CoStar Group - Earnings Call - Q1 2011

Transcript

Speaker 6

Ladies and gentlemen, thank you very much for standing by. Welcome to today's CoStar Group's first quarter 2011 and LUPNet's first quarter 2011 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions given at that time. If you require any assistance during today's call, simply press star then zero on your phone keypad. As a reminder, today's conference is being recorded, and I would now like to turn the conference over to our speakers today: CoStar Group Founder and Chief Executive Officer, Mr. Andrew Florance; LUPNet Chairman and Chief Executive Officer, Mr. Richard Boyle; CoStar Group's Chief Financial Officer, Mr. Brian Radecki; LUPNet Chief Financial Officer, Mr. Brent Stumme. I will now turn the conference over to our first speaker today, CoStar Communications Director, Mr. Tim Trainor. Please go ahead, sir.

Speaker 2

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on such short notice, but we couldn't wait until tomorrow to share the major acquisition news we announced today and to report the first quarter results for both CoStar Group and LUPNet. Before I turn the call over to CoStar Group's Founder and CEO, Andrew Florance, let me state for the record 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. The important factors that can cause actual results to differ include, but are not limited to, those stated in our press releases on CoStar Group's first quarter 2011 results and on our agreement to acquire LUPNet, and in CoStar Group's filings with the SEC, including its Form 10-K for the year ended December 31, 2010, under the heading Risk Factors.

All forward-looking statements are based on information available to CoStar Group on the date of this call, and CoStar Group assumes no obligation to update these statements. As a reminder, today's conference call is also being broadcast live over the internet at www.costar.com/investors.astx. Also, a replay of this call will be available on our website soon after this call concludes. Thank you for joining us. I now turn the call over to Andy.

Speaker 4

Thank you, Tim. We are very pleased to announce that CoStar Group has entered into an agreement to acquire LUPNet, the premier online marketing service for commercial real estate. CoStar has agreed to purchase all of the outstanding shares of LUPNet for approximately $18.75 per share, which represents a 31% premium to LUPNet's closing price yesterday. On a pro forma basis for 2011, based upon annualized first quarter results for both companies, our combined company would have revenues of $321 million and an adjusted EBITDA of $78 million. If you take into account what we believe are the potential intermediate-term cost synergies of $20 million, the adjusted EBITDA of the combined companies will approach just under $100 million. We are combining two very innovative companies that have transformed the commercial real estate industry.

The team at LUPNet led the commercial real estate industry from expensive and cumbersome paper-based marketing through traditional media like direct mail, flyers, and classified ads into the dramatically more efficient and effective world of marketing commercial properties on the web. On the other side of the spectrum, CoStar revolutionized how commercial real estate professionals research and analyze commercial real estate. We believe that the combination of our two outstanding and complementary companies will lead to even more innovative and greater efficiencies by creating the premier internet solution for the $11 trillion commercial real estate industry. We expect the benefits to our customers and ultimately our shareholders to be very significant. The U.S. commercial real estate market is massive, complex, and constantly changing.

CoStar and LUPNet developed completely different business models to address the challenges of aggregating content on and providing comprehensive service to this $11 trillion asset class that has nearly $3 trillion in transaction value annually. Each model excels at tracking a different major segment of the industry, but neither comes close to covering the entire industry. Unfortunately, too often our clients, who really need to understand the complete picture, pay the price for this lack of coverage by having to piece together information from many different sources, requiring an investment in time, money, and lost opportunities. Once a combination of LUPNet and CoStar is complete and we integrate the backend databases of our two companies, we believe that we will deliver a higher quality marketing solution to LUPNet's customers and a higher quality information solution to CoStar's customers. CoStar's 900-strong research team proactively collects information on 1.5 million listings.

LUPNet's marketplace with 1.5 million monthly unique visitors draws in nearly a million active listings. We estimate that together we will be able to deliver over 2 million unique listings to our customers. We believe that this more complete coverage will significantly reduce our customers' costs, save them time, and help them better understand the market and empower them to better serve their customers. In turn, we believe that this will help us win many more new customers. One of the things that I learned in exploring this deal that really amazed me was just how little overlap there appears to be between LUPNet's subscriber base and ours.

We have nearly 180,000 subscribers between us, yet since LUPNet sells mostly to individuals and CoStar typically sells to companies, and because we're in very different spaces, we believe that the subscriber overlap could possibly be as small as 10% on a revenue basis. Therefore, we expect this to create significant opportunities for us to grow our $321 million combined revenue company into something much bigger through cross-selling. Clients that subscribe to both services have clearly told us that they would continue to subscribe to LUPNet and CoStar because they find very different value propositions from each service. Oftentimes, because of the size and composition of our audiences and the size of our databases and their dynamic nature, our respective prospects do not realize the full potential of our respective service offerings. We plan to build the cross-selling functionality right into each company's website.

For example, CoStar customers will see prominent displays of how much more exposure is available for their listings on LUPNet, and they will be able to buy that exposure with a single click. LUPNet customers will see prominent displays of how much more information is available to them on CoStar, and we will make it easy for them to purchase that information. LUPNet has 4.8 million registered members, and CoStar regularly communicates with over 350,000 active market participants, who in turn represent the interests of about a million more participants. While 180,000 combined subscribers between us is an impressive number, we believe that over time the number could significantly increase. We believe that LUPNet and CoStar are still early-stage companies with approximately 15% to 25% market share of what we estimate to be 600,000 to 1 million active commercial real estate participants.

We think this deal gives us an even stronger value proposition to offer these potential customers, and it'll give us greater scale in our sales and marketing effort to better reach these prospects. With this combination, we believe that we can achieve significant forward cost synergies for many different areas of our businesses. By working with each other and focusing on the needs of the customer, we expect cost savings of approximately $20 million annually to be realized within 24 months of closing. Obviously, one area where we can begin to save money is by eliminating redundant legal costs.

Now, as it turns out, the legal costs being friends are almost as much as the legal costs being not friends, but by acquiring LUPNet, we believe we can add hundreds of thousands of new listings with dramatically less cost than we would if we used 100% of our traditional researcher-driven model. That could be an enormous cost savings for us. We believe similar synergies will be achieved on the tech side, where we will be joining forces with an excellent and experienced team of software development professionals at LUPNet. This new team could eliminate the need for much of our planned hiring of our new software developers at CoStar. When we acquired Comps.com more than a decade ago, we were very successful in integrating their software team into the core of our technology leadership at CoStar.

I believe most of those developers who came on board a decade ago at Comps.com are still here today making very important contributions to CoStar. We look forward to welcoming these software developers and all the LUPNet employees into the CoStar team and working closely together to create even more innovative solutions for our respective clients. Money we redundantly spend trying to build systems independent of each other can now be invested more effectively into our core brands, allowing us to develop innovative new products faster and at less cost. In combination, we can reduce our combined and not insignificant pay-per-click investments. Obviously, we will save on redundant public company costs. From a financial perspective, we are combining two complementary, profitable, growing companies with great cash flow.

We believe that as a result of those opportunities to leverage costs and cross-sell services, our target margins will increase and eventually approach 40 to 45% in the intermediate term. We believe that this will enable us to deliver very quickly to more conservative levels of debt. Finally, we believe the timing couldn't be better to do this acquisition. Later in this call, the CFO of LUPNet and the CFO of CoStar Group will report excellent first quarter results for both companies. I believe that these results herald clear inflection points in the recovery of the commercial real estate economy and the emergence of recovery in the general or Main Street commercial real estate economy. I believe LUPNet's revenue growth and renewal rate is most closely correlated with Main Street commercial real estate economy. Recovery in this area could drive faster LUPNet premium member growth.

LUPNet's report today of a strong 2,000-plus net new premium membership growth quarter over quarter is a very significant announcement to us. We believe that our massive research operations and our industry-leading market analysis and quantitative forecasting models give us unique intelligence into the trends driving commercial real estate. Either we were just plain lucky, or we effectively used that insight when we recently purchased our headquarters in Washington and sold a year later for more than twice what we paid for it. In that case, we were able to capitalize on the recovery in investment-grade real estate before the average investor was aware of it. We believe that the recovery in general commercial real estate is lagging investment grade by just a few quarters. Obviously, we cannot capitalize on this trend by buying a bunch of smaller commercial properties.

However, we believe that the investment in LUPNet is an excellent proxy for the broader recovery in the general commercial real estate sector. From 2003 to 2007, when commercial real estate markets were strong in the U.S., CoStar Group and LUPNet's pro forma combined revenues grew in the range of 22 to 27% annually. Even during 2002 and the recent 2008 to 2010 economic downturn, combined revenues for CoStar Group and LUPNet grew in the range of negative 4 to 13%, which we feel is pretty good given the scale of the downturn. We are forecasting a much healthier commercial real estate economy in the next several years. While we may not return to those 20+ annual growth revenue rates, we believe we can significantly exceed the modest growth rates we have recently seen.

We are looking forward to bringing CoStar and LUPNet together and providing even more value to our respective customers. LUPNet is an incredibly strong brand, and we intend to protect, evolve, and grow this valuable brand. On behalf of my CoStar colleagues, I want to congratulate the LUPNet team on building such an impressive business and welcome them on board. We are very excited about this acquisition, and we believe our customers will be too. I will turn the call over to LUPNet CEO and Chairman Richard Boyle.

Speaker 5

Thank you, Andy. This is certainly an exciting day for both LUPNet and CoStar Group. Since LUPNet was founded in 1995, we have been focused on our mission of developing the leading online marketplace for the commercial real estate industry. Our goal has been and remains to build a world-class organization that delivers the best platform for marketing and searching for deals to our customers in the commercial real estate industry. I am proud to say that over the past 15-plus years, we have made tremendous progress building our business and serving our customers. Today, through this deal, we are taking another very large step toward our long-term objective. LUPNet and CoStar Group each have a long history of technology-driven innovation in our respective areas of focus in this very large global industry.

We also share a similar vision of helping our customers be more efficient and effective in their jobs through the use of information and technology. We believe that the combination of LUPNet's marketplace business and CoStar Group's research and information platform offers tremendous potential for our combined company and our customers while delivering compelling value to LUPNet stockholders. Over the years, LUPNet has built a tremendous business, and I would like to take this opportunity to publicly thank all of our employees for their hard work and dedication. We are looking forward to working together with our new colleagues at CoStar Group to build on our successes and to provide even more value to our customers going forward.

As Andy mentioned, the first quarter of 2011 was a very good one for our business as well as that of CoStar Group, and we are very excited about the possibilities of this combination going forward. Now, Brent Stumme, LUPNet's CFO, is going to summarize our first quarter of 2011 financial results.

Speaker 7

Thank you, Rich. LUPNet's revenue for the first quarter of 2011 was $20.7 million compared to $20 million in the fourth quarter of 2010, $18.8 million in the first quarter of 2010, and our guidance of $20.2 to $20.4 million. The revenue growth was due to an increase in our base of premium, premium member, and property comp subscribers and the impact of recently completed acquisitions. LUPNet's adjusted EBITDA for the quarter was $7 million or 33.6% of revenue compared to $6.9 million in the first quarter of 2010 and our guidance of $6.4 to $6.6 million. Net income applicable to common stockholders for the first quarter of 2011 was $1.8 million or $0.04 per diluted share compared to $2.3 million or $0.05 per diluted share in the first quarter of 2010 and our guidance of $0.04 per diluted share.

Non-GAAP net income, which we define as net income excluding stock-based compensation, acquisition-related costs, and amortization of acquired intangible assets for the first quarter of 2011, was $4 million or $0.10 per diluted share compared to $4 million or $0.09 per diluted share in the first quarter of 2010. As of March 31, 2011, the company had $97.3 million of cash, cash equivalents, and short-term investments and no debt. Now I would like to review some of our key operating metrics. The number of unique paying subscribers to one or more of our commercial real estate-related services as of the end of the first quarter of 2011 was 91,147, a 2.6% increase compared to the end of the fourth quarter of 2010. The average monthly revenue per unique paying subscriber during the first quarter of 2011 was $58.77, a 1.2% increase compared to the fourth quarter of 2010.

In our LUPNet marketplace, the number of registered members, which include both basic and premium members, grew to 4,833,200 during the first quarter of 2011, a 17% increase over the first quarter of 2010. The number of premium members as of the end of the first quarter of 2011 was 70,692, a 2.7% increase compared to the end of the first quarter of 2010. Embedded in this metric was an average monthly cancellation rate that was within the 4.5% to 6.5% range we began seeing since the end of 2007. Average monthly revenue per premium member was $66.85 in the first quarter of 2011, a 1% increase compared to the first quarter of 2010. The number of profile views of listings on the LUPNet marketplace during the current quarter was 76.5 million, a 70% increase over the first quarter of 2010.

Average monthly unique visitors, as reported by Comscore Media Metrix, during the first quarter of 2011 to LUPNet-owned websites, including lupnet.com, cityfeet.com, landsofamerica.com, landandfarm.com, bizquest.com, and bizbuysell.com, was approximately 3 million, a 27% increase compared to the fourth quarter of 2010. Average monthly unique visitors, as reported by Comscore during the first quarter of 2011 to lupnet.com alone, were approximately 2.1 million, a 22% increase compared to the fourth quarter of 2010. As of March 31, 2011, the LUPNet marketplace contained 816,471 listings, an 8% increase compared to March 31, 2010. Thank you, and now I will turn the call over to Brian Radecki, Chief Financial Officer of CoStar Group.

Speaker 3

Thank you, Brent. Again, I'd like to thank each of you on the call today for your flexibility as we had to shuffle the earnings calls around in light of today's transaction. As you can see from our respective press releases, both companies posted exceptionally strong first quarter results, which we believe is a direct reflection of the emerging market recovery in commercial real estate. Before I go into the quarterly results, let me walk you through the transaction and some of the financial impacts. CoStar Group has agreed to purchase all the outstanding shares of LUPNet for approximately $18.75 per share, which represents a 31% premium to LUPNet's closing price yesterday. Total equity value of the transaction is $860 million, with an enterprise value of $762 million.

We expect the transaction to close before the end of 2011 and it is subject to shareholder approval by LUPNet shareholders and typical regulatory approval. LUPNet shareholders will receive a combination of cash and CoStar Group equity for each LUPNet share. Based upon the current value of CoStar Group shares, that would be 0.03702 shares of CoStar Group and $16.50 in cash. Upon completion of the acquisition, LUPNet shareholders will own approximately 8.5% of CoStar Group shares outstanding on a fully diluted basis. We will finance the cash consideration through a combination of cash on hand and debt. We received commitment from JPMorgan for senior secured credit facilities. We expect the acquisition to be accretive to 2012 non-GAAP earnings and adjusted EBITDA. As Andy mentioned, we believe there is potential for significant revenue synergies through cross-selling between both platforms.

Both management teams are extremely excited about this combination and bringing this transaction to a successful close later this year. Now to review CoStar Group's results for the first quarter, beginning with revenue. CoStar Group reported $59.6 million of first quarter 2011 revenue, with an increase of $1.4 million over our fourth quarter 2010 of $58.2 million and a $4.5 million increase year over year. We also reported $4.5 million in net income during the first quarter of 2011, an increase of 57% year over year and a 20% increase quarter over quarter. The company added $85.7 million to our balance sheet during the first three months of the year, increasing our cash, cash equivalents, and investments on hand to $325 million at the end of the first quarter 2011. We were very pleased with the exceptionally strong sales in the first quarter.

Company-wide net new sales increased 47% over the previous quarter and 337% year over year. This is the highest quarterly net new sales since the second quarter of 2007 and demonstrates the growing momentum we see in our sales, subscriber growth, and renewal rates that we've been reporting on previous calls. Annualized net sales for the first quarter was also very strong. Company-wide annualized net new sales was $6.8 million, up $2.2 million over the prior quarter. This is the second highest annualized net new sales in the company's history. Our customers continued to renew subscriptions at a very high rate during the first quarter of 2011. The 12-month trailing renewal rate for subscription-based services grew to 92% from approximately 86% one year ago and now has increased for six consecutive quarters. The 6-point percentage increase is the largest 12-month improvement in this benchmark in CoStar Group's history.

We believe this is a key indicator of the strong demand for our services. Subscription-based revenue continued to account for approximately 94% of the total revenue in the first quarter of 2011. The renewal rate for clients that have been customers for five years or longer increased to a phenomenal 98% in the first quarter of 2011. 98%. The renewal rate for firms that have been clients for less than five years remained high at 86%. During the first quarter of 2011, the average new contract value was $7,550, and our sales headcount was stable with a total of 193 sales reps compared to 195 on staff at the end of the fourth quarter. The total number of CoStar Group subscribers increased to 88,323 in the first quarter of 2011, and the total number of subscription client sites increased by 486 during the first quarter to 17,267 company-wide.

I will now quickly cover the results of our income statement for the first quarter of 2011 and also provide our outlook for the second quarter and full year. Gross margin was $37.1 million in Q1 of 2011, up approximately $144,000 compared to the fourth quarter of 2010. Total operating expenses in the first quarter of 2011 remained essentially flat at $30 million compared to $29.9 million in the fourth quarter. First quarter net income of $4.5 million works out to about $0.22 per diluted share, up $0.04 compared to last quarter, and our non-GAAP net income of $6.2 million or $0.29 per diluted share both exceeded our previous guidance ranges. EBITDA for the first quarter of 2011 was $10.5 million, and adjusted EBITDA was $12.6 million, or approximately 21% 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 earlier today and will be available on our website at www.costar.com. Turning to our outlook for the second quarter and full year of 2011, our forward-looking guidance reflects our current expectations as of today and takes into account recent trends, revenue growth rates, renewal rates, which may be impacted by the economic conditions in commercial real estate or the overall global economy. Let me reiterate that our guidance also does not include the acquisition of LUPNet and related costs, as we are not able to forecast with certainty when or whether certain acquisition-related costs may take place.

Therefore, we are providing guidance on a standalone basis reflecting our current expectations as of April 27, 2011. Based on strong sales and improving market conditions, we are raising our revenue outlook for the year, taking up the high end of our 2011 annual range by approximately $2 million to $242 million to $246 million in revenue. Our second quarter of 2011, we expect approximately $60 million to $60.8 million in revenue. In terms of earnings, we expect the second quarter of 2011 fully diluted non-GAAP net income per share of approximately $0.27 to $0.31, and for the full year, we expect non-GAAP net income per diluted share of approximately $1.15 to $1.25. We expect the second quarter and full year tax rate prior to the acquisition to be approximately 40%.

Additionally, during the third quarter of 2011, the company still expects approximately $1.8 to $2.2 million of restructuring costs associated with the previously announced consolidation and is expected to leave the cost savings approximately $1 million per year moving forward. Now with that, I'd like to turn it back over to Andy.

Speaker 4

Thank you, Brian, Rich, and Brent. Congratulations on great quarters. In closing, I want to summarize what we feel are the key rationales for this proposed transaction. These are two excellent companies that have revolutionized their respective niches, but they complement each other wonderfully. Together, they can have an even greater positive impact on commercial real estate. We believe that the transaction has the potential to take these two companies to more than $300 million in pro forma revenue and closer to $100 million in pro forma adjusted EBITDA. Most importantly, we believe that this transaction will enable our combined teams to build even more innovative services, which can deliver even greater value to our respective customers. At this point, we're going to open the call up to questions. Rich and Brent are not in the same room as Andy and Brian because we're on opposite coasts today.

It would be helpful if you directed the call to one management team or another, but we're going to take half a dozen questions or so.

Speaker 6

Thank you. Ladies and gentlemen, to queue up for a question, press star then one on your phone keypad. You will hear a tone indicating you've been placed in queue, and if you would like to, you may remove yourself from that queue by pressing the pound key. To queue up for a question, press star then one. One moment, please, for our first question. Thank you. Our first question will come from the line of John Mietta with Needham & Company. Go ahead, please.

Speaker 1

Hey, thanks very much. Congratulations, guys, on both sides.

Speaker 2

Thank you, John. Thanks, John.

Speaker 1

The primary question I had was around the operational integration around integrating R&D, the technology platform, sales and marketing, those types of things. To the extent you can provide color on day one here, I think it would be great if you could talk a little bit about that, please.

Speaker 2

Sure. I'm going to do it at a cursory level because you're right, day one, there's lots of research to coordinate. Rich and myself are committed to working closely together over the next six months, year, or so to make sure we do this right and get the most out of this combination that's absolutely possible. A couple of things that I think bode well here. LUPNet and CoStar use nearly identical technology stacks, so our developers understand the environments that we're working in. Actually, an awful lot of our software developers are in Southern California, so not so far away from LUPNet, and a lot of leadership in our group is out there.

I think while this probably comes as a shock to both employee bases, big picture, it's a pretty exciting opportunity to work on some pretty cool projects together and move the ball forward in a more meaningful way. On the sales and marketing side, this is going to be a fairly significant sales and marketing group. I think that LUPNet will be able to leverage the fact that we have a lot of field sales offices around the country. I think it's good when you're trying to sell in a national footprint. I think it's a little bit easier to have a little bit more scale like we're going to have here.

The sort of personal story side of it, I think also our Head of Sales, just coincidentally, John Stanfield, also happens to be the son of the Chairman of one of the founders of the original LUPNet Property First Mix. There are probably more similarities between these two companies than differences. Obviously, we competed or we tried to compete, never quite met in the same field, but it's been a spirited interaction back and forth to say the least. I think you actually learn to respect each other in that, and we can see the bigger mission here and this makes sense.

Speaker 1

Got it. Okay. Just a follow-up question. Given today's announcement, does that push back your investments around analytics, new products, customized offerings for various customer cohorts, and that type of thing?

Speaker 2

We will be reevaluating all of our investment initiatives to focus on what is the absolute most important priority, which is successfully integrating this transaction. We'll be evaluating that over the months that come.

Speaker 1

Thanks very much.

Speaker 2

Great. Thank you.

Speaker 1

Thank you.

Speaker 6

Next, we'll hear from the line of Brett Huff with Stephens. Go ahead, please.

Speaker 10

Good afternoon, and congrats to both management teams.

Speaker 2

Thank you very much.

Speaker 10

My question is just trying to make sure that I understand going forward once we get things integrated because I think that will probably happen smoothly. When we look at sort of normalized EBITDA margins, I want to make sure that, Rich, that you still think that the low 40% pro forma is still the right pro forma EBITDA margin for your business if it were standalone. Andy, do you still think sort of the 30% range in EBITDA for straight-up EBITDA is still the right number for you guys? That's my first question. Rich?

Speaker 5

Yeah, I'll address the LUPNet point of view on that. From our point of view, our marketplace business has margins at or above that level currently, and we absolutely see that continuing and going forward.

Speaker 2

From CoStar's perspective, I think the cross-selling opportunities here and the scale advantage that we gain here, which is actually very important when you're trying to track millions and millions of buildings and sell in 150 cities, I think the scale that we're going to gain is going to help CoStar as a combined entity to reach target margins closer to 40% and north.

Speaker 5

Okay. The thrust of that question is if I just look out and use kind of consensus revenue numbers and apply those kind of normalized margins, the EBITDA that I get even pre-synergies is meaningfully above $100 million. I just want to, if that's the case, I think that's a good thing. That was observation number one. The second question is, can you give us any more quantification in the kind of cross-sales that you're going to do, just any more specifics on that to give us a little bit more to hang our hat on?

Speaker 2

Sure. I'll try. It's fairly straightforward. Again, these are two huge subscriber bases that have very little overlap. We've done a lot of research here. We've conducted focus groups. We've done market studies. One of the things we hear is that people do not look at it as this one or that one. They look at LUPNet as having a set of value propositions that are very different than the value propositions CoStar has. Typically, on the CoStar side, people are looking at leasing, they're looking at information, they're looking at larger buildings, sort of Wall Street type properties, they're looking at office properties. On the LUPNet side, they tend to be looking at marketing benefits, they're looking at sale properties, they're looking at a different set of strengths.

We see that brokers and commercial real estate professionals tend to grow into the opportunity that's created by more powerful information systems. When we interview these potential customers anonymously, they say they will keep both systems. You've got all the ones who are buying both systems telling us they're going to keep both systems, but that overlap is actually pretty small. Many, many, many of the hundreds of thousands of people that list their properties on CoStar Group's website do not market that property or pay to advertise that property on the LUPNet network. The LUPNet network delivers an awful lot of exposure and lead value by serving up real clear information to our listeners about the amount of exposure they could receive.

They can look at their screen, they can see a list of their properties and get estimates of what additional exposure they could get if they were marketing on LUPNet. We believe that will help cross-sell to hundreds of thousands of folks who are listing with our service. Likewise, I find over the last 25 years I've been doing this, I find it's nearly impossible for a client on a casual basis to try to sort out which database is deeper or more comprehensive in one sector or another. By integrating these backends, we could actually, when people are conducting searches, we can actually run searches against both systems simultaneously and present merged results, which gives people a much better view of what's going on. We believe what these focus groups tell us is that people will buy into that and find significant value for that.

Speaker 1

Okay, great. That's why I needed. Congrats again. Thanks.

Speaker 2

Thank you.

Speaker 6

Thank you. Next, we'll hear from the line of Ian Corydon with B. Riley & Company. Go ahead, please.

Speaker 5

Thank you. Andy, are there any services that either company offers that you'll look to de-emphasize or discontinue or divest? Second question, given the cost and integration, what does this do to CoStar Group's appetite for acquisitions over the next, say, 12 to 24 months?

Speaker 2

Okay. On the first question, we will table that just because we need to actually study that, figure out what customer segments are buying what. From CoStar's perspective, we focused first and foremost on the main core of our respective businesses, and those main cores are premium membership with LUPNet and CoStar Property Suite. Those obviously continue to grow and thrive separately and are great brands. The reality is the two companies in combination probably have 15 secondary tertiary products or even more, 20 tertiary products. Resolving and rationalizing each one of those sub-products, which generally account for low single-digit revenue, Rich and I will be doing that over the next several months. Your second question?

Speaker 5

Appetite.

Speaker 2

Appetite for acquisitions. I have to say, I think we've been working 100-hour weeks for the last couple of weeks, and easily 100-hour weeks, and it's clearly diminished. We have accomplished our M&A goals for the year. There could be some smaller strategic tuck-in that we consider at some point, but we have a full plate right now. We definitively will be doing no international acquisitions, and anything that occurred domestically would be a small tuck-in and would be a footnote.

Speaker 5

Got it. Thank you.

Speaker 6

Next, we'll hear from the line of Todd Lukasic with Morningstar. Go ahead, please.

Speaker 9

Hi, good afternoon. Thanks for taking my questions.

Speaker 2

Hi, Todd.

Speaker 9

Hey, Todd. Just a quick question for you, Andy, with regards to LUPNet's recently launched recent sales, sort of comp sales data. Is that something that will be complementary and additive to your comp sales offerings, or is that a potential source of potential future cost synergies?

Speaker 2

Again, we are going to evaluate that. As we move forward, Rich and I will have very frank and open discussions and look at the fee. I have not been into the recent sales product. I haven't used the recent sales product. I haven't examined the actual customers. The recent sales product is what? 1.5% of the revenues roughly of the combined company. It is going to be a fairly small product area. My initial thought from where we stand today is that they are fairly different services. Recent sales, I think, probably is more in the core logic area or the assessment area, but that is sort of preliminary. We will evaluate that more going forward.

Speaker 9

Okay. With regards to the listings on LUPNet, any thought to adding sort of researched and verified stamps on those as well?

Speaker 2

Initially, the two management teams are going to refine the business plans as we go forward. I think that one of the things we can do is on higher value listings, investment-grade listings, 20,000-foot buildings and the like, we will be, since we're looking at all those listings anyhow at our research side, able to probably step up some of the QA a little bit. We'll have more independent knowledge, and we'll try to work to continuously improve the quality and consistency of the marketing information listings that are presented. It would be something like what you're talking about, but it's a little preliminary.

Speaker 9

Okay, thanks for taking my questions.

Speaker 2

Absolutely.

Speaker 6

Thank you. We'll go next to the line of Jim Wilson with TMP Securities. Your line is open.

Speaker 8

Thanks. Congratulations, guys.

Speaker 2

Thanks, Jim. You've been covering these two companies for quite some time.

Speaker 8

I thought you guys were going to merge for about the last 10 years, but anyway. Imagine my shock. Anything, it's probably way too early to discuss, but anything you contemplate or think of changing pricing-wise is obviously pretty, you know, it's different services, but pretty significant discrepancy in what pricing looks like for both products or sub-products.

Speaker 2

Sure. I think I've been beating the same drum for a long, long time on this subject. I think I've said this consistently over the years. I am a big believer that this is a marketplace with 600,000 to 1 million potential participants. There's an awful lot of people that we've sold that we could sell our products and services to. I am frustrated by the fact that we don't have 300,000 combined subscribers. I think that the play here is cross-selling and new customer acquisition. We're going to do that by improving the quality, using the combined strengths to improve the quality of the products. I definitively do not anticipate any price increases or material changes in pricing policy. This is a penetration play and quality play.

Speaker 10

Okay. I guess just the other would be, I mean, thinking through LUPNet and the dollar amounts and the potential for cost savings, could you drill even a little deeper in the sense $20 million seems like an awful lot? Is part of it data feeds and things I wouldn't see? Maybe I'm just thinking operating expenses and not thinking about cost savings at the gross margin level. Could you maybe break down a little bit where the biggest opportunities are?

Speaker 2

Sure. I'll let Brian do that.

Speaker 4

Hey, Jim, it's Brian. I think you've got a whole list of things that we're going to be looking at. Two management teams met a few weeks back and started discussing those. I think you hit the nail on the head. There's a lot of duplicative data costs. Both companies spend an awful lot competing on the internet for the same pay-per-click dollars. I won't give you the number, but it's a significant amount, millions and millions for each company. There's an awful lot of R&D spend where both companies are investing in R&D, which, as Andy discussed before, can be put towards the same goals versus separate goals. There's obviously going to be, it was sort of a joke, but not a joke, a lot of redundant legal costs, public company overhead costs, those types of things.

I think some of the things Andy talked about, we had a goal of adding $4 to $5 million of additional software development spend. We look at a tremendous software development team over at LUPNet, very similar to the tremendous team we picked up at Apartments.com 10 years ago. Almost every one of the same people are still there in San Diego. We look at, instead of having to go out and hire the majority of those people, we believe we've gotten a lot of them through the LUPNet acquisition. There's going to be, we're going to be looking at costs on both sides of the business. We feel very comfortable with that number over the first 18 to 24 months.

Speaker 2

Right. It's not like the two companies were going to be standing still. We were pursuing various investment initiatives. When you look at these cost synergies as a percentage of the total budgets of the two companies, it's roughly what, 7%?

Speaker 1

About 7%.

Speaker 2

Yeah, I think it's pretty achievable.

Speaker 1

Okay. I was just going to say, 18 to 24 months. If you were giving any guidance, you're not necessarily, Brian, two-thirds of it in the first in calendar 2012 and the balance after that kind of thing?

Speaker 2

Yeah. I mean, I think you can say it's something in that range. It obviously depends on when we close the acquisition. I think if the acquisition closes by the end of this year, again, we have all expectations this will be extremely accretive for the one year following the close of the acquisition, both on adjusted EBITDA and non-GAAP EPS.

Speaker 1

Yeah, okay. Good, thanks.

Speaker 2

Thanks, Jim.

Speaker 6

Next, we'll hear from the line of Jennifer Platt with Pacific Crest Securities. Go ahead, please.

Speaker 0

Hi. I'm representing Steve Weinstein. Congratulations for the acquisition. We just have a quick question. Is there any chance that the deal will break? Obviously, we don't hope for that. Also, if that's the case, whether there is any deal breakup fee?

Speaker 2

Sure, we have an exciting moment here.

Speaker 0

I know.

Speaker 2

John Coleman, our Counsel, has sat through 40 earnings calls and never spoken once.

Speaker 0

Uh-huh.

Speaker 2

I'm going to actually let him answer this question.

Speaker 0

One moment, thanks. Okay.

Speaker 2

In our view, the businesses are very complementary, and we think this combination is in the best interests of clients and shareholders. We don't think that this is going to give rise to any antitrust issues. We have to go through the process, but that's our view. The agreement does contain a reverse breakup fee. We haven't really disclosed it yet. We're going to.

Speaker 1

Which I think we can.

Speaker 2

Yeah, it's 6%.

Speaker 0

Oh, what does that mean, 6%?

Speaker 2

Approximately $52 million.

Speaker 0

Okay, if anything happened from now to the deal close.

Speaker 2

If the deal doesn't get done because of antitrust.

Speaker 0

Okay. Thank you.

Speaker 2

Okay, thank you.

Speaker 6

Thank you. The final question in queue at this time is from Tony Kaplan with Morgan Stanley. Go ahead, please.

Speaker 0

Thanks for taking my question. I'm not sure if you mentioned this before, but if you could talk about any plans for the management structure.

Speaker 2

At this point, again, it's preliminary. We will be exchanging people back and forth. We'll look to have people from CoStar operations work in the big operation centers of LUPNet and vice versa. We will do a lot of cultural exchange. I think we have an awful lot to learn from each other because we're in fairly different spaces. It's way too early to start trying to figure out the management structure. We've been revealing information to each other in slightly escalating amounts, and we'll do a lot more of that over the next six months.

Speaker 0

Great. Thanks. Could you give some of the terms of the term loan?

Speaker 2

Sure. It's a $415 million commitment with a $50 million revolver from JPMorgan. It's a first lien term. We do have options to convert that to other things. We're still evaluating all those options over the next few months. The ultimate capital structure will be in place as we close.

Speaker 0

Great. A final question on the quarter. I saw the great new sales number. I was wondering if there was anything in that that was specific to this quarter, or if we should just continue to expect that good new sales numbers going forward because of the changing environment.

Speaker 2

I believe that a lot of what you're seeing is a changing environment. I believe that the real driver of that excellent revenue growth was the high renewal rate and sales in our core product area. There was no particular standout monster deal that drove that. It was just hundreds, thousands of new folks coming on.

Speaker 0

Great, thank you so much.

Speaker 2

Absolutely. I think I need to revise my comments just slightly. One of the benefits I left out for the acquisition is that somehow when the two companies get together and do a joint earnings call, we finish it in less time than CoStar Group does when we do it by ourselves. We'll take that as an extra benefit. Thank you very much for joining us. We're really excited about this acquisition. Both management teams will be available if you have any other questions offline. Thank you very much.

Speaker 6

Thank you. Ladies and gentlemen, that concludes our conference today. We appreciate your participation and your using the AT&T executive teleconference. You may now disconnect.