CoStar Group, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; quarterly data below highlights the fourth quarter where available. CoStar provides commercial real estate information, analytics and online marketplaces, including CoStar, LoopNet and Apartments.com, and reports North America and International segments.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $575.9 million | $440.9 million |
| Gross margin | $419.0 million; 72.7% | $311.8 million; 70.7% |
| Operating income | $80.9 million; 14.1% of revenue | $54.2 million; 12.3% |
| Net income | $44.9 million | $29.7 million |
| Diluted EPS | $1.46 | $1.05 |
| EBITDA (non-GAAP) | $151.3 million | $94.2 million |
| Cash provided by operating activities | $143.9 million | $108.3 million |
Revenue rose approximately 30.6% and net income approximately 50.9% year over year. Gross and operating margins also improved. Management attributed revenue growth chiefly to $76.8 million from Apartments.com, alongside subscription-service penetration, cross-selling and high customer renewals. Subscription renewal was approximately 92%, versus 93% in 2013.
Fourth-quarter revenue was $156.1 million, versus $115.6 million in Q4 2013. Operating income was $23.3 million versus $21.7 million; net income was $13.9 million versus $12.8 million. Diluted EPS was $0.43 versus $0.45.
At year-end, cash and cash equivalents were $527.0 million, working capital was $480.5 million, total assets were $2.08 billion and stockholders’ equity was $1.51 billion. Long-term debt, including current maturities, was $385.0 million; no revolving-credit borrowings were outstanding. The company reported compliance with credit-agreement covenants. It said cash and expected operating cash flow should fund operations for at least 12 months.
Investing cash outflow was $606.0 million, primarily reflecting the $584.2 million cash acquisition of Apartments.com; financing cash inflow was $733.5 million, principally reflecting $529.4 million of net equity-offering proceeds and debt activity. The company held $17.2 million in auction-rate securities at fair value ($18.7 million par), which were illiquid and had failed auctions.
Material changes and notable items
- On April 1, 2014, CoStar acquired Apartments.com for $584.2 million net of working-capital adjustments. The business contributed $76.8 million of 2014 revenue and a $23.9 million pretax loss.
- CoStar issued 3.45 million shares in June 2014 at $160 per share, raising approximately $529.4 million net.
- The company entered a five-year credit agreement with a $400 million term loan and a $225 million revolving facility; the revolving facility was repaid in June. Variable-rate debt was $385 million at year-end.
- International revenue increased to $23.8 million from $20.1 million, and segment EBITDA turned positive at $2.3 million, compared with a $3.1 million loss.
- CoStar recorded $1.8 million of impairment charges related to discontinued trade names following brand changes, and paid $2.9 million to settle Civix patent litigation.
Outlook, risks and contingencies
Management expected existing services to remain profitable and generate substantial cash flow in 2015, while noting that investments or unforeseen events could produce losses or negative operating cash flow. It forecast 2015 capital expenditures of approximately $30–$40 million, primarily for leased-office build-outs. No specific 2015 revenue or earnings guidance is provided in the filing text.
Following the February 2015 Apartments.com relaunch, CoStar planned an incremental $75 million marketing investment during 2015 above the business’s 2014 annualized marketing spend. Management expects the campaign and product improvements to build awareness, traffic and advertiser appeal, but cautions that returns are uncertain. A potential LoopNet shift toward a paid-listings marketing model could reduce revenue and earnings in the short term; the company had not decided whether to implement it.
Key risks include customer cancellations and weaker commercial real estate conditions; competition for users, listings and advertisers; execution and integration risks for Apartments.com; returns on elevated marketing and product-development spending; data accuracy and cybersecurity or service interruptions; foreign-exchange exposure; and debt covenants and variable interest rates. The $18.7 million par value of auction-rate securities is not readily liquid, and further valuation losses are possible. The company reported no litigation it believed likely to have a material adverse effect, while noting other matters and uncertainty around possible outcomes. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification points
- Separate organic subscription growth and renewal trends from acquired Apartments.com revenue; verify the 92% renewal rate and its subsequent direction.
- Track Apartments.com traffic, advertiser growth, contribution to earnings and returns on the planned $75 million incremental marketing spend.
- Assess whether margin gains persist as marketing, research and integration costs increase, and review the acquired business’s reported pretax loss.
- Review debt amortization, interest-rate sensitivity, covenant headroom and liquidity alongside the company’s acquisition plans.
- Monitor auction-rate security liquidity and valuation, goodwill and intangible-asset recoverability, and any decision or financial effect from a LoopNet model change.