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LoopNet, Inc. (NASDAQ:LOOP)

Q3 2008 Earnings Call Transcript

October 30, 2008 4:30 pm ET

Executives

Erica Mannion – IR

Rich Boyle – Chairman and CEO

Brent Stumme – CFO and SVP of Finance & Administration

Analysts

Steve Weinstein – Pacific Crest Securities

Brett Huff – Stephens Inc.

Derek Brown – Cantor Fitzgerald

Jim Wilson – JMP Securities

Mitch Bartlett – Craig-Hallum Capital

Operator

Welcome to LoopNet’s earnings conference call for the third quarter 2008. The date of this call is October 30. This call is property of LoopNet and any recording, reproduction, or transmission of this call without the express written consent of LoopNet is strictly prohibited.

This call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of LoopNet’s website. I would now like to turn the call over to Erica Mannion, Investor Relations for LoopNet.

Erica Mannion

Good afternoon. Thank you for joining us to discuss LoopNet’s financial and operating results. With me today are Rich Boyle, Chief Executive Officer and Chairman and Brent Stumme, Chief Financial Officer.

Today, Rich will begin with an overview of the business and overall corporate strategy continued by a summary of the company’s third quarter performance and review of the marketplace.

Brent will review the third quarter financial results and provide fourth quarter and fiscal year 2008 guidance. During the fourth quarter the company will be attending the following investment banking conferences – SunTrust Robinson 2008 Business Services UnConference on November 6 in New York City, and the Credit Suisse 2008 Technology Conference on December 2 in Scottsdale, Arizona.

I would like to bring the following to your attention. On the call today you may hear forward-looking statements about events and circumstances that have not yet occurred. Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties.

Please refer to the company’s recent SEC filings at the SEC website at www.sec.gov for detailed discussions of the relevant risks and uncertainties. The company undertakes no responsibility to update the information in this conference call under any circumstance.

The press release distributed today that announced the company’s results is available on the company’s website at www.loopnet.com in the Investor Relations section under Financial Press Releases. The current report on Form 8-K furnished with respect to our press release is available on the company’s website in the Investor Relations section under SEC filings and on the SEC’s website.

You will also hear discussion of non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most comparable GAAP financial measures are contained in the press release distributed today, and available on the company’s website.

Now I will turn the call over to Rich Boyle, Chief Executive Officer and Chairman.

Rich Boyle

Thank you, Erica. I’d like to welcome all of you to the LoopNet third quarter 2008 earnings call. Today we’re going to be discussing our most recent quarter’s performance including our perspective on the current market conditions in the commercial real estate industry and how they are impacting our business. I will also provide an update on some of the strategic business initiatives we have been investing in and Brent Stumme, our Chief Financial Officer will be taking us through the numbers in some detail.

We continue to execute well in what can only be described as a challenging environment. Revenue for the quarter was $22.4 million, an increase of 20% over the third quarter of 2007. Adjusted EBITDA for the quarter was $10.4 million, an increase of 15% over the same period last year. We remain focused on providing a great service to our customers today as well as investing in the business to create value for shareholders in the future despite challenging conditions in the commercial real estate market and the overall economy.

The investment sales market continues to be affected by the turmoil in the debt markets as well as a continued bid-ask spread problem and increasing macroeconomic concerns. Deal volume during the third quarter was down by approximately 75% on a year-over-year basis according to the research firm, Real Capital Analytics. At the same time, average asset prices are down by only about 10% on a year-over-year basis according to the Moody’s Real Commercial Property Price Index.

We believe that the market’s expectation is that asset prices will continue to fall which is contributing to the lack of transaction activity. There continues to be a large pool of available capital waiting to invest albeit with much less leverage available due to the ongoing credit crunch. However, the key word there is "waiting".

The bid-ask spread problem that we’ve seen all year long continues to be very much a factor. Distressed sales are up significantly in the last quarter according to Real Capital Analytics and increasing quickly. A large supply of distress or at least highly motivated sellers coming to market is anticipated to further push asset prices down.

The increase in distressed sales and resulting decrease in asset prices will eventually, we believe, translate to more activity in the market but we have not reached a market clearing price yet. This overall reduction in sales transaction volume continues to affect our business as it has since September of 2007, in the form of relatively slow growth in both demand side searching and supply side listing of properties for sale.

On the leasing side of the industry, vacancy rates have continued to increase across asset types on a national basis. This has led to an increase of spaces for lease being marketed on our system. Overall, we believe that these conditions are likely to continue for some time, at least well into 2009. In their annual emerging trends report released last week, the Urban Land Institute and PriceWaterhouseCoopers predicted that 2009 will continue to be a challenging year across the commercial real estate industry.

Despite all of this we have continued to grow our business both in terms of the operating metrics and our overall financial results. Our commercial real estate listings active at the end of the quarter grew to over 642,000 which is a 19% increase over the same time last year. Members using our service to look at properties on LoopNet generated over 44 million profiles used during the quarter, an 10% increase over the same time last year.

Continuing the aggregation of the supply and demand activity remains the foundation of our business and we believe we are making solid progress. We ended Q3 with over three million registered members on the LoopNet marketplace and ComScore reported that we saw an average of about 900,000 unique visitors per month to LoopNet.com during the third quarter.

On the monetization side, premium membership revenues grew 16% on a year-over-year basis and accounted for 74% of total company revenues for the quarter. The revenue we derive from brokers marketing available properties is continuing to grow and accounted for an increasing share of the premium membership total coming in at slightly more than 58% of total PM revenue.

On a year-over-year basis, the revenues associated with premium membership for marketing listings increased by slightly over 30%. The revenue we derive from customers paying to search for properties is currently not growing and accounted for just under 42% of total premium membership revenue.

The remaining 26% of company revenues is generated from a number of other services which are also being affected by industry conditions in varying ways. Recent sales, BizBuySell and our advertising services have all seen growth slow due to the macro environment.

Recent sales are strongly correlated with activity in the investment sale market which as we said is slow. The non-recurring revenue items in BizBuySell and our related service advertising have also been challenged. On the other hand we’ve seen some notable new sales from the REApplications business that we acquired in Q2 and we’re also pleased with the progress we’re making in terms of integrating the LandAndFarm.com website into our broader marketing and distribution network for listings.

As we look forward in the immediate near-term, we expect that the poor macroeconomic environment is going to exacerbate the usual seasonality in our business. Q4 is always our slowest quarter and we expect this quarter to be no exception.

Our belief is that the sales of our non-recurring items such as advertising will be slower than normal and the cancellation rates for our subscription services will be elevated this quarter. The monthly cancellation rates for our premium membership service have remained within the 4.5% to 6.5% range we expected for the first three quarters this year but we believe there is some risk that they could move above the high end of that range for the fourth quarter.

The primary question on everyone’s mind is clearly when does this market get better? While we cannot estimate a specific timeframe we can say two things. First, the transaction volumes in the investment sale arena will eventually pick up from their current levels. In our view asset values will continue to fall until a clearing price is reached at which point deals will start to happen again.

We believe our business is strongly correlated to deal volume rather than to asset values. Secondly, with our strong balance sheet, excellent profitability, strong positive cash flow and leading position in the market, we think that we are not only in a position to continue to execute through this downturn but also to invest in our business and take advantage of the conditions to our shareholders long-term benefit.

With that in mind, I’d like to spend some time giving an update about some of the strategic investments we’ve been making throughout this year and where we’re headed with those.

As we said back in February when we gave our initial 2008 guidance, we planned on making a number of investments during this year and we’ve been following through with that. The primary strategy behind the investments are the dual themes of investing to grow the scale of our marketplace and investing to leverage the data flowing through the marketplace into information services that are of high value to our customers.

We’ve made a number of inorganic investments along those lines. On the acquisition side of things we’ve been very pleased with the ongoing progress of REApplications and we expect to go live at the end of this year with the first phase of the seamless integration between the REApplication platform and LoopNet.com.

Commercial real estate brokers using REApplications will be able to automatically distribute their listings to not only LoopNet.com but to our entire online network including CityFeet.com and over a 125 newspaper partner websites. We will soon be adding landandfarm.com to that distribution network, leveraging their great demand site traffic to provide more marketing exposure to the listers of land and agricultural properties on the LoopNet network.

Another area of investment has been with our partner, Xceligent. We have continued to make incremental investments in their business and they have made great progress despite this difficult environment. They have continued to expand their research-based information services and existing markets and have established themselves as the market leader in a number of additional markets such as Memphis, Albuquerque, and Milwaukee.

We believe that their strong growth momentum right now is driven primarily by the value proposition of their services, high quality research-based information services at a lower price point than offered by their main competitor in that space. Xceligent’s pricing has been stable to modestly increasing but remains considerably lower than the competition.

We also believe that in many markets the competition has reduced their level of effort to gather and maintain the necessary market information, perhaps trying to manage expenses. This helps create a great opportunity for Xceligent to win business in those markets and one of their major growth avenues has been taking share away from the competition.

We expect to continue working with them throughout 2009 and beyond with two main areas of focus. First we will work with them to expand into additional markets and we have a number of markets lined up for expansion efforts in early 2009. Second we are planning on implementing in the first half of 2009 the next phase of cooperation between the two companies, which is the seamless sharing of building inventory and listings information.

We will be rolling it out in certain test markets first but the intent is that LoopNet’s information can be used by Xceligent to reduce the costs to research and maintain their data and as Xceligent researches markets and identifies listings that are not on our system, we will offer the listing broker an easy and seamless method of marketing that listing on the LoopNet marketplace.

In addition to these, we have continued to make investments to drive organic growth as well along the same strategic focus, driving more marketplace scale and leveraging the marketplace to create additional information services for our customers. For example, we’ve discussed on prior calls that we think the current market environment is a good one for picking up share in terms of available properties.

While the shift to online marketing continues in our industry, we believe the majority of commercial real estate listings are still not in online world. To help accelerate this shift we have been testing a service where LoopNet allows a listing broker to send us their offline marketing materials and LoopNet staff will create for them the seed listing information on our system. The broker then takes ownership of the listing data record, augmenting and maintaining the information and joining the online marketing world.

We have been testing this process on a small scale with a few thousand listing throughout this year. The initial results have been very promising in terms of the listings we can generate. Our costs associated with doing so and the value we can provide the listing broker in terms of marketing exposure on LoopNet. We expect to continue to invest in this initiative and scale it up with the goal of being of bringing more brokers marketing listings into the online world via the LoopNet Marketplace and our distribution network.

Another example that we’ve talked about in the past is the ability we have to leverage the information being generated on our Marketplace to create other services that our customers highly value. Our recent sales service is a great example of this and we’re continuing to expand that product line.

In a similar vein we have been working to reuse the historical listings information from LoopNet as well as other third party data sources to create some additional innovative new services to provide information on the inventory of commercial properties in the United States as well as various market trends and statistics to our customer base.

We have millions of data records underlying our system and we believe that providing this information back to the commercial real estate community in various means we can create great value for our users.

In the first half of 2009, we expect to launch in a public beta forum some of these building inventory and market information services. While we have no revenue associated with them in our near-term plan, we are very excited about their long-term strategic potential for our business and we look forward to providing more information about them after the first of the year.

In conclusion, while we can’t predict how long this economic downturn will last, our focus is to continue to execute well in the short-term and positions ourselves to capitalize on the long-term recovery when it occurs. The short-term market headwinds have not changed our long-term view of the large scale opportunities in our business and we are committed to continue to making these investments to capture that opportunity.

We revisit our long-term business planning every 12 to 24 months and reset our goals for the next level of achievement in growing our business on a rolling three to five year time horizon basis. While market conditions make the near-term timing murky, our current role is to grow to a $200 million revenue per year business with adjusted EBITDA margins in excess of 40%.

We will provide our specific 2009 guidance when we report our Q4 earnings consistent with prior years. However, our belief at this time is that we will likely see continued challenging conditions in the market in the near term resulting in 2009 revenue growth being slower than we have achieved historically.

Our stated goal as a management team has been to manage to an adjusted EBITDA target margin in the mid to high 40s on a percentage basis but we see the opportunity to invest in the business in the near-term for better ROI over the long-term as more than sufficient to accept margins that we expect to be below that range next year.

We think that this environment creates some strategic opportunities for us to invest, expand what we do, and position LoopNet to better serve our customers and create shareholder value as we come out this cycle. We’ll continue to invest in the team here, look for more acquisitions, more aggregation and scale in the marketplace as well as expanded information services. We believe these investments are necessary to continue to capture what we believe is a very large opportunity in our space.

We also believe that our strong balance sheet, excellent profitability, and continued positive cash flow generation will enable us to take advantage of this environment. We look forward to updating our shareholders on our progress in capturing that opportunity.

Now, Brent Stumme, our Chief Financial Officer, will take us through the quarter’s financial results.

Brent Stumme

Thank you, Rich. LoopNet’s revenue for the third quarter of 2008 was $22.4 million, an increase of 20% from $18.6 million in the third quarter of 2007. The increase was due to higher average monthly prices for premium membership and continued growth of our non-premium membership products.

On a year-over-year basis, we experienced a 22% increase in the average monthly price of premium membership resulting in an average monthly price of $64.51. This increase was primarily the result of the shift to a volume-based pricing structure for listers, which we began to implement during Q3 of 2007.

LoopNet’s adjusted EBITDA for the quarter was $10.4 million or 46.5% of revenues, an increase of 15% from $9.1 million in the third quarter of 2007. The company has reported adjusted EBITDA, which we defined as EBITDA excluding stock-based compensation and litigation-related costs because, management used it to monitor and assess the company’s performance and believes it is helpful to investors in understanding the company’s business.

GAAP net income for the third quarter of 2008 was $4.8 million or $0.13 per diluted share compared to $5.8 million or $0.14 per diluted share in the third quarter of 2007. Non-GAAP net income, which we define as net income before stock-based compensation and litigation-related costs for the third quarter of 2008 was $6.4 million or $0.17 per diluted share compared to $6.4 million or $0.16 per diluted share in the third quarter of 2007.

The effective tax rate for the third quarter of 2008 was 37.8% compared to 35.6% in the third quarter of 2007. As of September 30, 2008, the company had $69.4 million of cash, cash equivalents, and short-term investments and no debt.

LoopNet purchased 543,127 shares of its common stock during the quarter ended September 30, 2008 for $5.4 million. From October 1, 2008 through October 29, 2008 the company repurchased an additional 1,076,671 shares of its common stock for $10 million. Since February 2008 the company has repurchased 4,925,961 shares of its common stock for $54.6 million or 13.9% of shares outstanding.

As previously announced, the company’s board of directors has authorized the repurchase of up to $100 million of common stock. Now, I would like to review some of our key operating metrics.

The number of registered members which includes both basic and premium members grew to 3,117,403 during the third quarter of 2008, a 29% increase over the third quarter of 2007. The number of premium members as of the end of the third quarter of 2008 was 83,808, a 7% decline from the third quarter of 2007. The number of profile views of listings on the LoopNet Marketplace during the quarter was $44.4 million, a 10% increase over the third quarter of 2007. Average monthly unique visitors on the LoopNet Marketplace were approximately 900,000 which was flat compared to the third quarter of 2007.

As of September 30, 2008, the LoopNet online Marketplace contained approximately 642,000 listing, a 19% increase compared to September 30, 2007. BizBuySell contained approximately 52,000 listings of operating businesses for sale, a 5% increase compared to September 30, 2007.

That brings me to our business outlook. Based on current visibility, the company expects revenue for the quarter ending December 31, 2008 to be in the range of $21 million to $21.3 million, adjusted EBITDA to be in the range of $8.8 million to $9.1 million, and non-GAAP net income to be in the range of $0.13 to $0.14 per diluted share, assuming an effective tax rate of approximately 40% to 41%.

The company expects revenue for the full year of 2008 to be in the range of $86 million to $86.3 million, adjusted EBITDA to be in the range of $39.2 million to $29.5 million, and non-GAAP net income to be in the range of $0.61 to $0.62 per share assuming an effective tax rate of approximately 40% to 41%.

The company expects stock-based compensation to be in the range of $0.02 to $0.03 per share net of tax benefit for the quarter ending December 31, 2008 and in the range of $0.09 to $0.10 per share net of tax benefit for the full year of 2008. The adjusted EBITDA in non-GAAP net income guidance for the quarter and year ending December 31, 2008 exclude litigation-related costs. Thank you for joining us today. I will now open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from Steve Weinstein from Pacific Crest, your line is open.

Steve Weinstein – Pacific Crest Securities

Great, thanks a lot. I’m just wondering if from where you’re sitting today how you’re thinking about the pricing structure as you go in to next year. You’ve worked over the last couple of years to move to a pricing structure that’s going to really vary more with the number of listings but you really haven’t touched the side of the business for people who are just searching for listings and given that that’s kind of where the weakness is right now, if you would look to make some adjustments there in particular?

Rich Boyle

Yes, I guess a couple things. On the searching side to begin with, I don’t think we’re planning on making any adjustments there and in particular the weakness there is not a pricing related weakness, it’s basically a binary decision of people that are saying I’m not in the market to look to buy a building right now. So there’s sort of this yes or no, well if they’re not in the market whether we’re charging them zero dollars or $49 is not the issue. So I think we’re comfortable with it there.

On the marketing side of things, we have basically completed the initial roll out of the volume based pricing that we launched in Q4 of 2007 and I think at this point in time, major changes to the pricing model are probably not going to happen. What we continuing to do is provide the users the flexibility to allow them to vary their marketing dollars, spend more marketing money and get more marketing results, but I think if you look at where we’re expecting to drive growth right now, we’re pretty comfortable with the pricing model we’ve put in place. We’re not entirely done rolling that out but I think we’re pretty close and really shifted our focus more towards driving more listings into the platform.

Steve Weinstein – Pacific Crest Securities

Thank you.

Rich Boyle

Sure.

Operator

Thank you, sir. Our next question comes from Brett Huff from Stephens Incorporated. Your line is open.

Brett Huff – Stephens Inc.

Good afternoon. Congrats on the nice quarter.

Rich Boyle

Thanks.

Brett Huff – Stephens Inc.

When you guys think about the working with Xceligent, it seems like they’re moving their business model more towards the proactive, send researchers out and do research kind of view and you mentioned that they have had some success in some of the smaller cities. You mentioned also that you were looking forward to work with them more, not just on the sort of sharing the data that they get and them doing listings but you mentioned working with them in other specific cities. What did you mean by that or did I hear that wrong?

Rich Boyle

No. You heard it right. They’re in roughly I think 25 to 30 markets currently and are looking to continue to expand their business and introduce services. They’ve always had a proactive research-based model so when they go into a market, they go out and gather information about the building inventory and the current availabilities and then keep it up to date, package it with a bunch of reporting and analytics tools and sell access to that on a subscription basis. So they haven’t fundamentally changed their model.

What they have done over the last seven, eight years is gradually get better and better at how they execute on that and more efficient on how they execute on that and I think have hit upon a formula now which really lets them go into one of these markets, research it, do a great job of keeping the information complete and current, and provide it back to the community at a price point that’s much lower than I think that’s been historically possible and so they’re getting good reception in the market in doing that and I think we’re just going to continue to work with them to roll it out into hopefully quite a few new markets over the coming years.

Brett Huff – Stephens Inc.

As you think about it going into ‘09, you gave us sort of broad brushed ideas of what to expect for growth and margins, can you give us any additional detail on the margins specifically and again, I think typically it’s mid to high 40s on adjusted EBITDA and you mentioned some investments. Are we talking substantial differences from that or can you give us any more specific sort of sense of that?

Rich Boyle

Yes, I don’t have any specifics to give you at this time. We’re in fairly early on in our budgeting process which always sort up wraps up towards the end of the year. It’s our policy in the past has been to give our next fiscal year guidance when we report Q4 which will be at end of January, early February next year and so we’ll continue that policy this year. I just think that qualitatively we think it’s important for investors to recognize that it is a challenging market which has been and we think will continue to impact growth.

But in a long-term sense our view of the opportunity really hasn’t changed at all and so the investments that we were already planning on making and have been making this year, we’re intending to continue because we’re in our minds further down the road of proving out the ROI that goes with those investments.

So we think it’s entirely appropriate to keep making them and we’re going to do so. It will bring margins down a bit next year. We think that given our balance sheet, strong cash balance, no debt, great profitability, great positive cash flow, making those investments, we think were entirely appropriate for us to do, but we’ll giving specific numbers around them when we report Q4 and give our ‘09 guidance.

Brett Huff – Stephens Inc.

Okay, so it is best for us to understand it as you’re just not going to pare back on what you think is the right thing to do for the medium and long-term even though you think ‘09 is going to be difficult? Is that the right way to think about it?

Rich Boyle

Yes, I think thematically that’s absolutely the right way to think about it. We are in the margin, we are getting a little more careful about certain expenses, just for example in this market climate where certain types of customers are just not actively buying right now, we may dial buy some of our marketing spends in a few segments here and there, but when it comes to fundamentally building scale in the marketplace either supply or demand, building out these information services, working with partners like Xceligent, all those things in our minds in the long-term have fantastic ROI and given our profitability, given our cash position, given our continued positive cash flow, we see no reason to pull back on that right now.

Brett Huff – Stephens Inc.

Okay and when you think about some of those tactical spend decisions, you talked about marketing and things like that, is there one big piece of low-hanging fruit that you could do without? I think you run pretty lean already but is there anything like that? Or could you give us examples of things that you guys are doing now besides the example that you gave that you’re sort of acknowledging that things are going to rough here for a while?

Rich Boyle

Well, I think aligning sales and marketing is probably a good example. As we scale up, we’re still growing as a company and so as we continue to grow, looking at where we’ve been adding people and increasing spend, and that’s certainly an area and so you don’t want to go inefficient if you will in things like customer acquisition costs and spend we would look at those kind of things on the margin but again, the bigger picture and long-term view is still the same and so we think we’re going to continue to invest to build the business there.

Brett Huff – Stephens Inc.

I think that’s one of the things I’d like you to expand on a little bit too is sort of the behavioral change that you all are trying to overcome in terms of getting offline marketers to come online. It sounds like one of the things you’re testing is, hey, give us your data and we’ll put the stuff into LoopNet for you as kind of a trial and try to get them sort of using and hooked. You said that you’re having some success. How exactly does that work? You literally just get their classified ads and retype them?

Rich Boyle

I think the most common example would be if you talked to a commercial real estate agent today who is not marketing in the offline world, what they will all have is a glossy print brochure for the building that they’re marketing and so we’ll just say, and they have no problem with sending you a copy of that glossy print brochure, and these are people that maybe they’ve been marketing in the offline world with a set routine for decades and so bringing them into the online world is one of the challenges we face.

So we’ll simply call them up and say, send us a copy of your glossy and we’ll do the initial data load on LoopNet to save you the effort. We send you the link so that the broker takes ownership of the data and they’ll very often augment and add additional information themselves.

Then they take ownership of maintaining the data and controlling its exposure in the public marketing sets but we just get them over the hump and we start delivering value to them immediately in the form of the marketing exposure on LoopNet and they all do begin its life as a free listing and then obviously what we want to do over time is convince them that by spending some of their marketing dollars on LoopNet they’re going to get a good ROI on that and convert them into paid marketers.

So we’ve been testing this out this year with a few thousand listings, basically measuring what it costs for us to put the listing in, what do we think the retention percentage is in terms of the brokers that then take over the data and maintain it on LoopNet and then what percentage of them we’ll be able to upsell to our premium services over time and we’re pretty pleased with the initial results so we’re continuing to scale it up.

Brett Huff – Stephens Inc.

Okay and then the last question I had was when you think about prices, you talked a little bit about this already, it seems that the value proposition is such that if people who are convinced that the service works, that have had some success will probably be fine with prices increases but as you think out into ‘09, is it just the sensitivity to the difficult times of potential customers and when do you kind of contemplate sort of revisiting pricing?

Rich Boyle

The major theme that we’ve been putting in place over the last couple of years is really feeling like through things like the CityFeet acquisition, trying to provide by far the best distribution network, the best online marketing exposure for your listings.

Then as we got that in place we were shifting to creating a more flexible pricing structure so that the agents that are marketing properties can really make the choice. They can spend zero dollars per listing or they can spend more money to get more exposure for their properties and we basically have those pieces in place right now.

But changing the per unit of marketing exposure pricing model whether it’s on a listing basis or otherwise, we feel like right now is just not the right time, basically, partially because we’re just finishing the first wave of the volume based pricing that we put in place a year ago but also just reflecting the economic times.

We think it’s important to be sensitive though it’s a tough economic environment for everyone. When we think in the benefit of our long-term relationships with our core customers, we think now’s not the right time.

Brett Huff – Stephens Inc.

That’s fine. Thanks for your time.

Rich Boyle

Sure, thanks Brett.

Operator

Thank you. Our next question comes from Derek Brown from Cantor Fitzgerald. Your line is open.

Derek Brown – Cantor Fitzgerald

Thank you. A question about the fees that listers are paying; if I’m looking at the numbers correctly it seems as if they’re paying about $0.22 per profile listing view which strikes me as a particularly low number.

Number one is that the right way to look at it? Number two, is that number correct? Number three, how sophisticated are listers with respect to that type of a metric? Is that something that they’re really focused on? And what are you doing to kind of raise their awareness of that metric?

Rich Boyle

I think it is a very important metric. At the end of the day what the listers are doing is marketing their properties in the online world and one of the great things about online marketing is the direct measurability of the ROI of it. So we think it is an important thing to look and be cognizant of.

That said, I think most of our customers are fairly unsophisticated in terms of how they think about it. The commercial real estate industry in general is in our view in the very early stages of thinking about online marketing. Historically they have done nearly zero marketing ROI when they think about their other marketing channels which are simply not something they think about.

So, from our point of view we’re trying to walk them down that road. To be honest we have a very long way to go, but what we are doing, we show the agents for example, that their marketing properties on LoopNet the profile views that get generated, where they come from, how it distributes over time, what the demographic of the viewers were, all this rich information about who’s seeing their listing that’s simply not available in the offline world and we don’t think is available really in the competitive online offerings as well.

So it’s a great set of information that we think helps them calculate that ROI and understand what is the cost per profile view and ultimately the cost per lead that we’re delivering to them and we encourage them to compare it to their other marketing channels.

I think the ways we do that is built into the product. It’d be a different marketing and selling messages but to honest I think we’re in the very early stages of getting the industry up to speed on what that really means.

Derek Brown – Cantor Fitzgerald

Great, thank you.

Rich Boyle

Sure.

Operator

Thank you, sir. Our next question comes from Jim Wilson for JMP Securities. Your line is open.

Jim Wilson – JMP Securities

Thanks, good afternoon, guys.

Rich Boyle

Hi, Jim.

Jim Wilson – JMP Securities

Looking at, obviously the interesting movements of the total premium members being down and obviously the pricing up considerably so there is I assume a lot, continues to be plenty of mix in there.

Could you give a little color on that in terms of growth in the listings side versus I would assume of course decline in the investors’ side? Is that how it worked and kind of what it looked like?

Rich Boyle

Yes, the overall revenue growth is definitely being driven on the listing side. On the searching side it was sequentially down on year-over-year basis it was basically flat. The key things, there’s a couple of, it takes a minute to kind of parse it apart but basically when you look at it on the listing side, the pricing increase changed to a per listing fee is definitely driving a big part of it.

There’s some differences in the sub-segments meaning we’re seeing at the moment faster growth on the leasing side of the system than we are in the investment sales side. Again, the investment sales side just being a very, very slow market right now on the searchers’ side, people looking for buildings to buy continues to be just a very slow segment for us. It has been since the credit crunch hit last year and continues to be currently.

So it’s a little bit scattered by segment within those big categories, but the broad themes are definitely the growth is being driven on the marketing side and that’s the way it’s been for some time now.

Jim Wilson – JMP Securities

Okay and would actually those investors or buyers, or I shouldn’t say investors, those looking for a lease, searching for a lease, has that accelerated too?

Rich Boyle

No, I think the demand side of the leasing side of the world at the moment is a little bit soft actually but it’s not a segment we monetize particularly heavily, meaning if you look at the paid searchers it skews pretty heavily towards the investment side.

In the leasing side of the world there are professional searchers, for example a tenant rep agent would be a good example that would be a paid subscriber on the service but the typical non-professional searcher like a tenant looking for office space to lease; they would be free searchers.

There’s a very low conversion rate to the paid subscription and frankly we don’t really expect them to be paid subs. Those people are the demand side audience that we think of as the agents that are paying the market to.

Jim Wilson – JMP Securities

Okay and is there anything else on the mix side of things influenced in the pricing? For instance, I believe it’s appeared that if you just want to get 24 hours of listing data as an option, that that pricing is moved up as well?

Are there any other items that have been material in the change or the increase in the average membership pricing?

Rich Boyle

No. Even that one, I think there’s a few of those things that we maybe tested for price points from time to time but the 24-hour search or 24-hour list are not material numbers in terms of the overall financial results, but no there haven’t been any material changes in any of that stuff.

Jim Wilson – JMP Securities

Okay. All right, great, thanks.

Rich Boyle

Thank you.

Operator

Thank you, sir. (Operator instructions) Our next question comes from Mitch Bartlett from Craig-Hallum. Your line is open.

Mitch Bartlett – Craig-Hallum Capital

Hi. Maybe back to Xceligent for second. If go out six months, nine months, my understanding is you kind of merge the data sets here, is that correct?

Rich Boyle

They’ll be separate data sets but the idea will be that you can think of it as sending data feeds back and forth. In our case it would be sending them a set of information about what has changed on our marketplace, which makes it easier for them to keep their research-based information up to date.

And on their side it would be brokers whose listings would be in their database that would like to have them marketed on LoopNet, they can send us a point or two of the listing information that says, hey, here’s a listing or here’s a broker to contact that wants to market their listing on LoopNet.

So it’s not as if it’s going to be one single database. It’s more of a methodology for reducing the effort that both of us are employing in this direction.

Mitch Bartlett – Craig-Hallum Capital

So a customer, a year from now, is not going to look at a more enhanced view of the world because your data is in there, it’s just a fresher set of Xceligent’s numbers?

Rich Boyle

Well, it will be both. What I mean by that is you’ll find listing information on LoopNet that Xceligent doesn’t have in their database right now and vice versa. So as we start to work together we think it will expand the coverage that both of us are able to deliver which will add value.

So for example if you’re again the tenant searching for office space for lease on LoopNet that is a non-professional searcher, we think we can through our broad distribution network and the newspaper partnerships and CityFeet.com and all the other websites, deliver a great audience for those lease listings.

So if Xceligent can help more brokers that want to market their lease listings, get them on to LoopNet efficiently we think it will expand the coverage on our system and as we gather listing information that maybe their research process hasn’t touched yet or as they go into a new market where it’s fresh, we think can help them accelerate the growth in their data as well.

Mitch Bartlett – Craig-Hallum Capital

And Xceligent, you talked about pricing and how their price is so much more competitive to what it already existing in the marketplace or they dropped prices dramatically is what I wrote down, whether you said that or not I’m not sure, but what does that mean? How are you dropping the prices? How competitive are you trying to get against the existing behemoth out there?

Rich Boyle

So one point of clarification, they have not dropped prices. If I said that then I misspoke. Their prices are flat to slightly up over the last year, two years since we’ve been involved in the company. They’ve been going to new markets they’ve been very consistent about being able to deliver at a price that’s probably half to a third of what competitive offerings typically cost so it’s a very attractive price as compared to the competition but their price on average has actually been going up over the last couple of years.

That said, what they can do and they do it in part we hope because of their partnership with us, in part because they work very cooperatively with the local brokerage community to help gather and validate and compile the information for the market, but they have a process that allows them to do this much more efficiently than we think the brokerage firms can do by themselves or that other competitors have been able to do so far so they’re able to deliver at that relatively low price and yet still see what look to be economics out of the markets on a margins basis.

Mitch Bartlett – Craig-Hallum Capital

And have you specified or could you update us on how much has been invested and what the plan might be there?

Rich Boyle

It’s a relatively small amount of money. We haven’t broken it out specifically. It would be a low seven figure number but it’s not something we’ve disclosed publicly at this point. We will continue to make additional investment tranches in them basically as they use our capital to roll out to new markets. We’ve been very pleased with their ongoing progress and intend to continue to provide the capital to do more expansion.

Mitch Bartlett – Craig-Hallum Capital

Perfect. Last question, you talked about churn maybe spilling above the 6.5% top side of your guidance in the fourth quarter. If you looked at the, I presume the fourth quarter churn does move up seasonally, maybe that’s correct or not correct, but if you look at the third quarter and just extrapolate that seasonally on to the fourth quarter, would churn have exceeded?

Are you looking at a churn that exists in the business from the third quarter as being above the 6.5% for the fourth?

Rich Boyle

The churn in the prior quarters was within that 4.5% to 6.5% range but what historically when you look at our churn even before the credit crunch hit when it was in a 3% to 5% monthly range for a long, long time, there were really two things that drove the variability historically.

One was seasonality, so Q4 always saw a higher cancellation rate and then the other was as we’ve made price changes historically and we’ve done it probably every 18 months on average going back six years or so now, as we do a price change you see a temporary bump in the cancellation rate which then mitigates after you’re done rolling that through the user base.

So we think those two factors are absolutely still in the business now, they have been for years, and it’s coupled with the extraordinary circumstances that we’re in right because of the poor macroeconomic environment. It’s been bad for a year and if anything it’s gotten worse. So that’s basically what’s causing to believe that it may occur in Q4.

Mitch Bartlett – Craig-Hallum Capital

Okay and on the searcher side, did they annualize most of the price increase in the third quarter of a year ago or was there some price increase on the searchers side?

Rich Boyle

No price increases on the searcher side.

Mitch Bartlett – Craig-Hallum Capital

Very good, thank you.

Rich Boyle

Thank you.

Operator

Thank you, sir and at this time I’m showing no further questions in the queue. This will conclude today’s Q-and-A session and today’s conference. Ladies and gentlemen, we thank you for your participation and have a wonderful. You may now all disconnect.

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Source: LoopNet, Inc. Q3 2008 Earnings Call Transcript

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