Nov 3, 2008
Executives
Tim Trainor – Communications Director Andrew Florance – Founder, President and CEO Brian Radecki – CFO
Analysts
John Neff – William Blair Jon Maietta – Needham and Company Brett Huff – Stephens Inc. Jim Wilson – JMP Securities
Presentation
Operator
Ladies and gentlemen, welcome to CoStar Group's third quarter 2008 conference call. Today, we have CoStar Group's Chief Executive Officer, Andrew Florance; Chief Financial Officer, Brian Radecki; and Communications Director, Tim Trainor.
At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session.
(Operator instructions) As a reminder, your conference is being recorded. I would now like to turn the conference over to Mr.
Tim Trainor. Please go ahead.
Tim Trainor
Thank you, Louise [ph]. Good morning, everyone.
Welcome to CoStar Group's third quarter 2008 conference call. Before I turn the call over to our CEO, Andrew Florance, let me state for the record that certain portions of this discussion contain forward-looking statements which involve many risks and uncertainties 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's third quarter 2008 press release and in CoStar's filings with the SEC, including CoStar's Form 10-K for the period ended December 31, 2007 and CoStar's Form 10-Q for the quarter ended June 30, 2008 under the heading “Risk Factors.” All forward-looking statements are based on information available to CoStar on the date of this call and CoStar assumes no obligation to update these statements.
You can find a webcast of this conference call on our Web site at www.costar.com/corporate/investor. Thank you for joining us.
I will now turn the call over to Andy.
Andrew Florance
Thank you, Tim. Welcome everyone, to CoStar Group's Third Quarter 2008 Conference Call.
If there is a theme to our earnings call today, it's earnings. We have managed our business quite conservatively over the past year or so, trimming costs where we could, diversifying our product mix with the launch of CoStar Showcase, and above all, focusing on earnings growth.
Our earnings results in the third quarter clearly demonstrate the strength of CoStar Group's business model. In an ailing economy, many companies are unfortunately reporting weak earnings.
In sharp contrast, CoStar Group is today reporting triple digit year-over-year quarterly net income growth. In fact, for the fourth consecutive earnings call, we are pleased to again announce that we have doubled our earnings year-over-year.
Net income for the third quarter of 2008 increased 104% to $6.6 million from $3.3 million in the third quarter of 2007. At $6.6 million, net income for the third quarter increased 22% from the second quarter net income of $5.4 million.
Earnings per diluted share for the third quarter were $0.34, up from $0.17 in the same period a year ago. CoStar's EBITDA growth has been equally impressive.
Our EBITDA for the third quarter was $15.5 million, a 95% increase compared to EBITDA of $8 million in the third quarter of 2007 and a 21% increase compared to EBITDA of $12.8 million in the second quarter of 2008. For the nine months period ending September 30, 2008, over the nine months period ending September 30, 2007, our net income has nearly tripled.
We believe that these results clearly demonstrate the absolute resilience of CoStar's business model in a very difficult recessionary environment. This strong earnings performance is consistent with the aggressive target we set in the second quarter 2007 to raise our then company wide 9% EBITDA earnings margin to a 30% U.S.
EBITDA margin by the fourth quarter of 2008. Some investors were concerned that the financial meltdown would make our 30% target unattainable, but we are pleased to announce that with our current 33% U.S.
EBITDA margin, we have met and exceeded the target we set with you an entire quarter ahead of plan. Of course, we expect to continue to remain above a 30% EBITDA margin in our U.S.
operations in the fourth quarter of 2008 and throughout 2009 and 2010. In addition, we are reiterating our expectation of swinging from a loss to break even in our international operations in the fourth quarter of 2008.
As we expect our international operations to move to break even next quarter, we can consolidate, simplify, and strengthen our EBITDA margin goals and state our expectation that we will reach or exceed an overall 30% EBITDA margin in the fourth quarter of 2008. So, rather than just reach a 30% U.S.
EBITDA margin in the fourth quarter, we are raising the bar and setting the expectation that we can reach a company wide EBITDA margin of 30% in the fourth quarter. This is a very significant milestone for CoStar Group.
For many of you who have seen the closing slide from our road show, any time over the past ten years, you know that we've had a long stated target margin of 30% EBITDA companywide. This is another testament to the resilience and strength of the CoStar business model that we expect to reach this longstanding target margin in the fourth quarter despite this negative business environment.
Once we obtain a 30% overall EBITDA margin companywide, we expect to remain at or above that target for 2009 and 2010. Furthermore, based upon the visibility we have at this point, we are raising our expected net income target for the fourth quarter and full year 2008.
Brian Radecki will give you more color on this later in the call. Having already established our research infrastructure, our operating costs are relatively fixed and we expect they will remain so.
This puts us in a very favorable position going forward as the majority of every additional dollar or pound of revenue we earn essentially falls straight to our bottom line. Because of our continued success in reaching our earnings goals, and despite the abysmal economic environment, we remain committed to our previously stated goal of reaching $100 million in annualized EBITDA companywide by the end of 2010.
One of CoStar Group's greatest strengths remains our very solid balance sheet. Our cash position increased by $15 million in the third quarter and now stands – and the total cash now, cash equivalents, short-term and long-term investments, now stands at $213 million.
The majority of these assets are invested in U.S. Treasuries.
CoStar's cash position when viewed together with our shares outstanding, currently translates to $11 per share in cash. And we expect to continue to generate very significant cash flow through the remainder of this year and through 2009.
In addition, the company has no long-term debt which I'm sure you'll agree is a very good position to be in right now. I know it certainly helps management sleep well.
At any rate, CoStar remains in a very strong financial position. As you well know, a great deal of change since the last time I addressed you.
As a result of these changes, as they dramatically alter the global financial landscape this past quarter, together with the ongoing turmoil in the capital markets and the toll all this is expected to take on the general economy, it's clear that the business environment has fundamentally changed and that companies of all sizes in every industry will be grappling with the extent and severity of this crisis for some time. Obviously, commercial real estate is not immune to the economic mayhem of 2008.
The commercial real estate industry has enjoyed several consecutive years of strong, positive net absorption, high occupancies, increased rents, and record sales volume in asset valuations. It had remained fairly resilient in the face of the rapid deterioration in property values within the residential real estate sector.
First, nationwide and global negative change in the commercial real estate market has been a dramatic 50% plus reduction in property sales that we've observed. I believe that the initial shock from the series of major bank failures and financial stop gap measures will almost certainly put additional stress on the commercial real estate sector.
The resulting slower economic growth, combined with tighter access to debt to capital could curtail an already diminished level of commercial real estate transaction activity, likely resulting in weaker negative absorption, climbing vacancy rates, and overall decreases in rental rates and sales prices. Based upon our analysis of the performance of a core set of U.S.
markets, average office rental rates only saw a slight drop of 0.3% during the third quarter. Meanwhile, the national average office vacancy rate continued to edge up in the third quarter to 11.8% from 11% in the third quarter of 2007.
And it continues to rise. We did not see a dramatic spike in the vacancy this past quarter.
Overall, national office vacancy did reach the highest rate it has been in three years, but it's lower than it was in 2002 through the period of 2005. The national average vacancy rate for retail industrial buildings also increased during the quarter, although the levels remained within the range considered healthy under most interpretations.
I expect we will see changes in market conditions over the next few quarters as the full extent of the impact of the financial crisis becomes clear. Having observed the ebb and flow of commercial real estate conditions for more than 20 years, this downturn is different and that the source is primarily financial in nature.
For the most part, the industry seems to have demonstrated a disciplined approach to new development, largely avoiding the wholesale overbuilding that exacerbated the effects of previous downturns in our economy. As a result, I believe the current balance between supply and demand is not nearly as out of balance as in previous market recessions.
Obviously, the market dynamic is now changed and we'll be following market conditions closely in the coming weeks and months to gauge its impact. Regardless, while demand for our information and marketing services clearly is affected by the commercial real estate economics, it is not nearly as cyclical as the commercial real estate industry is overall.
While leasing and property sales may go down, demand for information never does. Right now, every lender and institutional investor with commercial real estate exposure as well as every owner of commercial property and the brokers who represent them are grappling with the same fundamental questions.
What is this property really worth? What is the best strategy to preserve or enhance its value in the current economy?
And where are the market conditions heading and how should their businesses change to adapt to the new realities in this market? The information through CoStar – available through CoStar plays a crucial role in helping our customers answer those questions and in marketing their properties for lease and for sale.
Information is integral to facilitate real estate transactions and therefore integral to the real estate service providers day-to-day business. Only by gaining a fuller understanding of each asset at individual property level can lenders, investors, property owners and their representatives properly evaluate opportunities and minimize risk.
That's why we believe that this access to our research verified information on specific buildings or properties in any given US market – something that only CoStar offers becomes even more valuable in a weakening economy when market values are in flux. There is no question about it.
Brokerage firms are looking for ways to reduce discretionary spending right now. Of course they are.
Outsourcing the labor intensive task of conducting basic real estate research to CoStar Group is in fact a tremendous cost savings for our subscribers as opposed to hiring additional staff and redirecting resources to gather, confirm, and maintain information on a continuous basis. Finally, CoStar's customer base is extremely diverse.
Our largest client accounts for approximately 3% of our total revenues. When you move to our second and third client, that percentage rate drops dramatically.
Even if a major customer happens to go out of business or is acquired by another firm, our experience has shown that CoStar Group can pick up most of the lost revenue from other firms and even startup operations as the thousands of former employees who were CoStar users move to other companies. Because our products help our customers cut costs and drive new revenues, we believe there will be continued strong demand for our services despite the slowing market.
We had a strong increase in subscribers during the quarter. The company added 592 net new paying subscribers in the third quarter of 2008.
CoStar now has a total of 92,199 paying subscribers which is an increase of 5,144 subscribers or 45.9% from the 87,055 subscribers that we had in the third quarter of 2007. The company executed agreements with 587 new subscribing firms during the third quarter in the United States.
Total new subscription sales during the third quarter remained relatively strong at 90% of the new subscription sales level of the same quarter a year ago. Quarter-over-quarter, total new subscription sales remained flat.
Annualized total new subscription sales per U.S. sales rep increased to 21,000 per month in the third quarter of 2008, an increase of 6% from the third quarter of 2007 when annualized total new subscription sales per rep was approximately 19,800 per month.
Annualized total new subscription sales per U.S. sales rep per month increased 2% for the third quarter of 2008 as compared to the second quarter.
The fact that we're seeing continued demand for information services in a down market, I believe, attests the value of our service even when conditions in commercial real estate markets are negative. Unfortunately, like most companies, we have seen an overall adverse impact on our net sales this past quarter.
The bleak economic news certainly worked against us and dampened our net quarterly revenue growth. Quarter-over-quarter net sequential revenue growth fell to 0.5%.
U.S. subscription contract bookings fell to 2.3 million for the quarter and the average new contract value decreased 7% quarter-over-quarter from 7,155 to 6,642.
Net sales growth has been adversely impacted by cancellations or reductions from struggling investment banks, lenders, or institutions similar to the ones we've all been reading negative news about lately. The rapid decline in the relative value of the pound and euro to the dollar has reduced our dollar reporting of international sales.
And finally, we have seen higher than normal levels of business failures and lower renewal rates amongst our newest clients. As you may expect, we saw a higher number of contract cancellations for the quarter among lenders and institutional investors.
The cancellations in this area accounted for slightly more than $1 million in contract value during the quarter. Firms that have or are likely to reduce or cancel their CoStar agreements include Lehman Brothers, Bear Stearns, Countrywide, Merrill Lynch, LaSalle Bank, Genwest Financial, Equity Office, Washington Mutual, AIG, Wachovia, Cohen Financial, Vertical Capital, and GreenPoint Mortgage.
Looking at these cancellations, it's very clear why they're no longer subscribing or have reduced their subscriptions. Some like LaSalle Bank and Countrywide, were acquired by others and many others were involved in mortgage lending or mortgage-backed securities.
For example, if you look at Vertical Capital's Web site, it explains they were founded in 2002 and are a leading investment manager in asset-backed securities and related credit markets. The ABS market sectors that the firm focuses on include residential mortgage-backed securities, CEOs, CLOs, and commercial mortgage-backed securities and other forms of securitized debt.
If you go to GreenPoint Mortgage's Web site, its homepage states, "Please note that effective October 5, GreenPoint Mortgage has ceased accepting new commercial loan applications." Fortunately, we have more than 16,000 other subscribing firms that are still strong clients, 92% of which are not lenders and 90% of whom are not institutional investors.
Although we did get dinged this past quarter by cancellations from financial firms, we believe that the government's efforts to shore up the global financial system including its passage of the $700 billion rescue plan will slow and eventually reverse the losses we've seen among this segment of our client base. At the same time, many healthy firms in the financial services sector are signing major new contracts for our information services.
These healthy firms need our unique products to reasonably manage and report on risk and evaluate new investments. This situation appears to be quite different from the previous economic downturn when the tech bubble burst and we saw most of the telecom sector simply disappear and never really come back.
Some of the firms in the financial sector that signed new CoStar subscription agreements during the quarter include Massachusetts Mutual Life Insurance Company, Bank of America, RVI, American Insurance Company, Intercontinental Real Estate Corporation, Urdang Capital Management, Forest Realty Funding, Long Acre Fund Management, Trenwith Group, and most interestingly, the U.S. Federal Reserve.
In the history of financial firms failing or cutting back we have discovered another area in which we see elevated cancellation rates. In a downturn where most companies are looking to reduce costs, the newest clients who have not yet fully integrated the value of our services into their organizations are more likely to cancel.
We now have a sharply bifurcated renewal rate. Firms have been clients for more than three years appear to have a renewal rate of approximately 95% while those who have been clients for less than three years have a renewal rate of approximately 70%.
Fortunately, most of our clients have been with us for more than three years. While this issue surprised us somewhat, we believe there is a relatively straightforward fix.
We changed our commission program approximately eight months ago to make a significant portion of our account executives incentives payable not on contract signing, but upon successfully getting most of the users at new customer site using our service regularly. This has been working well and we believe that this is embedding our products into our clients operations at a much faster pace and should show a significant benefit when the first contracts of the program roll in four months time.
We are taking a number of additional steps which we believe should increase our renewal rate in the new client segment in our overall renewal rate. Unfortunately, in a down market, some unscrupulous firms in commercial real estate try to reduce costs by stealing CoStar's services rather than paying for them.
CoStar Group continued to make substantial progress this past quarter in our ongoing efforts to protect our intellectual property and legitimate subscribers from those who seek to fraudulently gain access to our information or otherwise use our images or information illegally. As previously reported, we've established an internal anti-piracy group that uses extensive fraud detection technology to continually monitor CoStar's online information products and detect and prevent unauthorized access.
Year-to-date, CoStar's anti-piracy team has brought in approximately $700,000 in out of court settlements with firms engaged in password sharing. And they have signed new agreements, properly licensing previously unauthorized users to an aggregate value of over $600,000 in annualized revenue.
CoStar will continue to prosecute individuals and firms engaged in this unlawful activity. CoStar Showcase is the innovative new marketing service we launched in May that we believe provides the most effective platform available to the commercial real estate professionals to market their listings to the tens of thousands of business professionals who are searching the internet for commercial real estate each day.
At the end of September, 4.5 months after the product launch, 748 client sites had committed to $2.2 million in annual CoStar Showcase contracts. These 748 clients are paying for approximately 2,300 brokers to market their listings on Showcase.
This means that within 4.5 months of launch, we believe the broker share using CoStar Showcase is roughly equal to 10% of the broker share our leading competitor took more than a decade to sign. Most of these 748 firms subscribing to Showcase tried the product free of charge for several months before committing to pay for the services under a one-year or more contract.
We think this is the strongest indication that this is a superior product. Indeed, many brokers who now subscribe to Showcase have told us that it is proving itself to be an effective tool for generating quality leads, property tours, and deals.
William Montrose, the principal of AMR Commercial in Bethesda, Maryland said his company's CoStar Showcase subscription paid for itself in a matter of days after generating a lead that turned into a deal for a seemingly unleasable basement suite. Joe Alberts with Lincoln Property Company in Chicago credit the huge internet exposure their properties have on CoStar Showcase for helping them reach perspective tenants interested in small and medium size office space for lease and they received numerous leads that resulted in property tours.
Jim Menton with Remax Commercial Brokerage in Manhattan Beach, California said his firm recently sold a high profile retail parcel in Southern California through a lead generated by CoStar. Put simply, CoStar Showcase works, he said.
We believe this demonstration of acceptance over the first 4.5 months following the product launch is a testament to its overall effectiveness and shows that the service provides a superior alternative to other solutions available. Specifically, CoStar Showcase offers much higher quality content than competitive Web sites because CoStar does the work to collect the content on behalf of subscribers.
As a direct result of our proactive research process, CoStar has the most extensive photo library and commercial property information database in the U.S. Unlike many other Web sites, CoStar does not bombard and scare off potential leads with endless pop-ups and registration requirements.
We believe that both property marketers and searchers favor this frictionless environment. We've seen consistent month over month increases in the number of unique visitors to CoStar.com following the product launch, which we believe will ultimately yield stronger results for Showcase subscribers through more property views and leads generated.
Our search engine optimization efforts have been very successful this year and we are now able to drive more traffic to our Web site for only 60% of the cost compared to July of this year. To see a prime example of this yourself, next time you're in Google, type in the keywords "Commercial Real Estate".
These are the most popular key words in this industry. You'll see that CoStar now not only has the number one slot in the sponsor results area, but also one of the top slots in the free organic search results.
That means CoStar now has some of the best retail space on the internet. Last year, CoStar didn't even appear organically in the first couple of page results.
Quickly achieving these top positions in sponsored and organic searches are translating into increasingly large visitor audiences. Indeed, CoStar's Web site audience measurement service, Omniture, confirmed that CoStar.com has seen month over month increases in unique visitors this past quarter totaling more than 1.1 million.
Omniture is the premier Web site audience measurement system available and we believe provides the most accurate data on our Web site audience. Our main competitor in this marketing space made claims recently that they have the most highly trafficked Web site in the industry.
Yet to get these comparative audience metrics, they rely on the consumer based panel ComScore, a system that tends to favor Web sites with heavy consumer traffic due to the consumer focus composition of their panel. As a result of this consumer skewed composition panels such as ComScore will under represent Web sites that cater to a business audience such as CoStar.com.
Being that our marketing efforts are geared towards driving a qualified business audience to our subscribers listings, we feel strongly that these ComScore numbers are mostly irrelevant for a site like CoStar.com and unique service like Showcase. For all these reasons, we believe CoStar Showcase has the potential to be a significant success.
Essentially, this new service expands our company's focus more directly than ever into the marketing side of the commercial real estate business. For years now, our clients have thought of CoStar as being their research partner.
Now with Showcase, we've taken a major step, positioning CoStar as their marketing partner as well. And the timing couldn't have been any better.
We believe that Showcase is a product that is countercyclical and that it helps brokers to generate leads inexpensively and do so at a lower cost than other marketing alternatives. This is exactly the remedy brokers are looking for in a down market.
Showcase is also a very efficient and high margin product for us because it leverages our existing research operations and requires very little additional support or investment other than software development, marketing, and pay-per-click budget. Turning to the research side of our business, our research operations are performing very well.
Our research team provides the core data that is the source of our value and identity as a company. They continue to do an outstanding job in researching all the markets we cover and demonstrate their value by aggregating listings and confirming their accuracy in an extremely efficient and timely manner.
The total number of listings available through our service continues to grow, total research and verified commercial real estate listings in the CoStar's U.S. database grew 25% year-over-year from approximately 798,000 in the third quarter 2007 to approximately 996,000 in the third quarter 2008.
In total, between both our U.S. and international operations, the company currently has 1.1 million listings in our database and the total gross building area (inaudible) maintained by CoStar is now approximately 63 billion square feet in the U.S.
Finally, I want to update you on the all cash offer of $8.75 per share that CoStar previously made to acquire Reis Inc., the New York based commercial real estate information provider. As you may recall, when CoStar reiterated that offer on August 12th, the 13th, roughly, of 2008, Reis's stock had previously closed at $4.40 per share or so.
At nearly 100% premium to Reis's share price at the time, we believed our offer of $8.75 per share was both compelling and attractive. Frankly, we were shocked that Reis would reject our offer so hastily and refuse to engage what we felt were meaningful discussions about a possible business combination.
The CEO of Reis never returned my phone calls. Attorneys for Reis insisted that CoStar enter into a multi-year non-negotiable standstill agreement and secrecy agreement before any discussions occurred.
We believe that this agreement was overly restrictive and unreasonable and we did not sign it. One of the feelings – one of the reasons we felt it was unreasonable was the fact in 2005, when Reis solicited acquisition offers before going public, CoStar offered in writing to acquire Reis for $80 million or better.
We believe we never received any real consideration for our valid offer. CoStar was not invited by Reis to participate in those negotiations alongside of other bidders and we were surprised that our 2005 offer was never even mentioned in Reis's disclosure documents detailing the decision by Reis and its CEO to take the company public by merging the privately held Reis Commercial Real Estate Services business with his brother's publicly traded land development firm.
In August of 2008, we could not anticipate the unprecedented drop in the major stock indices in our own stock. Since August 2008, the NASDAQ index has fallen 32%, CBRE has fallen 59% and CoStar Group has fallen 45%.
If Reis had fallen from $4.44 per share in line with the average of these numbers, they'd be trading somewhere roughly at $2.40. If Reis was trading in line at $2.40 per share, our $8.75 offer would be a ridiculous 260% premium.
Given the drop in our share price, we feel that the offer would no longer be accretive or make any sense whatsoever. As it turns out, Lloyd may have done us a favor.
While we continue to believe the combination with Reis could offer meaningful benefits for both firms shareholders, given the dramatic change in the economic environment, there is no way CoStar would now consider an acquisition at $8.75 per share. Accordingly, we are now formally and completely withdrawing our previous offer.
Instead of pursuing an acquisition, we are now moving on and focusing on further developing our own competitive service in what we believe will be – which we believe will have a very strong advantage, given CoStar's superior data and market coverage. Before turning the call over to Brian Radecki, our Chief Financial Officer and giving my voice a little bit of a rest, let me reiterate that the company expects to continue to generate consistent earnings growth as we move through 2008, through 2009 and 2010.
We are very focused on our goal of doubling our EBITDA to achieve $100 million in annualized EBITDA run rate for the company by the end of 2010 and we expect to continue to strengthen our already strong balance sheet throughout this year, through 2009 and 2010. Brian?
Brian Radecki
Thanks, Andy. Don't worry, everybody.
I'm going to work with Andy more next quarter to get his script under 100 pages. But we'll give Andy a little bit of a break here.
During Q3, CoStar posted another strong quarter of earnings growth, margin expansion, and cash generation. As Andy mentioned earlier and stated in our press release, net income increased 104% in the third quarter of 2008 over the same period one year ago to $6.6 million or $0.34 per diluted share compared to $3.3 million or $0.17 per diluted share for the third quarter of 2007.
EBITDA for the third quarter of 2008 was $15.5 million, an increase of 95% compared to EBITDA of $8 million for the third quarter of 2007. The third quarter 2008 annualized EBITDA is now $62 million as it continues to climb each quarter.
Now I'm going to mostly focus on sequential results for the third quarter of 2008 compared to the second quarter and our outlook for the fourth quarter and full year 2008. Total revenues grew sequentially from $53.5 million in Q2 to $53.8 million in Q3 of 2008.
Our revenue growth in the third quarter was clearly moderated by global economic turbulence. In particular, the impact of unfavorable foreign currency exchange rates, a decline in non-subscription based revenue and slower revenue growth from subscription based services all contributed to the slower third quarter revenue growth.
We do not expect non-subscription based revenue, which is ad hoc revenue, which is mostly related to products facilitating the buying and selling of commercial buildings, to improve for several quarters given the market conditions. But, as you probably know, unlike other competitors in the space, non-subscription based revenue for CoStar accounts for less than 5% of the total revenues for the company.
More exact, subscription revenues accounted for 95.5% of total revenues in the third quarter. Our 12-month trailing customer renewal rate remains strong at 89.8% or as we stated in the press release, approximately 90%.
This subscription revenue is accounting for most of our total revenue and the majority of our subscribers on annual agreements, we consider our 12-month trailing customer renewal rate to be a good indicator of the strength of our business model. In addition, for the third quarter, our customer renewal rates for subscription based services remains solid at 88%.
All in all, we believe these are still very healthy numbers based on where we are today in the economy and clearly heads and tails better than most other public companies that I'm aware of. International operations contributed 11% of total revenues and international subscription revenues accounted for approximately 91% of this revenue during Q3.
Year-over-year, international revenues modestly decreased in U.S. dollars 1.8% mainly due to the impact of foreign currency exchange rates while our international subscription revenues increased in British pounds, 5.6% year-over-year.
Including the impact of unfavorable exchange rates, international revenues decreased approximately $300,000 from $6 million to $5.7 million in Q3 of 2008. As Andy stated earlier after announcing our Q2 2007 goal of 30% EBITDA margin in the U.S.
by the end of this year, we have exceeded that goal by 10% three months ahead of schedule. Now, we are focused on working towards achieving the goal we set out last quarter $100 million in annualized EBITDA run rate companywide by the end of 2010.
We believe this goal is achievable based on our strong subscription based business model with a relatively fixed or slightly declining cost structure. We also believe this goal is still achievable in the current economic and commercial real estate environments.
Furthermore, we continue to expect that we will be adding new subscribers, renewing current subscribers, and growing our earnings throughout this environment. We believe our third quarter results demonstrate our ability to manage our cost structure carefully during these difficult times.
Now, let me discuss gross margin which increased by $1 million from $35.1 million in Q2 of '08 to $36.1 million in Q3 of 2008, an approximately $300,000 increase in revenues and an approximately $700,000 decrease in cost of revenues. About half the decrease in cost of revenues directly relate to permanent operational and efficiency gains that we've obtained by eliminating or reducing redundant costs.
The remainder of the decrease in cost of revenues relates to variable timing differences for new hires, headcount and other related costs. Overall, gross margin percentage expanded to 67.2% in Q3 from 65.7% in Q2 of 2008.
This increase in both gross margin dollars and percentage demonstrates the strength of our core business model. Now that we have completed the previous step ups in cost structure, we continue to expect the majority of the revenue to drop directly to the gross margin line, just as we have seen for many, many quarters in a row.
Overall, operating expenses decreased $1.7 million during the quarter from $26.6 million in Q2 to $24.9 million in Q3 of 2008. The decrease principally resulted from a decline in marketing expenditures in the quarter which are seasonally higher in the second quarter.
To remind everybody, in Q2, CoStar participated in the ICSC Trade Show and we had additional marketing costs associated with the launch of CoStar Showcase which Andy talked about in detail. G&A expenses remained flat from Q3 – from Q2.
One thing to note, legal expenses for the third quarter were approximately $1.1 million, slightly higher than last quarter, as we expected. We consider these legal costs like nearly all public companies to be normal recurring costs which we anticipate will continue for the foreseeable future.
As you are aware, we are currently involved in multiple lawsuits and could be involved in a few more which we have factored into our earnings guidance. As always, we follow GAAP-based accounting and report all of our legal expenses in our income statement EBITDA number and in our earnings outlook for the year.
Throughout the remainder of 2008, we expect the company's overall operating expenses to remain relatively fixed or to decline slightly. EBITDA for the third quarter was $15.5 million, an increase of $2.7 million compared to EBITDA of $12.8 million in the second quarter of 2008.
Reconciliation of EBITDA and all non-GAAP financial measures discussed on this call to GAAP based results is shown in detail in our press release issued yesterday. The press release is also available on our Web site, www.CoStar.com.
Turning to the balance sheet, we ended the quarter with approximately $213.2 million in cash, cash equivalents, short-term and long-term investments, an increase of $14.9 million since June 30th 2008 and as Andy mentioned, we have no long-term debt. Our third quarter capital expenditures were approximately $800,000.
Now I'll conclude my remarks with our outlook for the fourth quarter of 2008 and the year. As always, our guidance takes into account recent growth rates and our results may be impacted by the uncertainties around exchange rate fluctuations as well as changes in the economic conditions.
We have attempted to reflect economic weakness in our guidance, but recognize that we are in a period of flux and cannot predict the direction of the various market factors. The key strength of our subscription-based business model is that it provides good earnings visibility.
We expect to grow our earnings from U.S. operations through this year by leveraging the relatively fixed cost structure and managing it lower when necessary.
Moreover, we believe there are significant opportunity for additional high margin revenue growth following the investments we've made in the past several years to expand our coverage in the U.S. and U.K.
and with additional services like CoStar Showcase. Based on the strong results from the past three quarters and continued execution of our plan, we are raising the outlook for fully diluted net income per share for 2008 to approximately $1.22 to $1.24 per share.
In addition, we now expect fully diluted net income per share for the fourth quarter 2008 of approximately $0.34 to $0.36. Let me remind everybody, our updated annual earnings guidance is 20% higher than we forecasted just eight months ago.
All this while operating and I quote "in the worst economic environment seen since the great depression" as my 96-year-old grandmother would say. This is clearly the 100-year flood a few years early.
As indicated in our press release, we expect fourth quarter revenue in the range of $53.8 million to $54.3 million. Given the unprecedented current economic environment including significant foreign currency exchange rate fluctuations negatively effecting international revenue, our actual fourth quarter revenue results may differ from our guidance.
For the full year 2008, we expect approximately $5 million to $6 million in pre-tax, non-cash equity compensation charges related to the vesting of stock options and restrictive stock grants. As we continue to invest internationally, the mechanics of our effective tax rate calculation continued to be effected by the amount of income or loss in the UK where we do not get an equivalent tax expense or benefit to offset U.S.
corporate tax. This results in an overall blended effective rate which may increase or decrease from our current rate.
We anticipate our overall effective rate to be approximately 45% which we've been about for the year for 2008. In conclusion, the entire management team remains focused and fully committed to achieving our new earnings goal of $100 million in annualized EBITDA companywide by the end of 2010.
We fully expect to manage our business through the current environment and to capitalize on our stable subscription based business model to achieve this goal. Q3 results demonstrate that we are committed to delivering on our earnings goals.
As we have stated many times, we believe we have a strong business model. 95% subscription business, high renewal rates, unique, proactively verified proprietary database, high barriers to entry, market leader, strong balance sheet with no debt, high cash flow type business.
I have to say this is a nice business model to be in, especially in the unprecedented economic and commercial real estate environment we are in today. As great as it is, we've always said we're not completely immune to what's going on around us.
But as you can see from our earnings results, we are certainly prepared for it. We continue to look forward to reporting our progress to you.
And with that, I ask the operator to open the call for questions.
Operator
(Operator instructions) And our first question will come from John Neff from William Blair. Please go ahead.
John Neff – William Blair
Hi, guys. Thank you.
Congratulations on the quarter.
Andrew Florance
Thank you.
John Neff – William Blair
Couple questions for you. How do we think of the decline in cost structure?
Do we think of that as cuts that are necessary to deliver on the margin targets? Or do we think of it as a natural decline following a period of significant investment?
Or do we think of it as both?
Andrew Florance
If you were to – I would characterize the cuts that have occurred so far as being – they would not be characterized as layoffs in response to any environment or a target margin. It's more just basic business management given a bunch of factors like integrating together all these different companies we acquired in the UK into one much more efficient, streamlined company.
It is things like backing all the friction out of the process that occurs after we expanded into so many U.S. markets.
As soon as you take the foot off the accelerator in adding new markets as we've done here in the last five quarters, historically, every time we do that, our expenses drop off and it's frustrating because I can't get, Brian, when we're actually opening those new markets up and I know that we're ending a period of opening bunch of new markets. Brian will never in advance admit that costs will decline when we stop opening new markets.
They always do. But now he has to admit that actually costs do decline after we stop opening up new geography.
The company – if the company needed to, we have the ability to additionally reduce our cost structure. But we're running – right now we're making the margin targets we're looking for ahead of schedule and we will have room to continue to make those margin targets and enhance them.
So we're taking advantage of the fact that we've got a strong balance sheet. The marketplace is very volatile.
It's a little more challenging. But we feel we're comfortable where we are.
Brian Radecki
John, just to add a little color to that. As we completed the step up in cost structure in Q2, right around when I was made CFO, we reduced total costs 10% – 11% somewhere in that range or so.
And I think as Andy said, we haven't had to make any major adjustments to that or sudden cost cuts or anything that wouldn't allow us to continue to run the business for long-term growth. We're still releasing new products like Showcase, delivering higher quality information.
You see some of the efficiencies that we've gotten were from software releases, were from consolidating office space, getting paid $7.6 million for new space in the UK, reducing, consolidating space here in Bethesda and saving $1.2 million. So we're able to continue to go through that and while those types of cost savings and efficiencies, you can't really budget and forecast because you have to go out and find them.
I would expect that we could continue over the next few years to see something in that same range, similar spread out as we just continue to go through and look for more efficiencies, better ways to do things. As you know, if you gain just a few percentage points of efficiency gains on approximately 900 researchers, there is some significant cost savings.
When you're not hiring and training people in bulk the way we were for a few years, there is a lot of cost savings on training, travel costs of bringing people here to Bethesda and those types of things so.
Andrew Florance
And our turnover rate in research say in our San Diego operations is now probably half of the level it was just a couple years ago. Sales force turnover is actually fairly low.
So that all basically saves you a lot of money.
Brian Radecki
Does that answer your question, John?
John Neff – William Blair
Yes. That's helpful.
Brian Radecki
I'll be disappointed if you don't have a follow-up question.
John Neff – William Blair
Yes. I got a few for you.
Just thinking about what sort of minimum sort of sequential growth is required to kind of continue to unlock the operating leverage, is there a minimal growth rate below which you can't make progress towards – positive progress towards that $100 million annualized EBITDA goal?
Andrew Florance
I think that the last four months, five months or so have been very unusual. I never would have predicted that Wachovia, AIG, Countrywide, Bear Stearns, Merrill Lynch, WaMu, Lehman Brothers, et cetera, et cetera would occur.
I think that the bail out package has probably stabilized that area. And hopefully, the VIC settles down a little bit here and creates a more favorable operating environment.
But I think that in this pretty bad environment, we've been able to keep things positive. The exchange rate, obviously, is a problem as it goes the wrong way.
It's great for when you're traveling on business to London. It's not good for reporting earnings in US dollars.
But as long as we're flat, we'll continue to show earnings leverage.
Brian Radecki
And John, to follow-up on that, couple points. We talked about the subscription based business in the U.S.
being at 1.2% or something like that. I would expect to continue to see that to be some place in that range now.
I think, again, I can't predict what's going to happen to exchange rates in Q4. I look at the exchange rates.
I got back from a once in a life time trip, taking my entire family to Italy. I know I talked about this with some investors, which I saved up for and spent a lot of money on.
Literally, within a day or so after I got back at the end of July, the exchange rate dropped from about two x to about 1.75 on September 11th in one month. But then it popped back up within a week to 1.86 and now, over the past month, it dropped to where the same place it was when we acquired our focus operations nearly six years ago.
So just in less than a couple months, we've had some severe volatility up and down with exchange rates wiping out what we've seen as a pretty steady increasing gain of six years going up and down. So, pretty hard to forecast.
But I would think that over the next few quarters, those things will settle down, you'll be back into some more normalized ranges.
John Neff – William Blair
Okay. Another revenue question for you.
Just trying to get a sense of how the slow down is sort of manifesting across different sort of vintages in markets. In other words, is there a – are you seeing converging growth rates between old and new markets or are old markets slowing more rapidly than the new.
Just trying to get a sense of how homogenous or unhomogeneous?
Andrew Florance
I think the thing, it's not so much about the market. It's more about the age of the customer – I mean the age of the customer relationship.
So, again, it goes back to this thing where if I just subscribe to CoStar Group for the – some of the customers who – there's a higher likelihood that if someone just subscribed to CoStar Group in January of this year and yet deeply integrated their operations, they're more likely to cancel than someone who's been a customer for more than three years. So it's more about the customer, not about the markets.
The markets are acting fairly similar and this is a good problem because this is addressable and we've put four or five things in place that we think will actually have a big impact and should, outside of thing, unusual things like Bear Stearns and Lehman Brothers, should enable us to get the renewal rates back up as those changes take effect. So the markets are acting fairly similarly.
It's more about new customers versus middle aged or older customers.
John Neff – William Blair
Helpful. And last question and I can get back in queue.
Reaction to Xceligent's announcement today of recapturing the Magnificent Seven in Milwaukee and they're taking, as they say in the press release, responsibility for updating their market research databases? Is there sort of a renewed threat out of Xceligent?
Andrew Florance
We've gotten to the place where we're digging for news and we're talking about someone winning a $10,000 contract. So over the course of a number of years, Xceligent and CoStar competed in a number of secondary markets.
Things ebb and flow. I don't think anyone would say that Xceligent has a product that's equal to or even close to as high quality as a product as CoStar Group.
I know that I've heard that Xceligent has dropped their prices dramatically, which given the fact that my impression has been that their revenue growth has been flat or declining for quite some time and that there, my impression is that they don't make money. I would not want to be – I would much rather be in CoStar's seat going into this particular market environment where CoStar Group's got a strong balance sheet, is profitable, strong, and a top-notch product.
Because ultimately, cutting your costs when you're not making money to try to win business is probably not a survival tactic in an environment like this. So, I think this actually is probably good news because in a down market like this, sometimes you get some consolidation or you get market share gain.
And it would not be the right thing to do to slash your price dramatically to try to win business right now. Does that answer your question?
John Neff – William Blair
Yes, it does. Thank you so much.
Brian Radecki
Thanks, John.
Operator
Thank you. Our next question is from Jon Maietta from Needham and Company.
Please go ahead.
Jon Maietta – Needham and Company
Thank you.
Andrew Florance
Hi, Jon.
Jon Maietta – Needham and Company
Hi, Andy. How are you?
Hi, Brian.
Andrew Florance
I'm suffering from having two toddlers at home, bring them home from preschool.
Jon Maietta – Needham and Company
Andy, there are certain products within the portfolio that may lend themselves particularly well for this environment. I know you have an analytics product.
I'm just wondering if you could speak to that?
Andrew Florance
Sure. So obviously, we had a shock to the system with all the activity from the summer with the big financials, but we're gearing up both in the United Kingdom and the United States.
We're making it top priority to gear up our analytic products, because we think there's going to be a lot of demand in that area. So, for years, folks have used our products to originate mortgages or to produce the prerequisite half an inch of market data at the back of any sort of loan commitment documents for an asset.
I think very few people have actually read what was in those market reports that CoStar produces at the back of those loan commitment, investment commitment documents. So these market conditions, based on what we saw back in the '90s when things turned south on the asset side, people become a lot more interested in what's actually happening in the market conditions comparable sales cap rates, supply-demand, how new construction might impact leasing, what competitors are doing with rental rates.
So we're going to release a whole series of upgrades to our analytic products that will not cost a lot of money because basically using the development and resources we currently have, the data resources we currently have, but should appeal to a market that's becoming dramatically more risk adverse. And we're basically a unique service that eliminates what's happening in that risk.
So we're bullish about it, working hard in that whole analytic zone right now.
Jon Maietta – Needham and Company
Got it. Okay.
And then I'm just wondering if you could talk a little bit about the deal with the Federal Reserve? How are they using the products?
Maybe what group within the Fed is using the solution?
Andrew Florance
Under advice of counsel I cannot comment.
Jon Maietta – Needham and Company
Okay. Brian, just a couple of items on the balance sheet statement of cash flow.
I may have missed it. Cash from operations in the quarter?
Brian Radecki
I think for the nine months ended it's about – cash from operations is about $30 million.
Jon Maietta – Needham and Company
Okay. And stock comp in the quarter, if you have that?
Brian Radecki
Stock comp in the quarter was about – I think it was like $1.2 million, $1.3 million. Something like that.
Jon Maietta – Needham and Company
Okay. Got it.
And then just last question. On the OpEx line, are there certain operating expenses where you have more leverage than others?
Or is it just kind of – should we think about it more as the fixed – as you said, kind of all lines being fixed with maybe a slight bend to reducing over time?
Brian Radecki
Yes. I think obviously we talk a little bit about – there was a big decrease in selling and marketing, but I think that was clearly stated.
Everybody knew about ICSC and the release of Showcase. I think kind of where you're at right now is a pretty good cost base and obviously we'll give guidance as to if something's happening in one of those lines.
But I think right now, you're on a pretty good point trajectory for each of those.
Jon Maietta – Needham and Company
Okay. Thanks a lot.
Andrew Florance
Great. Thanks, Jon.
Brian Radecki
Thanks, Jon.
Operator
Thank you. Our next question is from Brett Huff from Stephens Inc.
Please go ahead.
Brian Radecki
Good morning, Brett.
Brett Huff – Stephens Inc.
Good morning. Congrats on a nice quarter.
Andrew Florance
Thank you, sir.
Brett Huff – Stephens Inc.
Just a couple quick questions. I wanted to make sure that – you talked a little bit about behavior of existing clients.
Brian Radecki
Yes.
Brett Huff – Stephens Inc.
I wondered how are those conversations going? You guys are a big cost for those guys that obviously you're still, as you say, at some level you're a cost reduction or a way to save for them.
But at the same time, as you say, they're obviously looking for ways to sort of clamp down. When you have those discussions, how do those usually go?
I know at that level you're as much a partnership as anything. So I'm just curious.
Andrew Florance
There is – it's probably can be described, you have to segment it out to multiple, different discussions. Unfortunately, for the one man shop that just set out last year to go into business and their timing was pretty poor, the conversation is sort of one way.
They basically default. For the company that is a midsize firm that's had dramatically bad impact (inaudible) fortune like say, they're based in Southern California or Southern Florida.
They may have cut their staff in half. And we'll work with those folks and try to be reasonable to help them through the market knowing that we'd like to have a long-term relationship with them as they recovered.
That is probably not the predominant kind of conversation that's occurring. At the mid and upper level client, things are actually very solid.
We hear little to no dialogue where people are questioning us to reduce our prices. No one's talking about that with us in the mid to upper level customer.
Just because they may engage in conversation, but we're like one-tenth of 1% of their cost structure. And in fact, without disclosing names, there's a really good side to this whole situation which is some of the bigger companies, the bigger, stronger companies who have been either maintaining internal research operations that are duplicative with CoStar Group or maintaining expensive internal research operations instead of CoStar Group.
Some of those companies are now actually eliminating those internal research operations and buying more from CoStar Group. So one of our biggest customers who is taking significant steps to reduce their internal cost structure is at the same time increasing the amount of products and services they're buying from us.
So we are a cost saving product at the end of the day for most firms and market conditions like this create an environment where people seek those cost saving products like CoStar Group. So this whole bifurcation we've seen recently in our renewal rate, I'm amazed.
When you look at customers in this environment who have been customers for more than three years, the fact their renewal rate is 95% is really amazing to me. That's in a context of folks like AIG disappearing for us or Bear Stearns disappearing for us.
So the conversations sort of range the spectrum. I hope that answers your question.
Brett Huff – Stephens Inc.
Yes. That's really helpful.
Brian Radecki
Big guys aren't saying to cut our costs because they know that we have people that we've got to pay and we've got to do the job for them. They don't want us to cut our costs too far.
Brett Huff – Stephens Inc.
Right. And sort of another question looking into '09.
I know you guys aren't giving guidance, but I'm just trying to think about the different components of revenue growth and I know it'll probably be tougher in '09 than in the past. But I think about things like your CPI price increases that usually happen.
I think about what Showcase could contribute. I think about cross sales and things like that.
Can you just talk a little bit about how you think about the components of growth in '09 on the top line?
Andrew Florance
We think that we can move the ball forward with Showcase and continue to pick up some market shares. We effectively communicate to the customer base the relative advantages of our product through every means.
We think that there's continued cross selling activity. We think there will be market share gains from firms who are getting rid of internal research.
We think that there will be institutional lending and government agencies who will buy more of our product because they're trying to understand what's going on with these mortgages. We are not going to rely heavily on price increases right now.
We think that in the interest of good long-term relationships with our customers, we don't want to hit them with price increases right now. So we're laying low on the price increase side.
Basically, CPI increases that sort of stuff. So, assuming things stabilize somewhat over the last several months, it should be a pretty solid year.
Do you want to add anything to that, Brian?
Brian Radecki
No. I think you got it.
Brett Huff – Stephens Inc.
That's helpful. And then just sort of one more as we think about this, the analytic stuff that you guys were talking about, is this kind of expense or incremental expense going to be similar to Showcase in the sense that you're just going to re-task developers?
Or is it the kind of thing that would be complex enough that you'll need to hire some specific expertise to get the real value that you think will sell to customers?
Andrew Florance
We believe we already have most of that expertise in-house. And we believe it will be less expensive than Showcase.
So I think it will probably cost a fraction of what Showcase cost, and Showcase cost a fraction of what opening new markets cost. So we think it'll be downright dirt cheap.
And the great thing about it is it's not like that kind of product is something that someone else could replicate. We're the only folks around with the largest research operations in the world.
Brett Huff – Stephens Inc.
And one last one on expenses. Brian, you mentioned, I think what you said was, you all have lowered costs by something like 10% over the last year or so and you think you can do that again sort of over time over the next, it sounded like three-ish type years.
It sounds like it's not so much staff as it is just efficiencies, sort of here and there, taken bit by bit that add up to a larger whole. Can you just give us an example?
You talked a little bit about that. I just want to make sure I understand the kinds of things that you're talking about.
Brian Radecki
Sure. I think it's a combination of the two.
So, as I said, we had more trainers, when you had hundreds of people going through training sessions and you're ramping up headcount, you had more trainers, more recruiters, you were placing more ads in newspapers. For the sales group, you were flying them here for a month of onsite training and then bringing them back for retraining and those types of things.
So I think it's a whole combination of maybe there is some less headcount if you don't need as many trainers or recruiters and those types of things. You have savings from lower turnover.
I think when you hire in bulk you typically have higher turnover. We've seen lower turnover this year than last year.
And I would expect that trend to continue going forward into next year. And then it does have things that have nothing to do with headcount which is like we talked about, the London lease where we had multiple leases out there and when you close something like that, you also gain efficiencies on communication costs and insurance and those types of things.
So I think it's a combination of the two and I think it's a thing that we can continue to look for and you'll continue to see efficiencies over the next few years without having any impact at all on the quality of the data or the projects that we're able to put out with new software like Showcase or focusing on analytics.
Andrew Florance
Brett, Brian's volunteering to take a pay cut for '09.
Brian Radecki
Right, after Andy.
Brett Huff – Stephens Inc.
Thanks. I appreciate your time.
That's all I had.
Brian Radecki
Thanks, Brett.
Operator
Thank you. Our next question is from Jim Wilson from JMP Securities.
Please go ahead.
Jim Wilson – JMP Securities
Thanks. Good morning, guys.
Brian Radecki
Good morning, Jim. How are you doing?
Jim Wilson – JMP Securities
Doing fine. Could you – I missed a little bit of the call because I have a few calls going on here at once.
But could you give a little color? You talked a lot about your biggest clients and the stability and obviously pricing issues, but how many or what percentage of your contracts or some form of color on how much is fixed in dollar pricing structure versus how much actually primarily (inaudible) per seat kind of revenue model for you?
Brian Radecki
I would say that 99% – I would say 96%, 97% of our subscription revenue is fixed. It's like – it's initially priced at per seat, but during the term of these contracts, it's fixed.
On contract renewal, there is some negotiation if they've downsized dramatically. But generally, our price list over the last ten years has been increasing at a pace much greater than the price that the average customer sees in escalations.
So the price schedule's climbing much faster than the existing customers' price is climbing each year. As a result, if someone has reduced their staff by 20% at the time the contract rolls, they're still at that 20% reduction receiving a 30% discount off of our list price typically.
So it's not a big variable for us. The bigger variable is like Lehman Brothers, Bear Stearns kind of situation.
Not so much headcount reductions.
Jim Wilson – JMP Securities
Okay. And have you had any big – these are financial services customers, really the AIG, Bear, or Lehman that might've left.
Anything material what thing of any in the actual real estate industry itself or the brokerage industry?
Brian Radecki
It's more of the real small guys. The big guys, obviously some very big names in the industry that you and I both know we're talking about.
They've had some weak earnings or a sharp drop in their stock price. But people forget that over the decades, these businesses don't go anywhere.
They go public. They go private.
They go public again. They go private again.
They still have thousands of brokers that spend hours each day inside of our terminals. So whether or not those brokers are at Company A or Company B, they still use our products.
And if their income goes down 30%, they still use our products. And when they're making no money, they still use our products.
When they're in bankruptcy, they still use our products. It's been pretty stable inside the brokerages.
Folks have been commercial brokers for 25 years of their life and they're in the top 10% of the industry don't stop being brokers because of a downturn. And remember, the brokers often make good money in downturns because they move all the tenants out of the B buildings into the A buildings that are sitting vacant and they move all the tenants out of C buildings into the B buildings that are then standing vacant and they play musical chairs with the industry until the next recovery comes.
So we're not seeing anything that makes us nervous inside the brokerage side of things.
Jim Wilson – JMP Securities
Okay. And then just finally, I see growth being modest in the quarter, but was it predominantly – I'm assuming that's the answer, predominantly existing customers adding new services?
Or was there much in the way of new customer acquisition?
Andrew Florance
There was a lot of new customer acquisition. 590 some I think.
570 some new firms came on board. So the total sales volume has not changed dramatically over, it's pretty much in line with what we've seen last five years.
The only change is a big change in exchange rates, new customer, brand new customers cutting costs, or the meltdown of Wall Street.
Jim Wilson – JMP Securities
Okay. All right.
That makes sense. Thanks.
Brian Radecki
Thanks, Jim.
Operator
Thank you. Ladies and gentlemen, this conference will be made available for replay after 1:15 today through November 13th at midnight.
You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 964778. Again, the number is 1-800-475-6701 and the access code is 964778.
Mr. Florance, please go ahead with any closing remarks.
Andrew Florance
I want to thank you, guys, all again for joining us. You can see we've switched vendors on the conference call service, another cost cutting move.
But we look forward to updating you on our results next quarter. Thank you for joining us and I apologize for having a bad voice here today.
Good-bye.
Operator
That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference.
You may now disconnect.