CSGP

CoStar Group, Inc. (CSGP)

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CoStar Group Inc. (CSGP)

Q3 2010 Earnings Call

October 21, 2010 11:00 am ET

Executives

Tim Trainor - Communications Director

Andrew Florance - President & CEO

Brian Radecki - CFO

Analysts

Jon Maietta - Needham & Company

Tim Connor - William Blair & Company

James Wilson - JPMorgan Securities

Chris Ramon - Deutsche Bank

Bill Warmington - Raymond James

Toni Kathryn - Morgan Stanley

Presentation

Operator

Ladies and gentlemen thank you for standing by and welcome to the CoStar Group’s third quarter 2010 conference call. At this time all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will be given at that time. (Operators Instructions). As a reminder, today’s conference is being recorded.

Speaking on today's call, CoStar Group Founder and Chief Executive Officer, Andrew Florance; Chief Financial Officer, Brian Radecki; and Communications Director, Tim Trainor. At this time, I will turn the call conference over to Mr. Trainor. Please go ahead.

Tim Trainor

Thank you and good morning everyone. Welcome to CoStar Group's third quarter 2010 conference call. Before I turn the call over to our 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 our press release on CoStar's third quarter 2010 results and in CoStar's filings with the SEC, including its Form 10-K for the year ended December 31, 2009, and its Form 10-Q for the period ended June 30, 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 no obligation to update these statements.

As a reminder, today's conference call is all being broadcast live over the internet at www.costar.com/corporate/investor. And a replay will be available on our website one hour after this call concludes. Thank you for joining us. I will now turn the call over to Andy.

Andrew Florance

Thank you very much Tim, and welcome CoStar Group’s third quarter 2010 conference call. I am pleased to report to you during this past quarter CoStar observed improving commercial real estate market conditions and in that environment we achieved raising sales and extremely high renewal rates. While the key headlines for CoStar Group this quarter, is that we can now report that both the US office vacancy and availability rates have clearly stopped climbing and are now improving.

These key fundamental industry indicators historically are highly correlated with our sales growth and renewal rates. During the third quarter of 2010 CoStar Group posted $57.1 million in quarterly revenue, an increase of 2.3% or $1.3 million over our second quarter 2010 revenue of $55.8 million.

Revenues increased $3.6 million or over third quarter 2009 revenues of $53.6 million. $57.1 million is the highest quarterly revenue level that CoStar Group has yet achieved.

Net new sales during the past quarter reached the highest level scene since the second quarter of 2008. This is the fourth consecutive quarter in which we are reporting increasing sales productivity. For the third quarter of 2010 company wide quarterly net new sales totaled $4.6 million and nearly $1 million improvement over second quarter new sales of approximately $3.7 million. The third quarter net new sales of $4.6 million is a $3 million improvement over the first quarter of 2010 net new sales figure, $1.6 million. We are obviously very pleased to be able to report that net new sales in the third quarter of 2010 nearly tripled over net new sales in the first quarter of 2010.

Our core product, the US CoStar Property Professional information suite was the biggest driver of our strengthening third quarter organic revenue growth.

Our great progress in sales this past quarter was only possible because of the company's continued success in retaining customers. Our 12 month trailing renewal rate for subscription based services increased approximately 2% quarter-over-quarter, climbing to a very impressive level of approximately 90%. The in-quarter renewal rate increased 7% year-over-year. A 90% renewal rate is the highest level we have enjoyed since the second quarter of 2008.

During the third quarter the renewal rate for clients that have then our customers for five years or more remained very strong at 96%. The third quarter 2010 renewal rate for firms that have been then our clients for less than five years also remained very high at 87% and very much improved from the 74% we were experiencing one year ago.

I believe the great improvements we've seen our renewal rates are the direct result of the hard work and talent of CoStar’s sales force and a clear indication that our core customer base is returning to financial health.

Commercial brokerage firms in particular have been very active recently and we continue to see strong demand from one of our largest client segments as tenants return to the market and leasing activity increases. Many brokerage firms have added users or subscribed to additional services and markets recently, including one of our largest clients, Grubb & Ellis, which recently signed a major contract extension for additional services during the third quarter.

We believe that a 90% 12 month trailing renewal rate for our subscription based services combined with the fact the subscription base revenue accounted for approximately 94% of the company's total revenue in the third quarter, makes CoStar Group an exceptionally solid and attractive company. Our company’s solid balance sheet was $232 million in cash, cash equivalents and investment on hand at the end of the third quarter with no long term debt and a [mortgage rate] Class A office building to boot, all serve to enhance CoStar Group’s startling financial position.

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