Welcome to the CoStar 4th Quarter 2010 Conference Call. At this time, all participants are in a And as a reminder, this conference is being recorded. Speaking on today's call will be CoStar Group's Founder and Chief Executive Officer, Andrew Florence Chief Financial Officer, Brian Radecki and Communications Director, Tim Trainor. I would now like to turn the conference over to your host, Tim Treanor. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to CoStar Group's 4th quarter 2010 conference call. Before I turn the call over to our CEO, Andrew Florence, let me state that certain portions of this discussion contain forward looking statements, which involve many risks and uncertainties that can cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in our press release on CoStar's 4th quarter 2010 results and in CoStar's filings with the SEC, including its Form 10 ks for the year ended December 31, 2009 and its Form 10 Q for the period ended September 30, 2010 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.
As a reminder, today's conference call is also being broadcast live over the Internet at www.coastar.com/investors. Astx. A replay will be available on our website approximately 1 hour after this call concludes. Thank you for joining us. I will now turn the call over to Andy.
Thank you, Mr. Trainer. I appreciate it. Welcome to CoStar Group's Q4 2010 conference call. I'm pleased to report a very strong Q4 close to a pivotal year for both Commercial Real estate and CoStar Group.
Commercial real estate made the turn towards recovery in 2010. The U. S. Office market gained 21,000,000 square feet of positive net absorption in the Q4 of 2010, tripling the amount of office absorption in the 3rd quarter and the strongest level since the Q4 of 2007. So it was a very, very impressive 4th quarter absorption number.
As a result of the strong leasing activity and significant absorption, U. S. Office vacancy rates continued to improve during the Q4 of 2010. From the peak in 2010 at 13.6%, the U. S.
Office vacancy rate has continued to decline to 13.3% currently. The office availability rate also peaked in mid-twenty 10 and has begun to decline. So this is after a erosion of market conditions that began in the Q4 of 2,006 until now we're finally beginning to see a clear turn. And office vacancy rates, industrial retail vacancy rates do not jump around. They tend to move in glacial high momentum trends.
So this is probably a stable improvement in the market. As I reported in the past, CoStar sales growth and renewal rates have historically been correlated to these two key industry indicators and the improving conditions have continued to have a strong positive impact on our business. The market outlook does vary from market to market, but the majority or 14 of 20 largest U. S. Office markets saw positive absorption in 2010.
Los Angeles and Orange County are 2 that posted negative net absorption in 2010. Nonetheless, our sales are still accelerating in these two markets. One very valuable indicator is to look at the number of submarkets in the United States that have improving conditions versus deteriorating conditions. So at the best point of the last cycle in 2,004, 67% of the submarkets had tightening vacancy rates. At the bottom of this last cycle when it was the darkest, only 37% of the markets had stable vacancy rates or improving vacancy rates.
Now we're back up to 65% of the markets being stable or improving. And I think it's possible that conditions could improve beyond the best point of the 2,004 part of the cycle. Meanwhile, construction levels for all types of commercial property remain extremely low. A paltry 1,000,000 square feet of office space broke down broke ground in the U. S.
In the Q4. That's the smallest amount of new office construction in decades, if not a century. Given this almost complete shutdown in new supply, we expect a very strong recovery in the office market over the next 2 to 3 years if trends in leasing and positive absorption hold. Based on current job growth forecasts, the prospects for a faster than expected recovery in the office market appears strong. Economy.com, for instance, is forecasting 6,000,000 jobs to be created over the next 2 years.
Today, yesterday, we saw an indication with a better than expected job numbers that economy.com could be right. We believe the level of job growth coupled with the extremely low level of new development activity occurring today would result in significant positive absorption and be accompanied by a dramatic decline in office vacancy rates to below 10%. The picture remains mixed in the sales market. CoStar Group's repeat sales index shows that general commercial real estate, particularly the typical midsize and smaller buildings across the U. S.
Continued to fall in value, declining 8.2% in the Q4 of 2010 11.2% for the year overall. In contrast and on a much more positive note, large investment grade properties in major markets have climbed in value 8% over the course of 2010. Larger properties in top markets that are 90% leased by credit tenants are doing extremely well. The investors are essentially buying bonds backed by commercial real estate. And I believe that the investment grade index is probably a leading indicator for the general commercial index.
The average price paid for an office property at the end of the 4th quarter was the highest it's ever in a time period we're tracking, which goes back 2 decades. The long term average price is $7,000,000 for a commercial estate transaction. The prior peak was back in 2006 at $17,000,000 and the number today stands at $20,000,000 At the same time, average asking prices for the average commercial property in United States have fallen from $1,100,000 at the beginning of 2010 to $994,000 at year end. Obviously, there's an awful lot of liquidity at the upper end of the market and not so much the lower end, sort of a bizarre market disconnect, but nonetheless a leading indicator I think of a positive trend. Just as with commercial leasing market, the picture for property sales changes depending upon the region even the market.
Commercial Real Estate in the Northeast U. S. Led the nation in terms of strength of pricing having recovered 23% of its pre recession pricing levels. The Southeast region of the country is the only other region that has recovered a portion of its pre recession pricing levels gaining back 14%. In Washington, D.
C, values of commercial real estate have climbed 15% year over year overall the property types large and small industrial office retail. Overall, we expect average property values for general commercial real estate to reach bottom and begin to increase in 2011. We believe this is an opportune time to become more aggressive in investing in our business given these clear signs that commercial real estate market conditions are well into a recovery stage and may in fact be poised for a long and significant growth phase. With the onset of market recovery, CoStar has experienced a very positive return to organic revenue growth. The organic growth we experienced last year is clearly evident in the consecutive record levels of revenue each quarter throughout 2010, culminating in $58,200,000 in revenue in the 4th quarter.
Year over year, 4th quarter revenues increased $3,600,000 or approximately 6.5 percent of our 4th quarter 2,009 revenues of 54,600,000 dollars 4th quarter revenue also increased $1,100,000 over our Q3 2010 revenue of 57,100,000 dollars Full year 2010 revenue of $226,300,000 increased $16,600,000 or approximately 8% over 2,009. And we're fairly happy with that number given the fact that we are coming out of a pretty brutal commercial real estate market and that pushed our expectations to come out that quickly. During the year, we added more than 2,600 subscribers to CoStar Group. Subscriber growth surged in the Q4 of 2010 with 11 35 new subscribers. We enjoyed very strong net subscriber growth across multiple product areas and regions.
This total includes the addition of 738 net subscribers to our Internet lead generation service Showcase and 705 subscribers net new to our flagship CoStar information product area. The Q4 of 2010 was seasonally very strong for subscriber growth and the sun was out and shining. The total number of subscription clients increased by 2 73 I'm sorry, the total number of subscription client sites increased by 273 to 16,781 company wide during the Q4 of 2010 from 16,508 in the 3rd quarter. As you would expect, with strong subscriber growth, our sales also showed consistent growth throughout the year, with a very strong Q4 and an especially strong December, one of the best sales months on record. For the Q4 of 2010, company wide net new sales totaled approximately $4,600,000 which is nearly a 3,000,000 dollars year over year improvement over Q4 2019 net new sales and is the highest level since the Q2 of 2,008.
Our company's success in retaining customers and driving usage through the recent economic recession and into the current recovery has remained a positive hallmark of our business. At the end of the Q4 of 2010, the 12 month trailing renewal rate for subscription based services exceeded 90%, increasing from approximately 85% at the Q4 of 2,009. This is also the highest renewal rate level since the Q2 of 2,008. Subscription based revenue accounted for approximately 94% the firms that have been clients for less than 5 years also remained very high at 86%, up from 80% 1 year ago. During the Q4, we continued to see strong demand from brokerage firms adding users or subscribers to additional services and markets.
The most notable example during the quarter was Jonesline LaSalle, which became the largest major service provider to sign a significant contract extension for additional services and new markets, joining Grub and Ellison Marcus and Millichap, 2 other major firms and valued clients that renewed and expanded subscriptions in the second half of last year. The average new contract value company wide during the Q4 of 2010 increased to $9,808 an 18% jump over the Q3 of 2010 average new contract value of $8,292 As we expect and communicated to you earlier, our sales headcount returned to mid year levels as new sales training class moved into production. At the end of the Q4, we added a total of we had a total of not added had a total of 195 sales reps, an increase of 14 from 181 on staff at the end of the Q3 of 2010. So we're at that approximate 200 person sales force level, which is a stable place for us right now. As I've reported in our recent calls, one area where we enjoyed exceptionally strong sales success all last year is in our financial services.
There is no question that we have certainly benefited from the additional exposure and visibility CoStar gained among investors, banks and other financial services firms from our acquisition of property and portfolio research. One recent example of successful cross selling of CoStar Services to institutional clients during the Q4 was Stancorp Financial Group, a major provider of financial products and services with mortgage investment, real estate and equities subsidiaries. We've also seen more CoStar clients subscribing to PPR services, most notably Apollo Global Real Estate Management, which recently completed its acquisition of the Real Estate Investment Management Group of Citigroup Investment Bank and now has a global property platform of more than $3,000,000,000 in assets under management. As I mentioned, Showcase continued to perform at an exceptional level during the Q4 2010. Our Internet marketing lead generation service added 738 subscribers in the 4th quarter, reaching 11,627 subscribers, which represents a 31% year over year increase compared to the Q4 of 2,009.
Showcase is now generating approximately $6,500,000 in annualized revenue, which is up 10% from the prior quarter, which is a pretty significant annualized growth rate, making it one of the fastest growing services in the CoStar suite of services. Given the continued recovery and consistent demand we're seeing in almost all areas of our business, I am very excited about our outlook for continued strong sales in 2011. This clear and growing strength in our business was also apparent in our earnings. Given the growing market recovery and the enormity of the CoStar opportunity, we have continued to invest aggressively in growing the business. Despite that level of investment, during the Q4 of 2010, net income increased to $3,800,000 or $0.18 per diluted share compared to 3rd quarter net income of 3,400,000 dollars or $0.16 per diluted share.
With more than 1,000 researchers, economists, software developers and analysts focused solely on commercial real estate, CoStar has a unique ability to provide our clients with much more accurate a much more accurate and complete window on the market. That is why we believe that CoStar's vacancy and availability rates indicated deteriorating market conditions 2 quarters before one of our key competitors going to this recent downturn and why CoStar's same key indicators signal the onset recovery 2 quarters before that competitor signaled the emerging recovery. We believe that this means that our clients know which way the markets are heading 2 quarters before our competitors reports the trend to its clients. We further believe this advanced insight provides our clients with a major advantage in the market. Knowing exactly what properties are available in each market under what market conditions and being able to forecast which direction the market is heading are the primary reasons our customers rely on CoStar's information and analytics.
In 2010, CoStar's research organization continued to expand its database to unprecedented levels. At the end of the Q4 of 2010, we tracked more than 3,900,000 properties in the United States, United Kingdom and France, having a total combined size of a staggering 75,500,000,000 rentable square feet. This is an astounding number that I believe is the largest proactively researched or proprietary commercial real estate database ever built and remains the main source of CoStar's value in the marketplace and I think it will remain so for quite some time. Another great strength of CoStar's research is its granularity, the ability to quickly identify the same facts for each property, its size, its location, availability or historical performance and then to do the same thing for a property next to it and the one across the street and then analyze the same set of facts for a specific set or thousands of properties to produce the most accurate and complete information and analysis on those properties. Because of the census approach to research, CoStar is able to achieve a level of accuracy and context that research constrained competitors relying on partial data or market samples simply cannot match.
One of the major milestones of 2010 for CoStar Group was our HQ move from Bethesda, Maryland into Downtown Washington, D. C. As you may recall, moving our headquarters to Washington D. C. Has proven to be a great decision.
When our lease expired in Bethesda, we wanted to move closer to the center of the region's transportation hub so that we could more effectively recruit from the entire Washington Metro workforce. In addition, with the national and international business, we believe that downtown Washington offered us much better access to the Northeast Corridor trains and to Washington's Reagan National Airport. Finally, to gain efficiencies, we wanted to consolidate our operations from 3 buildings in the Washington Metro area to just 2. The city offered us considerable tax incentives potentially worth more than $6,000,000 over 10 years if we relocate to the district and we increased the number of district residents on our payroll by 100 among other requirements. The city is now certified that we have achieved those requirements making us eligible to begin receiving significant property tax rebates or abatements.
Not sure which one it is. Now that we have completed the move and settled into our new headquarters, we could not be happier with the result. There is a tremendous positive energy and excitement in new headquarters. We have lost relatively very few employees in the move and our turnover rate remains low, very low by historical standards. We believe that we have had much better success recruiting new top quality staff in our new downtown headquarters.
We now have a staff of nearly 500 in our new HQ. Dozens of staff from our Columbia and White Marsh offices have relocated to our new DC headquarters. We believe that within the next 18 months after we have completed building out this facility, we will have more than 700 staff working in the headquarters or nearly twice the number we had in the old HQ. We also believe we will achieve significant improvement in operating efficiencies by having more staff in fewer facilities. Buying 1331 L Street Northwest last year was simply an opportunistic decision.
At the time, property values had dropped dramatically, while rents had not. Our lease was up and we had to make a decision. With some knowledge of the nature of commercial real estate cycles, we knew that Washington would recover quickly and if we leased facilities, rents for expansion space could become very, very expensive in the future. When we found a new Class A office building in D. C.
That we could buy in a distressed sale for less than its construction cost 18 months prior, we knew that it was highly probable that owning it could be less expensive than renting with very little potential downside. We bought the property last February for 41,250,000 dollars or $2.43 per square foot. With the advantage of the industry's largest research organization monitoring market conditions, we soon discovered that the market for fully leased credit tenant properties in Washington D. C. Was recovering very quickly as I shared with you earlier in this call.
Investors were looking for better yields backed by added security of prime real estate with some inflation protection, sort of a logical strategy. We did not hesitate to put the building on the market sooner than anticipated and received a number of qualified bids. To give you an idea of the extraordinary investor demand for this type of property, we received offers from more than 30 major investors throughout the U. S. As well as Europe, Asia and the Middle East.
We were very pleased to find a real quality buyer GLL for the building at $101,000,000 including $15,000,000 that's been set aside for completion of the build of our space in certain common areas. We sold the building at $5.96 per square foot with all the consideration and that was almost $60,000,000 more than we had purchased it for a year earlier. We believe that the purchase and sale represents the greatest appreciation from a single building bought and sold in the past 5 years in the United States, and we've examined 1,000 plus deals to determine that. Brian will discuss the financial details of the sale later in the call. When we announced plans to pursue this opportunistic property acquisition, we had no intention of remaining long term owners of real estate.
We feel it's very important to our success that CoStar remain a completely neutral, transparent intermediary within the industry with no vested interest in the outcome of the market conditions we report on or the transactions we support. We do not think it's possible for a company to play the role we play if they're very active or active at all in the marketplace. This sale largely culminates our plans for consolidating our facilities that we've communicated to you at the beginning of last year. In addition, we have moved aggressively to secure long term leases in the current environment of sharply lower rental rates for several of our major offices, including London, New York and Boston. We find facilities there that think long term very affordable numbers.
CoStar closed out the year with an exceptionally strong balance sheet. At the end of the Q4 of 2010, the company had $239,300,000 in cash, cash equivalents and investment on hand, a $7,300,000 quarterly increase and the company has no long term debt. With this successful building sale, we now have more than $320,000,000 in cash and investments on hand and no long term debt. With growing profitability and strong cash flow and more than $15 per share in cash, we now have a phenomenally strong balance sheet to support the company's future growth. It's probably an understatement.
We believe that the domestic commercial real estate information industry is an asset class worth $11,000,000,000,000 in the U. S. And globally is one of the largest asset classes worth in total more than $30,000,000,000,000 Millions of high value leasing, sales and financing transactions are conducted each year. These transactions, as the industry has recently learned can be risky and information intensive. Historically, there has been very little digital information available to support a relatively opaque industry.
It's my firm belief that much of the information the industry has historically relied on has been synthetic or guesstimated. Increasingly, the industry is learning the value of reliable high quality digital information sources and tools to speed transactions, reduce costs and reduce risks. With the market moving into a stronger recovery and CoStar positioned with a leading market position and massive information assets, we believe there's never been a better time to aggressively exploit this enormous potential market for our shareholders and our clients' benefit. We intend to use our strong cash position to support a more aggressive acquisition initiative in 2011. In 2008 and 2009, while the market was plunging, we took a relatively conservative stance by retaining cash and slowing M and A activity.
Currently, we believe that there are just under a dozen attractive strategic potential acquisition targets for CoStar. We intend to pursue several of these targets and believe that these potential acquisitions could create significant value for both our clients and shareholders. As we've demonstrated in the past with PPR, Resolve and many other companies, we look for acquisitions available at reasonable valuations that offer what we believe is a strong strategic fit with an exceptional management team and an innovative product or service with a proven ability to grow and gain market share. It's really important to note that we have a well established track record of walking away from overvalued deals. We have watched for more deals that we could not get a reasonable LOI on than we've ever done.
Among the companies we're considering out there, we're most interested in those that can take a leading market position and accelerate earnings growth by leveraging any or several of CoStar's strategic assets. These assets include our database of research, verified commercial property information, our strong balance sheet, our extensive client base, our advanced technology platform or a highly effective and efficient sales and marketing channel. And with more than a dozen successful acquisitions under our belts, CoStar's management team has extensive experience in acquiring and integrating commercial real estate information related companies successfully. The second area in which we plan to invest 11 2012 is software development. As we stated in our press release yesterday, we see numerous highly leveraged opportunities to drive additional growth in our revenues and earnings by investing in and upgrading our U.
S. And U. K. And French product offerings. In addition, we have several exciting new initiatives in advanced planning stages.
There among other initiatives, they include new and enhanced analytic tools for both CoStar and PPR users, new segment customized versions of our products, for instance, a specific appraiser version of CoStar property or an owner version of CoStar property or a bank version of CoStar property rather than one generic type of product. It includes new service to integrate proprietary customer data with our information to yield far greater insight and faster decision support. Right now, our clients pull data from many, many sources and laboriously move it at significant expense through many different software environments to accomplish their objectives. We believe we can create significant additional value by providing more of these information streams and integrating them more seamlessly with more vital applications, reducing the amount of friction and increasing efficiency and reducing cost. In doing so, we can significantly increase the value clients get from their information by making it much more proactive rather than the way it's reactive today.
Today, people turn to a data source to look up a specific value or solve a specific problem. But through integration applied analytics, information can become proactive, providing a trigger that alerts the user to a change or new development that may be the key to making a better investment or leasing decision. If you look at the entire real estate lifecycle, you see that people need the information at different stages and for different events and are basically having to reinvent the wheel each time they do an analysis or support decision or report. They're reorienting themselves to the market, rebuilding their models and going out and resourcing or updating for this component and that component and so on and so forth. This is a hugely time consuming process and introduces a large opportunity for error.
Examples
of some
of the events that they're doing are acquisitions, development, redevelopment, financing, valuation, leasing, raising equity, portfolio allocation, disposition, fund reinvestment and many, many other examples. If we can provide our customers with a 5% increase in value or a 3 month lead time on a particular market sight, we can create really tremendous value for them and for ourselves as well. We would argue, pointing to our successful recent purchase and sale of our office building that the value can create is a lot more than just 5% on these transactions. There will always be those market participants that stick to the old synthetic or guesstimate data sources and the old manual reactive ways of doing things. So the ones that have the advantage we hope to bring will take them to the cleaners.
There will be a tremendous transfer of wealth in commercial real estate over the next several years is our belief. Our customers stand to be on the right side of that transfer. We are also developing a new next generation version of our core product that will be designed to operate in the mobile environment, including the iPad and perhaps the Motorola's new device and it will enable our subscribers to take CoStar wherever they go. We think these software investments could leverage and further unlock the massive value we have in our proprietary datasets and technology. We believe that they will enable us to capture greater market share and continue the acceleration of
our revenue
growth. Before I turn the call over to Brian, I want to briefly mention and reiterate the landmark verdict in U. S. District Court on password sharing that was rendered in CoStar's favor that we announced in the Q4 on the Friday before Christmas when nobody was reading the press. But both the more than $1,000,000 in court order damages and the extensive media coverage on the case, which actually was pretty good, has been very effective in deterring the sort of illegal password sharing activity.
We have seen a reduction in the frequency of password sharing and an increase in the number of firms and individuals coming forward to subscribe to our services as a result of the significant legal victory. We are committed to doing everything in our power to strengthen the security of our products, to prosecute unauthorized users and to protect the value of being a CoStar client. Fortunately, the technology available today makes it increasingly easy to text that and identify those who engage in illegal password sharing, which in turn helps control the heavy costs associated with data theft and more importantly, the lost revenue opportunity, which we think is pretty significant. Let me close my remarks by saying that I'm very pleased with our company's performance during the 4th quarter in all of 2010. The increasing sales, high renewal rates and strong subscriber growth clearly demonstrate renewed strength in our business.
With commercial real estate markets now in initial recovery mode, we fully expect to achieve higher additional higher margin and revenue growth through the Q1 and well into 2011 beyond. At this point, I'm going to turn the call over to Brian Radecki, our Chief Financial Officer, and he's going to walk you through a discussion of last quarter's financial results, the building sales impact and the outlook of 2011 in more detail. Brian? Thank you, Andy. Take a breath.
As Andy mentioned, we're very pleased with performance in the Q4 and for the year 2010. We delivered excellent results for the quarter and saw positive momentum continue in many areas of the business. Today, I'm going to focus principally on sequential results for the Q4 of 2010 compared to the Q3 of 2010 and also our outlook for the Q1 and full year 2011. We believe the sequential trends offer the most insight into the performance of our business. Our 4th quarter revenues came in at an all time record of $58,200,000 an increase of $1,100,000 over the Q3 of 2010 and an increase of $3,600,000 compared to revenues of $54,600,000 in the Q4 of 2,009.
Our record revenue performance during the quarter was driven primarily by strong net new subscription sales from our core CoStar Suite service offerings as well as by our high renewal rates. International revenues on a functional currency basis was approximately £3,000,000 in the Q4 of 2010, essentially flat when compared to the 3rd quarter. International revenues were 8.2% of the company's total revenue in the 4th quarter. Subscription revenues for the 4th quarter accounted for approximately 93.7% of our total revenues and the number of total CoStar subscribers reached 87,938 at year end, up 11.35 from last quarter. As Andy mentioned earlier, we are pleased to see our renewal rates trend ahead of expectations as demand for CoStar services has been strong.
As of December 31, 2010, our 12 month trailing renewal rate, which is a measure of renewing subscription revenue, was 90.3%, up from approximately 85% 1 year ago and most importantly has now increased for 5 consecutive quarters. We believe this is an important measure of the strength of our business model and we are very excited to see the 12 month trailing renewal rate move back over in quarter renewal rate also remained strong at approximately 91%. Please note the in quarter renewal rate, which is a measure of total dollars renewing in the quarter, does tend to fluctuate from quarter to quarter plus or minus a couple of points. Therefore, we do continue to still focus on the overall 12 month trailing basis. Moving forward, we expect renewal rates to remain strong through 2011 beyond.
Now turning to gross margin. Gross margin was $36,900,000 in Q4 of 2010, up approximately $500,000 compared to Q3 of 2010, while gross margin percentage remained essentially flat at 63.4% in Q4 2010 compared to Q3 of 2010. Moving down the income statement, total operating expenses for the Q4 of 2010 decreased by approximately $400,000 to $29,900,000 compared to $30,200,000 in the Q3 of 2010. Selling and marketing expenses increased about $900,000 in the 4th quarter, primarily due to the increased commission on higher net new sales and customer renewals as well as slight increase in spending and marketing initiatives to drive additional sales growth. Looking at the profitability, net income for the Q4 of 2010 was $3,800,000 or $0.18 per diluted share, up $0.02 compared to last quarter and our non GAAP net income was $6,600,000 or $0.32 per diluted share, both at the high end or exceeding our previously guidance ranges.
EBITDA for the Q4 of 2010 was $10,400,000 an increase of $1,000,000 compared to the Q3 of 2010. And adjusted EBITDA for the Q4 of 2010 was $13,400,000 or approximately 23% of revenue. 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, which is available on our website at www.coastar.com. Turning to the balance sheet. We ended the Q4 of 2010 with approximately $239,000,000 in cash, cash equivalents and investments and no long term debt.
And as Andy mentioned several times, adding in the recent sale of our headquarters building, our cash and investment balance now exceed $320,000,000 Or more than $15 a share. Or more than $15 a share. Now I'll discuss our outlook for the Q1 and full year 2011. Our guidance takes into account recent trends, revenue growth rates and renewal rates, which all may be impacted by economic conditions in commercial real estate or by the overall global economy. Our forward looking guidance reflects our current expectations as of February 23, 2011.
As we have stated many times, our goal is to strike a balance between investing for continued long term growth and delivering short term growth in earnings. We expect for the Q1 of 2010 a range of $58,200,000 to $59,200,000 in revenue and for the full year 2011, we expect approximately $240,000,000 to $244,000,000 of revenue. Continued strong demand demonstrated by our renewal rates over our historical 9% average combined with consistent net new sales growth over the past 3 quarters has given us a high degree of confidence in our annual revenue outlook. Our guidance on the impact of foreign currency exchange fluctuations and our top line results remains consistent. We will not attempt to predict the exchange rate fluctuations and our guidance assumes little to no volatility for this rate.
The average exchange rate for the Q4 of 2010 was 1.58 dollars to 1 British pound and our 2011 guidance assumes a rate of 1.6 for the year. In terms of earnings, we expect the Q1 of 2011 fully diluted net income per share of approximately $0.15 to $0.18 and non GAAP net income per share of approximately $0.24 to $0.28 For the full year, we expect GAAP net income per diluted share of approximately $0.72 to $0.78 and non GAAP net income per diluted share of approximately $1.13 to 1 point $2.5 We expect the Q1 and full year tax rate to be between 42% 44%. As we mentioned in the press release, company's full 2011 outlook includes approximately $5,000,000 in increased expenses associated with the sale and leaseback of the company's headquarter buildings. Additionally, the company expects approximately $2,000,000 of restructuring costs associated with the consolidation of our White Marsh, Maryland facility into our Columbia, Maryland facility in Washington DC offices during the Q2 of 2011. The office consolidation is expected to lead to expense savings of approximately $1,000,000 per year moving forward.
We also expect to continue to make incremental investments, as Andy mentioned, to improve our existing services as well as launching new services. We expect the investment of approximately $4,000,000 to $5,000,000 in 20.11 to accelerate new software development and enhance our existing services in both the U. S. And U. K.
We believe that by timing these highly leveraged investments in the early stages of commercial real estate market recovery, our business will see accelerating revenue and earnings as the recovery continues. In closing, we're pleased with our record quarterly revenue results and the momentum we're seeing in the business. Our business model remains strong based on the fact that we have a 94% subscription based business model with high renewal rates over 90%, a unique proprietary database, market leading position, strong balance sheet, no debt and very high operating cash flow. Last night, as I was writing the script, started looking back just over the past 3 years or 5 years and CoStar has generated over $200,000,000 of operating cash flow, all while continuing to invest in the long term growth potential of the business through acquisitions, which we believe is a clear indication of the strength of the business model. Based on the results over the past few quarters, we believe we are well on our way to achieving the higher organic revenue growth rates and expanding markets and expanding margins that we've enjoyed in the past.
CoStar's management team fully believes there's significant opportunity for additional high margin revenue following investments in software and strategic acquisitions, which Andy discussed earlier. We continue to believe that our business has the potential for rapid growth with the expanding margins, continued strong free cash flow in the near term as we progress towards our long term goal of growing CoStar's business to $1,000,000,000 of revenue at a 30 plus percent EBITDA margin. And we look forward to reporting that progress to you. And with that, operator, I'll open up the call for any questions. We'd like to go ahead and open up the line for questions.
And we will begin with the line of John Maeda with Needham and Company. Please go ahead.
Hey, thanks very much. So it seems Hi, John. Hey, guys. It sounds pretty clear that the end market, the CRE market, at least that the investment grade level is improving and the outlook seems pretty bright. So I wanted to focus less on that and more on kind of the M and A strategy.
And in particular, I wanted to get a sense as to how you prioritize looking at sort of traditional license based on premise software companies versus information services? And then were you to execute an acquisition of a traditional license on premise type software company, would the goal be to over time migrate that platform to a hosted platform in a subscription revenue model?
It's a good question because you obviously have been researching trying to figure out what those dozen plus companies are and there are companies that are on premise licensed software platforms that could have strategic value to CoStar Group. Without a doubt, without any doubt at all, we would take any such acquisition and migrate it to a web based SaaS model and would invest a reasonable, but not unreasonable amount of money in doing that as quickly as possible. Our interest in companies like that is not so much because we want to be in the software business, it's because the software moving the data in and out of that software is a major pain point for our customers. And by seamlessly integrating our data into these software environments, we can make our information much more relevant and much more valuable to our customers. So I look at these on-site licensed software products as very nice razors that can help us sell an awful lot more razor blades over time.
So these are venues for accelerated information sales in a subscription model.
Got it. Okay, that's helpful. Thanks, Andy. And Brian, could you give us a sense as to what I think you had some revenue contribution from TELUS in Q3. I'm not sure if you had any at all in Q4 if that's gone entirely now?
Yes. The TELUS impact, I guess we didn't discuss that in the call. We did lose that in the 4th quarter, it was $200,000 $300,000 of lost revenue. Annually, the contract was approximately $1,000,000 So it did affect the revenue in the quarter and renewal rate. The renewal rates in quarter would have been up another 1.5% or so, would have been even much stronger if we didn't lose that contract.
So that definitely had an impact. So once every major cycle, we gain some sort of federal contract to support recovery. And then when recovery emerges, we lose it. And that's an example of that. It was a significant amount of money, but it's good news to lose it.
Got it. That's it for me. Thanks very much, guys.
Thank you very much. Thanks, John.
And next we will go to the line of Brandon Dobell with William Blair. Please go ahead.
Hi, guys. Good
morning. Good morning. Good morning. Good
morning. Exactly. Andy, if you could characterize maybe your level of comfort or confidence in the productivity of the sales force that's been around for a year or 2, are you happy with how those guys are performing? Maybe contrast that with your level of confidence or comfort around how the new guys are performing relative to what their quotas are, what their benchmarks are or what your expectations were when they were hired?
Sure. Right now, we're seeing obviously, we've been doing this for a while, and I'd say that right now, we're in the upper side of performance for the sales force. I'm actually quite happy with where we are overall in productivity on both the established salespeople and the more junior people. More importantly, I think that we are getting a group of sales managers that are giving us a little more strength in the middle of our management organization sales, which is very important on a widely dispersed national international sales organization. I have to say that the quality of the new recruits we've been bringing on board to our sales force is outstanding.
We're getting the resumes and experience level of the people that are joining us now is miles beyond what we were able to hire 5 years ago. So we're bringing people on board today who already have extensive commercial real estate experience, have sales experience. Often they may have advanced degrees, they understand DCF, they understand econometric modeling, and they're very fluent with that. And I think that these people have a lot of long term potential. At the same time, when you look at those 4th quarter 10% 4th quarter over 3rd quarter showcase sales, that came entirely from our centralized or almost entirely from our centralized sales force, which is also performing quite well, is fully staffed.
And so I think we've got a sales force right now that's well positioned to gain productivity really on the strength of the improving economy. Remember, we're talking all about how we're seeing recovery. We're seeing the clear signs of emerging recovery. We're not in a healthy commercial real estate market. We are in a market that's showing indications of solid improvement, which is usually predictable long term trend.
So their productivity will increase, I believe, will increase significantly as the vacancy rates really start to come down over 13% and they could become significantly more productive when you start moving below 11%. So I'm pretty happy with the group we've got and we've got some good tenure and the turnover rate is relatively low and the managers are making responsible decisions on their own to keep that quality level high. Maury, you wanted?
Yes. No, that's good. You mentioned earlier you thought you had a stable sales force headcount. Are there any assumptions in the 2011 guidance for growing that headcount or is it just more productivity that's going to get you the increased revenue base?
I believe we have some additional 1 or 2 senior management positions that we're adding in there in the guidance and I believe we have about 10, 11 additional financial sales reps. So these are people who will target investment banks, major banks, major owners. So we have growth there, but it's single digit growth, it's not double digit growth, it's not triple digit growth certainly.
Okay. You mentioned Showcase and the performance there. How has the upsell from that product for people who've been using it 6, 12 months, How has that been recently? Or is it meeting your expectations?
It is it does have an awful lot of potential. We set up a group to do that, I believe 4 months ago. So we took some of the people who were successfully showing selling Showcase and I believe the number was that 70% of the people buying the individual Showcase subscriptions were not CoStar Properties subscribers. So we felt that that represented a huge potential upsell. Now these people are all over the United States and secondary tertiary secondary markets in the United Kingdom.
So we set up this group to go after those folks and from a centralized sales group sell them the information products. They've geared up and I believe and I this is anecdotal. I'm not certain the numbers here. Actually, hold on one second. I think I have signed right here.
And I have to confess this is the first earnings call where I've used these reading glasses. You see it there? Yes. So we had that group had 0 sales in the Q2 of 2010. They had a little over 100 and some 1,000 in the Q3 and it increased 25% quarter over quarter going into the 4th quarter.
So I think that group will I think that will be a story of continuing growth and it's revenue we wouldn't have seen before. So it is working and it will move more staff in there. The problem is you can't grow it too fast or you lose quality.
Final question for me. Can you remind us again of the let's call it the product roadmap for analytics and working those into the core product and you're kind of making all one big happy family? And has there been any changes in the types of things that you're targeting to roll out or the timeframe under which you expect those to be able to hit the market with full force?
Sure. We have been in a process this 1st year with PPR and the analytics product of synchronizing our data sets. So PPR was tracking the market from the top down and we were tracking the market from the bottom up. PPR was not using our datasets since they were a competitor prior, thankfully. They're not using our data sets.
So we've been in a process in rebuilding all the forecast that PPR does, the performance forecast, the vacancy forecast and the analytics reporting, we've been rebuilding that using the CoStar data. We've made an awful lot of progress doing that. We replaced all the comps data in the PPR product line. And through significant effort, we anticipate that we will complete that integration of data providing totally consistent data allowing you to go from 60,000 feet down to the granular data on the ground. We'll complete that this summer.
Once that's done, that will open up a window for a whole lot of product opportunities. And what we're working on doing is creating a special owner version of the product that takes the forecasting and analytics that PPR is doing and it takes it from being something that's really appeals to the Global 24 Capital allocators down to a much broader audience somewhere between the traditional CoStar user and the traditional PPR user, which I think is the thick part of the market and beginning to bring the first products out at the end of 2011. But the product roadmap is extremely robust and is probably something that occurs over a dozen product releases, initially tying forecasting data, analytic data to granular on the ground data, then trying to get much more detail at the local market level to appeal to the those folks managing multi $1,000,000,000 portfolios in a specific city. We want to prioritize that roadmap tying this stream of data into the customers' own data. I think that will at least double the value of our products to the customer if the data flows into them and allows them to proactively see trends.
We also want to bring our Propex product, our U. K. System that the majority of investment grade sales in the United States I'm sorry, the majority of investment grade sales in the United Kingdom goes through this prophax introduction system. We want to bring that to the United States and integrate that with the PPR offering. We think that will allow our customers to actually conduct Efficient Frontier sort of portfolio modeling.
So we have a very robust roadmap and a bunch of talented people who are very excited to work on that map. So it's the first things you'll see are this summer, they'll be subtle, but very important. And then you'll see additional product at year end. You'll see a product offering that we're not talking a lot about this summer. We expect to bring a product offering out on the brokerage side, which we think will we're hoping we'll get rave review from the brokerage community and drive penetration there.
So we're really gearing it up as you know. I mean we're ramping up the investment. We've built a product design group. We're looking at acquiring a couple of strategic components to fit into this roadmap. And it's something that I think is appropriate for the balance sheet, the opportunity and the expansion for next 5 to 6 years that we hope we see.
Thanks. You're welcome.
Next, we will go to the line of Bill Warmington with Raymond James. Please go ahead.
Hi. This is Bethany Castor in for Bill Warmington. Congratulations on the good quarter.
Thank you very much.
Just a couple of questions regarding your EBITDA margins. In what range do you expect to exit the year?
We're not really giving guidance on EBITDA margin ranges we're going to exit the year, but I can tell you about the general trends. I think that as we talked about in the call, we are looking at investing in software development both this year and next year. We're also projecting growing revenue, which will drop to the bottom line. So I think as we move throughout the year, in the beginning of the year, we've got some investments where we're now reimplementing salary increases for the company. We're doing things obviously for the long term there.
I think by the midpoint to the end of this year, you'll start to see growing margins again. And then throughout next year, even with the software development, you'll continue to see the growing margins pretty much throughout next year. And I think you'll start to see them ramp up more significantly towards the end of next year exiting. So I think that we're definitely still focused on the 30% margin that the company has been talking about over the next few years.
Okay. Thank you. And one last question. You talked about adding a sales force for financial clients. Have you instituted any other changes to sales force compensation that would put more emphasis on volume or pricing or cross selling than in previous years?
Or is your focus for 2011 mostly on building up your roster of financial clients?
Well, we the building of the roster financial sales capability, that's a continuation of a process we began several years ago and the ramp up is significant. We probably anticipated doubling of that group. So it's big and important. In terms of what we've changed in the last quarter of 2 and focus on compensation, there has been a pretty significant change. And that is we've shifted the sales force compensation more towards purely compensating more to the side of purely compensating them for net growth in revenue.
And this basically is a signal that we believe we should be seeing stronger consistent net revenue growth. So at the back in 2008, when we knew the wheels were going to fall off of commercial real estate train, we shifted the compensation to a little bit towards gross sales, not net sales productivity and we shift the compensation towards heavier emphasis on usage, so that we would retain customers through the downturn, knowing that we couldn't hope to really grow net revenue at a meaningful pace in a really bad market. So this transition back to more net compensation, not gross compensation on revenue growth is an indication that we're sort of a little bullish about where the plan looks for 2011.
Okay. Thank you very much and that's all for me.
You're welcome.
Next, we will go to the line of Ian Gordon with B. Riley and Company. Please go ahead.
I wonder if you can talk about how much of the incremental investments are related to international, what you see as the opportunity for the next couple of years and or any of the dozen or so deals you're looking at companies that are based internationally?
Okay. So I'll start with international investments. So yes, I mean we are the software development investments are happening both here in the U. S. And in the U.
K. Last year U. K. Had about $3,000,000 EBITDA loss. A couple of $1,000,000 of that was a settlement with Nokia.
We're expecting them to be around the same loss this year. So instead of investing in Nokia, we'll be investing in our software development over there. So it is a fairly significant investment into the U. K. Into software and services, which we believe will yield much higher revenue growth next year and in the following year over
in the
UK. The yes, so it's basically split more towards here. Correct. More towards domestic. Correct.
But the but you get tremendous opportunity in the United Kingdom. We have an awful lot of impact in that market now. We believe we're number 1 in that market from being not even measurable on the radar screen with the customer base in 2,003 to being the clear leader. But what we've never done is we've never made a significant investment in software in the United Kingdom in order to move their products set to the same quality level and impact as the U. S.
Set, we're now doing that. And once we do that, we think that'll give us that coupled with recovery over there will give us margin expansion that makes that look like a great investment. In terms of the acquisitions we're looking at, our heart is not with trying to acquire companies in Italy that give us a presence in Rome. The what we're really interested in is what we're really interested in doing here is moving our information much more effectively through the kinds of software tools our customers need, things that get us closer to what we think is a tremendous segment, the owner side of the market or acquisition targets allow us to get more effectively into the to continue to grow our successes on the retail side of commercial real estate. There are I don't want to play 21 questions because people start to infer things.
But the there could be companies a lot of soft anything you touch that's got software is going to have some sort of international presence, but the goal is not to our goal is not to do an awful lot of opening up new cities overseas through acquisition. That's not the strategy.
Got it. Thank you.
You're welcome.
Next, we will go to the line of Brett Huff with Stephens. Please go ahead.
Good afternoon, Andy and Brian.
Good afternoon, Brett.
Couple of follow-up questions. Number 1, just on the long term goal, since you guys have started talking about a couple of different kinds of EBITDA, is the 30% long term goal just regular or pro form a EBITDA? It's regular. Okay.
That's what
I thought. And then, I missed the first little bit of the call, so I apologize if you addressed this. But can you just give us an update on how the you talked a little bit about the integration of PPR in the Q and A, but any update on Resolve? I know that was a fairly big undertaking to move some of that functionality or you're looking to move some of that functionality from sort of software to software as a service. Any update on that?
Sure. To be honest with you, we were sequencing. We were sequencing focusing on coming up with a roadmap for PPR and the integration of the data sets and rationalizing that because the strategy with resolve requires feeding CoStar and PPR forecasting through their products and services to their customers. And you really couldn't achieve that until you had CoStar and PPR integrated. So we've been doing a lot of planning there and had a very active agenda, but we don't expect significant product releases till next year on that.
There have been some minor integration successes, so people can access PPR reports through resolve of their customers, things like that, but not the sort of big picture grand strategy things we're looking for at this point. I mean, we're that's still in the future. And Brad, on the subscription sales, when we bought them, they were pretty much typical selling licenses versus subscription and we've been slowly moving them towards more of a subscription model with some implementation. I don't have the number in front of me, so I'm going to guesstimate, but I would say where they really had very little, if any, subscription sales, they did have a little bit of maintenance. Now they're up to almost probably, I'm guessing, about half is subscription or maintenance or even possibly more and that will continue to grow this year.
So I think we're definitely already in that process. It's been a good year as far as moving them more towards a subscription based model and less away from license model. Yes. Now unfortunately, that doesn't give you the sort of fast financial impact result you're looking for. It takes your recognized revenue down initially, but it's relatively small.
So we're just doing that and we'll do that with anything we acquire in the software side, we'll take them to a SaaS model. And a lot of the things we've done with the resolve this year are very straightforward blocking and tackling like we've relocated them under one roof with so we've consolidated PPR, CoStar and Resolve into one office facility in Boston. It may sound like a little thing. It's actually a big thing. It enables you to begin this sort of complex interaction you have to do to create the integrations you're trying to achieve.
Things like increasing their sales force. So we've done all those sorts of things. So we're making progress there.
And is the I know that there is a lot of complex data coming in, not just from you guys, but from the actual clients themselves. And how is the client base responding to not having something on premise as much and having it more outsourced? In general, is that something they like or what is their perception of that?
The great thing is people just think it's complex. It's actually fairly straightforward. We haven't actually moved it into the cloud yet. It is still largely residing on their servers. And that's something that Resolve designed their product to have it reside on their clients' servers.
Simulink has resolved it and have the capital structure to buy a big hosting facility or manage a hosting facility. So Resolve was trying to control its costs. We actually believe that the customers would just assume have it be in the cloud. Most of the customers would have it presume have it be in the cloud. They're not massive.
When you really get to reality, there's not massive differences in the security of it. And the convenience is huge being able to implement much quicker if you're doing a cloud solution rather than setting up servers like an awful lot of the implementation time on Resolve is the client setting up hardware and server environments and the like. So we'll move it to the cloud in one of the next several releases.
That's helpful. And then last question on product for me. How is CoStar Lite going? And I think the introduction of that was sort of in the fall, if I remember right. And can you just give us an update on that, how the sales are going?
How the pricing is looking? What the competitive nature is in the sort of secondary and tertiary markets you guys are focusing on? And are you still as optimistic on the low hanging revenue fruit there?
Sure. And I want to sort of we're optimistic. I mean, I mentioned, I would put that earlier comment talking about the 25% quarter over quarter increase in sales of that sort of low end product area. Yes, we're picking up good headcount there. We've got positive net new subscriber growth in the 4th quarter, strong subscriber growth.
That low end solution is a part of that. I guess you could say that some of those are competitive wins. So we'll continue that strategy, but to be honest, I'm really much more focused on picking up the $1,000,000 accounts than the $500 accounts. I think there's a lot more I think the section of revenue is up at the institutions managing $1,000,000,000 who have piles of MBAs just pushing data back and forth and not meeting their analysis expectations, because it's just so hard to do. So we're much more focused on bringing that ultra high value customer solutions that they that will give them 5% advantage on a multi $1,000,000,000 portfolio.
Okay. That's what I needed. Thanks for your time.
Yes. Thank you.
Next we'll go to the line of Chris Malone with Deutsche Bank. Please go ahead.
Hi. This is Vasu Gogol for Chris. Thanks for taking our question. Can you give us some color on what the CapEx and free cash flow generation was in 2010 and what your expectations are for 2011?
Sure. The free cash flow is approximately $40,000,000 in 2010 with CapEx of about 14,000,000 dollars more than half of that is sort of facilities related. In 2011, we expect the free cash flow to be approximately the same amount or even higher than that with CapEx back down to a more normalized range of let's say, dollars 6,000,000 to 9,000,000
dollars Great. Thank you. And then can you give us some color on what the renewal rates would have been excluding Showcase? And have these rates peaked? Or are you contemplating further improvements in your 2011 guidance?
I think renewal rates are going to continue to improve in 2011. Showcase is sort of for the subscription piece of it, it's included in the subscription renewal rate, the renewal rates for subscription services. And we do again expect that to keep improving as we move into 2011 through recovery. Yes. And it's important to note that compared to other companies in our industry, our subscription rates are dramatically higher.
So the showcase and the information subscription numbers are pretty darn high, so 90 some percent overall, 96% for clients 5 years plus. Remember, we do not exclude bankruptcies from that renewal rate. We don't exclude death or the like. So it's difficult to get above 96%, because that implies 50 year career terms in some of these small businesses. So we'll get some improvement, but just like DSOs can't go below 0.
We can't get we can only improve another point or 2. Yes. And again, our renewal rates are based on renewing dollars. So it's sort of a true renewal rate. It's not based on the number, it's based on the dollar.
So if we were to lose a big client like the TELF, did see the impact of that in the quarter for about 1.5%. We still were over 90%. We do expect that to continue to be high through 2011.
Great. Thanks. And one last housekeeping question. I'm just trying to understand why you've used a 40% tax rate for making the non GAAP EPS adjustments, The tax rates have generally been in the 40% to 44% range over the last few years.
Yes, I do expect the tax rate to continue to come down over the next few years. Tax rate is a little bit over 40%, because we're investing internationally. So we're not getting the benefit over there. So the tax rate appears higher. The cash tax rate is actually much lower than that.
So I do expect that to come down. So it's more of a long term, what do I think long term historically, I think the rates will be.
Great. Thank you.
Thanks, Chris. We appreciate that.
Next, we'll go to the line of Toni Kaplan with Morgan Stanley. Please go ahead.
Hi. Thanks for taking my question. Thank you,
Teddy.
Back on M and A for a second, are there any areas in the product portfolio that you're looking to build up in terms of content or areas that you're not in that you'd like to be in?
Oh, definitely. But they're all everything we're looking at, everything we're interested in doing is something where we already have a connector. So we would be looking for taking steps into adjoining squares, not leapfrogging into areas we're not already in. The good news is the footprint is pretty broad at this point and there's an awful lot of opportunities to pick up parallel information or content streams where we already have a substantive amount of content around what someone else is already doing and we join their content and we have a whole lot of free content that we can leverage, join with their content and create a very competitive offering. So in a lot of instances, there might be a competitive zone of content that we're not in today, but by joining our content with their content, we can make them the clear market leader and create competitive advantage that's just really compelling in their space.
So we're looking for that kind of thing.
Okay, great. And just wanted to get your take on how valuations are looking overall right now?
Valuations? Well, we spend we still spend an awful lot of time people with people who believe their school in Google or Facebook or whoever. But generally, folks are fairly reasonable and there are enough opportunities out there that you can work with the people who are reasonable and walk away from the people who are unreasonable. In some cases, there might be some more back and forth if there's one strategic asset in a zone, but we're trying to stay within our historical boundaries, which have been reasonably conservative given our industry and the size of the opportunity we're pursuing.
Okay, great.
And then
And our track record, I think is 20 and 1, one goof and 20 successes.
That's pretty good. And then moving on to pricing and last year you mentioned that you were implementing price increases just above inflation. Do you plan to accelerate that this year? And how much of your growth do you expect to come from pricing versus volume cross selling, etcetera?
I think the vast majority of our revenue growth will come from an improving market conditions and budgets opening up from people looking to adopt some of the new software we're bringing out. I think a lot of our growth is going to come from people whose budgets had to be trimmed and they had to cut our services. Now their budgets are getting a little healthier and they're coming back to us. We see a lot of that people who canceled last year are resubscribing. Having said all that, price increases will be a component, a small component of our increase.
We have people who have seen only CPI increases for 10 years on their services and perhaps and we did no increases whatsoever for the prior 2 years. And these folks are folks who bought a very different product 10 years ago. They bought a product with maybe 100,000 properties for the United States. Now we have 3,500,000 maybe just had office. Now it's got all the product types.
The number of data fields has probably double, tripled. The software functionality is probably quadrupled. So really I think our CPI shouldn't be the same as the as a typical Commerce Department Service with CPI. I think we could probably be a little more aggressive than CPI and still be extremely fair and extremely reasonable. So our goal would be to recapture some of the investments we've made over the years, but certainly nothing that approaches double digit.
Yes. And Tony, we're just starting to roll those out and we will roll those out all year long. So we really as Andy said, we don't expect very much of the revenue growth to come from that this year, 1% or 2% at tops, because you're rolling it out on 112th with clients roll the contract. So I do think that what you will see is you will see a bigger impact from it in 2012 and 2013 both because you'll have a full year of it also because as markets continue to recover, as Andy said, I would expect to see something somewhat higher. So I think we probably want to adopt inflation rates that look more like the schools where I send my kids and the colleges out there, their version of inflation rates.
Sounds good. Thanks so much.
You're welcome.
Next, we will go to the line of Jim Wilson with JMP Securities. Please go ahead.
Thanks. Good morning, guys. It's been a long call. So I'll just ask one question.
We were here for your questions, so take
your time. You're patiently waiting. Okay.
And we're the only ones left on the call, so take your
time. Okay. If you think about or as you discuss prospects and what's needed with bigger customers, so I'm thinking banks, Wall Street that are looking for the powerful analytical tools. What do they tell you they need to put in place to get you some big contracts with them? Obviously, you've got contracts with many of them already, but what do they really want to see?
What are they looking for that will so you can come out and say on a call somewhere, boy, we landed a really big contract with BofA or somebody?
Well, I think it's relatively straightforward. I think integrating Resolve like products with PPR and CoStar content with a strong local coverage of the top 20 MSAs would allow you to hit those 7 digit contracts. And some of it's not just what these major clients are looking for, in some cases what regulatory bodies might be looking for. So one of the things that's really stunned us in this downturn is how little information lenders actually have about what they've lent money on. And I think there'll probably be a trend towards these folks trying to have a clearer view of where their commercial assets are.
So just doing the basics of integrating Resolve, PPR and CoStar into a solution that integrates our forecasting and actual data against the customer's own data and putting that into a discounted cash flow context where people can use our rent growth and contraction indexes and cap rate growth index indexes and time on market indexes against their portfolio to get an automated refresh of their discounted cash flow analysis on a portfolio level, I think that's the big one. Now, this is something we'll work on throughout 2011. I don't realistically expect we'll deploy those sort of sophisticated integrated systems until 2012. But we've met with a number of these prospects and the communication is clear. We they're giving us a positive indication of what our roadmap looks like and now it's just our job to deliver on that roadmap.
Okay, great. And I guess just do you think you'd actually beta test any of these or anything else you'd announce earlier with the idea of still some kind of full contract to occur in 'twelve?
I think we would probably be deploying in 2012 and I think the limiter would be I think we could probably sell more than we could implement. I think that some of the lead major customers would be very hands on, very we develop it very closely with their guidance. But I don't think there'll be an extended beta cycle. I think it'd be more of an initial couple of installations and evaluation and then an expanded rollout.
Yes, a little more customized, okay.
Yes. Now we're also at the same time, we're going for a mid level solution too, which targets that fairly typical owner in the United States that operates the single city level with a $1,000,000,000 portfolio. And there's really no good solution for them right now. And that one does not have a big implementation. That one is shrink-wrap delivery SaaS, which is an oxymoron, but
Okay. All right. Great. Thanks.
Thank you very much, Jim. You have a good day. So I believe that's the last call we've got here. And I would love to thank you all for joining us for the Q4 call and we look forward to updating you on our progress in the next earnings call.