Welcome to the CoStar Group Third Quarter Earnings Conference 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. As a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Rich Simonelli. Please go ahead. Thank you, operator, and good morning, everyone. Welcome to CoStar Group's Q3 2013 conference call coming from our headquarters in Washington, D. C.
We are delighted you have joined us. Before I turn the call over to Andy and Brian, I have some important facts for you. Certain portions of this discussion contain forward looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's October 23, 2013 press release on Q3 results and in CoStar's filings with the SEC, including our Form 10 ks for the period ended December 31, 2012 as well as our Form 10 Q for the period ended June 30, 2013 in each case under the heading Risk Factors. All forward statements are based on information available to CoStar on the date of this call and then 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 also being broadcast live and in color over the Internet on www.costar.com. A replay will be available approximately an hour after the call and available until November 28 this year. To listen to the replay call 1-eight hundred-four seventy five-six thousand seven hundred and one within the U. S. Or Canada or 320-three sixty five-three thousand eight hundred and forty four outside the U.
S. And Canada. The access code is 304,716. A replay will be available on our website soon after the call concludes. And then I'll now turn the call over to Andy.
Good morning and thank you everyone for joining us today. Our Q3 2013 financial results were very strong. Revenue grew to $112,000,000 for the 3rd quarter, a 17% year over year increase. Our annualized net new sales of subscription services in the 3rd quarter were $13,700,000 an increase of 47% year over year. We added nearly 1200 new CoStar information subscription customers during the quarter, bringing the total number of new clients to 4,900 over the last 12 months.
This represents a 58% increase in the acceleration of new customers compared to the previous trailing 12 month period. EBITDA increased 52% year over year to nearly $30,000,000 for the quarter. I think this margin expansion is all the more impressive when you consider that we are investing so aggressively right now into important initiatives that we believe will enable us to sustain these impressive revenue growth rates for many years to come. In prior calls and meetings, we've briefed you on the years of planning our product design, development engineering teams have invested into building the next generation of our flagship product CoStar Suite and CoStar Go. At times we refer to this next generation of CoStar as Fusion.
We call this next product platform Fusion because it blends our valuable in-depth data, our historical data sets, the power of our subsidiary company's software and their solutions together with our clients' own data. We believe that this next generation platform moves CoStar into the realm of workflow solutions, decision support, creates communication channels and yields predictive analytics. We in turn believe that this increase for Fusion is very ambitious, so we intend to build the platform in a series of segmented lower risk product releases over the course of several years. Last week, we launched the first of these planned software releases with 5 major product enhancements to the CoStar platform. The five enhancements include a new map based interactive search tool based on the popular search tool that we had in our mobile platform CoStar Go.
We've had in-depth coverage of the U. S. Multifamily marketplace. We've expanded the property and market analytics capability of the product. And we've integrated in a lease valuation and comparison tool.
And finally, we released an upgrade to our very popular CoStar Go products giving its mobile analytics capabilities. The release was first made available in Maryland, Virginia and the District. The release went very smoothly in those areas, so we launched it in the United Kingdom and a few days later in the Northeastern United States. The release is still progressing very smoothly and we plan to roll it out to the rest of the country over the course of the next 2 weeks. The initial reaction is positive across the board and client activity in the first phase of our release has been fantastic.
In just 10 days, as of about 2 minutes before the call, we saw 1,130,000 searches in the platform and there were almost actually not almost there were 10 30 lease analysis financial models created in basically the 1st week. So we're very pleased with the level of activity from this limited rollout in the Midland, Northeast and U. K. We've met with over 100 firms in the 1st 10 days in order to understand how clients are reacting to the new product. The following anecdotal feedback gives you a flavor of the sort of feedback we're receiving overall.
Tom Edgar of GVR Phoenix Beard, the United Kingdom told us to quote, The upgraded CoStar Suite has massively improved the user's experience. It now offers an easy to navigate user friendly interface, which mirrors the fantastic CoStar Go app for iPad and offers great functionality. The extra time spent on further development of the product is clear to see. So in order to get an accurate gauge in our clients' reactions as a major product upgrade, we hired an independent third party market research firm called Market Connections to survey the initial Mid Atlantic users. They received completed surveys from about 500 clients.
They also asked for written comments and most of the respondents gave us valuable feedback. These participants were asked to comment on their view of the features for each of the 5 enhancements and overall how the new release compared to the previous CoStar tool. The researchers asked our clients to rate the new features as either not at all appealing, not very appealing, somewhat appealing or very appealing. For simplified reporting, we combined the response somewhat appealing and very appealing into one category of appealing as an indication of positive feedback. So the results showed that 93% of those surveys found the new map search appealing, 92% of our response found the new multifamily information appealing, 94% found the new analytics appealing, 93% found the CoStar Lease Analysis appealing, Finally, 94% of our respondents found CoStar Go Analytics appealing.
So I would be so bold as to say that sounds like straight As on the release. And in general over time I found that people really hate to see any change to software they've grown accustomed to and that they use every day. And for sure the improvements to software have to far outweigh the inconveniences you create by changing the software someone's used to using. If you don't, clients in the industry will typically react very negative at anything other than a really significant improvement of overall functionality. I think with this release, we really have avoided the problem of clients being resistant to the change.
On average, only 1.5% of the respondents found that the various enhancements were not at all appealing. That 1.5% negative response was overwhelmed by the average positive response of 93%, So we're running at a 63:one positive on the release. So let's take a closer look at what we are offering with this new release. Real estate is about location. The faster more intuitive map based search enables customers to visualize their search results on a map as they build their search.
The client sees the search as it happens. This makes CoStar Suite more user friendly. We believe that this will result in more usage, higher renewals and increased sales. Again, here are some of the quotes from our clients that are useful. Vinit Khanna, REIT analyst with Capital One Securities says, The MAP search is so intuitive.
I love having all the search criteria on one page. Patrick McCormick from Jones Lyon LaSalle told us, The new map features are extremely appealing to me. I'll be able to use them in presentations. Next, we launched our comprehensive coverage of multifamily properties with information analytics that we believe will increase our penetration with brokers, banks, owners and institutional investors. Multifamily is a $2,000,000,000,000 asset class in the United States and currently the hottest in commercial real estate.
In the past year over $95,000,000,000 of transactions were completed in this section sector. We have built a database that far exceeds other firms' multifamily information offerings. We are now tracking information on nearly 300,000 apartment communities with 5 or more units for a total of 16,000,000 apartments. Our nearest competitor tracks 6,000,000 apartments, so we cover 2 to 3 times what they do. We even offer multifamily specific submarkets that provide greater granularity than any of our competitors.
We have lost competitive sales in the analytics arena in the past to competitors because we did not have information on multifamily properties. But what was once our weakness is now our strength. We are capturing information such as building details and quality effective rents, concessions, occupancy levels, ownership, property sales, unit sizes and mixes, images and many other details. This data can be queried, analyzed in the product to provide valuable analytic information on market trends, give you great reports on what's happening in the marketplace. Trent Smith from Insight Property Group said, The multifamily data is impressive.
My head is spinning with all the possible applications of the multifamily analytic data. Sam Sherwood from Integra Realty Resources told us, The multifamily family detailed views are a huge improvement on what was previously available. I particularly like these specialized multi family submarket geographic definitions. 3rd, we've added analytics to provide users customizable property and market statistics that give our clients vivid charts and graphs to analyze vacancy rates, rental rates, absorption, leasing activity and more. For example, an owner will be able to compare her building to other similar buildings in the city and can use the data to price her leases competitively and have a better understanding of the probable amount of time it will take to lease up her buildings' vacancies.
Tom Hurd at Cushman and Wakefield says, I love the new analytics feature, which updates the map as I search new entries. Harold Burritt at CBRE says, As a research analyst, the new analytics report capabilities are very helpful in my daily duties. The new layout and capabilities seem very easy to use and make my job easier and more time efficient. The 4th major and most significant element of the release is CoStar lease analysis. This was made possible by CoStar's acquisition of Resolve several years ago.
Without the technology team at Resolve taking the lead, there would be no lease analysis in CoStar Suite today. I believe this is a truly transformational tool. It gives better visibility into the true cost of a lease and we believe will enable brokers to get a signed lease much more quickly, which is their commissionable event. It's an integrated workflow tool that allows brokers and owners to do intensive lease analysis incorporating CoStar information with their own data. Rather than manually entering all the data they need to build a financial model for a lease into a spreadsheet, they can now instantly load all the information from CoStar into a pre built integrated lease model.
This has many benefits including time savings and accuracy. The user never has to leave CoStar in order to access the tool, build the model, perform the analysis and create client ready reports. The reality is that many brokers did not do this analysis work before because the work involved or they hand this work off to an analyst in their back office. CoStar lease analysis is not intended to be a back office tool Now it's much easier and faster to build a model that the broker can work the broker can now work with our clients face to face, discuss terms and possible scenarios and compare several properties and models side by side real time. We also believe that brokers negotiating on opposing sides will use the tool real time with a what if analysis capabilities as a key negotiating tool.
CoStar Lease Analysis allows clients to generate reports that summarize the information for their client's senior management. These are professional high quality Board of Director reports that take highly complex information and presents an easy to understand document that lets users compare multiple lease options. We believe CoStar Lease Analysis will become the industry standard for the financial analysis of leases. This is just the start for this product genre and we feel that we have a very robust and promising product road map for integrated financial modeling. Again, I think our clients can say it best.
William Schwartz at the Meyer Group said, The lease analysis is amazing. This is more cohesive and easier than ProCalc. Plus it's modeled with COSTAR data already has, so you have a head start. Elizabeth Harvey at Cressa said, It's amazing. The presentation output is excellent.
Lisa Bensiewicz at Transwestern said, it is less daunting than Argus or even building something simple in Excel. The sensitivity analysis features are very helpful to see what little tweaks need to be made to hit the targets. Mark Wiskorich at Acridge said, Critical, very important and game changing. Nicky Arena of Guardian Realty Investors said, The lease analysis feature is also very cool. It takes a lot of guesswork out of the lease.
5th, we released CoStar Go 2.0, which is the upgrade for CoStar iPad app. This new version now has customizable analytics, which means brokers can work directly with clients in the field using powerful property market analytics. They'll give instant insight charts, graphs, absorption trends in the market area they're sitting in or anywhere else they want to steer their iPad. Mike Hetchkov of Cresta remarked, I like the fact that analytics just pop up. I like the ones that come up automatically so you don't have to create anything, especially because most of the time using CoStar Go and the Go and presenting in front of a client.
All in all, we're very pleased with the reaction of these enhancements and are optimistic they will have a positive impact on 2014 sales. These products allow our sales force to meet with existing clients to provide an opportunity for more cross selling of ALUPMET users. Can't help, but I'm going to share just 2 more comments. Jonathan Gardner at Coldwell Banker Elite said, I just like the evolution of the interface and what shows the attention to detail from user input. There's obviously strong communication links between the company and its clients, which will keep accounts alive and growing, very reassuring.
I especially like that instead of just sharpening existing tools, the commitment to excellence from CoStar has extended the lease analysis. Usability has reached another level. Thank you. And then Steve Romer, who is President of WestRock Appraisal Services, is one of the smarter guys I know said, I've been waiting for this my whole life. Okay.
He may be a little overenthusiastic. Okay. So all in all, a very solid product release and exceeding our expectations. So turning to LoopNet. Through the Q3 of 2013, the CoStar sales force has now achieved nearly 36 $1,000,000 of revenue synergies from our acquisition of LoopNet.
Through September 30, 2013, we have cross sold our products between LoopNet and CoStar client bases to over 6,400 real estate firms after completing nearly 19,000 cross selling demos. As we expected, this is an increase in the close rate to approximately 34%, up from 31% in the Q2 of 2013. I believe we can continue to include increase the close rate to trading of our sales force and very valuable technology tools that we're using to assist the selling process. I spoke last quarter of a comparison tool within CoStar Go for our sales force to use with LoopNet users who think they're seeing the whole market on LoopNet. The tool appears within CoStar Go and demonstrates that CoStar has significantly more listings in a given area than what is available under a user's LoopNet subscription.
In addition to that very important tool, we have just launched an automated LoopNet to CoStar upsell tool that appears within LoopNet's website. Once a person once one of our salespeople demos a LoopNet to CoStar information upsell prospect, we automatically turn on an automated comparison of the results of a CoStar versus LoopNet search every time the prospect searches within LoopNet. So if a LoopNet user who we think should be using CoStar goes into Santa Monica and looks for office buildings for sale, a little pop up will say there's 30 buildings that answer this criteria in CoStar and there are 15 in LoopNet, if you want to see the whole markets upgrade to CoStar. So this is a very effective way and those numbers are hypothetical, but typical. It's a very effective way to bring home to the LubeNet user the clear advantage between the different price point products we offer.
So it's a very cost effective way to stay top of mind with a prospect and convince them that while they need LoopNet for marketing, they need to invest in CoStar to get a professional level information tool and have more information than a client. In the 1st week, this tool has already resulted in new sales, more appointments and the LoopNet users calling our sales force to buy. After one day, one LoopNet user sent an e mail saying, please turn off the pop up, I'll buy. As we have previously discussed, we're preparing to launch a broker advertising option on LoopNet by the end of the year, enabling brokers to market their services to tenants or buyers looking for properties in areas they specialize in. This will be a completely new revenue source for us and I expect that it could be quite significant when you consider that on the residential side companies like Zillow, Move and Trulia earns tens they earn tens of 1,000,000 of dollars annually from similar advertising opportunities for their brokers.
I am very pleased with how we continue to grow revenue in LoopNet's premium lister product. In the Q3 of 2013, the sequential growth of the Q2 of 2013 was 5.6%. Since the Q3 of 2012, we have grown premium lister revenue by 25.8%. So it's growing much faster than the business overall. We are also increasing the ratio of paid to free listings in LoopNet.
We have increased the number of to 49% of total listings up from just 32% at the point we closed the acquisition. For the for sale paid listings, they're now up at 39%, up from 31% at the time of the acquisition. Membership growth continues to be very robust on LoopNet as we added nearly 360,000 additional registered members in the 3rd quarter and we now have 7,700,000 registered members in total. I think 10,000,000 is coming here soon. We increased premium membership average revenue per user of new sales 57% from $56 in the Q3 of 2012 to $88 in the Q3 of 2013.
Overall, premium membership average revenue per user is up from $66 to $76 which is a 16% year over year increase. In the Q3 of 2013, 48 of 2013, 48% of all premium memberships were sold on an annual basis and 27% were quarterly. The average contract term has gone from 1 month prior to the merger to nearly 7 months now. And the average new LoopNet contract value has moved from $56 as of the completion of the merger to over $600 today. Now I'd like to upgrade you on our activities in United Kingdom.
We're making excellent progress in London as our release of CoStar Go and CoStar Suite has resulted in a strong tick in sales there. September 2013 was our best ever sales month in the United Kingdom and we've had 4 of our highest ever sales months for the U. K. During the 1st 9 months of the year. Today, we have nearly 300 firms subscribing to CoStar Suite in the U.
K. In addition, we've achieved an average of 40% price increases in subscription fees from existing focused subscribers upgrading to CoStar Suite and Go and nearly 35% of the clients upgrading to Suite and Go have done so on multiyear contracts. We signed some excellent clients in the U. K. In 2013 including Wells Fargo, Standard Life and Europa.
Historically, the vast majority of our sales came from brokers in the U. K. But now with CoStar Suite, we're generating a high volume of sales to investors, owners and lenders. CBRE is one of a dozen major brokerage firms in the U. K.
And in fact is the largest of the majors there. CBRE and many of the majors subscribe to our low end, low cost legacy U. K. Product called Focus. The cornerstone of our strategy in the U.
K. Has been to upsell these brokerage firms in the significant additional value they can gain from our U. K. CoStar suite of products. After 2 dozen meetings with CBRE in a 9 month sales cycle, I'm extremely delighted that the leader in the market has made a significant investment by upgrading to a multiyear contract for CoStar Suite.
This is a major milestone for us and it demonstrates that our investment to integrate the U. S. And U. K. Is starting to pay off.
We believe it's only a matter of time before other top U. K. Commercial real estate firms will follow CBRA's lead in order to not cede a competitive advantage to them. I'd like to briefly update you on what we're seeing in the commercial real estate markets. The markets are continuing to show signs of recovery.
Both investor and tenant demand for real estate is currently increasing. Year to date net absorption of office, retail and warehouse space is averaging more than 50% higher than the same period last year and that department demand alone is up 28%. Furthermore, the Q3 of 2013 had the strongest net absorption so far this year for each property type. We continue to see capital flow into real estate investment and year to date sales of all commercial property are running 19% higher than 2012. Many formally distressed suburban office markets such as Orange County, Phoenix, Sacramento and Atlanta have registered over 2,000,000 square feet of net absorption each in the past year.
Strong apartment sector fundamentals pushed vacancies to a record low of 4% in the quarter. This record low vacancy is driving 2 trends. 1st, rent growth is very strong at 5.4% annualized rate. 2nd, net completions are up more than 150 percent year to date to 186,000 units. The apartment market strength is broadly based and rent has grown by 2% to 8% in nearly every major market.
The industrial sector is very healthy overall. Expanding Internet retailers and housing recovery related demand growth has caused year to date industrial net absorption to spike up by 40% compared to the same time last year. That's propelled industrial vacancy to decline by 80 basis points to 8.4%, which is the greatest year over year vacancy decline for any of the property types. Retailers are stronger today than they've been in years. In particular, they have mostly shed underperforming stores and have ridden a rebound in retail spending to record profits.
Retail net absorption has more than doubled from last year. So in conclusion, we generated exceptional financial results for the 1st 3 quarters of 2013. We believe that the enhancements to our existing products, the strength of the commercial real estate recovery as well as the continued growth of the size of our sales force positions us to be able to maintain mid teens revenue growth while expanding margins for the foreseeable future. I believe that this quarter further demonstrates that we're on our way to reaching our goal of $800,000,000 in revenue with high margin as we exit 2017. Okay.
At this point, I will now turn the call over to Brian Rodecki, our Chief Financial Officer, as long as he promises to make no sound effects. I promise Andy. Thank you.
You're welcome.
As Andy mentioned, we're very pleased with the financial performance in the Q3 and year to date 2013. CoStar's information, analytic and marketing services continue to show strong revenue growth and the successful integration of LoopNet continues to be a big contributor to the growth in revenue and earnings. EBITDA margins continued to expand driven by mid teens revenue growth. Additionally, as Andy discussed, revenue synergies for the LoopNet acquisition continue to ramp up and have increased to $35,800,000 since the acquisition. So this is where Andy is really excited because I get all the points, point this, point that in there.
So I'm really excited. So let's talk some numbers guys, right? Rich, are you ready? Are you ready? Are you with me?
I'm with you. John, are you with me? I am. All right. Everyone's with me.
All right. Here we go. Starting with CoStar's results for the Q3 of 2013, the company reported $112,300,000 of revenue, an increase of 16.3% or 17 percent compared to $96,000,000 in the Q3 of 2012. This growth was driven by solid core information services performance, continued cross selling efforts as well as impressive growth in the LoopNet marketplace. The Q3 of 2013 is the 1st year we had a full quarter of LoopNet revenue in the year over year comparison.
As I discussed at the time of the acquisition, our 2012 results were impacted by the purchase accounting adjustments included, which reduced LoopNet's deferred revenue. Normalizing these adjustments, our year over year revenue growth in the Q3 of 2013 remains a strong 15% compared to the Q3 of 2012 or in the mid teens. More than 75% of the purchase accounting adjustments were recognized in the 1st two quarters last year after the acquisition, so the impact on growth rates in the future is fairly minimal. EBITDA was $29,800,000 in the Q3 of 2013 compared to $19,600,000 in the Q3 of last year, an increase of 52%. As we reported adjusted EBITDA of $37,700,000 for the Q3 of 2013, an increase of $12,100,000 or approximately 47 percent compared to $25,600,000 in the Q3 of 2012.
Adjusted EBITDA margins increased to 33.6 percent in the Q3 of 2013 from $26,700,000 in the Q3 of 2012. Our results and these margin results are consistent with what was I think it was our medium or long term goal, but now it's coming closer of achieving $50,000,000 $500,000,000 run rate with 30% to 35% adjusted EBITDA margins by the end of 2014. We think it is clear that we are well on our way to these goals, which we've been discussing for a few quarters. I'm happy to note that we achieved the margin goal beginning last quarter 6 quarters earlier than we expected. While adjusted EBITDA margins may move around a little bit due to timing of marketing and other investments throughout the year, our 2nd and third quarter 2013 results demonstrate the potential for continued strong earnings growth and expanding margins for many, many years.
Gross margin was $80,600,000 in the Q3 of 2013, up compared to $65,100,000 in Q3 of 2012. Gross margin percentage was 71.8% in the Q3 of 2013, 4% increase compared to last year, which is fairly massive. Net income increased to $11,100,000 in the Q3 of 20 13 compared to $6,800,000 in the Q3 of 2012. And non GAAP net income in the Q3 of 2013 was $20,200,000 or $0.71 per diluted share, which is a 54% increase from the Q3 of 20 12. Reconciliation of all non GAAP net income, EBITDA, adjusted EBITDA and non GAAP financial measures discussed on this call so their GAAP basis results are shown in detail along with definitions for those terms on our press release issued yesterday, which is available on our website at www.coastar.com or you can just call Rich Simonelli.
Cash and investments totaled $244,600,000 as of September 30, up 32,800,000 dollars hold on $32,800,000 from $211,800,000 last quarter. Obviously cash flow remains very strong and cash and investments now are $87,000,000 higher than our total debt of 157 point $5,000,000 Obviously, our balance sheet is in great shape. At this point, I'm going to give some additional color on a few metrics to highlight our strong performance in the 3rd quarter. We achieved $12,200,000 annualized net new sales in the 2nd quarter based on our ongoing success of driving our information sales and analytics, also LoopNet's premium lister products and our cross selling efforts. I'd like to point out that this sales number, which is the one the older one that we were reporting for years actually understates our success.
As Andy noted earlier, the net new sales of subscription services on annual contracts is higher at $13,700,000 up 47% compared to the Q3 of 2012. The higher sales of annual subscription reflects our efforts to replace the short term LoopNet agreements with higher value longer term agreements. Moving forward to eliminate any confusion, we're just going to provide the net new sales metrics of annual subscriptions, which we believe is the most important and relevant metric. Revenue from subscription services on annual contracts was up to $83,800,000 for the Q3 of 2013 or 74.6 percent of total revenue, up from 71.2 percent a year ago. For the trailing 12 months ended September 30, 2013 subscription revenue from annual contracts totaled $311,900,000 or up 19% from $261,000,000 for the 12 month trailing period 2013 or 2012.
Sorry about At this point approximately 75% of our revenue is coming from annual subscriptions. The remaining 25% is primarily made up of marketing services including LoopNet's premium membership, which are on monthly or quarterly agreements in CoStar Showcase as well as some advertising revenue across both platforms. As we continue to make progress upselling looped up subscriptions to 1 year contracts, we continue to expect the increasing amount of marketing revenue will be included in the subscription revenue metric. The renewal rates for annual subscription revenue remained high during the Q3 of 2013. The 12 month trailing renewal rate for CoStar subscription based services was 93.3% in the Q3 of 2013 as this metric ticked down slightly from 93.7% in the prior quarter.
As we've been discussing for the last few quarters, the introduction of more annual LoopNet contracts into our subscription base is expected to cause the 12 month trailing renewal rate to add down slightly over time. The small decline to date is about what we've expected. We may see that number to continue to move a little bit 1% or 2% over the next few years. The renewal rate for CoStar subscribers who have been with for 5 years or longer continued high and remained at approximately 98%. Last quarter, Andy discussed in detail our plans to continue to evolve our sales force.
We're continuing to focus on expanding our field sales force, which now includes 190 field sales reps, an increase of 60 from the time of and we'll continue to add more reps there. Hopefully, we should be over 200 by the end of the year. So now I'll talk about my outlook. For the Q4 and full year 2013, our guidance takes into account recent trends, revenue growth rates, renewal rates, which may be impacted by economic conditions in commercial real estate or the overall global economy. We do not attempt to predict foreign exchange rate fluctuations, so our guidance assumes little to no volatility for the current rate.
Actual results may vary from these results. And if you're not sure call John Coleman or your doctor. Based on continued strong revenue, earnings and margin momentum and the expectation for continued growth in our core information services and cross selling initiatives, we're raising both the revenue and earnings guidance for 2013. For the full year, we now expect revenue in the range of $438,000,000 to $440,000,000 which is a $3,000,000 increase at the midpoint compared to prior guidance. It was consistent with our mid teens revenue growth we've been discussing and also accounts for the expected LoopNet marketplace seasonality which occurs every Q4.
Also due to continued cost and revenue synergies related to LoopNet's acquisition and our ability to grow revenue at high incremental margins, we expect 2013 full non GAAP net income per diluted share of approximately $2.51 to $2.54 based on 28,200,000 shares. This is an increase of approximately $0.19 at the midpoint with our prior guidance. For the Q4 of 2013, we expect non GAAP net income per diluted share of $0.72 to 0 point 7 $5 based on 28,400,000 shares. As we look forward to Q1 2014, we are extremely excited about the new product enhancements Andy discussed earlier. To support the launch of these enhancements and to drive continued revenue growth in 2014 and beyond, we plan to reinvest some of the benefits of our recent strong performance into sales, marketing and branding initiatives totaling 0 point dollars We plan to align these initiatives with selling beginning late Q4 2013 with the majority of the impact happening in Q1 2014.
Any Q4, 2013 spending is incorporated into my guidance. As we plan for next year, we have a lot of moving parts, which will affect my guidance including marketing to support the product launches, some decisions about deemphasizing or discontinuing certain services, finishing the back end integration of our databases to gain research efficiencies and completing the build out of our sales team. Sounds like a lot. Currently, we are in the budget process for 2014 and we believe we can continue to grow both revenue and earnings nicely compared to 2013, while also investing to further build out our platform and sales force to drive long term growth, not just for 1 year, but for the next decade. Once we finish the budget process, I'll be ready to give out much more detailed 2014 guidance in our next earnings call.
Until then, we expect to operate in that 30% to 30 5% margin range most of next year and exiting at the run rate of $500,000,000 of revenue or possibly better. As we move into 2015, 2016 and 2017, we believe the business will continue to grow and eventually operate in the 40% to 50% margin range. In summary, I'm very pleased with the CoStar financial results for the Q3 of 20 13, which clearly show the strong revenue growth and margin expansion. We continue to believe the company is operating a multibillion dollar potential market and we are focused on executing our plan to capture that opportunity. We also remain focused on the longer term goal I shared with you earlier this year of doubling the business over the next 5 years, continuing our mid teens revenue growth to an $800,000,000 annualized revenue run rate exiting 2017 at even higher margins in the 40 plus percent range.
As our track record shows, we believe we have the size of market, market position, competitive moat, platform, strong cash flow and management team to execute on our vision and take advantage of this massive opportunity. As always, I look forward to sharing our progress with you on these goals in the coming quarters. And with that, I'll open it up for questions. And the first question comes from Brandon Duvel from William Blair. Please go ahead.
Hey guys, good afternoon. Good afternoon. Quick one on sales force. First, you mentioned getting over 200. I want to make sure I understand where the 190 or how the 190 kind of I guess looks right now.
Are those truly all field sales force people? Or are there still some in that number that are kind of hybrid between field and inside? Or if it's not then how does the inside sales force stack up right
now? It's all 100% traditional field now. So they're basically out in our we designed a new territory structure to handle 220 some territories in the field responding to where the demand is in the market. And so it's 195 of these territories being filled. And they're not HQAEs traveling sort of hybrid inside sales.
And that this is not an insignificant effort. So we have we are doubling the number of managers out in the field And we've been hiring at a pretty good clip there some internal promotions. And then we also have been conducting the most training I think we've ever conducted for our sales force over the last 3 or 4 months. So both LoopNet cross selling techniques, PL selling techniques, training around the new products and the new financial modeling and then also just bringing in the new folks and new managers and getting them up to speed. But big picture, we're marching towards the goal and that feels pretty good.
Yes. And Brandon that like I'm just reiterating what Andy said. The 190 is pure in the field. The overall sales number is over 350, which would include all the other pieces, the verticals, inside sales and all that. So that number continues to move up.
We expect it to be over 200 by the end of the year. And
And again, that's all part of the plan we've been discussing in the last few quarters. Got it. Okay. And then back into your comments about the kind of the five new enhancements, those kinds of new rollouts, did that impact how you guys are pricing? Did it impact how you guys are looking at what types of customers may make sense?
Just trying to get a feel for other than just the anecdotes about how useful the product is, how else is there an effort to monetize all the efforts you put into those enhancements? Or is it just let's just make it better so we keep our renewal rates high?
No. I mean, I do want to get those 5 year renewal rates back over 99%. That's a good goal. Soft 98%. Now The on our kind of our key growth areas, lenders, banks, institutional investors, owners, we're still single digit penetration.
Retailers, still single digit penetration. So this is really building a dramatically better product in order to capture more Lumenet upsells, capture more penetration in these new market areas. Something like multifamily information opens up a whole new segment for us. So prior, if you were a major lender, it was a pretty big hole in the CoStar offering that they didn't cover apartment buildings. And we've now got that box checked and that opens us up to a lot of new business we couldn't really go for before.
The lease analysis tool is something that creates some interesting opportunities down the road. So the more of your user content you can manage and the closer you can get from and as you can move from being a data source or an information source to actually being a platform that your customers are using to negotiate on changes the dynamic and also moves you up the line of real time data. And this gives you a much stronger product, which I think will give us a more valuable product for owners and institutions to use and a whole range of things you could charge for down the future. But right now, we want to get a platform that we can get massive adoption on. So if we can pick up half of the brokers in the industry using our financial modeling tool it becomes a standard.
And then that allows you to move into other areas from a standard bearer position. So it's really penetration into new markets and setting the platform for new revenue opportunity like completely new products you'll sell.
Okay. And then final one for me. As we think about the net new subscription sales number you gave us, that 13.7 percent, how do we think about the, I guess, let's call it productivity from that 190 salespeople? Is that number driven by a small subset? Is it the eightytwenty rule?
Is it more broad based? I guess, trying to get at your comfort or confidence around increasing productivity from the sales force based on the numbers you've seen in the past couple of quarters.
Well, you certainly don't increase productivity when you double your sales force in the short term. Fair point. So So we strongly believe in what we're doing doubling the sales force. Like it would be negligent to build a larger sales force to deal with the opportunity we have here. But the process does not increase your productivity.
All these new people coming in, come in at a much lower productivity level than the established salespeople. And as you promote some of your best performers into some management roles or above average performers into management roles and as you also move into mentoring roles, your productivity would expect to move sideways for 2 quarters, 3 quarters where you get into your goal of the 2.25%. But big picture, as I look at those as I look at the numbers on individual performance, you still have a remarkably stable production level. We have maybe 5 super performers in the company. And then probably 75% of our sales or 80% of our sales are coming from 50% 60% of sales force.
So it's unusual for sales force. It's actually remarkably balanced with these new salespeople dragging the tail down as we would expect and we've seen in the past. And so Brandon just to add on to that, yes, I mean, so clearly productivity per rep is going to be sideways or down I think for most of the year because we're going to be continuing to add people through the end of the year. You'll be continuing to add salespeople next year. But obviously what that does is it gives us the opportunity obviously to grow continue to grow that net new by adding people.
And then the following year as you move into 2015 and 2016 then to continue to have more net new because then your productivity should then be moving up as you stabilize that and move forward. So I think it gives you a 2 or 3 year window what we're doing sort of at the end of this year and into next year it drives things for another 2 or 3 years. Got it. Okay. Thanks guys.
Appreciate it. Absolutely. Our next question comes from the line of Andrew Jeffrey from SunTrust. Please go ahead. Hey, good morning guys.
Thanks for all the color. The question I have is regarding these newer solutions, which about which you sound really enthusiastic and obviously you're putting a lot of marketing weight behind them. You're doing 15% or so organic revenue growth now and continuing to drive really good LoopNet cross sell success. Presumably, these newer solutions are going to be additive to growth. To the extent you're continuing to talk about 15% or mid teens, does that mean that we are nearing maybe a slowdown in the LoopNet cross sell productivity?
Or are you just being conservative? How should we think about the interrelation of those two things? Well, I would emphatically say that I don't think we're nearing any sort of a slowdown in LoopNet cross selling activity. That I expect close rates to go up and I expect to be able to keep that going at a stable pace for another 2 years at least. So it is solid and we're just now really getting our sales force really to the productivity level to be able to do that sale and delivering the technology tools they need to assist them in it.
And we really haven't yet brought the sales force to bear on the full potential of the PL side of LoopNet business which is the marketing advertising side of their business. So we're I think we are in the second inning of the whole LoopNet thing and that might be easily second inning. Yes. And I'll just add on to that. I mean, I think what it's tied to is what we've been talking about.
We have a big enough sales force. So now we close the deal. 1.5 years later, we've done 19,000 demos. So we've gone out once and demoed 19,000 people and we talk about 100,000, 140,000 prospects. We just don't have enough salespeople.
So I think it's everything is sort of tied together. We need to continue to grow the field sales force. It's quite a process to actually take the field sales force and double it because then you have to redistrict everything. And I think we're in the process of doing that. So I expect that cross sell to continue for honestly a decade.
I mean think about it. It's been a year and a half we've gotten through 19,000 of 140 or whatever 20,000 potential prospects. So I think that goes for a very, very long time. Okay. So I know one of the things you alluded to it Brian in your remarks, you've talked about potentially moving away from some legacy LoopNet offerings perhaps early in 2014.
I'm just trying to get a sense of cadence you gave us a little color on obviously the investments and what they might mean to EPS mostly in the Q1. But would you expect in early 2014 that there might be a slowdown below that mid teens growth rate as you twilight some of those older products? Is that still something you're thinking about? Yes. I mean, I think nothing has changed.
I've been talking about it for 3 or 4 quarters. I mean, so I mean, I think nothing has changed there. But my view is taking that out, I mean looking at Q2, Q3, Q4, yes, we'll be growing mid teens sort of year over year. And again factoring in whatever the seasonality numbers are, I mean, you know actually the LoopNet business better than anybody. So like when I talk about Q4, you know basically from Thanksgiving to the end of the year the LoopNet marketplace is just slow.
It has been every year for the past X amount of years and then comes back stronger in Q1. So I think sort of ex some of the things that However. We did manage them to their best Q4. Yes. So Andy is correct.
We did. Last year Q4 was unbelievable. So anyway, I think that next year is a great I think it's a pivotal year from product development finishing the back end integration, sales force. But you look at we're still planning on growing revenue and earnings very, very nice next year while completing what I think is a lot of significant things which really set the company up for like I said it's not just about 1 year it's about 2014 it's about 2015, 2016, 2017 and being able to run-in that double digit Minteeds growth. And not just I'm not just thinking about 33.6% margin this quarter.
I'm not just thinking about the Q1 of 2014. I'm thinking about getting to 40%. I'm thinking about getting to 42%. I'm thinking about getting to 46%. So we're definitely we're thinking long term.
Okay. That's helpful. One last one for me. Maybe you can just take a stab at it, Andy. By how much do you think and if you can't put it in dollar terms specifically, because I know it's a hard thing to nail down, but maybe proportionally, by how much do you think some of the newer solutions, lease analytics, multifamily, etcetera, how much do you think those expand your TAM?
How much do you expect to expand our TAM? It's I'm looking at the same market. So I'm looking at in the last 2 years, we went from 2.6% of the retailers buying our product to 3.6 3.6 percent of our retailers buying our and we added 100 of them. Our owner penetration rate went from 5% to 10% 5% to 7%. So I always have believed that you're talking a multibillion dollar opportunity.
And what these products do is just better position us to get the kind of penetration rates we think are possible in these just really attractive solid markets like the lender banking, the institutional owner, the retailer, even corporate America. So we've achieved 80% penetration rates among the biggest brokerage firms or the large brokerage firms or mid to large hedge brokerage firms. And we're moving the dials on these other 4, 5 segments, but we haven't begun to move them like we moved the brokerage. And that's what this is really all about. So potentially you add $100,000,000 plus by moving solidly into the multifamily.
And the financial modeling tools is a easily $100,000,000 there. But again the real thing is we know what this market opportunity looks like. We have very we have great growth rates, very low penetration in 4 sectors we think are huge and it's going to move us down the line faster. Thanks a lot. And again address the problem of the 98% renewal rates with customers 5 years or over.
Our next question comes from the line of Michael Hauck from Needham. Please go ahead.
Thanks very much. Great quarter guys. Thank you. Quick question for you guys. So first of all, so Brian, you had reiterated kind of your comfort level and confidence in this annualized $500,000,000 target as we exit next year.
And I think you threw in there and possibly more. And I can't remember or recall if that was the first time you said it or not. But I was just wondering, I mean, as you walk through or think about what are the potential kind of upside drivers to that target? Maybe just kind of help me understand where that might be coming from? Is that just better than expected sales productivity?
Is that better than expected kind of uptake of these new products? Maybe just kind of walk me through what are the upside drivers to that target?
Sure. Yes. I mean I think it's a lot of things that we've been talking about on the call. I mean obviously we're significantly increasing the size of the sales force. So as most people know, I'm fairly conservative in my numbers.
I'm a show me guy. I want to see productivity from some of these first. So I think that there could definitely be upside from the sales force and how we execute on that. Obviously, the better we execute the higher the revenue I think we can be. I also think there could be upside on a lot of these releases that we talked about.
And I think there could be upside from Andy talked about broker adds. I've said this fairly clearly on prior calls. I'll say it again. I'm not putting very much revenue or actually I'm not putting any revenue in my models for broker ads. I'll probably put a little bit, but not a lot.
And the reality is until I see the first contract in dollars come in the door, I'm not going to be throwing a bunch of revenue in my model for that. So I think as that rolls out and we start to see some revenue in the Q1, 2nd, Q3 that could provide side as we move along the year and hopefully we can do better than we thought. The reality is it still won't be a big number for next year, but then it can obviously be much bigger as we see success there in 2015, 2016 and 2017. That as Andy mentioned, you didn't get Zillow, Trulia, HomeAway. You got a lot of marketplaces out there that do 100 of 1,000,000 of dollars in those areas.
And I think over the next 5 years, we can see that. But I'm going to be conservative. I'm not going to start putting I've always said this, I'm not going to start putting revenue dollars in guidance for products that haven't released yet. I learned the hard way on that one. So I haven't talked to Brian about it, but I believe that his numbers for next year probably include below average production levels for the 2 25 field salespeople.
And so the way you get upside is that the field salespeople perform at average.
Got you. Okay. That's great. And then it's great to see kind of the improvement on the conversion rates as a loop consolidates. I was wondering as you think about kind of what that upper bound of kind of those close rates and what it could be over time.
Do you have kind of thoughts around that? And maybe I missed it, but did you give us kind of the number of kind of what that qualified loop lead base looks like as we exited Q3? I think it was $140,000 last quarter. Correct. And it's a modeled number.
I mean, we look at these
leads and we run assumptions against them and say, what do we think the real addressable folks are in that market? So the number is over 100,000. It was 140,000 using the same consistent model we've been using over time. The important takeaway is that despite the fact that we were able to cross sell so many people into CoStar, the size of the pool of prospects grew on us. So we weren't upselling them as fast as we were getting new ones, which is probably a result of the recovery.
You've got more people reentering commercial real estate and so we're not able to upsell them. Again, it's part of why we're growing the sales force.
Okay, great. And last question and I think you kind of touched on this a little bit. But in terms of the mechanics of kind of the fusion pricing, is it a la carte? So are there some of those things that you can buy just kind of piecemeal? Or do you have to buy the entire platform?
And if you're a Suite customer like what's the ARPU gains you get as you move to kind of the broader Fusion platform? Thanks.
Well, the Fusion platform, so we historically had an awful lot of customers who are buying just comps or just Tenet or just Property or Property Express or even look at LoopNet as continuum of our product line, so LoopNet Premium Searcher. What Fusion does is it creates more and more reason for these folks to step up to the suite level. And as they do that, they're coming up 50%, 75% in pricing. So it's the pricing schedule obviously based on number of shops national local is just incredibly it's too complex to have a quick answer that's one size fits all answer. But typically, you're going to get a lot more accounts going up 50%, 75% as they go from buying one of our products to buying application.
And then the other thing that's occurring here is this release is probably the last release that is generic one size fits all CoStar Suite. The next release will probably have the system diverge into a one product that's addressed towards brokers and then another product which looks very similar but has different functionality that's addressed to lenders and owners. So this is the last generic release or one size fits all release. When that owner institution release comes out, it will probably be at an ARPU of 4x the average of the broker version.
Got you. Great. Very helpful. Thanks guys. Thanks Mike.
Our next question comes from the line of Ian Corden from B. Riley and Company. Please go ahead. Thank you. I think you just partially answered my first question, which was, do PPR subscribers have access to the new analytics in CoStar?
Or are they meant for a different customer? And then when does that owner user interface come out? Is that 2014? That would be definitely 2014. And know that the someone at probably 80% of the people in our customer base subscribes to CoStar already.
And I'm going to just guesstimate that the 20% that do not, they're multifamily players. So now they will be an audience that will probably want to subscribe to CoStar property. When we launch the owner version of CoStar, we will be bringing the capabilities of the PPR web product into merge it with the CoStar product and there'll be a one stop shop which we hear from our customers they like to see. They like to be able to get the forecasting analytics screen tools in the same environment as they get the micro detailed data and leasing proposals and so on and so forth. So we'll be the CoStar owner product will not include the advisory services, the access to analysts, the briefings, but it will have the same functionality as the PPR website integrated with the CoStar website.
Perfect. That makes sense. And that's kind of what I figured. And then am I reading the guidance right that Q1 adjusted EBITDA might be a little below 30% and then for the rest of the year you'll be kind of in that 30% to 35% range? Yes.
I mean I think we're going to generally be in the 30% to 35% range. Q1 sort of including the marketing and all that, it will be around there. Yes, obviously, it depends on where we end up in the Q4. But yes, it will be close. Okay.
Thank you very much. Thank you. Our next question comes from the line of Todd Lukasik from Morningstar. Please go ahead. Hey, guys.
Nice job again with the continued business improvements. Thank you, Todd. Had a couple of questions on margin.
I think Brian you mentioned last call it's a business model where $0.70 to $0.80 of every incremental revenue dollar can fall to the bottom line. I think I had you guys at about a 74% incremental adjusted EBITDA margin for this quarter year over year, I think slightly less than that for the 1st three quarters. But I'm just wondering is that sort of the range that you expect to stay in in terms of an incremental adjusted EBITDA margin that 70% to 80% range that you mentioned?
Yes. I mean if you look at the gross margin, it's at over 71% now and yes I think it's up 4 points over last year. So yes I would continue to expect that you're going to drop $0.70 to $0.80 through that line. I think that will continue to grow over time on a long term model basis. And then yes, I think that if you look at where we're going, obviously, when you're doing that, we're sort of balancing I'd say this is different than 5 years ago or 10 years ago.
We're able to continue to grow and balance growing EBITDA earnings as you've seen all this year. I think we can do that all next year. And then I think in the following years and we can continue to push up the overall EBITDA margins into the 40%, 50% range. I don't think we're limited. I actually don't even think the top end of that range is limited in a longer term model.
We've seen for years some of our larger markets doing 60%, 70%. So right now I'm sticking to talking about the next 3, 4, 5 years. But I don't think the if by any means we're sort of bound by a 40% or even a 50% margin long term. Okay, got you.
And when you mentioned 40% to 50% that's the just to clarify that's adjusted EBITDA margin that adjusts that adds back to stock based compensation expense as well?
Yes. Okay. And then, I was just wondering I know
you probably don't want to talk about pricing for particular clients, but I was wondering with the Transwestern deal, how a deal like that impacts the net new sales numbers that you talk about? So if the deal if the total value of that client with all the dozens of contracts that were out there was 100 and the one national contract that you signed the value is 120. What's the impact of that on net new sales? Is it $20,000,000 or is it $120,000,000
It's $20,000,000 Okay. If you're going from $100,000,000 to $120,000,000 Yes. Yes, 20. Okay. Got you.
All right. Thanks a lot guys. We're very net new focused. Thanks, Todd. Well, thank you very much.
And there are no other questions in the queue. Well, thank you everybody for joining us today and we look forward to updating you on our progress in about 3 months, in 3.5 months, if that's more. Well, thank you very much everybody. Thank you. That does conclude our conference for today.
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