Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode and later we will conduct a question and answer session. Instructions will be given at that time. As a reminder, the conference is being recorded.
I'll now turn the meeting over to our host, Vice President of Investor Relations and Communications, Mr. Richard Simonelli. Please go ahead, sir.
Thank you very much, operator, and thank you and welcome to CoStar Group's Q1 2018 conference call. Before I turn the call over to Andy Florence, CoStar's CEO and Founder and Scott Wheeler, our CFO, I have some very interesting and important items for you to consider. Certain portions of our discussion today may contain 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 our hot off the press April 23, 2018 press release on our earnings and in our filings with the SEC, including our most recent Annual Report on Form 10 ks 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 on the date of this call, and we assume no obligation to update these statements whether as a a result of new information, future events or otherwise. Reconciliation to the most directly comparable GAAP measure to all of our 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 for those terms. The press release is available on our site at costargroup.com. As a reminder, today's call is being broadcast live and in color on our website, where you can also find CoStar's Investor Relations page. Please refer to our release on how to access that.
And remember, as usual, one question, so make it a good one. I'll now turn the call over to Andy Florens. Andy?
Thank you for joining us today for our Q1 2018 earnings call. We have begun 2018 with a very strong Q1, growing revenue 21% year over year. Net income grew 136 percent year over year to $52,000,000 in the 1st quarter. We expanded margins with the Q1 2018 adjusted EBITDA margins at 31%, nearly 300 basis points above Q1 2018 level. We are on pace to generate almost $400,000,000 in adjusted EBITDA in 2018.
We are confident that we will achieve our 40% adjusted EBITDA margin for the Q4 of 2018. CoStar Suite revenue accelerated to a growth rate of 19% year over year as revenue reached $130,000,000 in the Q1 of 2018. In the last 12 months, the number of individual subscribers for CoStar Suite in the United States alone grew by over 20,000 to approximately 126,000 as we continue to drive revenue growth across broker, owner, lender and institutional sectors. Multifamily revenue was $88,000,000 for the Q1 of 2018, an increase of 37% compared to the Q1 of 2017. On an organic basis, multifamily revenue increased 23% in the Q1 of 2018 year over year.
Commercial property and land marketing revenue grew 19% in Q1 2018 year over year and has grown an annual run rate of $160,000,000 This group generated its highest ever bookings number as sales were strong for LoopNet, our land sites and business for sale. Bookings were up 29% Q1 2018 versus Q1 2017. We are very excited about the strong growth and high margin potential of these businesses. Company wide bookings continue to be exceptionally strong in Q1 2018 as we achieved our highest ever sales quarter generating 54,000,000 dollars Given the tremendous strength in our business, we made the decision to accelerate the LoopNet to CoStar upsell conversion process. A number of the legacy LoopNet information customers have told me they would buy CoStar when we wind down Premium Searcher and some have even questioned me as to why we've not already done so.
So we did. We originally planned to discontinue Luminant Information revenue the next 12 to 18 months. But as we told you, instead we executed the wind down completely in the Q1. This created a $19,000,000 reduction those cancellations in later quarters and we'll be in a much stronger sales position going forward. We did this because we believe it will help us drive more CoStar upsell revenue in 2018.
We did this from a clear position of strength. The ongoing conversion and upsell of LoopNet information users is clearly contributing to the growth in both CoStar subscribers and LoopNet marketing subscribers. Since our Phase 2 LoopNet conversion push began in October of 2017, we have converted approximately 7,000 100 LoopNet customers to CoStar and or marketing contracts at an average price of approximately $5.28 per month. On average, these LoopNet users were paying $54 per month for an average monthly price lift of $4.74 per month or $5,688 annually. The 7,100 includes 5,200 conversions to CoStar at 555 per month and 1900 sales of LoopNet marketing subscriptions at 458 per month.
At this point, we have generated $40,000,000 in annual incremental contract revenue from the Phase 2 LoopNet conversion. Our initial Phase 1 push lasted about 18 months and generated in excess of $100,000,000 of incremental revenue. Phase 2 is expected to last at least 18 months, and I believe it can generate significantly more than $100,000,000 in revenue. There are approximately 80,000 discontinued LoopNet premium searchers or heavy LoopNet searchers and we're still pursuing them all and are confident about our ability to do that. They remain a primary focus and we are targeting a series of sales and marketing waves throughout the year to upsell them to CoStar.
One way we're doing this is by carefully targeting high potential broker prospects still using LoopNet for information with a special version of LoopNet that highlights the information advantages CoStar offers. When these targeted brokers search for a listing in a given area, they see the listings marketed and looped on the map as red pins and the many more CoStar buildings they cannot access because they're not CoStar subscribers as blue pins. When you look at the map, it's a sea of blue pins with just a handful of red pins. When the conversion target clicks to see the details behind the blue CoStar user only pin, they only see an upsell message. It's a very concrete illustration to the LoopNet heavy searchers just how much more value they can get with a professional version CoStar.
It also has a powerful emotional effect or a FOMO that drives people to action. The integration of the CoStar and LoopNet database has really been a tremendous success. With an integrated and easier to maintain database, our data products have never been better. We continue to proactively update 92% of over feature made available October 2017 and has seen widespread adoption. Of the 307,000 new commercial real estate listings added to our database since October, 130 6,000 or 44 percent were directly entered into Listing Manager.
In that period, there were also 1,000,000 listing updates and amazing 663,000 were edited directly by users. In the month of March alone, users edited just under 500,000 listings. At our typical research to listing ratio, that represents a shift of several 100 FTEs of researcher labor from us to our clients. We believe many of our clients prefer to add their listings themselves, so we're improving the product and potentially saving significant money. At this early phase of the new listing manager, our researchers are closely watching the listings users are editing.
But once we're confident of the quality of this data, our research workload may drop significantly. We are dramatically expanding our commercial real estate news coverage in CoStar. We now have a team of 15 journalists breaking news stories and creating original content for our subscribers. We're looking to further expand and build upon our established reputation as a trusted insightful news resource for commercial real estate. Our goal is simple, make CoStar the industry's most read and most respected source for commercial real estate news.
CoStar contains a wealth of information, but the user has to work to search it out in the product. With quality CoStar news, we proactively serve up our information to the user and engage them more deeply in the product. Not only does this make the product stickier by adding more value, it provides an even better platform from which we can support very valuable Dan is an Dan is an excellent business journalist and was a successful long time news editor for The Washington Post. In a recent independent survey of 2,000 commercial real estate professionals, 98% stated that they either rely on LoopNet or CoStar for commercial real estate information. We have invested heavily for decades to build such a strong value in our products such that 98% of the market would use them.
2018 marks a turning point for CoStar in that moving forward, we intend to be much more diligent in maintaining strong and consistent pricing integrity. We license our services on an enterprise wide regional site basis. We have tens of thousands of CoStar clients that are paying well below our list price. This has occurred for any number of reasons, but one of the most common is that a client grows and adds users, but their CoStar pricing does not increase to reflect the new additional users. I believe these discounts could be in aggregate worth tens of 1,000,000 of dollars to more than 100,000,000 dollars I can give you just a few of these month this month's examples.
A valuation firm in New York City was licensed 14 appraisers, but actually had 23 using the product, so they agreed to an annual fee increase of 27,000 dollars A banking client in San Diego took the negotiating position that only pay us $18,000 annually for 6 additional users, But when we walked from the deal, they agreed to pay $31,800 more annually. An asset management firm in Glendale, California that was a former client of Exelligence attempted to sign up for just one user, but eventually agreed to the correct 5 person enterprise license, which is an increase of $14,510 annually. We are now rejecting more contracts for under pricing and or under licensing than we ever have before. We have in fact turned away large but under priced contracts this quarter. No doubt this means we're foregoing some business.
In the intermediate and longer term, however, we are confident that consistent pricing is fair to all our clients, will drive more revenue and drive better shareholder returns. Many of our CoStar salespeople will have to climb a learning curve on pricing integrity, but I'm confident they will and the result will be much better. We invested significant legal fees and efforts over the past 2 years to bring Exeligent's best of our products to a complete stop. We're now turning our attention to identifying the many people using CoStar without a valid license. We intend to find these freeloaders and strongly encourage them to purchase a valid license.
We believe that there are as many as 10,000 plus people and perhaps 2 to 3 times that number illegally accessing CoStar. We are employing an increasing array of theft detection and prevention technologies. We're now contacting the 1st batch of 1,000 firms we believe are stealing access to CoStar. We communicate the ethical problem with their engaging in theft, give them an amnesty period to pay back fees and sign up. And if those efforts fail to correct the problem, we plan to seek monetary judgments.
And as you know, we're pretty good at that. We never want to litigate, but it is the reality of our business. You may know that our case against Exeligent brought us to the jungles of the Philippines where a company called Avion was hired by Exeligent to steal our data. In our investigation, we discovered massive volumes of evidence that Avion was also linked to child pornography, prostitution, human trafficking and Backpage, a notorious sex website. We provide the evidence to the FBI and cooperated with half a dozen other law enforcement agencies.
The site and its affiliated websites have been seized and shut down by a joint enforcement action by the FBI, the U. S. Postal Inspection Service and the IRS's Investigation Division. A 93 count indictment was issued against 7 individuals for doing very bad things. In addition, following publicity surrounding our Philippines discovery Section 230 of Communications Decency Act, which provide a legal safe haven for Backpage as amended to make it less likely that others will follow Backpage's footsteps in the future.
Others deserve most of the credit for fighting this chapter of human and child sex trafficking, but we are glad we could help and make a difference. Moving back to LoopNet. With clearly defined brands in the industry, we can now promote CoStar the best information service for professionals and LoopNet as the best marketing service to attract end users such as tenants and investors. We can also focus on making the LoopNet marketing experience even better and we're working to give our advertisers even more value for their marketing spend. With the integration, we have eliminated free listings and are limiting most of the deeply discounted legacy listing plans.
These free and nearly free listings were watering down the exposure value of our best clients' ads. In total, we've discontinued approximately 60,000 low cost LoopNet ads that were priced at an average of about $6.09 per month. We are shifting our focus to selling high value, high impact, larger top sorting ads for owners with the highest needs at price points in the 1,000 of dollars a month. In the Q1, clients advertised more than 5,000 properties in these upper end power ad levels at average prices ranging across tiers from $220 per month to $10.54 per month. These power ads are basically the equivalent of the tiered ads that we sell on Apartments.com so successfully.
Historically, and particularly before we purchased LoopNet, LoopNet targeted marketing products to brokers with low end properties. By doing so, LoopNet was effectively focusing on solving their $10,000 problems. In commercial real estate, there are plenty of $100,000,000 marketing problems that need to be solved. We are repositioning LoopNet to better focus on solving these high value needs for owners who have much more at stake and much larger budgets. We are demonstrating to owners that with of broker audiences we have in CoStar that read our newsletters, use CoStar and the massive end user audiences in LoopNet, we can help them migrate leasing risk and expensive multimillion dollar vacancy loss problems.
It's an exciting project to reposition LoopNet as a higher value marketing site. We're giving top advertisers on LoopNet bigger advertisements, higher placement search results, video exposure in the form of 3 d virtual walkthroughs, video montages, drone footage and much more. Historically, to sell lower end commercial real estate advertising, we relied on e commerce and inside sales team and a very small ad sales team in the field. As we move up market, it's more important to have a field sales force to market the higher price point CRE advertising opportunities just as we do so successfully with Apartments.com. To accomplish this quickly, we have restructured the CoStar sales force's incentive plan to include a significant quota for LoopNet sales.
CoStar sales force is well positioned to sell more LoopNet as they are already meeting with this target audience and these prospects have expressed a desire to have single points of contact. We expect that a significant change like this will initially slow sales productivity for a few months, but as you can see, will yield a greater result over the course of the next year. We believe the opportunity to have we have an expanding LoopNet as a marketing site as a total addressable market in the 100 of 1,000,000 of dollars. Apartments.com continues to strengthen its lead as the number one apartment Internet listing service. Our apartments network achieved all time highs in visitors and traffic in the quarter.
During the Q1, the network averaged 40 1,000,000 visits per month, up 40% and 15,600,000 unique monthly visitors, an increase of 38% year over year as reported by Comscore. The addition of ForRent strengthens our network. In the Q1 of 2018, ForRent averaged 3,700,000 unique visitors and 6,400,000 visits monthly. Our network produced 33% more leads in the Q1 of 2018 than we did a year ago during the same period. And since we believe we have the best leads in the industry, this should make a listing on Apartments dot com even that much more valuable.
In March 2018, we had nearly 90% more unique visitors in our network than the RentPath network according to Comscore, and we increased that gap each month in the Q1 of 2018. We continue to maintain an even bigger lead in total visits according to Comscore. Our new 2018 advertising campaign with Jeff Goldblum is in full swing and we believe it is our best campaign yet. We plan to run ads on primetime television, radio, streaming and outdoor and we expect to reach 95% of all from organic search. We exceeded 75,000,000 organic visits in the Q1 of 2018, an increase of 71% year over year and a 50% sequential increase in Q1 2018 versus Q4 2017.
We now have 72.5 percent share of top organic rankings for apartment rental keywords on Google, which is 12 times the Zillow network and 18 times the RentPath network. In a striking and positive development, the number of landlords who have a small property or 2 are increasingly marketing these properties on Apartments dotcom. These landlords typically enter their listings directly into Apartments dotcom. The number of these listings grew 96% year over year from Q1 2017. The most active markets include New York, Los Angeles, Chicago, Boston and Miami.
I think it's a really important and significant trend to watch. With the addition of ForRent, we added close to 5,400 non duplicative apartment community customers to take us to nearly 47 1,000 advertised apartment communities on our network. We closed the ForRad acquisition about 60 days ago, as we always do, we're moving quickly to integrate. We are already ahead of our original schedule and are running a playbook that we've incorporated previously with Apartments.com and Apartment Finder. We're moving full speed ahead on the tech integration user experience improvements to complete be complete by the end of the year.
We've already realized significant cost synergies ahead of schedule. Since the acquisition of ForRent, we have eliminated 158 positions from the combined multifamily organization. 136 of those came from ForRent and 22 came from the legacy Apartments team. This encompasses over 12,500,000 compensation across all departments of the company. We continue to uncover considerable additional cost savings with elimination of duplicative contracts and services.
We look forward to reporting our continued progress in this area in the months ahead. We are working closely with the ForRent sales force with just one goal of securing existing revenue. That's our first goal. Just after the close of the acquisition, we asked the ForRent sales force to meet every one of their unique customers two times as soon as they could and they delivered. The net promoter scores for these visits were similar to the NPS for the Apartments.com sales team, about 9.6 on a 10 point scale.
Obviously, very positive feedback to the integration of the 2 companies. We believe this will lead to a significant decrease in cancellations as the ForRent customers see the benefits of having a great network that generates more quality leads. We have offered ForRent customers more exposure on the Apartments dotcom network at no additional cost at our silver level. This has resulted in a 70% increase in the quantity of leads these communities would have received had they remained only on the ForRent website. And while this increase in leads was provided to our customers at no additional cost, we believe there's an excellent chance that many of these customers will self select into higher priced ad packages just like our existing clients have done.
While I've only had Forrendis part of apartments.com network for a very short period of time, we have already made a couple of important changes in ForRent lead generation practices to bring this site in line with best practices. We're discontinuing ForRent's practice of buying leads from 3rd party publishers through the practice of listing syndication. This change not only eliminates the generation of poor quality leads for our customers, it also protects the high quality apartment listing data that can only be found on apartments.com by discontinuing the sharing of this data with competitor sites. In addition, we have also made important changes to ForRent's on-site lead conversion process. These changes eliminate any co registration or shotgunning to help ensure the leads produced for the Apartments.comnetwork customers are only of the highest quality.
Our ForRent salespeople are now moving into full production mode as we fully integrate them into the Apartments.com sales team. We now have over 300 highly seasoned and trained sales professionals selling the Apartments.com network across the United States, which we believe will result in higher sales and revenue as the year progresses and beyond. ForRent also brings us a strong social reputational management product. We believe it may have the potential to provide good value to our clients and high margin revenue to us. We are evaluating rolling it out to our entire Apartments dotcomnetwork.
Recently, I think because of Zillow's recent announcement, I filled a number of questions as to whether or not we might pivot and begin flipping commercial buildings to drive revenue. I want to be clear that even after successful buying successfully buying our Washington, D. C. Company headquarters for $41,000,000 in 20.10 and selling it a year later for $100,000,000 of sale leaseback, we're not going to become flippers. We recognize that flipping is a completely different business from building marketplaces or information services.
It's lower margin, it's lower quality revenue and it has horrific cyclical and balance sheet risk. Instead, we expect to use our balance sheet and strong financial position to make strategic acquisitions and make sound investments to develop the broad myriad of great high margin growth opportunities we see ahead of us. A prolonged and slower economic expansion, the low cost of capital have driven the U. S. Commercial real estate market to very healthy levels and strong performance.
The market is very competitive and in most segments it is the landlords and sellers who have pricing power. In the office sector, vacancies continue to hold at 10.3% for 4 consecutive quarters. This is a very healthy reading for the national office market and very similar to what we saw at the peak of the last cycle in 2,006 and 2,007. Construction is subdued compared to previous economic cycles, so expect the national office market remain healthy overall. The apartment market has entered the 5th year of a great cycle with strong demand and strong supply.
Was a big year for completions, 2018 is shaping up to be at least as strong. That said, while current development activity may seem extreme, it's quite modest relative delivery seen in the 1970s 80s, where the U. S. Had 100,000,000 fewer people. Most of the new space continues to get absorbed and national vacancies are at 6.4%.
The homeownership rate, which had created millions of runner households early in the cycle, seems to be reversing, creating potential headwinds for the top end of the market, especially the 5 star apartment communities. All of this though is good news for Apartments dotcom as market competition and turnover lead to more ad spending. Total investment sales exceeded $340,000,000,000 in 2017. There was a slight decline from $364,000,000,000 peak in 2016. Fears of inflation and rising interest rates are expected to continue to create volatility in the stock market.
Comparatively, the commercial real estate market is expected to offer a sense of stability even if returns come down from the lofty levels seen over the last few years. So we've gotten off to an extremely good start in 2018, strong revenue growth, margin expansion and strong sales are indications that our investments and execution are strong. At this point, I will now turn the call over to our extremely competent CFO, Mr. Scott Wheeler of California.
Why thank you, Mr. Extremely Competent CEO, Andy of Washington, D. C. And Mutual Admiration Society. So yes, we did have a strong start to 2018.
And we're excited about the trajectory of the business, certainly moving forward for the rest of the year. So as Andy mentioned, our revenue in the Q1 of 2018 increased 21% over the prior year, coming in slightly above the high end of our guidance range. Organically, our revenue growth rate in the Q1 was 16% with all of our service areas performing at or above our forecast. ForRent contributed approximately $8,000,000 in revenue in the Q1. Our strong revenue performance is a result of our strategic investments primarily in 2 areas.
First, the investments we made in research and the CoStar LoopNet integration that position CoStar as a premier information solution for commercial real estate professionals. 2nd, it's our continued investment in and expansion of our multifamily marketplace, which continues to deliver outstanding revenue growth. Looking at our revenue performance by services. CoStar Suite revenue growth was 19% in the Q1 of 2018, significant increase from the 13% annual growth rate that we reported in the Q1 of 2017 and the 15% growth rate we reported in the Q4 of 2017. The conversion and upsell of LoopNet information customers to CoStar Suite since October and sales to former Exeligent clients are a significant driver of the accelerated growth.
At the same time, the sales team continues to close new business with owners, financial institutions and other customer types. As previously discussed, the revenue growth rate for CoStar Suite is expected to be in the 18% to 20% range for 2018. Revenue growth rates in information services were negative 18% in the Q1 2018, as expected due to the shutdown of the LoopNet information products. The remaining services in this information services grouping grew 30% in the quarter, driven by continued strong performance in our CoStar Real Estate Manager business over the Q1 of 2017. With the shutdown of LoopNet Premium Searcher substantially complete, we expect information services revenue to decline at a rate of negative 15% to negative 20% on a year over year basis in 2018.
Multifamily organic revenue growth for Q1 remained strong at 20 3% over the Q1 of 2017, while 1 month of acquired ForRent revenue increased the total growth rate to 37% in the quarter. Going forward, our integrated multifamily sales force will only sell an integrated network product. Accordingly, we will no longer be able to identify specific revenue as either organic or acquired. Going forward, we will only report on multifamily revenue and the related growth in total. Regardless, our revenue expectation remains unchanged.
With the addition of ForRent, we expect multifamily revenue growth of 40% to 45% for the year. Rounding out our services performance. Commercial property and land grew 19% year over year in the Q1 of 20 18, slightly above the 18% revenue growth we reported in the full year of 2017. Organic revenue growth normalizing for the May 2017 acquisition of LandWatch was 12% in the Q1 of 2018. We continue to expect organic growth in commercial property and land in the 12% to 14% range in 2018.
Our gross margins came in at 77% in the Q1, in line with the Q4 of 2017. The reported gross margins are expected to be lower in the second and third quarters of 2018 due to the purchased intangible asset amortization associated with the acquisition of ForRent. When you exclude these non cash amortizations, gross margins are expected to remain in line with the Q1 of 20 18 throughout the rest of the year. Operating expenses of $158,000,000 for the Q1 were well below our expectations and reflect a heightened focus on cost efficiency and margin improvement as we progress through the year. Approximately $4,000,000 of expense favorability to our forecast was related to delayed timing in some of our marketing spend within the year, while the balance related to resource savings and efficiencies across Our first quarter adjusted EBITDA of $84,000,000 was approximately $12,000,000 above the midpoint of our guidance range, resulting from the strong revenue results and the operating expense favorability I mentioned.
The resulting adjusted EBITDA margins of 31% is 400 basis points above the midpoint of our guidance range and 300 basis points above the 28% margin we achieved in the Q1 last year. The impact of ForRent on adjusted EBITDA was approximately negative $3,000,000 in the quarter as expected. Net income for the Q1 of 2018 of $52,000,000 increased 136 percent or $30,000,000 compared to Q1 of 20 17. Income from operations was up 42% year over year, while interest income increased and interest expense decreased as a result of our strong cash position and the debt restructuring that we completed in the Q4 of 2017. To top it off, our effective tax rate was only 6% in the Q1, reflecting benefits from the federal tax law changes and the incremental tax benefits on share based payment transactions that happened in the quarter.
Non GAAP net income for the Q1 increased 75% to $60,000,000 or $1.65 per diluted share and includes adjustments for stock based compensation and acquisition related expenses. The non GAAP net income assumes a tax rate of 25%, which does not include the discrete items such as the impact of share based payment transactions. Finally, in the Q1, we completed our exciting implementation of the new revenue recognition standard known as ASC 606, which primarily affects our accounting for sales commissions. You will notice now that we have a nice bright shiny new $75,000,000 deferred commission cost asset on our balance sheet. In the Q1 of the year, our commission expense was approximately $4,000,000 lower than it would have been under the previous accounting.
We estimate that for the full year of 2018, our commission expense will be approximately $11,000,000 to $13,000,000 lower, most of which was already included in our previous forecast. Now let's take a look at some of our performance metrics for the quarter. The end of the Q1, our sales force totaled approximately 905 people, including the addition of the ForRent team. Following some staff reductions earlier this month related to the integration of the apartment sales force, the current total is about 855 people. We delivered $54,000,000 in net bookings related to ongoing services in the Q1 of 2018.
The negative net new bookings from eliminating the LoopNet information services results in company wide total net bookings of $35,000,000 in the quarter. Adjusting for the onetime reduction in LoopNet information services in both comparative quarters, the net bookings of ongoing services increased 48% the Q1 of 2018 versus the Q1 of 2017. Sales in CoStar Suite and Commercial Property and Land both showed strong year over year growth in the quarter. Renewal rates on annual contracts was 91.3% in the Q1 of 2018, up from 90.3% in the Q1 of 2017 and unchanged from the renewal rate achieved in the Q4. Renewal rates for customers who've been subscribers for 5 years or longer was an impressive 97%.
Subscription revenue on annual contracts accounts for 79% of our revenue in the quarter, up slightly from 78% this time last year. I'll now discuss our outlook for the full year and the Q2 of 2018. Based on strong Q1 revenue and sales results, we are raising our 2018 revenue outlook by $2,000,000 at the midpoint from our previous guidance. Our new 2018 revenue outlook is expected in the range of $1,174,000,000 to $1,190,000,000 This revenue range implies an annual growth rate of 22% to 23% total growth compared to 2017. We expect revenue for the Q2 of 2018 in the range of $292,000,000 0 point 4 $3 at the midpoint to a range of approximately 7 by $0.43 at the midpoint to a range of approximately $7.44 to $7.64 for non GAAP net income per diluted share based on 36,600,000 shares.
We expect adjusted EBITDA to be in a range of $380,000,000 to $390,000,000 for the full year of 2018, an increase of $15,000,000 compared to our previous outlook and a 120 basis point improvement in adjusted EBITDA margins for the year. Year over year, we expect adjusted EBITDA growth of approximately 35% to 40%. For the Q2 of 2018, we expect non GAAP net income per share in a range of $1.25 to 1 0.34 dollars and adjusted EBITDA in a range of $66,000,000 to $70,000,000 We expect the 2nd quarter to be the low point for adjusted EBITDA margins for the year as we increase our marketing spend for the start of the peak apartment rental season. Margins are expected to increase sequentially through the 3rd 4th quarters. We expect to exit 2018 achieving our stated goal of 40% adjusted EBITDA margins.
Overall, I believe the strong start to 2018 positions us to continue our revenue growth trajectory and we plan to continue to manage costs and investments for margin expansion. I look forward to updating you on our progress throughout the year. With that, we can now open up the call for questions.
And our first question from the line of George Tong with Goldman Sachs. Please go ahead.
Hi, thanks. Good afternoon. Your EBITDA came $12,000,000 ahead of the midpoint of guidance for the quarter and you're raising full year EBITDA by $15,000,000 dollars You touched on the $4,000,000 of delayed timing of marketing spend. Can you elaborate on the remaining sources of upside surprise in the quarter and what areas you feel more confident in the rest of the year?
Yes, George. Thanks for the question. Yes, what we're seeing really is that we're finding good efficiencies across a number of our areas, all related primarily to resourcing levels. So, we don't need to add as many resources to get some of the productivity. You heard Andy mention the productivity we're seeing in research.
And we also saw some good productivity across some of the different marketing programs we run. The last area is that as we look at the synergies we're going to get out of the ForRent business that we are ahead of what we expected at this time regarding the headcount reductions that we just talked about. And so that's also helping us feel more confident about where we're going with the cost for the rest of the year.
Thank you. And our next question is from the line of Peter Christiansen with Citi. Please go ahead.
Good evening. Thanks for the question. Nice trends, guys. Good evening. So the sales force here has got the CoStar sales force has got a lot going on here.
Obviously, pricing integrity initiative, the LoopNet marketing, Exelligent transition, LoopNet conversions and then the normal day job. What's your expectation here for how this could impact, I guess, normal organic activity? And what do you think the timing is until you could see some of these initiatives kind of taper off?
Okay. So and I left out another one, which was a focus on more face to face meetings with existing clients for better service scores. So you're right, there's a lot going on. And the reason there's a lot going on is because we have a lot of opportunity. So all these things are good things.
And realistically, we're looking at where we are and the business has never been stronger. So we're thinking about things that are going to optimize the business longer term, intermediate term and we are doing some of these important moves like watching the pricing, being a little more aggressive with the pricing, making sure we're driving both the LoopNet sales and the CoStar sales of these clients. So I anticipate that over the course of the next 3 to 4 months, 5 months, that will create a little bit of churn. But it's a great sales force. They'll pick it up.
There'll be a little bit of change out as it goes, but we'll come out of it with an even more productive sales force. They've been extremely productive, but this will bring us what I think is optimizing our revenue opportunity. So looking out, it's probably in the fall, where you start to see a real traction pickup from it, maybe late summer.
Thank you. We'll go to Andrew Jeffrey with SunTrust. Your line is open.
Hi, guys. Thanks for taking the question. Impressive performance on the Exelligent and the cross sell efforts and the lift in resulting lift in pricing. Andy, can you maybe frame up what the tail on that is? In other words, I'm assuming some of those customers are smaller maybe on average than existing Suite customers and as a consequence over time they could grow, be a source I guess of same store sales growth as it were.
Is that sort of a layering effect over time that we can think about?
Yes. So a lot of the folks are going after. I mean one of the things I really want to stress is that when we that pool of 80,000 is still there. It's still an enormous, enormous opportunity in that 5 person, 3 person, 10 person shop category. And that's separate and distinct from the opportunity to continue to sell to banks, owners and institutional players.
So that broker segment is massive and we are very confident that they haven't gone anywhere. We're in the process of either getting them to stop stealing it and pay for it or just converting them and selling them up. As we do bring them on, you can see from the comments that we have 2 distinct really valuable products for these people. Subscriptions for marketing and lead generation. These same brokers are the folks that can set up introductions for us to the owners they represent who tend to buy the higher end ads, which I think has a lot of traction.
So it is it's really a gift that keeps on giving and it's a lot of opportunity for same store sales going forward.
Our next question is from Brett Huff with Stephens. Please go ahead.
Good afternoon, guys. Can you hear me okay?
Yes.
Great. Congrats on a nice quarter. Andy, I wanted to circle back to something you said. You've kind of sized up the overall annualized revenue opportunity from the loop upsell as well as the Exelligent, I guess, we'll call it opportunity now that they're largely gone. Can you remind us of what you think those numbers are kind of on a conservative to more optimistic range to make sure that we're all kind of thinking about this over the next couple of years correctly?
Thank you.
Sure. So I would say that Exeligent is more than largely gone. They're gone in a large way. But there's an intersection between the LoopNet and the Exeligent audience. So probably 50%, 60%, maybe 70% of Exelligent customers were also using LoopNet.
They filled in gaps back and forth between them. And so there is a universe of 80,000 we look at and that to me I'm very comfortable that audience represents well over $100,000,000 of incremental high margin revenue. And we are taking our time to make sure that we price that correctly and that we're not rushing and that we're optimizing that opportunity. So it's you can see the price points we've been achieving and that's just under $500 level. And again, the folks were coming in at typically $54 they're paying us $54 on average.
They're coming in close to $500 net increase. So it's a huge, huge opportunity.
We will go to Bill Warmington with Wells Fargo. Please go ahead.
Good afternoon, everyone.
Hi, Bill. Hi, Bill.
So a question for you on the gross and net bookings number. You talked about $54,000,000 gross bookings less than $19,000,000 in cancellations, giving you the $35,000,000 net. So my question is, how much of the $54,000,000 was from premium searcher users converting to the Suite users. And I'm trying to get a sense for like what the normal cancellation level is going to be like going forward and what the normal conversion level is going to be like going forward?
So most of that I would say that the impact of the $1,900,000 cancellation is going to I think most of that is future opportunity. So as you I would say that I mean that occurred what in what month exactly Scott was it, February?
In January, we did all the
And then they really got notice in March.
No, February is when we got them all shut off, is that what you're
So it's really we didn't see much impact to the positive from that shutdown. We expect that to happen over the next 9 months or so. And I guess it would be about, what, 1,000 to 2,000 loops in the upsells in the quarter, but probably half of that was unrelated.
Yes. And we didn't see really any of the shutdowns come in, in the quarter so much. Those will come out in the following quarter. It was really from the things we've notified previously in the Exeligent from the last quarter.
So they're more geared towards the Exeligent side. And then other opportunities, which are probably the majority of what was driving it. Does that answer the question?
One moment, please. We do have his line back open.
Hello. Yes, thank you very much.
And I have this normally we do this on Thursday. I wanted to say like have a good weekend, but then I realized it's only Monday night.
Yes. Someone signed me up for a keynote speech on Thursday at 11, so sort of got jammed up this week. So we're doing it Honolulu time this week.
Okay. All right. Thanks. Okay.
And we'll go to David Ridley Lane with Bank of America Merrill Lynch. Please go ahead.
Sure. So some Apartments dotcom competitors are offering different pricing models such as a cost per lease type of pricing. Curious if that's something you'd be willing to explore and if I could sneak in another with the increase in organic search at apartments.com, how does that play into your longer term or medium thoughts on advertising cost on the apartment side? Thank you.
Okay. So, yes, there are a number of people who are working cost per lease models. Generally, those are folks who have a weaker value proposition to the apartment community. So if you're the clear leader in the space, people look at you as primary source of filling up their property. They're willing to have a fixed subscription amount with us.
And that is the preferential that's a better situation to be in. If my traffic or my lead flow is lower, then I say, hey, guys, look, if I can't deliver anything to you, you don't have to pay anything. So you just pay me if I can show you get a lease. So it's something that we might consider at the low end, but not at the institutional end. At the institutional end, we're driving a consistent steady flow, the primary flow of leads into these big communities that would only make sense for us at the mom and pop level.
And I've spoken to some of the folks you're talking about who are doing the cost per lease models and they're pretty frank about saying we wish we could do subscription pricing, but we're not strong as you all. So we have to do cost per lease. The organic traffic is obviously mind boggling. The keyword share we have now is the organic keyword share is mind boggling and really strong. So congratulations to Fred Sainte and his team for producing that.
I don't think that that changes much on the advertising spend. That's one of the reasons why we do so well there is we have a good duration, a low bounce rate. People opt to click on it. So when it's served up, it's often a successful serve up, which then reinforces our organic ranking. So I think the 2 work off of each other.
And it's a good thing with growing margins and we're going to keep working to see more of it.
And our next question from the line of Mayank Tandoh with Needham and Company.
Maybe for Scott. Scott, in terms of long term margins, if you could just give us some thoughts around how you're thinking about that directionally, especially given that we'll see the synergies from ForRent, the high incremental margins from the LoopNet upsell and then of course the inherent leverage in the business. So what are the puts and takes we should be considering as we model out the long term margins for CoStar? So clearly, we're focused on getting through this year with the margins getting up to the 40% by the end of the year. And as you've seen, it's a combination of strong operating leverage as we drive revenue.
And that operating leverage requires that we make significant investments in future growth for the business often through the P and L that come ahead of obviously when that growth comes up. So as we're thinking further out, we're looking at what are those investments we need to keep making like the research investment, like the apartments investment that I mentioned. Those are driving these significant revenue growth, although they're a year or 2 sometimes lagging when we make the investment. So as we start to plan for 2019, we're going to look at all those opportunities for investments and What we're not What we're not doing at this time is putting out another big margin target like we did with the 40%. We're going to evaluate where we are as we get further in the year and then give you some further guidance as we get later in the year.
And we don't want to have 2 margin big margin goals simultaneously running. We'd rather achieve 1, get the trophy and then set another goal.
More to come.
And our next question is from Mike Crawford with B. Riley FBR. Please go ahead.
Thanks. Hey, furthering your earlier comments regarding greater research productivity, is there anything you're investing in from a technology or analytics standpoint that we should look out for?
Sure. I mean, I would say that it's next to impossible to beat the performance of listing managers so far. So I think that was a big that was a decent sized technology effort. We put a lot of effort into the U. S.
To make sure that it was a seamless experience. It was intuitive. We're continuing to do that. And that technology investment has led to something that could save us well north of $10,000,000 a year ongoing maybe even more than that and at the same time has increased the quality of data and client satisfaction. We're doing we do have a slightly different structure now.
We have a dedicated software team down in Richmond for supporting our research operations. We're doing across the whole system. We're seeing some really interesting potential in research product that comes out of technology. So things like we're starting to learn more about what customers want from their search behavior and that actually becomes data in and of itself. So for instance, your 5th we conventional wisdom says that people 60 and over want 2 bedrooms, while Apartments.comday is now showing us for free that that's actually people want 1 bedrooms based on the search activity we're seeing.
We're doing more robots to scrape websites and serve up content there and observe content. So we're we have any given point a dozen to 2 dozen initiatives in technology to support our research operations. But the silent the emerging big decadal winner is listing manager and the impact on our bottom line that is going to have is really, really hard to beat in the same quarter.
And our next question
This is Jackson Ader on for Sterling tonight. Question from our side, it sounds like the opportunity to go after some of these pirates is pretty large. But can you size maybe the annual spend that's going to be required to get some of these guys to start paying you? I think we've found you're right that the Pirate audience is pretty big. And the fact that we were spending so much time and effort with Exeligent probably diverted our attention away from these folks a bit.
We did invest about a year ago in building out technology, our own facial recognition, pattern scanning, device recognition. We did invest a lot about a year ago in technology tools that are available now, which will support this effort. Typically, when you approach someone with really compelling clear evidence that we know they've been stealing the product, 9 out of 10 or 19 out of 20 just want to like, all right, you caught me, I'll pay up. And so you're typically only litigating 1 in 20, which would still be a lot. But I think that if you just show people, if people read that they just can't get away with this, I think you can move your ratio up to 49 out of 50, we'll work something out with you.
So you just have to be able to show that you're willing to litigate and the law supports your side, which it clearly does. So someone that is using CoStar illegally and producing reports and printing up photos and they're subjecting themselves to potentially 100 of 1,000 of dollars of damages under the law. So we think it will cost a little bit, but nothing like we spent last year in Exeligent.
And our next question is from the line of Stephen Sheldon with William Blair.
I guess just at the midpoint for the Q2, it looks like the guidance only calls for about 30 basis points of margin expansion on an adjusted EBITDA basis. I think you talked about increasing marketing spend in multifamily. So I guess just any color on the plan incremental spend on that? And is there anything else to point out that will impact margin expansion in the second quarter?
Yes. The 2 big things for the 2nd quarters, like you pointed out, the marketing spend. So we do have the most significant Q2 marketing spend that we will ever have had in the Q2. So that definitely does cause some effect. And then the second is that we've got the 1st full quarter, the for rent costs coming into the 2nd quarter.
And so that's going to dilute a little bit more in the Q2 and it's going to show those costs moving sequentially. Obviously, as we continue to do our integrations and those will moderate over time, but those are really the primary drivers in the second quarter for us.
Thank you. We'll go to Patrick Walravens with JMP Securities. Please go ahead.
Good. Congratulations. It's really impressive. So I feel lucky that I get to ask the strategic acquisitions You've talked about the whole $50,000,000,000 digital real estate opportunity. What can you share with us in terms of your sense for timing and is the market receptive and sort of which areas seem most interesting?
Well, we are actively looking at and considering a whole range of opportunities and it is a broad and significant range of opportunities for sure. There are some things we're a little more excited about than others right now. And I think it's a combination of what is the most strategic and important initiative we could engage in or devote resources to as a company coupled with at what price can we acquire those assets. So we are looking to right now I could roll off 12 companies that I think would be great acquisitions for CoStar, but they are great acquisitions for CoStar at the right price on the right terms. So we are patient investors and we will continue to churn away at finding that next opportunity.
But we're not going to be just jumping because we have cash on hand and balance sheet on hand. And we also, for another 2 to 3 months, want to not take ForRent for granted. It's the largest acquisition we've ever done by revenue. Staff. So we want to make sure we do that right.
Has there been anything larger by staff? No. Yes. So when you get a big one, when you're you should never eat anything larger than your head.
And so I want
to make sure we get this one done properly. But we're busy. We are busy. We have not changed our stripes. We just haven't pounced yet.
So thank you very much. I think that was a great group of questions and thank you for being flexible As we approach our 20th anniversary as a public company for the first time we change to a Monday evening. We will try in the future to not let people schedule speeches for me on the same time as an earnings call. Thank you very much.
Thank you. And ladies and gentlemen, this will conclude our teleconference for today. We thank you for your participation and for using AT and T Executive Teleconference