CoStar Group, Inc. (CSGP) on Q2 2023 Results - Earnings Call Transcript

Operator: Good afternoon. My name is JP and I will be your conference operator today. At this time, I would like to welcome everyone to the CoStar Group Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. Now, Cyndi Eakin, Head of Investor Relations, will lead the safe harbor statement. Cyndi, you may begin. Cyndi Eakin: Thank you, JP. Good evening, and thank you all for joining us to discuss the second quarter 2023 results of the CoStar Group. Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Scott Wheeler, our CFO, I would like to review our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, including the company's outlook and expectations for the third quarter and full year 2023 based on current beliefs and assumptions. Forward-looking statements involve many risks, uncertainties, assumptions, estimates and other factors 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 press release issued earlier today and in our filings with the SEC, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q under the heading Risk Factors. All forward-looking statements are based on information available to CoStar at the date of this call. CoStar assumes no obligation to update these statements, whether as a result of new information, future events or otherwise. Reconciliation to the most directly comparable GAAP measure of any non-GAAP financial measures discussed on this call are shown in detail in our press release issued today, along with definitions for those terms. The press release is available on our website located at costargroup.com under Press Room. As a reminder, today's conference call is being webcast, and the link is also available on our website under Investors. Please refer to today's press release on how to access the replay of this call. And with that, I would like to turn the call over to our Founder and CEO, Andy Florence. Andy Florance : Thank you, Cyndi. It reminds me of summer camp, gather around the campfire kids. Cyndi is going to read the safe harbor statement again. All right. Let's be serious. Good evening, everyone, and thank you for joining us for CoStar Group's Second Quarter 2023 Earnings Call. Revenue for the second quarter of 2023 was $606 million or 13% growth year-over-year. Revenue growth in our Commercial Information and Marketplace business was an impressive 15% year-over-year. We continue to deliver strong double-digit revenue growth which, in this case, is particularly impressive during one of the most difficult property markets in decades. I'm pleased to see our portfolio is strong across the board with Apartments.com, CoStar, LoopNet, Real Estate Manager, STR, Lands.com and businesses for sale all delivering double-digit revenue growth. We continue to deliver outstanding sales results with $82 million of net new bookings in the second quarter, our second highest sales quarter ever. I believe we crossed a monumental milestone in June when our residential portal network continued its phenomenal growth and became the second most heavily trafficked residential marketplace in the U.S. Overall, traffic to CoStar Group's websites reached a high of 105 million monthly unique visitors in June, according to Google Analytics. Earlier this year, we moved into third place when we surpassed Redfin's first quarter self-reported home and estimated rental site traffic. Then in the second quarter, we moved up again the second place, as we had 84 million average monthly unique visitors to our residential portal network, surpassing realtor.com self-reported traffic of 72 million monthly unique visitors from their earnings release on May 11, 2023. CoStar Group's residential network combines residential rental site and homes traffic for sales site traffic, as others do. Homes.com is the fastest-growing residential portal with network traffic growing 130% year-over-year in June to 38 million monthly unique visitors. That's an accomplishment one year after we launched Homes.com or within the first year, won't be launching Homes.com. Congrats, Jerry, Livie and the whole team and Todd. Apartments.com once again delivered an outstanding quarter. Apartments.com revenue was $224 million in the second quarter, accelerating to 23% year-over-year growth. The Apartments.com sales team delivered a record net new sales quarter with net sales bookings increasing 84% compared to the same quarter last year. The month of June was our highest sales month ever. We continue to add new customers to our marketplace at a rapid pace and now have over 66,000 paying communities on our network, representing an increase of 12% over the second quarter of last year. Our mid-market efforts are contributing thousands of new properties, growing paid subscribers by almost 40% in the second quarter. New construction is also contributing to subscriber growth. 65% of all new 100-plus unit communities are advertising with Apartments.com. And of those advertising, 80% are at the platinum level or higher. Our sales team continues to deliver exceptional results and high productivity. Our sales productivity is up 24% over the second quarter of last year. The number of quality meetings with customers increased by 13% to 155,000 compared to the first quarter. Our Net Promoter Score rose to a very impressive 95%, the highest since the quarter -- first quarter -- I'm sorry, that's the highest since the third quarter of 2020, and a really impressive number. I'm proud to say our team delivered strong performance of the National Apartment Association Annual Conference in Atlanta last month. They were motivated by a surprise appearance by an always entertaining Jeff Goldblum. Our team delivered almost double the sales level of last year's conference. I'd like to extend a special thanks to Paige Forrest, Fred Saint and the whole sales team at Apartments.com for in continuing to produce exceptional results quarter after quarter, month after month. In June, monthly unique visitors for Apartments.com grew 9% year-over-year significantly outperforming the market, which is down approximately 9% year-over-year according to Google. Our 2023 Apartments.com marketing campaign is in full swing. We are reaching renters across all media channels during peak rental season and generating over 2.8 billion media impressions, up 11% over last year. Since the launch of this year's campaign, we're already seeing phenomenal results with unaided awareness for Apartments.com reaching a very impressive 49%. That's the highest level ever. Our data indicates that this level of unaided awareness has never been achieved by anyone in the online rental marketplace category. Economic conditions in the apartment industry continue to create a favorable advertising environment. Apartment vacancy rates on three, four and five-star properties continue to rise increasing 220 basis points over prior year to 7.9%. Unit-level deliveries are at all-time highs, and supply will continue to outweigh demand for the foreseeable future. We expect vacancy rates to continue to increase for the next four quarters, peaking at around 9% in mid-2024. With favorable advertising conditions, a strong and growing sales force and industry-leading products, we expect to see Apartments.com revenue growth accelerate to 25% through the end of this year. Over at Homes.com, we continue to make great progress in implementing our strategy. Traffic to our homes network reached a new high of 38 million unique visitors in June according to Google Analytics, growing 130% and over the same period last year. Sequentially, our Homes.com average monthly unique visitors grew 75%, as we continue to grow traffic share towards our next milestone of 50 million unique visitors. With returning users up 416% in June versus a year ago, I believe consumers are appreciating Homes.com's outstanding UX and the ability to contact the listing agents directly and clearly, the ones who know more about the property than some other unrelated agent. According to comScore, Homes.com unique visitors are up 224% in the second quarter over the same quarter last year, while Zillow's traffic is down 5%, realtor.com is down 13% and Redfin is up 4%. I'm pleased with our success growing site traffic on Homes.com to date, and I believe we have a lot of runway ahead as we continue to implement our content, product and marketing plans. This is a marathon and not a sprint. We are clear that we have more and bigger traffic levers to pull to grow traffic over the quarters to come. Our future growth in traffic will come in waves. Any period where traffic lulls, it may just be the trough before a monster wave comes. I'm very confident that 18 months from now, we will have very impressive rankings. Alongside our increase in consumer traffic, we continue to focus on agent engagement. We've built an incredible committee of 1.1 million real estate agents on Homesnap Pro with hundreds of thousands of active users each month. We have integrated the top feature set of our Homesnap Pro product into the Homes.com platform and have begun migrating agents over to Homes Pro, our new agent-facing set of tools. Our new Homes Pro product will provide significant benefit to our current Homesnap users, including access to 15 times the consumer traffic, millions of free leads and additional tools and feature upgrades. With these tools fully integrated, agents for the first time will be able to experience the full value of professional tools integrated with a heavily trafficked, agent-friendly your listing, your lead business model. In June, we launched our first installment of proprietary content on Homes.com with massive volumes of immersive neighborhood videos, informative write-ups and photographs. We also released a comprehensive set of school profiles, information ratings, all giving us what I believe to be the most complete coverage of schools on any residential property website. We are still in the very early stages of our content strategy, but I'm encouraged by the consumer response to what we've built so far. We recently conducted another round of focus groups in various cities with both consumers and agents and tested our product features and content. I have attended hundreds of focus groups in dozens of cities over the past three decades. The consumer and agent response we received them these most recent focus groups is the best I've ever seen, really encouraging responses. I believe we're on the right track. We have much more work ahead to build out the full new Homes.com product offering, but I believe that based upon the focus groups, there will be a very positive consumer response to what we deliver. CoStar revenue for the second quarter was $229 million, an 11% increase over the same period last year. That's coming in above our 10% revenue guidance. We're seeing higher levels of sales to new logo accounts, and I'm encouraged by the strong sales results to owners, lenders and corporate users, which grew 134% over the first quarter of this year. Clearly, our efforts to shift our sales team to focus on owner, lender and tenant prospects is paying off. Sales activities to these customer types were approximately 20% higher in the second quarter than the first quarter of this year, and are expected to increase further in the second half of the year. Another positive sign for CoStar was our 92% renewal rate in the quarter, which increased from the 91% renewal rate in the first quarter. Our CoStar Lender product had its best sales quarter ever, with net new sales nearly doubled the sales results from the first quarter of this year. We've had success selling to financial institutions of all shapes and sizes with a product that's proving far superior to competitive offerings. Our ability to match individual properties to loan portfolios alongside our credit default model are valuable differentiators of CoStar Lender that others simply cannot match. Our clients continue to refer to our solution as the best-in-class and the gold standard. We're still in the early stages of this $300 million market opportunity with 200 customers signed and 5,800 more potential customers ahead. In April, we released property investment fund data into CoStar. The release includes 12,600 investment funds, which we have linked to 70,000 commercial properties in the CoStar database. This new information adds to CoStar's unique data sets, providing the ability to search for funds based on their property portfolio characteristics, transactions and listings. In the two months since we introduced the product, we have closed over 100 CoStar sales where the fund data was a critical part of the value proposition. In May, we released our new tenant application, which includes enhancements to our existing tenant location information as well as a new corporate user feature. The new corporate user feature aggregates all locations for the 32,000 largest corporations that occupy five or more locations. This product allows users to run a query on a large corporate occupier for example, Walmart, and see all of their locations, the types of buildings they occupy, building details, financial information on the company and credit risk. Brokers find this information very valuable as they quickly understand how large tenants utilize space across their portfolios and identify opportunities to serve those companies. I believe the strong pace of new product introductions, alongside the sales team's focus on owners, lenders and corporate users will continue to support strong revenue growth even as we navigate one of the worst points of the current CRE cycle. LoopNet revenue was $66 million for the quarter, up 16% year-over-year and in-line with revenue growth of 16% in the first quarter. LoopNet continues to be the most highly trafficked commercial real estate marketplace, capturing 14 million average monthly unique visitors for the second consecutive quarter, up 13% year-over-year. According to SEM Rush data for the month of June, LoopNet and LoopNet Canada have seven and eight times the traffic of our nearest competitors, respectively. Unique visitors to the Canadian network are up 51% year-over-year. While the LoopNet marketplace remains strong and competitively advantaged, LoopNet's sales growth should have been stronger in the second quarter. We believe the lower sales resulted from a combination of factors and that most of these factors are correctable. These factors include a growing and relatively young sales team a training program, which has room for improvement, a large number of account transitions and a poorly conceived commission plan that drove lower activity levels and a weak customer service, which reduced our renewal rates. Does that sound like a CEO that's not happy with something? That's true. Countering that, the climbing commercial real estate vacancy rates did create positive countercyclical demand for leasing solutions similar to the positive results environment we're seeing in Apartments.com. In fact, I was on the phone this morning with Mike, who is one of our more experienced LoopNet sales reps, and he said he's witnessing unprecedented demand for advertising for LoopNet in this severe downturn. He says that office owners who in the past or industrial owners who never considered advertising before in the internet are now all in trying to drive leads to their troubled leasing assets. We will increase service levels while reinforcing customer retention is a priority in a revised incentive compensation plan. Despite the near-term disruption, I remain very confident in the long-term LoopNet growth opportunity in our direct sales team and strategy. Our LoopNet network of international marketplaces delivered strong growth in the second quarter with revenue increasing 35% year-over-year and net new sales up 24%. Our international expansion efforts will continue in the second half of the year as we plan on launching LoopNet in France and Spain, which will run alongside of our Bureau Loco, Business MO and Belbex marketplaces. STR revenue was 11% compared to the second quarter of last year, with subscription revenue growing an impressive 14%. For the second quarter in a row, STR achieved record sales results with more and more subscriptions. When we purchased STR in 2019, approximately 60% of STR revenue was subscription-based and 40% was one-off transactional. The STR team has done a great job of transitioning the business to 80% subscription revenue currently. Renewal rates on STR subscriptions are at an amazing 97%. In May, we successfully launched our STR benchmarking product in CoStar and the initial results are encouraging. Our teams have migrated over 60 customers to the benchmarking product in CoStar with another 250 customer migrations in progress. The transition is anticipated to be completed in approximately one year, encompassing over 900 corporate accounts and 6,000 independent hotels. The release of the new benchmarking product represents a digital transformation of the beloved and 38-year-old industry standard Star report. The feedback from clients on this integration and enhancement is astounding. One customer referred to it as an epical change. I don't think I refer to anything as epical changes. But owners and operators are thrilled with the new advanced analytics options, data visualizations, abundance of historical data and of course, the trusted STR report. We anticipate this release will open access to new clients as the data is invaluable for asset acquisition, operations and disposition. I'm looking forward to completing the migration to CoStar, which will accelerate our growth into what we see as a $300 million market opportunity. CoStar Real Estate Manager signed a number of the world's largest companies to our lease administration and transaction management solutions in the second quarter. Most of these names are confidential, but you'd recognize, for example, the company behind the word processing software that I wrote this on. Year-over-year subscription revenue grew 14% in the second quarter. Subscription revenue climbed at 92% of revenue in the first half of '23 versus 87% in 2021. We enjoyed a 100% customer renewal rate in the second quarter. Today, 7 out of 10 of the largest U.S. banks are using Real Estate Manager lease accounting, lease administration or transaction management solutions. BizBuySell continues to experience double-digit growth and is expected to exceed $30 million in revenue in 2023, an important milestone. Quarterly traffic to the BizBuySell network reached an all-time high of 12.6 million sessions in Q2, which is 25% growth year-over-year and lead volume to advertisers was up 30% during the same quarter. BizBuySell is the leading marketplace in the business for sale category. Our land business is on track to increase revenue by double digits and to exceed a major milestone of $50 million in revenue. When we acquired Land in Farm and LandsofAmerica, those businesses had $4 million of revenue. So $50 million is an important growth milestone. Implementing our and our playbook, we added LandWatch, combined sites into Land.com network greatly increased traffic exposure for clients and recently added gold and platinum ads. Our investment in product and people continues later this year with the launch of diamond ads and adding sales headcount, which increased 26% year-over-year, and our target is to increase at 50% year-over-year. Ten-X continues to perform well, while overall CRE market conditions remain challenging. Q1 '23 CRE transactions, commercial real estate transactions, were down 51% year-over-year, and Q2 further declined to 63% year-over-year down. That is the steepest decline since the Great Recession where transaction volumes had declined 66% year-over-year. Bid-ask spreads continue to grow wider due to higher interest rates and constricted debt loan-to-value ratios, and all that's caused upward pressure in cap rates. The overall CMBS delinquency rate rose to 3.9% in June, the highest rate in 14 months and it's expected to grow in 2023 and 2024. We appear to be seeing a very severe significant pretend and extend phase from lenders and distressed assets are coming but it's just a question of when, not if. Ten-X applied its proven principles of syncing value expectations with our seller broker customers to onboard assets with reserve pricing set to current market conditions. For Q2, Ten-X onboarded $1.5 billion of inventory, a 27% increase year-over-year and two times '23 volume. And we delivered a solid 52% trade rate, and that compares favorably to the offline world's 23% trade rate. Due to the ongoing bid-ask misalignment, Ten-X over $2.9 billion of potential inventory that was deemed high risk for transaction success because the seller had an unrealistically high opinion of value. So we didn't take those properties on in order to avoid wasting money on underwriting them and lowering our trade rates. We continue to build and improve our platform for the future. The Ten-X sales force grew 36% year-over-year and delivered higher quality high-valued assets in Q2. The average asset value was up 33% year-over-year from $3.5 million to $4.6 million. The average winning bid was up 11% year-over-year from $3.2 million to $3.7 million and the average buyer premium was up 27% year-over-year from 72,000 to 92,000. There was a 53% year-over-year inventory growth in the $1 million to $10 million range which is what we consider Ten-X a sweet spot. We've made significant progress with our technology with the Ten-X platform, now fully integrated in the CoStar ecosystem. Customers can now fully manage their transactions digitally through the marketing auction contracting and closing phases of a sale. Sellers and brokers can now manage their listings and leads in marketing center and buyers can interact with their brokers and sellers via the Ten-X LoopNet and CoStar sites. Finally, to lift everybody up, I would -- I thought I would talk a little bit about the commercial real estate economy, really sort of pick things up. Did you know [Indiscernible] means to lift up, yeah. So the capital markets continue to see the impact of rising interest rates. As I mentioned, second quarter sales transaction volumes were down 63% compared to the same quarter and was down across all property types in the commercial real estate markets. Prices are also falling, but the lack of real deal activity makes price transparency difficult. The debt market has not yet seen a wave of distress with delinquencies still very low by historical standards, but there has been some movement. The next couple of years will bring more clarity to that market as more than $1 trillion in CMBS debt comes due. The office sector continued to weaken in the second quarter and can now be characterized as the worst it's ever been. Vacancies now sit at 13 -- what a horrible thing to have to say. Vacancy rates now sit at 13.1%, their highest levels ever. However, office space that's no longer occupied by a tenant or is underutilized by tenant is not truly stably leased. Most lenders are not considering space leased that -- considering space leased but not occupied to be leased, there's got to be a tenant actually in this space before lenders consider at least. Based on that fact, the phantom or true effective vacancy rate is closer to 57% if you assume a 50% tenant occupancy of lease space. That is, by far, the worst vacancy rate in the history of the office industry. Tenants gave back 40 million square feet in the first half of 2023 with another $100 million forecast to be given back to the remainder of the year. Net absorption was negative again in the second quarter and now totals more than 150 million square feet negative since the pandemic began. Negative absorption was a third of that level in the '28 financial crisis at negative 50 million square feet. So this is much worse than the '08 situation. Conditions will likely not improve anytime soon. We expect vacancy rates continue to arise. Overall sales prices for office buildings are down 5.9% and delinquency rates while still low, have tripled since the end of last year to 4.4% currently. I believe the downward price pressure is much higher than a 5.9% decline and that the quality of office loan collateral is weaker than many presented to be. The hotel sector continues its recent trend of slow growth in the second quarter. Room rates rose at around the level of inflation, having limited potential for improved profitability. Resort destination show signs of slowing growth as consumer spending cooled, while hotels and urban markets report improved growth supported by corporate group demand and transient travelers. Higher interest rates have put a damper on construction and deal activity. The industrial and retail sectors continue to be relatively healthy at 4.7% industrial vacancy rate is historically low and annual growth for rent remains very strong. Retail vacancy reached another all-time low with continued positive absorption. Announced store openings continue to exceed store closures. So that's good news. The residential sector continues to face challenges with a 30-year mortgage rates around 7%, monthly prices on the rise in the last three months, and affordability is reaching a low not seen since 1986. And creates challenging condition. Total home sales fell 16% year-over-year with more than 60% of the existing mortgage rates below 4% and more than 80% below 5% and rate lock will keep inventory of existing homes low. People are not going to be trading out of those low interest rates. Builders have responded though as single-family housing starts moved higher earlier this year new homes account for 15% of all sales compared to only 10% a few years ago. Builders are offering incentives such as mortgage rate buydowns and price discounts to attract buyers. Still, affordability remains a challenge. So despite that difficult real estate market, CoStar delivered yet another quarter of strong double-digit revenue growth, our second highest sales quarter ever. We exceeded 100 million monthly unique visitors for the first time in June, which was an incredible milestone and demonstrates our ability to deliver successful leading property marketplaces across multiple sectors and across multiple countries. Our marketplace networks continue to grow and provide value to our advertising customers as time when vacancies are on the rise. Although the composition of our revenue growth continues to shift with the market dynamics, I'm very confident in our ability to deliver our financial projections for 2023. At this point, I'm going to turn the call over to young Chief Financial Officer, Scott Wheeler. Scott Wheeler : Thank you, old CEO, Andy. Andy Florance : Now, now. Scott Wheeler : I appreciate that introduction. I believe I'm one digit younger than you still for another month or two. Great quarter financially, a lot to cover. So let me jump right into the revenue by our service areas. So CoStar revenue grew 11%, as Andy mentioned, slightly above our guidance at 10% with the strength in our net new sales exceeding our forecast. So we saw a stronger new customer sales in the quarter, particularly to owners, investors and lenders. And even our broker sales stabilized in the second quarter, we signed almost 800 new broker agreements this quarter. Vast majority of them are in the one to two broker size category. So that's definitely an improved trend from the last couple of quarters. We expect CoStar revenue growth to be 10% in the third quarter, and now between 10% to 11% for the full year, a modest increase from our previous outlook. Apartments.com's second quarter revenue growth of 23% was in line with our expectations. We had another record sales level for Paige and the team. The new property volumes increased 12% year-over-year and volumes in the mid-market category growing much more rapidly at 40% growth year-over-year. We are seeing more and more customers now upgrading to the higher tier ads, particularly the 100 unit and above-unit properties are doing that quite a bit more now. Our net add level upgrades are now at or above the levels that we're operating at before the 2021 disruption in the apartments market. We expect that trend to continue. With continued strong sales results, we now expect third and fourth quarter revenue growth of 25% for Apartments.com which is up from the 24% assumed in our last outlook. So our full year revenue growth outlook is slightly up in the range of 23% to 24% for apartments. LoopNet revenue grew 16% in the second quarter, consistent with the first quarter of the year, slightly below our guidance of 18%, which is a shortfall of about $1 million. As Andy mentioned, LoopNet sales in the second quarter fell short of our expectations, and we are adjusting our full year revenue outlook for LoopNet to approximately 15% year-over-year revenue growth. LoopNet's third quarter revenue growth is expected to be around 14%. Revenue from Information Services grew 9% in the second quarter. STR and Real Estate Manager continued to post strong double-digit revenue growth, particularly in their subscription parts of the business, which we expect to continue through the end of the year. It's really impressive to look at the renewal rates and STR at 97% and Real Estate Manager 100%. Those are very critical products for our customers. We're starting to see more and more of our banking customers move to our new CoStar lender product which shifts a small amount of information services revenue up to the CoStar category. Accordingly, we expect revenue growth in the upper single digits for the third quarter and approximately 9% for the full year in Information Services. Our residential revenue came in at $13 million, in line with our expectations. We expect third quarter revenue of around $11 million, in line with our last forecast and full year 2022 fee revenue of $45 million. Other Marketplaces revenue was $32 million in the second quarter, up slightly from the first quarter revenue and effectively flat to prior year. Ten-X revenue was lower than expected in the second quarter as the low transaction volumes and deal uncertainty weighed on the results. Ten-X aside, our lands and businesses for sale marketplaces revenue were up 11% year-over-year in the second quarter. For the second half of the year, we're moderating our revenue outlook for Ten-X and assuming a continued low transaction level environment. If for some reason, it improves in the later part of the year, we'll take the upside. We now expect full year revenue for other marketplaces in a range of $130 million to $135 million for the full year, a reduction of approximately $20 million from our prior outlook. Adjusted EBITDA for the second quarter was $127 million, above the high end of our second quarter guidance range of $123 million. Favorable performance relates primarily to the timing of our investment spend. Our adjusted EBITDA margin was 21%, 1 percentage point above guidance. Our sales force totaled approximately 1,160 people in June 30, an increase of 17% from June of last year and approximately 40 sellers from the end of the first quarter. The majority of the increase in the second quarter is in our Marketplace business. Our contract renewal rate was 90% for the second quarter of 2023 with the renewal rate for customers who've been subscribers for five years or longer at 94%. Subscription revenue on annual contracts was 81% for the second quarter compared to 80% in the second quarter of 2022. We have a rock-solid balance sheet with $5.2 billion in cash. We now earn around 4.8% interest on our cash versus paying 2.8% interest on our debt. Positive net interest income was $52 million in the second quarter. 2023 outlook. Our full year outlook is now in the range of $2.45 billion to $2.46 billion for revenue, reflecting our adjusted transaction revenue forecast for Ten-X in the second half of the year. Our subscription-based businesses are expected to continue to deliver strong sales and double-digit revenue growth in the second half, and we expect full year revenue growth of 13% at the midpoint of the range for the year. The company expects revenue for the third quarter of 2023 in the range of $622 million to $627 million, representing revenue growth of approximately 12% year-over-year at the midpoint of the range. We're reconfirming our adjusted EBITDA guidance for the year and raising the midpoint of our guidance range. Our revised adjusted EBITDA guidance range is $510 million to $520 million. For the third quarter of 2023, adjusted EBITDA is expected to be in the range of $115 million to $120 million. Well, that does it for me in the financial facts. Let's go back over to our operator, and we can begin the quarterly ritual of question and answers. Back to you, operator. Operator: At this time, I would like to welcome everyone to the question-and-answer session. [Operator Instructions] Your first question comes from the line of George Tong from Goldman Sachs. Your line is now open. George Tong : Your residential network grew significantly in the quarter and is now the second largest in the U.S. Can you discuss how the strong performance in resi traffic influences your residential spending intentions in the second half of the year and heading into 2024? Andy Florance : Sure. Thank you for pointing out, George, that our residential platform is now the second most heavily traffic platform in the United States. I appreciate that. So I think we have a pretty clear plan or strategy for how we plan to continue to grow that traffic and the value of that platform to consumers. I don't think that the success we're having to date is going to take us off of that plan. So we're largely on track with what we've been intending. We want to continue to grow the traffic even more dramatically in order to make sure that we have the best platform for monetizing at the point that we decided to do that. George Tong : Got it. Thank you. Andy Florance : Thank you, George. Operator: Your next question comes from the line of Heather Balsky from Bank of America. Your line is now open. Heather Balsky : Hi, thank you for taking my question. I wanted to ask about LoopNet and the execution challenges, and I hope that wording fits for the business and kind of what you're looking to do to improve the trajectory? And how quickly you think you can reaccelerate the business and see the results from the investments you've made in the sales force? Thanks. Andy Florance : Sure. I thought you were going to ask about our residential portal being number two and moving quickly from number four or five to number two. But I'll take the question you asked. So I'm sorry. So I was thinking that we would begin to turn around the execution performance on LoopNet on Wednesday and Thursday and Friday. And so if you look at Apartments.com, I think a little about a year or so ago, it was growing at 6% year-over-year. Now it's moving towards 24%, 25% year-over-year growth. So these things are -- when they emerge, they're pretty straightforward to troubleshoot and to put them on track. I don't believe this is an issue of demand, I believe this is a simple, relatively simple problem to solve. We actually have a decent sized sales force now, but I think we're just incentivizing the wrong activities and I think we can move it back on track. Now keep in mind, big picture, it wasn't that long ago that we acquired LoopNet, and the revenue was less than our lands business, and now I think it's about $0.25 billion or something. So it's doing quite well. 16% growth is not bad, but I just think it can do better. And it will do better. So nearly immediately. Heather Balsky : That's helpful. Thank you. Operator: Your next question comes from the line of Pete Christiansen from Citi. Your line is now open. Peter Christiansen : Good evening. Thanks for the question. I'm not sure if I heard that right. You guys are number two in that --- Andy Florance : That's right. It's shocking that we have moved up that quickly to become an uncommon of a player. But yeah, that's actually right, Pete. Peter Christiansen : Okay. All right. I just wasn't sure. I want to dig a little bit more into LoopNet, like what you're seeing on both the broker ads and the signature ads and whether or not you feel the value proposition for some of the signature ads is really compelling enough. I was just wondering if you can draw that distinction, help us understand the differences between the two price levels and how you see that hopefully improving in the near future? Andy Florance : Yeah. So again, it's not that it is terrible. 16% year-over-year growth is pretty strong, obviously, in a bad CRE market, which actually should be helping it more. I think it's really -- I remain convinced that it's a no-brainer. When I talked to our experienced successful sales reps, the demand is clear. Their selling contracts that are reaching new high points for those premier signature ads. And if you think about it, if you think about somebody who owns a $1 billion building that has a major leasing risk and has as part of the massive loans coming due in the next couple of years, spending a couple of thousand dollars a month in order to try to raise your profile when the vast majority of tenants are looking for their commercial real estate on LoopNet and CoStar, it's a no-brainer. So I feel very comfortable with that value proposition. But it's just a question of continuing to improve the -- trying to go from 16% to 18% to 20%, still being satisfied with something in the lower teens. Scott Wheeler : And Pete, when we look at the growth in the signature ads, the biggest growing category in signature ads is the diamond listings. And those are the biggest, most expensive ones. They're up over 50% year-over-year by ad count. So that tells us that the demand is clearly there. The large owners and property managers really need those higher-performing ads. And so it's just a matter of getting our sales force back on track to cover the market more effectively. Andy Florance : And Pete, I toured a building the other day that was distressed, brand-new building, beautiful building, the owner stood to stand, they couldn't lease it. They stood to stand, they were going to lose perhaps $80 million. The building was completely vacant and the brokers had not marketed on LoopNet. And it just blows your mind that someone, an owner would potentially lose $80 million for a leasing problem. Vast majority of tenants look for space on LoopNet and the brokers save themselves a couple of hundred bucks. So I think it's a pretty solid value proposition. It should be coming into -- it should be doing better than ever, similar to Apartments.com. Peter Christiansen : Good commentary. Thank you. Operator: Your next question comes from the line of Ryan Tomasello from KBW. Your line is now open. Ryan Tomasello : Hi, everyone. Thanks for taking the questions. I guess, Andy, just reading between the lines and some of your comments around homes, I mean, obviously, the traffic growth continues to come in very strong. I mean should we now be expecting perhaps a bit longer of a time line in terms of when you intend to monetize that platform relative to, I think, the year-end commentary you've given in the past? And on the traffic levels, understanding there's some competitive sensitivity there, but any color you can provide around when we can expect these waves of growth to materialize? And then finally, on the content piece, what any one do you say you're in, in that build out there? Thanks. Andy Florance : Okay. So I would say from the monetization perspective, we anticipate we anticipate significant progress in our efforts in traffic in the first quarter of 2024. First quarter 2024, second quarter 2020 clear significant additional progress. We are -- the rationale for monetizing in the fourth quarter, even though we may be hitting very close to the $50 million monetization level would be to demonstrate proof of monetization ability to you -- the investor representative. But strategically, it might be much wiser to begin to monetize when you expect a second stair step function of growth in 2024 first, second Q. So always try to do the right thing for the investors in the intermediate time period, not the short time period. And maybe one day, we'll do the right thing for investors in the long time period, but the intermediate time period is pretty important. And then where -- what inning are we in on the content, I would say we are in the second inning on content. There's a lot -- I mean, and I will tell you, I'm really pleased with some of the work that's happening, there are things we could do better but the volume of what we're doing is enormous. And I think that what we'll be able to do in the next year or so with that content will be I think, really quite impressive, and I think will be a really compelling value proposition for our platform. Did I forget one of the questions? Scott Wheeler : Pretty good. I think you got a lot in there. Andy Florance : Yeah. So you're right, trying not to disclose strategic things. Anyone else. Are there any other questions? Operator: Your next question comes from the line of Jeff Meuler from Baird. Your line is now open. Jeff Meuler : Yeah, thank you. I want to ask about Homes.com traffic quality. You gave us a metric on return users. I'm assuming that's including on a re-advertised basis where they're clicking back through on another ad. Can you just give us any other Homes.com traffic quality metrics including things like return rates or time spent on site, et cetera, thus far in the markets where you've loaded the proprietary content up in June? Thank you. Andy Florance : For sure. So I won't have -- I will not have significant digit data for you in front of me, but I will tell you that one of the most important things I look for is return traffic direct, so people that typed in Homes.com, and that is up about 400% year-over-year. So we are not -- I'm not focused on who's coming back in off of SCM. I'm focused on who is coming in direct return. And that number is up dramatically, so very happy with that. Secondarily, I'm looking at the lead flow and the lead flow is, I believe, very solid. I believe and I'm not going to disclose any specific numbers, but I believe that we are delivering twice the lead flow of some of the well-known residential platforms in the United States. And I think there is -- I think that's dramatic. I think that's important. And I think the reason why we're delivering twice the lead flow of some of our competitors is really quite simple. We are putting the name, photo, likeness, contact information of the actual listing agent on the listing, so people can reach out and simply contact the person that knows the listing better than anyone else in the world. Competing sites are setting that lead into a call center and often syndicating the lead out to multiple unrelated agents that don't know that listing at all. So consumers are reasonably smart sometimes, and I think they're on to that and we're getting super high-quality traffic to the site and good lead flow. Now remember also, we have a huge engaged group of residential agents who are in our platforms, and they like our message. They like the fact that we are, your listing, your lead. So they're directing a lot of their clients, I believe, into our platform because they prefer what we're doing to alternatives. And again, that's super high quality. So I'm very happy with the quality, and I would just like to double the overall traffic at some point soon. Jeff Meuler : And what impact are you seeing in the markets where you've loaded the proprietary content thus far, in contrast with those were you having yet? Andy Florance : The content is being loaded on a partial level in all markets. So it's not it's not LA being loaded in Boston not being loaded. It's like x percent of Boston, x percent of LA being loaded. I would tell you that at this point, you haven't -- I don't think there's been time enough to see any traffic impact of the content that's been loaded. I think that's out in the future. And in terms of reaction, it have to go more to the anecdotal just that's like having focus groups interviewing consumers and that is very positive. That's very, very positive. I couldn't be happier with that result. Jeff Meuler : Okay. Thanks, Andy. Operator: You next question comes from the line of Alexei Gogolev from JPMorgan. Your line is now open. Alexei Gogolev : Hi, everyone. Andy, great to hear from you. Could I ask you to update us on your vision for the core CoStar products? I remember you talking a lot about penetration of brokerages with more than five brokers. How is that progressing? And could you maybe weigh out some other prospects that you see among owners, lenders and corporation. Andy Florance : Okay. So I was testing my hearing there a little bit. But -- so one of the most -- and one of the most encouraging and exciting things about what's happening in CoStar is the pace of delivery. So as you listen to what we're doing, where we're bringing the corporate user aggregation data, we're doing the fund data, we're doing CoStar Lender. We're doing -- we're bringing in a stream of functionalities. So Elizabeth Winkle, is doing a good job with her brand development team picking up the pace setting every time she adds in the STR integration. Every time we add another modular element to the product we appeal to a broader audience, where we have more relevance to a particular audience we're trying to penetrate more deeply. So I like this new era of CoStar where we're bringing modules out faster and faster and faster, and that will also include adding more international markets to the coverage area. And as we do that, we create more demand. I believe that our CoStar sales team has done a good job responding and shifting to selling to lenders, owners and corporate users. You see that number going way up. So I think that while Paige Forrest and her team at Apartments.com is knocking on the first milestone of $1 billion, I think Marc Swartz and the CoStar sales team won't be that far behind them. And I think the fact that we are in clearly hands down the toughest commercial real estate market ever, and we're showing the kind of growth we're showing is really a testament to the product quality, the value, the research team and the sales work. So it's not an optimal office market. So we're doing pretty darn well. Alexei Gogolev : Thank you, Andy. Operator: Your next question comes from the line of Stephanie Moore from Jefferies. Your line is now open. Stephanie Moore : Hi, good afternoon. Thank you. Andy Florance : Good afternoon. Stephanie Moore : Just touching on the residential side and again, congrats on the great achievements thus far, particularly related to the traffic on the sites themselves. But I kind of wanted to touch on maybe the level of investment spend expectations as we look out over the next 12 or 18 months? I'm just trying to kind of triangulate comments maybe related to your point on being in the second inning of content creation, plans to continue to spend on whether it's personnel? And then also the idea of kind of monetization more so a 1Q 2024 event. So just wanted to get your thoughts on where we are from an investment standpoint. Thanks. Andy Florance : Sure. Well, you're right. As you point out that we achieved rapidly ascended to the second most heavily trafficked sites in the United States. In terms of the content, adding personnel around the content and what we're doing with that, yes, when we produce the product, and we then test it and focus groups, and we test it with consumers and it's not a mockup. It's not PowerPoint, it's like real product, real data, real content and they clearly respond very positively to what we're doing. That leads us to feel very comfortable with the investment we're making in differentiating our product through a number of content strategies. So we would -- and to be clear, what we're doing is massive. One of the things you hear in focus groups is a, I love what they're doing. And then the next comment they say it is, are they really doing this for the whole United States of America? How are they doing that? But it's well worth it. And if you look at CoStar as a product or STR, sometimes our original content is all the differentiation to create a moat around a product. And in an intermediate term, that investment is a relatively modest percentage of revenue but it always looks much bigger when you're in the early phases of making the investment. But if you're concerned about us bringing additional investment into the content area, the focus groups were bad news for you because they love what we're doing. And then in terms of other investments, nothing has really changed. You can see -- you're not seeing any Jeff Goldblums out there for Homes.com at this point. There's no sort of broad consumer marketing occurring. But at some point, obviously, that is a lever you pull. It's an important lever to pull because it impacts SEO and SEM. It makes your SEO more effective, and it also makes you much more competitive in SEM. So the more likely people are to recognize the brand. The more likely they are to click on the SEM and Google serves it up more frequently at a lower cost to us, and you get a good effect there. But our unaided awareness on Apartments.com right now is 49%. The margin and profitability at Apartments.com is phenomenal. The unaided awareness, I got the first read from our unaided awareness is testing group on Homes.com and I'm not going to share it with you because it's so embarrassing. But one day and a couple of years from now, I hope to be reporting a number higher than 50% for Homes.com. So what right now we're doing is we're building a good loyal following of repeat users, but it's sort of all being earned one user experience at a time in the product. Scott Wheeler : And from a financial perspective, we're still confirming our investment levels for the year as we had announced from -- I think in February, we set them out. We haven't changed those financial levels for the year. So all on track there. Stephanie Moore : Great. Thank you. Scott Wheeler : You're welcome. Operator: There are no further questions at this time. We will turn it back to Andy to wrap up. Thank you. Andy Florance : Well, we really appreciate everyone joining us on the call. I hope you noticed that my script was about three minutes less than normal, so that's an improvement. But thank you very much for joining us for the second quarter 2023 earnings call. We look forward to speaking to you again in the third quarter call on October 24, 2023, at 5 p.m. on the same channel. Thank you very much for participating. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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Costar Posts In line Q3, But Stock Plunges 8% on Disappointing Guidance

Costar Group (NASDAQ:CSGP) reported Q3 earnings with an EPS of $0.30 and revenues of $625 million, reflecting a 12% increase year-over-year, aligning with market expectations. However, the company's shares saw a decline of over 8% in pre-market today due to its guidance not meeting anticipated numbers.

For Q4/23, Costar Group predicts an EPS between $0.31-$0.32, while market estimates stand at $0.35. The company also forecasts Q4 revenues to be between $630-$635M, whereas market consensus is at $644.5M.

For the entire year, Costar Group's anticipated EPS is between $1.21-$1.22, against the market expectation of $1.24. The company expects its annual revenues to lie between $2.445-$2.45 billion, slightly short of the market's prediction of $2.461B.

What to Expect From CoStar’s Upcoming Q2 Earnings?

RBC Capital analysts provided their outlook on CoStar Group (NASDAQ:CSGP) ahead of the company’s Q2/23 earnings, scheduled to be reported on July 25.

The company’s stock rallied around 30% in the second quarter due to a combination of improved fundamentals (CRE weakness offset by triple-digit bookings growth in Apartment.com and LoopNet) and technical (index reclassification and rebalancing).

In Q1, bookings grew 17% year-over-year. The analysts anticipate mid-teens growth in Q2/23, driven by Apartment.com and LoopNet, despite weakness in the CoStar suite. The analysts expect Q2 results and Q3 guidance to align with the Street estimates, and the company to reiterate its full 2023-year guidance. The analysts raised their price target on the stock to $95 from $85 while maintaining their Outperform rating.

CoStar Group’s Fiscal 2023 Outlook

RBC Capital shared its outlook on CoStar Group, Inc. (NASDAQ:CSGP) for fiscal 2023, expecting revenue and EBITDA guidance to be in line with the Street estimates but EPS is likely to come in above the expectations.

According to the analyst, the company should deliver modest 2023 margin expansion as incremental residential investment, namely in content, technology, and Sales & Marketing expenses, is more than offset by operating leverage.

Defensive CoStar (Suite) and continued recovery in counter-cyclical Multifamily, where the analysts model a return to 20% growth by Q4/23, bode well for sustained 2023 revenue growth.

CoStar Group’s Upcoming Q3 Earnings Preview

RBC Capital analysts provided their outlook on CoStar Group, Inc. (NASDAQ:CSGP) ahead of upcoming Q3 results, and raised their price target to $85 from $80, while maintaining their outperform rating.

The analysts expect a modest Q3/22 beat and guidance raise by the magnitude of the beat and look for any incremental color around 2023 investments. In addition, recent vacancy and rent data imply a continued recovery in Multifamily, and the analysts see the potential for a return to over 20% growth in the mid-term given the large penetration opportunity.

The analysts believe the defensive business model, strong pricing power, and counter-cyclical multifamily business should provide support to the stock in a volatile tape.

CoStar Group's Upcoming Q2 Earnings Preview

Analysts at RBC Capital released their outlook on CoStar Group, Inc. (NASDAQ:CSGP) ahead of the company’s upcoming Q2 earnings report on July 26, expecting a modest beat and guidance reiteration.

According to the analysts, Q2 could largely be a non-event, as investors are focused on longer-term residential strategy/investment as well as the continued Multifamily recovery, salesforce ramp, and sustainability of CoStar (Suite) growth.

CoStar growth is expected to accelerate to around 17% year-over-year in Q2, driven by upgrading customers to the full CoStar product offering and strong bookings growth. Although economic slowdown could potentially weigh on revenue growth, the analysts believe the impact will be delayed by the pricing increases and subscription-based revenue model.

CoStar Group's Q1 Outlook

Analysts RBC Capital provided their outlook on CoStar Group, Inc. (NASDAQ:CSGP) ahead of the company’s Q1 results, mentioning that residential strategy/investments, Apartments.com turnaround in H2/22, and hiring and ramping up of the salesforce continue to be key areas of focus.

Accordingly, the Q1/22 results, where the analysts expect a modest beat and the company to reiterate guidance, could potentially be a non-event. The March 9th Sell-side Analyst Day provided insights into the residential strategy; however, monetization won't happen till late 2023/early 2024.

Lastly, the analysts monitor the potential impact to high valuation stocks in the rising rate environment, however, a subscription-based revenue model with strong pricing increases in CoStar and Apartments.com bodes well with concerns around an economic slowdown.