CSGP

CoStar Group, Inc. (CSGP)

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CoStar Group, Inc. (CSGP)

Q2 2010 Earnings Call

July 22, 2010 11:00 am ET

Executives

Tim Trainor - Communications Director

Andrew Florance - President and CEO

Brian Radecki - CFO

Analysts

Chris Mammone - Deutsche Bank

Brett Huff - Stephens Inc.

Jon Maietta - Needham & Company

Brandon Dobell - William Blair

Ian Corydon - B. Riley & Company

Jim Wilson - JMP Securities

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group's second quarter 2010 conference call. At this time all participants are in a listen-only mode, and we will conduct a question-and-answer session, instructions will be given at that time. (Operator Instructions) As a reminder, this conference is been recorded.

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

Tim Trainor

Thank you, operator, and good morning everyone. Welcome to CoStar Group's second quarter 2010 conference call. Before I turn the call over to CoStar's CEO, Andrew Florance, let me state 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 second quarter of 2010 press release issued yesterday and in CoStar's filings with the SEC, including CoStar's Form 10-K for the period ended December 31st, 2009 and CoStar's Form 10-Q for the quarter ended March 31st, 2010 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 obligation to update these statements. You can find a webcast of this conference call on our website at www.costar.com/corporate/investor. Thank you for joining us. I will now turn the call over to Andy Florence.

Andrew Florance

Thank you Tim, and welcome everyone to CoStar Group's second quarter 2010 conference call. This is the first quarterly conference call we are making from our new headquarters building at 1331 L Street in Downtown, Washington DC. I am very pleased to report that the continued signs of stabilization in the commercial real state economy, CoStar group can report accelerating revenue growth and climbing renewal rates.

Our sales bookings doubled quarter-over-quarter and our in-quarter renewal rate climbed to a very impressive annualized rate of approximately 92%. We posted another consecutive quarterly revenue record of $55.8 million, which is an increase of $5.7 million over second quarter 2009 revenues of $50.1 million. The company added $11.6 million in cash to the balance sheet during the second quarter. Our total cash, cash equivalents and investments on hand now totaled $230 million and the company continues to have no long term debt or mortgage debt because of 94% of CoStar revenues is subscription based and because we have historically higher renewal rates in the 90% plus range, we believe that CoStar group is not a highly cyclical business and it is generally a bit more defensive.

Despite that fact, history shows that CoStar's revenues have grown dramatically faster during a stronger commercial real estate market than in a declining one. For that reason I would like to begin today's conference call by sharing with you in more detail some important and positive indication we continue to see emerging in the commercial real estate economy.

Perhaps the most significant recent development is that office vacancies rates have stopped climbing and appeared now to have stabilized. After having experienced one of the most dramatic losses in US jobs since World War II. Job losses appear to have bottomed out and we are beginning to see consistent job growth.

In the last eight recessions, we have had since World War II the rate of job recovery has been roughly symmetrical to that of job losses. Economy.com is forecasting strong job growth over the next several years. Of there were the case it would indicate the potential for a strong commercial real estate recovery over these next several years as well. The US had already experienced three consecutive quarters of office using job growth for a total gain of 200,000 jobs. I believe that the strong year-over-year overall growth in corporate profits we are seeing is a good leading indicator for continued job growth. Important leading indicators such as temporary employment and weekly hours worked are also showing a continued positive trend.

All economic lows in Greece are still threatening. I find it useful to keep in perspective that of the size of Greece is an economy of smaller [than so] obvious. The nature of job losses in this recession was somewhat unique. This time around the extensive job losses did not result in a very large amount of negative [vast] absorption. In the dot com bust, the job losses came from a smaller number of companies that eliminate most if not all of their staffs. Those sorts of job losses resulted in immediate and concentrated negative absorption of office space.

This time around the job, crests were spread more broadly across many companies. Many of which reduced their stats by 10% to 15% across the board. Companies that cut 10% of their staff typically do not immediately put excess office space back into the market, so this mitigates the scale of a negative absorption. And as rents have fallen over the past several years, many tenants may simply retain this less expensive excess office space. The bottom line is that less space has come flooding back into the markets than most experts expected.

We have seen solid leasing activity levels over the past four quarters and that trend continued in the second quarter of this year, as we recorded 6 million square feet of positive net absorption of US office space during the quarter. This is very good news for our core customers as leasing commissions are a major source of their revenue.

In 2009, 15 of the top 20 largest US cities suffered negative absorption of office space. But year-to-date in 2010, only 9 of top 20 say have measured any discernible negative absorption. Office leasing and absorption are recovering.

Commercial real estate constructions levels in the US are stunningly low right now. Due to falling rents, declining values and increasing the fall to an incredibly tight credit, new deliveries are at their lowest levels post World War II. In fact, we believe that the amount of commercial real estate being built is less than the physical deterioration rate of commercial buildings resulting in a net effective contraction of commercial inventory in the US.

Commercial credit markets remain very tight with stringent underwriting and large equity investment requirements in the part of borrowers. Most banks and traditional lenders have reduced their exposure to commercial real estate and CMBS mortgages continue to show increasing rates as default. With the current financing constraints, we are not likely to see an increase in commercial construction starts in the near future.

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