The Company is an online marketplace for commercial real estate in the United States, based on the number of monthly unique visitors to its marketplace.
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Stay out of the LOOP
Most of LoopNet's year-over-year revenue growth was attributed to price increases. Revenue in Q2 was up 29% year-over-year, and the price of premium membership increased to $62.13, + 21% Y/Y. In Q2 74% of revenue was premium membership revenue. But, price increases initiated in late 2007 (from a change to volume-based pricing) have almost completely propagated through, and will end in the later half of 2008, per management. Management was asked point blank on 1Q08’s conference call: “Any plans for additional price increases or adjustments this year?” CEO Rich Boyle: “No... the pricing model or the pricing engine that's in place is pretty complete for 2008 at this point.” Therefore, revenue growth is decelerating.
LOOP has also taken steps to mask earnings margins by netting stock-based compensation and litigation costs from EBITDA and EPS. And, egregiously in 1Q08, LOOP added litigation costs to its reconciliation of Adjusted EBITDA. Don’t be fooled. LOOP’s year-over-year Adjusted EBITDA does NOT compare. Furthermore, LOOP’s litigation costs are a reoccurring expense and, in my mind, the company has not met the burden of demonstrating the usefulness of excluding it. (See: http://www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm) What’s next?! LOOP reported a Q2 Adjusted EBITDA Margin (including Equity Comp and Litigation Costs) of 47.3% -- up from 46.5% in Q1. BUT, the company’s Q2 EBITDA Margin (unadjusted) was 35.3% -- DOWN from 37.4% in Q1.
MOREOVER, in Q2 LOOP cleverly began guiding to non-GAAP EPS for CY2008, and did not reaffirm GAAP EPS guidance for CY2008. Management stated on Q1’s call that GAAP EPS for CY2008 would be approximately $0.465. Therefore, at $11.37 LOOP trades at a CY2008 P/E multiple of 24.5. Don’t be fooled by non-GAAP EPS guidance! LOOP does trade at a P/E multiple of 19.3 non-GAAP EPS guidance of $0.59 per share for CY2008, but again non-GAAP EPS excludes pertinent items.
LOOP also trades at a CY2008 EV/EBITDA multiple of 11.3. Or, if you drink management’s wine, they trade at a CY2008 EV/ Adjusted EBITDA multiple of 9.4. I’m not thirsty.
To put a cherry on the top of management’s shenanigans, stock-based compensation was up 72% year-over-year in Q2! Stay out of the LOOP.
MoolaMonster on LoopNet continued:I had an epiphany last night. LoopNet management could start adjusting EBITDA and Non-GAAP Net Income even further by excluding HR expenses from the extra time and effort HR spends on granting executives more and more undeserved stock-based compensation!! Brilliant. Investors would be too stupid to figure out that HR is an ongoing operating expense, like litigation costs or stock-based compensation…(Note: With respect to adjusting stock-based compensation, I have seen a few other companies adjust stock-based compensation from EBITDA and Non-GAAP Net Income, although I do not believe it is useful for investors to exclude it. Under LOOP’s 2006 equity incentive plan, the number of shares available for issuance automatically increases on January 1st. Therefore, LoopNet intends to continue to issue stock-based compensation. And, stock-based awards disclosed in LOOP’s 2007 10-K indicate that the company will continue to have stock-based compensation expenses for the next few years.)What do you Fools think?!On to the next chapter… competition:Yesterday, August 4th 2008, I listened to LoopNet CEO Rich Boyle present at a Pacific Crest Securities conference.It’s no secret that in May 2008 CoStar launched a commercial property marketing service to directly compete with LoopNet’s showcase marketplace product. At the conference, Mr. Boyle was asked about the competitive impact of CoStar’s Showcase product. His response: “We haven’t seen a single customer cancel LoopNet in favor of their service… We haven’t seen it impact our business at all.” You are fool if you believe LoopNet will not be impacted by CoStar’s entry into the market in the second half of 2008 and beyond!For one, it appears to be very convenient to market a property on CoStar Showcase. Brokers can utilize CoStar’s extensive database to market listings on CoStar Showcase without re-entering data, which saves Brokers time and effort, and helps ensure accuracy. I think commercial real estate Brokers would utilize an automated service rather than spend precious time photographing, uploading, writing, and typing for LoopNet. CoStar has the industry's most comprehensive commercial real estate database, built and maintained by over 1,000 highly trained research professionals, according to the company.Also, while CoStar's Internet audience is smaller than LoopNet, CoStar.com averaged over 1.2 million unique quarterly visitors in 2008, and the company has over 400,000 prospects that can’t be found on LoopNet, according to the company. Not small potatoes! http://www.costar.com/ShowcaseInfo/ In addition, CoStar requires no search fees or registration. CoStar also charges monthly subscription fees to list all of a firm’s properties, whereas LoopNet charges a set price for the first few listings and incremental fees for additional listings. CoStar Showcase appears to be a real competitive threat.Yes, there will certainly be a portion of Brokers who will use both services – and a portion of non-Brokers who can only list properties LoopNet – but a 21% increase in the average monthly price of premium membership year-over-year is likely persuade a significant number of LoopNet subscribers to jump ship in favor of CoStar Showcase.
As a commercial investment sale broker who uses both LoopNet and CoStar, I prefer LoopNet for the following reasons:1) I get far more responses from LoopNet than I do from CoStar, probably due to the network effect and the momentum that LoopNet already has. CoStar appears to be a distant second at this point for drawing investors or brokers to sale listings.2) LoopNet allows me to tailor the marketing of my properties the way I want, not on how the CoStar employee or system prefers to show it.3) LoopNet's system can be used in smaller metros and internationally, whereas CoStar is basically confined to the major U.S. metros where they have dedicated staff.4) In my experience, the "highly-trained professionals" at CoStar are little more than call center employees. We seem to have a new CoStar contact every few months due to employee turnover, employees of which I am continually imploring to fix various inaccuracies in my listings. With LoopNet, if there ever was an error, I could correct it myself immediately.Lastly, as an investor, based on my industry experience and looking at it from a valuation persepective, my money is invested in LoopNet and not in CoStar. CoStar's high cost structure due to its large number of employees significantly limits near-term and future profitability versus LoopNet's expense-light EBay-type business model. Further, the market cap for CoStar is an inexplicable $1.0 billion versus LoopNet's $376 million, for close to the same earnings.CoStar may eventually be a competitive threat to LoopNet, but I don't see it in the foreseeable future.
As a former user of LoopNet user, I can safely say I am probably not coming back. Last year they increased prices for listings - by over double the previous year. This may work for some companies, but doubling prices can hurt your participation, and in this case it does. I along with others have stopped the service, and more will probably not come bacl.So I am not surpised at the numbers games that are being played. They have boxed themselves into a corner. They can't raise prices further in a horribly depressed market, and they can't lower them without severely impacting earnings as subscribers will be slow to come back. What a monumental blunder on management's part. Another example of management making mistakes, and getting rewarded for it...
kwfisher:You miss the point on comparing CoStar and LoopNet. CoStar is just entering the commercial real estate internet marketing business with its Showcase product. CoStar is primarily an information services software company for commercial real estate. In 2008 LoopNet is expected to make approximately $75 million in sales from commercial real estate internet marketing. CoStar's entry into this market appears to create downside risk for LoopNet. Any revenue that CoStar can steal away from LoopNet with its Showcase product appears to be upside for CoStar, downside for LoopNet.Also, how does "CoStar's high cost structure due to its large number of employees significantly limit near-term and future profitability"? CoStar has RAISED earnings guidance twice in 2008. In the most difficult commercial real estate cycle in recent memory, CoStar is leveraging investments made in the last few years to grow earnings. LoopNet's eBay-type, or transaction-based, business model is arguably more discretionary than subscription-based information services business models in a weak economic environment.Lastly, don't forget to mention that you recommended LOOP at $15.27...