CoStar Group's Big Bet Has Started to Pay Off

CoStar's big marketing push for its website is paying dividends. Image:

Online real-estate information has been a hot niche in e-commerce recently, and CoStar Group has become one of the key providers of data, analytical tools, and marketplace tools in the industry. With its having started a huge marketing campaign earlier this year, CoStar Group investors were already prepared coming into Wednesday afternoon's first-quarter financial report to see the company's earnings plunge from year-ago levels. Yet the rewards of higher revenue proved to be worth the cost in many investors' eyes, as the company exceeded the hefty sales growth that shareholders had hoped to see. Let's take a closer look at CoStar Group and what the rest of 2015 might bring for the company.

CoStar Group celebrates CoStar Group proved the concept behind its launch and marketing campaign with a big jump in sales related to the service. Overall, revenue jumped 34% to $159 million, exceeding the ambitious targets that investors had set for the company. The cost of the marketing efforts that drove those sales gains ate into profits, however, with adjusted net income falling 45% and earnings coming in at just $0.34 per share, down by half from last year's first quarter. Nevertheless, the results were more than a dime per share better than investors had expected, as CoStar had made its strategic vision clear well in advance of its report.

Digging into more detail, CoStar's numbers reflected the success of its recent campaign. Net sales of subscription services on annual contracts jumped 10%, and sales of core CoStar services climbed at a 20% pace. Companywide, net bookings soared 50% to $21 million, with seeing nine times the bookings it did this time last year and producing almost two-thirds more leads. Traffic levels to more than doubled to 15 million visits and 7 million unique visitors, sending the site to the top spot among apartment-listing websites and vaulting its mobile application into the lead as well.

CEO Andrew Florance couldn't have been happier with the early results of the rollout, pointing to the success in the first month following the launch of the new site and marketing campaign as well as the positive results on the rest of its business. "We are having great success selling CoStar information nand analytics combined with marketing on to property managers and owners," Florance said, and "we sold more net property additions in March 2015 than all of the preceding year."

Source: CoStar Group.

What's the next step for CoStar?Interestingly, after having applied pressure to the rest of the industry, CoStar made a big acquisition of a rival in the space. Along with its latest report, CoStar said today that it would buy the parent company of Apartment Finder for $170 million in cash, with the net effect of adding to the company's exposure to multifamily residential property. Putting together with could add to CoStar's lead-generation capabilities, and Florance touted the low valuation on Apartment Finder as making the deal even more attractive.

All the positive news on the corporate front led CoStar to boost its guidance for the full year. CoStar now expects to see revenue of $688 million to $698 million, with $30 million to $35 million of that coming from Apartment Finder. The company also boosted its earnings guidance by $0.03 per share to a range of $1.98 to $2.08 per share, with CoStar expecting investment in Apartment Finder to offset any added income from the purchase.

What investors need to watch out for, though, is the expectation of lower earnings for the second quarter. CFO Brian Radecki explained that most of the reason earnings exceeded expectations in the first quarter is that a portion of the expected costs of its marketing campaign got pushed into the second quarter. With the primary moving season for apartments coming this quarter, investors shouldn't be surprised to see weak results in the hopes of a bigger payoff down the road.

CoStar has aggressively gone after growth opportunities in the market, and at least so far, those efforts appear to be having a positive impact on its business. The coming months will be critical for CoStar to establish itself as the predominant player in the important apartment-information business and to prove that it can monetize its leadership position to justify the money it has invested toward that end.

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