Q3 2026 CoStar Group Earnings Conference Call - COSTAR GROUP INC

Financial Performance:

• Q3 2026 revenue reached $952 million, a 14% year-over-year increase, marking the 62nd consecutive quarter of double-digit growth.
• Adjusted EBITDA hit a record $229 million, doubling the prior year and exceeding guidance by $16 million; EBITDA margin expanded 100 basis points to 24%.
• Net income was $74 million compared to a $31 million net loss in the prior year; Adjusted EPS was $0.38, up 65% year-over-year.
• Operating expenses declined 2% year-over-year, with cost efficiency initiatives delivering $150 million below prior year guidance excluding Zonda.
• Operating cash flow was $188 million for the quarter and $455 million year-to-date (excluding the $109 million Brown settlement).
• Shares repurchased totaled 2.7 million for $81 million in Q3, with the full-year buyback program expected to conclude in Q4.

Guidance and Future Outlook:

• Full-year 2026 revenue guidance raised to $3.75–$3.77 billion; adjusted EBITDA guidance raised to $820–$840 million (22% margin).
• Q4 2026 revenue guidance set at $976–$996 million; adjusted EBITDA guidance set at $275–$295 million.
• Zonda acquisition is expected to contribute ~$60 million revenue and $10 million adjusted EBITDA for the full year 2026.
• Long-term target reaffirmed: Adjusted EBITDA of $1.25 billion by 2028, supported by identified cost savings and reinvestment.
• Identified $200 million in additional efficiency opportunities to be realized over the next 12–18 months, separate from the $150 million saved in 2026.
• Salesforce growth expected to re-accelerate in 2027 to capture uncaptured prospect opportunities.

Business Segments and Product Lines:

• Commercial: Revenue $492 million (+7% YoY); CoStar revenue $344 million (+8% YoY) with 92% renewal rates; LoopNet revenue $89 million (+13% YoY) driven by 20% sales force growth and 30% sequential booking increase.
• Residential: Revenue $460 million (+23% YoY); Homes.com revenue grew 50% to $31 million; Apartments.com revenue grew 6% despite sales capacity constraints; Domain revenue down 5% due to weak Australian transaction volume.
• Acquisitions: Zonda added August 21, expanding into new home construction analytics; Vexel acquisition announced for ~$730 million to provide high-resolution aerial imagery and AI-driven property data.
• New Products: Launched CoStar AI-driven tenant research (10x productivity potential); CoStar Debt Solutions Benchmark (covering $1.5T in debt); Matterport shipment growth of 52% YoY following Pro 3 model rebalancing; BizBuySell subscription revenue up 282% YoY.
• International: CoStar UK achieved 94% renewal rates; CoStar France migration of 1,100+ business accounts; CoStar Australia nearing launch with proprietary datasets.

Market and Competitive Landscape:

• Apartments.com maintains 63% unaided brand awareness, significantly outpacing competitors (Zillow, Rent.com, ApartmentList); 74% of visitors have never visited Zillow Rentals.
• Market headwinds include record-low pending home sales in the US, negative real rent growth in multifamily, and falling home prices in Australia due to interest rates and tax changes.
• LoopNet's combined selling strategy with CoStar in the UK is yielding strong results, prompting a US rollout to target mid-tier clients.
• Zonda is entering a ~$1 trillion new construction market currently reliant on fragmented data and manual processes.
• Vexel's aerial imagery offers 16x higher resolution than commercial satellites, enabling AI extraction of hundreds of property data fields.

Risks and Challenges:

• Salesforce capacity constraints hindered Q3 bookings ($37 million annualized), attributed to reduced headcount and lower conversion rates from inexperienced inside sales staff.
• Macroeconomic headwinds impacting transaction volumes in residential real estate (US, UK, Australia), negatively affecting Domain and transaction-based revenue.
• Higher interest rates and investment tax treatment changes in Australia are driving reduced home sales and increased vacancies.
• Integration risks associated with large-scale acquisitions (Zonda, Vexel) and the transition of Homes.com from inside to field sales.
• Potential churn in the lower-end residential portfolio (under 50 units) due to higher sensitivity to rental market conditions.

Management Commentary and Tone:

• Tone remains highly confident despite short-term revenue miss, emphasizing strong margin expansion, record profitability, and clear paths to long-term targets.
• CEO Andy Florence and new CFO Robin Rossman highlighted a disciplined focus on cost control without sacrificing growth investments.
• Management acknowledged the "step down" in bookings but framed it as a temporary capacity issue solvable by re-aligning sales recruiting and hiring experienced field reps.
• Confidence expressed in the transformative potential of AI, aerial imagery (Vexel), and cross-selling synergies to drive future efficiency and revenue.
• Commitment to achieving $1.25 billion EBITDA in 2028, with efficiency gains being reinvested to accelerate revenue growth.

Analyst Questions and Answers:

• Bookings & Sales Force: Analysts questioned the impact of sales capacity; Management confirmed the Q3 low was the bottom, with plans to decentralize recruiting and hire experienced field reps in major hubs to re-accelerate growth in 2027.
• Margins & Reinvestment: Clarified that the $200M in future savings will be split between margin improvement and revenue investment; long-term EBITDA targets remain unchanged as the full reinvestment strategy is being finalized.
• Vexel Acquisition: Discussed CapEx requirements (~$20M over 2 years), data rights (non-exclusive for Vexel's core business, integrated for CoStar), and sales approach (bundling with CoStar via existing 2,000 reps).
• AI & Data Propriety: Addressed concerns about LLMs scraping data; Management noted that while traffic from AI models exists, it drives users to the platform for transactions, and CoStar retains proprietary data not visible to the public web.
• Homes.com Losses: Confirmed the segment is on track to limit losses to $550 million for the year, with better-than-expected Q3 performance due to the new Platinum advertising product.

Other Key Points:

• Organizational Restructuring: A deep review identified ~$200 million in cost efficiency opportunities across procurement, marketing, and organizational design.
• Hiring Plans: Plans to appoint a new CHRO within two weeks; decentralizing sales recruiting to 20 major cities with dedicated recruiters reporting to field sales leadership.
• Cross-Selling: Testing a unified sales approach for LoopNet and CoStar in the US to maximize coverage of mid-market clients.
• Matterport: Expects profitability by end of 2027; subscription revenue now 70% of total.
• Zonda: Integration with CoStar and Homes.com expected to expand new construction inventory and builder advertising opportunities.