CoStar Group, Inc.

Thank you, operator, and good morning, everyone. Welcome to our first quarter 2012 conference call.

We're delighted you have taken the time to join us. Before I turn the call over to Andy, I have some 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 through such statements. Important factors that can cause actual results to differ include, but are not limited to, those stated in CoStar Group's April 25, 2012 press release on the first quarter results and on our filings with the SEC, including our Form 10-K for the year ended December 31, 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 whether as a result of new information, future events or otherwise. As a reminder, today's conference call is being broadcast live and in color over the Internet at www.costar.com.

A replay will be available approximately 1 hour after the call concludes and will be available until May 26, 2012. To listen to the replay, call 1 (800) 475-6701 within the U.S.

or Canada, or (320) 365-3844 outside the United States. The access code is 242701.

And a replay of the call will be available on our website right after this call concludes.

This time, I'd like to turn the call over to Andy Florance. Andy?

Thank you, Rich. Thank you all for joining us on this call to discuss CoStar Group's first quarter 2012 results.

I'm happy to announce that the strong momentum we had in 2011 has continued through the first quarter of this year. It's great to come out of the gates so strong in 2012.

Our revenue and sales growth has continued to accelerate. This is broad based and coming from across our products and our geographies, both domestic and international.

We recorded our 10th consecutive quarter of record revenue. We had first quarter revenue of $68.6 million.

This is an exceptional increase of 15.1% over the first quarter of last year. Our first quarter annualized net new sales increased 23% year-over-year.

With $8.4 million of annualized net new sales in the first quarter 2012, we achieved the highest first quarter net new sales quarter we've ever had. The U.S.

economy hit a bit of mild turbulence in the first quarter 2012, and the first quarter is historically not our strongest sales quarter, so we're very pleased with the results.

On the earnings side, our adjusted EBITDA for the first quarter 2012 grew by almost 21% over the first quarter last year, and our non-GAAP net income for the first quarter of 2012 was up 32% year-over-year to $8.2 million. You can find the reconciliation of adjusted EBITDA and non-GAAP net income to the GAAP basis results in our press release issued yesterday, which is available on our website, costar.com.

Our in-quarter renewal rate for subscription-based services during the first quarter increased to 94%. This is the highest renewal rate we have had since the beginning of 2006 and is a very good number for us in the longer-term history.

I continue to be particularly proud of the 98% renewal rate with our clients who have been with us for 5 years or more. We added 1,560 new individual subscribers in the first quarter of 2012.

We now have nearly 95,000 paying subscribers, the most we've ever had. We expect to hit and look forward to hitting the 100,000 paying subscriber milestone in the not-too-distant future.

Overall, I'm very pleased with the financial results we generated in the first quarter, and I feel that our team performed brilliantly.

I do not believe that improving economic conditions alone are driving our sales momentum. I believe that we now have the strongest sales organization we've ever had.

We currently have more than 210 salespeople and sales managers, with 139 of those being quota-carrying field sales representatives. Our average field sales representative now has 39 months of experience.

That is an average of the wide distribution. Many of our salespeople actually have 10 or more years of experience at this point.

We typically see sales productivity increase with tenure. And this is the most tenured scaled up sales force we've ever enjoyed, which is a large part of the reason we believe we are seeing great results.

In many organizations, salespeople focus exclusively on hunting new business. But in our business model, the key to success is placing equal priority on pursuing new business while continuing to strengthen our relationships and reinforce our value proposition with our existing clients.

Our sales organization is now seasoned enough to understand that principle. That is another core reason why we're succeeding right now.

Going into the last downturn, we, unlike many other companies, continue to invest in growing our organization in order to capture what we believe is a great achievable billion-dollar revenue opportunity, servicing the commercial real estate community's need for information. Because of that consistent approach to building our sales force, we have a large experienced sales force that have to fight hard to keep their customers during the downturn.

The CoStar sales force is battle tested and proving -- performing beautifully with a slight economic tailwind now. This week and last, I had the opportunity to observe focus groups that a market research firm conducted with commercial real estate professionals who are both prospects and are customers.

While I learned ways we can improve our performance from those folks, I also heard them clearly state 2 CoStar strengths. The first was, as I just discussed, our local field sales organization does an outstanding job of supporting them and making our products work for them.

Secondly, the participants unequivocally stated that they "love CoStarGO." They conveyed that with passion and conviction.

They feel that Apple's iPad teamed with our powerful commercial real estate information app is transforming the way they do business and empowering them in the field.

We just reached another milestone, 10,000 users for CoStarGo. In just over 7 months since the launch, commercial real estate professionals have enthusiastically embraced CoStar's mobile technology and have made it part of their daily routine.

I believe we are just seeing the beginning of the impact and potential of CoStarGo. I've heard very positive feedback from retailers, brokers, owners and appraisers on CoStarGo.

Despite that, only just over 10% of our users today have discovered this new platform. I believe that eventually most will use it.

From informal surveys, it appears that only a minority of our clients even own an iPad. We noticed a surge of usage over the holidays at the end of 2011, as clients receive iPads as gifts, so we noticed a similar surge in usage when the new iPad came out recently.

As the functionality and penetration of the iPad increases, we believe the appeal of CoStarGo will increase with it. I spent a day last week with executives on our development team, reviewing new products and upgrades in our pipeline, and one of the things that impressed me the most was the wealth of potentially valuable new features we have planned for the CoStarGo platform.

One of the development initiatives they would like to share with you now is our work on bringing CoStarGo to the U.K. market.

We currently have a large component of our development team working on merging our U.K. research fulfillment and CRM systems into our U.S.

software platform. That project has completed a number of key milestones successfully, and we expect it to be done by late this summer.

We expect to complete a U.K. edition of CoStarGo at approximately the same time.

Unlike the U.S., where we provide CoStarGo at no additional cost to our customers that subscribe to Property, Tenant, COMPS, in the U.K., we plan to sell CoStarGo as an add-on to our existing service there.

Well over 90% of the top 50 brokerage firms in the United Kingdom currently subscribe to our services, but our U.K. pricing is generally much lower than our U.S.

pricing, and we feel that CoStarGo will give us a great tool to help raise our average revenue per client in the U.K. We anticipate taking CoStarGo U.K.

to market just after London Olympics, and we believe it will drive solid U.K. sales figures beginning in the fall.

We plan to follow the release of CoStarGo with the U.K. version of our successful Property Professional, Tenant and COMPS suite of services.

We believe that this initiative can add to the momentum we already see building in our U.K. sales numbers.

For example in Q1 2012, U.K. net new sales increased more than 70% over Q1 2011 sales results.

In fact, this month, we just signed the final top 10 U.K. chartered surveyor brokerage firm that was not already one of our clients.

We believe that in combination, these initiatives and accomplishments will return the U.K. segment to a good profitability.

Should we achieve solid profitability and good scale in the U.K., we think that will be an indicator of the potential global scale of the opportunity that CoStar can address.

In addition to our U.K. and CoStarGo software development initiatives, we are also progressing on several other key software initiatives, most notably CoStar Fusion, our next generation web product that's expected to integrate the functionality of our current flagship product suite with elements of PPR analytics, showcase marketing, resolve asset management tools, virtual premise and various other new tools we're currently building.

We believe that this is a significant software design project that could have a very positive impact on sales in 2013, in a similar fashion to the way CoStarGo positively impacted sales in 2011 and into the first quarter. I will update you further on these initiatives as they mature and they progress from product design phase into development in the coming quarters.

I want to present a brief summary of current commercial real estate market conditions and how I believe they're giving us the economic environment we need to turn this into a -- to give us the kind of good performance we're seeing right now. We believe it is likely that this positive economic environment could potentially continue for years.

If a commercial real estate market gets even better, we could expect similarly better results for CoStar.

Coming out of this recession, commercial real estate rents are well below the long-term inflation adjusted averages. Employment, though inconsistent, is growing, and in particular, office employment is really showing strong growth.

Corporate profits continue at record levels and that's normally correlated with leasing activity. All of these facts are combining to drive a healthy level of property leasing activity.

In fact, net absorption of office space had its eighth consecutive quarter of positive increase. Leasing drives commissions, and that supports our key clients' financial health.

We are seeing very little construction activity. It remains at record lows.

All of this means that office vacancy rates have fallen from 13.6% at their worst level in this cycle to 12.9% now. We expect they'll continue to fall for several years.

We are, in fact, just reaching the point at which tightening supply can create the environment where rents will rise, which could further increase revenues for our core customer base.

This creates some justified optimism as building sales in 2011 were up over 40% from 2010. In particular, because of increased financing availability, we've seen a noted increase in portfolio and large building sales.

Since this increased volume means increased commissions, this is also a strong indicator for CoStar, as after leasing commissions, sales commissions are the next largest revenue driver for many of our clients and prospects. I continue to believe that commercial real estate markets are relatively stable, and that helps the outlook for CoStar in 2012 and beyond.

Let's see, is there anything else I forgot? Finally, there's LoopNet.

We recently announced that we reached an agreement with the staff of the Federal Trade Commission on a consent decree that moves us closer to the completion of the merger with LoopNet. We are now awaiting final approval by the FTC commissioners, which, if granted, would allow us to close the deal.

As of this call, we have not received the commissioners' approval, but we remain hopeful that we will receive such an approval and be in a position to close the merger by April 30, 2012. If that does not occur, the merger agreement does not automatically terminate on April 30, 2012 unless either CoStar or LoopNet exercise an affirmative election to terminate the merger agreement.

With the FTC commissioners action pending, and to deal with the possibility of not being able to close by April 30, 2012, CoStar has extended its financing commitments for the merger past April 30, 2012.

We are not providing details of the consent order pending the FTC's review and approval, but we believe that the proposed consent order will not affect our ability to realize the material benefits of the merger. In the event that we do not receive approval from the FTC -- I'm sorry, yes, in the event that we do receive approval from the FTC, we expect to schedule a conference call with investors shortly thereafter to discuss the terms of the consent and our initial plans for putting 2 companies together.

We are not in a position to discuss the status of the potential LoopNet merger today beyond what we have said here and in previous statements.

In summary, we're off to a great start in 2012. I believe that we will continue to bring a series of innovative and valuable products to market, which will drive sales and grow earnings as we move towards our $1 billion revenue goal.

I will now turn the call over to our Chief Financial Officer, Mr. Brian Radecki.

Thank you, Andy. We're very pleased with our performance in the first quarter of 2012.

Once again, we delivered strong revenue growth and earnings while continuing to invest in our business. Today, I'm going to primarily focus and discuss sequential results for the first quarter 2012, year-over-year trends and also our outlook for Q2 and the remainder of the year.

Now to review our results for the first quarter 2012, beginning with revenue. The company reported $68.6 million of first quarter revenue, an increase of $2.4 million or 3.6% compared to revenue of $66.2 million in the fourth quarter of 2011.

Revenue for the first quarter increased $9 million or 15.1% compared to Q1 of last year. Revenue growth is primarily attributable to CoStar's core suite of subscription services and again, driven by CoStarGo.

We also reported $5.1 million in net income or $0.20 per diluted share during the first quarter of 2012 based on 25.5 million shares, which is consistent with the $5.2 million or $0.20 per diluted share, also based on 25.5 million shares in the fourth quarter of 2011.

Non-GAAP net income of $8.2 million or $0.32 per diluted share in the first quarter of 2012 compared to non-GAAP net income of $8.4 million or $0.33 per diluted share in the fourth quarter of 2011. Non-GAAP net income increased $2 million or 32% compared to the first quarter of 2011.

And adjusted EBITDA for the first quarter of 2012 was $15.3 million, an increase of $2.7 million or 21% compared to adjusted EBITDA of $12.6 million in the first quarter of 2011.

The company had $576 million in cash and investments as of March 31, 2012, an increase of $3 million since last quarter. As we discussed in last quarter's call, we entered into a credit agreement during the quarter comprised of $175 million term loan facility and a $50 million revolving credit facility.

Drawdown of these facilities is subject to the simultaneous closing of the proposed LoopNet acquisition. With the FTC commissioners action pending, as Andy mentioned, and to deal with the possibility of not being closed by April 30, we extended the financing commitments for the merger until May 31, 2012.

Our customers continue to renew subscriptions at very high rates during the quarter. The in-quarter renewal rate was approximately 94%, which is the highest it's been since Q1 of 2006, and the 12-month trailing renewal rate for subscription-based revenue increased to approximately 93.4%, which is an improvement from the approximately 91.9% one year ago.

The renewal rate for clients that have been our customers for 5 years or longer held consistent at an outstanding 98% in the first quarter of 2012 and renewal rate from firms that have been clients for less than 5 years also increased 2 percentage points to approximately 88%, up from 86% in prior quarters. Subscription-based revenue accounted for approximately 94% of the company's total revenue in the first quarter similar to last quarter.

And subscription revenue grew a solid 3.8% quarter-over-quarter and continues to drive overall revenue performance.

During the first quarter of 2012, the annual average contact value was $8,683, up 15% compared to the first quarter of last year. And total sales headcount was 213, up from 193 at the first quarter of 2011.

Total number of paying subscribers increased to 94,956 in the first quarter of 2012, a net increase of 6,633 from a year ago, as Andy highlighted earlier. And the total number of subscription clients sites increased by 324 during the first quarter of 2012 to 18,507 company-wide.

I will now quickly cover the results for our income statement first of 2012 and also our outlook on the second quarter and full year.

Gross margin was $44.3 million in Q1 of 2012, up slightly compared to $44.2 million in Q4 of 2011 and down slightly quarter-over-quarter. As I've stated on last quarter's call, we expect the gross margin percentage be slightly lower in the first quarter due to seasonal expenses and then grow thereafter.

Total operating expenses in the first quarter of 2012 was $35.7 million, a reduction of $700,000 compared to $36.4 million in the fourth quarter. G&A expenses declined in Q1 as there was reduced legal expenses related to the proposed LoopNet acquisition.

John Coleman is shaking his head. Thank you, John.

Let's hope that keeps going in that direction next quarter. Sales and marketing expenses also declined in the first quarter.

As I discussed in our earnings guidance in February, we are making incremental investments in product development this year and those costs increased approximately $400,000 in the first quarter of 2012 compared to last quarter.

As I discussed in our last earnings release, one of our large customers filed for bankruptcy in the first quarter of 2012. We remain in contact with the senior management of that customer during the bankruptcy process, and we continue to provide services to that company.

If that contract were eventually terminated at some point later this year, it would have a significant short-term impact on our reported renewal rates, reducing the in-quarter rate by approximately 5 percentage points and our annualized renewal rate by approximately 1.5 percentage points. We believe our revenue guidance ranges, which I have given, adequately account for the uncertainty related to this customer from revenue.

Turning to our outlook for the second quarter of 2012 and our outlook which reflects all of our expectations as of today and takes into account recent trends, revenue growth rates, renewal rates, which may be impacted by the economic conditions in commercial real estate or by the overall global economy. Our outlook does not include the impact of the proposed acquisition of LoopNet or costs that are contingent among -- upon the closing the acquisition.

We're not able to reasonably forecast whether or when certain acquisition-related costs may take place. Therefore, we are providing the outlook on a stand-alone basis, reflecting our current expectations as of today, April 26, 2012.

Based on continued strong revenue in sales trends, we are raising 2012 revenue outlook by $3 million to a range of $284 million to $288 million. For the second quarter of 2012, we expect $70 million to $71 million in revenue.

Consistent with the strong revenue trends, we are raising the estimate for non-GAAP net income per diluted share to approximately $1.32 to $1.40 per share on a fully diluted share base of $25.5 million. For the second quarter, we expect non-GAAP net income per diluted share of approximately $0.32 to $0.35.

As discussed last quarter, the company continues to invest in new products, software development, including CoStar Suite and CoStarGo in the U.K. as well as the next generation of products in the U.S.

If the LoopNet acquisition is approved by the FTC commissioners, and after the transaction closes, we expect to revise our outlook to include the impact of consolidating LoopNet on a pro rata basis from the close date and for the remainder of the year. Additionally, we expect the acquisition will be accretive for the year of 2012 and beyond for non-GAAP earnings per share.

Our outlook will be adjusted to include LoopNet purchase accounting adjustments, including loss deferred revenue at LoopNet as well as various fees and expenses associated with the closing of the transaction and integrating the companies. Remember that the accounting for deferred revenue adjustment is -- temporarily reduces both top line and bottom line earnings and is not adjusted out of our non-GAAP net income.

We expect our earnings guidance to be based on a non-GAAP earnings per share format, which we have used in the past, which will normalize out many of the other items, although, as usual, we will include a reconciliation of GAAP earnings per share. I should also note that our base of fully diluted shares will increase by approximately $1.9 million at the time of the close as a result of the issuance of the stock portion of the merger consideration exchange for LoopNet shares.

As we had discussed when we first announced the proposed acquisition a year ago, we believe there are significant synergies associated with the combination of CoStar and LoopNet. If we close the transaction, we expect to focus initially on ensuring a successful integration and refining our detailed operating plans, including plans for realizing these synergies.

We expect the synergies to ramp up in 2013, and that we will reach our $20 million run rate goal of synergies by the end of the 24-month period, following the proposed and projected close of the acquisition. Therefore, we are not projecting many synergies this year.

If the FTC approves the acquisition, we expect to update our detailed operating plans with the LoopNet management team over the coming months as we incorporate these plans into our outlook, we will communicate them to you.

In summary, I'm very pleased to be able to share with you another strong quarter for CoStar that continues to build upon the strong momentum in sales, revenue, customer retention and earnings we saw accelerating throughout last year and through the first quarter. I continue to believe with the sales trends we are seeing and the investments we are making into our industry-leading products, CoStar is very well positioned to continue our progression towards the short-term goal of $500 million in high-margin annual revenue over the next several years and on our way to over our long-term revenue goal of $1 billion.

Now, I'll open up the call for questions.

I wanted to ask about the 15.1% revenue growth in the quarter. How much of that is -- I think most of it is organic, but how much of it is coming from acquisitions?

This is Brian. The majority of it obviously is organic.

It's a couple -- I don't know the exact number, it's a couple of percentage points from virtual premise. But moving forward, it'll all be organic moving forward.

So again, sort of -- we give you guys the numbers after the quarter of a close, and we'll do the same with LoopNet. But then moving after that, we're just going to be presenting consolidated numbers.

So as you said, it was definitely mostly organic.

Got it. And then if you could talk a little bit about the potential impact to R&D and marketing spending coming from the product pipeline?

I don't see -- well, there's going to -- we're going to do a much, much smaller version of the CoStarGo rollout in the United Kingdom in the fall after the Olympics. That'll be -- obviously, since you're covering 4 or 5 states in the United Kingdom as opposed to 35 in the United States, it will be a much smaller number than we saw associated with the CoStarGo rollout in the United States this year or in 2011.

So at current, we're not anticipating a material big increase associated with that product pipeline. The CoStar Fusion I mentioned is not something that's going to impact 2012, that would impact 2013.

There probably would be a rollout associated with that similar to the CoStarGo rollout in the United States.

And then the -- I wanted to ask if you could talk about a couple of the add-on products, if you will, for CoStarGo, just to give us a sense of what you're working on?

Well, I'll just give you one that's probably out there. I don't want to disclose anything that is not out there because we do have competition.

We have a really nice tour application, and it's something that, gets -- historically, when I go to look for 10,000 square feet of space with my brokers in some city, they will give me a 5-pound book with 60 pages of facts and figures and floor plans for the buildings I'm going to be looking at that day. That book is useless, and it really doesn't do you any good as you're moving around all these buildings, you're seeing 20 buildings as you move through Phoenix, and you can't turn the pages fast enough, and there's very little content in there.

And then when you get back on the plane and go home, you don't want to be carrying this 5-pound, 20-pound book in your briefcase. What's much more effective is giving the tenant an iPad as you go to look at the properties and have the information of the properties up -- have information geo-aware, and as you arrive at the building the information on the property is coming up.

You get 10 times as much information on the properties. The client can then put in feedback.

The client can put in feedback about what they like about the building. They can rate the architectural appeal, how they think the location works for the company, how they think the space is built out.

And the broker can instantly see that feedback as they move through the tour. And then there are usually multiple people on the tour, so they can all lock in their feedback as they go.

The brokerage firm can capture that information, use it in trying to formulate the best solution for that company after they viewed 10, 15 buildings. Typically, from when you see the buildings, when you first tour the buildings to when you actually execute a lease of 6 months, by capturing that feedback sooner, I think you can bring in by a month or so that time it takes to execute a lease, which would be a significant value at the brokerage firms as well as the owners because it basically brings the revenue in sooner.

So it's sort of a stupid 6 months it takes from viewing the property to executing a lease. Doing this Tenant version of the iPad app, I think, will help close that and I think it will be very well received by our customers.

All right. On the Loop, I just wanted to ask if you could just...

And the other 20 things, I'm not willing to talk about.

All right. On Loop, I just want to know if you could quickly mention a review for us, what the timeline would be assuming an approval by the FTC Commissioner.

You can pick a date, say, it's Monday the 30th is the date of approval. What would things look like after that?

We're going to pull in a guest speaker to the call, so get the drumroll for John Coleman.

Yes, actually, Brian, let me get Justin [ph] to answer that. Yes.

Well, I mean, if we -- we're hopeful we'll get approval, and our plan would be to close sort of as expeditiously as possible after that. So I can't give you a definitive date, but it would be quickly thereafter.

My first question is -- and I apologize if you had addressed this before, I hopped on late, I think that you said that the U.K. pricing for Go would be a little bit different.

And if so, what was the logic for that? Why make it different in the U.K.

versus here?

We've been -- the companies we acquired and integrated in the U.K. had fairly weak software or very weak software.

And they also had weak information outside of Central London, so they had -- the price points we picked up when we acquire those companies were dramatically lower than the U.S. price points, typically about 1/3 of U.S.

price points. As we bring in a very compelling product like CoStarGo, we don't feel that this is -- we don't feel that penetration is the right strategy in the U.K.

We've got great penetration in the U.K. We think that additional revenue per customer is a better strategy there, and we think we can achieve it.

So we might potentially charge something, a nominal like $19 a month per user to get the iPad app. It could be $29 per user.

And we're going to execute a strategy in the U.K. of continuing to do something like that.

So as we bring out the CoStar Property, Tenant, COMPS product in the U.K., which has advantages over the product mix currently there, that might be another $19 a month per user. So we're going to be working on bringing up the average price per user in the U.K., and it's sort of appropriate to the different situation on the ground there.

Great. That's helpful.

And then, Brian, I just want to make sure that I understood what you said about Loop that presuming it closes sometime in the near term, which we hope it does, that the cost synergies would be effectively starting in 2013 and then, how did you characterize that they would ramp, did you say they'd get the full $20 million run rate by 4Q?

Yes, I think -- obviously, initially, we have to close the deal. And once we do, we want to work pretty closely with them.

So I think we'll have some, but I would just say very light this year. But then I think it would ramp up throughout the year, and I would say by the end of -- I'm just saying the end of the 24-month period because obviously I don't know exactly when we're going to close.

Again, as John Coleman said, we are hopeful that it's soon and expeditious. So whenever that closing is you can sort of countdown the 24 months.

I mean, obviously, we will strive to beat that, but that's sort of the stated goal out there.

Okay. And then last question is just on revenue synergies.

You've talked a little bit about not very much overlapping customer bases and who has which products and sizes of those -- of customers that aren't in the overlap base. Any more qualitative or quantitative thoughts on revenue synergies, both amounts and timing now that we're, golly, a year-end to looking at this?

Due to the gun-jumping rules associated with this process, where we can't jump in and see competitively sensitive data with LoopNet until after we close and have permission -- I'm sorry, until after we have permission from the FTC to close, we have not been able to do detailed comparison of customer bases and come up with a more quantitative analysis for you. I can tell you that qualitatively, we are extremely confident that there is a large prospect base for CoStar's information services within LoopNet's customer base, and we believe there -- we are very confident that there is a large potential to sell LoopNet's marketing services to CoStar's information customers.

So we are very excited about that prospect, and we think it's substantive, but at this point, we're not prepared to give detailed numbers.

Okay. And then last question for me is just -- I'm looking at the CoStar base business.

You guys talk about various penetrations in different verticals that you have, be it brokers and appraisers and et cetera. Have any of those really accelerated over the last several quarters such that things are really starting to click in a particular vertical that you've been working on?

I would say that the good numbers we're seeing right now -- or one thing that I like about the good numbers is that they're across the board. We are making good progress in the financial services space, but we're also getting good, new brokerage firms and we're getting some retailers, so it's across the board.

And also I should say, we could have 30 great quarters, and we're not moving the dial on the penetration. I mean, fortunately or unfortunately.

So it's -- we're still relatively lightly penetrating into the potential market. So we might have 1/7 of the potential commercial banks right now signed up.

We might have less than 1/10 of the potential owner customers signed up right now.

So I just have a couple of quick questions for you. So first of all, I know it's a little bit early to be asking about revenue growth in 2013, but with the rollout of Fusion next year and the U.K.

launch, I mean, would it be a stretch to see an acceleration scenario in 2013 or what's your just high-level thoughts around that?

It's still early, and some of that is going to continue -- be sensitive to whether or not the commercial real estate recovery continues to accelerate or strengthen. But we -- during the call, I wrote down my sequential quarterly target for Brian, which I'm not going to share with you.

But we're optimistic and we would like to see it accelerate in 2013, but it's still too early to really be able to talk about that. And a lot of things going -- if things -- if we -- should we be able to integrate LoopNet, roll out this Fusion product, it would be a good environment.

Got you. And I'm not sure if I missed this, but did you share with us the contribution of CoStarGo to the net new sales or the approximate contribution?

And then as a follow-up to that, with 10,000 subscribers now on CoStarGo, do you have a target by end of year? And do adoption rates accelerate at some point in time given the references that you're building around these products?

I'll take the first part of the question, and then I'll turn over to Andy for the second part. So on the first part, we didn't give a number on that.

I think when we first started giving those out, I told people that we would give some initial numbers to start. We're still seeing, I mean, obviously, great traction.

It's definitely one of the things we keep hearing when contracts come in, "I signed up because of CoStarGo." It's what we hear in the focus groups.

But as I mentioned a couple of quarters ago, initially, when you roll that out because we're not charging specifically, well basically, it's for people that upgrade to the suite. It will be tarred over time as you get further and further away from the product release to say, "Okay, did Rich Simonelli sign up because of CoStarGo, or he just signed up because he was going to sign up for CoStar anyways?"

So I think we won't be continuing to give those numbers, but it is clear anecdotally that it's continuing to drive. You see the acceleration in sales.

You see the acceleration in revenue growth, and there's no doubt in my head that, that's behind it.

Now, the exception to this, in the United Kingdom, we will be able to give you some clarity there since we're charging separately for it.

Correct. That is correct.

Okay. And do you have a target number of users by end of the year on CoStarGo?

We don't have a specific target. It is -- I think it's linear, and with searches around releases and holidays, which I take is a really good sign.

So when you get 25% increase in usage because of Christmas, people getting iPad that says that you're -- you'd get a lot of traction ahead of you. So we don't have a specific number, but you could just basically take what we've reported in the last several calls, and you could extrapolate it linearly and surge it around the holidays.

Okay. And then last question on CoStar Fusion.

Have you made any conclusions on how you're going to price this product both for new and existing customers? I know it's still early on that, but any thoughts on how this would be priced?

We have not -- that's an active ongoing debate. I can tell you that we will probably have 2 variations of it, one with advanced analytics and one with basic analytics.

So one version of CoStar Fusion will appear to -- appeal to hedge fund institutions who are typically PPR customers. That'll be the higher end version of it.

And then we'll have a version that is geared to brokerage firms, who have a need for analytics but aren't doing -- do not have a need for advanced forecasting and the like.

It looks like average new contract value is down sequentially. That was a little bit surprising to me.

I would've thought that if people are signing up for CoStarGo, that might have been a higher ticket set of items. I just wanted to know if you could just talk a little bit about why sequentially that was a little bit lower?

Sure. Toni, it's Brian.

I think sequentially -- and I think we've talked about this on sort of prior calls, that number will jump around based on the mix of what we sell during the quarter. And definitely, the fourth quarter is always our strongest quarter of the year which people saw.

But again, you can see the first quarter -- again, year-over-year it was very strong, and of course, that number was up year-over-year. So it's sort of always hard to compare the first quarter and the fourth quarter because of seasonality.

So a better comparison I think is the fact that it was up year-over-year. But again, it does focus on the mix, and a lot of people signing up for CoStarGo might be upgrading from 2 to 3 products, so therefore it's not the same as if, for example, we had like a blowout quarter in financial services or something like that.

So it definitely -- that's a number that's a good indicator, and it sort of describes sort of what was happening in the mix of products during the quarter. But because we have so many different products firing on all cylinders, it is going to move around every quarter.

And you do get a financial services surge in the fourth quarter.

Correct.

And so that takes your average sales price up. One nice thing about a potential LoopNet merger is we have inverse cyclicality, so it would actually do some smoothing between that first and fourth quarter.

Correct. They typically have, yes, their strongest quarter in the first quarter, and the fourth quarter is usually not as strong.

Got it. And you mentioned earlier on the call that the health of the commercial real estate market is starting to improve.

And I was wondering if you could comment on the pricing environment. Are you able to push through higher rates as the environment gets better?

We have -- during the downturn, we suspended any counter price increases, even CPI increases. We are pushing through basic approximate CPI price increases, and we're not getting any pushback that I'm aware of for that.

But if you were to take from '05 to 2012, it's not an inflation-adjusted big jump. We still continue to believe that penetration is the more important thing to focus on.

So -- and also, we have the ability to keep on selling additional modules, which is a better received way to increase total revenue from a customer than price increases.

Yes. Just to add onto what Andy said, I mean, that's some pretty typical -- over the past decade, our contracts -- our annual contracts generally that auto renew, and they have obviously protection in there, basically the CPI protection in there, so obviously, if CPI went up.

Over that decade, it's average someplace in the 2%, 3%, so it's not a significant number. But again, I would anticipate much change from that moving forward.

Again, as Andy said it's really more about penetration, people adding new modules, adding new geography and those types of things than it is about price increases.

CoStar products are still the best bargain a brokerage firm ever finds.

I think you touched on this a little bit, but is it fair to say that the net new sales attributable to CoStarGo were similar to the third and fourth quarters of last year?

Yes, I would say that they're similar, but again I think it's getting harder and harder to sort of track those. So when you first release it, it's pretty easy.

I think as time goes on, it's not like we're asking every single salesperson to ask the client, "Please attribute, did you sign up because you think the service is great or did you sign up from CoStarGo." So I think, again, it's sort of something that when you initially release it, it's easier to track.

It gets a little bit more difficult. So, yes, I would say that anecdotally, it continues -- we continue to hear from salespeople that, that's one of the reasons why people are signing up.

Again, as Andy mentioned, in the U.K., we'll actually be priced, and we'll actually be charging for -- so something like that in the U.K. we'll be able to continue to track moving forward.

Okay. And then Andy said the -- you expect adoption for that to be linear.

Is that in terms of number of users, or is it net new sales driven by the app?

I think it would be number of users. I think you can -- I think it sort of holds the -- I think it holds the tailwind effect it's having on sales for several years.

But I think the user adoption actually goes a little higher. In the U.K., it would be 1:1.

So in the U.K., it would both be user and revenue growth. So we ultimately expect, whether it be HTML5 on a tablet other than Apple or whether it's Apple, I would expect to see 75%, 85% of our usage eventually become mobile.

In the focus groups last week, we had several people comment that they are using CoStarGo at their desk rather than using the web platform. So I think it's an entire operating system shift or platform shift, which is great.

It's a much more powerful tool.

Okay, great. And then you mentioned that you're getting, I guess, I would call a benefit from good end markets on the sales side versus leasing.

What is the breakdown for CoStar only of sort of customers who are in sales versus leasing and then sort of other? If you just had to break them into broad buckets?

I would probably say that -- so 50% or little less than 50% of our customers are brokerage, and those are the folks who are going to be very sensitive to things like leasing activity and sales volume. And within that space, I would say that it is probably 75% to 80% leasing and 20% to 25% sales sensitive.

But every brokerage firm -- or I'm sorry, not every brokerage firm, but every significant brokerage firm is going to have a combination of both in their financials. So it's sort of a blended result.

But we are -- we've been seeing a good environment leasing now for more than 18 months, 24 months, and we're now beginning to see -- we've been seeing a good investment sales environment for about a year. And we have seen a good general commercial sales, which is the $4 million properties, which is really the bulk of the U.S.

sales activity. We've been seeing a good environment there for about one quarter.

And so that was just starting to take off.

And what are the exposures for LoopNet?

The last one I mentioned. I think LoopNet is very strong in the sub-$2 million sale area, general commercial.

So they'll have growth around that. And their other sensitivity is that they have sensitivity to the leasing environment but differently than CoStar does.

When there's no leasing activity like in '08, people just don't have marketing budgets, so they see a little bit drive for revenue. And then they move into a good environment when the vacancy rates just begin to move downward a little bit.

And I would think that when they get down to extraordinarily low vacancy rates like San Francisco at '99, they also do poorly because no one needs to advertise anything because everything leases automatically. So they likely have a 5-year positive environment from here given traditional real estate cycles.

Okay. Final one for me is, I'm not sure if it was touched on today or in the first quarter call, but what -- did sales force incentives change for this year?

And then would you revisit those when or if the LoopNet deal gets done?

We -- each year, in January, we tweak the sales incentives. This year, we turned the dial from client retention to hunting a little bit more.

So in a bad market, we put additional incentive on driving usage and retaining customers. Now that the economy has a little tailwind, we've moved the dial a little bit more towards net production or the hunting.

Still, that's a major component for driving usage and retention. And then we also have some lucrative sales contest, which the sales force find highly motivational.

And last year, it was pure new client acquisition. This year, it is more about retention and overall year-over-year acceleration of performance on net sales.

So a little bit more -- summary, a little bit more aggressive on net new sales, on just revenue growth.

Okay. And then would that change post LoopNet?

It would likely shift to more teaming efforts between sales forces.

Well, with that, I would like to thank you for joining us from here in our San Francisco sales office for our Q1 earnings call. We'll look forward to updating you on our progress with LoopNet and our second quarter earnings call.

Thank you for joining us.