Q3 2022 CoStar Group Inc Earnings Call
Provide AD campaign has delivered over 12 billion media impressions and led to an all time high in consumer brand awareness.
Carbon stock Com continues to provide the highest quality consumer traffic to our customers.
We believe that a specific purpose sites such as apartments Dot com delivers higher intent leads we also believe that that third party lead analysis shows that our leads convert to leases at significantly higher rates than any of our competitors.
Overall I'm extremely pleased with the strong performance of our apartments dot com marketplace and sales team and have increasing confidence in our ability to return to 20% revenue growth.
Revenue for Costar was $213 million in the third quarter, representing a 17% increase over the same quarter a year ago on a constant currency basis.
Costar sales results as results increased 55% in the trailing 12 months compared to the trailing 12 month sales in the same quarter a year ago.
We surpassed 180000 subscribers in the third quarter and continue to maintain high renewal rates at 93%.
Our consistent double digit revenue growth and high renewal rates for Costar are a result of ongoing product investments that broadened the capabilities of costar and allow us to reach new customers integrating STR hotel data opened up hospitality investors as customers, while our new lender product.
To make 6000 medium and large lending institutions, great prospects to become customers.
We literally have dozens of major potential product enhancements on our product roadmap, which we will continue to deliver which will continue to deliver revenue growth opportunities for the next decade or more.
Okay.
The next product enhancement on the Costar roadmap involves adding information on 12600 commercial property investment funds that invest almost three six trillion dollars in commercial properties around the world.
These investment funds hold over 70000 commercial properties.
Over the past year, our research team has been linking the investment fund property information to properties in Costar.
And adding properties in countries that are currently not in our datasets approximately 70% of the investment fund properties are in the United States, Canada, and the U K, while the remaining 30% expand our property coverage throughout the rest of the world.
For the first time. These fund investors will have new detailed analytics on their property portfolios through costar there'll be able to access information like historic sales comps leasing.
History pricing vacancy rates in other important details to help understand their portfolio is better.
In addition, brokers and owners looking to sell properties will be able to clear the investment fund data to determine which funds still have dry powder and are looking to invest in properties that are similar to theirs.
I believe this new investment fund capability unlocks significant potential revenue opportunity. The investment fund product is scheduled to release in Costar in the first quarter of 2023.
We believe that there is significantly more revenue opportunity ahead for Costar. So we're continuing to grow our costar sales force to better capture that opportunity.
We have added over 50, new sellers, so far this year and plan to continue to expand both in the U S and internationally.
As we add to our sales teams, we've seen productivity levels increase as well.
Average gross sales per rep or higher this year than any single quarter in the past five years.
With our strong product development capabilities and continued investments in our sales team I am confident in our ability to sustain strong double digit growth in costar for many years.
Loopnet third quarter revenue was $59 million up 13% over the prior year on a constant currency basis.
Net new sales bookings for Loopnet in the third quarter are up 99% over the third quarter of last year.
Just one percentage point shy of being up 100% year over year.
We will try harder next time.
Our sales team.
Our sales team is now producing consistent strong sales results every month over the past six months, we've produced more net sales bookings than we did in all of 2021 I am very encouraged by the progress that Dave Miller and his team are making as we grow our dedicated Loopnet sales force, which is now three times the size it was.
From the beginning of the year, we have now surpassed 100 dedicated sales reps.
The result is that dedicated Loopnet sellers now account for roughly half of all the Loopnet sales in the Costar sales force is delivering the other half.
This is an improvement from a year ago and our dedicated Loopnet sales team produced roughly one third of Loopnet sales in the long term, we want to free up the Costar sales force to focus more effort on costar as it approaches $1 billion in revenue.
Traffic to our Loopnet network of sites reached a high in the third quarter, averaging approximately 13 million unique visitors per month with.
We now hold the number one keyword rank across 130000 commercial real estate search terms.
Sort to the number one position 97% of the time across 10000 of our highest performing U S commercial real estate search terms.
Our space for Dreams Media campaign has proven very successful delivering over 200 million impressions across TV, social media and the web in the third quarter.
We continue to expand Loopnet internationally with plans to launch Loopnet that Seo that U K across the United Kingdom in early November .
Following our successful launch of Loopnet in Canada in the first quarter. We believe there are significant brand efficiency revenue profit advantages in operating a multinational property marketplace.
We estimate the potential revenue for digital commercial property advertising in the UK to be well north of $100 million, which up to this point is largely untapped loop.
Loopnet Seo Dot UK will bring together the market leading traffic position of reality with a proven international Loopnet brand.
We intend to redirect traffic from Rialto to Loopnet and Sunset reality its been a very successful site.
As our costar clients in the UK or renewing their annual Costar contracts. Our sales force is working with them to add loopnet advertising to their service today.
Today, many of the listings unreality have been free in order to build traffic, but our goal is to convert many to paid on loopnet over the course of the next 18 months.
Following the launch of Loopnet and the U K, we will turn our attention to rolling out Loopnet in France, Spain, and Germany. In 2023, we're really excited to deliver the first multinational commercial real estate marketplaces, and we believe it will have huge appeal, we believe that the loopnet opportunity is in excess of.
$1 billion as we extend across Europe .
Our Tenex digital auction platform performed very well in the third quarter. Despite a significant slowdown in overall CRE sales volumes due to the disruption caused by surging inflation and the rapid increase in interest rates.
While CRE transactions were down in the market by almost $30 billion in the third quarter. The volume of properties brought to the 10 X platform increased 88% over the prior year.
Consistent with prior quarters over 80% of the assets brought to the platform through Tenex are still market rate performing assets and less than 20% of the assets are distressed properties.
I expect a significant increase in distressed properties in the quarter to come in quarters to come.
Clearly the commercial property transaction market is in a period of disruption with buyer and seller expectations not yet on the same page buyers are quick to recognize price drops, but sellers are slower to accept reality.
The result is an overall drop in sales volume across the board.
As expected, we're seeing a drop in the rate the properties brought to the platform actually ended up selling what we call the trade right.
Tenex trade rates rose to highs of 75% in the fourth quarter of 2021, and a sense dropped 27% to around 55%.
Nevertheless, tenex continues to be a more effective way to sell properties because in the same time period, we saw traditional offline trades dropped from 42% for about 42% from 43% trade rate to a 55% trade rate.
The 10 X platform trade rate went from outperforming offline sales by 74% and a stable market to outperforming offline sales by 120% in a dislocated market.
We believe the buyer seller dislocation as a near term event that will resolve itself over the next two to three quarters generally once buyers and sellers expectations align again sales volumes increase and distressed sales grows significantly.
Currently distressed sales rates are at multiyear lows, but believe they will significantly climb in the intermediate term and 2008 the year of significant economic dislocation.
There were only about 2300, I'm, sorry about 2900 distressed commercial property sales.
And distressed sales took years to peak with about 16000 distressed sales in 2012.
Year to date similar to 2008, there has only been about 2178 distress sales.
It would not be surprised if the number of distressed property sales quadrupled over the next few years, creating significant revenue opportunity for <unk>, we have had.
We've made a major investment to integrate <unk> into Costar and Loopnet and we have dramatically increased the size of the <unk> sales force in the next few months, we'll complete all of those integration efforts of Tenex, enabling significant scale efficiencies I believe the platform has never been stronger and is ready to handle the surge in activity.
<unk>.
Regardless of where we are with the economic cycles. We are building tenex for the long term I am confident our Tenex digital platform will become the industry standard for fast efficient property transactions.
Both for performing and distressed assets, regardless of the economic cycle 10 X will be ready.
Our residential business continues to perform well with third quarter revenue of $19 million.
Registered agents for our home snap pro and pro plus products have grown to over 958000 at the end of the third quarter, an increase of 23% over the same quarter last year.
Getting close to 8 million registered agents.
Registered agents precision App are also growing rapidly we now have approximately 70% of the real estate Board of New York agents registered to use city snap.
And we only launched the product a little over three months ago.
Traffic to homes Dot Com continues to grow with average monthly unique visitors for the third quarter up 52% compared to the third quarter of 2021.
<unk> visits to homes Dot com were up 83% over the same period last year According to Google analytics.
The greater increase of visits to visitors show deeper that shows deeper engagement with the site.
I am encouraged by the rapid improvement in consumer traffic, we do have a long way to go but we're tracking just where we were with traffic growth on apartments dot com at the same time.
In apartments Dot com was a very successful launch.
According to Comscore September 2022 over September 2021 homes Dotcom visits grew 27%.
While on the same time period, Zillow fell, 22% and realtor fell 30%.
As we communicated before in previous earning calls our residential product strategy is centered around our homes dot com marketplace that advertises the home as opposed to just advertising agents.
We believe consumers search for properties for sale in a marketplace like homes Dot com have higher intent to consumers who are served home for sale as randomly cross social media or the internet.
Our objective is to partner with a $1 5 million agents in the United States and supportive your listing your lead approach and enabled consumers in any agent to collaborate digitally throughout the home buying or selling process.
We're focused on building complete coverage of residential listings throughout the United States as well as developing unique proprietary content by leveraging the skills and capabilities of our awesome nationwide research organization.
Overall, we're making great progress developing homestar homes dot com across all of these strategic areas and are looking forward to showcasing a number of our agent focused product features of the upcoming National Association of Realtors Convention in early November .
In fact, I believe we have a big product release Thursday, or Friday of this week, if you want to check out some of the incremental upgrades at the end of the week.
With rising interest rates and a rapidly cooling residential property market I believe now is the perfect time to invest in a marketplace. That's designed to help consumers and their agents advertise and sell properties faster and at a higher price.
Deteriorating market conditions may well create a tailwind for our business model.
The majority of home snaps revenue is from reselling, social media and search engine advertising to agents.
We believe that this revenue while it's good revenue as lustrous T J less strategic less durable and just playing less of it than the potential revenue generated by a potentially successful high intent marketplace like comms Dot com.
This is a lesson we've learned from our experience with apartments dot com for rent Loopnet and other market places we operate.
In the coming quarters were going to deemphasize selling homes snap concierge and home snap pro plus and temporarily shift the selling resources to our marketplaces apartments dot com in Loopnet.
Our sales teams will gain new skills and become even more well rounded sellers across multiple marketplaces.
After a brief transition period, we believe that we will generate more revenue overall with a shift in sales force allocation.
As we have communicated previously when we have built critical traffic masks for homes Dot Com. We will then re allocate or allocate significant selling resources to homes Dot com.
There is a potentially interesting development in the residential industry I want to briefly mention.
We're closely monitoring ongoing antitrust litigation involving residential listing associations or Emma losses, and one that's currently pending in the Western district of Missouri.
Class of home sellers alleged that NAR and brokerage to finish created enforced anti competitive rules that require home sellers to pay a non negotiable commission to the broker representing the homebuyer, resulting an inflated buyer side brokerage commissions to.
To date the players have had some success to feeding our motion to dismiss and succeeding in class certification the.
The case is scheduled for trial in February .
If the plaintiffs in this case or other similar cases succeed this could have a significant adverse effect on residential marketplaces that rely primarily on broker sharing commission revenue models.
Our residential sales strategy should not be impacted as we are focused on a property advertising model.
I do not believe a judgment for the plants with significantly adversely impact most residential agents because most do both seller and buyer representation and the judgment would just shift fees from the buyer representation business to the seller representation business.
More on that in February .
The rise in interest rates over the past seven months is certainly weighing on real estate driving prices down reducing sales volumes.
The slowdown has been broad based across property types and geographies.
Office vacancy rates continue to climb as companies continue to recover from the pandemic.
And a significant number but minority of workers continue to work from home.
In the third quarter vacancy rates rose to 12, 4% and Thats approaching historic highs.
Inflation adjusted rents are well below normal levels and rent growth is at a 10 year low.
Net absorption has been negative for seven of the last 10 quarters.
Office vacancy will continue to rise in rents will continue to likely experience negative pressure. However.
Each quarter millions more office workers are returning to work in person because of the significant advantages of in person collaboration.
According to cast the security in January of this year usage of office space was only about 16% of the pre pandemic levels.
By last week office usage had trap tripled this year to 49% so from 16% at the beginning of the year to 49% now that's a pretty fast climb the trend is obvious traditional office using white collar employment is continuing to grow which means there's more under.
Lying demand and as more and more people return to the workplace, but new office construction starts are very very low.
This suggests that while we're while in the short term the office market will be very soft and there may be significant distress. There may be a significant rebound two to three years out I believe that Costar, Loopnet and 10 X can function very well.
In this.
Sort of volatile economic environment.
The story of the industrial sector is very different industrial vacancy fell to three 9% in the second quarter, the lowest rates seen in the sector history, but ticked higher in the third quarter as developers responded to robust demand new completions expected in 2023.
<unk> any annual amount delivered in the last 30 years.
Spite these numbers the sector remains remarkably healthy.
Net absorption in the retail sector drifted lower in the third quarter, although slowing demand has outpaced new supply for six consecutive quarters, leading to the third quarter vacancy of four 3% the lowest retail vacancy rate recorded tied.
Tight vacancies have given rise to some of the strongest rent growth in history with a third quarter quarter nominal rent growth of four 5%.
As the risk Federal reserve battles inflation mortgage rates horizon to their highest level in years combined with double digit home price gains over the past two years affordability has deteriorated to levels not seen in more than 30 years with buyers being priced out of the market sales are tumbling and prices are.
<unk>.
Despite the market uncertainty I believe costar is well positioned to sustain our revenue growth and profit through a potential economic cycle.
Have proven to be very resilient in previous downturns, which I believe is a direct result of our diversified product mix low customer concentrations mission critical products and a strong predictable subscription model.
We have a loyal and exceptional team of leaders and employees working together in our offices, resulting in the best employee retention rates, we've seen in years, if not decades, we're expanding our sales capabilities and geographic reach unlocking new customer segments and revenue opportunities our balance sheet has never been stronger.
And we view a downturn is the perfect time to go shopping.
More than three decades ago, while I was still a college student I founded Costar in a dorm room with an ambitious vision of digitizing the world's real estate.
That first year, we realized a poultry revenue of $7000.
But costar was in the right place at the right time.
There is almost 200 trillion dollars of real estate in the world and leading that effort to digitize that can unlock massive value.
This mission has drawn imagine of investors and energized colleagues, who brought life to the vision year by year decade by decade, we've consistently and persistently grown those paltry revenues into the impressive billions.
This quarter, we achieved an accomplishment almost no company ever achieved we have made the S&P 500.
Also proud and grateful to be here. We're here because we are a remarkable group of colleagues who are committed to the submission of digitizing the world's real estate empowering all people to discover properties insights and connections all of which improve people's businesses and lives.
Going forward, we are now single mindedly focused on reaching the SNB 100.
At this point I'm going to turn the call over to our Chief Financial Officer, Scott Wheeler.
Thank you Andy sounded great today.
I'm not sure if it's the microphone.
Yes.
I Hope you are in as good a voice in the Q&A session.
Well third quarter, certainly was another great quarter, great way to start our first earnings release in the S&P 500.
I definitely agree, we're well positioned strategically and financially regardless of economic volatility and the external market conditions.
Certainly encouraged by our strong performance across all of the information and marketplace products in our portfolio.
Let's start with Costar the product revenue grew 17% on a constant currency basis in the third quarter and 16% in total after considering the devaluation of the British pound.
Over half of our revenue growth in Costar is from new customers, which speaks to the success of the new product introductions that Andy talked about.
Costar product revenue has grown at least 15% every quarter. This year and we expect 15% revenue growth to continue in the fourth quarter.
Which is 16% on constant currency basis.
Multifamily revenue growth in the third quarter was 11%.
The number of properties on our platform is growing and we also see positive underlying trends in our AD sales mix.
Customers upgrading to higher value add packages is once again outpacing the value of properties downgrading to lower priced ads.
With strong sales momentum and an improving economic backdrop for advertising on apartments Dot com, we now expect multifamily revenue growth of 16% in the fourth quarter and 10% for the full year of 2022.
Loopnet revenue grew 13% in the third quarter on a constant currency basis in line with our guidance expectations.
We expect fourth quarter revenue to grow to trend similarly to the third quarter at 12% to 13% with full year revenue growth of 11% 12%.
Revenue from information services grew 14% in the quarter and the third quarter ahead of our 11% guidance estimate on revenue primarily as a result of STR revenue favorability.
Both real estate manager and FTR each grew double digits in the third quarter.
We expect full year 2022 revenue growth of 10% in information services unchanged from our prior guidance.
Residential revenue decreased 22% overall for the third quarter of last year as expected due to the runoff of the acquired non strategic revenue from homes Dot com.
On an organic basis, excluding homes dot com revenue grew 13% in the third quarter.
Subscription revenue grew 44%.
Our expectation for full year 2022 residential revenue remains unchanged at $73 million.
During the third quarter, we made a strategic decision to eliminate certain usage fees related to agent access to the home snap pro application.
The pro version of the home Snap application is now free to all agents in our multiple listing service network.
As a result, we accelerated $16 million of amortization in the third quarter for intangible assets that were recorded as part of the purchase accounting for the home snap acquisition.
Other marketplaces revenue grew 12% in the third quarter of 2022 led by continued strength in our lands end business for sale marketplaces.
<unk> revenue growth slowed in Q3 as a result of the market dislocation that Andy discussed.
We adjusted our Tenex fourth quarter forecast to reflect the continuation of this trend.
As a result, we now expect revenue growth in our other marketplaces sector to be 10% in the fourth quarter and 17% for the full year of 2022.
Adjusted EBITDA for the third quarter was $153 million exceeding the high end of our third quarter guidance range by $13 million.
Total cost in the third quarter were lower than our forecast as a result of investment spending levels.
Residential products.
We are leveraging more of our existing internal research teams to build out our content, resulting in higher quality content.
We are now hiring full time residential research teams not contractors, which results in lower investment spending levels. This year.
Our marketing investment was also lower than our forecast in the third quarter a trend we expect to continue through the end of the year due to our strong traffic.
A revised estimate for the incremental 2022 residential investment spending is now on the $125 million range compared to the $180 million to $200 million previously communicated.
Our sales force has eclipsed 1000 sellers for the first time totaling 1090 salespeople at the end of the third quarter.
We added a total of 115 sales reps in the third quarter, which is the second consecutive quarter growing sales head count by more than 100 people.
Year to date, our sales team has grown 32% compared to the beginning of 2022 with apartments Dot com Loopnet and Costar, increasing the most in terms of total heads added.
We expect to add a net 300 sales heads in 2022.
Although it takes 12 months to 18 months to get a return on a new salesperson when fully productive. These 300, new sellers can produce approximately $70 million to $80 million and subscription revenue every year and this is revenue that renews at over 90%.
Over five years. This has the potential to generate almost 500% return on the cost of this investment.
Clearly from a financial perspective, the faster we can grow our sales distribution channel against a market that is worth tens of billions of dollars the better off we will be.
Our contract renewal rate was 90% in the third quarter of 2022 slightly below the 91% renewal rate in the second quarter of 2022.
This is a trailing 12 month metric has fluctuated between 90 and 91% over the past three quarters anchored by Costar at 93% and multifamily at 90% in the third quarter.
Subscription revenue on annual contracts was 79% for the third quarter of 2022, four percentage points higher than the third quarter of 2021, reflecting the strong recovery in apartments Dot com this year.
Turning to the outlook, we expect full year 2022 revenue to range from $2 175 billion to $2. One 8 billion represents an increase at the midpoint of the range by $5 million and implies an annual growth rate of 12% at the midpoint.
Organic constant currency growth is expected to be 13%.
We expect fourth quarter revenue to range from 566% to $571 million, representing revenue growth of 12% 13%.
2022 full year adjusted EBITDA is expected to range from $665 million to $670 million, which is an increase of $48 million from our previous guidance at the midpoint.
This increase is a result of efficiencies realized in our residential investment program in both content generation Resourcing and marketing spend.
Fourth quarter adjusted EBITDA is expected to be in the range of $176 million to 181 billion, indicating a margin of 31% at the midpoint.
Overall, we're in a very strong position financially as we move through the final months of 2022.
We are on track to exceed the growth and profitability targets, we set for the business back in February our.
Our balance sheet is in great shape and provides us a significant amount of funding flexibility to pursue our long term growth strategies.
With that I will turn the call back over to Cindy.
I'm actually going to turn it back over to the conference operator.
So he can introduce the question.
That sounds like a plan overdue Bailey.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by two.
Each analyst is permitted to ask one question.
Our first question today comes from the line of Peter Christiansen from Citigroup. Please go ahead. Your line is now open.
Good evening, Thanks for the question and congrats guys on inclusion in the S&P that that's great.
I got to ask the question. Thank you.
Any preliminary thoughts on investment spending for 23 residential any sense of of a pacing there would be helpful.
Thanks, Pete and good to hear from you. So you noticed that we've been much more efficient this year on the on the residential investment spend so I think that's good news. The other good news is it doesn't mean that all of that spending gets pushed into next year like I said, we have a lot more efficiency in the content generation and we don't need to spend.
As much marketing for the traffic we are getting.
So we're not yet ready to give guidance on to the 2023 investment levels. We are working on those now, but we will keep you posted and be confident that we are still on track to our five year numbers that we communicated previously on both the residential and the long term growth and profitability of the business.
Great. Thanks, Scott Nice quarter you bet.
Thank you.
Thank you.
The next question today comes from the line of Jeffrey Mueller from Baird. Please go ahead.
Your line is now open.
Yes. Thank you.
So just on net bookings, obviously, a big year over year I think its typically seasonally weaker in Q3 than Q2, which was the case.
This quarter, but normally I think thats due to apartments and apartment. It sounds like you had a record.
Sales month in September so if you could just kind of like help reconcile what drove the sequential decline and if you think the record sales in what is typically not the seasonally strongest month.
Reflection of kind of the end market trends picking up with net absorption and builds on all of those stats you gave us. Thank you.
Yes.
It's a question of we're growing the apartment sales team.
The sales force of apartments are at the highest productivity levels, we've ever seen in any sales force.
Across the company.
We have been.
Get a better job at.
Managing our price per lead and keeping that number fair for both us and our clients.
And.
And just the quality of our traffic and the strength of the platform.
As remains strong so we're.
Moving up to some really impressive.
Production numbers, Scott do you want to anything there yet.
Yes, there was one other.
Issue that I talked about briefly around the.
The fees for the subscriptions on.
Some of the home pro access that triggered the $60 million write off I mentioned that.
That comes out of the sales numbers.
If we had not done that strategic decision our sales would have been over $80 million for the quarter.
Any other variation relative to second quarter, it's really just normal quarterly fluctuation amongst the other businesses.
But really the standout.
As we pointed out was it apartments were really the first time had a third quarter that was stronger than the second which is a great Testament to both the sales team and the momentum were seeing back in their apartment advertising space.
When we acquired apartments dot com third quarter used to be.
Growth in fourth quarter used to be decline, so it's great to see it.
Setting records in the third quarter.
Exactly.
Thank you.
Next question today comes from the line of Ryan Tomasello from Stifel. Please go ahead. Your line is now open.
Hey, everyone. Thanks for taking the question.
Yes.
Be helpful. If you can provide an update on how you're thinking about the residential site traffic milestone, but you've laid out previously.
Those changed at all in terms of the magnitude and timing.
And how are you prioritizing the different levers there in terms of marketing campaigns, SCO and SCM and any other levers that you outlined previously and then from there. If you have any updated thoughts on the timing of the monetization strategy. When you decided to turn that on and what products you might intend to lean into.
First thanks.
Sure so.
I believe that we are on target.
On plan for growing that traffic ends.
Are comfortable with the sort of $25 million $50 million traffic levels, we had laid out unique visitor levels, we've laid out.
And.
Yesterday I was looking at a traffic chart that.
Compared apartments, dot com and homes Dot com in the first 18 months. After we began rebuilding them and they matched perfectly so the growth we're seeing right now is on target.
But it's still early days, we just did a major switchover about a month ago.
And we're seeing Google crawl the site.
A great rate.
Which is good to see.
And but it's a it's a marathon not a sprint not a five K 10-K, its a marathon.
And.
We just continue to layer.
Bring layer and layer and try to grow that traffic on SCO functionality.
Referrals and alike I am encouraged by the fact that we are seeing the average number of visits to visit or go up significantly that's telling me that people are coming to the site are likely to experience. The fact that we.
Have a fast performing cite the fact that we're actually showing who actually has the listing that's uncluttered and it's clean.
Now we are not going to we're really focusing on the content the quality of the experience and SCO.
At this point, we are investing in SCM, but we're not investing aggressively in SCM. We're also not in.
Investing aggressively in consumer marketing.
We are going to begin to ratchet up those levers.
Once we are satisfied that we will have the optimal ROI for that investment based on.
The love the number of the sets of functionality, we've delivered the effectiveness of the SCO the site performance.
So that'll likely.
Begin to ramp up going into 'twenty three.
But we're on target for we expect to be and I look forward to.
Another one of our incremental releases on the product coming out later this week.
Thanks, I appreciate the update.
Thank you.
The next question today comes from the line of John Campbell from Stephens. Please go ahead. Your line is now open.
Hey, guys. Good afternoon, congrats on the continued momentum.
Thank you.
Sure I just wanted to revisit tenex.
Does seem like there's a pretty meaningful revenue opportunity there just I guess with rising distress activity.
On my math, I'm, getting you guys kind of near $70 million or so of <unk>, but I am curious about kind of how to size up that opportunity over time, I think nationally I think the distress level, it's still way less than 5% of the mix if that gets back to I don't know like 10, or 25% or so of kind of the range. We saw in 2012 2014.
What could that look like for <unk> and then maybe as a side question. There maybe if you could provide what <unk> kind of peaked out on revenue during kind of the heart of the crisis.
Do you want to get to yes, I'll take that back in the heart of the last crisis Tenex peaked out I believe it's between 100 $110 million of revenue all of which was on distressed properties.
And so you can clearly see there is significant potential.
Whereas today, we are only between 15% and 20% of our revenue in <unk> is coming from distressed. So it gives you some sensitive.
Based on your numbers of $70 million take that for distressed and then.
Consider we could get to those historic levels, depending on the size of this downturn and then theres a big wave of opportunity there.
The distress from the historical revenue side and remember that the OE.
Distress.
Didn't show up the dislocation away didn't show up until 2014 in full force.
And.
And that was really residential not commercial and so commercial like you could see you could see comparable levels of distress.
Do believe that this time around 10 X is a much stronger product the product is now integrated with Loopnet and Costar.
Is much more automated the salesforce is approaching twice the size of the sales force that they had at the last cycle.
And it's very scalable so two things could happen together over that like just before I say that we are building <unk> to be a performing asset product. So that has a core foundation of performing sales going forward, but.
There is no denying that it does really well in distressed environments.
So you will eventually see an end to this buyer seller expectation disconnect and they'll connect youll see trade rates go back up and you could see you could see distressed levels quadruple over the next two to three years.
And that would just.
Thanks, Scott alluded to it that could get you I believe well above the peak of the last cycle.
Okay. All very helpful. Thank you guys.
Okay.
Thank you.
The next question today comes from the line of Stephen Sheldon from William Blair. Please go ahead, Sir your line is now open.
Hey, Thanks, really strong trends in multifamily this quarter and it sounds like the backdrop is becoming even more favorable.
Your sales capacity and productivity continues to improve so curious how you're thinking about the potential growth there, especially heading into the first half of 2023 and the potential for continued acceleration with any visibility you have at this point.
Sure Stephen Thanks for the question.
We're sort of given any guidance of course at this stage for next year.
Clearly noticed the trends in growth for multifamily have gone from a.
Trough of 6% year over year up to 11, now we expect it to be <unk> 16, and.
And based on the strength of this last quarter sales than we would expect that to continue north.
We've always talked about getting back to those 20% growth rates that multifamily delivered a few years ago and the way we think of it now is that we have.
Certainly price.
Moving north as the number of leads we produce and the platform has dropped the price per lead for our customers. So those are resonating well, we're starting to see volumes come back into the platform, which we believe can deliver a good.
Mid to upper single digit growth range for the business and then like I mentioned, we're starting to see upgrades outpaced downgrades.
Which prior to the pandemic that impact was typically in the 8% to 10% range a quarter.
So I think we have three really strong levers each the capability of delivering high single digit growth rates.
Call, which of that mix is going to happen in which quarter next year, but I think thats the.
The measures, we're looking at and as Andy mentioned, our goal of doubling that salesforce to get us to penetrate the other half of the <unk>.
Scale market, we havent reached and the vast majority of the mid market that we haven't reached there seems to be a great platform for us to extend into the market. So hopefully that color gives you a little sense of the progression will be next year and into the future.
Very helpful. Thank you.
You bet.
Thank you.
Question today comes from the line of Ashish <unk> from RBC. Please go ahead. Your line is now open.
Thanks for taking my question I wanted to focus on the M&A pipeline.
Clearly with the $750 million of equity raise I understand was a button as take but also should we assume that was that something is imminent and then obviously you've shown intent in the past to do some transformational deal on residential side.
Is that an area that.
You would continue to focus on.
Yes, so we obviously have a great balance sheet now approaching $5 billion in.
Cash on the balance sheet.
And continue to be <unk>.
Strongly cash flow positive.
So.
Our primary new initiative is residential so we are looking at all the opportunities out there in the residential space.
And.
Right now we're in an environment where.
Things are shifting very rapidly to a buyers' favor.
And the question is how rapidly.
And when is the right time to move on certain things.
So we're very active in looking for M&A opportunities, but we're also monitoring market conditions and want to get.
The best.
<unk> for the shareholders moving at the right time, not being too greedy, but trying to.
Observe a rapidly shifting environment right now to our favor.
That's very helpful color. Thank you.
Mhm.
Thank you.
The next question today comes from the line of <unk> Tandon from Needham <unk> Company. Please go ahead. Your line is now open.
Thank you good evening, Andy and Scott Congrats on the quarter.
I wanted to focus for a moment on Costar suite could you maybe just peel back the growth from <unk>.
New accounts logos versus increased penetration within the installed base and then the impact of pricing I think Scott maybe you referenced that in your prepared remarks, but maybe a little bit more details around the underlying drivers of that segment specifically would be helpful. Thank you.
Yes sure. Thanks for the question Mark.
I did mention that.
A little over half of our growth is coming from new customers.
And as we've added so many good platforms with hospitality and with lender and now the fund information Thats coming out <unk> data.
It's a broad customer set that are <unk>.
Sellers are having a lot of success in so so new customers a strong part of our growth.
As you know we are continuing to move more and more of our customer base onto the global Costar platform that provides all of the data and the product capabilities that continues and thats still providing a few basis points of growth or a few percentage points of growth across the platform, which is really I consider a strong mix increase of around 3% to four.
Percent.
And then the remaining parts of those growth.
Our split between <unk>.
Increases in our renewals year over year as well as existing customers then expanding their licenses are expanding their user numbers on the platform. So those are the if you look at the top four areas that are driving the costar growth.
You see those rise to the top in this quarter it may shift a bit from quarter to quarter, but I think that gives us a strong.
Platform to continue with that size of growth going forward.
That's very helpful. Thank you.
You bet.
Thank you.
The next question today comes from the line of Andrew Jeffrey from Truest. Please go ahead. Your line is now open.
Hey, guys, it's Scott stepping on for Andrew.
So my question is Hello go ahead.
Market health.
Could you kind of discuss what youre seeing with customer sales cycles.
How has that changed as the year has progressed.
Sure.
Can you repeat that first part of the question Youre looking at.
We lost the first part of the question there.
Sorry could you talk about end market help for your customers and just how the sell cycle is behaving how does it kind of elongated.
For example here.
And the market help that's what you said.
Clear.
So the.
Yeah.
At this point.
At this point, we're not seeing any of our customers and.
Materially.
Diminished.
Health.
Obviously individual owners of properties may be experiencing levels of distress with high vacancy rates or.
Disadvantageous refinancing on properties that may have been pro forma debt at lower interest rates, but those individual owners situations don't tend to impact us.
Even if somebody is having refinancing difficulties they may they would still.
I want to keep those properties filled they would still want to understand what's happening in the markets.
So at this point, we're not seeing anything negative on sales cycle or.
Any real significant customer distress.
And we continue to operate in an environment where.
We would expect that I expect us to believe that as you did see end market distress.
You have offsetting counter cyclical factors that also kick in.
Got it thank you.
Mhm.
Thank you.
The next question today comes from the line of George Tong from Goldman Sachs. Please go ahead. Your line is now open.
Alright. Thanks, Good afternoon, I wanted to ask the M&A question, a little differently with respect to your residential strategy can you discuss whether your five year target assume M&A or are you able to get there organically.
And if there is M&A assumed in Rajiv is your focus more on acquiring residential data.
Residential online traffic.
Hey, George This is Scott. Thanks for the question and just to clarify on our long term guidance. We gave the five year outlook does not include any M&A. Those are all organic numbers in any M&A would either some planned organic will be on top of organic in those outlets. So hopefully I'll clarify at least the assumptions we had in that outlook.
Do you want to take the answer to the second part of the question is we would consider either both or neither.
So.
We're comfortable acquiring and integrating <unk>.
<unk> content that helps build a more vibrant residential product.
We are also experienced with uncomfortable with acquiring traffic.
And if we can't find the right company at the right price, we could achieve our goals organically.
I think it's more likely than not however.
That there will be a number of opportunities over the next five years it would be really hard to believe that there are not.
And.
I am spending.
Probably.
20% to 25% of my time, right now engaging in those opportunities.
Got it very helpful. Thank you.
Yeah.
Price is too high.
Yes.
Yes.
Yes.
Yeah.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Yeah.
The next question today comes from the line of Jeff Silber from BMO. Please go ahead. Your line is now open.
Hi, This is Ryan on for Jeff Silber.
Just one question on the Costar suite, what has been the feedback from customers on the transition over to the global solutions package and then how did you expect that transition to flow through to average selling price.
Okay.
What was the.
The last part of that question.
Around flowing through to average selling price okay.
That's correct yeah. So the the feedback has been very positive.
Track net promoter scores. So we survey our clients extensively after any sort of interaction with them to understand how they're reacting to our products and services.
We have seen.
Significant uplift in net promoter score as people go from.
No.
The local costar or the one or two modules of costar to going to the global suite.
And so that's really nice when youre out there achieving significant price uplift and end up with a happier customer.
I believe more likely to renew after you have gotten the price uplift and it's sort of common sense because we.
If you are just buying one of our modules for a given city say comps or or just property. When you buy multiple modules and multiple sit as it becomes a dramatically more powerful product with a lot more to offer the customer.
And at the end of the day the price for our products, while they are not cheap.
Are not the primary factor most successful commercial real estate players can afford the product and its.
A very small percentage of their.
On the expense structure so.
What they are much more interested in is the functionality and what it does for them and so we're getting a very positive.
We're getting a very positive reaction from folks as they upgrade and I think it will show higher renewal rates over time and it definitely is lift lifting the ASB.
Scott probably has some specific data on that yes. If you look at the the increases on the upgrades that we've done so far.
The average upgrade has been about 20% to 25% of the price being paid prior to the upgrade.
So thats really good value accretion, but keep in mind is this isn't a significant.
Number of our overall subscribers on Costar so.
The effect of the total growth rate is only two to 300 basis points or so.
Thank you.
Thank you.
There are no further questions at this time, so I'll turn it back to Andy to wrap up.
Well, thank you very much Bailey.
I would like to thank everyone for joining us for our third quarter 2022 earnings call and we look forward to speaking with you again in our year end call on February 21, 2023, which will be our 98th consecutive earnings call with me, having the honor of being at the helm.
And you can imagine we're going to make a big deal about our 100 learnings call, but until then stay safe and thank you very much for participating.
This concludes today's conference call. Thank you for your participation you may now disconnect your lines.
Okay.