Richard Simonelli - VP of IR Andrew Florance - Co Founder, Chief Executive Officer and President Scott Wheeler - Chief Financial Officer.

George Tong - Goldman Sachs Brett Huff - Stephens Inc Andrew Jeffrey - SunTrust Pete Christiansen - Citi Mayank Tandon - Needham and Company David Ridley Lane - Bank of America Stephen Sheldon - William Blair Bill Warmington - Wells Fargo Sterling Auty - JPMorgan Marc Wiesenberger - B. Riley.

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions] As a reminder, today's call is being recorded.

I'll now turn the conference to your host Richard Simonelli. Please go ahead..

Thank you, operator and welcome to the CoStar Group's second quarter of 2018 conference call. Before I turn the call over to Andy Florance, our CEO and Founder; and Scott Wheeler, our CFO, I like to share some very interesting and important items that can actually have a positive effect on your life.

Certain portions of our discussion today may contain forward-looking statements, which involve many risks and uncertainties that can 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 today in our July 24, 2018, press release on our second quarter results and company's outlook as well as in CoStar's filings with the SEC, including our most recent annual report on Form 10-K and our subsequent quarterly reports on Form 10-Q under the heading Risk Factors.

All forward-looking statements are based on information available to CoStar on the date of this call, and we assume no obligation to update these statements whether as a result of new information, future events or otherwise.

Reconciliations to the most directly comparable GAAP measure to all of the non-GAAP financial measures discussed on this call, including, but not limited to, non-GAAP net income, EBITDA, adjusted EBITDA and forward-looking non-GAAP guidance are shown in detail on our press release issued earlier.

The press release is available on our Web site located at costargroup.com. As a reminder, today's conference call is being broadcast live and in color on our Web site, where you can also find CoStar's Investor Relations page. Please refer to the press release on how to access the replay of this call. Remember just one question, so make it a good one.

I'll now turn the call over to Andy Florance.

Andy?.

Thank you for joining us for our second quarter 2018 earnings call. This month marks CoStar's 20-year anniversary as a public company making this our 80th earnings call. Congratulations to those of you who bought our stock on July 1, 1998 when we listed on NASDAQ at $9 a share.

The only thing better than your 4000% gain is the thrill you enjoyed listening to more than one hundred hours of these excellent information packed CoStar Group earnings calls. On our IPO road show in 1998, we had less than $10 million in trailing full year revenue.

Back then many investors expressed some skepticism to our claim that CoStar Group had a $100 million potential total addressable market. In June of 2018, we achieved our first $100 million revenue month and we're now at $1.2 billion revenue run rate.

In the second quarter of 2018 our Apartments.com business alone generated its first $100 million revenue quarter.

Revenue for the second quarter 2018 was $297 million an increase of 25% over revenue of $237 million for the second quarter of 2017, Year-over-year net income in the second quarter of 2018 doubled to $44 million and non-GAAP net income which excludes one-time costs associated with the acquisition of ForRent was up 114%.

I strongly believe we will meet our 40% adjusted EBITDA margin goal for the fourth quarter of 2018. Our strong momentum in sales continues, bookings in the second quarter of 2018 were very strong as we generate $45 million an increase of 23% percent year-over-year versus the $37 million we achieved in the second quarter of 2017.

Just one year ago that $37 million had been the best net new sales quarter we'd ever had. Our commercial property and land marketplaces had their best sales quarter ever in the second quarter of 2018 with a year-over-year revenue increase of 105%. This increase featured significant sales of LoopNet Premium Lister and Power Ads on the loopnet.com.

With the integration of the CoStar and LoopNet databases, we were able to eliminate LoopNet's information product and focus LoopNet entirely on being the best possible marketing solution for commercial real estate.

We're making significant enhancements within the LoopNet marketplace month in and month out, so we can further capitalize on this significant opportunity. Since last year's integration the number of views per advertised property has doubled.

We're shifting our priority to developing and selling our higher end LoopNet power ads such as our gold platinum and diamond level advertising. The diamond adds LoopNet reach the end user markets of its tenants and small investors more effectively with larger ads that soared to the top of relevant search results.

They are enhanced with immersive virtual reality walkthroughs, drone shots videos and more. They will also appear prominently throughout CoStar in order to make a strong impression on our broker audience as well. As we invest in growing our news service the diamond ads will reach this audience through our newsletters and news Web site.

Many landlords advertising, let's believe that reaching the professional audience [indiscernible] within CoStar Suite is equally as important as reaching the tenants themselves as the vast majority of leased transactions over 5000 square feet involve tenants represented by professional brokers.

We are already beginning to sell diamond ads on LoopNet for as much as $2200 per month which is 60x the $35 per month we currently average on LoopNet. We believe that properties advertised on LoopNet and CoStar are leasing and selling faster, so there is real economic value in return on our clients advertising investment.

Conversely vacant or unleased space is incredibly expensive for landlords, so reducing that downtime by marking the space with us provides an immediate and substantial return on investment.

We're also now focusing on selling to owners instead of just the brokers; owners typically have 94% of the economic interest at stake in a deal compared to a listing broker who has just 1,5% of the economics after they share the commission with other brokers or his or her firm.

We believe the return on investment argument resonates much more strongly with owner who has the most at stake. We believe that our commercial real estate advertising products are countercyclical. When an owner has a leasing crisis in $250 million property a one of a kind, $2200 a month effective marketing solution is a no brainer.

While the CoStar sales force remains focused on generating strong sales growth for the company we also have them heavily focused on pricing integrity and relationship development with our existing clients. As we've mentioned in the last earnings call we're holding the line our pricing policies and not accepting discount or under license contracts.

As a result, we've seen an 80% increase in the average price per new broker user licensed over the past six months. In January of 2018 with discounts incentives, we were licensing new brokerages at $255 dollars per broker. But by July, we're licensing new brokerages at $466 per broker.

This increase improves our intermediate and long-term revenue, but does come at a cost of some reduction a short-term contract volume. We average 624 total new CoStar contracts per month at the beginning of the second quarter and that dropped to 474 new contracts at the end of the second quarter.

So the trade-off is approximately 25% overall lower contract volume, but they're at a significantly higher price points.

Beginning in March of this year, we felt it was important to incentivize our sales team to visit each of their CoStar customers provide training, build stronger relationships and demonstrate the exceptional value of our CoStar Suite service. We are focusing our sales force on relationship development right now for a number of important reasons.

We've added tens of thousands of new users in the past 12 months. I feel it's important that these new and existing clients feel that we're in a partnership with them and focused on their success.

Working closely with our clients, we expect to gain stronger referrals, lower cancels, better learn our clients' needs, up sell other products and more accurately license and price our products as contracts renew.

It's working from April to June in the second quarter 2018, we saw a 75% increase in the number of face to face meetings our salespeople had with our clients focused on relationship development. As we do with Apartments.com sales force, we carefully track these meetings and get client feedback.

This resulted in an improvement of our net promoter score each month in the second quarter. In June 2018, our net promoter score reached 9.1 on a 10 point scale, very positive referrals. I firmly believe that while this focus does not maximize short-term sales productivity.

It does create greater customer satisfaction and relationships definitely increase intermediate term and long-term sales results. I believe it also significantly widens our competitive mode.

Today we kicked off a multi-day strategy session here at our headquarters with several dozen of Cushman & Wakefield's global leaders building strategies to best leverage CoStar technologies, information platforms and marketplaces to fuel the growth of their global platform.

We believe it is positive for the industry and our business for the number 3 commercial real estate brokerage in this space Cushman & Wakefield are one of the top three players to be going public.

Cushman is only one of only three really large global brokerage firms they have got almost $7 billion in revenue 48,000 employees in 70 countries and an awesome brand that dates back over 100 years.

We know the company aims to continue to drive growth by investing in its technology to best serve clients and deliver margin expansion as it drives efficiency with recently acquired businesses. Apartments.com continues to strengthen its lead as the number one apartment Internet listings service.

We achieved our first $100 million quarter, which is remarkable since we only entered the multi-family marketing business just four years ago with the acquisition of Apartments.com which at the time only had annual revenue of $85 million. During the second quarter, we once again achieved all time highs and visitors and traffic.

Our SEO performance remains remarkably strong measured on May of this year based on Google rankings list of 10,000 apartments keywords, apartments had 73% of the number one slots. That's 7x the 7% Zillow has or 25x, 24x the 3% RentPath has.

As reported by comScore during the second quarter of 2018, Apartments.com averaged 15.2 million unique monthly visitors, an increase of 37% percent year-over-year. Apartments.com had 3x more unique monthly visitors than Apartment Guide. This 4.9 million unique visitors represented a decrease of 11% during the same period.

Excluding traffic from move in both periods, our apartments.com network averaged 47.6 million visits per month up 33%. In June of 2018, our entire Apartments.com network had more than doubled the number of unique visitors 112% more to be precise than the RentPath network according to comScore.

We had 2.5x the total number of visits ever RentPath in June as well. Our network produced a stunning number of leads, it produced 41% more leads in the second quarter of 2018 than we did a year ago during the same period.

Since we believe we have the highest quality leads in the industry, this should make a listing on Apartments.com network even more valuable. In June of 2018, we announced that we are resuming our partnership with News Corp. subsidiary Move Inc., to power exclusively apartment community listings on Move's Web sites, Realtor.com and Doorsteps.com.

Move had partnered with apartment list in the first part of 2018, but that partnership failed quickly. Our partnership with Move significantly broadens the distribution of the apartments listed on Apartments.com. Move's Realtor.com brings us almost 7 million unique potential renters a month.

We believe this will result in the most cost effective use of advertiser dollars as their listings will enjoy increased exposure and will be available now on up to 11 different apartment Web sites.

In June we delivered our best gross sales month ever for Apartments.com, one of our primary priorities for our apartments.com team this year has been integrating the legacy apartments.com sales force with a new sales team additions from ForRent. The ForRent business is being integrated quickly and effectively.

We initially set a goal of integrating ForRent's operations clients and software within 12 to 24 months. Given the great progress we're making, it looks like we will complete the integration in less than 12 months. Our integrated sales force has been performing really well from the start.

They're selling an integrated network and advertising package that we expect further increases exposure for our clients and generates more leads for them. Since the ForRent acquisition closed in February, we have met with all of our ForRent customers multiple times. This has created enormous goodwill and decreased cancellations dramatically.

Since we integrated the sales force average monthly ForRent cancels were almost 35% less than the monthly average of ForRent cancels in 2017. We've converted over 4100 ForRent clients to bundled Apartments.com network contract stabilizing and retaining the associated revenue.

At the end of the quarter, we had 48,500 apartment communities investing in the Apartments.com network. That is up from approximately 18,000 communities four years ago. We're now very focused on that record setting 50,000 community milestone.

Once again, we had a strong presence at last month's National Apartment Association annual conference in San Diego resulting in millions of dollars of net new sales. We had enormous interest from property managers from around the United States, which resulted in thousands of booth visitors, leads captured and demos delivered.

We have already generated over 3.2 million in net new sales from NAA conference with more sales still rolling in. The highlight of the conference for me was the very positive feedback I heard from multiple principals of major clients on the value they received for their partnership with Apartments.com.

The CoStar real estate manager solution is now an established leader in facilities project management, lease subtraction and lease accounting. We continue to add to a strong list of Fortune 1000 companies as customers including top financial, industrial, healthcare, retail and service companies join us.

Additionally existing customers continue to expand their use of our services as they seek to meet the new ASC 842 leases standard. Over 350 companies are currently utilizing the service. In fact a couple of the companies on today's earning calls use it.

CoStar real estate manager sales continue to impress with year-over-year revenue growth in the second quarter of 2018 of 118%. This year Co-Star Real Estate Manager is expected to exit Q4 2018 at approximately $43 million revenue run rate with margins approaching 25%.

We've purchased Real Estate Manager in October of 2011 when it was known as Virtual Premise. You may recall this was right in the middle of the period that our acquisition of LoopNet was under careful, very careful review by the FTC. This shows we're able to do more than one thing successfully at that time.

We paid $17 million for Virtual Premise which had approximately $7 million in revenue, so we paid 2.5x revenue. I think you would agree that assessed business growing positive profitably through $43 million in revenue at 118% growth rate is now worth a lot more than $17 million we paid for it.

The purchase of Real Estate Manager builds our track record of making quality acquisitions that are selective that expand the total addressable markets we operate in, growing revenue and profitability of the company and strengthening our unique commercial real state platform, this has ultimately been a major contributor to increasing shareholder value.

As we manage our capital and the balance sheet of CoStar and look for our next M&A opportunity, we're careful we do not overpay for businesses or make recklessly risky bets.

I'd rather wait and identify quality businesses that have the high potential to integrate into our platform and that can grow our add significant value to our customers and shareholders. This is what leads to a successful M&A like CoStar Real Estate Manager, Apartments.com, LoopNet and many, many others.

I want to update you on our research operations. Our ability to collect and curate valuable commercial real estate content is our primary core competency. Our research operations continue to perform really well.

In order to optimize the efficiency and effectiveness of our research process, we're closing two major research centers and consolidating them into other centers. In August 2018, we'll be closing our research center in Glasgow, Scotland and consolidating it into London. At the same time, we're closing our research center in Columbia, Maryland.

Our centers in San Diego, Richmond and Washington will pick up the Columbia center's workload. Both of the Glasgow and Columbia leases expire this fall. CoStar listing manager continues to be very [additive] [ph] to CoStar's research process. Many brokers like to have direct control over when and how their listings are presented.

With brokers self entering quality information, it frees up our researchers to continue to gather even more information as they perform their monthly update cycles. We are not seeing any slowdown to the robust start from broker entry we had in the first six months of CoStar Listing Manager.

In June, 23,000 new listings were entered directly into CoStar by brokers as 38% of all new listings we experienced. In the same month, 36% of all listings are 297,000 were added directly by brokers and owners using CoStar Listing Manager. We believe as brokers learn more about Listing Manager their participation will increase even more.

Our CoStar product development teams have been working hard to deliver a significant update to the core CoStar platform. We expect this will provide a far more intuitive user experience to search, filter and view results, generate reports and produce visually stunning analytic charts covering every important measure within the search results.

The upcoming release is not just a big leap forward aesthetically, but it's been optimized for serious performance. Searches resulting in tens of thousands of records will typically return in less than a second. In fact, it's often measured in milliseconds.

Yesterday, I ran a series of searches in the updated CoStar and initially thought something was wrong because the screens weren't really changing as I did the queries. Look more carefully it turned out it was actually moving so quickly I couldn't see the results coming back. The results just seemed to appear instantly.

Clients really like speed in software, so they're really going to like the updated CoStar. They should. So there is one person who has listened to every one of CoStar's 80 earnings calls. It's Frank Carchedi, who was our CFO when we went public until he retired in 2007.

Frank is addicted to CoStar, so Frank unretired in 2009 for an extra nine years and has played a valued role in our M&A team. He's also successfully managed a number of our acquired companies. We all want to thank him for making CoStar's incredible journey from $5 million of revenue a year to $100 million a month possible.

It would not have happened without him. Frank is going to be retiring this fall and I'm confident that even in retirement, he'll be there for our 100th earnings call watching over his CoStar shares. I will make sure, I speak loudly so he can hear me. This summer, the U.S. economic expansion has entered its 10th year.

Yet growth seems to be accelerating rather than slowing. Consensus estimates for the 2018 GDP growth are strong and recent job growth has been solid as well. All of which is good for commercial real estate and apartment demand.

For investors prospects of rising interest rates have been the primary cause of concern in the commercial real estate industry as cap rates had compressed to record levels. However, the 10-year treasury reserved its trend after crossing 3% and some of the interest rate fears have eased.

Record capital is being raised for real estate investment and that should support real estate values in the future as well. The investment sales market has been fairly steady over the past 2.5 years with investment sales volume peaking in '15, steady in '16 down a bit in '17 and so far in '18 as well.

All four major sectors of commercial real estate have performed well in this economic cycle, occupancies exceeded the best readings of the last cycle and rent growth easily surpassed inflation. This year is turning to be a bit of an exception -- turning out to be a bit of exception.

Net absorption a measure of tenant demand is slightly down year-over-year for all property types except multifamily. This is not surprising as industrials had a tremendous run up due to e-commerce growth.

Retail is on a painful side of the e-commerce coin as more people [indiscernible] to their home with full employment, the office sector is starting to feel the slowdown of office job creation its inevitable resulting in slightly lower demand growth.

On the supply side, the slowdown in completions has been similar across all property types deliveries this year running below last year's totals making the market fundamentals look as healthy as they were at the beginning of the year.

Rent growth among the property types is diverse with industrial being the clear winner at just under 6% year-over-year growth, retail is lagging at 1.4% percent, the apartment sector is worth highlighting as after strong supply pipeline and weakening fundamentals, the market is recovering once again with rent growth accelerating up 40 basis points to 3% compared to the end of last year.

So the highlights of second quarter include great sales growth, cost reductions, strong margin expansion, successful new product innovation, phenomenal marketplace traffic, strengthening customer relationships, outstanding competitive positioning across multiple products and all in all a solid economic outlook.

I will now turn the call over for everyone's favorite part of the earnings call to our CFO Scott Wheeler..

Thank you, Andy. Great list of highlights, I don't think I can top that. Yes, we are making great progress against our operating objectives for 2018 and we continue to deliver strong financial results. We certainly remain confident about the trajectory of the business moving forward.

As Andy mentioned, we delivered outstanding sales this quarter with $45 million in net bookings, which exceeded our expectations overall and we're up 23% from the second quarter of 2017. We are particularly encouraged by these results as there are a number of initiatives currently underway across our sales team.

Our commercial real estate sales force continues to convert former LoopNet customers to higher value CoStar and LoopNet marketing contracts at a solid pace. Through the end of the second quarter, we've converted approximately 9300 LoopNet customers to CoStar and our marketing contracts at an average price of approximately $527 per month.

On average these LoopNet users were paying only $54 per month for an average monthly price lift of $473 per month consistent with our results last quarter. At this point, we have generated $53 million in annual incremental contract revenue from the LoopNet conversion.

In addition, we initiated our pricing and licensing compliance program in the second quarter resulting in higher prices per user on new contracts. We expect that this effort along with our focus on client service will result in improved sales and customer value over the long-term. Our focus on LoopNet as a marketing site is certainly paying off.

LoopNet sales were particularly strong in the quarter as the commercial real estate field sales team increased their LoopNet advertising sales over 250% compared to the second quarter of 2017.

Our field sales team is becoming increasingly effective selling power ads in the second quarter, selling 7x the level that they sold in the second quarter of 2017. Now granted this is from a small base, but the momentum is certainly encouraging.

Finally, we had our best month of multifamily growth sales ever in June which is impressive considering our focus on integrating the ForRent and apartment sales forces in the second quarter.

The anticipated cancellations of some legacy ForRent clients resulted in lower net bookings for multifamily in total, which we expect will be short lived as we complete customer integration and we continue reducing the ForRent property cancellations.

Switching over to revenue, our growth rate was 25% in the second quarter of 2018 over the second quarter of 2017 coming in slightly above the high-end of our guidance range.

As we indicated last quarter, we are now actively moving existing customers and selling new customers a combined multifamily network product that includes both the Apartments.com and the ForRent family of Web sites. Accordingly, we're no longer able to effectively calculate an organic growth rate for multifamily or for the company in total.

Overall, our revenue growth in our two largest businesses CoStar Suite and multifamily is very strong and we expect consolidated revenue to grow in a range of 22% to 24% for the year a slight improvement over our guidance from the first quarter of 2018.

Looking at our revenue performance by services, CoStar Suite revenue growth was an outstanding 18% in the second quarter of 2018 versus the second quarter of 2017, a significant increase from the 13% annual growth rate we reported just a year ago in the second quarter of 2017.

We expect CoStar Suite to continue delivering elevated growth levels with the growth rate for full year 2018 at or near the low-end of our 18% to 20% guidance range.

Revenue growth rates and information services were negative 14% in the second quarter of 2018 as expected due to the shutdown of the LoopNet information services in the first quarter of this year.

Excluding the LoopNet information services, our Real Estate Manager and other services in this group grew a whopping 57% in this quarter over the second quarter of 2017. Real Estate Manager continues to exceed our expectations with growth in excess of 100% in the second quarter of 2018 over the second quarter of 2017.

With the shutdown of LoopNet bringing [indiscernible] substantially complete and the strong growth at Real Estate Manager, we expect information services revenue to decline at a rate of negative 12% to negative 15% on a year-over-year basis in 2018 a significant improvement from our last outlook.

Multifamily revenue grew 54% in the second quarter of 2013 including the impact of the ForRent acquisition. The integration is progressing ahead of schedule but there's still a lot of work left to do. Accordingly, our revenue expectations remain unchanged and we expect multifamily revenue growth of 40% to 45% for the year.

Rounding out our services performance, commercial property and land grew 16% year-over-year in the second quarter of 2018. Organic revenue growth normalizing for the May 2017 acquisition of LandWatch was 12% in the second quarter of 2018 versus the second quarter of 2017.

With strong sales levels in both LoopNet and the Land marketplaces, we expect revenue growth rates to improve through the rest of 2018 and expect organic growth in commercial property and land in the 13% to 15% range for 2018. Our gross margins came in at 77% in the second quarter of 2018 in line with last quarter.

Gross margins in the second half of 2018 are expected to remain in line with the second quarter improving slightly towards the latter part of the year following the closure of our Columbia, Maryland and Glasgow, Scotland research facilities.

Our outlook includes some severance costs associated with these changes and modest savings in facilities and staff costs in the latter quarters. Operating expenses of $186 million for the second quarter of 2018 were below our estimates as we are laser focused on delivering our margin goals for the year.

Approximately $3 million of our expense favorability in the quarter was associated with lower than expected personnel costs. Marketing expenses increased seasonally as expected in the second quarter although we pushed approximately $3 million of our marketing spend out of the second quarter and into the third quarter of 2018.

The balance of the expense favorability related to focused cost management and operating efficiencies across the business including better than planned results in the ForRent integration. Our second quarter 2018 adjusted EBITDA was $85 million or 29% of revenue.

This was approximately $15 million above the top-end of our guidance range and a full 600 basis points above our projected margin. We're very pleased that we were able to maintain this high level of adjusted EBITDA margin in the second quarter when advertising and marketing costs reached their peak for the year.

Net income for the second quarter of 2018 of $44 million increased an impressive 98% compared to the second quarter of 2017. Our effective tax rate in the quarter is 4% which includes income tax benefits of $6 million for state level research and development tax credits for the years 2013 through 2017.

Along with $3 million of tax benefits associated with share based payment transactions. Non-GAAP net income for the second quarter of 2018 increased 114% to $60 million or $1.66 per diluted share and includes the adjustments for stock-based compensation and acquisition related expenses.

Non-GAAP net income for the second quarter assumes a tax rate of 25%, which does not include the tax benefits of share based payment transaction or the R&D tax credits we took this quarter. Now let's take a look at some of the performance metrics for the quarter. At the end of the second quarter of 2018, our sales force totaled 775 people.

The decline from the 905 sales people at the end of the first quarter relates primarily to the reductions associated with the ForRent integration. The renewal rate on annual contracts was 91% in the second quarter of 2018 up from 90.6% in the second quarter of 2017.

The renewal rate for customers who've been subscribers for five years or longer was an impressive 97%. Subscription revenue on annual contract accounts for 77% of our revenue in the quarter down slightly from 79% last quarter due to a full quarter impact ForRent, which has a lower percentage of revenue on annual contracts.

As with most of our acquisitions, we expect this percentage to start increasing again as we convert more customers to annual Apartments.com full network contracts. Before I get to the outlook, I'd like to give you an update on the ForRent integration.

Our efforts to convert ForRent customers to the new Apartments network product is on track and revenue retention is ahead of our expectations so far. Today, we have reduced approximately $20 million to $25 million in annual costs, which include staffing reductions of over 200 people and elimination of other duplicative operating costs.

We've incurred $9 million of non-recurring integration costs in the second quarter and $12 million year-to-date, which are included in our results and added back in our non-GAAP financials. Overall, we're very happy with the pace and execution of the integration and expect to be substantially complete within one year of purchasing ForRent.

I'll now discuss our outlook for the full year and the third quarter of 2018. Based on strong year-to-date revenue and sales results, we are raising our 2018 revenue outlook by $4 million at the midpoint from our previous guidance. Our new 2018 revenue outlook is expected in the range of $1.18 billion to $1.192 billion.

This revenue range implies an annual revenue growth rate of 22% to 24% compared to 2017. We expect revenue in the third quarter of 2018 in the range of $304 millions of $307 million representing top-line growth of around 23% at the midpoint.

In terms of earnings, we are raising our guidance range for the full year of 2018 by $0.31 at the midpoint to a range of approximately $7.75 to $7.95 for a non-GAAP net income per diluted share and that's based on 36.5 million shares.

We expect adjusted EBITDA to be in a range of $395 million to $405 million for the full year of 2018, an increase of $15 million compared to our previous outlook. Year-over-year, we expect adjusted EBITDA growth of approximately 40% to 45%.

For the third quarter of 2018, we expect non-GAAP net income per share in a range of $2.02 to $2.10 and adjusted EBITDA in a range of $102 million to $106 million. We expect adjusted EBITDA margins to increase in the third quarter and again in the fourth quarter as marketing costs decline and we continue to progress with the ForRent integration.

We expect to meet or exceed our goal of 40% adjusted EBITDA margin in the fourth quarter of 2018. Overall, I believe the strong results in the first half of 2018 position us to continue our revenue growth trajectory and margin expansion. I look forward to updating you on our progress throughout the year.

With that, I will now open up the call for questions..

Thank you. [Operator Instructions] Our first question is going to come from the line of George Tong from Goldman Sachs. Please go ahead..

Hi, thanks. Good afternoon. You've converted 9300 LoopNet customers through the end of 2Q.

Can you elaborate on the cadence of LoopNet conversions in the second quarter relative to earlier quarters and how you expect future quarters to compare with 2Q with respect to conversion speed, conversion rate and the amount of pricing lift?.

Well, pricing lift is remaining about the same as constant from Q1 to Q2 and expect the [indiscernible] of Q3 and Q4. We are building out some new marketing initiatives that we have been working on for a while that will be rolling out in Q3, Q4, which might provide some acceleration for the conversion pace.

We also have been building software to enhance the -- in LoopNet product up sell experience. And so we expect to continue at a good clip. And as we said before, we think we will be converting at this sort of clip for a little bit better around this area for two years plus out from here.

So -- and then even after we've converted a number of the folks who were formerly premium searchers are heavily searched for long rate time, LoopNet will remain a really important pipeline for up selling people to CoStar.

So it's a great way to identify folks who need commercial real estate information and do a highly targeted marketing message to them. So it was a good performance and it will I think remain strong and steady for quite some time now.

The one exception -- one thing that makes me think about though is, we're feeling really good about some of the product enhancements we've got coming on the marketing side of LoopNet. So we've been investing in making sure the sales force is comfort with [fluent in sound] [ph] and LoopNet marketing solutions across the whole CoStar Group.

So there's been a little bit of shift to folks selling the LoopNet marketing solution and that necessitates a little bit less of a focus on doing the information conversions. But all in all we're very happy with the result..

Thank you. Our next question is coming from the line of Brett Huff from Stephens Inc. Please go ahead..

Good afternoon, guys. Congrats on a nice quarter..

Great. Thank you, Bret..

On the bookings number of $45 million that's a focus some folks have had. Can you give us or I think it was Scott may have given us some kind of context around that vis-à-vis the -- there is still some LoopNet planned cancellations or shut down that negatively impacted that.

Can you quantify that again for us? And number two, can you put a number or a ballpark on the pricing integrity negative impact on that $45 million. So I think that's a question we'll get a lot of. Thanks..

Yes. So Brett on the components last quarter, we took a large reduction in the LoopNet info I think we talked a lot about that. This quarter there's only about a $1 million of negative drag for LoopNet info.

The other transition item in this quarter as we do for rent integration that we're seeing somewhere around $4 million or so of cancellations that come through as we work through the customer base and move the clients over to the network contract. So the pace and the revenue conversion ForRent is happening as expected.

But as you expect there's this couple of quarters where you're going to see the cancellations to really solidify all the revenue there. So that pulls the number down just a little bit more. But I think as you look at what we've done really on the CoStar side and we talked about the LoopNet conversions, there are still strong.

The CoStar field team is really put in some great effort now selling more of the LoopNet product in fact 25% of their output is now selling LoopNet marketing and it used to be 10% a year ago. So you see a little bit of shifting over to that commercial property and land which we talked a little bit about.

And then, on the pricing side, the value increases there on the contract basis, I don't think we have a real slowdown in the quarter to talk through on pricing.

I think it's more of the focus on the service initiative, the LoopNet cross sells, and then continuing the pace following the large discounting that that impacts the sales in the first quarter or the second quarter. So hopefully that gives you some context on the different pieces..

Yes. And again, the ForRent cancellation number, we are outperforming that number.

So when you put together two or three marketplaces, you expect to get very significant cost efficiencies, you expect to get -- you expect to have some loss of redundant advertising dollars which we're seeing, but we're actually getting a better than expected result on that. So we're really kind of happy with the way it's come out..

Yes. Our net sales for the quarter came out ahead of what we expected. Obviously that's what allows us to raise our revenue guidance, it's in a few different buckets and what it may have been in the first quarter, but our sales are always volatile quarter-to-quarter.

We're happy that we're in this mid 40s range this year, we're in the mid 30s range most of last year and we're happy with the momentum we have going forward..

Thank you. Our next question will come from the line of Andrew Jeffrey from SunTrust. Please go ahead..

Hey guys. Good afternoon..

Good afternoon, Andrew..

Like the same day conference call, it's turning into a tradition I guess..

No extra charge for that..

Much appreciated. With regard to cross-sell as you've seen this nice success with LoopNet. Any updates in terms of what you think the total cross-sell potential is. I know you've talked about Andy as much as a couple of hundred million dollars.

Is that still a good long-term expectation, how can we think about that maybe nuanced or from a timing standpoint too?.

Yes. So I absolutely still believe that number is a multi-hundred million dollar number. I consistently believe that to be the case. And as you know there will be two components sort of like that just looking at the number we have right now this quarter, relatively early on it's a pretty solid number for cross-selling.

But you've got two really solid legs you're working here. One is the selling LoopNet to CoStar customers and the other is selling CoStar to LoopNet users or former customers. And they're both. I feel very optimistic about both.

And it will naturally waiver up and down slightly, you will have some volatility from quarter-to-quarter, but it will be a real consistent message line for the next three years..

Thank you. Our next question will come from the line of Pete Christiansen from Citi. Please go ahead..

Good afternoon guys. Nice trend. Andy can you rank some of the key reinvestment areas that you're looking on again sort of the next 12 months..

Yes. I mean just generally, one of the key areas is transformational product initiatives. We're going -- we're working on at Apartments.com. We look at the apartment industry not just -- it's not just a lead generation opportunity for the institutional great properties are over a hundred units.

We think there's a really exciting opportunity for us and generally facilitating the leasing of apartments from the individual unit on up to the 400 unit property.

I don't want to get too specific into some of the issues we're working on, but we are cranking on some product initiatives that we're pretty excited about and I think they'll probably -- they're going to require some investment and they are taking some investment now and there will be something that maturate over the course of 18 months or so.

But when we are ready to bring this to market in the beginning of '18, we'll talk about them more explicitly. There are -- we continue to feel that there -- like ones or continue to feel there's an awful a lot of opportunity in the owner lenders segment of our industry.

We've got some very exciting products we're working on to enhance CoStar to make it more useful for our many banking clients and try to win deeper penetration there.

And we also believe that there is a significant global opportunity so we continue to invest into Spain and we'll be doing some investments into France where you know we already have a footprint. And the United Kingdom will probably begin cash flowing a little bit more, so they'll be priced for transfer investment into Germany.

And so it's -- those are some of our bigger initiatives. Something I forgot Scott that we're thinking about..

Certainly the LoopNet have marketplace..

So the LoopNet marketplace and you can see the numbers are really solid there. And you know that is becoming, I think that that has an opportunity, the LoopNet marketing commercials real estate on the internet, I believe is an opportunity on par with marketing apartments on the Internet.

So we're going to invest behind that a little bit over the next two years. And then we might also do some additional investment into the businesses for sale areas at the tail end of that 12 month horizon. So we're exploring a number of different things there.

Obviously, remaining sensitive to achieving our 40% margin goal and beating it the fourth quarter and then remaining somewhat consistent to that high margin level -- remaining consistent with high margin level ongoing and out year. So we're balancing reinvestment in the business would maintain the high margin levels.

There is absolutely no shortage of potential investment initiatives just a question of prioritizing the really exciting ones upfront work and then in a -- in as fast a process as we can responsibly and efficiently run these initiatives..

Thank you. Our next question will come from Mayank Tandon from the Needham and Company. Please go ahead..

Thank you. Good evening. Scott, you touched on some of the pricing lift and obviously that has a lot to do with the LoopNet conversion.

But could you just maybe parse out the growth rate that you expect going forward for '18, and then, maybe longer term as well as in terms of how it breaks down between increased penetration within the installed base adding new customers.

And then, of course, any other pricing uplift beyond the conversion on LoopNet?.

Yes. So the -- the growth rates going forward we still expect to get about half of our growth from existing accounts and further penetration or broader geographies and we expect to get about half from new business and getting new logos. We're seeing that pretty consistently it doesn't change a whole lot.

And the other area now that we're seeing more growth is really not only the pricing in the CoStar side, but as we've done more pricing on the LoopNet side for unlimited lister contracts and now on our listing plans we're seeing good upward movement in pricing on the LoopNet side as well.

But what we haven't called in really into the rest of the years is that the pricing right now has been on new contracts coming in -- for new customers. We have not begun our program on a scale basis to do repricing an existing contracts as they roll.

And we expect that will -- will start to work its way into the rest of the year and become a bigger impact into next year..

And that last point that Scott was making is huge. So on our existing customer base, we have not had in place rigorous processes to evaluate each contract renewing and making sure that it's appropriately priced at the point of renewal.

So there is a lot of potential value in -- particularly in firms that might have signed up many years ago have merged and grown about a lot of people have grown their footprint and our enterprise licensing hasn't kept up with that.

So one of Scott's primary initiatives is setting up the systems around that to make sure we're capturing that appropriate revenue uplift. And then also making sure that our commission schedules support that but that could be in -- that alone over the next three years could be $100 million in uplift, right pricing those.

So we'll continue to see this higher -- this higher average price point hold I believe. And then, just the mix shift of going from marketing products to brokers in LoopNet to marketing products to owners I think has an enormous net price uplift impact. So it'll be pretty significant for the next three years..

Thank you..

Thank you. Our next question will come from David Ridley Lane from Bank of America. Please go ahead..

Good evening. In the past you have shown the number of advertising multifamily properties, now that ForRent has come online. I wonder if I could get updated on that metric. And then, directionally what portion of those properties are on a premium level package versus a basic package. How much have you found that base already? Thank you..

Unfortunately the sheet that was printed on I removed from the conference room to go grab something, I took it from Rich half an hour ago, just before the meeting started. So we are at 42,147 on the Apartments.com before the ForRent came in.

And the real impressive growth there is at the upper end with a 55% growth of our highest end ad, the diamond ad, and then, the silver ads only growing at 3% year-over-year. So the single highest growth category that people are buying is that that premium level ad. So that's good news.

And the reason is, we're delivering a lot more leads and a lot more value and more value increase to the advertiser than the price is going up. And then overall it's 48,490 when you combine the ForRent apartments.

Again, we will mark when we hit the 50,000 mark because that's like a hugely impressive feat of strength in the apartment marketing industry..

Thank you. Our next question will come from Stephen Sheldon from William Blair. Please go ahead..

Yes. Thanks. Good evening guys. How should we think about the factors that drove the adjusted EBITDA outperformance in the second quarter coming in at $85 million versus guidance, I think $66 million to $70 million? You talked about the $3 million push out of advertising expense, but how much of the outperformance was driven by ForRent.

What other factors may have driven it. And did you adjust your profit assumptions for ForRent over the remainder of the year..

Yes. You mentioned the marketing piece which was the part that shifts out the rest of the outperformance was all from a strong cost management and then a few million dollars of extra revenue that we that we had over our expectation. Yes, there's probably $2 million or $3 million of better than expected cost from the ForRent integration in the quarter.

And so we expect that those benefits continue, we flowed the full $15 million of outperformance on EBITDA through to the guidance for the year.

So we're confident that the things we're doing outside of the push in the marketing have to do with managing resources tightly as well as accelerating the ForRent integration and watching every other operating costs that we have, which we get a lot of duplicative marketing and other contracts that you find as you go through these integrations and those we were able to get out the door quicker than what we expected.

So it's a solid performance managing headcount closely and taking out those duplicative cost gave you that outperformance..

And Scott overlooks completely the single biggest factor which is we said 100% of all the senior executive teams bonuses for the year on feeding the 40% EBITDA margins -- adjusted EBITDA margin target for the fourth quarter. And I have reminded them at every single executive meeting that it's either make the target or not….

That's true. You know that, every meeting..

Thank you. Our question will come from the line of Bill Warmington from Wells Fargo. Please go ahead..

Good afternoon, everyone..

Hello Bill..

So, 100 hours of calls, I can say it only feels like half of that. And also before I forget it, just wanted to wish good luck to Rich on his less than a month left of bachelorhood..

Thank you. Angela will appreciate your mention..

My question has to do with what -- one of those figures you threw out in terms of 41% more leads and higher quality better conversion rates. And so my question is, what are you doing to better demonstrate the higher quality to the potential buyers? And also then, what are you doing to better monetize those leads.

And can you -- in some way use that $1 billion in cash that you're sitting on to somehow accelerate that process?.

Bill I always appreciate your question. They are very helpful. Yes. So it's interesting the one of the ways at NAA, we partnered with two of the major players that provide lead tracking services for the apartment industry. One of them, LeaseHawk has sampled that 10 million incoming leads into apartment communities.

That service shows that not only are we producing by far and away with the highest volume of leads, but they're also the most -- had the highest conversion rate dramatically higher conversion rates than any of the other lead sources, which is important to our customers because each lead is an opportunity for them, but it's also a significant cost item for them they have to process the lead and walk them to the apartment everything else.

So we've been making it with these third parties that we're partnering with to communicate this information along with the tracking numbers we provide to our customers and the lead tracking tools we provide to them. They're very aware of the tremendous advantage we're providing them.

And we've been hearing from them that they used to require two or three services to keep the lead flow they need. And that today they're getting 100% lead flow they need by just advertising with the Apartments.com network. So we're getting credit for it.

I would say that in -- 30, 40 conversations I had with clients almost all of them told us straight out we measure it, we monitor it and absolutely without a doubt you guys get credit for the most leads and the highest quality lead. So that's a solid story we don't need to really -- I think we're effectively pushing it.

However, you would expect that the clients get a great deal right now because while the lead flow and the conversion rate is going up dramatically, I was shocked at how big the lead number was this past quarter. It was huge.

And it means that there is a pricing opportunity there and we're going to be -- we'll be looking at that and we will be -- we won't be out of control, but we do think there is an opportunity there for some pricing leverage there. So I think that we didn't expect such a tremendous growth in the lead flow as we've seen.

So we're seeing this, it holds consistent. We'll probably look for ways to recognize some of that additional value -- we'll capture some additional value we're providing to those. In terms of how we use that modest cash balance. We have the -- we are very active looking at opportunities in the market. We have a number of different irons in the fire.

We are being selective. We are not chasing things that we feel are overvalued in the cycle. And we're looking for reasonably priced assets that we think have -- we can get a 10 banger on, we can't get a 10 banger on it, why do it. But we're not -- we aren't forgetting that balance we're aggressively working it, but we want to do it the right way..

Thank you. We have a question from the line of Sterling Auty from JPMorgan. Please go ahead..

Yes. Thanks. Hi, guys.

Just one question on LoopNet conversions, of the 100,000 or so targets that you're going after, what percentage have you now kind of reached to do kind of the meetings and demos at this point to try to convert them?.

I don't have an exact figure in front of me here, so I could only give you a guesstimate. And I would imagine it is 20% or so. But also remember that my experiences over the years has been that often that you'll have a quick sale cycle where you meet with one of those conversions and they close within 30 days.

So your initial conversion rate -- initial close might be 50%. Your 3 year close rate might be 75%. So you have -- the first run of it and then those people often reconsider or eventually come around to it. So we have a motto here in our sales organization that eventually they all buy.

It's just a question of when they see the light and they are ready to get a fantastic ROI for their investment in CoStar..

Thank you. [Operator Instructions] And we have a question from the line of Marc Wiesenberger from B. Riley. Please go ahead..

Good afternoon. Thank you. Are you seeing any trend in non-traditional users across any of your platforms? And if so does that impact future product releases and/or marketing campaigns? Thank you..

We've always had a couple of big sea changes like one is the growth of owners, used we are predominantly driven by brokers now overwhelmingly our biggest customers are our owners and that's a growing segment. So that's a big focus for our product releases.

We always have a remarkable collection of unexpected users of our products like, you can delve into it, and when you look at 20 brands and you're like why in the world are they buying the product, and then there'll be some explanation about the need to measure the radio transmission blockage of buildings in order to calculate certain things.

So there's always something going on like LA school district subscribed to CoStar in order to forecast their budgets and out years since they're funded by commercial property taxes. So there is always something going on there. I actually think that it's not a small -- it's not a sort of wild outlier.

But the banking industry I think is the next big phase for us. So our ability to wrap our customers' loan portfolios with good surveillance and strong underwriting tools I think we can for relatively modest cost, we can invest there and build some really compelling tools to the banking industry. So we have some things in development there.

Also we're providing some tools for CMBS investors, I think are pretty exciting where we're giving CMBS investors advance information on the economics of properties in the portfolio as well before the servicers report that content to the investors. So again, some information arbitrage there, I think those tools have a lot of legs.

So we're now -- we're really more focusing on bigger blocks of opportunities to taking folks who are traditionally 4% of our revenues and saying can we grow them to 10%. And there's probably five or six of those..

Thank you. And at this time, we have no further questions in queue..

[indiscernible] batting cleanup. So thank you very much for joining us for our 80th CoStar earnings call. And we look forward to updating on our progress for the third quarter before long. And again, thank you very much for joining us..

Thank you. And ladies and gentlemen that does conclude our conference for today. We thank you for your participation for using AT&T Executive Teleconference. You may now disconnect..