, I'll have Chris answer the second part.

Yes. And I think to the second point, we're still on track to spend the amount we have discussed throughout the year in residential, and we continue to see continued growth in margins in the commercial businesses that we've discussed. So I think we're on track by for the numbers that we discussed historically, and no real change.

Thank you. Our next question comes from George Tong with Goldman Sachs. You may proceed.

Hi, thanks. Good afternoon. I wanted to also ask about the resi business. Can you elaborate on how much of your reduction to the residential guide is, due to the sales force productivity issues you mentioned versus client demand? And discuss how overall client demand for Homes.com memberships, is tracking relative to your internal expectations?

So I would say that, I would say that it's more - it's not so much about client demand. It is about sales force mechanics. It's about how many people you put - you can put onto the product and training cycle up, at what pace? So what we're seeing is, as we hire a significant number of - I don't want to say junior, but not senior salespeople. We're hiring a number of salespeople successfully into the homes sales force. A very high percentage of them are ramping up very quickly to a production level that, covers their cost in their first year [technical difficulty] with the company. And then moves them into being very profitable in out years. So it's not so much like they're all - like we're finding plenty of demand. It's more of a question of how many people do you have approaching the opportunity? And how fast can you hire people? I mean there's a limit to how many people you can hire into a sales - role like that, before you start to lose quality, or the things begin to rattle too much. So adding 108 people in a quarter is pretty good, but we wouldn't want to go too far ahead of that, because that's just a lot of people are bringing on board.

Thank you. Our next question comes from John Campbell with Stephens Inc. You may proceed.

Hi guys, thanks for the question. I know there's some seasonality in the spin, particularly with marketing spend that's typically higher in the front half, but - it looks like sales and marketing dropped sequentially pretty sharply. That was the first, I think, sequential drop you guys have seen in 3Q since maybe 2019. So kind of related to Ryan's question here, as you think about the resi investment next year? Andy, it sounds like you don't expect that to go up. But my question is, could that initially go lower from a growth standpoint. I would imagine you're not probably doing the same amount of Super Bowl commercials, I would imagine the step down, and spend probably was a little bit less SEM, so you're still seeing good traffic at lower levels of spend. So I'm just curious about, if there's a potential for it to actually go lower next year?

Well, I'll give you one glimpse. we are anticipating a 33% reduction in Homes Super Bowl ads this year. So that gives you some indication. But again, we remain bullish about the opportunity and what we're accomplishing. We see indicators that make us feel good about where we're going with this opportunity. So, we are likely to continue to push on it into next year, and don't see us pulling back dramatically from where we were this year, nor accelerating from where we were this year.

And I think it's important to remember, we will be growing the sales force pretty meaningfully. So actually, that sales force increase will drive expenses and will be partially offset by some lower marketing spend. So there will be some change in the mix, but inevitably, it probably ends up at the same level.

Thank you. Our next question comes from Surinder Thind with Jefferies. You may proceed.

Thank you. Hi Andy, just a big picture question here. As you think about the Homes.com product and just conceptually, you can make the argument that it's possible to build a perfect product, execute perfectly on our product, but for maybe factors beyond your control, it just doesn't work out. So how are you thinking about, some of the metrics beyond just like a net bookings number, to kind of understand the decision-making and how patient that you're willing to be, or how patient investors should be?

Well, again, you have this phenomena where people in seven months want a conclusive result, and that doesn't happen. You don't build a $1 billion product in seven months. And - but what we're looking at is we're looking at, our growth in consumer awareness, our ability to bring people to our site preference for our site, which we're seeing a clear preference for our site. And we are watching a shift in the industry, away from buyer agency lead diversion to something, where folks are looking to have the portals do what they do in the rest of the world, which is to market the home for sale, which is the whole point to begin with. So, we're pretty excited about everything that's occurring despite the fact that it's hard to launch it. And the fact that it requires a little bit of patience, and that it requires capital to be able to pursue an opportunity like this. So, when I look at the sales metrics at the micro level, and we just sum it up. And we look at the people we're bringing in, and what they're achieving and the growth in NPS scores just mechanically, it lays out to a good result and a good time period. Now, when does it become obvious to everybody that it is going in the right direction, it's not this year. It would be - it's difficult for me to tell when it becomes obvious that it's working, but it's probably next year.

Thank you. Our next question comes from Ashish Sabadra with RBC. You may proceed.

Hi. Thanks for taking my question. The core bookings were down 34% in the quarter. They're being down 38% year-to-date. How should we think about the impact of weak bookings going into next year? And how do we think about the puts and takes, to help offset that headwinds from the vehicle booking?

Yes. So inevitably, in a subscription business, net bookings ultimately translate into revenue in the following year. And so, it's fairly mechanical that we - at the third quarter, we have our net bookings, they're sort of in the ground and they'll roll forward to 2025. I think what Andy has talked about, is getting the sales force reengaged, but also investing in the sales force. So really pay attention to net bookings in 4Q, 1Q, 2Q of next year, which will then roll into a '26 growth. So again, I think it's a mechanical exercise. We have three quarters in the ground. You can roll it forward, but really pay attention to our net bookings over the coming quarters, to really get - line of sight on the second half of '25 growth into '26.

Thank you. I would now like to turn the call back over to Rich Simonelli for any closing remarks.

I'm actually going to grab those closing remarks from Rich. So I should...

Yes.

So, I just want to thank everyone for joining us on this earnings call. I look forward to updating you shortly here. If you have any additional questions following the call, please reach out to our very musically talented IR professional Rich Simonelli at getrich@costar.com. Thank you for joining us. Look forward to talking to you next quarter.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.