Jul 30, 2017
Executives
Richard Simonelli - VP of IR Andy Florance - CEO and Founder Scott Wheeler - CFO John Coleman - General Counsel
Analysts
Brett Huff - Stephens Bill Warmington - Wells Fargo Brandon Dobell - William Blair Jackson Ader - JPMorgan Peter Christiansen - Citigroup Andrew Jeffrey - SunTrust Pat Walravens - JMP Securities Sameet Sinha - B. Riley
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the CoStar Group Second Quarter 2017 Earnings Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Richard Simonelli.
Please go ahead.
Richard Simonelli
Thanks, operator. It's wonderful to be here.
Welcome to CoStar Group's Second Quarter 2017 Earnings Call. We hope you enjoy the call.
Before I turn the mic over to Andy Florance, CoStar's CEO and Founder; and Scott Wheeler, our CFO, I have some very interesting and important items for you to consider. Certain portions of our discussion today may contain forward-looking statements, which involve many risks and uncertainties that could cause actual results to differ materially from such statements.
Important factors that could cause actual results to differ, but are not limited to, those stated in our July 2016 -- or 26, 2017, press release, on our second quarter results and at CoStar's filings with the SEC, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q 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 whether as a result of new information, future events or otherwise.
Reconciliation to the most directly comparable GAAP measure to all of the non-GAAP financial measures discussed on this call, including but not limited to, non-GAAP net income, EBITDA, adjusted EBITDA and forward-looking non-GAAP guidance are shown in detail on our press release issued yesterday, which is also available on our website located at costargroup.com. As a reminder, today's conference call is also being broadcast live and in color on our website where you can also find CoStar's Investor Relations page.
Please refer to yesterday's press release on how to access the replay of this call. Remember, one question, make it a good one and you can always re-queue if we have time at the end.
I'll now turn the call over to Andy Florance. Andy?
Andy Florance
Thank you, Rich. Thank you for joining us today on our second quarter earnings call.
We achieved an excellent first half of 2017 as our investments into the business, along with tremendous execution on all levels by the CoStar team, resulted in remarkable increases in sales and revenue growth. We have excellent momentum heading into the second half of this year.
We delivered strong performances across the board as revenue in the second quarter of 2017 accelerated to $237 million, which is an increase of 15% year-over-year. For the second quarter in a row, we generated our best sales quarter in our history.
Company-wide net bookings were $37 million, a 39% increase compared to the second quarter of 2016. CoStar Suite sales bookings were the strongest they've ever been, with a 23% year-over-year increase.
Overall, CoStar Suite turned in solid revenue during Q2, with a growth rate of 13% year-over-year. Revenue growth in commercial property and land rose 17% year-over-year.
Multifamily revenue was up 24% over the second quarter of last year. We are particularly pleased with that strong growth in the second quarter with mid-20% growth rate of Apartments.com.
Apartments.com sales climbed for the third consecutive quarter as we reached our second best multifamily sales quarter. We continue to reap the rewards of our investments in our advertising campaign and strong presence at last month's National Apartment Association Conference in Atlanta.
We once again set company records for both booth visits, leads captured, demos delivered and client appointments. More importantly, millions of dollars of net new sales came from this important annual event.
We had an excellent quarter in commercial property and land as the sales team turned in second-best quarter of sales. We have a robust sales of LoopNet Premium Lister, tiered advertising sales to owners and excellent sales numbers from our land and business-for-sale teams.
We've had a strong start to 2017 in sales as we've achieved $71 million of net bookings in the first half of the year, up 26% from the same year-to-date period in the year prior. We're clearly benefiting from the impact of our investment into our larger sales organization, which increased in size by 40% compared to the beginning of last year.
The sales management team, very well led by Max Wellington [ph] is experienced and in place and helping this larger sales force to mature. We believe that maximum productivity levels are still ahead of us and that we have a huge runway of more than 100,000 clients to sell to.
Forbes recently recognized our strong performance in growing revenue by naming CoStar Group to the Forbes Fast Tech 25 list. The list recognizes technology companies with the highest 3-year sales averages.
The 2017 list has CoStar placed at number 16 with 29% average sales growth for the past three years. Salespeople sell best when they have excellent services to sell.
We continue to deliver new services, tools and top-flight marketing websites. This includes services like CoStar Analytics, Lease/Sale Analysis and tools like the mobile app for iPhone and our iPad mobile app, CoStar Go.
Great new marketplace sites like Apartamentos.com and tiered advertising on loopnet.com are also having a positive impact. We continue to look for ways to innovate and build upon our tremendous platform.
As we've spoken about on our previous earning calls, we're in the process of completing an overall CoStar Suite user interface. This will include a groundbreaking new listing management tool that will allow our clients to both -- to more easily manage their listings for both CoStar and LoopNet from one simple-to-use interface.
We believe this will result in faster real-time data updates and overall, better data quality. This will free up our researchers' time to focus on other valuable commercial real estate research subjects, ultimately delivering even more value to our subscribers.
Innovation drives growth. We are dedicated to driving the technology revolution of commercial real estate that we began in the 1990s.
And more recently, the multifamily industry by delivering world-class services and solutions for our clients and the more than 37 million unique visitors that came to our family of websites last month. As a proof point, I'm very pleased that in 2017, for the fourth year in a row, CoStar has been named in the Forbes' world's most innovative growth companies' list.
Our marketing efforts in multifamily have raised consumer awareness and driven huge numbers of unique visits and total visits. Once again, we remained the clear number 1 Apartment Internet listing service based on a combination of traffic, SEM traffic, SEO, total advertised communities, leads delivered, brand recognition, leases signed and revenue.
Our aggressive and effective advertising campaign continues. Our new consumer advertising campaign hit its peak media weight in the second quarter of '17.
We launched a total of 10 new spots and have already run 8,400 commercials this year, reaching 90% of U.S. households and delivering 1 billion impressions.
Our goal is to reach renters at home, on the go, on mobile devices, on their computers and through social media. We also ran significant ad campaigns for Apartamentos.com and Westside rentals this year.
Overall, our multifamily advertising campaign has been a major success and is leading to break-away results. According to Hitwise, in June '17, when compared to Apartment Guide, rent.com and ForRent, the Apartments.com network was number 1 in visits in 96% of the top 210 U.S.
local markets. This includes number 1 in markets such as New York, Los Angeles, Chicago, Philadelphia, Houston, San Francisco and Washington, D.C.
According to comScore, Apartments.com has been number 1 in visits for 28 months and number 1 in unique visitors for two years. In the second quarter of '17, visits and unique visitor traffic reached all-time high for Apartments as we continued to expand our lead over the competition.
Adding to that success, we're pulling away from the competition according to comScore. Apartments.com unique visitors increased in each month in the second quarter of 2017 and for June, are up 32% year-over-year.
Apartment Guide and rent.com unique visitors declined in each month in the second quarter and are down 12% and 17% -- 7%, respectively, year-over-year in June. We now have 25% more unique visitors than Apartment Guide and 185% more unique visitors in rent.com.
In visits, our advantage is even more pronounced as our network averaged 42 million visits per month in the second quarter. In June, Apartments.com had 22 million more visits than Apartment Guide and 24 million more visits than rent.com.
Apartments.com visits were up 29% year-over-year in June, while Apartment Guide was down an astonishing 37% and rent.com visits were down 11% for the same period. Interestingly, ForRent.com has moved ahead of both Apartment Guide and rent.com in visits in June of 2017.
ForRent's progress is impressive. Clearly, our investments in the multifamily space over the past 2.5 years have transformed Apartments.com into a very strong business with fantastic traffic and consumer engagement, but even more impressive for our paying clients is our ability to drive quality leads that result in signed leases.
That's what property managers are ultimately paying for. For June, our leads in Apartments.com are up 49% year-over-year.
On-Site and LeaseHawk are two third-party providers that provide information on leads in the apartment industry. They looked at 3.7 million leads in the first 6 months of '17.
LeaseHawk found that Apartments.com generate more leads than our top three competitors combined. In that same period, On-Site showed Apartments.com generate not only more leads but more importantly, more leases than our top three competitors combined.
Also, On-Site show that Apartments.com is the most efficient lead source. Their data show that it took Apartment Guide 17 leads on average to generate one lease.
It took ForRent 16 leads to generate one lease. It took Zillow 15 leads to generate one lease.
But Apartments was, by far, the winner requiring only 9 leads to generate one lease. Since Apartments.com needs about half as many leads to result in a lease compared to RentPath and ForRent, it follows that our clients can save a lot of time, money and hassle by using Apartments.com.
So we're delivering more leases and at a lower cost leasing process. During the first half of '17, we've delivered twice as many leases as Apartment Guide, 5x more leases than ForRent and 5x more leases than Zillow.
Apartments.com has taken a completely different approach than our competitors have. We focus on generating informed inquiries from legitimately interested potential renters while other companies frankly design their software to generate the most leads possible as their primary scorecard.
As a result of this lead spam mentality of our competitors, many apartment leasing offices have to wade through and process thousands of unnecessary, unqualified, useless leads. That costs them both real money and significant opportunity costs.
Our secret shoppers contact apartment leasing officers millions of times each year. The typical apartment community, we call, only answers its leasing office phone about 30% of time.
The largest property management companies don't do much better, only answering the phone about 40% of the time. Obviously, they're a little overwhelmed and they're missing many potentially highly qualified renters when they do not answer the phone.
In addition, they're creating a negative customer experience, which, I think, prevents them from building a positive brand image. I think the spam mentality of many of our competitors is directly responsible for this problem.
Our clients are beginning to give us credit for driving the most efficient leasing process. We think that over the course of the next few years, we can make the apartment leasing process even more efficient for both the renters and the landlords.
Renters have reported that the apartment hunting process is stressful. One of their very real concerns is that once they give notice to move out of their existing apartment, they must find a new apartment quickly.
And if their credit's not perfect or their income is not high enough, there is no guarantee that they will qualify for their next apartment. Two things happen to renters who are rejected at one or more apartments they apply to.
First, they typically lose more than $50 and valuable time at each community they unsuccessfully apply to, depleting their limited financial resources when they would need them most. Secondly, when they're rejected, they tend to panic a little bit and dramatically accelerate the number of inquiries they put out there.
This means that poorly qualified renters tend to generate many more leads than do highly qualified renters. This frustrates leasing officers and drives their costs up.
Neither renter nor landlord likes this situation. It does not have to work this way.
We intend to create a free premium renter service so that renters can confidentially establish their renter qualifications with Apartments.com at the beginning of their apartment search. We will collect their income and debt information, run a simple credit eviction criminal screen on them.
Apartment leasing officers could confidentially enter their qualifications standards into Apartments.com. When renters search, they can see exactly which communities they prequalify for as they search.
It will no longer cost them $50 each time just to learn they don't qualify. They would have the confidence and ability to find the apartments they're qualified for easily and quickly.
When the leasing office receives leads from premium renters, they will see immediately that a renter is prequalified and has a very high chance of successfully completing their screening process. The leasing agents' limited time is best spent focusing on these higher probability leads.
A number of our clients have indicated they would extend special offers to these highly-qualified and low-risk renters to bring them to their communities, making our premium membership even more valuable to our highly-qualified renters. More highly-qualified renters are drawn to Apartments.com and we could offer our advertisers an even greater flow of highly-qualified renters.
Renters that fail to prequalify are still able to apply to a community even if they initially fail to get a positive indication on Apartments.com. In the home mortgage world, mortgages are often price adjusted for risk.
This is not yet happening in the apartment world but could and perhaps should. There could be an opportunity for us here in this area as well.
To help facilitate these goals, earlier this month, we acquired a California-based company called The Screening Pros. They have over 25 years of applicant screening experience, and we believe that they're an excellent fit for Apartments.com.
They have been developing a prescreen tool for some time, which we plan to enhance and incorporate into Apartments.com. Their process does a soft credit inquiry on the applicants, which does not affect the applicant's credit rating like a hard inquiry does at the time of application.
Data points such as, does the applicant own a -- I'm sorry, does the applicant owe a previous landlord money? Do they have past unpaid utilities?
Do they have an eviction filing? Or has a judgment been rendered?
And can the applicant afford the rent? All are taken into consideration.
For property managers and landlords, this could make listing their apartments on Apartments.com even more valuable and allow us to win over even more apartment communities to Apartments.com. Investments in sales, technology and marketing have played an enormous role in driving top line success in CoStar, but frankly, it all begins with research.
We're a research operation at our core. Our highest value proposition is the high-quality and comprehensive commercial real estate information we curate.
The CoStar research team collects, investigates and analyzes the in-depth market data necessary to help clients and consumers make the best decisions and drive connections between millions of properties and the hundreds of thousands of companies that need those properties to grow their businesses. In 2016, 83% of all commercial real estate transactions involved a CoStar Group user.
We believe that today, CoStar presents listings with potential deal value of about $1.5 trillion. As of June of 2017, our researchers and technology resources were presenting about 1 million available apartment rentals, making Apartments.com the most comprehensive marketing site for millions of consumers looking to find an apartment.
Last year, an estimated 4 million people found their homes in Apartments.com. Back in October of '16, we announced our intention to build a new Global Research Center in Richmond, Virginia, to support our core commercial real estate research operations.
I'm really amazed at how well our team has cycled up a major and very productive research center in such a very short period of time. With 600 researchers and software developers in the Richmond Center, it's now, by far, our largest center.
Already, the Richmond Center is responsible for 60% of our U.S. research activity.
This time last year, we were still only visiting cities to determine where to locate our new research center. So this has gone really quickly.
Through our Richmond Center, we have proactively improved the way we do research. We are building new software tools to streamline the research process.
We're better branding the company through our substantial communications with the commercial real estate community. We've rebuilt our training processes to better equip our researchers to do the best job they can.
We've launched a new 233-person tenant research team in the Richmond Center to enhance and improve the highly-valued tenant information we provide in CoStar. Productivity has grown in all of our research centers across the U.S., as our team of over 600 professionals in Richmond are pushing the bar even higher for excellence in research.
The increased amount of information we're collecting by consistently making more frequent contacts with commercial real estate professionals is having a huge positive impact on data quality. Last month, we achieved a major milestone in research when we successfully found and interviewed representatives of 80% of the active commercial real estate players in North America and United Kingdom during the course of just one month.
This is a huge accomplishment we have aspired to but have never before achieved. I want to congratulate our Vice President of Research, Lisa Ruggles, and the entire research team on achieving this milestone on behalf of our hundreds of thousands of clients.
There is no doubt in my mind that our investment in stronger research has been a significant factor in our sales booking growth in the first half of 2017. I want to give you a quick update on LoopNet and CoStar conversion.
We're on track to integrate CoStar and LoopNet databases early this fall. As an organization, after many months of hard work and preparation, we're ready to move ahead.
Our data has never been better. Our software teams have integrated the LoopNet and CoStar databases into one unit by database on the back-end.
We haven't deployed it yet, but work is largely done. We have launched a B2B advertising campaign, clearly branding CoStar and LoopNet and differentiating the brands.
We expect to begin notifying some customers in September of the upcoming integration. We believe this will generate meetings and sales in the fall, but the fourth quarter is expected to be the first full quarter of sales resulting from this effort.
I'm just back from visiting our offices in Spain, Germany and Scotland and England and want to update you on what we have going on in Spain right now. We launched a completely new public commercial real estate website for Madrid in June at Belbex.com.
Check it out. Belbex will be similar to loopnet.com.
Belbex is a listing site that lets brokers and owners publish their office, retail and warehouse listings for lease or for sale in Madrid to both the brokerage community and end users. It's free to list and search as we look to expand content and build traffic.
We plan to initiate advertising opportunities on the site later in the year, similar to those that you find on Apartments.com. Belbex continues to offer their legacy robust information solution on a subscription basis.
Once we've collected more content, we expect to launch CoStar in Spain probably at about a year or so. We've invested this year building up our research strength in Madrid.
We quadrupled the size of the research team there and launched a major field research effort. We inspected tens of thousands of properties and discovered tens of thousands of new listings we've not known about.
We have nearly tripled the number of listings we present there from the beginning of the year to now. We anticipate double the number of active listings again within the year.
We believe that we'll be able to offer by far the most comprehensive commercial real estate marketplace ever offered in Spain. The commercial real estate markets remain healthy, with occupancy rates at or near business cycle highs across the apartment office, industrial and retail property types.
That said, as new construction deliveries have ramped up, occupancies have softened a bit in many areas. As job growth is healthy, the market can easily withstand this new construction, and these construction jobs are part of why the economy is healthy today.
As this new supply hits the market, rent growth in the apartment office sectors has also slowed from cycle peaks, especially in segments exposed to new construction. At the same time, recent strong job growth bodes well for commercial leasing as a household formation that drives the apartment sector.
These factors, rising supplies, day job growth, create a good situation for CoStar since we're an integral part of the leasing and marketing program for building owners and managers. In the office sector, vacancy rates were essentially stable at 10.3%, that's up slightly from 10.2% in the prior quarter but down from 10.4% a year ago, so it's flat.
Completions are now outpacing the absorption for the first time since 2010. The vacancy rates are expected to inch up a touch in the near term, but still be in the healthy territory.
Recent activity is in-line with our expectations with net office absorption totaling 25 million square feet over the past two quarters compared to 37 million square feet of completions. Similarly, rent growth in the office sector softened to 1.8% compared to 4.4% a year earlier, but basically in line with inflation.
As we reported in prior quarters, the apartments market is normalizing and that means slightly softer occupancy rates. Effective rent growth has dropped to 2.4% from 3.7% a year earlier, and lease-up on new construction is slowing a bit.
That stems partly from the 220,000 new units delivered over the past 12 months. That's a bit more than 187,000 units of net absorption.
This rush of deliveries has pushed vacancy up to 5.9%, which is still right in-line with historical averages. Since apartment advertising spending is highly correlated with weaker apartment markets, a more competitive apartment market with a lot of construction is actually good news for Apartments.com ad sales.
Investment sales activity declined slightly in the first half of 2017, a trend that has started in '16 and annual real estate trading volumes fell about 10% from a year earlier. Investment sales are running at about 10% above historical averages, though, of the past 10 years.
I have to say, we've had an excellent first half to 2017 in all aspects of our business. Our sales success that we're able to report to you today is driven by the fact that all of our core elements for our business are performing at full speed, and we're really happy with the progress we're making.
At this call -- at this point, I'm going to turn the call over to our Chief Financial Officer, Mr. Scott Wheeler.
Scott Wheeler
Thank you, Andy.
Andy Florance
You're welcome.
Scott Wheeler
Certainly, had a strong first quarter. Thanks for those highlights.
Great to see the benefit of our investments showing up really in a big way in our results this quarter. So as Andy mentioned, the revenue in the second quarter of 2017 increased 15% over the prior year.
Organically, our revenue growth rate in the second quarter was 14%. This is after normalizing for the acquisitions of WestsideRentals and LandWatch, both of which closed earlier this year and the THOMAS DAILY acquisition, which we completed in the mid-second quarter of 2016.
The second quarter organic revenue growth increased from 13% in the first quarter, reflecting continued strong momentum in sales, particularly in our online marketplace businesses. Looking at our revenue performances by services.
CoStar Suite revenue growth was 13% in the second quarter of 2017 versus second quarter of 2016. Because of our strong sales performance, we expect CoStar Suite growth rate to continue at 13% through 2017, which is at the upper end of the 12% to 13% range we previously discussed.
Revenue growth rates in information services remain negative in the second quarter of 2017, as expected. So we continue to wind down the LoopNet information products ahead of the planned integration with CoStar Suite.
The revenue decline from the LoopNet information products in the second quarter was moderated a bit by strong double-digit growth in our other information services areas, which includes portfolio strategies, real estate manager and our THOMAS DAILY operations in Europe. We've no change to our expectations, Information Services revenue will decline at low double-digit rates in the second half of the year.
This will leave us with expected full year revenue and Information Services declining around 8% to 11% for the year. We had a very strong second quarter in multifamily as revenue increased 24% year-over-year and 22% on an organic basis, adjusting for the acquisition of Westside rentals in January.
Approximately three quarters of the organic revenue growth is driven by the addition of new paying properties, while the remaining 25% of the growth is a result of existing customers selecting more valuable advertising packages. Revenue contribution from Westside Rentals of approximately $1 million in the quarter was not particularly material as expected.
We continue to expect this will wind down as we complete the transition of WestsideRentals to the Apartments.com advertising model. Based on continued strong sales performance, we expect our full year 2017 growth for multifamily revenue to be at the top end of the 21% to 23% range we communicated previously.
Rounding out our services performance, commercial property and land grew 17% year-over-year in the second quarter. Organic revenue growth, adjusting for approximately $1 million in revenue from our recent LandWatch acquisition, was 15% in the second quarter and continues to accelerate above the 11% revenue growth we reported in 2016.
This improved growth rate is a result of our increased focus on selling LoopNet Premium Lister and tiered advertising to property owners. We expect this organic growth trajectory in the business to improve to a range of 13% to 16% for the full year of 2017, an increase from our previous guidance range of 12% to 14%.
When we include the revenue from the acquisition of LandWatch, we expect commercial property and land services to grow in a range of 16% to 19%, which is an improvement from the 15% to 18% we discussed last quarter. On to gross margins, we came in at 77% in the second quarter, also consistent with the first quarter of 2017.
We expect gross margins to remain at approximately this level for the rest of the year. The vast majority of our cost of revenues relates to our research operation, and as Andy mentioned, we're very pleased with the productivity improvements we've seen from our investment in the new research center in Richmond, Virginia.
The center now houses more than 600 employees, is ahead of schedule with regards to this year's resourcing plan. Operating expenses for the second quarter of $154 million were favorable to our forecast, primarily due to the timing of our marketing spend and other investment initiatives.
We expect this to reverse in the third and fourth quarters. Accordingly, adjusted EBITDA of $54 million in the second quarter exceeded our guidance range by $11 million.
It was only $2 million lower than the second quarter of 2016. Adjusted EBITDA margin was 23% in the quarter, approximately 5% above the high end of our previous guidance range.
Net income for the quarter ended June 30 was $22 million, ahead of both expectations and prior year, aided by a reduction in our effective tax rate from 40% in the second quarter 2016 to only 14% in the current quarter. This change in the effective tax rate is a result of adopting a new accounting guidance for share-based payment transactions, which we implemented at the beginning of the year.
Under this new guidance, the tax benefits related to stock price appreciation on share-based payments are now recognized as an income tax expense rather than as an adjustment to stockholders equity on the balance sheet. This new accounting guidance is expected to result in increased volatility in our GAAP income tax rates from quarter-to-quarter.
Cash investment balances were approximately $575 million as of June 30, 2017, just down slightly from a balance of $582 million after the first quarter. The reduction in the cash investment balance is a result of the acquisition of LandWatch and timing of income tax payments.
Beginning this quarter, you'll notice we included a cash flow statement in our press release for the first time ever in response to requests from our investors. Now let's take a look at some performance metrics for the quarter.
As Andy mentioned, our sales force, which totals approximately 715 sales reps, delivered an all-time high of $37 million in net bookings in the second quarter of 2017, despite continued negative net new bookings from Information Services. Certainly, a high point for the quarter.
We saw strong sales performance across all three of our growing revenue sectors. We're making great progress towards our planned integration and cross-selling efforts of CoStar to LoopNet users, which we expect to commence before we talk again in the fall.
Consistent with the guidance we provided previously, the cross-selling of LoopNet users to CoStar is not expected to have a material impact on our 2017 sales and revenue results. The renewal rate on annual contracts was 90.6% in the second quarter of 2017, up very slightly from the 90.5% achieved in the second quarter of 2016 and 30-basis points above the renewal rate we achieved in the first quarter of this year.
The sequential increases in the renewal rate is a result of improvements in our multifamily business. The renewal rates for CoStar Suite remain strong and in-line with recent quarters.
The renewal rate for customers who've been subscribers for five years or longer was 97.1%. Subscription revenue on annual contracts accounts for 78% of our revenue in the quarter, up from 77% this time last year.
I'll now talk through our outlook for the full year in the third quarter of 2017. Based on the strong sales and revenue performance in the second quarter, we're raising our top line outlook by $7 million at the midpoint.
We now expect revenue in the range of approximately $954 million to $960 million for the year, representing an increase in the expected growth rate to 14% to 15%, up from a range of 13% to 14% communicated previously. We expect revenue for the third quarter of 2017 in the range of $243 million to $245 million, representing top line year-over-year growth of around 15% at the midpoint.
LandWatch is expected to contribute approximately $2 million in revenue in each of the third and the fourth quarters of this year. In terms of earnings, we're raising our guidance range for the full year 2017 to approximately $4.42 to $4.52 for non-GAAP net income per diluted share based on 32.7 million shares.
This includes an increase of $0.12 per share related to the strong projected organic revenue result, substantially all of which is expected to convert to earnings. As I mentioned earlier, our second quarter EBITDA results were favorable to our published guidance ranges, partially a result of the timing of expenses for marketing and various investment initiatives.
We still expect our full year 2017 investments to remain at the levels consistent with our prior outlook, although the quarterly timing has shifted somewhat. For the third quarter of 2017, we expect non-GAAP net income per share in the range of $1.09 to $1.15 and adjusted EBITDA in the range of $67 million to $70 million.
Margins are expected to increase sequentially through the third and the fourth quarters. Costs associated with the Xceligent litigation were approximately $3 million in the second quarter, and we continue to expect costs in a range of $10 million to $20 million for the year.
Our guidance range for this litigation has not changed from what we communicated previously and includes $15 million in legal costs for the year and $5 million in the third quarter related to this matter. Overall, I'm very pleased with our sales performance and the success of our investment programs in the second quarter 2017, and we remain on track to reach our stated goal of achieving a 40% adjusted EBITDA margin exiting 2018.
With that, we will now open the call for questions.
Operator
[Operator Instructions] Your first question comes from the line of Brett Huff from Stephens.
Brett Huff
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Andy Florance
Sure. So from your perspective in terms of any impact in next two to three years, I think the impact is de minimus on our EBITDA expansion.
So it might involve the addition of 20, 25 staff something like that for Madrid. But what we're doing is, it's a robust and significant market.
There is, in our mind, no material competition. There is a huge opportunity.
It's a trillion dollar economy. And the market needs information on what's happening in commercial real estate.
The brokerage firms there don't have as big a presence as they do in other countries. I mean, they're there, but they're not as prevalent, don't have the same market penetration.
So what we've seen is that the owners there are bigger drivers of what's happening in the market. And that's true in Germany as well.
So we think there is a lot of potential to sell advertising to owners who take real pride in their properties and are more motivated to spend marketing dollars to try to bring in tenants.
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Operator
Your next question comes from the line of Bill Warmington from Wells Fargo.
Bill Warmington
So one question. I was really trying to decide whether to ask about revenue or the safe harbor statement.
So I think I'm going to go with the revenue.
Andy Florance
Well, thank you for asking about our safe harbor statements first up because, as you noticed the Beatles references, Bill.
Bill Warmington
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Andy Florance
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Bill Warmington
Bookings effect?
Andy Florance
Bookings effect. Yes, so probably more material in the fourth quarter, first, second, third quarter of next year.
Scott Wheeler
And we haven't assumed a significant amount of bookings in this year, Bill, in our outlook.
Operator
Your next question comes from the line of Brandon Dobell from William Blair.
Brandon Dobell
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Scott Wheeler
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Andy Florance
I think that covers it.
Operator
Your next question comes from the line of Sterling Auty from JPMorgan.
Jackson Ader
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Andy Florance
I'll take a shot at it. But I think it's nominal.
I just checked with the CMO this morning and I think we pushed $1.3 million of marketing expenses over the quarter with CoStar [mill] at $2.7 million. So it's $1 million or $2 million pushed into the next quarter.
So it's not that much.
Scott Wheeler
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Operator
Your next question comes from the line of Peter Christiansen from Citigroup.
Peter Christiansen
Thanks for the cash flow statement. I appreciate that.
Andy Florance
Somebody noticed, and you're welcome.
Peter Christiansen
So two things real quick. I think you called out 25% of the multifamily growth was attributed by existing customers.
Any sense if that's pricing or lifting volume or vacancy rate kind of related or not? And then, my follow-up would be in the last quarter, I guess, multifamily kind of just started to break even, I was just wondering if you could comment on the trajectory of profitability there if the trend is continuing?
Andy Florance
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Scott Wheeler
What was second part of the question?
Peter Christiansen
Multifamily profitability?
Scott Wheeler
Yes, multifamily profitability. We mentioned in the last quarter that we swung the profitability in multifamily and when we've moved in that business, it moves a material amount, so we're in double-digit profitability is expected in the multifamily business already by the second half of this year.
So it really does swing quickly once we move into that territory. So we expect that to continue in the second quarter when we spend a bulk of our marketing, obviously, that dips down but for the rest of the year, we expect it to be pretty strong.
Operator
Your next question comes from the line of Andrew Jeffrey from SunTrust.
Andrew Jeffrey
So it sounds to me like the investment you've made in research is really paying off in a meaningful way. I wonder, Andy, if you could comment a little bit on sort of the next step is?
I heard your world-class IR guy, Rich, tell it, in terms of allowing brokers to perhaps begin entering some of their own data into maybe a combined CoStar LoopNet front-end, enhancing or maybe in some ways outsourcing the research gathering function. Does that provide potential scale, revenue growth opportunities?
I'm going to be just kind of frame that out for us.
Andy Florance
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Operator
Your next question comes from the line of Pat Walravens from JMP Securities.
Pat Walravens
Great and congratulations on the new bookings, guys. Can I ask about this Xceligent litigation?
And I know there is going to be some real limits on what you can say given that it's live, but how long will this level of spending go on? And then, maybe, Andy, at a high level, why is it so important that you're willing to spend this kind of money?
Andy Florance
I am so excited to answer that question. I'm going to turn that over to Jon Coleman, our General Counsel.
Jon Coleman
Thank you, Andy.
Andy Florance
You're welcome, John.
Jon Coleman
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Pat Walravens
So why is it important that you're willing to do that?
Jon Coleman
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Operator
Your next question comes from the line of Mike Crawford from B. Riley.
Sameet Sinha
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Andy Florance
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Sameet Sinha
Just LandWatch?
Andy Florance
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Operator
And at this time, there are no further questions.
Andy Florance
Well, thank you very much for joining us for the second quarter earnings call, and we look forward to updating you on our progress in the third quarter. And again, congratulations to the sales team on a fantastic acceleration in sales bookings and to our research management team for quadrupling the number of contacts with our customers year-to-date.
Thank you.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference.
You may now disconnect.