CoStar Group, Inc. (CSGP) Q3 2023 Earnings Call

CoStar Group, Inc. (NASDAQ:CSGP) Q3 2023 Earnings Conference Call October 24, 2023 5:00 PM ET

Company Participants

Cyndi Eakin - Head of Investor Relations

Andy Florance - Founder and Chief Executive Officer

Scott Wheeler - Chief Financial Officer

Conference Call Participants

George Tong - Goldman Sachs

Pete Christiansen - Citi

Heather Balsky - Bank of America

Ella Smith - JPMorgan

Ryan Tomasello - KBW

Stephen Sheldon - William Blair

John Campbell - Stephens Inc

Jeff Meuler - Robert W. Baird

Nicholas Jones - JMP Securities

Ashish Sabadra - RBC Capital Markets

Operator

Good day, everyone. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the CoStar Group Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Now Cyndi Eakin, Head of Investor Relations will read the Safe Harbor statement. Cyndi, you may begin.

Cyndi Eakin

Thank you, Lisa. Good evening. And thank you all for joining us to discuss the third quarter 2023 results of the CoStar Group.

Before I turn the call over to Andy Florance, CoStar's CEO and Founder; and Scott Wheeler, our CFO, I would like to review our Safe Harbor statement.

Certain portions of the discussion today may contain forward-looking statements, including the company's outlook and expectations for the fourth quarter and the full-year of 2023, based on current beliefs and assumptions. Forward-looking statements involve many risks, uncertainties, assumptions, estimates and other factors 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 CoStar Group's press release issued earlier today and in our filings with the SEC, including our most recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q under the heading Risk Factors. All forward-looking statements are based on the information available to CoStar on the date 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 of any non-GAAP financial measures as discussed on this call are shown in detail in our press release issued today, along with the definitions for those terms. The press release is available on our Web site, located at costargroup.com under Press Room.

As a reminder, today's conference call is being webcast and the link is also available on our Web site under Investors. Please refer to today's press release on how to access the replay of this call.

And with that, I would like to turn the call over to our Founder and CEO, Andy Florance.

Andy Florance

Good evening, everyone, and thank you for joining us for CoStar Group's third quarter 2023 earnings call. Revenue for the third quarter of 2023 was $625 million or 12% growth year-over-year. Our commercial real estate information and marketplace businesses grew revenue at an impressive 14% this quarter compared to the same quarter a year ago. We also delivered strong net new bookings of $65 million in the third quarter, with CoStar sales improving sequentially, and Apartments.com coming off the seasonally strong sales record they set in the second quarter.

We've now reported 50 straight quarters of double-digit revenue growth, stretching all the way back to the first quarter of 2011, as we came out of the Great Financial Crisis. This is a remarkable achievement. Over the past 12-plus years, we've generated 21% compound annual revenue growth, increasing revenue tenfold, from $230 million to over $2.3 billion on a trailing 12-month basis. As we move into the fourth quarter, we are generating almost $1 billion of adjusted EBITDA annualized from our commercial real estate business.

We have diversified our revenue across countercyclical marketplaces, such as LoopNet and Apartments.com, while diversifying CoStar product revenue into broader vertical markets such as owners and lenders. Alongside our diversification efforts, we remain committed to building a subscription-only revenue portfolio across the business. The result we see today is an extremely resilient and steady growth business, even during a time when the property markets are in a hard down cycle as they are now. To produce these exceptional results, we made big investment bets on expanding our geographical footprint or entering new adjacent segments.

These investments, for example, such as expanding CoStar into all the U.S. cities, Canada, and the U.K., or entering the apartment marketplace business, though clear to us, were not universally popular at the time when we were in the investment phase they acquired. We pursue growth investments regardless because we are singularly focused on the enormous value creation we see in meeting the demand for digital information, analytics and marketing of the $300 trillion real estate asset class globally. Digitizing real estate is unlocking major value, and we are absolutely in the earliest innings of this opportunity.

I believe that CoStar Group's revenue will grow tenfold again over the next 12 years because of the careful, significant calculated investments we're making that optimize our competitive advantages and capabilities. We firmly believe that Homes.com can compete and win in the residential opportunity, just as we lead today in all the prior asset class we have entered in the past, including office, industrial, retail, hospitality, multifamily, land, et cetera. Homes.com delivered over 100 million unique visitors in the month of September according to Google Analytics. That's an increase of 1,290% over the same period a year ago, making Homes.com the fastest growing residential marketplace in the United States.

Our residential network traffic, which consists of homes and apartments, reached over 140 million monthly unique visitors, in September, which is more than Realtor and Redfin combined based on the traffic reported in their most recent earnings announcements. According to ComScore, we are clearly now the second most heavily-trafficked residential network by a wide margin, with monthly unique visitors 35% higher than Realtor.com and 90% higher than Redfin, in September. Looking at the trend lines, we are on a convergence path with the historically most traffic site.

Two short years ago, when we acquired Homes.com, we set out to deliver an agent-friendly site that home buyers love. I believe that reaching over 100 million monthly unique visitors in September to Homes.com is evidence that we are achieving that goal. Our returning users have increased almost 900% over September of last year, which is a testament to our success of building rich content and providing a great consumer experience. The traffic generation plans for Homes.com are still in the early stages, and we have already delivered double the 50 million monthly unique visitors that we initially targeted. In the Apple App Store, Homes.com has climbed from 136 under lifestyle, to now become number 19.

Homes.com is now ranked about Realtor, Redfin, Trulia, and even Apartments.com in the App Store. When we announced that we were going to build Homes.com into a leading residential portal, the number one risk factor called out was skepticism that we could build the traffic required to compete. Earlier this year, media reports speculated that CoStar Group was in talks to acquire Realtor.com for approximately $3 billion. If that was true the primary objective in acquiring Realtor.com could have been to take the number two traffic position in the United States.

Given that that speculation did not come to pass, we might have been good stewards of our shareholders' $3 billion that we saved by building the traffic to Homes.com for a fraction of the cost of buying it. Clearly, successfully building traffic is no longer Homes.com's primary risk factor. At this point, shrewd investors seeking a new risk factor to replace the now reduced traffic risk factor will now need to turn to monetization as the next key risk factor. Unlike its competitors, Homes.com has never invested in any material brand marketing. Because of that Homes.com's unaided awareness is in the low single digits, while our competitors' unaided awareness is in the mid to high double digits.

When we acquired Apartments.com, it similarly had a single-digit unaided awareness problem. But through persistent creative branding, we've grown Apartments.com unaided awareness to the industry leading unaided awareness of 53%. Achieving significant unaided awareness is important because it improves SEO, optimizes SEM investments, and facilitates sales of advertising products to prospects. It is essential to build unaided awareness before we begin monetizing. We do not believe that building unaided awareness is our most significant risk factor. We anticipate selling Homes.com memberships in the second quarter of 2024.

CoStar Group has created dozens of successful monetization strategies, and we believe that our planned monetization strategy for Homes.com will become a dozen-plus one of our successful monetization strategy. When we acquired HomeSnap, we quickly built a centralized sales team to sell their Facebook ads. While we did not believe in the long-term value of reselling low retention, low margin Facebook ads, we did very quickly scale a sales force and sold tens of millions of dollars worth of ads.

We look forward to doing it again with Homes.com, which we will believe will be a much better product with higher margin and higher retention. William Blair recently published a paper on October 20th titled Competition Intensifying Among Home Search Portals. There's some interesting call-outs from their survey of residential agents that are worth noting. Combined spend and potential efficiency gain from agents marketing their properties and services is $15 billion to $20 billion in the United States.

Most of the agents marketing spend today is not on our competing portals, it's like print. Most agents do not spend marketing dollars with Zillow. Most agents do not spend marketing dollars with realtor.com. Most of Zillow's clients feel that Zillow will become less important to their lead generation efforts in the next one to two years. 60% of Zillow's premier agent client surveys stated that the value of the product is declining and 5% said it's improving.

So, 60% said the value was declining and 5% said it was improving. 94% of Zillow's premier agent customers said that they're very open or somewhat open to alternative sources for lead generation, sounds good to me. Even before we begin selling premium services, we're creating real value for agents. As a result of our traffic growth and superior your listing, your lead business model, I believe we're already generating millions of leads for agents that are converting to commissions for them.

I'm encouraged by the [technical difficulty] with one agent saying that 85% of their total sales come from being able to build their brand and collaborate with sellers and buyers on the Homes.com network. From these leads, we estimate that Homes.com is helping agents generate billions and billions of dollars in annual commissions already while saving them billions in referral fees.

Last week, Sitzer/Burnett versus NAR lawsuit went to trial. We could be seeing the biggest change to the residential real estate industry in recent or even intermediate history or long-term history. Sitzer/Burnett and other class action lawsuits are challenging the legality of the buyer broker commission rule which requires the home seller to pay the home buyer's agent fees. Plaintiffs are seeking damages of more than $40 billion, implying the nationwide damages of more than $400 billion.

Several defendants have already agreed to collectively pay $138 million in settlements and to changes to the rule. The first generation real estate portals leveraged this threatened buyer broker commission rule to divert listing leads from all the agents in the market to a small handful of agents who were then required to split their commissions with the portal. Often that's the model. Many agents and brokers strongly resent that model. Now that Homes.com is one of the most heavily trafficked portals, there is a strong and viable alternative for lead generation available to agents that does not require usurious commission splits.

Unlike the first generation portals, Homes.com business model is not negatively impacted by the potential end of the buyer broker commission rule. Momentum around our residential strategy is clearly building with the early successes of Homes.com and there is potential for dramatic change in the industry soon. Our confidence in the success of Homes.com and timing is increasing, the need to time the movement that we see happening. For these reasons, we have decided to slightly accelerate the pace and level of our investments into Homes.com.

Last week, we announced our offer to acquire OnTheMarket, the third most trafficked residential property portal in the U.K. for approximately £100 million, doesn't seem like we thought that number out carefully. How could it just round out to £100 million? Okay, we did actually. OnTheMarket was founded by agents in 2013 to provide a competitive alternative to the existing U.K. portals, which they agents felt represented duopoly extracting economic rent from them. We believe that right moves are put is 21,000 while ours is less than 1,000. So, we feel confident that we can profitably deliver the U.K.'s most cost effective solution over the long-term. OnTheMarket has successfully developed a large network of agents and property listings by taking an agent-friendly approach. Today, OnTheMarket has over 13,000 agent advertisers and attracts high-intent leads at a fraction of the cost of other U.K. portals.

Our intention with the acquisition of OnTheMarket is to create the number one property portable by combining the strengths of our leading commercial U.K. commercial property site -- I said U.K. twice there, CoStar and our technology platform driving Homes.com with OnTheMarket's large network of agents. So, taking our two decades of experience with commercial property sites in the U.K., along with the technology driving the successes of Homes.com and combining it with OnTheMarket's large share of agents in the United Kingdom to create a very valuable solution, we believe the acquisition of OnTheMarket represents an attractive and efficient entry point into the $8 trillion United Kingdom residential property market. CoStar Group has a proven track record of acquiring strong performing property portals that are not the number one players and investing in building them into the most successful portals serving their market.

We intend to apply a similar approach with OnTheMarket as we plan to invest £46.5 million into sales and marketing in the first full-year following the commencement of the integration of the portal into CoStar's network of marketplaces. That amount represents six times OnTheMarket's current annual media spend and more than three times the current annual media spend of Rightmove. The sales and marketing investments in the first stage of a multi-year investment program is to drive consumers to OnTheMarket portal with the goal of significantly increasing the quality of valuable leads to OnTheMarket agent clients at good prices.

We believe that real estate portals across Europe will soon be entering a period of consolidation. We did not want to approach that emerging opportunity by jumping into buying assets that are priced to perfection. Private equity firms are more likely to seek to acquire portals in the number one position at elevated multiples because they don't have the same strategic value add with which to grow share. We believe that as a strategic with extensive proprietary technology and expertise, we can create more value for shareholders by acquiring good or great assets at excellent values that may benefit from our track record of acquiring and growing traffic share and revenue in high potential portals. We believe that Europe represents a $17 billion revenue opportunity. Currently, we estimate that publicly traded and large private portals in Europe have a market cap of about 30 billion or so. We also believe that those declined about 10% when we announced the acquisition of OnTheMarket or since we don't know that it's related, but there has been a decline since we announced the acquisition of OnTheMarket.

Apartments.com continues to deliver impressive quarterly results with revenue of $235 million in the third quarter, a 24% increase over the third quarter of last year. Apartments.com is now our largest business by revenue and is on track to reach a billion dollars in revenue run rate in the first quarter of 2024.

Net new bookings increased year-over-year for the seventh consecutive quarter while communities advertising their spaces on Apartments.com grew to more than 69,000 in the third quarter, the highest tally ever and 15% above the third quarter of 2022. Apartments.com achieved an all-time high in unaided brand awareness in the third quarter of 53%, proving the strength of our brand and the value of our long-term commitment to marketing investments.

Apartments.com attracts the highest quality potential renters with average monthly unique visitors of 45 million in the third quarter according to Google Analytics, outperforming the market on a year-over-year basis. Visitors spend twice 2x more time on our site per visit and our leads convert to leases 3.4x more than our closest competitor according to Rent Dynamics.

Our sales team continues to deliver strong results conducting the highest number of quality meetings ever at 163,000 meetings in the quarter. There's an increase of 36% over the same quarter last year, all while maintaining a net promoter score of 95.

Our expansion of the mid-market sales team continues to deliver productive results. We have more sellers, increasing levels of productivity, and new flexible listing plans, all which result in a 48% increase in properties under 50 units advertising on Apartments.com. The size and strength of our sales team continues to differentiate us from the competition. As we hear about competitors shrinking their sales teams, we continue to add and train new sales reps each month to capitalize on the large opportunity we see clearly in front of us. We continue to see favorable overall economic conditions for rental property advertising. Vacancy rates continue to go up with 3 to 5 star property vacancy rates increasing 200 basis points over prior year to 8.1%.

New unit deliveries are expected to continue at all-time highs through the end of the year. For these reasons, we expect to see Apartments.com revenue growth to continue at 24% in the fourth quarter of 2023.

CoStar revenue for the second quarter was $233 million, or a 10% increase over the same period last year and in line with our expectations. Our focus on selling to owners, lenders, investors, and corporates continues to yield great returns, and most of our sales activities are now focused on these high-value customers.

Even though the property markets remain as some of the worst in decades, we still see high levels of engagement and usage of CoStar by our customers. Our subscriber count remains well above 180,000 this year, and our renewal rates increased sequentially in the third quarter and are now above 93%. There were 140,000 distinct logins to CoStar in September, our second highest month of logins this year.

Property searches were up 13% compared to the same period last year. Our sales force remains strong and very active, and our attrition rates are at an all-time low. Demand for our new lender product continues to be strong. We now have 230 customers on the CoStar lender platform, which is more than double what we had this time last year.

Our year-to-date net new bookings have increased 45% versus last year. CoStar lender is now helping clients manage over $620 billion of debt, or 14% of the outstanding $4.4 trillion in non-securitized commercial property debt. And still, we have significant opportunity to expand into the market further. I'm encouraged by continued strong customer engagement on CoStar and the success of these new product capabilities. Our ability to continue to generate solid revenue growth and sell through the current downturn is a testament to the value of CoStar at all points in the property cycle.

LoopNet revenue was $68 million for the quarter, up 15% year-over-year, and slightly ahead of our guidance forecast. LoopNet international revenue for the third quarter was up 38% compared to the same quarter last year, as we continue to work towards the launch of LoopNet in France and Spain.

Office vacancy rates increased again in the third quarter, now over 13%, and in phantom vacancy rates are dramatically higher, creating counter-cyclical momentum with the need to advertise empty commercial property space. Signature ad listings in the third quarter are up 16% compared to last year, and we see more customers move up from the basic silver level ads to the higher performing LoopNet signature ads, which deliver more traffic and lead flow to their properties.

LoopNet generated 14 million monthly unique average visitors for the third quarter in a row, an increase of 10% year-over-year. We have a new sales leader in place for LoopNet, Brandon Liu, who has extensive experience leading both CoStar and LoopNet teams and has experience with Ten-X as well. We also changed the LoopNet dedicated sales team commission plan to now focus on both sales and service, which will be backed up by our activity metrics and net promoter score tracking capabilities.

Since making these changes, sales activities, including customer service meetings, have almost doubled from the prior quarter. We continue to expand our dedicated LoopNet sales team while shifting more and more of the direct customer account responsibilities over to LoopNet from the CoStar sales team. I'm confident in the long-term opportunity for continued strong revenue growth in LoopNet.

STR revenue growth was 12% compared to the third quarter of last year, with subscription revenue growth accelerating to 22%. STR had another incredible sales quarter with their second highest sales ever growing 156% in the third quarter versus the same quarter last year. We have now reached a record 78,000 Host Hotels participating with historical data. And over 100 -- I'm sorry over 16,000 hotels providing forward-looking data. The more hotels we have contributing the better data we're able to provide to the industry, which is evidenced by our impressive 97% renewal rate.

We've now migrated over 300 customers to the new CoStar hospitality benchmarking product up from 60 last quarter with another 200 underway. One customer referred to the new benchmarking product as a game-changer saying I grew up with the old STR report and watched its evolution over 30 years. And by far, this is the best thing that could have happened with a tool. In total, our plan is to migrate over 900 corporate accounts and 6,000 independent hotels into the CoStar platform. And we expect that process will be completed by the end of the second quarter next year. I expect strong double-digit revenue growth to continue for STR for the foreseeable future as more and more hospitality customers see the enhanced value that CoStar information analytics brings to their subscription.

Ten-X brought $1.1 billion assets to the platform in the third quarter and achieved a 51% trade rate more than double the trade rate we are currently seeing in the offline transaction space. We continue to see tremendous transaction interest in the platform in the third quarter, as we reviewed $4.8 billion in potential assets for sale in the quarter.

Unfortunately, bid ask spreads remain at high levels, leading to only 35% of these potential assets moving through to auctions on Ten-X in the quarter. The Siri market continues to face significant headwinds with transaction volumes down 47% in the third quarter, as compared to the same quarter a year ago. Historically, low levels of transaction volumes are continued, expected to continue for the remainder of '23 and '24 or at least the first-half of '24.

It's still early to see an increase in distressed assets on Ten-X at this point. We continue to see the long-term value in digital transaction platforms for both commercial and residential real estate regardless of any current market conditions. We're focused on continuing to improve our technology tools as part of our CoStar integration, and believe there are additional performance synergies to be gained by aligning our Ten-X sales and marketing activities closer with LoopNet.

Turning to the real estate economy, the capital markets continue to be stressed as I mentioned with transaction volumes significantly lower. Values are also down with both office and multifamily prices falling by 16% year-over-year, multifamily and office prices down 30% from their peak. Banks are not lending and now they're shedding CRE loans from their balance sheet. CMBS delinquencies are also trending higher with office delinquencies of 6%, up more than 600% where they were at the end of 2022 and rapidly approaching the 10.5% peak last seen after the last recession.

We expect this trend to continue as it took more than three years after the conclusion of the great financial crisis for the delinquencies to peak. The office sector already experiencing its worst market conditions ever continued to weaken in the third quarter. Total negative absorption for the year is now 50 million square feet. Since the pandemic begin, there has been over 170 million square feet of negative absorption in the office sector, which represents about 30% of all of the positive absorption that occurred in the 10-year recovery period after the last recession.

Absorption will likely continue to be negative for some time as most indicators point to continued weaknesses. Measures of workers coming back to the office have largely been flat and only slightly up over the past year. Lease renewal activity is well below pre-pandemic levels and new leases now average about 20% less than floor space than pre-pandemic levels. The U.S. hotel sector continues to approach pre-2020 levels in the third quarter. Mid-week occupancies rose fueled by group and corporate customers, room rates and occupancy rates are also improved and RevPAR is expected to grow at about 4.5% for the year, even with a potential recession.

The industrial and retail sectors continue to perform well. The industrial vacancy rate remains low at 5.3% in the third quarter, and rent growth remained strong as well at 7.5% over the past 12 months. Retail vacancy reached in another all-time low at 4.1% with steady demand, fewer store closures and minimal new supply. The residential sector continues to face challenges from still rising mortgage rates and associated declining home sales down 15% year-over-year in September, more than 90% of the in-place loans are now below 6%, with more than 60% below 4%, leading to very low levels of inventory.

In combination of rising prices and mortgage rising mortgage rates has pushed affordability to its lowest level since July of 1985. In conclusion, for my part, CoStar Group continues to deliver both double-digit revenue growth and accelerate our performance against our Homes.com residential strategy. I'm very proud of our residential team for hitting a record milestone of 100 million monthly unique visitors to Homes.com in September, achieving the number two position in the residential marketplaces in the United States and climbing coming off of our 1,290% year-over-year growth rate.

I'm also very proud of the success of our commercial real estate teams have had increasing our revenue tenfold over the past 10 years -- 12 years and generating 14% year-over-year revenue growth in a downturn while growing our commercial property adjusted EBITDA to approaching $1 billion annualized as we move into the fourth quarter.

At this point, I'm going to turn the call over to our Chief Financial Officer, Scott Wheeler, Scott, the floor is yours.

Scott Wheeler

Thank you, Andy, great set of results, strong improvements in both investment momentum and clearly our revenue growth. So, let me cover some facts by the service areas to start out with CoStar revenue grew 10% year-over-year in the third quarter, which is in line with our guidance. And you think of course this is outstanding growth at a time when everything is pretty much gone pear shaped for the property markets. With rising interest rates, high inflation, record high office vacancies, only 50% return to office numbers and pretty much a frozen up transaction market.

We saw stable improving trends in CoStar's net new bookings in the third quarter. As our sales efforts are focused on new product capabilities and high-value portfolio customers like lenders, owners, and corporate tenants our CoStar retention rates improved sequentially in the third quarter to 93%. This includes higher levels of cancellations from bad debt as the property downturn lingers, while client initiated cancellations are actually lower than in prior downturns.

Once again, we're seeing that CoStar has proven to be mission critical to our customers regardless of where we are in the property cycle. So, this is our third major downside in the last 15 years starting with the great financial crisis in 2008, then of course the COVID pandemic disruption in '22 or sorry 2020, and most recently, now the high interest and inflation cycle that started in 2021.

In each progressive cycle, CoStar's performance has been stronger. During the great financial crisis, net new bookings went negative and CoStar revenue growth dipped into negative territory for three quarters before returning to positive growth. During the COVID disruption, CoStar net new bookings remain positive and revenue growth slowed to only 4% positive growth before returning back up to double-digits. The current market environment is much worse economically than in 2020. And we see CoStar's revenue performance being stronger.

We continued to invest in the CoStar product and our sales force through the pandemic and it's paying off. We expect CoStar revenue growth between 10% to 11% for the full-year 2023, and in the range of 8% to 9% in the fourth quarter. If market trends continue as they are now, we expect CoStar revenue growth would stabilize around 7% to 8% in the first couple quarters of 2024 and possibly improving thereafter. Again, this is a very strong performance and certainly above the growth we saw from CoStar in the prior downturns. Apartments.com revenue growth increased to 24% year-over-year in the third quarter to $235 million and Apartments.com is now our single largest business by revenue volume. This is remarkable for a business that did not even exist in CoStar 10 years ago.

For those of you that were with us back in 2014 and 2015, you'll certainly remember the acquisition of LittleApartments.com, number five in the market, and the subsequent announcement of a major investment cycle that consumed practically all of our profits at the time. Fast forward to today, we now have the leading apartments marketplace with the most revenue, the most customers, the highest brand awareness, and organic growth at the highest level now at scale than at any time since the first year of the site launch in 2015 and 2016.

By my calculations, Apartments.com has added over $10 billion of market cap to CoStar Group. I think we would all agree that the early years of investing our profit in Apartments.com was a very smart thing to do and something we believe we can repeat at an even bigger scale as we invest in our residential markets with Homes.com and now the pending offer to acquire OnTheMarket. Properties advertising on Apartments.com increased 15% year-over-year with mid-market as the leading category of the growth. Our sales force is approximately 22% larger year-over-year, and their performance continues to fuel the growth.

Net new bookings in the third quarter remain strong but step down from the record results of the second quarter for both seasonal reasons and due to spending capacity limits in some communities that are faced with the unfortunate decision to pay their high interest and rising inflation costs or to pay more in marketing.

We expect fourth quarter revenue growth to remain incredibly strong at 24% for Apartments.com and our full-year revenue growth outlook is 23%. LoopNet revenue grew 15% in the third quarter and we're expecting fourth quarter growth of 11% and full-year revenue growth in the range of 14 to 15%. This is relatively unchanged from what we talked about last quarter.

Revenue from Information Services grew 9% in the third quarter with STR and real estate manager subscription revenue posting combined 17% revenue growth. We continue to expect Information Services full-year revenue growth to be in the 9% range. We're doing the right thing in Information Services de-emphasizing and reducing transactional revenue while we focus and grow our subscription revenue across those platforms.

Residential revenue came in at $10 million in the third quarter and we expect full-year 2023 revenue of $43 million as we continue to run off the legacy products. The old Pro Plus products are holding up better than we expected while the Facebook advertising products decline. I suspect agents are finding that our millions of free leads from Homes.com are a much better source of potential customers than the poor performing Facebook ads that were sold through Homes.com.

Other marketplaces revenue was $34 million in the third quarter down 5% year-over-year as Ten-X is still facing the headwinds of the low transaction volume market. Our lands and business for sale marketplace revenues are consistently delivering double-digit growth. As we don't see near-term indications of an upturn in transaction volumes nor do we plan for those, we expect full-year revenue for other marketplaces of approximately $130 million.

Looking at profitability, our adjusted EBITDA for the third quarter was $112 million, slightly below our guidance range of $115 million to $120 million as we made the prudent decision to accelerate investments in our residential strategy.

Turning to performance statistics, our sales force totaled approximately 1,180 people on September 30th, an increase of 8% from September of last year and approximately 20 more than last quarter. Our contract renewal rate was 91% for the third quarter of 2023, with the renewal rate for customers who've been subscribers for five years or longer at 96%, with both rates increasing sequentially over the second quarter. I find this particularly impressive given the current state of the property markets.

Subscription revenue on annual contracts was 82% for the third quarter of 2023, compared to 80% in the third quarter of 2022. This is primarily attributable to our strong Apartments.com growth. We have a Fortress balance sheet with $5.2 billion in cash that is now earning 5% interest. Our net quarterly interest income is pacing at around $55 million.

Turning to the outlook for 2023, with our offer to purchase OnTheMarket expected to close late in the fourth quarter our guidance does not reflect any financial impact of the potential transaction. We expect full-year 2023 revenue outlook in the range of $2.445 billion to $2.450 billion, representing growth of 12% at the midpoint of the range. The modest adjustment to our revenue guidance range is from less favorable property market conditions, primarily in the third quarter.

Our commercial business growth rate for the year is expected to be 14%, generating revenue of over $2.4 billion. The company expects revenue for the fourth quarter of 2023 in the range of $630 million to $635 million, representing revenue growth of 10% to 11%. The commercial business growth rate for the fourth quarter is expected to be approximately 12% to 13%. We anticipate adjusted EBITDA for the year in the range of $485 million to $490 million. The fourth quarter 2023 adjusted EBITDA is expected to be in a range of $123 million to $128 million. This guidance includes the additional Homes.com investment that Andy mentioned, as we prepare for our residential product launch in 2024.

Overall, we're excited to be able to deliver 50 straight quarters of double-digit growth. Over the past 10 years, we have built a much more diversified portfolio focused entirely on subscription revenue, which makes our growth rates increasingly resilient to economic and commercial property cycles. What we are now seeing in the property markets are some of the worst conditions in decades. I suspect this is the first that many people on this call have experienced high inflation and interest rates, like some of us enjoyed back in the '80s and '90s, and maybe back in the '70s.

What CoStar has learned and demonstrated over time is that it's important to continue invest in attractive long-term opportunities for revenue growth and TAM expansion during downturns when others are shrinking or retrenching. We are once again leaning into our high-growth future with great promising investments, like Homes.com and OnTheMarket. The overwhelming proof of the success of this strategy is happening now as we continue to deliver double-digit revenue growth in our commercial information and marketplace businesses, which we expect will continue into 2024.

Assuming market conditions and trends don't improve next year, we expect continued double-digit revenue growth throughout 2024 in the range of 11% to 12% exclusive of our residential business and depending on the market transactions. With these impressive growth expectations, we expect to generate over $1 billion in adjusted EBITDA from our commercial portfolio next year.

With that, I will now turn the call back over to our call operator to begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of George Tong with Goldman Sachs.

George Tong

You mentioned commercial real estate transaction volumes are seeing significant declines. Can you elaborate on how different customer types within CoStar's suite are responding to these trends? So, large brokers, small brokers, and non-brokers, how are basically net bookings growing year-over-year across these different types of customers?

Andy Florance

Well, most of the brokerage firms are going to be doing both leasing, valuation, and investment sales or property sales. The folks doing property sales are certainly seeing lower revenue. But I would not call out any particular big difference from one firm to another. Owners, I think the bigger difference is that our sales force is investing more effort right now against owners and corporations and lenders than they're focusing on brokers. So, we're seeing an increase of bookings with owners, corporates, and lenders because that's where the sales force has placed their strategy. And that's based on new product offerings, and the fact that those have been historically under-penetrated areas for us. So, the actual reduction in year-over-year sales volume is only really impacting Ten-X as far as I'm aware.

George Tong

Very helpful. Thank you.

Operator

Your next question comes from the line of Pete Christiansen with Citi.

Peter Christiansen

Thank you. Good evening.

Andy Florance

Good evening.

Peter Christiansen

Good evening. I was hoping we could dig into the bookings performance this quarter a little bit. I know we have the pivot in Suite, which I think was really [topping out] (ph) Q4 of last year. Then you have the commission change in LoopNet and the new leadership change in LoopNet. Do you think of the bookings growth that we saw this quarter really as an inflection point or bottom or do you think this is more the level kind of production amount that we should expect for the next few quarters given the economic backdrop? Thank you.

Andy Florance

Yes, thanks for the question, Pete. As you know, and you've watched our patterns over the year, quarter-to-quarter changes in our net bookings numbers don't create trends. You have to obviously look for more quarters in a row to actually determine what that looks like. We come off of Q2, which is seasonally a high quarter for Apartments, which was also fueled by the NAA conference in some of those things. And so that's where you see most of the variation between the two quarters. As I mentioned, CoStar's solid is mildly improving, LoopNet's, not changed much since the last quarter. So, I think we see everyone as holding on well with good strong growth. The new sales teams we've added are performing well. And we don't attempt to predict forward guidance on the bookings, again because of that quarter-to-quarter volatility, but hopefully that helps you get an understanding of where the changes were in the quarter.

Peter Christiansen

Thank you. That's helpful.

Operator

Our next question comes from Heather Balsky with Bank of America. Please go ahead.

Heather Balsky

Hi, thank you. I was hoping you could -- well, thank you for the explanation on the market and what you plan to do. I was hoping you could dig in a little bit more on the spending and help us just understand when -- you talked about, after the first year of integration, you were going to spend the $46 million. Is that the right way to think about? And what that spending means for your 2027 target in this acquisition just given that you're going to be investing behind it? Thanks.

Andy Florance

Yes, thank you, Heather. So, the integration after the pending transaction would begin, of course, when the transaction close, if it gets approval of the vote from the shareholders. We expect that to be at the end of the year, in December. So, obviously there's people, technology, and other things you'd start to work on immediately, as we've outlined in our 2.7 announcements. So, we can't say much more beyond what those integration activities are, but we do expect those synergies and the advertising to begin with in the six months following the closing of the acquisition. And so, we don't include any of that yet in our longer-term outlooks. We'll wait until we see what the shareholder vote and the transaction with [site first] (ph) and then we can provide more updates on the effects into next year, and beyond.

Scott Wheeler

And I would just, outside of commenting on anything specific to OnTheMarket, I would say that something at that scale would not be likely a material -- materially change our 2027 outlook.

Heather Balsky

That's helpful, thank you.

Operator

Our next question comes from the line of Alexei Gogolev with JPMorgan.

Ella Smith

Hi, this is Ella Smith on behalf of Alexei Gogolev from JPMorgan. So, my question --

Andy Florance

Good afternoon, Ella.

Ella Smith

Hi, good to hear you, Andy. Can you help us understand the organic investments into the residential business over the next year? Could this be north of $400 million in '24 and '25, respectively, and then taper off and then?

Andy Florance

So, thanks for the question. We have yet to set out investment plans for 2024 for the residential investments. So, I won't be able to give you any specific guidance out into 2024. As we talked about today, we've seen such strong response, both in traffic and in the capability of the site, reaction from customers and from agents, that we felt it was the right thing to do to keep moving as fast as we can. Also knowing that there's been some cracks possibly in the industry business model, and we want to be as prepared as we possibly can with the site if changes happen in the industry. So, it wasn't a significant move in the 2023 time period. I think it was roughly around $30 million when you look at the change in the guidance. But certainly, we expect to continue to invest in residential into next year through when we monetize. Things are going well. And now is the time you keep going and you don't back off on the spend levels, for sure.

Ella Smith

Understood, thank you. And my follow-up question is around the market dynamics in the U.K. So, Rightmove has maintained a market dominant position in the U.K. for quite some time. And as we understand that many players have sought to disrupt Rightmove with marketing and digital investments, and they've largely failed. What do you think CoStar can do differently to disrupt the market despite the company's minimal presence in Europe currently?

Andy Florance

Well, I tend not to assign god-like characteristics to mere companies. And when I see a 72%-74% margin in a company with none of the major players actually materially investing, in my view, into significant marketing in the market, I think that the power of the technology we've developed with Homes.com and our experience in building traffic often against companies that have more traffic than we have when we begin, feel very comfortable we have something to bring to the table in the United Kingdom, and that we can offer some real value in the market. I would flatly reject any concept that any company is impervious to competition, with the exception of a couple of the [FAANGs] (ph).

Ella Smith

Great, thank you both so much.

Andy Florance

Yes.

Operator

Your next question comes from the line of Ryan Tomasello with KBW. Please go ahead.

Ryan Tomasello

Hi, everyone. Thanks for taking the questions. I guess following up on the U.K. deal, Andy, obviously OnTheMarket gives us a solid foothold in the U.K. specifically. But you also called out the optionality that that infrastructure brings you to expand the Homes brand across the European market more broadly. So just curious if you could elaborate on the strategic rationale of what a trans-European type residential portal brand, what synergies that could provide, what the strategy can look like from here in terms of perhaps participating in that consolidation wave that you're expecting across other portals, perhaps in other countries? Just a finer point around what that could look like over the next several years. Thanks.

Andy Florance

Sure. I don't know, there's probably 80 portals operating in Europe with a market cap very roughly, because some are private, some are private, $30 billion-plus. Some of them trade extremely high multiples, some of them trade at lower multiples. It's a very fragmented market. And I do believe I think there's two different camps. There's some camps that feel that technology does not play a meaningful role in the digitization of real estate. And there's some people that think that technology will play a big role in the digitization of real estate. We fall in the camp of thinking that technology is important, and that having -- and that scale, there'll be greater scale in individual countries over time.

And that fundamentally what these companies are doing is very similar. They're basically putting placards, maps, SEO strategy, SEM strategy, branding strategy. They're serving up digital twins, they're serving up videos. It's all very similar. And there is the opportunity to differentiate one brand from another with technology. And so believe there will be significant consolidation. And there will be a little bit of a musical chairs occurring, and that there'll be winners and losers in it. And we want to keep a careful eye on it. And I just would say that it reminds me very much of the United States maybe 10 years ago, before a lot of the consolidation occurred. So, I think it's an exciting opportunity. Again, the scale of the opportunity both in the revenue potential in the $10 billion to $20 billion range, and the market caps in the $30 billion-plus, it's great to have a seat at the table. And we believe that our technology is competitively advantaged in the market. And so, we're operating on that premise.

Ryan Tomasello

And as a follow-up to just the residential opportunity in the U.S., regarding the commission lawsuits, you've talked about the potential outcomes there that could pose a risk to the legacy portals focused on buyer, agent, region. But from the perspective of Homes.com, is there an opportunity where that brand could more directly benefit from structural changes there over time? Would unbundling commissions help unlock the under-monetized home advertising TAM that you've spoken about in the U.S.?

Andy Florance

I think we can succeed, regardless of what the outcome is in those cases, but I think it would likely, if the plaintiffs prevail, it will likely create rapidly changing conditions that might favor a company like Homes.com, which is not focused on monetizing buyer agent leads. And as things get turned upside down, if you're not in the blast radius of that change, you're much better off to compete the next day. So, I think that's where it really matters.

Ryan Tomasello

Thanks for taking the questions.

Operator

Our next question comes from Stephen Sheldon with William Blair. Please go ahead.

Stephen Sheldon

Hey, thanks for taking my questions. So, I wanted to dig on resi spend a little bit more sounds like you're committed to continue spending on Homes.com. So, just kind of curious at a high level, more qualitatively how the areas of spend could change as we head into 2024. So, when do you think brand marketing spend for Homes.com could pick up? Could the budget for that be covered from reduced spend on SEM this year, reallocations from brand marketing on other assets. And then, on the content side, will you be building out different content next year versus a lot of a neighborhood and community content been building up over the last year or so. Just curious where your areas of investments might be changing?

Andy Florance

Sure, on the content side, we will be continuing to build out and evolve neighborhood content well into 2024. We will be initiating more general blog content, part content, more school content. So, it'll be a shifting mix with some of the same in the first-half of the year and then some evolutions in the year out. In terms of the mix of what is on branding versus what is on SEM versus what is on content that will absolutely shift from quarter-to-quarter. Clearly, we have to build the unaided brand awareness. So, we've got a great site, we've got some great traffic, we have some great return visitors, we feel very strong, we feel very confident about our roadmap going forward. But you have to have that unaided awareness number grow. So, there will be some shifting and changes in what we're doing. But we have not done, we certainly have not done our 2024 budgets, we can't really comment specifically.

Stephen Sheldon

Great, thank you.

Andy Florance

And we can get your copy of that William Blair report if you want.

Stephen Sheldon

Sounds good.

Operator

We'll take our next question from John Campbell with Stephens Inc.

John Campbell

Hi, guys, good evening. Congrats on the Homes.com traffic gains, and depending OnTheMarket deal, those are pretty exciting developments. I've got just -- sure, I've got two questions that follow-up to, two other questions you guys already received. But first one, though is the resi investment spend. If you can maybe just kind of put us, just pinpoint this just for now. But I'm curious about what the kind of breakout or the mix of spend looks like today for content versus marketing or software?

Andy Florance

I can give you a directional marketing is going to be the top category. Content generation will be the second and technology would be the third. But that's probably as much information and I'll probably give on the components for now, John.

John Campbell

Okay, that's helpful.

Andy Florance

Yes, they're all pretty big.

John Campbell

Okay. And then, on the marketing side, I'm hearing you correctly, it sounds like the majority of that's probably SEM, performance marketing this year, and then the softer brand side the TV, radio, print, all that's going to be what essentially ramped into next year?

Andy Florance

It's a combination of a number of things for marketing. So, we're doing a lot of industry marketing as well. So, it's a mix and but yes, moving into next year, there will be more brand development, which will be important. So, you will see a mix of the marketing change as we go forward.

John Campbell

Okay, that's helpful. And then, the other question on the resi strategy. I mean, clearly it seems to me that the chess pieces are kind of put in place where you would benefit from, the kind of the happenings or potential ripple effects from the Commission suits. So, Andy I'm curious if you can -- yes, exactly. So, if you could maybe talk to how you envision, particularly how you envision excuse me Ten-X kind of fitting into the mix, it seems like it might have a place in helping field offers or organized offers or maybe even serving as that final kind of cash register in the late stages of the transaction?

Andy Florance

Sure. I mean, I think the best, I mean we are very focused right now. We're working very hard on many, many fronts on building out the site and our monetization strategy, our brand development strategy, this quarter, next quarter, 2024. Ten-X will not enter into the residential mix in the next 12 to 18 months, but I wouldn't say that it won't ever enter into the mix. When various players moved into asset heavy participation and basically, I buying, it struck me that there's an asset light version of that where it's more like a Ten-X and less actually putting on your balance sheet, but facilitating transactions.

Certainly, there's inefficiencies in the market when 20 people show up to bid on an asset and it's not digitized. I mean, I think that's a lost opportunity for the seller to get the highest price possible. And also, it's a lost opportunity for the sellers to fairly participate and try to put the best offer out there. So, Ten-X can bring value there. I think elements of what Ten-X has worked on like deal room documents, that sort of stuff that may occur in 2024. But right now, we are excited about and have very robust product plans going into 2024 that we think will deliver real value and Ten-X would be a little bit further out there.

John Campbell

Okay, that's very helpful. Thank you, guys.

Operator

We'll take our next question from Jeff Meuler with Baird.

Jeff Meuler

Yes, thank you. So, just first, it looks like the EBITDA guidance maybe comes down $27.5 million at the midpoint. I think you said, Scott, that the increased Homes initiative spend is around 30. So, can you just confirm if the consolidated EBITDA guidance change is almost entirely just the increased Homes investment?

Scott Wheeler

Yes, and a little bit of drop-through, obviously, from the revenue. So, the Homes investment number is probably smaller than the 30 by a little bit, somewhere in the mid-20s, possibly, but you're kind of in the ballpark.

Jeff Meuler

Okay. And then, I see the great traffic numbers. I guess, help me think through anything further on like what you're seeing in terms of quality of Homes.com traffic. There was some metric, like a 900% increase in revisits or something, but, what are the other benefits? I'm thinking about like the ability to market a big traffic number as you launch products, any sort of future SEO and SEM efficiencies that could come from a lot of traffic flowing through your site ahead of some of those additional investments, things like that?

Scott Wheeler

I think we'll put the number in there about the really outstanding numbers for return traffic as a key point because we are seeing significant growth in return traffic, which means in my mind that people come into the site, like the experience, like the layout, like the fact they could reach agents directly, not go to a call center, not get rerouted around and sold.

So, we think that number shows exactly what we want to see, which is the fact that we're winning over some consumers. So, that's exciting. Certainly, we don't want to go into too much detail on what we're doing on any given day, but certainly you work the blend of SEM/SEO and branding at different points and different phases to get the optimal result. We're doing the things you would do at this point in time. We're getting, I think we can confidently say we're double the traffic that we expected to have at this point, so we're happy with what we're doing right now. And I look forward to being able to do the next steps, which optimize the site even further. I think one of the metrics is probably not coming up, but I believe is there. It's a little tougher to measure, but we're seeing some of it is we're getting some really good lead flow numbers.

So, I think that a significant number of consumers have figured out that if they're interested in a property, when they come to Homes.com, they get directly connected to the person who knows the most about the listing, and we believe that's the best consumer experience. And they know that on some of the alternative sites, they are going to go through a ringer of a sales process to be sold a buyer agent. They're not going to get a quick answer about the property they were expressing interest. So, I think we are seeing -- it's early to tell, but I think we are seeing a significant advantage in traffic to lead flow ratio compared to some of the other players out there. I do believe that even though we are not monetizing today, I believe it's quite possible that we are perhaps demonetizing some other sites, because if a lead comes through to Homes.com, that lead may no longer be available to go to another site, even though we're not charging for it.

Jeff Meuler

Got it.

Scott Wheeler

We go on, there's lots of different metrics out there, but I think lead flow is a good one. You can tell from Apartments.com and our track record there, we're very good at thinking about those leads and the quality of the leads and not spraying junk leads at people, and optimizing the experience and reducing the friction when people actually want to express interest in a particular property.

Jeff Meuler

Got it. Thank you.

Operator

[Operator Instructions] We'll take our next question from Nicholas Jones with JMP Securities.

Nicholas Jones

Great, thanks for taking the questions. I guess maybe kind of double-clicking on lead quality on Homes.com. Can you kind of speak to the uniqueness of the leads? Are there people who are maybe coming through and maybe the average response time isn't fast enough and then they're kind of abandoning and going to other sites where they can kind of get on-demand tours? Can you kind of speak to the difference, I guess, in response time and maybe then what the uniqueness is in the leads to the agents based on kind of what the consumer needed? They may have a question that's very specific to the property, or they just may want to get a tour quickly and they're looking for kind of a quick response?

Scott Wheeler

Are you asking when I stopped beating my dog? I've never beaten my dog. And we don't think that we have a slow response time on leads on Homes.com. In fact, I would believe we have a better response time in that if you are reaching out to the person that's got the listing, they know the most about the listing and can respond quickly, and you get a single point of contact typically as opposed to alternative sites, you might get many people responding. You might get four or five agents calling you back about one house you expressed interest in. We feel confident that the experience we're giving the consumers is a solid experience, and we think, when you talk to a leader in portals over in Europe and you explain how the legacy models work in the United States and how Homes.com works in the United States, people have operated portals for 20 years, and they do it the way homes. They listen to what I'm explaining about how it works in the United States, and they go, well, gosh, that's really obvious. The consumer would prefer to contact the person who has the listing and knows the property rather than contact someone who doesn't have the listing and doesn't know the property. And so, in the eyes of someone that's not been exposed to it, our lead process would appear to be the obviously superior process.

Nicholas Jones

Great, thank you.

Scott Wheeler

I'm not sure if that answered the question or not.

Nicholas Jones

It directionally does.

Scott Wheeler

Okay, great.

Operator

We'll take our next question from Ashish Sabadra with RBC Capital Markets.

Ashish Sabadra

Thanks for taking my question. So, I just wanted to ask about the international M&A opportunities. Obviously, you've talked about OnTheMarket and organic investments there, but would you also consider doing more tokens or strategic acquisitions to build out the pan-European platform? And then would you also look at other opportunities outside of Europe? In particular, you called out how you necessarily are not interested in the number one property but going after good properties. Would you apply the same approach when you think about M&A outside of Europe or in Europe or outside of Europe for residential assets? Thanks.

Scott Wheeler

Sure. I would just -- I don't know if I'll get the answer to that in the proper order, but I would say that -- I wouldn't say that we're not interested in the number one asset in the market. We would be interested in the number one asset in the market. What we want to avoid is we want to avoid overpaying materially for something. And one of the things we do and we look at a particular portal, is we consider, if there are three portals in a market or four portals in a market, we will look at what the traffic on the lead portal, the number two portal, number three, number four portal. We look at the potential cost or value, like acquisition cost of each of those portals. And we'll also be mindful of how we can change the outcome.

So, if we think that we can build traffic on a give portal up to the number one position, if we could take a portal from number four to number one, we can estimate the cost of what it takes to do that. And we know the cost of bringing the technology in. We balance that against the cost of buying the number one portal. And so, if it's cheaper to build versus buy, we'll build, but build from the context of acquire and invest, as opposed to acquire number one and try to hold that number one position. So, I think sometimes you could do the calculation in various European markets and determine that it would be -- it would take you 60 years to get a payback relative to the cost of simply buying and building the traffic up. So, you're looking for a better return.

So, we look at it through that lens, the value you get for the price you're paying. There is a mindset that you've heard, that people believe that all of these 80 portals are set and locked in their stack rank, and that there's no value to technology in any of these digital portals. I think that's wrong. I think the positions will move, and they always have moved. If you look at who was number one five years ago it's different than who was number one seven years ago. So, it's more dynamic than people appreciate. And we just carefully are meeting some wonderful people in Europe, getting to know them, getting to know their companies, a lot of people we'd love to work with. But we want to make sure that our shareholder's dollar goes as far as possible, and that we're optimizing the investments we're making.

Ashish Sabadra

That's very helpful color. And I was just wondering if you can comment on aspirations for international resi strategy outside of Europe as well? Thanks.

Andy Florance

I've been doing this for a while, and the longer you do it the more you appreciate that it's basically all pretty much the same everywhere. And when you get wrapped around an axle around the minor differences from one market to another, you're missing the similarities. Like Steve Jobs would have been very definitive that human beings are very similar from Singapore to Brazil to South Africa, and to obsess about the cultural differences in delivering technology as opposed to the similarities would be a mistake.

Ashish Sabadra

That's great color. Thanks again.

Operator

And there are no further questions at this time. So, we'll turn it back to Andy to wrap up.

Andy Florance

Well, I'd like to thank everyone for joining us on this third quarter earnings call. And we look forward to having you join us again where we can share results with you on, I believe, February 20, at 5:00 p.m. Eastern Standard Time, 2:00 p.m. Pacific Time, on February 24. So, thank you for joining us, and thank you for participating. We enjoyed the questions. Thank you very much. Have a good evening.

Operator

And this concludes today's conference call. You may now disconnect.