Welcome to the CoStar Group Fourth Quarter Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. And as a reminder, this call is being recorded.
I'd now like to turn the conference over to Rich Simonelli. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to CoStar's 4th quarter 2013 conference call broadcast live from our headquarters in Washington D. C. We're delighted you've joined us. And before I turn the call over to Andy, I have some really important information for you.
So certain parts of this discussion contain forward looking statements, which involve many risks and uncertainties that can cause actual risks or 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 February 19, 2014 press release on 4th quarter and year end results and in CoStar filings with the SEC including our Form 10 ks for the period ended December 30 1, 2013, as well as our Form 10 Q for the period ended September 30, 2013, in each case under the heading of Risk Factors. All forward looking statements are based on information available to us on 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 over the Internet at www.coastar.com and a replay will be available approximately 1 hour after the call until March 28, 2013. To listen to the replay, please call 1-eight hundred-fourteen
So listen to the replay
call 800-four seventy five-six seventy one within the U. S. Or Canada or or ARDIC03653844 outside the United States and Canada. The access code is 318,994. It's also available on our website right after the call.
So without further ado, I turn it over to Mr. Andy Flores.
Good morning, everybody, and thank you for joining us today. 2013 was clearly the best year in CoStar's history. We had an exceptionally strong year in all aspects of the business and we believe we are positioned to continue to grow at high margins for many years to come. I'm very pleased with our outstanding financial results, which are the direct result of our entire organization of 2,000 plus professionals working hard to create valuable products for the huge community of commercial real estate professionals we serve. We increased revenue by $91,000,000 in 2013, growing it to $441,000,000 for the year.
We continue to grow the top line in the mid teens as our 4th quarter revenue was nearly $116,000,000 which is approximately 16% year over year growth. EBITDA for 2013 was $94,000,000 This is a 56% increase over 2012 and by far the most EBITDA we've generated in our history. Adjusted EBITDA margin accelerated to over 5% for the Q4 of 2013. In the Q4 of 2012, adjusted EBITDA margin was 20 5%. Margin expansion continued throughout 2013, while we continued to aggressively invest in the business.
Our 12 month trailing renewal rate was 93% 98 percent for customers who've been with us for 5 years. In 2013, we added nearly 4,800 new CoStar information subscription customers, which is the most we've ever added in 1 calendar year. Our annualized net new sales of subscription services in the Q4 was $15,800,000 an increase of 15% over the Q3 2013 and a 46% increase year over year. Our 4th quarter 20 13 subscription based revenue reached $87,000,000 for nearly a 21% year over year revenue growth rate. So we're really quite pleased with our revenue momentum and our earnings momentum.
The LoopNet acquisition integration has been extremely successful and beneficial for customers shareholders alike. We have now achieved $50,000,000 of cross selling revenues since the merger. At this point, I think it's clear that we've exceeded the expectations set for both cross selling between LoopNet and CoStar customer bases and we've exceeded the initial expectations for cost synergies that could be created by combining the 2 companies. So it's taken us about 20 months since the close of LoopNet to get to this $50,000,000 cross selling point. And at this point, we feel that's going to be a little more difficult to accurately report on this number and it will become a little less meaningful.
So we're going to stop reporting on the cross selling number going forward. So at $50,000,000 we're no longer counting. The commercial real estate recovery is continuing. 2013 was one of the best years for commercial real estate since 2007 as measured by the fundamentals of demand, occupancy and rent growth. For example, in 2013, real estate net absorption of the 4 principal real estate sectors tracked by CoStar increased by more than 30% versus 2012.
This absorption support a broad base above inflation rent growth ranging from 1.9% for retail to 4% for industrial. And we continue to see capital flow into real estate investment as sales of commercial property ran 19% higher last year than in 2012. In fact, at $439,000,000,000 in property sales, 2013 had the highest sales volume since 2000 and 7. Net absorption of office space was up 24% in 2013 to 59000000 Square Feet, A post recession record 64% of off the submarkets recorded vacancy declines in the Q4 of 2013, which is a very important indicator that the broad geographical base of commercial estate is improving and is showing good fundamentals. I think that is probably one of the single most important indicators.
Strong apartment sector fundamentals allowed vacancies to remain near record lows at just 4% as of year end. For 2013, apartment 2013, and reduced homeownership rates continue to boost apartment demand. A doubling in the amount of new construction has provided alternatives for tenants and in the near future will probably lead to a period of slightly rising vacancies. In many respects, the industrial sector is the healthiest of the property types, because it benefits from technological changes, in particular, e commerce and limited new supply. Net absorption of industrial space was 37% higher in 2013 than in 2012 and allowed the sector to achieve one of the highest demand growth rates among the 4 major property types.
Retail sales are now up by more than 13% from 2,006's peak levels, driving up retailer profitability and encouraging new store openings. While the market remains plagued by MT retail space, in higher quality centers landlords have been able to push rents aggressively. In short, 2013 was a good year for retail. All in all, all the sectors appear to be giving us a favorable environment for a successful 2014. All this valuable intelligence on what is occurring in commercial real estate markets is only made possible by dedicated efforts of our more than 1200 commercial real estate researchers, economists and software developers supporting their work.
Over the course of 2013, that team kept CoStar firmly positioned as the leading commercial real estate research organization in the world. They conducted 5,400,000 research calls, drove 1,600,000 miles inspecting properties, to our market coverage. Turning now to the United Kingdom. We entered the U. K.
In 2003 with the purchase of small commercial real estate company called Focus and I believe its corporate name was Property Intelligence. Over the several years that followed, we acquired several more small companies in the United Kingdom and France. None of these companies had sophisticated software nor did they have comprehensive or adequate information. Our first challenge was to cost effectively research the U. K.
Market, so we could deliver comprehensive current and accurate information on the U. K. Market. We initially acquired a small U. K.
Research team with only a dozen or so researchers based in an extremely high rent area Central London. This group was only tracking a fraction of the market with about 25,000 commercial listings in the U. K. With that spotty coverage of the market, the service was not considered an indispensable utility to our clients. We estimated we needed over 100 researchers to track the market properly.
In order to cost effectively, we closed our London Research Center and opened a much larger research center in Glasgow, Scotland, ultimately employing over 150 researchers there. Under the leadership of Simon Law, our U. K. Director of Research, the team took our database from 25,000 listings to over 156,000 listings, so a 6x increase. And we believe that is the most comprehensive coverage the U.
K. Market ever built. Despite achieving recognition from our clients, we're now delivering high quality research for the U. K. Until recently we were still delivering that data through the old 2013, a large international team of software developers led by Jason Butler, Vice President of Software Development, modified our successful U.
S. CoStar software solution to handle the U. K. Data model and we migrated the U. K.
Data into our successful CoStar software environment. Our plan is to upsell existing subscribers to the new enhanced platform with an average price increase that we're seeing of approximately 37%. In addition, we believe the new service has greater appeal to new customer segments such as owners, banks and others, which should accelerate our acquisition of new customers. In fact, we are seeing owners and banks sign up at about 3 times the rate we historically were picking up that sort of segment since we released the new software. During the course of 2013, 386 U.
K. Firms upgraded or purchased our new U. K. Co Star platform and that those subscriptions are covering 2,000 users. 1 of our more notable transactions in 2013 U.
K. Was our multi year contract with the largest surveyor in the U. K, CB Richard Ellis. Revenue growth has accelerated in the U. K.
And in fact it K. And in fact it increased 5.5 percent from Q3 in 2013 to Q4 in 20 13. As we completed the enhancement of our U. K. Database and the migration into our CoStar Suite platform, our costs in the U.
K. Fell dramatically. And in the Q4 of 2013, the U. K. Was profitable with $781,000 EBITDA at a 14.1 percent EBITDA margin.
Congratulations to the U. K. Team. Giles Newman, the Managing Director who leads CoStar in the United Kingdom Matthew Green, our Finance and Operations
one provider in
the U. K. 97 of the top 100 brokerages in the United Kingdom subscribe to one of our services now. We have thousands of client firms to potentially upsell in the U. K.
In addition to many completely new prospects. We anticipate significant revenue growth in the U. K. For some time to come. Our results in the U.
K. Clearly demonstrate that the CoStar business model can be successfully implemented And with that, let's turn to Toronto. With our successes in the U. K. Now freeing up a little bandwidth to allow us to focus our efforts up in Canada, we're now focused on beginning to deliver that product and bringing the Canadian operations into profitability as soon as possible.
After 2 years of research in the Toronto market pleased to announce that we're beginning to sell CoStar Services covering Toronto. I recently spent time up there with our local sales team visiting the top 15 firms in the market. Feedback we received was overall very, very positive, very welcoming. In half of my meetings, clients asked why it had taken so long to bring the product to Toronto. Didn't really have a great answer.
Many have had U. S. Associates call over the years and asked for the CoStar reports for buying interest and we're now actively negotiating contracts with multiple brokerage firms. I believe that there is great potential for decades of profitable growth in Toronto and Canada overall. As we discussed in earlier conference calls, we invested throughout 2013 to build a much larger direct field sales force throughout the U.
S. We believe that we can deliver higher levels of profitable growth with a larger sales force. We believe the size of the opportunity we're addressing and enjoy right now requires a larger field sales force to fully capture it and get the value that we have here. It takes 6 months to a year for a new salesperson to become fully productive. So in the short term, sales force growth reduces EBITDA.
In addition, the lower productivity of new salespeople and higher initial training requirements these salespeople temporarily produces our per salesperson productivity across the board. It actually caused a little bit of dip in the existing established salespeople's productivity and we've seen this several times
in the past when
we grew. Salespeople with 3 months of experience tend to generate approximately 10,000 production number has typically climbed to approximately 14,400 per month. A fully trained field sales AE with several years of experience typically produces significantly more at 30,000 per month. In the beginning of the Q1 2013, we had 124 field sales reps in the U. S.
By July 2013, we had 140 and by year end, we had 2 12. That's an increase of 71% over the course of the year and really quite significant. This is the largest field sales force we've ever had in place. In order to provide optimal management support to this larger sales force, we added 10 senior sales managers with relevant backgrounds from great companies such as Thomson Reuters, JLL, PR, Newswire, ADP, Lexus, Nexus, Paycheck, EMC, Informa, XO Communications and others. The hiring of these individuals, reconfiguration I am proud of the commitment to excellence our sales force delivered during this time and they did so while producing solid top line growth.
We recently held our annual sales conference and the positive energy in the room was really great. We are really excited about the upcoming year. With our larger sales force and new sales territories, we plan to drive sales at a more local level, which we believe will increase sales and increase retention rates. You have to worry about that at 93%, 94%. It will take some time for our new sellers and sales management to come fully up to speed, but I expect to see the full impact of the recent growth in sales force in our net new numbers as we get into the later part of the year and into 2015.
We launched 5 CoStar product enhancements in the fall of 2013. These enhancements included new lease analysis tools, mobile analytics, enhanced web analytics, a new map search and comprehensive multifamily information. On LoopNet, we released a new advertising opportunity brokers can use to reach prospective clients that are likely searching for properties on LoopNet. Since our October 2013 release, our clients have successfully executed 28,000,000 searches on the new CoStar suite and they've built over 11,000 lease financial models in the new CoStar lease analysis tool. We continue to be very pleased with the positive reaction we are receiving to the product.
One important area of success I want to highlight though in this new release is the new multifamily or apartment information analytics tool released. We have been collecting partial information on apartment properties for decades now. Now with this new release, we have dramatically increased the breadth and depth of coverage. 1 of our most experienced research executives, David Porter, has led a team of several dozen researchers assisted by over 100 field researchers and a number of overseas researchers on a multiyear effort to build the premier information source on U. S.
Multifamily properties. We believe that we have built by far and away the most comprehensive database of apartment buildings ever assembled. We now have information on 326,000 apartment buildings, representing more than 17,500,000 apartment units. With those words, competitors are out hiring researchers trying to catch up. We have hundreds of thousands of images, details on construction type and quality, amenities, unit mixes, rents, sales prices, asking prices, concessions and more.
We are also tracking details on 3 quarters of a 1000000 apartment units that are proposed or under construction currently. We believe we have information on 7 40 percent more properties than the 2nd closest information provider and 25 20 4 times more properties than the number 6 player in that space. U. S. Multifamily properties have an aggregate value of approximately $2,000,000,000,000 We believe this is a very important component of commercial real estate and an area we have not historically fully addressed.
We believe there are very significant revenue opportunities that could be achieved by meeting the full information and marketing needs of the multifamily industry. In the same way CoStar has successfully met the information needs of the office, industrial and retail real estate industries, we believe we can additionally meet the needs of the multifamily industry. We've been meeting some of their needs, but we believe we can meet a much broader set of their needs. The same way CoStar Group has shown through BizBuySell, Lands of America, LoopNet and other market places that we can meet the marketing needs of the office retail industrial business for sale land and farm brokers, we believe we can meet the the needs of multifamily leasing agents. We began making significant investments in this area several years ago and we'll continue to do so.
Since we released the enhanced multifamily service in October 2013, clients have executed 800,000 multifamily specific searches and users have viewed close to 1,000,000 detailed pages on multifamily properties. Client surveys suggest that our multifamily enhancements were the most popular element of our fall product enhancements. We intend to execute aggressively on additional product initiatives in 2014 to capture what we believe are very significant revenue opportunities in providing multifamily information and marketing services. Our marketplace products are some of our fastest advertising opportunities we just released. This is basically with large audiences of people coming to our website looking to potentially lease or buy lease or buy properties, our broker clients are interested in presenting as these people offering their services to help them with that process.
We just released this and we've begun selling it. We're having some good success and we hope to be able to report more on that next quarter. Over the last 6 years, we've accumulated an enormous amount of experience building, running and growing marketplaces. In fact, we run the top 3 commercial real estate marketplaces in the industry. We also run the top marketplaces for business for sale and farms for sale.
With loopnet.com, we operate the clear number one commercial real estate marketplace in the United States. Since the close of the acquisition at the end April 2012, we've really reinvigorated LoopNet as growing stronger than ever before. Loopnet.com draws by far the most traffic in commercial real estate with an average of 4,800,000 monthly unique visitors. This is up 37% from 3,500,000 monthly uniques back just before the acquisition closed. In that time, we grew In the 20 months since the close of the LoopNet transactions, dollars In the 20 months since the close of the LoopNet transactions, we have increased revenue for premium lister 30 8% and that stands in stark contrast compared to the 8% growth for the 20 months prior to the acquisition.
So it's one of our faster growing areas now in the company overall. The Louvet acquisition also gave us the 2nd most trafficked commercial real estate marketplace called CityFeet and that joins our original marketplace showcase which is now number 3. So we've built the first, 2nd and third ranked marketplaces for commercial real estate on the web based on site traffic and likely revenue. We also own and operate several industry leading marketplace marketplaces in other verticals. Lands of America, land and farm are number 1 and number 3 industry sites for rural land based on revenue and clients.
They are the number 2 and 3 sites by traffic and are showing strong growth in that area. In 2013, total visitors increased 20% 41% respectively for each site. Land and farm now averages 1,000,000 monthly visitors, while 2012 revenue. Our industry leading business marketplace verticals are BizBuySell and BizQuest. They facilitate the sale of small businesses and are the number 1 and number 2 websites in this important space.
In 2013, BizBuySell grew total visitors by 27% year over year with an average of 1.2 1,000,000 monthly visitors. Total leaves delivered to business sellers grew by 25% year over year. Biz Quest grew monthly total visitors 48% year over year and total leads delivered to business sellers increased by 31% year over year. In 2013, we've averaged over 9,000,000 unique monthly visitors in aggregate for all of our sites. Our marketplaces add to the depth and breadth of our offering and add large communities of users who come to CoStar.
This increases the network effect and allows for enormous cross selling opportunities, which we believe lead to high sustainable growth. 2013 was our most successful year yet. We believe we're in excellent position to maintain mid teens revenue growth, while expanding margins for the foreseeable future. We expect the introduction of new services, especially in the apartment sector, enhancements to our existing services, continued growth and development of our sales force as well as the strength of the commercial real estate recovery will create an even more successful 2014. We continue to believe that we are on our way to reaching our goal of 8 $100,000,000 revenue with 40% margin as we exit 2017.
I will now reluctantly turn the call over to our CFO, Brian Radek. He'll do a fantastic job running through the numbers. Thank you, I think Andy. That was more of a good one to keep talking. I know.
That was tough. I'm pretty impressed, Rich, you kept him under 3 hours. So as mentioned, we're very pleased with our performance during the Q4 and full year 2013. CoStar's information analytic and marketing services continue to show strong revenue growth and the successful integration of LoopNet continue to be a big contributor to our growth in revenue and earnings. EBITDA margins continue to expand, driven by mid teens revenue growth.
Today, I'm going to principally focus on the year over year comparisons for the Q4 of 2013 and then also on our outlook for 2014 and beyond.
Starting with COSGRIP's results for the Q4
of 2013, the company reported 115,600,000 dollars of revenue, an increase of 15.5 percent compared to $100,100,000 last year. Full year revenues were 440.9 $1,000,000 an increase of $91,000,000 or 26 percent over revenues of $349,900,000 for 2012. This revenue growth was driven by the core information service performance and the continued progress on cross selling the LoopNet efforts as well as strong revenue from the marketplaces. EBITDA increased 54% year over year to $31,500,000 for the Q4 of 2013, up from 20 point $5,000,000 in the prior year. EBITDA for the 12 months ended twelvethirty onetwenty 13 was $94,200,000 which is an increase of 56 percent or $34,000,000 from EBITDA of $60,200,000 in Q4 of 2012.
We reported adjusted EBITDA of $40,800,000 for Q4 2013, which is an increase of 15.7% or approximately 63% compared to $25,100,000 last year. Adjusted EBITDA margins increased to 35.3% in the Q4 of 2013 from 25.1% in the Q4 of 2012. So when you look at the flow through from incremental revenue down to earnings, one can sort of understand what happened here and how significant the earnings leverage is in our business. I think we've talked about this for years, but if you think about that flow through, it is fairly significant. Net income for the Q4 of 2013 was $12,800,000 or $0.45 per diluted share, which is an increase of $8,100,000 from $4,700,000 or $0.17 per diluted share in the Q4 of 2012.
Non GAAP net income for the Q4 of 2013 was $22,200,000 or $0.78 per diluted share, which is a 76% increase from $12,600,000 or $0.46 per diluted share for the Q4 of 2012, amazing. Reconciliation of all non GAAP net income, EBITDA, adjusted EBITDA or any 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.coastar. Com or you can just email richciminellicoastar.com if you have questions. Cash and investments increased $33,300,000 to $277,900,000 as of December 31, 2013, up from $244,600,000 at the end of the Q3 of 2013. Cash and investments exceeded total short and long term debt of $153,100,000 as of December 31, 2013.
Cash flow from operating activities was very strong at $35,500,000 for the Q4 of 2013 and was $108,300,000 for the 12 months ended December 31, 2013, which demonstrates again the strong cash flow characteristics of our business model. So $108,300,000 of cash flow from operations, phenomenal. At this point, I'm going to give some additional color on a few metrics to highlight the strong performance in the 4th quarter. We achieved $15,800,000 in net new sales of subscription services and annual contracts in the 4th quarter as a result of the ongoing success of driving sales of information analytics, marketplaces and lead generation, all coupled with the successful cross selling efforts. This represents a 46% increase in net new sales of subscription services and annual contracts compared to the $10,900,000 during the Q4 of 2012.
Revenue from subscription services and annual contracts was $87,100,000 for the Q4 of 2013 or 75.3 percent of our total revenue, up from only 72% a year ago. For the trailing 12 months ended December 31, subscription revenue from manual contracts totaled $326,900,000 up 21% from 2 $71,200,000 for last year. At this point, approximately 75% of our revenue is coming from manual subscriptions and the remaining 25% is primarily made up of our marketing services including LoopNet Premium memberships on monthly or quarterly arrangements along with CoStar Showcase as well as revenue from advertising across both platforms. As we continue to make progress upselling LoopNet subscribers onto annual contracts, we expect to increase the amount of revenue included in our subscription annual metric. The renewal rates for annual subscription revenue remained high during the Q4.
The 12 month trailing renewal rate for CoStar subscription based revenue was $93,100,000 in Q4 of 2013, as this metric ticked down slightly as expected from $93,300,000 in the prior quarter. As we've discussed for a few quarters now, as we continue to introduce more LoopNet contracts into our subscription base, we'll expect this 12 month trailing renewal rate to edge down slightly. The small decline to date is about what we expected and we do expect to continue to see it move down a little bit a percent or 2% over the next few years as we get more and more people signed up for annual contracts. And then eventually that will turn around and it will start to increase. Renewal rates for CoStar subscribers who've been with us for 5 years continues to be strong at 98% and pretty consistent for the past several quarters.
As Andy discussed earlier, we continue to see great progress on cross selling LoopNet and CoStar Services. To the end of 2013, total cross sells were $46,800,000 and earlier this month we achieved $50,000,000 as noted in our press release. I think we've clearly demonstrated that the revenue synergies from this acquisition have been a powerful growth catalyst for the business and exceeded expectations and will continue to be for years to come. I believe the progress selling into the LoopNet lead list will continue to be evident in the sales and revenue numbers we report moving forward. At the end of 2013, we had 3 79 total sales reps, a modest increase from 355 at the end of 2012.
Today, our total sales reps in the field, sort of core field sales reps as Andy mentioned is 212. We have 109 inside reps, 14 in the U. K. And a handful supporting the various subsidiaries. On previous calls, we've talked about how we're going to be pushing to make the move to get more people selling in the field.
As Andy noted, we're making great progress expanding that core field sales team, which is now 212. We started 2013 with 124 core field sales reps, which does not include inside sales, ad sales, HQAE or trainees and etcetera. Therefore, we increased our core field sales rep by 88 people or 71% in the past year with the majority in the last few quarters. Including the impact of sort of normal turnover, as of the end of the year, about half our reps have been with us less than a year. As Andy noted, we've also added about 10 new managers to our team to support the growth in sales territories.
We're now very focused on training and developing all these new managers and sellers and bringing them up the productivity curve as quickly as possible. As Amy mentioned, it usually takes 6 to 12 months to bring a new rep up to historical productivity levels. So essentially half our sales force with experience is training the other half which is brand new. Therefore, while we're training and developing these new reps, I would expect to see sales trends in the first half and sales metrics in the first half of twenty fourteen to be somewhat lower than prior year and then begin to ramp up in the second half of the year and into 2015 as we reach full productivity increases. This expected lower productivity in the first half of the year, while ramping into the second half of the year and into 2015 is factored into my revenue guidance range.
Throughout the year and last year, we continued to deliver solid sales numbers while undergoing this transformation and I expect to see solid sales numbers and strong returns from these efforts as we start moving into the back half of the year. I'll now discuss outlook for the Q1 and full year. Our guidance takes into account all these trends, growth rates, renewal rates, which may be impacted by economic conditions in commercial real estate and the overall economy among other things. The guidance takes our guidance on the impact in foreign currency exchange fluctuations on the top line remains consistent. We do not attempt to predict foreign exchange rates or fluctuations and our guidance assumes little or no volatility to the current rates.
Actual results may vary from these estimates. We're providing outlook reflecting our current expectations as of today, February 20, 2014. We expect revenue for the Q1 of 2012 to be in the range of $116,000,000 to $118,000,000 and for the full year, we expect revenues of approximately $490,000,000 to $498,000,000 In calls last year, I discussed our plans to deemphasize or discontinue certain redundant services, which we expect to have an impact on 2014 of approximately $10,000,000 to $12,000,000 which this is included in my revenue and earnings guidance for year. So we've taken that into account. In terms of earnings, we expect the Q1 2014 fully diluted non GAAP net income per share of approximately $0.62 to $0.66 based on 28,600,000 shares.
For our business, the 1st quarter expenses include seasonally higher costs related to our annual sales conference, annual standard increases for personnel as well this year planned investments in marketing and branding in the first half of the year. If you look back over the past decade, you'll see typically our earnings declined from Q4 to Q1 in most years due to these seasonal expenses that are typically incurred in the Q1 followed by increases in earnings and margins in subsequent quarters. We currently assume a 38% tax rate in order to approximate our long term effective corporate tax rate, which I believe was 37.5% last year. For the full year 2014, we expect non GAAP net income per diluted share of $2.92 to $3.02 based on 28,800,000 shares. Additionally, we expect to continue to invest on improving our service, marketing, branding initiatives as we discussed earlier and further evolving our sales force throughout the year.
In the middle of 2012, shortly after the LoopNet acquisition, I introduced the financial goal of $500,000,000 run rate by Q4 2014 with adjusted EBITDA margins in the low to mid-30s, which would have included essentially mid teens growth rate. The revenue and earnings ranges I shared today highlight that we fully expect to meet and possibly beat these goals.
So I
think there's a little doubt in that. In summary, I'm very pleased with CoStar's financial results for the Q4 and full year 2013, which clearly shows strong revenue growth and margin expansion in cash flow. We believe the company is operating in a and continuing our mid teens revenue growth to $800,000,000 in annualized revenue run rate exiting 2017 at even higher margins in the 40 plus percent range. We believe the size of the market opportunity, our position in that are competitive moat, platform, strong cash flow and management team to execute on that goal and take advantage of this massive opportunity. As always, I look forward to sharing the progress with you in the coming quarters and I'll now open it up for any questions.
We'll begin with the line of Andrew Jeffrey with SunTrust. Please go ahead.
Hi, guys. Good morning. Nice job. Thank you. Hey, a couple of questions.
First of all, and I appreciate the BlueNet cross sell and the fact that it's no longer quite as relevant as call out metric. But it looks like we got some nice acceleration in the Q4. Are you still thinking about the potential LoopNet cross sell in the same context that you have before somewhere between $120,000,000 $150,000,000 opportunity? Has anything changed in that regard?
No. It still remains a massive cross sell opportunity. In fact, December was an unusually high month of CoStar property subscriptions, I mean, really surprisingly so. I mean, there's lots of different revenue drivers in the business. But if you look at a chart of new CoStar subscribers in the information side month by month December stood out like Everest.
So it's not going away. It's still there. We still have 50,000 to 100 1,000 people to try to sell our information who are not yet buying CoStar property or suite. That remains a CoStar audience. But as a metric now, it sort of refers back to the acquisition and I want to get the salespeople a little more focused on total revenue, not on a metric around an acquisition.
So just trying to and then also it's just too it's a metric that's driving sales force behavior in a way that I think we want to pull them back from a little bit.
Okay. So I assume some of the LoopNet cross sell strength is reflected in the good net new growth against what was a pretty tough comp versus the Q3?
That's 100%. Yes, correct. Okay.
And with regard to the 14 revenue growth guide, I appreciate call it 200 bps, 300 bps of headwind from some of these discontinued legacy with Net Solutions on one hand. On another hand, it sounds like you've got a bolus of new salespeople that should really become much more productive as the year goes on perhaps as early as sort of late 2Q, early 3Q.
Following their ramp, could we expect CoStar
to grow above trend line at some time for some period
of time? Because you've added
a lot of new salespeople as you noted who are probably below trend line productivity right now?
They are below trend line productivity. Like well, they're where we expect them to be, which is below trend line productivity. And their productivity over the next 2 to 3 years can grow typically 300%. And then again, I was looking at a chart last night that shows when we add a large number of new salespeople to mix, the existing salespeople who act as mentors also come down a little bit. So I would expect them to begin to pick up their productivity as we move into the second, third and fourth quarter.
Even if they pick up their productivity in the 3rd quarter, if those are bookings, that's not going to really move the dial meaningfully on the revenue side. So I mean, I sure I look forward to the point at which they are beginning to take effect. But we've been through this 2 or 3 times in the past as we grew from 10 to 30 and we went from 30 to 70 and from 70 to 120. Each time we do that, you put that expense out there, some anxiety around the 2 quarters where you're not seeing an immediate return. And then you begin to see a new higher level production.
And I'd stick with what we really talked about to stay reasonably conservative.
Yes.
And I think so just to add on to that, to answer your question simply, the answer is yes. I think as you exit 2014 into 2015, I think we're setting up the back half of this year, the end of the year and going into 2015, I think should be a strong year. And obviously, each quarter we're going to be reporting on the sales force and sort of productivity. As far as I said, if you look at it, the majority of the sales force has ended or added sort of towards the tail half of last year. We actually at the sales conference we're talking to people that actually had not started yet, but came to the sales conference anyways.
So I think the reality is you're going to spend the majority of the first half of this year with all your experienced people training all the other half of the sales force, which is inexperienced. So I feel really good about as we exit this year. At least you're right. Yes, as you exit this year and you go into 2015, I definitely think we should be seeing increasing growth rates there. So I feel pretty good about it.
Okay. That's helpful. Thank you. And maybe just a quick housekeeping question perhaps for Rich. Could you tell me the number of subscription client sites you had at year end?
Yes, Rich. Good question.
I'll put you on the spot, Rich.
It's about $20,000,000 $22,800,000 $22,800,000 $22,800,000 I just off the top of my head.
Perfect. Thanks a lot.
All right. And next we will go to the line of Brett Huff with Stephens Inc. Please go ahead.
Good morning guys and congrats on a nice quarter.
Hey, Brett. You Brian
in your sort of long term outlook and Andy mentioned this too of the doubling the $800,000,000 to $800,000,000 number. Yes. One of the questions we get a lot is can you give us a little bit more color on the total addressable market so that we can feel comfortable how you all get there? And you've addressed pieces of this over time multifamily and etcetera. Could you just give us a quick tour through the addressable market and the rough sizes as you see them or whatever color you can give us on that so we have sort of a holistic view on that?
Sure. How about if I'll give you something I was looking at last week, which is a slightly nerdy answer to your question. But we took I took longer term revenue trends for Washington, L. A, Baltimore, Boston, Charlotte, just a number of sort of prototypical markets for us. And I look and I took those revenue streams, the subscription revenue streams and LoopNet revenue streams and I divide that revenue by the number of people in the particular city we were serving with that revenue stream.
And then I set the starting point not to a calendar date, but to quarter 1, quarter 2, quarter 3, quarter 4. And then did a polynomial regression on the revenue growth path of those different cities. And it's really quite amazing. So like if you look at Los Angeles, it grows at 0.004x squared, which x is the quarter that you're in as a revenue per person and population. So we're reaching and our square on that is 0.994 and you get basically a 0.94 on doing Washington the same way.
So you
get a really tight sort of polynomial in these revenues and you get exactly the same formula in several of these older markets. So what's that mean? That means that Washington is now generating about $4 per person per year in the population. And a newer market like a Charlotte might be doing $1 or $2 per person of population, but it's following the exact same curve. Now if I take all the markets, if I take all the markets which range from very young like Toronto, which is we may have a contract at this point, which would make it day 0.
And an oldest market like Washington, D. C. And you just accelerate them on this curve. You take where they are and you accelerate them on this curve implies a market size of $2,400,000,000 in revenue in 2024, which is really quite optimistic. But that's basically just an empirical analysis of very consistent long term market by market trends.
So the longer we're to market, the more revenue per person of population we're getting and perhaps there's some Metcalfe law operating there. Perhaps we're creating more opportunities for people to earn brokerage commissions by making the business more profitable. A lot of different ways you can analyze that. So that for me, I can give you a hypothetical size of market looking at penetration rates. I can say, gosh, we're 16% penetrated to brokers.
We're probably I'm guesstimating 4% or 5% penetrated to owners, I could say. And obviously, we have the biggest players in these markets. We have all the CBREs and the JLLs and the top retail owners and so and so forth. But there are still 100,000 plus people who make a living in 100,000 plus firms that make a living each and every day around commercial real estate, but are not yet our customers that we believe will become our customers. And for the 150,000 plus who are our customers today, there is no shortage of additional products and services we believe we can sell these people.
So if you ever are suffering from really debilitating insomnia, I would invite you to come spend some time with me and we can run some polynomial regressions against our historical revenue trends because they're really, really quite predictable. Sounds like a blast. As Andy goes to come up for air, I'll add about 30 seconds to it and I'll keep it short. But I think that when you look at the fact we're approaching essentially with my guidance close to $500,000,000 of revenue this year and you go back to something he said at the end where we have the chart in our slide deck that shows what percent for brokers, single digit for owners, single digit for retailers, everybody else. You're just you're sort of basically looking at the overall market as less than 10% penetrated.
If you're already doing $500,000,000 you're already selling into all of those. Obviously, 10% in the $500,000,000 gives you a $5,000,000 market. And then that's for the products and services we have today with the people we know about already selling into those groups.
So it's not fictitious numbers or
we're not fictitious numbers or we're not selling into these groups. It's what we're doing today. And then of course, if you said globally, it's 2x to 3x that. Obviously, we'll be plucking up Toronto and again slowly over a couple of decades we'll pluck off other cities internationally. You can multiply that by 2x to 3x.
And to me
that's the opportunity with sort of where we are today.
And then of course, you know we
like to do things to expand that opportunity. So we have no in my view, that's a very simplistic way I look at it. There's no shortage of opportunity at $500,000,000 I think to get to $1,000,000,000 or $2,000,000,000 over the next decade, 2 decades is very reasonable and won't even approach half of what the opportunity is today here in the U. S. And where our platform is today.
And of course, you could always multiply that globally. So that's sort of my one minute add on to Andy's. Intuitively, typically information is about 1% of an asset class. And you can say global commercial property is approximately $50,000,000,000,000 and you can do the math from there. And it will clearly indicate one follow-up question.
On field sales,
you mentioned a bunch of different numbers Brian on the field sales what it was, what it is. Yes. What I'm trying to get to is if the average person who's 3 months in Andy I think you said is $10 in bookings a month and goes over call it 3 years whatever the number is to $30 of bookings a month. And I'm trying to do the math where I can hold for that times. Are there 50 people
who are sub 3 months in the field sales? No. It's like 80 or 90. So if you look at it, I'll give you the numbers again. We have 212 sort of core
field reps today. It was versus 124
last year. So if you now. Essentially half our sales force has been here, has experienced and half is in the 1st quarter or 2. So that will ramp up over the next like I said, I think as you start to get through the back half of this year and then I think we should be going into 2015 with a fairly strong ramp on the sales productivity. And then of course that will continue to ramp through 2015 and into 2016.
So I think the increase in size of the sales force will really carry us to the back half of this year and then through 2015 2016. And I think there's plenty of opportunity for upside with the productivity in the sales force. Obviously, the better job we can do to get them up to speed faster the better the numbers can be. I just want to give you the exact formula. It is revenue per person in the population equals 0.0004x
squared
where X is the quarter that you how many quarters you've been in the market and then there's an intercept adjustment which is not really relevant.
Thanks. Appreciate that. Thanks guys.
Appreciate it. Thanks Brad. That's the follow-up.
All right. And next we will go to the line of Bill Warmington with Wells Fargo. Please go ahead.
Good morning, everyone. Good morning, Bill. Congratulations
on a strong quarter.
Thank you. Hey, Bill. Welcome back.
Well, thank you very much. Thank you. Good to be back. So a couple of questions for you. On the $10,000,000 of sudden setting of the old products, should we just I mean, if you I mean, obviously, on an annual basis, you back that out from the base of $13,000,000 and that gives you about a 14% to 16% growth rate for 2014.
But should we think about that being just spread ratably across the quarters $2,500,000 a quarter? Are you going to give us that adjustment each quarter?
Yes. I mean, I think it's just spread throughout the year. Not going to keep I think I probably won't talk about the rest of the year. I mean, I think we sort of gave it to you I prepped everybody last year. I gave it to you guys this quarter.
Now we'll just move forward. It's spread ratably. I mean, essentially what it is, is we have 0 people in our sales force selling 2 or 3 or 4 different products that we believe are redundant. So those will just sort of burn off throughout the year. These are monthly and quarterly contracts that have high churn.
Their old stuff redundant. So I'm probably just not going to talk much about it, but it will be spread pretty much throughout the year. And not only that, these products are not just redundant. These products are products that are we provide we feel they provide less value to the customer and they are have a substitution effect against higher priced more valuable products to the customer. So we believe that all this revenue we give up this year comes back in later time periods with a better client relationship, higher renewal rates at a higher price point.
Got it. Now should we think about it having some EPS drag as well over those products that were basically not contributing a lot to the bottom line?
Yes. And I basically factored all that in. I factored both the revenue and the earnings in my guidance. So I think it's pretty much now will be spread throughout the year and I think you won't really see much of it after that.
Got it. Now on the selling of the commercial real estate broker advertisements on the LoopNet sites, How should we think about that in terms of potential revenue? How many territories are you thinking about? Initially, what are you able to charge per month? It seems like it could be significant.
Yes. So we depending upon what the client is buying is basically a share of voice or they're buying a percentage of the searches in a particular zip code that they might be interested in. So if you're a New York worker, you might be buying office searches in 100 and 19. So that ranges from a couple of $100 a month for some zip codes on up to 1,000 of dollars a month for another zip code you can buy. And in that case, you're buying anywhere from 10% to 100% of the share voice.
And more share voice sold, the price goes up in that particular ZIP code. This is I believe this is comparable to the main revenue drivers for a Zillow or Trulia or a Moove. So I believe that this is something that has well over 100,000,000 dollars of revenue potential. It is only a handful of people in our sales force are selling it today. We are basically opening up the software and providing the basic training required to the rest of the sales force to begin to enable them to sell it.
And then we'll be looking at selling it from inside sales teams as well. So it will take probably 6 months to really get this ramped up to everyone selling it and folks beginning to figure out what their particular sales pitch is around the product. And to add a little color to that Bill, so I think that when you look at that sort of funny I look back at some of these companies like Trulia and Zillow, I mean they had 1,000,000 dollars 2,000,000 in their 1st year, 1.5 years. So I have less than 1,000,000 in my model. The fact that we're starting to be right now it's basically being tested with a handful of people.
It really won't be fully rolled out as Andy said for 6 months or so. Again, think this is something that comes in the back half of this year where could there be some upside from that? And the answer is yes. So then obviously I would expect in 2015, 2016, 2017 I think this can be a long driver of revenue for years to come.
Okay. Now on the sales force hiring, you've had a big surge of hiring. And I had a couple of questions there on that. The first is, once you get through the surge as you kind of think after 2015, 2016 and beyond, what are you thinking about in
terms of how much you'd like
to be growing the sales force? And then the other question is, have you been looking at hiring some more experienced salespeople who would be able to hit the ground running for some of
the other segments that you're developing? Yes. So I believe the I'm fairly confident that the rate of addition for the existing core business will absolutely come down. We will not be 70% next year 70% the year thereafter. I figured, thanks.
We'll continue to grow it at a slower pace, more measured pace. And while we may be able to hire folks who may have more experience with the advertising side specifically something like a Trulia, Zillow. It's more our business is fairly unique and there are not a lot of salespeople that have experience in what we sell. So unfortunately, there is not a ready pool of folks who know how to sell this particular set of products to this particular audience. It's probably a dozen or so not working for CoStar.
And Bill just to add a little bit more color to that too is that, if you actually looked at this, we talked about this pretty extensively last year. We are changing out the plumbing in the hotel, while we're still selling the rooms. So our total sales headcount that I gave you guys is only up 5% or 6%. It wasn't like we added a lot up to the total amount, but we had to carefully move them and in a lot of cases replace it to increase that field sales force, right? And we talked about this pretty extensively actually for the past 4 or 5 years.
So we did that. And if you look at the sales numbers with putting up some pretty strong sales numbers. So I think I feel good about that was a very careful sort of moving of numbers. So the total sales people which we went back to the Lucid acquisition we said, hey, in total we have enough. We just don't have them in the right area.
So I think we did a good job of essentially doing what we told people we're going to do. Now we have to get them up to speed. I would like as we move into 2015, 2016 and beyond to continue to see the field sales force growing the core field sales force, which is driving the core of the business up, those numbers up 10%, 15%, 20% for years and years to come because of the size of the opportunity, I think obviously we have to swallow this down this year. But again, that doesn't mean the total size of the sales force has to grow that much, because I think again it's just moving them into the right places. So I feel pretty good about where we're entering this year in.
And I think by the end of the year, we'll all feel pretty good about the productivity.
Excellent. Thank you very much for the insight.
Thanks, Jeff.
And next we will go to the line of Michael Wang with Needham. Please go ahead.
Hey, thanks
very much. Hey, guys. Hey, Michael. How are you doing, Michael? Doing well.
Just a couple of
quick ones for you and then we'll wrap this up hopefully. So I apologize if I missed this. So with respect to Fusion, I was wondering if you kind of help us understand how Fusion may be impacting ASPs and sales cycles and maybe close rates? And what are your assumptions kind of around how Fusion kind
of has been received in marketplace?
Sure. So remember Fusion, the concept of rebuilding the overall product suite and eventually integrating a lot of these acquired components into 1 integrated software suite is a multiyear effort. And we think it's probably 5 major product releases each time putting out 5 major product enhancements is sort of a rough approximation of the way to think about it. And so what we released recently was just round 1. So we've got we're 20 percent of the way there.
We got a fair amount of work to go and a number of years to do it. I believe it is shortening the sales cycle. I believe there's increasing the close rate. We are still in a mode where we are keeping our pricing somewhat aggressive to try to get additional share and convert more people in from the LoopNet information side, where they were paying pretty much onefive, onetenth of what they're paying for the CoStar side. I think it is when you look at the CoStar property only renewal rate running in the 94.5% range something like that, it's a I think that it is contributing to a higher renewal rate.
So when I look at cancellations, It is I think it's helping there, which contributes to overall net growth. And more importantly, our clients like it. Our clients are just really quite happy with the product and you feel better about the business when the clients are happy. And I just got one note that someone just slipped into me. We got our 1st Canadian contracts at JLL just signed up for a Toronto service.
Whoo! We have revenue in Canada. We have revenue in Canada. Great.
I can correct on that. And so just a final question for me. And I'm not sure if I missed this one. So as you were thinking about kind
of
around some of the opportunities you were going kind of around some of the opportunities you were going after. I was wondering how you did exiting the year given the strong contribution from that and what's your assumption around that going forward?
Thanks. I do apologize because I do not have that particular number. What I can guesstimate is that it did continue to track as we thought it would, because again the surprising based upon the surprising increase in CoStar subscriptions in December. It was an unusual number. I cannot believe that the rate did not continue to move upwards.
So it's probably approaching that 40%. We also invested a lot of time and effort in the 3rd Q4 in training managers and salespeople on how to effectively do the cross selling of LoopNet to CoStar on the information side. So I think that drove the conversion rate up and I think that's what caused that higher surge in that core in the core business in December. Great. Thanks guys.
Appreciate it. Thanks, Michael.
And next we will go to the line of Todd Lukasick with Morningstar. Please go ahead.
Hey guys. Great job again with the business this quarter. Thank you, Todd. Good morning. Yes.
Good morning. Congratulations. Good afternoon. So good morning for you. Yes.
So good morning for me. Congratulations also on the Canada deal. I guess we're going to see Canada operations broken out next quarter like you do the U. K. Brian?
Not exactly, Thank you for that. I appreciate that. You just made more work for me
and my team. Kind of along those same lines,
I did have a question about international markets. And Andy, you mentioned potentially more markets eventually in Canada. You talked about the acquisition you'd made in France. I'm just wondering if you could give any more color there about where you might look to go next and when we might expect to hear a definite announcement about that? Sure.
So we're I would like to see us get to profitability and a respectable margin in Canada dramatically faster than we got to the profitability in the new platform in the United Kingdom. The United Kingdom, I believe, was unusually complex because it's one of the most sophisticated commercial real estate markets in the world and we had 8 little companies we were integrating and that just made the and then modifying the data model across all those were a little more complicated. So I think Canada will get profitable a little quicker there. We would like to see the United Kingdom and potentially Canada at the 30% margin range before we really consider aggressive additional international expansion. One of the things on future international expansion is we would probably do that expansion in closer alignment with our biggest international customers.
So we have conversations from time to time with our biggest international customers about how we might be able to meet their needs on their needs to have Internet marketplaces to generate leads for their listings globally. If we were to do a more LoopNet like product internationally, I believe that is much lower investment costs with a faster return. You could begin to generate revenue in markets, learn the nuances of the markets and then later come in with the more expensive heavy investment commitment CoStar Property traditional full information model. So bottom line is do not look beyond Canada, do not look for any sort of EBITDA dilution in the near term from international expansion. You'll see more domestic initiatives and significant domestic initiatives.
And but we want to we still want to be able to show the investors the proof point of this is international business and we'll really be able to deliver on that promise intermediate term. And just to add to that. So I mean my translation of that is what I've been saying I think for the last year or so that over the short term, the next few years, there's no significant international plans. But definitely in the 5, 6, 7 year as you get to the bigger models, clearly, we're demonstrating this business can do very well internationally, hence the 2 to 3x the current opportunity. Got you.
Okay. Thanks. That's helpful. And then Brian, you mentioned the high incremental margin on the incremental revenue. I think if I calculated the incremental adjusted EBITDA margin in the quarter, it was actually over 100%.
Is there anything in particular about 2014 where the incremental adjusted EBITDA margin, we should expect that to be lower than what the potential long term run rate is? Yes. So I'll answer this quickly and then I think we'll wrap it up after this question. So yes, I mean if you look, I mean I've got that question.
I've always said historically, if
you look at our gross margin line, we're actually over 72% now, 72.5% something like that. It was in the low 60s prior to LoopNet. So, each incremental dollar, like that. It was in the low 60s prior to LoopNet. So each incremental dollar you pay out a little commissions, you have some costs, but essentially you're dropping $0.70 to $0.80 to the bottom line.
Obviously, because of the acquisition over the past 2 years we've been working synergies out in the business. So it appears like you're getting over 100%, which is awesome, right? I mean nobody can argue with that. So I think that this year and if you look at the long term, clearly we feel good about the 30% to 35% range we set out last year and I feel very good about the long term of being over 40%. We talked about this year in the first quarter and the first half of the year.
If you just look every year, our EBITDA margins are lower in the first half of the year and the second half of the year. So I expect them to be where my guided range was for Q1 and then I expect to see them slowly increase throughout the year, because obviously we're still investing some piece into the business. It's not a pure 100%. So I don't think I can run at 100 plus percent forever, but I feel pretty good when I and I've said it for years, we can drop $0.70 to $0.80 to the bottom line, still invest into the business and really grow this thing. And it goes I mentioned it, when you look at the significant growth in that and you look at the significant operating cash flow, this is the business model we operate in and it's unbelievable.
All right. Great. Thanks guys. Thanks for taking my questions. Thank you.
Thank you very much. And I appreciate all of you joining us for this year end conference call. We look forward to updating you on our progress shortly. Thank you.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.