I recently interviewed Richard Boyle, CEO of LoopNet (Nasdaq: LOOP), and earlier this month, I discussed a few of his responses concerning the company's legal battle against CoStar Group (Nasdaq: CSGP), the state of commercial real estate, and how the company attracts premium subscribers to what is typically an ad-supported site. The challenges are real, as online real estate companies like lead generator House Values (Nasdaq: SOLD), Realtor.com parent Move (Nasdaq: MOVE), and RealEstate.com parent Tree.com (Nasdaq: TREE) have all sunk to trade below $3 a share.
In fact, all three of those companies closed within copper pennies of one another yesterday.
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Company
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10/13/08
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52-Week High
|
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Tree.com
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$2.22
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$11.10
|
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House Values
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$2.25
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$3.99
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Move
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$2.21
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$3.47
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LoopNet is holding up considerably better. Its commercial real estate bent has delivered real growth even in a problematic market. LoopNet grew its top line by 29% in its latest quarter, closing out the period with 623,000 property listings.
In other words, as real as the challenges may be, the opportunities also loom large.
The moment of truth
I asked Boyle about the company's recent financials and fundamentals. This is what he had to say:
Rick Aristotle Munarriz:
You increased your subscription rates last year and I have seen online companies like The Knot (Nasdaq: KNOT) and eBay (Nasdaq: EBAY) raise their fees under deteriorating marketing conditions last year, only to be ultimately burned. What is LoopNet doing to avoid falling into that trap?
Richard Boyle: Well, the deteriorating market conditions are on the demand-side traffic and we haven't raised prices there. Where we have been changing our pricing model is on the marketing side of our system, so people marketing properties are moving to a volume-based pricing, so your contrast with something like eBay is interesting. eBay has always had a per-listing insertion fee and a per-transaction closing fee -- or success fee -- and we have historically not had anything like that.
Our model historically was a monthly flat fee. If you had one listing, you were paying us a certain fee. If you had 100 listings, you were paying us the same fee. We did that for a reason, as we were building momentum in the business initially, but what we introduced at the end of last year was a gradual tiering where the $89 monthly subscription to the marketing listings right now is for up to four active listings. As you go to five or more listings, the fee scales up in a fairly linear manner.
Ultimately, we feel very comfortable with that in a couple of ways. No. 1, the agents are used to thinking in terms of a marketing budget on a per-listing basis. That is how they operate in the offline world. No. 2, the cost to market those properties on LoopNet as compared to the other marketing channels they have available to them is still very, very low and No. 3, the cost to market those properties [is attractive]. Let's say you have four active listings. You are paying roughly $22 a month as an effective rate, and the cost of that as compared to the value of the leads we deliver to completing a transaction and earning a multi-thousand dollar commission is pretty trivial in our minds.
RAM:
Revenue grew 29% in your latest quarter, but adjusted earnings aren't keeping up. Is there a reason for the margins being squeezed?
RB: A couple of things. Our EBITDA margins last year had been running at about 48%, excluding stock compensation. On that basis, what we told people at the end of the year is to expect it to be more in the mid-40s range, and the reason was top line growth was a little bit lighter than we wanted this year because of these market conditions. But there are some areas where we are making some investments that we think are important for the future, and we just decided to spend the money anyway.
So as a management goal, what we had said when we went public a couple of years ago was we had a goal of managing the business to an adjusted EBITDA target margin in the mid to high 40% range and any leverage above that, we wanted to reinvest in the business for future growth as opposed to delivering higher margins right now.
So this year, our original guidance for top line growth was in the mid-20% range on a year-over-year basis and that was a little lighter than we would have liked to get due to market conditions, but we chose to spend some of the investment dollars anyway so our original guidance I think had our adjusted EBITDA margins around 44 or 45%.
On a GAAP basis, the big change is really some initial stock comp expenses that are coming in this year as well as, unfortunately, we are also having to bear some litigation expenses this year. We hope it is a passing phenomenon, but it is definitely impacting the GAAP EPS numbers this year.
RAM:
Thank you for your time and good luck. Keep navigating these tricky waters. You are doing a great job.
RB: Yeah, thanks. We are trying and looking forward to seeing the market come back at some point when the debt markets normalize and all that fun stuff. But in the meantime, we are just running a business and trying to do good by our customers.
RAM: Unfortunately, all customers can't be as cash rich and debt-free as you guys out there, buying all these properties at this moment, so...
RB: Yeah, we do think it is a good time. Clearly, we are not happy with 30% growth, but it is not awful. We would like to do better, but we do think it is a great time to look at some strategic acquisitions and other moves we can make to position for where we want to be in the long run because the market will come back, there is no question in our minds.
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