CoStar Group, Inc.

Ladies and gentlemen, welcome to CoStar Group's fourth quarter and year-end 2011 conference call. On the call today are CoStar Group's Founder and CEO, Andrew Florance; CFO, Brian Radecki; and myself.

We're delighted that you all could join us today. Before I turn the call over to Andy, I have some very important facts for you.

Certain portions of this discussion contain forward-looking statements, which involve many risks and uncertainties that could cause actual results to differ materially from such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's February 22, 2012, press release on the fourth quarter and year-end 2011 results and in CoStar's filings with the SEC, including our Form 10-K for the year ended December 2010, and form 10-Q for the period September 30, 2011, under the heading risk factors.

All forward-looking statements are based on information available to CoStar on the date of this call, and CoStar assumes no obligation to update these statements. As a reminder, today's conference call is being broadcast live and in color over the Internet at costar.com.

A replay will be available approximately 1 hour after the call, and will be available until March 23, 2012. To listen to the replay, call (800) 475-6701 within the United States or Canada, or (320) 365-3844 outside the United States.

The access code is 235325. A replay of this call will also be available on our website soon after the call concludes.

So now, without further ado, I turn the call over to Andy Florance. Andy?

Thank you, Rich. Thank you all for joining us on this call to discuss CoStar's groups year-end and fourth quarter 2011 results.

Again, I'm happy to announce that we had another strong quarter and outstanding year overall in 2011. Here are some of the highlights of 2011.

We achieved our best year ever, our best quarter ever, and our best monthly sales results ever. We had record revenue exceeding a quarter of $1 billion for the first time and a 13.7% year-over-year growth rate.

We launched CoStarGo, a revolutionary new product that puts our industry-leading information on to a mobile platform in the field where our clients need it most. CoStarGo generated nearly $5 million in annualized sales after being available for only 2 quarters in 2011.

It has been a key driver of sales to new and existing clients, and we expect that trend to continue in 2012.

We announced the agreement to acquire LoopNet, which we believe will be a very positive potential combination of 2 industry-leading, complementary and innovative companies that could better serve the industry and provide excellent cross-selling opportunities and efficiencies and cost savings. We raised $250 million in equity to help finance the potential purchase of LoopNet, and we recently signed an agreement for a $225 million credit facility that will be used to help fund that transaction.

We completed the sale leaseback of our Washington D.C. headquarters at $60 million above our original purchase price from a year after buying the building.

The purchase was recognized as the office deal of the year for 2010, and maybe the sale leaseback will get similar recognition in 2011.

I believe we received a huge branding benefit within our industry since we used the CoStar database and PPR analytics to capture that opportunity. We achieved a key milestone in integration of PPR analytics and forecasting division, replacing the very limited data previously used for analytics and forecasting with CoStar's more comprehensive and much more granular data.

We believe this will provide PPR clients with a much more timely and precise understanding of the market, which we expect will give PPR a tremendous competitive advantage in the analytics space. We completed the acquisition of Virtual Premise, a leading provider of SaaS-based lease management tools.

By matching CoStar's strong information and product design capabilities with Virtual Premise's lease management products, we believe we can bring significant value to our combined client base and create another strong platform for growth.

Our balance sheet is very strong. We ended 2011 with $573 million in cash investments.

We expect to use some cash on hand along with the addition of manageable [indiscernible] debt upon the possible closing of the LoopNet transaction. I am particularly proud of this year's 98% renewal rate with clients who have been with us for 5-plus years.

We now have approximately 93,396 paying subscribers, the most we've ever had. This demonstrates that we are providing very high-quality products and outstanding value to our clients.

Overall, I'm very pleased with what we've accomplished in 2011, and I'm excited about where we're going as we continue to deliver leading-edge innovation in the commercial real estate information space.

Let me walk you through some of the details of the quarter and where we're heading in 2012. Annualized net new sales for the fourth quarter 2011 were $8.7 million, an increase of 86% year-over-year.

There's no need to adjust the sound on your TV sets; you heard that correctly, 86% year-over-year. We have increased our sales in each of the last 9 consecutive quarters.

We're elated to have crossed the $0.25 billion mark in revenues this year, and we believe it's an important milestone on the way of achieving our stated goal of generating $1 billion in revenues. We still believe we're only scratching the surface.

We believe our current penetration is less than 20% of the potential markets of users of commercial real estate information products. There's still a lot of runaway out ahead of us.

We're charging ahead with CoStarGo, our other -- and other new software initiatives in 2012, which we believe will have equally high potential. As I mentioned, CoStarGo has been a key driver of our recent record sales.

CoStarGo integrates information from CoStar's comprehensive property, tenant and comparable sales databases into a powerful but simple app on the iPad. CoStar Group Go was released in the middle of the third quarter of 2011 following a 34-city tour to introduce our new app to approximately 3,000 of the most active and influential commercial real estate brokers in the U.S.

In the fourth quarter, we implemented an aggressive marketing campaign consisting of direct mail, e-mail marketing, print and online advertising and social media, and our salespeople conducted over 4,500 demos and trainings in CoStarGo. The results, total annualized net new sales associated to CoStarGo, as of the fourth quarter 2011, was $4.9 million, up from an annualized rate of $2.2 million in the third quarter, up from basically 0 in the second quarter, because we haven't launched it yet.

Essentially, we have already recognized the return on the earnings we reinvested to launch this game-changing product.

CoStarGo has been the catalyst for long-time customers who previously bought 1 or 2 products to upgrade to the full suite of CoStar products. These are companies like Cassidy Turley, BT Commercial in San Francisco we're thrilled to have onboard, Colliers International and CNW Commerce [ph] in Seattle and Studley.

We also added new customers like Colliers International in Columbus, Ohio; DESCO Group in St. Louis; and Flagstar Bank in Detroit.

We believe we have developed a tool that's creating a sea change in how commercials [ph] and professionals in the field operate and access data. Already, 8,000 clients have downloaded the app and logged in; there's more everyday coming in.

When we launched CoStarGo, our customers told us it was amazingly fast and worked very well. But we were not satisfied with very well.

We wanted to create an application that was exceptional. So we stayed close to our users, listened to their suggestions, stepped up the development and put our senior development team intensely focused, along with the product designers, to create an even better user experience.

The result was 1,600 software enhancements to the product between the launch in August 15, 2011, and now, and that's just the beginning. But that 1,600 enhancements is an amazing number.

We plan to continue to make additional updates on a regular basis with new features and enhancements that will make CoStarGo an even more effective tool for the Siri [ph] professional.

I believe that we will benefit from the meteoric growth of the iPad into the mainstream and its increasing acceptance as a business tool. It is hard to believe that the iPad is just 2 years old.

It was only released in January 2010. Gartner Group estimates that annual iPad sales will grow from 47 million units in 2011 to 148 million in 2015.

Doubtless, many of these units will be going to commercial real estate professionals. We believe as more brokers get iPads, more brokers will use CoStarGo.

In fact, we noticed this as a mini trend during the Christmas season. As our clients receive iPads for the holidays, our logins to CoStarGo jumped 15% in the week following Christmas.

The iPad 3 is due out this spring, and we believe it will have 4G LTE speed, higher screen resolution, a higher resolution camera overall. We believe as the volume of iPad shipped climbs, this will drive usage, and the expected iPad improvement will further increase the utility of the product we have designed for this device.

Since the launch of CoStarGo, we've seen a 20% increase in the usage of our web-based products. More than 1,300 clients who've never used our website products themselves began using our iPad product when it became available, and 57% of those new users also started using the web-based product as well.

Many of these new users are top producers and senior brokers who may have thought it was uncool to do research on a desktop or laptop computer, but they appear to find the mobile product very attractive, accessible and cool. We believe this will continue to positively contribute to higher customer retention.

CoStarGo is not a one-off product for CoStar. It defines a powerful new method we're using in our product development going forward.

In the past, our software design function resided within our software development group. While that may have worked, it tended to focus product design and engineering of the product rather than the customer experience, the value proposition, the visual appeal of the product.

Last year, we created an independent design team that is comprised of extraordinarily talented graphic artists, staffed with thousands of hours of experience with our customers, former CoStar sales executives, former CoStar researchers, commercial real estate tech entrepreneurs, even former clients. This group reports directly into me.

Since they're not all software engineers, they don't focus on how hard it will be to build something; rather they simply focus on designing an innovative, highly refined and perfected awesome product experience. I think our engineered teams like this process better because they recognize that this gives them the opportunity to work on more innovative, exciting, better designed, challenging new products.

All in all, I believe this new process will reduce our development cost on a per project basis, while delivering more compelling products and more products overall.

With that in mind, we're in a process of reimagining our current web product. It is about to undergo a series of major upgrades and design enhancements that will incorporate a host of new features.

This next-generation product is called CoStar Fusion [ph]. This will be a new product that brings together CoStar suite and analytics from PPR, financial tools, customer data and, we expect, eventually, Virtual Premise and Resolve.

We expect this to be a premium product that we believe could become a significant revenue driver for CoStar in 2013.

Switching over to the other side of the pond, for those in the United States, we're nearing the completion of our project to integrate our U.K. sales, research and fulfillment process and data into our more powerful U.S.

back-end software systems. We believe that we can complete this phase in April.

We're working on modifying our iPad product to work in the U.K., and we expect to complete and release CoStarGo U.K. this summer.

We believe we will see a solid revenue uplift for the release of CoStarGo in the U.K. By the end of 2012, we expect to release the rest of the U.S.

product suite to the U.K. market.

Again, with the expectation of generating revenue uplift. We believe that these initiatives will take the U.K.

to profitability by year-end 2013 and continue to grow the margin there on out. This will be a significant upgrade to the U.K.

commercial real estate market, and it will give the professional access to comprehensive information that has not previously been available in the U.K.

Another place we've been innovating is on the research side of the business. We noticed that our industry was hampered by lack of effective building quality ratings, which in turn made it difficult to impractical to effectively analyze market movements and investment opportunities.

The only system out there has been the ad hoc ABC rating system used for office buildings only. There have been no definitions of what really distinguishes an A office building from a B office building, and so certainly no consistency from market to market on these ratings.

And just 3 categories cannot cover the range and quality of buildings we encounter every day. The ABC systems often relied on the broker trying to sell the building, rating it himself, making the credibility of that rating system completely suspect.

Finally, the system ignored retail, industrial, multifamily and land properties, which is the vast majority of the value of the commercial real estate in the United States. This backdrop was the perfect opportunity for CoStar Group.

In 2011, we introduced the CoStar five-star building rating system under the direction of Anthony Guma. Anthony holds a Master's of Science in Real Estate and Masters of Architecture from MIT.

He has practiced and studied architecture in Europe, and he gained a solid understanding of rating systems while he worked in developing products for the U.S. Green Building Council.

This new rating system provides more detail and consistency in comparing property assets across markets than the old ABC rating system. The CoStar building rating system also covers all property types.

We are working hard to make this new system objective and responsive to the industry's needs. Since the launch, we've been speaking to and meeting with hundreds of industry professionals.

We are winding up a 20-city tour of major cities all over the U.S. where we have been reaching out to owners, brokers and research directors for feedback to learn how we can refine the ratings and make them more accurate, relevant and to increase transparency in the process.

The launch of the rating system has also helped us to improve the accuracy and quality of some of the listings in our database, as owners are even more inclined to proactively share information about their properties in order to meet our criteria and ensure the highest possible rating. Overall, the feedback from clients in this initiative has been very positive.

During the third quarter of 2011, we completed the integration of PPR's best-in-class analytics and forecasting tools with CoStar's comprehensive commercial property database. In November 2011, we began supplying PPR clients with analytics and forecasts based on CoStar's research-verified platform.

One of our priorities in 2011 for PPR was to ensure we continue to invest in and continue to grow our accomplished team of thought leaders at PPR. We believe that PPR's thought leadership was already undisputed, but adding segment specialists was even more of a value add for our clients and prospects.

So we added Walter Page to lead the office sector team. Walter was previously Vice President of Research at Equity Office in La Salle Investment Management.

We also welcomed Rene Circ, who comes to PPR with 15 years of experience as a market strategist and real estate economist at Grubb & Ellis and First Industrial Real Estate Realty Trust. Mark Berry joined us in New York.

Mark brings more than 20 years of experience as a portfolio manager and REIT analyst. He most recently was portfolio manager for Deutsche Bank's commercial real estate collateralized debt obligations.

Prior to joining Deutsche Bank, he was a senior analyst with Green Street Advisors. We have also hired an accomplished multifamily economist who we expect to join the team soon and we will be able to announce shortly.

I know many of you on the call are with institutions that are PPR customers, and my hope is that your firms will benefit from our new colleagues' insights.

Turning to some other minor news, let's touch on the LoopNet acquisition. We're working diligently in an effort to bring the LoopNet acquisition to a conclusion.

We are in ongoing discussions with the FTC staff in an attempt to reach a mutually acceptable consent order, and we feel the process has been productive. But as of yet, we have not reached a mutually acceptable agreement.

We remain hopeful that these discussions might allow this deal to close in the not too terribly distant future. In the event that we reach an agreement with the FTC staff in the near future, we have recently secured the debt portion of financing needed to complete the LoopNet acquisition by entering into a credit agreement that provides for $175 million term loan facility and a $50 million revolving credit facility.

Our CFO, Brian Radecki, will give you more details on this in a few minutes.

At the time of the announcement of the acquisition of LoopNet, we were confident the proposed combination of CoStar and LoopNet was good for our clients, the industry and our shareholders. After 9 months, our confidence that our investment thesis is sound has grown.

We believe, even more now, that the cross-selling opportunities, greater efficiencies and combined innovation efforts will be great for the commercial real estate industry and our shareholders. While some may interpret my comments as optimistic, I think it's important to remind our shareholders that even in a scenario where, despite our best efforts, this deals might or could not close, we believe that this company, CoStar, as always, would absolutely have a great future going forward on a stand-alone basis.

We believe the company would continue to deliver innovative products, grow revenue and profitability for many years to come. I also believe the [indiscernible] holds true at LoopNet.

In the meantime, we continue to make our very best efforts to work cooperatively with the Federal Trade Commission and any other relevant parties to reach an equitable and workable basis and to move forward on.

Finally, I want to present a brief summary of commercial real estate market conditions and how I believe they're creating and improving a positive environment for our business moving forward and potentially for some number of years to come. Coming out of [ph] recession, commercial estate rents for high-quality properties were well below, and still are well below, long-term inflation adjusted averages, while, at the same time, employment in many sectors is growing and corporate profits continue at record levels.

This is resulting in some of the strongest leasing activity we've seen in years. Leasing activity drives leasing commissions and is the best indicator of our core client base's financial health.

Net absorption of office space had its seventh consecutive quarter of positive increase led by top-tier U.S. cities.

At the same time, commercial real estate construction activity and enhanced deliveries of new competitive supply is at all-time extreme historic lows. Because of this, vacancy rates continue to climb the vast majority of U.S.

cities and will likely to continue to do so, which will ultimately drive rents upward. This recovery is broad with 2/3 of all U.S.

sub-market's vacancy rates continue to move lower.

This is the best we've seen this benchmark in the last 10 years. This creates some justified optimism with commercial real estate investors, who believe that net operating incomes and properties will continue to improve, creating even more attractive yields compared to the very low yields available from alternative investments.

Building sales volumes in 2011 were up over 40% versus 2010 volumes. Increased volumes mean increased commissions.

Sales commissions are the next largest revenue driver for many of our clients and prospects, and this potentially bodes well for CoStar. Values for larger investment-grade properties stopped falling, began stabilizing and then climbed over the prior year.

Now, in the past 2 quarters, values for general commercial real estate or smaller properties around the country, those values stopped falling and are now beginning to climb back up. We believe that LoopNet's business has more exposure to that economic sector, the smaller properties, and so I believe this is a very important positive indicator for their business environment.

I continue to believe that the commercial real estate markets are stable and improving at a pace that helps the outlook for CoStar Group in 2012 and beyond. In summary, we're extremely proud of our financial performance in 2011, and I have never been more excited about the prospects for this business than I am now.

I believe that we will continue to bring a series of innovative and valuable products to market, drive sales into these massive market opportunities and grow earnings as we move towards our $1 billion revenue goal. I will now turn the call over to our Chief Financial Officer and Treasurer, Brian Radecki.

Thank you, Andy. We're very pleased with our performance in the fourth quarter of 2011.

Once again, we delivered strong revenue growth and earnings while continuing to invest in our business. Today, I'm going to focus on sequential results, year-over-year trends and also on our outlook for the first quarter and full-year 2012.

The company reported $66.2 million of fourth quarter 2011 revenue, an increase of $2.4 million, or 3.7% compared to revenue of $63.8 million in the third quarter. Revenue for the fourth quarter of 2011 increased $8 million, or 13.7% compared to last year.

Full year revenues were $251.7 million, an increase of approximately 11.2% over revenues of $226.3 million for the full year of 2010. Sequential and year-over-year revenue growth was primarily attributable to growth in subscription revenues from our core suite of services, CoStar property, COMPS and Tenant, which was supercharged by CoStarGo.

We also reported $5.2 million in net income or $0.20 per diluted share during the fourth quarter of 2011 based on 25.4 million shares compared to $2.3 million, or $0.09 per diluted share in the third quarter of 2011 based on 25.3 million shares. This reflects the impact of approximately $3.1 million expenses associated with the proposed LoopNet merger, a decrease of $2.7 million compared to the third quarter.

Adjusted EBITDA for the fourth quarter of 2011 was $16 million, compared to adjusted EBITDA of $14 million in the third quarter of 2011, an increase of $2 million or 14.3%. Adjusted EBITDA increased $2.6 million or 19.4% over the fourth quarter of 2010.

Non-GAAP net income was $8.4 million or $0.33 per diluted share in the fourth quarter of 2011 compared to non-GAAP net income of $7.2 million, or $0.28 per diluted share in the third quarter of 2011. Reconciliation of non-GAAP net income, EBITDA, adjusted EBITDA and all of our non-GAAP financial measures discussed on this call that are GAAP basis results are shown in detail along with definitions of those terms in our press release issued yesterday, and is also available on our website at the www.costar.com.

If you have any further questions on those, e-mail Rich Simonelli.

The company had $573 million in cash and investments at December 31, 2011, a decrease of approximately $10 million since last quarter. We used approximately $15 million cash to complete the acquisition of Virtual Premise in the quarter.

As previously reported, last week, we entered into a credit agreement that provides for $175 million term loan facility and $50 million revolving credit facility, each with a term of 5 years. Drawdown of these facilities is subject to the closing of the LoopNet acquisition, and the proceeds of the term loan facility are expected to be used along with the net proceeds of CoStar's June 2011 equity offering to pay a portion of the merger consideration and transaction costs.

The credit facility includes a group of 6 banks, with JPMorgan Chase bank as the administrative agent and sole lead arranger, and effectively replaces the fully committed term loan and revolving credit facilities disclosed at the time of the merger announcement. This credit agreement carries a rate of LIBOR plus 200.

This $225 million term loan A facility will save the company 3% to 4% in interest costs or approximately $20 million over the duration of the loan, versus the term loan B structure, as indicated in the initial merger announcement. And by the way, my title is actually just Chief Financial Officer.

I want to thank Charlie Colligan, our Treasurer who we hired last year, and his team and the finance team and accounting team and legal team that worked tirelessly to get this done. It's a tremendous agreement.

The term loan facility amortizes beginning with 5% in year 1 and gradually increases to 50% in year 5. The entire amount of the revolving facility is available through its 5-year term.

Our customers continued to renew subscriptions at a very high rate during the fourth quarter of 2011. The end-quarter renewal rate exceeded 93%, which is an improvement from 91% one year ago.

Additionally, the 12-month trailing renewal rate for subscription-based revenue remained at approximately 93%, which is an improvement from approximately 90% one year ago. The renewal rate for clients that have been our customers for 5-year or longer held constant and outstanding 98% for the fourth quarter, an increase of 2 percentage points in the same period in 2010.

The renewal rate for firms that have been clients for less than 5 years is approximately 86%, which is consistent with 2010. Subscription-based revenue accounted for 94% of the company's total revenue in the fourth quarter.

During the fourth quarter of 2011, the average annual new contract value was $9,277, up 4% from the third quarter of 2011, and our sales headcount totaled 209 sales reps, a 5% increase from 199 on staff at the end of the third quarter. Total number of paying subscribers increased to 93,396 in the fourth quarter of 2011, a net increase of 2,386 over last quarter, which is just great.

The total number of subscription clients increased by 286 during the fourth quarter to 18,183.

I will now quickly cover other results from our income statement of fourth quarter 2011 and also provide the outlook for the first quarter and full year. Gross margin was $44.2 million in the fourth quarter of 2011, up approximately $1.5 million compared to $42.7 million in the third quarter.

This performance results in a 3.3% year-over-year improvement in gross margin percentage from the fourth quarter to 66.7%. We expect gross margins to be slightly lower in the first quarter due to the seasonal expenses and then grow thereafter.

Total operating expenses in the fourth quarter 2011 was $36.4 million, a decrease of $3.3 million compared to $39.7 million at third quarter of 2011. As we indicated in last quarter's call, the fourth quarter 2011 sales and marketing expenses were expected to decrease as the third quarter includes the launch of CoStarGo, and these are partially offset by higher commissions, which resulted from our record sales quarter.

G&A expenses were $15 million, which included $3.1 million expenses associated with the post [ph] LoopNet merger, which was down $2.7 million compared to expenses in Q3.

As you are probably already aware, one of our clients, Grubb & Ellis, recently filed for bankruptcy. This is not a material event for CoStar and will not significantly impact our financial results.

No one client represents over 5% or more of our total revenue, and Grubb's annual revenue is significantly below that number. We have been in communication with the senior management of Grubb since we were made aware of the financial uncertainty, and the impact of these events is already reflected in our published 2011 financial results.

We expect to continue to provide services to Grubb, and we pay for those services on a priority basis going forward from bankruptcy unless our contract is terminated as a part of the bankruptcy process. If the contract were to be terminated, the impact would be approximately a 5% point drop in our in-quarter renewal rate in that quarter and our reported annual renewal rate would drop by about 1.5%.

While there are many possible outcomes related to Grubb & Ellis's bankruptcy proceedings that I previously mentioned, we believe our revenue guidance range adequately accounts for all these scenarios.

I will now discuss our outlook for the first quarter and full-year 2011. Our guidance takes into account the recent trends, growth rates, renewal rates, which all may be impacted by the economic conditions in commercial real estate or the overall global economy.

Our outlook includes Virtual Premise but does not include the impact of the proposed acquisition of LoopNet or costs that are contingent on the closing of the acquisition, as we're not able to reasonably forecast whether or when certain acquisition-related costs may take place. Therefore, we're providing outlook on a stand-alone basis reflected as our current expectations of today.

Our guidance on the impact of foreign currency fluctuations remain consistent. We do not attempt to predict foreign currency exchange rate fluctuations, and our guidance assumes little to no volatility on that rate.

The average rate in the fourth quarter of 2011 was USD $1.57 to GBP 1, and our 2012 guidance assumes a similar rate for the remainder of the year.

We expect revenues for the first quarter of 2012 in the range of $66.7 million to $67.7 million, and for the full year 2012, we expect revenue of approximately $281 million to $285 million. The continued strength of our core information sales over the past several quarters gives us a lot of confidence in our annual revenue outlook.

In terms of earnings, we expect the first quarter 2012 fully diluted non-GAAP net income per share of approximately $0.27 to $0.31 based on 25.4 million shares. For our business, as I mentioned earlier, first quarter expenses traditionally include seasonally higher cost related to our annual sales conference and just increased personnel, payroll, taxes and benefit costs in the first quarter.

We currently assume a 38% tax rate in order to approximate a long-term effective corporate tax rate. For the full year 2012, we expect non-GAAP net income per diluted share of approximately $1.27 to $1.39.

As Andy discussed earlier, we expect to continue to make incremental investments to improve our existing services as we launch new product offerings. We expect to invest an additional $3.5 million to $4.5 million in 2012 to develop the CoStar suite of products for the U.K.

market including CoStarGo iPad app, which is expected to accelerate revenue growth in the U.K. We plan to increase our investment in new products in the U.S.

by approximately $3 million to $4 million and expect to support these new product initiatives with some marketing programs later in the year.

We are extremely excited about this robust pipeline of new products, and we believe these investments will provide a basis for continued strong revenue growth and even stronger earnings growth next year and beyond. In summary, I'm very pleased with our record revenue results and strong earnings growth.

The business model remains strong based on the fact that we have a 94% subscription-based business coupled with a 93% plus renewal rate for our services, the unique proprietary database, market-leading position, strong balance sheet and very high operating cash flow. As Andy mentioned, we crossed $0.25 billion in revenue this year, which is a great milestone, with momentum, and we are operating in a very large, multibillion-dollar space.

I believe, with the sales trends we are seeing and the investments we are making in our industry-leading products, CoStar's position to continue to progress towards our previously stated goal of $1 billion of revenue at 40-plus percent adjusted EBITDA margins. I look forward to that progress and reporting to you each quarter, and now, we'll open up the call for any questions.

A question for you on the 2012 guidance. Just wanted to ask what kind of EBITDA guidance you are implying in that?

I just want to make sure I'm doing the calculation correctly.

Sure, Bill. I mean, I think we're giving just the non-GAAP EPS numbers, but you can -- in the back of the press release, I won't spend on the call going through every line, the detail of the reconciliations of the guidance, so you'll be able to see all the different lines.

So you'll see exactly what we're sort of forecasting for the year for DLPs and everything like that. So we put a detailed reconciliation in there.

Got it. And it sounds like it's going to be weighted, the expense, the 6.5 to 8.5 would be weighted how throughout the year?

It sounds like the $3 million to $4 million would be more towards the second half for the U.S.?

Yes, I mean, we're actually starting hiring right now for all of those positions. So anybody, developers anywhere in the country, please e-mail us, let us now.

We're looking for a lot of great developers here. But in the first quarter, I think, it's just typical seasonality, you have higher payroll, taxes and benefits, and then we'll be ramping up pretty evenly throughout the year after that.

So we're definitely looking now to see a ramp-up development this year; that's the main focus.

Okay. And then I might also ask another housekeeping question on the -- the contribution of Virtual Premise in the quarter.

That was probably small, but I just wanted to check that.

Yes, it was pretty small. That was pretty small.

And then as far as this year goes, we've just incorporated their numbers in to ours. They were on about $7 million run rate, of course that's prorated; we also lost about $2 million to $3 million in purchased accounting of their deferred revenue.

So the number end up being fairly small, and I think with the Grubb & Ellis putting the range in there, they sort of offset each other. So all that's pretty much incorporated in the guidance.

I think the 11.5% to 13% range is a very comfortable range for us. Obviously, we feel great about it.

And so for the fourth quarter contribution, you're looking at less than 50 basis points to the growth?

Yes.

And then I wanted to ask about the expansion into the U.K. and whether you guys have the data in place there to support a CoStarGo type product?

I would -- in answering the question, I'd say 2 things; one is I believe we do. It's not in the exact same format as the U.S.

data structure, but it was kind of 4 years ago that we shut down the 15-person research operation in London and opened a 100-plus person operation in Glasgow, so that we could get the same level in nature and quality of data in the United Kingdom that we have in the United States. So there's no material anticipated ramp-up in the United Kingdom around research.

The U.K. research team will be working very hard this year as they are tweaking the data to move it from the U.K.

[indiscernible] into the U.S. enterprise system, but that has been, today, surprisingly well managed and looks like it's going smoothly.

When we actually release the product, when we see it the first time in the U.K., I'm sure we'll see things that -- there'll be some gaps in the teeth that don't look quite right. But we will fix those quickly.

And then ultimately, this is not really an expansion of costs; this should ultimately reduce our costs in the U.K. So we're pretty optimistic about it, and we're glad we're on the track we're on.

Got it. And then for the last question, if you could comment on the strength that you're seeing in multifamily and whether that creates an opportunity for you guys.

Well, I think we're seeing strength across most all of the sectors. I think multifamily is getting a little more media attention, a little more hype than the other sectors.

So actually, I'm pretty jazzed about all the sectors. We have been collecting more and more data on multifamily.

We're definitely climbing a curve there. And we do provide a multifamily advisory service and economic forecasting through PPR, which is being well received.

A couple questions. One, just want to make sure I understand what's in and out of the guidance, and so I guess, Brian, this is for you.

The additional marketing spend you talked about, is that in the 3.5 to 4.5 and/or the $3 million to $4 million that you called out in the release, or is that in addition to. And second question related to that is, whatever -- whether it's in or out of that number, is it contemplated, is the additional marketing spend contemplated in the guidance?

Sure. The numbers I talked about the 3.5 to 4.5 and 3 to 4, those are pure development numbers, so that's really the investment in the development group with sort of there being a big piece in the U.K.

and the U.S. The U.K.

piece, that number that I outlined there, is not just development; there are some other costs in there, but I would say the majority of this is development. The U.S.

piece is almost all development. The guidance does include sort of some marketing spend this year, so we've got some numbers in there.

Clearly we'll keep evaluating things; a lot of it depends on when the timing of the marketing spend is all going to depend on when the products are released and when they come out. So some of it's a little bit hard to predict, but, I mean, I think overall, we're trying to account for all that.

Just depends on the timing.

Okay. And then you mentioned again the long-term 40-percent plus pro forma EBITDA margin, and I think that was a combined company goal; is that still right?

That's correct. And I think it's obviously a CoStar Group goal too.

But it is also -- it would be if the proposed merger closes a combined company goal.

Any thought on the -- one of the things that I think, we, as investors, try to suss out is just how much you guys need to invest in order to continue your nice top-line revenue growth. Can you give us more color on how the spend that you've recently announced, just yesterday, is that going to be ongoing, does it stop, how does it fit or figure into that 40-plus goal?

Well, we look at this investment as more opportunistic. As we look at some of the product concepts that we have developed and things that we want to do and bring to market, we think we have a number of very compelling, potentially very high-margin products we can bring to market, and we don't have to bring those things to market.

We can continue to grow without bringing those things to market. But we think they're very compelling and that we should bring them to market, so we're basically reinvesting into higher-margin initiatives.

They're optional only in that we would feel stupid not building them if we can.

Got you. And then last question for me, the gross margins, Brian, you mentioned a little bit, obviously, they were very good; much better than we thought.

Can you tell us what's driving that? I mean, is this just the business, or is there something going on there.

You mentioned they'd come down a little bit in 1Q but then continued to grow; what kind of expansion can we expect assuming standalone basis?

Yes, I mean, I think that clearly, when you're growing revenue, I mean, we've always talked about it, when you got a relatively fixed cost structure in sort of the research area, I mean, each year we do invest a little bit more there, but essentially you're going to continue to see margins grow. I mean, the first quarter is always just a function of the fact that you've got, like I said, a lot of the seasonality and payroll benefits in that, and a thousand researchers in there, obviously a big chunk of all that seasonality ends up showing up in that line.

So in general, yes, the first quarter is always going to be a little bit lower seasonality wise, and the expectation is, when you're growing revenue, you're going to be growing the margin line. So I would expect it to be a little lower in the first quarter.

I think Q4 was exceptionally strong. We had a couple of expenses that didn't happen there that might flow over to Q1, but in general, I think that you're going to continue to see gross margin expansion after the seasonality in the first quarter based on strong revenue growth.

Just a few questions for you guys. So first of all, I believe you mentioned that you did $4.9 million of CoStarGo related bookings in the quarter.

How much of that was from new customers and how much was from up-sell. And then just wanted to clarify your comments around the holiday season iPad shipments.

Was the strength of this, at all, due to that? And as a consequence, how does that -- how should we assume the level of this type of booking in Q1?

I'm going to take an educated guess, and if Brian wants to provide a different color, that's great. But my feeling is this has been -- the CoStarGo associated sales have been a relatively even combination of completely new customer acquisitions and existing customer up-sells.

Maybe a little skewed slightly to new customer up-sell, I mean, to existing customer up-sells, but it's probably in the 60-40 range there. I don't know that we have specifically an immediate revenue enhancement from the holiday season iPad shipping; what we saw was more of a usage jump, but it was material and clear.

I mean, it was -- watching the line, it just stair stepped up to a new level following the holiday season. So I think ultimately it will definitely result in more revenue, and if there's a very popular iPad launch in March, I would expect another stair step in 2 things: One, slight limitation of the current price [ph] as that 3G speed, LTE speed, would definitely make it an even better client experience, looking at photos and aerials and maps on a high-resolution screen would be an even better customer experience.

So an increase in volume of units as the new iPad 3 comes out along with a better customer experience I think will ultimately drive sales. But also, it's a little frustrating to me, like, we have a number of customers who are bringing home half a million in commissions a year who are slow to open up their wallet and drop their $700 on probably the most important business tool they could get, but with the iPad 3 coming out, we imagine they'll probably reduce prices on iPad 2 significantly, which will dramatically increase volumes.

So we think all that this spring is good, good and better to keep the sales going for the CoStarGo. And this is not a product that taps out in 2 quarters.

I think this product will be driving revenues for 8 quarters, 10 quarters solidly. Because we're only at -- we're not even at 10% yet of our customer base on this.

And just to make, add onto that and make one clarification, it was $5 million annualized sales for sort of the 2 quarters that it was out, so it wasn't $5 million in the fourth quarter. So my comment on sort of bookings and where can those go, I think I said this last quarter and the quarter before, and so I'll say it again now, I mean, you can't, it's hard to predict breaking records every single quarter.

The fourth quarter also tends to be seasonally one of our strongest quarters. So I think you got a combination of obviously growing momentum, iPad and then seasonality.

So my expectation is the first quarter probably will not be as high as the fourth quarter, but I believe growing all year long and then of course overall great growth rate for the year, we're projecting up to 13%, even factoring in for something like the Grubb, so it could be even higher on that. So I definitely would not expect Q1 bookings to be the same.

But again, overall, I think we're in for a great sales year.

And I know it's still early around, kind of, CoStarGo, but how have you seen this impact cost of acquisition for these new subscribers and length of sale cycle. Have you seen any notable changes that you could share with us?

Yes, I do believe it's a shorter sales cycle. You're bringing in a piece of technology that frankly is sexy, and if all sales are emotional, this is definitely a faster sale cycle.

Some of the bigger ones may not be that much faster, but the smaller ones, I think, definitely.

Okay. And my last question for you.

So given CoStar Fusion and the launch in the U.K., what would you expect that to do to growth rate in 2013. I know you have no formal guidance around that, but could we see acceleration from 2012 levels, assuming no material change in the end commercial real estate market, or what's your kind of first flush thought on kind of what this could do?

We'll take the 2 separately. I think with the U.K., I think that even if the U.K.

were to triple its growth rate or quadruple its growth rate, it doesn't -- I don't think it'll materially move the dial for CoStar Group overall because it's a relatively small percentage of our revenue. It's more of a proof of concept that what we're looking for there is to be able to show that we can do a 30% margin, grow revenue in an overseas market.

The much more meaningful revenue would be from a major enhancement to our U.S. product suite in the United States.

That's the juggernaut where, no matter how fast these other initiatives grow, the core initiative grows -- at any pace, it's outgrowing the others. So this [ph] go right to that core market.

And while it's extremely early, we're sitting here in the first part of '12 and this is a product that would really be about the first quarter of '13, I am extremely enthusiastic about the way this product looks, and if it's well executed, I think it will have a material and significant impact on our per salesperson productivity throughout 2013. It will certainly reenergize any kind of momentum we have from CoStarGo.

And just a follow-up with that. So the U.K., people can look at the separate financials, and they're presented in U.S.

dollars, but if you convert them back, they've been actually generally, relatively flat or low growth the last few years compared to CoStar, which has been growing, and one of the things we've identified there is it's because of the software. We believe we have great data.

So I think the investment in the U.K., I believe will generate higher revenue growth in the U.K. as you rollout CoStarGo this summer and into the fall, and then the full suite of products by end of the year, early next year.

As Andy mentioned, the U.K. is 8%, 9% of our business.

If we were to close a proposed merger with LoopNet, it would drop to 4%. So it's not a huge piece of our business, but clearly, we're focused on getting their revenue growth rate up to ours in the U.S.

or higher and also getting them up to profitability, and the way to do that is to invest in the software, which we haven't done yet. So I think that's the U.K.

piece. On the U.S.

piece, I think it's a little too early to predict growth rates, but clearly, the way we invested in CoStarGo this past year, we are now investing in some new products in the U.S. to obviously release and hopefully then keep the momentum going on growing revenue into next year.

So obviously, where we sit today, we feel pretty good. As the year goes on, we'll obviously have a better feel for that as we know when the products come out and we see what the reactions to those are.

Couple of quick ones. Have been comparing sales cycles in new markets versus, looks like kind of a more mature markets these days; are you seeing any, I guess, [indiscernible] impact either from CoStarGo or just with the improving environment in commercial real estate?

Are you seeing any shortening of the sales cycles, or is it still about what you've seen in the past couple of years?

We are seeing something, I think, very materially different in the newer markets. So the newer markets, I would say, is, I would call newer markets that last round of 200 we entered after the 80 big ones, so if I'm looking at big establishments being New York, Washington, Baltimore, Philadelphia, Phoenix and so forth, those are doing well, moving along, but when I was preparing for this year's sales conference and I was reviewing the sales numbers in some detail, I saw one thing that really shocked me, and that was our performance in tertiary markets.

So I was looking at numbers like our Buffalo, New York; our Lubbock, Texas; our Boise, Idaho numbers, and I was -- while they're relative, they don't move without the whole company that quickly [ph], I was sort of shocked at how well those markets are doing. So the markets like a Buffalo, where we could, just as an example, we could be doing, we were doing very little revenue before.

We're now are doing $100,000, $200,000 in revenue, and what's driving that is a successful, centralized selling model. So people selling into these markets with a cleaner, simpler product offering from our centralized call center in Washington, and then also having a career path where people have [ph] centralized calling center into a sort of periodic visit to these secondary markets.

So it's a pretty good trend. I think if that holds up and that keeps going, we're going to feel very good about our decision to go into those tertiary markets.

They look really, really nice [ph] right now. [indiscernible]

During the fourth quarter, something came up with kind of, I guess, talk between you guys and CBRE about, I think it was the power broker rankings. Maybe a little color on what those rankings actually are and what this issue is, if there is an issue with this between you guys, or if that is kind of gone away as the quarter progressed?

I don't recall what you're talking about. No.

CB and CoStar Group have a very important, mutually symbiotic relationship through the years. And we have, we provide a lot of value to them, and they're a very, very important customer to us.

They have had a policy that changes from time to time, where they don't want comparable sale data getting out to the market because they believe that, or comparable leasing to get out to the market, because they believe it gives their competitors some advantage and neutralizes their scale. And it's inconsistent.

I think a short paragraph piece or 2 come out in Washington business something about it, and it's sort of blown over. We had a very good and productive meeting with my friend, Mike Lafitte, who's the President of CB over in Dallas last week.

And I would say things are on a very good footing.

Okay. Perfect.

Since nobody's asked the big elephant in the room question, I guess I'll be the guy to ask you about the LoopNet transaction. Maybe I'm reading too much into the words, but, I guess, should we assume that the transaction process is at this point, or has taken this long, because the FTC didn't like the deals or they saw there was something that they didn't like, either a market concentration or what have you.

Or I guess asked another way, if the transaction does go forward, should we expect it to look like you guys thought it would back when you announced it midyear 2011?

I have a lot to tell you about that, and I want to basically open up and tell you everything.

That would be fantastic.

[indiscernible] have John Coleman answer that for you.

Yes. Unfortunately, I mean, we're going to have stick to kind of what the disclosure is we've given.

I think Andy said it best; we're working extremely hard to bring this to a close. The conversations have been very productive and we're hopeful to wrap this up in the near term and -- but I think we can't really get into more specifics than that at this point.

I think what he said was, "Wah wah wah."

That's pretty much what I heard, I think. And then maybe more of a process question, is there something that we should look for that, just call it "restarts the clock" for kind of a final run of discussions, or could the next data point just be, hey, we got it completed or we didn't get it completed.

Is there some interim step that kind of gives us a better timeline for how this may play out? Just from pure process perspective, or is there some part of the FTC process that we need to be aware of that you guys need to tell us about.

I think, as we disclosed, there's this kind of 45-day period, and I mean, we would likely tell you if that 45 day trigger was pulled. So that would be, if that happened, you would certainly hear about that.

But otherwise, hopefully the next thing you hear is that we've gotten where we're all trying to get to.

I can tell you that they don't offer coffee in their conference rooms.

And then final question. How do we think about research and sales force headcount additions in 2012?

I think Brian's talked about a 5% uptick this past year for sales force; should we see about the same kind of number this year, or you guys happy with how the headcount looks right now?

Yes, I think as far as sales and research goes, sales, we're always adding a little bit, 5%, 7%, each year. So I would expect to see a sort of similar range there.

I mean, nothing significant, but we, obviously, as the revenue base grows, we continue to grow the sales force a little bit. Very similar with research, very minor adds in research.

So again, nothing significant there, and I think this goes to the conversation of gross margin growth. I mean, the first quarter is seasonal, but then after that, with revenue growth, we would continue to expect to grow gross margin.

So some minor investments on both of those, but essentially, we think we've got great teams there.

I was wondering, are you having success in selling to [indiscernible] or, I mean it's sort of geared towards the larger or the broker segment, and I know brokers are the largest sort of client type that you have, but just wanted to hear if there was any surprising success with other customer types as well.

It's a good point because I think we tend to, when we write things, we tend to always focus on the broker side of it. And definitely the brokers have responded very well to this product.

But actually, I think that we're getting an equal and potentially even greater reaction from both retailers and institutions. So if you think about retailers, if you're a regional manager for a Starbucks, you are traveling all over the southwest going to different sites, and actually having all that data in your hand is pretty valuable and much more interesting [ph] that you have in the office.

One of the things we do hope to do is eventually integrate the Virtual Premise leases that allows retailers -- the software that allows retailers to house their leases directly into the CoStarGo application. So when one of these retail acquisitions folks are in the field, they can see their existing leases plus all of our data wherever they're going on a location-centric interface.

Also some of the heaviest users of the product are some of our institutional customers. So our very best customers each year come to our PPR conference up in the Cape, the institutional customers, and we show them the iPad application CoStarGo, and we actually gave the attendees an iPad, and I was looking at usage, and the heaviest usage I'm seeing is from some of those attendees, and these are not brokers; these are folks who manage a $50 billion, $100 billion, $50 billion portfolio.

So they actually find a lot value because they're from city to city, and being able to look up local market conditions, I think, is of interest to them. So we've probably done you a disservice on not focusing -- and talking about all the different segments that are using it, but it's being used across the board.

We also have an upgrade coming to it, which is pretty cool, where -- and I know for competitive purposes, I shouldn't be blabbing, but, Steve Jobs would look down on me, but we have a cool thing coming where you can, if you're in a submarket in Austin, Texas, and you're looking at investment there, you can actually zoom in to the neighborhood and it is a realtime calculating statistics on vacancy absorption, price trends and the like on the area you're actually in, which is, for the commercial real estate world, pretty mindboggling. So that's something we think can bring out later this year.

Okay, great. And then once someone has the required suite for getting the iPad application, what's the up-selling opportunity from there?

Well, so if someone has purchased the iPad application -- stepped up and are now purchasing all the items to get the iPad application, the next up-sell opportunity would be, depending on the customer, additional geographies, it could be Virtual Premise, it could be Resolve, it could be PPR. There are a whole range of other services.

Almost nobody in our client base is buying everything we've got. I mean, we should actually look into that.

I doubt there's anybody buying anything, and should that day occur, we'll develop something new.

Well, at this point, I'd like to thank everyone for joining us for this year-end and fourth quarter conference call. And we look forward to updating you on our progress on all of these initiatives we're pursuing at next quarter's conference call.

Thank you.