CoStar Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. CoStar provides commercial real estate information, analytics, and subscription-based online marketplaces across North America and international markets.
Financial results
Amounts are in millions of U.S. dollars, except per-share data. Comparisons are with the same 2019 period.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $425.6 | $352.8 | $1,214.6 | $1,025.0 |
| Gross profit / margin | $347.8 / 82% | $281.6 / 80% | $983.8 / 81% | $810.8 / 79% |
| Operating income | $76.8 | $94.3 | $234.0 | $262.6 |
| Net income | $58.2 | $78.6 | $191.3 | $227.0 |
| Diluted EPS | $1.48 | $2.15 | $5.04 | $6.20 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $355.3 | $350.0 |
Q3 revenue increased 21%, while operating income fell 19% and net income fell 26%. For the first nine months, revenue rose 19%, but operating income declined 11% and net income declined 16%. Higher selling and marketing, software development, general and administrative costs, acquired-asset amortization, and interest expense weighed on earnings. Nine-month EBITDA, a non-GAAP measure used for segment reporting, was $317.9 million versus $319.8 million.
Revenue and operating trends
- Q3 service revenue: CoStar Suite $166.0 million (+6%); information services $33.2 million (+70%); multifamily $155.2 million (+23%); commercial property and land $71.3 million (+38%).
- Growth included acquired businesses: STR contributed materially to information-services growth, while Ten-X contributed $12 million of Q3 commercial property and land revenue. Multifamily growth reflected marketing investment and customer upgrades. CoStar Suite growth was primarily from renewal pricing.
- North America Q3 revenue was $410.9 million and segment EBITDA was $107.9 million, down from $116.0 million. International revenue was $14.7 million and segment EBITDA was $0.6 million, compared with a prior-year loss of $2.9 million.
- Net bookings of subscription services were approximately $53 million, versus $50 million. Nine-month renewal rates for CoStar annual subscriptions were approximately 89%, compared with 90%.
Cash, debt, and liquidity
- Cash, cash equivalents, and restricted cash totaled $3.87 billion at September 30, 2020, up from $1.07 billion at year-end 2019. The balance includes $59 million restricted for the pending RentPath transaction.
- Long-term debt was $1.0 billion face value ($986.4 million net). CoStar issued 2.8% senior notes due 2030 and had no borrowings under its new $750 million revolving credit facility, which matures in 2025. The company reported compliance with its debt covenants.
- Nine-month operating cash flow was $355.3 million; investing cash outflow was $223.9 million, including acquisition spending; financing cash inflow was $2.67 billion. Financing proceeds included approximately $1.7 billion net from a May equity offering and approximately $983 million net from the July notes issuance.
- Management stated that cash and expected operating cash flow should be sufficient to fund operations for at least the next 12 months.
Outlook, risks, and unusual items
- No numerical earnings or revenue guidance is provided. Management expected CoStar Suite revenue growth rates to continue declining through the remainder of 2020, while commercial property and land growth rates were expected to increase relative to 2019 growth rates. It also described Q3 marketplace sales as improved and STR revenue as moderately higher than Q2.
- Management said the pandemic had not materially affected reported financial statements for the periods presented, but warned that economic weakness could reduce new sales, increase cancellations or service reductions, delay or impair collections, and raise credit-loss or impairment charges. The company reported increased credit-loss allowances and expense.
- RentPath remained subject to FTC antitrust review as of September 30. The proposed $588 million acquisition had bankruptcy court approval; the outside date was extended to November 12, 2020 for $7.5 million. A $59 million break fee was in escrow and could become nonrefundable in specified termination circumstances.
- Ten-X was acquired in June for $187 million in cash. Its preliminary purchase accounting included $135 million of goodwill. STR, acquired in October 2019, and Ten-X increased amortization and operating costs; acquisition integration and realization of expected benefits remain execution risks.
- Management identified commercial real estate conditions, customer retention and payment behavior, acquisition approvals and integration, marketing returns, foreign exchange, and potential goodwill or intangible-asset impairment as risks. It reported no litigation expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported revenue growth reflects organic performance versus STR and Ten-X contributions, and whether subscription bookings and renewal rates sustain growth.
- Whether higher marketing and personnel spending converts into durable revenue and profit growth, given the decline in operating income and segment EBITDA.
- RentPath’s regulatory outcome, closing prospects, and potential loss of the $59 million escrowed break fee.
- Customer cancellations, delinquencies, credit-loss provisions, and collection trends as pandemic-related economic conditions evolve.
- Use of the substantial cash balance, acquisition spending, integration results, and any changes to debt or liquidity needs.