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Executives

Erica Mannion – IR

Rich Boyle – Chairman and CEO

Brent Stumme – CFO and SVP of Finance & Administration

Analysts

Andrew Jeffrey – SunTrust

Derek Brown – Cantor Fitzgerald

Steve Weinstein – Pacific Crest Securities

Jim Wilson – JMP Securities

Mitch Bartlett – Craig-Hallum

Heath Terry – Credit Suisse

LoopNet, Inc. (LOOP) Q1 2008 Earnings Call Transcript April 30, 2008 4:30 PM ET

Operator

Welcome to LoopNet's earnings conference call for the first quarter 2008. The date of this call is April 30. This call is the property of LoopNet, and any recording, reproduction, or transmission of this conference call without the express written consent of LoopNet is strictly prohibited. This call is being recorded. You may listen to a webcast replay of this call by going to the Investor Relations section of LoopNet's web site. I would now like to turn the call over to Erica Mannion, Investor Relations for LoopNet.

Erica Mannion

Good afternoon. Thank you for joining us to discuss LoopNet's financial and operating results. With me today are Rich Boyle, Chief Executive Officer and Chairman; and Brent Stumme, Chief Financial Officer. Today, Rich will begin with an overview of the business and the overall corporate strategy, continued by a summary of the company's first quarter performance and review of the marketplace. Brent will review the first quarter financial results and provide second quarter and fiscal year 2008 guidance.

Before I turn the call over to Rich Boyle, I would like to mention that the company will participate in the following investment banking conferences during the second quarter. Each presentation will be available via web cast on LoopNet's web site – Needham & Co. Internet and Digital Media Conference in New York City on May 8; JMP Securities Seventh Annual Research Conference in San Francisco on May 21; Stephens' Spring Investment Conference in New York City on June 4.

I would like to bring the following to your attention. On the call today, you may hear forward-looking statements about events and circumstances that have not 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 web site at www.sec.gov for detailed discussions of the relative risks and uncertainties. The company undertakes no responsibility to update the information in this conference call under any circumstance. The press release distributed today that announced the company's results is available on the company's web site 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 web site.

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

Rich Boyle

Thank you, Erica. Welcome, everyone, to LoopNet's first quarter 2008 earnings call. I am pleased to report that during the first quarter, we continued to make strong progress in serving our customers and building our business. Revenue for the quarter was $20.6 million, an increase of 33% compared to the first quarter of 2007. Adjusted EBITDA for the quarter was $9.6 million, which is a 31% increase over Q1 of 2007. This continued progress is a direct result of the unique value our services provide to our customers and it comes as we continue to see some challenging conditions in the commercial real estate industry that we serve. The conditions in the commercial real estate market have been consistent with our expectations. Specifically the activity in the investment sale market has slowed dramatically driven by the disruptions in the credit markets that began last year. The challenges created by the credit crunch have been further exacerbated by concerns about the economy, employment, and recessionary fears. We believe this has impacted the overall industry in numerous ways with one important example being that the activity levels of investors looking to buy buildings have remained muted.

Research firm Real Capital Analytics reported recently the transaction volumes of properties valued at $5 million and up were down significantly in Q1 of '08 as compared to Q1 of '07 across all major asset types. According to RPA, industrial sales transactions during the quarter were down 36%, apartment buildings down 40%, offices down 62%, and sales of retail buildings down 75%. The picture on the leasing side of the business is not so bad with many of the underlying fundamentals in the commercial real estate space in relatively good condition. Vacancy rates and rental rates remain within reasonable ranges in both market segments, though in some instances they are trending in negative directions due to the macroeconomic issues. For example, Jones Lang LaSalle reported in their Q1 office market survey that the U.S. office market saw negative net absorption during the quarter for the first time since the last downturn around six years ago. The JLL report expects that 2008 will be characterized by activity that's consistent with the first quarter, which is to say relatively sluggish demand-side activity, which will lead to moderate increases in vacancy rates and some softening in rental rates. These industry conditions have been largely consistent with our expectations and we continue to believe that these conditions are going to affect industry activity for the near-term future. However, despite these challenging market conditions, we have seen solid ongoing growth in the usage of our marketplaces and in our business.

The fundamental value proposition provided by our services to our customers is very strong, especially when compared to the alternatives, either offline or online. The long-term secular shift of marketing and searching activity into the online world is continuing. In addition to this, our execution has been excellent, leading to another quarter of very good results. I'll provide you with some of the highlights of the quarter and then Brent is going to take you through the numbers in some more detail.

The overall usage metrics on our marketplace showed solid growth during the quarter, albeit with some impacts in some areas the market conditions I talked about earlier. We ended Q1 with over 596,000 active commercial real estate listings on loopnet.com, which is approximately 24% growth compared to Q1 of 2007. We saw a strong and steady flow of new listings coming on to the system throughout the quarter. We ended the quarter with over 2.78 million registered members on LoopNet. That total was up 39% as compared to the same time last year. Our key measure of user activity on our marketplace is the profile view metric. A profile view is when one of the searchers on LoopNet calls up and looks at the property listing from one of the brokers marketing listings on LoopNet. We delivered over 44 million profile views during the quarter, which is 15% higher than Q1 of last year and 26% higher than Q4 of 2007.

Our value is a marketplace lies in facilitating the supply/demand discovery process. And this solid growth in activity on our system, especially during a time of challenging market conditions, we believe is a clear validation of the value proposition our system provides to our users and our customers. Premium membership remains the primary means of monetizing that activity and the biggest driver of revenue growth in our business. Revenue from the premium membership service was up 29% as compared to Q1 of 2007 and accounted for 76% of total company revenue for the quarter. The underlying trends include solid growth in monetization on the listing side, which accounted for 55% of premium membership revenue, partially offset by some challenging conditions on the searching side, which was the remaining 45%. We believe that the ongoing strong growth on the marketing side of the system is due to the unparalleled value and effectiveness of our services, which are particularly useful to brokers in a time of soft demand in the industry.

Our system provides outstanding value to the brokers marketing listings due to the efficiency and cost-effectiveness of our platform, as well as to the scale and measurability of our results. We continue to invest in improvements to the service, but we have received significant positive feedback about many new features added to the system since Q4 of last year, for example, the greatly enhanced reporting that we provide to our premium listers about the marketing exposure we deliver to their listings. The rollout of our new flexible listing plans for premium listers has continued to go well, as has the expansion of other optional tools we provide to brokers, giving them more choice in the options available to market their listings on LoopNet's systems, such as our showcase offering. And, of course, while these sophisticated tools are incredibly useful to our customers, what matters most is that we have by far the largest online audience to market to. comScore reports that we averaged approximately 950,000 unique monthly visitors to loopnet.com during Q1. Additionally, LoopNet and our CityFeet group offer our broker listing client an extensive and exclusive distribution channel through the online web sites of over 100 newspaper partners, which generates over 18 million monthly unique visitors to their web sites, again, according to comScore.

As more and more brokers become aware of the power of online marketing, we encourage them to hold us directly accountable for the activity we deliver as a marketing channel. And we encourage them to compare it to any other tool available as well. We have been very pleased with our growth in this area and are very confident of the value we deliver.

On the searching side, however, conditions have been more challenging. As has been the case since last fall when the credit crunch hit, many investors are simply sitting on the sidelines due to the credit crisis and related macroeconomic deterrents, leading to slower growth in activity, lower sales, and a higher cancellation rate in this segment of our subscribers. On a combined basis, we ended Q1 with approximately 88,200 premium subscribers, which is essentially flat from Q4 and up 4% from Q1 of 2007. The average monthly revenue per user was $59.20, up approximately 19% from the same period last year. The cancellation rate was within the range of 4.5% to 6.5% that we expected and provided in our 2008 guidance. In short, the Q1 results for premium membership service were right in line with our expectations.

Our services other than premium membership accounted for the remaining 24% of revenues during the quarter and also performed overall as expected. We did see some weakness in areas exposed to the credit crunch. For example, advertising from commercial mortgage brokers was down. This was offset by strength in some of the other areas, such as property marketing/advertising via our Showcase offering and some very positive responses to the new version of our LoopLink service launched during the quarter.

Next I wanted to talk for a few minutes about our recently announced acquisition of REApplications and how we see that business fitting in with our strategy. REApplications is the leading provider of software-as-a-service solutions for commercial real estate brokerage firms to manage their listings, projects, market research information, operations, and customer relations. It's a terrific and very experienced team that will be staying on as part of LoopNet to help build this business further. We see a number of strong synergies between the REApplications business and the core LoopNet marketplace. We believe these will provide numerous benefits to our customers and we have received lots of positive feedback from customers since the deal was announced about the benefits that they see from the combination. The most important of these, we believe, will be the ability to offer our shared clients the potential to seamlessly integrate the information in the REApplications platform with LoopNet, for example, making it completely seamless for a broker using REApplications to choose to publish an active listing on the LoopNet network of web sites for public marketing purposes.

We also believe there are many opportunities to assist the REApps team scale with access to some of LoopNet's existing resources, for example, in terms of selling and servicing their customers. As we previously stated, we expect the acquisition to add just over $2 million in additional revenue during the remainder of 2008 and we expect it to have no significant impact on EBITDA during this year. REApplications has been a consistently profitable business on a standalone basis, but we'll be making a number of investments and bearing some costs due to integration over the course of the remainder of 2008 that will offset that temporarily.

Now I would like to spend a few minutes providing you with an update on the strategic partnership we announced just under a year ago with Xceligent. Xceligent is a provider of research-based information services to the commercial real estate industry, building a database of researched and verified information about building inventory, listings, and other information, which is sold on a subscription basis, primarily to commercial real state brokerage firms. We have been working with them for close to a year now and have been very impressed by the tremendous progress they are making in building out the solutions they are providing to these firms. They have been fine-tuning their research processes and tools and building up their research teams and are showing really strong momentum and results in a number of metro areas around the country. For example, they launched their research efforts in Oklahoma City last year and have now signed deals to provide their services with virtually all of the major firms in that market. These Oklahoma City customers had been unhappy with the costs and quality of data that they were seeing from another national data research firm in the market. Overall, Xceligent is making excellent headway in a number of these markets and we believe they are well positioned to expand their efforts into many more markets around the country over the next few years. The benefit to LoopNet will be the integration with their efforts on the supply side of our marketplace offering the seamless option for the brokers with listings in the Xceligent database to have those appear on the LoopNet network for public marketing purposes, which we believe will further accelerate the growth of our marketplace on the supply side.

We ended the quarter with over $76 million in cash. And we continue to be a strong generator of cash, delivering approximately $8.9 million in cash flow from operations during Q1. We continue to seek ways to deploy this capital to increase value for our stockholders. During the first quarter, we purchased REApplications for approximately $9.4 million and we also completed a substantial portion of the stock buyback we announced last quarter, which Brent will discuss in more detail in a few minutes. Going forward, we intend to continue to seek the best means possible to deploy our cash to increase shareholder value.

Finally, I'd like to provide you with a brief update on the situation regarding the litigation with CoStar Group. In November of 2007, LoopNet brought suit against CoStar to stop CoStar from copying listings from loopnet.com. As described in more detail in our complaint, when CoStar copies LoopNet's listings, that is a breach of LoopNet's terms of service and a violation of California law. We look forward to having a jury trial on our claims, which the court has set for January of 2009. In the wake of our legal action to stop CoStar's copying, CoStar filed a separate lawsuit against LoopNet in New York, claiming that LoopNet falsely advertises the number of users of our web site. We believe CoStar's retaliatory suit to be wholly without merit because we do not control the timing and pace of the legal process and therefore due to the uncertainty associated with the timing and magnitude of the litigation-related expenses, we will be disclosing these litigation expenses separately and we will not be including them in our forward-looking guidance. Because these lawsuits with CoStar are active, pending legal matters, we will not be taking questions about them during the Q&A period.

In conclusion, our basic strategy and goals have not changed and we think we are in a unique position to change the industry that we serve. First, we intend to continue to increase the scale of usage in our marketplace by bringing more users, more listings, and more searching activity onto the LoopNet marketplace. Our core monetization model, premium membership, will continue to evolve as we work to improve the tools provided in the service and to drive better results for our subscribers. We also expect to continue to increase the options our users have in marketing listings on LoopNet, as well as to continue to broaden the exposure for those listings via our distribution network and partnerships. Our goal is to provide the best ROI marketing channel for our customers and to allow them the marketing flexibility to drive more exposure results for their listings. We will always – we will also continue to broaden our suite of information services, such as recent sales. By leveraging the power of the community using our marketplace, we believe we can aggregate market data and provide information back to the community that they find useful and we can do so very efficiently. We will also continue to use strategic partnerships and acquisitions to further all of these objectives.

Our overall goal is quite simple – to better serve our customers, providing them with the best possible means of marketing and searching for deals. We are executing very, very well and are well positioned to continue to build our business for the future as we move through this cycle and beyond.

And now Brent Stumme, our Chief Financial Officer, will take us through the quarter's results in some more detail.

Brent Stumme

Thank you, Rich. LoopNet's revenue for the first quarter of 2008 was $20.6 million, an increase of 33% from $15.5 million in the first quarter of 2007. The increase was due to higher average monthly prices for premium membership, an increase in the number of our premium members, and continued growth of our non-premium membership products. On a year-over-year basis, we experienced a 19% increase in the average monthly price of premium membership, resulting in an average monthly price of $59.20. This increase was a result of the price increases that were implemented in Q2 of 2007 for premium members who use our service to list and search for properties and the shift to a volume-based pricing structure for listers, which we began to implement during Q3 of 2007.

LoopNet's adjusted EBITDA for the quarter was $9.6 million or 46.6% of revenues, an increase of 31% from $7.3 million in the first quarter of 2007. The company has reported adjusted EBITDA, which we define as EBITDA excluding stock-based compensation and litigation-related costs because management uses it to monitor and asses the company's performance and believe that it's helpful to investors in understanding the company's business.

Net income for the first quarter of 2008 was $4.9 million or $0.12 per diluted share compared to $4.5 million or $0.11 per diluted share in the first quarter of 2007. Net income in the first quarter of 2008 included $0.02 per share of stock-based compensation and $0.01 per share of litigation-related costs. Net income in the first quarter of 2007 included $0.01 per share of stock-based compensation and no litigation-related costs. The effective tax rate for the first quarter of 2008 was 41.2% compared to 41.3% in the first quarter of 2007. As of March 31, 2008, the company had $76.3 million of cash, cash equivalents, and short-term investments and no debt. Since the announcement of the $50 million stock repurchase program on February 5, 2008, the company has purchased 3,306,163 shares of its common stock for $39.1 million, which represents 9.3% of shares outstanding.

Now I would like to review some of our key operating metrics. The number of registered members, which includes both basic and premium members, grew to 2,781,109 during the first quarter of 2008, a 39% increase over the first quarter of 2007. The number of premium members as of the end of the first quarter of 2008 was 88,226, a 4% increase over the first quarter of 2007. Average monthly unique visitors on the LoopNet marketplace were approximately 950,000, a 7% increase over the first quarter of 2007. In addition, there were 44.2 million profiled use of listings on the LoopNet marketplace during the current quarter, a 15% over the first quarter of 2007. As of March 31, 2008, the LoopNet online marketplace contained approximately 596,000 listings, a 24% increase compared to March 31, 2007. BizBuySell contained approximately 51,000 listings of operating businesses for sale, a 10% increase compared to March 31, 2007. That brings me to our business outlook.

The company has provided the following guidance for the second quarter and fiscal year 2008, which reflects current business trends. The company expects revenue for the quarter ending June 30, 2008 to be in the range of $21.7 million to $22 million, adjusted EBITDA to be in the range of $9.5 million to $9.8 million, and net income to be in the range of $0.12 to $0.13 per diluted share assuming stock-based compensation of $0.02 to $0.03 per share net of tax benefit and an effective tax rate of 41.2%. The company expects revenue for the full year of 2008 to be in the range of $86.3 million to $88.3 million, adjusted EBITDA to be in the range of $37.5 million to $39.5 million, and net income to be in the range of $0.45 to $0.48 per diluted share assuming stock-based compensation of approximately $0.10 to $0.11 per share net of tax benefit and an effective tax rate of approximately 41.2%.

The adjusted EBITDA and net income guidance for the quarter ending June 30, 2008 and the full year of 2008 exclude litigation-related costs. That concludes the formal portion of our presentation, so now we'll open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from Andrew Jeffrey from SunTrust.

Andrew Jeffrey – SunTrust

Hi guys, good afternoon.

Rich Boyle

Hi, Andrew.

Andrew Jeffrey – SunTrust

Good performance in a – in an obviously a very challenging macro environment. And part of the performance as previously advertised was obviously a function of very strong pricing. I heard you mention the 2Q '07 price increase, as well as the volume-based price increase. Maybe you could give us a little color as to the magnitude of each of those price increases impact in the quarter and as well as what you'd anticipate in terms of how that rolls out through '08 and whether or not you have any other pricing increases or changes on the docket?

Brent Stumme

Yes, we'll try to provide a little bit of color for you. I don't have right in front of me the specific breakdown of the components. I mean the price changes that we were referring to was in Q2 of '07, the base price for listers went from $69 a month to $89 a month. And then in Q4 of '07, the volume-based pricing with scaling for basically the brokers having the option of paying more listings and having an increased fee on a per-listing basis. The list we got in Q1 would have been affected by both of those. I don't have a percentage breakdown as to the relative difference between the two. I know going forward this year, starting this quarter, in Q2 of '08, the list will still be affected by both of those things because of the date at which we implemented the $69 to $89 price change was at the end of Q2 of last year. And then as we get into Q3 of this year, it'll be still affected by the volume-based shifts. And then once we get into Q4, it'll be pretty much done propagating all the way through. It's early Q4 that we moved to the volume-based. So that's kind of the phasing throughout the year in which we'll get the effect. And the shift overall has gone very well. And ultimately what we are doing right now is giving our users the choice of how many of their listings they want to get enhanced marketing exposure for and leaving it up to them to align the dollar spend with the marketing results they get. And we are pretty pleased with the results. I don't know, Brent, if you have anything to add in terms of the–

Brent Stumme

No. And, of course, I don't have the specific breakdown either between the two.

Andrew Jeffrey – SunTrust

Any plans for additional price increases or adjustments this year?

Rich Boyle

No. I think we are pretty comfortable with the model as it is right now. And ultimately I think the changes we have made, we still have a ways to go propagating them through and the changes that we have made to date are really creating a situation where the users can kind of turn the dial themselves and decide what – how much of their marketing spend the want to allocate, how they want to measure the ROI in that and drive additional results. But I think the pricing model or the pricing engine that's in place is pretty complete for 2008 at this point.

Andrew Jeffrey – SunTrust

Okay. And then with respect to the premium registered members, which was essentially flattish sequentially, are you prepared to think about a return to growth on a sequential basis? Or are we still in sort of a holding pattern?

Rich Boyle

I think we are still in sort of a holding pattern. At the end of the day, the market conditions that are driving that, and we talked a little bit about it on the call, or on the script earlier, we are seeing solid growth in the monetization on the marketing side, no question about it. And the demand side of the industry is seeing some headwinds right now. And we don't think those market conditions have changed at this point. We look forward to when they do and we think we are in a great position as we eventually come out of the cycle, but we don't se that changing in the near term.

Andrew Jeffrey – SunTrust

Okay. Thanks a lot.

Operator

Our next question comes from Derek Brown from Cantor Fitzgerald.

Derek Brown – Cantor Fitzgerald

Hi. Thank you. Two questions. The first is in relation to the demand side of the equation, in particular profile listing view growth was I guess surprisingly robust given your comments about demand. And I'm trying to sort of figure out where there's a disconnect between those two, number one. And number two, with respect to competition, there's been obviously some noise in the market and I'm wondering if you have any kind of updated thoughts on the competitive landscape?

Rich Boyle

Okay. Well, the profile view metric, I guess there's a couple things going on there. Certainly there's sequential acceleration from Q4 to Q1. There's a little bit of seasonality there that we see normally. The 15% year-over-year growth is definitely a deceleration from where it was a year or so ago. And I think it is showing some of those industry effects if you will. We believe there is a phenomena where we are starting to see more people kind of coming back into the markets and looking, but we haven't really seen them converting into active buyers, which is when they really become paid subscribers to our searching services. So that's kind of our interpretation of the data as it stands right now. So if – we are beginning to think we are in a great position going forward, but we just haven't seen the buy side activity really sink in a material way yet. In terms of the competitive landscape, we haven't really seen any material changes. There is a competitor that's been talking about a new marketing service. We have heard that they are out pre-marketing the service. But I don't believe it's live yet, so we haven't seen it in actual use or from customers in any detail. What we have heard is that it basically appears to be a knockoff of our Showcase product. In fact, it's unfortunately got the same name in terms of providing marketing service to brokers for their listings. The challenge for them I think, of course, would be the – they have got to convince customers that they can provide a successful marketing platform and deliver a substantial and sustainable marketing audience. And most people today think of them just as a closed research service. But if you use CoStar numbers I think is a – or, sorry, comScore numbers as a third-party basis of comparison, our average monthly unique visitors during the quarter were I think about 4.5 times what theirs were. And that's just to loopnet.com, which is only part of the marketing exposure that we offer to our customers.

So, we continue to believe that the real strategic issue for us is just simply getting people to move from the offline world to the online world. And from that perspective, we are happy that online paid marketing is getting a lot of interest and we believe the benefits are going to accrue to us as the clear leader in this space. And once customers are in the online world, they really start to look at things like measuring their marketing results. And we are very confident of the value we deliver in that regard. But we haven't seen any material change at this point.

Derek Brown – Cantor Fitzgerald

Okay. And one additional question – with respect to the pricing changes, can you give us some sort of a ballpark for the percentage of your customers that have now been touched by higher price points maybe within the last 12 months?

Rich Boyle

Percentage of customers that have been touched by higher price points? Well, it would be – a substantial portion of people on the marketing side are would have at this point been touched. On the searching side, obviously, we haven't changed prices at all, so none of those people have been impacted. But on the marketing side, if you go back to Q4 of '06 is when we made the first pricing model change. And so we have been through pricing changes over the course of the last 18 months that would have touched everybody. That said, I mean, we have made pricing model changes in the past as well, so it's sort of – it's happened on a over time.

Derek Brown – Cantor Fitzgerald

Great, thank you.

Rich Boyle

Sure.

Operator

Our next question comes from Steve Weinstein from Pacific Crest.

Steve Weinstein – Pacific Crest Securities

Great. Thank you very much. Just wanted to check in on the CityFeet acquisition and see if that was still meeting your financial expectations just kind of given how the environment has changed. And then two, now that you have owned the business for a while if you have any sort of change in plans about how you may run it or if it's consistent with what you have told us at the time of the acquisition.

Rich Boyle

Yes, it's pretty consistent. So the standalone results that are coming from that business unit if you will are roughly in line with what the original expectations were. Roughly a $2 million run rate is I think what we talked about back at the time of the acquisition and that's still kind of where it is. Where the leverage is coming from is really integrating that broader distribution network with the listings flow that was coming into LoopNet. And so the Showcase product, what we have talked about in the past on LoopNet, which is an agent can optionally choose to spend some additional marketing dollars to get more marketing exposure for their listing, both by getting sort of top search results placed in on LoopNet and by syndicating it out through the CityFeet distribution network. We have been really pleased with how that business has been developing for us. And it's – that's where I think the majority of the leverage has come from in the CityFeet acquisition and been running probably slightly favorable to our original expectations. We are very pleased with that. And in terms of the integration between the two businesses, that was probably the primary step we wanted to make happen initially. The other step that's going on now is companies that were listing in both places, we have been reconciling that, so they only have one place to list to and they would typically start on LoopNet and then we would distribute listings out to the CityFeet network from that starting point, so the customers no longer have to list in both places. And that work at this point is I think fairly complete and so we are pretty pleased overall with the results.

Steve Weinstein – Pacific Crest Securities

All right. Thank you.

Operator

Our next question comes from Jim Wilson from JMP Securities.

Jim Wilson – JMP Securities

Oh, thanks. Good afternoon, guys. Was wondering in the – if you could give the absolute numbers of – the number – the absolute numbers of listers that are in the premium member account, as well as the number of searchers? I'm just trying to look through here. I'm going to guess that of your 4% net increase, you actually had a lot – much higher growth in listers and maybe some reduction in searchers and that also contributed to mix shift in pricing? Is that correct?

Rich Boyle

There are some differences. We actually don't provide the detailed breakdown. We did see strong growth on the monetization size as you look at total dollars. It's a function of price menu on the lister side. They are roughly in parity, but we don't provide the specific breakdowns at this point. And the – it is true as well that searchers tend to be – by and large a larger proportion of them are what we call transactional people that kind of come and go around a given deal, so they are a much more fluid subscriber base if you will. But we don't, unfortunately, provide the specific breakdowns in the various segments.

Jim Wilson – JMP Securities

Okay. And then the other question I guess, customer turnover churn rate, how was that in – I'm not sure I heard it, but how was that in the quarter or recent trends? And I'm just wondering maybe if property is starting to stay on the market longer and obviously you are having an impact, helping the market or actually subscriptions therefore stay in place longer? That's what I was kind of wondering.

Rich Boyle

Yes, the overall churn or cancellation rate was right in the range that we had expected and talked about in our last call, which was between 4.5% and 6.5% on a monthly basis. And that came in pretty much right as expected, again, primarily driven by an elevated rate in the searchers that are not looking to buy (inaudible) at the moment. And in terms of property staying on the market, we have seen that creep up a little bit. It hasn't crept up a lot. I think days on market on the investment sales side is maybe up about 10% or so. But it's not a dramatic change at this point.

Jim Wilson – JMP Securities

Okay. Then I guess just finally, would my – would that – I guess true potentially that if properties do start staying on the market even longer that that actually could be to your benefit in terms of the listers obviously having that much more motivation to subscribe that much longer?

Rich Boyle

Yes. I mean, I think generally the thesis there of in a market where demand is lacking, the – your best marketing sources become even more valuable to you. We absolutely think it's true. There's not a direct correlation. I mean, we don't get paid 100% today based on dollars per listing per month. We are rolling out – as we roll out the volume-based pricing model, you start to see the business a little more correlated with that, but it's not quite a direct connection at this point in time. So there's some benefit to that, but I wouldn't say it's real material yet.

Jim Wilson – JMP Securities

Okay. All right, great. Thanks.

Rich Boyle

Sure.

Operator

Our next question comes from Mitch Bartlett from Craig-Hallum.

Mitch Bartlett – Craig-Hallum

Hi. How are you?

Rich Boyle

Hi Mitch.

Mitch Bartlett – Craig-Hallum

You talked – you spent a good amount of time on the call talking about Xceligent. And I'm not as familiar with that. I saw the last press release where they talked about Oklahoma and what not, but sounds very interesting. I don't know how – what percentage of the company that you own or what your plans are, how many markets they are in right now and how fast that they can roll out, and maybe if you could just touch on what their cost structure is as opposed to others that might be competing against them?

Rich Boyle

Sure, so I guess a couple of points. They are – I think they are in I want to say 20 to 25 markets today, somewhere in that range. The company's been around since the late nineties. And we own a small minority position in the company. We have invested in them to really try to strengthen the partnership, as well as provide them with some capital to help them accelerate their growth. So we are not a majority owner, but we are closely aligned with them at this point. The business model, it is a research-based service. They do have I think more of a collaborative approach to how they do that than some of the other research companies that are in this space. They have also been working really hard over the last couple of years to in effect come up with what I'll call a next generation research process, which gives them some real competitive advantages from an efficiency point of view so that from a cost point of view, they are able to deliver back to the market their researched and fully verified data at a lower price point than some of the competition. So–

Mitch Bartlett – Craig-Hallum

Is it significantly lower than the competition on price or–?

Rich Boyle

Yes, I believe so. I believe it's – on average it's probably 50% less or something like that, a substantially lower cost. I'm not completely familiar with their pricing schedule versus the competition, but I think it's definitely a substantial difference.And I would say they are still in the early stages of rolling this out, but they have got – what we hear from customers – and we obviously have great connections kind of throughout the industry, all over the country – a lot of really positive momentum from customers that are looking for alternative solutions and are excited about what these guys can do for them. So obviously there's still a lot of scaling to be done. It takes a while to roll out these kinds of services, which is–

Mitch Bartlett – Craig-Hallum

Could they touch 25% of your listings in two, three years with the information?

Rich Boyle

I think – yes, potentially. I think they'll be constrained by the pace at which they can go research these markets, just because it does take a lot of work. But at this point, they are showing some really good progress.

Mitch Bartlett – Craig-Hallum

Last question – you are not defining where you are on your churn, but that you were inside the range. But could you give a little more breakdown on kind of the progression of churn on the lister side? It certainly must be up over a year ago, but is it progressing more dramatically than maybe the last few quarters we have seen?

Rich Boyle

Well, on the lister side, no. I mean, it's up a little bit. What we tend to see is when we make a pricing model change similar to what we have done, the cancellation rate does go up slightly. And we are fine with that. People tend to – they don't leave our system. They go back to using the free service for a period of time and we are very comfortable with that trade-off. Our customers can make the choice and there's no issues there. I think we are probably seeing a little bit of an elevation even on the listing side from just market conditions, meaning some of the less productive agents are not necessarily subscribing as much as they were. But it hasn't changed tremendously. What's been driving more of the cancellation rate increase for us is coming on the searching side. Investors that are – that would buy our product for a three-month period while they look for a building to buy, for example, just due to the financing debacle that's going in the broader world right now, they are just not active in the market. And so that's what's driving the primary elevation in our cancellations.

Mitch Bartlett – Craig-Hallum

Fabulous quarter. Thank you.

Rich Boyle

Thanks.

Operator

(Operator instructions). Our next question comes from Heath Terry with Credit Suisse.

Heath Terry – Credit Suisse

Great, thank you. I was wondering if you could just kind of walk us through the – as we are focused more on the macro side of things here, kind of update us on some of the penetration metrics or the areas that we first started talking about that provided so much growth for the business in terms of what kind of penetration you think you have got with the active commercial brokers that are out there and how that number might have changed, both as you have grown subscribers and we have potentially seen fewer active commercial brokers in this current environment.

Rich Boyle

Sure. I mean, from an overall penetration point of view, if you kind of look at – and I'm talking about activity on our platform right now independent of who's a paying subscriber, so this is inclusive of all of the free activity as well. When you sort of paint with a broad brush, we think we have about 20% of the sort of annual active sort of transactions and transaction participants in the marketplace on our system right now. And that's whether you look at it as a listing skew, meaning the supply side of the marketplace or the demand side of the marketplace. So and it's showing solid growth and we think we are the biggest online player in that regard, but we still have quite a ways to go in terms of trying to get the industry online.

Heath Terry – Credit Suisse

Great. Thank you.

Operator

I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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Source: LoopNet, Inc. Q1 2008 Earnings Call Transcript
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