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    CoStar Group Inc (CSGP)

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    Business Description

    CoStar Group, Inc. (CSGP) is a leading provider of information, analytics, and online marketplaces for the real estate industry, primarily operating in the United States and the United Kingdom. The company offers a comprehensive real estate database and operates a prominent online marketplace for real estate and apartment listings, catering to various commercial property types such as office, retail, industrial, multifamily, commercial land, mixed-use, and hospitality . CoStar Group's principal product lines include CoStar, Information Services, and Multifamily, with subscription-based services accounting for a significant portion of its revenue .

    1. CoStar - Provides a subscription-based platform offering commercial real estate intelligence, including data on properties, tenants, and market status.
    2. Multifamily - Offers advertising services for rental units through its flagship brand, Apartments.com, and earns transaction-based revenue from tenant applications and rental payment processing.
    3. Information Services - Delivers real estate and lease management solutions, along with benchmarking and analytics for the hospitality industry.

    Q3 2024 Summary

    Initial Price$73.93July 1, 2024
    Final Price$74.65October 1, 2024
    Price Change$0.72
    % Change+0.97%

    What went well

    • CoStar Group expects growth to accelerate in 2025 for its core businesses like CoStar Suite and LoopNet, due to improving market conditions and the reallocation of sales resources back to these core products.
    • The company is significantly expanding its sales force, which is expected to drive increased sales and growth in the coming years.
    • The refocusing of the sales team on core products has already led to an uptick in sales, indicating strong potential for future growth.

    What went wrong

    • Decline in net new bookings may impact future revenue growth. The company reported that core bookings were down 34% in the quarter and 38% year-to-date, which will mechanically translate into lower revenue in the following year.
    • Sales force productivity issues due to Homes.com launch may negatively impact overall sales. The reallocation of the sales force to focus on Homes.com resulted in lower productivity, lower service skills, and suboptimal value propositions, causing lower overall productivity and renewal rates.
    • Reduced revenue guidance for the residential segment and concerns about seasonality. The company reduced its full-year revenue outlook for the residential segment, expecting revenue to approximate $100 million, and there are concerns about seasonality affecting renewals in the Homes business due to short-term contracts.

    Q&A Summary

    1. Core Bookings Decline Impact
      Q: Weak bookings down 34%—impact on future revenue?
      A: In our subscription business, net bookings translate into revenue the following year. The 34% decline in core bookings this quarter  will affect 2025 revenue. We're reengaging the sales force and investing in them. Watch our net bookings in Q4 and early next year, which will influence growth into 2026.

    2. Growth Outlook for Core Businesses
      Q: Outlook for growth in CoStar Suite and LoopNet in 2025?
      A: We're optimistic about growth in 2025 as the market improves. Early signs in the office market should shift from a headwind to a tailwind, benefiting us. There's ample room to grow among brokers, corporations, and institutions, and growth will be easier in a better market.

    3. Homes.com Investment Levels
      Q: Will investment in Homes.com affect margins next year?
      A: We launched Homes.com with aggressive investment appropriate for its scale. We don't see a need to increase investment in marketing or Homes.com next year. Margins should stabilize as we've passed the low point in net investment.

    4. Marketing Spend Reduction
      Q: Will Homes.com marketing spend decrease next year?
      A: We anticipate a 33% reduction in Homes.com Super Bowl ads this year. While marketing spend may decrease, we'll significantly grow the sales force, so overall investment levels will remain similar.

    5. Reengaging Sales Force
      Q: How is shifting sales focus back to core products going?
      A: We've seen an uptick in CoStar sales recently as salespeople refocus on core products. Previously, selling Homes.com distracted them and affected productivity. By 2025, 100% of legacy sales teams will be back on their products, reenergizing growth.

    6. Homes.com Seasonality and Renewals
      Q: Is seasonality affecting Homes.com renewals?
      A: The main issue wasn't seasonality but launching a new product with limited training. Some customers misunderstood the value proposition. However, we're showing a 50% improvement in win rate on new listings, providing adequate ROI. NPS scores are improving, and we expect agents with consistent listings to be high renewal subscribers.

    7. Sales Force Capacity for Homes.com
      Q: Is reduced guidance due to sales force issues or demand?
      A: It's about sales force mechanics, not client demand. We're hiring many salespeople for Homes.com. A high percentage are ramping up quickly, but there's a limit to how many we can hire and train effectively.

    8. Patience with Homes.com's Progress
      Q: How patient should investors be with Homes.com's progress?
      A: Building a $1 billion product takes time; it doesn't happen in seven months. We're seeing growth in consumer awareness, site preference, and a shift in the industry. Positive sales metrics and improving NPS scores indicate we're on the right path, but it may be next year before success is evident to everyone.

    Guidance Changes

    Quarterly guidance for Q4 2024:

    • Other Marketplaces Revenue: Similar in Q4 to Q3 (no prior guidance)

    Annual guidance for FY 2024:

    • Full Year 2024 Revenue: $2.72B to $2.73B (lowered from $2.735B to $2.745B )
    • Adjusted EBITDA: $205M to $215M (raised from $195M to $205M )
    • CoStar Product Revenue Growth: 10% (no change from 10% )
    • Apartments.com Revenue Growth: 17% (no change from 17% )
    • LoopNet Revenue Growth: Mid-single-digit (no change from mid-single-digit )
    • Residential Revenue: ~$100M (lowered from $105M–$110M )
    • Information Services Revenue: Modestly higher than $130M (no change from $130M–$135M )
    • Contract Renewal Rate: 91% overall, 95% for long-term subscribers (no prior guidance)
    • Subscription Revenue on Annual Contracts: 80% (no prior guidance)
    • Pending Acquisitions: No financial impact from pending acquisitions included (no prior guidance)

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Andrew C. FloranceFounder, President, and CEO1987Andrew C. Florance founded CoStar Group in 1987 and has been serving as a director since then. He has led the company from a start-up to a market-leading position, including its IPO in July 1998 .
    Scott T. WheelerChief Financial OfficerJanuary 2016Scott T. Wheeler has been the CFO of CoStar Group since January 2016. He previously held senior financial roles at Experian plc and worked at Avery Dennison and General Electric .
    Lisa C. RugglesSenior Vice President, Global OperationsNovember 1999Lisa C. Ruggles joined CoStar Group in November 1999 and has held various roles, becoming Senior Vice President, Global Operations in 2022. She has been key in launching CoStar's research coverage in multiple markets .
    Frederick G. SaintPresident, Marketplaces2000Frederick G. Saint joined CoStar Group in 2000 through the acquisition of LoopNet. He became President, Marketplaces in September 2018, overseeing product, marketing, and business development .
    Frank A. SimuroChief Technology OfficerDecember 1999Frank A. Simuro has been with CoStar Group since December 1999, initially as Director of Information Systems. He became CTO in March 2015, focusing on operational efficiency and database technologies .
    Michael J. DesmaraisChief Human Resources OfficerJuly 2019Michael J. Desmarais has been the Chief Human Resources Officer since July 2019. He previously held senior HR roles at Goldman Sachs & Co. and began his career in public accounting .
    Jonathan BoxerGeneral Counsel and Corporate SecretaryMarch 2022Jonathan Boxer joined CoStar Group in March 2022 as General Counsel and Corporate Secretary. He has extensive experience in legal and compliance functions, mergers and acquisitions, and enterprise risk management .
    Christian M. LownChief Financial Officer and Principal Financial OfficerJuly 1, 2024 (expected)Christian M. Lown will serve as CFO and Principal Financial Officer starting July 1, 2024 .
    Rich SimonelliHead of Investor RelationsJuly 11, 2024 (expected)Rich Simonelli was appointed as Head of Investor Relations on July 11, 2024. He rejoined CoStar Group from Compass, having previously held a similar role at CoStar for nine years .

    Questions to Ask Management

    1. "Given that core bookings were down 34% in the quarter and 38% year-to-date , how do you anticipate this will impact revenue growth in 2025, and what strategies are you implementing to mitigate these headwinds?"

    2. "With the aggressive investment in Homes.com already impacting margins , can you provide more clarity on how next year's investment levels will trend relative to this year, and what impact this will have on overall profitability?"

    3. "You have set ambitious targets to expand the Homes.com sales force to over 600 by the end of 2025 ; what challenges do you foresee in scaling the sales team so rapidly, and how will you ensure consistent sales productivity and effective onboarding?"

    4. "Homes.com operates in a highly competitive market dominated by established players like Zillow and Realtor.com ; what specific strategies are you employing to capture market share from these entrenched competitors, and how sustainable is your current growth trajectory?"

    5. "While Homes.com's unaided awareness and Net Promoter Score have increased significantly , how are you translating this increased consumer engagement into meaningful revenue growth, and can you provide evidence that this is leading to higher sales conversions for your agent members?"

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Full Year 2024 Revenue: $2.72 billion to $2.73 billion, growth of 11% .
      2. Adjusted EBITDA for 2024: $205 million to $215 million, $10 million higher than Q2 guidance .
      3. CoStar Product Revenue Growth: 10% growth .
      4. Apartments.com Revenue Growth: 17% growth .
      5. LoopNet Revenue Growth: Mid-single-digit growth .
      6. Residential Revenue: Approximately $100 million .
      7. Information Services Revenue: Modestly higher than $130 million annually .
      8. Other Marketplaces Revenue: Similar in Q4 to Q3 .
      9. Contract Renewal Rate: 91% overall, 95% for long-term subscribers .
      10. Subscription Revenue on Annual Contracts: 80% .
      11. Pending Acquisitions: No financial impact from pending acquisitions included .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      1. Adjusted EBITDA Guidance: $195 million to $205 million for FY 2024; $47 million to $52 million for Q3 2024 .
      2. Commercial EBITDA Margin: Around 41% for the year .
      3. Revenue Guidance: $2.735 billion to $2.745 billion for FY 2024; $692 million to $697 million for Q3 2024 .
      4. Residential Revenue Guidance: $30 million for Q3 2024; $105 million to $110 million for FY 2024 .
      5. Apartments.com Revenue Growth: 17% for FY 2024 .
      6. CoStar Revenue Growth: 10% for FY 2024 .
      7. LoopNet Revenue Growth: Mid-single-digit growth for FY 2024 .
      8. Information Services Revenue: $130 million to $135 million for FY 2024 .
      9. Other Marketplaces Revenue: Relatively flat for Q3 and FY 2024 .
      10. Exit Rate EBITDA Margin Target: 15% to 16% .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      1. Revenue Guidance: $2.760 billion to $2.770 billion for FY 2024; $674 million to $679 million for Q2 2024 .
      2. Adjusted EBITDA Guidance: $185 million to $205 million for FY 2024; $5 million to $10 million for Q2 2024 .
      3. Segment Revenue Growth:
        • Apartments.com: 17% for FY 2024 .
        • CoStar: 10% for Q2 and FY 2024 .
        • LoopNet: 5% to 6% for Q2 2024; mid-single digits for FY 2024 .
        • Information Services: $130 million to $135 million for FY 2024 .
        • Other Marketplaces: Flat for FY 2024 .
      4. Residential Revenue: 180% total growth, 105% organic growth for FY 2024 .
      5. Contract Renewal Rates: 90% overall, 94% for long-term subscribers .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024
    • Guidance:
      1. Revenue: $2.75 billion to $2.77 billion for FY 2024; $645 million to $650 million for Q1 2024 .
      2. Adjusted EBITDA: $170 million to $190 million for FY 2024; negative for Q1 2024 .
      3. Residential Revenue: $110 million to $120 million for FY 2024 .
      4. Capital Expenditures: $800 million for FY 2024 .
      5. Net Interest Income: $200 million for FY 2024 .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Google - Mentioned as a potential competitor due to its far-reaching web presence and substantial data aggregation capabilities, which could allow it to enter the commercial real estate marketing arena .
    • Zillow - Already has a presence in residential real estate and the apartment rentals industry, and could use its resources to further expand in the online apartment rentals industry, creating greater competition among internet listing services .