CoStar Group, Inc. (CSGP) Earnings Call Transcript & Summary

[Audio Gap] services companies here at RBC. We are excited to host Chris and Rich from CoStar. Chris, Rich, thanks for giving us this opportunity.

Thank you.

Maybe I'll just kick it off first with -- I was wondering if you can give a sneak peek into the Investor Day. I think it is officially the first official Investor Day, at least what I remember. So what should we expect?

So it's Rich's child. So I'll let -- when he first came back, we hadn't done an Investor Day for a while, so we immediately start thinking about what to do, why don't you give some insight?

Yes, I think from our perspective, I think we've got a really strong management team that we want to display at the day and talk about our whole product set and services along the way. So I know there's a lot of focus right now on homes. But -- and we'll spend a fair amount of time on that, on that day as well, but more importantly, really give full credit and full time to those other parts of the business that actually do create a lot of value, high margins and high growth rates. So -- but no, this isn't a financial update. We're not going to give sneak previews to 2025. We're still working through the numbers, but it's really more than that. And space is limited, unfortunately, we want to try and maximize really the day and try and get it out on the Internet, didn't have as many folks who watch on there as possible.

That's very helpful. That's great color. And maybe we'll jump into Homes.com. As you said, a lot of questions on Homes.com. So maybe we'll just start off first with -- if you want to take a step back and just talk about the strategy there, what's -- how do you differentiate yourself compared to other players out there, but also the momentum you're seeing in the business? There was some slowdown recently. What's causing that slowdown? Why don't we start there? And I might have a few follow-ups.

Yes, great. So listen, I think that the product that we're offering is a completely differentiated product. We are apples to the oranges of the markets that exist, like the buyer lead generation models that exist that were built off the MR system over the last couple of decades is a model that looks to monetize revenue by selling buyer leads off of their platform to 5% to 10% of the agents that exist. And that's great. They've built nice businesses, $1 billion businesses, that's fantastic. But what we see, especially as we look around the world is that we think the business model is flawed in the regard that what we would really be trying to do is support the brokerage industry, we should be supporting listing agents to help them build their brand, their reputation, improve their listing profiles, improve their listing outreach, and most importantly, give them an opportunity to increase a higher yield off of their asset, and their asset is their listing. If you're a listing agent, your biggest asset is your ability to win listings and monetize those listings by selling them. And our platform is the only platform that if you're a broker, your name, your face, your contact details are there, so everyone can find you and see you. It shows all the details of things you've done. You also have -- from a retargeting effort when you have a listing, there dramatically increases the amount of views that it sees. It gets retargeted into other places you go when you're on the Internet. It gets followed, so you understand where people are going. And so there's a value proposition for the listing agent that doesn't exist today. The reality is around the world, most models are kin to what we're trying to create versus what's create in the U.S. Now that is partially because of the MLS platform in the U.S. We're very unique. Canada is one of the few countries that have MLS platforms. But we just think that there is a better model to help listing agents market themselves, market their products and also create lead generation for themselves because, again, we're the only product, when you hit a button, say, contact the agent goes just to their agent. There's only one button and it goes just to them. And there is an ability to create a lead for them that is very valuable because it can help them increase the yield on the asset they generate or create a buyer lead for them. So again, we're early days. I think we're trying to create a -- it's just a differentiated model. It's different than what's out there. And we are early days, and we launched in February, but we feel good about how the business has grown, the sales force growth that's happened. So it's -- next year will be an important year, but we're moving along.

And I would say on Homes.com as well is that another big part of this is not just about lead gen for the seller's agent, which is obviously quite beneficial to them from a financial point of view, but also from a marketing perspective. So in the marketplace, that's spending anywhere between $12 billion and $15 billion a year on advertising for the brands in all kinds of crazy places. Being married to a realtor, I know, you should see all the squeezy balls and pen with her name on it and the magnets on the refrigerator, the post cards that go out, the $3,000 sign for listings, the church bulletin advertising, the $500 a month on Facebook advertising, and this is just one person, right? This is what she does and an agent is spending a lot of money. And what we're trying to do is very similar to what we did with Apartments.com, which is where we go to somebody that might be trying to advertise on their own or trying to buy their own keywords. We'll say to that property and say, look, you're already spending an x amount of dollars on this. Give us some portion of that budget and let us try and do something with it and show you what we could do. And everybody knows the Internet is the place to be. It's a very expensive endeavor to try and do it individually. Like I say, my wife spent $500 a month for 5 years, never got a lead, but did it anyway because you felt like you had to be on the Internet. This is the way that lets people play the Internet, get retargeting, get themselves more famous, but more importantly, get their exposure for the property to represent it.

That's great color. Maybe if we can just talk about what's caused the slowdown, what we've seen in the third quarter? What do you think about going forward? And when do we start to see the inflection in growth?

Yes. So one of the keys of the strategy is to build out a dedicated sales force. And so when we launched, we didn't have a dedicated sales force of the scale we were planning for. And so we used our entire sales force to go out and sell Homes.com, and they did exactly what we asked them to do. They went out and they sold Homes.com. But now we're in a position of they have all gone back to their specialty sales roles, whether it's CoStar Suite or whether it's Apartments.com, and we've been building a dedicated sales force. We hired a new Head of Sales in April, March, April. And so he brought in trainers as we have regional sales managers set up. And so we're in the process today of building out that dedicated sales force, which will then reaccelerate the growth profile as we generate revenue and hit targets that we've set for ourselves in 2025.

And I think also I think the industry was used to going out and seeing buyers' leads as being the model that everybody is used to. So a lot of people, I think, bought early thinking that this is going to be a buyers' leads proposition. The good news is today, our sales force has been trained. And if you say, I don't have any listings, but I want to come on the site, we might still sell you a membership, but more importantly, we'll say, listen, this is really meant for listing agents. And if you're going to use it, it's a marketing tool, but it's not to generate leads for you and actually turning business away. So I think that the pitch has gotten much tighter. We got the sales force really trained solidly to understand what are the 4 value props to this business? What are the 3 or 4 objections you're going to get from the agents and we're seeing some really good success in the fully dedicated sales force. And so I think it's -- I find it amazing that we have a lot of great sales reps at CoStar and Apartments.com. I'm down and I see the leaderboard of people that are selling, we typically have their affiliated company that they're with. And I look at the top 30 people, and it's 28 of those people are Homes.com reps. And so they're not 20-year CoStar vets. They're not 15-year Apartments.com vets. They're the people that we train to go sell the product. And I think that the more that we could scale that team up, the better that we'll do in sales.

That's great. And just maybe drilling down further on the salespeople ramp. I was just wondering what are your targets for salespeople hiring by the end of the year and end of next year? If you could just...

Yes. Our aspiration is by year-end to have close to 300 salespeople and in the following year, more than double it. Obviously, we'll be watching the development of the business, but that is sort of how we modeled out the business.

That's helpful color. And then as we think about retention, attrition had already also picked up. How do you plan to get that under control as well? Like how do you plan to improve the retention near term?

For churn, you mean for the customer?

Yes.

Well, so I think it's a lot about what Rich said. We now have a targeted value proposition and the marketing message. So we are selling to the right people today. From February through May, June, we -- clearly, our sales force were just selling. And so now we don't have people who are coming on who don't understand the value proposition, don't understand what they're going to get out of it. So therefore, that's less likely to stop subscribing. So I think it's just sort of the evolution of the sales force and the messaging and the value proposition we're talking to.

And reminds you of the same thing that happened on Apartments.com. We came out with the CoStar sales force back in February of 2015 and essentially said to them go out and sell Apartments.com, and they did a great job of doing that for the first quarter, but they were doing it. And it's interesting, some people were asking us why did it take so long to send everybody back to their day jobs, I mean, the whole 3 months, in this situation. For apartments, we had CoStar sales reps selling apartments for 7 quarters. And -- but similar effect, I think they hit it with gusto at the beginning. I love Chris' analogy. We've been hanging out a lot on the circuit, having a lot of rubber chicken dinners. And one of the things that he says that we established a position on the beach. We got revenue much needed to get the business rolling and get it started. And so now we have a foundation and now we're sending in the specialists that actually are going to really create the long-term value.

That's great. And in terms of improving the value proposition, I think one of the things that was worked on was also bundling Matterport. Can you talk about the success there? How is that rollout coming along? And any initial feedback from agents?

Yes, the agents love it. I mean they understand the value proposition of a Matterport. And actually, it's -- there's multiple aspects to it. One, from an agent's perspective, if you Matterport a house, you reduce the amount of people who are coming in who really aren't interested. So as a time efficiency mechanism as an agent you love it because you don't have as many people coming through because you have a better chance of saying yes or no by going through the matterporting of the house and they understand the schematics and the dimensions. Two, there's just a better awareness overall of what we're offering and what's in the house and our bounce rates are lower and our time on site is increasing because when people see a Matterport, when you're a subscriber, you see a Matterport and you say, okay, I'm going to look at it. We're now in 90 cities. So if you're a subscriber in one of those 90 cities, we'll come Matterport your house. But we're just at the beginning of that journey, but it's really interesting sort of what we're seeing thus far.

Help from a sales perspective, too, it was a nice thing to add to the members' membership. And we've used it quite successfully at Apartments.com. If you have the upper tiers, we give it as part of the membership on that product. But it's a great way for people to create more quality leads. And I think that that's really the best part about it is that oftentimes, how many times you walk in the house and you walk in, open the room and you're like it's not for me. So you want to eliminate those types of things, you'd rather have quality leads. And I think quality over quantity is very important.

That's very helpful color. Maybe a question on investments. So I believe this year, the investments are going to be around $900 million on Homes.com. And I think the comment was similar investment. Can you just talk about how the investment -- even though the dollar amounts are similar, how is the mix going to be different next year versus this year?

Yes. And so for '24, the mix was sort of 60% marketing, so SEM, SEO, TV, radio, direct Internet advertising. The other 40% was content, technology, sales force build. Well, next year, the $900 million is going to be held constant. There's going to be some mix shift where marketing will come down and that will be replaced by dedicated sales team as that ramp. But generally, the other mix is relatively similar.

Okay. That's helpful color. And is there a way to think about what the -- once you scale the business, what's the run rate investment that's required in Homes.com?

Well, it comes down meaningfully. So if you create an environment that has scale to it and there's organic -- the first thing that starts to come down is organic. If organic traffic increases, therefore, you can reduce SEM and SEO, which is really valuable, right? That's a big spend. And if we can reduce that, you can kind of bring your margin in. Inevitably, there will be technology reduction because we built out the platform and you move more to a maintenance and obviously, some increase, but we're building up the platform. Content roughly stays the same because you're refreshing and keeping it up, but there's probably still some benefits and synergies there. And then the sales force ramps to where the opportunity is. So if there's an opportunity, the sales force pays for itself, you will increase the sales force, but the payback is relatively quick in the business.

That's very helpful color. Now I know we talked about the revenue acceleration, maybe expenses starting to moderate. But when you think about the path to profitability, even in terms of thinking about revenue run rate to expense run rate, not looking for exact time line, but how should we think about that path to profitability?

Well, so one of the great things that Andy did in the last call is he sort of gave a metric of sort of for a 4-month tenured sales rep for Homes.com, he expects them to earn x in net revenue per month. And so you can simply take the build-out of your sales reps that we've laid out and sort of net new at 4 months and kind of build that out. And by the way, our limited data set suggests that, that number increases as they get more tenured. But just if you roll that out, you get a sense of sort of annual net new and revenue as that builds. And inevitably, when you create that ecosystem, there's the opportunity to then create tiering, right? So you have the ability to -- when you have people then competing for where they are, you create sort of tiering elements to where they are. And there's other -- once you get that ecosystem, there's other opportunities to push on revenue and margins. And so you can take all that and build it up and come to where you get to on a reduced expense base with that $900 million.

That's very, very helpful color. Maybe switching gears, going on to the core. So core obviously continues to have pretty solid growth profile, but the revenue growth is pretty stable, but the bookings have been a bit weak. So over the last few quarters, we've had relatively weak bookings. Can you talk about what's weighing on the bookings?

I prefer the word soft. And so listen, inevitably, we pushed all of our sales force to attack Homes.com. And inevitably, there was distraction as they were trying to hit targets and goals and servicing requirements, et cetera. So they were distracted, and that was the first, second into the third quarter. We've now returned everybody to their corners. They're basically back in their specialized sales force positions, and they're building pipeline, and it will take 2 to 4 months depending on the segment to build that pipeline. But distraction was a big part of it. I think people will say, well, Apartments.com is decelerating. Well, yes, it's a $1.1 billion revenue business, right? The business has scaled massively over the last 5 years. And so it's still a mid-teens grower, which is great, off of a very high revenue base at an attractive business model. So that's great. So I just think it's adjusting to a business that scaled to $1.1 billion. And on the CoStar Suite business, I think it's a couple of things. Clearly, there was distraction, which had an impact, but we're still dealing with the worst commercial real estate market we've ever had, right? It's definitely worse than '08. It took really 4 years to kind of get through '08 from a commercial real estate perspective. And so we believe we're seeing -- somewhere at the bottom, we're seeing kind of where we are in the bottom. Definitely there's been a massive headwind with the commercial real estate market for CoStar Suite, but yet we've increased pricing and customer count over the last couple of years. So you get a little bit of a tailwind from the commercial real estate market, we obviously get more productivity as we increase sales. We have international expansion. We have existing TAM that is underpenetrated, and we have new [indiscernible] we've developed in the lender product and in the owner's product to go tackle. So I feel pretty good about us being able to get that business back to a double-digit growth profile. But inevitably, I think we should applaud the fact that in light of a horrible growth environment, we've been able to grow the business, which is fantastic.

Yes. I think the other thing, too, you can't underestimate the other value of productivity. So when we talk about distraction, it's not like looking over here or looking over there. What it really means is we have a sell and serve model for our sales forces. And so when they are busy doing something else, that means one thing is going to falter and it's typically not the service side because we want to make sure the clients stay happy, it's the ability to go out and get new business. So that's the first thing is that's why you might see some compression. The other interesting thing is we haven't really been expanding the size of the sales force the way that we could have or should have been doing. And for whatever the reasons were before we were here and after I had left, whatever, we hadn't really expanded the sales force as much. And I think that the problem again with the sell and serve model is as you continue to add people as clients, you have less time to sell, just the fact of life. And so I think a credit [indiscernible] coming in is one of the things you noticed in the first month of this year is we have a lot of TAM. We have great products. Why don't we get more salespeople? What are we doing? And so some people have said, well, why don't you just wait for the productivity to come back. But we're not thinking about like what happens in Q1, Q2. We're thinking down the road because you're going to make investments in the CoStar Suite sales force, for example. It takes a while to get up to full capacity, typically 2 to 3 years. They're profitable at the end of year 1. But if you're going to be thinking down the road about how do I attack these large TAMs, you're going to need more sales reps. The other thing that we've done, I thought, really well is we've always been able to sell at the institutional level for CoStar Suite. And back when I started the company, it was 100% sales to broker. And I remember one of my first meetings with Andy, I was still a consultant at a time, who told me, one day I'm going to be selling this stuff to institutions. And I was like, okay. And today, it's 2/3 of the revenue for CoStar Suite, which is very interesting. And I think it's going to grow, not because we're not going to sell to agents, it's just that there's so much opportunity. But the other nice thing is by developing these new products like the lender product, for example, which customizes for banks the CoStar Suite. We recently released a similar product for owners. You're seeing benchmarking that we're pulling through for hospitality. There are eventual benchmarking things that we could do on the leasing side with our Visual Lease acquisition. And so we're constantly building out new types of products that do nothing but expand TAM. So you absolutely need to have bigger sales forces to go after that. And so the final thing I would say is like I just finally find it funny like that people think that the minds of CoStar because, oh my God, we shrunk 6% growth, basically what's been felt like a depression in commercial is a bad miscalculation. And one day, when the economy and real estate market comes back, we stop. This part of the business will be doing well.

Absolutely. No, that was very helpful color. So as we think about the bookings, right, and bookings translating into revenues, currently, the booking trajectory seems to suggest it's growing slower than getting to that 10% growth in core. So when do we get -- like is there a time line by which bookings come to a point where they are accretive to the growth?

Yes, absolutely. I mean if you think about it, so we have $3 billion of revenue. So you can easily back into -- if you need a 10% growth rate, it's $300 million, so you can get a pretty good view on what your net new needs to be every month, and you just you divide that number by 2 because it's half of the year, and you can get to the number. And so I think we feel pretty confident around getting that number. And that 25% is -- this is a roll-forward business. It's actually a very simple business from a modeling perspective. And basically, our revenue for '25 is pretty big for '24. So you have to roll forward. So what you really should be looking for is net new numbers in first quarter, second quarter of next year to give you a line of sight on sort of the reseller rates and the [ baseline ].

That's great color. You mentioned ability to take price even in a tough market. I was just wondering if you can talk about price versus volume dynamic in the businesses at a high level or maybe at individual levels?

I think historically, Andy has taken a very conservative view towards pricing. We're a CPI plus pricing type company. Andy's view is we're in this with them. And therefore, we want to -- we need pricing increases from a CPI plus perspective. But we don't push significant price increases away from that. And so I think that -- so you know what that number is, right? So 2%, 3% inflation number or whatever that is in the 4% range. Then you just have to back into what your volume increase has to be. And what makes you feel confident about that, again, is these TAMs as we define them and we put out a slide on this, even in brokers, we're underrepresented. And I think our tool is essential if you're a broker. And so there's -- even in our most prominent TAM, which is 33% of our business today, there's still massive opportunity for sales prospects. And then other TAMs like 20% to 30% in new TAMs or less than 10%. So there's just a lot of opportunity to grow customer count on top of the CPI plus price increase.

That's very helpful color. And as you mentioned, on the CoStar Suite, obviously, the introductions of new products continue to expand TAM. How do you think about the traction there on the lender side, on the owners?

It's great. I mean I think we're doing things in lender that I'm surprised that our partners want to do with us. We have banks. We have risk officers who are using our models as challenger models. We have banks who are using our models to submit to regulatory requirements. They're running this analysis. They're running their whole portfolios on our platform. So I just think it's a pretty exciting time for us because it's -- there's this shift in how people are thinking about it and the technology we're willing to use, a very complex hard problem, like to manage your real estate portfolio as a financial institution or the bank or insurance company is really complex and hard. I used to do it at Freddie Mac. And I think we create this solution that works, that people are using and streamlines their operation for a cost and complexity that is really high for them that we can really consolidate and reduce for them in a way that even I was like I -- was shocking to me to do.

That's great. That's very helpful color. Switching over to apartments. As you mentioned, apartment continues to grow at a very rapid pace, mid-teens plus. When we look into -- again, I'm not looking for guidance, but as we think about some of the deliveries are still at very peak level as deliveries start to come off or vacancies start to moderate, could that have any impact on the growth profile?

Yes. So the deliveries, I think, was sort of overhyped from the perspective because I think inevitably comes down to we did win a lot of new deliveries. But ultimately, it translates into vacancy and where vacancy rates are. And when vacancy rates are high where they are, if you're a 50-plus asset owner of apartments, you inevitably have some leverage against that asset base. So you wake up every day thinking like, okay, I'm trying to sweat my equity and make the best return. But boy, I got to get those apartments cash flow because I got to meet my principal and interest payments, right? And so that's what we think about every day. So high vacancy rates, you're like you're going everywhere. Anyone you think you can earn a return off of or get something right, you're doing. What we know is that our stats and our leads are the highest quality, the lead-to-lease times on our platform are much better than others. And that just means increased cash flow for our users. And so I think as vacancy rates come down, I think tertiary advertising platforms sort of fall off because the returns aren't that high. But I think we're a couple of percentage points away from there being a real sharp pencil around what you have to do. And I also think, ultimately, it does revert to our statistics and our ROI from the metrics. And it will just be simple math. People will look at like, okay, this is your cost. This is what the leads I get, the quality of those leads, this is the lead to lease time and how quickly I can get them occupied. How is that cost versus other platforms, and we feel really good about our position in that market.

And another SAM story, too, another $1 billion of TAM and 50 units and above. And so even as rates come down, you still have a lot of people to go to and sell to. And this is one of the reasons why we're looking to increase the size of that sales force as well. So that's -- and I think we keep coming back to the TAM. And it's very funny because I know we've been in some very difficult financial times as a country and during this whole period. In the old days of CoStar, like we never used to talk much about the economy because the products do well most of the time in almost every kind of market. So it's when you're in this kind of dead in the water market, hard to sell because people are going out of losing seats at the independent firms, really hot markets. Sometimes they're not easy time to sell because people are so busy. But most of the time, we're in that other space in between. And I think that we're feeling like those times are coming back. When, we all don't know. I mean if not, but when we get back into more normal economic times, I think you'll really start to see the full function of the model. And that's one of the reasons why we're preparing with additional sales reps, 300 more on the core business, 300 more -- actually 400 more in homes because 100 more by the end of the year-ish, 300 more next year. So that is important for us.

Well, having a field sales force is a huge differentiator for us. And our sales force are cracked salespeople. They go on with tearsheets on data of what their metrics are, what we're doing for companies, and we're delivering the value proposition and we're in front of them. Like Apartments.com, a salesperson has to go to 7 sites a day, right? That's hustle. You got to move around a lot to get to 10 places. it's full-time job, and then some. And so we have that pretty done pack, like we have a sales force, we have a training program. We run it well. And it's part of, I think, the value proposition we offer that allows us to generate the value we do.

Yes, ultimately, 94 NPS score for Apartments.com is incredible. I think back to the days when we first got into apartments and the first sales reps we had were a bunch of classified ad folks that happened to sell this digital thing, and we roll all those out, then we would buy these firms and you'd be excited. It's 100 sales reps, it's just going to be awesome. We just got to increase the size of the sales force. And then Andy would be like, yes, you got to go in the field 7 times a day, then out of 100, you have 95 quit in 2 months. Like the amount of distraction and turnover and things that we went through in those years. And when people sit here today and some apartments, that was easy. They were the same people that when we bought LoopNet and they hated that deal. And then 2 years later, they were like, oh, that one was obvious, but this Apartments.com is just so stupid. So we keep hearing the same things over and over again. And I think that the best part about CoStar is we pride ourselves on sales and training sales forces and doing things well in service.

The value proposition of the platform, right? Best branding, great organic search, great leads, great lead to lease time on apartments. In the CoStar Suite, we just keep building a better [ mousetrap ]. As we create more modules, that creates more stickiness. But more importantly, and I'm sure Andy saw this, but I'm sure most people didn't, that Apartments.com data is also now feeding into like information in CoStar suite. So it's just a virtuous cycle that revolves around the company that just gets better and better.

That's very helpful. A quick question on core margins. So core margins were 43% last quarter. As we think about some of these investments, but also operating leverage in the business, how should we think about margin expansion opportunities going forward?

Well, the reason people love these businesses and our business is very similar to the other ones you cite or you all think about is that you have a fixed cost base basically. The CapEx requirements aren't that great. And therefore, incremental dollars that come on to the platform at a very attractive margin, high margin. So inevitably, you should get uplift in margin over time. But you obviously have to invest in the platform, you have to invest in sales forces. But inevitably, there is an upward to right bias because of the incremental value of dollars coming on the platform. So it's as true for us as others, and we'll see it over time.

That's very helpful. Thank you. Thanks, Rich. Thank you. Thanks, Chris.

Thank you all for being here.

Great to see you again.