CoStar Group, Inc. (CSGP)

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CoStar Group, Inc. (CSGP)

Q3 2008 Earnings Call Transcript

October 30, 2008, 11:00 am ET


Tim Trainor – Communications Director

Andrew Florance – Founder, President and CEO

Brian Radecki – CFO


John Neff – William Blair

Jon Maietta – Needham and Company

Brett Huff – Stephens Inc.

Jim Wilson – JMP Securities



Ladies and gentlemen, welcome to CoStar Group's third quarter 2008 conference call. Today, we have CoStar Group's Chief Executive Officer, Andrew Florance; Chief Financial Officer, Brian Radecki; and Communications Director, Tim Trainor.

At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, your conference is being recorded.

I would now like to turn the conference over to Mr. Tim Trainor. Please go ahead.

Tim Trainor

Thank you, Louise [ph]. Good morning, everyone. Welcome to CoStar Group's third quarter 2008 conference call. Before I turn the call over to our CEO, Andrew Florance, let me state for the record that certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties 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's third quarter 2008 press release and in CoStar's filings with the SEC, including CoStar's Form 10-K for the period ended December 31, 2007 and CoStar's Form 10-Q for the quarter ended June 30, 2008 under the heading “Risk Factors.”

All forward-looking statements are based on information available to CoStar on the date of this call and CoStar assumes no obligation to update these statements. You can find a webcast of this conference call on our Web site at www.costar.com/corporate/investor. Thank you for joining us.

I will now turn the call over to Andy.

Andrew Florance

Thank you, Tim. Welcome everyone, to CoStar Group's Third Quarter 2008 Conference Call. If there is a theme to our earnings call today, it's earnings. We have managed our business quite conservatively over the past year or so, trimming costs where we could, diversifying our product mix with the launch of CoStar Showcase, and above all, focusing on earnings growth.

Our earnings results in the third quarter clearly demonstrate the strength of CoStar Group's business model. In an ailing economy, many companies are unfortunately reporting weak earnings. In sharp contrast, CoStar Group is today reporting triple digit year-over-year quarterly net income growth.

In fact, for the fourth consecutive earnings call, we are pleased to again announce that we have doubled our earnings year-over-year. Net income for the third quarter of 2008 increased 104% to $6.6 million from $3.3 million in the third quarter of 2007.

At $6.6 million, net income for the third quarter increased 22% from the second quarter net income of $5.4 million. Earnings per diluted share for the third quarter were $0.34, up from $0.17 in the same period a year ago.

CoStar's EBITDA growth has been equally impressive. Our EBITDA for the third quarter was $15.5 million, a 95% increase compared to EBITDA of $8 million in the third quarter of 2007 and a 21% increase compared to EBITDA of $12.8 million in the second quarter of 2008.

For the nine months period ending September 30, 2008, over the nine months period ending September 30, 2007, our net income has nearly tripled. We believe that these results clearly demonstrate the absolute resilience of CoStar's business model in a very difficult recessionary environment.

This strong earnings performance is consistent with the aggressive target we set in the second quarter 2007 to raise our then company wide 9% EBITDA earnings margin to a 30% U.S. EBITDA margin by the fourth quarter of 2008. Some investors were concerned that the financial meltdown would make our 30% target unattainable, but we are pleased to announce that with our current 33% U.S. EBITDA margin, we have met and exceeded the target we set with you an entire quarter ahead of plan.

Of course, we expect to continue to remain above a 30% EBITDA margin in our U.S. operations in the fourth quarter of 2008 and throughout 2009 and 2010. In addition, we are reiterating our expectation of swinging from a loss to break even in our international operations in the fourth quarter of 2008.

As we expect our international operations to move to break even next quarter, we can consolidate, simplify, and strengthen our EBITDA margin goals and state our expectation that we will reach or exceed an overall 30% EBITDA margin in the fourth quarter of 2008. So, rather than just reach a 30% U.S. EBITDA margin in the fourth quarter, we are raising the bar and setting the expectation that we can reach a company wide EBITDA margin of 30% in the fourth quarter.

This is a very significant milestone for CoStar Group. For many of you who have seen the closing slide from our road show, any time over the past ten years, you know that we've had a long stated target margin of 30% EBITDA companywide. This is another testament to the resilience and strength of the CoStar business model that we expect to reach this longstanding target margin in the fourth quarter despite this negative business environment.

Once we obtain a 30% overall EBITDA margin companywide, we expect to remain at or above that target for 2009 and 2010. Furthermore, based upon the visibility we have at this point, we are raising our expected net income target for the fourth quarter and full year 2008.

Brian Radecki will give you more color on this later in the call.

Having already established our research infrastructure, our operating costs are relatively fixed and we expect they will remain so. This puts us in a very favorable position going forward as the majority of every additional dollar or pound of revenue we earn essentially falls straight to our bottom line.

Because of our continued success in reaching our earnings goals, and despite the abysmal economic environment, we remain committed to our previously stated goal of reaching $100 million in annualized EBITDA companywide by the end of 2010.

One of CoStar Group's greatest strengths remains our very solid balance sheet. Our cash position increased by $15 million in the third quarter and now stands – and the total cash now, cash equivalents, short-term and long-term investments, now stands at $213 million.

The majority of these assets are invested in U.S. Treasuries. CoStar's cash position when viewed together with our shares outstanding, currently translates to $11 per share in cash. And we expect to continue to generate very significant cash flow through the remainder of this year and through 2009.

In addition, the company has no long-term debt which I'm sure you'll agree is a very good position to be in right now. I know it certainly helps management sleep well. At any rate, CoStar remains in a very strong financial position.

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