CoStar Group Inc (CSGP) Q4 2018 Earnings Conference Call Transcript

CoStar Group, Inc. (CSGP -1.50%)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter, and 2018 earnings call. At this time, everyone joining by phone is in a listen-only or muted mode, and then later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, press *, then 0 on your phone keypad. As a reminder, the conference is being recorded; and I'll now turn the meeting over to our host, Rich Simonelli. Please go ahead.

Richard Simonelli -- Vice President, Investor Relations

Thank you, operator -- and welcome to CoStar Group's fourth quarter and year-end 2018 conference call. Before I turn the call over to Andy Florance, CoStar's CEO and founder, and Scott Wheeler, our CFO, I have some very interesting, and important items for you. 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 in our press release today, on February 26th, for our fourth quarter and year-end earnings, as well as the company's outlook, and in CoStar's filings with the SEC -- including our most recent annual report on Form 10K, and our subsequent quarterly reports on form 10Q under the heading "Risk Factors."

All forward-looking statements are based on information available to CoStar at the time of this call. CoStar assumes no obligation to update these statements, whether as a result of new information, future events, or otherwise. Reconciliation to the most directly comparable GAAP measure to the non-GAAP financial measures discussed on this call, including, but not limited to non-GAAP, net income, EBITDA, adjusted EBITDA, and forward-looking GAAP guidance, are shown in detail on our press release issued today, along with definitions for those terms. The press release is available in the Press Room section of our website, located at costargroup.com.

As a reminder, today's conference call is being broadcast live, and in color on our website, where you can also find CoStar's investor relations page. Please refer to our press release on how to access the replay. Remember, one question -- so make it a good one -- and I'll now turn the call over to Andy. Andy?

Andrew C. Florance -- President, Chief Executive Officer

Rich, that was authentic, and moving -- thank you.

Richard Simonelli -- Vice President, Investor Relations

You're welcome.

Andrew C. Florance -- President, Chief Executive Officer

Thank you all for joining us for CoStar Group's fourth quarter 2018, and year-end earnings call. The first number I wanna focus on is our adjusted EBITDA margin in the fourth quarter, which was 44%. By achieving that strong margin, we have successfully accomplished an important financial goal. Five years ago, in 2014, we set two key long-range financial goals for 2018. One was to achieve $1 billion in annual revenue, and the second was to reach 40% adjusted EBITDA margin for the fourth quarter of 2018. Today, five years later, with a $1.2 billion in revenue for the full year 2018, and a 44% adjusted EBITDA margin in the fourth quarter, our team is pleased to have solidly delivered on both of those goals.

Delivering this sort of consistent growth is on-target with our long-range record of good growth. Since 2011, we've achieved a 25% compound annual revenue growth rate, which is in line with our 20-year compound annual growth rate of 25%. For the full year of 2018, our adjusted EBITDA margin was 35%, over 600 basis points of improvement over 2017. EBITDA in 2018 was $351 million, an increase of 48%, compared to $237 million for 2017. Net income was $238 million in 2018, compared to $123 million in 2017, a 94% increase.

The past five years have proven that we can grow the top line, expand margins, and still make significant growth investments into the business. Some of those recent investments include the Richmond Research Center, expanding and marketing the Apartments.com network, growing our sales team, integrating the CoStar LoopNet databases, and expanding our Canadian and European businesses. Our most significant growing investments are product and software development; those investments have allowed us to build powerful, profitable businesses with strong leadership positions with CoStar Suite, the Apartments network, CoStar Real Estate Manager, LoopNet, and many others.

Because of our exceptional technology, deep understanding of real estate, and the value of our connected commercial real estate communities, we have created transformative value for our clients. We are now attracting 42 million people to our websites monthly, and have earned the business of 150,000 CoStar subscribers. This has enabled us to balance investing back into our business, while still significantly expanding our margins.

CoStar Group holds a leadership position in the exciting transformation of a multi-trillion dollar real estate industry, moving from off-line to online. We have positioned the company well for the enormous long-term opportunity that lies ahead of us by building an exceptionally strong balance sheet. We have $1.1 billion in cash, no debt, and $351 million of growing EBITDA to leverage. CoStar Group has acquired dozens of companies and expects to continue acquiring companies that will bring value to our shareholders.

CoStar Suite revenue grew 18% in 2018, over 2017. Commercial property and land, which includes the LoopNet.com, as well as our land and business sites, grew 16% year-over-year in the fourth quarter of 2018. For the full year of 2018, multi-family revenue grew 45%, versus 2017, as our multi-family revenue increased to $406 million. CoStar Real Estate Manager grew an astounding 124% year-over-year and is already off to a strong start this year. That's right -- 124%.

We now have more than $1 billion of visible, high-margin, reoccurring, or subscription revenue. Companywide net new bookings of $50 million in the fourth quarter of 2018 were the best we've ever achieved. That is an increase of 15% year-over-year, and 26% over the fourth quarter of 2018. Remember that the fourth quarter 2017 was an exceptional quarter for us, as one of our long-term competitors filed bankruptcy. For the full year of 2018, we turned in another top performance with $169 million in net new bookings. In a sense, even that number is understated, because it does not include all the work our sales team did in finding tens of millions of dollars of ForRent revenue into Apartments.com contracts.

In the fourth quarter 2018, we signed two large brokerage firms to new, multi-year contracts. The contract we signed with CBRE was our first global contract. CBRE has been a great, longtime customer of CoStar, and their users are spending more time on our products than ever before. 2018 CBRE users doubled their time spent working in CoStar over 2016; this is a testament to the growing utility of our products to top industry players.

Marcus & Millichap also signed a multi-year contract renewal with us, and they pointed directly to improvements made in research, particularly our tenant data, as a reason for going forward with us, and expanding the volume of services they buy from us. They're also renewing and growing Canadian contracts with us.

In 2018, our CoStar field sales force began focusing on selling LoopNet, in addition to CoStar. We did this because it makes good sense, and we feel that our customers prefer one point of contact. As a result, net new year-over-year bookings for LoopNet.com increased by 74%. With two products to sell, the sales force is selling a bit less CoStar, but it's selling much more of the combined services; clearly, this is a good trade-off.

Our Apartments.com sales force is doing a great job; the fourth quarter of 2018 was our best sales quarter ever for Apartments.com. Our sales force has essentially completed converting ForRent customers to Apartments.com customers, so they now have more time available to focus on signing new business. Hitting a record Apartments.com sales quarter in the fourth quarter is a remarkable achievement, given the fact that -- historically -- apartment Internet listing services suffered from sharp seasonality, and historically would contract in the fourth quarter -- so setting records in the fourth quarter is great.

Our Apartments.com sales force knows the power of client service, and how it leads to more sales; 2018 they conducted 309,000 client meetings, and most of our reps average nearly seven meetings per day. Some are averaging almost ten client meetings a day. An independent group within CoStar follows up many of these meetings by calling and asking the client, on a scale of one to ten, how likely they are to recommend Apartments.com to a friend. On average, our clients give us a 9.64. One of our best reps, Nicole Gagliardi, across 1,000 meetings, scored an outstanding 9.94 -- an A++. I believe this sales team is the best in the industry, and I'm looking forward to another excellent year with them.

In 2018, according to ComScore, the Apartments.com network had half-a-billion visits for the full year -- up 33% over 2017. In one month, according to Google Analytics, we saw 57 million visits over the Apartments.com network. We average 17 million unique visitors per month over the course of the year, according to ComScore, which is an increase of 35% compared to 2017. This is by far the most in the industry, as we continue to pull away from RentPath, which only had 208 million visits in 2018, and averaged less than 8.8 million unique visitors per month.

Even more impressly, for the full year of 2018, Apartments.com leads were up 43%. With almost 300 million more visits than RentPath and great lead flow, we believe the obvious choice for an advertiser has to be Apartments.com. In 2018, 4,600 properties advertising with RentPath started advertising with Apartments.com. We estimate that there are only 6,000-8,000 that still advertise on RentPath, and do not yet advertise on Apartments.com, and we are focused on capturing that business. In 2018, RentPath got a competitive rest, or a little competitive holiday, while we focused on the ForRent conversion, but in 2019, we'll dramatically increase the competitive intensity.

We believe that RentPath may have a ticking time bomb of a pricing problem. We believe that similar apartment properties in the same city are paying wildly different prices for essentially the same advertising levels; this may have happened because they used to have much better share of traffic, and RentPath may be relying on long-term clients to keep paying yesterday's higher prices that might have been justified years ago, when their traffic was good, but now these prices may not make any sense. How will long-term clients react if they find that new clients are paying a fraction of the price for the same product? It used to make sense to pay $3.00 a minute to use a 10-pound mobile bag phone, and you were cool. Today, a cellular provider would not be able to sustain that $3.00 a minute pricing for long in a highly competitive market.

We now have over 50,000 properties advertised on our network -- up from 18,000 when we purchased Apartments.com in 2014. In just ten months, we have successfully integrated ForRent, the largest acquisition we've ever made. We are increasing our 2019 apartments marketing budget by 11% year-over-year in an effort to gain more share. We expect to launch our new, bigger 2019 marketing campaign shortly. The campaign will once again feature Jeff Goldblum as Brad Bellflower. The 2019 campaign is called "Enter the Apartmenternet." There will be a lot of futuristic technology and special effects that will make the ads fun, and memorable. We hired director Taika Waititi, famous for directing the recent blockbuster smash hit, Thor: Ragnarok to direct our spots, so that the production value and quality will be truly first-class. We just wrapped up filming these neat TV spots. In the series, we emphasize the vast array of alternative futures the renter can potentially have by choosing various apartment alternatives.

The aggressive plan calls for over 8,000 television ads, 6 billion digital impressions, 300 million streaming impressions to reach 95% of renters. We expect that the net impact of this investment will be well over 600 million renter visits in 2019 to the Apartments.com network. According to company estimates, there are 14 million apartment units in larger apartment buildings with 100 units or more -- that represents only 31% of the 45 million rental units in the United States. Despite the fact that it represents only 31% of the market, the overwhelming majority of Apartments.com's revenues comes from this upper 31% of the market. 84% of the 540,000 apartment buildings in the US are smaller, and have four units to 100 units. In addition, there are 17 million other units altogether -- that are in condos, townhouses, or properties with less than four units. These smaller properties are owned by what we call Independent Owners, or the IO market.

The IO market does not have the scale, and resources of larger players like Greystar, Avalon Bay, Pinnacle, and other large property managers. We believe that without the benefits of scale, independent owners spend more time and money leasing each unit; we further believe that there is far more absolute revenue potential in the independent owner and small apartment building market than there is in the upper end or institutional market. We believe we've done a better job than any other online company at monetizing the upper end of the market. Now, in 2019, monetizing the other 69% of the United States' rental housing market will become our top priority.

We have been, and expect to continue to invest very aggressively in building out the software platforms, and products that we believe will enable us to provide compelling online rental solutions that appeal to both renters and independent owners. We want to take many of the traditional off-line, or disparate functions required to lease an apartment, and move them into one, seamless online, easy-to-use solution. It's an exciting project to work on, and we're motivated by the potential to have a very positive impact on tens of millions of renters, and independent owners.

Part of that effort includes our November purchase of Cozy Services. They're a leader in the online rental property market, and have nearly 60,000 landlords using their services. There are approximately 150,000 renters making lease payments through Cozy, totaling $1.7 billion in 2018. We believe that Cozy provides a best-in-class solution for one of the key components of the rental process, so we're integrating Cozy into the Apartments.com full rental cycle.

We will control the costs associated with selling solutions to a much larger audience at lower price points by relying on e-commerce sales to monetize the higher volume independent owner market, rather than using our field sales force. It's our goal that this new solution will form the foundation of our 2020 marketing campaign. We plan to share more details about our new products, as we get closer to launching them.

2019 will be the first full year that LoopNet's position as a pure online marketplace, like Apartments.com, rather than a hybrid information solution and marketing platform. LoopNet has become a vital utility for tens of thousands of commercial real estate professionals seeking to market their properties to the millions of tenants and investors looking for commercial real estate online. LoopNet is the most heavily trafficked commercial real estate marketplace, with approximately 5 million unique visitors in a month. LoopNet generates $127 million of annual revenue on a very high margin. While we've more than tripled LoopNet's marketing revenues since CoStar acquired the company in 2012, we believe that we can further enervate and evolve the LoopNet solution -- and more than triple the revenue again -- with a focused effort, and site relaunch.

Early in LoopNet's evolution, it was best suited to marketing smaller properties, often for-sale properties in suburban areas, or tertiary cities. The economics on these smaller properties are a fraction of the economics involved in large office property leasing, or industrial. While CoStar Group has years of experience marketing tens of thousands of major office properties for lease, LoopNet was not originally optimized for marketing and leasing prestigious, brand-conscious office buildings. In 2019, we are investing aggressively to redevelop and relaunch the next generation of LoopNet, so that it better meets the needs of a much broader cross-section of the commercial real estate industry.

This effort is very similar to the effort we successfully made to relaunch and reposition the Apartments.com site after we acquired it from Classified Ventures in 2014. This is a comprehensive project, engaging much more than just our software development teams. Similar to the Apartments.com launch, we expect this will engage more than half our company. We're very excited about the opportunity to exploit the potential of a next-generation online marketing platform for commercial real estate.

2018 ended with commercial vacancies near all-time lows; prices and rents at all-time highs, and leasing and transaction volume setting new records for the year. The ongoing health of commercial real estate is the result of solid economic growth in 2018, which -- although slowing in the fourth quarter -- accelerated for the year as fiscal stimulus kicked in. Almost 2.7 million jobs were created last year, and the unemployment rate is hovering at, or below 4%. All of that is great for commercial real estate.

The industrial market continues to lead all property types, in terms of rent growth, price appreciation, take-up, and new supply. The industrial sector's outperformance results from the ongoing shift to online buying, which has produced strong demand for in-fill and regional bulk distribution centers across all markets. E-commerce has also affected the traditional retail sector; retail rents have trailed the other property types, and developers have delivered little new space; however, well-located retail assets continue to show strong performance, and demand for quality space matched with very little new construction has kept overall retail vacancies at historic lows.

In the office sector, vacancies fell into the single digits last year for the first time since the early 2000s, the result of healthy absorption and limited new supply. Rent growth at the national level stayed within a narrow band of around 2% over the last eight quarters, but has weakened in some coastal markets, which are facing higher levels of supply. Many secondary markets, on the other hand, have enjoyed stronger rent growth, as new construction still remains low. For the multi-family sector, absorption reached a cyclical high, as a strong labor market and rising mortgage rates resulted in high demand for rental units. Apartment rent growth accelerated, exceeding 3% for the first time since 2015, and transaction volume and pricing continue to set new records.

In summary, 2018 was another remarkable year in the unprecedented streak for commercial real estate. We see no reason that the slow and steady status quo that has defined this cycle won't continue for the foreseeable future; that said, the prospect of rising interest rates, and narrowing spreads appear to have brought an end to nearly a decade of cap rate compression, but cap rates remain very low. Still, construction remains limited, leasing remains healthy across all property types, and rising mortgage rates could safeguard apartment demand.

We're proud to have delivered on the financial goals we set for CoStar back in 2014. We are now coming off our best year ever, and we're moving into 2019 in a strong commercial real estate market with great products, great clients, great people, great research, and a phenomenal sales team. We believe that 2019 will be another great year for CoStar Group, and our clients. We told you that upon completing our last five-year financial goal we would set a new goal for 2023. That goal will be to exit 2023 at a $3 billion revenue run rate, with an adjusted EBITDA margin of 40% or more for the full year. While we anticipate acquisitions will contribute, we believe that most of our growth will be organic. At this point, I'm gonna turn the call over to the accomplished mountaineer, and our CFO, Scott Wheeler.

Scott Wheeler -- Chief Financial Officer

Thank you, Andy. That's a great introduction. I'm feeling very accomplished today.

Andrew C. Florance -- President, Chief Executive Officer

Soaring to new heights.

Scott Wheeler -- Chief Financial Officer

Here, let me raise my chair a little. There -- I feel better up here. Great -- yeah, 2018 -- what a great year we had for CoStar: very strong growth, we acquired three businesses; we invested for our future, and we expanded our margin over 600 basis points. On top of that, I -- for one -- am happy we can put these old, tired long-term goals behind us, and move on to multi-billion land next.

All right, let me start with some insights on our revenue results, which in the full year of 2018 increased 23% over 2017, while our growth rate in the fourth quarter of 2018 was 24%, versus the prior year. Looking at our revenue performance by services, CoStar Suite revenue growth was 18% for the full year 2018, as expected, and 16% in the fourth quarter 2018, coming in slightly above our 15% guidance range. CoStar Suite sales are very good in the fourth quarter, as we continued strong conversion of our LoopNet users to CoStar, and we completed the long-term contract renewals with both CBRE and Marcus & Millichap that Andrew mentioned. As we headed into 2019, we expect the CoStar Suite growth rates to moderate sequentially, as they did in the fourth quarter of 2018, and settle in in the range of 11-13% for the year.

There are a couple factors converging here to note: first, we fully lapped the very high revenue growth quarters that followed the LoopNet integration, and the Xceligent bankruptcy. Second, we have a sales substitution effect here, as our CoStar sales force is focused on selling more LoopNet to accelerate the growth of that marketplace. In total, the team is delivering more combined sales -- in fact, 20% more in 2018 than in 2017 -- so we like this increased productivity. We will see some shifting effect from CoStar to LoopNet.

Revenue growth in information services was 11% in the fourth quarter of 2018. It's our first quarter of positive growth in two years, when we stopped actively selling the LoopNet information products. Back then, LoopNet information was over 50% of the revenue in information services. All that revenue is effectively gone, and CoStar Real Estate Manager and CoStar Risk Analytics have made up the gap. CoStar Real Estate Manager revenue continued its outstanding growth, increasing 165% in the fourth quarter of 2018 versus the fourth quarter of 2017. We expect total revenue from information services to increase at a rate of 11-13% on a year-over-year basis throughout 2019. It's great to finally put behind us that negative growth rate.

We had a very strong quarter in the fourth quarter in multi-family, as revenue increased 45% year-over-year, including the impact for the ForRent acquisition. For the full year 2018, the average number of properties that advertised on our network increased approximately 25%, while the average revenue per property improved 20%. Looking forward, we expect multi-family revenue growth of approximately 20% for the full year of 2019. We expect growth of approximately 30% in the first quarter of 2019, compared to the first quarter of 2018, as we lap the late-February acquisition date of ForRent. Growth rates in the second and third quarter should be in the mid-teens, due to the negative effect of certain duplicative and discontinued revenues from ForRent that was in our 2018 results, that won't be in our 2019 results. The growth rate exiting 2019 is expected to be in line with the 20% full-year outlook for multi-family.

Finally, in commercial property and land, revenue grew 17% year-over-year in the fourth quarter of 2018. This strong growth reflects the increased sales of LoopNet marketing products by our national CoStar field sales force. Our LoopNet tiered advertising products performed exceptionally well, growing approximately 50% for the year. For 2019, we expect revenue growth in commercial property and land in the 18-020% range.

Our gross margin was 77% for the full year 2018, and it came in at 78% in the fourth quarter of 2018, up 200 basis points from the third quarter of 2018, and 130 basis points from the fourth quarter of 2017. We are certainly realizing the benefits of strong operating leverage in our research operations, which we expect to continue as our listing manager tools achieve greater adoption throughout 2019. We expect overall gross margins of 78% for 2019, with margins improving throughout the year, to between 79-80% by the end of 2019.

Fourth quarter adjusted EBITDA of $139 million was approximately $12 million above the midpoint of our guidance range, due to revenue outperformance of approximately $6 million, and lower expenses -- primarily personnel-related. I know we've said it already, but it really never gets old; our adjusted EBITDA margin for the fourth quarter came in at 44%, above our 41% margin guidance, and that long-term goal of 40%.

Net income for the full year of 2018 was $238 million, 94% ahead of the prior year, reflecting tremendous operating profit growth, as well as the R&D tax credits we achieved in the second quarter of 2018. Net income was $9 million ahead of the net income expected in our guidance forecast for the fourth quarter.

Now, our GAAP net income for the full year of 2018 was $302 million, and includes adjustments for stock base compensation, and acquisition-related expenses. This represents growth of 96%, compared to 2017.

Now, let's take a look at some performance metrics for the quarter: at the end of the year, our sales force totaled 741 people, a slight increase from the 733 salespeople we reported at the end of the third quarter of 2018. We anticipate a modest increase in the size of our sales force in 2019, primarily focused on CoStar and LoopNet. The renewal rate on annual contracts for the fourth quarter was broadly in line with the rate achieved in the third quarter of 2018, at 90%, which was down slightly from the 91% we achieved in fourth quarter of 2017. The renewal rate for customers who've been subscribers for five years or longer was 96%, consistent with the third quarter of 2018, and down slightly from the 97% in the fourth quarter of 2017. Subscription revenue on annual contracts accounts for 80.9% of our revenue in the quarter, up from 79.7% this time last year.

We're now one full year past the date we acquired ForRent, and we completed the integration. When we announced the deal, we expected to add revenue of approximately $75-85 million, with adjusted EBITDA margins expected to be in the range of 45-55%. I'm happy to say we achieved our financial objectives after only ten months. These results are highly accretive, as you can tell by our profit results, and indicate a post-synergy acquisition price of less than nine times EBITDA, certainly not a bad day's work.

So now, we'll discuss our outlook for the full year, and the first quarter of 2019. We expect revenue in the range of $1.37 billion to $1.38 billion for the full year of 2019; this implies an annual growth rate of 15-16% over 2018. We expect revenue for the first quarter of 2019 in the range of $325-329 million; this represents approximately 19-20% growth, compared to the first quarter of last year. As I noted earlier, we booked approximately one month of ForRent revenue in the first quarter of 2018, which is why our consolidated growth for the first quarter of 2019 is stepping down from 24% growth rate in the fourth quarter of 2018. As we pass the anniversary of the ForRent acquisition, we expect revenue growth in the range of 14-15% for the remaining quarters of 2019.

We'll focus on a number of important growth investments in 2019, while at the same time growing our profit margins. Our top investments for 2019 include the independent owner software platform, and products that Andy talked about, along with the development and launch of the next-generation of LoopNet. In addition, we're developing product capabilities within CoStar that we believe will take advantage of significant growth opportunities with both owners of commercial properties, and lenders. We'll also continue to build our network of marketplace businesses, including our international operations in Europe and Canada. As a result, we expect total operating costs to increase between 9% and 11% against revenue growth of 14-15% in 2019.

As in prior years, our advertising spend is expected to be more heavily weighted in the first half of the year, with the second quarter expected to be our largest marketing quarter. As a result, we expect the second quarter to be the low point for adjusted EBITDA margins for the year, as was the case in 2017 and 2018. We expect adjusted EBITDA in a range of $495 million to $505 million -- that's half a billion dollars -- for the full year of 2019, which represents 20% growth at the midpoint compared to 2018. We expect adjusted EBITDA margins for the year of approximately 36% at the midpoint of our guidance range. For the first quarter, we expect adjusted EBITDA in a range of $120-124 million, up 45% compared to the first quarter of 2018.

We expect 2019 non-GAAP net income for diluted share in a range of $9.80-10.00, based on 36.6 million shares. For the first quarter, we expect non-GAAP net income per diluted share in a range of $2.38-2.47, based on 36.5 million shares. These ranges include a revised non-GAAP tax rate of 25%.

Overall, I believe we're well positioned in 2019 to deliver strong growth, and margin expansion, while at the same time making significant investments for the future. I'm excited about our long-term goals of $3 billion in run-rate revenue, and 40%-plus of adjusted EBITDA margins in five years. Now, with regards to our margin improvements, keep in mind we have a tendency to avoid doing things in a straight line -- accordingly, our margin trajectory may vary considerably from year to year. I sound like Rich giving a disclaimer on this. It's important that, when we have attractive investment opportunities, we allow the flexibility in our expectations to pursue those opportunities vigorously. All right, that's enough of me talking; let's open up the call for questions.

Questions and Answers:

Operator

And ladies and gentlemen, if you would like to ask a question, please press *, then 1 on your touch-tone phone. You'll hear a tone indicating you've been placed in the queue, and you can remove yourself from the queue at any time by pressing the # key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, for questions, press *, then 1 at this time; also, it has been requested if you can limit yourself to one question. Our first question from the line of Peter Christiansen with Citi -- please go ahead.

Peter Christiansen -- Citi -- Analyst

Good afternoon; thanks for the question. Andy, there's been some deal activity in Europe recently, and I don't wanna point to one deal specifically, but -- and there's also some start-up activity in Asia -- similar models as CoStar, which I think is a testament to your financial model, but do things like this -- and I'm not pointing to one deal specifically -- change the calculus, in terms of when and how CoStar is thinking about making international more of an investment priority?

Andrew C. Florance -- President, Chief Executive Officer

Well, thank you, Peter. We are putting a significant amount of effort into our international operations. You'll see that -- when you look at our outlook -- we have significant capital going into our European and Canadian operations. We think that some of the deals I believe you're referencing are interesting, but they're not direct parallels to what we're doing, so they don't really shift the competitive picture in any which way. We're watching that, and if something came up that was really interesting, we would participate in that, but we're gonna continue to be aggressive, but measured in our international operations.

But to wit, I'll be over there next week, so we're watching it, and continuing to build the operations there. We are -- and I think at this point, we have eight of the top ten firms in Canada as clients, now -- and I think we are nine or ten of the top ten in the United Kingdom, so we're doing well, and Germany's continuing to do well; France and Spain continue to build there, so we're watching it, but not dramatically shifting.

Operator

Thank you, and we have a question from Andrew Jeffrey with SunTrust. Please go ahead.

Oscar Turner -- SunTrust Robinson Humphrey -- Analyst

Hey, guys, this is Oscar Turner on for Andrew.

Andrew C. Florance -- President, Chief Executive Officer

Hello, Oscar.

Scott Wheeler -- Chief Financial Officer

Hi, Oscar.

Oscar Turner -- SunTrust Robinson Humphrey -- Analyst

Hey, guys. My question is on the incremental investments. I was wondering if you could quantify the incremental investment toward a couple of the top initiatives you talked about, and then -- how should we think about the incremental revenue growth that those investments can drive, and the timing of the growth acceleration in LoopNet and Apartments?

Scott Wheeler -- Chief Financial Officer

Yeah, let me cover a bit of the investment side, and then we can talk a little bit on the outlook for them. The bigger ones we're gonna be focused on this year are really the marketplace build outs -- both the LoopNet in the US and then the Marketplace in the UK, which is on the back burner of our Realla business. We think we'll probably have between $20-25 million in our investment that'll go into building those platforms out, which includes marketing, and other capabilities. Then we have the independent owners investment that Andy mentioned, which you already have a decent amount of investment going in currently, and I think we'll ramp that up by another $10 million or so next year.

And then the build out of the CoStar platform, with owners, lenders -- promoting some of the listing manager work we're doing in software, along with some more marketing in CoStar, we think there's probably another $10-15 million in costs in investments there.

When you look at our cost growth, we figure that a little bit less than half of our cost growth really has to do with investments we made in 2018 that annualize in 2019, or labor increases, inflation -- those types of things. So a little less of the cost growth is for year-over-year, and normal business operations and the rest really isn't going into new investments that'll really benefit future years, and future revenue growth.

I don't know, Andy, if you wanna talk about the revenue?

Andrew C. Florance -- President, Chief Executive Officer

Yeah, I think that the revenue return on LoopNet is a reasonably short cycle. There'll be a pretty aggressive focus on that productary investment on that product over '19 and '20, but we think we'll see results coming from that in the back half of '19, and '20, and then ongoing. And then with the IO market, that's probably -- the more meaningful results there are probably in 2020, and then for the increase in the Apartments.com budget, we think that -- while we are taking share, and leading the market -- we wanna keep the pressure up, and accelerate the -- keeping share to widen the moat and increase the lead.

So it's a range of different outlooks on these, and we feel pretty solid about all of them.

Operator

Our next question from the line of George Tong with Goldman Sachs. Please go ahead.

George Tong -- Goldman Sachs -- Senior Research Analyst

Hi, thanks. Good afternoon.

Andrew C. Florance -- President, Chief Executive Officer

Hi, George.

George Tong -- Goldman Sachs -- Senior Research Analyst

You've outlined goals of reaching $3 billion in run-rate revenues by the end of 2023, which implies at least mid-teens annual revenue growth. Can you discuss how much pricing will contribute to these growth rates, given your previously discussed plans to eliminate discounting in CoStar Suite, and potentially increase rate cards in the multi-family segment?

Scott Wheeler -- Chief Financial Officer

Sure, I don't believe the substantial majority of this will be price increases; we think that across Europe and Canada, and the United States, there are a lot of new revenue opportunities -- new customers, and additional modules to be purchased, increased purchasing -- so we think a lot of this is share gain, and share wallet. The pricing increases, on places like LoopNet, you're shifting your priority from selling a basic ad to a broker for $50.00-60.00 to selling something that looks more like an Apartments.com ad, with really impactful presentations -- sort of the top -- with more features, and you're selling it to an owner with a lot of economics at stake, and often, it's gonna be different properties in that mix, and the new price could go from $60.00 up to $6,000.00 a month.

So they're sort of shifting the budget, shifting the priority -- you're shifting the target audience, shifting the priority. We don't anticipate getting to $3 billion in revenue by simply increasing the same customers' price for the same product.

Operator

And we have a question from David Ridley-Lane, with Bank of America; your line is open.

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Sure, good afternoon. Can you talk a little bit about the details of the LoopNet site relaunch, and whether or not you considered launching a separate brand to differentiate between the up-market, and the down-market there? Thank you.

Scott Wheeler -- Chief Financial Officer

That's a good question, and it'll be a little challenging to go into too much detail on it. We have thought about that, but we don't think we need to do that; we actually are going to initially go to market really focusing on the branding of CoStar Marketing Network, because if you own a, say, a speculative new office building in Washington, D.C. We're actually providing our customers with a whole range of marketing solutions. We enable that owner to reach the professional community by carrying these ads into the CoStar network; we're carrying them into CityFeet, and to Showcase, into CoStar. We also power websites through LoopLink; we also have email marketing campaigns through CDX Direct, our direct email marketing product, and then we've got tactical and analytical support, where we can reduce analysis on the amount of demand and supply for the particular kind of product you're producing, and where you may wanna position the product in pricing, or how you may wanna subdivide it, or what terms you may wanna consider.

And then we're also uniquely providing the biggest end-user audience through LoopNet, so we can -- and there's two or three other items, but -- as we put all this together, we're gonna simplify it into a network sale, the way we simplify Apartments.com into a network sale, and LoopNet is just one component of this whole range of very valuable marketing solutions for getting a property leased at the best price, in the shortest time frame, on huge economics. And then we think that -- over time -- as we shift the way LoopNet looks and feels, and it becomes much more polished -- has more breadth of data, has a lot of content articles that de-mystify some of the leasing process, and investing process -- as we shift it from industry jargon to more plain English, as we add in a lot more exciting shopping characteristic stuff, like where the best place is to eat lunch at this particular property, what's your commute gonna look like -- all that kinda stuff -- we think the LoopNet brand itself will be a good brand to carry, because it's already super well-known, and what we're doing is just moving it more up-market, and targeting a slightly different audience, while continuing to target the original audience.

So we think we're pretty happy with the CoStar Marketing Network at this point.

Operator

And our next question, from the line of Brett Huff with Stephens -- your line is open.

Brett Huff -- Stephens, Inc. -- Managing Director

Good afternoon, guys.

Andrew C. Florance -- President, Chief Executive Officer

Hello, Brett.

Scott Wheeler -- Chief Financial Officer

Hello, Brett. You're our first net.

Andrew C. Florance -- President, Chief Executive Officer

Yeah, you win.

Brett Huff -- Stephens, Inc. -- Managing Director

My question is on the Suite mix in sales. I think one consequence of having Suite salespeople also sell LoopNet was a little bit of extra juice for LoopNet, and a little bit less growth in sales for Suite. We get some questions sometimes about penetration rates of Suite, and, "Are we getting to a point where those are starting to trickle off?"

Can you illuminate kinda -- how do we know that the mix of sales is a result of effort levels being different, versus maybe reaching the harder to reach tam areas of that market?

Andrew C. Florance -- President, Chief Executive Officer

Well, when you ask, "Has CoStar reached a saturation point?" All I can say is, "Ha!" So, yeah -- absolutely not. There are so many different ways that the CoStar product is growing, and adding more value.

Like, in preparing for this earnings call last night, I was just curious about some of those apartment stats, and what the mix of units are in different and I was like, "Well, go into CoStar, and pull some of this data, according to company estimates," and man, what a phenomenal product. The ability to actually get good data on the mix of apartment units in different size communities -- it didn't exist in the product a couple years ago; it's invaluable. I can't imagine someone investing in the apartment sector without that information.

I've been at this -- as we've mentioned, I guess this went public -- we're approximately 25% compound annual growth rate. At the point where we went public, there was a lot of discussion about the fact that CoStar was saturated, and five years before that, there was discussion around, "CoStar was saturated," I spent my entire career hearing about CoStar's saturated, pretty much from the first or second year we launched CoStar. In my view, not a chance -- not even a chance. Unfortunately, if I work another 20 years like my dad, I will not outlive the potential to saturate the CoStar market, but -- it's just one man's wishy-washy opinion, but -- solidly, no.

Operator

Our next question from the line of Mayank Tandon, with Needham & Company, please go ahead.

Mayank Tandon -- Needham & Co. -- Senior Analyst

Thank you. Andy or Scott, I just wanted to dig in a little bit on the EBITDA trajectory for 2023. Scott, you said it won't be linear, which is obviously to be expected, but if you could just talk about the various levers that get you to that 40% target, and maybe you could talk about it by segment, in terms of where you think the profitability will come from, across the three different business lines?

Scott Wheeler -- Chief Financial Officer

Yeah, so the margin accretion -- clearly, you can throttle it pretty rapidly, as we just showed this last year. We added 600 basis points, and then the year -- for example, in 2017, when we did the research investments, yeah, we slowed it back down, and we had modest margin growth. It's not inconceivable to see 100-200 basis points margin growth a year, pretty simply, and still have room like we have in this plan for 2019, to make significant investments for future growth. So that's all pretty stable, from an organic perspective, and I can see us getting -- if nothing else changes, and you keep driving this organic growth -- you can certainly get over that 40% margin, and the business can capably do that in the five years.

The real wild card in some of this is the amount of acquisition we're gonna be doing, the margin profiles of acquisitions that we buy, and how that dilutes over time, and so you heard us be a little bit cautious in saying, "Okay, it's 40%-plus, and that really depends on what happens with the acquisition path," what those look like, and the timing of them, and then how long it takes to move the margins of the businesses we acquire up to our natural margins.

When we look at the margins of the different product sectors that we're in, our marketplaces typically run the very highest margins that are 50%-plus margin profiles in the marketplaces, and then, now with CoStar being in that historically 30-40% range, depending on the investments we make, you're gonna see both sides of the business grow pretty substantially. I think you'll see Apartments will obviously outpace CoStar in a couple years, given our current growth trajectories, and so I think you'll get that information in investment side of things coming in those 30-40% margins, and you'll see the marketplaces as they really continue to scale rapidly, moving up in those 40-50%-plus margins.

Furthermore, CoStar is not in any way saturated.

Andrew C. Florance -- President, Chief Executive Officer

Haven't forgot that question yet, have you?

Scott Wheeler -- Chief Financial Officer

I'm sorry.

Andrew C. Florance -- President, Chief Executive Officer

Good answer.

Operator

Now we'll go to Bill Warmington with Wells Fargo; please go ahead.

William A. Warmington, Jr. -- Wells Fargo Securities -- Senior Equity Research Analyst

Good afternoon, everyone.

Andrew C. Florance -- President, Chief Executive Officer

Hello, William.

William A. Warmington, Jr. -- Wells Fargo Securities -- Senior Equity Research Analyst

So, I'm a history major, so sometimes I need a little help with my math, so I wanted to run some math by you, and you can tell me what I'm doing wrong. If you look at CoStar Suite, and how that was up about 18% last year, and if you look at -- if you kinda back out $15-20 million of revenue from what you did in the fourth quarter, that would seem to -- which I know you don't specifically break out, but if you assume that, and that would seem to imply something in the upper teens as the organic growth for the quarter -- and then if you look at the net bookings coming about $50 million in Q4, versus a tough comp, and you average that out into 2019, that would be about $200 million for the year, which -- versus $169 million -- would be up about 18%.

And I guess what I'm getting at is that the leading indicators on the revenue side seem to be pointing to something closer to 18% -- mid-teens going to the upper teens, and I just wanted to run that math by you, and see if that was the same math you guys were getting.

Andrew C. Florance -- President, Chief Executive Officer

Bill, you know, as I do that math, I start to think that Scott is somewhat conservative!

Richard Simonelli -- Vice President, Investor Relations

You have a lot of selling to do this year, people, let's ourselves.

Andrew C. Florance -- President, Chief Executive Officer

Or all the climbing he's been doing has been on a mountain of sand, right? Pick up the pace.

Scott Wheeler -- Chief Financial Officer

You know, we have the better crystal ball on the quarterly sales numbers, Bill. I mean, you've watched us for so long, you see how they bounce up and down; $5 million swings quarter to quarter isn't unheard of, depending on what we're focused on, what part of the business we're generating, timing of renewals on contracts -- so we always want to make sure we don't get too far ahead of ourselves when we have a lot of plans for the year, and we'll continue to start the year that way, and hopefully, we'll get to the point where you can do our forecasting for us, because your numbers'll be a lot better than mine, I'm sure -- as we keep going.

we did have a good quarter in the fourth quarter, but those bounce around between quarters, so we'll give ourselves time to sell out from under those in the first two quarters of this year.

Operator

And I have a question from Sterling Auty with J.P. Morgan; please go ahead.

Sterling Auty -- J.P. Morgan Securities -- Senior Equity Research Analyst

Yes, thanks -- hi, guys. I was just wondering if CoStar's opportunity is saturated.

Andrew C. Florance -- President, Chief Executive Officer

It's a cycle -- would you like to have a different question?

Sterling Auty -- J.P. Morgan Securities -- Senior Equity Research Analyst

Yeah, actually, I would, I would. I wondered, actually -- I think the comment in the call around the investment in sales headcount increases -- that they'd be modest in 2019, so I'm curious where the focus of those added heads will go, and when you think about -- you talked about some of the other increases in budgets, and investment -- what's gonna be the focus of it? I imagine in multi-family; you talked about the marketing campaign, but just to wrap our heads around the structure of the investments in 2019.

Scott Wheeler -- Chief Financial Officer

Yeah, they run broadly in line with the numbers I gave a bit earlier I think someone asked one of the other questions on how much we're spending in the different investments, and those are broadly people-driven. The marketing side'll be concentrated fairly more on the Apartments and the LoopNet side; that's where the marketplace is set, but we are adding a decent amount of resourcing into LoopNet, into technology, and then -- when we say "modest" for sales, I consider that's less than 10%, which is still can be 50-75 people, easily, for a sales force of that size.

In our big area of research, we're finding that they're getting so much good productivity, that's one area we don't need to add a lot of people, as our listing manager products are freeing up resources that we then deploy onto owner and lender products, and helping to support LoopNet, so it's not gonna be in the research world. It's gonna be mostly in technology, and the resources going in to building those investments in the international marketplaces, and the independent owner space.

Andrew C. Florance -- President, Chief Executive Officer

I have to say that if I were to look at my wish list from the beginning of 2018 on the structural improvements we would like to complete on our sales force, I feel that we have accomplished a lot of those goals. We have one or two things to do, in terms of go-to-market strategy on major accounts in CoStar, but over the years, I don't feel think I've been in a place where I feel like our sales force is more stable than it is now. We've got a good Apartments.com sales team, led by Paige Forrest, who's a very experienced sales professional. We've got Max Linnington doing a fantastic job.

What's happening now is really tweaking a strong group, and we're still probably a year out from anything that would be a major structural change driven by a change in our acquisition, or some other significant change, so we're in a pretty stable place.

Operator

And we have a question from Stephen Sheldon with William Blair; please go ahead.

Stephen Sheldon -- William Blair & Company -- Analyst

Hi, good evening. So you talked about building out software platforms to integrate more in the rental leasing process, and moving past leads with Apartments.com, to more of the execution side, which appears to include Cozy. It makes a lot of sense, but I also wanted to ask about how this could impact your ability to extract data from the rental cycle. So beyond just alleviating pain points, is this also about getting, and integrating more, and better data into your core database?

Andrew C. Florance -- President, Chief Executive Officer

That's one of the nice things that we love about the marketplaces; the fact that you're in the data business helps you to perform much more effectively in the marketplace, and the fact that you then do well in the marketplace feeds your data business with some really exciting and valuable data, and it keeps your costs lower, overall, than if you were in just one or the other of the markets. So we're able to afford to get data, and content that we otherwise probably couldn't afford, and we can provide consumers with information in marketplaces that we normally would never pay for if we didn't have an offsetting revenue stream in information.

So, yes, success in the IO market will generate a massive amount of real-time, and accounting-grade data. It also gives you really interesting data, where you can understand pricing in relationship to credit, and risk, and you also will be, it also could have the potential of generating new sorts of credit information, that's very valuable to independent owners, and the independent owner data, the data that you generate from the independent owner side is equally valuable to the institutional players, because the renters move back and forth between the different markets, and so it's all very interesting to both those groups, and certainly a Greystar property, though it offers a lot in a given market, its pricing is driven by what's happening in the IO market all around it in a neighborhood.

There is high substitution between those two segments, so yeah, if you're a data nerd, pretty exciting data coming out of the project on success.

Operator

And we have a question from Scott Buck with B. Riley FBR; please go ahead.

Scott Buck -- B. Riley FBR -- Equity Research Analyst

Hi, guys. I was curious of the $1 billion-plus you have in cash on the balance sheet, what do you actually need to run the day-to-day operations, and -- to the extent that you're carrying a fair amount above that, would that suggest an appetite for doing a larger transaction within the next couple years? Thanks.

Scott Wheeler -- Chief Financial Officer

So I'll take that, and flip it around. I'll say that -- highly likely that we would continue to do acquisitions, as we've done successfully for 20 years, and the size of acquisitions we do -- we'd continue to do smaller deals, and mid-size deals, but we keep gradually escalating the scale of some of the deals we do, so we believe it's quite likely that we'll use that buying power to do transactions in a reasonably short time frame.

In terms of how much we -- on the cash side, we're gonna get about $400 million of free cash coming out of this next year, so we'll be adding to our cash piles, unless we're doing larger acquisitions.

Andrew C. Florance -- President, Chief Executive Officer

We need new carpet.

Scott Wheeler -- Chief Financial Officer

New carpet, OK. Well, $399.5 million we'll generate this year . But, yeah, we had $300 million of free cash flow in 2018; it'll go to $400 million next year, so we definitely don't need all that to run the business. We need to get out there, and keep adding new capabilities, and bigger ones, too.

Andrew C. Florance -- President, Chief Executive Officer

Well, I think with that, we are done with the Q&A period, and thank you all for joining us, and don't forget: CoStar is not saturated. I am excited about the many tens of thousands, if not hundreds of thousands of additional future clients we have ahead of us. Thank you for joining us.

Operator

Ladies and gentlemen, this conference call will be made available for replay. That begins at 7:30 p.m. Eastern time today, running for one month, until March 26th at midnight Eastern. You can access the AT&T teleconference replay system by dialing 1-800-475-6701, and entering replay access code 463809. International participants may dial 1-320-365-3844: the replay access code 463809. That will conclude our teleconference; you may disconnect.

Duration: 63 minutes

Call participants:

Richard Simonelli -- Vice President, Investor Relations

Andrew C. Florance -- President, Chief Executive Officer

Scott Wheeler -- Chief Financial Officer

Peter Christiansen -- Citi -- Analyst

Oscar Turner -- SunTrust Robinson Humphrey -- Analyst

George Tong -- Goldman Sachs -- Senior Research Analyst

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Brett Huff -- Stephens, Inc. -- Managing Director

Mayank Tandon -- Needham & Co. -- Senior Analyst

William A. Warmington, Jr. -- Wells Fargo Securities -- Senior Equity Research Analyst

Sterling Auty -- J.P. Morgan Securities -- Senior Equity Research Analyst

Stephen Sheldon -- William Blair & Company -- Analyst

Scott Buck -- B. Riley FBR -- Equity Research Analyst

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