Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Costar third quarter financial results Conference call. At this time, everyone. Joining by phone is in a listen only or muted mode. And then later, we will conduct a question answer session instructions will be given at that time.
If you should require assistance during the call you May Press Star then zero on your phone keep had as a reminder, the conference is being recorded all now turn the conference over to our host Mr. Rich Simonelli Investor Relations. Please go ahead.
Thank you operator, and welcome to Costar group's third quarter 2019 conference call everyone before I turn the call over to Andy Florence, Costar, CEO , and founder and Scott Wheeler, our CFO I'd like to share some important facts certain portions of our discussion today may contain forward looking statements, which involve many risks <unk>.
In tease that could cause actual results to differ material materially for such statements important factors that could cause actual results could differ include but are not limited to those stated today in Costar group's October 22nd 20, It I'd seen press release that our third quarter results and the company's outlook and then costars filings with the FCC, including arm.
Most recent annual report on Form 10-K , or subsequent quarterly reports on Form 10-Q under the heading risk factors. All forward looking statements are based on information available Costar in the state of this call Costar assumes no obligation to update these statements whether as a result of new information future events or otherwise [laughter] reconciliation to the.
The most directly comparable GAAP measure to the non-GAAP financial measures discussed on this call, including non-GAAP net income EBITDA adjusted EBITDA on forward looking non-GAAP guidance are shown in detail in our press release issued today along with definitions for these terms.
They can also be sound in the on the press release on our website, which is located at Costar group Dot com.
As a reminder, todays conference call is being broadcast live and then color on our Investor Relations website. So please refer to todays press release on how to access the replay of this call.
Remember one question and if we have time permitting will re queue, but I'll now turn the call over to Andy for its Andy.
Thank you rich that was extremely well done thank you.
Thank you for joining us for Costar group's third quarter 2019 earnings call.
Sure groups total revenue was 353 million in the third quarter 2019, an increase of 15% year over year.
During the second quarter 2019, Costar suite revenues move through the 600 million annualized run rate Mark.
In the third quarter apartments Dot com moved past, the 500 million annualized run rate Mark and did so with a 20% year over year gross.
This is outstanding sustained growth considering where in the six years of a six year voting apartments dot com.
Well, we expect there's much more to come multifamily is a huge opportunity we estimate the total addressable market multifamily is somewhere between eight and 10 billion. This is four to five times bigger than we initially estimated the multifamily opportunity was when we entered the space in 2014.
Net income for the third quarter 2019 was 79 million an increase of 34% over net income of 59 million for the third quarter of 18.
Even though was very strong fifth third quarter of 19 coming in at a 113 million an increase of 24% versus EBITDA of 91 million for the third quarter of 2018.
Adjusted EBITDA margin moved to 37% and we achieved 80% gross margin in the third quarter.
Our balance sheet remains strong and we expect to have over 1 billion in cash at year end and no debt even after the closing of the STR acquisition earlier today.
We continue to show strong growth and profitability, while we continue to invest in the future growth of the company.
I'm delighted with our ability to consistently deliver on both fronts.
There's a massive opportunity in both the United States and abroad and information analytics in marketing for commercial real estate.
While I'm pleased that we're approaching a 1.4 billion revenue in 2020, we believe there billions of dollars of opportunity not yet realized so can change the investment is optimal.
We had another excellent sales quarter generating 50 million in company wide net bookings and increased 27% year over year in the third quarter.
Our average net new sales or 52.5 million per quarter year to date in 2019 is 32% higher than the comparable period in 2018, when they average net new sales per quarter was 39.8 million.
On the multifamily side of the business the larger Salesforce. We deployed in 2018 has delivered in a big way in fact, both Costar suite and apartments dotcom sales team each achieved more than 30% growth in net new sales and the third quarter 2019 compared to the third quarter of last year.
I'm optimistic that our sales levels will continue to be strong for the remainder of 2019 and can improve in 2020 as we are proactively increasing the size of our salesforce offering new products and services and continued to grow share in our huge addressable market.
We now have 280 field sales reps in production for Costar suite, and Loopnet and we look to add.
Enter 2020 with about 300 in the third quarter at 22019, we identified and distributor list of 17000 Siri owners, a strong sales leads to our salesforce.
Each rep has a target on our list we had been aggressively preparing ourselves for us to target and so honors both loopnet signature listings and more Costar suite.
I'm pleased to announce that we've closed on the acquisition today of STR for 450 million.
Founded 1985, the STR team has created the global industry, leading benchmarks and analytics that are the primary information tools hotel management investors rely on to monitor and optimize their assets. It provides the foundation for daily hotel and lodging pricing strategies.
This is an extraordinary company, that's a valuable partner with the hotel industry.
Ultimately the cash flow intelligence STR provides is the fundamental value driver and the three trillion dollar hospitality sector of commercial real estate.
The industry needs information to effectively developed finance appraise and transact hospitality properties, we are bringing together the leading provider of commercial real estate information analytics and online marketplaces, where the gold standard global hospitality industry for premium performance benchmarking and revenue forecasts.
We're excited to add this world leader has extended the depth and reach of our comprehensive Costar platform.
STR aggregates data from over 65000 hotels worldwide, representing 9 million Guestrooms and over 180 countries.
Tells electronically submit the revenue occupancy data STR on a weekly basis.
Costar currently provides building information on 80000 hotels 45000 hotel sales comparable and 4500 hotels currently offered for sale, we plan to integrate the STR data with Costar occurred to create exciting new products that provide hotel building data aggregate incoming occupancy information.
Sales comps for the for sale information.
STR has expanded our global footprint Costar now has over 4400 employees in 19 countries with over 600 working outside the United States.
For the first time Costar now has staff in Singapore, Australia, China, Colombia, Brazil, you a ended in Asia, Italy, India, South Africa and Japan.
Just imagine that air miles.
[noise] Smith travel brings an unrivaled reputation within the global hospitality industry for their data integrity reliability and strict confidentiality.
And we look forward to contained to build on those core values in the next chapter Smith travel is growth.
Costar has extensive experience segregating and protecting highly confidential client information such an accounting data leases and lease abstractions major deals in progress payroll data insensitive banking data.
Integration of STR to the Costar product will maintain absolute confidentiality, while also allowing property owners investors and service providers in the hospitality sector, a more holistic aggregated view of the industry at market levels.
I've already has a chance to meet with the STR team in London, It's a great group and Tomorrow I will be in Henderson build Tennessee to welcome hundreds of new employees to the Costar team.
Looking forward to working with their outstanding management team, including Amanda height, CEO , Hello, Amanda Elizabeth Winkle, Chief strategy Officer, Robert Rosman, managing director and many other strong leaders as just to get there.
We believe that combining STR superior hospitality service offering combined with the Costar platforms will benefit all industry participants as we work together to create a valuable new.
And improved tools.
I'm very pleased to report that one of the world's leading property companies JLL has renewed its contract with Costar with a five year deal and a two year renewal option.
As you know JLL recently completed its acquisition of HFSA.
Our contracts for the combined entity as large the two firms were paying individually since now all the brokers at JLL will add access to the national Costar suite data and analytics, we saw similar phenomenon granolas combined with numerous knight Frank confirm that consolidation sorry can be beneficial to costar revenues, particularly.
When they can buy that expands our access to Costar services.
Well update you on Loopnet, and where we are with that.
Office buildings for lease have historically been under marketed from broker to broker via print brochures or email brochures and owner seeking to lease up their building what higher broker would then distribute a few hundred flyers other local brokers announcing their brokers availability.
The landlord sprecher will generally a fix assigned to the building announced in the space offered for lease but that will only reach prospects who are already at the building.
Given that some of these leases can be worth more than 150 million. This strikes me as a primitive way to market space.
It's understandable and historical offline context is there a severe limits or the methods available to market office space. There can be tens of thousands of task within five miles of a typical office building availability with hundreds of thousands of potential decision Influencers. Additionally, 20% to 40% of 10 searching for space in a market.
Our coming from outside that I must say the size distribution and changing name for it nature of the prospects have made it impossible for owners to build effective direct mail or email marketing less.
Running national TV radio newspaper campaigns for years. So it takes to Lisa property is prohibitively expensive.
NC industry has relied on marketing through a double middle man model.
On 150 million dollar leasing under my pay 9 million in commission 7 million in free rent concessions in 14 million tenant improvements for a total marketing cost of 30 million.
Even after investing that much money, we estimate that office owners lose approximately 40 billion annually to access vacancy.
Smaller tenants occupying about 35% of the U.S. office space. So most owners cannot pay a mortgage without them.
Yeah Commission brokers or less motivated to pursue small deals therefore owners relying on the double broker model face greater challenges marketing to small tenants.
While we work has not been a complete success.
One of its growth drivers has been that is me in the massive unmet need for connecting smaller tenants to space.
The Internet has created transformative opportunities to market commercial real estate online and lives as fortunate to be at ground zero for that opportunity.
Net adds related sites are now generating 6.6 million unique visitors per month as reported by Google analytics.
This is a 16% year over year increase.
No other Sherry marketplace comes close to live net.
No. Other Sherri website comes close to Loopnet. According to hit Wise lived that has almost 2000 per cent more traffic. The seven second most heavily trafficked website, we worked dotcom.
The 22000 series keywords, we prioritize Loopnet holds the number one FCO position on Google 86% of the time.
The fact is that today millions of times look for office space online, we believe that that loop and as the most effective way to market commercial space today, because it offers unprecedented reach strong frequency and elevates the properties brand.
We know live nets effective marketing because tens of thousands of brokers pay them Aravinda listings on loopnet in order to reach tests and users. We believe we can significantly expanded properties reach frequency in branding by sorry, if the top of Loopnet and Costar just as we do in apartments dotcom. This increases the ads size content and by repeating across.
Our websites and it's growing that reach and frequency.
We call the signature ads and we already can see they work by tracing IP addresses we can see major tenants viewing signature ads on loop that follow later by their brokers view in the same adds or content and Costar and then we see the tenants lease space in the property, we believe that the tenet originally founded on Loopnet.
We see specific deals in the range of half a million feet. So we see some huge deals this way.
The owners of an office building have a much greater stake in economics than their broker surf focusing our sales force on sign these ads to owners directly in harmony with the brokers at price points above 2500 a month.
We have recently put in place more training incentives to drive sales to this goal we have made great strides in improving the web site over the past year to better fit our clients brand and goals. We have created richer content on signature listings, including photography reviews buyers and graphics.
The signature as can have a hugely positive impact on marketing of building for as little as a few cents to a few times per square foot when the honor could already be investing $100 a foot in traditional cost and methods to lease up their space. So we're talking a point or two.
On the additional cost to make the program more effective.
We believe that marketing commercial real estate online will be a multibillion dollar opportunity and that Costar group is well positioned to capture a major share of that opportunity. We expect that loosen that will be a significant contributor to our 2020 sales growth.
Turning to apartments dotcom.
Farmers Dot com is doing very well apartments revenues up 20% year over year net sales are up 30% year over year and power profit contribution has been growing rapidly as we continue to grow revenue.
In July and August the apartment stock comp network reached an all time high and unique visitors according to Comscore.
We had nearly 60 million visits in August 2019, and increase of 8 million over August 2018.
The apartments Dot Com network continues to pull further away from the competition by growing unique visits visitors, 10% year over year to 18.9 million in September as reported by Comscore at the same time Rentpath saw a decrease of 4% in the same period.
Our network had more than nine times, a number of visits that apartment less Tad and 2.6 times the visits that rentpath hat the harvest Dot Com network had more visitors ended the zillow rental network.
We've just begun beta testing apartments, dotcom digital tenant screening lease documents and rent payment system.
Our first two markets are Santa Monica Atlanta.
It's only been a two week so it's still very early but the initial reaction exceeds our expectations.
36% other landlords, who entered a listing on apartments dot com and the test period elected to use our digital leasing tools really happy with that number.
We've already forgotten processing applications screening renters and executing leases in collecting rent payments.
Some of the owner and comments have included.
It shows me the level of overall quality this specific tenet, especially compared to other potential tenants in terms of reliability trustworthiness responsible et cetera.
Another honor said.
It was more thorough than what I was expecting another said I felt it was user friendly and takes a holistic approach. It covered every deal till we needed and was quick and easy to use for both myself and my potential tenants finally, and other under said very easy in fast.
Some of the renter comments early quite simple.
One application it was much easier than expected. Another one it was extremely simple and felt secure submitting my information and finally it was fairly easy I think it's good that the comments are so short.
We expect to continue rolling out the tools throughout the rest of the year and into next year.
There are hundreds and thousands of midsize and smaller apartment communities that were now successfully selling due.
To fully capture this opportunity we're significantly expanding our apartment sales force by building 100, plus person team enrichment focused on this middle market opportunity.
I had a chance to meet with the first steam a 17 reps and managers last week.
It's a very promising highly motivated group with excellent support from our Richmond technical and administrative infrastructure.
I'm very excited about the growth prospects are they expand salesforce can deliver going forward.
During last quarters earnings call.
We reported that we thought we could provide our advertisers with more value enhance our competitive advantage and generate a good ROI with more aggressive marketing investment behind departments dotcom.
On our last earnings call call, we announced that we're increasing our marketing spend for the second half a 2019 by 10 million.
We did that and we.
Increased investment in the third quarter alone.
We have analyzed the results and we've achieved our desired outcomes.
Beginning in August we roughly doubled our investment in certain categories of Google keywords, and not surprisingly, we more than doubled we more than doubled our apartment rental click share compared to other top internet listing services.
Moving from 32% click share to 67% click share according to hit wise.
During the same time period rent path click share plunged from 35% to 17%.
Rentpath had been making up four week FCO by buying FCM traffic during the trial Redpath moved from having more click share that apartments dotcom to having one fourth of apartment dot coms clip share.
Urban list had 24% of click share before we began and their share dropped in half to 12%.
We've also increased the number of times, we were in the number one position in Google by nearly 600%.
During the trial, we appeared that top for Google SCM positions, 95% of the time in our targeted neighborhoods.
Given the success the trial.
The only humane thing to do is to immediately suspend the trials and widely deployed the increased investment to help millions of additional renters find a great apartment soon.
I think meet channeling Brad elsewhere.
We plan to continue to sustain an elevated level of at Sam spending in the fourth quarter.
By the ended the year, we will have increased our assay m. spend by a total of 20 million in 2019 over our initial budget at the beginning of the year.
We acquired apartments in 2014 and since that we've grown we've grown profitable revenue organically in acquisitive Lee.
We expect achieve a five year compound annual growth rate of 38% based on our 2019 forecast.
Grown from serving just over 17000 apartment communities to serving well over 50000 facts about 52000.
And industry that has historically only monetize larger come art apartment communities were very successfully selling marketing solutions to large medium small communities and even single family rentals of which there are tens of millions.
That shows this is a massive massive opportunity we're clearly in the lead position in the industry, we absolutely want across a billion dollars in revenue that apartment dot com soon and go well under the billions of dollars or revenue.
Ultimately, we would like to generate a 1 billion plus EBITDA from the apartment sector alone.
In 2015, we shut our commitment to the industry with an unprecedented hundred million dollar investment into marketing apartments stock onto the 100 million plus writers in the U.S.
It was not initially very popular with everybody, but it clearly worked it helped us grow our revenue from 85 million to 500 million.
And the third quarter. This year, we've tested a more aggressive marketing investment and we like the returns.
As we move into 2020, we plan to take apartments dotcom to the next level again.
We expect to increase our investment in marketing from approximately 150 million in 2019.
To 250 million in 2020.
That's a 100 million dollar incremental increase in our marketing spent this will bring our 2020 margin down but we believe in the future. This investment will drive our revenue and margin.
Well beyond the investment were making in 2020 .
Our 250 million 2020 apartments Dot com marketing budget is expected consist of much more aggressive search engine marketing.
More aggressive TV and digital video marketing with a goal is moving our unaided awareness for the 26% to 33% range to the 50% plus unaided awareness range.
We also plan to invest in marketing programs to support our digital Leashing and leasing initiatives.
Make hay, while the Sun a shining.
Scientists shining brightly and we intend to make a spectacular amount of today.
Have a legal update for you [noise].
On.
Onyx Alogent, if you remember that.
Costar shareholders have invested billions of dollars to enable costar group to build and acquire robust information systems and marketplaces.
That our invaluable to the commercial real estate industry.
Costars ability to protect its intellectual property for misappropriation is a critical factor in our success.
Over the course of those last several years.
Belgian as former officers and directors instructed contractors and employees to circumvent our security systems protecting Costar group's websites in order to steel in an enormous volume of intellectual property from Costar group.
They repackaged in sold that content as they are on.
This represented.
This represented.
A fundamental threat to Costar group when we had this stop it.
We relied on the protections of the U.S. copyright law in terms and used for websites among other legal tools.
We sued accelerating their contractors as I smoke screening celgene complain to the FTC and countersued complaining anti competitive behavior.
Faced with an iron clad case against acceleration for massive copyright infringement in November 2017, Axogens parent company DMG T. Rowe times investment accelerant to zero.
After losing somewhere around 150 million investments like Cellengine.
Accelerate it was bankrupt.
On the day Dmgt announced the write down and loss of 150 million in share suffered a 23% drop hitting a five year low.
Do not believe that damn GT was aware of the OLED scale of the illicit things that accelerant was doing.
DMG. He was just a string of investors an acceleration over the course of the 20 plus years that lost millions tens of millions or $100 million.
We welcome Dan investigation, including an audit authorized by the Federal Trade Commission determine whether costar content was improperly add to excel engine systems or vice versa.
The massive investigation led by the FTC approved monitor conclude that acceleration in properly derived.
Took nearly 38500 images from costars database.
We believe this is a complete vindication of costars allegation of excellence unlawful activity.
The department of Justice appointed trustee to manage the now bank craft a state of accelerant.
After the results of the FTC monitors investigation, along with our other overwhelming evidence of willful copyright infringement perpetrated by Cellengine under as CEO , Doug Curry.
The trustee has agreed to the entry of a judgment of $500 million against sticks Allergan in favor of Costar group for copyright infringement.
This 500 million dollar judgment would be the largest copyrighted image judgment history, and the third largest copyright judgment of any kind.
The judgment is awaiting approval of the bankruptcy court overseeing accelerations bankruptcy and the court overseeing costar copyright suit.
Because acceleration is bankrupt and virtually without sellable assets. The total amount costar recover under the judgment is only 10.75 million, which will be paid to us by accelerants insurers.
Of course, I never put the word only in front of 10.75.
The trustee has also agreed that accelerations countersuit against Costar would be dismissed with prejudice.
In connection with Axcelis agents massive illegal operation the directors and executive as of avian accelerants foreign contractor in the Philippines have been charged and indicted on cyber crime charges brought by the Philippine prosecutors and its papers the Philippines Deo Jason.
They did that avian acted in concert with Accelerant management to commit the classic example of computer crime.
And final judgement entered in in India in court in favour of Costar accelerations. Other foreign contractor Maxwell say that was misled by Axcelis generics executives and managers, including Accelerants CEO , Doug Curry, who personally visited the operation India to supervise their work infringing costars copyrights.
Surely after accelerations bankruptcy that create started another competitive sherri information business called Intrepid that failed within a few weeks of launch.
Apparently after that Doug has started another sea area and permission business with several million dollars a funding from Moodys company you may have hurt if.
The scale of accelerants copyright infringement is unprecedented.
That's sort of a history marker and Costar group is very grateful for the Therell efforts of the FTC appointed monitor and completing the massive audit of the copyright violations.
I believe our investors will give us credit for aggressively defending their investment in costar against intellectual property theft, we have ultimately achieve favorable findings are judgments in this defense in federal court in the U.S. coming up on two in Federal Court in court in India before the Philippines Department of Justice for me U.S. Department of Justice appointed.
Trustee and a monitor appointed by the Federal Trade Commission, which sums up to five wins in zero loss isn't a pretty challenging case.
A special thanks to our trial attorney Nick oil had a fantastic job in the entire teams at Williams and Connelly.
Quick look at the commercial estate economy, despite growing concerns around the economic outlook commercial real estate activity continues to post strong totals for leasing and investment volume.
We believe this is justified given the sector sound fundamentals.
They can see remains in or vacancy rates remained near historic lows across all sectors and supplies generally limited.
And the recent drop in Treasury yields makes returns on commercial real estate multifamily real estate all the more compelling.
Investors May also view real estate as a defensive investment as trends in capital market and economic indicators have increased the probability of a near term slowdown in particularly we know disruptions and trade falling manufacturing output in business investments slowing demographic growth. Despite these headlines however, GDP growth and job gains have.
Yet to show any meaningful slowdown and continued support demand for commercial and multifamily real estate.
The property markets apartment rent growth once again top 3% nationally.
We believe the on growing healthily apartment sector. It relates the broad and growing shortage of housing in the United States in particular in into the sufficient supply of new for sale housing units has limited home buying and led to the unprecedented level of apartment demand.
In response this demand apartment construction has risen to levels not seen since 19 eighties Costar track just over 300000 units delivered over the past 12 months.
And we're tracking about 650000 apartment units currently under construction.
The large majority of these developers rely on the apartments dot com advertising platform to market those units.
Investors continue to favor us multifamily assets investment this sector set a third quarter record this year topping $40 billion.
In the office sector leasing has consistently set new records. Despite single digit vacancy rates had limited supply.
Large tech firms have driven the demand as they expand beyond their bay area in Seattle footprints rank growth. However has trying to just around 3% well below typical gains in the past periods of expansion.
Unlike past expansions, our supplies limited at less than 2% of kind of current inventory and concentrate a handful of markets.
New York also stands out with 25 million square feet under way.
We work Unfortunately will.
Leave New York, a little bit vulnerable since they're heavily concentrated New York.
But we don't think it's a big issue.
We believe that measured rank gains and low supply risk in the office sector help insulate the market from potential economic reversal and our base case forecast calls for steady rankings and industrial sector ongoing changes in how consumers shop contended generate record levels of demand for industrial space. Despite they consider it's around 5%.
Developers have responded a record amount of industrial spaces under construction, but rank growth contains posted gains of about 5% year over year. The best among major property types investment the sectors on pace to set another record.
Disruptions to trade pose some rest of the sector, but we expect fast growing demand for local distribution space to provide same delivered same day delivery goods will help offset any slowdown.
In the retail sector negative headlines around store closings ecommerce obscure the sector superb fundamentals, we estimate retail vacancies are below 5% the lowest across the property types and construction underway amounts to less than 1% of current stock.
Sure just space has resulted in low leasing absorption levels, but demand for retail space from grocers discounters fitness clubs and experience or retail is off say move outs from department stores and big box retailers.
We expect a record levels of activity in commercial in multifamily real estate continue we expect the demand for Costar group's products and service to grow as we help honors lenders brokers and investors property managers make quality choices and realize successful outcomes and any economic environment.
We can generate we continue to generate strong momentum in 2019 and make important investments I'm extremely excited about the rest of the areas. We continue to execute our long term vision with a great company.
This point I will turn the call over to our CFO , Scott Wheeler and he'll give you more detailed our earnings and our planned investments.
Thank you Andy well said.
Thank you laid in seemed like we took a break this summer.
Third quarter, delivering another great financial outcome, while initiating and closing our acquisition of SGR took less than 12 week.
But who's counting.
Hey work.
Well any mentioned the number of highlights our third quarter results.
Including our second consecutive quarter of net new bookings of 50 million or more.
We also had strong double digit revenue growth, 50% year over year.
Which by the way is 10 straight quarters of revenue growth of 15% or more.
And probably you EBITDA lovers out there another fund fact over the trailing four quarters.
We amassed over $500 million in adjusted EBITDA, that's one half a billion.
Certainly significant achievements for all of Us your Costar.
So starting off with revenue, which came in above the midpoint of our guidance range for the third quarter at 15%.
And for the year, we expect consolidated revenue growth of approximately 16% to 17%.
Looking at revenue performance is by services Costar suite revenue growth was 12% the third quarter versus the third quarter of 2018.
Revenue growth rate for Costar suite is expected to be approximately 13% for the full year of 2019.
Revenue in our information services sector grew 11% year over year in the third quarter of 29 came primarily as a result of Costar real estate manager revenue growth of 19% year over year.
As we get further pass the lease accounting standard adoption dates real estate manager results include subscription revenue growth of 44% year over year in the third quarter and a 20% drop in onetime implementation revenues.
We expect information services revenue to grow at a rate of 20% to 21% on a year over year basis and 29 team.
Which includes approximately $3 million to $4 million of STR revenue.
More on our STR outlook, a little later in the call.
Multifamily revenue growth for the third quarter remained strong at 20% over the third quarter 2018.
The full year 2019 revenue growth for multifamily is expected in the 20% to 21% range.
Commercial property inland revenue grew 17% year over year in the third quarter of 2019.
Our loopnet marketplace, which represents approximately 75% of the revenue in the commercial property in land sector.
And continued strong growth numbers, even as we reposition loopnet premium advertising solution for property owners.
There's a lot of work going on behind the scenes to implement our plans for loop that as Andy mentioned.
This includes discontinuation of certain legacy products and contracts that are not aligned with our strategy.
Excluding these one time impacts of discontinued products and contracts the third quarter revenue growth rate up loop net would have been over 20%.
We expect year over year organic growth in the commercial property in land sector to be about 16% for the full year of 2019.
Looking forward to stronger growth rates from loop net as we continue to build that sector of our company.
Our gross margins came in at 80% in the third quarter of 2019 slightly increasing from 79% gross margins, we achieved in the second quarter of 2019.
So as a result of strong cost leverage.
Our revenues increased 9 million in the third quarter of 2019 compared to the second quarter 2019, but our cost of revenues remained relatively unchanged sequentially.
We now expect overall gross margins of approximately 79% to 80% for the full year 2019.
Operating expenses of $187 million for the third quarter 2019 were slightly below our estimates and down from the $197 million in the second quarter of 29 team.
As a result of seasonally slower marketing spend in the third quarter.
As mentioned during our last financial update in July we increased our planned levels and marketing spend in the third quarter, which we expect to continue through the end of the year.
Our third quarter adjusted EBITDA of 129 million represented 18% increase compared to adjusted EBITDA of $110 million. The third quarter 2018 was approximately $2 million above the top end of our guidance range.
Severable personnel expenses were the main reason for the positive variance.
The resulting adjusted EBITDA margin of 37% is 80 basis points above the 36% margin we achieved the third quarter of 2018.
Net income for the third quarter of 2019 was $79 million increase of 34% or $20 million compared to the Q3 of 2018.
Our effective tax rate in the quarter was 21%, reflecting benefits associated with our share based payment transactions and R&D credits.
non-GAAP net income for the third quarter increased 21% to 96 million compared to Q3 2018 or $2.61 per diluted share includes adjustments for stock based compensation acquisition expenses, some restructuring costs associated with the organizational changes in apartments dot com and resources.
Just last quarter.
non-GAAP net income for Q3 assumes a tax rate of 25%, which does not include other discrete tax adjustments.
Cash investment balances were approximately 1.4 billion as of September Thirtyth 2019 up approximately 91 million since last quarter.
And as you know we closed on the STR acquisition today, So we expect our cash balance to be approximately $1 billion.
And around that at the end of 2019.
Now, let's take a look at some of our performance metrics for the quarter.
We had another strong bookings quarter net new sales of $50 million, an increase of 27% year over year for the third quarter.
The sequential decline from the $59 million of bookings in the second quarter as a result of seasonal sales patterns, primarily in our online marketplace businesses.
At the end of the third quarter, our Salesforce totaled approximately 820 people up about 40 people from last quarter and up almost 90 people from the third quarter of 2018.
Most of this growth is in our commercial real estate sales team, which is focused on selling costar loopnet.
We expect to continue growing the commercial real estate salesforce during the remainder of this year along with the ramp up of our Midmarket sales team in apartments Dot com.
We anticipate our sales team will grow to an approximate range of 880 to 890 by the end of 2019.
The renewal rate on annual contracts for the third quarter 2019 was in line with the rate achieved in the second quarter of 2019 at 90%.
The renewal rate for the quarter for customers, who have been subscribers for five years or longer was 95% also in line with the renewal rate of 95% in the second quarter of 2019.
Subscription revenue on annual contracts now accounts for 82% of our revenue in the third quarter up from 80%. This time last year.
On flat compared to last quarter.
I'll now discuss our outlook for the full year and the fourth quarter of 29 team beginning with the outlook for the STR acquisition.
We expected STR will contribute between $3 million to $4 million in revenue in the fourth quarter of 2019.
Our revenue estimate is impacted by the negative accounting effect of deferred revenue that was on SCR is books of the type of acquisition.
STR as deferred revenue balances are quite significant relative to other acquisitions, we've completed in the recent past.
This is because STR billed and collected the full year amount for annual subscriptions in the first quarter of the calendar year.
This is a practice I am, particularly quite fonda, but it does reduce the accounting revenue post acquisition.
Similarly, our estimate of adjusted EBITDA for STR in the fourth quarter is negatively impacted by the accounting adjustments for deferred revenue.
It's all the impact of integration costs.
We expect a negative impact to adjusted EBITDA of approximately $5 million to $6 million in the fourth quarter.
As a result of the acquisition.
These estimated impact to revenue adjusted EBITDA from the acquisition of STR are included in the revised outlook for 2019.
As we look towards 2020 the results for STR will continue to be affected by the negative accounting adjustments for deferred revenue.
For example, the current annual revenue run rate for STR, approximately $64 million would be reduced by an estimated $10 million of deferred revenue that carries over to 2020.
This would result in a revenue outlook of approximately $55 million for STR in 2020, before any anticipated growth or integration changes.
Similarly, the deferred revenue effects in 2020 flow through to the EBITDA for STR.
Well need time to develop a detailed plan for STR and the integration in 2020, but at this stage, we expect the acquisition to become accretive in the second half of the year and contribute positive EBITDA for 2020.
Of course these are all accounting results for STR Woods in no way impact the economic attractiveness of combining costar and STR, which we've discussed previously.
We continue to expect as we said in the press release for the acquisition. It within the next three to four years, our investments in new products and are focused on growth of the combined businesses will generate annual revenue growth above 20%.
Is approximately two times STR its current growth rate and.
And profit margins in line with Costars long term goal of 40% plus adjusted EBITDA margins by 2023.
Now I'll discuss the combined outlook for the company.
We're raising our revenue outlook slightly to 1.385 billion to 1.391 billion for the full year of 29 team to include the estimated revenue from the STR acquisition.
Outlook reflects revenue growth for the year between 16 and 17%.
We expect revenue for the fourth quarter of 2019 in the range of 360 million to 366 million representing topline growth in a range of 14% to 16% for the quarter versus Q4 2018.
We expect adjusted EBITDA to be in a range of 494 million to 500 million for the full year 2019, which is relatively unchanged from our previous guidance, except for the inclusion of the estimated STR results mentioned previously.
We expect full year adjusted EBITDA growth of approximately 19% year over year with an adjusted EBITDA margin for the year of approximately 36%.
Up approximately 70 basis points at the midpoint of the range compared to 2018.
Despite the negative short term impacts of the STR acquisition.
For the fourth quarter 2019, we expect adjusted EBITDA on a range of 129 million to 135 million.
Included in our outlook for fourth quarter adjusted EBITDAR, the impacts of the STR acquisition, along with the increased level of marketing spend for apartments Dot com.
As any discussed we've seen outstanding results from the increased spend levels and expect to continue investing apartments dotcom marketing at a higher level.
The net result, the fourth quarter F., considering other cost offsets as an incremental spend of approximately five to 6 million the fourth quarter 2019.
In terms of earnings we expect full year non-GAAP net income per diluted share of $9.90 to $10.02.
Based on 36.6 million shares.
For the fourth quarter of 2019, we expect non-GAAP net income per diluted share the range of $2.52 to $2.64 based on 36.7 million shares.
Looking ahead, we believe that 2020 is the right time to increase our investment in marketing to rapidly expand our multifamily business.
Although it's too early to provide detailed guidance for 2020, we expect overall adjusted EBITDA margins to decline by approximately 400 basis points in 2020 from the adjusted EBITDA margin outlook for 2019.
In dollar terms, we would need to generate approximately $65 million of incremental profit to recover those 400 basis points.
To put that in perspective in 2019, we expect to add approximately $80 million of adjusted EBITDA.
We believe the by increasing our marketing investment in 2020 the results in the form of increased revenue growth will improve our ability to reach our long term goal of $3 billion run rate revenue and 40% plus adjusted EBITDA margins in 20 to 23.
I'd like to add additional financial perspective to this investment which is similar in size to the initial marketing investment we made but we launched apartments dot com back in 2015.
As many of you may recall after we bought apartment stock comp, we placed a big bet by investing $100 million in marketing.
Go after what we believed at the time was a 2 billion dollar addressable market opportunity.
Looking back now it's hard to argue with the results which indicate that this battle is clearly paid off.
Since we last apartments dot com, our multifamily revenues have grown from 160 million in 2015 to almost $500 million in 2019, an increase of 310%.
During that same period, our annual apartments marketing spend has grown from $130 million in 2015 to only 150 million in 2019.
It's an increase of only 15% in total over four years.
So revenue has grown 20 times faster than the marketing spend I.
I think thats pretty good leverage although some might argue that we've actually under invested in marketing as we've grown this business.
This year as opposed to 2015 were at a much stronger position increased marketing spend both operationally and financial financially than ever before which increases our chance for even greater success.
Our direct Salesforce is much larger and continues to deliver record sales levels each year. Our site traffic leads the industry. Our data content is massive and the addressable market opportunity that we see now is $8 billion to $10 billion, which is four to five times of size. It was back in 2015.
Also back in 2015, our marketing costs represented 80% of the multifamily revenue.
Now in 2019, they're only 30% of multifamily revenue.
Well this potential increase in our marketing budget of $100 million, we estimate the marketing would represent approximately 40% to 45% of multifamily revenue in 2020.
Costar has now big enough and growing fast enough to absorb investments of the size.
If our growth continues in 2020 at the same rate is 29 team.
We could potentially at $200 million in revenue next year, which would be two times the potential increase in marketing.
To summarize now's the time to increase our multifamily investment.
We believe the market opportunity is bigger and much easier to see them before we have more assets at our disposal and more experience to leverage these for success.
The investment required is actually much smaller than before relative to our size and scale.
And we believe there turns will be bigger and faster than in 2015.
Overall, I believe our strong results and operational improvements have us well position for the fourth quarter and beyond.
We are happy to have closed the STR deal so quickly and once again, we want to welcome everybody at STR to the Costar team.
With that.
I was a mouthful, we'll now open the call for questions.
And ladies and gentlemen, if you would like to ask a question. Please press Star then one on your Touchtone phone, you'll hear a tone, indicating you've been placed in the queue and you can remove yourself from the Q any time by pressing the pound key if you are using his speakerphone. Please pick up the handset before pressing the number.
Once again, if you have a question press Star then one at this time and it's been requested that you limit yourself to one question and then if time permits will be able to take additional questions. Our first question from the line and Brett Huff with Stephens. Please go ahead.
Good afternoon, guys Hillenbrand Rep.
Scott. Thank you for the sort of thoughts and justifications around the additional AD spend that's super helpful.
Can you just go through those go through that one more time for me and then talk a little bit about.
Where does add to spend go from there and Andy you mentioned right. After you guys did the first permit steel people worried about it I think the worry was that.
This business in order to grow would require incrementally even more AD spend and just give us your thoughts as you go forward that 20 times return is compelling, but just explain how you guys think about that long term. Thank you.
Alright, Okay press, let me walk through that one more times or the financial perspectives around this thing.
So so back when we did the initial investment in marketing and 2015 $100 million. We had a report out that said the the marketplaces $2 billion in size.
And then as you know we've worked through the.
The large into that marketplace, we've seen the opportunity the mid market. We've seen now the opportunity Io large tail market and we know that that that estimate has now grown to between eight to 10 billion dollar opportunity. So we think the 100 million due after 2 billion was a great move we think the 100 million to go after the next.
8 billion is an even better move so that was one one important note.
The other is that.
The time, when we made that investment.
The total company of multifamily was not nearly as big as strong as we are now so we we had 130 million.
You know dollars marketing spend and that was 80% of the revenue.
Clearly, we've grown that now to be almost 500 million in revenue and so an incremental 100 million.
In stand against that fast growing business is much less a portion of the business much less of a bigger better.
The other thing I think is important notices that that we've now grown salesforce is much bigger than it was before and produces a very high level the site traffic.
Has grown significantly the amount of data we have the amount electronic feeds.
All the strength of that site there to leverage into this next size of the market that will make that $100 million, even much more effective for like softening up the beach had before the troops all all go in on the attack.
And then I think when you look at just the.
The ability to company now and we are growing as rapidly at 1.4 billion in revenue, we add a couple of hundred million revenue any year at our current growth rates.
We've added over 100, 1000 50 million in costs. This year. So so adding investment in costs are just they're going to be bigger numbers. They scare people because because they are big but when you look at the relative size of the company. These are the best we should be making to keep increasing the scale on the growth on the on the topline.
So that's what bright comment on let and yen break even more sort of.
Expressed concern from the 2014 period, where.
Well, we have to continuously invest increase these investments in marketing.
I want to things that is unique about this industry is we are one of the.
Only aggregators out there investing any material money into the industry. So this is not something where we are doing it in a zero sum game trying to keep up with some other competitor. What we're doing is we are seeing that when people are aware of our products and services, they're tending to buy them.
And renew at a high rate and with a unaided awareness in the twentys to low Thirtys Theres a lot of people, they're not aware of the product and we want to make more people aware of the products and services that we can sell to more people. We also perceive there is a strategic advantage of investing ahead of the.
Pack.
We want to be.
We are confident and believe that we will be turning through a billion dollar revenue mark on apartments at some point and going beyond there and they want to be investing into that size a company not into what the industry was doing a couple of years ago. So this is really driven by the fact that we now have much.
Better numbers metrics ROI.
Analysis SCM analysis, we have a good handle of what we can sell in who we can sell into at what price points.
And we just want to go capture the opportunity, it's a relatively small investment.
Compared to what we think the upside game is that some people think that theres, a big opportunity in the apartment sector that would be one of us than some people think theres not a big opportunity for carbon sector.
But we believe there is a big one so we're investing in that were not being driven by an escalating tit for tat with a bunch of head to head competitors, we're not in the beer business of the car business or the insurance business were all alone in a.
And on multi trillion dollar asset class. So we're pretty excited about we think it's it's good.
Our next question from Andrew Jeffrey with Suntrust. Please go ahead.
Hi, guys.
Good afternoon lots of into orbit as usual.
No one of the things I think you you touched on Andy in Luke Nat.
The changing behavior.
Commercial property owners.
And managers and more of a focus on online.
If you could provide a little texture around that.
And why you think we're at a tipping point and what specifically you're doing it at Loopnet to capture that opportunity I may not get as much.
Airtime or attention is that at the big marketing spend in multifamily, but it sounds like a structural change in the market year dressing.
Yes. It is so I've had the good fortune to spend a couple decades in the industry and I was there back in a completely offline side and then you see of move into.
Unsophisticated online where that there was an area where online marketing commercial real estate meant that you say 55 cents on a staff when you center Flyers, a PDF to the brokers and tab.
But really what's happened is we can see it clear as day is you look at the traffic coming into live net attractiveness got 87% share of the folks looking for commercial property coming through.
And weak through Riverside fees and through Google analytics, we can get an idea of who these folks are and they're pretty much. The fortune 100, their Wal Mart their Amazon its mcdonalds as all the major tenants as the big law firms.
Just like people are.
Just like people are using the internet and everything from dating to buying a house to buying a car to buy insurance everything they do.
People are looking for commercial real estate and it should not Facebook is a client of ours. It should not surprise anybody that Facebook goes on the internet to look for commercial space.
Right, but it does surprise the industry exam industry is sort of.
Trying to figure out.
As is locked into a historical marketing mindset of you could all you can't market to end users. There's just too many of them and it's just not possible in traditional methods to do it but as a whole digital folks searching out on the internet rather than rather you going out and try to market to them they come.
The yield and were produced in the tools, where the owners can be visible when they come looking for them. So I'm very bullish on it I think I think it is just an identifiable mathematical certainty that it's occurring but and so we're going to push that and we're going to create awareness with folks has happening.
And I think it's a pretty interesting opportunity because.
The burden of broker model is pretty good at the 30000 foot 50000 foot the size, but it doesn't work so well when you get below 10000 feet and Thats, where the majority of transactions are.
So.
We're going to push on it we're going to seize I believe we'll see success in it and I'm pretty excited about it but it doesn't happen overnight.
We are rebrand we're rebuilding loopnet, we can see it when you go look at the site you can look at some office buildings for lease in certain cities, you'll see that.
We're no longer presenting the data.
Like just simply a Craig's list Ray just presenting raw data at we're now.
Paying attention to how the buildings are branded online and the image. They presented the image of the architect the image of the owner the image of the brokers and so we're not just presenting them, we're controlling the kind of frequency they get by controlling where they sort the size. The placard, we're controlling the branding and reach.
And.
So I think we're producing what will be the most powerful marketing tools, the industrys ever seen and I think it's going to be exciting revenue opportunity and it's pretty much I think about about half a day.
Thanks will go to Bill Warmington with Wells Fargo. Please go ahead.
So congratulations on closing the Fcr deal. Thank you very much Phil.
So the.
Good question I have few is on on loop that.
Maybe you could talk a little bit about.
The pricing assets being applied to the real estate brokers and then the pricing as it applies to the owners.
And you gave the an update on the Tam for multifamily at eight to 10 billion I was hoping we could get an update on loop net Tam as well.
So yes, so the.
Again, the way Loopnet as was historically marketed it was geared to brokers just because loopnet. When it was a Standalone company had no research department and need to get content via the broker AD. So they would sell buckets of ads to brokers at Super low prices brokers have a row.
Relatively small economic interest in the transactions. They typically the loopnet as were purchased by a broker who was pulling 1.5% of the economics themselves.
And unlike an honor the actual price achieved in a sale or a lease transaction isn't nearly as leverage for the broker as it is for the owner so.
Brokers have small budgets remember when we first picked up a loop net probably the average add price was $6 a building.
We're now seeing owners, who have 95% of deal economics, and who are willing to pay the sorts of the top have walked videos at walk through the building willing to pay for drone videos willing to pay for larger placards those folks are willing to pay price points in the 5000 6000 remember we reset.
Selling ads to owners in print we were up at 12000 up to 50000 a building so.
We're just we're migrating and it's not something we're doing in conflict with the brokers the brokers like what we're doing because.
The brokers get promoted since they're the ones representing these buildings. So the owners paying to promote their building get broader reach for the building in frequency and exposure and branding.
And that also carries that lifts the brokers too. So it's it's sort of fun when you can be.
Raising prices by shifting to a different segment with a different value proposition for what you're producing and not alienate anybody.
So that's where we're doing in terms of the Tam.
We we haven't really recalculated that but if we're at a.
We're under 200 million now on that we're roughly about 160 in the last calculated on this was between two and two and a half billion yen. The top of the envelope version. So we have an updated that lately, but as we get further into the selling and we see the take rates and the the full.
Salesforce behind the products that we launch over this next few months, we'll probably be able to update that as we get into the mid part of next year.
And there and Thats just looking at the marketing side of it there's.
There are a number of things we perceive the industry would find valuable like reducing their workload and sub 2000 foot leases.
So anyway. It we're comfortable that it's a pretty big Tim and that we heavily on it.
We have a question from George you time with Goldman Sachs. Please go ahead.
Hi, Thanks, good afternoon.
Got you are planning to increase your apartment dot com marketing spend by 100 million in 2020, which amounts to about 600 basis points of margin headwind. You mentioned earlier that you expect margins to decline by about 400 basis points next year. So can you discuss where you expect positive margin off that's the come from whether it's from productivity gains or.
Cost cutting elsewhere in the business.
Yeah, there's a certain amount.
George that we'll we'll spend each year outside of marketing that you know as natural to the business heads. We've added this year salary increases dosing. So they'll go on into next year, but.
But they won't go as fast as these increases in marketing. So now our forecast now looks at that around a 36% margin at the midpoint for 2019.
So if you take into account extra 100 million in.
In marketing and then the rest of those costs will to see personnel costs and related wrote nearly as fast and so that will provide a bit of an offset so in the end of the day, we'd expect to have about that 400 basis point drop off the off the 36 as a rough guide now obviously there'll be some variety around that when we get into specific.
Planning and we'll share that in February but.
But that's that's really where we are we don't we don't see that there needs to be a bunch of.
Cost cuts out there it's more of managing.
After we've done a nice bit of investing this year.
Our cost base into next year.
Our next question will be from Peter Christianson with Citi. Please go ahead.
Hi, good afternoon, thanks, guys.
Andy how can you.
It's obviously huge step up in marketing spend here.
Makes sense clean at this time, how can you ensure you get the ride efficiency when you're trying to target the eye on the independent owner category versus broader category.
How do you ensure that you get that efficiency, what's what's the strategy.
Yes.
That's a really good question and that is right on target, it's something I think a lot about.
And I sort of have a simple answer which is.
We're not targeting the Io strategy.
We are we can look.
We are targeting general awareness, we are targeting.
We are targeting making sure that we're capturing increasing percentage and share of the renters hitting the internet.
Regardless, where they go to institutional property or to a low on property that creates value and it's hard to and it's it's really.
Not that easy the mess up on that we have a experienced strong team on handling our SCM on apartments, we have a good sense of what the good key words are good neighborhoods and the like so that one is a pretty safe investment that's driving demand to our clients secondarily.
We are on the we've broken opened on this middle market opportunity. So we have gotten great penetration at the larger size properties really good institution at 100 unit plus to hundred 200 unit plus but we are selling 10000, plus ads in an area that folks.
Never really knew existed which is the five units a 100 unit community. So we are just trying to create general awareness for the person. That's got a 30 unit apartment building and softening the road for the.
The hundreds of folks we've gotten the apartment salesforce selling exactly the same thing we've been selling successfully so it's just creating awareness in the same way for the same folks now as a derivative of that it really it it has.
As a side benefit of supporting our Io effort because as they become aware of the site you see that pickup rate, where someone puts an apartment onto apartment stock comp for lease they select.
The renter tools at this early stage, we're seeing 36% opt in.
So just awareness general awareness the site will support the Io initiative and when we run focus groups.
We're getting.
Positive feedback from both a renter and the small owner on what we're offering we're getting extremely positive feedback from the renter and so our primary concern is just to make sure that we have a large pool of owners opting into the tools. So the renters can take advantage of so.
No we're thinking a lot about it a lot of it is.
Very basic blocking and tackling blocking tackling low risk and then what we're doing is we're fine tuning the messaging, creating awareness amongst the 300000 folks with apartment buildings that we haven't sold two and we hope to sell to over the next couple of years.
It's a lot of money.
Thanks.
Well go next to Ryan Tomasello with KBW. Your line is open.
Good evening everyone.
The revenue profile of the businesses, obviously involve a lot over the past few years and it seems like that will definitely continued to be the case.
Apartments dot coms reach expand.
The prospect.
The Loopnet owner initiative seems strong and of course, the push into hospitality with SDR.
So Andy I was hoping you could provide us with your updated thoughts on the resiliency of the business model through a downturn.
As these new businesses grow and how.
Your efforts to manage the revenue quality of the business or perhaps governing you're just your decision.
With respect to new investments.
Across the Costar platform.
Sure.
So I mean, it's it's important question we are.
Obviously in a very mature cycle I went through the market economics for Sherri right now and they've done.
When you say they can't get better they get better.
And then they get better so we're not seeing any weakness in this area industry. However, just common sense is set at the we're not at the end of cycles. So.
You know we.
One of the things I do like is that if you look at the Costar information revenue stream.
It is a lot of that revenue is now coming from banks and major owners and when you go into a cycle bank step up they're buying typically they don't reduce it.
So.
That is a stabilizing influence we are.
We continue having gone through 2008, we continued to discourage salespeople, putting a lot of energy into plant watering companies and moving companies and other companies that are fat parade.
In in a cycle and we put effort into a major owners banks.
Investors, who tend to have more demand the cycle now we operated.
Showcase and we can observe loopnet in a cycle.
And there is a little bit counter cyclicality, there, where when you got a $150 million below that loses a tenant you are willing to spend thousands of miles to try to replace that vacancy and what we hear from people who have operated the apartment business through cycles is that this is actually the worst cycle to be.
Right.
These are so low and when they can increase people's budgets go up for marketing apartments that makes sense.
You do in a cycle get complete bankruptcies, but then that is quickly followed by someone picking up the asset with an unlimited marketing budget, which is a wonderful thing to see.
The STR revenue, we believe is very resilient the renewal rates there are shockingly high.
So we think theres some resilience there and it's and it's it's a.
It's a basic operating metric being used by the hotels between there.
Between their from their sales manager general manager to the flag to the brand to the investors.
If it's something that is a utility and it's not something that they have the optionality to shut off in a down cycle, even yes in less they.
Just simply don't exist anymore. So.
We're now we've done well and in past cycles, where we don't.
I think we dropped costar self dropped 3% in Oh, eight which is remarkable given the scope of it and I think were pretty diversified and pretty resilient.
When the next one comes and Theres the offsetting a thought which is when you go into a cycle. It's a wonderful time to buy really good companies at a big discount, which we always look forward to it.
Well go next to Mayank Tandon with Needham and company. Please go ahead.
Thank you good evening.
No you give the margin guidance, but could you at least qualitatively talk about but revenue outlook for next year just in the context of should we expect the growth to accelerate given the investments that we will not be more for 2021 scenario and then should we look at the 19 growth rates across the different product lines that maybe a baseline for 2020.
Yes.
Thank you.
So is it a tricky.
Spot at where the third quarter, we don't have our.
Specific guidance ready or forecaster budget prepared for 2020.
No I alluded in my comments to continuing growth next year like we've seen this year, which.
Certainly what we've been planning for and investing for.
And we expect certainly with the increased investments in marketing to help underpin that.
Well, we more looked out was we gave that five year outlook previously.
And obviously when you when you make the new marketing investment you want to be sure that the business one can absorb it make it may get invested effectively and then the outcomes of that will get us.
More assurance that will hit those goals and I think as we work through that exercise you could see just.
Just by the scale of the business, where we're now you can invest 100 million and you may take a bit of a margin drag on that but with the size in the speed of our growth you could recover that margin drag within a year and then then go back on top of the quickly in the second year out.
Now these are all financial models are not plans are budgets, yet so I don't want to.
Get out ahead of ourselves on what that means but we certainly expect that these investments will continue the growth rates, where we are.
And we want them to move us forward into the into the mid later part of next year and really see the benefits of them into 2021.
And so we have to invest now to get that to happen.
If that helps give you some directional how we think about it.
Our next question from Sterling Auty with JP Morgan. Please go ahead.
Yes, Thanks, Hi, guys savings John .
Good evening on the marketing Andy you said a number of times that this actually is the tougher time of the multifamily cycle, where occupancy rates are still high vacancies are so low so is the incremental and best me more tied to just where you think the competitive positioning. So you can just take a disproportionate amount of market share.
Because of the help your competitors and it's not about the cycle or is it in preparation for hey of vacancy rates rise in 2020, not only the competitive position, but maybe you get a little bit of a tailwind from the cycle as well.
Well certainly itself.
The primary driver is not.
Coming sense of a cycle, though that is true you'd want to have greater awareness and broader share. It's more of that the first thing you said which is.
It's an open field there is a clear massive transition from offline to online for the apartment industry, we're the leader and and each time, we gained more information about what the market looks like we think it's bigger.
Than we anticipated and we want to use the word get disproportionate share. We don't believe in the word disproportionate share. We believe in the word a lot a share and nothing's disproportionate.
We we just want to get a lot of share in it and we just think it's the as the it relatively speaking it is.
Period or time in that evolution the industry, we can buy it at the cheapest price you can possibly by it.
Just because no one's bidding for it really aggressively knowns fighting for really aggressively.
We're sort of alone and in this space right now or were not alone in the space right now, but people don't seem to be investing in it even though there are lots of players out there.
Can we have a question from Stephen Sheldon with William Blair. Please go ahead.
Great. Thanks, it's actually Josh on for Stephen.
Hey, Jeff.
Hey, just want to get your quick thoughts from the delayed timeline of HFC 842, and how might impact real estate manager results for the rest of the year.
And then is there anything else that you guys are watching that could act as a headwind or tailwind.
To the adoption of that product over the near term. Thanks.
Yeah sure the the.
The delay in the adoption certainly gives you a little bit of a trough now as people may back off a bit we we think that will.
Ill pick back up next year when more of the requirements come in.
The effective them now is really the losing that implementation revenue that.
The onetime stuff is going backwards, but it's nice to see the subscription.
Piece still growing over 40%. So we expect that'll all moderate out into the 15% to 20% growth range over time.
And then it's really the future growth for that business will be less dependent on the accounting teams and what they do in more around how we integrate it with Costar we provide more.
Services and tools for their clients to use the rest of costar in managing their real estate portfolios and that should fuel the growth of real estate manager much longer and more effectively than the near term effects the accounting teams.
Great with that I believe we have no more questions and thank you very much for joining us for the third quarter earnings call and we look forward to update you on our progress.
At the year end broken it out your end called everywhere, it's a big segments exciting.
The holidays or thank you everyone for joining us and we.
We won't see until you're through Thanksgiving and the and the holidays summer holidays Christmas new years, and everything else, but we'll see you soon.
Thank you ladies and gentlemen, this will conclude our teleconference for today, we thank you for your participation and for using ATM <unk> executive Teleconferencing women.
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