CoStar Group (CSGP) Andrew C. Florance on Q2 2016 Results - Earnings Call Transcript

| About: CoStar Group, (CSGP)
This article is now exclusive for PRO subscribers.

CoStar Group, Inc. (NASDAQ:CSGP) Q2 2016 Earnings Call July 28, 2016 11:00 AM ET

Executives

Richard Simonelli - Vice President-Investor Relations

Andrew C. Florance - President, Chief Executive Officer & Director

Scott Wheeler - Chief Financial Officer

Analysts

Brett Huff - Stephens, Inc.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Brandon B. Dobell - William Blair & Co. LLC

William A. Warmington - Wells Fargo Securities LLC

Andre Benjamin - Goldman Sachs & Co.

Natasha Asar - JMP Securities

Ian Corydon - B. Riley & Co. LLC

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Operator

Ladies and gentlemen, we thank you for standing by, and welcome you to the CoStar Group Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given at that time. As a reminder, this conference is being recorded.

I will now turn the conference over to Richard Simonelli. Please go ahead.

Richard Simonelli - Vice President-Investor Relations

Thank you, operator, and good morning, everyone. Welcome to CoStar Group's second quarter 2016 conference call. Thanks for joining us. Before I turn the call over to Andy Florance and Scott Wheeler, I have some important facts for you.

Certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to those stated in CoStar Group's July 27, 2016 press release on our second quarter earnings results and in our filings with the SEC, including our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q under the heading Risk Factors.

All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements whether as a result of new information, future events, or otherwise.

Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA and all of the non-GAAP financial measures discussed on this call to their GAAP basis results and reconciliation of forward looking non-GAAP guidance discussed on this call to the most directly comparable GAAP measure are shown in detail along with definitions for those terms in our press release issued yesterday, also found on our website.

As a reminder, today's call is being broadcast over the Internet and is available at costargroup.com, where you can also find our Investor Relations page. A replay will be available approximately one hour after the call and will be available for approximately 30 days. To listen, you can call 1-800-475-6701 within the United States or Canada or 320-365-3844 outside the U.S. The access code is 397279. A replay of this call will also be available on our website soon afterwards.

So, I'll now turn the call over to Andy Florance. Andy?

Andrew C. Florance - President, Chief Executive Officer & Director

Thank you, Rich. Revenues for our flagship product CoStar Suite grew 14% year-over-year, which is the highest growth rate since 2013. Apartments network revenue grew 58% year-over-year in the second quarter and pro forma 24% for the same period. For the fifth quarter in a row, we achieved net bookings of greater than $25 million, adding $26 million in the second quarter of 2016.

In the second quarter 2016, we delivered $207 million in total revenue for an excellent top-line growth of 21% year-over-year. At $7 million, we achieved our highest quarterly sequential organic revenue growth increase ever. I feel that there is tremendous momentum in our business right now and that our products are dominating their respective segments.

Our management team has been working hard to reduce costs, especially for the consolidation of redundant operations resulting from the merger of Apartments.com and Apartment Finder into CoStar. Year-over-year, we have reduced our overall head count 372 from 3,302 to 2,930.

One of the ways we did this was by consolidating much of the operations of Apartments.com in Chicago and Washington D.C. into Apartment Finder's lower cost city of Atlanta. I think the team has achieved remarkable efficiency, given that we acquired Apartment Finder this time last year, integrated the operations, built a completely new website, discontinued their print products and ended the quarter with fewer people in our Apartment group than we had before last year's merger with Finder. Such dramatic cost reduction is even more impressive, given that at the same time, we grew Apartment's marketplace revenue 58% year-over-year. Since June 2015, we've essentially stripped away all of the net incremental expenses associated with Apartment Finder, while maintaining $65 million of its revenue. We acquired Apartment Finder last year for $170 million at approximately a 7.4 times EBITDA. Now that we've effectively eliminated their net expense, you could say that it was a 2.6 times EBITDA deal.

With strong revenue growth and dramatic cost reductions, we have seen a surge in profitability. EBITDA increased to $46 million in the second quarter of 2016, compared to a loss of $1 million in the second quarter 2015. EBITDA margin for the second quarter 2016 was a solid 22%. We are remaining fully committed to achieving $1 billion revenue in 2018 – I'm sorry, yeah, in 2018 and 40% adjusted EBITDA margins exiting 2018.

I would like to update you in a bit more detail on our progress in the Apartment sector. Driving traffic to Apartments.com is the core to our success. According to comScore, year-over-year in the second quarter 2016, our Apartment's network achieved a 58% increase in unique visitors and a 103% increase in visits, driving a 24% increase in leads delivered to our clients. The Apartments.com network has nearly 35 million monthly visits in June 2016 as reported by comScore. Our network now has over 12 million more monthly visits than our closest network competitor, RentPath, which includes Apartment Guide and more than 27 million monthly visits more than our next closest competitor, ForRent.com.

While the renter traffic to Apartments.com has grown year-over-year, our closest competitor's traffic has fallen off. Among our ILS competitors, Apartments.com is now number one in SEO traffic, SEM traffic, and overall site traffic. We are clearly pulling away from the competitors. Apartments.com traffic dominance is translating into value creation for our customers.

Last week, we met with one of our largest customers that manages hundreds of thousands of units across the United States. They track the source of all incoming leads into their apartment communities and how those leads convert into signed leases. They shared with us how the Apartments.com networks perform for their communities. They told us that our network generates more leads and 100% more leases than any competing network. That means our network converted leases at a 94% higher rate than the next competitor, all at half the cost.

The fact that we are becoming such a huge source of vital renter leads is not news to me. It's consistent to what I'm hearing from many of our clients. I have, in fact, had clients tell me that we are now generating up to 90% of their leads. In fact, in just two years after the acquisition of Apartments.com by CoStar Group, we have now delivered our 50 millionth lead to property advertisers.

We conducted 4,500 Apartments.com customer satisfaction surveys during the second quarter this year. Each customer was asked on a scale of one to 10, how likely they are to recommend Apartments.com to a colleague? On average, our customers responded with a rating of 9.6. We are thrilled to achieve a score that rounds to a 10 on a scale of one to 10. We believe that, not surprisingly, our very significant product advantage is translating into a major shift in market share from our competitors to Apartments.com. We do not have hard or verified numbers on the exact number of properties advertising on our competitors' sites, so I am estimating, but we believe that each of our closest and second closest competitors have lost approximately 3,000 and 9,000 advertising communities, respectively, over the past two years, while we have gained more than 10,000.

We also believe that our closest and second closest competitors have lost approximately 2,000 and 1,000 advertisers, respectively, this year alone, driving their revenue down materially. We believe that our competitors are lowering their prices in an attempt to preserve market share. We've increased our average revenue per community to approximately $600 per month. This is up significantly from $435 in June of 2015.

Our tiered pricing structure and our quality leads and volume of leads are getting property managers to spend more money with us. We believe that we have moved from being the third-place player in this space when we acquired Apartments.com in 2014 to the clear number one position based on traffic – SEM traffic, SEO, total communities – total advertised communities, leads delivered, growth, and total revenue.

Customer service is an important component of success in the apartment marketing space. As we have grown so dramatically over the past two years, we felt that our sales force was falling behind on the relationship-building element required to succeed long-term in the apartment industry. Our sales force has been really busy and having a lot of success with new sales. We wanted to refocus them on customer service. I think it would be a huge mistake over the long-term, if we had the best site but lost share to any competitors because of so-so customer service. As a result, we made customer service priority one for our Apartment sales force this year. We wanted to get face-to-face in front of as many of our clients as we could to tell our very positive and great story and make sure that we built a brand, not just with great technical performance specs, but huge goodwill as well.

Since we started that effort earlier this year, we have doubled the number of clients we meet with each month. In February, our team visited 9,000 client sites. By June, that number had more than doubled to 19,000 face-to-face client visits per month. We conducted 45,000 face-to-face apartment industry meetings in the second quarter. We made a strategic decision to build equity with our customers for the long-term and we're willing to forgo a little bit of short-term sales to achieve that. We are making this investment in customer service from a position of strength, not weakness.

There's been a tangible pay-off from those tens of thousands of additional meetings. Property management companies sometimes cancel their advertising contracts with us for different reasons and some are unavoidable, such as when a client sells their building, but many cancels are avoided by getting in front of clients regularly. With the most customer contact we have ever had, we have also, not surprisingly, achieved our lowest cancellation rate ever. Our monthly apartment marketplace cancel rate fell close to 1% monthly from an historical rate of 2% to 3% monthly. So, it's less than half of what the historical rate had been.

What is really impressive is, since our acquisition of Apartments.com in 2014, we have nearly doubled the number of paying properties and have cut the number of monthly cancels in half. Our entry into the Multifamily space is not only driving advertising revenue, it's also driving strong CoStar information sales. When we acquired and invested in Apartments.com, we took the massive amounts of Multifamily data we began generating and used it to produce Multifamily information within our CoStar information products. This information is useful to property managers who need to set rents, to lenders underwriting loans, to developers studying the feasibility of new apartment buildings, and to people buying or selling apartment buildings.

This revenue stream was basically immaterial when we acquired Apartments.com, but has now climbed to $5.8 million in the second quarter of 2016, up $1.3 million from $4.5 million in the first quarter of 2016. This new $23 million of annualized information revenue is reported under our CoStar information revenue line, not under our Apartments.com or Multifamily revenue line. If you combine the two Multifamily associated revenue streams, we are approaching $243 million of revenue in the Multifamily space or about a $0.75 billion.

We have been and will continue to make strategic investments for the long-term growth of our business. We believe that our growing field sales force is more productive and their morale is higher, when we have CoStar group offices in their market that they can work out of and that our clients can visit them in.

We opened new sales offices in 10 cities in the second quarter and anticipate opening an additional 17 in the third quarter of 2016. I have to say that we have some advantage in finding good high-quality office space that someone else has built out and we're leasing without the full expense of build out. We have some inside sources there.

The new offices will bring together our multiple sales teams from CoStar, Apartments, and LoopNet into an integrated setting, which we believe will accelerate our sales penetration and provide better support to our existing customers. We anticipate continuing to grow our sales force this year and into next year because we believe that we have many more qualified prospects to sell to than our current size sales force can possibly reach.

We plan to grow the size of our CoStar, Apartments, Land, business for sale, and LoopNet sales teams by, in combination, approximately 200 staff over the next 18 months. We anticipate opening a major new operations and research center in the coming months, in a lower cost of living city such as Charlotte or Kansas City. We believe that compared to a location that we operate in today such as San Francisco or Washington D.C., these markets will allow us to recruit and retain employees more easily by providing more competitive local salaries to our staff, who could then afford a relatively higher quality of life.

We will not be shifting jobs, but more looking to build new hires in these locations. This will cost have higher costs at startup or create higher costs as we start up a new low-cost center, but should produce savings over the intermediate-term and long-term. We are considering organically adding new homes information to the CoStar product in 2017. We believe that we have had a significant competitive advantage in this area, and that the investment would be reasonable compared to the opportunity. We believe that it would be particularly valuable to our lender clients.

As mentioned on last quarter's earnings call, in an effort to drive higher customer satisfaction rates for CoStar customers, and this is opposed to the Apartments customers. In order to try to drive higher renewal rates, greater upsells, and indirectly more total sales, we have staffed a new team of approximately 60 CoStar customer service representatives whose job it is to drive more usage and adoption of the CoStar and LoopNet products within our client base and to provide customer service generally. I believe they're making a very positive impact on the business. Before the team was deployed in February of 2016, our sales force conducted a total of 3,600 on-site face-to-face client training sessions. In June of 2016 with a new sevice team in place, we conducted twice that number of client engagements with 7,300 on-site client training sessions. This means we are on pace to build relationships with tens of thousands of CoStar customers, we would not have seen before.

While the short story might be that we're doing this because of some sort of problem, similar to our approach in the apartment side of the business, we are, in fact, doing it from position of strength, not weakness. We want to have a large support team in place in preparation for the anticipated demand to train thousands of LoopNet customers, when we accelerate the migration of LoopNet information customers into CoStar next year. So in total, we're meeting with approximately 40,000 more face-to-face sessions each quarter with customers and we're convinced that will have a long-term positive pay off. The single biggest investment we're making right now is in integrating the back ends of LoopNet and CoStar into one unified database. This is a huge project ultimately engaging a thousand plus software developers, designers, researchers, trainers, and sales people. When successfully deployed in early 2017, we believe the project will have a number of important benefits for the company and our customers, including the following:

A dramatically higher quality database, a more efficient and lower cost of research, reduction of our customers cost to maintain their listings, a better commercial real estate marketing platform, a reduction in intercompany product cannibalization that we believe costs us tens of millions of revenue annually and better facilitation of sales and upsells of customers into our higher value CoStar information products.

Right now, there are tens of thousands of subscribers to LoopNet's lower cost, lower value information products and hundreds of thousands of repeat users of LoopNet's free information services. Our goal is to convert tens of thousands of these clients into much more valuable CoStar subscribers. As we approach sun setting the LoopNet information products, we have dramatically reduced the effort we're putting into selling them and we're in fact shortening the contract terms to month-to-month so that we have the flexibility to eliminate them.

And we have long anticipated this and we've communicated it, however, it is causing a significant reduction of LoopNet information revenue. We anticipate that there will be volatility in this LoopNet information revenue as we move through the anticipated conversion in the first quarter 2017. We expect to bring in offsetting positive revenue benefit in the CoStar information product line in 2017 and beyond.

In the short run, we believe it makes good sense and we're willing to sacrifice the new sales and information side of the LoopNet business in order to obtain a much larger long-term benefit of having people buy higher value CoStar services.

Consumer use at LoopNet continues to be strong. Profile views have increased to 66 million in the second quarter this year, up from 49 million views year-over-year. LoopNet continues to attract the largest unique visitor traffic in the industry by a very, very large margin.

For a third year in a row, CoStar has been recognized by Forbes magazine as one of the most innovative growth companies. This year, we ranked number 11 globally, which represents a 16 spot jump from 2015's list. Interestingly, several of the top 20 most innovative growth companies on the list are in the digital real estate space. CoStar was also recently honored at the National Building Museum's Annual Honor Gala, which drew more than 1,000 industry professionals.

Quick update on the commercial real estate markets, it looks good. The U.S. commercial real estate markets continue to show strength in the first half of the year. Occupancy rates are now at a business cycle highs for office, industrial, and retail properties and within 20 basis points of those highs for the apartment sector too. Demand for space is still driving rent growth to well-above inflation and ranges from over 6% for industrial properties, down to 2.6% for retail properties. Geographically, the vast majority of U.S. Metros reported improving fundamentals. In the office market, 66% of submarkets reported falling vacancy during the quarter. That is one of the most important statistics, I keep my eye on and is a business cycle high, and 56% of the Metro markets now have higher overall occupancy rates than in the 2006-2007 peak. In the apartment market, 63% of the Metros have higher occupancy rates than the last market peak. This is very significant since apartment construction has doubled over the past four years.

So clearly, the key driver of investment returns and occupancy is very strong. The pace of commercial real estate sales have slowed for all property types and sales in the first half of the year fell 28% from the same point in 2015. Despite the slowing sales, the context of this trend is important since 2015 was a record-high year for real estate sales.

Additionally, the commercial real estate sales pace is still 70% higher than the 2015 average for the first half of the year and the investment sales market continues to produce value increases. While sales have slowed somewhat, the market remains strong when compared to historical trends. Analysis department market shows this it is becoming increasingly competitive. New construction completions have doubled since 2012, which has led to a 20-basis point rise in apartment vacancy rates since the market cycle low in the same quarter 2015 and annual rent growth slowed to 3.5% from 7.2%,one year ago, still these numbers are very strong.

But because the apartment advertising demand is highly correlated with weaker apartment markets, a more competitive apartment market is likely to benefit our apartment ad sales. Office real estate fundamentals remain strong with occupancy at a business cycle high of 89.4% and year-over-year rent growth more than double inflation at 3.9%. Even though rent growth is marginally lower than the 4.2% growth recorded a year ago, the real story is that rent growth is becoming more evenly distributed by Metro. This story of strong demand, high occupancy, and well above inflation rent gains is repeated in other real estate sectors including retail, logistics, light industrial, hospitality, and specialty.

So the second quarter of 2016 marked my 30th anniversary since I started the company and our team began leveraging the potential of digitizing real estate markets. It's a number of years. Over the years, CoStar has provided the most comprehensive and accurate data and intelligence in marketing solutions available to professionals involved in every aspect of commercial real estate. Our transformation of the Multifamily information and marketing industry is just the latest iteration of our innovation. I'm very proud to lead a great team of professionals who are accomplishing so much, and have so much potential. Who knows, this might only mark the halfway point of my career.

After all, my father was 30 years older than I am today, before he in fact retired. It is possible, I don't think my wife will want to hear that, but it's possible. Mathematically, if CoStar sustained the 20% plus growth rate of the past few years, we could, in fact, report to you $250 billion in revenues in the year I'd reach my next 30th year or my 60th anniversary. That's right, $250 billion in revenues, which is a world record for the largest forward-looking revenue possibility any CEO has ever said in any public earnings call. In the short term, we remain focused on reaching $1 billion in revenues in 2018 with a 40% adjusted EBITDA margin exiting 2018 or sooner. That's a surer, safer bet.

I will now turn the call over to our CFO, Scott Wheeler, who is six months into his first 30 years with CoStar.

Scott Wheeler - Chief Financial Officer

All right. Thank you very much, Andy. Looking forward to that next 30 years and the $250 billion.

Andrew C. Florance - President, Chief Executive Officer & Director

Only 29.5 years.

Scott Wheeler - Chief Financial Officer

Only 29.5 years to go for me. As Andy mentioned, we're pleased with the performance in the second quarter of 2016. Today, I'd like to provide a bit more color on the results in addition to what we've already communicated to you in our second quarter press release, which we sent out yesterday.

My comments are going to focus on the financial results, some performance metrics, and then our 2016 outlook. Regarding our financial results, revenue in the second quarter 2016 increased 21% over prior year, which translates into a 15% growth rate on a pro forma basis. These pro forma results include the revenue from Apartment Finder for 2015, net of the revenue streams that we eliminated such as Finder Social.

Now, looking at our revenue performance by services, we're very pleased with the acceleration in revenue growth in CoStar Suite from 12.5% year-over-year in the first quarter of 2016 to 13.9% year-over-year in the second quarter of 2016. The acceleration in the growth rate is underpinned by continued strong CMA sales as well as the refocusing of our information sales force back to selling information products following our successful Apartments integration. With this strong performance, we believe that CoStar Suite will continue growing in the 12% to 14% range throughout 2016 as opposed to the 11% to 13% range that we've previously communicated.

The information services revenue growth for the second quarter was in the low single digits, as expected. You'll recall that information services includes revenue from our LoopNet information products, LoopNet Searcher, Property Comps and Property Facts, which we are not actively selling in advance of our planned integration of LoopNet and CoStar expected at the end of this year, as Andy was talking about. Accordingly, we expect revenue growth rates in information services to decline throughout the year and turn negative by the fourth quarter in advance of our conversion.

In our Multifamily service offerings, our revenue growth rate of 58% year-over-year in the second quarter includes increases in both the number of properties that advertise on our network as well the average revenue per property. In addition, despite removing the requirement to sell only annual contracts in the Multifamily space, our net new sales on annual subscriptions for the Apartments network increased in the second quarter of 2016 versus the first quarter of 2016.

Multifamily revenue growth was 24% on a pro forma basis, including revenue from Apartment Finder and net of the revenue streams we eliminated, and is expected to remain in the range of 20% to 25% throughout this year, as previously discussed.

Rounding out our services performance, Commercial Property and Land grew 11% year-over-year in the second quarter and remains in the low double-digit growth range expected for the remainder of the year.

Now, regarding our profit performance this quarter, we continue to manage our cost structure so that incremental revenue drops through to profit at a very high rate. In the second quarter, over 100% of incremental year-over-year revenue was converted to profit, as our revenue grew 21% and expenses were down 6% year-over-year, as Andy explained.

Our gross margin came in at 79.4% in the second quarter, representing an increase of 90 basis points from the first quarter of 2016 and that's an increase of over 500 basis points from the gross margin in the second quarter of 2015.

The vast majority of our cost of revenue relates to our research operations, which is comprised of fixed and semi-variable costs. This, of course, enables margins to improve with revenue growth. Our expectation is that our gross margins will continue in this high 70% range this year, as our revenues continue to increase and we continue to invest in our research capabilities.

Operating expenses are down $10 million year-over-year as a result of the previous announced plan to reduce our marketing and advertising spend as well as reduce resource levels in the business and the integration of Apartment Finder. Staffing levels are expected to increase throughout the remainder of this year as we had sales resources across all of our major service areas.

As a result of our continued strong revenue growth and cost management, our second quarter adjusted EBITDA results are favorable to the second quarter guidance range that we provided in April by $4 million at the midpoint. Of this favorability, $3 million is due to productivity we achieved in our marketing spend that allowed us to meet our marketing objectives with lower spending than anticipated. We plan to redirect the resulting marketing savings to other advertising priorities in the second half of this year.

Now, let's take a look at some performance metrics for the quarter. At the end of June 2016, we had 584 salespeople, an increase of around 75 people from the end of March 2016. We added sales resources across all our major service areas with the largest increase in our Apartment sales force. We will continue to add sales resources in the month ahead along with the local offices to support this expansion, as Andy discussed.

Revenue from subscription services on annual contracts continues to increase. It was $158 million for the second quarter of 2016 or 77% of total revenue, up from 74% in the prior quarter. For the trailing 12 months ended June 30, 2016, subscription revenue from annual contracts totaled $564 million, which is up 34% from $420 million for the 12-month period ended June 30, 2015. We added $26 million in net bookings in the second quarter of 2016 along with annualized net new sales on annual subscriptions of $23 million. This is our fifth consecutive quarter of net bookings over $25 million and the second highest sales quarter in our history in both CoStar Suite and Multifamily. Although the net bookings are strong, they're down from the record levels achieved in the second quarter of 2015, which is when we launched the new Apartments.com site and a major advertising campaign.

In addition, the reduction in LoopNet information sales in the second quarter of 2016, that Andy referenced, also contributed to the decline in net bookings, both on a year-over-year and a sequential basis. Renewal rates for annual subscription revenue across all service offerings improved slightly as we focused on improving customer service. The 12-month trailing renewal rate for annual subscription-based revenue is now at 90.5% and the 12-month trailing renewal rate for customers who've been with us for five years or longer was 97.3%.

I'll now discuss our outlook for the third quarter and the full year of 2016. Our full year 2016 revenue range of approximately $834 million to $840 million remains unchanged and we expect pro forma revenue growth for the year of between 13% to 14%, including Apartment Finder revenues for the relevant periods. Our third quarter revenue range of $211 million to $213 million implies a year-over-year pro forma growth rate of 13% to 14%, while we expect the reported growth rate to look closer to 12% to 13%. This is because we had approximately $2 million of non-core revenue in the third quarter of 2015 and that we have since eliminated.

Accordingly, this $2 million needs to be deducted from the third quarter 2015 revenues in your pro forma growth calculations. We continue to see positive trends in our expense profile and are again raising our full year 2016 non-GAAP earnings per share outlook. Our revised range of $4.05 to $4.13 per diluted share is an increase of $0.04 at the mid-point, compared to our prior outlook, and that's up $0.42 from the initial 2016 guidance that we provided in February of this year.

For the third quarter of 2016, we expect non-GAAP net income per diluted share in a range of approximately $1.00 to $1.04, which represents an increase of $0.11 at the mid-point over our second quarter results. This is primarily the result of planned reductions in marketing expenses coinciding with the end of the summer apartment rental season.

Given our strong second quarter performance and the investment plans that support the continued growth of this business, we believe we are well-positioned to achieve our stated financial goals of $1 billion of revenue in 2018, and exiting that year with 40% adjusted EBITDA margins.

With that, we'll now open the call for questions.

Question-and-Answer Session

Operator

Our first question is from the line of Brett Huff with Stephens. Please go ahead.

Brett Huff - Stephens, Inc.

Good morning, guys. Hope you're doing well.

Andrew C. Florance - President, Chief Executive Officer & Director

Thank you, Brett.

Scott Wheeler - Chief Financial Officer

Thanks, Brett.

Brett Huff - Stephens, Inc.

My question is on the net new annualized bookings and the net new bookings. Just to make sure, I understand, it seems like that was a negative growth, because both the tough growth or (35:11) because of the big-time media spend last 2Q and because of the shutdown or the deemphasizing of the sales of the info products, but we had a lot of questions from folks asking, when will that normalize and when – which should we see that start to get positive again on a year-over-year, or even sequential basis?

Andrew C. Florance - President, Chief Executive Officer & Director

And you're referring to the impact of LoopNet Premium Searcher, Premium Comps and Property Facts or ...?

Brett Huff - Stephens, Inc.

Yeah. So, I think two things is what you guys said that, and then also just the tough comp because you had so much media spend in 2Q last year?

Andrew C. Florance - President, Chief Executive Officer & Director

Right. And then the shutdown of the Finder Social, and non-core revenue. So the LoopNet information products will remain volatile through the first quarter of 2017 for sure. And again we're in a position where we do not want to artificially try to accelerate or intervene to accelerate sales of a product we intend to discontinue before long. So that will – and we don't want to begin aggressively converting LoopNet customers to CoStar Suite until we have 100% of all LoopNet content available within CoStar Suite so there is no reservation factor for a convertee.

Brett Huff - Stephens, Inc.

Yeah.

Andrew C. Florance - President, Chief Executive Officer & Director

So we anticipate that being first quarter 2017. So we would begin looking to report a clear consistent progress with that in second quarter 2017.

Brett Huff - Stephens, Inc.

Great.

Andrew C. Florance - President, Chief Executive Officer & Director

Did you want to add anything to that latter part of that, Scott?

Scott Wheeler - Chief Financial Officer

Yeah. Keep in mind that as we transfer to CoStar Suite, you'll see that growth obviously in the CoStar Suite sector. And so, if you're looking really at only information services then as you'd expect, that's going to continue to decline as we get the more of the value shifted into the CoStar Suite sector.

Andrew C. Florance - President, Chief Executive Officer & Director

And over the long-term it would go to zero and hopefully be transitioned over to CoStar.

Operator

Our next question is from the line of Sara Gubins with Bank of America.

Sara Rebecca Gubins - Bank of America Merrill Lynch

Hi. Thank you. Just a follow-up on that discussion. Could you size the amount of revenue that you expect to effectively eventually go away by the first quarter of 2017 and do you think you'll be able to recover all of that into CoStar Suite during 2017 and is this any different from what you've been talking about previously around doing some sort of hybrid product between LoopNet and CoStar?

Andrew C. Florance - President, Chief Executive Officer & Director

It is not different, it's what we've been talking about for, I guess gosh, I hate to say it, but two years now.

Scott Wheeler - Chief Financial Officer

Yeah, quite a while.

Andrew C. Florance - President, Chief Executive Officer & Director

But ...

Scott Wheeler - Chief Financial Officer

It's getting there.

Andrew C. Florance - President, Chief Executive Officer & Director

Yeah, so the PCPF component, the Property Comps, the Property Facts component which is immediately impacted in the first quarter is what ...

Scott Wheeler - Chief Financial Officer

Yeah, it's about $35 million to $40 million.

Andrew C. Florance - President, Chief Executive Officer & Director

The total is $35 million to $40 million. And then the (38:24) is probably $18 million or so, roughly.

And so the $18 million – and then the other part, we basically phase out. The half that we phase out over probably an 18-month cycle beginning in the first quarter 2017, but we do that prioritizing the most likely to convert and upsell first and our goal would be to be able to show a net overall uptick in revenue during the course of 2017 from that effort, but again we look at it. It's only estimating, you're just trying to make an estimate with your best belief. I'm pretty darn confident that it represents up to a $50 million cannibalization of the higher value products and it represents an upsell opportunity of $250 million.

So I think, again it can't be known, but it's in the $200 million to $300 million positive range, and I think that would be captured over five years to 10 years overall.

Operator

Thank you. Next in queue is Brandon Dobell with William Blair. Please go ahead.

Brandon B. Dobell - William Blair & Co. LLC

Hi. I just want to make sure I connect two dots here. First, the number of salespeople you're adding through, I guess, the balance of this year into 2017. How that will fit with – I guess it's the changes you're making in advance of combining the LoopNet and CoStar databases to really push the CoStar information suite. How do those two things align, and is there some connection between that answer and how we should think about the net new number the next two quarters or three quarters?

Andrew C. Florance - President, Chief Executive Officer & Director

Well, as you know, growing the sales force in the next two quarters does not grow the revenue in the next two quarters dramatically Now, we do have some pent-up growth already in the Apartment side. So, we probably have in the range of 30 folks to 40 folks in the pipeline to be added to productive sales or production sales for apartments that will go online in the third quarter and fourth quarter. So we have about 30 people to 40 people that will become productive in the third quarter or fourth quarter in the Apartment side. We'll probably see some benefit from that. The information LoopNet side will be a little bit slower. And then, we're going to bring on a second component later in the year, where we're creating 40 hunter territories in the Apartment side. And again, then they probably won't really be – their work will not be visible to the first quarter 2017. But that growth in cost is already reflected in our earnings guidance and in the raising the earnings guidance for the year. So, we're reinvesting some of the outsized beat for the year.

Scott Wheeler - Chief Financial Officer

And what's encouraging about this, Brandon, as you look at our sales head count that is obviously down 50 plus heads from where we were last year at this time. And even with that we achieved second highest sales quarters in both Multifamily and CoStar even at these depleted levels. So, we're really encouraged that the effectiveness, if you look at the productivity of the sales force on an individual basis has grown dramatically between now and a year ago. And so, that's definitely encouraging for us and we'll underpin the plans to want to continue to grow sales as that productivity is still rising.

Andrew C. Florance - President, Chief Executive Officer & Director

Yeah. The productivity, especially in the Apartment side is really quite impressive. And I'd also say that, just to give you some color on that, it's always tough to pull together two equal-sized sales forces into one and then restructure it all in the course of a quick 12 months. I'd have to say I just completed – last week I completed a two-day – our bimonthly two-day apartment sales manager meeting. And the group is really cohesive now and stable, and really rowing in the – pulling in the same direction, I think really strong. So we can see that we have – we're reaching 80% of our clients each quarter, which is a mandatory thing. And – but we only have enough feet on the street to reach about 15% of our prospects each quarter which is just lost revenue opportunity. And we're – when we meet with a – when we do have a demo with someone who is marketing their apartment building, we have about a 30% close rate. So, given that we can only reach 15% of the prospects, we want to reach 100% of the prospects each quarter, hence we're scaling the sales force a little bit.

Operator

Next in queue is Sterling Auty with JPMorgan.

Unknown Speaker

Hi, this is (43:37) in for Sterling. Thanks for taking my questions. Just quickly about the Apartments.com unique visitors in relation that you gave on the release. Does that include the new traffic from Move.com and Realtor.com? If you can just give us more color on that, so, that we can give more of an apples-to-apples comparison from a year-over-year standpoint. That would be really helpful. Thank you.

Andrew C. Florance - President, Chief Executive Officer & Director

Sure. It does include that Move.com traffic, Realtor.com traffic as well. I'd have to say that that is not a large driver. I don't have exactly a number, but I know that it represents, gosh – it represents a little less than 4.5% of our lead flow. So, one of the things is that a residential site like that, a site that's got both residential and for rent on it, drives dramatically less lead flow of like a fraction of the lead flow of the dedicated Apartment site drives and then it also has a lower conversion rate.

So it's not the meaningful driver of that story. One of the things that was a remarkable benchmark this quarter was that Apartments.com, one site, not the whole network of sites – Apartments.com one site beat the unique visitors of our second closest competitors' four or five sites combined.

So it's really where we thought this would be more of a story of a network of sites, the Apartments.com traffic is pulling so far ahead that it's really just about Apartments.com.

Operator

Next in queue is Bill Warmington with Wells Fargo. Please go ahead.

William A. Warmington - Wells Fargo Securities LLC

Good morning, everyone.

Andrew C. Florance - President, Chief Executive Officer & Director

Good morning, Bill.

Scott Wheeler - Chief Financial Officer

Hi, Bill.

William A. Warmington - Wells Fargo Securities LLC

So the $250 billion figure, is that a full year number or is that a run rate exiting 2046?

Andrew C. Florance - President, Chief Executive Officer & Director

Third quarter.

William A. Warmington - Wells Fargo Securities LLC

Third quarter. Okay.

Andrew C. Florance - President, Chief Executive Officer & Director

Third quarter. But we might revise that.

William A. Warmington - Wells Fargo Securities LLC

Okay.

Andrew C. Florance - President, Chief Executive Officer & Director

Guide upward on that number.

William A. Warmington - Wells Fargo Securities LLC

All right, now the real question. On the Apartment sales force, if you could help me understand again, how big is it now and how long before you get to parity with the CoStar Suite sales force?

Andrew C. Florance - President, Chief Executive Officer & Director

I think it's – by head count to-date on our payroll it's in parity. But 35 of them, let's say, 30 to 40 of them are still in training or just coming out of training. And that training period includes maybe currently four weeks to five weeks of training, and then a mandatory no-sell period of about three weeks to four weeks where they have to visit 100% of the clients in their territory. So it's about a two months to three months phase-up.

And so – but they'll all start coming on line in this quarter and the following quarter. And then, we would have a larger sales force in the Apartments.com side of the house in the – coming in the first quarter of 2017 as we add another 10 account managers and then 40 hunters.

Operator

And next in queue is Andre Benjamin with Goldman Sachs.

Andre Benjamin - Goldman Sachs & Co.

Hi, good morning.

Andrew C. Florance - President, Chief Executive Officer & Director

Good morning, Andre. How're you doing?

Scott Wheeler - Chief Financial Officer

Hi, Andre.

Andre Benjamin - Goldman Sachs & Co.

Good, good. So, I just want to talk a little bit about the core Suite. I know there's a lot of focus on Apartments and the LoopNet up sell, but with the headline number for growth in the Suite, could you talk a little bit about how much of that is driven by underlying user or number of corporations, or teams growing relative to pricing. And then, similarly, the year-over-year growth was about $12 million. How much of that is from the broker-client space that most people are traditionally focused on versus the institutional investors in other buckets you're trying to grow?

Andrew C. Florance - President, Chief Executive Officer & Director

So, I would say that not a lot of it is – there's not much of it coming from price increases. So, we have – I would say it's inflation, sub-inflation, two points, three points depending on which inflation you're using. So, it's really an expansion of the client base and new logos coming on board. A little bit of – like I think there was a big Bank of America deal where they were expanding the number of heads in there, but a lot of its coming from people who are buying Multifamily information services from us in CoStar.

So, a lot of business is coming from banks and lenders. We are making good progress with folks like Fannie Mae and some other organizations in that side of the world. So, a lot of its institutional owner, but we're still adding brokers. But the real season for focusing on the brokerage industry is in Q1 2017, once we do the LoopNet conversion. So we still have tens of thousands of brokerage firms who want to add to the client base and the real push on that happens next year. Did that answer your question, or what did I leave out there?

Andre Benjamin - Goldman Sachs & Co.

Nope. That was it. Thank you.

Andrew C. Florance - President, Chief Executive Officer & Director

Okay. Thank you. Appreciate it.

Operator

Next in queue is Patrick Walravens with JMP Securities.

Natasha Asar - JMP Securities

Yeah, hi. This is Natasha on for Pat. We were just wondering what ...

Andrew C. Florance - President, Chief Executive Officer & Director

Hi, Natasha.

Natasha Asar - JMP Securities

Hi.

Andrew C. Florance - President, Chief Executive Officer & Director

You could be Pat.

Natasha Asar - JMP Securities

What is the appetite for M&A, in particular for property management software solutions like RealPage or Yardi?

Andrew C. Florance - President, Chief Executive Officer & Director

RealPage, Yardi. I've never heard of them.

Scott Wheeler - Chief Financial Officer

We should look them up.

Andrew C. Florance - President, Chief Executive Officer & Director

We should look that up...no, I'm teasing. Those are – I'd have to say those are some great companies; huge customer presence, mission critical functions to those industries. And you could put MRI in there; you could put Entrata in there, but they're also very complex and they don't move share very quickly. So, I would say that in the apartment marketing space, there's been a lot of share shift. We're telling you that we believe there's a lot of share shift in the last two years. It wouldn't move like that in the Multifamily property accounting space. It is developed over 30 years to 40 years, that kind of share, and people don't – switch costs are very high moving from one system to another. We think it's more advantageous to have a positive 'coop-etition' with those players and there is an unlimited number of things we can be doing on the revenue generation side for the industry right now, without getting into direct competition with one or another of those folks. So we're open to different things. We're more focused on the revenue generation side of the business right now. We're lazy. We don't like to work hard. So...

Okay. Thank you.

Operator

Our next name in queue is Ian Corydon with B. Riley & Co.

Ian Corydon - B. Riley & Co. LLC

Thank you. You talked about some of the trends you're seeing in the apartment space with respect to absorption and rent growth. I'm curious what kind of conditions would have to occur before you might get concerned that advertising spend might actually contract for the apartment space?

Andrew C. Florance - President, Chief Executive Officer & Director

Well, the thing that would worry me more is dramatically lower vacancy rates, and I don't think that's what's going to happen. Both in the CoStar information business and the Apartments business, when vacancy rates start moving to 1% and 2%, there's no such thing as marketing. The nice thing in the Multifamily spaces are such high churn though that people want to maintain that lead flow and they can in fact, push rents, but I'm more concerned about ultra-low vacancy rates. I'm less concerned about vacancy rates expanding. So, if vacancy rates expanded to the 10% rate, I think you would see a lot of bankruptcies occur. And if that happens, there's plenty of capital in the world. There is overall a fundamental housing shortage in the United States, residential housing shortage, so the capital would flow in and the new capital would come in at a lower cost base and stable balance sheet and would aggressively market to fill those vacancies.

That's our view and I think we would have a painful time seeing any of our customers lose their properties, but we would come out of it and it would cause short-term friction. It could be a 90-day cycle where the property drops off, before it comes back on, but we would benefit. The one thing that I think is happening right now and again I'm only estimating, but we watch it carefully, I think one of things that is happening now is that over the past five years or six years, I believe apartment communities used to maintain substantial advertising contracts with multiple ILSs for the same property. I think that people are beginning to reduce the number of ILSs they use and that's because of these super-low vacancy rates.

Fortunately, our product is strong enough that they're choosing our ILS as the one to remain with to the best of my knowledge. So big picture, I am not, I'm more concerned as a taxpayer what it might to do to bailout programs and deficit than I am to what it does to Apartments.com advertising spend.

Operator

Our last question is from the line of Andrew Jeffrey with SunTrust.

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Hi, guys. Thanks for squeezing me in.

Andrew C. Florance - President, Chief Executive Officer & Director

No problem there. Always, we do that.

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Hey, Andy, you mentioned a nice lift in apartment community revenue yield or revenue per community and it seems that that reflects pricing to value. You also mentioned, I think that some of your competition is now perhaps cutting price in order to take share in a competitive environment. It would seem that given the value add and the quality of the data, et cetera that CoStar is in a position where it could actually start to price to value more effectively. Is that something that we could see drive revenue growth over time in the Apartments business?

Andrew C. Florance - President, Chief Executive Officer & Director

Certainly, so one of the things we intentionally did is when we selected Apartments.com as the first company we wanted to merge with, we made it a point to select the lowest cost provider. We wanted to have the group with a lowest cost point on the belief that if nobody had more than 10% share of the market and you have a fixed brand development marketing budget line, you're better off going in there at lower cost and trying to achieve much higher volume, and if other people play a high price point game and have lower volume and can't invest in branding, they're in a tough place.

So, we like being somewhat aggressive, and we like taking share. You said – you mentioned one thing that our competitors are reducing price to take share, I think they're reducing price to hold share. I believe they're losing significant share, I think they're losing shocking share. So, we would, I mean I do believe that's there. When we get major customers who we value telling us the kinds of things they're telling us about, the kind of lead flow we're generating comparatively and the fact that our cost per lease is less than half of the competitors. Yeah, we certainly have pricing power, but I would like to see us get to 40,000, 50,000, 60,000 paid properties before we considered pricing to value.

But the other nice thing is we're not raising people's prices, we have these multiple tiers. And so, companies can choose where they need to be for lead flow, and we might be aggressive in the silver and gold, the lower categories on pricing there, but we can hold and raise pricing in platinum and diamond. And then, people who really need lead flow and want to soar to the top and be the most prominent, especially new construction projects. Those prices would start to be – would probably start to reach some of the highest price points people have seen, but the main goal is share. The main goal is just getting more and more communities involved. Remember, also that the more communities we get digitally feeding to us, the higher quality information products, we're producing. So we are now running at something like 17,500 communities, electronically connected to us, digitally feeding content to us, typically on a daily or multi-hour basis.

So we're trying to get volume, and we're making good progress there, obviously, having almost double the number of properties in the last two years.

I think that was, yes or no, you're looking for, I'm sorry for the four paragraphs.

Andrew Jeffrey - SunTrust Robinson Humphrey, Inc.

Thank you.

Andrew C. Florance - President, Chief Executive Officer & Director

And I think we have one more question. No? We're all set. Well, thank you everybody. We appreciate you joining us in the second quarter earnings call and I look forward to talking to you on the third quarter.

Operator

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference service. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!