LoopNet CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: LoopNet, Inc. (LOOP)

LoopNet, Inc. (NASDAQ:LOOP)

Q4 2010 Earnings Conference Call

February 9, 2011 4:30 PM ET


Derek Brown – VP, IR and Corporate Planning

Rich Boyle – Chairman and CEO

Brent Stumme – CFO and SVP, Finance and Administration


John Blackledge – Credit Suisse

Mitchell Bartlett – Craig-Hallum Capital Group LLC

Ian Corydon – B. Riley & Company

Brett Huff – Stephens

Jim Wilson – JMP Securities


Welcome to LoopNet Inc.’s Earnings Conference Call for the Fourth Quarter of 2010. The date of this call is February 9, 2011.

This call is the property of LoopNet Inc. and any recording, reproduction or transmission of this conference call without the expressed prior written consent of LoopNet Inc. is strictly prohibited. This call is being recorded.

You may listen to a webcast replay of this call by going to the Investor Relations section of LoopNet’s Web site. The webcast will be available on the company’s Web site until February 11, 2011.

I will now turn the call over to Derek Brown, VP, Investor Relations and Corporate Planning.

Derek Brown

Good afternoon. Thank you for joining us to discuss LoopNet Inc.’s financial and operating results for the fourth quarter and full fiscal year of 2010. With me today are Rich Boyle, Chief Executive Officer and Chairman; and Brent Stumme, Chief Financial Officer.

In addition to discussing our performance in Q4 2010 and fiscal year 2010 during this call, we plan to share our perspective on current conditions in the commercial real estate industry and discuss how these conditions are impacting our business. We will also provide you with updates on new investments we are making to expand the breadth and depth of the services we provide to our customers.

First, Rich Boyle, Chairman and CEO will provide some context for our quantitative results and offer some color on our business and plans for the future. Then Brent Stumme, our Chief Financial Officer, will walk through our fourth quarter and year-end financial results and guidance for Q1 2011. Following these prepared remarks, we will open the line for your questions.

Over the next few months, LoopNet has plans to meet with institutional investors in Miami, Phoenix, San Francisco, Los Angeles, and New York among other locations and will be participating in investor conferences hosted by Deutsche Bank, Credit Suisse, JMP Securities, B. Riley, and Stephens. We hope to see you at these events, but we’ll also make webcast of our presentations available on the Investor Relations section of LoopNet’s website.

I would now like to bring the following to your attention. On the call today, you will hear forward-looking statements about events and circumstances that have not yet occurred. Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. Please refer to the Company’s recent SEC filings at the SEC’s website at www.sec.gov for detailed discussions of the relevant risk and uncertainties. The company does not intend to update the forward-looking statements in this conference call, which are based on information available to us as of the date of this call.

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

You will also hear discussion of non-GAAP financial measures. Reconciliations of these non-GAAP measures to their most comparable GAAP financial measures are contained in the press release distributed today and available on the Investor Relations section of the company’s Web site.

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

Rich Boyle

Thank you, Derek, and thank you all for joining us today.

In the fourth quarter of 2010, LoopNet delivered strong financial results highlighted by the fact that year-over-year revenue growth accelerated once again to over 9%. Additionally, our company continued to push forward on key initiatives that we think will extend and deepen our relationship with our customers and accelerate our growth in the quarters and years ahead.

When coupled with gradual improvement, we see in the commercial real estate markets that we serve these dynamics give us confidence as we begin the new year. We said at the start of last year that our business was at an inflection point and we were correct. 2010 marked overturn to revenue growth at increasing levels as the year progressed. We believe that this return to growth was due to stabilizing industry conditions, the strength of our underlying business model and our ongoing investments both organic and via acquisition that have expanded our fleet of products and services among other factors.

As we step into 2011, our belief is that industry conditions have bottomed and that the broader commercial real estate market will continue to improve modestly as the year progresses.

Against this backdrop, we are optimistic about our ability to continue driving adoption of our marketplaces, expanding the depths of our existing customer relationships, broadening our customer base to an expanded set of industry participants, and growing our revenue. To achieve these ends, we remain focused on building scale and driving activity in our commercial real estate, land for sale, and business for sale marketplaces, expanding the array of products and services we deliver, particularly new information services, and increasing the number of industry participants using our solutions.

With that, let’s begin with a very quick review of current conditions in the commercial real estate market to provide some context for the discussion about our business initiatives and results.

Overall, the industry improved modestly during the last quarter of 2010. We are seeing increasing signs of stabilization and modest improvement in transaction volume in the commercial real estate market and are expecting to see continued improvement again at a modest level as we move further into 2011. There are some segments of the industry that have moved solidly into full recovery mode such as the markets for higher end investment properties, the market for smaller Main Street properties, which is in many ways LoopNet’s primary market segment remained sluggish but is getting better gradually, we believe.

Conditions in the leasing markets continue to improve modestly as well as vacancy rates stabilized in many markets while remaining at relatively high levels and many markets begin to show overall (med absorption) 0:04:26.1 and stabilizing rents. These improving conditions are being driven by a number of fundamental factors – early signs of overall employment and economic growth, a continued low interest rate environment, improved access to financing in certain sectors, and what we believe is increasing confidence from the investor and business communities that the broader economy is in recovery mode.

In terms of how this industry environment impacted LoopNet, our premium membership service remains the largest revenue contributor to our business and accounted for 69% of revenues during the quarter. Revenue for the product increased 1% over Q4 of 2009, marking the first period of year-over-year growth in premium membership revenues since Q4 of 2008.

After so much industry disruption, we’re happy to see this product line growing again. At the same time, however, we are aiming for higher rates of growth and are optimistic that our proactive efforts to stimulate marketplace activity coupled with growing industry tailwinds as the year progresses will accelerate our gains.

Historically, we have experienced fairly pronounced seasonal weakness in the fourth calendar quarter given holiday schedules and the general nature of the industry and Q4 of 2010 was no exception. While we did see our normal seasonal weakness, gross sales of premium membership subscriptions were up modestly year-over-year and cancellation rates continue to decline from a year ago levels. In fact, our Q4 of 2010 cancellation rate was the lowest than it has been in more than three years and felt comfortably within our expected range of 4.5 to 6.5 % percent despite some variability caused by the uneven patterns of activity across the industry as it bounces along the bottom.

Importantly, our marketplace results from early 2011 have been encouraging. Consistent with seasonal patterns in our business, we have seen a notable increase in overall activity as we moved into the new year. As a result, we expect growth in our base of premium members and modest growth in premium member revenue in the first quarter of 2011.

Overall, we remain confident that we provide the most vibrant, liquid online marketplace in the commercial real estate industry. We are equally confident that our online marketplace continues to gain share of total market activity in this challenging environment. If the ongoing stabilization in broader market conditions continues, we expect to see growth in both revenues and subscribers for the premium membership product during 2011 that comfortably exceeds the level seen in 2010.

In terms of supply on LoopNet’s marketplace, total active listings increased nearly 8% year-over-year. The for lease side, which saw a more than 8% year-over-year increase in the number of spaces being marketed, continue to be the fastest growing part of our marketplace. However, we are pleased to report that the number of for sale properties on LoopNet continue to grow at an accelerating rate, increasing more than 6% from Q4 of 2009 compared with a 3% year-over-year growth in Q3 of 2010.

And looking even further into our data, this marked the second consecutive quarter and just a second at all since the first quarter of 2008 in which the number of new for sale listings added to our marketplace has exceeded those of the year-ago period. Moreover, we experienced a material acceleration in this rate of year-over-year growth in Q4 of 2010 from Q3. As we have been saying for some time now, supply constraints have hampered the for sale side of the industry in our marketplace so we are very encouraged to see early indications of accelerating growth there once again.

Turning now to the demand side of our marketplace, we are pleased to report that we again saw very strong levels of activity in the fourth quarter of 2010. LoopNet users continue to focus more time and resources analyzing markets and searching for potential investment properties and spaces for lease on our marketplace. We have also continued making improvements to LoopNet’s core search engine and believe we are aggregating more of the demand side industry activity as it moves online.

As a result, loopnet.com saw a record number of listing profile views in Q4 of 2010 up 44% from year-ago levels. At the same time, the number of profile used per active LoopNet listing, which we believe is a key measure of overall liquidity in our marketplace approached an all-time LoopNet record and increased 34% year-over-year. We experienced healthy demand growth in both the for sale and for lease sides of our marketplace, lending further credence to the view that the significant compression of pricing and increasing confidence in the economy are fueling demand side interest.

Overall, our marketplace continued to delever unparalleled visitor traffic according to third party traffic measurement services. For example, comScore Media Metrix reported that the average number of monthly unique visitors to loopnet.com was approximately 1.7 million during the fourth quarter of 2010.

More broadly, our collection of Web sites including LoopNet, LandsofAmerica, CityFeet, LandandFarm, BizQuest, and BizBuySell saw a roughly 2.4 million unique visitors, on average, during the fourth quarter again according to comScore.

Now, I’d like to update you on areas of our business beyond our core marketplace services where we have been investing considerable resources. We have made substantial progress in these areas, particularly in the area of information services and believe that we are well our way to seeing favorable impacts on top line revenue growth as a result of our investment dollars. Moreover, we are increasingly optimistic about the long-term growth potential we see in these opportunities.

First, we’re extremely excited by the market’s early response to our property database service, which provides access to a database containing over 7.5 million improved commercial properties nationwide and includes information on historical listings and transactions, ownership, occupancy and tenants, imagery, and other valuable information.

We initially launched the service in a beta form in May of 2010. At that time, we provided bundled access to it with premium membership at no additional cost in an effort to both build awareness and usage of the product and to gather important feedback from our customers.

In October of 2010, we began taking our first steps toward monetizing the property database by offering different bundled access to property database for new subscribers to premium membership for an incremental monthly subscription fee. Our major objectives in this effort were to get feedback on the product and pricing and to gain experience in our sales and marketing efforts with this new service.

To this end, we have already sold a few thousand property database upgrades to new premium members given that we are not yet in full scale marketing and sales mode and that the product was still waiting for significant enhancements, we think that having thousands of premium members already willing to pay us for access to property database highlights the appeal and potential opportunity around this new product offering.

In regard to the product itself, we took a major leap forward last week with the release of version 2.0, leveraging the tremendous feedback, suggestions and requests from our early property database users, version 2.0 represents a substantial upgrade for our current and future customers. With the inclusion of advanced parametric search, robust reporting capabilities, and additional depths and breadths to our data set, property databases utility in addressing our customers’ business needs has increased materially.

While we plan to continue expanding the capabilities of the product in the future, we have removed the beta label and consider this product to now being in full production usage. There is no question in our minds that it provides real utility to subscribers in the current version. Moreover, in coming months, we will also begin selling access to property database that is independent of premium membership in addition to continuing to offer bundles to subscribers were relevant.

We believe strongly that the property database service has the potential to significantly broaden our opportunity to sell subscriptions both by making our services relevant to existing customers that might need information beyond the marketing and searching for availabilities that is the focus of premium membership and also by appealing to commercial real estate industry participants that may have no appreciable need for premium access to our marketplace such as appraisers and banks. While we remain at a relatively early stage of property databases lifecycle, we couldn’t be more pleased with this development to date and are extremely optimistic about its potential in 2011 and beyond.

Building on the early momentum we’ve seen for property database and in anticipation of the standalone version coming to markets soon, we are in the process now of substantially ramping our sales and marketing efforts around this product. We believe strongly that property database’s powerful combination of utility and value will appeal broadly to participants in the commercial real estate industry. We believe that the addressable market for this service is at least as big as that for our existing premium membership service and our goal will be to drive subscriber numbers at similar scale to premium membership in the coming years.

I’d now like to take a few moments to highlight our RecentSales product, which is another important offering for us in the area of information services. This database of comparable sales records has also been a focal point of internal investment for us over the past year, and we are very excited by the market’s response to our work.

Fueled by a re-engineered search interface, the inclusion of significant new information and enhanced functionality as well as by stabilizing market conditions, year-over-year growth in our base of total recent sale subscribers accelerated once again, and we ended the year with a record number of subscribers that easily topped 10,000. Revenue in the fourth quarter of 2010 increased by nearly 20 percent year-over-year for RecentSales and our expectation is that it will continue to grow rapidly through 2011 and beyond. We have also made investing in the expansion of our overall marketing platform used by brokers to market listings.

In December, we announced the beta release of Enterprise Deal Tools. Leveraging the technology and skill set of Reaction Web, the business we acquired in the first half of 2010, Enterprise Deal Tools is a suite of deal management products that enables corporate customers to eliminate much of the backend work associated with property marketing campaigns and transaction management.

More specifically, these tools will allow corporate customers to easily generate high-quality company-branded HTML email campaigns, quickly qualify and focus on their highest value leads, automate the process of executing confidentiality agreements, and easily share documents in a secured environment. These new tools also integrate with the core LoopNet platform, allowing the brokers that are marketing properties to leverage the massive audience and distribution network of LoopNet for the public marketing efforts they undertake. This initial release of the Enterprise Deal Tools is only available in a beta release form to select clients at this time. We will be rolling it out more broadly and expect to make a version available to individual subscribers in the coming quarters.

In addition to our core marketplace, the property database, RecentSales, and our Enterprise (Deal) Tools, we are continuing to make investments in other areas as well. For example, our initial efforts to integrate our most recent acquisition, LandsofAmerica with our other land for sale platforms is going well, and we will continue to build on this early momentum. We intend to continue dedicating resources to the land for sale category, which is one of the largest categories in the entire commercial real estate industry. We acquired LandsofAmerica in September of 2010 after having acquired landandfarm.com in 2008, and we remain bullish on the impact of integrating our platforms and introducing innovative marketing, searching, and information services to our customers in this segment of the industry.

As we have said numerous times, expanding the range of services we provide to an increasing number of industry participants is a key part of our growth strategy. In particular, we see substantial opportunity in generating more revenue for customer by cross-selling an expanded array of products and services and simultaneously growing our customer base by providing more utilities across the full commercial real estate life cycle to a broader set of industry participants.

With this in mind, we are happy to report that we ended the fourth quarter of 2010 with 88,878 unique paying subscribers to our commercial real estate services, up from 88,505 at the end of the third quarter. These subscribers were paying us, on average, $58.08 per month, up from $57.30 per month last quarter.

Importantly, more than one-third of new premium member customers sold during the fourth quarter purchased one or more additional services from us with relatively limited cross-selling efforts on our part. All told, LoopNet’s total commercial real estate related subscription revenue increased to $15.5 million – pardon me – in Q4 of 2010 from $15.2 million in Q3 of 2010, representing 77% of total company revenue in the quarter.

Looking forward, we are anxious to build on a positive momentum developed in our business in 2010. We are especially excited about the early results of and potential returns associated with the investments we have been pursuing.

Our plans for 2011 are continue to invest in three primary areas to serve our customers and drive growth for the future. First, scaling our marketplaces will once again be an intense focus for us in 2011. We already have several initiatives underway that are dedicated to increasing the number of participants and level of activity in our core LoopNet marketplace and our confidence that we can continue growing supply and demand in lockstep.

Second, we will also be focusing substantial resources this year on increasing the scope of services we provide to an expanding array of customers. Most importantly, we see a considerable opportunity in the area of information services. We are thrilled to have recently going live with version 2.0 of our property database and fully expect ongoing updates to this service as the year progresses. We also plan continued improvements to our RecentSales product. Overall, we think it’s possible that tens of thousands of customers may purchase one or more of our primary information services over the next 12 to 24 months, particularly as we continue improving functionality and increasing the breadth, depth, timeliness, utility, and accuracy of the data we deliver.

Third, we will continue exploring new potential acquisitions and investments and pushing the ball for upgrading, integrating and expanding the offerings from some of the acquisitions and investments we have made in the past. We see several opportunities to make small tuck-in acquisitions and see these types of transactions as effective vehicles through which to add scale to our marketplaces or expand the tools and services we can provide to our core customers. Accordingly, as 2011 progresses, we anticipate that our investment spend will continue to increase in absolute dollar terms as we add more technologies and significantly ramp our sales and marketing efforts around property database.

Our current expectation is for our organic investments to peak in absolute dollar terms over the next few quarters at slightly elevated levels relative to what we plan for them to be in Q1 of 2011. When coupled with the timing and pace of expected revenue growth from new and existing products as well as potentially gradual improvements in industry dynamics, this plan suggests that overall adjusted EBITDA margins will trough midyear and then begin expanding gradually on a quarter-to-quarter basis later this year then on into 2012 and beyond.

In this regard, we think it is important to note that our core marketplace franchise continues to have adjusted EBITDA margins in excess of 40% currently and we are more confident than ever that the incremental dollars we have been investing in our business to enhance our offerings, expand our solution set, and increase adoption will generate substantial incremental growth in our business starting in the next few quarters.

Even as we pursue this investment program, our high-margin business will continue to generate significant free cash flow. We ended the year with over $90 million in cash and we will continue evaluating other ways to appropriately use our cash to enhance stockholder value as we did during 2010.

In conclusion, our company performed well in Q4 of 2010 despite still challenging market conditions. We met our financial targets, extended the lead of our core online marketplace, and made substantial progress developing and delivering new value-added products and services to our customers. Moreover, we have strengthened our head as we head into 2011, setting the stage for more rapid, longer term growth driven by increases in our existing core premium membership business, revenue from new services such as the property database and gradually improving market conditions.

We believe that we are building toward and rapidly approaching a phase in our company’s development characterized by both revenue and profit expansion. We are expecting to see top line revenue growth continue on both the sequential and year-over-year basis as we move through 2011 and as our current investment program reaches its fully ramp level in the next few quarters, we believe we will also begin to see adjusted EBITDA growth in both absolute dollars and on a margins basis in the back half of 2011.

Looking a bit further down the road, we also believe that we are well-positioned to see continued top line growth and gradually expanding adjusted EBITDA margins continuing on to 2012. We believe that we’re making excellent progress towards our previously stated medium term goal of building a $200 million revenues business with over 40% adjusted EBITDA margin and look forward to providing updates on our progress in coming quarters. Thank you.

And now, I will turn the call over to Brent Stumme, our Chief Financial Officer to walk you through our fourth quarter financial results and guidance for the first quarter of 2011.

Brent Stumme

Thank you, Rich.

LoopNet’s revenue for the fourth quarter of 2010 was $20 million compared to $19.8 million in the third quarter of 2010, $18.3 million in the fourth quarter of 2009, and our guidance of $19.7 million to $19.9 million. The revenue growth was due to the impact of recently completed acquisitions and increase in our base of subscribers to RecentSales and a modest improvement in broader industry conditions.

LoopNet’s adjusted EBITDA for the quarter was $7 million or 34.8% of revenues compared to $7.6 million in the fourth quarter of 2009 and our guidance of $6.9 million to $7.1 million.

Net income applicable to common stockholders for the fourth quarter of 2010 was $7.2 million or $0.17 per diluted share compared to $3.2 million or $0.07 per diluted share in the fourth quarter of 2009 and our guidance of $0.04 to $0.05 per diluted share. Net income applicable to common stockholders for the fourth quarter of 2010 included three non-recurring items, which had a net positive impact of $0.12 per diluted share. The first item was a positive tax adjustment of $5.4 million or $0.13 per diluted share related to the reversal of the income tax valuation allowance for certain federal and state operating loss carry-forwards.

The second item was an insurance reimbursement related to previous shares, litigation related fees of $750,000 or $0.01 per diluted share. And the third item was an impairment charge related to an equity investment of $1.4 million or $0.02 per diluted share. Excluding these non-recurring items, net income applicable to common stockholders for the fourth quarter of 2010 was $0.05 per diluted share.

Non-GAAP net income, which we define as net income excluding stock-based compensation, amortization of acquired intangible assets, litigation related cost and recoveries, impairment charges, and certain non-recurring tax adjustments for the fourth quarter of 2010 was $4 million or $0.10 per diluted share compared to $4.9 million or $0.11 per diluted share in fourth quarter of 2009.

LoopNet did not repurchase any shares of its common stock during the quarter ended December 31, 2010 so in February 2010, the company has repurchased 2,756,300 shares of its common stock or 8.6% of total shares outstanding for $31.7 million. As a result, $43.3 million remains on our previously announced authorization for repurchase of up to $75 million of common stock.

As of December 31, 2010 the company had $92.3 million of cash, cash equivalents, and short-term investments, and no debt.

Now, I would like to review some of our key operating metrics. The number of unique paying subscribers to one or more of our commercial real estate related services as of the end of the fourth quarter of 2010 was 88,878, a slight increase compared to the end of third quarter of 2010. Average monthly revenue per unique paying subscriber during the fourth quarter of 2010 was $58.08, a 1% increase compared to the third quarter of 2010.

In our LoopNet marketplace, the number of registered members, which includes both basic and premium members grew to 4,626,973 during the fourth quarter of 2010, an 18% increase over the fourth quarter of 2009. The number of premium members as of the end of fourth quarter of 2010 was 68,608, a 0.3% increase compared to the end of the fourth quarter of 2009.

Embedded in this metric was an average monthly cancellation rate that was within the 4.5 to 6.5% range we began seeing since the end of 2007. Average monthly revenue for premium member was $66.62 in the fourth quarter of 2010, a 1% increase compared to the fourth quarter of 2009.

The number of profile views of listings on the LoopNet marketplace during the current quarter was 67 million, a 44% increase over the fourth quarter of 2009.

Average monthly unique visitors, as reported by comScore Media Metrix during the fourth quarter of 2010 to LoopNet-owned websites including LoopNet.com, CityFeet.com, LandsofAmerica.com, LandandFarm.com, BizQuest.com, and BizBuySell.com was approximately 2.4 million, which was essentially flat compared to third quarter of 2010. Average monthly unique visitors, as reported by comScore during the fourth quarter of 2010 to LoopNet.com alone were approximately 1.7 million, which was essentially flat compared to third quarter of 2010.

As of December 31, 2010, the LoopNet marketplace contained 788,330 listings, an 8% increase compared to December 31, 2009. Additionally, our business for sale marketplace contained 81,444 listings of operating businesses for sale, a 2% decline compared to September 30, 2010 and an 82% increase compared to December 31, 2009. The increase compared to December 31, 2009 was primarily a result of our acquisition of BizQuest in the first quarter of 2010.

That brings me to our business outlook. Based on current industry dynamics and marketplace trends, the company expects revenue for the quarter ending March 31, 2011 to be in the range of $20.2 million to $20.4 million, adjusted EBITDA to be in the range of $6.4 million to $6.6 million, and net income applicable to common stock of shareholders to be approximately $0.04 per diluted share, assuming stock-based compensation of approximately $0.03 per diluted share net of tax benefits, and effective tax rate of approximately 40%.

Thanks for joining us today. I will now open up the call for questions.

Question-and-Answer Session


Thank you for that presentation. (Operator Instructions)

Your first question comes from the line of John Blackledge of Credit Suisse. Please proceed.

John Blackledge – Credit Suisse

Thanks and thanks for taking the question. So I just want to – a couple of questions. One is review the margins for 2011.

Rich, I think you said that margins are going to – kind of decline to the second quarter and then second half of the year ramp up, and it looks from your guidance that the implied EBITDA margin for first quarter is 32% so then we can expect a little bit down from there and then rising up after that, if you can just make a comment on that.

And then the other question I would have is on the sales force ramping. Is that for upselling the new services or cross-selling, or they’re going to be focused on the services separately? Thank you.

Rich Boyle

Sure, John. This is Rich. So in response to the two, yeah, I think you basically got it right. So when we look at the margins for Q1, we are seeing the accelerating top line growth. However, as we’ve said previously, we’re still in the process of ramping our investment program.

What we look at right now is, on an absolute dollars basis, we think the dollars we’re spending are going to go up modestly from the levels we’re at right now. And the timing is not exact or it’s a little bit uncertain because of the rate that was top line revenue growth is accelerating. But basically, our expectation at this point is we’ll see a trough and margin switches slightly below our Q1 levels in the mid part of this year and then margin expansion going forward after that.

Then in terms of the sales force ramp, it’s really both things. So one is the existing sales force team, which is primarily focused on selling premium membership, some of our other service as well, for example like RecentSales, we are expanding that as we’re spending some more effort in that group having them cross-sell property database now to people that are signing up for premium membership. So there is some expansion of bandwidth that’s required just to capture that opportunity.

But then in addition to that, coming soon is the standalone release of property database, which we’ll be selling as a separate service independent of premium membership. So today, if you want to buy property database, you cannot buy unless you’re signing up for premium membership first. We’re going to be selling it separately in the not too distant future and so we’re adding some incremental sales people that we focus on selling that as an independent offering so we’re doing both.

John Blackledge – Credit Suisse

Okay. That’s great. Thank you.

Rich Boyle

You bet.


Your next question comes from the line of Mitchell Bartlett from Craig-Hallum. Please proceed.

Mitchell Bartlett – Craig-Hallum Capital Group LLC

Yeah, Rich, that was a very bullish overview. So the question just kind of – last quarter, you were obviously less bullish. You were talking maybe about kind of a disappointing slowdown in commercial activity and all of a sudden now it’s back. What really happened and how much activity are you seeing on the site in January and February?

Rich Boyle

Yeah, we did see what we think was some evidence that we saw back in Q3. So if you recall, we reported Q3 results in early Q4. There has been what I’ll call in hindsight more of a hiccup in activity in Q3 and it did turn out to be transitory, which is – I think what we said at the time was our expectation but it’s still – it happens and give you a little bit of a pause.

So I think in Q4, there are a couple of things that we saw that we’re happy. Certainly, if you look at the sort of high end property segments of the industry which in many ways are sort of the leading indicators, activity levels for high-end investment properties in Q4 were very, very strong. And I think we’re starting to see some indications that that activity is now migrating into the more, you know, Main Street segments of the industry that LoopNet primarily focuses on.

We saw that. We saw better than expected activity levels across the board on our own platform. As we mentioned earlier on the call, we’re seeing some very healthy activity levels in early Q1. You know, it is – we’re only a month or a month and a half into the quarter so it’s still early but we’re encouraged by what we’re seeing there as well.

So whether it’s greater new listings coming on, which is something we’re certainly excited about demand side activity picking up in Q4, which we’re also excited about. And then lastly, we’re obviously – what we’re doing for the first time in Q4 was beginning sales and marketing effort around the property database product, and that also went better than expected in Q4. We’re still in at least so far the testing mode with that product in January. Version 2.0 literally just went live last week, which we’re going to begin ramping some sales and marketing efforts around, so we’re not fully ramped there yet but we’re also – that’s driving some optimism for us as well.

So across the board, we’re feeling like the industry is getting more stable. Our core business is reflecting that and we have some new product excitement as well.

Mitchell Bartlett – Craig-Hallum Capital Group LLC

And in light of that, the guidance seems a little bit lukewarm on the revenue side at the low end up $200,000 or so sequentially. Now I know you’re building a subscriber base and that comes in to the numbers very slowly. Is this just a – it’s obviously not a sea change in activity, it’s just incrementally better than it was. Is that fair to say?

Rich Boyle

Yeah, I think that’s fair to say that what we’re seeing is what I would describe as a gradual momentum build as opposed to a hockey stick style shift. And as it relates to kind of sequential guidance from Q4, I mean, in our core premium membership business, we’re seeing good momentum but it builds on a relatively gradual basis that’s just the nature of that product.

And in the property database service, while we’re very enthusiastic about the initial feedback, we have not yet stepped on the gas bill from a full sales and marketing mode. It’s still in test marketing phases, if you will, from October on. So the reception has been very good but we expect it to begin ramping.

We’re hiring sales people now, really beginning to focus on it towards the end of the quarter – this quarter. As we bring you sales people on it, it takes a while for them to ramp as well. It’s a quarter or two before they’re fully productive. So I think our expectation is we’ll start to see it add more materially as we get into the second and third quarter this year.

Mitchell Bartlett – Craig-Hallum Capital Group LLC

And just last question, property database, as you bring on people, what kind of – did you say that this could be a big in total subscribers as your core marketplace? And how is it going to be priced as a standalone service?

Rich Boyle

Yeah. So we did say that we think the opportunity set – the addressable market for it is at least as big as that for premium membership, so we think it’s a very substantial opportunity. Our view is that anybody who’s using premium membership would also be interested in the information contained in this service potentially for different business problems in different times but by definition, they would be interested in it and we think it opens the door to new people that aren’t really interested in premium membership. So we’re quite excited about the overall opportunity.

The lease price is currently pegged for the offering and it’s on the Web site right now and it has been, since October, $59 a month. That said, the average effective price as we’re doing promotions, testing different price points, and bundling it with premium membership in this initial phase, the actual average or proof for the existing subscribers we have right now is probably in the mid-20s range.

Mitchell Bartlett – Craig-Hallum Capital Group LLC

Thanks very much.


Your next question comes from the line of Ian Corydon of B. Riley & Company. Please proceed.

Ian Corydon – B. Riley & Company

Thank you. I’m just curious how you plan to get out the word on property database to potential customers outside of your existing marketplace, what channels and how aggressively.

Rich Boyle

We’ll be doing a few things, Ian. So it probably be increasing our participation in things like industry conferences, a certain amount of offline marketing activity which has not really begun incidentally. But we definitely have the luxury of – we’re very good at, we think, the online marketing aspects whether it’s organic search activity and/or search engine marketing activity that we can leverage on this and that’s always been our most productive marketing channels, and we believe it will continue to be and we’ll see a lot of effort there.

It’s an area where we benefit greatly from having a very large installed user base, so we have not yet begun marketing to our 4-1/2 million registered members that the servicing exists, and that’s something that we’ll be ramping up and we can do that on a very cost effective basis but we think we’ll be beginning the process of marketing that service in the not too distant future to the – both our install base and the broader world, primarily via online means, organic and paid search. Those will probably be our primary marketing channels.

We don’t see it frankly as being substantially different than the marketing channels we use for our existing business, getting people on the marketplace in the first place.

Ian Corydon – B. Riley & Company

Okay. And you mentioned that you’re pleased with the comp product. In the past, you’ve talked about market trends per product. Can you just – and talk about where you are right now with those two products?

Rich Boyle

Yes, sure. So the comparables product, which we branded under the name of RecentSales, as we said it’s – it has continued to see solid growth. On a revenue basis, fourth quarter was up 20% on a year-over-year basis and we’re pretty excited about its momentum right now. We think that’s both because we spend a fair amount of effort investing in – enhancing the product last year, ramping some of our sales and marketing efforts around it and also, it’s benefitting from the early recovery, if you will, in market conditions. So we think that is a product line that has continued ongoing growth potential and we’re very excited about it.

The market trend is that the data set that we released in a beta form in the first half of last year, it’s still in beta right now. We’ve been experimenting with all kinds of different combinations, uses, and tests of it. Just for people that may not be familiar with it, it’s essentially using our information set about available properties and closed transactions to generate statistics and pricing information. So trends in asking rates for office rent for lease in San Francisco, for example.

We’ve built a couple of successive generations of the data there. We’re working on some alternatives so it’s still something that I’ll describe as being in beta and I expect it to be in the – for at least the next few quarters as we look at a couple of variations and where we may go with that.

Ian Corydon – B. Riley & Company

Got it. And last question is on the Enterprise (Deal) Tools, if you can talk about the pricing for that product and what you think about what the market size there might be?

Rich Boyle

Yeah, the market size would literally be any broker marketing piece of commercial property. So – and we think that there are in the millions of listings and hundreds of thousands of brokers that are active in the market engage in those activities. We haven’t set pricing for it yet. Right now, the version that we have at the moment is tailored towards brokerage firm of somebody that wants to run a number of marketing campaigns and has a goal of not just automation but also standardization. So they’ve got, for example, a common corporate branding and platform and toolsets that they can use.

We are not charging the current customers that are using it. We’re – we have a – it’s in a relatively small number of brokerage firms that are using it and they’re acting as in effect early beta customers that are giving us great feedback and suggestions and telling us what they want the product to do, but we haven’t set pricing for it. We expect to continue developing it over the course of the next few quarters and have a version that will be available for individual subscribers a few quarters from now, but we don’t have any pricing stakes in the grout at this time.

Ian Corydon – B. Riley & Company

Thank you.


Your next question comes from the line of Brett Huff of Stephens. Please proceed.

Brett Huff – Stephens

Good afternoon, guys.

Rich Boyle

Hi, Brett.

Brett Huff – Stephens

How are you?

Rich Boyle

Doing well. How are you?

Brett Huff – Stephens

Good. Thanks. A couple of quick questions, as we look – I get the curve of the margins down and up through ‘11 and I get the curve of revenue, which is sort of a slow ramp up at least in 1Q and 2Q but do you expect an increase in the revenue curve as a result of property database. Like you mentioned stepping on the gas, are your tests encouraging enough that you can see bending that curve upward in revenue even beyond sort of the cyclical trend back that seems to have at least started in the core growth of the business?

Rich Boyle

Yeah, I think we will. I mean, I think we’re in the very early stages. It did have – it added a very small amount of actual revenue in the fourth quarter. It will have a minor impact on Q1 as well. But as we begin to build that subscriber base and drive it into the tens of thousands over the next year or two, we think that’s going to have a material impact on top line revenue acceleration – no question.

Brett Huff – Stephens

Even in the back half of this year?

Rich Boyle

Yeah. I mean, it will start to have more significant impact as we get into full selling mode. Probably over the next quarter to two, it is a combination of standalone saleable version of the product, which is coming the next several months. And then the ramping of the sales force which is just beginning now as we hire new people and get them trained up and get them on their production ramp, it will be a quarter or two before those two things come together, but I think we’ll be in full scale sales mode in the back half of this year that will start to impact things.

Brett Huff – Stephens

Okay, that’s helpful. And then in terms of the margin profile of the property database, I know your incremental margins in the core business are very nice. Is this – is the property stuff [ph] materially different or how should we think about that? I mean as we think about this becoming really hitting more of a volume level where it’s moving the needle more, is there anything in particular about it that is different and that we should know about in terms of step functions, anything like that in terms of cost?

Rich Boyle

No, I wouldn’t – there’s no step functions. I mean, to some degree, we’re bearing the cost now.

Brett Huff – Stephens


Rich Boyle

As I think straightforwardly obvious to everybody, it’s having a significant impact on margins at the moment. As we look down the road and get scale though, we definitely don’t view any step function in the cost structure. We think the incremental margins are very good. And as it gets scale and blends in with our core business, we feel very comfortable that it will be an essential part of helping us drive to that near-term $200 million revenues goal and 40% EBITDA margins goal. We think it will definitely fit into that structure very nicely.

Brett Huff – Stephens

So – well, it sounds like it won’t be meaningfully – it’s certainly not meaningfully less than your current core business, if you can…

Rich Boyle

Yeah, I mean, maybe modestly less because there are some costs in terms of aggregating the data in a few ways that aggregating and cleansing and organizing the information but just certainly not from a sales and marketing structure or anything like that point of view. So I think on a – it may be modestly less but not dramatically less.

Brett Huff – Stephens

Okay. And then of the – you mentioned a few positives in terms of metrics that you’re seeing, is the one – the one that jumps out at me is the profile views and particularly, the profile views per active user, is that the one that you find most exciting or is it the supply side that you mentioned?

Rich Boyle

Yeah, to some degree both though the profile views really began to develop for us several quarters ago. We felt like we were seeing the demand side interest begin to grow. And I guess, it goes back almost a year now as prices in the industry got to a level where we felt like we were seeing the demand side interest grow, it has continued to grow.

The new news is that we did feel like we were supply-constrained. And it goes back to this whole pretend and extend phenomena that’s being going on in the banking world where owners of properties were not being pushed to or did not have to address their refinancing problem because they could push out the terms in their loan, for example. And so we were seeing a relatively small number of new properties coming on the market, which was constraining overall activity levels in our minds. So seeing a number of new for sale listings increase substantially is something that we’re very excited about and there’s definitely relatively new news. We saw a little bit of it in Q3 of last year and then it accelerated nicely into Q4.

Brett Huff – Stephens

Okay. And then one – that’s helpful. And then one last question, when you think about that extend and pretend phenomenon, et cetera, my understanding of the bottleneck for the property that you all deal in has typically been a function of banks not willing to lend simply because they have a big book of business and they’re trying to sort of manager that. They’re willing to do some of this extend and pretend. Has the bank’s behavior changed meaningfully? I missed about two minutes of your first commentary, so if you answered that question there, I apologize. But is it the banks that are changing or is it the owners of the properties who are giving up the ghosts [ph]?

Rich Boyle

Well, there’s a couple of things going on. It’s still a very complicated thing. We didn’t address it in depth in the script.

In short, there’s a little bit going on of – it’s facilitated by still a very low interest rate environment, meaning the bar that needs to be cleared from an owner generating positive cash flow on a property is still relatively low. The technique of extending the loan terms for an extra three or four years has to some degree – well, I won’t say we’re anywhere near out of the woods. The strategy there, I think, has been to try to engineer a "soft landing" and to some degree, it’s been working as the banks have been writing off or writing down the value of those assets over time quarter-by-quarter for the last two to three years.

What was a hundreds of billions of dollars in outstanding loan balances in the commercial real estate small banking world that need to be it fixed. A substantial portion of that has now been written down so there are – there’s certainly banks that are still in trouble. The troubled institution list of the FDIC continues to grow. The number of failed banks last year was at the highest since early 90’s but it has been much better than anybody expected, I think, a year and a half ago.

So I would say we’re not out of the woods yet but it’s been getting better gradually. And then that in turn, we are seeing circumstances where banks now, I think are starting to lend again as a result of that. So it’s still not I would call a normal environment but it has been getting gradually better in avoiding the doomsday in our end.

Brett Huff – Stephens

And you had talked in the past too about bid/ask spreads. Clearly, the buyers are out there sort of looking, thinking that we’re near the bottom. Have the sellers capitulated or have they needed to capitulate, or have the buyers come up to them?

Rich Boyle

I think it’s a little bit segment-specific. Certainly, if you look at high-end investment properties, I think prices have, in many ways, come back to where they were a few years ago. It’s very active market in that segment.

Kind of reflecting a lot of capital, a lot of cheap capital, a lot of flight to quality type of behaviors, in the mid-market and the small market properties, I think prices have stabilized to some degree but they’re not by any means recovering so I think it’s more sellers accepting the reality of where prices are and if they want to get liquid or need to get liquid in doing so with that adjusted expectation levels.


Again, ladies and gentlemen, if you like to ask a question, please press star-1 at this time. And your next question comes from the line of Jim Wilson of JMP Securities. Please proceed.

Jim Wilson – JMP Securities

Thanks. Good afternoon, guys.

Rich Boyle

Hi, Jim.

Jim Wilson – JMP Securities

We’re just wondering if you could – and I know you would answering one question, went into a little bit on the pricing strategy for the property database but could you go into a little bit more of how you think about it on the long run as well as the RecentSales together in the enterprise – the desktop solution, what you’re thinking about the long-term?

Rich Boyle

Yeah. On the RecentSales service, so the official list price which I think we mentioned is on the Web site right now at about 59 bucks a month. And we’re approaching it to some degree with the same mindset that we have for premium membership which, on average, is kind of right in that same price point. It’s a little bit based on kind of what we think the target customer would view as both the appropriate value and affordability levels.

In terms of the actual pricing at the moment, we’re using some of the same strategies we used when we initially launched premium membership years back where we launched RecentSales, which is we are doing a fair amount of testing of different price points to experiment with where we think the leverage lies in the elasticity curve. We’re also, in effect, rewarding the early adopting customers with some lower price points.

One of the key things is bundling so keep in mind – somebody buying property database today has already decided to make us a purchase of the premium membership subscription as a starting point so it’s in addition to that. We’re not selling it on a standalone basis right now. So – but as I think I mentioned the effective rate for the customers we’ve sold so far ends up being on an average basis of about $25 a month. I will say there’s a very wide distribution around that as we’ve been testing different price points in different bundles, so it will probably converge to a more stable or a narrower distribution as we finalize our pricing.

But going forward, I think the initial starting point of around 60 bucks a month, which is where it is right now is probably where our mind will be and then opportunities to either buy that on a standalone basis or see some lower prices as you potentially bundle multiple products together is how we’re thinking about it.

On the enterprise tools basis, we really – we don’t have a price point in mind there yet. I think we’re still in the early stages of making sure we understand what our customers really wanted to do from a functional point of view and then it will – probably over the course of the next quarter or two that we’ll develop a clear point of view on how we want to monetize that.

Jim Wilson – JMP Securities

Great. And do you think the new products – do you think this can bring in any – a new set of customer? I guess, what I’m thinking is moving up market a little bigger brokerage firms, maybe put you a little more out of the million dollar property segment and open up opportunities to more of the middle part of the market.

Rich Boyle

I think to some degree, yes, but I wouldn’t describe it as our core focus. I mean, there’s no question that as information service, we think it will get used by people even at the high end of the market in certain circumstances. They might be looking for additional information to augment other sources of data they might have right now. They might be looking for something that our access to our information tended to be very easily available. We have a very frictionless model where they want the data for a couple of months and they don’t want to find some onerous contract, I mean, that’s the sort of stuff that is very easy to do with our service. And so I think you’ll see some higher end customers take advantage of it in that sense.

That said, we view it – we view our focus as a business and our core customers as the folks doing the mid-market $1 million to $2 million transaction, and that’s really where we’re aiming. What we’re trying to provide in this service in our minds and from talking to our customers is really address a very unmet need in the market.

You talk to people at the lower end of the market right now and information is either simply not available to them or it’s incredibly expensive and it’s focused on higher end properties that they’re just not really interested in or it’s not their bread and butter. And so we view it as primarily a green field opportunity where we think we’ve got an opportunity to provide services to people that have a very large unmet need right now.

Jim Wilson – JMP Securities

Okay, great. All right. Thanks.


This concludes the question-and-answer session of today’s call. Thank you for your participation in LoopNet Inc.’s earning conference call for the fourth quarter of 2010. This concludes today’s conference. You may now disconnect and have a wonderful day.

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