CoStar Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited, with comparisons to Q1 2021 unless stated otherwise. CoStar provides commercial real estate information, analytics and online marketplaces, alongside residential and other marketplace services. Most revenue comes from subscriptions. Amounts below are in U.S. dollars; figures are rounded to millions where appropriate.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $515.8m | $457.7m | +13% |
| Gross profit / margin | $420.3m / about 81% | $368.9m / about 81% | Gross profit +14% |
| Operating income / margin | $128.3m / 24.9% | $101.2m / 22.1% | +27% |
| Net income / diluted EPS | $89.3m / $0.23 | $74.2m / $0.19 | Net income +20% |
| Operating cash flow | $130.7m | $87.9m | +$42.9m |
| EBITDA (non-GAAP) | $158.4m | $135.5m | +17% |
Cash, cash equivalents and restricted cash were $3.93bn at March 31, 2022, versus $3.83bn at year-end 2021. Net cash used in investing was $12.4m, compared with $134.3m in Q1 2021, which included $123m for the Richmond property. Net cash used in financing was $15.8m. The filing reports $12.4m in purchases of property and equipment and other assets; this is not presented as a standalone capital-expenditure total.
Debt was $1.0bn face value, consisting of 2.8% Senior Notes due 2030; net carrying value was $988.3m. The $750m revolving facility, due 2025, was undrawn. Current assets were $4.10bn and current liabilities $370.2m. Management said cash, operating cash generation and capital-market access should be sufficient for requirements over the next 12 months and beyond.
Material changes and business trends
- Revenue grew across all reported service categories: CoStar +15% to $198.6m; Multifamily +6% to $175.5m; LoopNet +11% to $54.4m; Residential +63% to $18.1m; Other Marketplaces +31% to $32.0m; and Information Services +7% to $37.2m.
- CoStar growth reflected more subscribers and renewal price increases. Multifamily benefited from renewal pricing but had fewer advertised properties. Residential growth primarily reflected Homesnap product sales. Other Marketplaces benefited from Ten-X transaction value and land listings.
- Operating expenses rose 9% to $292.1m. General and administrative expense increased 22%, including higher personnel, travel, software and credit-loss costs; software development expense increased 15%, partly from residential investment. Selling and marketing rose 4% despite lower marketing spend.
- The effective tax rate increased to approximately 26% from 20%, largely due to lower excess tax benefits. The company reported no goodwill or intangible-asset impairment in the quarter.
- Annualized net new subscription bookings were approximately $68m, versus $52m. Trailing-twelve-month renewal rates for eligible contracts were approximately 91%, versus 90%.
Outlook, risks and notable items
- No consolidated numerical revenue or earnings guidance is provided in the filing. Management expected CoStar’s 2022 revenue growth rate to increase versus 2021; Information Services growth to be consistent; and Multifamily and LoopNet growth rates to decrease. Residential revenue was expected to decline in 2022, partly offset by Homesnap growth; Other Marketplaces growth was expected to be lower than in 2021.
- Management expected to increase 2022 investment in residential products by approximately $200m, primarily for content, marketing and technology. It said this investment was expected to reduce 2022 operating results and operating cash flow. A Richmond campus expansion may also require material cash in 2022 and beyond, expected to be funded from cash on hand.
- Management said COVID-19 had not materially affected the reported statements, but warned that weaker commercial real estate demand—particularly if office demand falls—could harm client spending, renewals, revenue and profitability. Other cited risks include acquisition integration and returns, competition, customer retention, cyber/privacy matters, foreign currency movements and product-development execution.
- Foreign-currency-denominated revenue was approximately 3% of Q1 revenue; a 10% strengthening or weakening of the U.S. dollar was estimated to change quarterly revenue by about $2m in the opposite or same direction, respectively. The company did not hedge foreign-exchange exposure.
- Management said ongoing litigation was not expected to materially affect financial position, results or liquidity. The company acquired Business Immo on April 5, 2022, after quarter-end. The filing also notes a $7m Homes.com state-tax accrual and an offsetting indemnification asset established at acquisition.
Important facts for investors to verify
- Whether the planned approximately $200m residential investment delivers the expected growth and how it affects full-year earnings and cash flow.
- Whether CoStar subscriber additions and renewal pricing sustain growth, and whether Multifamily listing declines or LoopNet sales-force development affect outlook.
- How much of the operating-cash-flow increase reflects sustainable operations versus working-capital timing; the increase was attributed primarily to a $39m improvement in working-capital changes.
- Cash requirements for the Richmond campus expansion, acquisitions and integration, and the terms and financial impact of the post-quarter Business Immo acquisition.
- Debt maturity, facility availability and covenant compliance; management reported compliance and an undrawn revolver at March 31, 2022.
- Potential impacts from office-market weakness, foreign exchange, goodwill and intangible-asset recoverability, and the Homes.com tax contingency and indemnification.