Ladies and gentlemen, thank you for standing, and welcome to the CoStar Group Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode and later we will conduct a question and answer session with instructions being given at that time. And as a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Rich Simonelli.
Please go ahead, sir.
Thank you, operator. Good morning, everyone. Welcome to the CoStar Group's Q3 2015 conference call. Thank you for joining us. Before I turn the call over to Andy, I have some items for you to consider.
Certain portions of this discussion contain forward looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in our October 28, 2015 press release, on our Q3 results and in our filings with the SEC. All forward looking statements are based on information available to CoStar on the date of this call and to cause our students no obligation to update these statements, whether as a result of new information, future events or otherwise. And given last call, we anticipate that no executives will actually cry on this call. As a reminder, today's call is being broadcast live and in color over the Internet on www.coastargroup.com, where you can also find our CoStar Investor Relations page.
A replay will be available, and you'll be able to access that at 1-eight hundred-four seventy five-six 70 1 within the U. S. Or Canada and 320-three 65-three thousand eight hundred and forty four outside the U. S. The access code is 370580.
Be available about an hour after the call today and will be online for about a month. So I'd like to now turn the call over to Andy Florance. Andy?
Thank you, Rich. Good morning, and thank you for joining us today for our Q3 earnings call. We are reporting strong results and growing forward momentum in the business. We had exceptional sales performance in the Q3. Our revenue in the quarter increased 24% year over year to $189,000,000 in the Q3 of 2015 compared to $153,000,000 in the 3rd quarter of 2014.
Net new sales on annual subscription contracts were 31,000,000 dollars for the Q3 of 2015, a 102% increase over the Q3 of 2014, a doubling. Annual subscription contracts in the Q3 of 2015 increased nearly 22% sequentially from the Q2 of 2015. Through 3 quarters of 2015, we have added over $85,000,000 in net bookings. We had more bookings in the second and third quarter of 2015 than the entire 4 quarters of 2014. While those numbers are very impressive, they understate the sales team's productivity.
During the past two quarters, the Finder sales team signed an additional $30,000,000 plus of contracts converting clients from print to pure digital apartment advertising business. But that was not net new revenue, so it would not be in the $85,000,000 I mentioned. When those 100 and 10 Strong Finder sales force comes back into focusing on pure net new having accomplished their conversion task, I expect to see a tailwind behind our booking numbers, our already strong booking numbers. With strong sales in both core CoStar Services and in the Apartments products, we are very pleased with this growing sales momentum. Excluding the impacts of Apartment Finder, our business grew organically at a very strong 4.2 percent sequentially in the Q3 of Q2.
That is up from the Q2 over Q1 sequential quarterly growth rate of 3.2%. In those numbers, you can see our recent booking success beginning to translate into 12 month renewal rate of 90%. Our core CoStar information renewal rates remain very steady at an extraordinary 94% plus. While we continue to move overall post acquisition renewal rates up significantly for both LoopNet and post acquisition renewal rates up significantly for both LoopNet and Apartments, they have historically been lower renewal rates. And when you blend those with the CoStar high renewal rates, it brings overall rate down slightly to 90%, but it's all moving in the right direction.
The core CoStar information business is solid with CoStar subscription services achieving a sales booking increase in the Q3 2015 of 22% year over year. We continue to add to the quality of our service offering with the development of new products such as CoStar Market Analytics. We designed CoStar Market Analytics to meet the needs of property management companies, apartment owners and lenders who need access to comprehensive daily rent and occupancy information. Owners and management companies need this sort of information so that they can set and optimize their rents and occupancy levels. Small movements in rents and occupancy levels can be leveraged into very large movements in value.
With cap rates at historical lows, this leverage can be magnified even more. For example, it's a fairly typical portfolio of 1500 apartments units averaging 2,000 a month rents, can push its rental rates just $100 a month and hold occupancy, it can create $35,000,000 in value. But conversely, if it pushes rents a little too far beyond the market, it can quickly lose 5 percent of occupancy a month and destroy $35,000,000 in value. Even apartment owners using yield optimizers need Comdata manage and audit the yield maximizers pricing. We do not believe any other information prior to the market delivers adequate comprehensive or certainly not timely rent data.
Our competitors typically have research departments a small fraction of the size of CoStar and can only co stars and can
only deliver 2 to 6
month old data on 1 quarter as many properties as we do. That certain weak data is useful as a starting point, but it's not good enough to use in underwriting loans and definitely not for setting pricing. Many property management companies spend a lot of money on in house research shopping their competitors in order to get the current rents they need to do the job right. An on-site leasing consultant might spend a few unpleasant hours one day a week secretly shopping their competitors. For each call they make, they're likely getting 1.5 calls shopping them right back.
We believe that the community might be spending 3,000 to 10,000 annually perch property shopping competitors and being shopped. This could aggregate up to $1,000,000,000 plus in annual industry spreads of property companies shopping each other and not very efficiently or effectively. Worse yet, while these leasing consultants are busy secret shopping one another, they're not answering the phone when the real renters call them. We have made or monitored approximately 10,000,000 calls to leasing communities this year and 76% of the phone calls to leasing offices during business hours go unanswered. Given that these communities are spending 1,000,000,000 annually trying to drive calls in their leasing offices, we believe the potential loss of wasted advertising leads is in the billions.
We have designed more than half a dozen processes to collect rents and property information. We have a huge advantage in that we have a large digital flow of rent data into Apartments.com and Apartment Finder. Many of the investments we are making into people collecting comprehensive pricing data is the same content we are using to make Apartments.com so successful. So we're having multiple revenue streams off the same data expense and creating a competitive efficiency. For the first time ever, multifamily owners, investors, lenders and property managers have the real time rent and sales comp and a lot of the information they need to optimize their income.
The CoStar Market Analytics service is very closely related to Apartments.com and Apartment Finder
and
that they're all key pieces in the rent maximization puzzle. We plan to sell the products together and gain there and let President Obama go by. Early adopters are giving us very positive feedback. We intend to put an emphasis on this service. Last week, we took steps expand the pool of the sales team selling CoStar Marketing Analytics by 100 plus sales representatives.
We have sold nearly $12,000,000 of net new sales of CoStar Market Analytics since February of this year, and we have a robust pipeline of deals pending. Of these CoStar Market analytic deals, many of the contracts included packages with our apartments network, adding an additional $10,000,000 in net new sales to these contracts, making the total related sales $22,000,000 in subscriptions in the 1st 8 months. Companies like Widener Apartment Homes, HSL Properties, National Property Manager, Bizzuto, Hunt Mortgage and many others are now using CoStar Market Analytics. Bizzuto is a good example of a major advertising that decided to expand its relationship with us, increasing their marketing spend in the same contract they used to add CoStar Market Analytics. It was only in February of this year that we launched the new apartments.com site, which leveraged our technology and experience to create a better way for renters to search for an apartment online.
In March, we began the first ever significant business to consumer apartment marketing camp in the industry that not only reached tens of millions of potential renters but demonstrated to the multifamily property managers owners that we were serious about building and maintaining their premier go to site on the Internet for the multifamily industry. Since the beginning of the campaign in March through the end of September, we generated over 6,800,000,000 impressions with the vast majority coming in the key age demographic of 18 to 49 years old. Most of you have seen the television campaign featuring Jeff Goldblum. It was responsible for 2,000,000,000 impressions. We also generated over 2,300,000,000 impressions digitally, 2,200,000,000 impressions for out of home and radio and other social media added another 142,000,000 impressions.
Our website traffic and consumer engagement are exceptionally strong. In September of 2015, apartments.com experienced a 74% year over year increase in unique visitors according to Comscore. For the 6th month in a row, Apartments dotcom has the most trafficked apartment listing site according to each of the major marketing authorities, Comscore, Experian, Hitwise, Amazon Alexa and Compete. That's pretty much the Triple Crown plus plus In September of 2015, Apartments.com was the number one apartment listing site in consumer engagement with the most page views and minutes per visit according to Comscore, HitWise, Alexa and compete. Some of the services don't actually have all those metrics.
Throughout the campaign, we have conducted brand awareness surveys to measure the success of the strongest indications of brand strength is measured by unaided awareness, which is based entirely on brand awareness and recall. So we ask renters or a third party asked renters, if you're looking for an apartment on the Internet, what site would you go to? Back in February of this year, before we launched the marketing campaign, Apartments dotcom was at 16% unaided awareness. Way back then, Craigslist was by far the leader with approximately 38% unaided awareness. In other words, nearly 4 in 10 mentioned Craigslist without being prompted.
At the end of September, we took over the number one position with 40 percent unaided awareness for Apartments.com. Now it's Apartments.com that Ford and Ted mentioned as the place to go online to rent an apartment. Craigslist was essentially changed, and every other competitor was less than 21% unaided awareness. The perception of Apartments dotcom as a leader surpassed key competitors and ranks in the top 3 based on this same study, while its strengths are being characterized by renters as smart and allied, honest and trustworthy. Our competitor, rent.com, Apartment Stock campaign by spending a significant amount of money on TV with their Legitimaster campaign, featuring the comedian J.
V. Smooth gyrating his bits and pieces on an elliptical. In February yes, it actually just happened on earnings call. In February, before their campaign began, rent.com's unaudited awareness was approximately 20%, 20% at the beginning of the campaign. And at the end of September after the campaign, it was still stuck right around 20%.
That's half of apartment.com's 40% unaided awareness. More importantly, with the most current Alexa numbers, apartments.com has nearly 60,000,000 monthly page views or about 3x rent.com's 17,000,000. I have to say that I am grateful to our ad agency, RPA, for apparently effectively investing our money. A survey of 25,000 U. S.
Renters published this month by J. Turner Research Company covering the period from June, July 2015 demonstrates how far we've moved the needle in the 6 months since we launched the new Apartments.com website and marketing campaign. Asked which website did they use to find their last apartment, renters surveyed responded the number one place was Apartments dotcom@26%, followed by another great site, Apartment Finder, at 23%. 23% of the renters said they did a generic Internet search and renters saying they couldn't recall was 19%. Rent.com came in 5th place with 17% of renters saying they used that site.
Apartment came in 6th place with 16%. Craigslist came in at 15% and for rent came in 10th with 12%,
of which
there was no ribbons awarded.
When the response I don't recall is beating
all of our competition, it's obviously we're obviously pulling away from that competition a bit. Quite simply, the headline on the Apartments.com marketing campaign is, it worked. The impact on the sales has been astounding. We achieved $65,000,000 companywide in the second and third quarters alone. When you consider the high incremental margin incremental contribution margin from these sales along with the expected high renewal rates that become an annuity over many years, we believe that return on investment is very promising.
When you look at the story at a more granular market level, the story is also very impressive. Here 2014, we had $5,100,000 apartment advertising revenue in the Washoe Metro area. 18 months later, that revenue has grown by 59 percent to $8,100,000 If you add our apartment information revenue to that CMA, the growth would be well, well over 60% in 18 months. We believe we are and will continue taking a lot of business from a broader range of competitors. I believe that this year, we have established Apartments.com as an absolute leader.
In 2015, we've invested heavily in marketing we felt necessary to properly introduce and brand a greatnewapartments.com. We also accelerated our search engine marketing spend on Apartment Finder to facilitate a successful migration from digital and print revenue to pure digital revenue. We have filled a lot of questions from investors wanting to have some guidance on our spending plans for marketing in 20 ask that we expect to maintain an aggressive level of investment that we believe is required to maintain our newly established leadership position and high customer satisfaction levels. But the headline is that in 2016, we plan to reduce our marketing spend below our 2015 levels. We expect to lower our total marketing spend by 20,000,000 dollars below our dollars below 2015.
It's more expensive to introduce a new brand than it is to maintain 1. We have successfully introduced that new brand. As we move into the 2nd year of this campaign, we believe we do not need the same level of spend to achieve brand awareness and continue the momentum. We believe that the Apartments business will move to EBITDA positive in 2016. We continue to be committed to increasing the quality and breadth of content on our apartment sites.
This is expected to increase engagement and help attract even more traffic to our sites. Our market research tells us that apartment reviews are very important to rent or searching on the Internet. So we built a marketing campaign and contest around winning rent for life by writing a review of your apartment on our site. We received over 155,000 reviews during the contest period, nearly 1700 per day. I believe that's close to 10x the number of reviews that came into Apartments dotcom in the prior 3 years total.
The winner of the Rent for Life prize was Martin Huttig from Woodbridge, New Jersey Woodbridge Township, New Jersey, and I believe he was very happy. Market research tells us that consumers love our immersive 3 d virtual tours for apartments with we're using the Matterport technology. We now have over 37,000 of these 3 d videos on the Apartments.com site. More impressive, these videos are extremely popular with renters as we've had over 7,200,000 views of these immersive apartment walk throughs. It is important that both us and our clients know well in advance when new apartment buildings are being built.
These new buildings are a stiff competition to our clients, requiring change in their leasing tactics. These new buildings are also good revenue opportunities for us as the new apartment buildings looking to lease up have the largest advertising budgets. In order to catch as much construction activity as possible, we launched an aerial surveillance plane a few months ago that flies over cities to identify new construction. It's a high wing plane equipped with state of the art GeoWear ultra high resolution camera system with augmented reality Of course, everyone needs one of those. We are lucky to have a few very experienced military pilots handling the flights and a team of aerial researchers operating equipment.
It's been an amazing resource in identifying construction sites. We've covered 28 metro areas in the U. S, and in that time, we've added nearly 120,000,000 square feet of new construction. I believe that we will ultimately identify close to 1,000,000,000 square feet of previously unknown construction by the time we cover the entire U. S.
That could be 1,000,000 in potential advertising revenue. We hope to fly over the country content is important, and we monitor competitors to make sure that they're not illegally stealing our content to gain unfair advantage. Unfortunately, and not surprising, we often do detect theft and recently have. We filed lawsuits before and anticipate again filing 1 or more lawsuits alleging theft of a large volume of our proprietary data in the next month. We believe the facts are clear and the evidence is very damning.
We believe we will prevail in the court of law on this issue and expect to receive substantial redress, including injunctive relief. So let's turn from that segue to Apartment Finder. We've made tremendous progress at Apartment Finder in the 5 months since we closed the acquisition on June 1. Our goal is to offer our advertisers exposure for their communities on a wide array of heavily trafficked rental sites. Adding Apartment Finder to the family meets that goal.
You'll recall that we purchased the assets of Apartment Finder at approximately 7x EBITDA. Apartment Finder is an established and well respected brand in the industry with a great team of professionals behind that brand. 1 of the challenges the brand faced was a substantial legacy print apartment directory business. As long as Apartment Finder had a print directory in a highly competitive Internet marketplace, it would have a proverbial boat anchor around its neck. Most of its advertising contracts provide its advertisers with exposure on the Apartment Finder website and in the print books I believe that risk is now diminished almost entirely.
I am very pleased with what Finder sales leader, Marcia Bollinger and her team have accomplished in just a few months. At the time of the acquisition, we had approximately $65,000,000 of that core advertising revenue to protect through the print to digital conversion process. And in those contracts, we had to maintain the revenue levels throughout the conversion process. After just two quarters, we've converted this print based company into a pure digital one. We have shut down the print business and retained 95% of the contracts, representing $64,800,000 in core advertising business.
And after 2 quarters, we are no longer printing books. I believe they printed books for probably 25 years, something like that, maybe longer actually. At the time of the acquisition of Apartment Finder, we anticipate that we could achieve cost synergies of approximately $20,000,000 by discontinuing those print products and other various non core services. Through September, we have already achieved $15,000,000 of annual cost synergies through elimination of the print business and cuts of approximately 100 associate staff. We believe we'll see another $5,000,000 in various cost savings and reach the expected $20,000,000 synergies in the short term.
As we mentioned in past calls, in addition to eliminating Print and Apartment Finder, we eliminated various other non core unprofitable revenue streams such as social media consulting, street rack distribution services, banner ads and promotional printing services, including Cozy's. In total, we eliminated $13,000,000 of non core and profitable revenue and anticipate elimination of $20,000,000 in associated expense cost mentioned above. This sort of cost reduction process is always hard on those involved, but I believe that Finder is much stronger now and is ready for rejuvenated long term growth. Since June of this year, our combined product design teams have reimagined all of the Finder desktop and mobile search products to make them industry leaders and highly competitive. A small army of our combined software developers have worked really diligently over the past two quarters to build these new products bring them to market as quickly as possible.
In addition to building the new client facing services, they had to rebuild just about every software system at Apartment Finder. They had to connect Finder to CoStar's apartment back end research, billing, fulfillment, sales support and accounting systems. I'm pleased to report that at this time it appears that we are within 3 weeks of completing all of those projects. Once we complete all the software, we plan to port all the finder content and client data into the new systems, test it very thoroughly and then expect to go live with the new website mid December. I'm amazed and very impressed by what our software and product teams keep accomplishing.
I was CoStar's first original software developer, no longer the best, and have some amazing. Going forward, all of this will integrate the back ends of Apartments.com, CoStar and ApartmentFinder, thereby leveraging the same research systems, support and sales platform to power our entire Apartments network consisting of Apartments.com, Apartment Home Living and Apartment Finder as well as valuable CoStar information analytics. This significantly leverages our investment sales, support, product accounting, technical and research teams since their efforts will be monetized across yet another major marketing platform. Once complete, all of our finder and original Apartments.com sales staff will sell the very same compelling network of Apartments.com sites. I believe that only in combination can these two sales forces give us a sales team with the coverage, scale and experience we need to reach all the many potential clients we have for our industry leading products.
The Apartment Finder acquisition has been a great success to date and brings a great new team to CoStar Group, and I believe it will continue to help us transform our apartment listing services. The LoopNet marketplace remains vibrant as we reached 10,000,000 registered LoopNet members. When we signed the deal to acquire LoopNet, it had $78,000,000 in revenue. Since then, we've grown it and reduced costs, and it now has $78,000,000 in EBITDA instead of $78,000,000 in revenue. As my great grandmother always used to say, buy them for revenue and convert it all to EBITDA.
She didn't really. We should finish this year with about $1,000,000 in LoopNet revenue, so we're approaching doubling the top line since the acquisition. Got some great businesses in LoopNet beyond just the commercial real estate component, such as our land business and our businesses for sale on the Internet, both of them showing great promise. At the time we closed the deal, all 40,000 LoopNet advertising clients were on month to month contracts. Now today, 33
1,000 are
on annual contracts, 7,000 on quarterly contracts and 18,600 are on month to month contracts. This migration to longer term contracts has significantly lowered the churn and cost of sales in this business and given us more visibility in the revenue stream. We have plans to make substantial upgrades to the LoopNet website in the middle of Q1 of 2016. We expect to incorporate some of the successful features we have deployed on apartments.com, such as in apartments like Map View, larger main listings, images and a photo carousel. We want to make it even easier for our premium listeners to manage their listings, upgrade their plans and allow them to easily buy tiered advertising.
We have seen some solid early successes from our differentiated advertising offering. Similar to what we offer at Apartments dotcom, this enables brokers and owners in office, industrial and retail to pay more for LoopNet premium lists in order to move up in a relevant search result with a larger ad. This provides clients with a need to sell or lease property, an opportunity to do it more quickly using the LoopNet marketplace. Earlier this year, we began a tiered advertising structure on LoopNet offering diamond and platinum ads, and it's giving them the ability to pay more to sort higher with large ad. Debt.
So we've been achieving and for the rest of the year and next year, we continue to seek higher prices per user in an effort to reduce internal competition and cannibalization between the LoopNet information products and the CoStar information products. Over the next year or so, the 2 will be merging together. Higher prices are having a positive impact on the LoopNet bookings. In the Q3, LoopNet bookings were up 74% year over year. And as we continue to increase pricing at LoopNet, we've achieved our 1st and second highest quarters of net new bookings in the second and third quarters of 2015, respectively.
We had an excellent quarter recording our highest ever U. K. Revenue in the Q3 2015 with £4,200,000 in the Q3. We achieved sequential quarterly growth of 4.2%. Earnings were strong in the U.
K. EBITDA margin for the 3rd quarter was at 20.1%, the highest it's ever been. All these numbers are a testament to our strong leadership in and the potential global appeal of the CoStar service offering. In Canada, we now have over 2,000,000 in annual contracts with over 100 clients and 7 25 users. Keep in mind, we just opened the Toronto office in March of 2014, so the uptake has been extremely strong.
And I believe the Toronto market has a revenue potential in the tens of 1,000,000. We just opened up services in Calgary and Vancouver towards the end of the second quarter and have already landed 14 good firms. We plan to open up in Edmonton and Ottawa in late Q4 this year, followed by Montreal in the second half or later part of twenty sixteen. We believe we currently collect more inventory and listings than any of the competitors in the local market other local market brokers in Toronto, Calgary and Vancouver. And I believe we have outpaced our local competitor revenues at this point, though they've been in the market for 18 years.
So the commercial real estate market continues to play display great strength. Bottom line, we're definitely in a very strong commercial real estate market. On the leasing side, absorption is up, vacancies are down and rents are growing. The year to date net absorption of office, retail, logistics and apartments was 7% higher in the same period a year earlier. The composite vacancy for the 4 main investment property types stands at 6.9%, 30 basis points lower than a year earlier, and year over year rent growth averaged 4.3%, well above inflation.
Sales volume year to date is 20% higher than the year earlier, which is within 3% of the peak in 2,007. This near record flow of capital to real estate has driven the CoStar repeat Market Price Index up 9% over the past year. That's just capital appreciation. Real estate markets in the most real estate markets in most geographies in the United States are strengthening. For example, within the office market, 65% of the submarkets are quarter over quarter improvement occupancy, a market cycle high, plus 52% of the 54 metros now have occupancy rates above the 'six, 'seven peak.
So that's a very important metric and usually we believe is a leading indicator 18 months out of good conditions. Due to the pressed energy prices, Houston has been the exception, although even there, net absorption has been slightly positive for the 1st 3 quarters of the year. The apartment sector is performing solidly with net absorption up 4% year to date compared with the same period in 2014. Falling homeownership is still a key driver of demand, but the growing number of senior citizen renters and higher income renters suggest the market shifting to more renters by choice, which could become a very key driver of future apartment demand. Despite a 10% increase in construction deliveries year to date, which might be due to our plane, strong demand allowed occupancy to increase by 10 basis points from a year earlier and rents increased by 4.8%.
Apartment sales volume is up by 10% with several cities posting average prices per unit well, well above the last cycle. In the office sector, net absorption of 68,000,000 square feet year to date is 14% higher than 1 year earlier. While office completions are up 40 percent to 41,000,000 square feet, that's actually a very, very small number. Strong demand growth has allowed office vacancy rates to fall by 60 basis points to 11% over the past year. Because of tightening in supply, office rents hit a business cycle high of 4.3% year over year growth.
Office sales volumes grew 30% compared with a year earlier, which is well above the 20% increase for all real estate transactions. The story of strong demand, high occupancy and high investment sales volumes is repeated in other real estate sectors, including retail, logistics, light industrial, hospitality and specialty, such as bowling alleys. The broad based strength in both fundamentals and sales has helped attract increased demand for CoStar products and services and foretells a good operating environment for the next year or so. So we're happy with that. So in conclusion, 2015 has been a landmark year with our very successful move into serving the immense marketing and information needs of the apartment industry.
I believe that 2015 is the year that successfully expanded our TAM, our total addressable market, by $2,000,000,000 with this expansion into the apartments marketplace. While we had to invest and draw from other areas in our business to make this expansion such a success, I believe we are following a well tread path of great long term growth companies as we make these moves. Accelerated by the new apartments products, our 2nd and third quarter 2015 sales results are tremendous. In the second half of the year, we've begun to achieve significant margin improvement, which I anticipate will continue into the full year of 2016. In fact, we anticipate our EBITDA growth to move upward by about $100,000,000 in 2016 and by roughly that amount incrementally in each of the next 3 years overall as we remain committed to reaching our goal of 40% margin by the end of 2018.
Now that Brian Radecki is no longer here, I can actually get the costs of this business under control. That's a joke. Brian is here with us. I'm right here, Andy. I will now turn the call over to Scott Yinger, our very capable acting Chief Financial Officer.
Thank you, Andy. As Andy mentioned, we're very pleased with our performance in the Q3 of 2015. The service offerings we've introduced throughout the year, including CoStar Market Analytics and the relaunch of Apartments dotcom, accompanied by the national marketing campaign are driving strong sales results and are contributing to top line revenue growth in 2015 and beyond. In the Q3 of 2015, the company reported $189,100,000 of revenue, an increase of 23.5% compared to the Q3 of 2014. The core business continues to grow at a consistent rate, while the Apartments.comrevenue accelerated to 20% in the quarter and is expected to be in the range of 25% to 30% in the Q4 of 2015.
Gross margin was $135,400,000 in the 3rd quarter or 71.6 percent of revenue, which includes expenses in the quarter related to Apartment Finder's print and distribution services, including a $1,700,000 charge to terminate the Apartment Finder print agreement. As Andy mentioned, we are no longer printing books and expect to be fully out of the print business before year end when all remaining books and racks are collected from the markets. We've been very aggressive in transitioning away from print at Finder and we expect the resulting cost savings to be evident in our gross margins in 2016 beginning in Q2 after seasonally higher expenses we always see in Q1. Adjusted EBITDA was $35,500,000 or 19 percent of revenue for the Q3 of 2015 and non GAAP net income in the Q3 was $17,200,000 or $0.53 per diluted share. Net income in the Q3 of 2015 was a loss of $5,400,000 As expected, we reported an increase in all of our earnings metrics in the Q3 of 20 15 versus the Q2 as marketing expenses began to decline following the peak apartment rental season and we realized planned cost reductions related to the Apartment Finder acquisition.
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 those terms in our press release issued yesterday and are available on our website at www.coStargroup.com. Cash and investments were $391,000,000 as of September 30, 2015. Short and long term debt outstanding totaled $370,000,000 as of September 30. As Andy noted, the integration of Apartment Finder is ahead of business. Our conversion out of the print business is nearly complete as well.
Shutdown of the print and social media platforms is expected to result in cost synergies totaling $20,000,000 in annualized expenses by year end, 7 months from the data acquisition and well ahead of expectations. We expect to gain additional cost synergies in 20 16. Now I'd like to give some additional color on a few metrics to highlight our strong performance in the Q3 of 2015. As of September 30, we had approximately 5 95 total salespeople across the company compared to approximately 624 at the end of the prior quarter. We are actively integrating our sales resources to ensure that our field sales teams are appropriately sized and managed in each of our markets.
We've introduced consistent job titles, compensation plans and training initiatives to create a cohesive organization across our sales force focused on driving sales growth in all of our services. Revenue from subscription services on annual contracts was $121,400,000 for the Q3 of 20 15 or 64.2 percent of total revenue. For the trailing 12 months ended September 30, 2015, subscription revenue from annual contracts totaled $442,100,000 up 18.4 percent from $373,400,000 for the 12 month period ended September 30, 2014, reflecting our continued success in growing these annual subscriptions faster than our non subscription services. Just to repeat that important point, that's $442,000,000 in annual subscriptions growing at 18%. Renewal rates for annual subscription revenue remained high during the Q3 of 2015.
The 12 month trailing renewal rate for CoStar subscription based revenue was 90.3% in the Q3 of 2015, while the 12 month trailing renewal rate for customers who have been with us 5 years or longer was 96.4%, roughly in line with the prior quarter. As Andy noted, the renewal rate on CoStar information subscriptions has remained essentially stable for the past couple of years. LoopNet contracts have always historically renewed at lower rates than CoStar subscriptions and as we continue to move larger percentages of the LoopNet customer base on to annual contracts, there's a small product mix impact on the trend of our overall renewal rate. I will now discuss our outlook for the Q4 and the full year of 2015. We are raising our full year earnings guidance based on great progress integrating Apartment Finder and the fact that we're reducing costs faster than we expected.
We expect non GAAP net income per diluted share in a range of $1.74 to $1.78 for the full year of 2015, which is up $0.10 at the midpoint from the range we provided last quarter. For the Q4, we expect non GAAP net income per diluted share of approximately $0.79 to $0.83 which includes approximately $1,500,000 to $2,000,000 of marketing expense or $0.03 to $0.04 of non GAAP net income per diluted share that shifted from the Q3 of 2015
to the Q4 of 2015.
For the full year 2015, we expect revenue of approximately $709,000,000 to 712,000,000 dollars As the integration of Apartment Finder continues, we believe we're ahead of schedule in discontinuing non core services and we have revised our estimates for both the in year impact of these actions as well as for the core Apartment Finder revenue that we expect to carry forward into 2016. Faster than expected shutdown of Apartment Finder Services is contributing to the increased 2015 earnings outlook, while having a small negative impact on revenue. The updated range includes Apartment Finder 2015 revenue of approximately $39,000,000 to $41,000,000 The company's strong sales in the Q3 of 20 15 are expected to offset any impact on overall revenue related to the accelerated Apartment Finder integration. As Andy noted, the Apartment Finder core online advertising business is now estimated at approximately $65,000,000 in annual revenue as we finish the transition away from print and other non core services. For the Q4 of 2015, we expect revenue of approximately $190,000,000 to 193,000,000 dollars which includes expected 4th quarter seasonality in the LoopNet marketplace.
The sales results since the launch of the new apartments.com website and the start of the national consumer marketing campaign have been impressive. This business is seasonal in nature and we may see lower sales and traffic volumes in the 4th quarter. With our clear leadership position among apartment ILS competitors, we expect sales momentum in early 2016 as apartment communities prepare for the 2016 rental season. The growth trajectory of the business and our financial goals remain unchanged from what we previously communicated. We still see the core business growing in the 11% to 13% range with potential for uplift resulting from changes to the LoopNet premium searcher transition beginning to become evident in 2017.
We still believe we can grow Apartments.com in the 25% to 30% range we previously communicated for 2016. At Apartment Finder, we expect revenue of approximately $65,000,000 We're working on our budget for 20 16 and expect to give guidance ranges early next year consistent with our practice in prior years, but hopefully this gives investors and analysts some insight into our preliminary views of 2016. In terms of expenses, as Andy noted earlier, we currently expect to reduce our marketing expenses by approximately $20,000,000 in 2016, while maintaining our leadership position in traffic. In addition to marketing expenses, we continue to believe that we can reduce the cost base of our combined apartments business and we still expect the Apartment Finder acquisition to be highly accretive to the bottom line in 2016 and beyond. We believe we can add approximately 8 to 10 percentage points in adjusted EBITDA margin in 2016 from our full year 2015 estimate of 17%.
And this puts us on a path to achieve our previously stated goal of 40% adjusted EBITDA margins exiting 2018. In summary, I'm very pleased with CoStar's financial results for the Q3 of 2015 as well as with the strong sales results we have achieved throughout the year, beginning with the introduction of CoStar Market Analytics and the relaunch of apartments.com. We're making great progress with the integration of Apartment Finder and are on track to relaunch that website, as Andy said, later this year. We believe the current sales trends and plans for continued integration of our multi family platforms keep us well positioned to achieve our stated financial goals, dollars 1,000,000,000 in revenue in 2018 exiting that year with 40% adjusted EBITDA margins and a $1,500,000,000 revenue run rate at even higher margins exiting 2020. I'll now open the call to questions.
Thank
My question is in terms of the math on the amount of spending at apartments. There are the 2 buckets. I believe there's $75,000,000 to $80,000,000 incremental marketing and branding spend. I think that's what's supposed to go down by $20,000,000 next year. The rest of the costs, my math is about and $50,000,000 or so, but that could be off.
What should we be assuming that those costs do year over year? Would those be flat, down or up? And any color on how much?
Yes. Andre, this is Scott. So I think what we are saying is that in total, the apartments marketing spend, we should be able to manage down $20,000,000 year over year. So as you said, there's various components in there. There was roughly $80,000,000 incremental spend that we announced around Apartments.com and then we put some SEM spending behind Apartment Finder as well.
And in aggregate, we expect that we can bring the marketing budget down about $20,000,000 year over year. Thanks.
Thank you. We'll go on to the line of Bill Warmington with Wells Fargo.
Good morning, everyone.
Good morning, Bill.
So I wanted to ask about the very strong annual subscription net new number at $31,000,000 And we have been looking for something in the low 20s. And I just wanted to check because one of the beauties of the model is, of course, you get this net new and you can just fan it out over the next 4 to 5 quarters in terms of the contribution. And so that works as long but the only exception that would be is if there's a component of that, which is being converted from existing clients because then you already have that revenue in your model. And so that's my question is, maybe give us a little detail in terms of that strong $31,000,000 How much of that represents net new business from that was not previously revenue in some form within the revenue base?
Yes, Bill. So we net out in that number, we net out prior billing amounts. So if somebody was on a month to month contract and now moved to an annual contract, that's netted out of that number.
So in fact, it is as big and as impressive and as beautiful as you think it is.
All right. Well, that's helpful. And then the other just sort of a note, are you guys going to be dressing up for the Halloween party tomorrow? Because I heard a rumor that Andy was going as J. D.
Tucker.
Yes. It's sort of rough when the Washington Post writes an article about the fact that everyone in town should drop by and see our Halloween party because it's really good. That puts a lot of pressure on us and could possibly diverge away from our business. But it's really our field research team that does the really good Halloween party. So yes, I'll be participating in the spirit of it for sure.
All right. Thanks a lot.
Thank you. Next, we'll go to the line of Sarah Gobens with Bank of America Merrill Lynch.
Hi, thank you. Sorry if I missed this earlier, but what was the core CoStar growth in the Q3? And how does that compare to the trend in the Q2?
That's the 4.3% sequential quarter. 4.2% is total growth.
Just on a year over year basis, if you have it?
It's on an annualized basis, the core business in the 3rd quarter was running in that 10% to 13% range.
Yes. So 11% to 13% range, the core business continues to be in that range. I think absolutely year over year was sort of the low end of that range this quarter. And then as Andy pointed out in his comments, sequentially, if I strip out Apartment Finder, the business was up 4.2% sequentially, just organic growth quarter over quarter.
And the prior quarter, Q2 or Q1 would be 3.2%. So it climbed from 3.2% to 4.2% sequential quarterly.
Okay. And then just a question on M and A. So now that you've done the Apartment Finder deal, should we rule out more brands in the apartment space? Or do you think that's a likely area of focus?
Well, on behalf of the 115 software developers who have been staying in various hotels, North of Atlanta and Norcross, Georgia for the last three months, I am not going to say we're about to do something else. They would like to have a little break after finishing this integration job. But I think that this probably has changed the calculus a little bit. So that I think it would now look like we have been able to integrate in another good brand the apartment space, get a good reaction from the customers, retain the revenue and achieve significant cost efficiencies. So I would definitely as you look at other deals, they would obviously have to be priced correctly.
We want to capture the value for our capabilities ourselves, not give them to someone selling a business. But I would feel much more comfortable about our ability to do these deals and manage the risks of conversion. There are opportunities, but there's nothing specific right now.
We'll go next to the line of Andrew Jeffrey with SunTrust.
Thank you. Good morning.
Good morning, Andrew. Rich, actually,
I was hoping to hear you cry on this call, but maybe next quarter. There's still time.
With regard
We'd all cry.
True. With regard to the EBITDA growth cadence and appreciate the color your color on 2016. As we think about the 2018 target of 40% exit margin, is it going to be pretty ratable the EBITDA growth improvement or the margin improvement sort of 2016, 2017, 2018 or would you anticipate more of a hockey stick as we get closer to the end of that 3 year period?
Well, this is Scott, Andrew. I think the kind of guidance we just gave you, I think, will show you that we're making pretty steady progress next year. And exactly what the trajectory is beyond that, it's hard for me to give any detailed guidance on it. But I think it's fairly steady. Quarter to quarter, it will vary based on the seasonality of the marketing and things like that.
So I don't think every quarter it's up into the right by a fixed percentage. But annually, I think we gave you pretty good point. I think we I just said, I thought we could be up 8% to 10% margin points next year. And I think if you sort of plot that out over the next couple of years, it gets you to that 40% exiting 2018.
Thank you. Next, we'll go to the line of Sterling Auty with JPMorgan.
Thanks. Hi, guys. You gave a number of points around kind of macro supply, etcetera. I just wanted to see if you could time together in terms of how do you feel where we are in terms of the cycle? And you talked about the plane flying over and isolating construction.
But how do you see the timing of new construction coming in impacting 2016?
I think our thought is that well, first of all, it's great news for Apartments.com and for Apartment Finder to have that construction coming in because those folks tend to buy our most expensive ad packages. So that's a good driver there. There's definitely concerns out there about the amount of construction on the multifamily space specifically. And will the with incomes being relatively flattened down for a lot of the demand side. Will that will we be able to continue to see rent growth with all supply coming in?
But realistically, the absorption is matching the supply still. And our feeling is that you still got 18 months to 2 years before you're really going to see any big problem develop. Things are obviously priced to perfection in a lot of areas. The office side is actually $40,000,000 in construction. The office side is nothing.
The other sectors are pretty darn stable. And one metric that I put a lot of weight on, we've seen in 2 prior cycles, we've seen it be a good leading indicator is the going down to the submarket level and counting the number of submarkets improving versus the number of submarkets degrading. And right now, the 65% of submarkets improving, we're still feeling that things look pretty solid. So let's call it a very rounded flat mountaintop, a plateau mountaintop. Does that answer your question at all?
No. Feel free to redirect if you think I didn't answer the question properly.
No, I think that's good. Thanks,
guys. Okay.
Thank you. And we'll go to the line of Mike Hung with Needham and Company.
Thanks very much and good morning guys. Good morning, Mike. Good morning, Mike. Good morning, Mike. So let me see if I could kind of get you to give me a little color kind of inside that bookings number, I mean, great number.
Were there any kind of large deals in there? Maybe you could kind of give us a flavor for kind of deal sizes and how that might be trending. And then I'm not sure if you're prepared to answer a question like this yet, but given that you're going through your budgeting cycle now, but given the strength of bookings over the last couple quarters, I mean, are we comfortable to call that a trend now? And how should we be thinking about bookings growth rates going forward? Thanks.
So on the first question on the nature of the deals coming in, for sure, we are seeing a wide array of deals that are significantly larger than the deals we traditionally see. So at that but they're not like CB Richard LS Scale deals or anything like that. They're just good solid $10,000 a month, dollars 20,000 a month deals at the upper end of this. But there's a the real bulk is $1,000 a month here, dollars 1,000 a month there. But that is dramatically higher than doing LoopNet deals at $3.95 a month.
So these ASPs are pretty good. There are a couple of things that are floating around out there that could be could move significantly above that number, but those are not really forecast pipeline or anything like that. And the ability to think that we have runway on this is high. So we have been like the duck swimming smoothly across the water, the feet are churning under the water. We've been moving really quickly here, integrating these things, developing new software, switching teams around, blending teams, a lot of things happening here.
We're now moving into having a little bit of the luxury to begin to refine and to optimize. And I am really struck. We just finished a round of focus groups with renters, small landlords and large landlords and property management companies in Dallas, Los Angeles and Washington. And I have to say, when I compare what those folks were saying to us 2 or 3 years ago when we were researching prior to our move into Apartments.com and I compare that to what they're saying now, you would be giddy to hear what they were saying. Like they love like we really have good products here.
They like the people who have CMA, our customer market analytics are giving us very good feedback on it. And then folks are giving us very good feedback on the apartment .com site. Finder still is not a factor with them just because it hasn't had the new site launch. And hearing someone who has hearing a small apartment manager who has 20 units in Washington say that in the spring his Craigslist marketing stopped working for him. He wasn't getting leads.
And so he started asking the millennials in his community where they were looking for apartments and they all said apartments.com. And so he's been looking at advertising there. We're really at the beginning. And when I look in all those focus groups and I see there's only 2 people in the randomly selected group that are CMA clients, CoStar Market Analytics clients, but they're all expressing the need for the same kind of product. I think we have a long, long, long runway.
So as a CEO, I'm more frustrated by the fact that we have only reached 5% of the people we should reach, but I can't be unhappy with the results we've got so far. So definitely, it's got legs for sure in my view.
Thank you. Is that
now optimistic?
We'll go next to the line of Brandon Dobell with William Blair.
Thanks. Andy, just to say you know, I've raised $80,000,000 to spend on marketing and I'm going to go after the things most likely to rent market for me, just myself as a rental opportunity, just me. Just so you'll see that out there next year, going to be a nice competitor for you guys. I guess I'd focus on the core for a minute, maybe some color around, Scott or any of your comments around that 11% to 13% being sustainable, but more importantly, how you get that to drift towards the 13% as opposed to letting it drift down to 9% or 10%?
Yes, sure. So it's a good question. When we say the core, at some point in the next couple of quarters, we're going to probably have to redefine what is the core, because ultimately the core will probably be defined as LoopNet information products, CoStar information products, LoopNet marketing products and then CoStar advertising products being one set the way you look at apartments. So you have to break out the CoStar Market Analytics targeting multifamily maybe. Okay.
So the core probably will ultimately involve LoopNet and CoStar. Now there's no question about when we made this commitment 1.5 years ago to go into Apartments.com and to really try to expand our addressable market by taking share in this relatively new area, we definitely gave up the ability to get 2 or 3 extra points in our core business while it took your sales leadership, your software leadership, everyone to try to grow the scope of the long term opportunity. So as you can tell from this call, we're feeling that we've made very good progress in this and that we there are like a bunch of different ways to measure that we're now number 1. And you can see the ability to grow margin in it as well. So I think probably one of our highest priorities in 2016 is to go back and to strengthen the relationship between the LoopNet information products and integration between LoopNet information products and the CoStar information products and use that integration to dramatically strengthen the quality of the product and be able to take what is today 2 very large audiences who are very committed.
1 audience is very committed to CoStar, 1 audience is very committed to LoopNet information and bring their resources and their eye balls and their content into 1 ecosystem rather than 2. And then to also eliminate some of the unacceptable price irregularities in the LoopNet information business. So firms doing $150,000,000 a year in revenue, relying entirely on our information systems, but only paying us a couple of $1,000 a year. So will be a high priority for us. And I feel it would be a good adventure.
We'll be able to I think we'll be able to get some additional margin improvement out of the LoopNet and CoStar business together, obviously, very, very profitable now. And we'll be able to get some additional operating leverage there. But I think the more exciting thing is we'll be able to build higher quality products, better content, better customer satisfaction and then we'll be able to monetize that by getting more consistent pricing between the 2. Now that's a lot of work and we'll give you more color on it in Q2. And it will take us software wise, it will take us through the year.
But we're working on that right now, we're excited about it and very optimistic. So I would be surprised if as we shifted some of our best resources or balanced our resources back towards the core, you wouldn't see that number come up in the next year.
Thank you. We'll go next to the line of Brett Huff at Stephens Inc. Please go
ahead. Good morning, guys. And thanks for the additional disclosures as we look into 2016. That's very helpful.
All you need is every analyst asking for it and then we are very responsive.
We appreciate it. My question is just to dive a little bit more in the core number again, I want to make sure I understood what the 22% core info net new annualized sales bookings number comprised of. First of all, is that the right number that I'm referencing?
Yes, Fred, that's correct.
Okay. 2nd of all, that includes what we think of as the original database business as well as loop as well as the cross sales of the new market analytics business all in there. Is that the right pieces?
The way we define that, that did not have loop in it. So that was basically the core information analytics. And it would include the new CoStar Market Analytics that we sell
to. Okay. So it's core info and then the new market analytics product. Can you give us the core analytics product you said grew 10,000,000 dollars in net new annualized year over year. Dan, you mentioned a number and I didn't quite get it.
So can you just how much of that 22% was the old business, if you will, and how much of it was selling this new market analytics piece?
Well, the $10,000,000 was just bookings this year on CoStar Market Analytics, 2 apartment oriented businesses. So it was specifically just that CoStar Market Analytics piece. The 3 quarters of the year. So it's probably yes, so that number would be much larger than that $10,000,000 you're talking about.
We'll go next to the line of Peter Lowry with JMP Securities.
Okay, thanks. Have you seen any changes in terms of strategy at RentPath since they hired their new CEO in July? Who's RentPath? Exactly. No.
That's a good question. And we obviously watch that. We definitely observed the change of strategy on the part of their Board when they put a new CEO in place. And you look back at their historical activity of his historical activity of trying to migrate back end systems, I believe, from AutoTrader into the front end marketing systems. I think that's interesting, but I'm not sure the same parallel exists here because the interaction between the property manager and the owner and the accounting systems and the variety of systems involved here and how heavy they are and how switching is so RealPage where they entered into my new place to try to get synergy between the back end systems and the front end systems.
And I have a lot of respect for RealPage, but I would say that they would probably agree with me. I'd say that my new place was decimated by that effort. So I don't see them executing the same strategy. The strategy that had year to date, I would say, is really challenging because their ApartmentGuide is where all the traffic is for them and all the customer goodwill is around ApartmentGuide. Rent.com, I believe, has much lower customer goodwill.
I think somebody interested in URL names pushed the rent.com moniker. The traffic is on Apartment Guide as well. So they've got to switch the customer loyalty from a well known and liked brand over many years to one that has been less liked by the industry and has less traffic. And again, those numbers on unaided awareness are real. The traffic numbers of 3x in apartments.comversrent.com are real.
So I'd say they're going to have to think about some sort of reset. And I take them all very seriously. They're good people. They're confident people. They're not going to just go to sleep and go away.
But so far, I'm still waiting to see what the effective strategy is, waiting with bated breath. But we're going to keep moving forward. And I would say there might be some evidence our strategy is working well. We'll try to move to the next strategy and keep one place ahead. But I do think they probably had a short term reprieve.
I guess you noticed their debt was downgraded the other day. That might have been the source of your question. From that document, you can try to put together the fact that they're not making the numbers they thought they would make this year. But I think they had a little bit of a repeat because we were very motivated to move swiftly through the Finder integration. And we weren't going to print books for another 2 years in order to keep 99.999 percent of the customers.
They probably picked up a little bit of business from us doing that transition every 3 months, but that's not sustainable. That's a short term event. And we come through the integration much stronger with a much stronger sales force and very motivated. So I hope that answers your question. If not, circle back for another one.
Thank you. And we'll go to a follow-up from the line of Andre Benjamin with Goldman Sachs.
Thanks. I have to jump back in there with the one question rule. So I'm wondering with the pricing on apartments.com and Apartment Finder, I was wondering how that's trending both absolute and versus competitors such as you just mentioned RentPath for rent and Zillow, Trulia, sorry. I'm really just trying to think about how that delta has trended over time and how we should think about you closing the gap, contributing to next year's growth versus the underlying traffic and customer growth?
Sure. Well, looking at TILO first, no, teasing. So again, one of our factors in looking at what companies we were more inclined to acquire, one of the factors was we wanted to make sure we acquired a company that did not have a legacy pricing momentum from their print origins. So we many, many years ago CoStar print commercial real estate directories back in the early '90s. And one of the things I noticed was as we switch from print to digital ads, we carried the price schedule right from print into electronic.
But ultimately, the truth is you've got a less direct cost associated with the ad, so prices can drift down a little bit. And so we did want to we felt that there was probably some downward pricing pressure in some players in the industry. So I felt very comfortable going with Apartments dotcom, which was middle, lower part of the pack for pricing. And right now, we're comfortable with that. We feel that the pricing is one that will allow us to grow volume and volume grows our digital data flows and it grows and improve it grows a stronger customer experience.
So we're less interested in trying to nickel and dime each property manager as a client into getting the whole thing we used to literally people used to charge $25 extra a month to say pets were allowed on the ad. We're not doing that. We're trying to get more volume. So we get broader and broader participation. We build a stronger network.
And we like the fact that we have the wind at our back on pricing and that others have a headwind on pricing. So and then the other thing is that we're not just trying to make the money on an advertisement. We're making the money on selling both the pricing information, the comparable information and the marketing solution. So we can go in there and have bigger contracts overall, but much better pricing. And I just like having the best product and the lowest pricing while we're trying to grow share.
And I think the industry has suffered from having these little 5% shares fiefdoms. The renters and I think even the owners would like to have a real clearinghouse here, and that's what we're trying to build. Do we have Bill, did you come in there and disappear? Well, at this point, if anyone has any other additional questions, feel free to give us a buzz this afternoon. I'm sure we'll hear from you anyhow.
Thank you for joining us for the call, and thank you, Brian, for joining us for the call. There was no crying. It was a very good call. And thank you very much, and we look forward to updating you next quarter with a lot of exciting news. Thank you.
Thank you. And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation