Welcome to the CoStar Group's 2nd Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. And also as a reminder, this conference call is being recorded. And at this time, I will turn the conference call over to your host, Director of Investor Relations, Mr.
Richard Simonelli. Please go ahead, sir. Thank you, operator, and good morning, everyone. Welcome to CoStar Group's Q2 2012 conference call and we're delighted that you could join us. Before I turn the call over to Andy, I have some important facts for you.
Certain portions of this discussion contain forward looking statements, which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that cause actual results to differ include, but are not limited to, those stated in CoStar Group's July 25, 2012 press release, on second quarter earnings results and in CoStar's filings with the SEC, including our Form 10 ks for the period ended December 2011 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 over the Internet at www.coastar.com and a replay will be available approximately an hour after this call concludes and will be available until August 26, 2012. To listen to the replay call 800-four 70five-six thousand seven hundred and one within the United States or Canada or 320-three 65-three thousand eight hundred and forty four outside the United States.
The access code is 252, 801. 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 very much for joining us today for this earnings call. As you might expect, it's been a very busy quarter for us. As you know, we closed the Luteman transaction on April 30. Today, just a few months into integration, we know dramatically more about the potential of the 2 businesses in combination.
What we have learned has not changed our investment thesis. In fact, it has strengthened our belief in it and our excitement about the scale of our potential upside here. I'm very happy with the way our 2 organizations are approaching the integration process. Both LoopNet and CoStar Group have a very talented team of great professionals. Every day I've seen enthusiasm, open communication, hard work and commitment to strengthening our position as the number one service provider to the commercial real estate industry.
Our greatest strength in this combination is the expertise, professionalism and commitment of our 1900 person strong team. The core investment thesis behind the CoStar Group LoopNet merger is that CoStar Group is a great information service and LoopNet a great marketing service. In combination, each service could be effectively cross sold to one another's huge client basis. The combined company is the clear number one player in marketing commercial real estate on the Internet as well as the number one go to source of information for the commercial real estate industry. With common customer profiles and content, we believe the combined companies will enjoy significant cost synergies.
I would like to begin today's call by telling you what we have learned so far. I will tell you how we expect to pursue the opportunity to upsell our LoopNet members who are using LoopNet for information to CoStar's information products, while retain them as LoopNet marketing customers. I will also tell you how we will encourage firms that have listings in CoStar to actively advertise them in the LoopNet marketplace. As you may know, LoopNet has over 100,000 unique paying members now and over 6,000,000 registered members. In our effort to find the best prospects from this universe to upsell CoStar information products to, we look at several factors.
These factors include does the client already subscribe to CoStar? Are they marketing more than one listing on LoopNet? Have they been searching LoopNet repeatedly over both the past month and the prior 6 months and perhaps before? Are they subscribing to one of LoopNet's information products? Good prospects may include individuals who do not pay LoopNet to subscribe to a product, but nonetheless they're searching the LoopNet website for free.
Right now, we have identified a group of about 130,000 LoopNet users who we believe are good prospects for CoStar property tenant or comps. I believe that 130,000 prospects is more than I'm sorry, I realize that the 130,000 prospects is more than the 100,000 paying subscribers at LoopNet, but we have identified many individuals that are using the free search feature of LoopNet as an information source. Overall, this is obviously the largest pool of prospects we've ever had the opportunity to sell to in any acquisition we have ever done in the past. The number is staggering to me and quite motivating. The number of potential sites, clients or users could differ slightly from the 130,000.
In a handful of cases, we might find 3 of these leads working together in 1 company. So if they began subscribing to CoStar, they would become 1 client with 3 users. In some cases, we could find a few LoopNet leads from 1 company to site where there actually might be dozens of potential CoStar users there. Now that we have merged with LoopNet, we have access to the data in their systems. This is important because we know the names and contact information of these prospects as well as their search histories.
This means we can approach them with a very targeted sales presentation that's relevant to them and educate them on the benefits they can receive from CoStar information products and show them clearly how the same search done in CoStar provide more information and more depth of data. We can show these prospects the difference between complete and detailed information from CoStar versus a little less so from LoopNet when you're using it as an information product. In order to learn more about these prospects, we selected and tested 1 representative market Chicago. It's a diverse market and it allowed us to get a good sample of industry professionals who know LoopNet. Our goal was to understand the scope of the opportunity, the profile of these prospects as well as their priorities, beliefs, needs and attitudes.
Ultimately, we wanted them to ultimately, we wanted to understand the best way to market and sell CoStar information services to them. We retained a 3rd party market research firm to survey hundreds of Chicago based LoopNet users and what we learned was quite interesting. These prospects work foremost in retail real estate followed by apartments, office, industrial and then land. They come from both large and small shops, but most typically they work in 3 to 10 person shops. The majority of them are full time commercial real estate brokers followed by investors and appraisers.
What we learned is that these prospects are not dissimilar from the profile of clients we currently have. 86% of these LoopNet users said the information they access from commercial estate websites like LoopNet is critical to their success. 97% of LoopNet users said that it's important that the website to use has the most accurate data on properties in their market. Not one respondent said that the accuracy of data was unimportant. The overwhelming majority said that it was important that the site they use have a complete list of properties for lease or sale in their market.
The bottom line is clear, I believe, access to quality and complete commercial real estate information is critical to their success and they know its importance. According to the survey results, half the respondents stated that paying the lowest price possible for access to a commercial real estate website was not an important factor. They value the quality of information over the price they paid for it. 1 of the respondents summed up the opportunity perfectly by saying, as a commercial real estate consultant, it's necessary to have the most information available. Our top priority is to provide quality consultation to our clients.
The fees are an afterthought. So they're looking for the highest quality information and price is not the most important factor. So my clear takeaway is that half the LoopNet users are using LoopNet as an information source, because they believe it to be the highest quality source available or at least roughly as good as other sources out there, but at a slightly lower price. I believe that in many cases, they believe that CoStar might be the best source for areas when they're in the commercial real estate market, but in the area they work in, they believe that LoopNet has higher quality information. Only 20% of LoopNet users survey believe that LoopNet has less listings for Chicago than CoStar does.
For those where retail real estate is their primary practice area, only 11% believe that LoopNet is doesn't have as much information as CoStar or more. Not one of the principally land focused LoopNet users thought LoopNet had less listings than CoStar. In other words, the majority of LoopNet users surveyed believe that LoopNet is a more comprehensive or at least as comprehensive information source as CoStar. For most LoopNet users, we believe the misperception that LoopNet has more information than CoStar is an important decision for them to start subscribing to use LoopNet as an information source rather than CoStar. Are these LoopNet users correct?
Does LoopNet have a more comprehensive database of listings for Chicago than CoStar does? Before LoopNet and CoStar merged, that was very difficult for anyone to answer with any real certainty. Now 3 months post merger, our respective teams have jumped right in and connected and cross references the databases and we can clearly demonstrate the differences in the databases. CoStar has the most listings by far. As of today, our research team has successfully completed a massive effort to comb through the LoopNet database and find any commercial real estate listings that were in LoopNet's database, but not in CoStar's database.
The connections made as a result of cross reference in the databases have allowed our researchers to strengthen the relative information advantage CoStar has. They examined more than 225,000 LoopNet listings that our systems teams could not automatically match to our database and in the process they found and added 50,000 new listings to the CoStar database. In addition to adding just listings, they've also found thousands of new people with listings to initiate regular contact with. So let me clarify the facts on how the 2 databases compare. Remember that LoopNet is primarily a marketing system and predominantly relies on user input for all their listening content.
CoStar in sharp contrast has a staff of just about 1,000 engaged in proactively collecting commercial real estate information. So not surprisingly, but contrary to what most LoopNet users believe, our CoStar database has roughly twice as many commercial real estate listings in the U. S. As our LoopNet database does. Beyond that, CoStar has dramatically more depth of data on these properties and listings.
In every one of the 200 largest U. S. Cities, CoStar's database has significantly more properties than LoopNet's database does. Remember that only 20% of the surveyed Chicago LoopNet users thought that CoStar had more listings than LoopNet in Chicago. The majority of LoopNet users surveyed think that the LoopNet that LoopNet has more listings in Chicago are same as CoStar does.
And it's now clear that majority is absolutely completely wrong. Coaster has 34,730 listings in the Chicago CBSA and LoopNet has 17,848. That means that someone using LoopNet has an information source that's missing nearly 17 listings for their requirements. Many LoopNet users surveyed or interviewed in great depth in various focus groups we conducted really believe that LoopNet had many more retail listings, for sale listings, small billing listings and land listings. That may or may not have been true in the past, but certainly not now.
CoStar has 218% more for sale listings, 2 0 6% more retail listings, almost 300% more listings in buildings smaller than 15,000 square feet and 273% more land listings than our LoopNet database for Chicago offers. Most importantly, every valid listing in LoopNet will be in CoStar. For years, we've heard from many clients and prospects and focus groups and meetings that they would really love to have a one stop shop for complete listing data that combine the listings in LoopNet and CoStar into one place. Now we can credibly offer them exactly what they want and need. Most importantly, at the end of our survey, we also told the Chicago LoopNet users that CoStar has twice as many listings that our LoopNet service does and we asked them knowing this information, how likely would they now be to subscribe to CoStar for their commercial real estate needs.
56% stated that they would now be very likely or likely to subscribe to CoStar. 29% stated they were unsure that they would need some selling to subscribe to CoStar's information service. Only 15% stated they would be unlikely to subscribe. We believe that our survey suggests that the 130,000 LoopNet prospects in theory somewhere in the neighborhood of about 70,000 would be likely to subscribe to CoStar for their information needs, if they really came to believe that CoStar contained twice as much information on their market than the LoopNet service they've been using for information. We are focusing our immediate efforts across the U.
S. On them. Time and again in focus groups, we have learned it is hard to change long held beliefs about the relative quality of these databases, especially accepting a different view might imply that the broker have provided incomplete information to to their clients over an extended period of time. Now that the two companies have merged, we believe it will now be dramatically easier to change their minds and get them to accept and internalize a belief that CoStar provides a dramatically more complete picture of the market. Last month, we took what we learned from linking our listing and client databases, our surveys and focus groups and we set 24 demos in Chicago over a 2 day period with LoopNet users who use LoopNet as an information service and did not subscribe to CoStar.
Our goal was to see how effectively we could sell CoStar information services to these LoopNet prospects. In the demo, we confirmed for them that LoopNet is the most heavily trafficked website for commercial real estate and that it was a critical resource for them in marketing their properties to large Internet audience of tenants and investors. LoopNet users viewed millions of detailed profile views in Chicago over the prior year and that could generate leads for their listings. We then explained to them that all the listings in the LoopNet service would be in CoStar and that there were nearly 17,000 additional listings in CoStar added by a research department that they could not find in LoopNet. We went through comprehensive comparisons between the two databases looking at retail office land for sale for lease so on and so forth.
I did 4 of those demos and on 2 of my demos, we were able to get a contract right there and then. Another demo we did was to a large brokerage firm about 30 some brokers. And while it did not close on the spot, which I would not expect to happen with a large brokerage firm, I believe it will close within a month or so. One of the sales I was involved with was to a 2 person brokerage shop that had been paying LoopNet $159 per month on a month to month basis. They entered into an annual contract for CoStar information and LoopNet marketing with us for $7.30 a month, a 3 59% monthly increase.
They increased their contract commitment from $159 to $8,760 The second 2 man shop I was involved with signing up that day increased their monthly payment by 900%. The large 30 broker firm I mentioned is paying LoopNet $187 a month on a month to month basis and our proposal would be in the $8,000 to $10,000 a month range on annual contract. Of the 24 demos we conducted on these 2 days, 13 have already signed annual contracts and the majority of cases it was for both LoopNet for marketing and CoStar for information. So we were gaining CoStar revenue and not losing LoopNet revenue. So in total, 54% of our demos resulted in a signed contract within 2 weeks of the original demo.
That far exceeds any close ratio or time to close we normally experience. We believe that eventually approximately 80% of those 24 demos could close. What's interesting to me is when I compare that to that survey question of, if you were to learn that CoStar twice as many listings, would you be likely need some time likely to subscribe to CoStar, need some time to think about it or not? Our results here actually match that survey, which is really quite promising, consider that implies across the whole country. In total, we've converted 15 LoopNet users in Chicago this month, taking them from an approximate aggregate LoopNet fee of $14.25 a month on a month to month basis to $8,873 a month with combined LoopNet and CoStar purchases on an annual commitment.
We increased our monthly yield on these accounts by 500% and we increased our contract value by 7,000%. Interesting to note and important, 6 of the 15 converted LoopNet users were not paying LoopNet anything at all prior to the conversion. They were free basic users searching heavily, but not paying for premium service. Within a week of our successful Chicago experiment demos, we brought 200 LoopNet and CoStar salespeople together in Dallas for a sales conference and training session, so that we can begin to scale our Chicago trial to a nationwide cross selling effort within the next month or so. In addition to selling LoopNet users CoStar information products, we will also be approaching firms to encourage them to advertise their properties on loopnet.com.
As we mentioned, LoopNet is the most heavily attractive website in commercial real estate. Yet surprisingly, only about 17% of the listers in the United States for commercial real estate pay for listings on lubnate.com, leaving 83% as a potential target market. There are about 500,000 listings that CoStar was aware of that were not in LoopNet, but opened up a whole new prospect universe for LoopNet to sell advertising to. LoopNet built a great brand by selling advertising contracts on monthly basis, 1 broker at a time. It's effective, but it results in much higher churn rates.
We can believe that we can grow LoopNet even larger by selling premium lister at the firm level on annual contracts rather than just an individual basis subscription. So we think that those annual contracts will decrease customer turnover. We are very bullish on the revenue potential of cross selling Lutemet and CoStar products, so we intend to increase our investment in marketing for the second half of this year. I'm very proud of both the LoopNet team and the CoStar team as their hard work continues to move us rapidly towards realizing the full potential of this merger. Post merger, we have restructured the LoopNet senior management team to best realize the potential of the merger.
LoopNet executive Fred Saint, Mike Handelsman, Brian Smith and Wayne Wortham have all been key contributors with LoopNet for many years and have taken charge of several key areas of the company as follows. Fred Saint is President of the LoopNet Marketplace responsible for the company's product marketing business development. As we already know, with approximately 3,600,000 unique visitors a month, lubnet.com is a powerful force in commercial real estate marketing. Working closely with me, Fred oversees product roadmap and product development of the LoopNet marketplace. Fred joined LoopNet in 2007 with the acquisition of cityfeet.com, which he founded in 1999 I'm sorry, yes, and successfully led from start up to profitability and its eventual acquisition by LoopNet.
Mike Handelsman is President of LoopNet Marketplace Verticals and is responsible for the business for sale and land sectors including BizBuySell, BizQuest dotcom, Lands of America and Land and Farm. He is also responsible for our CRM system, RE applications. Mike joined Lubna as General Manager of bizbuysell.com in 2006. He is responsible for growing each of these verticals. Brian Smith is President of LoopNet Sales and Customer Service and is responsible for overseeing and managing LoopNet's significant sales and service teams.
He is responsible for overall sales and service strategies as well as leading the advertising sales business. He's working closely with myself and John Stanfill, who as you know is the Head of Sales and Customer Service for CoStar. Brian joined up with the LoopNet team in 2,003. Wayne Worthen is LoopNet's Chief Technology Officer and Senior Vice President of Information Technology. Wayne joined LoopNet in 1999 and directs LoopNet's data center network operations and oversees design and development of the company's web and software applications.
Wayne is working closely with our team Frank Samira, our Chief Information Officer. All 4 of these executives are doing a fantastic job and it's a great honor and pleasure to work with them. In addition to LoopMed, I'd like to update you on other important company initiatives. While we've been doing the LoopNet merger and integration, we've made tremendous progress towards our goal of converting our U. K.
Operations and clients from our antiquated U. K. Technology base into our much more powerful and efficient and attractive U. S. Products and technology platforms.
As of last month, our entire United Kingdom database, which contains 20 years of information has been migrated from the U. K. Input system to our U. S. Technology platform.
And at this point, the U. S. Technology platform is back feeding the content into the legacy U. K. Information products.
We've also converted their fulfillment and CRM systems to our U. S. Technology platform. Now all U. K.
Researchers are inputting and updating data using our U. S. Enterprise platform. Before the London Olympic closing ceremonies are done, we expect to have CoStar Go U. K.
Up and running. We anticipate the rest of the CoStar U. K. Product suite will be complete by early fall. There's a culmination of 12 months of intense and excellent effort by 40 of our best software people in the U.
S. And U. K. And our 110 researchers in Glasgow. We'll do a CoStar Go rollout in the fall in the U.
K. From a sales perspective, the U. K. Business reported nearly US1 $1,000,000 in annualized sales for the 1st 6 months of the year. We believe that we can upsell UK clients to this enhanced technology platform and achieve significant acceleration of revenue growth in the U.
K. In the latter half of this year, next year and beyond. Back in the U. S, we have a couple of noteworthy initiatives. Our recent acquisition Virtual Premise is expected to release 2 significant product enhancements this fall.
First, we expect to bring Virtual Premises tenant and retailer real estate management software platform to mobile and tablet devices, increasing the visibility of portfolio and lease information for its retailer, bank and corporate real estate customers. 2nd, we expect to deliver the 1st phase of integration of CoStar data into virtual premise. We've gotten a very positive reaction to that from our clients there. It will enable customers to see relevant CoStar data side by side with their own portfolio data. This is always the beginning of putting more information decision making power into the hands of the Virtual Premise customer base and exactly what we intended to do when we purchased Virtual Premise last fall.
In the Q4 of 2012, PPR expects to launch a multifamily data and analytics service based on research developed with CoStar's research team. We believe that we have now surveyed more apartment communities than anyone else in the business and that we have the largest and most comprehensive database for the apartment industry. Demographic analytics such as population income combined with unit level asking and effective rents and vacancies will provide unparalleled horsepower for such things as lender underwriting, apartment rent setting, redevelopment and ground up feasibility studies. We also expect to launch Compass Flex, which is a customizable analytic tool. It enables users to find custom credit scenarios from a selection of economic forecasts, confidence levels and mortgage risk parameters to model loan level defaults, losses and related recoveries as well as interest shortfalls that may impact cash flows to certain bonds within CMBS deals.
Flex gives users more control to evaluate bonds across multiple scenarios and it provides a more accurate projection of the timing of cash flows, which is essential for appropriately evaluating the risk return proposition of both safer premium bonds and the riskier discounted bonds in CMBS. In the Q2 2012, RESOLVE released a new dashboard for ReQuest. With the industry's heightened focus on data visualization, Resolve's new dashboard has more attractive graphics, more end user capabilities and improved drill down to underlying detailed capabilities. Let's touch on commercial real estate conditions briefly, which right now are looking fine for CoStar and actually are actually pretty solid. The office market improved in the Q2 of 2012 with vacancy down 20 basis points to 12.6%.
Net absorption of 18,000,000 square feet for the quarter was double the 9,000,000 square feet in the prior quarter. The 62,000,000 square feet of absorption for the year we're running fairly close to long term averages. We expect demand to remain positive at 10,000,000 square feet to 25,000,000 square feet of net absorption per quarter and to show more growth as fears about the current economic recovery diminish over the next few years. The steady demand is very good for brokers. Although office rents have been flat in many markets for the first time since the recession, we're seeing a small just under one point rise in asking rents year to date with technology markets showing the highest rent growth.
As San Francisco rents are up roughly 16% in the year. The office sector has significant upside in rents relative to most other property types, which in part represents past distress and a low level of rent versus replacement cost rents. Office sales have also returned to normal levels and as of the Q2 of 2012, sales were on pace to match 2011. Annual office sales volume reached 75,000,000,000 dollars with a $1,000,000,000 for 2011, which is near the $80,000,000,000 10 year average. Improved financing conditions have allowed for the return of large building and portfolio sales for the first time since late 2007.
So in conclusion, with 2nd quarter revenue increasing 37% year over year to $85,200,000 96,000 and 96 paying CoStar subscribers with a 94% renewal rate and 100,507 paying LoopNet subscribers, I believe it's clear that our business is healthy, growing and has great prospects. As we continue with the integration of LoopNet throughout the second half of twenty twelve, we are more than excited about our prospects in 2013 and beyond. We believe that our employees, clients and shareholders will benefit from our larger stronger combined company as we continue to expand. Before I turn the call over to our Chief Financial Officer, Brian Radecki, I would like to congratulate said Brian Radecki for becoming being named as Chief Financial Officer of the Year Large Company Category. He was honored to be the CFO of the Year.
I was honored that it was in the large company category. And you'll be glad to hear that Mr. Radecki still remains humble and focused on his work. In fact, he's working out here in Glendora this summer and he has selected modest office space here. As I looked around for Mr.
Radecki yesterday, I found him in his office, which is labeled Accounting Storage 2. And the office manager was really quite dismayed that the CFO of the company wanted to work in interior storage room. She insists on removing the cabinets. But I just thought if you had an ego, he'd be in accounting storage room 1 not in accounting storage room 2. So with that, I'll now turn it over to our Chief Financial Officer, Brian Radecki.
Thank you, Andy. And appreciate the kudos, which I think I've said before, it's really a team effort. The entire team at CoStar, so I'll accept the honor on behalf of the entire team. As Andy mentioned, we are very pleased with our performance in the Q2 of 2012. We closed the LoopNet acquisition at the end of April and have included 2 months of LoopNet's financial results as well as some significant acquisition and integration related costs in the Q2 of the consolidated financial statements.
Today, I'm going to primarily focus on year over year comparisons for the Q2 and our outlook for Q3 and the remainder of the year and a peek into how we think the next few years will develop. Now to review CoStar Group's results for the Q2 of 2012 beginning with revenue. The company reported $85,200,000 of 2nd quarter 2012 revenue, an increase of $23,100,000 or 37.2 percent compared to revenue of $62,100,000 in the Q2 of 2011. CoStar's organic growth rate continued to steadily accelerate in the first half of twenty twelve compared to the organic growth rates we witnessed throughout the 4 quarters of 2011, which were in the range of 8% to 12%. CoStar's revenues increased 13.8% from the Q2 of 2011 continued by strong sales performance and a small one time revenue item in the quarter.
LoopNet annual revenue on a pro form a basis before any adjustments grew 10.7% year over year for the Q2 of 2012, which is relatively consistent with our 2011 reported annual growth rate. Therefore, the combined business is currently growing in the approximate 11% to 13% range on a pro form a basis before any accounting adjustments. We believe that we can continue to accelerate revenue growth rates with the cross selling and synergy opportunities Andy discussed. We reported a net loss of $6,700,000 or a negative $0.25 per diluted share during the Q2 of 2012 based on 26,500,000 shares. These results reflect $9,500,000 of acquisition and integration related expenses incurred in the Q2 as well as an unusually high tax provision of $5,600,000 driven by the costs related to the LoopNet acquisition that reduced GAAP earnings, but are non deductible for tax purposes.
I highlighted this expected high tax provision last quarter and also alluded to our favorable tax position on a cash basis. Specifically, as a result of the loss carrybacks, we received a tax refund of approximately $9,000,000 during the 2nd quarter and we expect to receive another refund of approximately $3,500,000 in the back half of the year. Additionally, we expect to receive further tax benefits, which we estimate will result in approximately $16,000,000 in cash tax savings at the back half of 2012 and the first half of twenty thirteen. Pretty nice. Non GAAP net income increased $3,200,000 or 43 percent year over year to $10,500,000 or $0.39 per diluted share in the Q2 of 2012.
From non GAAP net income of $7,300,000 or $0.33 per diluted share in the Q2 of 2011. Adjusted EBITDA for the Q2 of 2012 was $20,400,000 an increase of $6,100,000 or 42% compared to adjusted EBITDA or $14,300,000 for the Q2 of 2011. Reconciliation of non GAAP net income, EBITDA, adjusted EBITDA and all the non GAAP financial measures discussed on this call to their GAAP basis results are shown in detail along with definitions for those terms in our press release issued yesterday and will be available on our website at www.coastar.com. The company had $129,000,000 in cash from investments and $173,000,000 in debt as
of June
30, 2012. This represents a modest level of leverage given the strong cash flow generation of our business. At this point, I'm going to give some operating metrics for CoStar and the LoopNet businesses, which demonstrates that both businesses performed very well in the 2nd quarter. As we integrate the businesses, we do not expect to continue to give all these separate metrics and may introduce some new combined metrics. Net new sales from existing CoStar businesses totaled $8,200,000 an increase of 16% year over year sold by approximately 209 sales reps.
The acquisition of LoopNet adds 117 sales reps to our existing sales force for a total sales headcount of 326. This combined sales force has begun to focus their combined energy on the exciting cross selling opportunities we see in front of us and Andy discussed earlier. Our existing CoStar customers continue to renew at very high rates during the Q2 of 2012. The 12 month trailing renewal rate for CoStar subscription business increased to 93.7%, which matched our all time high for this important metric, which was back in Q1 and Q2 of 2,006. This is a 1.5% improvement over the 92.2% from 1 year ago.
All time high. I wasn't sure it was possible. I had the Yinger group check it 5 times. The in quarter renewal rate was 94.3 percent just above last quarter's 94%, up from 93.2% in the 2nd quarter. As discussed in prior quarters, one of our large customers Grub and Ellis, Newmark, Grub and Knight Frank filed for bankruptcy in the Q1 of 2012.
We expect that contract will be renegotiated. However, if the contract is eventually terminated, it would have a significant impact on our short term renewal rates, reducing the in quarter renewal rate by up to approximately 5 percentage points and the annualized renewal rate by 1 or 2 percentage points. We believe our revenue guidance for this year adequately accounts for the uncertainty related to this customer. Additionally, we received a termination notice from RMS, a DMGI owned company that has a data license with CoStar. In connection with the closing of the LoopNet merger and as mandated by our consent order with the FTC, LoopNet sold its interest in Exeligent to DMGI and has now become one of our primary competitors.
The termination is expected to have a one time impact in our in quarter renewal rate in the Q4 of 2012 of approximately 1%. At the end of the Q2 2012, the existing CoStar business had 96,096 paying subscribers, while the LoopNet business had 100,507 paying subscribers, to 1 or more of LoopNet's commercial real estate related services. Both subscriber numbers increased compared to the Q1 of 2012 and the Q2 of 2011. In the quarter, CoStar products featured 1,500,000 listings, while the LoopNet commercial real estate marketplace included 823,000 active listings. As Andy discussed earlier, we're making great progress in aligning the CoStar and LoopNet databases in an effort to ensure our information services provide customers visibility with respect to all available listings and to enhance the value we provide our customers.
For all the Loopsters on the call, a few Loop numbers. Loop net premium members increased to $77,279 compared to $75,829 in the Q1 of 2012 and an average revenue per premium member, ARPU, increased to 66.04 compared to 65.59 last quarter. Profile views in the LoopNet marketplace sold $107,000,000 for the Q2 of 2012 and LoopNet registered members including both basic and premium users totaled 6,100,000 as of June 30, 2012. Total unique visitors to LoopNet owned websites tallied nearly 5,600,000 according to Google Analytics. Essentially, our early insight into the LoopNet marketplace gives us confidence that we can drive significant additional value by introducing long term CoStar customers to the marketplace, increasing sales at the firm level and focusing on long term subscription agreements.
I will now cover results from our income statement for the Q2 and also provide our outlook for the Q3 and full year. Gross margins were $57,100,000 in the second quarter of 2012, up compared to $39,700,000 in Q2 of 2011. Gross margin percentage was 66.9, a 3 percentage point year over year increase over the Q2 of 2011. We expect to see gross margins expand further for the remainder of the year. Total operating expenses in the Q2 of 2012 was $57,100,000 an increase of $21,300,000 compared to the $35,800,000 in the 2nd quarter of 2011, primarily due to 2 months of LoopNet expenses in the quarter.
Additionally, as I mentioned earlier, we recorded $9,500,000 in acquisition and integration related costs. Most of these costs will impact G and A expenses, but some of the other lines were impacted as well. Turning to our outlook for the Q3 of 2012. Following outlook reflects the current expectations as of today 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. Actual results may vary from these estimates.
Is that good, John? Got it. Okay. As we continue the LoopNet integration process, we will consider alternatives for certain services from the 2 companies that overlap or create confusion among customers. We may reduce new sales efforts in some areas or discontinue services within the boundaries established in our consent decree with the FTC.
We would undertake such changes only if we believe they were accretive to the business in the long term, but this could lead to negative short term impacts in revenue or earnings. We believe the revenue and earnings guidance we are providing account for these possible changes. Based on the continued strong trends in sales and revenue, we are increasing the low end of our 2012 revenue guidance range to a range of $345,000,000 to $349,000,000 Remember, we just put that out 2.5 months ago. We're increasing the bottom. For the Q3 of 2012, we expect approximately $94,500,000 to $96,000,000 in revenue.
While we are pleased with the strong sequential revenue growth rate so far this year, we do expect a more moderate rate in the 4th quarter, mostly due to the seasonally weaker Q4 for LoopNet and in part due to the termination notice I mentioned earlier. Consistent with strong revenue trends, we're also raising the low end of our 2012 estimates for non GAAP net income per diluted share to a range of $1.40 to $1.52 per share based on 26,900,000 fully diluted shares, which includes the additional marketing spend in the second half of the year. For the Q3, we now expect non GAAP earnings per diluted share of approximately $0.38 to $0.42 As Andy discussed earlier, we plan on launching a substantial cross selling initiatives that we believe will drive considerable long term growth benefits for both CoStar Information Services and the LoopNet marketplace, although the exact timing of these marketing initiatives may vary. We are planning to reinvest the benefits of our strong year to date performance in the form of the significant marketing initiatives in the 3rd 4th quarters to support these critical sales initiatives. We estimate the impact of these initiatives on our non GAAP earnings to be a $0.02 in the Q3 and again total $0.10 to $0.12 for the year.
If we execute on all the marketing initiatives being considered, we expect to be in the bottom half of our non GAAP net income diluted share range for the year. Also included in earnings guidance as we discussed last quarter, the company continues to invest in development in CoStar Go and CoStar Suite in the U. K, which Andy mentioned. And we expect to incur costs to successfully launch these services in the U. K.
Market in the Q4 of 2012. We expect the launch of these products in the U. K. To be accompanied by approximately $700,000 in marketing spend. While this will impact the profitability in our U.
K. Segment in 2012, we expect these new products to accelerate revenue growth in the U. K. And begin to drive improvement in U. K.
EBITDA margins in 2013. In summary, I'm very pleased to be able to share with you the strong second quarter results included with the combined CoStar and LoopNet businesses for the first time. While the results include some significant acquisition related items and a partial quarter for LoopNet, the underlying business remains very strong and we have been able to maintain the momentum in both businesses as we began integration efforts. Additionally, we have begun to take actions that we believe will deliver the $20,000,000 in annualized cost synergies we expected when we announced the deal and remain confident in our ability to achieve these synergies within 24 months of the merger close. More importantly, based on our early cross selling success, we believe more than ever in the revenue opportunities that are achievable by integrating these 2 great businesses and introducing both customer bases to the outstanding value available by subscribing to both our information in analytics services as well as the industry's leading marketing solutions.
CoStar is engaging with customers along the full spectrum of commercial real estate marketplace from mom and pop shops to the biggest names in the industry and across a wide range of customers from brokers to owners, investors, banks, retailers, appraisers just to name a few. We see an enormous opportunity for growth as the industry leader with the most complete and growing set of products and services to support this varied customer base. Based on the current health of the business, potential synergies and opportunities in front of us as a result of the LoopNet merger, which closed 2.5 months ago, We want to set a goal of $500,000,000 in run rate revenue by the end of 2014 with adjusted EBITDA margins in the low to mid-thirty percent range. We believe that this is an achievable benchmark that sets us on a realistic path towards our long term goal of $1,000,000,000 in high margin revenue. And with that, hopefully it was worth the wait.
I'll open up the call for questions.
Thank And we'll take our first question in queue from Bill Warmington with Raymond James. Please go ahead.
Good morning, everyone, and congratulations on the strong quarter for SunTogether.
Thank you very much. Thanks, Bill.
A couple of housekeeping questions. The I want to ask what the CoStar or actually will DA LoopNet revenue contribution was. I wasn't sure if I caught that on a standalone basis.
I don't think we put it on a stand alone basis, but we gave you their pro form a before adjustments grew year over year at about 10.7%. I think the businesses are combined, so we're going to continue to report a combined number.
Okay. So I mean is there a way to get to the CoStar revenue without Loop is what I'm trying to back into?
I think we gave you the year over year growth rates on that too on an organic basis.
Okay.
So 13.8%. And then it's important to note that going forward there's going to be a lot of revenue moving back and forth between these entities. So if we're taking somebody from $89 of information oriented product in Lutnet over to $509 of CoStar RAN revenue. Right. You're going to see it will be difficult for it to track what's happening there and what's original LoopNet revenue and what's original CoStar revenue.
So it will get very blurred pretty quickly. What will be more relevant is probably total marketing revenue and total information revenue. What I can tell you Bill is that when we announced the combined company's guidance, I gave a range of the CoStar's business to $70,000,000 to $71,000,000 I can tell you we came in much above that number. And then you could back into the Loop number, they came in much above the guided number too. So both businesses, it wasn't like one did better than other.
They both were above the guided range, which is you can see the combined numbers of 85.2 percent well above the guided range.
Got you. On the marketing spend, the it looks like it's about $2,200,000 to $2,700,000 I want to make sure that number is right. Does that include the $700,000 in the U. K? And I just was going to ask how you plan on some detail on how you plan on spending the incremental marketing spend?
I'll answer the first part and I'll let Andy answer the second part of it. The marketing spend now the U. K. Is a separate number, but again it's all included in the guidance. I think your number is a little bit low.
You'd have to sort of divide by the number you have to multiply by the number of shares and divide by the sort of the non GAAP EPS tax rate of 38%. So, the numbers are probably a little bit low, but the U. K. Is not included there. But of course both of them are included in the guidance number.
The timing isn't we're working through the timing of that now. So it might be late in Q3. It might push into Q4. It might push into a little bit next year. I think there'll be a big push in Q4 for sure.
So that's why it's a pretty big range and the majority of it will hit in the 4th quarter. And so that will depend on where we end up in sort of our guidance range. And I'll let Andy talk about sort of what his thoughts are around the details of the marketing. Sure. I'd be happy to.
So in the U. K, obviously, it's a much smaller number of cities, smaller economy. It will be a rollout of the CoStar Go app similar to the one we did in the United States with event based marketing, but just a much smaller scale because it's a smaller country. And that was very successful for us here in the U. S.
So it's just a repeat of that. Then you have to consider those 130,000 leads and you're going to want to communicate with them with at least 4 pieces of direct mail along with supporting electronic initiatives. And then on the LoopNet side, creating we want to create awareness among the 1,000,000 listeners in the 1,000,000 listings universe of CoStar for we want to let them know about the opportunity to generate greater awareness to their listings in the general business community, investor community through again a series of direct mail campaigns. We retained an agency in San Jose that's done a great job putting together a campaign. We're going to be communicating with the people who broker the listings as well as the owners behind the listings.
And we're going to do one marketing event that I'm not going to talk about and you couldn't imagine it in your wildest dream. You'll see it on YouTube and I think you'll agree it's sort of funny and useful and effective. So we just believe the we believe that the opportunity is there. There's never if I'm a broker in San Diego working for CB Richard Ellis, doesn't have any listings in the LoopNet system. I don't think that person has ever considered trying to generate more leads for their listings using LoopNet.
They've never received the direct mail fees from LoopNet. They've never received any sort of marketing from LoopNet. So I want I mean any sort of traditional marketing media from LoopNet. So we want to break that ground quickly.
Okay. Well now the Chicago test sounds very promising and I wanted to ask what a couple of things. One is your thoughts on what it is we went through some real detailed statistics, but conceptually what it is that has kept people from switching over from LoopNet to CoStar in the past? And how are you going to overcome that? And then the also how you plan on attacking the markets to go after the larger ones, smaller ones?
How you plan to do that?
Well, we'll definitely do a staggered lead system. We're going to migrate more people from our centralized operations into field operations to try to scale the number of people we've got in the field to deal with the opportunity. We'll definitely pursue some of the more likely leads based upon intensity of search activity, tenure inside the LoopNet system. And we will allocate out these leads salespeople based upon their success and closing the leads they do receive. We feel comfortable with I mean, we've spent a fair amount of time and effort in researching how to present the products to these prospects.
We I mean the reason they weren't considering it before is because Loop Bank and CoStar Group were not one company. Neither company could make the promise of having a one stop shop where all the listings were in one place. Neither company could effectively communicate what was happening in multimillion record databases that were changing by the 100 of 1000 every day. It just was too complicated. Now with 1 uniform back end, you can clearly communicate it.
Your message is completely credible because they know that your briefcase has both LoopNet and CoStar. And so we're pretty excited about it. I described it briefly coming out of that day in Chicago, I described it briefly as the most exciting day in my life and a number of my friends reminded me that I should no longer say that because my wife will hear it and I'll pay for a couple of times.
All right. Thank you very much for the insight.
Thanks, Bill.
Thank you. Our next question in queue will come from the line of Brandon Duvel with William Blair. Please go ahead.
Gentlemen, how are you? Good. How are you doing? Not too bad, not too bad. A couple of things.
First,
I guess, if I were
to add up all the different metrics you guys have given us the past several quarters, it would be like $10.12 I'm trying to get an idea on a go forward basis. Are we going to get some consistent metrics like LoopNet used to provide on paying premium subscribers that kind of stuff so we can start to model this thing a little bit more accurately? And I guess on both the CoStar side and the LoopNet side or how should we think about what metrics should be the ones that we should be paying attention to that you guys are going to give us?
Yes. So Brandon, it's Brian. So actually if you went through the call, the reason why there's so many metrics because I gave pretty much almost every metric that CoStar had been giving in addition to every metric that LoopNet has been giving. So if you go back through it, you'll see all
of them.
Yes. And so we didn't really take any away. We gave the premium member number. We gave what they call ARPU, average revenue per member. We pretty much gave we gave the CoStar bookings number.
I mean we gave every number that each company always does. So it has been only 2.5 months. So we are looking at which how do we sort of combine these. We're obviously going skinny it down and not give so many numbers. It's sort of funny.
Some people want more data and metrics and then other people want it streamlined. So we are going to streamline it. What I was saying. Okay. I think that you obviously continue the renewal rates and the CoStar bookings numbers are going to be relevant because 75% of the business is still sort of CoStar core CoStar information services.
And I think that the Lucas stuff will sort of be toned down a little bit. But we'll also come up with some new combined numbers. So next quarter, I think we'll give you a little bit more clarity on some of those numbers. But if you go back through it, we gave you all of them. And I figured I'd try to confuse you as much as I could because I appreciate you stealing my thunder this morning.
I'm easily confused. So Mr. Debo, the and the other thing that's going to be a little tricky is, if we we don't want to spend too much time and energy focusing on the total LoopNet premium customers and the number of CoStar users because over the last over the next 12 months, I think that number will be a little deceptive because you don't quite understand the overlap in the duplicate level. Within our goal will be to try to integrate for exactly that reason. We're going to try to integrate the back ends of LoopNet and CoStar Group on an expediated basis will make it a high priority for the company.
And the benefit among other benefits, one of the benefits will is that we'll be able to give you a just a unique customer number for the combined company that will actually allow you to effectively measure how we are doing in terms of capturing the scope of the opportunity. But when you're looking at BlueNet Premium and CoStar members, it's going to have duplicative it's going to have overlap.
Okay. And then Brian, I want to clarify something in your January remarks about the run rate exiting 2014. You said low to mid-30s adjusted EBITDA margins. Is that for the whole of 2014? Or should we think of that as a 4th quarter potential range for 2014?
Yes. I mean, I think both numbers are sort of an exiting run rate. Okay. And I think that's sort of the goal we're putting out there today. Obviously Andy and I are very competitive.
We like to beat goals. But the goal is a $500,000,000 run rate at a low to mid-thirty percent range exiting 14%, which I think is a pretty good number. And that's really with all the things that we've talked about today sort of organically. So I think that again, Jamie and I obviously will
do our best to do better. Right. And then final question. Organic growth rates at both companies
a little bit faster than we thought we'd see it
at CoStar, but pretty much in line at LoopNet. The CoStar organic growth rate, maybe some color on the puts and takes as we think about the next couple of quarters. You mentioned the Grub and the DMGI termination in Q4 as potential noisy bids. But what else is out there that could move that organic growth rate around and or I guess in the back half of the year? Are you assuming any material difference in those organic growth rates within your guidance?
Thanks.
Yes. I think last year we were anywhere from 8% to 12%. So it's fairly steadily accelerating and obviously you can see continue to accelerate in the first half of this year. LoopNet's obviously running at lower growth rates. So as a combined company, it obviously brings down the combined number.
There are a lot there is lots of noise in the back half of the year accounting adjustments, deferred revenue adjustments. I did talk a little bit about we are evaluating various services that the company has that we might deemphasize or decide not to do anymore. We factored all that into there. So there is going to be a lot of noise in those numbers. But I think the 11% to 13% range factoring in all that noise is sort of a good range.
And then obviously as we see how this cross selling goes, I mean it's obviously going to be a big topic of conversation on the next couple of calls, what kind of results we see, then we can give a little more clarity for year. But clearly, I don't talking about all those numbers, there's a good range out there for next year. And as we get more clarity on the cross selling, hopefully again we can do better. But there is a lot of noise in the back half of the year. And I think I mentioned the Q4 typically again I mean everyone on the call has been following LoopNet 2.
It's typically seasonally low for them. So again we have to factor a lot of that noise in. But I think we're feeling very, very good about 2013 2014 based on the prospects. And not only is Andy's wife probably not too happy, I'm sure his kids aren't happy either. There's several important days in there.
Thanks guys. Thanks Brandon. Thank you, Ian.
Thank you very much. Our next question in queue will come from Brett Huff with Stephens. Please go ahead.
Congrats on a nice quarter and giving us some longer term guidance guys.
You're very welcome. We're glad to do that.
As you guys think about uses of capital, it seems like you're it's just all plowing back into the business. And when you guys are doing that, give us a sense of how you make those decisions? I mean, you've outlined them a little bit. You have a lot of levers that it seems like you can pull and invest in and you've chosen a $0.10 to $0.12 lever with the cross sale. How do you guys internally manage how you allocate that money?
Is it ROI driven? Or what's the kind of process? Because it seems like there's a lot of choices that you could make.
Well, it's ROI driven, I would say. So there are a lot of choices you could make. We obviously we are we would have a 5 hour conference call earnings call if we were to go through all the different things that are going on in the business. So when you look at all the opportunities out there, like we didn't touch on our French operations or our residential information product in Paris. So we look at things like the cross selling opportunity to us and to our Board is obviously the biggest ROI and it has in addition to having what we perceive to be or believe to be a very high ROI, it also has a real strategic urgency to it.
You'd like to create the single stop shop as quickly as you possibly can and get brand recognition for it. So that's what we're thinking about. It's the things that we believe are the unconscionable if you don't do them things. And Brett, there's so much leverage in the model as everybody knows. I mean going after this opportunity that Andy talked about on the cross selling and synergies is extremely high margin.
Obviously, you're paying out some commissions on that. But we talked about having a 300 plus person combined sales force now. You have a large sales force. You have this large opportunity. And each dollar that you get in there is significantly high margin dollars.
So I think clearly when you look at the ROI and the potential for that right now it's I mean I think it's easy to say it's number 1. I mean it's the number one opportunity for the company.
Okay. That's helpful. And then in terms of small cities I know you all have we're building the CoStar based product small cities right kind of as the recession started. LoopNet I think has probably better penetration there and even Exeligent has some better penetration
in the smaller cities.
But I think that's to me it seems like low hanging fruit. Can you be fairly specific or give us a sense of
what the small city strategy is from here?
Is it CoStar Suite, I think is what you called a particular product that might work there? Kind of where are we on that strategy?
Sure. I would not begin my answer with accepting your characterization that Exeligent has achieved meaningful penetration in a small way in small cities or anything of that nature. So in fact, we've actually done extremely well over the last 2 years in penetrating the smaller markets. So in the bottom 200 cities, we've seen phenomenal year over year growth and through our fly teams, which are based in D. C.
And periodically travel into certain targeted markets, they had great growth over the last 2, 3 years. So these markets are now, I would say, as a group, the smaller markets are profitable for us and are doing well. I would actually say that LoopNet's client base so you take a Corpus Christi, Texas, LoopNet might have 100 customers there, 150 customers there and that is more than CoStar has there. However, what I'm more focused on is the fact that LoopNet has 11,500 customers in here in Los Angeles that we don't have. So the small markets today are successful and profitable for us.
There is no market anywhere in the United States that I'm aware of where anyone has any more penetration than we do. So the smallest market, biggest market we've got more penetration. But the story the market that smallest that's profitable and you can't walk away from that because they do make money. And but the real story is going to be Texas, Florida, California, New York Tri State area. That's just overwhelming.
It's just stunning. Like if you we now have 19,000 users here in Los Angeles County. And that is just that's an amazing number. And so upselling that group is still just the £800 gorilla.
Okay. That's helpful. Thanks for your time and congrats again.
Thank you very much. Thanks, Brett.
Thank you. Our next question in queue will come from Ian Korten with B. Riley and Company. Please go ahead.
Thank you. I wonder if you could just provide an update on CoStar Fusion and the analytical products that you have under development? Sure. I'd be happy to. We those hit the cutting room floor last night at page 2025.
So we are making the absence of discussion, I don't want anyone to think that we're not working on that. We I spent all day Monday Tuesday with a combination of senior software execs from LoopNet and CoStar and product design people from CoStar. We're working on that. And I believe the specification for Fusion is now over 2,400 pages long. And we viewed and discussed the designs covering maybe only 700, 800 screens Monday, Tuesday.
And I am blown away by what the analytic side of our design team has produced as led by a guy named Jay Spivey who came to us from the analytics side is led by a guy named Jay Spivey who came to us from Jamieson acquisition back in 1998, 2009 been with us for a while. He did a phenomenal job. It was just stunning. It takes what we're doing in analytics up 5 or 6 levels. In addition, our R and D quantitative team based at PPR has been working on some very interesting initiatives that we'll keep confidential to be part of that new analytic release.
So it's very impressive stuff. It will not there's no chance that it will release anytime in the next 2 or 3 quarters. And we will likely while we'll be developing it, we will prioritize integration. We'll likely prioritize integration of the LoopNet CoStar database first and foremost, because once you do that, it gives you more stability in the platform. It gives you better intel, better communication with shareholders, better marketing capability.
It also frees up a lot of development resources to work on one common set of goals. So it's alive and well. It's fantastic. It will blow your mind when you see it. But it's a scale and scope that's quite significant.
Got it. Thank you. You're welcome.
Thank you very much. Our next question in queue will come from Mark Fuller with Needham. Please go ahead. Hey, guys. Great quarter.
Just a question on the Chicago cross selling. Kind of wondering, can you give us any more color on kind of how many regions outside of Chicago by the end of the year you might be penetrating or kind of selling into? And how many users end users this kind of represent?
Well, what we're going to do is we're now in the process of taking what we learned in Chicago. And initially we've given a day of training to the sales force. We're going to do follow-up training with them. We are today working on our strategy for utilizing an additional 40 of our salespeople who traditionally have worked in our centralized sales role to go out and hit the opportunity which is too big for our current field sales force to fully cover. Our first priority will be to go after the biggest cities, these massive pockets in California, Texas and the like.
So that will be the priority for the first two quarters or so. And then we'll be fanning out to cover the Corpus Christi's and the Albanese in 2013. And a number of users that this impacts, again both LoopNet and CoStar probably 80 plus percent of our users are in the top 100 MSAs, which is where we initially focus. And probably 80 plus are in the top 50 MSAs. So that's where the user counts are initially.
Got you. Got you. And then I'm not sure if I missed this, but did you say kind of how many what percentage of your bookings is from new users versus upsells?
In Chicago? No overall. Overall. Sorry. It was approximately where it's always is in the 50%, 50% range.
Again, I mean, I think some of the things that Andy is talking about was pretty much a couple of weeks ago. 2 weeks ago. Yes. There was really no impact at all in the Q2. And obviously, we'll have a lot more color on next quarter's call for you guys.
Cool. Thanks. And then last question. Did you mention how many CoStar Go users were added in Q2?
We did not. Do we have that number? Host or go users. We do not have that in front of me, but it continues to trend up. Right.
We're still getting we're still in year 1 I guess of probably a 10 year pipeline cycle on that and getting great feedback.
Cool. Thanks.
Appreciate it.
Great. Thanks.
Thank you. Our next question in queue will come from Todd Lueckasek with Morningstar. Please go ahead.
Hey, guys. Nice job on the quarter again. And thanks for all the detail on the early integration efforts.
Yes. I'm glad there was someone out there who I didn't put to sleep. I'm still here. Just a question on,
let's see, the integration and the synergies. It sounds like you guys are still comfortable with sort of the $20,000,000 in expected expense synergies?
That's correct, yes.
And given the initial information you have from the Chicago market, are you guys can you share with us a number that you're thinking about for potential revenue synergies or maybe just ballpark greater than or less than expense synergy expectations?
Well, without any doubt, dramatically greater than orders of magnitude greater than the expense synergy. So if you I don't know if you took the what was the average sale so far? If you take the 15 units in Chicago and divide them into divide into the $8,800 sold so far and then assume it's a 500 percent increase and then run that against the $130,000 against the 54% that said they would upgrade. The number is stupid big and we won't even say it. So it's orders of magnitude larger than the synergy side.
Okay. Got you. And then just with regards to the listings, are those did you say whether they're being integrated now? So anything that was in the LoopNet system, but was not into CoStar is now also in CoStar now? Or is that a future enhancement?
No. That's done. Okay. We didn't waste any time there. We it completed today basically.
So the systems ran today and they had gotten through the listings. I think there were a handful of calls out still that were not in there, but basically they moved through the whole pile, added over 50,000 listings, several 1,000 new listers. And that was done in a combination of Wayne and his team and Frank and his team connecting the databases automatically on a one time basis or in an automated fashion onetime basis and then kicking out all the exceptions to the research department who then reached out and had conversations with those 50,000 some listings over the last 2 weeks, 3 weeks. And but long term, we want that to be automated, which is why we're going to integrate the back end, so that when you enter a listing in LoopNet, it's basically entered into CoStar automatically. It will go through a verification process, but it gets it's basically the same database.
So it will be technically impossible to have a valid listing in LoopNet that's not in CoStar. And ultimately, I think it will like initially it actually increased our cost of research because you're adding 50,000 listings making 100 of 1000 of phone calls. Longer term, I think it will reduce our cost when it's automated.
Right. Okay. But all of that sort of user generated
that's a top that's a top priority to them and it will.
Okay. And but your expectation is that that doesn't you're not going to need more researchers to do that. You can do that with the current staff?
I would guess we're going to get a significant productivity gain here, especially after we connect the databases and for a number of different reasons. You still have a trend, which I think that the coming together of LoopNet and CoStar Group will accelerate that trend, because now you have an even clearer picture in the industry of what the main clearinghouse is. And that trend is people are creating more and more listings. So that prior putting a building up for sale was done with a lot of forethought and it was done less frequently. People are putting their buildings up for sale more and more frequently.
So if I go back to 10 years ago in Washington D. C. Approximately 1% of the buildings in Washington D. C. Were marketed for sale.
Today, I believe the number is closer to 12 percent of all properties in Washington, D. C. Are being marketed for sale. So and against a database that's more than 50,000 properties in Washington, D. C.
That's significant growth. So you've got people using CoStar, LoopNet as a clearinghouse more aggressively. That's good news big picture for our role in the industry, the utility of the company and our potential revenue. It does put a pressure to continue to grow the scope of people dealing with all these people selling their buildings. But I think the 2 will balance out and I think you'll get continued productivity gains and you get continued acceleration the amount of content coming at us.
Right. Okay. And then with regards to the sort of the year end 2014 goals, $500,000,000 run rate in annual revenue. I'm assuming that's based on an expectation of organic growth as opposed to unannounced acquisitions at this point?
That's correct. And I think that should be clear. That's based on what we've talked about here today. So with sort of the product services geography things that we've talked about. That's a little bit like asking a woman who just gave birth to triplets whether or not she wants to have another child while she's
I guess, you guys will be busy with the LoopNet stuff for a while. And then just with regards to the adjusted EBITDA margin, I mean, is it the low 30s to mid 30s that you gave there, is it safe to assume that the only adjustment between reported EBITDA and adjusted EBITDA that the expectation for that would be stock based compensation expense at this point?
Yes. I mean it's the same it's any of the same adjustments. So if we were to be doing other acquisitions or anything else down the road which would be on top of those numbers, it would be the same adjustments that we always have. But so barring any of those, yes, it's the same adjustments nothing new.
Okay, great. Thanks a lot guys.
Thank you very much. Thank you. And at this time,
we have no additional questions in queue. Please continue.
With that, we'll conclude the call. Thank you all for joining us. And we appreciate your support and look forward to talking to you next quarter.
Thank you very much.