Welcome to the CoStar Group Third Quarter Earnings Conference Call. At that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Richard Simonelli.
Please go ahead.
Thank you very much, operator, and good morning, everyone. Welcome to CoStar Group's Q3 2016 conference call. Thanks for joining us. Before I turn the call over to Andy and Scott, I have some important facts for you to consider. Certain portions of this discussion 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 CoStar Group's October 26, 2016, press release and our Q3 results and in our filings with the SEC, including our most recent annual report on Form 10 ks and quarterly report on Form 10 Q under the heading Risk Factors. All forward looking statements are based on information available to CoStar at the time of this call, and we assume no obligation to update these statements whether as a result of new information, future events or otherwise. Reconciliation of non GAAP net income, EBITDA, adjusted EBITDA and all the non GAAP financial measures discussed on this call to the GAAP basis results in reconciliation of forward looking non GAAP guidance discussed on this call to the most directly comparable GAAP measures are shown in detail. Did you get that? Yes.
As a reminder, today's conference call is also being broadcast live and in color over the Internet on www.coastargroup.com, where you can also find our Investor Relations page. A replay will be available almost an hour after this call. It concludes and will be available for the next 30 days. And so listen to the replay call at 80047 56,701 within the U. S.
Or Canada or 320365344 outside the U. S. The access code is 403281. I'll now turn the call over to Andy Forays. Andy?
Thank you very much, Rich, and thank you, everyone, for joining us for our Q3 2016 financial results call. We had another strong quarter with profitable revenue growth. Revenue in the 3rd quarter grew 12.5% year over year to $213,000,000 On a pro form a basis in the quarter, revenue grew 14% year over year. CoStar Suite revenue in the quarter was up 13% year over year, with multifamily revenue in the quarter growing 22% on a pro form a basis. We continue to see tremendous momentum in our business and our services continue to lead in each of their respective verticals.
During the quarter, you can clearly see that we've made significant progress growing margins as we emerge from successful investments we made in 'fifteen. EBITDA margin was 27% in the Q3 of 2016 versus 12% in the same quarter last year, more than double. Adjusted EBITDA margin expanded 32% in the Q3 of 'sixteen compared to 19% in Q3 of 2015. Sorry, Scott, I stole the next sentence from you. We generated $58,000,000 of cash during the Q3.
I just had to say that. Sales continue to be strong. For the 6th quarter in a row, we achieved net bookings of greater than $25,000,000 adding $26,000,000 in the Q3 of 2016. The 1st 3 quarters of 'sixteen are the best three quarters we've ever had selling CoStar Suite. Year to date, we are outpacing CoStar Suite sales in the same period of 'fourteen and twenty fifteen by 52% and 33%, respectively.
One of the factors behind acceleration in CoStar sales is that we have invested in growing our original sales team over the past few years. When we acquired Apartments.com, we led some of these CoStar salespeople to Apartments.com. Recently, have shifted their focus back from Apartments.com to CoStar. This means we have more experienced producers selling CoStar in this year than last, but but it also means we have fewer experienced salespeople selling at barbers.com advertising than we did this time last year. One of the things we're doing is getting prepared for the intensive selling efforts next year around the integration on the information sales.
So going back to apartments, today we believe we are approximately 30% penetrated in apartment properties with 50 units or more. 50 units or more are generally our core target market. This means we have a significant opportunity to grow our share in the apartment industry. We believe that we have the best product offering to market apartments online and that we could capture significantly more revenue if we were to invest in growing our apartment sales force. Our goal is to grow from the 100 or so apartment salespeople we had at the time of the acquisition of Apartments.com to a field sales team of approximately 240.
We expect 200 of those salespeople will be account executives, managing relationships with our existing customers and 40 will be focused solely on new business development. We will consider growing the sales force beyond that point if we continue to see profitable incremental production as we reach that level. I would not be surprised if we don't see that happen. Our first priority for this year for the apartment sales team was to improve our customer service levels to nothing short of excellent. We shifted our commission plan to reward higher customer service ratings, put a range of customer service metrics in place as well.
I think the effort has been a clear success as measured by our client satisfaction score and our growth in face time with clients. We completed 1700 client interviews in the month of September. One important question clients were asked was, on a scale of 1 to 10, how likely are you to recommend Apartments dotcom to a friend or colleague? The average score from response was an absolutely outstanding 9.6 out of 10. I believe we achieved this score because of the effectiveness of our product and the effort we put into getting in front of our clients more often.
In January of this year, we had less than 9,000 face to face meetings with Apartments.com clients. The face to face meetings grew through the year and the month of September we completed over 20,000 meetings. Not only are we having more meetings, we also believe that we're having more effective and valuable meetings. We have produced a suite of customized reports that we review with the clients at each meeting that help them to understand the effectiveness of our marketing solutions and the competitive positioning of their properties within their market. Not surprisingly, our determined focus on increased productivity has resulted in some increased apartment sales staff turnover, slowing the rate of growth in the sales team.
The apartment sales team is a combination of sales cultures from Apartments.com, Apartment Finder, CoStar and some new hires. Some of these cultures were not used to metrics or active management, which is a euphemism for we require when it come to work regularly. Generally, as a company grows the size of a sales force, it's disruptive as territories change, managers focus on recruiting and training and churn inevitably climbs. We began this year with 179 apartment sales reps and fell to low of 141 reps in production in April. That did have a negative impact on net new sales.
We still had strong net new sales, but that retired a little bit. As of now, we have built the team back to 212 in production. About 70 of those reps are so new that it's not likely producing any material sales. As these reps and additional reps we hire become more productive or enter into production, we believe that we'll be able to accelerate sales growth and share gains. We have already added 20 additional apartment reps that are currently in training or that have been hired for November classes, and that takes the current total to 232, which is an increase of 65% over the count back in the mid year.
So that's quite an upcoming growth in number of producers in place. As we approach the integration of CoStar and LoopNet, we've already begun to wind down sales of LoopNet information products. We believe we're convinced we are trading off lower dollar sales today for much higher dollar value subscription revenue opportunities over the next several years. This product discontinuation created a headwind to sales bookings during the past two quarters. Much of the discontinuing LoopNet information revenue is not on annual subscriptions, while 100% of the Co Star revenue we often replace it with is on annual subscription basis.
Complementing this trend, we're now selling 61 percent of our apartment advertising contracts on annual subscription agreements, up from basically 0 on annual agreements when we first acquired Apartments.com. In the Q3, 76% of our total revenue was from annual subscriptions, up from 64% in the Q3 in the prior year. Subscription revenue reached $162,000,000 in the 3rd quarter, up $40,000,000 year over year from $121,000,000 in the Q3 2015. We like the visibility and stability that increasing our annual subscription revenue base gives us. It gives us great visibility and a little bit of recession proofness.
Our subscription renewal rate ticked up in the 3rd quarter again to 90.7%. That's the highest level we've seen in the past 6 quarters. We believe that our increased focus on customer service has helped us achieve these growing and improving renewal rates. In addition, our new team of 65 CoStar Field Customer Relations Managers working actually in our client's office conducted over 8,000 customer trainings in September and 18,000 in the Q3 overall, driving up the growth of usage of CoStar products and more likely not to increase renewal rates ongoing. So let's focus a little bit more on the Loop integration.
The significant important effort to integrate the 2 leading commercial real estate online platforms CoStar and LoopNet into 1 digital platform is well underway. Today, CoStar is an information product, while LoopNet is both a marketing product and an information product. After the integration, we plan to position LoopNet as a pure marketing product. We believe there's brand confusion around the LoopNet dual value proposition that will be resolved with a repositioning around a more straightforward single marketing value proposition. The LoopNet users can be broken down into 2 general profiles.
There are nearly 5,000,000 small business owners, tenants or small investors come to the site each month looking for a single new facility or a potential investment, making LoopNet by far the most visited website in commercial real estate. These small business users or tenants are not reoccurring users and their highest value to us is the lead value they represent to our paying advertisers. The second segment is that there are hundreds of thousands of LoopNet users that are basically commercial real estate professionals. There are approximately 130,000 active LoopNet members that logged into LoopNet over the course of the past 12 months and conducted more than 100 searches each. An additional 300,000 visitors to the site conducted more than 100 searches each in the past 12 months.
This pool of approximately 430,000 intensive or more professional users is the target upsell audience for CoStar over the next few years, and I believe will result in a tremendous revenue opportunity for years to come. These users are in the market continuously and many are willing to pay for higher quality information. Today, LoopNet and CoStar are powered by 2 separate databases. The CoStar database is a higher quality curated database maintained by our very large research team. The LoopNet database, while very large, is updated and maintained via broker user entry and accordingly is not as comprehensive or as quality controlled as the CoStar database.
Nonetheless, there's a lot of valuable content in the LoopNet database that is missing from the CoStar platform today. After the integration, both LoopNet and CoStar will be powered by 1 unified database. 100% of the content that is entered in LoopNet will be immediately available in the CoStar platform and will be more tightly quality controlled and monitored, making the CoStar platform much more comprehensive and more valuable. Only the paid advertised content will be visible on the LoopNet platform after the integration. This will draw a much sharper distinction in value proposition between CoStar and LoopNet for the brokers and professionals who really need to find the most effective information solutions to do significant transactions.
Post integration, CoStar will always have dramatically more information available than LoopNet in all cases or virtually all cases. We plan to market this reality aggressively in highly targeted online campaigns. We've identified about 24 segments that will break users into and we'll be tailoring highly customized messages to each one of them to get them to the optimal upgrade path. We believe that this is going to put us in an excellent position to upsell many of the hundreds of thousands of regular consistent LoopNet searchers. We believe that the scale of the potential upsell opportunity is more than $200,000,000 over the period of several years.
Simultaneously, we believe that by purifying and clarifying the brand value proposition of LoopNet as the essential tool to leverage the Internet to market commercial real estate, we can significantly accelerate the LoopNet marketing revenue as well. Once we integrate LoopNet and CoStar, we expect to grow and strengthen our curated research and simultaneously look to capture the value, efficiency and preference of some of our clients to enter their own data. I'm really quite pleased with the quality of the new interfaces we're now building to empower our clients to more effectively manage their content in our future integrated environment. We believe it will make it much easier for our clients to manage their data and to communicate with their CoStar researcher. This should in turn result in much higher quality data.
We see clear indications from our clients and prospects that our value proposition to them grows very significantly as we improve and quality of the data we can offer them. We believe there's a direct relationship between the improvements we can make to the quality of the data and just how much that 200,000,000 plus potential LoopNet to CoStar user upsell revenue we can achieve and how fast we can achieve it. This revenue growth would be at extraordinarily high margins. So it's particularly important that as we approach this concentrated upsell event, our research, data quality and software is the best it's ever been. In addition to the revenue upsell opportunity, Luma integration offers us, it also presents us an opportunity to dramatically increase the number of CoStar users, thereby increasing the network effects benefiting CoStar and potentially accelerating sales into completely new segments of commercial real estate professionals.
In an effort to improve the likelihood of success of our LoopNet upsell efforts, we are accelerating our investment in CoStar marketing, sales personnel, software and research through 2017. We are planning to hire approximately 400 additional researchers to dramatically improve the depth and accuracy of our research, particularly with respect to tenants and retailers that occupy space in commercial properties. At the same time, we're eliminating 70 offshore research positions, making the increase 330 net new. Of these 330 net new researchers, 150 are property portfolio researchers added to ensure that our data quality remains high as we're handling intensive research tasks related to the integration during 2017. The need for some of this incremental headcount will fall post integration.
Our Washington HQ facilities, along with Atlanta and San Diego research centers are completely full already. So rather than leasing more space in Washington, D. C. Where the cost of living is high, we conducted a nationwide search to find the best possible location to place our anticipated research staff growth as well as to relocate a significant portion of our existing staff. Our goal has been to find a city with much more affordable cost of living so that our researchers, many of whom are recent college graduates on starting salaries, can have a better quality of life.
We believe that translates to greater longevity with our company, which translates to lower training costs, higher quality work and better client relationships. We search for cities with apartment rents half of those in DC. We look for cities that are accessible to our corporate headquarters. We look for cities that had high quality office properties at half the cost of DCs and for cities that has significant college student population from which to recruit. Half the cost.
Earlier this week, we announced that we are opening a research and technology hub at 501 5th Street in Richmond, Virginia. It's a beautiful building and we're getting a great value. Greater Richmond is 1 hour and a 42 minute drive from Washington, D. C, and has if you leave at the right time and has office and apartment rents half of Washington's. Richmond also has tens of thousands of new college graduates each year.
We intend to provide competitive salaries to our staff who could then be able to afford a relatively higher quality of life and we believe we'll be able to achieve higher longevity and quality. The state of Virginia in concert with the city of Richmond provided more than $10,000,000 in potential incentives to CoStar to support our new research center in Richmond. Over a period of years, we expect to have over 700 professionals in Richmond, 730 exactly, including researchers, portfolio researchers and software developers. We will incur costs at the start up, but over the intermediate and long term, we believe that this investment will lead to lower costs and allow us to further strengthen the quality of our CoStar information services. Richmond will allow us to provide even stronger data service to our customers.
Stronger data means we expect to sell more services. We believe it will absolutely help us convert on the huge opportunity we have in moving hundreds of thousands of LoopNet information users to CoStar information products as we seek to deepen our overall penetration with brokers in the United States. We expect some of the research headcount increases to drop after we complete the integration. I just want to reiterate that. Maybe someone could ask a question about that.
Turning back to Apartments. We have reached an important milestone for Apartments.com. After 2.5 years of successful investment in the site, revenues have grown to now transition the product from losses to profits. I'm proud to say that we have turned the corner having reached the breakeven mark in the Q3 of 'sixteen, and we expect to be profitable with Apartments.com in the Q4 of 'sixteen. We believe that we're now entering an extended period where Apartments dotcom can contribute materially to our future earnings growth rather than being a drag on earnings.
Our investments over these past two and a half years have transformed Apartments dotcom, which was the number one the number 3. And when we acquired it, it was the number 3 apartment listing site in visits, and it was 3rd in annual revenue by some distance with $86,000,000 in revenue at the time of acquisition. We have now become after all these investments, we've become the clear number one ILS based on the combination of traffic, SEM, momentum, total communities and leads delivered. We believe we are the number one annualized revenue in the multifamily space in with approximately $1,250,000,000 in marketing information revenue on an annualized basis annualizing this particular quarter. From a competitive position, we have the size and scale to provide what I believe is the best marketing site and information services available in multifamily.
According to comScore, apartments.com increased its lead as the most traffic department Internet listing site as unique visitors increased 28%, while total visits were up 39% in the Q3 of 2016 year over year. Our apartment network had 37,000,000 unique visitors in aggregate in the Q3 2016, which is 26% more than the former top network in the apartment listing space. While the renter traffic to Apartments dotcom has grown year over year, our closest competitor site traffic continues to fall off. Our leads delivered to clients grew 20% quarter over quarter and 35% year over year. Since we have more than doubled the number of leads we're delivering to our clients on a quarterly basis since we acquired Apartments dotcom, we are now able to achieve higher prices for the superior service.
Our average revenue per advertised apartment community on Apartments dotcom has climbed 56% to $602 per month, up from $3.85 per month in the Q1 of 2014 when we had announced the acquisition of harvest.com. So it's quite a significant increase there. Our average revenue per community has climbed 28% year over year from $471 per month in the Q3 of 'fifteen to $602 per month in the Q3 of 'sixteen. In the same timeframe, the number of properties advertised on Apartments.com has climbed 38% or 8,692 properties from the Q3 of '15 to the Q3 of 'sixteen. This was assisted by the integration of the Finder acquisition, but the net result has been very successful as we have achieved higher pricing and more volume and we believe very high customer satisfaction.
Reflecting continued strength in the U. S. Economy, commercial real estate markets are very healthy. A lot of questions about that, but I would have to say that I really feel quite bullish about where the markets are right now. National employment is 6.3%.
That's 4.6 percent of last cycle's peak in 2,008. So employment is $6,300,000 over last cycle's peak in 'eight. What's more, the combination of solid job growth and low employment rates has supported personal income gains of 3.1% over the past year. And that's pretty significant when you consider that inflation is about 1%. So it's a really good result.
As a result of steady economic and job growth, occupancy rates for all property types except apartments reached a new business cycle high in 2016 Q3. Because of high occupancy rates, rent growth for all property types is well over the national inflation rate ranging from 2.9% for retail to 7.1% for light industrial properties. Construction activities are very low in office, warehouse and retail sectors, and we're only adding 1% to the inventory of commercial space overall all the product types. The apartment sector is the only property type that stands out for healthy levels of supply. About 4% of apartment inventory is underway for delivery over the next 2 years.
However, the apartment sector also has very high occupancy rates and needs additional supply to satisfy very strong demand. Overall, commercial property occupancies are high, but supply is relatively modest. As we reported last quarter, the pace of commercial real estate sales has slowed for all property types. Specifically, year to date, real estate sales are down 9% from the same point in 2015, but those were very high peaks back in 'fifteen. Year to date sales changes range from a 4% increase in multifamily sector to a 20% decline in industrial sales.
In summary, real estate markets will maintain a high level of liquidity, which is a strong indicator of investor confidence in this sector. Analysis of the apartment market shows us becoming increasingly competitive as rent growth has slowed from has slowed to 3.2% from 5.9% a year earlier. The slowdown of rent growth in part reflects the 134,000 new units delivered in the 1st 3 quarters of 'sixteen, which is 35% more than the 10 year historical average. Net absorption of apartment units totaled 127,000 units year to date, which marks a 26% decline from year earlier levels. Again, a frame of reference is important because the current net absorption rate is 19% over the 10 year historical average.
Since apartment advertising spend is highly correlated with weaker apartment markets, a more competitive market is likely to benefit our apartment ad sales. So a more competitive car market is good news for CoStar. One of the things I do want to highlight is that we are currently in the United States building about 0.6 Apartment housing units for each new household forms in the U. S. So we fundamentally have a housing shortage.
And you see that reflected when you look at young millennials in Washington, D. C. Spending 55% of their salary to rent a modest one bedroom or studio. So I think while there's discussion of oversupply, with a dramatic drop in single family home construction, these elevated levels of supply in the apartment market are actually inadequate. Office fundamentals remain very strong with occupancy rates up 40 basis points year over year earlier levels to a business cycle high of 89.5%.
Year over year rent growth of 3.6 percent marks the 12th consecutive quarterly period of annual rent growth exceeding 3%. Net office net absorption of 63,000,000 square feet year to date is down marginally from 69,000,000 square feet for the same period of 'fifteen, but this level is 25% over the 10 year historical average. So I have to say that with steadily declining office vacancies, very, very modest supply of new inventory, clear cut housing shortages across the United States. I have I don't think I've been more bullish about where the commercial real estate economy lies. So any upcoming economic shocks for sure are not coming from commercial real estate supply activity.
So in summary, the Q3 of 'sixteen was highlighted by solid revenue growth, strong sales, particularly in CoStar Suite and significant margin expansion year over year. Our transformation of the multifamily information and marketing industry is just the latest iteration of renovation. I am very proud to lead our team of professionals who are accomplishing really remarkable things. We have made important investments that I believe position us for a long period of top line growth and market penetration. The upcoming LoopNet integration is on track and I'm very optimistic about the potential outcome.
So at this point, I'd like to turn the call over to our CFO, Mr. Scott Wheeler. Thank you very much, Andy. You're welcome.
Very informative and comprehensive update. It tomorrow yet? Will be soon. So as Andy mentioned, we're pleased with our performance in the Q3 of 2016. So let me provide a bit more color around the results in addition to what we already communicated in the Q3 press release, which we issued yesterday.
My comments will focus on the financial results, performance metrics and then our outlook for 2016. With regard to our financial results, revenue in the 3rd quarter of 2016 was up 12.5% over prior year, which translates into a 14% growth rate on a pro form a basis. The pro form a results include the revenue from Apartment Finder for 2015, which is net of the revenue streams that we eliminated such as Finder Social. Breaking down our revenue performance by services, we're very pleased with the growth in CoStar Suite of 13%, which is 14% year over year excluding the effects of foreign currency movements.
I hope you don't mind, but I'm so excited by the growth that I arranged for sirens to be sounded. Yes, celebration outside.
In constant currency terms, this is 200 basis points higher than the comparable year over year growth rate of 12% in the Q3 of 2015 a full 300 basis points higher than the comparable growth rate of 11% that we achieved in CoStar Suite in the Q4 of 2015. This acceleration of the growth rate in 2016 is a result of continued strong sales of CoStar Market Analytics and the shift in focus of our 200 plus person info sales force back to selling information products following the Apartments integration that Andy mentioned. With this strong performance, we believe CoStar Street will continue growing towards the upper end of the 12% to 14% range that we've communicated for the Q4. The information services revenue, which is approximately $19,000,000 per quarter, grew in the low single digits in the 3rd quarter as expected. You recall that information services includes the revenue from our LoopNet information product, which we are not actively selling in advance of our planned integration of LoopNet and CoStar.
Accordingly, we expect the revenue growth rates in information services to turn negative in the Q4 of this year. In multifamily, our revenue increased 17% year over year, which is 22% on a pro form a basis in the Q3, adjusting for $2,000,000 of discontinued revenue from 2015. For the full year, multifamily revenue growth is expected to be in the 20% to 25% range that we previously communicated. For the Q4, we expect the multifamily revenue growth rate to be slightly below 20%, primarily as a result of lower family sales in the 2nd and third quarters of 2016 as we work through the sales force transitions and increases that Andy mentioned. Going forward, we expect the long term sales levels to improve in multifamily as a result of the increased sales headcount and our sales force productivity effort.
Rounding out our service performance, commercial property and land services grew 10% year over year in the Q3 and remain in the low double digit growth range we expect for the year. Our gross margins came in at 80.2% in the 3rd quarter, a high watermark for the company. The vast majority of our cost of revenues relates to our research operations, which we are expanding with the recent announcement of our new research center in Richmond, Virginia. Beginning in 2017, the net research investment is expected to be in the range of $25,000,000 to $30,000,000 per year. Accordingly, we would expect gross margins to moderate in 2017 into the 75% to 80% range as we scale up our team in Richmond.
As Andy mentioned, there are a number of important benefits we expect to realize from expanding our research capabilities in Richmond. First, as we're out of space in our existing centers, expanding our facility in Richmond cost less than half of what it would have cost to expand here in Washington, D. C. In addition, the cost of living in Richmond is almost 50% lower than Washington, D. C, which allows our employees an improved lifestyle, which we believe will result in lower turnover and a longer tenure quality workforce.
Finally, Our operating expenses were down $5,000,000 year over year as a result of previously announced plans to reduce marketing and advertising spend and from lower headcount levels as a result of the integration of Apartment Finder. Seasonal marketing expenses are expected to decline further in the 4th quarter, partially offset by higher personnel costs in the areas of sales and customer service. As a result of our continued strong revenue growth and cost management, our Q3 adjusted EBITDA results are favorable to the Q3 guidance range we provided in July by $5,000,000 at the midpoint. Now let's take a look at some performance metrics for the quarter. At the end of September 2016, we had 665 salespeople, an increase of around 80 people from the end of June 2016 and up 155 people from March of 2016.
We added sales resources across all of our major service areas, the largest increase in our apartment sales force. We expect these higher sales staffing levels will produce a positive tailwind in net bookings in the coming quarters. As Andy mentioned, we added $26,000,000 in net bookings in the Q3 of 2016, along with annualized net new sales on annual subscriptions of $24,000,000 We continue to see strong net bookings levels in the CoStar Suite, while net bookings in information services are down year over year, consistent with the Q2 of 2016, as we prepare to sunset the LoopNet information product in 2017. We expect these headwinds will continue through the rest of 2016 and into the 1st part of 2017. Our cross selling efforts of LoopNet users to CoStar is expected to result in increased bookings in the second half of twenty seventeen, with the resulting revenue contributing to growth beginning in 2018.
I'll now discuss our outlook for the Q4 and the full year of 2016. With only 1 quarter remaining in the year, we're tightening our revenue guidance range around our previous midpoint of 837,000,000 dollars Our updated full year 2016 revenue range is approximately $835,000,000 to $838,000,000 which represents pro form a annual growth in the upper end of the 13% to 14% range we previously discussed. Our 4th quarter revenue range of 216,000,000 to 219,000,000 implies a year over year growth rate of 12% to 13%. This will be the Q1 without pro form a adjustments related to the Apartment Finder acquisition. We continue to see positive trends in our expense profile and are again raising our full year 2016 non GAAP earnings per share outlook.
Our revised range of $4.20 to $4.25 per diluted share is an increase of $0.13 at the midpoint compared to our previous outlook. For the Q4 of 2016, we expect non GAAP net income per diluted share in the range of $1.23 to 1.28 dollars For the full year 2016, we expect to deliver adjusted EBITDA margin of around 30%, represents a significant increase over the 19% adjusted EBITDA margins of 2015. Moving forward, we expect to increase the level of investments we are making in key areas of the business to support future growth, such as the expansion of our sales teams, adding to our product development capabilities and the recently announced research center investment in Richmond. As a result, while it's too early to give any detailed guidance for 2017, we expect minimal expansion in our adjusted EBITDA margin in 2017 compared to 2016. While we remain confident and committed to our long term margin expansion target of exiting 2018 at 40% adjusted EBITDA margin, We don't expect the path between here and there to be a linear one.
Overall, we'll continue to focus on investing to deliver profitable revenue growth. I believe we are increasingly well positioned to achieve revenues in excess of $1,000,000,000 in 2018.
With that, I will now open the call for questions.
Your first question comes from the line of Andrew Jeffrey from SunTrust. Please go ahead.
Hi, good morning guys. Thanks for taking the question. Appreciate it. Absolutely. I guess I'd like to understand a little bit, Andy, sort of the sales force re focus, if you will, the shift of some of those resources back to Suite.
Can you just talk a little bit about the rationale behind that and your confidence in the ability to hire, train and drive productivity of some of the new hires within the apartments sales force? And I guess as a corollary, whether or not you think the path toward sort of market dominance is defined by more than 50% share has changed at all?
Sure. So when we acquired Apartments dotcom, they had the smallest sales force in that industry. And it was and relative to the investment and the improvements we were making in the software and the branding of Apartments dotcom, it was too small to be appropriate for what we were doing. So we leveraged a very strong CoStar sales force and pulled them in, and they began leading a lot of sales efforts for Apartments dotcom. So that means you are, a certain degree, robbing Peter to pay Paul.
You're taking people good resources off of your flagship to moving apartments. And we were able to continue growing both while we're doing that. But as we begin to stabilize and as we've begun to build up our dedicated apartments resources that are not coming from CoStar, we wanted to move the CoStar sales team back out of that apartments focus in preparation for what we think is going to be the huge selling event for the next several years, which is the LoopNet to CoStar integration. And so we are as a sales organization, we are probably a little more intense than the average sales organization. And so we're in the process of building up an apartments team that's a little bit more in our mold of folks that want to earn more and work harder.
And that's a transition period. We're achieving it. We've now built up a much more robust management team that was there when we acquired these companies. We are having no trouble hiring people. We are filling up these slots very quickly.
And I have confidence that we will enjoy the benefit of 2 strong sales forces, 2 strong relatively independent sales forces in 2017, one that is completely adequately staffed to capture the opportunity apartment side and one that's prepared to execute on the opportunity on the Live Bed upsell. And that makes me feel very optimistic. So and we're not growing sales forces is not new to us. That's one of our core competencies and we're just executing on that.
Your next question comes from the line of Bill Warmington from Wells Fargo. Please go ahead.
Good morning, everyone.
Good morning, Bill. Hey, Bill.
And congratulations on formally achieving the number one rank in the apartment space.
Thank you very much.
You mentioned the figure of 430 1,000 users or frequent users of LoopNet who would make prime prospects for the conversion of CoStar Suite. So you guys have been at this now for, let's say, 4 years. So what is the data now in terms of your ability to convert those
users? Okay. So let's just look at this as Phase 1 and Phase 2. Phase 1 and Phase 1 began immediately after we acquired LoopNet several years ago. That was the first time we were able to see who some of these very intensive users of commercial real estate information were that we prior to the acquisition did not know about.
So we put a lot of focus on our sales force to go in and try to upsell those high value users. And we were extremely successful. We upsold, I believe, about 10,000 users at $80,000,000 The typical upsell was about 500%, what they're paying for LoopNet versus what they would pay for CoStar. So it was very successful and it really delivered for us for a while and it really exceeded investor expectations. At the end of Phase 1, it became clear that the next phase in order to optimize what you could pull from this revenue opportunity, you really need to create that one database.
You needed to make sure that there was nothing in the LoopNet system of value that someone wouldn't get if they spent significantly more to go into CoStar. That is no small feat, that integration effort. You're dealing with millions and millions of properties that you have to resolve and integrate. And in addition, we didn't want to be very respectful of every element or potential element of our FTC agreement. So we wanted to wait until after that 3 year 1st 3 year period before it really started to do that.
And at the end of that period, the opportunity with Apartments dotcom came up, and we frankly shifted our focus on software, put a lot of software resources on what has clearly been an outstanding investment. As we have completed the integration of Finder and Apartments dotcom, We now can shift towards that integration of that back end database and that tees us up for Phase 2. And Phase 2, I believe, is more significant than Phase 1. And we'll be able to seamlessly electronically market to people who are these 430,000 users. We'll be able to show them exactly the differences between what they're using and what they could be using.
We divide them into 24 different customer profile or user profiles. We'll be serving up specific marketing content, retargeting to them around those profiles. And I believe that we have the opportunity to sell significantly more than we did in Phase 1. But preparing for Phase 2 has been a patient process involving a lot of technology and a lot of data flow modeling. But I look forward to when we can begin to pursue that in mid-twenty 17.
And as we do that, we'll be able to report to folks some of the progress we're making in the summer of next year, but it won't really majorly move the dial in revenue recognition in the middle of the year. It will be more so it kicks in the 3rd, Q4, Q1 of the following year. But we'll be able to clearly communicate the upsell activity we have just the way we did in Phase 1 where we were giving you real good stats on that.
Your next question comes from the line of Brandon Dobell from William Blair. Please go ahead.
Thanks. Scott, just to make sure I understand how you guys are talking about margins in 'seventeen and the phasing of some of these expenses as we go through, Maybe just a little more color on how we get to minimum margin expansion, what minimal may mean for you guys. It could be 0 or it could be a couple of 100 basis points. Just help us understand how you're getting from where you finish going to finish out 'sixteen to that 2018 exit target and what that curve may look like? Thanks.
Yes, sure, Brandon. As we go through our planning process, which we're doing now and we'll finalize our specific 2017 plans as we get into December, we'll definitely have a lot more to share with you in February on what that curve looked like. I think what we wanted to do today was as we've obviously pushed very hard on the margin pedal this year and seen that major growth that we need to do some of these investments to underpin the growth rates in the future. So we don't want the expectation to be that's going to be the straight line between here and the 40% at the end of 2018. Now what we do expect is that the seasonal margin pattern that we see in the business, particularly driven by marketing and advertising, will continue next year where you have your highest margins in the Q4, you have your lowest margins in second.
And on the first and the third end up somewhere in between that. We think the margins we've achieved this year are certainly sustainable with the investments we plan to make. We think they will probably move forward a little bit next year. Exact basis points, we haven't set that number. But we just wanted to make sure that there wasn't a straight line between where we are today and there and that we're going to pause that straight line, reduce it a bit into next year and then we'll see a return to accelerated margin improvement in 2018.
Your next question comes from the line of Sterling Auty from JPMorgan. Please go ahead.
Yes, thanks. Let's follow-up on that line of thinking. So it would seem to me that in order to hit the 40% EBITDA target exiting 2018 based on the commentary, it really looks like you'll have to cut expenses. So we'll see operating expense declines in 2018 over 2017 in order to get there. Is that correct?
And when should we see it sounds like some of the nuance to your revenue target was at least 1,000,000,000 dollars So are you suggesting that either in 2017 or beginning of 2018, the trajectory of growth would improve because you're making these investments in what should be revenue yielding
assets? I'd love to so Sterling, I think you can achieve it on the revenue side, but I do want to remind everybody that CoStar has shown again and again and again that we are able to reduce costs after an investment initiative. We are very good at that. Everyone I think we get credit for that. So it is possible that cost could come down post integration, but that isn't necessary in order to achieve that 40.
But we are given what we're doing, our number one priority is we're going to move any and all ammunition required up to the front and to support the offensive next year is what we're doing. Then we would expect to complete it next year and then move on to the next thing. And then the second part of his question, Tarver when they asked compound questions to avoid the 1 question rule and then I forget the second one. Do you remember the we'll let him repeat the second part of the time.
If you can still hear me, it was really around the revenue acceleration from these investments, so the timing of it. So if you're saying you can get there based on revenue without expense cuts, when the market is obviously reacting negatively to the comments around margins. But if there's near term visibility that you're going to get payback on those investments,
whack. Right. Well, that is thank you, what you said. Yes, for sure, right? So the reason we're making the investments we're making is because we believe that they have outsized returns.
And we would expect that as that sales force grows on the apartment side, that trailing maybe 6 months of deployment at a new higher steady state, you would see material you'd see increases in sales associated with those folks. So our per person productivity is really quite good there. On the LoopNet side, on the LoopNet integration side, we clearly believe and are reiterating and saying for everyone to hear that we believe that you'll get really significant sales off that upsell. We think that is what's going to happen. But we also know that as you discontinue the low dollar sales to replace them with high dollar sales, the discontinuation is upfront and then the upsells are trailing that.
So, yes, we certainly there it would be someone would have to have a complete lack of imagination if they were to think that we are just shifting our margin expectations for the business. We're not.
Your next question comes from the line of Brett Huff from Stephens. Please go ahead.
Hey, this is Blake on for Brett. Thanks for taking my question.
Hi Blake.
Hey, it looks to if you're using the midpoints for 2016 revenue, you guided the top end just down a little bit and so that maybe reduced the midpoint down by $500,000 or so. Is that the right math? And then I'm just wondering, ex these increased investments you now expect, was there anything maybe fundamental you are seeing differently in the market that's maybe the reason for the little bit of weakness in the 4Q? And any of that would trickle over into next year? Thanks.
Yes. So when you look at the guidance, as we said, we're tightening up the range for the rest of the year. As this business continues to grow bigger and bigger and we look at $500,000 movement around the midpoint, up, down or in the middle. I just don't think we should read much into that as you look at the pace and the growth of the business. The strength that we're seeing in CoStar, we obviously expect to continue and that's a very positive thing.
We'll see the revenue rates that I mentioned in the 4th part of apartment slightly below 20% and then a bit of the headwinds from the info solution. So you're going to see a little bit of lumpiness in there like we talked about last quarter over the next quarter or so, but we're still very confident about the long term trajectory of the growth of the business and the improvements that we're making are going to deliver that type of revenue growth.
Your next question comes from the line of Patrick Walravens from JMP Securities. Please go ahead.
Great. Thank you.
Andy, I'd love to hear sort of
how you're thinking about M and A
at this point with the projects you currently have on your plate. I mean, what's your appetite for it and where would you be interested in doing it?
Well, we are there is a lot of M and A potential out there. There are probably a dozen different opportunities that we are tracking and watching and engaging with. But realistically, we're interested in doing things at more interested in doing things at a little more scale. And given the efforts we've got going right now with the LoopMed integration, we wouldn't want to be distracted from that effort. We want to complete that before we do larger deals.
But there are just like Apartments.com had a lot of intersections in a parallel vertical to the things we were doing and we're good at, there are many other opportunities similar to that. But again, like right now, at this very moment, we've got 110 software developers working on the Luminant integration. So that we're sort of focused on that or we're focused on that.
Your next question comes from the line of Mayank Tandon from Needham and Company. Please go ahead.
Thank you. Good morning. I'm sorry if I've already missed this, but I wanted to just clarify the LoopNet revenue that is tailing off of $40,000,000 or so over the next couple of years, how does that trend over the next 2 to 3 years? And then how do you offset that with the incremental revenue that I think you've talked about the $100,000,000 to $150,000,000 that is coming from the researchers transitioning over to the CoStar Suite product?
Sure. So some of that, about $10,000,000 $11,000,000 is property comps, which is a service we're just going to discontinue in 2017. So that is a that's something where people are paying as little as $20 a month to have a product that we normally that's a low quality comparable sale product that would compare with something that we normally charge several 100 dollars a month for. So that $10,000,000 will disappear pretty quickly and we anticipate that we'll be able to recapture most of that in the course of the following 12 months or so into CoStar Suite subscriptions. The other revenue on premium searcher, which is close to the 30 some 1,000,000 dollars will not immediately tail off because we will continue to provide those premium searchers with access to a little bit more content in the LoopNet site.
And we will that revenue much of that revenue will tail off in the process of a conversion sale. So if someone's paying $70 a month for premium searcher, that Premium Searcher will discontinue when we move them into a CoStar property subscription typically at $500 and some dollars a month. So that revenue will sort of we'd like to see most of that revenue be 1 to 1 upgrade activity. So it's that should be a little smoother. But the property comps and property facts drop off will be a little more immediate in that $10,000,000 in the second quarter.
Yes. And that will happen in mid year. So you'd expect half of that revenue impact next year and then half kicks over in the following year of 2018.
And at this time, there are no further questions.
Great. Well, thank you very much for joining us for this Q3 earnings call and I look forward to updating you at Wow! Year end. Thank you very much.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT and T Executive Teleconference. You may now disconnect.