CoStar Stock Drops After It Lowers Revenue Projections Due To Slow CRE Market
CoStar Group, the $34B tech firm that provides data and listing platforms for the commercial real estate industry, isn't going through the same Category 5 hurricane that its customers are, but it's not basking in the sunshine either.
While the company on Tuesday reported 13% year-over-year revenue growth, bringing in $606M in the second quarter, it also lowered its revenue projections for the remainder of the year, a drop it attributed to slow sales volume in the commercial real estate market and the effect on its property sales platform, Ten-X.
"Ten-X revenue was lower than expected in the second quarter as the low transaction volumes and deal uncertainty weighed on the results," CoStar Chief Financial Officer Scott Wheeler said on the company's earnings call Tuesday evening.
He didn't disclose exactly what Ten-X's quarterly revenue was, despite giving that figure for other segments of the company.
The company said it now projects full-year revenue to total between $2.45B and $2.46B, down from the previous guidance range it gave April 25 of $2.465 to $2.48B. That represents a decline in the midpoint of the range of $17.5M.
Following its Tuesday evening earnings release and call, CoStar's stock price fell by 10% within the first half-hour of trading Wednesday morning.
CoStar executives spent much of the earnings call highlighting the growth in its residential platforms, including Homes.com and Apartments.com, with CEO Andy Florance multiple times boasting that it has become the second-most-visited residential platform behind Zillow.
But the company's commercial real estate-focused platforms aren't doing as well.
In addition to Ten-X, its commercial property listing platform LoopNet also saw lower-than-expected sales last quarter.
While LoopNet's revenue grew 16% year-over-year in the second quarter, Wheeler said that was below its guidance of 18%, representing a shortfall of $1M. Florance said LoopNet's sales growth "should have been stronger," and he attributed the miss largely to personnel issues that he deems fixable.
"We believe the lower sales resulted from a combination of factors and that most of these factors are correctible," Florance said. "These factors include a growing and relatively young sales team, a training program which has room for improvement, a large number of account transitions, a poorly conceived commission plan that drove lower activity levels and weak customer service, which reduced our renewal rates."
"Does that sound like a CEO that’s not happy with something?" he added. "That’s true."
Florance also pointed to the pain facing the office market, with offices being emptied out at levels surpassing what was seen during the Global Financial Crisis.
"The office sector continued to weaken in the second quarter and now can be characterized as the worst it's ever been; what a horrible thing to have to say," Florance said.
"Conditions will likely not improve anytime soon," he added. "We expect vacancy rates to continue to rise. Overall sales prices for offices are down 5.9% and delinquency rates, while still low, have tripled since the end of last year to 4.4%. I believe the downward price pressure higher is much higher than a 5.9% decline, and the quality of office loan collateral is weaker than many present it to be."
One analyst who covers CoStar, Bank of America's Heather Balsky, said in a report Wednesday morning she is lowering her stock price outlook for the company by $3 per share due to the "headwind" facing its commercial real estate platforms.
CoStar's second-quarter report "was not as strong as we hoped as execution challenges led to a sales miss and guide down for LoopNet," Balsky wrote in the report. "We think CSGP can quickly reaccelerate LoopNet growth, but investors may need to see improvement before gaining confidence."
After Wednesday's dip, CoStar's stock price is up roughly 8% so far in 2023, trailing the S&P 500, which is up roughly 18%, and the tech-heavy Nasdaq composite, which is up 35%.
