CoStar Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Comparisons are with the three months ended March 31, 2011, except balance-sheet comparisons, which are with December 31, 2011. CoStar provides commercial real estate information and analytics, primarily through subscriptions, and reports U.S. and International segments.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $68.6 million | $59.6 million | +15.1% |
| Gross profit / margin | $44.3 million / 64.5% | $37.1 million / 62.1% | Margin +2.4 percentage points |
| Operating income / margin | $8.6 million / 12.5% | $7.1 million / 11.9% | Income +21.2% |
| Net income / net margin | $5.1 million / 7.5% | $4.5 million / 7.6% | Income +13.2% |
| Diluted EPS | $0.20 | $0.22 | Down $0.02 |
| EBITDA, company-reported | $11.9 million | $10.5 million | +13.2% |
| Cash from operations | $6.4 million | $7.7 million | Down $1.3 million |
Revenue growth was attributed principally to greater subscription-service penetration, cross-selling and high renewal rates. Subscription services generated about 94% of revenue; the trailing 12-month renewal rate was 93%, versus 92% a year earlier. U.S. revenue rose to $64.0 million from $55.0 million; International external revenue was roughly flat at $4.6 million. U.S. EBITDA increased to $13.2 million from $11.4 million, while the International EBITDA loss widened to $1.3 million from $0.8 million.
Operating cash flow declined mainly because of working-capital movements, particularly accrued wages and commissions. Investing activities used $1.8 million, compared with $77.8 million provided in Q1 2011, when CoStar received proceeds from its headquarters building sale. Capital expenditures were $3.0 million in Q1; management expected 2012 capital expenditures of $15–$20 million.
At March 31, cash and cash equivalents were $549.1 million and short-term investments were $2.3 million, totaling $551.4 million, versus $548.8 million at year-end. Current assets were $584.9 million and current liabilities $57.7 million. Total liabilities were $107.0 million and equity $666.7 million. The balance sheet reported no funded borrowings; the newly arranged credit facilities were conditional on closing the LoopNet merger.
Material changes and notable items
- General and administrative expense increased to $14.5 million from $10.9 million, primarily reflecting higher legal and acquisition costs, personnel costs and Virtual Premise expenses. LoopNet-related costs were $1.2 million in Q1 and $15.4 million cumulatively through the quarter.
- Basic and diluted weighted-average shares increased to 25.1 million and 25.5 million, respectively, from 20.5 million and 21.0 million. The June 2011 equity offering issued 4.3 million shares and generated approximately $247.9 million in net proceeds; higher share count contributed to lower EPS despite higher net income.
- In October 2011 CoStar acquired Virtual Premise for approximately $17.0 million after purchase-price adjustments. Its results were consolidated from the acquisition date and were not material to the reported statements.
- CoStar recorded a $36.0 million deferred gain from its 2011 headquarters sale-leaseback, recognized as a reduction of rent expense over the lease term. The lease runs through May 2025.
Outlook, risks and contingencies
Management expected existing services to remain profitable and generate substantial cash flow, and stated available cash and operating cash flow should fund operations for at least 12 months. It also cautioned that product development, international expansion and the proposed LoopNet integration could increase expenses, reduce profitability and potentially result in losses or negative operating cash flow. CoStar expected continued investment in products including CoStar Fusion, which it believed could become a revenue driver in 2013; this was not a quantified earnings forecast.
The proposed LoopNet acquisition was valued at approximately $860 million in equity value and $762 million in enterprise value as of April 27, 2011. Financing was to include cash on hand and a conditional $175 million five-year term loan, plus a $50 million revolving facility. The facilities include financial covenants and restrictions on certain company actions. After quarter-end, the FTC accepted a consent order on April 26, 2012, terminating the antitrust waiting period; the order required divestiture of LoopNet’s minority interest in Xceligent and specified business-practice commitments. The merger remained subject to other closing conditions at the filing date. CoStar’s potential termination fee was $51.6 million in specified circumstances; LoopNet’s was $25.8 million.
Liquidity risk includes $27.3 million par value of auction-rate securities that had failed auctions, carried at $24.5 million fair value. The $2.7 million unrealized loss was treated as temporary and recorded in accumulated other comprehensive loss. CoStar warned that further losses or an earnings impairment charge could arise if auctions fail or credit quality deteriorates. Other risks cited include commercial real estate and broader economic weakness, client cancellations or payment failures, competition, foreign-exchange movements, acquisition integration and consent-order compliance. A proposed settlement of LoopNet shareholder litigation could cost CoStar approximately $100,000, subject to merger completion and court approval; management did not consider other current litigation losses probable.
Important facts for investors to verify
- Whether the LoopNet merger and Xceligent divestiture closed as intended, and the final FTC consent-order requirements and integration effects.
- Actual borrowing, debt-service and leverage covenant status after any merger-related financing; the reported quarter-end balance sheet had no funded debt.
- Subsequent subscription renewal rates, revenue growth and the International segment’s path toward profitability.
- Actual 2012 capital spending and acquisition/integration costs compared with management’s stated expectations.
- Recoverability and liquidity of the failed-auction securities, including any changes to their fair value or impairment assessment.