CSGP

CoStar Group, Inc. (CSGP)

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CoStar Group (CSGP)

Q1 2013 Earnings Call

April 25, 2013 11:00 am ET

Executives

Richard Simonelli - Director of Strategic Communications and Investor Relations

Andrew C. Florance - Co-Founder, Chief Executive Officer, President and Director

Brian J. Radecki - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Michael Huang - Needham & Company, LLC, Research Division

Brett Huff - Stephens Inc., Research Division

William C. Marks - JMP Securities LLC, Research Division

Todd Lukasik - Morningstar Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group First Quarter Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Rich Simonelli. Please go ahead.

Richard Simonelli

Thank you, operator, and good morning, everyone. Welcome to CoStar Group's First Quarter of 2013 Conference Call. We're delighted you joined us today. Before I turn the call over to Andy, I have some really important facts for you. 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 Group's April 24, 2013, press release on the first quarter results and in CoStar's filings with the SEC, including our Form 10-K for the period ended December 31, 2012, 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, whether as a result of new information, future events or otherwise.

As a reminder, today's conference call is being broadcast live and in color over the Internet on www.costar.com. A replay will be available approximately 1 hour after the call concludes and will be available until May 28, 2013. To listen to the replay, call (800) 475-6701 within the U.S. or Canada; or (320) 365-3844 outside the United States and Canada. The access code is 287842, and a replay will also be available on our website soon after the call concludes.

At this point, I'd like to turn the call over to Andy Florance.

Andrew C. Florance

The day after tomorrow is the second anniversary of our announcement that CoStar had entered into an agreement to acquire LoopNet. In that announcement, we stated that we expected to achieve annual cost synergies of approximately $20 million over the first 24 months following the close of the transaction, and we also stated that we saw the potential for significant revenue synergies through the cross-selling of each company's complementary services to the other's client bases. As you know, it took 1 year before we received permission from the Federal Trade Commission to close the acquisition. Tuesday of just next week is the first anniversary of our closing on the CoStar LoopNet merger, and I'm very pleased to report that I believe the actual results of the merger have clearly met and exceeded those initial expectations.

We have achieved our goal of $20 million in cost synergies from the acquisition in half the time we expected. We have eliminated redundant or unnecessary expenses, and I am confident the result is a more efficient and better-managed company that is extremely well positioned for sustainable and profitable growth. I believe the excellent results that the new LoopNet management team continues to deliver prove that point.

A skeptic might worry that these significant cost savings might hurt LoopNet's ability to perform. In the first quarter 2013, we achieved the highest quarterly revenue ever from LoopNet's Premium Membership. Since the merger, we have refocused LoopNet to its core strength of marketing commercial properties on the Internet. We have refocused on annual rather than monthly contracts. We have improved the pricing of LoopNet's products relative to their value, and we have refocused on firm-wide contracts rather than contracts with individuals. The result is a 219% increase in the organic growth rate of LoopNet's Premium Membership revenue from 5.2% in the quarter before the acquisition to 16.6% in the first quarter of 2013. The fact is that LoopNet's operation is enjoying $20 million in cost synergies while turning in dramatically better results.

On the anniversary of the closing, I believe you'll agree with me, the potential for significant revenue synergies through cross-selling of each company's complementary services has become a reality. Through March 31, we closed 3,067 cross-selling deals between each other's client bases. These 3,067 deals cover over 7,000 users. These deals total $18.4 million in revenue synergies, which is a 26% increase from the $14.6 million I reported on our last investor call just 6 weeks ago. I reported a lot in that earnings call. An hour-and -- 90-minute call.

Now here is how the $18.4 million in revenue synergies breaks down. The pure cross-selling of our 2 customer bases totaled $14.4 million, which is approximately $12.4 million in CoStar information services to LoopNet members and approximately $2 million LoopNet marketing services to CoStar customers. During these sales calls, we were also able to move LoopNet customers from monthly to annual contracts for LoopNet marketing, and in many cases, we added additional users at those sites. This resulted in an additional $3.9 million in new sales associated with cross-selling. The LoopNet customers previously only had a combined monthly commitment of $329,000 with LoopNet, so the conversion to 18.4 million in annual subscriptions in little more than 7 months of cross-selling is quite impressive, and I think you'll agree with that.

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