Xceligent Owner Weighs Company's Future As CoStar Goes For Legal Knockout
British conglomerate Daily Mail and General Trust Thursday morning cast doubt about the future of the U.S. real estate data company it owns, Xceligent, citing the property data firm’s struggles to expand in New York City and its high cost of operations.
DMGT wrote down Xceligent’s value to zero, it said on an earnings call, and it is undergoing a review of the company’s long-term plans. DMGT removed Xceligent founder Doug Curry as CEO this fall and replaced him with Hanley Wood Chairman Frank Anton to conduct the review and guide the company through the tumult.
"This year we expanded into the largest market, New York, and to be candid, the revenue was disappointing,” DMGT Chief Financial Officer Tim Collier said on the call. “It will be a longer and more challenging path to profitability than anticipated. Given the timeline and the degree of investment required to become cash-generative, I thought it prudent to fully impair the business. We've already taken steps to contain costs and brought in new management. We are working with them on a strategic review that will look at all the options and address and contain the current challenges."
Shares in DMGT dropped 24% Thursday to a five-year low following the release of its earnings report. Analysts at Liberum downgraded their rating of the company from “buy” to “hold.” Liberum analysts Ian Whittaker and Annick Mass expressed concern about DMGT writing down the value of Xceligent, plus the write-downs of two of its other businesses.
“That points to the risk of what has been DMGT’s change into an almost VC-style structure where it takes multiple investments,” the analysts said, according to The Guardian. The announcement came as good news for CoStar, which has a current market capitalization of $11B and is watching what many perceived as its biggest competitor experience a major setback.
“Everyone implicitly assumed that Xceligent was in trouble,” said Morningstar analyst Brad Schwer, who covers CoStar. “CoStar always had the market cornered. We have a wide moat on CoStar. It’s a borderline monopoly, as you know. It just goes to show that any competitor that tries to get into CoStar’s business, they’re so far behind that they don’t have a chance.”
DMGT recorded an impairment charge north of $56M as it took Xceligent’s previous value off its balance sheet. The company also owns other commercial data properties, BuildFax, Trepp, SiteCompli and EDR, and wrote down the carrying value of SiteCompli, which provides a compliance tool for retailers, for $32.1M. It is also in the process of selling real estate and environmental data company EDR.
As Xceligent faces these financial struggles, CoStar is ramping up its legal offensive against the company. Last week, CoStar issued notice that it plans to take oral depositions of three Xceligent employees in mid-December. It plans to depose Xceligent Chief Revenue Officer Danny Rice, Associate Research Manager Leslie Houston and Research Associate Nicole Guinn.
CoStar is suing Xceligent for allegedly stealing intellectual property and images from CoStar’s database. This summer, Xceligent filed a countersuit, alleging CoStar is a monopoly that has used anticompetitive tactics to stifle competition and innovation in the industry.
CoStar and Xceligent declined to comment for this story.
Houston is named in CoStar’s lawsuit as a manager who allegedly directed researchers at Avion, Xceligent’s Philippines-based contractor, to switch IP addresses to avoid internet blocks on LoopNet, CoStar’s public listings platform.
CoStar also issued subpoenas of third-party companies ClientLook and WebFurther. Xceligent has worked with ClientLook since at least last December, when it announced it would integrate its open architecture platform with the client management company.
Along with the new subpoenas and dispositions, CoStar has bolstered its official legal team on the case, which previously consisted of nine attorneys, with two more D.C.-based lawyers. The team added Williams & Connolly associates Sean Douglass and Eric Elliott to the court docket Nov. 17.
The last time CoStar went after one of Xceligent's third-party contractors, it did not end well for the Missouri-based firm. A Pennsylvania judge in October ruled in favor of CoStar in a separate suit against RE BackOffice after the Pittsburgh-based contractor told the court that Xceligent directed it to hack CoStar’s websites. The next day, Curry was out as CEO.
When he spoke to Bisnow after his hiring as Curry’s replacement was announced, Anton said he was already undertaking a strategic plan review, but said the company was still actively expanding in Chicago after launching in New York this past summer.
“Nobody here is of the mind that CoStar is not a worthy competitor, but we’re making headway,” Anton said in October. “It’s a David and Goliath story, but David eventually won that battle.”
DMGT spent tens of millions of dollars building Xceligent's operations in New York, but has been unable to break through in the country’s most important city for real estate. While it has a presence in major cities like Houston, Los Angeles and Atlanta, Xceligent is not active in some of the country’s major beacons for investment, like Washington, D.C., Boston and San Francisco.
“I’d probably argue Xceligent going away is less a function of CoStar’s existence than the DMGT guys didn’t understand how hard it was to build a big data business,” said William Blair & Co. analyst Brandon Dobell, who also covers CoStar.
“This is a business that has a very low initial barrier to entry. You and I could go start a business for commercial property information in our city, call up a bunch of brokers and get some data. You want to do that in two cities, five, 10, 20, and make a bunch of money doing it? The barriers to scale get very, very high. Part of why the market likes CoStar as a core asset is it’s really difficult to catch them if you’re a competitor. The data and footprint takes a lot of money and a lot of years.”
While Xceligent had enough success to grow in secondary markets like Kansas City, where it was founded, some say it didn’t present enough of a difference with CoStar to encourage mass adoption.
“Xceligent vs. CoStar in New York City is competition, but it was more of the same. They’re still collecting it the same way, it wasn’t really innovation,” said Reonomy CEO Richard Sarkis, whose company collects real estate data through technology and scraping online public records. “It wasn’t Uber vs. taxicabs."
With Xceligent so long from profitability, as its owner admitted, it is fair to wonder about the implications for the market at large forced to grapple with another competitor to CoStar potentially falling by the wayside.
DMGT owns Xceligent because the Federal Trade Commission, as a condition of its approval of CoStar’s acquisition on LoopNet in 2012, required LoopNet to sell its ownership stake in Xceligent to form a viable competitor. Xceligent sued CoStar, using that decree as part of its grounds that CoStar has acted improperly.
That competitor’s viability is now in question. But odds that the federal government steps in are slim. Three of the five commissioner seats at the Federal Trade Commission are vacant, and the last monopoly the federal government successfully broke up with the Sherman Antitrust Act was Microsoft.
“I don’t see the government going after these types of situations, they’re trying a more hands-off approach outside of some random targets,” Schwer said. “I don’t see anything coming of that. We do think it is a borderline monopoly, and there could be antitrust issues down the line, but nothing in the near term.”
CORRECTION: Dec. 1, 12:25 P.M. ET: An earlier version of this story stated that DMGT was reviewing options for all five of its U.S. property businesses including Buildfax, Trepp and SiteCompli. EDR is being sold and a review of Xceligent being undertaken, but the other three businesses are not under review.