CoStar Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. CoStar provides subscription-based commercial real estate information, analytics and online marketplaces, across North America and International markets.
Financial performance
Amounts are in USD millions except per-share data and percentages.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $328.4 | $273.7 | +20% |
| Gross profit / margin | $257.3 / 78% | $211.2 / 77% | +22% gross profit |
| Operating income / margin | $93.5 / 28.5% | $53.4 / 19.5% | +75% |
| Net income | $85.2 | $52.2 | +63% |
| Diluted EPS | $2.33 | $1.44 | +62% |
| Operating cash flow | $148.5 | $73.0 | +$75.5 |
| Capital expenditures | $9.4 | $8.6 | +$0.8 |
| Company-reported EBITDA | $113.2 | $70.4 | +61% |
- Revenue by service: CoStar Suite $147.7 million (+13%); information services $18.9 million (+25%); multifamily $114.3 million (+30%); commercial property and land $47.6 million (+17%).
- North America revenue was $319.2 million; International revenue was $9.2 million. North America EBITDA rose to $115.3 million from $71.1 million, while International EBITDA was a $2.1 million loss versus a $0.6 million loss.
- Cash and cash equivalents were $1.233 billion at quarter-end, up from $1.100 billion at December 31, 2018. Current assets were $1.346 billion and current liabilities $198.2 million.
- No long-term debt was outstanding. The company had a $750 million revolving credit facility and reported compliance with its covenants. Lease liabilities were $145.2 million at quarter-end, including $26.1 million current.
- Cash flow from operations less purchases of property and equipment was approximately $139.1 million. Financing activities used $6.6 million; investing activities used $9.4 million, versus $348.7 million in Q1 2018, which included the ForRent acquisition.
Changes versus prior year
- Revenue growth reflected the full-quarter contribution from ForRent, acquired in February 2018, and organic growth. Management attributed multifamily growth to ForRent and the effects of prior-year marketing; CoStar Suite also grew organically.
- Operating income increased faster than revenue. Gross margin was approximately 78%, versus 77%; software development expense rose 22% to $27.9 million, while selling and marketing expense was nearly flat at $88.1 million.
- Net income growth was partly offset by income tax expense increasing to $12.5 million from $3.5 million. The effective tax rate was approximately 13%, versus 6%, with the increase primarily reflecting higher pre-tax income, partly offset by higher excess tax benefits.
- Operating cash flow more than doubled, aided by higher net income and timing of accrued expense payments and income taxes payable. The prior-year comparison also included $340 million of cash acquisition spending for ForRent.
- Annualized net bookings were approximately $48 million, versus $35 million. The renewal rate for existing annual CoStar subscription contracts was approximately 90%, compared with 91%.
Outlook, commentary and risks
- No numerical full-year financial guidance is provided in the filing. Management expects lower multifamily year-over-year revenue growth in the remaining 2019 quarters, citing the ForRent anniversary, ongoing integration and discontinuation of certain ForRent products included in 2018 results.
- Management plans continued investment in rental services, CoStar Suite, LoopNet, research and international expansion, including integrating Cozy and Realla. It cautions that investment, acquisitions or service changes could reduce profitability, increase capital spending, or result in lower revenue or negative cash flow.
- Management expects available cash and operating cash flow to be sufficient to fund operations for at least the next 12 months, based on current plans. Future capital needs depend partly on expansion and acquisition activity.
- Risks highlighted include commercial real estate and economic conditions, customer retention, marketing returns, execution and integration of ForRent, Realla and Cozy, competition, data quality, cybersecurity and privacy, foreign currency movements, and potential impairment of goodwill or intangibles.
- Foreign-currency revenue was about 4% of total revenue; a 10% U.S. dollar strengthening or weakening was estimated to change quarterly revenue by approximately $1 million. The company does not currently hedge this exposure.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recognizing $116 million of right-of-use assets and $150 million of lease liabilities at adoption, and a $12 million after-tax increase to opening retained earnings related to the headquarters sale-leaseback. Quarter-end operating lease liabilities had a present value of $145.2 million.
- Approximately $206 million of remaining contract consideration for unsatisfied performance obligations was expected to be recognized over the next five years; contracts of one year or less are excluded. Litigation was described as incidental, with no current matter expected by management to materially adversely affect financial position, results or liquidity.
Important facts for investors to verify
- How much of reported growth, particularly multifamily, is recurring organic growth versus acquisition contribution, marketing effects or discontinued products.
- Whether bookings, renewal rates and customer retention trends support continued subscription revenue growth.
- Progress and costs of integrating ForRent, Cozy and Realla, and whether planned product and cross-selling investments deliver expected returns.
- Drivers and sustainability of the increased operating cash flow, including working-capital timing, and the effect of the higher effective tax rate.
- Lease obligations and the liquidity and valuation risks of the $10.1 million fair-value auction-rate securities portfolio, which had failed to settle at auction.
- Potential effects of currency exposure, goodwill and intangible-asset recoverability, and ongoing legal contingencies.