CoStar Group, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. CoStar provides commercial real estate information, analytics and marketing services in the U.S. and internationally, primarily through subscription services and the LoopNet marketplace.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $349.9 million | $251.7 million |
| Gross margin | $235.1 million; 67.2% | $163.6 million; 65.0% |
| Operating income | $27.4 million; 7.9% margin | $21.8 million; 8.6% margin |
| Net income | $9.9 million; $0.37 diluted EPS | $14.7 million; $0.62 diluted EPS |
| EBITDA (company-reported non-GAAP measure) | $60.2 million | $34.6 million |
| Cash from operating activities | $86.1 million | $25.7 million |
- Revenue rose approximately 39%, driven by LoopNet, acquired April 30, and organic subscription penetration and cross-selling. LoopNet contributed $60.0 million of FY2012 revenue and a $3.8 million net loss after acquisition.
- Fourth-quarter revenue was $100.1 million, versus $66.2 million in Q4 2011. Q4 operating income was $9.9 million versus $7.8 million; net income was $4.7 million versus $5.2 million.
- FY2012 net income fell despite higher revenue and operating income, reflecting increased purchase amortization, interest expense, income taxes and acquisition-related costs. The tax provision included $5.8 million of nondeductible transaction costs.
- Cash, cash equivalents and short-term investments were $156.1 million at year-end, down from $548.8 million. Working capital was $97.9 million. Operating cash flow increased; investing cash flow was negative $640.4 million, principally because of the LoopNet acquisition. Capital expenditures were $14.8 million.
- Year-end debt was $170.6 million, including $17.5 million current; the $50 million revolving facility was undrawn. Debt bears variable interest. The company reported compliance with loan covenants and no required excess-cash-flow prepayment for 2012.
- Annual subscription renewal rate improved to 94% from 93%. U.S. revenue was $330.8 million; International revenue was $19.1 million. U.S. EBITDA was $70.2 million; International EBITDA was a loss of $10.0 million.
Material changes and notable items
- LoopNet was acquired for total consideration of approximately $883.4 million, consisting of $746.4 million cash and $137.1 million in CoStar shares. The purchase-price allocation was preliminary. The transaction substantially increased goodwill, to $718.1 million, and intangible assets.
- Gross margin improved, but operating margin declined to 7.9% from 8.6%. Operating expenses rose to $207.6 million from $141.8 million; purchase amortization increased to $13.6 million from $2.2 million.
- FY2012 included $5.2 million of LoopNet acquisition-related costs and approximately $2.3 million of LoopNet employee severance expense. The company expects further integration and cross-selling spending, including in Q1 2013.
- Failed auctions left $24.4 million par value of auction-rate securities (ARS) illiquid at year-end; fair value was $21.7 million, with an approximately $1.9 million temporary impairment recorded in other comprehensive loss.
Outlook, risks and contingencies
- Management anticipated revenue growth in 2013 and beyond from product investment, international expansion and cross-selling, but provided no numerical revenue or earnings guidance in the supplied filing text. Management expected International development expense to decrease in 2013 and forecast $20–$25 million of 2013 capital expenditures, primarily for leased-office build-outs.
- Plans included upgraded U.S. services, further integration of acquired businesses and a Toronto launch in late 2013 or early 2014. Management said commercial real estate conditions showed improvement, while emphasizing uncertainty around the recovery, employment and customer spending.
- Key risks include customer retention and adoption, competition, data accuracy, execution and cost of LoopNet integration, acquisition-related goodwill and intangible-asset impairment, and compliance with the FTC consent order. The order requires products to be sold separately and on a market-by-market basis, among other licensing and customer protections.
- Variable-rate debt creates interest-rate exposure; a 25-basis-point rate increase was estimated to add about $0.4 million of annual interest expense. Foreign-currency exposure is unhedged; a 10% stronger U.S. dollar was estimated to reduce annual revenue by about $2.0 million.
- Pending Civix patent litigation involved unspecified damages, and management said the outcome could not be predicted. A separate merger-related stockholder settlement was estimated at approximately $200,000, subject to court approval. Management said other current litigation losses were not considered probable or estimable.
- Management stated that available cash and expected operating cash flow should fund operations for at least 12 months. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Verify LoopNet’s post-acquisition contribution, integration costs, customer retention and realized cross-selling benefits against management’s expectations.
- Review the preliminary LoopNet purchase-price allocation, amortization schedule, and assumptions supporting the $718.1 million goodwill balance and acquired intangible assets.
- Track operating margin, GAAP earnings versus EBITDA, and cash conversion as acquisition-related spending and purchase amortization continue.
- Confirm debt amortization, variable-rate exposure and covenant headroom; assess liquidity separately from the illiquid ARS portfolio.
- Monitor the FTC consent-order obligations, Civix litigation developments, and any changes in ARS valuation or impairment status.