Ladies and gentlemen thank you for standing by and welcome to the CoStar Group’s third quarter 2010 conference call. At this time all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instruction will be given at that time. (Operators Instructions). As a reminder, today’s conference is being recorded.
Speaking on today's call, CoStar Group Founder and Chief Executive Officer, Andrew Florance; Chief Financial Officer, Brian Radecki; and Communications Director, Tim Trainor. At this time, I will turn the call conference over to Mr. Trainor. Please go ahead.
Thank you and good morning everyone. Welcome to CoStar Group's third quarter 2010 conference call. Before I turn the call over to our CEO, Andrew Florance, let me state that certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties that can cause actual results to differ materially from such statements.
Important factors that can cause actual results to differ include but are not limited to, those stated in our press release on CoStar's third quarter 2010 results and in CoStar's filings with the SEC, including its Form 10-K for the year ended December 31, 2009, and its Form 10-Q for the period ended June 30, 2010, under the heading risk factors. All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements.
As a reminder, today's conference call is all being broadcast live over the internet at www.costar.com/corporate/investor. And a replay will be available on our website one hour after this call concludes. Thank you for joining us. I will now turn the call over to Andy.
Thank you very much Tim, and welcome CoStar Group’s third quarter 2010 conference call. I am pleased to report to you during this past quarter CoStar observed improving commercial real estate market conditions and in that environment we achieved raising sales and extremely high renewal rates. While the key headlines for CoStar Group this quarter, is that we can now report that both the US office vacancy and availability rates have clearly stopped climbing and are now improving.
These key fundamental industry indicators historically are highly correlated with our sales growth and renewal rates. During the third quarter of 2010 CoStar Group posted $57.1 million in quarterly revenue, an increase of 2.3% or $1.3 million over our second quarter 2010 revenue of $55.8 million.
Revenues increased $3.6 million or over third quarter 2009 revenues of $53.6 million. $57.1 million is the highest quarterly revenue level that CoStar Group has yet achieved.
Net new sales during the past quarter reached the highest level scene since the second quarter of 2008. This is the fourth consecutive quarter in which we are reporting increasing sales productivity. For the third quarter of 2010 company wide quarterly net new sales totaled $4.6 million and nearly $1 million improvement over second quarter new sales of approximately $3.7 million. The third quarter net new sales of $4.6 million is a $3 million improvement over the first quarter of 2010 net new sales figure, $1.6 million. We are obviously very pleased to be able to report that net new sales in the third quarter of 2010 nearly tripled over net new sales in the first quarter of 2010.
Our core product, the US CoStar Property Professional information suite was the biggest driver of our strengthening third quarter organic revenue growth.
Our great progress in sales this past quarter was only possible because of the company's continued success in retaining customers. Our 12 month trailing renewal rate for subscription based services increased approximately 2% quarter-over-quarter, climbing to a very impressive level of approximately 90%. The in-quarter renewal rate increased 7% year-over-year. A 90% renewal rate is the highest level we have enjoyed since the second quarter of 2008.
During the third quarter the renewal rate for clients that have then our customers for five years or more remained very strong at 96%. The third quarter 2010 renewal rate for firms that have been then our clients for less than five years also remained very high at 87% and very much improved from the 74% we were experiencing one year ago.
I believe the great improvements we've seen our renewal rates are the direct result of the hard work and talent of CoStar’s sales force and a clear indication that our core customer base is returning to financial health.
Commercial brokerage firms in particular have been very active recently and we continue to see strong demand from one of our largest client segments as tenants return to the market and leasing activity increases. Many brokerage firms have added users or subscribed to additional services and markets recently, including one of our largest clients, Grubb & Ellis, which recently signed a major contract extension for additional services during the third quarter.
We believe that a 90% 12 month trailing renewal rate for our subscription based services combined with the fact the subscription base revenue accounted for approximately 94% of the company's total revenue in the third quarter, makes CoStar Group an exceptionally solid and attractive company. Our company’s solid balance sheet was $232 million in cash, cash equivalents and investment on hand at the end of the third quarter with no long term debt and a [mortgage rate] Class A office building to boot, all serve to enhance CoStar Group’s startling financial position.
The total number of subscription client sites increased by 211 during the quarter to 16,508 company wide, and that’s in comparison to 16,297 in the second quarter. The total number of individual subscribers also increased by 486 during the third quarter to 86,803.
CoStar continues to see strong demand from investors, banks and other financial services firms. We also continue to take advantage of cross-selling opportunities with our subsidiary Property Portfolio Research or PPR. One example of successful cross-selling to institutional clients was our third quarter subscription sale to Wells Real Estate funds. One of the largest private rates in the US, Wells agreed to purchase CoStar’s suite and PPR’s performance service. I understand our combined solution with chosen over several other good competitors.
All state investments, an affiliate of the good hands people was also a major combined CoStar PPR effort this past quarter. Banks have also continued to be another good major source of sales. Our sales force has made a concerned effort to target banking firms and we have been tremendously successful in introducing and expanding CoStar’s services to this sector. So far this year 66 banks have become new subscribing clients. A strong regional bank called BB&T became a subscriber in February of this year, initially purchasing just a two years license. By the third quarter of this year BB&T had increased its subscription to a 40 user license. Partially reflecting the increase in sales for larger clients, our third quarter 2010 average new contracts signed increased 18% to 8,292 over the second quarter of 2010 to average new contract values of $7,031.
Our sales organization and our sales management has performed exceptionally well throughout this downturn in driving usage, retaining clients and wining new business. They are now a better trained and more experience team than ever and they are looking forward to winning more new business as the economy recovers. At the end of the third quarter we had a total of 181 sales reps, down slightly from 194 on staff at the end of the second quarter 2010. This includes 118 US subscription sales reps, 7 US advertising sales reps, 34 in-house sales reps, 16 UK field sales reps and 6 sale reps for PPR and Resolve.
We expect sale headcount to return to mid-year levels as the new sales training class moves into production. Given the continued strong demand we are seeing in almost all areas of our business, I am very excited about our current position. With the initial recovery underway in the commercial real estate economy I believe that CoStar’s tremendous research advantage and expanding platform will continue to drive strong sales growth in our sales and revenue.
We’d like to take a moment to discuss current improving commercial real state market conditions in a bit more detail. In our last call I stated that our research had confirmed that office vacancy rates had stabilized in the second quarter of 2010 after nearly three year of steep increase. In the third quarterly we confirmed the major news that the US office vacancy rate and availability rate has never worse course and begun to decline and improve. This important market inflection point comes after two consecutive quarters of positive absorption of commercial office space and almost complete shutoff of new supply.
We believe this improvement is the first in a series of steps towards overall improvement in the commercial real estate market. While this is certainly welcomed we are still very early in the recovery phase. It will take time before the recovery gains momentum and becomes wide spreads throughout the market. We will know that recovery has occurred when no one is talking about recovering anymore.
Job growth is a key driver of commercials to recovery and the job growth we are seeing now is painfully slow. Although job growth has remained sluggish there continue to be strong leading indicators of future job growth including positive GDP, increasing corporate profits, strong productivity gains and a lot of temporary hiring.
The US has posted two consecutive quarters of positive office employment growth. economy.com and others are continuing to forecast strong job growth over the next several years.
Although weak the job growth we have seen was strong enough to allow the US office market to post two quarters of positive net absorption with 7 million square feet of office space absorbed during the third quarter. This is a 2 million square feet increase over the 5 million square feet of office space absorbed in the second quarter. While this is not a large amount of absorption given the telesize of the US office market, it is significant because new commercials and constructions as I mentioned remains in all time low. So the positive absorption activity we are seeing is affectively working away at the extra space in the market.
Recovering the capital markets tends to lag recover in the leasing market so it’s been so. This is certainly the case in the market now as the capital markets and commercial real estate sales remain unsettled.
Sales volumes remain well off for overheated peaks but have nearly returned historical averages for commercial real estate before the bubble of 2004, 2007. Reflecting a market transitioned we're seeing different trends recurring in different segments of the market. Cap rates are up while sales volumes and prices are down across another second and third tier markets.
In contrast, cap rates are declining while sales volumes and prices are up in first tier markets for leading cities such as New York, Washington DC, Boston, San Francisco, Los Angeles. Institutional great properties are beginning to show value appreciation after they may have perhaps over corrected in response of the collapse with the CMBS market and the complete lack of debt or funding for that kind of high end asset.
This is driven by the current slight equality investment strategy among commercial real estate investors, especially (inaudible) and other large institutional investors with access to equity.
What's interesting is that they all appeared to be target in the same core high quality buildings in CBDs that are well leased to credit tenants. A competition for these buildings just phenomenal with actual bidding awards breaking out in some cases. Last week I made a presentation at the recent Urban Land District Conference here in Washington DC and because our also sponsor of the Kennel panel with the discussion centered on this very issue.
One panel has described the current investment sales market as an inward in a mile deep, with all of the major potential buyers targeted in the same select group of assets. Another panelist agreed adding that this is part of a global search for yield among large investors. In the current market with debt being relatively inexpensive, high quality core real estate assets stack up quite well in terms of yield compared with the equity and fixed income markets.
We believe the path to market recovery is clear but modest. Our forecast for the office market cost for continued positive net absorption with the national average vacancy rates declining to under 12% in 2012. We believe that this renewed market activity is great news for our clients and also supports CoStar’s revenue growth prospects over the next several years. There is one downside to the emerging recovery, each time the commercial estate market crashes CoStar tends to pick up counter-cyclical crash related businesses much of it focused on loan defaults and workouts and I have to say this is a great attribute of the CoStar’s business the fact that we generate new business in down cycles that make us little cyclical.
In due course there when the market recovery stat business goes away or the minimum maybe reduced. Fortunately the loss of any workout business we pickup during a downturn tends to pale in comparison to the new business generate in recovering market.
I believe I previously provided the example of CoStar picking up the resolution trust corporation as a major client in 1990s, the RTC’s mission was completed and it wind down its operations once all the external assets have successfully been divested.
Once they close the shop we lost that contract and there was not much to be done about that. This regional cycle has been no difference and won’t be different in the future. Last year PPR was selected as a sub-contractor under the Term Asset Bank Securities Loan Facility or TALF to provide analytics and forecasting services and support of this important program which is under the operation of fund Reserve Bank of New York.
Roughly a year later, the legacy is CMBS portion of the TALF program is considered a success by almost any measure which is certainly good news for the market as a whole. We were pleased to win the contract and assist the TALF program, now having largely served the purpose that was hard to do, the program is no longer issuing new loans, therefore our services are no longer needed and our contract has ended. Our experience supporting TALF over the past year has been invaluable as we continue to develop our products in market position in the area of credit risk analytics. We are now seeing strong sales momentum in this area which is helping to offset the loss of this business.
In the third quarter of 2010, CoStar’s research team remained focused and effective adding more than 160,000 new listing. For the year-to-date our research team has added nearly half a million new listings. Not only did these listing represent a half a million new opportunities for our customers today, they also provide the added value of half million new comparable sales and lease transaction that provide our customer such tremendous value, we now have approximately 1.5 million listings offered in our service. That’s a lot of listings. And for the first time our fore sale listing count grew to more than half a million listings during the third quarter of 2010.
We now track 3.9 million properties combined in the US, UK and France. It won’t be long before we reach a 4 million property milestone. We believe this is the largest proactively researched or proprietary commercial real estate database ever built and that represents a huge competitive advantage in the market place.
Showcase continued to perform well during the third quarter, our online marketing service now has 10,889 subscribers in both the US and UK, which is a 53% year-over-year increase compared to the third quarter of 2009. Showcase is now generating approximately $6 million in annualize revenue. The introduction of showcase in the United Kingdom this year has gone exceptionally well as we already have 510 paying UK subscribers, successfully capturing significant market share in a very short period of time.
And I hope you recall, CoStar purchased a Class A office building in downtown Washington DC in the first quarter of 2010 to $41.25 million. This building will serve as our new headquarters in today the earnings call is being broadcast from the new headquarters. This headquarters has replaced our leased headquarters in the past 11 years and nearby with us in Maryland.
The city of Washington invested considerable effort in crafting mutually beneficial tax incentive legislation enabling CoStar to move into the District of Colombia. That legislation requires CoStar among other things to increase by net 100, the number of district residents CoStar Group employs before we will be eligible for millions of dollars of potential tax and make them incentives.
I am pleased to report that CoStar Group has both completed the move to our Washington headquarters and we have reached the important milestone of 100 net new district residents employed. This achievement should clear the path for us to pursue our significant potential tax and maintenance from the city. In fact we now have 458 employees working at our Washington headquarters. I believe morale is extremely high in this new HQ. We are exceeding our recruiting goals in our new facility and we appear to have improved employee retention.
50 of the 458 employees working in our new HQ transferred from our Colombia and White Marsh, Maryland research offices. I think of these transfers bring an influx of talent and great energy into our new HQ. The company did offer move allowances to dozens of employees in order to quickly staff the new HQ and retain talent. We have incurred a number of non-recurring expenses associated with our move to the new HQ, including move costs, double-ramped employee incentives and recruiting expenses.
We are no longer paying rent besides the HQ, thank God, and most of these one-time expenses should slow going forward. And relate though that we are pleased to receive an award this month in a Washington, Downtown DC Business Improvement district for strengthening and diversifying the city’s employment base. According to the Downtown DC Business Improvement district, CoStar's relocation from the best of Maryland is the largest move into the district by a public or private company in 2010 and ranks among the largest such moves by a private employer in the past decade.
We couldn't be happier with our decision to move to this new HQ, this is a fantastic building in a great location, that’s capable of accommodating our expected growth for many years to come. We intend to invest and complete the build out of our new HQ over the next nine months. So we could eventually house close to 727 HQ facility.
And therefore our facility and IT staff was not busy enough during the third quarter. We also consolidated our three Boston offices into one facility at 33 Arch Street. With Resolve, PPR and CoStar, all literally right under one nice roof, you can see progress picking up speed towards building some amazingly powerful fully integrated software tools between these companies. I think some of the most valuable and impactful commercial real estate information analytic and forecasting tools ever built will be built in our new laboratory at 33 Arch Street. We expect that both our new headquarters and the new Boston office will be LEED Platinum,
I believe that both of these new facilities are bringing our human capital together into more productive, consolidated facilities. I expect that these moves will increase retention, increase productivity and ultimately reduce our long term costs.
Let me close my remarks by saying that I am very pleased with our company’s performance during the third quarter, increase in sales, high renewal rates and accelerated revenue growth clearly demonstrate renewed strength in our business.
With commercial estate markets now in initial recovery mode, we fully expect to achieve additional high margin revenue growth through the fourth quarter and well into 2011 and beyond, thank you. I will now turn the call over to Brain Radecki, our CFO so he can discuss our quarter’s financial result in more detail.
As Andy mentioned, we are very pleased with the third quarter 2010 results. We achieved accelerating organic revenue growth for the fourth consecutive quarter and saw a positive momentum continue in almost all areas of our business.
Today I am principally focused on sequential results for the third quarter 2010 compared to second quarter 2010 and also on our outlook for the fourth quarter in full year 2010. We believe that sequential trends offer the most insight into the performance of our business as we continue to progress through the current economic and commercial real estate cycle.
Our third quarter revenues came in stronger than anticipated that $57.1 million, an increase of a $1.3 million over this quarter 2010 and an increase to $3.6 million compared to the third quarter 2009. Our record revenue performance during the quarter was primarily driven by strong net new subscription sales for our core CoStar suite service offerings as well as the high renewal rates for our subscription services.
International revenue on a functional currency basis was approximately $3.1 million pounds in the third quarter of 2010 essentially flat compared to the second quarter of 2010.
International revenues were approximately 8.4% for the company total revenues in third quarter. Subscription revenues for the third quarter accounted for approximately 94% of our total revenues with their 12 months trailing renewal rate which everybody know that the measure of renewing subscription revenue was approximately 90%.
We believe this is a very important measure for the strength of our business and are very excited to see the 12 months trailing renewal rate move back towards historical average of 90% and let me remind everybody this is two to three quarters ahead of where we originally projected. As I publicly stated on earnings call for over two years now, we expected that 12 months trailing renewal rate to decrease into the mid-80’s during the downturn and then begin to recover in 2010.
Our in-quarter renewal rate for the third quarter was again high in the low-90s and I am pleased to report that the renewal rates continue to trend in the right direction. Please note that the in-quarter renewal rate which is a measure of subscription dollars renewing will fluctuate from quarter-to-quarter across the (inaudible) approximately 2 percentage points.
Therefore the overall trends and the 12 months trailing renewal rate are very important. We believe that moving from the low-80’s into 90’s all within a year is extremely positive news, over the next few quarters we continue to expect that 12 month trailing renewal rate to be in the high-80’s and low 90% range.
Now turning to gross margin, gross margin was $36.4 million in the third quarter of 2010 it was up $900,000 compared to Q2 of 2010. In addition gross margin percentage increased from 63.7% to 63.5% from the second quarter of 2010 due to higher revenue in leverage and our model. Moving down the income statement, total operating expenses of third quarter of 2010 decreased by 800,000 to $30.2 million compared to $31 million in the second quarter of 2010.
Third quarter of 2010 does include expenses of $1.3 million associated with the consolidation of the former PPR result in CoStar offices in Boston into a single facility which ran through the G&A line. We believe having those teams together and new Boston office will facilitate the integration product development in cross-selling initiatives we have been discussing with you for the past several quarters.
Selling and marketing expenses was essentially flat in the third quarter. Looking at profitability, net income for the third quarter of 2010 was $3.4 million or $0.16 per diluted share and our non-GAAP net income was $6.9 million or $0.33 per diluted share, both above our previously guidance range.
Quite simply we are very happy with the results on both the GAAP and a non-GAAP basis which reflects our stronger revenue and stronger operating results. Third quarter 2010 headquarter transition charges which Andy spoke earlier were approximately $1.3 million. We now expect those cost to be in the $2.7 million to $3 million range which is slightly lower than what we originally expected for the year.
EBITDA for the third quarter of 2010 was $9.4 million, an increase of over $1.6 million compared to the second quarter of 2010. In adjusted EBITDA for the third quarter was $13.8 million or approximately 24% of revenue.
Reconciliation of non-GAAP net income, EBITDA and all non-GAAP financial measures discussed on this call so that their GAAP basis results are shown in detail along with definitions for those terms and our press released issued yesterday which is available on our website on the internet at www.costar.com.
Turning to the balance sheet, we ended the third quarter 2010 with approximately $232 million in cash, cash equivalents and investments, no long term debt in a shiny new building. I will now discuss our outlook for the fourth quarter and full year 2010. Our guidance takes into account recent trends, revenue growth rates, renewal rates which all maybe impacted by the economic conditions and commercial real estate or by the overall global economy. Our forward-looking guidance reflects our current expectations as of October 21, 2010.
We expect revenue for the fourth quarter 2010 to be in the range of $57.1 million to $58.1 million. And for the full year 2010 we are once again raising the high end of our annual guidance range by $2 million as we did last quarter to approximately $225.1 million to $226.1 million. Continued strong demand for our services demonstrated by our 12 months around renewal rate moving back to the historic 90% average combined with consistent accelerating revenue growth in 2010 gives us a lot of confidence in our higher annual revenue outlook.
Our guidance on the impact of foreign currency exchanges fluctuations and our top line results remain consistent. We do that and attempt to predict the foreign exchange rate fluctuations and our guidance assumes little to no volatility in the current rate. The average extent rate for the third quarter of 2010 was $1.55 US, so one British Pound and the remainder of our 2010 guidance into rate of 1.5.
In terms of earnings, we expect the fourth quarter 2010 fully diluted income per share of approximately $0.15 to $0.18 and non-GAAP net income of $0.28 to $0.32. For the fourth quarter outlook for GAAP net income per diluted share we expect about $300,000 to $500,000 of remaining costs related to the transition of our new corporate headquarters in Washington DC in October, and approximately $2.5 million to $2.7 million in equity compensation charges.
We expect the fourth quarter tax rate to be approximately 49% while again our annual rate we still expect to be 44%. For the full year 2010 we expect GAAP net income per diluted share of approximately $0.61 to $0.64 and non-GAAP net income per diluted share of approximately $1.20 to $1.24.
We expect to achieve our annual earnings outlook even with the short term dilution of net income resulting from the legal settlements, costs associated with our ongoing efforts to reduce our facilities by moving our headquarters into a corporate-owned facility and consolidating in moving our Boston and UK offices. For our annual guidance range we are increasing the earnings projections based on the expectations for the increased revenues we discussed above.
For the full year 2010 we expect approximately $2.7 million to $2.9 million of costs related to the transition of our new corporate headquarters and that is approximately $300,000 lower than what we provided last quarter. Additionally, we expect to close 2010 with approximately $1.3 million of the lease restructuring charge and $8.3 million to $8.4 million of equity comp expense.
Costs in 2010 related to the acquisition and transition of the corporate headquarters, as Andy said, it was primarily overlapping costs incurred to the end of the lease term and the carrying cost with the building prior to our move, but then the headquarters lease expired October 15 and we completely to moved to that facility last week. We continue to believe we will create significant long-term value at the move to our new headquarters facility at Washington DC.
In closing we are very pleased with our record revenue results in momentum we are in our business. Our business model remains strong based on the 94% subscription based in this model with a 90% renewal rate, our unique proprietary database, market leading position, strong balance sheet, no debt and very high operating cash flow. Based on the results we’ve seen in the past few quarters we believe we are well back on our way to a more normalized organic revenue rates in expanding margins that we have enjoyed with the past decade in the near future.
Now that we are essentially through the majority of the consolidation of office space and operation in 2010, we believe we are well positioned to enjoy the revenue and earnings growth similar to what we enjoyed in the period of the second quarter of 2007 to the third quarter of 2008, which was the last completion of our expansion investment phase.
CoStar’s management team believes there is significant opportunity for addition high margin revenue from the investments we have made and believe in our long term goal of a billion dollars of commercial real estate information revenue at a 40% to 50% margin. We continue to look forward to reporting our progress to you, and with that I open it up to call for question.
So at this point we’ll take any question we’ve got in the queue.
(Operators Instructions) Our first question is going to come from the line of Jon Maietta with Needham & Company. Please go ahead.
Jon Maietta - Needham & Company
The first question I had was around your expectation for growth and Andy may be you can talk a little bit about the would you expect it to come from so obviously it will have a portion from the existing client base who will start to add, see if their business improved, you will see a piece from new services, incremental services and then you will have a piece obviously that comes from brand new client logos and I just hope that you can help me think about that mix?
I actually look at this and I think the greatest driver for the next five years, four to five years we will new logos. There is an of a awful lot of customer based to go, prospect based to go after here in the United States, so we still have a North of 10,000 meaningful to sell our products and service to here in the United States.
We have got a 1000 of retailers to sell our products to services too, there are 7000 plus banks with commercial real estate assets in their portfolio. Our successful compose product is only sold about 25 some units, we've got several total 100 on the CoStar property side but you still have 1000s to go there.
And I think institutional space is one of the biggest opportunities for our business over the next the five years. So, big picture as the economy recovers and these prospects are more open to considering new affective investments we think we will able to pick up tractions in new logos organic growth.
There certainly is a lot of opportunity for cross-selling in the existing customer base that’s always been half of our sales activity and I expect that to continue to be the case. As you know, we have begun to institute some minor price increases that keep us abreast or keep us a pace with any CPI activity that’s going on. But the main thing we are focused on as we know that there are thousands of good companies out there that would benefit from our products and it's a penetration story, it's a story that going after those names and those companies.
Jon Maietta - Needham & Company
And then could you just remind us where you are in terms of, you talked about the lower end bundling on the quarterly call last quarter just maybe where we are in that cycle and would you kind of saying there early days?
Sure. The program begin last quarter focusing on bundling our Swedish services to these like the fourth tier markets into the summer smaller firms out there, so provide them with a tremendous value proposition for relatively low cost, and not doing that through our field sales force but instead using our centralized lower cost headquarter base sales force, that has gone well, it is I know that we are peaking up I believe hundreds of people that lower level and that group is internal sales group is a strong contributor to our sales growth right now but that is sort of a blocking and tackling things something we are doing but our real focus is probably at the middle to upper end of the marketplace, institutional marketplace the banks, the leading brokerage. So that's where the most of the revenue dollars can be pushed.
Jon Maietta - Needham & Company
And Brian just last question from me. If you could I don't see at the number but operating cash flow on the quarter and see the CapEx number as well?
Sure. Yeah. That CapEx number was about $6 million for the quarters and about $10 million to the year. I am sure there are a lot of CapEx related to our new facilities and we believe the operating cash flow is about $27 million for the year I think it’s above the $7 million mark for the third quarter.
Next question comes from the line of Tim Connor with William Blair. Please go ahead.
Tim Connor - William Blair & Company
Couple of questions, first just wanted to ask about price impact on renewals and on new business?
The best of my knowledge there has been zero impact. I have not heard a single comment from anyone of our sales organization about any prospect whatsoever any of this price increase. I think the CoStar Group took a very, very client focused conservative stands going into the downturn when we proactively, immediately stopped a new price increases anywhere even the one that we could contractually take, so I think the costumers are certainly comfortable with our pricing policies and for us to re-institute our price increases that just got us back to CPI from the last year, so I think there is zero push back I haven’t heard a single thing out in branch or anything either.
Tim Connor - William Blair & Company
No push back on.
No it’s going well.
Tim Connor - William Blair & Company
Would you say that’s a function of just their improving business or it is something else?
I think it’s definitely a function of their improving business and the fact that CoStar Group services are really risky important tool for them to be able to productively go and do what they do and do they make money. So what they pay for our services is relatively small compared to the value they are getting from and as long as we have a reputation of being fair in the marketplace, you are getting pushed back in. And we’ve been doing this for a long time now, so I think that it’s certainly a good sense of when the customers are going feel they are getting pushed and they are not feel they are being crushed right now.
Tim Connor - William Blair & Company
Okay and one more customer question on DSO trends. How far do you think those can continue and anecdotally would you think?
I am sorry repeat that again.
Tim Connor - William Blair & Company
So customer payment behavior, DSO trends had been improving. How far do you think you see those coming and do you have any anecdotal stories on that?
Sure. I think that the payment trends continue to improve, DSOs continue to improve and our aging has just, I mean I compare it to last year it’s like night and day, and it really what if this goes to the overall how the client and the business and really sort of you know we talked about in prior call sort of the client that were unhealthy we really lost in the past year, I think now that’s why you see the renewal rates going up you see improved collections you know bad debt you know half of what it was last year so I will continue to expect that to move in a positive direction I don’t see anything on the radar screen right now, unless something significant changes in the global economy to really move to dial over there next few quarters there. So, it’s very positive.
I think he saying a sandbag, any CFO worth his salt can give DSOs to four days.
Tim Connor - William Blair & Company
And then stashing levels are you comfortable with these and then plans for your future on this?
Right now we are coupled with our staffing levels. I think we are reasonably stable in our research staffing levels. We might have one or two relatively minor initiatives which would represent single digit percentage in research staff in order to pursue a few new initiatives. We out of our 2011 we might become a little bit more aggressive with some software development initiatives, but we are by and large fairly comfortable where we are right now and there is some big trends towards some cost efficiencies as we get rid of these multiple facilities.
They kind of (inaudible) any mentions as before we are training process in the 10 to 20 range that we happen to be at the end of the quarter and actually as we moved, we actually pushed the training class into the next quarter so that’s why you saw that dip a little bit. So I think you will see that go back up and we will see that continue to be around the 200 plus and minus a little bit pretty consistently moving forward.
Tim Connor - William Blair & Company
Okay, thanks and then one final one. analytics programs, PPR integration and putting that on top of the data base. Just could you discuss this generally what the plans are for that going forward.
Sure, some day I want to be more like and only talk about new products when I am on the stage when we actually them shipping tomorrow. But its going well again getting everyone under roof in Boston is great because you have got a great technology team over a result, you got a very innovative group with PPR and then put under one facility its much easier to work on a integrations so we are pursuing a deeply integrated set of products between everything we re doing. From compass to portfolio maximize or to request to DCF to analytics and forecasting and in property data we envision something that is tightly integrated one interface for the customer, one looking field, one login and that's we're going to be pursuing and we're probably not going to give a lot of color on specifically what we're doing until we actually are delivering the product to our clients. (inaudible) had a reasons.
Next question comes from the line of Jim Wilson, JPMorgan Securities. Please go ahead.
James Wilson - JPMorgan Securities
Andy I was wondering if you could give little more color on deal mainly what -- at anyone tell a dollar amount probably but what change and what was added from the last contract you had with them?
This is actually wells real I think wells trying I believe there is a client but the one it was specifically mentioned it was wells real estate and that we're just been that was has been a new customer acquisition that would be something where they would have been I believe using a different competing service for their analytics information, their market forecast and when they looked at being able to get the highly granular detail that a CoStar provides coupled with the great market analytics in the right hubs and forecasting the PPR provides, they thought that was a more effective solution so they basically our new (inaudible) for us.
James Wilson - JPMorgan Securities
Okay, I see. All right and then maybe other one would be you working to both cross sale the analytics and then what you will produce on the combine desktop, so do you maybe the traveler little are highlight the coupled two, three main things that customers tells you about this is what we really want from you, can you do this, will you do this or when will you be able to do this?
Okay so I think two things lets focus on three things. One is the customer who is attending our PPR conference in the Cape and getting high level overviews of forecast and vacancy rates and run rates and discussions which metrics to be investing in commercial real estate. One will be able to access that information and online they customize that information very high level analytics on macro.
Macro trends in US commercial real estate but they want to be able to go from there down to the asset level and see what’s actually happening in specific assets and these people have assets, they like to look and have directly competing assets and performing compared to their assets and they want that all be in a same system with their macro economies resize and they want to be able to go back and forth between the two.
The other thing is they want to get too more granular economic, analytics and economic forecast. They want to be able to get a very specific analytics and breakouts on how one submarket and micro market is likely to perform compared to another macro market so its not good enough to talk about what’s happening in office space and mid-town Manhattan you need to be talking about what’s happening in the Plaza district distinctly different from what’s happening in the Grand Central area.
So getting into greater granular and that’s part of our initiatives but economist in each local market and really get into the detail there. We think there is a huge market there, there are more than a 100, 200, 300 developers and owners who have multi-billion dollar portfolios only at the local level and that appeals to them in particular.
The other thing I think is very interesting is being able to take the customers information, the customers have a wealth of information about their portfolios from accounting information to lease management systems to forecasting systems being able to take that information help them organize it but then present and mind the relevant information in our database analytics and forecast and set against what's relevant and important to them based upon their data and help them soar through this billions of piece of data to find out which ten pieces of data is important to them.
So those are the three big trends are going out. We are having a blast doing it’s a fun project. It’s very ambitious but that’s what the customers are saying and we are very happy to pursue solution that sort of matches with the customers are asking for I guess we are nerds.
Your next question comes from the line of Chris Ramon, Deutsche Bank. Please go ahead.
Hi, this is (inaudible) for Chris. Can you talk about what excess capacity you install basis clients might have currently in terms of a new subscription ID and how that may impact an incremental spend with an outline basis towards the recovery?
Certainly like the CoStar shadow vacancy rate or something. It’s actually relatively low, our sales force is compensated fairly heavily and we actually shifted our compensation structure at the beginning of the downturn to centralize our sales force to proactively pursue inactive user ids and try to make them active. We call it going creating green bar users, so, in our internal tracking system if you are using our product heavily you are green user.
They have earned hundreds of thousands of dollars if not millions of dollars in commissions over the last two years. Going after these dormant ids these people have the legal or subscribers but don’t our product and getting them to use the product, so we are probably when the history of our company at one of the better places we have ever been in terms of having these high percentage of user ids active.
And then actually the sales people actually get a loose commissions on new sales as they have a high ratio of dormant ids. So they are right on top of it and the positive evidence of that effort is the fact that these new customers, these customers that have been our customers less then five years right now, they jumped from 74% renewal rate to 87% in the course of one year and that’s because we chased down the dormant ideas.
So, I think our company is in the strongest place it’s ever been in terms of percentage of active user ids.
Thanks, and just as a clarification if there is a headcount reduction at any of your book or client does that id go away or are they still paying for it and they might have a lot backlog of that which they might need to use before they start buying new ids from start?
Well, that was really a sort of story from last year and the year before when people were reducing brokerage headcount. So, as we went into the downturn like third quarter '07, '08, '09 (inaudible) reducing headcount there were many disruptions were actually probably little bit authorize a lot meant, so there was a lot of recall it and right downs in '08 and '09 associated with down side and then it's the right number by these I don't expect that could be a major factor going forward, I think we're now moving into an expansion phase in brokerage and I think that we're probably as I understand from our sales management team we're seeing a lot of seat adds right now, to now lot of see reductions.
(Operator Instructions) Our next question comes from the line of Bill Warmington, Raymond James. Please go ahead.
Bill Warmington - Raymond James
Good morning. Question for you on adjusted EBITDA margins, and you saw some improvement quarter-to-quarter and year-over-year there and time-to-time the number of 30% achievable target is come up and the question for you that, how should we think about that margin going forward, what kind of the timeframe should we have for getting toward 30% type number and how should we think about the incremental operating margin between now and there?
Sure. Hi, Bill, it's Brian. I think that we obviously giving guidance on next year this call, but I think we're very, very well positioned to see expansion in that number. I think, I kind of point people back to the 2007 (inaudible) to the end of the third quarter 2008 time period which that time period was great after we completed a major expansion in pretty much every quarter you saw revenue drop from the top line to the bottom line, sometimes at 50% sometimes at 79% sometimes at 100% so I think we are staring to move back into that phase, we have had a lot of things we have done this year with the acquisition of PPR reserves, the integration of those businesses they are moving in the headquarters. We saw some of that noise coming through in the fourth quarter maybe at just the (inaudible) in the first quarter by believing as you certainly get to the middle of next year, the end of next year I think you will see that number expand and I think it will look a lot more similar to that 2007-2008 time period I think if we continue at the rates that we are at, we can get through a 30% margin, I believe fairly quickly and I guess at this point everybody back to hat time period and you can see the figured out based on your own revenue growth projections
Bill Warmington - Raymond James
Alright the other question for you how the acquisition pipeline is looking?
The acquisition pipeline is robust there are a number of potential things out there that we are any given time dialoguing with half a dozen different companies and there is no lack of potential deals out there. I think we are realistically – the consolidation of the headquarters, all the Boston office, result PPR as capital busy as (inaudible) software planning so probably we are moving into a season with little bit of accelerated operation like (inaudible)
Bill Warmington - Raymond James
Okay. And I wanted to also ask about that -- what you think that shiny new building is worth today versus what you paid for it. And whether you had any plans to unlock that value.
Yeah its always difficult much you actually have a transaction you don’t really expecting [waving] I guess we paid [41.2], $230 per sq foot it does not, its got a long term land lease out of the property there has been a trends towards institutional investor really wanting to find yield that may look at class A Asset and first year cities as being good alternatives to low yielding debt instrument, cause its pretty much taken up a bond from a company back by high quality real estate so we seen some deals we picked up (inaudible) 230 something a foot 240 something a foot we seen some deals within a couple of blocks of here in the 600, 700 range we are not long term investors in commercial real estate we provide services people who do that so we are always open to, unlocking the value in that and deploying the capital in other probably other users are more core to our business, so was that a good non answer.
Bill Warmington - Raymond James
I think it’s at least worth of a couple of bucks, (inaudible) tax, but anyway thank you very much
Your next question comes from the line of [Toni Kathryn] from Morgan Stanley please go ahead
Toni Kathryn - Morgan Stanley
Hi guys thanks for taking my question, just a quick question on your traction in the retail marketing how it’s progressing and the initiate you have to sort up the customer base in that market, thanks a lot
Thank you for question Tony we have had some good traction so we now have a lot recognizable retailers as customer using our services for above evaluating their properties and also opening new store we now have I believe in the relatively short period that we have been in retail information and I believe we have 10 of the top 10 retail, nine of the top 10 retail owner developers now as customers so that’s been very successful. To be honest with you I think we are overdue for some product enhancements and upgrades so we have been extraordinarily successful on this space.
We have been successful in gaining the trust of the industry and they are using our platform to communicate their offerings listings properties for sale and they are doing it and I guess we've seen multi 100% growth in the number of listings moving through our system. So I think we are at the early stages of developing a product for the retail community and as we get to version two, three and four I think we will be able to get some really solid growth in that space.
So, we want to get to next year's ICSC where I think some product upgrades responsible what we know about the industry what we can do for them.
I mean these are not really expensive upgrades by the way I should say, this is not involved hiring hundreds of people involves couple of software developers.
Speaking of this time we have no further questions in queue.
Okay. And just wanted to thank you all for joining us for the third quarter call and we look forward to I guess next call of the year end results numbers and we are really glad to be in a strong market with some attraction sales and we hope all the other earnings call goes well. Thank you.
Ladies and gentlemen that does conclude our conference for today. Today's conference will be available for replay, as it will be available starting today at 2:00 pm Eastern going through November 4, 2010 at midnight. You may access AT&T replay system by dialing 1800-475-6701 and then entering the access code 173086. International participants may dial into United States and then 320-365-3844, those numbers again 1800-475-6701 and international is 320-365-3844 with the access code 173086.
That does conclude the conference. I want to thank you for your participation. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!