Ladies and gentlemen, thank you for standing by. Welcome to today's call, CoStar Closes Loop Net Acquisition. At this time, all participants are in a listen only mode. You will have an opportunity to ask questions after the presentation. Instructions will be given then.
As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Rich Simonelli, Director of Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, everyone. With me today are Andy Florins, Founder and CEO of CoStar and Brian Radecki, Chief Financial Officer. Welcome to today's call to discuss our 2012 guidance, which includes LoopNet and we're delighted that you've joined us. But before I turn the call over to Andy, I have some very important facts for you. Certain portions of this discussion contain certain forward looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements.
Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's April 25, 2012 press release on Q1 results, CoStar's May 2, 2012 release on combined guidance with LoopNet and in CoStar's filings with the including our Form 10 ks for the year ended December 31, 2011 and our Form 10 Q for the quarter ended March 31, 2012, under the heading Risk Factors. All forward looking statements are based on information available to CoStar on 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. As a reminder, today's conference call is also being broadcast live and in color over the Internet at www.coStar.com. A replay will be available approximately 1 hour after this call concludes and will be available until May 2, 2012. To listen to the replay call 800-475-6701 within the United States or Canada or 320-365-3844 outside the United States.
The access code is 2,fourseven,060. A replay of the call will be available on our website soon after this call concludes. And now I'd like to turn the call over to Andy Florins. Andy?
Thank you all for joining us today. It's taken more than a year from the time we signed the merger agreement with LoopNet to the point we gained FTC staff commissioner and commissioner's acceptance of the consent order. That has made us all the more excited about now closing the LoopNet acquisition. We're very eager to start focusing on bringing these 2 successful and profitable companies together and begin building an even stronger one together. We feel that the merger has great potential and we believe that combining the top online marketplace with the top information analytics brand will benefit our clients, the industry and our shareholders.
As we mentioned earlier, the combination of CoStar and LoopNet will create a strong integrated platform for sales growth. With 100 of thousands of brokers seeking investors and tenants for over a 1000000 commercial estate listings across the U. S, we believe that the Internet has become an essential tool for effectively marketing commercial real estate. We believe it's clear that the Internet offers an order of magnitude advantage in cost and effectiveness over traditional commercial real estate marketing methods such as newspaper print ads, brochures and mailers, directories and traditional industry print periodicals. With 5,800,000 registered users and 3,600,000 monthly unique users, we believe that loopnet.com is the clear number one solution in meeting this growing demand.
LoopNet has achieved impressive content revenue and earnings levels all without the benefit of CoStar's proactive research on listings and potential clients. Now that we are putting these two companies together, Lumenet will have the opportunity to leverage CoStar's 900 person strong research department that captures details in over a 1000000 commercial estate listings, companies and industry participants. This means that CoStar can now bring over 100,000 new leads to LoopNet sales team. I would like to give you some specific numbers from 1 city that help illustrate the scope of the potential upside we believe we have. If you're not into numbers, you might find this part a little bit boring, but I'll just move through it.
We have been very careful to respect the Federal Trade Commission's gun jumping rules that prohibited exchanging competitively sensitive client information prior to closing the deal. Accordingly, we've only had access to any detailed LoopNet client data for a few days. We have initially analyzed paying subscribers, listers and registered members in the Chicago area since we felt that's fairly typical and a significant market for both CoStar and LoopNet. I need to caution at these points, these numbers are only preliminary and approximate and could change. CoStar has 4,623 paying subscribers in Chicago and LoopNet has 3,049.
In Chicago, only 22% of those LoopNet clients are also CoStar users and conversely only 15% of CoStar users are LoopNet clients. So in Chicago and we strongly suspect also in all markets across the country, we believe there's relatively little overlap between the client basis. Further, many or most of LoopNet's users are paying for marketing exposure rather than information. So the overlap in business models is even smaller than these numbers suggest. Since more than 90% of LoopNet sales are to the individual users and 90% of CoStar sales are to the firms, the actual paying customer overlap is likely in the low single digits.
We believe that most of both brands clients are prospects for each other's services. There are 3,380 LoopNet members in Chicago putting listings into the LoopNet marketplace, but only 11.63 today are paying LoopNet for enhanced exposure or premium lister status. Only the premium listings from these 11.63 that are paying are visible to LoopNet's entire mass audience. In Chicago, there are many more listeners in the CoStar side with 6,149 individuals putting listings into CoStar's Chicago database. There are 941 individuals who are listing in LoopNet, but not in CoStar.
As a side part, locating these 9 41 listeners again their listings into CoStar will significantly improve the quality of CoStar's information services and we believe it will ultimately result in more CoStar sales. Combining the listers from both companies shows us that in total there are at least 7,090 individuals listing commercial properties in Chicago. Prior to the merger and without the benefit of CoStar's proactive research, LoopNet was only aware of an attempting to sell premium listing memberships to the 2,217 firms that had listings in LoopNet and had not yet purchased those premium memberships I mentioned earlier. LoopNet had a large and experienced sales force with good management, so they were able to reach out to those prospects on a pretty regular and aggressive basis. Post merger and with the CoStar LoopNet will be able to identify and potentially sell to 5,927 Chicago individuals with commercial real estate listings.
That is 167% more than prior to the merger. I have seen samples of these new prospects and I firmly believe that they're absolutely real. Prior to the merger, if LoopNet were to sell to a new client who had not previously entered their listings into LoopNet, those individuals might have had to spend hours entering their listings manually into LoopNet. This could be a major obstacle to getting the sale. After initial setup, we expect LoopNet will be able to electronically import these prospects listings into LoopNet, thus reducing the true net cost of customer acquisition.
Essentially, LoopNet has gained 3,710 new qualified prospects in Chicago alone as a result of the merger. Assuming that Chicago is very roughly 4% of the U. S. Market, this implies that our merger could open up 92,750 new good prospects across the U. S.
This has a theoretical potential of more than doubling LoopNet's marketplace and specifically the premium lifters revenue. CoStar believes commercial real estate in the United States is an $11,000,000,000,000 asset class supported by over a 1000000 market participants. This market is enormous and is constantly changing. CoStar's property comps, tenant and PPR services are the industry's leading commercial real estate information and analytics solutions. Even so, as I alluded to, we believe that LoopNet contains hundreds of thousands of listings that are not yet to be found in CoStar.
As these properties are validated and added to CoStar, CoStar's clients can benefit from even more comprehensive coverage of the commercial real estate market. In addition, there are hundreds of thousands of industry participants searching LoopNet who do not yet subscribe to CoStar and probably even know CoStar exists and access to these leads represent a significant cross selling opportunity for CoStar. In Chicago alone, there were 23,300 LoopNet users, 23,000 plus LoopNet users who conducted searches for commercial real estate on the LoopNet website in the last 180 days. Clearly, not all of these searchers are qualified prospects for CoStar property, but the number which is more than 5 times the current CoStar Chicago client base is impressive. 4,442 of these 23,300 searchers conducted more than 20 searches and are not CoStar property clients.
These appear to be motivated information searchers and using the LoopNet Chicago Davis alone, they're missing about a third of the listings. We believe that this makes those searchers good prospects for upgrading to the more higher priced CoStar property solution. Again, assuming CoStar I'm sorry, assuming Chicago is 4% of the U. S. Market, this implies that there are 111,000 quality potential CoStar property clients within the LouvreNet membership, which is more prospects than CoStar currently has users.
That's right, more quality prospects than we currently have total CoStar clients. This is a huge opportunity. With the 2 company sales forces now joining forces, we have more than 300 sales professionals on staff to go after and pursue this opportunity. I hope these cross selling demographics give you some sense of why I'm so excited about the potential benefits from the merger. Quite simply, we believe the cross selling opportunities will be outstanding.
While we have indicated that we believe the synergies across the entire organization for the transaction will ramp up to $20,000,000 per year within 24 months, the real reason for doing this transaction is the massive cross selling opportunity. These cost synergies do include items like eliminating dual public company costs, some minor redundancies that have already been handled reducing future hiring plans and focusing staff on a few higher value projects. As we go forward, it's our intention to keep the LoopNet brand, invest in it and continue to develop LoopNet's strong product base and revenue streams. This is also true with LoopNet's highly successful marketplace verticals business, BizBuySell, Land and Farm, Land to America, Reaction Web, BizQuest and of course RE apps. All these products have significant brand equity and we will look to make them even stronger.
We intend to integrate the back end commercial real estate and contact relationship management databases, so we can gain major efficiencies, quality improvements and deeper insights into our client bases and prospects. The front ends will remain independent separately branded websites. When we are able to tie in the back end systems, we plan to add ecommerce cross selling features to both systems. We believe this can be really powerful when you consider that LoopNet and CoStar currently have approximately 4,000,000 unique monthly visitors. It takes too much time for clients to maintain their listings on 2 or more separate platforms.
Our goal is to enable a client to enter their listings once where and how they wish and then seamlessly move that property information for them to the number one commercial real estate professionals information platform which is CoStar, then they can move it to the number one marketing website loopnet.com then onto their very own website via LoopLink on to brochures, standalone building websites, our future discounted cash flow system into RE apps commercial customer relationship management system, into LoopNet's Pro Tools, virtual premises, Generousalves, Dashboard, so on and so on and so on, so be able to move these listings around without any cost. We believe that putting CoStar's and LoopNet's content to one place will save time and effort for our clients on a daily basis and that this could potentially save 100 of 1,000 or even 1,000,000 of hours, which we believe in turn will result in potential savings of conservatively tens of 1,000,000 of dollars to the industry every year. From an employee perspective, LoopNet has a great team of professionals who are experts in Internet marketing and have successfully built fantastic brands with a huge following. We're looking forward to working with them to build on what they've accomplished and create an even better company together.
Innovation will continue to be of utmost importance for the combined companies. Throughout its history, Lumin has been an innovator in marketing properties and bringing buyers and sellers together over the Internet. LoopNet has a large and highly talented software development team. I'm actually sitting with Dan Glendora right now. And many of them have more than 10 years of experience developing commercial real estate related software.
CoStar already has a solid reputation as a leading innovator and by adding the experienced team of software developers from LoopNet, we believe we can gain even more momentum in developing new innovative technology solutions that bring real value to our customers. You've heard me talk a lot about CoStar Go these past few quarters. That revolutionary mobile iPad app has been a runaway success. I should note that most members of the software development team that developed this incredible app came to CoStar through our acquisition of California basedcomps.com 12 years ago. CoStar Go is a great example of how we value the talent from our acquisitions and how we expect to integrate the turn current team from LoopNet.
By day 2 of the merger, I've already begun to gather valuable feedback on how to improve CoStar's mobile platform for some of LoopNet's talented product design leads. I spent the past few days in San Francisco and Glendora offices of LoopNet and I'm very impressed with the people and the energy and the great things they've accomplished. The talent pool at LoopNet is deep and committed to success. My deepest compliments to Rich Boyle, the CEO of LoopNet, Brent Stumey as CFO and Tom Burns, President, along with Wayne Wortham, its CTO for building a great company and keeping the team focused during the past year, while we're going from going through the whole Federal Trade Commission review process. These top executives are staying on for a period of time, some permanently, in advisory capacity to facilitate a smooth transition and integration of a great company they have built.
These guys have genuinely been a real pleasure to work with over the last year and they've been indispensable to making this a smooth and effective process. Before turning it over to Brian Radecki, our Chief Financial Officer, I'd like to briefly address the FTC consent order. As you know, we worked hard over the past year to negotiate a mutually acceptable agreement with the FTC that wouldn't critically impair our ability to recognize the very valuable benefits we saw in putting these 2 great companies together. The consent does put a number of conditions on CoStar going forward. Among those things, just some of those things, the order requires LoopNet to divest its minority interest in Exeligent promptly and for LoopNet to provide them with a one time extract of contact data for people who placed listings on LoopNet.
No listing data from CoStar LoopNet will be provided. CoStar property comps tenant clients with multiyear contracts will be given a one time opportunity to opt out their contracts with 12 months notice. We agreed to various restrictions on bundling. We agreed to send a one time e mail to LoopNet's now current e mail list for each market on each occasion of Exeligent First entering that new market. There are various other conditions and requirements that you can read on the FTC's website.
In total, we're satisfied that these and other conditions we agreed to are fair and do not harm our ability to realize the material benefits of the merger. We are confident that the combination of CoStar and LoopNet is a winning combination for our clients and the industry and our shareholders and that the cross selling opportunities, the greater efficiencies and combined innovation experts will be great for the commercial real estate industry. I will now turn the call over to our Chief Financial Officer, Brian Radecki. Thank you, Andy. As Andy mentioned, we are extremely excited to have finally closed the deal.
We have already started to move forward with integrating and aligning LoopNet into our existing business. We expect the addition of LoopNet business to be accretive for 2012 and beyond on a non GAAP EPS earnings per share basis. Last week CoStar and LoopNet released Q1 2012 results reporting strong revenue and earnings growth. CoStar reported revenues for the Q1 of 2012 of 68.6 $1,000,000 an increase of $15,100,000 over revenues of $59,600,000 for the Q1 of 2011, including our 1st full quarter revenue of Virtual Premise. LoopNet reported 1st quarter revenue of $22,900,000 including similarly impressive growth of 10.6% over Q1 of 2011 revenues of $20,700,000 This revenue growth for both companies and LoopNet was accompanied by year over year earnings growth.
CoStar reported adjusted EBITDA of $15,300,000 for the Q1, an increase of $2,700,000 or approximately 21% compared to adjusted EBITDA of $12,600,000 for the Q1 of 2011. LoopNet reported adjusted EBITDA of $7,500,000 for the Q1 of 2012, an increase of $500,000 or approximately 7% compared to the Q1 of 2011. Reconciliation of CoStar and LoopNet's historical non GAAP net income, adjusted EBITDA and all other historical non GAAP financial measures discussed on this call to their GAAP basis results are shown in detail along with definitions for those terms in each company's respective press releases issued last week on the respective company's websites at www.costar.comandwww.loopnet.com. Further reconciliations of forward looking non GAAP net income and all other forward looking non GAAP financial measures discussed on this call to their GAAP basis results are shown in detail on our website. Love those legal disclaimers.
Now I'll turn to our outlook for Q2 and the remainder of 2012. Our forward looking outlook accounts for current expectations as of today and accounts for the recent trends, revenue growth rates, renewal rates, which may be impacted by the overall economy or commercial real estate. Actual results may vary from these estimates. Because LoopNet's transaction is closed, our outlook includes the impact of consolidating LoopNet for approximately 2 months in the Q2 of 2012 and the remainder of the year. As I mentioned earlier, we expect the acquisition to be accretive for 2012 and beyond on a non GAAP EPS basis.
Our outlook includes purchase accounting adjustments, including loss deferred revenue at LoopNet as well as various fees and expenses associated with closing the transaction and integrating the companies. Our earnings guidance is based on non GAAP earnings per share format, which we have used in the past, which will normalize out many of the one time items. Although as usual our press releases will include a reconciliation of the GAAP earnings per share. I should also note that our base of fully diluted shares will increase by an average of to an average of approximately $26,800,000 for the 2nd quarter and full year as a result of the stock portion of the merger consideration for LoopNet's shares. For the full year 2012, we now expect consolidated revenues of approximately $339,000,000 to $347,000,000 which includes revenue from CoStar's existing business of approximately $284,000,000 to $288,000,000 as we discussed last week.
Revenue from LoopNet business from Mayford as well as the impact of purchase accounting adjustments included to reduce as a reduction of LoopNet deferred revenue, which is approximately $6,000,000 to $8,000,000 The final purchase accounting valuation has not been completed, so these results could vary from the estimate. The loss of deferred revenue will have an equivalent impact on both revenue and pre tax income. As I noted earlier, LoopNet's Q1 2012 revenues grew in the range of 10% to 11% year over year. And we think that is a reasonable range for the rest of this year as we are only beginning the integration process. For the Q2 of 2012, we expect approximately $81,500,000 to $84,000,000 in revenue for the combined company.
2nd quarter revenue estimate includes $70,000,000 to $71,000,000 in CoStar revenue and pro form a revenue of approximately 2 months for LoopNet. As I previously indicated, we have not completed the purchase accounting, but estimate the impact and reduction on LoopNet deferred revenue at approximately $3,000,000 to $3,500,000 for the Q2. We expect 2012 non GAAP net income per diluted share of approximately $1.36 to $1.52 on an outstanding fully diluted share basis of 26,800,000. For the Q2 of 2012, we expect non GAAP net income for diluted share of approximately $0.32 to $0.36 Our estimates of non GAAP net income per diluted share include the impact of CoStar's existing business, the prorated impact of LoopNet, increased interest expense associated with the term loan I discussed earlier and loss deferred revenue at LoopNet, which impacts which does impact non GAAP EPS. We have continued to assume a 38% long term tax rate for our non GAAP earnings analysis.
On a GAAP basis for the Q2 of 2012, we expect an unusually high tax rate driven by the acquisition related costs from 20112012 that reduced GAAP earnings, but are non deductible for tax purposes. This is very exciting, Andy. Pay attention. That's 100% tax rate. Yes.
For the full year, the impact of the non deductible acquisition cost will also lead to a higher than normal tax provision. The guidance tables included in our earnings release what we currently believe to be the likely range of outcomes. We expect our long term effective rate to return to a more normal level over time. I'd like to note that while our 2012 tax provision will be very high, we expect to pay minimal tax on a cash basis in 2012 due to loss carry forwards created from the acquisition and in fact expect to receive refunds of taxes paid in prior periods approximately $9,000,000 to $12,000,000 As we discussed when we first announced the acquisition a year we believe there are significant synergies associated with the combination of CoStar and LoopNet. With the transaction closed, we expect to focus initially on ensuring a successful integration and refining our detailed operating plans, including plans for realizing synergies.
We expect cost synergies to ramp up in 2013 and that in 2014 we'll reach our goal of $20,000,000 by the end of the 24 month period we projected when we proposed the acquisition. Now that the acquisition has been finalized, we expect to update our detailed operating plans with the LoopNet management team over the coming months. As we incorporate these plans in our outlook, we'll communicate them to you. So, our outlook today basically puts the 2 companies together at current expected course and speed along with some expected accounting adjustments. As Andy mentioned earlier, since we only have officially closed the deal 2 days ago, we plan to be working in more detail on a combined operating plan on the coming months along with the LoopNet senior team and we will update you on this over the next few quarters along with guidance for the rest of the year and more clarity for the combined outlook for 2013, which will include the ramp up of expected synergies.
In summary, I'm thrilled to move forward with the LoopNet acquisition and to begin unleashing the substantial shareholder value we believe will come from this business combination. I believe the combined company is uniquely positioned to deliver increased value and innovative products to our expanding customer bases as well as strong growth in revenue and earnings to shareholders. I expect to exit this year with a quarterly revenue run rate approaching $100,000,000 for the quarter with double digit growth rates in expanding margins. We expect the acquisition and successful integration of LoopNet leaves us well positioned to achieve our medium term goal of $500,000,000 in high margin annual revenue within the next few years and on our way to our previously stated long term goal of over $1,000,000,000 in revenue. And now with that, we'll open it up for questions.
So congrats on getting the deal done.
So a couple of questions for you. So first
of all, you're obviously excited about bringing these 2 leaders together, but what do you foresee as the biggest challenge with respect to the integration? And what's your game plan to mitigate these risks?
Well, you get all the you have all the typical challenges involved in the integration. You have 2 different cultures. You've got a past competitive history in some ways. We didn't compete directly for customers with similar products, but we did compete for PR space etcetera, etcetera and mindshare. But at the end of the day, I'd probably surprise you what I think the greatest risk factor is and that is too many opportunities.
We probably have between the two platforms about 34, 35 different product areas. And I think it's going to be important for the combined team to focus our combined resources and go after the core and most valuable revenue opportunities. So I think focusing on what's important and the best way to drive revenue is going to be the biggest challenge.
Okay. And just kind of following up on that. So I know the focus over the next kind of year or 2 will not be on necessarily realizing revenue synergies. But from your view, like what is the easier sell? Is it information services to loop customers or vice versa?
And what is the earliest that we'll start seeing some of the benefits of the cross selling? Thanks.
Well, it's definitely both and it is achievable in the near term. So yesterday up in San Francisco, I was meeting with the LoopNet staff, many of whom are salespeople up there. And we were sharing some of these numbers on the Chicago demographics with them. We instituted a very highly motivational sales incentive plan with them for the end of the year and show them how to quickly show them how to search for these folks who aren't currently advertising on the LoopNet platform who would be great prospects. And I don't think I can stop them.
I think they're going to start cross selling into that audience nearly immediately. So I think you'll see a ramp up over the next several months as they start to grab that audience. It will take time to actually set up a really efficient way to do that. So in an ideal world, it would be great if the CoStar researchers who talk to these people several times a month began to mention, oh, by the way, you should probably talk to Sally over at LoopNet about exposing your listings to the broader market and then the software would automatically send the qual up the warm lead over to the LoopNet side, etcetera, etcetera. So some software logistical things would be nice, some marketing campaigns into this new audience for LoopNet to way for that cross selling activity.
So you'll start seeing teeny results the next 2 months and then ramping up to probably full momentum over the course of 3 quarters or so, 3, 4 quarters. And then on the selling CoStar information products into the LoopNet audience, that probably doesn't ramp up for another month or 2, but that could probably gain some significant momentum in the as you move into the Q4 of this year. So that's the primary focus. Getting these back ends integrated, capturing the data quality improvement potential and beginning to try to harvest these cross selling opportunities and the nearly immediate entry into that effort. And this is Brian.
I think that Andy hit the nail on the head. I mean, both companies have been growing pretty significantly year over year and that, of course, has been increasing and accelerating. I think by the time we get some of these together, we'll have a lot more clarity on the next couple of calls and I'm sure we'll be updating you guys on that progress. But the reality is in our business, by the time you do start to see some of those things, you'll hear about it more anecdotally before you'll see them on the impact in revenue at least for this year. And that's why we do have a range, but that is we're pretty excited and we will be more excited after we get a couple of quarters under our belt to put out some 13 numbers for people, so they can see those and also look at some of the ramp ups on the earnings side.
So I really do think it's going to be really a fun next couple of years financially as we sort of get this thing moving. And the other thing I should sort of caution you on or a factor you want to consider is that when a sales force has a completely new pattern or tries doing something different, even if it's a great new you may get some initial list, but you also have some headwinds and some of the change involved.
All right. The next question comes from the line of Susie Stine with Morgan Stanley. Please go ahead. Hi. First quick question, are you going to provide pro form a financial statements historical?
There's requirements for pro form a financial statements that will be filed. I believe it's within 71 days, if I have that correctly. Those pro form a ones, I don't think ours is useful is what the combined ones are moving forward because it sort of assumes assumptions that the deal closed prior, but those will be filed. And I think we give fairly detailed numbers moving forward and I would have people more focused on what our current course and speed is. But yes, we will file those in 71 days.
Brian, are you sure it's not 72 days? I have to double check. I'm sure there's a lot of people in the room right now sending me emails that I can't see telling me the exact number of days. But if my memory serves me correctly, it's 71.
Okay. And then can you just address why you're issuing stock?
I mean, I think that was from the acquisition, what we agreed to over a year ago. So we came up with what we thought was sort of the optimal structure between the cash from the two companies, the debt we planned on raising and a small stock piece. So I mean that's been out there for quite some time.
Okay. And then just what gives you confidence that Loop users will want to use CoStar services? I guess the question is why aren't they buying services now? And will you be up selling or down selling? I mean is there a chance that existing CoStar customers will be able to trade down once this is all worked out?
Well, I think one of the things that's continuously impressed me over the last 25 years is my and everyone's ability to continuously underestimate the size of the commercial real estate market. The market is really huge and there are a number of people who've never seen a CoStar demo, never seen the product or service. LoopNet does have a bigger brand name than CoStar in the general commercial real estate community by far. So in a number of markets, big cities, little cities, folks have been using the LoopNet platform. They've been getting great leads out of it.
They may also use it for information. Basically, it was initially probably more of an advertising product. They've been using it for information. And some of them are really quite intense commercial real estate brokers. And being able to go there and look at the last query they did and go to the salesperson and say, this is what you can get as an additional intelligence into the market if you had this broader deeper database from CoStar.
Our experience has been that when you show them what additional content that you can give them, which is critical to giving them a competitive edge in the market, they respond. So you're dealing with a huge pool and I'd be shocked if those 100 of 1000 of folks aren't good prospects because we're signing these folks up every single like people like that every single day. Now these are probably middle market clients for us and including some smaller clients for us. I don't see any I don't see I have not been able to come up with any scenario in which environment where we're improving the data quality in CoStar and learning more about the profile of the prospects in the market where that results in us down selling to LoopNet on the information side. So I really can't come up with the way that that can happen.
But I'm again, I'm fairly psyched about this and I think it's fairly straightforward. It takes a little bit of time to gear up a sales force, build the right tools to support them, build the right marketing and branding program. But the opportunity to brand these 2 companies to their core strengths and not muddy up the brands is phenomenal.
Okay, great. Congratulations on getting this done.
Thank you very much. Thanks. It didn't take much work.
All right. Next we go to the line of Brandon Doble with William Blair. Please go ahead.
Thanks. Maybe an FTC question first. The relationship or the divestiture of Exeligent to DMG, I know there's a provision in there for some sort of, I don't know, data that you're going to have to give them. Is this like a one time thing? Is it you got to keep updating the data for them?
How is that whole thing going to work and what's the time frame for what we should expect?
I would turn that question over to Justin. Now the inside pull there. So the data the one time data feed, do you know the exact date, John? There's a data feed that has to be provided within promptly after the divestiture takes place. And the one time the one time fee of certain contact information for people who have listed with LoopMed during a period of time.
And so it doesn't include listing information from CoStar or listing information from LoopNet. It's simply contact information. It's the what we're trying to do or whatnot we what the FTC is I believe trying to do is maintain the competitive status quo. So prior to the contemplated merger, LoopNet would give Exelligent a list of people who had listings in a if Exelligent expands into Washington, if Exeligent expands into Washington, D. C, they'll be able to draw on the list of all the people who had a listing on LoopNet for say 2 years prior or 3 years prior.
And they can use that to start their research on Washington. It does not include the e mail addresses. It includes the name, phone number and address of the people with listings. Now as you know and that's what Exeligent had prior to the merger. But as I
talked about in the Chicago
scenario, the 7,000 listings in people with listings in Chicago, LoopNet was collecting information or listings from probably 3,100. So it gives Exeligent a good start, but they still have to do the kinds of things we do, which is drive the market, look at Okay. It's fair and we're comfortable with it. Okay. That makes sense.
It Okay. It's fair and we're comfortable with it.
Okay. That makes sense.
It did take probably a month or 2 to nail it down.
Shocking. Can't even believe that happened. I guess the in previous calls, actually the past couple of years, you just put a lot of emphasis on the analytics opportunities you guys see with the core CoStar business. Does LoopNet help you there or does analytics help you sell or can you sell analytics back into that LoopNet customer base? So forget kind of the CoStar, it's got database stuff, but what else you're doing from a big picture point of view?
Yes.
We are fully engaged right now in our spare time on building the integrated PPR CoStar platform, which is this broader fusion product line I talked about on the last on the earnings call so long ago. And the that's moving ahead. And insofar as we go find brokerage firms and investors who are casual users of LoopNet who are ideal prospects for CoStar, many of those can be eventually upgraded up to an analytics package. So in focus groups, we were holding focus groups a week ago. A broad segment of participants, people who are LoopNet customers, people using LoopNet Premium Searcher, broad cross section of brokers and small investors like those analytics and they talk about how they like the fact that CoStar provides them.
And so in that, LoopNet gives us more information customers that will give us more demand for the analytics. But really, I think you probably are in your mind thinking about institutional purchasing of that kind of stuff and LoopNet won't be a big driver for that other than we sure like the fact that if we can improve the quality of our databases that much more by finding digging up another 100,000, another 200,000 listings in a very big market. Our analytics get more accurate and more valuable. So that's probably the bigger impact. This week, we're going to be suffering from the fact that we really are very focused on the advertising cross selling opportunity right now.
Okay. That's fair enough. I think in the release you talked about validating the LoopNet properties and kind of merging them back into the CoStar database. And I'm assuming there is some sort of expense associated with that that's built in the guidance, but what's the risk that you overspend there? Or I guess given the opportunities you see, you start getting in there and you say, boy, we found an awful lot of things that we can do to make this data better And all of a sudden you're throwing an extra $2,000,000 $3,000,000 $4,000,000 at it because you want to bring that data up to a level that you feel is going to be advantageous to go cross sell down to the customer base?
Well, you know Mr. Deville, Brian is the big spender, not me. I think that goes back to my response on the first risk factor, which is, I think we need to make sure that everybody in the combined LoopNetCoStar team think beyond whatever project they were working on the day before the merger occurred and those resources need to focus on getting this integration and connection of each company building and listing between the two systems done. If you get people rallied around that, it shouldn't take additional human research on the research or the systems side. We have those capabilities in house to do that now.
So I don't see it driving up costs. Ultimately, it takes your costs down, I believe. So it is a question of prioritizing people to one task. Right.
And then final one for me. Showcase, how does that fit into the combined company's plans?
Well, I believe it does. Already we have turned over management of CoStar Connect and Showcase to Fred Sainz over at LoopNet, who's going to be running the LoopNet marketplace. So I believe that we will find that Showcase probably has more of a different audience and similar audience than the LoopNet marketplace does. And we've got great organic search on Showcase now. You've got Showcase showing up on page 1 of an awful lot of Google Yahoo big searches.
And it's an opportunity. LoopNet marketplace will be the lead marketing platform, but the sales force over there LoopNet will be the way they do with newspaper distribution or a city fee distribution say for an extra $10 a month on that list Showcase platform as well.
Okay.
So one of the big opportunities I think we've got here is if you think back to when we launched Showcase, for the 1st 3 or 4 months, we sold that on annual contract basis with our existing information sales force and they ramped it up to $3,000,000 $4,000,000 very rapidly and our renewal rate today on that business they sold is still around 90%. And so you can use Showcase and Cityfi distribution, newspaper distribution, packaging up these multi channel marketing vehicles into such an attractive offering, you can get people to potentially go into annual subscriptions at the firm level, which is a much more stable business that you can build on. So, I Showcase has not had the sort of dedicated expertise and management focus and product development that needs in the last year or so. I'm sure that there's people on the LoopNet team who can evolve it, make it different, give it enough of a different personality that use the beautiful real estate, the great real estate and create value in bundled packages, not bundled packages, aggregated packages. I don't know.
Got it.
All right. Appreciate it. Thanks guys.
Yeah.
We go to the line of Bill Warmington with Raymond James. Please go ahead.
Good afternoon, everyone.
Hello, Bill. Hey, Bill. And let me
add my congratulations as well.
Thank you very much.
Thank you. Maybe you could talk a little bit about plans to tie together CoStar Go and LoopNet, how that would work?
You got me. We haven't thought about it. No, we don't have any current plans. I think they're both CoStar Go is going to be the harder core sort of professional platform. It actually is we're adding least discounted cash flow tools to that.
We're adding analytic tools to that. That is not something that the broader LoopNet marketplace is terribly interested in. So, the product team at LoopNet will probably have not had time to see what those plans are, but I'm sure they've got plans to evolve their platform. Certainly, it's a critical thing for us to have something where a tenant in the field, a potential buyer in the field who uses the LoopNet platform, they need to have an ability to go out there and be able to see the content in the field. And I think we all believe, I think at this point, 25% of LoopNet's entire site activity is through a mobile platform and talking to Justin, one of the product leads on that the other day, he's sort of taken the view that that is going to be the I would actually sort of say that CoStar Go represents the CoStar information platform and Lumenet will continue to represent the marketing platform and the iPad is just a platform for it.
It's not so much a different strategy.
Got it. Now would you guys be reporting LoopNet revenue separately going forward?
No. Hey, Bill, it's Brian. We will not. They'll be consolidated into our numbers. Obviously, for this quarter, we sort of broke that out.
There's obviously some accounting adjustments to the end of the year with some loss deferred revenue, but they've been running at 10% to 11% year over year. I think that's a pretty good number. Once you take out the accounting adjustments, you can see we gave pretty specific guidance. Everybody can see we still have our numbers that we took up last week in there. Moving forward, it will just be combined numbers for the 2 companies.
But right now, you can easily break those apart.
Okay. And then if you could walk us through the deferred revenue impact?
Sure. Yes, the deferred revenue impact, again, I mentioned it in my script, it's not final. We're still working with the auditors to go through the final purchase accounting adjustments. So we're sort of benchmarking it at $6,000,000 to $8,000,000 It's a pretty typical thing that happens in acquisitions where the deferred revenue on the balance sheet of the company that's acquired is typically reduced. So I think I don't have their exact numbers on me right now, but I think they had about $10,000,000 or so on the balance sheet.
So, some place in that range. That will happen sort of over the next 4 to 5 quarters with the biggest piece of it happening in the second quarter, which I think we're estimating in the $3,000,000 range or so. And then it will be a little bit less for the following 3 quarters and it will whittle off. So that will affect both revenue and non GAAP EPS. So it's a direct hit to both.
It's not adjusted out in the non GAAP EPS line. So it's a mechanical thing. We've had this in smaller doses with other acquisitions, but it is a mechanical thing that people have to put into their models.
Got it. And then if you could help us with the interest rate or interest expense on the $175,000,000 term loan, are you guys going to keep that all outstanding or do you think you'll be paying that down quickly?
Yes. I mean, I think right now, I mean, we're going to sort of pay it down based on what we've got in the agreement. So there's specific pay downs to that. It's L plus 2 right now, very manageable, reasonable debt. Again, I mean, I think we're just getting the deal closed and we'll be paying the minimums on that for the next 2 or 3 quarters.
Obviously, as we move forward, we'll continue to look at the optimal capital structure and what the debt pay down is on that. But I think right now, we're going stick with pretty much what we've put out there on that. And there's details again in the guidance section, you'll be able to look at all those numbers.
Okay. And then the $20,000,000 in cost synergies, that starts to kick in. I would ask how much of that's going to flow through in 2012? And then will it be completed basically by the end of 2013 to leave 2014 as a clean fully integrated year?
Yes. I mean, you always wish that these things if we were to close this by the end of the year, you would have had clean years, but certainly that didn't happen. So it probably will not be as clean as we all would like. Yes, John, I'm looking at you. Yes, I'm looking at you.
But so, again, we give pretty big ranges. So, there will be some synergies this year, but I mean the reality is we just closed this 2 days ago. So we are really going through everything in detail. So, I mean, they're built into the ranges. There's not much this year.
I think the majority of it will ramp up fairly evenly through next year, but I would not say it will be clean and we will be at a $20,000,000 run rate by the end of the year. I mean, obviously, as we go through the next few quarters, we will have more detail for you guys and I will have more confidence in those numbers. We still feel very comfortable that in 'fourteen, at the end of the 24 month period, that we'll be able to achieve sort of those types of numbers. And I think realistically what you guys will see is you'll see it in the guidance as we're able to really go through the operating plans and come out with you guys with some guidance for next year, I think people will see a big piece of those ramp ups. And then again, I think sort of achieving them, I think it will fall in the Q2 of 2014.
So I would definitely pretty much start that in 2013 and ramp it up into the finalization in the Q2 of 2014. Of course, we want to beat those numbers. I mean, I think it's just a little bit hard on day 2 after the deal closes to give too much more detail than that as far as the ramp up out of it. But we put numbers out there. Obviously, we'd like to do better.
Is it thought still to double adjusted EBITDA margins within 3 years?
I think that is definitely achievable. It's definitely a goal that Andy and I both would like to achieve. So I think that, again, clearly over the next few think as we see how revenue is ramping and synergies on revenue and the combined sort of earnings profile, I think we'll have much more clarity. I know that both Andy and I share the same vision to ramp up the earnings and I think that's absolutely a goal of ours. I'm looking at him, he's shaking his head yes.
And I think what I'd love to do obviously is come out with guidance for you guys next year and put a goalpost out there and say here's what we think that's going to happen and that's going to be one of my goals to work with Andy on. But definitely something I think we can achieve, right Andy? Yes. Truth be told, we're sitting in a very distracting room. For the first time, I'm sitting in a software development studio over at LoopNet.
And with the gun jumping rules, we haven't been sharing future product plans and I'm looking at the whiteboard at some data structures. It's fascinating.
Okay. Well, again, thank you very much and congratulations on doing it.
Thank you very much. Appreciate it.
All right. Next we go to the line of Brett Huff with Stephens Inc. Please go ahead.
Hey, guys. It's John Campbell in for Brett Huff. Good afternoon.
Hey, John.
Hey, congrats on crossing the deal finish line. Nice job staying the course.
Thank you very much. You are obstinate and determined.
So I'm thinking international would have to be maybe at least a small piece of the puzzle as you guys try to get to the stated 500 mil in the next few years. But as you guys continue to look to improve overseas, how do you see Loop is playing a role in helping turn that around? Just seeing that Loop did a great job in covering some of the smaller markets here in the U. S. So do you guys see that maybe as lending any type of blueprint and how to effectively expand your footprint internationally?
Well, you're correct. Now I have to the big caveat and they're actually the central theme is, we're very interested in capturing what we think is a massive U. S. Opportunity and that's our primary goal and pursuing the EBITDA growth and capturing the profitability potential of the U. S.
Is our primary goal. Having said that, we're making very good progress in the United Kingdom on getting the platform there integrated with the U. S. Platform, which means that whatever we do with integrating the LoopNet platform will automatically or almost automatically integrate LoopNet into the UK platform. So without a doubt LoopNet is a much more leveraged cost effective way to expand into new geography because the users do the data entry for you.
And historically, the biggest cost of expansion for CoStar is sales and research and people in the field. LoopNet's model using centralized sales and e commerce sales along with user generated content is much less expensive. Also, it's a great place to leverage technology advantage. So with LoopNet, a higher piece of your value proposition is understanding Internet marketplaces, SEO, pay per click techniques, quantitative analysis of best prospects things like that, that sort of technology can be quickly levered into new markets. So there will be no conversation.
We will try very hard to have no conversations about international expansion beyond the United Kingdom in the next several months. But I think in a little bit later out, LoopNet will be the vehicle we use to expand globally.
Great. 2nd part here. So just on the FTC orders, the first one I had a question on was, I guess, just the rule allowing the customers to allow to break the contracts. I guess, I should say just terminate them early. It just gives them that optionality.
So how much of that I guess just how much contract risk do you guys see there? And if you could maybe provide a rough estimate if I don't know if you're able to do that, but of what percent of your rev is maybe tied up in those longer term contracts?
The reality is we have for years years years preferred or just by practice have just done 1 year contracts. So 93% of our contracts by count are 1 year contracts. The contracts that we tend to go on to multi year deals with, they're with the largest firms and we do that because it takes a year or so to negotiate the contract in the first place. But more importantly, those customers prefer longer term contracts. So we are very we believe and the FTC concurs that we are a very important supplier.
I don't mean they actually concur, but I believe they concur. We are a very important supplier to some of these major firms. And it's the major firms who are saying we want to have pricing visibility for years. We want to know we don't have interruption of supply and they want to protect themselves. So and many of the firms who are impacted by this have been our customers for 20 years.
So we don't think that the fact they now have an ability to cancel with 1 year's notice will have a major impact. I would be surprised if I'm sure someone somewhere will execute that 1 year cancellation option, maybe a few more people. I'm sure that I would be deeply disappointed if our new emerging competitor did not remind everybody There was a lot There was a lot of where we negotiate around was taking it to less than a year, which I think would have hurt us substantially, but we're not doing that.
Okay. Thanks. And then the second question there, and this seemed like a pretty broad statement, but the order that mentioned that you guys couldn't bundle products together in ways that would impede your competitors. I know that the FTC just basically wants you guys to play nice with Exeligent, but that seemed like a pretty exactly. So that seemed like a pretty broad statement.
If you guys can maybe just give us your understanding of that order?
Well, I would I can give you my understanding of the order and then John can correct me. I would recommend that you just look at the FTC website and read it. It's great reading. It's well written. It costs more to write that document than any of the Harry Potter series.
But the point there, I mean, the simplest point is they don't want us to say that in order to get access to the LoopNet premium membership, you must buy CoStar property or tenant or comps or vice versa. So we have to continue to agree we have to continue to sell separately LoopNet premium lister, LoopNet premium searcher, CoStar comps, CoStar property, CoStar tenant for a period of 3 years and not condition the purchase of one product on purchasing the other product, which we're quite comfortable agreeing to do. And so I don't think it's going to have a terribly adverse impact. Now different platforms like CoStar Go or CoStar Viewcean that take elements of these different databases and connect them, you can sell those, but you have to keep offering the core original products. And this does not impact Resolve or Virtual Premise or any other things.
I think it's totally reasonable and they're doing their job and I think they're doing it right.
Okay, great. And I guess Brian is going to be providing the 60 day updates in writing?
The new monitor who is I've known for 20 some years and I think he's a wonderful guy. He handsome. He's nice. He's smart. But he contacted me on the day of the close and said, I want you to be the primary contact to Andy and I've tried to avoid that.
But yes, Brian is going to do the 60 updates for 10 years. I've delegated it to Rich. Thank
you. That's all we got. Congrats, guys. Thank you.
We next go to the line of Todd Lukasik with Morningstar. Please go ahead.
Hi, good afternoon guys. Good afternoon. Hey, Todd. Hey, just a quick follow-up on the data feed of the contact information to Exeligent. You said it's a one time feed.
I may have misunderstood, but is there an implication that if they enter markets, new markets, say, 2 years down the road that there's another requirement for you to give them contact information at that time? Or is it just once the minority stake is sold?
It's just once and it's when the minority stake is sold. So, 2 years from now, if they should enter, oh gosh, Tampa, Florida, they would be using the data 2 years from now, they'd be using the data from roughly today to research the market. Now, it's still useful to them because many of the people that actually have multiple listings are multiyear players in commercial real estate and they're likely to still be around.
Right. Okay. And then just a question on I know you said there's not going to be necessarily separate reporting of the financial information for sort of the CoStar business and the legacy LoopNet business once it's combined. I'm just wondering with regards to some of the other sort of operating metrics and the one that pops to my mind is your guys renewal rate in terms of subscription revenue renewals and historically LoopNet seemingly having higher customer churn and whether or not that and sort of other metrics, whether it be subscribers or clients or whatnot, whether you guys will try to continue to report those on a separate basis or whether that will become combined on a go forward basis as well?
Yes, I think we're going to try to continue along with as many of the important metrics as we can that we always have for both companies. I think just as an example, the renewal rate is a subscription based information services, which is always hovered in the 93% to 90 percent range. Obviously, we'll still we can still report that, just that 93% to 94% will drop. And obviously, it will be a smaller percentage. But if you're still in the 70%, 80% -plus range, it will still tell you a big piece of what's happening in the business.
And then we can still give some other metrics as to what's happening as far as registered members and paying subscribers and other things. So we're still going to provide, I think, a whole list of things, but there will be combining of things over the next few quarters with still being able to get people clarity on what's happening. If you look at just a couple of examples, we acquired comps.com 12 years ago, we acquired PPR Resolve, They're all consolidated in our numbers, but we do from time to time talk about, hey, this quarter we really PPR had a great quarter because we're focusing on financial services or some of the non subscription based things and we'll talk about those pieces. So I would say you'll definitely hear lots of talk. You'll get the majority of the metrics and we'll still we'll explain what happened in the quarter and what were the drivers behind the revenue.
We'll report annual contract at renewal rates. And that will give you a great idea. Correct. You'll know from that. Correct.
Okay, great. Thanks a lot guys and congrats on closing the deal.
Thanks, Todd. Thank you very much. We couldn't really remember why it was we're closing, but we're excited. That's a joke. Okay.
With that, at this point, we don't appear to have any more questions. And I'd like to thank you all for joining us on this special LoopNet CoStar closing conference call. And we look forward to speaking with you all at the next quarterly earnings call. Thank you very much.
Ladies and gentlemen, this conference will be available for replay today after 7 p. M. Through June 2 at midnight. You may access the AT and T teleconference replay system at any time by dialing 1800 4756,701 and entering the access code 2,470,060. International participants may dial 320-365-3844.
Those numbers again are 1-eight hundred-four seventy five-six thousand seven hundred and one and 320 3653844 with the access code 2,470,060. That does conclude our conference for today. Thank you for your participation and for using AT and T Executive