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CoStar Group Inc. (NASDAQ:CSGP)

Q3 2009 Earnings Call

October 22, 2009 11:00 am ET

Executives

Tim Trainor - Communication Director

Andy Florance, Founder, President and Chief Executive Officer

Brian Radecki - Chief Financial Officer

Analysts

John Neff - William Blair

Jonathan Maietta - Needham & Company

Brett Huff - Stephens Inc

Ian Corydon - B. Riley & Company

Jim Wilson - JMP Securities

Vance Edelson - Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing by, and welcome to CoStar Group's Third Quarter 2009 Earnings Call. On the call today, we have CoStar's President and CEO, Andrew Florance; and Chief Financial Officer, Brian Radecki; and Communication Director, Tim Trainor. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I'd now like to turn the conference over to Mr. Tim Trainor. Please go ahead.

Tim Trainor

Thank you, operator, and good morning, everyone. I'd like to welcome you to CoStar Group's third quarter 2009 earnings conference call. Before I turn the call over to CoStar's President and 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 third quarter 2009 press release and CoStar's filings with the SEC, including CoStar's Form 10-K for the year ended December 31, 2008 and CoStar's Form 10-Q for the quarter ended June 30, 2009.

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.

A webcast of this conference call is available on our website at www.costar.com/investors.aspx. Thank you again for joining us.

I'll now turn the call over to Andy.

Andy Florance

Thank you, Tim. I appreciate it. Welcome, everyone to CoStar Group's third quarter 2009 conference call. I'm very pleased once again to report that CoStar Group completed another profitable quarter with a strong performance of 4.3 million in earnings. Third quarter 2009 EBITDA was 10.6 million. Revenues for the third quarter were 53.6 million, a 7% quarterly increase from 50.1 million in the second quarter of 2009.

As a result of the strong fundamentals of our core business, CoStar continues to generate consistent profits and enjoy a very healthy and secure financial position despite the current weakness in the commercial real estate markets. In fact, we believe that we are seeing a marked improvement in our business fundamentals currently.

As we noted in our press release issued yesterday, we saw fewer cancellations this past quarter, a significant improvement in our organic revenue growth, and our renewal rate increased in the third quarter over the second quarter. Perhaps, more importantly, the company's outlook going into the fourth quarter is for continued improvement in these areas.

Clearly, we are still operating in a down market. However, these positive trends and a number of other positive market indicators that I will discuss later in the call lead us to believe that a potential recovery may be in sight.

The value placed on our information by subscribers has always separated CoStar from competitors, and we believe it remains the chief reason why CoStar Group has continued to enjoy high renewal rates and generate strong earnings and cash flow through the whole recession. And we fully expect the company will continue to do so.

We added 10.2 million to our balance sheet during the third quarter and our cash balances now exceed [$0.25 billion]. Our total cash, cash equivalents and investments on-hand totaled 253.9 million, and the majority of these assets held in cash are invested in U.S. Treasury or other U.S. government money market funds. Also contributing to our strong financial position is the fact that the company has no long-term debt.

I would like to tell you more about the acquisition, we announced earlier this week of Resolve Technology, a leading provider of business intelligence and portfolio management software, primarily serving institutional real estate investors. This is the second company we have acquired in the past 90 days or so. I will also provide an update on our earlier acquisition, Property and Portfolio Research, which CoStar acquired in July.

Last quarter, I announced our intent to expand CoStar Group's platform and create additional growth opportunities by selectively acquiring successful companies that we believe can leverage our extensive data, strong balance sheet, and highly effective sales channel in ways that we - that can enhance the value of our services to subscribers and generate significant future revenue. Since then, we have continued to take advantage of what we see as an excellent opportunity in the current environment to acquire companies at reasonable valuations.

As in the case of PPR, we believe Resolve Technology is a company with exceptional products that we can - with which we can achieve accelerated revenue growth by leveraging CoStar's strategic assets. We couldn't be happier to have an innovative thinker like Resolve's Founder and CEO, Eric Forman, and his very impressive team joined CoStar.

We look forward to working alongside with him and his talented staff of approximately 17 product managers, developers and customer service professionals. The Resolve team is very enthusiastic about our potential as a combined company, and we completely share that enthusiasm.

Based in Needham, Mass., just outside of Boston, Resolve's clients include many of the world's leading real estate advisory and investment management firms, REITs, life insurance companies, pension funds, including such names as Boston Properties, Bentall Capital, Kimco Realty, LaSalle Investment Management, Principal Global Investors, Prudential Financial, and UBS to name just a few.

Many of these firms are CoStar customers already for our data products and a smaller number are customers for PPR currently. These investment managers have large complex real estate portfolios and use Resolve software to integrate data contained in numerous disconnected systems and countless Excel spreadsheets into a useful centralized information dashboard and reporting tool and what a scenario engine.

I just returned last night from Resolve's user conference. It was very informative and really quite motivating. Among some of the presentations, we heard Doug Pritchard, VP of Information Systems from Kennedy Associates, talk to be Resolve customers about how he uses the request platform to collect information from the various accounting systems and property management systems and Argus systems to present their investors with detailed information on how the various commercial real estate assets are performing in their portfolio.

Doug feels that this will give Kennedy Associates a significant advantage in drawing additional capital into their organization and clients because of the transparency they can give their limited partner investors.

We also heard from [Jay Silvia], who is VP of Portfolio Reporting from New Boston Fund. Because of FASB regulations, he was challenged with the requirement to mark-to-market over 500 commercial real estate loans in a very short time period.

He turned to Resolve's product portfolio Maximizer. He got KPMG's buy-in on the calculations used within the portfolio Maximizer, and they were able to meet their requirement to mark-to-market 504 loans ahead of schedule.

Now in the case of the first gentlemen, Doug Pritchard, he actually is a CoStar customer and he puts a lot of work and effort into producing market reports around the properties they have invested in and putting that up into their request engine that their customers will log into.

He was thrilled with the concept that through this acquisition that whole process would become automated and happen automatically. Any time you can thrill a customer, who is doing something manual like that with an automation you're growing a potential customer base.

So, in addition to automatically consolidating historical budget, pro forma, financial and property information from various real estate investments, Resolve's analysis tools also tie together information related to assets, debt and partnerships giving investors added clarity on their impact on performance and returns.

Investors can also use Resolve's software to apply different what-if scenarios for analyzing the impact on the forecast performance of their investments. They can be used to develop strategies to optimize the performance of their real estate portfolios.

We believe that CoStar's and PPR's tools can become much more valuable when integrated with Resolve software and vice versa. We intend to move quickly to make all this happen.

Let me offer a quick example of how we believe this combination will enhance the value of each service. Resolve's tools have always made it easy for a client to quickly identify properties within their portfolio that have a higher risk concentration of, say, lease expirations within a specific market in a given year.

But what it could not tell you from an independent third-party source was whether or not that lease rollover exposure was likely to result in lower or higher net operating incomes for these individual properties.

This is where CoStar's market information and forecast from PPR real estate economists can provide valuable context that these investors can use to quickly make much more informed decisions. They can look at an asset and say, these lease rollovers are likely to result in significant lower NOIs or higher NOIs, and act accordingly, before you'd have to really dig into it and do research, call brokers, do whatever you'd have to do to try to understand the truth.

Once the CoStar and PPR data is integrated, a client using Resolve's analysis price will be able to better analyze and understand how current and forecasted market conditions affect their portfolio. Is the amount of available space forecasted to increase or decrease in their buildings? Are current market rents higher or lower than expiring rents? Are competitive properties in the same market leasing up quickly or not at all? We believe this enhanced capability will be invaluable for institutional investors with larger, complex portfolios in a whole lot of different property types spread over many different markets.

Our goal is to provide investors with the ability to analyze opportunities, manage risk and evaluate their real estate portfolios with speed and precision using technology on par with what investors use to analyze and valuate stock and bond investment portfolios.

And we believe that the Resolve acquisition, together with our previously announced acquisition of PPR, offers a tremendous up-sell opportunity for hundreds of CoStar clients with sizable real estate investments.

We have some development work ahead of us, no doubt, to bring all this capability to reality, but we believe we can use this valuable research to help us further penetrate and expand our presence in this important higher-end segment. This was a strategic decision to acquire a company that helps us capture this huge opportunity, and we believe that ultimately it will support long-term earnings growth.

We have a robust pipeline of additional potential strategic acquisitions that we believe offers similar growth opportunities. For more than 20 years, CoStar has focused on expanding our research and market coverage to offer the most comprehensive source of commercial real estate information. Now, having largely completed our coverage of domestic U.S. markets, we are increasingly focused on helping our subscribers to do more with the enormous amount of valuable information we provide to them.

We believe that providing additional value-added tools and resources for accessing and analyzing commercial real estate information will not only enhance CoStar's value for existing clients, but also appeal to potential new subscribers in other real estate and investment sectors, ultimately expanding the overall market for CoStar services.

As I previously mentioned, the integration of PPR has been going extremely well. I attended the PPR client conference two weeks ago and had the privilege of meeting a great many of the firm's clients, including senior level executives from several major banks, real estate funds and pension funds. To a person, every one I spoke with said that they recognize the tremendous potential in the combination of CoStar and PPR.

They see the value in bringing together the strengths of each representative firm and having access to a single source of reliable granular and 35,000 square foot information in one stop. They feel this will help them in their needs for real estate information, market analysis, credit risk analysis and forecasting needs.

We are also beginning to see real significant cross-selling opportunities emerge in the PPR acquisition. In the first three months, we have already signed three large PPR, CoStar cross-sell deals. These are deals that we do not think would have happened if the merger had not occurred, and we believe there are a lot more deals where that came from. Projected sales and revenue from the acquisition are currently running ahead of plan, and I'm very pleased by the interest we're seeing in cross-sold products so far.

Let's turn to commercial real estate market conditions. Conditions across most commercial real estate markets remained [appressed] in the third quarter, but a small number of significant small positive indicators and trends are just beginning to emerge. These indicators may signal an approaching bottom and a not-too-distant recovery.

Despite increasing prospects for recovery, the reality remains that pervasive job losses have triggered a sharp decline in demand for all types of commercial space, resulting in negative absorption, increasing vacancy rates, falling rents, and falling NOIs, and falling property values.

Office leasing activity is off approximately 20% from year-ago levels and all but three of the core U.S. office markets that CoStar tracks posted negative absorption over the first three quarters of 2009.

Based on historical trends, it will take up to two years for the office market to recover from pervasive job losses. The U.S. office market had an average office vacancy rate of 13% at the end of the third quarter. Based on the number of job losses, the negative absorption, CoStar is forecasting the average U.S. office vacancy rate to increase to 16% before sustained widespread job growth and the company demand for space returns in 2011 and 2012, timeframe. Office vacancy will decline just after that.

Given that it will take time before the impact from an economic recovery leads to increases in commercial real estate rents, overleveraged building owners will likely operate in a negative operating income environment, leading to significantly more widespread loan defaults. As a result, I believe we can expect to see an REO cycle likely lasting through 2012. If this were to happen, we believe that it would generate additional interest in CoStar's products.

First, we expect there'll be tremendous demand for accurate and comprehensive information on commercial real estate properties and asset sales among major institutions, lenders, value-add and opportunity investors, foreign investors, CMBS special services, and others seeking to establish commercial property values in this new environment.

So this is similar to what [Jay Silva] was doing at New Boston Fund and named quickly mark-to-market hundreds and hundreds of commercial properties. We believe this is a large potential market for CoStar. Secondly, we will likely see a wave of new ownership in place following this REO cycle. They too can benefit from access to CoStar's real estate information.

On the sales side, we're seeing some initial signs of improvement in the economy, and it's reflected in our sales this past quarter. In addition to stronger-than-expected organic revenue growth, our total subscriber counts, average contract value and the annualized net bookings were all up during the third quarter. Taken together, we believe the overall sales activity points to some sign of recovery. As I said earlier, we are also very encouraged by the fact that the positive trends we saw this past quarter appear to be carrying over into the fourth quarter where we have some visibility.

During the quarter, we added 874 new subscribers. I want to say it one more time because it's been a while since I've been able to say the word “added”. During the quarter, we added 874 new subscribers for a total of 83,620 at the end of the third quarter, up from 82,746 at the end of the second quarter.

Also, the renewal rate in the third quarter was 84%, a 1% increase over the prior renewal rate of 83%. Renewal rates among customers who have CoStar for more than five years remained at approximately 89%.

So to put this in context, this is the first quarter in which we've seen an increase in renewal rates since the fourth quarter of 2006. This is the first quarter that we’ve seen an increase in subscriber count and that subscriber count number I’m giving you excludes PPR. It does includes PPR?

Brian Radecki

Organic is up too.

Andy Florance

Okay. So it’s up organic and it’s up with PPR. So it’s the first increase in subscriber count on an organic basis since the third quarter of 2008. In addition, the average new contract value among our U.S. site subscription sales also increased to 7,878 in the third quarter compared with 7,497 at the end of the previous quarter.

Our annualized net bookings, although still negative, showed a quarterly improvement of $3.17 million. This reflects the positive impact of an increase in our overall gross sales coupled with a slowing pace of reversals and contract write-downs. We are seeing a turnaround in our sales in some of those markets that went into the down cycle first.

In Orange County, California, for example, which was the epicenter of the financial meltdown, we’re now seeing very strong sales, positive overall revenue growth. That market led the country in leasing activity as a percentage of total inventory in the third quarter of this year. As this cycle continues, we expect to see an increase in office leasing activity among more markets as rents adjust, which of course is a welcome good news for brokerage firms, which then we believe could translate into more sales for CoStar Group. So there’s something of a rental capitulation creating volume, creating additional commissions, creating sales for us.

Another sign that the cycle may be turning is the interest we’re seeing from former customers in becoming subscribers again. Many of these former clients canceled out of necessity. They simply had no cash flow. Others perhaps tried using competitive services to cut costs but found the quality of information to be wanting and provided much less value than the CoStar services.

I expect we will see a number of former subscribers rejoin us as their businesses recover and they once again need and can afford reliable data. Having seen these positive trends in our sales activity after what we hope was to have been the bottom of the sales cycle over the past - the first two quarters of this year, we added a number of new sales reps to take the total number of sales reps to 192 on staff at the end of the third quarter.

Our increased sales headcount at the end of the third quarter consist of 128 U.S. subscription sales reps, seven U.S. advertising sales reps, 30 in-house sales reps, five PPR sales reps, and 22 U.K. field sales reps.

Included in the PPR sales team, this is an increase of 48 salespeople since the end of the last year and an increase of 32 since the third - since the second quarter of 2009. So we have basically grown our sales force by 33% since the beginning of this year.

Although, this increase in headcount had a negative impact on this quarter’s earnings, from the trends we’ve seen this past quarter, we believe it will be advantageous to increase sales headcount ahead of the increased sales opportunity we expect among our core subscribers who stand to be among the first to benefit when the economy stabilizes and leasing and sales activity resume.

We signed a major renewal this past quarter with Studley, the leading global tenant advisory firm, which became the largest - latest major commercial real estate services provider to expand its access to CoStar’s entire U.S. database of property listings and tenant information. The renewal represented a net fee increase for more services provided.

Turning to our research efforts, our research team continues to do an outstanding job in researching all of the buildings and markets CoStar covers. Over the past year, the total number of commercial real estate properties in CoStar’s database grew 15% from approximately 3.058 million in the third quarter of 2008 to approximately 3.522 million in the third quarter of 2009.

For sale properties valued at more than 519 billion were favorable in CoStar’s database at the end of the third quarter. In total, between both our U.S. and international operations at the end of the third quarter, the company had approximately 1.35 million active listings in its database.

The information available in CoStar represents the largest aggregation of commercial property information ever assembled within a research database system anywhere in the world and offers tremendous value for our subscribers.

Also this past quarter, our research team expanded our CoStar COMPS and CoStar Tenant services, bringing CoStar’s full suite of information services to every market in the U.S. We have already begun to capture additional revenue from the expanded offerings. To handle this expanding coverage, we added more than - or almost several dozen part-time researchers and more than 30 full-time researchers.

We believe that we will realize a significant ROI on this investment as we sell to more new clients and cross-sell existing clients in these enhanced markets.

Already this past quarter, CoStar continued to invest in and released enhanced versions of our products. We have recently released two upgrades to our CoStar COMPS and Property Professional products, providing subscribers with even more expanded capabilities for conducting in-depth analysis and reporting on trends in sales and leasing activity using the CoStar dataset.

The new features include seamless access for CoStar Property users and CoStar COMPS users to all 93 analytic charts available for displaying trend data in CoStar Analytics from a single set of search results.

Subscribers can now easily switch from analyzing sales information for a selection of buildings to accessing key leasing performance measures for the same set of buildings without performing a separate query. This allows the user to really be able to look at the interacting dynamics of their driving leasing sales and get a better understanding of their markets.

After using the CoStar COMPS Analytics search option to analyze the average price per square foot and average cap rate for all Class A office buildings sold in San Diego in 2009, for example, a subscriber can quickly analyze the same set of buildings using any of the CoStar Property Analytics search options such as average rental rates, time on market, occupancy and percent leased.

In addition, subscribers can now use CoStar’s Analytic capabilities to identify buyers, sellers, brokers and lenders with significant commercial real estate sales. The new company view identifies the firms involved in building sales. Subscribers can quickly identify and compare the top buyers, top sellers, top listing brokers, top buyer-brokers ranked by overall sales volume or by the number of sales transactions.

You can imagine, if I were trying to dispose of a property, knowing who is active - who the most active buyers are for that type of property and my reach in the company - country would be extremely valuable to me. I can basically look for similar properties in similar geography, get a list of the top 10 buyers and go pursue them to see if they want to buy my property.

The new expanded CoStar Analytic platform includes several new reporting options, including sales volume by buyer type and sales transactions by a buyer type, providing additional intelligence in the types of firms that are most active in the market, such as REITs, institutions or individuals. Again, this gives me the ability to develop a strategy for who is most likely to want to buy my property.

In providing these enhancements, our goal is to offer subscribers additional insight and clarity on changing market conditions, helping our clients conduct the type of thorough analysis needed to identify investment opportunities, manage risk more effectively, and forecast future investment and leasing performance.

With these and additional analytic tools enhancements, we plan to bring to the market, CoStar’s committed to delivering additional value to our subscribers by providing even more ways to analyze and interpret the vast amounts of data we provide.

In conclusion today, we are seeing some clear signs of renewed strength in our business. We are seeing improving organic revenue, higher renewal rates, and increasing subscriber counts for the first time this year and really since last year. We are excited at the prospect of integrating CoStar’s industry-leading research and property data with Resolve Technology’s advanced software and PPR analytic and forecasting capabilities. And we believe the combination of our three firms will generate significant future revenue and earnings growth for CoStar.

We believe the fact that we have continued to generate strong earnings during this down market, not only reflects the strong fundamentals of our business, but also the hard determined work and dedication of all of our employees.

At this point, I will turn the call over to Brian Radecki, our CFO, for a more in-depth discussion of our quarterly financial performance and outlook. I can’t wait to hear what you have to say, Brian.

Brian Radecki

Thank you, Andy. As Andy mentioned, we are pleased to report CoStar achieved solid financial results for the third quarter of 2009, and we saw a marked improvement in many areas of our business.

Today, I’m going to focus principally on sequential results for the third quarter of 2009 compared to the second quarter and also on our outlook for the fourth quarter of 2009. As we progress through the current economic and commercial real estate cycle, we believe sequential trends offer the most insight into the performance of our business.

Our Q3 revenues came in stronger than anticipated at 53.6 million, which was above our guidance range, and increased 3.5 million over the second quarter of 2009. Our favorable revenue performance during the quarter was directly related to the prorated acquisition of PPR at 3.8 million, which was substantially higher than expected, and a noticeable stabilization of our organic revenues, which only declined 240,000 in Q3, representing a significantly smaller decline than the average of the prior two quarters, which was over $1 million.

Q3 subscription revenues accounted for 95.1% of our total revenues. On a functional currency basis, the international revenue stabilized at £2.9 million in the third quarter of 2009 and is flat compared to the second quarter. This is a positive sign that recovery may be near in the U.K.

International revenues were 8.9% of the company’s total revenues in the third quarter and 88.4% of those were subscription-based. Our 12-month trailing renewal rate, which is a measure of renewing subscription revenue, was 84.6% or approximately 85%. While I publicly stated for nearly two years that we expect the 12-month trailing renewal rate to decline to the low to mid 80s for the calendar year 2009 and then begin to recover next year, we have now seen our in-quarter renewal rate improve, putting us ahead of our expectations.

The positive trend we’re seeing in renewal rates directly contributed to the increased subscribers and stabilization we saw in organic revenues and also translated into improved DSOs and lower bad debt during Q3.

Moving to gross margin, gross margin was 34.4 million in Q3 of 2009. The gross margin percentage decreased to 64.3% in Q3 from 66.6% in Q2 of 2009, mainly due to the impact of PPR’s comparatively lower gross margins and some investments in research which we discussed prior.

Moving down the income statement, total operating expenses in the third quarter of 2009 were 27.5 million compared to 25.1 million in the second quarter of 2009. PPR added approximately 1.6 million in these operating expenses, as expected.

And as Andy mentioned, we invested in the sales force during the Q3 to take advantage of our recent enhancements in a more positive selling environment by adding 32 people in the quarter.

In addition, we incurred approximately 500,000 of acquisition-related costs, as expected, and approximately 160,000 in costs related to a write-off of a lease.

Finally, the third quarter 2009 operating expenses included legal costs of approximately 1.3 million, which were about 300,000 higher than expected. As you are aware, we are currently involved in a number of lawsuits and could be involved in others aimed at protecting our intellectual property rights.

Turning to profitability, our third quarter 2009 net income was 4.3 million, or $0.22 per diluted share, and our EBITDA for the quarter was 10.6 million. Reconciliation of EBITDA and all non-GAAP financial measures discussed on this call to the GAAP basis results shown in detail in our press release issued yesterday. The press release is available on our website at www.costar.com.

Looking at our balance sheet, we ended the third quarter of 2009 with approximately 253.9 million in cash, cash equivalents and investments, an increase of 10.2 million since June 30, 2009 and the company has no long-term debt.

Now, I’ll move my remarks to the outlook for the fourth quarter and full year 2009. As is typical, our guidance takes into account recent revenue growth rates and our results that may be impacted by the surrounding global economy.

We’re confident in our earnings guidance and believe one of the strengths of the subscription-based model is it provides solid earnings guidance and cash flow visibility. Just to remind everybody, our guidance for the fourth quarter includes prorated projections for the Resolve deal we just closed.

The Resolve transaction resulted in an initial cash payment of approximately $2.9 million, which excludes the hold-back for purchase adjustments, and approximately 26,000 of restricted shares locked up for three years.

Although Resolve has estimated revenues of approximately 3.6 million for 2009, we expect fourth quarter revenue from the Resolve acquisition to be much smaller than normal expected due to the purchase accounting rules for deferred revenue.

Under GAAP accounting rules, deferred revenue for software licenses or maintenance agreements where clients have paid Resolve in advance would normally amortize in the recognized revenue over the term of the license or maintenance period.

However, under purchase accounting rules, the deferred revenue on the Resolve balance sheet at the closing gets revalued based on actual costs remaining to complete the service. In the case of software licenses and maintenance, unlike our reoccurring information services, the ongoing cost is minimal.

Therefore, the purchase accounting and deferred revenue that is carried over is also minimal and we will not get to recognize the revenue from the amortization of deferred revenue of approximately $1 million.

As a result, acquired revenue for Resolve is expected to be lowered by $1 million over the next 12 to 15 months with the impact being most significant in Q4 of 2009. It is important to note that the accounting treatment affects the reported revenues but does not alter our expectation of future cash flows or our IRR projections for the Resolve acquisition.

As we have stated in our earnings release, we expect Resolve to be dilutive by approximately $0.03 per share in the fourth quarter due to the revenue recognition issue, deal-related costs, purchase amortization, equity compensation, and other costs related to the acquisition. These costs will have very little Resolve revenue to offset them in the fourth quarter. As new sales are made and cash is collected, the deferred revenue and subsequent quarterly revenue is expected to build back up over the next year.

We expect the fourth quarter 2009 revenue for the company in the range of 53 to 54 million and approximately 208 to 209 million of revenue for the full year, as we expect to see positive trends on the sales side of the business continue. We expect total cost of revenues to be approximately 19.5 to 20 million in Q4, which will include the additional prorated costs for the Resolve acquisition.

Moving down the P&L, we expect total selling and marketing expenses in the fourth quarter of approximately 11.8 to 12.3 million, software development of approximately four million, and G&A of approximately 11.5 million in the fourth quarter.

In terms of purchase accounting, we expect total purchase amortization of approximately two million in the fourth quarter, inclusive of the acquisition of Resolve with approximately 800,000 allocated to cost of revenues and 1.2 million allocated to operating expenses.

As we continue to invest internationally, the mechanics of our effective tax rate calculation continue to be affected by the amount of income or loss in the U.K. entities. The tax expense or benefit from the U.K. operations is not equivalent to the tax rate of our U.S. operations, which can have an impact on the overall blended rate.

As CoStar utilize all of its NOLs, in the third quarter of 2009, we made an entity classification election with some of our U.K. entities to roll them under the U.S. group for tax purposes, which provided us a small benefit in Q3, about $0.01 of EPS, while our overall rate for the year remains at 44%.

In addition, this election may bring down our overall effective rate next year and more importantly save the company tens of millions of dollars in actual cash tax savings over the next five to seven years. I view the fact that we are able to utilize this benefit from a book perspective, coupled with the potential actual cash tax savings, is a huge, huge, positive to investors who would and should be extremely excited about this.

In terms of earnings, we expect fourth quarter 2009 fully diluted net income per share of approximately 0.16 to $0.19 on approximately 20.3 million of fully diluted outstanding shares. For the year 2009, we expect fully diluted net income of approximately 0.92 to 0.95.

Just to remind everybody, our guidance for the fourth quarter and full year outlook has been reduced by $0.03 per share related to the prorated estimates for the Resolve deal which we just closed and I just discussed.

As Andy explained earlier, we are very excited about the future growth opportunities from the combination of CoStar, PPR, and Resolve. We are looking past the short-term financial impact of the acquisitions and expect them to create significant high revenue and margin growth opportunities moving forward as we address a very, very large opportunity. I understand these types of deals with one-time expenses, or non-operating accounting charges, makes it a little harder to understand, therefore I’m considering some additional disclosures next year to help investors more easily evaluate the core operations.

Also, our full year guidance includes approximately 6.9 million in pre-tax non-cash equity compensation charges related to the vesting of restricted stock and stock option grants. We also made - continue to consolidate or move some of our office space over the next year to save money and take advantage of upgraded space at much lower cost, which sometimes create one-time gains or losses for the company, just as we have in the past. These charges are not factored into our normal operations, in our outlook, and in our numbers.

Our business model remains strong based on the fact that we have a 95% subscription-based business with high renewal rates, a unique proprietary database, a market-leading position, strong balance sheet, no debt and extremely high cash flow.

We expect to return to a more normalized revenue growth rates and expanding margins we have enjoyed over the past decade in the near future as we continue to see positive trends in our business and the overall economy. CoStar management team believes there is significant opportunity for additional high-margin revenue growth following the investments we’ve made in research and sales and the strategic acquisitions like PPR and Resolve.

We continue to look forward to reporting that progress to you, and with that, I open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And first we’ll go to the line of John Neff with William Blair. Please go ahead.

John Neff - William Blair

Hey, guys.

Andy Florance

Hi, John. How are you doing?

John Neff - William Blair

Good. A couple of questions here for you just a little bit on the PPR acquisition, any impact there on the retention rates that you reported? In other words, is that an organic number?

Andy Florance

Yes. The retention rate is all organic. It doesn’t factor anything from the PPR’s deal.

Brian Radecki

And the PPR deal, just on a side note is almost - they’re running almost at the identical numbers that we are. So it is pretty much identical.

John Neff - William Blair

Right. The tax rate, Brian, just a little more detail there, is it now - I think of the U.K. as having a lower corporate tax rate than the United States. So is it suddenly advantageous to have some of the U.K. operations in the U.S. tax jurisdiction? Is that an indictment of future U.K. profitability? And is this change permanent? In other words, what sort of effective tax rate can we expect perhaps even next year?

Brian Radecki

Sure. We’re not giving guidance on next year, but as we all know, in taxes nothing is permanent. The tax rules change daily. But what I can say is that, if you look at how we utilized - we utilized almost $100 million of NOLs over the history of the company. When we just completed that I was told by several tax partners that we were one of the few public companies that actually utilize all of their NOLs.

We’re now taking advantage of utilizing the NOLs over in the U.K. from the losses there by moving that entity under the U.S. for tax purposes. So it’s not - it doesn’t give any indication of what plans are internationally, but it’s just allowing us to utilize those now because you don’t have profits in the U.K. where you can utilize those NOLs at those lower rates that you have. So you are able to utilize them now to offset higher U.S. tax rates.

So this is a tax planning strategy. It’s a small benefit in the quarter but, to me, the more exciting thing is the possible cash tax savings we’re going to have over the next five to seven years from this, which is real.

John Neff - William Blair

So, I mean five to seven years, for all practical purposes, fairly permanent?

Brian Radecki

If you want to call that permanent.

John Neff - William Blair

Okay, foreseeable future?

Brian Radecki

For the foreseeable future, I like that better.

Andy Florance

That wouldn’t be permanent [in marriages].

Brian Radecki

I think every time I say permanent, I think I said something about the tax rate will go down. People are going to pull my comment from two years ago and then we had an $8 million gain and the tax rate went down. So I try to avoid saying permanent and will not do this because things happen in the business which sometimes changes. But this is another way of us utilizing and saving more cash, which should be important to investors. It should be a positive.

John Neff - William Blair

Yeah. But one thing you had mentioned, that you quantified it as a $0.01 per share benefit in the quarter. Last quarter, you had guided to 45 to 47% effective tax rate, so I guess I think of it - at 40% that’s about $0.03 benefit in the quarter. Is that incorrect?

Brian Radecki

No. It’s about 44% for the year if you look at the annualized year rate and you take the difference between the annualized and the in-quarter, it’s about $0.01, $0.015, somewhere around there.

John Neff - William Blair

Okay. Then a question for you on Resolve, how is that solution deployed? Is that client/server, or is that software as a service? I’m trying to think - are there any data advantages that accrue to you, given how Resolve solutions combine a client’s internal as well as external data?

Andy Florance

It’s actually - you can imagine this is the crown jewels of proprietary data for these customers. So the solutions are - I mean so it’s a series of web reporting tools, but it’s all deployed inside the client’s firewall and we get no data benefit from their data that’s in the Resolve platform.

And similar to the tax situation though, nothing is permanent. It does open up the possibility that sometime down the road at the client’s choosing, they may decide to share and benchmark data back and forth amongst each other. This would create a systems infrastructure that would make that fairly straightforward and inexpensive to do.

The real value is the fact that if I’ve got 1,000 investment grade office properties in 400 different sub markets in the United States, integrating the details of my internal property management system, lease administration system, accounting system, budgeting and forecasting system with CoStar data, the benefit is extraordinary.

Being able to basically have a third-party independent automated valuation function for your assets and get a rolling daily independent third-party view potentially down the road of your loan-to-value ratios and your equity and so and so is phenomenal. So it’s got a lot of potential.

John Neff - William Blair

And last question just --

Andy Florance

It is dilutive in the first quarter though.

John Neff - William Blair

Last question, I just want to --

Andy Florance

On an accounting basis, I’m sorry.

John Neff - William Blair

A showcase update and jut how - any sense of the annualized run rate there? And also give us an update on - you mentioned you have got 1.35 million listings on - across CoStar’s entire platform currently. What percentage of those are you allowing to be in Showcase? How many listings available in Showcase versus your overall universe? Thanks very much.

Brian Radecki

Sure. On the 1.35 million listings, I don’t have the precise numbers with me. We do have caps on what we’re proactively selling in the various sub markets and markets. And I believe we are below those caps. I think Anchorage, Alaska sold out. I think half of the listings and literally half of the listings in Anchorage showed up on Showcase. And so we maxed out in that market. We stop selling new ones. But it is still probably less than 15% of the listings are moving through Showcase. So we don’t believe there is any cannibalization occurring there.

One of the models for that product was our company up in Scotland, SPN. They have a Showcase-like product, which has 85% of the listings in Scotland up on it and yet they still have all the major brokerage firms subscribing to the information product. So I don’t think we’re anywhere near any sort of substitution effect. And what I will do is I will try to come back and give you a briefing next quarter on how things are going at Showcase. It’s going fine, it’s going well, and we’ll prepare some more detailed remarks in next quarter’s earnings call for it.

John Neff - William Blair

Great. Thank you very much.

Brian Radecki

Thanks, John.

Operator

And next we will go to the line of Jon Maietta with Needham & Company. Please go ahead.

Jonathan Maietta - Needham & Company

Hey, thanks very much. Hi, guys.

Andy Florance

Hey. How are you doing, Jon.

Brian Radecki

Hey, Jon.

Jonathan Maietta - Needham & Company

Good. So strategically, I just want to make sure, I’m not missing anything in that, with these past couple of acquisitions, you’ve effectively extended the value of the database, number one. I think, number two, you’ve done a good job of what I see a lot of consulting organizations do in that you’ve chased the dollars where they are being spent today. And three, I’m just wondering is there anything else? Does this help you put up a defensive wall against competition potentially or --?

Andy Florance

Sure. This is a way to accelerate our move into value for institutional large-scale financial organizations, which is absolutely a - something that represents a barrier to competitive entry. So we think that, with 20 some years of experience, you look at the various people involved in these different companies, myself, Eric Forman, Bret Wilkerson. We’ve all been in this business serving institutional clients for 10, 20-plus years.

So working together, we can build some very compelling products for the institutional world that right now has got intense information requirements on revaluing assets, deciding on what they’re going to dispose, what they’re going to acquire and giving them real-world solutions to integrate their proprietary internal data with the best forecasting available - the best data available. And I think that represents a huge competitive advantage.

And this is a difficult step to replicate. If you look - if you sit through a day-long presentation of the Resolve portfolio, maximize their software like I did on Monday, you would come to appreciate that this is not some build it this week and off to the races you go. This is extraordinarily complex, sophisticated software we’re talking about here. So I think it would take a lot of time to rebuild this stuff.

Jonathan Maietta - Needham & Company

Andy, just to piggyback off of John’s question with regard to Resolve and potentially exchanging data with that platform at some point, would that require you to rewrite the platform? Could we potentially see a software as a service offering at some point?

Andy Florance

Well, absolutely. We could provide this and we could have spin-offs that are software as a service. In fact, we’ve discussed that. So there are a lot of derivative products that are possible. But in terms of the access and the client data, that data, it’s utmost importance to us and Resolve that that data is completely secure, confidential inside their firewall; it’s their data. It only be - because those clients, who actually are a pretty active user group, get together and want to do some benchmarking, assuring that day that we would do that, that we’d ever be having that discussion about their data. But should that occur, it would be real easy to do.

So should they decide to push something outside the firewall, they are all in the same - because of Resolve, they are all in the same data structure. We’ve actually mapped out all of the charts of accounts from all kinds of disparate accounting systems and disparate property management systems, and it would be very straightforward to create benchmarking that could be extremely useful to them.

Jonathan Maietta - Needham & Company

Interesting, okay.

Andy Florance

Again that’s completely their choice.

Jonathan Maietta - Needham & Company

Got it. Okay. What does the Resolve - the typical Resolve sales cycle look like? Is it six to nine months? Is it three months or --?

Andy Florance

It’s probably six to 12 months. It’s fairly - I mean, this is something that goes throughout an organization. It has a one year plus implementation cycle for the higher-end product. They do have a lower entry-level or a more entry-level product which is an out of the box low cost implementation product, but generally it’s a pretty extensive implementation.

Jonathan Maietta - Needham & Company

Okay. And then Brian, with regard to gross margins, should we expect kind of a similar margin going forward for the next couple of quarters or so? Or how do you think about that?

Brian Radecki

Yes, I think so. It might have a slight downtick when you add in the Resolve but in general you’re at about the level that you’re going to be at for a few quarters.

Jonathan Maietta - Needham & Company

Okay. And then do you happen to have the figure for stock compensation in the quarter?

Brian Radecki

Sure, yeah. It has been running at about 1.5 million or 1.6 million a quarter. It is about two million in Q3, which a lot of that is what we disclosed as far as the acquisitions of PPR and it will probably be running at about two, 2.1 in the fourth quarter with Resolve.

Jonathan Maietta - Needham & Company

Okay, perfect. Thanks very much.

Brian Radecki

Thanks Jon.

Operator

And next we’ll go to the line of Brett Huff with Stephens Inc. Please go ahead.

Brett Huff - Stephens Inc

Good morning and congrats on the Resolve deal.

Brian Radecki

Thank you, Brett.

Brett Huff - Stephens Inc

A quick question, I want to make sure that I understand the internal growth trends going on. So can I just do a - some quick back-of-the-envelope math, trying to understand exactly what the Resolve impact will be for 4Q, Brian? If I take the midpoint of your guidance, which is 53.5 and take out - should I take out 3.8 for PPR in 4Q to get to an organic number? Is that the right estimate?

Brian Radecki

Yeah, it will be plus or minus around there.

Brett Huff - Stephens Inc

Okay. And then how much - I try to kind of do your math on Resolve, which is - I took the 3.6 million and took away the $1 million of deferred revenue and then tried to kind of prorate it for the amount that you guys will own it for Q4 and got a couple of hundred thousand dollars and that gets me to 49.5 of organic revenue. Is that a reasonable way to go at it?

Brian Radecki

Yeah. I mean I didn’t put a number on the Resolve, but I agree it will be a couple of hundred thousand. It will be very minimal in the fourth quarter, and then that will grow back up to kind of that 3.5 to $4 million rate next year as we sell those and book them in deferreds.

Brett Huff - Stephens Inc

Okay. I just want to make sure that compares then to the - so that is 49.5 by my math, whether it is right or wrong, to 49.8 this quarter. So that tells me your organic growth, to your point, will be - declines will - that we’ve seen sequentially have moderated meaningfully and that’s what you’re saying when you’re seeing these trends continue. Is that right?

Brian Radecki

Exactly, exactly. I think we’re still seeing a lot of positive trends and we would expect to see those positive trends through the fourth quarter. And I think that’s why the Resolve deal, not only with deal cost is so dilutive in the fourth quarter is because you have no revenue to really support their cost structure because of accounting reasons. But again, for cash flow purposes, it’s nonexistent.

Andy Florance

Brett, you should be writing some of our scripts.

Brett Huff - Stephens Inc

Okay. I just want to make sure I get the organic in the right way. Andy, I think maybe this is a question for you. On the net adds, I think you said you gave us an add number of 873. Is that gross or net? And do you have a gross number if it’s not?

Andy Florance

That is net and I don’t have a gross number right here. That would take some work.

Brett Huff - Stephens Inc

And then just in terms of - can you give us a little bit more detail or color on - you gave an example of why people aren't canceling now. Can you give us a sense of what they're saying when they re-sign up? Is it brokers who are saying okay, life is not as bad as it used to be, I have cash, or is it non - you know, the half of your business is non-brokers, who is actually buying new now?

Andy Florance

Well, first of all, as we've gone in this cycle, a lot of the stuff actually makes it up to my e-mail as you go into a really severe cycle like this. And you see a lot of [vignette] of what's occurring in the marketplace. So you have some people that aggressively try to negotiate amazing discounts because of the downturn. I've gotten an awful lot of e-mails from good customers who have been customers for a long time that say, [you don't pay] loves your service, I simply don't have any money to pay for it. I haven't had a commission in 18 months, so I have to appreciate everything. I have to shut it off for a while.

We're seeing a fair number of that kind of a person, who are seeing some commission checks come in, turn the service back on. So they turn it off for a year because they didn't have any money. Now that things are back, they're - and so what we're seeing again we took a -- we did analysis of all the U.S. cities and we looked at the change in rental rate in the preceding year and correlate that against the leasing volume, and there's a close correlation. So as owners basically come to grips with the fact that rents are going to be lower and they bring their rents down, tenants are taking advantage of that leasing space. We believe that's driving up these leasing commissions so people can come back on board.

So there's some of that. Also why are cancellations mitigating? Because a lot of the marginal folks who just entered the business in 2007 at the crazy, cheap credit top of the market died in the first 18 months of the downturn. So, the Darwinian effect happened and extinctions occurred. And one of the reasons it's leveling out is because now we're down to looking at customers who are core customers, who are not going anywhere and they can survive in almost any market condition.

And again, you go back to that. The folks who have been customers for five years or more, they're almost an 89% renewal rate and they have been throughout this entire cycle, which is really quite amazing to maintain close to 90% renewal rates in the worst commercial real estate downturn in our lives. So, now, some of the other customer segments we see coming in, we're definitely seeing a lot of banks right now.

Banks are having conversations with the Fed every day about what is your loan-to-value ratio? What's your likely debt service coverage? What is the health of your commercial loan portfolio? Why should we not close your doors? So they're having those kind of conversations, and so we're seeing a pickup in interest from banks. We are -- our PPR operation has a great debt forecasting modeling service that is doing extremely well, right now. We're selling a lot of that product. Steve Miller Group up there is doing that. And then we're also seeing hedge funds emerge - the dirty word -- hedge funds emerge to take advantage of distressed sales. So, in office space, multi-family - all of the different sectors, we've seen drops in values on these properties ranging from down 20% to typically down 50% or more. So people are getting pretty excited about the ability to buy a building for $200 a square foot that was trading for $500 a square foot 18 months ago.

So those kinds of customers are coming in with new capital. So this is sort of what we expected. You've got a little bit of trading in and out of our client base. We've seen a number of folks buckle in the downmarket and then new people are coming in to pick up these assets. Some of these higher-grade institutional grade investment assets don't go anywhere just because they go bankrupt, the building is still there, there is still tenants paying rents. So, that's probably more you were looking for there.

Brett Huff - Stephens Inc

No, that's really helpful. I appreciate it. That's all I had. Thanks, guys.

Andy Florance

Okay, great.

Brian Radecki

Thanks, Brett.

Operator

And next we'll go to the line of Ian Corydon with B. Riley & Company. Please go ahead.

Ian Corydon - B. Riley & Company

Thank you. Couple of quick ones. Of the 83,000 or so paying subscribers, can you say how many of those are PPR subscribers and how many are showcase also?

Andy Florance

Two. No, Brian, what would you guess on the PPR side?

Brian Radecki

The PPR is about 600 or so adds. So we had almost 300 adds, organically; and so that's kind of how that broke out. So we saw both organic increase and then obviously the increase we're picking up with PPR. And I don't have a number right here on what the exact number would be for the showcase side.

Ian Corydon - B. Riley & Company

Okay. And I'm not sure --

Andy Florance

We'll try to address that in the next - we've got two questions on that. So we'll try to address more of that in the next earnings call.

Ian Corydon - B. Riley & Company

Okay. And I don't know if you gave this but do you have the number of subscribing sites at the end of the quarter?

Andy Florance

It is 15,000 -- hold on one second. We have that number here.

Brian Radecki

15,300.

Andy Florance

So, 15,300. That would include PPR - it would not include PPR. It would not include PPR.

Brian Radecki

So with PPR, it would be a couple of hundred more.

Andy Florance

I think there's 187 with PPR.

Brian Radecki

Yes.

Andy Florance

So you'd add 187 onto that. And then I don't think it includes individual showcase or CLMS subscriber sites, probably does not include metropolis.

Brian Radecki

Correct.

Andy Florance

Right. So that's an approximate number.

Ian Corydon - B. Riley & Company

Okay. And it looks like that number I think is down a little bit sequentially. Are you just seeing -- are you seeing the adds come on with more sites or your existing customers adding -- existing sites adding customers. How is that working?

Andy Florance

We're probably seeing a growth in the adds, maybe cross-selling into some institutional players or different departments, that sort of thing.

Ian Corydon - B. Riley & Company

Okay. And on the PPR numbers coming in ahead of expectations, was that driven by cost selling - cross-selling or is that improvement in kind of their core business?

Andy Florance

It is. There were some good cross-sells, right of the – [right off the bat]. So like we had a deal this week, I think that came in like five days time on a cross-sell for 60,000 that was nice. Royal Bank of Scotland was a cross-sell, a big cross-sell that happened. So - and we're doing a big push on that in the fourth quarter. We're trying to get out and we've identified several hundred CoStar customers who are the right profile, revenue level, who are ideal customers for the PPR forecasting. We're trying to get out and visit every one of those folks in the fourth quarter to tell them about the PPR forecasting and analytics services. Also, we're limited to what we can talk about, but we also are providing some services to the subcontractor on the TALF program to the Fed. And you'd be shocked to know that business is growing, so the revenues from that have been climbing.

Brian Radecki

And ahead of our expectations.

Andy Florance

Yes. And we want to thank you as a taxpayer.

Ian Corydon - B. Riley & Company

My last question is on the comps and the tenant expansion. Could you just kind of give us a magnitude of how much that product has been expanded?

Andy Florance

It's fairly dramatic and pretty important. This really represents - up until we did this, there were still 80, 90 reasonable MSAs that did not have tenant or comparable sale data from us in the United States. And these are not going to be the New Yorks and LAs. But you see - an example of a decent-sized city that would be San Antonio.

Brian Radecki

San Antonio, Texas would be a good example.

Andy Florance

Salt Lake City.

Brian Radecki

Salt Lake City.

Andy Florance

So these are pretty good-sized cities that did not have our full product suite, which would really limit your ability to do more sophisticated analytics, would probably frustrate some banks or institutional investors. And so, this means that our product offering in 70, 80 MSAs just significantly clicked up a notch here, and we've added another significant dimension to the product and it should drive strong sales in those smaller markets.

Now, you've to drive a lot of sales in those smaller markets to move the overall dial, but it's a good place to be. And we're sure trying to make sure that we're looking at every space that we're in and pursuing that objective here. The number one or number two going to number one and that does a lot of that. So if you look at some of our - if you looked at Salt Lake City and say, how we're going to be number one Salt Lake City? How we're going to be number one in San Antonio? And this does that for us.

Ian Corydon - B. Riley & Company

Great. Thank you very much.

Operator

And next we'll go to the line in Jim Wilson with JMP Securities. Please go ahead.

Jim Wilson - JMP Securities

Thanks. Morning, guys.

Andy Florance

Morning, Jim. Thanks getting up early for us.

Jim Wilson - JMP Securities

I'm always up. So with the 600 new PPR clients, I guess, either way of looking at it or both, what kind of number or percentage were already existing CoStar customers? And I guess maybe more importantly, the bigger PPR customers or the bigger CoStar customers, which are already customers of both services? Or how many are customer of both services?

Andy Florance

Actually, it's pretty interesting. The - of this, the site level is a little easier for me. It's about roughly 180 sites on PPR, and we're dealing with several different product areas. So, you could be a debt customer, you could be a consulting customer, you could be a baseline information customer. I believe it was - what do you say, Brian, about 70%?

Brian Radecki

Yeah.

Andy Florance

About 70% of those PPR customers are also CoStar customers. But you had examples where someone might be a significant national customer for PPR but only a landlord representation customer for CoStar in one Texas City. So you can have someone with a small CoStar footprint and a large PPR footprint. So you still have, even though you've got - 70% are customers of both - you still have a lot of upsell opportunity within both services. The other thing is, in talking to customers, they really regard these products as completely different and they're used in different ways by different segments generally.

So our products are relied on heavily by the people doing valuation, by people doing transactions, positioning properties competitively, marketing properties, and the PPR. PPR products would tend to be used more intensely by someone doing portfolio strategy work for a larger organization. So one of the things I think is sort of exciting here is we are building together a matrix here of products that are going to eventually be seamlessly integrated that are reaching many different constituencies within these bigger operations. So we might be, with PPR, reaching the folks managing portfolio and acquisition disposition strategy. With Resolve, we can be reaching the asset managers and the finance department, CFO's office and with customer property we're reaching the appraisers, the brokers, the whole valuation side of it. So it were - these are different segments within these companies.

But the bigger thing is there are hundreds of the PPR profile of customer that are CoStar subscribers that are not PPR subscribers. So we should be able to - that's where you're going to see your biggest sales growth.

Jim Wilson - JMP Securities

Yeah, that makes sense. All right and just one other question, Brian, the best tax rate to assume going forward, since it was lower this quarter?

Brian Radecki

Yeah, I think, we're at - 2009 is at about 44%, so I think that's what the annualized is if you calculate it off the P&L. We haven't come out with 2010 guidance yet, but obviously when we do we'll give a 2010 number.

Jim Wilson - JMP Securities

All right, thanks.

Brian Radecki

Thanks, Jim.

Operator

Next we'll go to the line of Vance Edelson with Morgan Stanley. Please go ahead.

Vance Edelson - Morgan Stanley

Hi. Thanks a lot. I'm just trying to -

Andy Florance

How are you doing?

Vance Edelson - Morgan Stanley

Doing all right. Just trying to reconcile on the margin expansion trajectory, I think, Brian, you had mentioned that you expect to return to more normal EBITDA margin expansion in the near future, but also margins are expected to be flat for a few quarters, if I heard correctly. So, I guess, the bigger question is how should we think about the margin goals as we move into 2010? Is margin expansion is sort of an overarching company goal or is it more likely that attractive acquisitions could weigh on that margin expansion in the near-term? And how do you balance those goals?

Brian Radecki

Well, I think, we've long had a 30% target EBITDA margin out there for years and we've shown that the business can do that. So, I think, that's obviously the longer-term. Again, we're not giving out 2010 guidance. But I think that 30% EBITDA target margin has been posted around CoStar for the 12 years that I've been here. We've achieved that and I think that that's where we will be long-term.

In the shorter term, you are right. You have to kind of balance the potential acquisitions that could be somewhat dilutive in the short-term, that will be very accretive in the long-term. So, if I was only to look at the fourth quarter and the impact on Resolve or only look at the third quarter, the impact of PPR, I would have done the same thing, we did the comps acquisition where we now have 40, 50, 60% margins returning from it. We acquired them, they are losing about $8 million a quarter.

So, I think, that you do have to balance the short-term impact with what we believe the long-term goal is. 30% has been the goal but we clearly see 50, 60% fully loaded EBITDA margins in places that we've been for over a decade. So people have seen us present. There is no reason why this business can't be doing over a billion in sales in the next 10 to 15 years and doing a 40, 50% plus fully loaded EBITDA margin. So that's where the company is focused. A lot of these acquisitions opening up these huge market opportunities is going to be what helps drive us to get there.

Vance Edelson - Morgan Stanley

Okay. Got it. And then, I guess, another balancing act in the near-term is - you continue to see is advantageous to grow the ranks of the salespeople even though that might add some margin pressure. Where do you think the sales head count is ultimately headed? A lot of folks were added during the quarter. Does it look like that's going to go well above 200 in the coming quarters?

Andy Florance

Well, the good news there is we have actually - Jim Black has taken over responsibility for our sales recruiting and our training of salespeople. Jim actually - for those of you who are commercial real estate nerds, would know Jim from - he basically was the predecessor to CoStar Group. He invented - he did the Black's Guide office directories, which were the Bible of commercial real estate through the '70s and '80s.

So, he is a great trainer, recruiter. And we have been experiencing a very different ROI on new salespeople recently than we’ve historically experienced. So we are in some sectors, in some sales of strategies. We’re actually getting a positive ROI from new sales hires inside of four months. And historically, that ROI was out there at a year. So while we can continue to add salespeople in a - and get an ROI almost within the quarter, we will keep reporting to you that we’re increasing the sales force.

Vance Edelson - Morgan Stanley

Okay, great. And finally, just a housekeeping item, I think we're only missing one metric at this point. The number of new paying subscriber firms which last quarter I think was 494. Is there an updated metric for the third quarter?

Andy Florance

I think it was approximately around 400, but I'll check it out and give you a number.

Brian Radecki

Sorry about that. We normally do that.

Vance Edelson - Morgan Stanley

Okay. No problem. Thanks a lot guys.

Andy Florance

Okay. Thank you. So, again, I want to thank you all for joining the third quarter 2009 earnings call. And we look forward to updating you on the - oh my gosh - the year-end next call. So, I hope you guys have a good rest of your week.

Operator

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