CoStar Group Inc 2026 Q3 Earnings Call

Thank you, operator, and thank you all for joining us today to discuss the third quarter 2026 results of the CoStar Group. Before I turn the call over to Andy Florance, CoStar CEO and founder, and Robin Rossmann, our CFO, I'd like to review our safe harbor statement. Certain portions of the discussion today may contain forward-looking statements, and the company's outlook and expectations are 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. 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 because of new information, future events, or otherwise. Reconciliation to the most directly comparable GAAP measures of any non-GAAP financial measure discussed on this call are shown in detail in our press release issued earlier today, along with the definitions for these terms. Press release is available on our website, located at costargroup.com under Press Room. If you have joined via webcast, please refer to today's press release on how to access the replay of this call. Remember, we want to give everybody a chance to ask a question, so please limit your question to just one during the Q&A, and you can requeue, and time permitting, we'll be able to ask a second question. With that, I'd like to turn the call over to our founder and CEO, Andy Florance.

Thank you for joining us today. CoStar Group delivered an outstanding third quarter. Revenue grew 14% year over year to $952 million, marking our 62nd consecutive quarter of double-digit growth. More importantly, we delivered record quarterly adjusted EBITDA of $229 million, double the prior year, and surpassing the previous record of $193 million from Q4 2021. EBITDA increased $166 million year over year to $179 million in the quarter. Also, the highest in our history. Net income was $74 million, an increase of $105 million year over year. Third quarter adjusted EBITDA, excluding the positive impact of Zonda, exceeded the high end of our guidance range due to strong cost control, with quarterly operating costs declining 2% year over year.

We expect to continue to benefit from these savings and the inclusion of Zonda, and we're therefore raising our full-year adjusted EBITDA guidance to the midpoint of $830 million, 24% above our previous record of $672 million set back in 2022. That represents an adjusted EBITDA margin of 22%, up from 14% in 2025 and 9% in 2024. As we've done repeatedly over the past four decades, after completing an investment period, we focus on generating strong multi-year increases in adjusted EBITDA. This time is no different, and we remain firmly committed to our adjusted EBITDA target of $1.25 billion in 2028. We're generating strong margin expansion while simultaneously investing aggressively in high-potential future revenue drivers. Our 2026 margin growth came from initial steps to improve workforce marketing and procurement efficiency. Last quarter, we expected to bring our 2026 expenses $100 million below our original guidance.

We now expect to bring them $150 million below that guidance, excluding Zonda. A deep review of our expense base over the last two months identified approximately $200 million of additional cost efficiency opportunities across procurement, organizational design, technology, infrastructure, marketing effectiveness, and post-acquisition integration. That's incremental to the $150 million we expect to save this year, which we expect to realize that additional $200 million over the next 12 to 18 months while continuing to invest in future revenue drivers. Our annualized net new bookings were below our expectations, coming in at $37 million for the third quarter. We attribute this to economic headwinds and slower than expected sales force growth. Our renewal rates remained high, but with a growing multibillion-dollar subscription base, we need to continue to grow high ROI sales force headcount.

Our sales team met with hundreds of thousands of clients and prospects but lack the scale to reach the hundreds of thousands of additional prospects we have. We currently have about 2,000 sales professionals, down about 10% from the prior year. We launched Homes.com with a large centralized inside sales team in Richmond, many of them without prior sales experience. Not a profile we have traditionally hired. Many have succeeded. Others have not.

We'll continue to build the Richmond team, but we are shifting most of our growth effort to the field sales professionals with prior real estate and sales experience in our top cities. Field reps who meet with clients face-to-face are on average much more productive than inside sales and having visited prospects and clients with our home field sales teams at the agents' open houses and offices, I can tell you, agents are very receptive to local in-person sales professionals. We have taken action. We expect to publicly announce the appointment of a new highly qualified CHRO within the next two weeks. We are decentralizing sales recruiting from Richmond into our major city hubs with recruiters reporting into our field sales leadership, and we are building sales force growth into our sales management compensation plans.

We expect to re-accelerate sales force growth in 2027 to serve our growing customer base and reach our prospect opportunities. Nonetheless, the impact of the third quarter net bookings together with lower transaction volume at Domain means we are revising our revenue guidance for the full year. Our updated full year guidance is up $25 million at the midpoint and includes approximately $60 million from Zonda. Excluding Zonda, the outlook is $35 million or 1% lower than in July. Our commercial real estate business generated $492 million of revenue in Q3, an increase of 7% year-over-year, and adjusted EBITDA of $180 million, down 2% year-over-year due to investments in upcoming product releases, including Australia, France, and the new homes modules. CoStar had a great quarter with revenue of $344 million, up 8% year-over-year. Renewal rates remain strong at 92%.

NPS reached a record 70, and users grew 17% year-over-year to 331,000 subscribers. The CoStar sales force of 485 grew 4% in the quarter, but remains 4% below the beginning of the year. We anticipate returning to Q4 2025 levels by year end. We are launching a transformative new AI-driven research process for CoStar Tenant that I believe can expand the productivity of our tenant researchers more than tenfold, allowing us to offer much deeper, more accurate information on an order of magnitude more corporate occupiers. Our tenant AI agents combine four decades of proprietary property level and ground truth from our field researchers with thousands of other sources, so we can now update all 6.7 million tenant locations every year instead of just updating a small percentage. We are updating with higher accuracy than we have ever achieved.

In head-to-head tests, an AI agent using only publicly available data had a 75% error rate. We believe our solution operates with single-digit error rates. CoStar's international growth momentum is continuing. In Canada, we now serve all five leading brokerage firms, as we do in the U.K., where CoStar subscribers now participate in 80% of commercial real estate transactions. In August, renewal rates reached an impressive 94%. In France, following CoStar's launch last quarter, we made a strong start in the migration upselling of over 1,100 Business Immo customers, onboarding our first major global brokerage firm nearly right away. In Australia, we are nearing launch with a proprietary data set of more than 93,000 commercial properties, 45,000 curated listings, and 123,000 tenant records, plus close to 10 million pages of government filings abstracted with AI, which we believe will make CoStar Australia one of the most compelling solutions we have ever offered.

This week, we are launching CoStar Debt Solutions Benchmark, built on $1.5 trillion of CRE debt across more than 155,000 loans, giving lenders visibility into non-securitized lending activity for origination, portfolio risk, and compliance. Next year, we expect to add loan origination capabilities to lending workflows. LoopNet generated $89 million of revenue in Q3, up 13% year-over-year. LoopNet's sales force of 220 representatives was up 20% year-over-year, helping drive a 30% sequential increase in Q3 annualized net new bookings. LoopNet and CoStar sales reps generally call on the same firms. With large owners, brokerages, and enterprises, that makes sense, as the decision-makers differ and the solutions can be more complex. For small to midsize clients and prospects, one skilled rep can sell both products more effectively, reducing our cost of sales and offering the single point of contact prospects desire.

Our U.K. trial of this approach this year has produced very good results. U.K. revenue in Q3 rose 22% year-over-year, and silver-level renewal rates reached 96% in August. We are now cross-training reps to roll out the same strategy in the U.S. later this year. Ten-X is regaining momentum under its new President, Steve Price, winning back volume from the industry's largest brokerages, investors, and loan servicers. The third quarter trade rate of 60% was the highest since the second quarter of 2022. CoStar Real Estate Manager grew annualized net new bookings 15% year-over-year, with the majority of new bookings replacing competitor applications. We are expanding our direct sales presence into Europe. Matterport delivered strong Q3 performance with subscription revenue up 11%, direct sales bookings up 14%, and new enterprise customers up 46% year-over-year.

Following the rebalancing of the Pro 3 commercial model towards subscription in July, shipments of the Pro 3 reached their highest level since launch, up 52% year-over-year. Matterport's profitability has improved massively since it was a standalone public company prior to our acquiring it, and we expect Matterport to be profitable by the end of 2027. BizBuySell's Q3 net new subscription revenue grew 282% year-over-year, driven by strong supply-side demand, and membership increased 23% to a record level. Residential revenue was $460 million in Q3, up 23% year-over-year. This included Zonda from August 21. On a full quarter basis, Zonda would take our annualized single-family home revenue to approximately $500 million. Residential third quarter adjusted EBITDA quadrupled quarter-over-quarter to $49 million.