CoStar Group: 1Q25 Business Update
Reaccelerated Revenue Growth, But Elevated S&M Remains
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1Q25 Business Update.
CoStar reported 1Q25 and their stock dropped -10% the following day.
What drove the large stock movement is a bit perplexing as they reaccelerated revenue growth from +10% y/y last Q to +12% y/y. One theory is that when they refreshed the board of directors at the beginning of April and formed a “Capital Allocation” committee that perhaps investors were expecting expenses to be tapered. However, that most certainly did not happen and there was no indication they will curtail marketing investments in homes.com or slow growth investments elsewhere.
Whatever caused the selloff, there was nothing in their quarterly results that were notably different to the trends we’ve seen over the past few quarters. In fact, we recommend readers look at our 4Q24 update for more color as many of the things we mentioned last quarter still hold.
Total company revenue growth of +12% y/y growth represents the 56th consecutive quarter of growth and Andy Florance deserves credit for this reacceleration.
The CoStar segment growth of +6% y/y is in line with prior quarters if we remember that STR (the hotel data acquisition they did a few years ago) used to be housed in Information Services but was moved here. They noted on the call that they typically don’t take pricing in soft macro environments, signally that they could take price on their CoStar Suite once the environment improves. This commentary together with their disclosure that they had the best quarter ever of net new bookings (+116% y/y) suggest that most growth has been driven by new client acquisition.
Multi-family revenue growth decelerated again to +11% y/y from +13% last Q. This was at the low end of their 11-12% guidance. These results are still decent in this macro backdrop. Their Other Marketplace segment showed strong growth, increasing +46% y/y. They noted strength in their BizBuySell marketplace, as well as cross-seeding appropriate listings from Homes.com to Land.com that helped drive their quarter’s performance.
Homes.com revenue growth slowed to +46% y/y (from +181% last Q) and actually contracted q/q. While this is perhaps not what investors want to see given the amount of money they are investing in the site, it is in line with their guidance. Perhaps the most telling on their progress with Homes.com is that they noted unaided brand awareness increased from 4% to 36%. Zillow right now sits at 60% and they fully intend to keep spending until they reach or exceed them. Florance also noted on the call that Homes.com monthly churn (from paying agents) was 10% when they launched and now is ~2.5%.
S&M continues to be very elevated at 50% of revenues for the quarter, about 20 points higher than a few years ago. Key to a CoStar investment thesis is how much of this spend is growth marketing that once successful, will permanently raise their top of mind brand awareness, versus maintenance marketing that will require on-going upkeep.
While they note that their CoStar Commercial Information and Marketplace brands deliver 43% margins, it is unclear how they calculate that. No doubt we would expect the CoStar and Information Services segment to have high margin (perhaps around 40-50% if run just for profit), but we do not have the disclosures to calculate that.
Furthermore, as S&M spend increases, a large portion of that is being diverted to their salesforce. While salespeople no doubt bring in new business, they also are required to maintain existing users. While they haven’t talked about it in a while, they mentioned around the financial crisis that “green baring” users was key to getting retention higher. This was a term they coined to describe getting users to regularly use their product and they had to use their sales force to ensure that happened. Perhaps there is just a period initially where the salesperson is needed to prob the new client to use the platform, which becomes unnecessary as the client builds habit (suggesting that the salesperson isn’t a maintenance expense needed to support revenues from existing clients).
While this may all seem theoretical, it is critical to understand CoStar’s steady-state economics. With them running 50% S&M as a % of revenue today and growing only 12% y/y, it does bring the question of what growth would look like if they were to drop S&M 20-30 points?
Today they have an EV of ~$26.5bn (~$2.7bn of net cash) and guided this year’s revenues to ~$3.1bn. With 40% mature margins, that implies mature margins of 27x. An investor would likely want to see at least a mid to high single digit revenue growth rate, while running at mature margins, in order to get a historical stock market return of ~9-10%. This then brings the question on whether all of that S&M is really just to grow revenues a few more points? Or would cutting it lead to worse results? If cutting S&M didn’t depress revenue growth that much, that could imply S&M isn’t being spent that efficiently.
These are key questions an investor needs to wrestle with. On the other hand, the core Costar Commercial Information Services and Marketplace business should in theory be very high margin and not require much spend to grow. So, it certainly is possible that this S&M is just a “start-up cost” to get Homes.com and some of their other businesses going and once pulled back on, growth will continue to hum. It is hard to say.
We recommend investors read our Extensive Research report on CoStar for more valuation commentary as the reverse DCF assumptions and outputs still generally hold.
1Q25 Notes.
Costar
Revenue was up 6% y/y, while annualized net new bookings reached their highest level since Q3 '23 and generating 68% year-over-year growth
4th consecutive quarter of increasing net new bookings.
CoStar for lenders, led by John Vecchione achieved its best ever quarter of net new bookings, up 116% y/y
In less than 3 years, it has achieved $80 million in annual revenue run rate
Several product enhancements coming over the next few years that can take TAM for lender to well above $1 billion.
CoStar remains a mission-critical tool for our clients across all segments. Log-ins to CoStar were up 21% y/y, and our subscribers averaged 100 million activities each month, highest activity in 9 months
Quarterly renewal rate remains strong at 92%.
On pricing
“we've always slowed our pricing increases during difficult markets to support our clients. And then we are generally more aggressive with our price adjustments when we are in good markets for our clients.”
LoopNet
LoopNet turned in an outstanding quarter as annualized net new bookings skyrocketed 200% y/y
In the quarter, per rep productivity was twice as high as Q1 '24
Shifted focus to selling a broad subscription package to owners and brokers to get all their properties on the platform rather than focusing on selling a few high value signature ads that only address a small portion of the portfolio
Implementing asset-based pricing as silver ads come up for renewal.
Our renewal rates on these ads remain strong at 97%
Information Services
CoStar Real Estate Manager and Visual Lease attained annualized subscription revenue growth nearing double digits.
Moved forward with the consolidation of leadership and operations across the brands, positioning the leases businesses for integration in the greater CoStar data offering. T
Resulted in 50% y/y EBITDA growth for the combined brands
Both brands “continue to take market share” from lease management competitors
The leases product team is now focused to combine the value of its portfolio management applications with CoStar's data and analytics, Matterport and LoopNet offerings to create an unrivaled solution for occupiers for real estate.
Other Marketplaces
For the quarter, Land.com net new bookings increased 58%. And land.com continues integrating with Homes.com
Over 8k Homes.com members are syndicating over 22k applicable listings to Land.com.
Soon, Land.com members will receive a similar benefit on Homes.com increasing value and opportunities for both sites.
BizBuySell revenue reached $8.7 million in the first quarter, representing a 10% increase y/y. Net new bookings increased 85% y/y, driven by strong growth in both business owner and business buyer subscriptions
Buyer demand continues to strengthen with website visits up +22% and lead volume increasing +33% y/y.
Multi Family
Apartments.com sales team conducted over 166k interactions with clients and prospects in the quarter
Added 4.3k new communities in Q1, the most properties they’ve have added to Apartments.com in a single quarter in almost 10 years.
Benefited from the shutdown of Redfin of their rent period business as they target those properties that were formally on rent period, not apartments.
Now have 80k multifamilies on Apartments.com. The sales team maintained a 94 Net Promoter Score during the quarter.
They see a $2.6 billion opportunity in the 20-unit and above building space and is our intention to grow the sales team 23% this year to keep up with this potential.
Since 2019, we've grown our apartments revenue 118%, but only grown our sales reps in production by 56%, so we'll continue to accelerate our sales force growth to keep up with this opportunity
Residential
Before we launched in February '24, only 4% of that target audience knew Homes.com
In 14 months of marketing campaign, we have steadily increased our unaided awareness 9x to 36%.
We began Zillow with 64 points above our own unaided awareness. We've closed the gap to 24 points and are still improving.
I have consistently set the expectation of building a B2C brand takes 3 to 5 years. To reach this level of unaided awareness and unaided intent in an audience of hundreds of millions in 14 months is excellent progress
Provide members with the Matterport and floor plan for their listing so that potential buyers can tour their listings 24/7. “It's a comprehensive digital real estate marketing package no one else is offering”.
Our out-of-cycle early cancellation rate or failed payment at the time was high at 10% monthly, now it is between 0.25% and 2.5% per month.
NPS soared 85 points from negative 42
In April, month-to-date, our demo-to-close rate is 56%. “This is the highest monthly close rate I've ever seen for any CoStar brand”
Home sellers can boost listings too, adding marketing spend to their listing, which has been successful in Australia
Launching a new homes.com marketing offering for homebuilders
Domain Acquisition
1 of Australia's 2 largest real estate portals and 1 of the 10 largest real estate marketplaces in the world.
2024 annual revenue was $250 million using today's conversion rate and EBITDA of $88 million.
One element from Domain that will benefit Homes.com and OnTheMarket is advertising depth
Domain offers 4 tiers of advertising that offer increasing levels of exposure as you move up their ad tiers by utilizing sort order, larger search placards, social notification and retargeting. They will be adopting the best practices of Domain in the U.S. and in the United Kingdom.
Strong entry point into Australia’s commercial real estate market. They operate commercialrealestate.com.au, a top 2 CRE marketplace in Australia with thousands of listings we can migrate into LoopNet
Macro
“During the past few years and through today, we're operating in one of the worst commercial real estate environments in decades.”
Although absorption is improving, we are still seeing historic high vacancy rate of about 16%
Real asking rents of sit at a 30-year low
Real sales price per square foot is a decade low
Market cap rates are at a high point of 9.17%
Sales volume, while recovering, is about 1/3 of normal levels
“I want to be clear, we see clear signs that the cycle is improving”
Guidance
Full year revenues of $3.115 to $3.155bn for the full year, representing revenue growth of 15% at the midpoint. This now includes their Matterport acquisition.
2Q revenues of $770 to $775mn, which is about 14% at the midpoint.
EBITDA of $355mn to $385mn, representing a 12% margin at the midpoint for the full year.
2Q EBITDA of $50 to $60mn.
For more on CoStar Group, check out our Extensive Research Report.
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*At the time of this writing, one or more contributors to this report has a position in CoStar Group. Furthermore, accounts one or more contributors advise on may also have a position in CoStar Group. This may change without notice.