CSGP

CoStar Group, Inc. (CSGP)

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CoStar Group Inc (CSGP)

Q2 2013 Earnings Call

July 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

William C. Marks - JMP Securities LLC, Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Brett Huff - Stephens Inc., Research Division

Michael Huang - Needham & Company, LLC, Research Division

Todd Lukasik - Morningstar Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group Second Quarter Earnings Conference Call. [Operator Instructions] 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 Second Quarter 2013 Conference Call. We're glad you joined us today.

Before I turn the call over to Andy, I have some really important facts for you to listen to. First, of all, certain portions of the 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 the CoStar Group's July 24, 2013 press release on second quarter results and in our filings with the SEC, including Form 10-K for the period ended December 31, 2012, as well as our Form 10-Q for the period ended June 30, 2013, which we filed yesterday. In each case, 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 also being broadcast live over the Internet at www.costar.com., and a replay will be available approximately 1 hour after this call concludes and available until August 28, 2013. To listen to the replay, call 1 (800) 475-6701 within the U.S. or Canada and (320) 365-3844 outside the U.S. and Canada. The access code is 297687. And a replay of this call will also be available on our website soon after the call concludes. So I'd like to turn the call over to Andy Florance.

Andrew C. Florance

Thank you, Rich. Welcome and thank you for joining us today.

I think we have some very strong news to share with you today. CoStar's 2013 second quarter was our best quarter yet, as we achieved our highest ever net new sales quarter, our best-ever quarterly revenue and EBITDA results.

Revenue grew to $109 million for the second quarter of 2013, an increase of $23.8 million or 28% year-over-year. Our annualized net new sales bookings in the second quarter climbed to $14.4 million, an increase of 49% over the same period last year. This is our second consecutive quarter of record annualized net new sales.

In the second quarter of '13, we added 1,300 new CoStar information subscription customers, which is the highest number of new subscribers we have ever added in a quarter. Over the course of the last 12 months, we have added a total of 4,700 new clients, the most in our history during a 12-month period.

In the second quarter of '13, our EBITDA increased 209% year-over-year to $25.3 million, a new high point for CoStar. Our EBITDA margin rose to 23% in the second quarter, up strongly from 10% in the second quarter a year ago. This shows our ability to flow a high percentage of every incremental revenue dollar sold to the bottom line.

Some of the primary drivers behind our solid results are: one, continued strong cross-sales for our -- of our CoStar information services to our LoopNet clients; two, strong results from our LoopNet marketplace as we see higher average price points, longer contracts and more firm-level purchases; three, solid performance across all 20 of our product lines; four, cost synergies achieved in the LoopNet acquisition; and finally, continued recovery in the commercial real estate economy.

We continue to grow the top line, and we are reinvesting in the business aggressively for future growth, while at the same time expanding our margins. We're hitting on all cylinders and building an even stronger platform for the 7.4 million registered members we've got, and our hundreds of thousands of paying commercial real estate customers.

When CoStar acquired LoopNet last year, one of the core rationales for the purchase was the potential to sell CoStar's premier commercial real estate information to LoopNet's large commercial real estate community on the Internet. In the first year post acquisition, we have clearly delivered on that potential for cross-selling between the LoopNet and CoStar communities.

Through the second quarter of 2013, the CoStar sales force had achieved $27.3 million of revenue synergies from our acquisition of LoopNet, which is an increase of 48% over the first quarter's cumulative total of $18.4 million. Of the $27.3 million in cross-selling synergies through quarter-end, $18.4 million of the revenue is from selling CoStar information to LoopNet users. This represents an increase of 48% quarter-over-quarter as well. $6 million in revenue synergies is attributed to selling an annual firm contract for LoopNet Premium Lister, where before the client was previously free or a paid individual user on a month-to-month agreement. Generally, the sale of the company that are done at the same time with the sale of CoStar services to the LoopNet firm. Revenue from this type of sale grew 53% quarter-over-quarter. Finally, $2.9 million of the cross-selling revenue was generated selling LoopNet Premium Lister to CoStar clients, which is an increase of 45% quarter-over-quarter.

Overall, through June 30, 2013, we had cross-sold our products to 4,800 commercial real estate firms. We have closed approximately 31% of the 15,500 sales cross-selling demos we had arranged. We believe that we can continue to increase the close rate. The number of cross-selling deals we are closing has accelerated to nearly 600 per month. The 4,800 firms we have cross-sold to date represent less than 4% of the active CoStar and LoopNet prospects we believe are out there for cross-selling.

I believe that we are nowhere near reaching the cross-sell potential from the merger yet. And at this point, I believe cross-selling revenue could be several hundred million dollars over time.

Another significant factor to consider is the size of the LoopNet prospect pool. The LoopNet team has grown the LoopNet membership remarkably in the past 12 months. The number of LoopNet registered members grew by 21%, or nearly 1.3 million over the last 12 months; which is a robust gain of approximately 25,000 new members a week. We now have 7.4 million registered users, and the number of unique monthly visitors to loopnet.com has grown by 36% year-over-year to nearly 5 million.

LoopNet's flagship information product is Premium Searcher. In the first quarter of 2012, before it closed the merger, Premium Searcher had annualized revenue of $18.7 million. Not only have we converted nearly that amount of information revenue by selling CoStar to LoopNet members, we also simultaneously grew LoopNet Premium Searcher revenue 27% to $23.8 million annualized. That depth and strength of the market really came as a surprise to me and is great news. The bottom line is, the pool of LoopNet subscribers we have to sell CoStar information services into is growing.

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