CoStar Group heads into its third-quarter report on October 27 with a story that has quietly flipped. For years the pitch was revenue growth funded by heavy spending. Last quarter, management traded some of that growth for profit, cutting full-year revenue guidance for the first time in this cycle while holding firm on earnings. The stock has since rallied about 24%, so the market has clearly accepted the swap. This report will show whether the bargain is holding, or whether slower sales are starting to eat into the margin gains.
The Street expects non-GAAP earnings of $0.34 a share on revenue of about $951 million, which would be roughly 14% revenue growth from the year-ago quarter. That bar is not trivial. Management guided to EPS of $0.31 to $0.34 and revenue of $935 million to $945 million, so analysts sit at the top of the earnings range and above the top of the revenue range. The Earnings Whisper of $0.37 is higher still, which points to an expectation of a clear beat on profit. Hitting consensus on earnings looks plausible given the cost discipline. Matching it on revenue would mean beating management's own top-line forecast in the same quarter that forecast was lowered.
The operating checklist comes straight from last quarter's call. Margin is the first item. Adjusted EBITDA reached a 20% margin in the second quarter, a quarter ahead of plan, and management guided to 21% for the third quarter. It also kept full-year EBITDA guidance at $780 million to $820 million, supported by about $100 million of cost cuts. Residential turned profitable for the first time at $12 million. If that figure grows rather than slips back toward breakeven, the cost story holds. A return to losses would suggest the second-quarter result depended on timing.
Bookings are the bigger swing factor. Net new bookings fell to $69 million, down about 26% from a year earlier, and the third-quarter comparison is tougher still, against $84 million last year. Management blamed the restructuring of the 10X transactional business, a smaller Homes.com inside sales team (about 400 reps, down from 660 at the end of last year), and its refusal to cut Apartments.com prices while about 40% of multifamily communities offer concessions and Zillow undercuts on price. Bookings that stabilize or improve sequentially would support the claim that this is deliberate housecleaning rather than weakening demand. Another drop, or further erosion in Apartments.com ARPU after last quarter's 3.6% decline, would raise doubts about how firmly CoStar can hold its prices. Early results from the Homes.com Platinum depth advertising tier, launching this quarter, also matter. Depth products drive most of Apartments.com's revenue, so any early traction would strengthen the long-term residential case.
Other items include continued strength in CoStar Debt Solutions and Matterport, an update on the Zonda acquisition (excluded from guidance), and commentary from a new CFO after Chris Lown's departure. Sentiment has improved, moving from about 32.5% bearish before the last report to 24.5% bearish now. The shares sit near the upper end of their post-earnings range of $25.89 to $33.82 but remain well below the 200-day moving average near $38.39. The rebound is real but has not yet repaired the longer-term damage.
The central question is whether the lower revenue guidance marked the bottom or the first of several cuts. If CoStar delivers 21% margins, holds full-year revenue guidance and shows bookings leveling off, the profit-first story stays intact. If revenue disappoints again, the recent rally will look premature.