Welcome to the CoStar Reality Information Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr.
Rich Simonelli. Please go ahead.
Thank you, operator, and good morning, everyone. Welcome to CoStar Group's Q1 2016 conference call. Thank you all for joining us.
Before I turn
the call over to Andy Florins, I have some important facts to discuss with 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 could cause actual results to differ include, but are not limited to, those stated in our April 27, 2016, press release on Q1 earnings and results and in CoStar's 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 in the date of this call, and CoStar assumes no obligation to update these statements whether as a result of new information, future events or otherwise. 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 are shown in detail along with definitions for these terms in our press release issued yesterday, which is available on our site, costargroup.com.
As a reminder, today's conference call is being broadcast live and in color over the Internet at costargroup dotcom, where you can also find CoStar's Investor Relations page. A replay will be available approximately 1.5 hour after the call and will be available for approximately 30 days. To listen to the replay, please call 1-eight hundred-four seventy five-six thousand seven hundred and one within the U. S. Or Canada or 320-three sixty five-three forty four outside the U.
S. The access code is 391087. A replay of the call will be available right after the call concludes. I'll now turn the call over to Andy Florins. Andy?
Thank you, Rich, for a fantastic warm up act. You're welcome. Good morning, and thank you all for joining us for CoStar Reality's Q1 2016 financial results call. We had an excellent Q1 as we continue to grow revenue while we are focusing on reducing costs and driving margin expansion. We generated excellent top line growth of 26% year over year, reaching $200,000,000 in revenue for the Q1 of 2016.
Annualized, that would be an $800,000,000 rate. We generated net bookings of $30,000,000 in the Q1 of 2016 with solid performances from both CoStar and our Apartments network. CoStar Suite, which represents 50 percent of our total revenue, grew 12.5% from the Q1 of 2015 to the Q1 of 2016 and 4.4% sequential quarterly quarter over quarter. For each of the past 4 quarters, we've been averaging over $30,000,000 in quarterly bookings, which is double our 2014 quarterly bookings, which were approximately $15,000,000 per quarter. We increased net new sales on annual subscriptions 53% year over year to $25,000,000 in the quarter and achieved our highest quarter ever of net new sales for CoStar Information Services.
With these strong and a consistent focus on cost control, we increased EBITDA 2 34% year over year from $14,000,000 in the Q1 of 2015 to $48,000,000 in the Q1 of 2016. In that period, our EBITDA margin rose from 9% to 24%. With a $41,000,000 increase in revenue over the same time period, this indicates 82% of our revenue flowing through to EBITDA. This dramatic EBITDA expansion is all the more impressive given that it was achieved in the same quarter, we invested aggressively in our 1st Super Bowl commercial. We are moving swiftly to rationalize down the headcount required to effectively run the newly integrated operations of CoStar and the apartment network.
We have 450 fewer employees today than we did in June of 2015. We will reallocate a portion of those headcount savings into other important positions where we need to invest for growth. In total, we saved approximately $20,000,000 just in annual printing costs by shutting down the Apartment Finder Print Guides and Finder Social. I believe we have significant additional opportunities to find even more cost savings over the year to come. We expect our 2016 focus on the integration of LoopNet and CoStar databases will give us another good opportunity to drive higher revenue while simultaneously reducing costs.
CoStar Market Analytics, which we launched in March of 2016, now has delivered over $25,000,000 in sales. This is an enhanced version of CoStar Suite and has been extremely popular with apartment property managers and lenders. We are looking to expand the offering of CoStar Market Analytics over the course of the year with new enhancements for the office, industrial and retail segments. I'm happy to report that we have successfully completed converting clients of our acquired legacy focused product in the United Kingdom to CoStar Suite. After 20 plus years in the role of the primary commercial real estate information product for the U.
K, focus is no more. As of March, Suite revenues in the U. K. Were 76% higher than those achieved by Focus at its peak. This reflects the fact that we achieved both significant price appreciation and increased share during that migration.
This is our 3rd country on a fully integrated commercial real estate data model in a unified CoStar product. We expect to see another incremental sales driver when we complete the back end integration of the LoopNet database and to begin to move users to the higher value CoStar information services. The technology integration is going well, and I believe that you will see strong revenue lift from the migration in 20172018. I believe the migration of LoopNet Premium Searcher, comps and fax users to higher value CoStar services will take less time and result in higher upsells based on our success and learning in the United Kingdom. Revenue for our online apartment marketplaces in Q1 grew 100% year over year with pro form a organic revenue growth of 24% year over year.
Sales have been very strong, and we're now moving into the prime rental season. In the Q1 of 2016, we continued to expand Apartments.com's lead in unique visitors and consumer engagement versus other apartment rental Internet listing sites. Apartments.com achieved the number one position among other apartment rental websites in unique visitors, monthly visits, total page views, total time on-site, average time on-site, consumer engagement, lowest bounce rate, unaid awareness, search engine marketing and number of apartment buildings offered. The apartments.com site had 7,700,000 unique visitors in March, 27% higher than our nearest direct competitor. Similar total views of Apartments.com were 60% higher than the nearest direct competitor site in March.
We have already built significant momentum and started 2016 off strongly with our successful Apartments dotcom Super Bowl ad. With the return of peak rental seasons in the middle of March, we resumed an intensive advertising campaign for our Apartments dotcomnetwork. The television campaign component includes television ads in primetime, on cable and syndication and during supports and select titles like The Walking Dead and The Voice. Once again, our TV commercials feature Jeff Goldblum as Brad Bellflower. The new ads were directed by Bob Onderkirk, who you may know for his work with Breaking Bad and Better Call Saul.
There are a number of brand commercials that highlight the benefits of Apartments dotcom. They emphasize the breadth of our inventory, ease of use, loads of information, all to help consumers find the perfect apartment. The ads also feature our mobile app prominently. In the Q1 of 20 16, 57 percent of traffic to Apartments.com originated from a mobile device or app. A second set of spots celebrate the joys of renting an apartment over the crippling debt and maintenance torture associated with homeownership.
With more Americans every day making the wise choice to rent, there are now 110,000,000 U. S. Renters and we believe that the ads will resonate with these renters and have a positive brand halo effect with our apartment manager owner clients. The brands are really fun I mean these spots are really fun. They point out the benefits of renting versus owning in a humorous way.
The 3rd set of spots targets the millions of property managers, realtors and small owners with just 1 or a few rental listings and encourages them to market their rentals to the millions of renters searching on Apartments.com. Renters have told us clearly that they would love a site with full selection of rentals from apartment buildings, houses, condos and townhomes. We believe that if we build more content, we will get more renters searching on our site, and that means more communities advertising on our site. You will recall in 2015, we announced our exclusive agreement with Move Inc. To power listings in apartment buildings with 50 or more units on Move's network of websites, which includes realtor.com, move.com and doorsteps.com.
We now promote our advertisers' communities across 6 major apartment and real estate rental websites with a single point of contact at prices we believe are on average well below the prices our largest competitors in the apartments listing space charge. This was the Q1 of our partnership with the Move network of sites. In the Q1 of 2016, we used move.com to deliver an incremental additional 117,000,000 page views for our advertisers. Our industry leading apartment network, coupled with more exposure on the move network creates the best place on the Internet for property managers to reach the most consumers. According to, again, Comscore, our apartment network combined with the move network generated nearly 12,000,000 unique visitors in March, which is number 1 among apartment listing sites or networks.
Unique visitors are an important traffic metric, but we want consumers to keep coming back to our site. In March, we had over 34,000,000 total visits to our combined network with move.com, which is nearly 50% more than the biggest competitor, the RentPath network. The average time for visits to a site in our network is nearly 15 minutes per visitor, which is over 30% more time per visitor than RentPath. Our network had over 50% more page views than the RentPath network in March. Overall, that is an amazing 8,500,000 hours renters spent searching apartments.com searching for apartments on our sites in March.
I think our deal with Move has delivered very strong results and much more. As you may have heard, Moove has sued Zillow for $1,700,000,000 in a theft of trade secrets lawsuit. Thanks to our friends at Move and National Association of Realtors, you can watch live streaming video of Zillow's top executives' truly zany defenses against allegations that they intentionally destroyed evidence in the case. I think it's nothing sure the best entertainment Rupert Murdoch's media empire has ever delivered. You can you really should watch the testimony or at least read the transcripts at inman.com.
You heard it here first. We have added over $100,000,000 of revenue and 1,000 of new clients to our apartments network over the past year. We want to be careful not to get too far out over our skis and make sure that we are still delivering excellent customer service and not just great leads for our customers. And in that effort, we have communicated clearly to our apartment sales force a major emphasis on visiting with existing clients and ensuring that they're receiving excellent service and communication. There is a short term trade off in new sales, but we believe that refocusing on great service will drive stronger overall results across this year.
In the interest of winning business away from competitors, we have deemphasized annual contracts for apartment advertising a bit. As we bring on an unprecedented numbers of new advertisers, almost none of them have ever committed to annual contracts before on alternative advertising sites. I think it's more important to win them over to our sites and to insist on annual contracts when they first sign up. In order to do this, we're raising the price for 3 month contracts and offering discounts for committing to annual contracts. We believe it will accomplish the same goal over the intermediate term.
LoopNet remains the number one destination on the Internet for brokers and owners to advertise commercial real estate properties for sale and lease. It's a great way for brokers to generate leads and for owners to have their properties move more quickly with 5,000,000 unique visitors coming to the site per month. In order to improve the user experience and create even more speed and efficiency in generating more transactions, we have updated the LoopNet website and introduced tiered pricing similar to Apartments.com. We're seeing some good results from our upgraded LoopNet site, including increased search activity. Total searches and total searches per unique visitor are up over 60%.
Profile views are up 18% and leads have increased 20%. We believe searchers are getting more utility from LoopNet than ever before. I believe that our LoopNet product can achieve significantly higher growth rates if we invest into more into sales resources for the LoopNet product. Over the past year or so, costar.apartments.com have drawn sales resources away from the LoopNet product. We're now focusing to increase the number of salespeople dedicated to LoopNet product.
With subscription sales, you always have some churn and have to devote some percentage of your sales force to replacing business loss to churn each month. As you increase sales resources, you do not necessarily increase churn in the short run. New sales resources just increase gross sales. The benefit is that it's possible to increase sales resources by X percent and possibly increase net revenue growth by 3xx percent. We plan to focus many of these new sales resources on the commercial estate owner marketing opportunity.
LoopNet has traditionally been sold to brokers. A broker in a typical transaction might earn $6,000 which they must pay for the LoopNet ad. The owner in the very same transaction could receive $376,000 and would be in a better position to pay more for enhanced exposure to get the deal done faster and realize the economic value. When we will sell a property when we sell a property add to an owner rather than a broker, we typically achieve per property add prices 20 times higher. Looking ahead, as I mentioned in our call in February, our single highest priority in 2016 is to complete the integration of the back ends of CoStar and LoopNet.
Our software development teams are working hard to accomplish this mission, which we believe will lead to better data quality, lower cost at CoStar, service integration and up with an upswing beginning in 2017. In preparation for a major conversion of LoopNet clients over to the CoStar platform over the next 24 months, we have dramatically increased our investment in field customer relationship managers. We've added approximately 50 relationship managers during the Q1. I believe that this team will have a big impact on driving more usage of our products, improving customer service, increasing renewal rates and facilitating more upselling and cross selling activity. This new team visited 11 50 clients' offices this past week to conduct product trainings.
That increases the number of client trainings we're conducting in a typical week by approximately 400%. It is an investment that I think will pay off in the future. CoStar is committed to working aggressively to protect our intellectual property from theft. 2 or 3 earnings calls ago, I mentioned that we had caught a competitor red handed stealing our content. In March, we resolved our lawsuit against RealMassive with them agreeing to pay CoStar $1,000,000 In addition, the federal court entered a sweeping injunction requiring a dramatic change in their business model.
Under the court order, RealMassive now has to pre filter content submitted to their platform for infringement of CoStar IP before anything can be posted to their site. And they will have to pay additional damages if infringing content is discovered on their site in the future. In the litigation, So rather than So rather than engage in a long drawn out suit, we decided to take their $1,000,000 offer to settle the issue and move on to the next item on our list. We are all for fair competition, but theft is not competition. The nation's real estate markets continued to achieve favorable results in the Q1 2016.
Occupancy rates are now at a business cycle high for industrial and retail, and they're actually very close to those highs for the apartment and office sectors. Strong demand for space continues to drive rent growth to well above inflation and ranges from over 6% for industrial properties to near 3% for retail. Geographically, the vast majority of U. S. Metros reported improving fundamentals.
Within the office market, more than half of the submarkets recorded quarter over quarter improvement in occupancy. That's really important. And also more than half of the 54 major metros now have occupancy rates above the 2,006, 2,007 peak. There is also strength in the construction industry, now more than double what it was just 4 years ago, which is a trend that significantly benefits our clients. Investment sales did decline about 17% in the Q1 from 1 year earlier, but since 2015 was an all time record year for real estate sales, the Q1 sales pace is still 80 percent over the long term average.
As we reported last quarter, the apartment market is increasingly competitive due to high levels of supply. In fact, new units underway today represent a very large 4% increase on annualized basis and represent a level of construction, which is nearly double that of the other property types. This has caused rent growth to slow to 5.1% as we move into the strong peak season here over the 7% I'm sorry, over 7% along with a 20 basis point rise in vacancy from the business cycle low, with further increases in vacancy expected. But because apartment advertising demand is highly correlated to weaker apartment markets, a more competitive apartment market is likely to benefit apartment ad sales. For office, real estate fundamentals remain strong with rent growth and occupancy within 10 basis points of the market peak in Q4 2015.
This story of strong demand, high occupancy and well above average investment sales volumes is repeated in other real estate sectors, including retail, logistics, light industrial, hospitality and specialty. The broad based strength in real estate activity has helped attract increased demand for CoStar products and services. I'm very pleased with our strong results in the Q1 2016. I believe that the strong first quarter sales hitting 800 $1,000,000 annualized for the first time, along with increasing cost savings, puts us on solid trajectory to reach a margin approaching the mid 30s in the Q4. We believe these results show that we're clearly on our way to achieving our stated goal of $1,000,000,000 in revenue and 40% adjusted EBITDA margin exiting 2018.
I will now turn the call over to our Chief Financial Officer, Scott Wheeler.
Great. Thank you, Andy. So as Andy mentioned, we're pleased with our performance in the Q1 2016. We're able to deliver both solid top line growth and year over year margin improvement, while at the same time continuing to fund the important growth investments in sales, marketing and new services. In the Q1 of 2016, we delivered a 26% increase in revenue compared to the Q1 of 2015.
On a pro form a basis, our year over year revenue growth was 14% for the Q1. Now because this is the first time that we're presenting our revenue by services, it's important to take a few minutes to explain this new information in a little more detail. You can find the new revenue by services schedule in both our press release as well as our soon to be filed SEC Form 10Q. Now a number of you asked for additional revenue information following our year end results, so we prepared the data along with 5 quarters of trended information to help you understand our business as well as the direction of travel. Our new revenue disclosures are built around the 2 main categories that we've discussed in the past.
The first being information and analytics and the second being our online marketplaces. Within each of these categories, we further broken down the revenues to provide insight to our primary service offerings. First off, in information and analytics category is our flagship commercial real estate service, CoStar Suite, which represents approximately 50% of our Q1 revenues. CoStar Suite is comprised of both the North America and the UK, including CoStar Property, CoStar Comps, CoStar Tenant, CoStar Portfolio Strategy and the CoStar Market Analytics. Essentially, all the revenue in this category is on 12 month subscription and has a very high renewal rate.
Our strategy is to continue investing in our information and analytics services within the CoStar Suite, like the CoStar Market Analytics Services for office and industrial and retail that Andy mentioned. We expect to continue growth of this sector in the 11% to 13% range. Next, also in the information and analytics category are our information services service lines. These represent approximately 10% of our Q1 revenue. Information services includes LoopNet premium searcher, fax and comps, CoStar Real Estate Manager, CoStar Risk Analytics Compass and a number of other information service capabilities, which we either acquired directly or as parts of other acquisitions.
There are a variety
of revenue models at play here, most of which are subscription revenue with terms ranging from 1 to 12 months, along with consulting services and software. We have strategies in place to grow a number of these services, for example, the LoopNet search integration and migration that we've talked about previously, while some other services might not play a prominent role in our strategy going forward. Accordingly, we expect the revenue from information services to provide flat to low single digits growth for the remainder of 2016. Now let's switch over to our online marketplaces category. Our multifamily marketplaces include revenue from advertisers that list with us across our complete network of apartment sites, including apartments.com, Apartment Finder, Apartment Home Living, realtor.com, move.com and doorsteps.com full networks.
Our multifamily marketplace revenue was approximately 20% 25% of total revenues in Q1 and it grew 100% compared to Q1 of last year. On a pro form a basis, as Andy mentioned, our year over year multifamily revenue growth was approximately 24% in the Q1. This came in at the upper end of the 20% to 25% range that we provided in the February earnings call. Revenue in this category is almost all subscription based with continue to continue to aggressively invest and grow our multifamily marketplace capabilities in the years ahead. Finally, also in the online marketplaces category, our commercial property and land marketplaces, which grew 10.5% year over year in the Q1.
Commercial property and land marketplaces are comprised mainly of our commercial property related marketing sites, LoopNet Premium Lister, Showcase and City Feed. These sites represent approximately 80% of the revenue in this category. The remaining revenue is made up of Lands of America, Land and Farm, BizBuySell and BizQuest online marketing sites. Revenue in this category is almost all subscription base and is sold through our direct and indirect sales channels as well as through our online e commerce tools. Our strategy is to continue investing in our commercial property and land marketplaces, which in the current year involves integrating LoopNet with our CoStar database and tool sets.
Growth in this area is expected in the low double digits for the remainder of the year. And we hope these further revenue details will be useful in understanding the business and we'll intend to continue providing revenue by services each quarter going forward. Regarding our profit performance this quarter, we continue to manage our cost structure so that incremental revenue drops through to profit at very high rate. In Q1, over 80% of our incremental year over year revenue was converted to profit. There's 3 important components of our cost performance here to highlight.
First, our gross margin reached an all time high of 79% of revenue, an increase from the 71% gross margin reported last year in the Q1 and a sequential 200 basis point increase over the Q4 of 2015. Most notably, our revenue increased by over $40,000,000 year over year, while our cost of revenue decreased by over 5%. This inverse revenue cost relationship is clearly very effective in delivering profit improvements. Secondly, resourcing levels have come down by approximately 450 employees since last June, as Andy mentioned, result of efficiencies from our integration of acquisitions and other cost control activities. And third, the success of these cost management activities allows us to sustain high level of advertising and other investments and still grow our margins.
For perspective, our ad investments in the Q1 of 20 16 were at the same level as our investment in advertising last year when we launched the new Apartments.com website. It's very important we continue reduce costs through productivity and shift these savings to investments. EBITDA was $48,000,000 for the Q1 of 2016, increase of $34,000,000 or the 2 34 percent versus $14,000,000 in the Q1 last year. Adjusted EBITDA also increased $34,000,000 dollars from $24,000,000 in Q1 of 2015 to $58,000,000 for the Q1 of 2016. Our adjusted EBITDA margin increased to 29%, up from 15% in the Q1 last year.
Our adjusted EBITDA results are favorable to the Q1 guidance range we provided in February by $14,000,000 at the midpoint. The majority of the favorability is a result of the effective headcount management and successfully reducing non critical spending. The rest of the earnings favorability, approximately $6,000,000 or $0.12 per share on a non GAAP basis, was due in equal parts to a shift in timing of marketing expenditures to later in the year as well as one time expense reductions in the quarter. Non GAAP net income in the Q1 was $31,000,000 or $0.95 per diluted share. Net income in the Q1 of 2016 was $17,000,000 an increase of $23,000,000 versus a net loss of $6,000,000 reported in the Q1 of 2015.
Turning now to a few operating metric highlights. Revenue from subscription services on annual contracts was $149,000,000 for the Q1 of 2016 or 74% of total revenue, which is up from 70% in the prior quarter. For the trailing 12 months ended March 31, 2016, subscription revenue from annual contracts totaled $517,000,000 up 28% from the $405,000,000 for the 12 month period ended March 31, 2015. This reflects our continued success in growing annual subscriptions, primarily within our CoStar Suite and our multifamily marketplace clients. The renewal rates for our annual subscriptions revenue remained stable.
The 12 month trailing renewal rate for subscription based revenue was at 90.1 percent and the 12 month trailing renewal rate for customers who've been with us for 5 years or longer was 96.2%. At the end of March, we had approximately 510 salespeople, a decline of around 25 people for ended last year as we continue the integration of our multifamily sales force. We recently increased our hiring of new salespeople to cover new sales territories and have our single largest sales training class underway here in Washington as we speak. As we grow our sales force throughout the year, we'll also be opening 25 to 30 new sales offices in select markets throughout the country to build local market presence and stay close to our clients. I'll now discuss our outlook for the Q2 and the full year of 2016.
For the full year of 2016, we expect revenue of approximately 834 $1,000,000 to $840,000,000 or 17% to 18% growth over the 2015 results. On a pro form a basis, Q1 sales and revenues, we are raising the full year revenue guidance by $2,000,000 at the midpoint of the range. This outlook assumes continued strong growth in the CoStar Suite in the 11% to 13% range and a pro form a growth in the range of 20% to 25% for the online multifamily marketplaces. For the Q2 of 2016, expect revenue of approximately $204,000,000 to $206,000,000 representing total growth of around 20%. We're also raising our earnings guidance for the year given our exceptional profit results in Q1.
We now expect non GAAP net income per diluted share in a range of $4 to $4.10 for the year 2016, an increase of $0.38 at the midpoint from the prior outlook we provided in our February call. Based on this new and improved guidance, the midpoint of our 2016 non GAAP net income range is approximately double the 2015 results. For the Q2 of 2016, we expect non GAAP net income per diluted share in a range of approximately $0.80 to $0.84 This includes a $6,000,000 to $7,000,000 increase in our total marketing expense from the Q1 levels as we enter the peak apartment rental season. This equates to approximately $0.11 to $0.13 of non GAAP net income per share. Marketing expenses are expected to decline sequentially in both the 3rd and the 4th quarter as was the case last year.
As a result, we'll see a step up in earnings in Q3 and then again in Q4, exiting the year with margins in the mid-thirty percent range. So in summary, I'm pleased with our financial results in the first quarter. I look forward to reporting continued progress throughout the year. We believe our sales trends and sustained focus on expense management has us well positioned to achieve our stated financial goals of $1,000,000,000 in revenue in 2018 and exiting that year with 40% adjusted EBITDA margins. Having said all that, we will now open the call for questions.
We'll first go to the line of Sarah Gubins with Bank of America.
Hi, thank you. I was hoping to get some more color on the strategy that you mentioned within multifamily to have your sales people make sure that they're spending some more time with existing clients. Did you see changes in retention trends? Were they worse than you expected? I'm wondering what drove you to decide to do that?
And I know that you reiterated the 20% to 25% growth forecast, but I'm wondering if there's any additional resources that you need to put in order to get that or if you see any risk given the increased focus on retention? Thanks.
Yes. So the increased focus on retention is just common for me it's just common sense a lot of experience selling subscription oriented products over the decades. And we try to stay very close to our customers in the industry and we do a lot of market research. We do a lot of focus group work. And it's just clear that we've had a great year here.
We've done a lot. We've rapidly integrated Finder into the fold, done the move deal. We've just been very busy. And it's just very important that we build the department industry is a little bit more of a relationship oriented industry. It's just important that our salespeople know their customers well and aren't always focusing 90% of their time on trying to find another piece of revenue.
And so I think it's just a life cycle in the flow of the business here. We need to make sure we establish those relationships. Now we did move to a much more efficient territory system at the turn of the year where we went from alphabetical assignment of accounts in major cities to geography based accounts, which means that a lot of people have new account representatives from Apartments.com and have not met them before just because of these shifts in territories. So it is important that we take some time and really get out there and make sure that they're meeting all of these people. And it is a referral oriented business.
The good news is what we are hearing in these focus groups is that hands down we have the best lead flow that they are we have the best name recognition by far. But that needs to be coupled with good customer service. And it can't always be, did I get the most amount of money today out of that client relationship. It's got to be did I get the most amount of that money out of that client relationship over 5 years and still remain good friends. So and then on the in terms of investing to get more out of it, we might incrementally increase the size of the sales force slightly, but not because we're trying not because we think that's the necessary thing to get to the goal we've stated.
It's just because we may have more good prospects to address than the number of salespeople we have can possibly reach. So we continuously evaluate that. And if we think there's more opportunity there like we really believe there is with LoopNet, we'll invest and we'll keep you up to date on that. But again, the as we pull down that headcount dramatically, I mean, so that down 4 50 year over year or from June to this quarter includes the increase of 50. That's a net number after the increase of 50 for the account management people we put out in the CoStar side.
And so we have the ability to reduce where we have redundancy or technology has eliminated function or we're not doing print anymore. But then we want to deploy it into client sales oriented type stuff. Also, Scott mentioned that the Scott and I've noticed that Scott we had a slightly different organic growth rate for Apartments dotcom and I'll definitely go with yours. And the but the he mentioned that the headcount in sales is down slightly year over year. That is that's only if you exclude those customer relationship management people we pushed out.
So with those people, we're up 25% net net. And you might see a little more that kind of reallocating as we pull all these things together to get the best mix. Is that more than you were looking for?
Thank you. We'll move on to the line of Brett Huff with Stephens.
Good morning, Andy, Scott and Rich.
Good morning.
Thanks for the new segment detail, very helpful. So first I want to say that.
You're welcome.
One detailed question, one big picture question. The detailed question is you mentioned you're having more people out doing training, I think is what you called them, kind of training folks, as you think about merging the LOOP and CoStar databases. Can you just tell us again, is the worry that is the user interface going to change and you want to make sure that goes smoothly? Or is it more a function of, hey, we want to show people what they could get and help them up and help the upsell process? I'm just confused about what that comment was directed at.
Sure, sure. What may worry? That's not what we worry about. So what it really is, it's just sort of again, I just think that in these high subscription based businesses, it's important that you maintain close client contact across as you approach $1,000,000,000 in revenue, you just want to make sure that you have good solid relationships. And it's not a reaction to any one particular thing.
It's just good business. And partially as your sales increase, as you keep adding more customers faster and your salespeople can achieve really good production numbers on new sales. You just got to make sure that you're continuing to have a relationship with that bulk of 100 of 1,000,000 of dollars of revenue that have been in place for quite some time. So that's a big part of it. The other thing is there are a number of really good clients who are using the LoopNet platform either for information or information marketing who are not using the CoStar Property platform.
There are tens of thousands of them. And these are good firms and these are firms we want to develop our relationship with them. When we acquired LoopNet, they had a mission statement, which said we never talk to customers after we sell them. And I mean literally that was the mission statement. And that doesn't really resonate with us.
You should communicate with your customers. You should have a priority on customer service and relationship. So one of the things we're trying to do is make sure that we're out there and that we are supporting the LoopNet customers just whatever they're buying from us today. So that as we transition to much greater buying opportunities with our company, they'll have good feelings with us and that it will be easier to move through that process. So it's some of these folks that this customer relationship management team are spending time on might be spending a couple of $1,000 with us right now to get apartment CRM, but some might be spending a couple of $100 with us across 100 brokers to use LoopNet Premium Searcher.
Well, their client one way or another and that small client with a lot of potential might be spending $5,000 $10,000 a month more with us next year and we want to begin that process now, not at the time that we have a financial transaction in front of them. But again, it's not a worry or weakness thing, it's actually a strength thing. Like if you feel you're in a great position, you want to bring your customers along and deliver all the value. And we've got that ability to do that and that's what we're focused on. And I would say that the number of meetings we are having with customers right now on a daily or weekly basis is probably 4 times the number of meetings we were having the same time a quarter ago.
So and for any business, a lot of customer contact is a good thing.
Okay. Thank you. And my follow-up was the big picture one. You've articulated kind of the addressable market that you see over the next, whatever, 3 to 5 years for the ILS business, the apartments business. Can you any update to that?
Can you remind us of how you see that? Maybe how you see your share in that, in kind of the long term margin profile of that part of your business?
Sure. On the very so first of all, on the margin basis, remember that we expect to be profitable in this space in the Q4 this year. And you can see that margin expansion. You can see that we are able to show the margin expansion even with the Super Bowl ads and other ads running during the quarter. So we do believe that the margins are the potential is excellent over the next 3 to 5 years and that they're in line with the 40% ranges.
We've talked a number of times about different size of markets in the $2,000,000,000 range. You have direct competitors or fairly direct competitors in the $1,000,000,000 plus range right now. We believe that we can we believe we're just about to cross one of our direct competitors and go from the 2nd most revenue in the space to the most revenue in the space. And we think we can hold significant share advantage in the multifamily space similar to the share advantage we hold in the office industrial retail space. So and then there's so there's the very straightforward business we're talking about, which is the 1,000,000,000 2,000,000,000 plus business of driving renters into the leasing offices of these buildings.
And that we understand well and we're making good progress on it. There is a whole series of other ancillary businesses that we think are pretty exciting that are growth areas down the road. But the core is clear, addressable, and that's what we're really focused on is harvesting that opportunity. Great. Thanks for the detail.
Yes.
Thank you. We'll go to the line of Andre Benjamin with Goldman Sachs.
Thanks. Good morning.
Good morning, Andre. Hello.
How are
you doing?
I'm good. Thanks. So I want to dig a little bit more into the cost performance, given you beat revenue guidance at the midpoint by about $3,000,000 but EBITDA by 15. I guess how did you end up being that far ahead of your cost expectations given the guidance was given pretty late into February? And how much of that was in apartments versus the core suite and other parts of the business?
And the last piece is just given that, how do we think about upside versus downside risk to the implied cost guidance for the rest of the year?
Yes. So let me just make a few comments to that, Andre. The components of the better cost performance were really 2 broad areas. Obviously, we're all about marketing spend as a big category and then all of the personnel related costs. And there's a number of other costs in the business, but they're not as big as those ones.
When you first I mentioned the marketing spend, we had about $3,000,000 or so that didn't get spent in the quarter and they'll move off until later in the year. And those just were better performance in some of the things we did and some things that will be timed better later on. We also had some really good cost performance late in the quarter that we don't see reoccurring. Again, I mentioned those combined were about $6,000,000 that will shift out and not help us later. But then when you just saw the ability to manage the headcount effectively and find more synergies in the business and the hiring plans that we had didn't need to be as aggressive as we thought they would be when we went to the quarter.
So those things helped us both lift the gross margin side of things and keep the personnel costs well down. And those really are the major components that gave us that. When you look going forward, we've obviously improved the cost picture that we expect in Q2 and the guidance that we gave. And then we left the second half with some investments that we need to continue to make. As Andy mentioned, as we find productivity, we need to put some of that money back in over the second half of the year, which we've provided for now.
So we continue to find more opportunities. We continue to integrate. We'll continue to use those and shift them around. So we feel good about the balance of where we are with the costs and we'll always shoot to outperform those as we go forward.
Yes. So big picture, it's also just it's the season of cost control. So we came through a 2 major acquisitions, major conversions of products, pulling together of 100 and 100 of people from new companies into one combined team. We went through a major, major reorganization of our management structures and the way our departments are organized in the 4th the end of Q4. Our departments that have hundreds and hundreds of people all have new leaders right now.
And those leaders were given a mandate to understand why they had staffing that they had in different areas and was it really necessary or was it just an artifact and momentum of an old business model that no longer applied to the reality of the combined companies? And so there was it's never pleasant, but there a lot of focus on just rationalizing why do we have what we have here. And there were areas that as the dust settled all these integrations and new product launches and efforts to move from number 5 to number 1 in the major new space, you'd find something where you had a 4:one manager to staff ratio and you don't need that. You can easily operate in in 1 to 8. So just a lot of focus on that kind of stuff.
And we don't like to the division, the segment presidents or the product area presidents, we delegate and push responsibility to them to find these cost savings that don't hurt the business. And we have to see them, produce them and yield them before we really talk to shareholders about them. So it's just been the management team with a little bit of shift in their bonus structure more towards EBITDA have delivered on more cost savings than we thought we could deliver on.
Thank you. You're welcome.
Thank you. We'll go to the line of Bill Warmington with Wells Fargo.
Good morning, everyone.
Good morning, Bill. Hi,
Bill. So congratulations on an impressive on the impressive profitability this quarter.
Thank you very much.
So for my first question, I was going to ask about the difference between the net sales net new sales, annual and annual subscriptions at $25,000,000 and the net bookings of $30,000,000 It would be helpful, I think, if you could talk a little bit about the dynamic between those two and how we should think about those two metrics going forward?
Yes. A lot of that is and I'll answer and I'll let our CFO, Scott Wheeler, answer as well. So a lot of that is just we're very focused right now. We have a better value proposition for people trying to market their apartments on the Internet than our competitors do. And so we're trying to move a lot of long established relationships into our apartment network.
And as you do that, you can go meet with these folks. They've never seen a 1 year contract for apartment advertising. And I do think that once they're into a relationship with you can get the 1 year contracts. But I do not want to give up share shift opportunity for the optics of an earnings call of saying that the difference between our bookings and our subscription growth are close. I'd rather have the revenue in the business and worry about the optics in an earnings call later.
So it's just a policy shift of saying bring these folks on into a business relationship on whatever contract term. If we deliver for them, which I believe we are doing for the overall majority of the people we're bringing on board, then you can give them annual contracts on renewal that give them better pricing. So it's more of a short term tactic thing.
So the subscription version of that would be captured in annual subscription piece of $25,000,000 and the non subscription contracts on the apartment side are going to be captured under the net bookings?
Correct. Yes. That's got to give you the correct answer.
Anything there going on with cancellations on the loop side or anything there?
No. Nothing really significantly moving around on the loop side. The changes from quarter to quarter on our annualized net sales versus our total net bookings numbers, they've both been in this sort of 25 to 30 ish range over the last 4 quarters for each. And the noises in the apartment things that Andy mentioned, the CoStar Suite pieces continue to be strong and advanced that they have for many years.
So I think once
we get once we start getting past the annualization of the apartments business is being combined, the sales forces having their focus on customer retention as well as growth and you start to see these stabilize more, you'll see less of these sort of $4,000,000 to $5,000,000 up and down swings sequential quarters and you'll see them start to stabilize more. But that $30,000,000 overall net new number is a great number. We expect to continue to see that going ahead.
Okay. And as a follow-up, Andy, in your comments, you mentioned the Apartments.com offering being a better value. And so my question is, have you been able to quantify for advertisers that your leads are higher quality or better value than the competition?
Well, the advertisers and our clients conversations with them and in these focus groups and through our share gains. So I am getting a clear message from them that it's a dramatic difference. And I mentioned that in a conversation not too long ago with a senior executive of the biggest department operator in the world. They said that they have been tracking it and that the lead flow and close rates of our leads continued to widen dramatically over any other source. And I forgot the number was, so we're pulling 62% of all Internet traffic on the search results on the apartment listing sites.
So we're just getting a really good share. And then again, we're not playing the games that a lot of folks have fallen into on lead gen where they were shotgunning leads or serving up apartments that didn't meet the customer's requirement, hoping the customer wouldn't the renter wouldn't notice before they communicate with the leasing office, sort of a lead at all cost mentality. I think that our strategy just giving them really straightforward connections is what the runner is looking for, your apartment works for it and then make sure we have the most traffic by far. We're getting a much higher time on-site, which to me indicates that they're actually working to find their apartment on our site. And then I think probably the most important metric for me, which you can't quantify, I don't have a comScore number for, I don't have a Google Analytics number for is 2 years ago when we acquired the apartment .com website, one of our young staffers, maybe 24 years old, came up to me after a presentation I'd given to the all the employees.
And he said, honestly, apartments.com sucks. I would never use it to find an apartment. And I said, okay, I appreciate that position, but we're going to work on and see how we do. And now in the Q1 2016, I'm running into all sorts of very young millennials who are telling me they found their apartment on Apartments dotcom and as I do it. And that's probably the best indicator of lead flow to our clients and effectively working.
So that's not really a comp score number. Does that answer your question, Billy, are you now gone?
He's gone. We'll move on to Sterling Audi with
JPMorgan. Yes.
Thanks. Hi, guys.
Hi, Sterling. Just wondering,
when you look at that net bookings number, first of all, can you give us the number for the Q4? I don't know if it was actually given in the call. And then when you look across the customers, can you give us a little bit of qualitative color around what's driving that number? In other words, what's the type of customer within like the core CoStar Suite that's buying? Is it an investor?
Is it bank? Who might it be? That would be helpful. Thanks.
Yes. Let me cover the numbers real quick just to reiterate that the net new bookings was $30,000,000 in the quarter and the net new on annual subscriptions was 25 $1,000,000 And the prior
quarter, what was it? The prior
quarter was $29,000,000 on the net new annual subscriptions.
Yes. Okay. So the prior quarter So
what was it hold on, but what was the prior quarter net booking? So the equivalent of the $30,000,000 that's what we've dealt with?
Yes, that was $25,000,000
Okay.
So the bookings went up.
Yes, the bookings went up sequential quarter and the annual bookings
went down, right. And that's going
to be And all the same amount. Right. Yes. And we looked at the quarters before, the net bookings were back up to the $30,000,000 So again, you get this shifting noises between as the apartments pieces settle out, and that's what's causing some of that volatility.
And maybe just can you guys just take a quick second just walk through the net bookings? I think the net new subscription services on annual contracts only is pretty self explanatory. But can you remind us because I believe the net bookings is inclusive of churn, but can you just walk us through how you're calculating that and how we should interpret that metric?
Yes. So the well, yes, the net new bookings has all of the new contracts, obviously, that we bring in during any given period and then it takes the churn of clients that we lose or things that go away out of it. So you get this net number that we first look at on a quarterly basis and then we do the annualization to get to those numbers in total. And then we look at it obviously by the different business sectors we have and watch how those numbers progress through the quarters and those also advise our decisions on what's happening in the market where we deploy our sales forces and our different resources to go after the both the opportunities and the impacts we're having. Keep in mind that we've as we started to move things, when you get back to the annual contract ones, you start to move things to annual contracts.
We'll start to lap the full year when we started doing that for the apartments. So you'll start to see clients for the first time renewing annual contracts coming up here in the next quarter. So there's still going to be noise in these as we go for a couple of quarters on this.
Thank you. We'll move on to the line of Brandon Dole with William Blair.
Guys, given the discussions around the net new numbers and the sales force changes, how should we think about expectations exiting this year for organic growth in the old core business as well as apartments? And it seems like there's more opportunity for accelerating that growth rate than not given how the changes are going to work through the system. But I want to understand how you guys are setting expectations both internally and with The Street. Yes.
So internally, the way we look at it is I'm very optimistic as to where we are right now across all three major segments that we look at. So on the CoStar side, we are moving a lot of resources that have been diverted into apartment sales back into the core CoStar business. The core CoStar business is doing really well, real strong performance there. And that is before we do 2 of the most important things we could possibly do to capture a lot of revenue, which is integrate LutinNet and CoStar and expand the successful CMA product that came on the apartment side into all the market segments. So I see a lot of upside over the next 2 years on the core CoStar Suite.
So I feel really good about that. I see where that is and I feel good about that. On the apartment side, we've gone through that challenging period where half your sales force was just trying to move people from print to electronic with no revenue gain. We have done the made the hard decisions to shift the way territories are aligned, so that people are much more efficient in their day and separate out the sales structure so you have a cleaner focus on apartments and a little bit of growth in that Apartments group. So I would expect acceleration in their sales over the next 2 years to serve to serve on a consistent or incremental basis with a little bit of investment occurring on customer relationship in the early part of the year.
And then just getting to meet everybody, there's 1,000 and tens of thousands of customers they have to meet. And then a huge opportunity on the LoopNet side just because that one frankly got short shift in all the excitement of the last year or so in apartments and in CoStar Core. And so that sales force has drifted down to a number we're not crazy about, mainly because the CoStar salespeople just were focusing on apartments, not LoopNet. So we're bringing more of a stronger independent LoopNet sales force up to speed and with a very good return on investment because it's the old subscription model of you take you're going to have no matter if you take 3 steps forward or 10 steps forward, you have 2 steps back. We're sort of in the 3 steps forward, 2 step backward on churn with LoopNet, adding 1 more salesperson, adding a 25% increase in salespeople can, in theory, increase revenue growth by 50%.
So a lot of things going on here that we're really investing on Q4, Q3, Q1 of next year. We're doing a lot of things just to ensure consistent strong growth over the next 3 to 4 years.
Sorry, cover the guidance part of that question in the CoStar Suite sector 11% to 13%, So growth rate we expect going forward. In the Q1, we were at 12.5% as we mentioned, so pressing the upper end of that. We expect that to continue to press the upper end, as Andy mentioned, going forward for the rest of the year. And on the apartment side, we said 20% to 25% pro form a growth. For the outlook for the year, we hit 24% in the Q1.
We expect to stay solidly within that middle of part of that range for the rest of the quarters of this year. So that's really where the guidance is and saw very strong and positive.
Thank you. And we'll move to the line of Andrew Jeffrey with SunTrust.
Hey, guys. Thanks for taking the question and all the color. And I just I'm trying to understand a little bit mechanically and I know a lot of questions have sort of gone to this in this direction. But when I look at the growth in net new on annual subscriptions, which has accelerated, it did accelerate in the 4th quarter on a trailing 4 quarter basis. And then I consider the total percent of your total revenue that's on annual contracts.
Why wouldn't there be an acceleration in reported revenue as we go through year even if we saw a decel in net new on annual in the second quarter. Why shouldn't the business just sort of mechanically accelerate as 2016 progresses in more of a pronounced fashion than what your guidance implies?
Well, I think we're well, I think as we continue to watch the net news come in and we watch the annual subscriptions each quarter. They're strong. They continue to grow. We want to see them accelerate for the rest of the year. We're going to watch that progress.
We think there's a good chance that we continue to progress and move forward. But at this stage in the year, we want to just keep our forecast in a modest but optimistic range and move forward and see how they go.
Keep our powder dry. Keep our powder dry. Keep our powder dry. Keep our powder dry. Did you have a follow-up to that question?
One moment, please.
Okay.
Okay. Mr. Jeffrey, your line is open.
Okay. Thanks. If there's a follow-up, up, it would be around the sort of explicit sales of data into the apartment communities. Can you talk a little bit about the ramp in data sales and whether or not sort of qualitatively data are pulling along share gains and just sort of how to think about that dynamic?
So specifically you're talking about the information products around multifamily and how they're doing and are we getting share gains? Exactly, right. Yes. We've gotten terrific share gains in that space without a doubt. And I don't have I do not have actual competitor numbers, but I have an idea.
And my belief is that we have sold maybe twice some of the traditional competitors' entire revenues this year in the space. So I'd call that a really good share If you can sell their whole revenues once or twice in the year and it's really just the beginning. So the product is real. It works. We have we'll continue to evolve at Refinance on version 1.1 or 1.1.2 maybe.
We'll continue to push it. We're doing I was very happy with where it's going overall. And our sales force is very excited about our sales force is finding good traction with it. So we're really in the very early stages on that. And I think we just have a big fundamental advantage in the fact that we are the most heavily trafficked website where people shopping for apartments.
So that collects a lot of information in search behavior that's very valuable to our customers. For example, some cool stuff we're doing with the product right now that no one else can do is people traditionally try to understand who their apartment building competes with by looking at similar rated buildings within 2 miles of their apartment building. And that would be a very simplistic way to look at it. We have nearly we have 1,000,000,000 searches, 1,000,000,000 property views on our system in 2015. We know exactly who your competitor is like no one else knows.
So when someone looks at a 1 bedroom in your community, we know exactly what other 1 bedrooms they tend to look at when they consider your community and it's not similarly rated communities within one mile. It's actually could be someone 8 miles down the highway that you're competing against. Don't know it. And only we can really tell you that in CoStar Market Analytics. So we have a very unique product, and we'll continue to surface these kind of advantages in the product and I think we'll do incredibly well.
So we have to keep evolving it because you're it's a complicated business and we're getting more nuanced and we're tweaking it, but all good. And what part of the question I forget? Just having fun there.
I think you hit all the high points. Thanks, Andy.
Okay. And we just published a paper in American Real Estate Society about our correlated filter peering of competitors. And I hope we do hope we win an award for it. We'll see.
Thank you. We'll go back to the line of Andre Benjamin with Goldman Sachs.
Thanks. Just one follow-up here. Given the amount of attention that we hear on the core suite and concerns about the growth there with the backdrop in the CRE market. Could you talk a little bit about how much of the sales growth came from brokers versus some of the other initiatives like pushing to institutional lenders, apartment managers, etcetera? And have you seen any slowdown in the growth rate of selling to brokers in this quarter versus the last few?
No. And I wouldn't address it. I would not say there's a concern with growth rate. We're at the upper end of the range on big numbers. So we're there isn't like it's actually really strong with upside potential significant upside potential as we just showed in the U.
K. As we integrate the LoopNet and CoStar families together. I think I'm very optimistic about what that means. So we are hitting it on all cylinders and the brokerage business is strong as well as the owner and the institutional component. Our sales force always likes to go to the institutional and owner because they're typically bigger dollar contracts upfront.
If I were to look at a crystal ball over the next 18 to 24 months, I think just because of the conversion with LoopNet, I think there'll be a surge of brokerage sales over the next 18 to 24 months, which is why I invested in putting the 50 more customer relationship people to prepare the field for that surge. And we'll probably grow that group maybe to 80 people over the course of the year. But so it's good. It's good. It's good.
And it's good. And it's all good. And it's all good. There's nothing I'm aware of that is bad. It's good.
So, okay. I think with that, I think we're all set here. We'll wrap up and we'll get the call done before we get to 12:15. Thank you all very much for joining us and we look forward to speaking to you next quarter. Bye bye.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for