Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Costar second quarter financial results Conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer period and instructions will be given at that time. If you should require assistance during todays conference call.
Please press star followed by zero and an operator will assist you offline also today's conference call is being recorded.
I would now like to turn the conference over to your host Vice President of Investor Relations right Semon Nellie. Please go ahead.
Thank you operator, and welcome to Costar group's second quarter 2019 conference call before I turn the call over to Andy Florance, Costar, CEO , and founder and Scott Wheeler, our CFO I'd like to share some very interesting and important items that can actually make your day.
First of all certain portions of our discussion may contain forward looking statements, which involve many risks and uncertainties.
That could cause actual results to differ materially from such statements important factors that could cause actual results to differ.
Include but are not limited to those states in our.
The press release today July 23 to 2019 on our second quarter results and in our company's outlook and corporate filings with the FCC, including our most recent annual report on Form 10-K , and our subsequent quarterly reports on Form 10-Q under the heading risk factors. All forward looking statements are based on information available to Costar and the date of this call and Costar assumes no obligation to update these statements whether as a result of new information future events or otherwise.
Reconciliations to the most directly comparable GAAP measure to the non-GAAP financial measures discussed on this call, including but not limited to non-GAAP net income EBITDA adjusted EBITDA and forward looking non-GAAP guidance.
Are shown in detail in our press release issued today along with definitions of these terms. The press release is also available on our website located at Costar group.
Dot Com as a reminder, today's conference call is being broadcast live and in color on our web site. So please refer disease release to see how to access the replay of the call.
I have a feeling you are really going to want to listen to this one again.
So look up the recall number.
Just remember one question so make it a good one.
I'll now turn the call over to Andy floors.
Andy.
Thank you Richard you're welcome.
Thank you for joining us for Costar group's second quarter 2019 earnings call and this the week of the Fiftyth anniversary of the Apollo 11 mid Atlantic.
Hey.
Slightly more impressive feat than our second quarter earnings.
In the second quarter 2019, Costar group total revenue was $344 million up 16% year over year, that's 7 million above the upper end of our guidance for the second quarter says one of our biggest revenue beats.
We had our best sales quarter ever generating 59 million in the company wide net new bookings.
An increase of 32% year over year. The primary driver behind our exceptional sales result was that much better than expected apartments dot com sales.
Apartments Dot com net new bookings alone increased 122% year over year in the second quarter 2019.
In each of the past three quarters of harvest Dot Com has been all prior sales records for a quarter.
The second quarter of 2019 of the first quarter apartments Dot com net sales bookings were up 44%.
In my experience there are very few times when you get the monthly sales close numbers and our stand by having the number is and this was one of those quarters repeatedly.
The apartments Dot com sales team is performing exceptionally well as operating at the highest productivity level we've ever achieved.
We expect to reach half a billion dollar annualized revenue run rate milestone for apartments Dot com next quarter.
There is a major milestone for us given that we purchased Parvus dot com in 2014 with only $86 million of revenue there.
From that point of acquisition five years ago to now we have grown apartments dot com and over 40% compound annual growth rate.
We believe that we have every opportunity to continue this exceptional growth rate.
[noise] Costar suite revenue growth was strong and cross the 600 million of revenue run rate in the second quarter.
We now have over 150000 individual subscribers to Costar suite.
Net new bookings were up 26% from Q1 of this year.
Our quarter over quarter, U.S. Costar suite revenue growth of 3.5% in our year over year at U.S. Costar suite revenue growth of 15.1% are right in line with our five year averages.
I find it valuable to look at the revenue generated by our core U.S. Salesforce Costar sales force, which is U.S. Costar suite combined with Loopnet premium Lister subscriptions.
The quarter over quarter growth for this combination was 3.7% and the year over year was 15.7.
The 3.7% quarter or core growth rate is exactly our five year average.
The year over year growth number is above the five year average of 15.5%.
We are growing the Costar sales force, which we believe will support future acceleration in bookings, we entered 2019 with 213 reps in production.
We now have 262, and we hope to reach 300 reps selling costar and loopnet by the end of the year.
We have hired approximately 50 additional sales reps that are going into production over the next three months, we believe that they will impact sales results about nine months after going into production.
We saw strong sales of Loopnet premium Lister product in the second quarter with net new bookings up 46% quarter over quarter.
Real estate manager net new bookings dropped 40% quarter over quarter, and 6% year over year, because the booking increases of the prior year had reached so high level at 400%.
Overall revenue growth was great for real estate manager as total subscription revenue climbed 75% year over year and 24% quarter over quarter.
Net new bookings for our land business was up 27% quarter over quarter and net new bookings for our business for sale marketplace is was up 36% quarter over quarter.
It's important not to overlook the tremendous value of these smaller or mid size businesses Costar real estate manager lands and Bizbuysell.
This quarter five years ago, those three businesses combined had annualized revenue of 28 million this quarter they'd combined annualized revenue of $108 million.
They have grown at a really impressive compound annual growth rate of 31% for five years.
They're very profitable and they have more than seven or eight times. The revenue that costar had in total for the year, we went public.
We continue to focus on prioritizing and selling subscription based services with high renewal rates.
Over selling one off services with non recurring revenue.
Subscription based revenue is grounded comprised 82% of our overall revenue.
As of the second quarter 2019, our trailing 12 month subscription revenue grew 25% year over year, which is faster than our revenue growth overall and for the first time, we crossed a billion dollars of subscription revenue on a trailing 12 month basis.
We continue to show strong growth and profitability net income for the second quarter 2019 was $63 million, an increase of 44% over net income of $44 million for the second quarter 2018.
EBITDA for the second quarter was 94 million, an increase of 45% versus EBIT of $64 million for the second quarter of 2018.
With strong cash flow, our balance sheet is stronger than ever with 1.3 billion in cash.
And no debt.
As reported by Comscore apartments Dot Com continues to pull further away from the competition as we increase our industry leading position among internet listing services by achieving all time highs in unique visitors and number of visits.
In the second quarter, the apartments Dot Com network had 175 million visits up 21% year over year.
The huge renter traffic, we have built there is very valuable, particularly the clients with newly constructed properties and the lease up phase.
Today, 70% of apartments that have delivered in the last two years or advertising with us.
But some properties need more exposure and are willing to pay an additional fee to cert, even higher up on our site to get more leads.
To meet this demand we have recently began selling a new higher tiered advertising level called Diamond plus very creative naming.
This AD package guarantees the advertiser placement in the top three search results in a given sub market.
In the second quarter, we sold 6 million and Diamond plus ads at an average of approximately 3600 per month.
With apartment communities in some markets paying as much as $7500 per month, that's a new exciting price point for us.
This stands in sharp contrast, with our primary competitor Rentpath, who began advertising $99 a month that saving about social media with them.
That price is 175th of our Diamond plus price point.
I think that tells you everything you need to know about the competitive landscape.
Given the success of our Diamond plus offering we have decided to introduce a plus option in each of our platinum gold and silver categories.
We plan to add offer the plus ads at fixed price with little to no discounting.
In June we purchased off campus partners, a leading online multifamily marketplace service for student housing in the United States.
There are over 17 million college students in need of housing near universities, and they're paying approximately a $100 billion in rent annually.
Often their parents assist with these rent payments.
We believe apartments dot com has a unique opportunity to develop a long lasting connection with the students as they move into other stages of their lives have become renters off campus.
Off campus partners' enters into exclusive subscription agreements with universities to provide an off campus housing listing service used by students parents faculty and staff.
Currently it has existing contracts with approximately 130 universities servicing over 2 million off campus students.
These units at University partners include the likes of.
University of Michigan, Harvard VC, you, Clemson, Berkeley University of Pennsylvania, and most importantly of all an exceptionally University Princeton.
We believe that this massive market with tremendous opportunities for us to partner with more universities attract more advertisers.
Especially small independent honors.
The majority of off campus partners' advertisers, our independent owners, who are excellent candidates for our new online leasing features such as screening applications digital leases and payment, which we plan to offer next quarter on apartments Dot com.
We are also plan to release, a student housing upgrade to our Costar multifamily analytics solution. We believe this additional information will be very valuable to student housing investors property managers lenders and developers.
We had a strong apartments dot com.
Sales success and the National apartment Association annual conference in Denver, This year and held in May.
It was it it was attended by over 10000 property managers, who are prime targets and prospects and clients. Once again apartments Dot Com was front and center with an amazing presence and we attracted more than 4000 visitors to our booth.
The apartments Dot Com Salesforce met with 916 property managers over the course of the two day conference in Denver.
As I mentioned, we bought apartments dot com in 2014, we had approximately 17000 paying properties.
Nearly 90% and 90 nearly 90% of those properties were from communities of 100 units or more.
Today, we have just over 50000 paying communities and nearly 13500 of those properties.
We are in a smaller one to 99 unit property size range.
We have successfully grown our annual multifamily revenue from 86 million 2014 to a run rate that we expect to reach $500 million later this year.
During that time, we increased our penetration rate of the market six fold from 2% to approximately 12% or an average penetration growth of about 200 basis points per year.
This has truly been amazing success story as we lead the industry in revenue lead generation for our clients and traffic.
In the last 18 months, our apartment stock comp sales have been accelerating as we added more salespeople.
From the beginning of 2018 two today, we went from roughly 220 apartment stock comp sales reps to 265.
A 20% increase that generate a staggering 122% increase in net bookings year over year in the second quarter.
This sales force is on fire and they have set all time high of bookings in the last three quarters in a row, we want to build on that incredible momentum and plan to reinvest some of our outstanding performance or our out performance back into the business to capture more market share more rapidly.
With the current size of the apartments dot com salesforce, they spend approximately 85% of their time with existing clients.
And only have about 15% of their time available to prospect for a completely new clients.
As a result, we estimate that our Salesforce has only made contact with 3.5% of our good new business prospects in the past 12 months.
This means there are hundreds of thousands of apartment communities, we could sell to that our sales team has not yet had the bandwidth to reach.
We believe that we can dramatically increase our 12% penetration and add billions of revenue.
By among other things growing the sales force, it's obvious it's obvious to us we need more salespeople. So we plan to add another 100 apartment salespeople into an outbound sales team based in Richmond, effectively increasing the size of our apartment sales team by nearly 40%.
To about 370 people.
We do not believe this will require significantly more investment we have offset most of the additional head count costs by eliminating 120 researcher positions this month from Atlanta.
Those researchers were community callers and were tasked with finding properties with availabilities that we would place on apartments dot com for free.
The added tens of thousands of units a year. This was great for the property managers, who didnt have to pay for these ads.
Given the enormous amount of traffic on apartments Dot com. These free ads, which would serve below our paid ads would often generate more leads to these nonpaying property managers than those property managers would see from their paid ads on competing internet listing sites.
When we first launched relaunched apartments dot com, we need to include this free content to draw renters in.
But at this point, we've grown our content and traffic many times over and now no longer need to spend so much money, giving valuable advertising away.
We believe by adding a 100 salespeople, we will add tens of thousands of paid community ads maintained by the advertisers rather than by researchers.
In effect, we are exchanging researchers for salespeople and we think we'll end up with more data and more revenue.
We believe the opportunity is gigantic there are 345000 mid size apartment properties in that five to 99 unit size range and we estimate that we have less than 4% penetration is properties the opportunities virtually untapped. The good news is that we have been successfully selling at this level. So there is a proven demand for our advertising solution.
We feel the online leasing tools, we plan to offer will further the appeal of apartments stock comp to these mid size apartment communities.
Intensified marketing is the second area, where we intend to reinvest our outperformance back into apartments dot com in order to accelerate our market share capture.
We see a clear path to providing even dramatically more lead flow to the industry than our competitors and by doing so we expect to achieve a compelling ROI and build a durable long term leadership position.
Our primary competitors balance sheet is the polar opposite of our balance sheet.
Rentpath has more than half a billion dollars of debt and as handcuffed with tens of millions of dollars in interest payments.
So they did not have the ability to invest to drive more leads to their clients the way we do.
According to Debtwire their first quarter 2019, adjusted EBITDA cratered as it dropped 34.5%.
And it underscored their liquidity pressures there second lien has been trading below 20 cents on the dollar.
Given roughly an 11% coupon on that second lien.
Yielding about 11 cents a year a likely go way payment would be achieved in a in a default or bankruptcy from the first lien holders paying the second lien holders five to 10 cents.
And you add that with some option value and number of people believe that the redpath second lien debtholders think theres about a year until redpath could default, but who knows.
But it seems like a good time to accelerate our investment in order to increased competitive pressure and capture more market share.
Loopnet remains the clear number one site in commercial real estate for advertising properties for sale or for lease.
In the second quarter, we averaged 5.8 million unique visitors per month up 19% year over year.
Historically loopnet has not materially monetize premium ads the way apartments Dot com does.
We are hard at work deploying diluted net a number of valuable successful lessons, we've learned from apartment stock comp.
We believe that in the future these significant enhancements to loop net.
Will allow us to dramatically accelerate our revenue growth there.
We are making our premium gold platinum and diamond adds even more valuable.
We're adding maps demographic information local transportation in more we're also giving prominence and exclusivity to listing broker firm visually we're featuring the premium ads with excellent photography Threed walk throughs in video.
In addition to our efforts from our 160 field researchers who create visual content for Loopnet listings.
We're in the process of adding a number of highly skilled professional architectural photographers who will bring these buildings to life in our ads.
Our portfolio research team is helping to promote the loopnet listings by adding original written content about the properties in the neighborhoods they're located.
The landing pages continue to improve and functionality appearance in content, we're adding content, we believe will be valuable to loomis target audience of tenants in small investors.
You should have ever to Loopnet, a few months as new enhancements rollout over the course of the next year.
I've been fortunate to witness first hand, an amazing transformation the commercial real estate industry over the past 30 years digital marketing has moved from being virtually nonexistent to being an absolutely essential necessity.
Our real critical part of selling or leasing properties.
The good news for Costar is is that we own the most valuable digital real estate at the crossroads of commercial real estate and digital marketing.
We have the largest audience of potential tenants investors on loop net.
And the largest audience of brokers on Costar.
The commercial real estate professional needs to market their properties, where this audiences.
In the past our researchers primary value proposition to our clients was the information they gathered for them.
While the debt data, we gather is still the foundation of our business the marketing opportunities our platform affords is becoming the prime value proposition we offer industry professionals.
We used to reach out to brokers to collect most of our information now is flipped and many brokers come online and bring listings to us brokers continue to adopt our costar listing manager tool, allowing them to update listings directly into the Costar database.
It has been nearly two years since we initiated listing manager and usage continues to increase.
52% of all spaces were added online by users in the second quarter 2019.
We now have over 41000 power users who are updating their listings monthly.
Costar listening managers, providing greater convenience to our clients at a much lower cost to us than our historical data collection methods.
Our move to Richmond has been amazing success and as transforming how we collect and present data.
We're having more collaborative and productive conversations with our clients.
This increases the quality of our data immensely and build stronger relationships with our users.
As a result.
One of the recent changes we've made in the research Department is updating the researchers titles to better reflect our marketing focus and expertise.
The researcher job title is now marketing research advisor.
Additionally, as we further establish Richmond is our marketing researcher headquarters.
All East Coast research opportunities are being consolidated into our Richmond office.
We believe this will lead to better collaboration and synergies among the research teams and significant cost savings.
In addition, since the development teams that build our research systems are in Richmond. This consolidation creates more opportunities for our marketing research and technology teams to work hand in hand.
To build the most efficient back end systems.
We live we believe this will also create additional career growth opportunities for our marketing research advisors.
As a result, we are relocating the 145 marketing research advisor positions currently in Washington, DC, and the multifamily research positions and Atlanta.
To Richmond.
We will soon have close to 950 people based in Richmond.
Commercial real estate activity continues to grow.
Leasing volume and investment activity in the second quarter of 2019 rank among the strongest quarters on record.
We believe the high level of interest to be justified given the sectors sound fundamentals.
Vacancy rates are low single digits across all sectors and supply remains limited.
And compared to low prevailing interest rates returns and commercial and multifamily real estate offer compelling relative value.
The us economy at large set of postwar record in the second quarter of 2019, reaching 105 months of consecutive job growth and recent data releases show ongoing strength.
In turn US commercial real estate has enjoyed 36 quarters of positive demand among the longest periods on record.
In the property markets apartment rent growth has accelerated once again posting gains about 3%.
We believe the ongoing health of the apartment sector relates the broad and growing shortage of housing in the United States.
In particular insufficient supply of new for sale housing units has limited home buying and led to the unprecedented level of apartment demand.
In response to this demand the apartment construction has risen to levels not seen since the eighties.
Costar tracked about 300000 units delivered over the past 12 months and we're attracting nearly 675000 apartment units under construction.
The large majority of these developments rely on apartments dot com to market those units.
In the office sector, the national vacancy rate has fallen below 10% for the first time since 2000.
In spite of the limited space available leasing has consistently set new records as the large tech firms continue to expand beyond their silicon Valley Seattle footprints.
New office construction has been limited, but impactful mega projects at Hudson yards in New York, The Seaport in Boston South of market in San Francisco, and the H. Street Noma quarter in DC and the West loop in Chicago.
Have up ended gateway markets enforce landlords are traditional CBD product to compete for signature tenants.
As a result rank growth has trended at just 2%. Despite the single digit vacancy rates. This is not deterred investors deal volume last quarter could set a second.
Quarter record.
In the industrial sector demand remains at historically high levels driven by the ongoing trend among.
Towards same day delivery, which requires regional local distribution close to population centers. However, vacancy rates appear to have bottomed out mid heavy supply and have edged higher from the 5% low.
Rent growth continues to trend above 5%.
And investment continues to favor the industrial sector in no small part for the development or redevelopment potential for infill product.
Based on our property level value estimates, we believe industrial prices rose by 7% year by year, leading all property types.
In the retail sector negative headlines around store closings in a shrinking share share of brick and mortar sales obscures the sectors superb fundamentals, we estimate retail vacancies are below 5% the lowest across the property types.
And construction underway amounts to less than 1% of current stock.
We expect to record levels of interest in commercial real estate and multifamily real estate to continue to meet the complex needs of the industry Costar group offers products and services designed to help owners lenders brokers and investors and property men managers.
Realized successful outcomes in any economic climate.
We've had a tremendous start to 2019 with an exceptional second quarter.
I am extremely excited about the rest of this year as we continue to execute on our long term vision within a great company.
At this point I will turn the call over to our CFO Scott Wheeler.
Who will among other things hopefully reiterate that net income for the second quarter was $63 million increase of 44% of the second our balance sheet is strong with $1.3 million cash and no debt.
And.
Very importantly that we had our best sales quarter ever with $59 million in bookings.
But what costar investors ever get tired of hearing about all of that.
That's a great story, thank you Andy.
We certainly did have a terrific first half of the year.
But I'm going to try not to repeat that our net income for the second quarter.
<unk> million, an increase of 44% over the second quarter of 18, I also will not say again that our balance sheet is stronger than ever with $1.3 billion in cash and no debt and I'm certainly not going to tell people that we just turned in our best sales quarter ever with $59 million in bookings that's your job.
So let me start with our revenue performance by service.
Costar suite revenue growth remained strong at 14% in the second quarter of 2019 versus second quarter 2018.
The revenue growth rate for Costar suite is expected to be in the 12% to 13% range for the full year of 2019.
Modest improvement over our ex based expectations, we told you last quarter.
Revenue in information services grew 33% year over year in the second quarter of 2019.
Primarily as a result of Costar real estate manager revenue growth of 57% year over year.
This includes both the subscription revenue growth of 75% that Andy mentioned.
And the onetime implementation revenue growth of 25% for new customer implementations.
The first half 2019 growth or real estate manager exceeded our expectations as companies continue to implement our solutions for the new lease accounting standards.
As we move further past the lease accounting standard adoption date, we expect growth rates for real estate manager to slow in total for the second half of the year as subscription revenues continued to grow but onetime implementation revenues will decline.
Information services revenue is now expected to grow at a rate of 15% to 17% on a year over year basis in 2019.
Which is 400 basis points above the growth rate range, we indicated last quarter.
Multifamily revenue growth for the second quarter remained strong at 15% over the second quarter of 2018 slightly higher than our expectations.
As mentioned last quarter, we expected a lower growth rate in the second quarter as we have fully lapped the anniversary date of our four rent acquisition.
And we have a negative effect of certain duplicative revenues and discontinued products from Fort rent.
That were evident in our 2018 results.
With the strong sales results this quarter I'm increasingly confident that the multifamily revenue growth rates in the third and fourth quarters of 2019 will meet or exceed 20%.
The full year 2019 revenue growth rate for multifamily is expected in the 20% to 21% range.
Commercial property and land revenue grew 16% year over year in the second quarter of 2019.
All of our marketplace businesses, including Loopnet lands and business for sale are delivering solid growth in the mid to upper teens, which we expect to continue and increase in the second half of the year.
Accordingly, we expect year over year organic growth in commercial property and land in the 17% to 19% range for 2019.
Gross margins came in at 79% in the second quarter of 2019 slightly increasing from 78% gross margins, we achieved in the first quarter of 2019.
This is a result of very strong cost leverage.
Our revenues increased $15 million in the second quarter of 2019 compared to the first quarter, but our cost of revenue only increased $1 million sequentially.
We now expect our overall gross margins of approximately 79% for the full year of 29 team.
Our operating expenses were $197 million for the second quarter of 2019, which was in line with our expectations, including the higher seasonal marketing spend we experienced in the second quarter.
Our second quarter adjusted EBITDA of $110 million represents a 29% increase compared to adjusted EBITDA of $85 million in the second quarter of 2018.
Second quarter, adjusted EBITDA was approximately $8 million above the top end of our guidance range stronger revenue was the main driver of the positive variance.
The resulting adjusted EBITDA margins of 32% as 220 basis points above the midpoint of our guidance range and 340 basis points above the 25, 9% margin we achieved in the second quarter of 2018.
Net income for the second quarter of 2019 of $63 million increased 44%.
Or $19 million compared to Q2 2018.
Our effective tax rate in the quarter was 21%, reflecting benefits associated with share based payment transactions and R&D credits.
non-GAAP net income for the second quarter increased 35% to $82 million or $2 in place three cents per diluted share.
It includes adjustments for stock based compensation acquisition related expenses, and some restructuring costs associated with the organizational changes in apartment start calm and research that Andy mentioned.
non-GAAP net income for the second quarter assumes a tax rate of 25%, which does not include discrete items such as the impact of the share based payment transactions.
We acquired off campus partners in June for approximately $16 million subject to standard post closing adjustments.
We are currently working our product integration plans with apartments dot com as well as business and financial integrations.
Although strategically important the impact of the acquisition to our financial statements for 2019 is not material.
Now look at some of the performance metrics for the quarter.
As Andy noted, we absolutely crushed it and sales this quarter with net new sales of $59 million.
Thus for Andy to talk about.
This was exceptionally strong in multifamily.
Also contributing to the big sales numbers this quarter, where our two biggest industry conferences of the year.
The IC FC Real estate conference and DNA apartments conference both for in the second quarter.
As you know, we don't provide guidance on future sales, given seasonal and other fluctuations quarter to quarter, but we're very focused on reinvesting for long term sales and revenue growth.
Suffice it to say, we're very happy with the sales results across the business and the direction in which we are heading.
At the end of the second quarter of 2019, our Salesforce totaled approximately 779 people.
Reflecting growth in the Costar suite field Salesforce that we talked about last quarter.
We expect to continue growing the CRT salesforce this year with productivity of new sellers typically ramping up over the next nine months or so.
The renewal rate on annual contracts for the second quarter of 2019 was in line with the same rate we achieved in the first quarter 2019 at 90%.
The renewal rate for the quarter for customers, who have been subscribers for five years or longer was 95% slightly below the renewal rate of 96% in the first quarter.
This is the first quarter that we've included multifamily five year subscribers, which is the reason for the modest dilution from Q1.
Subscription revenue on annual contracts accounted for 82% of our revenue in the second quarter up from 77%. This time last year.
The improvements are primarily the result of successfully migrating the four rent customer base to our apartments Dot Com network strong sales and annual contracts.
I'll now discuss the outlook for the year and the third quarter of 2019.
Based on the strong second quarter revenue and sales results, we're raising our revenue outlook for the year by $11 million at the midpoint.
To a range of $1.382 billion to $1.390 billion for the full year of 2019.
This outlook reflects revenue growth for the year between 16, and 17% up from the 15% to 16% we indicated last quarter.
We expect revenue for the third quarter of 2019 in the range of 350 million to $354 million, representing top line growth in the range of 15% to 16%.
We expect adjusted EBITDA to be in the range of $498 million to $505 million for the full year of 2019.
Which is relatively unchanged from our previous guidance.
And then you discussed exceptionally strong results and the market position of our multifamily business as as convinced that now is the time to reinvest the increased revenue back into the business.
Accordingly, we have decreased our marketing spend in the forecast for apartments Dot com in the second half of 2019 by approximately $10 million.
Consistent with our previous guidance, we expect adjusted EBITDA growth of approximately 20% year over year.
Adjusted EBITDA margins for the year of approximately 36%.
Up around 110 basis points in the midpoint of the range.
For the third quarter 2019, we expect adjusted EBITDA in a range of $123 million to $127 million.
Margins are expected to increase sequentially in the third and the fourth quarters.
In terms of earnings we expect full year non-GAAP net income per diluted share of $10 to $10.14 based on 36.6 million shares.
Certainly great to see the $10 per share numbers coming into view this year.
Which if achieved would present compounded EPS growth of over 30% per year since 2016.
For the third quarter of 2019, we expect non-GAAP net income per diluted share in a range of $2.44 to $2.52 based on 36.6 million shares.
Overall, our Costar team delivered a phenomenal first half of 2019.
We're very well positioned to continue our strong revenue growth trajectory to increase the level of growth investments for the future and continue to expand margins.
With that we will now open the call for questions.
Ladies and gentlemen at this time, if you would like to ask a question. Please press star followed by one.
You will hear a tone, indicating that you had been please thank you.
You may remove yourself from Q at any time by pressing the pound key.
One moment for the first question.
First question is from Peter Christiansen with Citi. Please go ahead.
Hi, Good afternoon. Thanks for taking my question and Rich you are right about that replay.
I had a question about.
Thanks, Andy I think you were talking about.
The there's a portion of the apartments dot com network that that is getting free ads that is shutting off now obviously, obviously because of the success you've had on driving lead growth.
Has that happened is that going to happen again.
When is that going to happen with the timeline and what are you kind of expecting for those three AD turning into pay that.
So what's happening in phases. Some of it has happened only first relaunched we were running.
Free ads for communities at all sizes on up to 250 units the properties over 100 units.
And as we start building up more and more content more and more traffic we started.
Eliminating free ads above 200 unit instead of 150 units at a 100 units and we just keep on bringing that level down and as we do that.
A significant number of those folks decide.
To go ahead and sign up for apartments, dot com and not lose that lead flow.
So the.
The community is below a 100 units that will that will roll out over the course of the remainder of the year and.
We will be trying to build up that inside salesforce fast quickly enough to be able to pursue the leads that that generates Sylvia we'll be flexible, but it'll be six to 12 months to eliminate the freeze below 100 now we won't.
We will continue to carry.
The very small communities for free for quite some time, so the condo for ran to the house for rent the real small stuff.
And I also want to reiterate that our second quarter at 59 million in bookings.
And our next question is from Brett Huff with Stephens. Please go ahead.
Good afternoon, guys congrats on a nice quarter.
Thank you congrats.
Great to see the bookings power that can be generated it I know that this had some real positives in the conferences and things like that helping but.
One of the questions we get a lot is as we look forward.
The bookings.
Should kind of trend higher than they've been kind of run the $50 million range up until this quarter as you look out in order to sort of think about supporting the growth rate that you guys have talked about over your long term guidance.
The street is sort of baked in what looks to be.
You need maybe 65 million or so a quarter starting sometime next year in order to drive the kind of revenue.
You know in the out years.
How should we think about the sustainability of this 59 number or should we expect it to come down a little bit because it was particularly good and then just continuing to rise and as if it rises can you tell us what the drivers of that and I know some sales some pricing give us some sort of view into how those bookings probably rise over time. Thank you.
Sure. So I'm very excited about the street expectations for bookings in the sixties next year and I look forward to those earnings calls will be exciting and will repeat.
Successful results throughout the earnings call.
But the.
There are a number of different things that give you.
Tailwinds as you go in to try to achieve those higher numbers like we obviously don't know small fluctuation nuances from quarter to quarter. So.
The bookings next quarter could go up a little bit go down a little bit.
And it's not necessarily terribly material, which way it goes a slight increments, but the trend.
I feel comfortable.
With expectations that it goes up.
Again growing the Costar sales force materially yet is a big driver there is no shortage of opportunity so penetration rates for the advertising on live that new products in Loopnet.
Taking owner product out there new multifamily product.
Student housing analytics on the on the Costar side, a lot of opportunity there.
Adding 100 salespeople to apartments Dot com.
The expectation is that they would sell something and that would also.
Drive the opportunity and as we increase the marketing will increase the lead flow and.
And then.
Looking at the numbers.
Our ability to successfully sell product too.
200 unit communities hundred unit community 75 unit communities 50 unit communities 40, 30, 10 unit communities means that we've got a huge marketplace to sell to and and and adding additional salespeople.
Is going to give us.
That ability to go address that opportunity.
And then.
The land business, the best buy sell business and Costar real estate manager continues to hit on all cylinders. So this is a lot of good tailwinds there and so.
We're not really shy of those expectations next year.
Our next question comes from Bill Warmington with Wells Fargo. Please go ahead.
Good afternoon, everyone.
Hi, Bill.
So I wanted to ask on the apartment side, if you could talk a little bit about the end to end digital solutions for the small landlords.
Specifically, what services are going to be providing there.
The beta testing how is that going and then what will the Q4 roll out look like.
Thank you Bill So we're I'm actually on my way up to Chicago I'm just in from Tokyo, If you can't tell that I'm, a little jet lag.
[laughter] heading up to Chicago for.
A focus groups on that over the next couple of days, we're going to be interviewing small landlords tenants on that whole new products, so that new product is.
Providing an end to end leasing solution within apartments Dot com, where.
Someone marking their property apartments dot com can elect for online leasing, which means renters can apply directly digitally using our applications on apartment stock comp or department, we screen them for credit criminal and prior infections.
If the landlord wants to move forward with a tax loss move forward. They can enter into a digital leasing apartments dot com and then we can facilitate the rent payments on apartments Dot com. We believe this will be particularly appealing to the.
Smaller landlords that don't have these sorts of solutions. We also think it will be appealing to the renters, because our price points for doing an online application is typically half of what the normal fees are and we are providing portability to the application. So a renter who applies to one property autopart and stock comp can use that same application nearly instantly for any other community within 30 days, so it's pretty exciting and we have.
And we're going to be looking at.
You know how that reaction is going but it's early we're just rolling it out this quarter.
I'll know more after the focus groups, but one of the things that.
You know I'm. We're looking at now is we think it will have a big impact not just on the folks running a single house or condo, but we think it will be really helpful in helping us to sell more advertising to the middle market. The folks with 20 units 40 units 50 units.
And that will be sold through our inside the new inside salesforce will be really aggressively going after that sector. So.
It's.
It's rolling out for I think we added one more markets I think it's rolling out in five markets in the third quarter and based on that we will.
Geared up to additional markets in the fourth quarter, but we haven't really finalized how many.
And.
One of the things we want to do is build up that inside sales team. So we really.
Focus our energy on the markets were rolling it out in intensely so that the.
Theres enough people participating in the program that that renter application portability between multiple communities has enough scale and mass that's particularly valuable but we'll we'll tell you more we'll report in on the third quarter call in the year end call, we'll have more color on it it's still little early.
But man it was a lot of work.
Our next question comes from George Tong with Goldman Sachs. Please go ahead.
Hi, Thanks, good afternoon.
Commercial property and land revenue growth in the quarter decelerated to 16% year over year from 17% Q1 despite easier year ago comp can you discuss the reasons for this moderation and maybe elaborate on your efforts to go after the institutional customer channel at Loopnet marketplace.
So the so the.
The sales outlook George is still strong for Loopnet business. The differences you're talking about the only move the forecast a million or two.
In any quarter and you get a percent change in this business because the numbers aren't really that big.
What we're still seeing is really good sales through the Costar sales force for Loopnet and you mentioned some of these.
Premium Lister sales that we're getting.
And we continue to sell the signature ads you get different fluctuations in cancels from quarter to quarter, which sometimes does get a little higher than they back off so depending on the timing of those we tweak the forecast and tend to take a more cautious approach going out, but we're still very positive about the changes, we're making and how that salesforce can create momentum in the second half.
Also.
Our Big initiative, there, which is really the premium.
Gold.
Platinum and diamond levels has not effectively rolled out.
And that'll be coming in the next couple of quarters. So we're having a.
A big conference pulling together, our senior sales leaders are beginning to walk through the sales process for selling those.
Apartments dot com like ads on Loopnet, and you're not seeing any revenue associated with that right now and that's a future revenue streams that will be upside.
Our next question comes from Tom.
I'm, sorry, Ryan Tomasello with KBW. Please go ahead.
Hi, everyone. Thanks for taking the question today.
Andy just in terms of Loopnet rebranding.
On your recent comments.
And the owner focus can you give us some color on what the go to market strategy will be in the education process.
Will this be more of a gradual education education process or are you targeting more of a focus launch and if so do you think that the sales force is right size following the year to date growth.
And if there are perhaps any efficiencies in partnering with your existing broker clients for sales at our sales effort to align interest and more quickly reach this.
Very valuable Warner client.
Sure. So one of the things I did not mention go into detail on was we have been.
Reorganizing the Costar sales force a bit in order to get ready for selling these premier loopnet owner oriented as they sort of upper end ads.
And what we've done is we've identified.
About 65 salespeople.
Across our network, Oregon, who are the more senior folks and were assigning the top owner prospects to them, we're putting them together for a couple of days of training. So far we haven't really we haven't done that we're we're just beginning that process. It's relatively straightforward the value proposition is pretty straightforward and I think that will get adoption or the salesforce will pick the specialist salespeople will pick this up pretty quickly.
And we'll really be relying on them to take that forward.
I would expect that.
Over time with success, there will feel that 65 is not quite the right number and we'll probably want to.
Grow that team a little bit, but I think we'll take one step at a time a little bit of success. The 65 people would be a lot of success to our bookings numbers.
The second part that you mentioned, there about partnering with our broker clients as exciting.
In the past, we have partnered with our broker clients too.
Basically wholesale.
Or resell advertising to their own or clients and allow them to offer discounts and give them. Some rebates for volume and we've had some discussions with some of our brokerage clients about allowing them to resell those loop net adds owners. It's a win win for everybody the broker the owner and us and it is similar to what happens with apartments dot com. So often when we're selling and an advertisement for an apartment community to Gray star.
Great start is acting on behalf of an owner, who we don't really know who they are.
But they're just authorized to make the purchase and Gray star through volume gets a better price for their owner so we'd be looking for the same thing to happen in Costar Loopnet.
But it.
It will be something that would be be happening next year, but we've gotten really positive feedback from folks like CBR in some others on that on that opportunity and it's not unprecedented again not only in the Parvus dot com side, but also costar real estate manager, where a lot of our sales. There are is white labeling from folks like JLL in CV area in some and Cushman Wakefield too.
Who.
Basically steer their clients into Costar real estate manager.
And thanks for joining us Ryan.
Glad to have you.
Thanks for certain coverage.
Our next question is from Andrew Jeffrey with Suntrust. Please go ahead.
Hey, guys good afternoon.
Good afternoon, I missed that bookings number so it was 59 attuned to all thank you for asking.
Just under 60, so we're not saying.
Yes.
Seriousness one of the things that that strikes me is the.
The success, you've had building out your salesforce without from move from we can tell from the outside looking and really sacrificing productivity can you speak a little bit about.
What the gating items are to continuing to build sales I mean, we're in a full employment economy.
These are not sort of simple products. This I would think it's a fairly sophisticated sale, what I mean kind of what's the secret sauce and what do you worry about in terms of.
Being able to continually expand the sales organization.
Well.
You know for me My primary concern is typically.
We are an organization that changes a lot.
So as we.
You know we don't stay the same most most sales organizations do exactly the same thing for 10 years in and out they don't change a lot.
Things like refocusing the sales team against the smaller communities doing online leasing refocusing the info salespeople towards.
New AD opportunity in the Loopnet side Thats, a lot of change and that requires a big organization to adopt change and that just that's heavy lifting thats, probably our single biggest gating item I was.
Meeting with a couple of tech people yesterday with Ceos of some other companies and they were talking about having challenges hiring salespeople.
Knock on wood, we've been able to.
Keep a really good pipeline of high quality salespeople coming in the door and we have not seen problems with being able to find those folks. So you can see that in the 50 plus recent hires in the Costar side.
And then I also we're going to be in hiring enrichment I feel confident there we invest a lot into the Richmond market place, we have a big brand there and we've been successful meeting our high requirements there.
So.
We're always looking to try to improve our sales training.
And try to give them more experiences and developing ongoing training.
But.
We like the productivity numbers, we're seeing the productivity numbers per salesperson parvus dot com as exceptional right now and if we can keep that through going through an inside sales team will be really happy with that result, so.
The main issue is just.
Continuously reshaping the organization things like dividing the apartments in the Costar teams into separate management lines. That's the main challenge.
Our next question comes from Stephen Sheldon with William Blair. Please go ahead.
Great. Thanks, This is actually Josh lammers on for Stephen.
Josh Hi, there.
Over the last few quarters you guys have provided some helpful data points on the apartments up so kind of looking at 2.0.
But I was hoping you could frame for us what you view as the bigger opportunity over the next two or three years and if there is time, what what you see are are kind of the main factors driving demand for the higher priced ads and a high occupancy environment.
Thanks, Yeah.
I would like.
When you ask which of my children are my favorite.
That's a tough one.
So I'd like to say that apartments dot com is awesome and lived that's awesome and they both have tons of upside.
But you have to say.
You have to respect Warren Buffett and.
One burden the hand is better than two of the Bush and apartments Dot com was on fire right now and it's happening.
What's driving demand for the up sell when you see.
Folks adopting rapidly price points at 3600, 7500, a month, where the average had been 770, what's going on there is we're just delivering the traffic in the lead flow, we've got massive traffic and lead flow it's working.
And we're hearing like in a focus group I was in two three weeks ago and Dallas.
Property managers, who are building a lot of new products.
Putting a lot of new units out there.
Are finding that.
Everybody in say Dallas Uptown is now buying our diamond AD and it's hard to stand out like and they're looking to spend more to stand out more when they are in lease up and.
And so with so many people buying and apartments dot com people with higher demand are willing to pay more and when you think about what's at stake for them as they launch a $200 million community into lease up.
They don't really care, if our AD cost a thousand or 10000, there they're going to nine month lease up period, and where the source for the majority of their.
Their community. So we've kept our frankly, we've kept our pricing very aggressive in our price per lease in our price per lead is very low and they are very happy with it and if they want more they're willing to fork up money. So the upside is we are.
This plus categories, where within silver gold platinum and Diamond we're going to.
Enable people to pay the sort higher within the categories I think will generate a lot of revenue.
And then again, just bringing out the online leasing tools and going after the mid market will be big.
Loopnet I'm highly confident about but it's.
It is still in development, it's still early days, but we're very familiar with everything about that live in that area and.
Feel like its a clear opportunity and remain very optimistic about it.
Our next question comes from Sterling Auty with JP Morgan. Please go ahead.
Yes, Thanks, Hi, guys and.
Earlier today, we really appreciate all the detail that you gave on the call. So thank you very much.
Question on the Costar suite when when you look at the growth year over year, how would you characterize I know you gave us a rough estimate of the number of subscribers, but how much of that growth is coming from increases in user count versus maybe the best way to put it is increase in average revenue per subscriber.
Most of it is new subscribers there is a little bit more there's a slight increase in average price point per.
Users so we're getting.
We're being a little more thoughtful about looking at some of the dramatically underpriced accounts and bringing them up a little bit closer not all the way to list for bringing up a little closer list. So I'd say the shift is mixing the mix is shifting a little bit between price point.
There's a little bit more of that than there has been in the past, but not nothing crazy you know we're talking about.
Instead of 3% average price increase it might be six or seven.
Got it thank you.
Yep.
Our next question is from Pat Walravens with JMP Securities. Please go ahead.
Hi, This is Joe going on for Pat.
Hi, James.
Hey, guys.
Just quick question.
Andy how how's the environment for co sort of do more M&A any commentary you can probably is there and then I have another question.
So the question was what does the M&A environment look like.
So were.
You know, it's very active there is a lot going on there we are.
You know at any given point, where we are.
Looking closely at probably a dozen companies.
We are being selective.
We continue to be selective.
So.
If valuation doesnt appear to be rational to us we're not we're not doing any sloppy deals that way.
But we do have a pipeline and we are working through it and some of it is smaller deals like off campus partners.
And then there is some.
There's some larger things in the pipeline but.
Again they.
They don't occur until they occur because we.
Have a great track record across you know 2030 acquisitions of not having any big goose.
And we.
We will continue to be very careful as we go forward.
But we're we're well we're not going to change our ways of.
Continue to make good acquisitions.
Our next question is from Scott Berg from B. Riley.
VR. Please go ahead.
Hi, good afternoon, guys a bit of a follow up there.
Yes, I'm watching the cash balances continue to climb quarter after quarter. How are you prioritizing uses.
And will we see at some point, maybe some repurchase activity or potential dividend. Thanks.
Thanks, Scott our our priorities right now are the exhibition pipeline that we just talked about.
Putting money back into organic.
Spend as much as possible clearly we were still they are going to generate net positive cash, but our intention is to put that back in through acquisitions.
We'd love to see.
Some more rational price discussions in the marketplace on on deals right now, but we know they are out there and they're big enough to use that cash.
So it's just a matter of time I think we do that right now we're not considering any.
Any share buybacks or dividends as there's still so much opportunity in this growing.
Digital marketplace transformation that that it's better to be holding that for some of the near term and then and then using it when we have those opportunities.
And if there are any further questions. Please press star followed by one.
Thanks.
Well. Thank you all for joining us for the second quarter call and we look forward to.
Getting together with you again in the third quarter and thank you very much.
And ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using <unk> TNT you may now disconnect.
[music].
[music].
[music].