Welcome to the CoStar Group third quarter earnings conference call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. Instructions will be given at that time. If you should require any assistance during today's call, please press star and then zero. As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Director of Investor Relations, Mr. Richard Simonelli. Please go ahead, sir.
Thank you. Ladies and gentlemen, welcome to the CoStar Group's 2012 third quarter conference call. On the call today are CoStar Group's Founder and Chief Executive Officer, Andy Florance, Chief Financial Officer, Brian Radecki, and myself. During today's conference, all participants will be in a listen-only mode, and later there'll be a question-and-answer session as well. 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 24, 2012, press release on the third quarter results and in CoStar's filings with the SEC, which include our annual report on Form 10-K for the period ending December 31st, 2011, and our quarterly reports on Form 10-Q under the heading Risk Factors.
All forward-looking statements are based on information available to CoStar 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 on the internet at www.costar.com. A replay will be available approximately one hour after the call today is completed and will be available until November 25th, 2012. To listen to the replay, call 800-475-6701 within the United States or Canada, or 320-365-3844 outside the United States. The access code is 266046. A replay of the call will also be available on our website soon after the call concludes. I'll now turn the call over to Andy Florance. Andy?
Good morning, everybody, and thank you all for joining us. I'm very pleased to bring you news this morning of solid financial performance in the third quarter. Driven by both strong organic growth along with the acquisition of LoopNet, CoStar's revenue for the third quarter increased 50% year-over-year to $96 million. Third-quarter EBITDA increased 227% year-over-year to $19.6 million. I would love to be able to say that every earnings call. In the third quarter, we added 948 new subscription customers, which is the largest number we have added in any quarter. That's organic sales. This is a result of our sales team ramping up to take advantage of the opportunity to cross-sell CoStar into the LoopNet client base.
Following our successful acquisition of LoopNet on April 30 of this year, our single greatest priority as a company right now continues to be aggressively integrating the resources of LoopNet and CoStar together to capture what we see as a once-in-a-lifetime opportunity. The combined company now has nearly 2,000 employees, and I believe that they see the potential these combined companies have, and they and we are all very excited about it. The commercial real estate industry is massive, with over $10 trillion in assets in the U.S., and the scale we need to address this opportunity is great. One of the best things about the merger with LoopNet is that it has enabled us to team up with several hundred new gifted colleagues who have the skills we need to succeed in our mission.
I think it is safe to say that we all feel pretty lucky to be here in this company right now with this opportunity. That's a good thing because right now we have an awful lot of work to do here. Prior to the merger, these two great companies were structured top to bottom to optimize the ability of each company to succeed, given the environment that existed before the merger. With this merger, that environment has been turned upside down and inside out for the better. That means that our staff has to embrace a tremendous amount of change in order to ensure that we put the right talent in the right place, doing the right job.
I'm really proud to say that our team is doing a great job embracing that change and working through the inherent challenges in order to build the best company to serve the industry. I think it is remarkable how quickly this integration is coming together. I've seen a dozen-plus mergers up close, and this one is progressing at a faster pace than just about any I have seen before. A lot of credit for that definitely goes to a great leadership team on the LoopNet side. I have the entire LoopNet team to thank for supporting the vision of the inspiring potential of this combined company. Let me give you just a few examples of the level of integration occurring. LoopNet had perhaps two dozen researchers tasked with finding commercial real estate listings to load into the LoopNet marketplace in an effort to drive greater participation.
After the merger, that task made no sense because CoStar already had the vast majority of those listings in our database, and there was no need to collect data twice. The LoopNet research team spent several weeks in training, both in Washington and California, learning how to do research to support the CoStar information products. In addition, several experienced CoStar managers and researchers have moved to LoopNet's offices in California to further train and support these former Loopsters as they begin doing CoStar research. This was not easy. The company has eliminated around $1 million of redundant cost in this area alone, has retained good talent, and is improving our products in doing so.
Over the past quarter, the entire research team, with the support of our software team, has combed through the entire LoopNet database and added 50,000 listings to the CoStar information products that had been missing prior. This should make our products even more valuable to our customers. Total listing count grew to 1.6 million in the third quarter from 1.6 million in the prior quarter. The newly combined companies now have significant telephone customer service teams in London, Washington, and San Francisco. Each separately can effectively service customers in an eight-hour window, given that two of these centers support five time zones. We are integrating these three customer service teams into one virtual call group and are cross-training the teams. This means that a Chicago client will be able to reach a good customer service help from 2:00 A.M. their time until 9:00 P.M. their time.
Our goal is to have that six days a week. In addition, by increasing the pool, you need less standby staff to handle call surges. This means that through attrition, we can have fewer customer service reps providing higher quality support over greatly expanded hours. CoStar has a multi-year pipeline of detailed product development specifications that we believe will become industry-leading tools that will drive even higher sales results in the future. Now that the companies have merged, LoopNet will be devoting even greater software resources to its innovative and profitable internet marketing solutions but will not need as many resources working on fledgling redundant information products. Both LoopNet and CoStar develop in the .NET environment and have very similar technology stacks. More importantly, both companies have top-flight software talent and management.
Our technology teams have spent many hours post-acquisition briefing one another on how our respective company's technology solutions are built. I think it's probably not hours. I think it's probably days and weeks of briefings. This has been a great two-way learning experience for the staff. This also means we can use some of the LoopNet software teams to bring CoStar products to market faster and vice versa. Several weeks ago, I was attending a regularly scheduled half-day CEO software briefing session when it dawned on me all of a sudden that I was listening to a LoopNet senior executive, Jerry Rogers, brief me on the timing of the next major CoStar product release. In several short months, people have taken cross-responsibilities across the companies. It was a great briefing. Another area where I believe we are realizing extraordinary value is in the integration of our sales teams.
Remember that we have very roughly about 80,000 to 100,000 good prospects currently using LoopNet that we want to cross-sell CoStar information products to. We have just started on that effort, but in addition, we have a similar scale task of cross-selling LoopNet internet marketing solutions to CoStar users. Any way you look at it, we need a very large sales team to take advantage of this large opportunity. When we closed the deal, we had just over 200 CoStar sales reps, and now combined with LoopNet's team, we have almost 350 sales reps. The problem is that most of these salespeople were not tasked with selling the cross-sell products, the highest value products, which have the highest revenue potential post-merger. LoopNet was devoting a large number of sales resources to selling Premium Searcher property comps and Property Facts on monthly terms to individuals.
These products have lower renewal rates and lower price points. Each unit sold is ultimately worth only several hundred dollars. That stands in sharp contrast to sales of CoStar information products, which have higher price points, firm-level purchasing instead of individual purchasing, annual contracts instead of monthly, and extraordinarily low cancellation rates. We believe that each subscription of CoStar Property sold can be ultimately worth approximately $50,000 to the company over time. Some of LoopNet's Premium Lister plans can be worth several thousand dollars per unit sold. I believe that LoopNet's Premium Lister plan sold on annual contracts at the firm level might approach tens of thousands of dollars in value per unit sold.
It may have made sense to devote resources selling low-price products to individuals when the companies were standalone. It makes no sense now when we believe that we have tens of thousands of potential sales with long-term values approaching $50,000 per unit. Obviously, it is a great opportunity to shift sales resources from the lower value products to higher value ones. Often within merging cultures, that is much easier said than done, though. In this case, I think our sales organization is committed to doing the right thing and is making phenomenal progress. LoopNet has a number of strong sales professionals, and we have already promoted approximately 20 of them from selling these lower-priced subscriptions to field sales, where they're selling CoStar and LoopNet Premium Lister at the firm level on annual contracts.
In order to bring them up to speed as quickly as possible, we teamed them with senior CoStar sales value per unit sold than Showcase. We have trained 24 Washington-based salespeople on selling LoopNet Premium Lister, and that is their primary role today. This is really significant because we are now successfully selling LoopNet from CoStar headquarters in Washington, as well as LoopNet's headquarters in San Francisco and their Glendora office, and throughout the field too. We have also promoted an additional 21 sales staff from our centralized group in HQ to field account executives and teamed them up with East Coast account executives, more senior East Coast account executives who've been in the field for a while, and they're now focusing on cross-selling our higher value products. We have 15 advertising salespeople who, prior to the merger, only focused on selling enhanced marketing exposure within our CoStar products.
They have now been trained in selling LoopNet Premium Lister and are selling it on annual contracts at the firm level. In total, more than 100 CoStar and LoopNet salespeople have seen their sales responsibilities change significantly since the merger closed 6 months ago, that we could take advantage of the higher potential we have in cross-selling LoopNet and CoStar services. With that, let's talk about actual cross-selling results to date in these first number of months. In August, we began distributing LoopNet user lists to our sales team for cross-selling. Of the approximately 100,000 information cross-sell leads we're focusing on, we have only distributed about 16,000 to date. The sales force has made contact only with a portion of those first leads. They have already closed 723 deals selling CoStar information products to LoopNet users.
Most of the LoopNet users we converted to CoStar contracts were freemium users. They were paying nothing to LoopNet. The others, which were the minority, were paying LoopNet a total of $37,000 a month for various combinations of information and marketing services that they, in essence, could drop at any time. They were not annual contracts. These people are now purchasing CoStar information services and LoopNet marketing services for $381,000 a month on annual contracts. That is a monthly billing increase of 930%, which is clearly a home run. Go Giants. These clients, their prior commitment was only to pay LoopNet $37,000. Now they have committed to annual contracts with us with an aggregate commitment of $4.6 million. You can do the math. It's about 120-fold increase in contracted revenue from these users. Much more stable, predictable revenue.
The $381,000 of monthly revenue was comprised of $58,000 of LoopNet Premium Lister and $323,000 of CoStar information services. I have participated in a number of these sales, and these new customers appear to be very pleased with these new combined services. We are just in the beginning phase of this effort. We currently expect that the number of demos will increase significantly in the fourth quarter of 2012 and beyond. I know that we already have 500-plus scheduled out into the future. The company sales force spent much of the third quarter of 2012 training, developing sales tools, reorganizing the sales force, and forming new teams by end HQ AEs. We look forward to reporting a full quarter of cross-selling activity in the fourth quarter that we expect will improve on these initial numbers. Just to put some pressure on our sales management.
While we have put a lot of focus into selling CoStar information products in this quarter, we also believe we have significant growth ahead in LoopNet premium memberships. LoopNet's core business is performing extremely well in the quarter, with premium memberships up 2,783 during the third quarter to 80,062 premium members. That is the strongest membership growth LoopNet has seen since the third quarter of 2007. The growth in members is a 91% increase quarter-over-quarter and 112% increase year-over-year. I think one of the exciting things happening here is that for each of the 723 LoopNet users we upsold, we replaced them with three new ones that perhaps could be future upsell opportunities. It is a gift that keeps on giving.
Historically, LoopNet experiences significant sales cycles with the first quarter being the best, and then each successive quarter moves downwards until the fourth quarter is normally LoopNet's most challenging quarter, and that's sort of a long-term pattern with LoopNet. This quarter's result is significant, though, because we broke that historical downward trend in the third quarter. CoStar salespeople and Washington HQ-based centralized sales helped achieve that upward trend, along with the LoopNet traditional sales team. That HQ team that was prior selling CoStar Showcase in Washington, along with some of these CoStar field sales reps, sold 555 LoopNet premium memberships in the quarter that would not historically have happened for LoopNet. The pace of that contribution is picking up. On top of the 555 units sold in the third quarter, CoStar salespeople have already sold an additional 69 units in the first weeks of this month.
LoopNet turned in its best ever August based on gross sales and best since the market's 2007 peak based on net sales growth. We are now only selling CoStar's traditional internet CRE marketing platform, CoStar Showcase, as a bundled add-on to LoopNet's Premium Lister product. The LoopNet Premium Lister product will be our lead product going forward in this area. CoStar Showcase is being packaged with LoopNet and CityFeet and National Newspaper Distribution Plan, which includes 225 publications like The Wall Street Journal and The New York Times. This becomes the LoopNet Premium Lister Gold package or combination package. 24% of our new Premium Lister subscribers are now subscribing to the enhanced bundle, which we only very recently started selling. Overall, we believe we are very well positioned to continue to drive sales and conversions of LoopNet and CoStar customers.
I am really, really pleased to be able to announce a major milestone in the U.K. We have now completed the migration of our U.K. property database into the same research system we use in the U.S., and we have now completed building CoStar Property, Tenant comps, and CoStar Go for the U.K., and will have completed it before the 10th anniversary of our being in the U.K. This is a completely new product offering for the U.K. market, and we believe it'll be a huge competitive advantage for CoStar that will drive penetration of new customers and will lead to upgrades and increased retention among existing clients. We are doing a 2-stage launch of the product in the U.K., with the first release occurring in a two-week series of marketing events across the U.K. starting November 5th.
The first release is a soft preview release available to 2,000 users at our higher revenue clients and is available to them at no cost. We're giving away a large number of iPads, as we did in the U.S., in order to spur fast adoption and create buzz for the broader market. The official complete national launch will be on January 2nd, 2013. At that time, our remaining 10,000-plus users can upgrade from our existing FOCUS software platform to the new CoStar platform by paying a reasonable premium to their current monthly price. We believe that this release of our integrated international CoStar software platform will enable us to significantly accelerate our revenue growth rates in the U.K. and move us towards profitability there. In other news, in September, we launched our multifamily product or apartment product.
Multifamily is PPR's number 1 property type by number of page views and report downloads, indicating that there is a lot of interest in this sector. It is one of the biggest asset classes of commercial real estate. We have dedicated approximately 40 research analysts to the multifamily team. The database includes over 50,000 multifamily properties with effective rent data, and it's growing really quickly. We have hundreds of thousands of apartment buildings in our database that we're enhancing with this current rent data, vacancy data, et cetera. We believe that this is significantly more properties than anybody else in the space offers by a wide margin. The potential target market for this product at both the CoStar and PPR levels is vast. We believe this offering will give us deeper penetration with current and prospective clients, including banks, government agencies, CMBS investors, investment managers, REITs, municipalities, and many others.
We expect to release the enhanced multifamily data in our CoStar platform as well, in that sales channel in the first part of 2013. For the past two years, we have had research resources canvassing buildings in Toronto, Canada. In total, they have thoroughly documented 38,000 commercial properties for a total of 1.7 billion square feet of Canadian inventory. We have met with the major players in Toronto, and when they saw the technology we had to offer, they were very impressed. We are fairly confident. We're extremely confident, and we do not believe there's anything comparable covering commercial real estate in Canada. We believe we will launch the Toronto service in the first quarter of 2013.
I want to stress we have no current plans to expand to any other markets in Canada or outside the U.S. right now, and we do not believe the Toronto expansion will materially negatively impact our margin expansion. This is a controlled expansion. Current commercial real estate market conditions remain positive for CoStar and most of our clients. While the economic recovery remains weak and we've not gained back all the jobs we lost in the downturn, office job growth is up over 2%, better than the overall economy, and it's positive for commercial real estate. Gross leasing activity is high due to inexpensive office space out there. Overall, the third quarter of 2012 looks very similar to the second quarter of 2012. In the office market, year-to-date net absorption has been focused on top-quality buildings. It is still running fairly close to long-term averages.
Net absorption for the quarter was 15 million square feet, which is in line with the current trends in the market. Across the nation, rents are only up 1% from the bottom and actually showed a slight downward trend in the quarter. However, rents in some markets are up significantly, particularly in technology and energy cities. Say, San Francisco rents, as an example, have risen by 20% From last quarter's 16% increase. Overall, the commercial real estate economy is creating an acceptable business environment in which we can pursue our top priority of cross-selling CoStar products to LoopNet users and LoopNet tools to CoStar clients. The cross-selling opportunities from the LoopNet acquisitions are now proven to be real and are driving significant new customer sales.
We move towards the end of the year and into 2013, we expect to continue to see the benefits of the LoopNet acquisition continue to unfold. We believe that our employees, clients, most importantly, shareholders, will benefit as we continue to integrate the two companies, grow profitably, and move towards our goal of $500 million of revenue and 30% or more adjusted EBITDA margins as we exit 2014. I will now turn the call over to our Chief Financial Officer, Brian Radecki.
Take a breath. Thanks, Andy.
You're welcome.
We're very pleased with our performance in the third quarter of 2012. This is the first full quarter we have LoopNet included in our consolidated financial statements. The progress we are making on integration has already translated to synergies showing up in both our revenue and earnings. Today, I'm going to principally focus on year-over-year comparisons for the third quarter of 2012, and also on our outlook for the remainder of the year and into next year. To review the results in the third quarter, beginning with revenue. The company reported $96 million of revenue in the third quarter of 2012, an increase of $32.2 million or 50% compared to revenue of $63.8 million in the third quarter of 2011.
CoStar's organic revenue growth remained strong in the 12%-13% annual growth range during the third quarter of 2012, while the LoopNet business, excluding purchase accounting adjustments, continued to achieve year-over-year revenue growth in the 10%-11% range. The combined businesses are operating in the 11%-13% range. We're excited about the performance of the combined business and continue to look for ways to maximize our future revenue growth as we reprioritize our sales efforts and aggressively pursue cross-selling opportunities. Our non-GAAP net income earnings reached an all-time high in the third quarter for several key metrics we report, including EBITDA, adjusted EBITDA, and non-GAAP net income. We believe the earnings potential for the combined business is evident as I expect to see strong earnings growth year-over-year as we take further actions to capitalize on synergies from both the LoopNet acquisition.
EBITDA increased 227% year-over-year to $19.6 million in the third quarter, up from $6 million in the third quarter of 2011. Adjusted EBITDA of $25.6 million for the third quarter of 2012, which is an increase of $11.6 million or 83% from the third quarter of 2011. Adjusted EBITDA margins increased to 26.7%, up from 21.9% in the third quarter of 2011. Non-GAAP net income for the third quarter of 2012 was $13.1 million or $0.47 per diluted share, which is an increase from $7.2 million in the third quarter of 2011, or 82% year-over-year. Net income increased to $6.8 million in the third quarter of 2012 or 196% year-over-year.
Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA, and all non-GAAP financial measures discussed today to the GAAP basis results are shown in detail, along with definitions for those terms in our press release issued yesterday and is available on our website at www.costar.com. If you have any questions on those in detail, you can email Rich Simonelli at costar.com. Cash and investments increased $22.7 million to $151.8 million as of September 30th, 2012, up from $129 million at the end of the second quarter. Cash flow from operating activities was very strong at $26 million for the third quarter of 2012 and $56.6 million for the nine months ending September 30th, which demonstrates the strong cash flow profile of our business. Short and long-term debt totaled $170.6 million as of September 30, 2012.
At this point, I'm going to give some operating metrics for the combined business, which highlight our strong performance in the third quarter. As we further integrate the businesses, we may adjust or introduce some new combined metrics. Annualized net new subscription sales totaled $9.3 million in the third quarter of 2012. We have slightly refined this metric to include only net new subscription sales from annual contracts. It does not include the monthly or quarterly sales. Revenue from subscription services on annual contracts in the quarter was $68.3 million for the third quarter of 2012 or 71.2% of our total revenue. This represents an increase of 14.2% organically from the $59.8 million in the third quarter of 2011.
If you looked at it on a trailing 12 months basis ended September 30th, 2012, subscription revenue would have totaled $261 million, up 14.3% from $228 million for the 12 months ended September 30th, 2011. Renewal rates for annual subscription revenue remained very high during the third quarter. The 12-month trailing renewal rate for annual subscription revenue increased to 94%, actually up 0.3 percentage points from the 93.7% during the second quarter, which is a new record. The 94% is also a 1.4% improvement from one year ago. CoStar subscribers who have been with us for five years or longer remained at a remarkable 99%, matching that all-time high we reported last quarter. As we discussed previously, we expect the cancellation of the RMS at the MG I-owned company to have a one-time impact on our revenue and renewal rate of approximately 1% in the fourth quarter of 2012.
In addition, the ultimate resolution of the ground and Alf contract, currently still in bankruptcy court, may impact our revenue renewal rate, as we've discussed on the past few calls. At the end of the third quarter, the CoStar business had approximately 95,568 subscribers, up from 91,010 in the third quarter of 2011, and down slightly compared to the second quarter of 2012. While subscribers to our U.S.-based information services increased in the quarter, the small decline quarter-over-quarter is primarily attributed to the change in CoStar Showcase subscriptions. As Andy mentioned, we have combined our marketing services are no longer selling CoStar Showcase as a standalone service.
We are now providing CoStar Showcase as a part of the expanded national distribution option for the LoopNet Premium Lister subscribers, and we expect the former and existing CoStar Showcase subscribers to migrate into the subscriber counts of the LoopNet marketing subscriptions as we upsell them to this premium bundle. As we have discussed on prior calls, we expect to continue to make some moves to rationalize our combined portfolio, and this decision to stop marketing CoStar Showcase on a standalone basis is an example of that. The former CoStar Showcase sales force is now selling LoopNet Premium Lister, both on a standalone basis and bundled with CoStar Showcase or national distribution. At this point, we have approximately 71% of our revenue coming from one-year subscriptions, while the remaining 29% is primarily made up from marketing services, including LoopNet's premium membership, CoStar Showcase, as well as revenue advertising across both platforms.
As we continue to make progress cross-selling some of the LoopNet subscribers onto one-year contracts, as Andy talked about, we expect an increase in the amount of marketing revenue to be included in our subscription revenue metric. For all the Loopsters on the call, the LoopNet marketplace continues to be the premier website for marketing commercial real estate. The number of LoopNet premium members during the third quarter of 2012 increased to 80,062, up approximately 6,800 compared to the third quarter of 2011. The average revenue per paying subscriber or ARPU for subscribers was approximately $65.91 for the third quarter of 2012. Unique visitors to each of the LoopNet-owned websites tallied 5.9 million during the third quarter of 2012, according to Google Analytics, up approximately 30% from 4.6 million in the third quarter of 2011.
LoopNet registered users, including basic and premium users, totaled 6.4 million as of September 30th, up 22% from the third quarter of 2011. I will now provide the outlook for the fourth quarter and the full year 2012. Our forward-looking outlook reflects current expectations as of today, takes into account recent trends, growth rates, renewal rates, which may be impacted by economic conditions in commercial real estate or by the overall economy. Actual results may vary from these results. Call your doctor if you have any issues. As discussed last quarter, throughout the LoopNet integration process, we plan to consider alternatives for certain services from the two companies that overlap or create confusion among customers. We may reduce sales efforts in some areas or discontinue certain services within the boundaries established by our consent decree.
We would undertake these changes only if we believe they are accretive to the business in the long term, but this could lead to some negative impacts in the short term. The change to our CoStar Showcase marketing services is one service, and we intend to continue to evaluate other services like LoopNet Property Comps and Property Facts. We believe the revenue and earnings guidance we are providing accounts for these possible changes. Based on strong earnings results in the third quarter of 2012, we are raising our estimates for non-GAAP net income per diluted share to a range of $1.59-$1.64 for the year. This increase in guidance range is a $0.16 increase from the previous midpoint. $0.16. We are clearly seeing the benefits of integration activities associated with the LoopNet acquisition translate to cost synergies as reflected in our higher non-GAAP net income.
For the fourth quarter of 2012, we expect non-GAAP net income per diluted share in the range of $0.40-$0.45. The marketing programs accompanying our ongoing cross-selling activities I discussed last quarter are still expected to have an impact range of $0.10-$0.12 on our non-GAAP net income per diluted share. However, the timing of these activities has changed slightly. We expect to align these marketing activities with our cross-selling activities from the sales force throughout the fourth quarter and into the first quarter of 2013. The first quarter 2013 non-GAAP net income per diluted share is expected to be lower than the fourth quarter as a result of the marketing activities as well as seasonal higher expenses in the first quarter, which we always see. After the first quarter of 2013, we expect earnings to increase at a healthy pace moving forward.
We expect to publish more detailed guidance for 2013 as we discuss our 2012 year-end results, and we expect to continue to grow earnings year-over-year each quarter 30%+ adjusted EBITDA margins by the end of 2014. Included in our earnings guidance, as we discussed last quarter, the company expects to launch CoStar Go and CoStar Suite in the U.K. in the fourth quarter, and we expect to incur launch-related costs in the fourth quarter of 2012, and as Andy mentioned, into the first quarter of 2013. While this is expected to impact profitability in our U.K. segment for the next two quarters, we expect these new products to accelerate revenue growth in the U.K. and to begin to drive improvements in the U.K. EBITDA margins in 2013.
In terms of revenue, we are raising the low end of estimates for our range to approximately $347 million-$349 million for the full year. The fourth quarter 2012, we expect $97 million-$99 million in revenue. While we are pleased with the strong sequential revenue growth rates so far this year, we do expect a more moderate growth rate in the fourth quarter, mostly due to the seasonally weaker sales quarter that LoopNet has seen for years and years, coupled with the expected impact of RMS and the Grubb contracts, which we've discussed. In summary, I'm very pleased with the third quarter results, which include the first full quarter of LoopNet operations that begin to provide insight into the strong earnings potential of this combined business.
With our integration activities already directly contributing to earnings, we are well on our way to delivering the synergies we expected when we announced the deal. More importantly, based on our early cross-sell success and realignment of the sales force, we remain confident in the revenue opportunities that are achievable by integrating these great businesses. We see an enormous opportunity for growth as the industry-leading platform with the most complete and growing set of services for commercial real estate. Based on the revenue and earnings results for the quarter, I believe we are well on our way to achieving the medium-term goal we introduced last quarter of $500 million in run rate revenue by the end of 2014, with adjusted EBITDA margins in the low to mid 30% range.
More now than ever, we believe it is an achievable benchmark that sets us on a realistic path towards our long-term goal of $1 billion in high-margin revenue. As always, I look forward to sharing this progress with you in coming quarters. With that, I'll open up the call for questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star and then one on your phone. You'll hear a tone indicating that you've been placed in queue. You can remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up your handset before pressing the numbers. Once again, for questions, please press star, then one at this time. Our first question will come from the line of Bill Warmington of Raymond James.
Good morning, everyone.
Good morning, Bill.
I wanted to ask first if you could talk to us about where you are relative to the cost synergies for the merger. We've been talking about a $20 million target over a 24-month period. It sounds like you're probably running ahead of that.
Hey, Bill, it's Brian. Yes. I think clearly shown in the numbers, we're just barely six months into the integration, but I think we're probably ahead of where we thought we would be, and you're seeing that directly in our earnings numbers and us raising earnings guidance, along with still being able to invest in the marketing for the cross-sells. I think we're extremely happy where we are on that metric. I think we're, again, well on our way to getting there more than halfway, and I think that we already have other things in place that we believe we will be there on time or sooner.
Okay. I wanted to just ask, you were very helpful last time in terms of last quarter in terms of giving some color around the organic growth. I know you gave some figures on the subscription-based portion specifically. If you look at it for total growth there, I know that you have some adjustments there for the LoopNet revenue in terms of deferred revenue write-offs. How do you manage those pieces in terms of what you calculate for organic growth for third quarter, and then how does that play out in the fourth quarter?
I tried to give everybody a little bit of clarity on that. If you were to look at the CoStar business, we're sort of in the 12%-13% range. If you looked at LoopNet, sort of taking out all the adjustments, they're sort of in the 10%-11% range. Again, I'm sort of giving a range of 11%-13% for the business. I gave a new metric. People will go back and look at the transcript this time of what the subscription-based revenue is. It's now about 71% quarter-over-quarter, and that's growing at 14%. What does that tell you? It tells you the other 29% is growing at below 14%.
Right.
Sort of the one-off marketing stuff. Obviously one of the big goals, as Andy talked about, is to constantly go out there and sell people annual contracts for those marketing services and moving them over to that bucket. I would expect to see that 71% grow next year, which as that grows, you'll see higher growth rates. I think until then, you're going to sort of be in that 11%, 12%, possibly 13% range. I'd probably be a little bit more conservative in there as we combine the two companies.
Okay. Any specific thoughts on the fourth quarter organic?
Sure. We talked about in the fourth quarter, if anyone goes back and looks at LoopNet's numbers
They've always. That's always sort of been their worst quarter.
Okay
It's always a seasonally weak quarter for them. I think obviously that will moderate sort of our organic revenue growth. We do have the RMS contract and the Grubb & Ellis, which is still in bankruptcy court, it keeps getting extended, that we don't know. I would actually expect to be in the middle of the revenue range. Now again, there's a lot of factors. We reversed the trend last quarter. There's a lot of other things that can happen. I think with their seasonally weak quarter, knowing that these other contracts are definitely coming out in the fourth quarter, I'm expecting sort of a mid-range, in the middle of the range of where we're at. I expect, obviously, to move back to what we've been seeing prior to that into the first quarter.
Got you. I wanted to ask, where are you seeing? It sounds like you're seeing a lot of success with the cross-selling. I just wanted to know if you could give us some color in terms of particular market sizes, particular geographies, particular firm sizes, type of product, something that, where you're having particularly strong success.
Sure. I mean, it's a good question. I would actually say that, at this point, a couple markets stand out. The California markets.
are doing extremely well. In particular, Los Angeles, where both LoopNet and CoStar Group have very large customer bases down there. Some salespeople are having some great success there. Another area would be Chicago, where they've seen a lot of success. I actually think that the biggest determinant of the kind of numbers we're seeing and where they're coming from is individual sales professionals' skillset and what they've learned and how they approach the upsell or conversion sale. I'm seeing individuals who clearly get it and are I think we've got individuals who've done 20 to 30 upsells on their own, and then we have other individuals who haven't yet figured it out, and we are providing continuing ongoing training support to help them figure out how this sale works.
I guess that's ultimately good news because eventually we'll get everyone up to speed, and it should be fairly consistent. Over the short term, it's Chicago where we first started to trial the process, and those salespeople get a lot of exposure to the cross-selling. Southern California, where we just have a bunch of good salespeople and they've got a big pool to work. Over the intermediate term, it will probably be heavily focused in California, Texas, and Florida, but with a lot of activity everywhere else in the country. The other thing we've seen is that in the initial rounds, we've done extremely well with the one-to-five person shop at LoopNet. Someone with just a handful of brokers, a relatively small shop, which has never historically been CoStar's greatest strength, and now this merger's given us that entryway there, and that's doing really well.
The 35 or 40 person shop who might have been using LoopNet before, they're facing a very significant cost increase to go from LoopNet to CoStar. Where the two-person shop may be paying $400, $500 more per month, and they can do that, the larger shop may be facing $10,000 plus more per month, and I think that is a longer sales cycle. The typical size of the leads we're looking at, or the LoopNet users we're looking at, are 3 to 10 users in the shop. I'm encouraging the salesforce to work that sub-10 list because if we have a lot of success on the sub-10 list, that'll just give us a stronger position in the plus-10 user area over time.
The biggest misperception out there in the marketplace prior to the merger, which we're now able to correct, that we've merged, and we can actually compare databases and show that to people, and people take it at face value when you share it with them. The biggest misconception is the relative strength of the CoStar retail product versus the LoopNet retail information service. A lot of retail-oriented brokers are going, "Wow, CoStar's got a phenomenal retail database." We're getting a lot of little retail shops coming over, which is good news. We really, to be honest, have not achieved what our potential is going to be in the selling LoopNet Premium Lister to the CoStar clients, and that's just a function of training. It's just we've tried to do a lot, as you can tell, really quickly.
Yeah.
Probably at our annual sales conference in January, we'll start putting a lot more effort into cross-sell on the other way, where we start selling LoopNet subscriptions to the CoStar information clients. I actually think that that is going to be I'm very optimistic about the potential for that because I think it just makes so much sense for these firms to be marketing their listings on LoopNet and many of them to start taking advantage of it. I think we'll get dramatically better economics when we start selling the LoopNet Premium Lister to firms, collections of brokers on annual contracts rather than one-off monthly contracts to individuals. All that bottom line is a way of saying it looks good. We're moving really fast. I'm very impatient for the future.
Well, excellent. Thank you very much for the color.
Yep.
Thank you. We'll go next to the line of Brett Huff at Stephens. Please go ahead.
Good morning, guys. Congrats on a nice quarter.
Thank you, Brett.
One quick follow-up to what you said before, which was very helpful, Andy, sort of the three to five person target. They were paying, it sounds like an incremental four or $500. I'm assuming that's per month?
That's per month.
Okay.
The average deal size is, you can calculate it, but somewhere in the $500 a month is the average deal size there.
That's the incremental, or is that the new bundle that replaces the $60 a month on average, or whatever, maybe $100 or $120 a month on average?
Actually, I haven't done the math on the numbers I have. These numbers are moving pretty quickly. It's ramping up, moving quickly here. What I've been observing is that when someone was paying LoopNet $80 for some combination of marketing information services, they are typically now paying us about $500 a month for CoStar information services alone, and then they're paying a little bit more in addition to get pure LoopNet marketing services. Not in every case, but in overall, we're capturing a little more LoopNet revenue, but it's all on the marketing side on annual contracts, and we're getting about $500 average for CoStar Information Services, again, on an annual contract.
Okay. That's helpful. Of the, I think 948 was the new sales. Congratulations on that, by the way.
Thank you. I was trying to pull the number together, we didn't get it fast enough. One of the significant things there that you sort of catch in there is we've gone for about 10 or 15 years with a 50/50 balance between selling to new customers and existing customers. It's been 50% adding additional services to existing customers, 50% find new customers. For the first time, in these last six months, we've shifted dramatically to the new customer side. We're picking up I heard different numbers during the quarter, but it was moving towards a 70-some%.
Correct. Yeah. Moving towards 70.
Wow, that's helpful. Then the 948 number, that's net new sales. Is that just new customers or new customer sites, or is that additional modules to existing customers?
That's new customer sites.
Okay.
Part of the surprise here for us is that the people who are upgrading the fastest on the LoopNet are the people who weren't paying anything at all.
That's interesting.
Yeah.
Of the 948, in that 948, are you counting people who were Loopsters and who are now buying this $500 CoStar on average? Is that count in the 948, or are Loop customers now existing customers and don't count in the 948?
They don't count in the 948. They've got to be a new customer.
Okay.
if they were a freemium LoopNet user-
Correct
they would count.
Correct.
If they were just using the LoopNet site.
The question is, were they paying or not? I think what Andy was saying before is that the surprising thing is that it's quote unquote freemium, more heavily weighted towards freemium people that actually weren't paying anything. They were using the LoopNet system, but they weren't paying, that were signing up here. I think that mix will change, but I think that's, to me, almost an amazing statistic.
last question on the 948. Can you tell us how many were those kind of upgrades or the freemium type deals, freemium to paid?
I looked at it, and I'm giving you a recollection from memory, so it could be wrong, but it was, I believe somewhere in the 400 to 500 were freemium.
Okay. That's helpful. Lastly, the billion-dollar goal that you all have talked about for a while. Can you give us an update on the broad strokes of which segments or products or however it is easiest to divide that up? What percentage of that $1 billion kind of comes from different things? Like for example, I know Loop is a big cog in that wheel in terms of marketing services. Is there any sort of granularity you can give us on what the split might look like in various products once you get to $1 billion?
I'm sure a lot of things will evolve, and we'll see the world differently over the next several years. We often look at it not so much by specific product, but by industry segment. In a most simplistic way, if you look at brokerage firms, owners, and owners are really just institutions. They could be debt, equity, private, public, whatever. Banks, who are more towards the regulatory side, and it's a little different there. Other. We believe that the potential in the banking side of the business. Remember, these banks keep a very large percentage of their commercial real estate on their books, so they're particularly sensitive to it and trying to evaluate, understand it, looking at credit risk defaults and the like.
We were meeting with the CEO of Wells Fargo week, and he was talking about how the fact that in the residential world, he's presented with a lot of very hard numbers and quantitative analysis on what's occurring. Historically, in commercial real estate, it feels much more like an art and an opinion. We think that on the banking side, there is a $200 million+ opportunity, and currently, that is probably something in the $20 million-$30 million range for us. We think that could grow tenfold+ over time. We also think that we are relatively lightly penetrated in the owner segment. We see in some cities among owners that we think are of a certain scale, we might be 17%+ penetrated, in the older cities. Newer cities we're single-digit.
We think that's also another $200 million+ segment. You can just mechanically look at. One of the things that the LoopNet merger has done is it has clearly, in very vivid color, reinforced for us the size of the brokerage community out there doing deals, making a living in commercial real estate. We feel like half of them are using LoopNet marketing as a solution, half are using CoStar information, and you can cross-sell both. We believe that's several hundred million of potential. I look at it as those three legs of stool, and then I'm sure the other category will be really fascinating. All the bizarre, never expected uses of the information products from cellular towers to taxi dispatch, to package routing to power planning, so on and so forth.
I don't see that ever being more than a $50 million-$100 million space, the other category, except I was thinking the other day that Apple could use some help with their maps. I hope that gives you some help.
Brett, just to put that in context, by the first quarter of 2013, we're going to be in the $100 million range for a quarter. We'll be in the $400 million+ range. We set a $500 million target out there by 2014. I think if you add up Andy's doing this off the top of his head, but $200 here, $100 there, $200 there, you sort of quickly get from the $500 million to $1 billion. I think that gives people a pretty good roadmap. I also think in there, you're going to have $200 million from just marketing, across all the platforms. I think it's a pretty clear path to the half a billion. I think people can see the clear path on the earning side, too, which is, for me, really exciting.
I think from there, a run to $1 billion.
Last question is on how the comp works for the cross-sale. Andy, I know you pay a lot of attention to how your sales force is working and have in the past. What kind of insights can you give us on how you're incenting your folks during these trainings and sort of reprioritizing? What's the key comp driver?
Brian. You just made Brian hit the floor laughing.
I was trying to keep it to myself. It's probably a little bit of a view into how the sausage is made. It may not be terribly interesting. The reality is that you've got a couple of salespeople here who are putting in some really good numbers on this cross-selling, who once they figure it out, they're doing extremely well. It's just a traditional sales plan there. The other salespeople are responding to that. The other key here is that we've initiated this teaming effort where we're taking more junior account execs and more senior account execs and building teams where the juniors are keeping the demo flow going and handling installations. The more seniors are handling presentations and close activity.
We have set a number of incentives at different tiers where someone gets their first 120,000 of cross-sell annualized, they get a bonus that might be $10,000. Then there's some bigger prizes. They could escalate up to the 100,000 mark for the teams and individuals that hit these escalating volume goals. Then, the one thing we've done the last two years is we have given a market goal to the sales teams that has a very low seven-digit number to it that a team of 10 or 12 people split up. You get both team and individual focus on trying to win these prizes as well as just a traditional commission plan, which is quite adequate. On the flip side, in the U.K., we're focusing on the rest of the year very heavily on deployment and usage objectives.
Then in 2013, they'll be on the same plan as the U.S. On the LoopNet side, we have made some pretty significant changes, and I really again, stress, I'm very pleased with the way they've sort of seen the big picture and are working forward in this. We are now. We did some calculations in looking at the lifetime value, as I mentioned, of selling Premium Lister to someone versus selling property comps. These were dramatically different lifetime values to the company, and yet they've often paid very similar commissions. We have dramatically shifted the commission plans to reward the sales team for selling the Premium Lister products, which we think have longer staying power and are more solid revenue. We've kept stagnant or softened the commission. Actually, we completely eliminated commission on things like property comps and Property Facts.
There's a fair amount of movement in all kinds of areas here occurring.
That's helpful. Thank you for your time.
Yes, Brett.
We'll go next to the line of Michael Wong at Needham. Please go ahead.
Thanks very much. Just a quick follow-up on the 948 customers you had in the quarter. Was there anything one-time in nature here, and how should that trend kind of go forward, absence in the seasonality that you might see in Q4?
Well, it's a good question. The beautiful thing about this is I've probably seen, I don't know, what I say, maybe 20 of these sales. I'm not sure. I've seen a lot of them, where I've gone in just different parts of the country and gotten a feel for what it's like. Overwhelmingly, in my view, these are absolutely real career commercial real estate players. When you migrate these players into CoStar Go, and they adopt an inventory system with dramatically higher quality content, research verified, much more comprehensive, I believe that this is very sticky revenue, and I would expect that it would be in the same 90% renewal area. I have seen no indication that any of this stuff is one-time in nature. Some of the sales that you're seeing are things like Resolve, Virtual Premise, in other areas.
That, by its nature, is extremely sticky, where you're doing lease management and portfolio management with big implementation costs. This is a continued philosophy of the company to pursue the long-term stable revenue, and swear off things like telecom and vendor revenue, which comes and goes with the wind.
Would it be unrealistic to kind of see that number trend up through 2013? Could we see another record in terms of customer adds as we
I would be disappointed if we didn't.
Okay, great. Then, in terms of the U.K., I think you had kind of touched on how growth rates could accelerate on the heels of some new products launched out there through next year. What actually would be the kind of range of expectation for 2013 in terms of growth rates out of that region and maybe help us kind of understand what that could look like as you exit next year?
It's difficult to give you any sort of precise number, just because the situation is new. We would be able to give you a clearer view of this after the first couple of months of selling activity. In the simplest terms, the product that's being offered in the U.K. is basically, it's called Focus. It is described by the U.K. leadership as deeply unsexy. It is based upon, I believe, ColdFusion. It was designed and built in late 1990s, early 2000. I've been struck by what a piece of garbage it is. That's what people are going to be on. That's what people are on right now. We're basically coming in with the iPad app, which some of our clients describe as they love, use the word love in their relationship with the CoStar Go.
We've got bookends of product here. You got radically different products. We're going to go in there, and we're going to look for They typically are paying dramatically less per person in the U.K. for our services, this old Focus system, than we are able to capture in the U.S. We're not going to try to get to U.S. pricing. If we did, we would be wildly profitable in the U.K. We have very good penetration there. We're trying to get reasonable, not overly aggressive upgrade prices, and we'll be able to report at the end of the first quarter. When we report first quarter numbers, we'll have some really good color on that. I'm expecting a good result. You need to see what it looks like with actual experience on the ground.
Just to add just a few things to that, I think that, as Andy said, we're actually going to be focusing on training in the fourth quarter, so we would sort of not expect to see a lot from the U.K. on the sales side in the fourth quarter. Again, as you said, as we start selling in the first quarter, you'll get a better shot at what that looks like in the second quarter. Just to give you some rough numbers, the U.K. has traditionally, for the last two, three, four years, has run behind the CoStar Group in sort of growth rate percentages. In 2010 and 2011, they were flat or up or down just a tiny bit. In 2012, they're sort of in single digits, where CoStar's grown in double digits.
Our goal for 2013 for the U.K. is to get them up to double digits. One thing we've been doing, and so it's in the U.K., it's looking at the marketing services, which is growing at smaller growth rates at 10%-11% versus the subscription businesses and the higher percentage rates.
Is to look at all the pieces of the business and say: How do we get all the other pieces up to sort of where the big subscription thing is? That applies to the U.K. My goal for the U.K., Paul Marples and Matt Green, if you're listening, is double-digit revenue growth, which we haven't seen in years. Obviously to continue that moving forward. It's the same thing, I want to get the marketing piece up. I want to get the LandSites and the BizBuySell. There's a bunch of smaller pieces of our business, Virtual Premise, and I want to get them all up to sort of the higher growth rates. Anyways, hopefully that gives you a little more color.
Awesome. Just last question for you. I think you had mentioned that you've only distributed kind of 16,000 of those LoopNet leads to your sales team, and they've only contacted a portion of those. When would you expect to distribute out the balance of those leads and kind of contact that broader audience? What does that imply to sales headcount growth through next year? Thanks.
What you'll see is probably more of shifting resources from headcount being allocated to shifting headcount allocation from products that may have lower value to products that have higher value. 350 salespeople is still a pretty significant number. We will accelerate the distribution of those leads, particularly to those people who get it and are closing, converting them to sales. We'll accelerate those through the year, but realistically, there is no conceivable way that the sales force can actually get to all these people over the course of the next three years. There will be also, you can take your traditional Geoffrey Moore, Crossing the Chasm kind of adoption curve. You're going to have your innovators, early adopters, the early hoard, that kind of thing. It's going to be a three-year process, I think, to sort of move through these things at the very best.
Great. Thanks very much, guys.
Thanks, Mike.
Okay. Thank you. The next question comes from the line of Brandon Doble of William Blair. Please go ahead.
Hey, guys.
Good morning.
Brian, on a go-forward basis, have you guys kind of narrowed down what the kind of consistent metrics are going to be that you're going to give us? Sounds like there's going to be a subscription revenue number, but in terms of users added or user count or things like that, have you guys narrowed it down to what we should kind of expect and how we can start to build a model with a little more granularity?
Yeah. I think we're still evolving that, I think you guys heard some of the metrics.
here in this one, it's definitely going to be on a subscription basis. It'll be on premium members. We're going to continue to give some metrics as some of the other metrics, as they evolve, we'll evolve more. I think that's where you look at 71% of the business is about the subscription-based services, we want to move more of it there. I want to see that number increase to 75 or 80% over the coming years.
I think those will be the metrics that we'll focus on. We will still give user metrics and explain, okay, well, here's what's happening in those user metrics. For example, the CoStar numbers and what we're doing with Showcase. We explain that. I think I always tell people, you have to understand what's happening in the metrics based on the decision we're making. I wouldn't necessarily take the metrics at face value.
Yeah.
The other thing, just to point out, I'm glad to see that I'm not the only one up at all hours of the night when I saw your note there. I was pretty clear as far as the revenue range goes, I actually do think we're going to be in the middle of the revenue range. I know I saw your note that said, "Hey, they should be in the high end," or, "They always beat it." We give a range so that we can be in the range, and we definitely, when you look at LoopNet historically, Q4 has always been very tough for them.
Right.
We do have some things that we know about as far as RMS and some other things. We actually do believe we'll be in the middle of the range, and so that should be the expectation for people. I just want to throw that one in there since you're on the line.
Yeah. Fair enough. I appreciate that.
Do you think that was directed to someone?
It seems like it, I got to go back and listen to it again. Brian, your comments about the transition from Q4 of this year to Q1 of next year, and then expectation for EPS to increase, I think you said at a healthy pace going forward. I want to make sure I understand the semantics between quarter-on-quarter or year-on-year, and that increase at a healthy pace. We expect every quarter to have a greater EPS number than the first quarter and kind of that stair step up?
I haven't given 2013 guidance, maybe I'll try to be a little more clear on that, is that, we gave $0.40 to $0.45 in the fourth quarter.
Yep.
If you look at it, eight of the nine or eight of the 10 for CoStar Group transitions from Q4 to Q1. Q1's always down, that's because we do the annual sales conferences. That's when everyone gets raises. You have all the high benefits. That's sort of a given. If my range is $0.40 to $0.45 for the fourth quarter, people can expect it to be lower by a few pennies in the first quarter.
in addition to the marketing services that we had. That should still be up, I expect that to be up year-over-year when you compare it. I expect each quarter next year to be up year-over-year. I definitely expect going from Q1 to Q2, as I said, at a healthy pace, expect to see.
Okay
net income. The first quarter, if someone just says, "Here's my number for the year, and I divide it by four," you're going to be off in the first quarter. Because of that seasonality. I was purposely pointing that out because I noticed models where people sort of just divide the number by four.
Yeah.
I think people are sort of getting there. I think that's that first quarter, I was trying to purposely point that out to people.
Okay.
Similar with the revenue on the LoopNet. If people weren't paying attention, they would say, "Gee, why does Q4 look softer?" It's not. It's a seasonality thing that's in their business. I'm just trying to point those out to people.
I guess in a similar fashion from a kind of staging perspective, the U.K. business, how far away are you guys from profitability? Is there a time frame in which to say, "We're 100% certain we're going to get there," or is there kind of a range of where it starts to make a difference that we can see in the model? I guess as the add-on there, can this business be as profitable as the U.S. business or is it just a scale issue, it's not going to get there?
The business. Now, remember that we acquired it. It was a pretty small business. We acquired a number of very small businesses. There was a long period where we were migrating multiple software platforms together into one common U.K. platform. We embarked upon investing, the business was profitable. It was sharing good margins in the U.K. We made the investments to quadruple the research in the U.K., quadruple the investment research in the U.K., in order to get up to the same standards of product we produce in the U.S. The next phase was to transition the old tired software into the much more competitive, consistent international U.S. software platform with CoStar Go. Those were two very significant investments which did not have an immediate return post Lehman Brothers.
Now what happens is you launch this new product. You certainly would expect to get accelerating revenue. You also get declining expenses now because you have a surge of research that was occurring. You had dozens of additional researchers surging, that temporary staff starts coming off. You also have dozens of software developers who are allocated to the U.K. that start phasing off. We would expect to have a very clear picture of the road to profitability. As you move halfway through the year, we can start talking about it. You're familiar with the company over time. Often, when these things switch from investing mode to margin expansion mode, it surprises everyone how fast it goes. I would absolutely expect the U.K. to have the same margin potential as the United States.
It is a very sophisticated, intensely focused commercial real estate industry over there. Despite the fact that's a $2 trillion-some GDP, this is a $14 trillion, $15 trillion GDP, your scale is in your software, it becomes sort of like a California operation. I still believe it'll have good potential in the long run.
Just to throw some numbers on that, Brandon, I think that if you sort of looked at the nine months ended with allocations, we're at $6.6 million loss versus $2.8 million. I think once we release the product in the fourth quarter and we get through some of the marketing in the first quarter, I would expect to see the loss as half
Okay
over the next four quarters, which at least gives everybody a little something to model to.
Yeah.
I think obviously based on the revenue growth, we'll be giving people more clarity on what the target date of break even. Yeah, just like Andy said, I thoroughly believe it can be just as profitable as the U.S., and that's what we expect. I expect nothing less. I mean, we'll definitely put a time period on that. Probably, we'll have more clarity by the end of next year. I think once we've sort of finished these initial marketing things, I think you'll see the cost get cut in half the following few quarters, just because product development sort of rolls off of that. We'll give you guys clarity on the rest.
Okay, great. Appreciate the color. Thanks a lot.
Thanks.
We'll go next to the line of Tad Lukaszak with Morningstar.
Hi, guys. Thanks for taking my questions.
Hey, Tad.
Hey.
Just following up on the U.K. there. The corporate allocation of $2.3 million in the last quarter, is that literally just corporate overhead, or does that include the cost of-- You mentioned dozens of developers allocated to the U.K. to transition the technology.
Yeah, it is. There's a lot of development allocation in there. Once that stops at the end of this year, obviously those loss numbers will be pared back fairly quickly. We do have some marketing that we've talked about that's going to be happening there. That's why I would definitely expect by the time you get into the second quarter, third quarter, fourth quarter, those numbers will be half of what you saw this year, and I think improving with revenue growth.
Okay.
You only have temporarily transferred personnel and increased travel expenses.
Got you. Okay. I just wanted to go back and revisit the numbers you mentioned earlier, Andy, with regards to the cross-sales results to date. 100,000 leads, 16,000 distributed. Some of those have received demos and 723 deals closed for, I think, a monthly contract value of $381,000.
Correct.
Is that $381,000 attributable to all of the 723 closed deals, or just the portion of the 723 that had prior monthly commitments with LoopNet?
That's the entire set.
I was curious about the 100,000. Do you have a breakdown in terms of the number of those leads that are paying LoopNet something now versus sort of the freemium category that you guys mentioned?
Sure. We actually have analyzed that list to death. You start out with a 6 million sum, you filter it down to the 100,000 that you're focused on. We built and rebuilt that database, added all kinds of fields to it, characteristics, usage patterns, the sorts of listings they had, the dollar value of the listings, estimated their commission earnings, all that kind of stuff. We developed scoring systems, where for consistent, continuous use, plus having listings, plus time periods between accessing the system, all kinds of things. Came up with a scoring system. They ended up getting scores from the 6 million from -20 to +50. +50 being the most promising.
We are just focusing on the 100,000 are really the ones that are in the, I might get it exactly right, I think maybe 6-plus or 5-plus category. Of those, I think it's about 50/50. Roughly 50/50 that are paying something or who have paid something over time. The leads we've been distributing to the sales force to date are random. We have intentionally not distributed the ones we scored 20s, 30s, the higher score ones, because we want them to confront the 5s and 10s and 11s and 12s first and learn what they're doing, and then start to go to the higher value ones.
If I understand correctly what you just said, there may be a greater yield opportunity in the leads that you tackle next year or the year after that, the year after that.
Yes, that's a combination of just continuing to put out more of these higher-scored leads.
Gotcha
The salespeople figuring out how to do it.
The 381,000 that you have on the monthly contracts, I think the incremental annual revenue opportunity there is somewhere around $4.1 million, if I did the math correctly.
Correct.
Is it fair to assume that there's about $1 million in LoopNet cross-sale revenue synergies baked into the fourth quarter revenue guidance?
You're sort of plucking that out of the air. Obviously, all the sales numbers, as Andy said, a lot of the core people were spent sort of training and cross-training and putting people on teams. By the time they sold it, I would say it was in the back half of the quarter, of course, you'd only get the back half of the quarter revenue on that. That number maybe seems a little bit high to me.
Okay.
You're sort of plucking that one out of thin air.
Okay.
All right.
All right. Well, thanks a lot, guys.
Absolutely. Thank you, guys.
Thanks, Tad.
Thank you. Our next question will come from the line of Toni Kaplan of Morgan Stanley.
Hi, guys. Thanks for taking my question.
Absolutely, Toni.
G&A was a little bit lower than I'd expected and probably included a portion of the $2 million of integration costs. I was just wondering if we look at, $18 million ± per quarter, excluding seasonality, is that sort of a sustainable run rate for G&A, or was there a reason that this quarter was lower?
I think it's sustainable, and obviously the goal is to continue to get more synergies and to obviously improve upon that. I do have the general counsel sitting next to me, so with the caveat as long as there's no lawsuits coming in the future, because that's where all the legal costs would go. Yes, I think it-
He's laughing at my comment. Yeah, I think obviously, synergies, we're definitely Somebody asked, I think Bill started out with that question. We're doing much better on synergies than we anticipated. We're moving much faster on things. Obviously we're seeing positive results that we think will continue, again, unless something else comes up that we're not aware of.
Okay, great. You mentioned that some of the marketing that you plan to do on cross-selling will be pushed into the first quarter of 2013 instead of doing it all in the fourth quarter. I just wanted to find out what was the decision-making behind the delay. Thank you.
A number of different factors. We have done several waves on One of the things we're trying to do upfront is we're trying to differentiate, begin to re-educate the industry on what the key attributes of the brands are. We're trying to re-identify LoopNet with marketing and CoStar with information. We did a series of marketing pieces, or we've done several marketing pieces on the LoopNet side, some good pieces. We just decided that the pace at which we could do all these changes to the sales force, we wanted to time some of the marketing programs closer to when they would actually be able to go out and meet with people and demo people. The information branding pieces are being staged to go out just before the salespeople contact them to try to do the upsell rather than all at once in the fourth quarter.
Also, we shifted a major marketing event from 2012 to early 2013 just because schedules weren't working out, we wanted to make it a little more efficient. It's more of a shift of several months.
Toni, I think what it was is aligning exactly what Andy said. It was aligning it with the sales activity. We talked earlier about we have 350 salespeople, Andy talked about moving over 100 of them to doing new things that they hadn't done before, teaming people up and training them. I think, the idea is obviously to have the marketing pieces going out and making sure that the salespeople are in place to capitalize on those activities, versus just sending a bunch of marketing out, but you're still then reorganizing sales forces and teaming people up. I think it's aligned the two, and obviously, we think you'll see a much higher IRR in return on those investments by having the two aligned.
Okay, great. Just lastly, on that point of the sales reps shifting, how long do you think it takes for a full ramp-up? Obviously, they're in training now, but in order for people to get to sort of the full run rate capacity, how long does that normally take? Thank you.
Yes. The vast majority of the people we're talking about here are already experienced commercial real estate information or marketing services salespeople. It's more a question of picking up new roles. I would say that that's probably a three to six-month time period to really get to the point where they're really up to speed and optimized.
Great, thanks. Nice quarter.
Thank you.
Thank you very much.
We have a follow-up from the line of Brett Huff at Stephens Inc.
Hey, guys. Just one thing. I missed this earlier in the call. What was the average new rev per customer site, that number you guys usually give?
$8,314.
Thank you. That's what I needed. I appreciate it.
Great. Thanks, Brett.
Thank you. A follow-up from Bill Warmington at Raymond James.
Chance to bookend the call here.
There you go. You guys are competing. Just when I thought he had you, too.
A quick question. I just wanted to make sure I followed the math on the initial cross, the uplift you got this quarter, third quarter, from the cross sales.
I don't think there was math. I think Todd asked the question if we thought there was a $1 million in there, and I don't think we actually know the exact number. As we talked about, the majority of the quarter was reorganizing the sales force.
Yeah
cross-training them. I think a lot of the sales came in towards the back half of the quarter, which would mean only a small portion of the revenue would've came in then, too.
Gotcha. The annualized revenue for the $948?
The annualized revenue for the $948. Yeah.
Eight.
Yeah.
$5 million
Yes. $7 million or $8 million, somewhere in that range.
$7 million or $8 million. You can figure probably a couple million next quarter from that group.
Correct.
All right.
Correct.
That was it. Thank you very much.
Thanks, Bill.
Great.
Thank you. There are no further questions in queue.
Thank you. With that, we will conclude this call. Thank you for joining us, and we look forward to hosting you on the next earnings call, which I believe is our CoStar Group's 50th earnings call. Look forward to talking to you then.