Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Costar Group earnings Conference call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question during the session you'll need to press star one on your telephone.
If you require any further assistance please press star zero.
I would now like the hand, the call over to your speaker today, and Sarah Spring of Investor Relations. Please go ahead.
Thank you very much.
Thanks, and thank you all for joining us to discuss the first quarter 2020 results of the Costar group [laughter] before I turn the call over to Andy Florence, Costar, CEO, and founder and Scott Wheeler, Our CFO I would like to review the Safe Harbor statement.
Certain portions of the discussion today may contain forward looking statements, including expectations for the second quarter 2020.
Forward looking statements involve many risks uncertainties assumptions estimates and other factors that can cause actual results could differ materially from such statements.
Portland factors that can cause actual results to differ include but are not limited to the duration and impact of covered 19, the pace of recovery customer usage and purchasing decisions changes in investment strategy or plans timing and success of acquisitions.
Those stated in Costar group's press release issued earlier today and in our filings with the FCC, including our most recent annual report on form 10-K, and quarterly report on form 10-Q under the heading risk factors.
All forward looking statements are based on information available to Costar on the date of this call Costar assumes no obligation to update these statements whether as a result with new information for their events or otherwise reconciliation to the most directly comparable GAAP measure to the non-GAAP financial measure discussed on this call, including EBITDA adjusted EPS.
Total non-GAAP net income and forward looking non-GAAP guidance 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 Costar group Dotcom under pressure.
As a reminder, todays conference call is being webcast and the link is also available on our website under Investor Relations. Please refer to today's press as the replay of this call.
And with that I would like to turn over to our founder and CEO Andy for.
That's a.
That's an unusual milestone to have a pandemic enabled safe Harbor statement.
[music].
If we could avoid the rest of my life.
So good evening. Thank you for joining us today for coasters first virtual first quarter 2020 management team.
Okay.
Quarter to normal months, one pandemic month.
As with every business because of 19 pandemic.
We ended the pandemic.
Hi, durations in costars.
The pandemic hit operations and Costars Beijing office first giving us advance warning.
And.
I'm, sorry, I'm getting a bunch of beeps here.
If we use teams that leaves you might use.
Here's some shirt.
Yes.
Giving us advance warning and sometime to prepare to transition 100% of our North American and European operations to digital this.
First remote workplace.
Employee safety and continuity of operations for the sake of our investors clients and their employees, who is our top teams responded promptly.
Working around the clock to execute our.
We're very grateful for their diligent efforts, we believe that 95% of Costar staff has successfully transitioned to working remotely.
At 90% predicted.
Committee.
In times for our employees in them also.
And continued focus on our.
Professional responsibility for our employees kids periodically duck there has endured many videos.
Conference calls.
We're consistently keeping its front and center.
And innovate for costars and our clients future. After this disruption subsides.
We believe that our products remain mission critical.
And as they deal with pandemic driven market disruptions the commercial real estate industry will continue to operate.
And to do so we'll need to side.
And renew leases find investment opportunities value prop priced markets and very importantly market vacancies to generate much needed revenue.
Yes.
Properties in person.
Digital marketing becomes even more important.
Costar group and our digital solutions are here to meet the industry's continuing need for high quality data and higher.
In immediacy of the.
Initial phases of our crisis, our clients and they're trying to de risk.
This means buying new information or marketing solution, sometimes is not there first priorities initially.
Also putting things on whole domestic.
Concerning to our clients.
Over the years and initial phases of in that.
Economic disruption, let alone a global pandemic, our gross sales drop and enhance alive.
Cancellations rise initially.
We are seeing some of that now since has always been.
So.
In the 2008.
This session, which was very hard on the commercial real estate industry for contracted for even a core.
And even then our sense in calendar 2009.
1%.
Experienced a flat sales.
I mean sales, finishing with this.
Slightly negative sales quarter.
After that cycle.
The worst year in our 34 year history.
Yes.
Sadly.
And any economic cycle, some number of our clients.
This will lose buildings to bankruptcy.
We share their fan.
Do you plan to fight for any of our clients is.
We have often seen clients looking through bankruptcy organization known can continue to pay for the mission critical service.
There's lose their buildings these buildings room.
I'm seeing new investors step into the by them and many of those invest.
As I begin to operate there.
New purchases.
Domains and every past cycles, the majority of our customers continued to operate their business.
Sales of property slowed dramatically for several quarters two years so.
After the disruption like wells.
Fortunately, we're not as heavily impacted by the property broker clients tend to derive a lot more of their revenue from leasing commissions.
In the cycle for for so that tends to.
The.
This is this this is for the simple fact that any good.
Activity is driven by leases expiring that needs to be renewed.
Dates have no respect for an economic crisis and most companies remain in business and continue the needed facilities.
They sign leases either.
And then a down cycle.
And as they sign those leases our client I've asked our economist to use the welcome.
Tend to run Monte Carlo simulations to us.
Estimate access a decent activity.
We believe there will be close to a million leases signed in the next 12 months. He believes that these will generate more than half a trillion dollar launch of leasing value and one of them as.
Well leasing hasn't.
So lot of business, we've done in the back half year.
This analysis refers to total leasing activity not growth in demand.
We expect will be a significant contract.
Overall for the commissions or nor not normally impact early impacted by that.
Rates fall, a little bit doesn't really have hit them have commissions too hard.
In fact with high leasing buys on some contraction of demand there is something like a game of musical chairs for building owners going on there's a lot of leasing activity, but every time. The music stops. There are few owners left without a critical tenet income or by analogy a chair.
Marketing commercial space and apartments becomes even more important when it becomes harder when it's on it that vital revenue in a shrinking.
The pool of channels.
The pandemic than social distancing make this economic downturn harder than other downturns, the physical leasing process of prospective clients driving by properties being signs and touring because of buildings as in most cases ground to a halt.
Just one owners desperately need to promote the buildings and toward tenants to fill growing vacancies the physical inspection of properties you're pulling in practical.
The digital marketing Department stock comp Loopnet, we Gallo Bell Bucks lands of America, or Bizbuysell offer to become a critical replacement for the loss of the traditional physical leasing process.
Prospective tenants come toward other options on apartment style palm see with the buildings look like use aerial drone videos to understand the area. These matter ports to walk through the apartments, virtually and even potentially use our online leasing tools to apply sign a lease and pay the red without ever exchanging stacks of paper where the stock.
Ranger.
It Fortune 500 executives are touring potential new office space and high rise tower right now I.
I believe that it's much more likely they are in their pj's at home doing it at loopnet rather than touring in person.
It's much safer that way.
I believe that this phenomena is why apartments dot com had its second best sales month ever last month.
And in fact, if you exclude a a convention sales month like M&A. It was our best sales month ever last month.
Even if this happened we achieved that best sales month or even after most of the country was locked down and our entire sales team was working from home.
At this point in April sales for apartments Dot Com is pacing ahead of April of 2019.
To be clear, we expect that revenues overall may contract in the near term.
But we feel that they're a number of drivers that make our business resilience or even somewhat counter cyclical over the course the next year.
With Threed is 34 years of experience rated company that provides economic insights through multiple cycles. There's no doubt that this pandemic has created more uncertainty than any other scenario I see.
The pit pandemic has created too much tragedy for too many.
It is created serious economic uncertainty.
Good bankers Iris fact pulled diametrically opposed outlooks.
So from where we stand today, it's essentially unrealistic for debt to the certainty we need what the detailed consequences of this pandemic will be on our business over the year to come so we'll provide guidance for the next quarter, but not the full year.
However, we continue to believe that our data analytics and marketing tools will be among the most valuable source of information leads and potential traffic for our customers.
Therefore, we remain very confident in our business model on the role we play supporting the Siri industry.
We're maintaining our investments to strengthen our position both from a brand as well as a product perspective, and believe that we will exit the present the presence of uncertainty.
Stronger position than before.
With that qualifying prologue I want to continue and quickly review our Q1 results.
I'm very pleased the first quarter, we delivered at the high end covered guidance range across the board.
Costar group's total revenue grew 19% year over year to 392 million.
Across all of her service lines. Our revenue growth was ahead of expectations with loop net revenues, leading the pack at nearly 23% year over year growth.
The Subcom was strong with revenue growth just above 20%.
In the context of significant investments, we're making his apartments dot com brands Ishares and this quarter's net income was strong at 73 million.
Yesterday, but it was solid at a 124 million.
During the course, the first quarter or sales team generated 48 million and net new bookings despite the pandemics disruptive impact.
Again apartments Dot com was the truth standout achieving its second highest quarter ever of net new sales up 34% versus the prior year quarter.
Brad same pace horse in the whole multifamily team delivered an amazing resilience and adaptive performance throughout the first quarter. They never missed a beat.
Lived that had an exceptional start to the you're also but the Syria industry slowed a little harder in March in reaction to the pandemic.
Let's go into a purpose sarcom old deeper in 2019, we invested approximately 150 million to market Department stock comp to consumers. We continue to feel the department stock comp represents a huge market opportunity for Costar group and then we can achieved in outside returns.
Facing our investment in a marketing in marketing apartments dot com to our previously communicated level of 250 million 2020.
Our enhanced marketing campaign launched in March Justice Renters began quarantining netcom.
And they consumed unprecedented amounts of media. The initial results from the first months. The campaign were strong with 1.5 billion impressions nearly double that last seen last year.
Total visits to apartments dotcom reached a new all time high or unaided brand awareness also continues to climb with a new high of 35%.
Believe Jeff Goldblum, and RPM and the whole team did a fantastic job, where the creative and we're really happy with.
The whole series of ads were going to be able to present to consumers over the course of the monthly comp.
After a dip in March as quarantine efforts across America began leads have recovered substantially and are now trending above the levels. We saw at the same time last year.
Without a day or marketing investment is paying off and combined with the efforts of our Salesforce. We hope this will allow us to maintain good net new bookings levels.
We continue to work diligently through diligently through all the required regulatory processes required before we can close in our acquisition of rent attacks.
The bankruptcy proceedings are following the expected course.
Late March no auction was held.
Okay. That's a a virtual earnings call when the kids call you in the middle of the calling them call waiting hits your phone [laughter] [laughter] sorry.
The bankruptcy proceedings are following the expected course in late March no auction was held because no qualified bidders came forward.
For the public filings, we can see it the vast majority the debt holders support the planned reorganization, which includes the contemplated failed to costar.
The FTC review is ongoing and we expect the expected request, which will extend the review on a timeframe that is consistent with their previous estimates three to 12 months from signing.
As always we respect the FTC process and we will cooperate fully to provide the agency with all the information they need to perform their investigation.
There is no additional information we can provide an outlook for the process at this time.
Net started the year very dynamically continuing the positive usage in sales trends that we saw in that fourth quarter.
As we in the rest of the country transition to home in early March we experienced a drop off in daily average users that lasted for about a month over the past couple of weeks, we've seen a steady increase in users just about back to last years levels. More importantly, the number of searches now exceed last year's level and that's what counts for.
Our customers.
As I mentioned, let fills dipped as in March as people transition to work from home.
Net sales have now it's showing the same resilience that apartment sell so Sean I.
I think one thing to remember is the digital advertising value proposition has been well understood for many years now in the multifamily industry, whereas we're in the early stages of adoption for the commercial real estate industry.
Ultimately, we believe that the current situation will actually accelerate route net adoption.
But it may take more time.
On the huge believer that would that will be in a central virtual solution for owners looking to win in outsized an important share of the hundreds of billions in commercial leasing dollars that are likely to occur this year.
Right now industry participants really need to know what's going on they need to have the best information available for forecasts availabilities listings and the pricing information that Costar provides we remain committed to continuously improving our user experience and utility of our costar product.
For Costar suite particular, 2020 will be year of significant product development initiatives.
There are deeply engaged with the back and integration of the SCR platform.
As the year progressive Glenn to integrate STR into the Costar product with a front end as well.
Well I'll coaster operates in dozens of countries around the world our product is not yet one seamlessly integrated multi lingual system.
To localize system.
On the short term commercial property sales volumes will fall dramatically, we expect the surge again in the years. So much that investment activity will be multinational in order to provide the most values and capture the most value for that opportunity we want to provider clients was a truly siri global trends.
Action analysis and marketing platform.
We're hard at work on that initiative and expect to release the first phase one of our global system in the third quarter 2020.
We expect to support a dozen or so languages by the end of the year.
Ultimately a customer from one country, we will be able to use one a one platform to seek analyzing compare investments across multiple countries in cities.
SDR as clients are clearly one of the harvest sits segments part of our client base in this pandemic.
Hoteliers definitely have had a hard time here.
This downturn will be more damaging to them that 911, and the great concept recession combined.
We expect STR, we'll likely see the drop in revenue and profit, but we expect the fallout to be relatively are comparatively mild.
For STR subscriptions, we have been able to handle about 80% of the client financial assistant requests through payment deferrals.
But the other request we've offered tdthree month contract extensions that represent in total 300000 in annual revenue.
We also had 54000 annual canceled product subscriptions.
At this point, it's remarkable remarkable but it suggests less than 1% of canceled revenue.
STR subscribers are key partners and the least likely to cancel their products. These are hotel operators that no. The data data is vital to understand the market and what is happening with their competitors as well.
They also want to make sure they have continuity in recordings, they're able to track as soon as recovery is beginning in their market.
Due to the number of hotel closures in some markets, especially outside the U.S.. We have a plan to continue to provide value to these subscribers. Even if we cannot report on market numbers for some period of time.
We are providing custom analysis, such as a deep dive on the average daily revenue declines at under I'm uncovered. The fact, the 80, our declines were not from hotels slashing rates, but rather from a rapid shift in the mix of demand.
The feedback from clients in our exclusive content serious developed for them has been overly importance in value of maintain their contract with STR.
SPR is the most risks associated with.
The AD hoc revenues AD hoc revenues are far off but we expect the revenue will begin recovering in June.
This is revenue that will come back in the industrial begin recovery in development activity will restart which will result in trend sales.
Or if we ever programs downturn, they'll be trend sales happening with distressed assets or portfolio evaluations or dispositions.
We are releasing for the first time tomorrow monthly profit and loss analysis for U.S. hotels. The data has continued to Canadian and even with so many hotels closed and there's even more desire from hotels to see this profit loss information.
The entire industry is watch.
I'd like or whatever recovery in their parts.
We have been reporting on China Weekly and has now additive video series focused on China recovery that we're currently producing both in English and Chinese.
As of last week, 90% of the hotels in China are open.
We have a couple of markets that are inching towards 50% occupancy.
Overall, though occupancy in China is at 35%.
And that's certainly nowhere near the normal 70% to 75% occupancy we expect.
But it's well up from the low at 10% occupancy a few months ago slow, but measured recovery in a matter of months.
Finally, I want to update you have to say the commercial estate economy overall.
It's it's really still too early to impaired please see the full and ultimate impacts as a pandemic from the commercial real estate industry.
The data so far shows an unprecedented collapse in economic activity jobless claims over the past four weeks it exceeds 26 million and this figure would likely be higher if it were not for the overwhelmed application websites and offices.
Most high frequency economic indicators are showing unprecedented declines from manufacturing output for traffic to retail sales consumer confidence.
Consensus forecasts are calling for 4% decline and GDP in 2020 and for the unemployment rate to approach, 20% levels not seen since the great depression for.
We're already seeing the effects of the outbreak on commercial real estate.
Continuing with the hotel a theme hotel revenue per available room is down more than 80%.
We are simply never reported figures like that.
And then the other property types, though.
Thankfully our daily.
Asking rents have fallen by about only 1%.
One percentage point since Pete.
Speaking on March 10.
And tells but normally music.
Percent over the same period, but all of them.
Oh given everything.
But.
We believe that name.
Arrogance or actively looking for new apart and purpose fact calm as exceeding pre outbreak levels.
In the commercial sectors leasing volume over the past few weeks has fallen to about half of typical levels.
And we expect to fall further may before it begins rising again in June or July.
We expect the retail sector to be the hardest hit.
As many shops have closed due to social distancing measures the man for retail spaces already turned negative so far this year, many shops restaurants bars in coffee shops, Sadly may never reopened.
Yeah.
Forecasting miles predict occupancy bosses that as much as 300 million square feet and that vacancy.
He rates could rise 350 basis points to levels, well above the peak or the last Dow could reach 15% tapping the 10% losses in 2009.
Outcomes for office at this point, who is are lower in construction is about huh.
Kevin.
Ill.
Expect occupancy losses, ranging from 100 million square feet every four quarters to a quick.
Order billion square feet over the next two years compared with just 57 million square feet over the seven quarters of the last on term.
Our models predict asking rent losses of 10% to 20% compared with 14% 2008.
Sure as landlords offer concession.
To retain tenants.
Demand for industrial has held up.
Got it thus far.
First quarter leasing setting all time record and while the pace of.
Leasing has slowed mid March Amazon has leased more than 6 million square feet in April alone.
Can't help but I need to point out that Amazon is one of the single heaviest you see their staff working on Loopnet at many of these properties. They eventually lease.
Me to commercial in there and the economic section to pay for the economics.
Third 100000 workers.
Cope with the demand and plans to higher severance even industrial we'll see occupancy loss.
Demand falls, even in our upsides.
Scenario.
The positives resume trend growth by the middle of next.
The negative net absorption.
Will likely suppress the losses last.
Downturns of 2008 experienced activity won't fall by nearly as much in 2008.
Three types was down just 7%.
On the pre recessionary rich and 2009 this down just 4%.
Even as occupied space, followed by a 2010 leasing was.
Session levels.
In the capital markets to send them to know the effect on deal volume, but initially.
Indicators suggest investment like 50%.
In the last.
And the 5%.
Swift an unprecedented action by the fed it showed up financial markets and thus far prevented the worst but we expect.
Like prices to fall by at least 10%.
And reset or more.
Yes.
Perhaps levels for the next decade.
There, though predicts conditions start to improve.
Pass depends on containment.
To the vaccine two variables.
They're almost impossible to predict and difficult to incorporate into economic uncertainty that many firms will fail rents will fall in vacancies will rise. We also know day to day business of commercial real estate will continue as leases expire, Tennessee is space brokers in that.
Refinance lenders under eight deals appraisers determine value and operate.
Strong looking for bargains and Americans continue to look for new apart.
Burdens.
Costar group is on a strong foundation as we add back.
It was 19% year over year revenue growth.
73 million of netting that 9 billion in cash on the balance sheet <unk>, we had a great quarter in the overall context.
Our remote working.
We believe.
That we will have a rich set of ahead and were core currently exploring a number of such opportunities.
Its mission critical needs and we are harder.
Work building the innovative products that will drive our future growth.
Right.
At this point.
I would like to turn the call over time.
For our CFO, Scott Wheeler for them much more interrupt call.
Well done thank you Andy.
It certainly was an unbelievable start to the unlike anything I've ever seen us.
For sure.
But I'm thankful active.
Our business is performing.
Neither navigate through all of these changes.
A very strong position.
We maintained a very conservative balance sheet precisely for times like this.
The time and we can continue to invest for the future and take advantage of you offered.
We have $1.9 billion orders in cash.
Our subscription revenue model is resilient and the services, we provide our 100%.
So the person contact has been practically eliminated.
Our business is much more diversified than it was in the O. eight onein recession.
50% of our revenue now coming from online marketplaces.
100% from Costar on top of that owners property manner.
Jurors institutional investors and lenders now represent our largest customer base, whereas we were much more.
Tumor sector during the last downturn.
Okay.
We have financially become very very granular.
Correct on contracts on sales for retention cash receipts purchase.
Some payments.
This information, although valuable does not tell us what the future holds but it certainly provides insights for the multiple revenue.
Scenarios, we create in our financial models.
Which we even the absolute worst case scenarios do not indicate any concerns with regard to liquidity or the ability to continue generating strong positive operating cash flows.
Now onto some color on the results.
We had a great start to the year with revenue in the first quarter up 20, 19% over the first quarter last year.
While revenue growth in the first quarter, excluding the STR acquisition was 15% year over year.
Costar suite 2020 versus first quarter of 2019 as expected.
As a stay at home orders began in early March we saw the daily sales in the new contract flow for Costar decline cropping to roughly half of the January and February levels by the third week in March.
Coming into the last week of April sales levels have stabilized and have improved slightly.
Right.
Month ahead, just as they did in the previous economic downturn.
We discontinued all price increases in her remarks to our customers.
Assuming these sales and renewal trends continue through May and June we'd expect the revenue growth rate for Costar suite to be in the 7% to 8% range for the second quarter 2020.
Revenue in our information services grew 72% year over year in there.
$2 million.
This concludes our first complete quarter of results for it.
SPR.
On a combined basis STR at our real estate manager business represent approximately 80% of the revenue in it.
Probation services.
Both of these businesses have recurring subscription revenue as well as onetime transaction or implementation fee revenue.
The subscriptions revenues, which were 80% of the revenue in the first quarter are stable and as Andy said, we'll continue to be stable and actually growing both year over year and sequentially into the second quarter.
This is encouraging as the global hospitality industry is certainly one of the hardest hit by these recent travel restrictions.
Now the transaction the implementation fee revenues have declined as customers delay purchases and planned implementations.
Overall, we expect a reported revenue from information services to grow to rate somewhere between 30 and 40% in the second quarter of 2020 compared to the second quarter 2019.
Multifamily revenue growth for Q1 remain really strong at 20% over the first quarter 29 team.
Which was exactly what we were expecting.
Our revenue growth continues to be generated from both an increase in a number of properties that advertise with us which was up 9% in the quarter.
As long as growth in the average rate per property, which increased 11% in the first quarter as customers upgraded to higher level and packages.
Despite the disrupt phenomenal first quarter with their second highest ever quarterly bookings.
Digital marketing has never been more critical in April we see continued strong sales level.
Quarter would result in revenue growth.
And for the second quarter of 2020.
Commercial property inland revenue grew 20% year over year in the first quarter.
2020.
Loopnet marketplace, which represents over 75, 5% of the revenue in the sector grew 23% year.
Following very strong loop net sales.
It's dropped roughly in half consistent with what you saw him Costar suite in the second half in March and the remainder that level pretty much through this time in April.
Let's look net user week to week, we're optimistic that these sales levels could improve in the month.
So again.
We expect commercial property and land revenue growth rate to be a quarter of 2020 compared to the second quarter 2019.
Our gross margin came in it in line with expectations and we expect our gross margins to continue at that level.
Well in the second quarter.
Our profitability was strong in the first quarter EBITDA and non-GAAP EPS result, all ahead of the guidance we issued in February.
Overall spending less.
And as we rapidly adjusted for the business to respond to the stay at home orders and prepare for the anticipated negative effects and the economy.
Increased including cleaning and.
Well the cost for moving to remote environments.
Reserves to reflect anticipated ex canonic hardships in certain customers.
Retail in small brokered shops.
Our vacation accrual actually.
Our in place.
In other areas of course, our spending decreased this included travel conferences.
[laughter] facility improvements infrastructural to support our customers are.
Central hiring and compensation in the beginning.
Lending.
Our marketing spend increase year over year in the first.
First as part of our previously announced.
[laughter] multifamily growth strategy.
Included higher levels of search marketing as well as the launch of our uptime.
This represented a significant increase over prior year.
Spending levels and total marketing spend in the first quarter was just modestly lower than planned.
Primarily due to timing of the spend as some of the expectedly tournament were cancelled.
Okay. It will not be effective when our customers are working from home.
Such as direct mail or offices it yet.
Thanks.
And then estimates in marketing is planned for this.
Second quarter 2020.
More relevant and effective during social.
The pullback on marketing support for these investments.
Cash and investment balances were approximately $1.9 billion as of March.
31st 2020.
Up 857 million since the end of 29 team.
$45 million against our revolving.
And the expected Rentpath acquisition and the increased cash reserves for other acquisition opportunities there.
But emerge in the near future.
The remaining $120 million cash generated through the strong in the first quarter.
Now, we'll look at a few of our performance metrics.
At the end of the first quarter.
Salesforce totaled approximately 800 people.
That's sub 45 people from the first quarter of 2019.
Down approximately 40 people sequentially from the fourth quarter 2019.
At least up hiring in March Salesforce attrition is not currently being replaced with new hires.
The inside sales roles.
In addition, we shifted a number of our best field customer service people into direct selling rolled resulting in little impact to our direct field sales teams for costar and multifamily whose levels are roughly equivalent to the fourth.
The renewal rate on our annual contracts for the first quarter 2020 was in line with a rate we achieved in the fourth quarter at 90%.
Renewal rate for the quarter of cut.
Longer was 95% also in line with the renewal rate in the fourth quarter 29 team.
As a point of reference during the last economic downturn in 2008 into that.
About six quarters.
Certainly we could see declines in our renewal rates in the month ahead.
Our second quarter 2020 forecast assumes that our 12 month trailing.
Renewal rate will decline around 200 basis points from the current Lipton revenue on annual contracts accounts for 83% of our revenue in the first quarter in line with the fourth quarter last year.
Now onto the outlook and as indicated in our press release and Andy mentioned the uncertainty in the current environment, where withdrawing full year guidance and we're not going to be issuing new annual guidance at this time.
We expect to resume our practice and providing annual guidance at some point in the future.
We are able to provide estimates for the second quarter 2020, as our subscription revenue model provides a reasonable forecasting visibility for the near term.
Our approach to the second quarter revenue outlook assumes that the overall sales results observed for the first three weeks of April continue relatively and changed throughout the end of June.
Accordingly, we expect revenue for the second quarter of 20 trending in the range of 387 million to 392 million.
Representing topline growth of around 13% at the midpoint compared to the second quarter 2019.
For the second quarter 2020, we expect adjusted EBITDA in a range of 110 million to 115 million.
This outlook assumes it will seasonally increased second quarter marketing spend in apartments and it looked at.
Which will partially be offset by reduced spend levels in personnel and other operating expenses when compared to the first quarter.
For the second quarter 2020, we expect non-GAAP net income per share in a range of.
Parts and 12 cents based on 36.8 million shares.
In summary, we delivered very strong financial results in the first quarter of 2020, and our businesses on a very.
Solid financial footing.
Our teams are safe and productive.
Fine marketplaces will become increasingly valuable to our customers in the months and the years ahead.
Thank you for all of your support and I look forward to updating you on our progress in July.
With that we'll now open up the calls to questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then number one on your telephone keypad.
Your first question comes from Marriott Court to Lucky Jefferies. Please go ahead.
Hi, Thanks for the time I hope all of you in all your families are healthy I think safe.
I was just curious because we have limited insight into how parmesan common form during the last downturn, obviously wasn't part of your financials.
Just wondering if you can give us a little more insight into how that business reacted and and I guess.
But it's more of a consumer type of business. So it would likely be more active but any extra color or anymore or background.
Found on the performance will be greatly appreciate I've asked.
Executives, who managed apartment as satcom or similar companies that we acquired.
In the last downturn and.
They have.
Typically said that part of the Satcom does.
Better in a downturn than in a really healthy markets a higher vacancy rates.
I mean, there's more demand for.
Leads and and and traffic into leasing offices. So.
And when the fact that many people executives believes that they really healthy market like we've had a year ago.
He is a bad environment to operate apartment stock comp.
Consumer behavior here is fundamental it's like having a root wherever your head so it's very resilient.
During a downturn.
Great and then just more of a longer term question I think we've done a lot of questions around how the industry could structurally changed on the commercial real estate side I guess just for the working from home environment do you think that impacts demand for commercial real estate longer term.
I think I heard you could tossed out a number on just square footage in commercial real estate declining over the next two years I didn't know if I heard that correctly or maybe that has something to do it that but you think that said this is a structural change in the industry that could happen longer term as more people work from home and there's just less demand.
For office space.
Well forgive me I don't want to stands for days of having these sorts of discussions I come across a little bluntly.
I was in early.
It was an early scenario on the concept that co working will take the world.
I am a much bigger centered on the fact that people are going to want to continue working from home.
[laughter].
And I actually think that I think theres, a little knee jerk, where people say Oh gosh I was going work from home.
I'm not saying that.
And in fact, I could actually make the argument that the.
The the potential downside of quarter billion square feet of demand going away in the office sector is really just driven by job losses, you know one person through.
And for office space is very elastic choose the price so.
The amount of space per person in Houston is dramatically larger than the amount of space per person.
In London, and so as prices fall, 20%.
Overall demand may go up, especially when companies are trying to figure out potentially over two years three years have not to be jamba, all over each other and want to spread out a little bit but.
Our staff in Beijing.
His who will be back in the office.
And I've never seen people like happier.
Great. Thanks, so much.
Yep.
Your next question comes from Peter Christianson with Citi. Please go ahead.
Yes. Thank you guys said, Sarah great to hear from me and thanks for the option to ask a question.
Andy Tom do you think this this economic shock.
Well.
We think about changing any of your products or services, whether it be.
Features or perhaps the way, it's priced or package do you think costar will need to change any of its products because of this economic shock.
Yes, yes, we are.
Our product seems to have probably initiate a.
A dozen or more.
Product changes to deal with this situations to go live in that you'll see a very prominent virtual tour, but now in the homepage, we now have an ability and looting that were.
A broker Ken or two executives a broker in a tenant for a two executives can join each other on a loop that tour and actually initiate video conferencing together and in the Loopnet website as they view properties, we call that code tour, there, probably a dozen or so the short.
[music].
Virtual leasing.
More social distancing type things that we're doing.
And we're also ratcheting up the marketing this is due to the one thing that.
Happens in any one of these disruptions.
Is typically behavior changes permanently and so we believe that there's a chance that.
People will come to value online marketing and real estate much more than they value that before and we're basically.
Well in all the strings in product features to try to capture that as quickly as we can there's some other initiatives, we're looking at and maybe one or two acquisitions. We're looking at that are responsive.
So what's occurring right now.
And what we think will happen next year.
Based on this cycle so were.
I think probably.
You know, 30% to 40% of what we're doing in product is around the situation right now I don't think theres a lot changing in pricing.
I think we never increased prices a when the market isn't disruption, but beyond that I don't think there's a bunch of is no big need to change pricing.
Two long answer there I'm sorry.
Now that's fine and and then have you seen any new use cases for costar products. As there has there been new clients that have that have approached you.
Interested if anything's popped up.
It's a little early for that but I'm positive there will be a what you'll typically see is.
Money on the sidelines looking to move in on.
Non distressed properties thats already starting to ramp up as usual.
Great. Thank you.
Yep.
Your next question comes from Stephen Sheldon with William Blair. Please go ahead.
Hi, Thanks.
You know Andy you made the comment that revenues could could tracked in the near term ABS I know, there's a lot of uncertainty out there but generally.
How much visibility do you have right now looking at potential revenue in the third and fourth quarters, if you're right. There at least a meaningful likelihood that revenue in the second half the year could be down organically or where you just saying that if in general possibility, but maybe not what we should expect at this point.
I would reiterate that theres a lot of uncertainty right here, we don't know if we're going to be fully back if or when how but I would not be at all surprised if there was a ah yes, the I would expect softness and rather have to say that when I saw the apartment sales numbers come in last month I was shot.
Back to when that's going to sales numbers coming in this month I'm shocked and like Oh, My Gosh you know.
Well, it's falling apart, we're selling a lot of lot of online marketing, but.
Yeah, I have to assume that sentiments of our business as with other downturns, we'll see a softness or cancellations would go up we've had a number of customers ask for forbearance on their bills, we probably negotiated some deferrals on about a 160 customers on Costar, we probably.
Eliminated some you use your head count and some sites on.
You know 100 or 200, some sites roughly but.
Yeah, we have to be prepared for that it doesn't really change.
Change the long term course, we would expect to pick back up if they're softness shortly thereafter, and we're going to be try to we're going to try to keep everything moves in the right direction, but oh, we certainly can't say that it won't go negative here or there, but again when it went negative last time it only onetime.
I'm ever and three four years on an annualized calendar basis. It was 100% down so I'll take that if that's the hit we're going to take I'll take that but we're going to try to fight it.
Okay, and then secondly, I you'd mentioned that potential global system that you plan to roll out in the third quarter for the Costar suite any any thoughts on what that could mean for the Costar suite financially as we think about the next few years.
Yes.
It's a it's a it's certainly not a pandemic related investments the long play [laughter], but you look at.
I think Lee.
When I look at the early days at Costar and we were in a handful of cities there was X demand for our products as soon as we covered the majority United States I felt that there was fourx the demand for our products because we were a.
A way to transcend multiple markets and geographies in the United States I believe that same opportunity exists on international level. Once we can start to stitch together, our European point solutions into a consistent solution along with the consistent solution in the United States and tie in some of our new assets in Asia into that same flat.
Form.
Believe we'll we'll be able to offer a lot more value, we will not be making massive investments.
In cycling up you know.
Poland This year, obviously, but.
Modest investments to start to build our our network around the world and we'll be doing things like if a customer subscribes to national data in the United States. They will automatically get global data someone in London video search for.
Those opportunities in Toronto or in you know look a hotel information in Beijing, et cetera, et cetera, but we do think that.
We want to be well positioned for.
What we think always happens in a cycle, which is the drop in investment fill activity followed by a surge which is multi.
Multinational and.
And we want to really be able to build an.
Good luck, it really capture that global capital flow at its invested in commercial real estate and it's making good progress and we're lucky that our lead developer of my focus in there actually came to us.
From.
Oh, my gosh, I couldn't possibly remember that number one language software.
What does it Scott.
If you were going to learn new language Oh geez.
That is a good question, maybe see plus.
Is that there is no sense. Thank you very much right. Okay. Thank you [laughter] that comes from our General Counsel [laughter] perfect Guy to have running Costar development as we guided lead development ever at Rosetta Stone.
Yes.
Sounds good appreciate the color.
You definitely have too many devices of my screen now on my desk now I have like for a set us on popping up in 16 bubbles on three screens [laughter].
[laughter]. Your next question comes I think I need to Jeffrey for Suntrust. Please go ahead.
Hi, Good afternoon. Appreciate you taking the question and all the color as usual.
And then is it and yet I know, it's a it's a super fluid environment and I'm just trying to.
Qualitatively what pieces together, especially.
You are trying to square the circle I think around the second quarter guide, which is pretty good all things considered.
Some of the qualitative commentary about how things how bad things could get I guess juxtaposed against what appear to be is I think you need to acknowledge surprisingly strong sales and multifamily group net so.
If you continue to do well given the investments we moved that and given the counter cyclical aspects of multifamily should we infer that.
Except the numbers sort of get much worse comparable to the worst parts of the o. eight or nine downturn that most of the downside risk exists and sweet.
And I, just wonder about the mechanics that.
Yes, so we.
You know sadly I'm I really do expect to see a lot of bankruptcies and I remember clearly no way than they used to be had thousands of companies that were clients going bankrupt. So I imagine you're going to see some bankruptcy you're going to see folks again of their career decided to step out at this point.
So you'll see that.
I see that hit the Costar suite side and that typically it'll happen over X number of quarters, but you also see new buyers entering the market in the after a quarter too.
Especially like Vulture investors are opportunistic investors.
You will see.
Got you will see building owners go bankrupt the.
Only up silver lining their has said they tend to maintain there in the past tended to maintain.
Their marketing plans through bankruptcy bankruptcy courts tend to approve that because I don't want the revenue stream to erode during the bankruptcy process.
And then the thing that I remember clearly from the last several cycles is that.
The new owner steps and that just thought the asset for 50 cents on a dollar their flush with cash and much of it flows are way.
So you know there I think that.
They'll be friction throughout the system, but probably a little bit more on you know that the brokers, who step out of the best Chicago or go bankrupt on the Costar side.
Going forward and the interest of time, we ask that you. Please limit yourself to one question. Your next question comes from May got Tandon with Needham. Please go ahead.
Thank you Andy or Scott, maybe a one of you could ask for this in terms of the multifamily platform I think Scott you mentioned that.
11% of the growth last quarter came from some of the upgrades could you provide a little bit more color in terms of what deals features are that the users are buying and what does that mean for twoq you in terms of the contribution from the upgrade or on a platform. Thank you.
Yeah sure what I was referring to in the growth in the quarter was that the.
Our clients or are choosing higher level and packages to purchase which cost more per package.
You may recall last year, we announced that we're putting a diamond plus level.
For a for sorting to the top of the Diamond section and then this last year at the end of the fourth quarter. We also introduced a platinum and gold plus tiers as well to sort of the top to those level.
And those aren't aren't material parts of our sales right now, but there's just examples of when people want to get more exposure when they have additional vacancies and even filled then they can buy up to higher level and packages to get more traffic and more leads and we saw that in the first quarter and thats what generated that 11%.
Revenue growth from that price mix effect.
Your next question comes from Bill Warmington with Wells Fargo. Please go ahead.
Good morning, Oh, sorry, good evening everyone.
And one day and we start the call in the morning.
No [laughter] that long.
It has been.
No.
Signature ads at loop Mount Yeah that was a big focus of the sales conference in January.
And allows the whole move from from having Loopnet go from being a broker focus spoken driven to the owners we're the market.
Yes, I you are you see uptake on those ads moving from the.
The broken price point, and 35 40 $60 per listing per month.
To the two to 3000 dollar level.
For the owner, if that's taking place and yes. It is that going to continue to drive the revenue because it it sounds like the revenue on that division is going from around 20, 22% expected revenue growth of about 10% to 12% revenue growth.
Yes, so I'm sorry, the for the for the.
Oh, the big Sandy hit we saw Oh.
Some really good sales results of Livnat signature ads and then the pandemic hit and everything just basically stopped while people are figuring out what's going on but the the really good results and so you get your adds continues in a January February and as much as anything I think we saw some.
Brokers, who are more vulnerable pulling back some of their spending and while it's a you know the there was a dip in search activity and losing that initially as we went into a dependent in the United States.
That activity has come back up in searchers are now stronger than they were before.
I think we need to clarify our message or evolve our message to the owners about the fact that.
They have you know the message is really solid for those folks.
There will be.
Hundreds of thousands to a million leases in the next year, there will be a contraction overall demand people are not driving by in seeing building signs people not during the buildings.
We are continuously improving the immersive quality of the marketing their buildings on Loopnet and ER. We think will we will pick up revenue there I think it'll keep going but we're being conservative right now because.
A lot of our revenue in Luton that comes from small brokerage firms and we think they will take.
In outside hit, but that's not really impacting the fact that we're going.
After a new market pretty aggressively which is the larger institutional owners and the amount of money. They spend on an advertisement on a high end lose net add relative to their vacancy loss is.
It is about as Levered as you could possibly be you know you're looking at 800 million dollar vacancy loss and you're looking at that cost you know couple of thousand Bucks. So I remain optimistic I spent most of Sunday working on new marketing materials for lives not to try to us.
Adjusting focus and I think will you know I'm still bullish about the potential there but Mr. Wheeler.
Dr. Wheeler will be Dr., no because were.
Below the being conservative [laughter] and and Bill you know we talked about the revenue per listing increasing in apartments is people buy add in just signature adds alone we saw from the fourth quarter, we're around $500 Brad.
In the fourth quarter, an hour a little over $700 Brad in the first quarter.
And that's not price increases that people deciding to buy them you know the platinum and the diamond level for your dread, they're more and more quantities.
As time is going on as our Salesforce is really focused.
On those high value properties. So it's it's starting to move up nicely from from an average price perspective.
Your next question comes from Brian talk to sell out with KBW. Please go ahead.
Good evening, everyone. Thanks for taking the question regarding the expense base can you talk about what levers you have to pull there going into the back half of the year and how willing you'd be to pull them depending on how this all plays out over the next few quarters and particularly with respect to the apartment AD spend can you clarify your key.
Your comments regarding the intend to continue with that plan is that just with respect to one Q, meaning the AD spend in the second half of your capacity could potentially be curtail depending on how the environment unfolds.
We at this point as Weve as we've mentioned so there's a bunch of different levers we can fill in cost structure Oh, we have.
A lot of Optionality there, but at this point, we don't have conditions that would merit contracting or send dramatically. We actually have a lot of great growth drivers in the business and we are.
Yes, as we reported this quarter were meeting our expectations.
If things fell apart.
You know certainly we would react but that's not what's going on and when you look at and when you look at the results were having in apartments Dot com.
Got it they're strong and we believe that potential is still there and.
And we don't see a reason at this point to change our strategy our traffic to apartments Dot com.
And our lead flow is at the highest level, it's ever been so across the board all almost all of our.
A key sites are hitting the numbers are hitting the traffic numbers.
And we think that Theres, a transition going on from more offline for more online and this is an opportunity that we don't really want to change our course or a mission.
On a given what the facts we have today.
So we're anticipating continuing to stays the same investment we originally planned.
Unless something changes.
Your next question comes from George Tong with Goldman Sachs. Please go ahead.
Hi, Thanks. Good afternoon, you withdrew your full year 2020 guidance or we guiding one quarter out for now can you discuss your confidence level in achieving your previously disclosed 2023 targets.
Those are always fun questions to ask George in the midst of an extremely uncertain environment. When we [laughter], we decided not to getting 2020 guidance George asked as me for 2023 guys.
I kind of news you ever lurking out there George if you get to that.
[laughter] so.
Right right now you know we've we've liked we say we've gotten the second quarter.
Is what we're seeing so far and clearly we were focused on growing back at our historic levels as quickly as possible and continue to invest so that can snap back.
And continuing to pursue acquisitions, which will help fill any of those revenue.
Gaps it might be created by a temporary slowdown.
Certainly either have to buy more.
Acquisitions, or even have to get that revenue growth rate running up further in the out years, but mathematically we can still get there.
Again, we Didnt tell you know what the lengthened the duration. The downturn is you can't say for certain.
No that's not all we know about it so far and as pace and directions change, we'll obviously keep in mind.
That uncertainty clearly as high right now and but the.
And we don't have a reason to believe that it's not achievable at this point until facts change and and there's.
A recent lives not achievable I would actually say you could say if an element of that is organic it would probably more achievable to I'm sorry, it's an or element of that target is acquisitive for an act by acquisition it may become easier to achieve those targets in this acquisition environment.
Your next question comes from Brett Huff with Stephens. Please go ahead.
Good afternoon, guys and glad you're all well.
In the I want to follow up a little bit with you because I know you've been probably talking with a lot of your customers and we've gotten a lot of questions on kind of the the microeconomic decisions that say a multifamily owner.
Or a commercial building owner, who wants to sell or maybe is under duress or or maybe wants to weights give any anecdotes that will help us give some insight into those decisions that folks are making and how we therefore, they're going to make decisions on whether they advertise on loopnet or advertising multifamily you give us a good example, the large multifamily owner with lots of vacancy risk.
Buying an AD for a few thousand dollars, but are there any more in the middle market or even anymore for loopnet, but you could give us. Thanks.
So you are in terms of.
I think they're two different questions there.
One is.
The microeconomics and the decision to market on live that are apartment stock comp.
I think that math is really quite simple like if if you across the board the economic trends, it's going to be to softness in leasing revenue.
And when you hit softness in leasing revenues on big dollar items.
And and traditional methods like broker priorities or events are signs are people spending to sign outside or walk into the building are all gone away.
Beautiful print brochure is not going to be seen or touched by anybody.
It's a no brainer is at the trend should be to digital marketing virtual experiences more matter towards more drones that is and the like so that's a no brainer.
And.
Then the other element of that decisions have people using our tools to try the side should they sell should they you know.
I think those macro I think those trends are tsunami like and I think that.
I think that.
I hope our clients use our data.
Aggressively in trust the numbers to set their pricing realistically quickly. So when it became of musical chairs I'd sit down first if the data says you should sit down first that having a chair is better than having no tenant at all.
I think that people should be using our data right now, it's a really be realistic between and also to help coordinate between owner lender and.
Under lender Investor make sure, they're all making that decision together with data as opposed to hope and.
And then on the on the part of investment sales I I feel that there's typically a big disconnect right now, where it's gonna be really difficult for people to.
Sellers to reduce their expectations enough to meet.
Where buyers are right now so typically that doesn't happen for a year to 18 months to 24 months, but we will build products and services to try to be there's that with a strong offerings as that volume unleashes.
Your next question comes from Sterling Auty with JP Morgan. Please go ahead.
Yeah. Thanks, sorry, guys. So for my for my one question just want to go back to multifamily in terms of the common set you made is it is it fair to say that you actually believe the bottom has already been put in multifamily or is there potential that multifamily could see sequential contraction.
And.
The upcoming quarters.
I think there just two questions one is.
Our experience selling advertising the multifamily and then secondly rates in occupancy levels, an asset prices in the multifamily world.
I believe that just by the nature of our business. We are somewhat insulated as to what happens with occupancy has been maybe inversely correlated to what happens with occupancy.
I think were relatively independent of what happens with the rents the rent fall. So far are you know not material.
And I think were independent of what happens to asset values, we may be.
Somewhat negatively impacted by the fact, there may not be a lot of new developments over the next two years.
But at this point the sales are holding up strong because you know if you.
If you have tenants, who are not paying rent and we're paying rents the month before and you anticipate they may not be paying rent again in the future you need to begin to backfill them. If he just had a large property delivered and it's got a lot of vacancy then.
You know.
Then you may have I need to really pick it up so I don't you know again, we can't really CV on next quarters to what's going to happen economy, but right now we feel pretty good about what's happening from apartments Dot coms perspective, and our experience you know it could change but right now its.
So it has surprise to me.
Materially because the upside.
[noise] shock to me.
Your next question comes from Joe Goodwin JMP Securities. Please go ahead.
Well you can see Glenshee Oh.
Yes, sometimes on the and move them.
Mhm maybe.
<unk> like you <unk>, Joe Joe I'm, sorry could you could you speak up a little bit it's very very again could you try again.
There's a better.
That's much better.
Oh, sorry about that brings a whole hold on omnicom [laughter]. So on the a on the commentary around the potential about your revenue revenue actually going negative growth could you maybe just give some color around what quarter will likely be the bottom or at least how you're thinking buffer.
I would look at you know, we don't know or but I would just like back to the worst we ever experienced in 30 years was so wedo nine and we had two quarters, where it really materially so.
So that would be you know quarter to out on the Costar side, but we you know a this is a different cycle and we have no idea you know when you know.
It's just too hard to predict passed the quarter, but it it typically wouldn't be if you just take exactly what happened in a way to stick it right here it would be third fourth quarter.
Yeah. Good hurting people, we yeah, we're seeing and that you to keep in mind is that if you recall back in the last recession. It started to build the negative momentum starting to build through all eight and then and dropped pretty heavily at the end of only early on nine. So it took a number of quarters for that developed what we're seeing happened here is.
Yeah, we hit mid March things dropped quickly and they they dropped within a week down to the levels. I mentioned, you know half of the levels of sales et cetera, which never happened before in the O. eight or nine and then when we see what's happened since then.
You know the Andy mentioned, we've seen volumes move up in traffic and leaves on both Loopnet and apartments Dot com apartments Dot com is up where it was before the downturn, we've seen costar and the last week and a half we've seen the contract pacing move up a bit in costar in the last week and a half. So so we just saw this this you know the cliff dropped.
Quickly and then it held there for a week or two and then we've seen.
Some build underneath it now does that mean, it's going to continue the builders are going to drop again, if something else happens the economy or is it going to build faster like we don't know, but but the patterns very different in this. This shock then then what happened to know eight or nine.
Well, we try and take as many lessons as we can from it and then just see how this thing.
Develops in a different pattern.
Having no further questions at this time I'll turn the call back centers for any closing remarks.
Well, thank you very much for the first quarter.
Since the first quarter inch co look forward to update you. This summer on the second quarter and I hope, you're all saying safe and well appreciate you joining us here on the call today.
This concludes today's conference call. Thank you very much for joining US you may now disconnect.
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