The operator welcomes everyone to the CoStar Group Second Quarter 2023 Earnings Call and Cyndi Eakin, Head of Investor Relations, leads the safe harbor statement. Certain portions of the discussion may contain forward-looking statements, which involve risks, uncertainties, assumptions, estimates, and other factors that can cause actual results to differ from the statements. Reconciliation to the most directly comparable GAAP measure of any non-GAAP financial measures discussed is available in the press release on the website.

In the second quarter of 2023, CoStar Group saw strong double-digit revenue growth with its Commercial Information and Marketplace business, and $82 million of net new bookings. In June, CoStar Group's residential portal network became the second most heavily trafficked residential marketplace in the U.S. and overall, its websites reached 105 million monthly unique visitors.

CoStar Group's residential network had 84 million average monthly unique visitors in the second quarter, surpassing realtor.com's self-reported traffic. Homes.com grew 130% year-over-year in June, and Apartments.com had $224 million in revenue, accelerating to 23% year-over-year growth. Apartments.com sales bookings increased 84%, and the number of paying communities on the network increased by 12%. Sales productivity was up 24%, and the number of quality meetings with customers increased by 13%.

The team at Apartments.com had a successful National Apartment Association Annual Conference in Atlanta last month, with Jeff Goldblum making a surprise appearance. Their Net Promoter Score rose to 95%, the highest since the third quarter of 2020, and monthly unique visitors grew 9% year-over-year. The 2023 Apartments.com marketing campaign is in full swing, with unaided awareness reaching the highest level ever at 49%. Economic conditions in the apartment industry are favorable, with vacancy rates increasing 220 basis points over prior year to 7.9% and unit-level deliveries at all-time highs. It is expected that vacancy rates will continue to increase for the next four quarters, peaking at around 9% in mid-2024.

Apartments.com is expected to see revenue growth of 25% by the end of the year, while Homes.com has seen traffic reach a new high of 38 million unique visitors in June. According to Google Analytics, traffic has grown 130% year-over-year and 75% sequentially. Homes.com's UX has been well-received, with returning users up 416% year-over-year. Compared to other sites, Homes.com's unique visitors are up 224%, while Zillow's, Realtor.com's, and Redfin's are down. Homes.com is focusing on agent engagement and has built an incredible committee of 1.1 million real estate agents on Homesnap Pro.

CoStar recently conducted focus groups in various cities with both consumers and agents to test their product features and content. The response from the focus groups was the best CoStar had ever seen, indicating that they are on the right track with their new Homes.com product offering. CoStar reported an 11% increase in revenue for the second quarter, exceeding their 10% revenue guidance.

CoStar's sales efforts to focus on owner, lender, and tenant prospects have been successful, resulting in a 134% increase in sales from the first quarter of the year. Additionally, CoStar's renewal rate increased to 92%, and their CoStar Lender product had its best sales quarter ever. The company also released property investment fund data into CoStar, which has been successful in closing over 100 sales in the two months since its introduction.

LoopNet released a new tenant application in May that includes enhancements to their existing tenant location information as well as a new corporate user feature. This feature allows users to see all locations, building details, financial information and credit risk for large corporate occupiers. LoopNet revenue was up 16% year-over-year and they have 14 million average monthly unique visitors, up 13% year-over-year. However, LoopNet's sales growth could have been stronger in the second quarter due to a combination of factors which they believe are correctable.

The CEO of LoopNet is confident in the long-term growth opportunity of the direct sales team and strategy. The LoopNet network saw strong growth in the second quarter, with revenue increasing 35% year-over-year and net new sales up 24%. The company plans to launch LoopNet in France and Spain. STR revenue was 11% compared to the second quarter of last year, with subscription revenue growing 14%. For two consecutive quarters, STR achieved record sales results with more and more subscriptions. When the company purchased STR in 2019, 60% of revenue was subscription-based and 40% was one-off transactional.

The STR team has successfully transitioned the business to 80% subscription revenue, with a 97% renewal rate. In May, they launched a benchmarking product in CoStar, which has received positive feedback and is expected to open access to new clients. Subscription revenue grew 14% in the second quarter and 7 out of 10 of the largest U.S. banks are using Real Estate Manager solutions.

BizBuySell is experiencing double-digit growth and is expected to exceed $30 million in revenue in 2023, while Land is on track to exceed $50 million. Traffic and lead volume have increased significantly, and the company has implemented a playbook to increase exposure for clients. Ten-X is performing well despite the challenging commercial real estate market, with transaction volumes declining and delinquency rates rising. Lenders are in a pretend and extend phase, and distressed assets are expected to arrive soon.

Ten-X applied its principles of syncing value expectations with customers to onboard $1.5 billion of inventory in Q2, with a 52% trade rate. The average asset value was up 33% year-over-year, and the average winning bid was up 11%. There was a 53% year-over-year inventory growth in the $1 million to $10 million range. The Ten-X platform is now integrated in the CoStar ecosystem, allowing customers to manage transactions digitally. Rising interest rates are impacting the capital markets.

Second quarter sales transaction volumes in the commercial real estate market were down 63% and prices were falling. The debt market has not seen a wave of distress yet, but there has been some movement. The office sector is the worst it has ever been, with vacancies now at 13.1%. True effective vacancy rate is closer to 57% due to tenants not occupying leased space. Tenants have given back 40 million square feet in the first half of 2023 and net absorption is negative 150 million square feet since the pandemic began. Sales prices for office buildings are down 5.9% and delinquency rates have tripled to 4.4%. Conditions are expected to worsen, and vacancy rates are expected to rise.

The second quarter of the year saw slow growth in the hotel sector, with room rates rising at the level of inflation and limited potential for improved profitability. The industrial and retail sectors remain relatively healthy, with industrial vacancy rates being historically low and retail vacancy reaching an all-time low. The residential sector is facing challenges, with mortgage rates around 7%, monthly prices on the rise, and affordability reaching a low not seen since 1986. Despite this, CoStar delivered strong double-digit revenue growth in the quarter.

CoStar's revenue grew 11% in the second quarter, exceeding their forecast, with increased new customer sales to owners, investors, and lenders. Apartments.com's revenue grew 23%, in line with expectations, with record sales levels and a 12% year-over-year increase in new property volumes. Scott Wheeler is the Chief Financial Officer and expects CoStar revenue growth to be 10-11% for the full year.

Apartments.com is expected to have a 25% revenue growth in the third and fourth quarters, and a 23-24% revenue growth for the full year. LoopNet's revenue growth is expected to be around 15% for the full year, with a 14% growth in the third quarter. Information Services is expected to have a 9% revenue growth in the second quarter, with a upper single digit growth in the third quarter and a 9% growth for the full year. Residential revenue came in at $13 million, which was in line with expectations.

In the third quarter of 2023, the company expects to make around $11 million in revenue, with full year 2022 fee revenue at $45 million. Other Marketplaces revenue was $32 million in the second quarter, up slightly from the first quarter and flat to the prior year. Ten-X revenue was lower than expected due to low transaction volumes. For the second half of the year, the company is moderating its revenue outlook for Ten-X and expecting a range of $130 million to $135 million for the full year. Adjusted EBITDA for the second quarter was $127 million, with a 21% margin. The sales force increased by 17% since June of last year, with a contract renewal rate of 90%. Subscription revenue on annual contracts was 81%, and the company has a balance sheet of $5.2 billion in cash, earning 4.8% interest.

Andy Florance discussed the success of the company's residential platform, which is now the second most heavily trafficked platform in the United States. The company plans to continue to grow the platform and its value to consumers, and has a clear strategy for doing so. The company has also reconfirmed its adjusted EBITDA guidance for the year and raised the midpoint of its guidance range, with expectations of revenue growth of 12% year-over-year for the third quarter of 2023.

Andy Florance believes that LoopNet's execution challenges are relatively simple to solve, and that the sales force is incentivizing the wrong activities. He mentions that LoopNet has grown since it was acquired, now bringing in around $0.25 billion in revenue and 16% growth. He believes that the company can reaccelerate the business quickly and see the results from the investments they have made in the sales force.

Andy Florance explains that LoopNet's 16% year-over-year growth is strong, considering the current CRE market. He believes that the value proposition for their signature ads is a no-brainer, as they provide a way for owners of large buildings to raise their profile and increase their chances of finding tenants. He is confident in the value proposition, but is aiming to continue to improve it to reach higher growth rates.

Scott Wheeler and Andy Florance discussed the increasing demand for diamond listings in signature ads, which have grown over 50% year-over-year. They also discussed a distressed building whose owner was at risk of losing $80 million, and how LoopNet could have saved them money. Peter Christiansen then asked a question about LoopNet's plans to monetize their homes platform and the competitive sensitivity of their traffic levels.

Andy Florance discussed the company's plans to monetize in the fourth quarter of 2024 and the rationale behind it. He also mentioned that they are in the second inning of content and that they are pleased with the work they have done so far. He concluded that the company is trying not to disclose strategic things and asked if there were any other questions. Jeff Meuler then asked about Homes.com traffic quality, mentioning a metric on return users.

Andy Florance reported that Homes.com direct return traffic is up 400% year-over-year, and that they are delivering twice the lead flow of some of the well-known residential platforms in the United States. This is due to their policy of putting the name, photo, likeness, and contact information of the actual listing agent on the listing, which has been proven to be more effective than setting the lead into a call center and syndicating it out to multiple unrelated agents.

Andy Florance is pleased with the quality of the proprietary content that has been loaded on a partial level in all markets. He has not seen an impact on traffic yet, but anecdotal feedback from focus groups and interviews with consumers has been very positive. Florance also updates Alexei Gogolev on the progress of CoStar's core products, which are being delivered at a rapid pace and include corporate user aggregation data, fund data, CoStar Lender, and a stream of functionalities.

Andy Florance, CEO of CoStar, is proud of the success of his brand development team and sales team in the toughest commercial real estate market ever. He credits the success to the product quality, value, research team, and sales work. He also mentions that Apartments.com has achieved the first milestone of $1 billion and CoStar is not far behind. Florance expects to continue investing in personnel and content creation over the next 12-18 months.

Andy Florance is confident in the investment being made to differentiate their product through a number of content strategies. He notes that the focus groups respond positively to the product and that the investment is a relatively modest percentage of revenue. He also states that no broad consumer marketing is occurring for Homes.com at this point, but that it is an important lever to pull for SEO and SEM.

Andy Florance discussed the effectiveness of SEO and SEM for Apartments.com, which currently has an unaided awareness of 49%. Scott Wheeler then reported that the financial levels for the year remain unchanged, and Andy concluded the call by thanking everyone for joining and announcing the date of the third quarter earnings call.

This summary was generated with AI and may contain some inaccuracies.