Ladies and gentlemen, thank you for standing by and welcome to the CoStar Group Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Richard Simonelli, Head of Investor Relations. Please go ahead, sir.
Thank you very
much, operator, and good morning, everyone, and welcome to our call. Before I turn the call over to Andy, I have some really important facts for you to hear, so please listen carefully. 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 July 23, 2014 press release on our Q2 results and in CoStar's filings with the SEC, which include our most recent annual report on Form 10 ks and our most recent quarterly report on Form 10 Q in each case under the heading Risk Factors. All forward looking statements are based on information available to CoStar at 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.
As a reminder, today's conference call is being broadcast live and in color the Internet on www.coastargroup.com where you'll find the new CoStar Investor Relations page since our recent rebranding. The replay will be available approximately 1 hour after this call concludes and will be available for approximately 30 days. To listen to the replay call 1-eight hundred-four seventy five-six 701 within North America or 3203653844 outside of the U. S. The access code is 3,313 29.
And we'll put this up shortly after the call today. Just one procedural note before we go on. Just want to let you know that we want to take all of your calls or your questions during the call and are happy to stay past the hour to do so as we've proven time and time again. But we ask that you limit yourself to one question. That means like 1 part question not 8 part questions.
And unlike the lunch line of middle school you can get back in line to ask other questions if you want to. So without further ado, I'd like to turn
the call over to Andy Florance. Andy? Thank you, Rich. I guess that one question rule is to help my feeble mind keep each question in mind. Compound question is too complicated.
Okay. Welcome and thank you for joining us. I'm very pleased with our team's performance over the first half of twenty fourteen. Revenue for the Q2 of 2014 was $148,000,000 which is an increase of approximately 36% over the Q2 of 2013. For the same period, EBITDA was $38,000,000 up 49% year over year.
In the Q2 of 2014, we achieved net new sales subscription services on annual contracts of approximately $16,000,000 which is an increase of 9.2% over the Q1 of 2014 and is basically in line with the same quarter prior year, which was a phenomenal record quarter for us. The core CoStar product lines show accelerating sales growth, achieving $9,700,000 in the 2nd quarter, which is up 17% quarter over quarter and 6% year over year. In May 2014, we recorded our all time highest net new sales month. Through the first half of the year, we've added over $30,000,000 of annualized net new sales on our annual subscription Our annual subscription businesses continue to enjoy a very high renewal rate of over 92%. During the quarter, we raised $529,000,000 in net proceeds from our successful equity offering.
I had a chance to visit with a number of you. And we intend to use that for investment purposes, general capital and continued growth of the company and to better position ourselves for potential strategic acquisitions. Take a moment to comment on the commercial real estate market economics right now that we're operating in. The recovery continues to improve and is showing signs of strengthening. For the most part, we're enjoying a healthy operating environment in commercial real estate.
Investor demand for U. S. Real estate remains healthy. Liquidity is strong with year over year sales up 10% from 1 year ago. Trading volume is now well above historical averages and nearly back to 2,007 peaks.
For our brokerage clients, this means commission levels are high, which is a positive for CoStar's revenue growth. Construction remains focused on a handful of markets. Demand growth is strong enough to heal fundamentals, but not strong enough to lure developers back into market en masse with aggressive building. Specifically, new construction inventory is at about half the pace of demand and the supply growth is 20% to 40 percent of what occurred from 2,006 to 2,008. So it's a very quiet construction environment.
Office market fundamentals are improving at a steady pace. National vacancies have fallen steadily for 4 years straight and are closely aligned with 2,005 levels and long term averages. Net absorption surpassed 75,000,000 square feet for the past 12 months ending in the Q2 and 20,000,000 square feet for the Q2 2014. This was the largest annualized increase in 6 years. Industrial market fundamentals are the tightest they've been since 2,001 with a 7.2% vacancy rate, while the retail market is returning to normal with vacancies back in line with long term averages, while rents and incomes are growing.
Apartment market performance was solid in the 2nd quarter as millennials have helped to absorb newly built units. A total of 202,000 apartment units have been added to the market stock over the past year, up a very significant 60% from 1 year earlier. Despite the surge in construction, net absorption at 173,000 units was only 30,000 units short of completions and is nearly unchanged from a year earlier. Since the market cycle low in 2013, vacancy has risen by 20 basis points to 5.4%. So while supply has picked up, apartment fundamentals of supply, demand and rent are benefiting from housing trends that favor renting.
I believe the strong leasing activity and slightly increased vacancy is creating good tailwinds for our apartment products. Now I want to take a moment to update you on LoopNet. Our LoopNet marketplace continues to show vibrant growth with 44,200,000 profile views in the quarter excluding bots and that's up 18% year over year. LoopNet Marketplace revenues for the Q2 of 2014 were 27,500,000 dollars growing 6.2% over the Q1 of 2014, so really good growth there. The LoopNet premium membership revenue grew approximately 20% in the Q2 over the prior year.
Migrating clients from month to month contracts to annual subscriptions remains a a year over year to $41,300,000 annualized in the 2nd quarter. We continue to make very good progress increasing our Average revenue per premium member climbed 18% to $86.34 in the Q2 of 2014 compared to $72.90 the prior year. Average revenue per premium lister grew 14% year over year to $101.74 in the 2nd quarter. We continue to pursue what we believe is a huge opportunity to sell CoStar information solutions to nearly 100,000 higher potential prospects that use LoopNet for information rather than just using it for marketing. We have now raised the entry price for a single user upgrading from LoopNet information to CoStar information from $29 per month to $3.95 per month.
When we closed the LoopNet deal in April 2012, only 31% of the listings on LoopNet were paid and the remainder were free listings. We have made it a priority to increase our monetization of those free listings. We have succeeded and 50 percent of the listings on the site are now paid. We have 278,200 paid listings, up 26% year over year and up 65% since closing the merger in April 2012, when we only had 168,400 paid listings. While we've made a lot of good progress, we believe we have significant additional revenue potential in the 587,000 listings in the CoStar database that are not yet advertised or paid on LoopNet.
In addition, we have significant additional potential to monetize various enhanced listing opportunities throughout the site. Our sale of spotlight ads has proven to be very successful. We plan to continue to add new levels in areas of placement and larger ad sizes for our advertisers who need additional exposure for the listings and are willing to pay a premium for it. Now I want to turn to give you an update on the Q1 of operating Apartments.com. So as you know in the Q2 of 2014, we closed our acquisition of Apartments dotcom, 1 of the leading Internet apartment marketplaces.
We have moved very quickly with real focus and are well ahead of planned schedule having already achieved several key goals. We've achieved $5,200,000 revenue synergies by converting 2,007 100 clients from indirect wholesale purchases to direct sales. Prior to our acquisition of Apartments dotcom, newspapers owned by Apartments dotcom owners in certain cities purchased advertising exposure in Apartments.com and use their sales force to retail it directly. So newspaper sales forces were selling space on Apartments.com. Upon closing the acquisition, we made it our top priority to add 40 salespeople into these indirect sales markets and convert them from wholesale to direct sales of Apartments.com.
Typically Apartments.com would receive $130 per month for an apartment community advertised at wholesale price and $4.45 per month per apartment communities advertised directly. This conversion from wholesale to direct sales had a very significant impact, driving an overall 15% increase in our average revenue per per apartment community and that's across all the apartments being marketed on our site not just the ones converting from wholesale to direct. This allowed us already achieve approximately $5,000,000 in contracted revenue and approximately $875,000 in monthly sales post acquisition. Wow! We believe we have already significantly improved the apartment.com website.
We improved the mapping capabilities. We have cleaned and simplified the look and feel and increased the professional presence of the advertised communities. We have eliminated unrelated banner advertising on the site, which we believe cheapened the presentation of our advertisers' properties. This meant foregoing approximately $3,000,000 in annualized revenue, but we believe that investment will pay off in the short term. We achieved a much higher growth rate in the quarter for Apartments.com despite terminating banner revenue.
We have also significantly increased our investment in search engine marketing. We believe that all of these improvements have resulted in a 27% quarter over quarter increase in leads generated for our clients, which delivers more value to our clients. As with LoopNet, we have quickly accelerated revenue growth at apartment.compostacquisition and we're not done. In the Q2 of 2014, apartments.comrevenue growth accelerated from growing 11% year over year to 15 point 7% year over year at the end of the second quarter. We will continue to make important incremental improvements to the apartment's website, but we also completed a comprehensive new product design for the next generation of Apartments.com's website.
That next generation product is now in our software development team's hands and work is well underway on building a new product offering that we believe will be an industry game changer that will enable us to take and his team have done in coming out of the gates so quickly and focusing intensely on successfully converting these thousands of customers from wholesale to retail, thereby driving this revenue surge. I have strong confidence in Brad's sales leadership as we move forward. We're very pleased with our continued strong results in both the United Kingdom and Toronto, Canada. CoStar in the United Kingdom had our highest ever sales result in the Q2 of 2014, coming in 32% higher when measured in British pounds than the same quarter in the prior year. Our sales results in the U.
K. Have now accelerated to a level that matches the U. S. Sales levels on a pro rata GDP basis, which has been a long term goal of mine. CoStar Suite growth is strong.
It is becoming the single largest revenue stream in the United Kingdom, surpassing our legacy focused product in monthly revenue in the month of June. We have now signed 600 U. K. Clients to CoStar Suite in 600 days. Half of the 8 major U.
K. Brokerage firms have now upgraded the benefits CoStar Suite offer. After a period of investment, the U. K. Business has now achieved positive EBITDA on a trailing 12 month basis with $1,100,000 EBITDA year to date.
We believe the U. K. Will continue to stay positive going forward And we know Matt Green will watch the costs. I could not be more pleased with the good work Giles Newman and his team are doing in Europe. In Toronto, Canada, we continue to sign on additional brokers, investment companies and owners.
We now have more than a dozen leading Canadian companies subscribing to our flagship product CoStar Suite and we have a phenomenal sales team up there to exploit that opportunity. Give you a little bit of an update on sales. I think a couple of you are interested in sales force growth and productivity. Now let's skip that. Now let's do that.
We believe that the addressable market for commercial real estate information and analytics in the U. S. Is in the 1,000,000,000 of dollars and that we have penetrated only a fraction of that opportunity to date. In order to better and more quickly address the market, we have made significant investments in growing our sales force over the past three quarters. We now have approximately 500 salespeople on staff.
The most dramatic organic growth in that sales force is in our U. S. CoStar LoopNet field sales team, where we've added 75 net new salespeople over the past year for an increase of 50%. We know from experience that when you grow a sales force dramatically, per sales person productivity drops significantly across the sales force as these new sales people ramp up. We have not expected to see significant revenue growth gains from that sales force into the later half of this year.
The first part of the process is all about investing in work. We have approximately 99 U. S. CoStar LoopNet field salespeople with 1 year or less of experience. On a rolling 3 month average, they're averaging 196,800 in annualized gross sales.
We have 118 experienced U. S. CoStar LoopNet field salespeople with more than 1 year
of experience.
In contrast, they're averaging $422,640 in annualized gross sales on a 3 month trailing basis. That's 114% more experienced people are selling 114% more than the inexperienced sales reps. And that's not a surprise to us at this point. It's also important to note that your the first half what a salesperson sells is pretty or 3rd is pretty much past the cancels. So as you climb in productivity, you have a leveraged increase in net production.
Anecdotally, I noticed on today's metric report that 4 sales reps Max Mantooth, Brett Reed, Charles Tappan and Keith Wells just reached their 1st anniversary in our sales force and they are now averaging 337,700 in annualized production. Congratulations these guys on their strong performance. Of course, we also have some rookies who are hitting home runs and maybe even grand slams on their first at bats. Thomas Valenzuela has a financial sales background and has been selling debt and equity solutions for us in Orange County for less than a year. On a 3 month trailing basis, he has sold on an annualized basis 9 $86,000 in new business.
Just as some of these new salespeople are making positive contributions to our sales team, so too are some of our new managers making a big difference. John Toomey joined us less than a year ago. He has a background in commercial real estate and software sales. When he joined us, his region was at 42% of target. For the past 2 months in a row, he now has that region to 104% of target.
In order to help us achieve our target productivity gains across our larger sales force, we have made an important leadership change at the top of sales organization. Max Leamington has joined us as Vice President of Sales. While leading North American sales for Bloomberg, Max demonstrated his ability to create a culture of success and accountability across a 700 person sales organization. He is now responsible for leading all of our North American sales operations, including the sales team of all CoStar, LoopNet, Apartment.com and our marketplace verticals and one of my favorites, Lands of America. Max's expertise in selling at the institutional level will be extremely valuable as we develop an even better strategy for penetrating lucrative verticals such as banks, institutional investors and owners.
As we begin to stabilize the sales force of the new larger size, we're happy to have found some very valuable new additions to the team. We're also realistic about those salespeople and managers who've not reached our expectations and we will continue to upgrade in those positions until we reach our historical productivity levels at a larger scale team. Finally, I'd like to update you on our successes recent successes, really strong successes at CoStar Real Estate Manager. In particular, since I'm in the Atlanta office today and I'll be talking to the team later, I really want to give them good kudos. Subscription revenue for CoStar Real Estate over 22% in the first half of 2014 compared to the same period in 2013.
Formerly known as Virtual Premise, CoStar Real Estate Manager had its highest ever level of net new sales for Q2 2014 since we acquired the company in October 2011. The team is doing a fantastic job and they're a pleasure to work with. Some significant new client wins in the quarter include American Airlines, Stanley Black and Decker and Schlage Lot Company. United Parcel Service also extended and expanded their client relationship with us. So a lot of exciting things happening there.
I'm very excited about the prospects for the rest of this year and beyond for CoStar. Revenue, EBITDA and sales are strong and we've made investments that we expect will continue to see us move towards our goal of becoming a 1,000,000,000 revenue company with 40% plus margins in 2018. We're going to take a brief 15 minute intermission before the second half of my presentation. No, just joking. I'm going to go ahead and turn the call over to Brian Radecki.
Brian, we've squeezed up all our jokes. Thanks, Andy. And thank you again to Andy Thomas and his team out here doing a great job for allowing us to follow their conference room. As Andy mentioned, we're very pleased with our performance in the Q2 of 2014. CoStar's organic business continues to show strong growth, while EBITDA margins continue to expand.
Q2 2014 is the 1st quarter to include financial results with Apartments.com's numbers, which closed on April 1, 2014. We're making great progress integrating Apartments dotcom into our existing business, while continuing pursue growth drivers in our core business through sales force staffing and productivity as well as ongoing product development efforts. Now let's get started with CoStar Group's results for the Q2 of 2014. Company reported $147,700,000 of revenue, an increase of approximately 36% compared to $109,000,000 revenue in the Q2 of 2013. This growth was driven by strong information service performance and from strong growth across all of our marketplaces including loopnet.com and apartments.com.
On a pro form a basis, our year over year revenue growth was 13.5% for the year to date 2014 compared to pro form a 2013 adjusted to include Apartments dotcom's revenue. Therefore, we're operating in the 12% to 15% revenue growth range. EBITDA increased from 12.3 percent to $12,300,000 to $37,600,000 in the Q2 of 2014, up from $25,000,000 or 49% in Q2 of last year. Also we reported adjusted EBITDA of $45,300,000 in the second quarter, which is an increase of 12,700,000 dollars or approximately 39% compared to the Q2 last year. Adjusted EBITDA margins increased to 30.7% in Q2 of 2014, again up from last year.
Non GAAP net income in Q2 of 2014 was 23,500,000 dollars or $0.80 per diluted share, which is a 37% increase from the Q2 of 2013. Gross margin was $108,200,000 for the quarter or 73.3 percent of our revenue. This is an increase from approximately 70% in Q2 of 2013 reflecting the continued strength and growth of our business model. Reconciliation of non GAAP net income, EBITDA, adjusted EBITDA and all 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 at our newly rebranded website at www.coastargroup.com. Stay tuned.
Cash and investments was $466,500,000 at June 30, 2014 and short and long term debt totaled $395,000,000 as of June 30, 2014. We had a lot of movement in our capital structure during the quarter To fund the $585,000,000 acquisition of apartments, we entered into a credit agreement that provided $400,000,000 term loan facility and a 225,000,000 dollars revolving credit facility. We initially drew $150,000,000 under the revolver and then subsequently repaid that amount. Additionally, we issued 3,450,000 shares of common stock for net proceeds of $529,400,000 Therefore, we currently have access to the $466,500,000 of cash and investments along with the 225,000,000 dollars revolving credit facility that are available to fund future potential strategic acquisitions to finance the growth of our business or working capital or other general corporate purposes. At this point, I'm going to give some additional color on a few metrics to highlight our strong performance in the 2nd quarter.
We achieved $16,000,000 in net new sales of subscription services on annual contracts in the Q2 of 2014 as a result of our ongoing success driving sales and information analytics services, marketplaces, lead generation, cross sell with LoopNet, you name it. To be clear, this sales metric is consistent with what we reported in recent quarters and does not include sales from Apartments.com, so a consistent metric. Apartment.comstandardcontracts have annual terms but have cancellation rights after 6 months. Therefore, we did not include them in the annual subscription sales metric. The $16,000,000 is on par with our highest sales result in the company's history in the Q2 of 2013.
We are pleased with this result in light of all the changes we made late in 2013 and the first half of twenty fourteen including the increase in sales headcount as well as the change in leadership atop of our organization. For those investors who are new to CoStar in our metrics, I want to be clear that our net new sales metric reflects incremental future revenue. Flat net new sales does not mean flat revenue. Every dollar of net new sales grows our subscription revenue base. In prior calls, Andy and I spoke at length about the great progress we're making expanding the sales force and our roadmap for moving these reps up the productivity curve.
Maturing the sales force will take time, but we believe it will keep delivering upside over the next few years. As we've previously stated, we expect to begin seeing the productivity increases later this year and all throughout 2015, so 20 16 will be sort of full impact. Remember that half the sales force is new in learning from the other half with experience. It takes time and energy for the whole sales force. As Andy noted earlier, we have approximately 500 total salespeople across the company.
Of that total, 215 are in the U. S. CoStar field sales reps, which would be up from the 140 we had reported a year ago and 123@apartments.comfieldsellers, up from 80 approximately 80 at the time of the acquisition. Additionally, we have about 100 inside sales reps across CoStar Loop and Apartments, 22 in the U. K.
And about 40 across our other market verticals and businesses. Revenue from subscription services and annual contracts was $95,400,000 in the Q2 of 2014 or 64.6 percent of our total revenues including apartments. For the trailing 12 months ended June 30, subscription revenues from annual contracts totaled $357,800,000 up 21 percent from 290 $6,400,000 for the 12 month period ended June 30, 2013. If we look at the pre apartments business subscription revenue and annual contracts would have comprised 78% of total revenue, up from 71% right after the LoopNet acquisition, reflecting the solid growth in the annual subscriptions. Just like with LoopNet, our long term goal is to move as many clients from all of our services and marketplaces over to annual agreements over time.
The renewal rates for annual subscription remained very high during the quarter. The 12 month trailing renewal rate for CoStar subscription services was 92% in the 2nd quarter. As we've discussed the last few quarters, the introduction of more annual contracts across LoopNet in our subscription base is expected to cause a 12 month renewal rate to add down slightly, possibly 1% or 2% over the next year or so. The renewal rate for CoStar subscribers who've been with us for 5 years or longer was approximately 98 percent, which remains phenomenally high and consistent with prior quarters. As noted in our press release and Andy stated, revenue from LoopNet Marketplace is about $27,500,000 in the Q2 of 2014, which represents all the services available at loopnet.com, but does not include revenue from the other businesses that came along with it like the market verticals if you're trying to figure that out.
Since the apartment business does not conform to our annual subscription we provided historically, I'd like to give some insight on how the business performed in the quarter. Apartments.comrevenue for Q2 2014 was $25,000,000 Since the acquisition, we made a strong push as Andy said to expand the apartment sales force and we successfully added 40 new sales reps to their field sales force. So that's a 50% increase again for them. So they've also got significantly new staff. This staffing allowed us to achieve the $5,200,000 in revenue synergies by expanding our presence in the markets that used to be serviced by the newspapers that previously owned Apartments dotcom.
And as Andy said, we converted 2 1,700 Apartment Communities from indirect wholesale purchases to direct. Our previously published revenue ranges outlook plan for the successful transition of these markets over 3 or 4 quarters. Therefore, we're able to seize this opportunity faster than anticipated, which helped contribute to our strong quarterly results. We've also achieved approximately $5,000,000 in annualized synergies so far. As we suggested at the time of the deal, we believe we can realize $20,000,000 of annual synergies over 24 months following the deal and we are already halfway to that goal after just 3 months.
During the quarter, we started to implement product enhancements at apartment.com aiming to improve the consumer experience as Andy mentioned, which is expected to have short term impact on the revenue results as we discontinue non core revenue producing services. We've already eliminated banner ads from the website and we're moving forward with other strategies that are expected to make the site easier to navigate and more appealing to consumers that visit in search of a new apartment. The impact of eliminating these revenue generating non core offerings as I stated last time is approximately $2,000,000 to $3,000,000 in 2014 with a $4,000,000 to $5,000,000 potential run rate going into 2015. As we move forward, we'll relook at these metrics that we currently provided in order to make sure we give appropriate insight into the newly acquired apartments marketplace as we gain more information. Now, I'll discuss my outlook for the Q3 and full year 2014.
Our guidance takes into account recent trends, revenue growth, revenue renewal rates, which all may be impacted by economic conditions in commercial real estate or the overall global economy among other things. Our guidance on the impact of foreign currency exchange rate fluctuations at our top line results remain consistent. We do not attempt to predict foreign currency exchange rate fluctuations and our guidance assumes little or no volatility for the current rate. Actual results may vary from these estimates. If you're feeling dizzy or light headed right now, call your doctor or John Coleman at 301-452-46 73.
Again, John Coleman at 301-452-46 73. We're providing our outlook reflecting our current expectations as of today July 24, 2014. Based on strong revenue and earnings results in the Q2, we are raising both our revenue and earnings guidance outlook for the year. For the full year 2014, we now expect consolidated revenue of approximately $565,000,000 to $571,000,000 which is an increase of $3,000,000 at the midpoint of the revenue range compared to our previous guidance. This revenue range considers our sales performance to date, synergies at apartments and 4th quarter seasonality, which will be associated with both LoopNet and Apartments marketplaces along with the elimination of some of the services we discussed at Apartments.
Apartments people that used to track LoopNet will remember they had some tough Q4s apartments business very similar without annual contracts in the Q4. So we've accounted for that. We expect revenue in the Q3 of 2014 in the range of $149,000,000 to $151,000,000 As I mentioned earlier, we issued an additional 3.4 5,000,000 shares in our June follow on offering, which resulted in a reduction of our $0.20 for 20.14. We now expect non GAAP net income per diluted share in the range of $3.05 to 3 point of the shares. We currently assume a 38% tax rate in order to approximate a long term effective corporate tax rate.
Details of my outlook are in the guidance tables at the back of our press release line by line. For the Q3 of versus 29,500,000 shares in the Q2 of 2014. These additional shares result in approximately $0.07 of dilution in the 3rd quarter. In summary, I'm very pleased with CoStar's financial results for the Q2 of 2014, which clearly shows strong year year over year organic revenue growth and increasing margins while adding Apartments dotcom. As Andy mentioned several times in the past, we believe the opportunity in the multifamily space is massive and we believe we can make investments in the business now that will drive further growth and market share gains moving forward.
We continue to believe that the company is operating in a market with multibillion dollar revenue potential and we are focused on executing on that plan to capture the opportunity. Operation of the company is making great progress towards the integration of apartments achieving the $20,000,000 in annualized synergies we expected at the time of the acquisition. Product development pipeline looks great across many of our digital real estate services and marketplaces. Our sales management team is focused on driving steady improvement in sales productivity and increased focused on many of the customer verticals where currently have low penetration. I'm confident these combined efforts will continue to drive consistent year over year sales growth in the quarters ahead.
Based on the growth trajectory of the combined businesses as well as the expected synergies, I continue to believe can reach our long term goal of achieving the run rate of $1,000,000,000 in annual revenue sales and 40 plus percent adjusted EBITDA margins in 2018 based on the platform we have today. As always, I look forward to sharing our progress towards these goals with you in the coming quarters. And now we'll open it up for questions.
And our first question will come from the line of Sarah Gubins with Bank of America. Please go ahead.
Hi. Thank you. In the Q1, you saw your net new sales increase throughout the quarter. Did you see similar improvement during the Q2? And could you talk about your expectations for net new sales in the second half?
Yes. In the second quarter, the volatility from quarter to quarter from month to month, it has a certain random element to it. It will have a volatility month to month. In the second quarter, May was our best month ever. And but not by some sort of runaway trend difference between June July between June the other two months.
So sort of it was fairly level. We would expect that more and more of these salespeople approaching their 1st anniversary or their 9th month with the company would be getting would be beginning to see higher productivity as well as half the managers in the sales force are also approaching their 1st anniversary. So fundamentally, we would expect to see some tailwinds in productivity as we move through the year. And just to put a little more on that, if you looked at the increase in the sales force, it really came at the end of the Q3 and mostly in the Q4 last year. So we were pretty pleased being that last Q2 of last year was the high watermark that we essentially were on par with that.
And of course, it was up 9% over the Q1. So we feel pretty good that later in the year we should start seeing those
Sarah. And our next question will come from the line of Andrew Jeffrey with SunTrust. Please go ahead.
Hey, guys. Good morning. I can't tell if you're having fun or not there. When we look at the price gains that you've gleaned from going direct in the Apartments dotcom business. Could you just talk about sort of how much progress you've made versus the potential for converting the indirect business to direct?
And also the types of units or apartment buildings, I should say, that have been the focus? In other words, are they the 100 plus type apartment buildings, 100 plus type unit buildings? Is there any characteristics that inform sort of the ramp and the visibility to ongoing price gains and synergies over the next year or so?
Sure. So in terms of what type of properties, I would say it is the traditional sweet spot of the Apartments dotcom business, which is in the 130 unit plus category. So it's very smooth across. There's no nuance about what converted from wholesale to direct by unit size. We've converted about 75% to 80% of those wholesale customers to direct, which is something that's very pleased that Salesforce pulled that off.
My goal was to get that done by the end of this year. So to be at 75% to 80% in July, hugely exceeds our expectation. And I felt that there was some risk around that conversion process. I'd say that risk for me is now gone. So we feel very happy about that.
But there have been some prior market conversions from wholesale to direct in the past for Apartments dotcom. And what normally happened was that you would have a slight drop in market revenue as you did the conversions. And then in the years that followed, you'd have an acceleration of revenue growth in those markets. And the reason that is, is that the newspaper sales teams were typically selling all sorts of things. They're selling car advertisements, residential, multifamily.
And this is just one thing that they were carrying in their bag. Our Apartments.com sales force, this is what they do. We can control the process much in a much more effective way. We can add resources to markets where I think there should be resources added. So normally you see an ongoing lift in growth in these conversion markets for quite some time.
So the big markets that were really impacted here were Washington, D. C, Chicago, Phoenix, Indianapolis and a couple of others. So just to add to that Andrew. So I have put this in my sort of revenue range for the year. It's great to actually sort of lock it in early.
So it's sort of a one time step up in the sales and then I think their sales will be pretty steady moving forward. Now just like with LoopNet and I know you covered them, the apartment renting season, advertising season is pretty in full force in the second quarter. As you get into late in the year and especially in Q4, it's a tougher comp. And of course, the majority of their customer base is not annual subscription. So just like with LoopNet, we're going to go through the same process where we're going to start moving those over in the long term to annual agreements.
But I've accounted for all that in my guidance range.
Thank you. Great. Thank you.
And next we'll go to the line of Bill Warmington with Wells Fargo. Please go ahead.
Good morning, everyone.
Good morning, Bill.
Such pressure to ask a good question. I think I want to ask what was that website address? No. Just kidding. I wanted to get John Coleman's phone number again.
The
Is the call getting off the hook Bill?
All right. The real question I want to ask is, if you could talk a little bit about the organic growth calculation. I mean, if you just kind of back out $25,000,000 in revenue, you end up with a figure that sounds like it's below the pro form a level. So I was hoping you could give us maybe a bridge, if you will, from the reported to the organic level? Not a Brooklyn Bridge, but just a growth bridge.
So to give you some color
on that, so all we did was we pro form a ed sort of the year so far the 6 months ended June. The business would have done on a pro form a basis about $289,000,000 of revenue for 'fourteen versus $254,700,000 in 2013. So all we did was take their numbers and our numbers on a pro form a basis. So it's grown about 13.5%. So we're sort of growing again plus or minus on a bigger broad range 12% to 15%.
And I think that's a pretty good range that we'll be in here over the coming quarters as again which will relate to the sales force maturity and productivity. Now remember you get the basically the combined business the CoStar business before 50% of them new. Now the Apartments business will go through the same thing, which actually might even be lagged by a few 2 or 3 quarters from the our core business. So that will again those productivity gains will come in sort of in the back half of this year Q4 and then really roll through to 2015. So sort of you're on a I would say on more of a full run rate in 2016.
But for people that were have listened to the calls and been around in the meetings with Andy and I, I mean, realistically the productivity gains actually continue to go up for 5 years. But obviously you see the biggest increase in those 1st 24 months. So we're pretty excited. I think we're in a good position and we look forward to it.
All right. Thanks.
Thanks, Bill. Thank you.
And our next question comes from the line of Michael Wong with Needham and Company. Please go ahead.
Thanks. Good morning, guys. Just a quick question for you. So, obviously, the revenue synergies around Apartments dotcom stems from the conversion of wholesale to direct. I was wondering, I mean, could you talk about the activity and any early success
that you're seeing
selling CoStar information services into the Apartment.com customers? I mean are we too early to see any benefit from that yet?
Michael, the answer is I gave you some good color around that. We are too early to have around that. So just like LoopNet, we focused on certain components in sequence. So to me the very most important component was securing the wholesale revenue. And then secondarily making some immediate improvements to the site and then having everything in the bank for the plans for the next generation sites.
We've got all that behind us. We've also ramped the sales force. The phase of beginning the cross selling the phase of beginning the cross selling with information is later in the year. I'll tell you that I met with a very small handful of customers, significant customers who I come across in various functions. And I was excited to show them our plans for the next generation of the marketing website for Apartments.com.
And I was thrown off by the fact that 100% of their focus went to what we could do for them on the information side. So I would sit in a presentation with some reasonably intelligent client for apartments.com and you're showing this great these are great marketing solutions you're doing for 45 minutes with a lot of passion. I say, man that information potential is fantastic. When can you help me with that? So we think there's we know that there's a lot of potential there.
Some of our very biggest customers have invited and solicited follow-up meetings on the information component, even though that's not in the 1st cycle for us. So we are going to be talking about that over the course of the next year or so. And I think it'll end up being similar to LoopNet and that you'll have a very strong information and marketing back and forth. And it will help I think to strengthen the relationship with these clients and build more meaningful long term relationships not the they're a great partners.com already has great relationship with these customers, but even stronger real multilevel business relationships. And just to remind everybody just like LoopNet, I don't think we really started getting into that until 3 to 4 quarters into it.
So as you guys listen to all the things that we've done in just the 1st 3 months, we're off to a pretty fast start. But it is a moment for self reflection when you're disappointed that they're not paying enough attention to your marketing thing they want to buy talk about buying your information like hey guys I'm not trying to sell information.
But I will. But I will
if you want. Thank you. Thank you.
Thanks. And our next question comes from the line of Brandon Dobell with William Blair. Please go ahead.
Thanks. My only question Andy is how did you get your prepared remarks under 45 minutes?
I have been significantly
yes, it only took you, what, 5 or 6 years. So your synergy kind of it's kind of, I guess, trajectory is much better than your prepared remarks trajectory. So congratulations.
Question sir?
If you were to look at the group of experienced sales, I think you called out 118 that have more than 1 year and they're doing 420,000 plus of annual gross sales. What did that number look like, I don't know, a year ago, 6 months ago? I guess what I'm trying to get at is your experienced guys, do they continue to see growth in that annual gross sales on a per capita basis?
I'll be giving you a somewhat anecdotal or an educated estimate of what that number would look like.
Okay.
But I'm fairly certain that it would be flat or down. And it would not be about competitive positioning, product value or economic. It would be more around disruption in the sales force associated with that level of growth. So managers are focusing on hiring, training, onboarding in many cases learning the products themselves, meeting new customers. And some and you get some number of salespeople sort of fall through the cracks.
So some of our very top producers, Joe Pascal is still doing fantastic. But you get some folks in the middle who start to fall through the cracks when you have a much bigger sales force. And then you'll be able to but you'll catch they'll catch up with productivity and get back on their curve. So if you look at a 5 year Sort of growth throws a wave in that line, but you expect it to come back once you have everyone's sort of more grounded and has their sea legs. And Brandon just to add to that, we're setting up calls with analysts for after the meeting and I think Rich or somebody was scheduling a 4:30 call and they said, well, are you sure you guys will be done with your earnings call by then?
Good question.
It's a good question. And the investor that e mailed that knows who they are. So and just to add to Andy, so essentially I do think that the cohorts of people that spill over each year and obviously we have fairly high retention with people that have been here for over a couple of years. Those cohorts do continue to get productivity gains over a 5 year period. I think we've sort of shown that and talked about that.
So but obviously right now you just have a huge cohort in the new area that will just continue to move. So this is going to be something again. It's going to the big hiring push happened sort of late 2020 or Q3 and Q4. We're ramped up by the end of the year. And I think you're going to start seeing those gains, but it will really carry all the way through 2015.
And so we're pretty
excited. Should we expect to get those metrics, those inexperienced and experienced, I guess, numbers of reps in their annual gross sales on future conference calls?
Yes. I mean, I think just like we do here, we try to give relevant we give some consistent metrics all the time, but we'll give relevant metrics each quarter based on what we're doing. I don't know that we're going to give it every single quarter every detailed number, but we're obviously going to be giving you guys insights on every call on how the sales force is doing.
Okay, great. Thanks.
And our next question will come from the line of Peter Lorre with JMP Securities. Please go ahead.
Hey, thanks. Congratulations on a very nice quarter. I know it's still early, but can you sort of discuss some of the high level similarities and differences between your experience with Apartments dotcom so far versus LoopNet? Sure. Well, the businesses are extremely similar.
Obviously, there are more players in the apartment sector, more competitors in the apartment sector. However, I would say that the apartment sector is probably more sophisticated and their sense of their need for these sorts of products and services is more focused and more intense. So again, you have these professional investors with $200,000,000 $300,000,000 assets with hotel more hotel like booking needs than a retail property that leases up for 10 or 20 years at a time. So the demand is very clean, clear. The customers are sophisticated.
I would say there are many more similarities than differences. So SEM, SEO, site design, content advantages, information, marketing. A lot of the mistakes we've made over the last 28 years apply that can give you some sense here what you should and shouldn't do. A lot of the sales force planning is very similar. And I'd say that through the last several months, my enthusiasm has climbed for the new space that we're in and you see an awful lot of opportunity here.
And realistically, it's an industry that has sort of in my mind fallen into a little bit of a pattern and there's a lot of opportunity for innovation. Great. Thanks. Thank you.
And our next question comes from the line of Brett Huff with Stephens Inc. Please go ahead.
Good morning, guys. Good Good morning.
Hey, Brett.
I hate to burn my question on just a clarification, but I want to make sure I get it, so I'm going to do that. So you all said that
there were $16,000,000 of net new annualized subs and you said
it was basically the same as 2Q last year. But I recall that it was more like $14,400,000 last year. Are my numbers wrong? Or is there something that I'm It's
$16,100,000 last year. It's 16.1% this year. Just like we sort of gave a little color around the core CoStar family of brands this time, but the consistent metric is 16.1% versus 16%. So they were very similar. The 16% was actually 16.043%, almost rounded up to the same 16 point 1, but it was pretty close.
And last year it was 16. And I'll give you another question because that really was just
a clarification. The question I have is on the Apartments dotcom property, one of the questions that we've got and
it seems like the advantage that
you all will have in addition Andy to the work you're doing on the website design and the SEO and the conversion to from wholesale to direct and etcetera is obviously your information advantage. And I recall that Apartments dotcom had was it 4,000,000 units in their kind of research inventory? If I recall you had something like 16,000,000 or 17,000,000. I'm not sure if those numbers are right. What how many
of those
incremental units the 4,000,000 that they have versus the 16 or 17 you have? When does that data go into the site? And is that one of the things you're going to use to draw more eyeballs to the site?
Yes. So for I'm sure that I've got a dozen fine competitors on the call listening and greetings to all of you today. Welcome to the CoStar earnings call. But the it is something that from a consumer, the industry I think historically has really focused everything around how do I develop my business relationship with the property owner. And I think there needs to be more focus on what does the consumer want in the experience.
I think that's a huge opportunity here. And the content we have, I think will allow us to provide a much better experience to consumer. I think that it will be a very similar game to if you look at what I was talking about with starting out with 31% of listings monetized at LoopNet acquisition and now moving that to 50% continue to move that on up. I think it will be a similar kind of game where you'll have a game where you have a mix of monetized and unmonetized and you'll just try to move it to more and more monetized over time. But we believe that we can give a better consumer experience by using our research capabilities.
And in terms of when we do that, I can't tell you.
Thanks, Brett. Thank you. That's my need. I appreciate it.
And next we'll go to the line of Todd Lueckasek with Morningstar. Please go ahead.
Hi, guys. Nice job with the continued development of the business as usual. And thanks for taking my question. I was just hoping you could talk a little bit about how you view debt in the capital structure. You've obviously got debt there today, but overall it's a net position.
And what would you like net debt to enterprise value to be over the long term for the business?
Yes, sure. I mean, obviously, we're looking to optimize the capital structure. We believe that we sort of put the $400,000,000 term loan to L+2 and that drops over time with leverage ratios plus we have a 2 $25,000,000 revolver. So it's a combination of long term I believe with the significant cash flow that we have that we can have a slug of long term debt and I think in the 2 to 4 turns range, we could flex up higher right after certain acquisitions because of the cash flow. But I think long term we'll have 2 to 4 turns on there because of the high cash flow.
And again, it will move around based on strategic acquisitions and different things that we're doing. But I think we're pretty comfortable in that 2% to 4% range in the long term, again having ability to flex up, keeping our options open with revolvers like we have. So I think that's a pretty good place for the company to be. It will give us opportunities to take advantage of strategic opportunities similar in size to LoopNet Apartments that we've done. You take the $466,000,000 plus $225,000,000 you can see in our cash flow, we've got quite the capacity to do more strategic deals.
Okay. Thanks.
Great. Thanks. Thank you.
I know Brian you can't ask the question.
Okay. We do have another question from the line of Todd Lukasik. Please go ahead.
Hey, guys. Back again. Just following up on that and some of the earlier comments you made with regards to acquisitions. It felt like after the LoopNet deal that you guys were on pause for a little while with all the time that that was taking to integrate and get it to where you guys wanted it to be. Is there a similar situation with Apartments dotcom?
Or if another large deal came around today, would you guys have the bandwidth to take that on?
Well, it would depend upon what kind of deal that was. So I think right now the only way we would consider a transaction in something a very unique opportunity. So we would likely be somewhat conservative in what we do in acquisitions that stretch management bandwidth. However, there are always opportunities to do acquisitions where the acquisition is more consolidation or something that is already well within our management competency all the way through our ranks, so that the integrations occur at a level other than the C suite. So to answer your question, it is there are a lot of things out there right now.
We're looking at everything. Some are very interesting, but we prefer to focus on the great opportunities we have in LoopNet, CoStar, Lands of America, BizBuySell, Apartments dotcom, the debt and equity space. We've got a lot of good things to focus on and we really only want to do things that support those core areas.
Got you. Thanks a lot.
Thanks, Todd. And I appreciate everyone. I think we just crossed the noon hour, so we're over our time limit. And I think AT and T is charging us about $1,000 a minute. So we appreciate everyone's time on the call today.
And that does conclude the conference for today. Thank you for your participation and for using AT and T's executive teleconference service. You may disconnect your line.