Ladies and gentlemen, we thank you for standing by and welcome you to the CoStar Group Second Quarter Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session with instructions given at that time. As a reminder, this conference is being recorded. I will now turn the conference over to Richard Simonelli.
Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to CoStar Group's 2nd quarter 2016 16 conference call. Thanks for joining us. Before I turn the call over to Andy Florance and Scott Wheeler, I have some important facts for you. 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 July 27, 20 16 press release on our Q2 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 on the date of this call, and CoStar assumes no obligation to update these statements whether it's a result of new information, future events or otherwise. Reconciliation of non GAAP net income, EBITDA, adjusted EBITDA and all of the non GAAP financial measures discussed on this call to their GAAP basis results and reconciliation of forward looking non GAAP guidance discussed on this call to the most directly comparable GAAP measure are shown in detail, along with definitions for those terms in our press release issued yesterday, also found on our website. As a reminder, today's call is being broadcast over the Internet and is available at costargroup.com, where you can also find our Investor Relations page. A replay will be available approximately 1 hour after the call and will be available for approximately 30 days.
To listen, you can call 800-475 6701 within the United States or Canada or 320-365-3844 outside the U. S. The access code is 397,279. A replay of this call will also be available on our website soon afterwards. So I'll now turn the call over to Andy Flores.
Andy?
Thank you, Rich. Revenues for our flagship product CoStar Suite grew 14% year over year, which is the highest growth rate since 2013. Apartments network revenue grew 58% year over year in the 2nd quarter and pro form a 24% for the same period. For the 5th quarter in a row, we achieved net bookings of greater than $25,000,000 adding $26,000,000 in the Q2 of 2016. In the Q2 of 2016, we delivered $207,000,000 in total revenue for an excellent top line growth of 21% year over year.
At $7,000,000 we achieved our highest quarterly sequential organic revenue growth increase ever. I feel that there is tremendous momentum in our business right now and that our products are dominating their respective segments. Our management team has been working hard to reduce costs, especially through the consolidation of redundant operations resulting from the merger of Apartments dotcom and Apartment Finder into CoStar. Year over year, we have reduced our overall headcount 372 from 3,302 to 2,930. One of the ways we did this was by consolidating much of the operations of Apartments.com in Chicago and Washington, D.
C. Into Apartment Finder's lower cost city of Atlanta. I think the team has achieved remarkable efficiency given that we acquired Apartment Finder this time last year, integrated the operations, built a completely new website, discontinued their print products and expanded the quarter with fewer ended the quarter with fewer people in our apartment group than we had before last year's merger with Finder. Such dramatic cost reduction is even more impressive given that at the same time we grew Apartments Marketplace revenue 58% year over year. Since June of 2015, we've essentially stripped away all of the net incremental expenses associated with Apartment Finder, while maintaining $65,000,000 of its revenue.
We acquired Apartment Finder last year for $170,000,000 at approximately a 7.4 times EBITDA. Now that we have effectively eliminated their net expense, you could say that it was a 2.6 times EBITDA deal. With strong revenue growth and dramatic cost reductions, we have seen a surge in profitability. EBITDA increased to $46,000,000 in the Q2 of 2016 compared to a loss of $1,000,000 in the Q2 of 2015. EBITDA margin for the Q2 of 2016 was a solid 22%.
We are remaining fully committed to achieving $1,000,000,000 in revenue in 2018 I'm sorry, yes, in 2018 and 40% adjusted EBITDA margins exiting 2018. I would like to update you in a bit more detail on our progress in the apartment sector. Driving traffic to Apartments.com is the core to our success. According to Comscore, year over year in the Q2 of 2016, our apartments network achieved a 58% increase in unique visitors and a 103% increase in visits, driving a 24% increase in leads delivered to our clients. The Apartments dotcom network has nearly 35,000,000 monthly visits network competitor RentPath, which includes Apartment Guide and more than 27,000,000 monthly visits more than our next closest competitor for rent.com.
While the renter traffic to apartments.com has grown year over year, our closest competitor's traffic has fallen off. Among our Apartment ILS competitors, Apartments.com is now number 1 in SEO traffic, SEM traffic and overall site traffic. We are clearly pulling away from the competitors. Apartments.com traffic dominance is translating into value creation for our customers. Last week, we met with one of our largest customers that manages hundreds of thousands of units across the United States.
They track the source of all incoming leads into their apartment communities and how those leads convert into signed leases. They shared with us how the Apartments dotcom networks perform for their communities. They told us that our network generates more leads and 100% more leases than any competing network. That means our network converted leases at a 94% higher rate than the next competitor, all at half the cost. The fact that we are becoming such a huge source of vital renter leads is not news to me.
It's consistent with what I'm hearing from many of our clients. I have in fact had clients tell me that they're now that we are now generating up to 90% of their leads. In fact, in just 2 years after the acquisition of Apartments dotcom by CoStar Group, we have now delivered our 50 millionth lead to property advertisers. We conducted 4,500 apartments.com customer satisfaction surveys during Q2 this year. Each customer was asked on a scale of 1 to 10 how likely they are to recommend Apartments.com to a colleague.
On average, our customers responded with a rating of 9.6. We are thrilled to achieve a score that rounds to a 10 on a scale of 1 to 10. We believe that not surprisingly, our very significant product advantage is translating into a major shift in market share from our competitors to Apartments.com. We do not have hard or verified numbers in the exact number of properties advertising on our competitor sites, so I am estimating, but we believe that each of our closest and second closest competitors has lost approximately 3,000,9,000 advertising communities respectively over the past 2 years, while we have gained more than 10,000. We also believe that our closest and second closest competitors have lost approximately 2000 to 1000 advertisers respectively this year alone, driving their revenue down materially.
We believe that our competitors are lowering their prices in an attempt to preserve market share. We have increased our average revenue per community to approximately $600 per month. This is up significantly from $4.35 in June of 2015. Our tiered pricing structure and our quality leads and volume of leads are getting property managers to spend more money with us. We believe that we have moved from being the 3rd place player in this space when we acquired Apartments.com in 2014 to the clear number one position based on traffic, SEM traffic, SEO, total communities, total advertised communities, leads delivered, growth and total revenue.
Customer service is an important component of success in the apartment marketing space. As we have grown so dramatically over the past 2 years, we felt that our sales force was falling behind on the relationship building element required to succeed in long term in the apartment industry. Our sales force has been really busy and having a lot of success with new sales, we want to refocus them on customer service. I think it would be a huge mistake over the long term if we had the best site, but lost share to any competitors because of so so customer service. As a result, we made customer service priority 1 for our apartment sales force this year.
We want to get face to face in front of as many of our clients as we could to tell our very positive and great story and make sure that we built a brand not just with great technical performance specs, but huge goodwill as well. Since we started that effort earlier this year, we have doubled the number of clients we meet with each month. In February, our team visited 9,000 client sites. By June, that number had more than doubled to 19,000 face to face client visits per month. We conducted 45,000 face to face apartment industry meetings in the Q2.
We made a strategic decision to build equity with our customers for the long term and we're willing to forego a little bit of short term sales to achieve that. We are making this investment in customer service from a position of strength, not weakness. There has been a tangible payoff from those tens of thousands of additional meetings. Property management companies sometimes cancel their advertising contracts with us for different reasons and some are unavoidable such as when a client sells their building. But many cancels are avoided by getting in front of clients regularly.
With the most customer contact we have ever had, we have also, not surprisingly, achieved our lowest cancellation rate ever. Our monthly apartment marketplace cancel rate fell close to 1% monthly from an historical rate of 2% to 3% monthly. So it's less than half of what the historical rate had been. What is really impressive is since our acquisition of Apartments.com in 2014, we have nearly doubled the number of paying properties and have cut the number of monthly cancels in half. Our entry into the multifamily space is not only driving advertising revenue, it's also driving strong CoStar information sales.
When we acquired and invested in Apartments dotcom, we took the massive amounts of multifamily data we began generating and use it to produce multifamily information within our CoStar information products. This information is useful to property managers who need to set rents to lenders underwriting loans, to developers studying the feasibility of new apartment buildings and to people buying or selling apartment buildings. This revenue stream was basically immaterial when we acquired Apartments dotcom, but has now climbed to $5,800,000 in the Q2 of 20 16, up $1,300,000 from $4,500,000 in the Q1 of 2016. This new $23,000,000 of annualized information revenue is reported under our CoStar information revenue line, not under our Apartments.com or multifamily revenue line. If you combine the 2 multifamily associated revenue streams, we are approaching $243,000,000 of revenue in the multifamily space or about $250,000,000 We have been and will continue to make strategic investments for the long term growth of our business.
We believe that our growing field sales force is more productive and their morale is higher when we have CoStar Group offices in their market that they can work out of and that our clients can visit them in. We opened new sales offices in 10 cities in the 2nd quarter and anticipate opening an additional 17 in the Q3 of 2016. I have to say that we have some advantage in finding good high quality office space that someone else has built out and we're leasing without the full expense of build out. We have some inside sources there. The new offices will bring together our multiple sales teams from CoStar, Apartments and LoopNet into an integrated setting, which we believe will accelerate our sales penetration and provide better support to our existing customers.
We anticipate continuing to grow our sales force this year and into next year because we believe that we have many more qualified prospects to sell to than our current size sales force can possibly reach. We plan to grow the size of our CoStar, apartments, land, business for sale and LoopNet sales teams by in combination approximately 200 staff over the next 18 months. We anticipate opening a major new operations and research center in the coming months in a lower cost of living city such as Charlotte or Kansas City. We believe that compared to a location that we operate in today such as San Francisco or Washington, D. C, these markets will allow us to recruit and retain employees more easily while providing more competitive local salaries to our staff who could then afford a relatively higher quality of life.
We will not be shifting jobs, but more looking to build new hires in these locations. This will cost higher this will have higher costs at start up or create higher costs as we start up a new low cost center, but should produce savings over the intermediate and long term. We are considering organically adding new homes information to the CoStar product in 2017. We believe that we have a significant competitive advantage in this area and that the investment would be reasonable compared to the opportunity. We believe that it would be particularly valuable to our lender clients.
As mentioned on last quarter's earnings call, in an effort to drive higher customer satisfaction rates for CoStar customers, and this is opposed to the Apartments customers, in order to try to drive higher renewal rates, greater upsells and indirectly more total sales, we have staffed approximately 60 CoStar customer service representatives, whose job it is to drive more usage and adoption of the CoStar and LoopNet products within our client base and to provide customer service generally. I believe they're making a very positive impact on the business. Before the team was deployed in February 2016, our sales force conducted a total of 3,600 on site face to face client training sessions. In June of 2016, with a new Sears team in place, we conducted twice that number of client engagements with 7,300 on-site client training sessions. This means we are on pace to build relationships with tens of thousands of CoStar customers we would not have seen before.
While the short story might be that we're doing this because of some sort of problem, similar to our approach in the apartment side of the business, we are in fact doing it from a position of strength not weakness. We want to have a large support team in place in preparation for the anticipated demand to train thousands of LoopNet customers when we accelerate the migration of LoopNet information customers into CoStar next year. So in total, we're meeting with approximately 40,000 more face to face and more 40,000 more face to face sessions each quarter with customers. And we're convinced that we'll have a long term positive payoff. The single biggest investment we're making right now is in integrating the back ends of LoopNet and CoStar into 1 unified database.
This is a huge project, ultimately engaging 1,000 plus software developers, designers, researchers, trainers and salespeople. When successfully deployed in early 2017, we believe the project will have a number of important benefits to the company and our customers, including the following: a dramatically higher quality database a more efficient and lower cost of research reduction of our customers' cost to maintain their listings, a better commercial real estate marketing platform, a reduction in intercompany product cannibalization that we believe costs us tens of 1,000,000 of revenue annually and better facilitation of sales and upsells of customers into our higher value CoStar information products. Right now, there are tens of 1,000 subscribers to LoopNet's lower cost, lower value information products and hundreds of thousands of repeat users of LoopNet's free information services. Our goal is to convert tens of thousands of these clients into much more valuable CoStar subscribers. As we approach sunsetting the LoopNet information products, we have dramatically reduced the effort we're putting into selling them and we're in fact shortening the contract terms to month to month so that we have the flexibility to eliminate them.
And we've long anticipated this and we've communicated it. However, it is causing a significant reduction of LoopNet information revenue. We anticipate that there will be volatility in this LoopNet information revenue as we move through the anticipated conversion in the Q1 2017. We expect to bring an offsetting positive revenue benefit in the CoStar information product line in 2017 and beyond. In the short run, we believe it makes good sense and we're willing to sacrifice new sales and information side of the LoopNet business in order to obtain a much larger long term benefit of having people buy higher value CoStar services.
Consumer use at LoopNet continues to be strong. Profile views have increased to 66,000,000 in the Q2 this year, up from 49,000,000 views year over year. LoopNet continues to attract the largest unique visitor traffic in the industry by a very, very large margin. For a 3rd year in a row, CoStar has been recognized by Forbes Magazine as one of the most innovative growth companies. This year, we ranked number 11 globally, which represents a 16 spot jump from 20 fifteen's list.
Interestingly, several of the top 20 most innovative growth companies on the list are in the digital real estate space. CoStar was also recently honored at the National Building Museum's Annual Honor Gala, which drew more than 1,000 industry professionals. Quick update on the commercial real estate markets. It looks good. U.
S. Commercial estate markets continue to show strength in the first half of the year. Occupancy rates are now at a business cycle highs for office, industrial and retail properties and within 20 basis points for those of those highs for the apartment sector too. Demand for space is still driving rent growth to well above inflation and ranges from over 6% industrial properties down to 2.6% for retail properties. Geographically, the vast majority of U.
S. Metros report improving fundamentals. In the office market, 66% of submarkets reported falling vacancy during the quarter. That is one of the most important statistics I keep my eye on and is a business cycle high. And 56% of the metro markets now have higher overall occupancy rates than the 2006 peak.
In the apartment market, 63% of metros have higher occupancy rates than the last market peak. This is very significant since apartment construction has doubled over the past 4 years. So clearly, the key driver of investment returns in occupancy is very strong. The pace of commercial real estate sales has slowed for all property types and sales in the first half of the year fell 28% from the same point in 15%. Despite the slowing sales, the context of this trend is important since 2015 was a record high year for real estate sales.
Additionally, the commercial real estate sales pace is still 70% higher than the 2000 to 2015 average for the first half of the year. And the investment sales market continues to produce value increases. While sales have slowed somewhat, the market remains strong when compared to historical trends. Analysis of the apartment market shows that it's becoming increasingly competitive. New construction completions have doubled since 2012, which has led to a 20 basis point rise in apartment vacancy rates since the market cycle low in the Q2 2015.
And annual rent growth slowed to 3.5% from 7.2% 1 year ago. Still, these numbers are very strong. But because the apartment advertising demand is highly correlated with weaker apartment markets, a more competitive apartment market is likely to benefit our apartment ad sales. Office real estate fundamentals remain strong with occupancy at a business cycle high of 89.4% and year over year rent growth more than double inflation at 3.9%. Even though rent growth is marginally lower than the 4.2% growth rate recorded a year ago, the real story is that rent growth is becoming more evenly distributed by metro.
This story of strong demand, high occupancy and well above inflation rent gains is repeated in other real estate sectors including retail, logistics, light industrial, hospitality and specialty. So the Q2 of 2016 marked my 30th anniversary since I started the company and our team began leveraging the potential of digitizing real estate markets. It's a number of years. Over the years, CoStar has provided the most comprehensive and accurate data and intelligence and marketing solutions available to professionals involved in every aspect of commercial real estate. Our transformation of the multifamily information and marketing industry is just the latest iteration of our innovation.
I'm very proud to lead a great team of professionals who are accomplishing so much and have so much potential. Who knows, this might only mark the halfway point in my career. After all, my father was 30 years older than I am today before he in fact retired. It is possible. I don't think my wife want to hear that, but it's possible.
Mathematically, if CoStar sustained the 20% plus growth rates over the past few years, we could in fact report to you $250,000,000,000 in revenues in the year I'd reach my next 30th year or my 60th anniversary. That's right, dollars 250,000,000,000 in revenues, which is a world record for the largest forward looking revenue possibility any CEO has ever said in any public earnings call. In the short term, we remain focused on reaching $1,000,000,000 in revenues in 2018 with a 40% adjusted EBITDA margin exiting 20 18 or sooner. That's a sure safer bet. I will now turn the call over to our CFO, Scott Wheeler, who is 6 months into his 1st 30 years with CoStar.
Great. Thank you very much, Andy. Looking forward to that next 30 years in the $250,000,000,000 Really $29,500,000 $29,500,000 to go for me. As Andy mentioned, we're pleased with the performance in the Q2 of 2016. Today, I'd like to provide a bit more color on the results in addition to what we've already communicated to you in our Q2 press release, which we sent out yesterday.
My comments are going to focus on the financial results, some performance metrics and then our 2016 outlook. Regarding our financial results, revenue in the Q2 2016 increased 21% over prior year, which translates into a 15% growth rate on a pro form a basis. These
pro form
a results include the revenue from Apartment Finder for 2015, net of the revenue streams that we eliminated such as Finder Social. Now looking at our revenue performance by services, we're very pleased with the acceleration in revenue growth in Co Suite from 12.5% year over year in the Q1 of 2016 to 13.9% year over year in the Q2 of 2016. The acceleration in the growth rate is underpinned by continued strong CMA sales as well as the refocusing of our information sales force back to selling information products following our successful Apartments integration. With this strong performance, we believe the CoStar Suite will continue growing in the 12% to 14% range throughout 2016 as opposed to 11% to 13% range that we've previously communicated. The information services revenue growth through the 2nd quarter was in the low single digits as expected.
You recall that information services includes revenue from our LoopNet information products, LoopNet searcher, property comps and facts, which we are not actively selling in advance of our planned integration of LoopNet and CoStar expected at the end of this year, as Andy was talking about. Accordingly, we expect revenue growth rates in information services to decline throughout the year and turn negative by the Q4 in advance of our conversion. In our multifamily service offerings, our revenue growth rate of 58% year over year in the Q2 includes increases in both the number of properties that advertise on our network as well as the average revenue per property. In addition, despite removing the requirement to sell only annual contracts in the multifamily space, our net new sales on annual subscriptions for the apartments network increased in the Q2 of 2016 versus the Q1 of 2016. Multifamily revenue growth was 24% on a pro form a basis, including revenue from Apartment Finder and net of the revenue streams we eliminated and it's expected to remain in the range of 20% to 25% throughout this year as previously discussed.
Rounding out our services performance, commercial property and land grew 11% year over year in the second quarter. It remains in the low double digit growth range expected for the remainder of the year. Now regarding our profit performance this quarter, we continue to manage our cost structure so that incremental revenue drops through to profit at a very high rate. In the Q2, over 100% of incremental year over year revenue was converted to profit, as our revenue grew 21% and expenses were down 6% year over year as Andy explained. Our gross margin came in at 79.4% in the 2nd quarter, representing an increase of 90 basis points from the Q1 of 2016, and that's an increase of over 500 basis points from the gross margin in the Q2 of 2015.
The vast majority of our cost of revenue relates to our research operations, which is comprised of fixed and semi variable costs. This of course enables margins to improve with revenue growth. Our expectation is that our gross margins will continue in this high 70% range this year as our revenues continue to increase and we continue to invest in our research capabilities. Operating expenses are down $10,000,000 year over year as a result of the previous announced plan to reduce our marketing and advertising spend, as well as reduced resource levels in the business and the integration of Apartment Finder. Staffing levels are expected to increase throughout the remainder of this year as we had sales resources across all of our major service areas.
As a result of our continued strong revenue growth and cost management, our 2nd quarter adjusted EBITDA results are favorable to the Q2 guidance range that we provided in April by $4,000,000 at the midpoint. Of this favorability, dollars 3,000,000 is due to productivity we achieved in our marketing spend that allowed us to meet our marketing objectives with lower spending than anticipated. We plan to redirect the resulting marketing savings to other advertising priorities in the second half of this year. Now let's take a look at some performance metrics for the quarter. At the end of June 2016, we had 584 salespeople, an increase of around 75 people from the end of March 2016.
We added sales resources across all our major service areas with the largest increase in our apartment sales force. We will continue to add sales resources in the months ahead along with the local offices to support this expansion as Andy discussed. Revenue from subscription services on annual contracts continues to increase and was $158,000,000 for the Q2 of 2016 or 77% of total revenue, up from 74% in the prior quarter. For the trailing 12 months ended June 30, 2016, subscription revenue from annual contracts totaled 564,000,000 dollars which is up 34% from $420,000,000 for the 12 month period ended June 30, 2015. We added $26,000,000 in net bookings in the Q2 of 2016, along with annualized net new sales on annual subscriptions of $23,000,000 This is our 5th consecutive quarter of net bookings over $25,000,000 and the 2nd highest sales quarter in our history in both CoStar Suite and Multifamily.
Although the net bookings are strong, they're down from the record levels achieved in the Q2 of 2015, which is when we launched the new apartments.com site and a major advertising campaign. In addition, the reduction in LoopNet information sales in the Q2 of 2016 that Andy referenced also contributed to the decline in net bookings, both on a year over year and a sequential basis. Renewal rates for annual subscription revenue across all service offerings improved slightly as we focus on improving customer service. The 12 month trailing renewal rate for annual subscription based revenue is now at 90.5% and the 12 month trailing renewal rate for customers who've been with us for 5 years or longer was 97.3%. I'll now discuss our outlook for the Q3 and the full year of 2016.
Our full year 2016 revenue range of approximately $834,000,000 to $840,000,000 remains unchanged and we expect pro form a revenue growth for the year of between 13% to 14%, including Apartment Finder revenues for the relevant periods. Our Q3 revenue range of $211,000,000 to $213,000,000 implies a year over year pro form a growth rate of 13% to 14%, while we expect the reported growth rate to look closer to 12% to 13%. Just because we had approximately $2,000,000 of non core revenue in the Q3 of 2015 that we have since eliminated. Accordingly, this $2,000,000 needs to be deducted from the Q3 2015 revenues in your pro form a growth calculations. 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 $4.05 to $4.13 per diluted share is an increase of $0.04 at the midpoint compared to our prior outlook and that's up $0.42 from the initial 16 guidance that we provided in February of this year. For the Q3 of 2016, we expect non GAAP net income per diluted share in a range of approximately $1 to $1.04 which represents an increase of $0.11 at the midpoint over our 2nd quarter results. This is primarily the result of planned reductions in marketing expenses coinciding with the end of the summer apartment rental season. Given our strong second quarter performance and investment plans that support the continued growth of this business, we believe we're well positioned to achieve our stated financial goals of $1,000,000,000 of revenue in 2018 and exiting that year with 40% adjusted EBITDA margins. With that, we will now open the call for
Our first question is from the line of Brett Huff with Stephens. Please go ahead.
Good morning, guys. Hope you're doing well.
Thank you, Brad. Thanks, Brad.
My question is on the net new annualized bookings and the net new bookings. Just to make sure I understand, it seems like that was a negative growth because both the tough Grover because of the big time media spend last 2Q and because of the shutdown or the deemphasizing of the sales of the info products. But we had a lot of questions from folks asking when kind of when will that normalize and when should we see that start to get positive again on a year over year even sequential basis?
And you're referring to the impact of LoopNet premium search or premium comps and property facts search?
Yes. So I think two things is what you guys said that and then also just the tough comp because you had so much media spend in 2Q last year.
Right. And then the shutdown of the finder social and non core revenue. So the LoopNet information products will remain volatile through the Q1 2017 for sure. And again, we're in a position where we do not want to artificially try to accelerate or intervene to accelerate sales of a product we intend to discontinue before long. So that will and we don't want to begin aggressively converting LoopNet customers to CoStar Suite until we have 100% of all LoopNet content available within CoStar Suite.
So there's no reservation factor for a convertee.
Yes.
So that we anticipate that being Q1 2017. So we would begin looking to report clear consistent progress with that in Q2
Great.
Did you want to add anything to that
latter part of the No, I think keep in mind that as we transfer to CoStar Suite, you'll see that growth obviously in the CoStar Suite sector. And so if you're looking really at only information services, then as you'd expect that's going to continue to decline as we get the more of the value shifted into the CoStar Suite sector.
And over the long term it would go to 0 and hopefully be transitioned over to CoStar.
Our next question is from the line of Sarah Gubins with Bank of America.
Hi, thank you. Just a follow-up on that discussion. Could you size the amount of revenue that you expect to effectively eventually go away by the Q1 of 2017? And do you think you'll be able to recover all of that into CoStar Suite during 2017? And is this any different from what you've been talking about previously around doing some sort of a hybrid product between LoopNet and CoStar?
It is not different. It's what we've been talking about for, I guess, gosh, I hate to say it, but 2 years now.
Quite a while.
Yes, so the PCPF component, the property comps and property facts component, which is immediately impacted in the Q1 is what? Yes.
It's not that 35 to 40 to 40. The total
is down to 40 and the next component is probably 18 so roughly. And so the 2018 and then the other part we basically phase out half that we phase out over probably an 18 month cycle being in the Q1 2017. But we do that prioritizing the most likely to convert and upsell first. And our goal would be to be able to show a net overall uptick in revenue during the course of 2017 from that effort. But again, we look at it, it's only estimating.
You're just trying to make an estimate on your best belief. But I'm pretty darn confident that it represents up to a $50,000,000 cannibalization of the higher value products and it represents an upsell opportunity of $250,000,000 So I think it's in the again it can't be known, but it's in the $200,000,000 to $300,000,000 positive range. And I think that would be captured over 5 to 10 years overall.
Thank you. Next in queue is Brandon Daubel with William Blair. Please go ahead.
I just want to to make sure I connect 2 dots here. First, the number of salespeople you're adding through, I guess, the balance of this year into 2017, how that will fit with, I guess, if the changes you're making How do those two things align? Is there some connection between that answer and how we should think about the net new number the next 2 3 quarters?
Well, as you know, growing the sales force in the next two quarters does not grow the revenue in the next two quarters dramatically. Now we do have some pent up growth already in the apartment side. So we probably have 30 in the range of 30 to 40 folks in the pipeline to be added to productive sales or production sales for apartments that will go online in the second 3rd Q4. So we've got 30 to 40 people that will become productive in the 3rd or 4th quarter in the apartment side. We'll probably see some benefit from that.
The information LoopNet side will be a little bit slower. And then we're going to bring on a second component later in the year where we're creating 40 hunter territories in the apartment side. And again, and they probably won't really be their work will not be visible to the Q1 2017. But that growth in cost is already reflected in our earnings guidance and in the raising the earnings guidance for the year. So we're reinvesting some of the outsized beat for the year.
Yes. And what's encouraging about this Brandon as you look at our sales headcount that is obviously down 50 plus heads from where we were last year at this time. And even with that, we achieved the 2nd highest sales quarters in both multifamily and CoStar even at the depleted level. So we're really encouraged that the effectiveness, you can look at the productivity of the sales force on an individual basis has grown dramatically between now and a year ago. And so that's definitely encouraging for us and we'll underpin the plans to want to continue to grow sales as that productivity is still rising.
Yes. The productivity, especially in the apartment side is really quite impressive. And I'd also say that just to
give you some color on that, it's always tough to pull together 2 equal sized sales forces into 1 and then restructure it all in the course of a quick 12 months. I'd have to say, I just completed last week, I completed a 2 day or bimonthly 2 day apartment sales manager meeting. And the group is really cohesive now and stable and really rowing in this pulling in the same direction, I think, really strong. So we can see that we have we're reaching 80% of our clients each quarter, which is a mandatory thing. And we're only we only have enough feet on the street to reach about 15% of our prospects each quarter, which is just lost revenue opportunity.
And we're when we meet with a when we do have a demo with someone who is marking their apartment building, we have about a 30% close rate. So given that we can only reach 15% of the prospects, we want to reach prospects each quarter, hence we're scaling the sales force a little bit.
Next in queue is Sterling Auty with JPMorgan.
Hi. This is Nina Kansai in for Sterling. Thanks for taking my question. Just quickly about the Apartments dotcom unique visitors information that you gave on the release. Does that include the new traffic from move.comandrealtor.com?
If you can just give us more color on that, so that we can do more of an apples to apples comparison from a year over year standpoint, that would be really helpful. Thank you.
Sure. It does include that move.com traffic, realtor.com traffic as well. I'd have to say that that is not a large driver. I don't have exactly the number, but I know that it represents gosh, it represents no less than 4.5% of our lead flow. So one of the things is that a residential site like that, a site that's got both residential and for rent on it, drives dramatically less lead flow like a fraction of lead flow that dedicated apartment site drives and that also has a lower conversion rate.
So it's not the meaningful driver of that story. The one of the things that was a remarkable benchmark this quarter was that Apartments.comone site, not the whole network of sites, Apartments.comone site beat the unique visitors of our 2nd closest competitors 4 or 5 sites combined. So it's really where we thought this would be more of a story of a network of sites, the Apartments.com traffic is pulling so far ahead that it's really just about Apartments.com.
Next in queue is Bill Warmington with Wells Fargo. Please go ahead.
Good morning, everyone. Good morning, Bill. Hi, Bill. So the $250,000,000,000 figure, is that a full year number or is that a run rate exiting 2,000 46?
3rd quarter. 3rd quarter, okay. 3rd quarter. We might revise that.
Okay. But we have
to guide upward on that number.
All right. Now the real question. The on the apartment sales force, if you could help me understand again, big is it now and how long before you get to parity with the CoStar Suite sales force?
I think it's by headcount today on our payroll, it's in parity. But 35 of them, let's say, 30 to 40 of them are still in training or just coming out of training. And that training period includes maybe currently 4 to 5 weeks of training and then a mandatory no sell period of about 3 to 4 weeks where they have to visit 100% of the clients in their territory. So it's about a 2, 3 month phase up. And so but they'll all start coming online in this quarter and the following quarter.
And then we would have a larger sales force in the apartments.com side of the house in the coming into the Q1 of 2017 as we add the another 10 account managers and then 40 hunters.
Next in queue is Andre Benjamin with Goldman Sachs.
Hi, good morning.
Good morning, Andre. How are
you doing?
Good, good. So I just want to talk a little bit about the core suite. I know there's a lot of focus on apartments and the LoopNet upsell, but with the headline number for growth in the suite, could you talk a little bit about how much of that is driven by underlying user or number of corporations or teams growing relative to pricing? And then similarly, the year over year growth was about $12,000,000 How much of that is from the broker or client space that most people are traditionally focused on versus the institutional investors and other buckets you're trying to grow?
So I would say that not a lot of it is not much of it coming from price increases. So we have I would say it's inflation, sub inflation 2, 3 points depending on which inflation you're using. So it's really an expansion of the client base and new logos coming on board. The a little bit of like I think there was a big Bank of America deal where they expanded a number of heads in there. But a lot of it's coming from people who are buying multifamily information services from us in CoStar.
So a lot of business is coming from banks and lenders. We are making good progress with folks like Fannie Mae and some other organizations in that side of the world. So a lot of its institutional owner, but we're still adding brokers. But the real season for focusing on the brokerage industry is in Q1, 2017, once we do the LoopNet conversion. So the we still have tens of thousands of brokerage firms who want to add to the client base and the real push on that happens next year.
Did that answer your question or what did I leave out there?
No, that was it. Thank you.
Okay. Thank you. Appreciate it.
Next in queue is Patrick Walravens with JMP Securities.
Yes. Hi. This is Natasha on for Pat. We were just wondering what Hi, Natasha. Hi.
What is appetite for M and A in particular for property management software solutions like RealPage or Yardi?
RealPage, Yardi, I've never heard of them.
We should look them up.
We should look that up. No, I'm teasing. Those are I'd have to say there's some great companies, huge customer presence, mission critical functions to those industries. And you can put MRI in there, you can put Entrata in there. But they're also very complex and they don't move share very quickly.
So I would say that in the apartment marketing space, there's been a lot of share shift. We were telling you that we believe there's a lot of share shift in the last 2 years. It wouldn't move like that in the multifamily property accounting space. It is developed over 30 40 years that kind of share and people don't the switch costs are very high moving from one system to another. We think it's more advantageous to have a positive coopetition with those players and there is an unlimited number of things we can be doing on the revenue generation side for the industry none of those folks.
So we're open to different things, but we're more focused on the revenue generation side of the business right now.
And next I'm lazy,
we don't like to work hard. Okay, thank you.
Our next name in queue is Ian Corrigan with B. Riley and Company.
Thank you. You talked about some
of the trends you're seeing in the apartment space with respect to absorption and rent growth. I am curious what kind of conditions would have to occur before you might get concerned that advertising spend might actually contract for the apartment space?
Well, the thing that would worry me more is dramatically lower vacancy rates. So and I don't think that's what's going to happen. So both in the CoStar business and in the CoStar Information and the Apartments business, when vacancy rates start moving to 1% 2%, there's no such thing as marketing. The nice thing in the multifamily space is there's such high churn though that people want to maintain that lead flow and they can in fact push rents. But I'm more concerned about ultra low vacancy rates.
I'm less concerned about vacancy rates expanding. So if vacancy rates expanded to the 10% rate, I think you would see a lot of bankruptcies occur. And if that happens, there's plenty of capital in the world. There is overall a fundamental housing shortage in the United States, residential housing shortage. So that capital would flow in the new capital would come in at a lower cost basis, a stable balance sheet and would aggressively market to fill those vacancies.
That's our view. And I think we would have a painful time seeing any of our customers lose their properties, but we would come out of it. And it would cause short term friction. It could be a 90 day cycle where the property drops off, but it before it comes back on, but we would benefit. The one thing I think is happening right now, and again, I'm only estimating, but we watch it carefully.
I think one of the things that is happening now is that over the past 5 or 6 years, I believe apartment communities used to maintain substantial advertising contracts with multiple ILSs for the same property. I think that people are beginning to reduce the number of ILSs they use and that's because of these super low vacancy rates. Fortunately, our product is strong enough that they're choosing our ILS as the one to remain with to the best of my knowledge. So big picture, I am not I'm more concerned as a taxpayer about more concerned as a taxpayer what it might do to bailout programs deficit than I am to what it does to Apartments.com advertising spend.
Our last question is from the line of Andrew Jeffrey with SunTrust.
Hey, guys. Thanks for squeezing me in.
No problem.
Always. Andy, you mentioned a nice lift in apartment community revenue yield or revenue per community and it seems that reflects pricing to value. And you also mentioned I think that some of your competition is now perhaps cutting price in order to take share in a competitive environment. It would seem that given the value add and the quality of the data, etcetera, that CoStar is in a position where it could actually start to price to value more effectively. Is that something that we could see drive revenue growth over time in the Apartments business?
Certainly. So one of the things we intentionally did is when we selected Apartments dotcom as the first company we wanted to merge with, we made it a point to select the lowest cost provider. We want to have the group with the lowest cost point on the belief that if nobody had more than 10% share of the market and you have a fixed brand development marketing budget line, you're better off going in there at lower cost and trying to achieve much higher volume. And if other people play a high price point game and have lower volume and can't invest in branding, they're in a tough place. So we like being somewhat aggressive and we like taking share.
So you said you mentioned one thing that our competitors are reducing price to take share. I think they're reducing price to hold share. I believe they're losing significant share. I think they're losing shocking share. So we would I mean, I do believe that's there.
When we get major customers who we value telling us the kinds of things they're telling us about the kind of lead flow we're generating comparatively and the fact that our cost per lease is less than half of the competitors. Yes, we certainly have pricing power, but I would like to see us get to 40,000, 50,000, 60,000 paid properties before we considered pricing the value. But the other nice thing is we're not raising people's prices. We have these multiple tiers and so companies can choose where they need to be for lead flow. And we might be aggressive in the diamond.
And then people who really need lead flow and want to sort to the top and be the most prominent, especially new construction projects, Those prices would start to be would probably start to reach some of the highest price points people have seen. But the main goal is share. The main goal is just getting more and more communities involved. Remember also that the more communities we get digitally feeding to us, the higher our higher quality information products we're producing. So we're now running at something like 17,500 communities electronically connected to us digitally feeding content to us typically on a daily or multi hour basis.
So we're trying to get volume and we're making good progress there, obviously having almost doubled the number of properties in the last 2 years. I think that was a yes or no you're looking for. I'm sorry for the 4 paragraphs. And I think we have one more question. No, we're all set.
Well, thank you everybody. We appreciate you joining us in the Q2 earnings call and look forward to talking to you on the Q3.
That does conclude our conference for today. Thank you for your participation and for using AT and T Executive Teleconference Service.