Baron Funds Comments on CoStar Group
CoStar Group, Inc. (NASDAQ:CSGP) shares continued to outperform in the second quarter, driven by outstanding financial results, accelerating business momentum, and FTC approval of the acquisition of LoopNet. CoStar generated record quarterly gross new sales, which we estimate grew by almost 25% annually, fueled by rising demand for its CoStarGo Ipad application. Retention rates improved to 94% for the quarter, an all-time high for the company, including 98% retention rates for customers that have been CoStar subscribers for more than 5 years, and 88% retention rates for the company's newer customers. The company has been investing aggressively to enhance its product functionality and broaden its sales coverage, which have been key drivers of accelerating results.
CoStar closed its acquisition of LoopNet early in the second quarter after a full year of antitrust review. The acquisition adds the U.S.' largest marketing services platform to CoStar's market-leading information services tools, which we expect will lead to significant cross-selling opportunities. We estimate that site-level overlap between CoStar and LoopNet is less than 25%, and user overlap is currently in the single digits. Once the tools are integrated, legacy LoopNet users will be able to access enhanced data and analytics from the CoStar platform, and legacy CoStar customers will be able to seamlessly market their CRE properties on the LoopNet marketplace. We believe that selling a bundled service will enable CoStar management to transition LoopNet customers from monthly subscriptions to annual subscriptions, as well as reduce overall churn as the integrated product becomes more engrained in workflows. Finally, we believe that the integration will result in better data quality across both platforms, with lower aggregate research costs due to shared infrastructure and LoopNet's user-provided data model. (Neal Rosenberg)