CSGP

CoStar Group, Inc. (CSGP)

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CoStar Group, Inc. (CSGP)

Q1 2010 Earnings Call

April 22, 2010 11:00 am ET

Executives

Tim Trainor - Communication Director

Andrew Florance - Founder, Director, President and CEO

Brian Radecki - CFO

Analysts

Timo Connor - William Blair

Jonathan Maietta - Needham & Co.

Ian Corydon - B. Riley & Co.

Jim Wilson - JMP Securities

Vance Edelson - Morgan Stanley Research

Brett Huff - Stephens Inc.

Presentation

Operator

Ladies and gentlemen thank you for standing by and welcome to the CoStar Group's First Quarter 2010 Conference Call. On the call today are CoStar Group’s CEO, Andrew Florance; CFO, Brian Radecki and Communications Director, Tim Trainor. During today’s conference all participants will be in a listen-only mode, later there will be a question-and-answer session; instructions will be given at that time (Operator Instructions). And as a reminder, today’s conference is being recorded.

I would now like to turn the conference over to CoStar's Group Communication Director, Mr. Tim Trainor, please go ahead.

Tim Trainor

Thank you, operator and good morning everyone. Welcome to CoStar Group’s first quarter 2010 conference call. Before I turn the call over to our CEO, Andrew Florance let me state that certain portions of this discussion contains 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 first quarter press release and in CoStar's filings with the SEC, including its Form 10-K for the year ended December 31, 2009 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.

As a reminder today’s conference call is also being broadcast live over the internet at www.costar.com. A replay will be available approximately one hour after this call concludes and remain available through May 6, 2010. To listen to the replay, call 800-475-6701 within the United States or Canada or 320-365-3844 outside the United States. The replay will also be available on CoStar’s website for a period of time following the call.

Thank you again for joining us. I will now turn the call over to Andy.

Andrew Florance

Thank you Tim, I appreciate it. Welcome everyone to CoStar Group’s first quarter 2010 conference call. I am very pleased to report the initial signs of economic improvement we reported last quarter had continued to strengthen throughout our business during this first quarter and this has all resulted in strong organic quarterly sales performance and a record $55.1 million in quarterly revenue. The $55.1 million in quarterly revenue for the first quarter of 2010 was an increase of approximately 500,000 over $54.6 million revenue during the fourth quarter of 2009. It was about a $5 million increase over the revenues a year ago same quarter. First quarter 2010 EBITDA was $8.8 million and the company’s net income was $2.9 million during the first quarter.

We are investing aggressively in our business in anticipation of economic recovery. We had invested by growing our sales force 32% year-over-year with the addition of nearly 50 net new sales professionals. We have also invested in the quality and depth of our research by adding 100 net new researchers year-over-year. We believe that this distressed real estate market has presented a unique opportunity for us to control long-term occupancy cost. So we’ve invested by purchasing a new headquarters building and made the decision to consolidate leases in both Boston and London.

We believe that advancing from what traditionally been a research focused business to one that includes analysis and applied research presents a tremendous growth opportunity for our company and so we've had a key personnel and have acquired and we are integrating property and portfolio research and resolve technology in to CoStar Group.

With these investments, coupled with ongoing our organic sales momentum, we believe the company is well positioned to achieve accelerated high margin revenue growth as commercial state markets recover.

We are pursuing these opportunities with the benefit of a strong balance sheet. At the end of quarter, the company had a total of $218.5 million in cash, cash equivalents and investments, and we have no long-term debt obligations.

We had a very strong subscriber growth during the first quarter adding 1,265 new subscribers to take our total subscriber base to 86,590. This is the third quarter in a row in which we have turned in strong subscriber growth.

Our renewal rates remained very high in the first quarter 2010. The 12 month trailing renewal rates for subscription based services improved to approximately 86% in the first quarter of 2010 from approximately 85% in the forth quarter of 2009. This improvement in renewal rates is a direct result of our successful efforts to retain the business of newer customers. 18 months ago we identified the need to improve our renewal rate among firms that have been customers for less than five years. We noted that on average our newer customers use the service less than our more established customers and that the low usage rates were directly co-related with lower renewal probability.

We attack this problem by gradually changing our sales professionals commission plan such that they are paid for this sales, the salesmen would get their commission when a customer has used the service rather when they signed up to buy the service. The net result was a dramatic improvement in usage within new customers’ sites.

In 2008, an average 38% of the authorized user at first year client sites where actively using our service. So by 2009 that active user rate has climbed to 53% among first year client sites. Our revised commission plan appears to have translated directly in the higher new customer renewal rates and fewer failed sales. The new customer renewal rate were 70% in the first quarter of 2009. That renewal rate has climbed to 85% in first quarter of 2010.

The average new contract value increased to $9,365 in the first quarter of 2010 from $9,143 in fourth quarter of 2009. This increase was driven upward by the Property and Portfolio Research average new contracts value of $107,383. We’ve had tremendous success with CoStar accounting introduced in the PPR team to CoStar customers and vice-versa with the result being millions of dollars in annualized subscription value cross sold. The total number of subscription client sites remained approximately 16,000 company wide. All major business services CoStar U.S. PPR SHOWCASE in U.K had positive organic growth in revenue in their local currencies for the first quarter in 2010.

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