CoStar Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Amounts are in U.S. dollars.
Business context
CoStar provides commercial real estate information, analytics and online marketplaces, primarily through automatically renewing, subscription-based agreements. Its principal offerings include CoStar Suite, Apartments.com, LoopNet and STR. The company reports North America and International operating segments. STR, acquired in October 2019, contributed to year-over-year growth.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $391.8 million | $328.4 million | +19% |
| Gross profit | $312.9 million | $257.3 million | +22% |
| Gross margin | 80% | 78% | +2 percentage points |
| Operating income | $75.9 million | $93.5 million | -19% |
| Net income | $72.8 million | $85.2 million | -15% |
| Diluted EPS | $1.98 | $2.33 | -15% |
| Operating cash flow | $131.5 million | $148.5 million | -11% |
| EBITDA, as defined by the company | $100.1 million | $113.2 million | -12% |
Revenue by service: CoStar Suite $165.0 million (+12%); information services $32.4 million (+72%, including STR); multifamily $137.5 million (+20%); and commercial property and land $57.0 million (+20%). Gross profit growth was outweighed below the gross-profit line by higher spending: selling and marketing rose 42% to $125.1 million, software development rose 49% to $41.6 million, and general and administrative expense rose 47% to $58.9 million. The company cited increased marketing, personnel and development costs, as well as higher credit-loss expense.
North America revenue was $377.4 million; International revenue was $14.4 million. Segment EBITDA was $102.4 million in North America, down from $115.3 million, and a $2.3 million loss internationally, broadly consistent with the prior year. The effective tax rate was approximately 7%, versus 13%.
Liquidity, debt and other key metrics
- Cash, cash equivalents and restricted cash were $1.928 billion at March 31, 2020, up from $1.071 billion at year-end. The increase principally reflected a $745 million revolving-credit borrowing; it should not be viewed as solely internally generated liquidity.
- Long-term debt was $745 million, compared with none at December 31, 2019. The debt had a 2.2% weighted-average interest rate and is due in October 2022. Only $4.8 million of the $750 million facility remained available; the company reported compliance with its covenants.
- Operating cash flow was $131.5 million. Investing activities provided $2.7 million, including proceeds from selling auction-rate securities; financing activities provided $725.2 million, mainly from the credit-facility draw.
- Current assets were $2.070 billion and current liabilities were $236.7 million. Accounts receivable net of allowance was $112.2 million; the allowance for credit losses increased to $8.3 million from $4.5 million at year-end, including $6.2 million of current-quarter credit-loss expense.
- Deferred revenue was approximately $88 million. Remaining contract consideration for unsatisfied performance obligations was approximately $249 million, excluding contracts with durations of one year or less.
Material changes, outlook and risks
Management said COVID-19 had not materially affected Q1 financial statements, but customer requests for cancellations or suspensions began increasing toward quarter-end. LoopNet sales volumes fell in the second half of March and remained at a lower level in April. Management could not accurately forecast full-year 2020 revenue or earnings and warned that the pandemic could reduce new sales, increase cancellations, suspensions and nonpayment, and lead to higher credit losses or impairment and restructuring charges.
For Q2, management expected slower year-over-year growth rates for CoStar Suite, information services and commercial property and land. It expected multifamily growth to ease slightly but remain relatively strong. These are directional expectations, not quantified financial guidance. The company shifted nearly all employees to remote work in mid-March, reported near-normal productivity, and cited cost controls including limiting hiring to essential roles, restricting travel and canceling in-person marketing events.
CoStar had agreed to acquire reorganized RentPath for $588 million in cash, subject to bankruptcy court, antitrust and other closing conditions. A $59 million break-fee deposit was held in restricted cash and could be forfeited in specified termination circumstances. The company borrowed under its revolver with the stated intention of funding RentPath and other strategic or general corporate needs. It expected to defer approximately $21 million of income tax payments from Q2 to Q3 under the CARES Act. Management believed available cash and operating cash flows would fund operations for at least 12 months, while noting substantial uncertainty tied to the pandemic and economic recovery.
Other notable considerations include foreign-currency exposure (foreign-currency revenue was about 5% of total revenue), no current currency hedging, and the expected transition away from LIBOR, which could affect borrowing costs. Management said current litigation was not expected to have a material effect on financial position, results or liquidity. No goodwill or intangible-asset impairments were recorded in Q1.
Important facts for investors to verify
- Whether RentPath closed, the final purchase funding and integration costs, and the outcome of the $59 million escrow deposit.
- Subsequent trends in customer cancellations, suspensions, collections, credit-loss allowances and renewal rates; the reported Q1 renewal rate for annual CoStar subscriptions was approximately 90%.
- Whether Q2 and later revenue growth, especially LoopNet and hospitality-related services, tracked management’s stated expectations.
- How operating expenses and margins evolve as marketing, product-development and personnel investments continue amid pandemic-related uncertainty.
- Cash available for operations after accounting for restricted cash, debt service, acquisition spending and the limited remaining revolver availability.