CoStar Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. CoStar provides commercial real estate information, analytics and online marketplaces, plus residential services. Revenue is predominantly subscription-based.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $536.3 million (+12%) | $480.3 million | $1,052.1 million (+12%) | $938.0 million |
| Gross profit / margin | $435.3 million / 81% | $390.8 million / 81% | $855.7 million / 81% | $759.7 million / 81% |
| Operating income / margin | $110.2 million / 20.5% | $101.0 million / 21.0% | $238.5 million / 22.7% | $202.2 million / 21.6% |
| Net income / diluted EPS | $83.5 million / $0.21 | $61.1 million / $0.16 | $172.8 million / $0.44 | $135.4 million / $0.34 |
| Operating cash flow | Quarterly figure in MD&A: $81.4 million | Quarterly figure in MD&A: $132.4 million | $212.1 million | $220.3 million |
Q2 net income rose 37%; six-month net income rose 28%. Six-month EBITDA, a company-defined non-GAAP measure, was $298.4 million versus $268.9 million. Six-month operating cash flow declined $8.2 million, primarily reflecting less favorable working-capital changes. Investing cash outflow was $57.7 million, compared with $284.8 million, largely because the prior-year period included substantially more acquisition spending.
At June 30, cash, cash equivalents and restricted cash totaled $3.964 billion; the company reported no restricted cash. Long-term debt, net, was $988.6 million, representing $1.0 billion of 2.8% Senior Notes due 2030, net of discount and issuance costs. The $750 million revolving facility was undrawn. The company said cash, operating cash generation and capital-market access should cover requirements for the next 12 months and beyond. Current assets were $4.181 billion and current liabilities $350.0 million.
Changes, operating trends and management outlook
- Revenue growth was led by CoStar (+17% in Q2), driven by subscriber growth, pricing and customer upgrades. Q2 growth was 6% for Multifamily, 10% for LoopNet, 11% for Residential, 10% for Information Services and 17% for Other Marketplaces.
- Subscription services represented approximately 93% of Q2 revenue, versus 92% a year earlier. Annualized Q2 net new subscription bookings were approximately $84 million, up from $51 million. Trailing-twelve-month renewal rates were about 91%, compared with 92%.
- Gross margin held at 81%. Operating expenses rose 12% in Q2; general and administrative expense increased 33%, including higher personnel, professional-services, technology and travel costs. The operating margin consequently eased from approximately 21.0% to 20.5%.
- Management expected 2022 CoStar revenue growth to accelerate versus 2021, Information Services growth to be broadly consistent, and Multifamily and LoopNet growth rates to decline. Residential revenue was expected to decline for the full year as certain Homes.com offerings were discontinued, partly offset by Homesnap growth. These are business-line expectations; the filing does not provide a clear consolidated revenue or earnings forecast.
- The company planned to increase 2022 residential-product investment by approximately $180 million versus 2021, including content, marketing and technology, and said this would reduce 2022 results and operating cash flow. Other priorities included international expansion, sales-force hiring, residential marketplace development and continued CoStar product investment.
- On April 5, 2022, CoStar acquired French commercial real estate news provider Business Immo for approximately $6 million, net of cash acquired, and assumed debt, which it repaid in Q2. The purchase-price allocation was preliminary.
Risks, contingencies and unusual items
- Management cited uncertainty from COVID-19, inflation and rising interest rates. A weaker commercial real estate market, reduced office demand, customer spending cuts or cancellations could impair demand for CoStar’s services.
- Foreign-currency translation reduced comprehensive income: the six-month translation loss was $24.2 million, and accumulated translation loss was $30.0 million. Foreign-currency revenue was approximately 4%; the company did not hedge its foreign-exchange exposure.
- The effective tax rate was approximately 23% in Q2 and 25% for the first half, below the prior-year rates of 35% and 28%. The filing attributes the comparison primarily to a discrete restructuring gain in 2021.
- Management did not expect current litigation to materially affect financial position, results or liquidity; it noted unfavorable outcomes were reasonably possible. No material changes to previously disclosed risk factors were reported.
- The company reported effective disclosure controls. Implementation of a new financial system was continuing beyond 2022; management said no other quarterly internal-control change had materially affected, or was reasonably likely to materially affect, financial reporting controls.
Investor facts to verify
- Whether subscriber growth, pricing and bookings continue to offset the decline in renewal rates and support CoStar’s stated growth outlook.
- Progress and returns on the planned $180 million incremental residential investment, and the resulting impact on margins and cash flow.
- Multifamily listing and package-mix trends, and the effect on Apartments.com growth.
- Operating cash flow and working-capital trends, capital spending for the Richmond campus, and liquidity relative to planned investment.
- Acquisition integration and the final Business Immo purchase-price allocation; also assess non-GAAP EBITDA alongside GAAP results.