CoStar Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. CoStar provides commercial real estate information, analytics and marketplaces, alongside residential and other property services. Most revenue comes from subscriptions; the company reports North America and International segments.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $605.9 million | $536.3 million | $1,190.3 million | $1,052.1 million |
| Gross profit / margin | $493.5 million / 81% | $435.3 million / 81% | $958.7 million / 81% | $855.7 million / 81% |
| Operating income | $79.1 million | $110.2 million | $151.4 million | $238.5 million |
| Net income | $100.5 million | $83.5 million | $187.7 million | $172.8 million |
| Diluted EPS | $0.25 | $0.21 | $0.46 | $0.44 |
| Operating cash flow | Not separately provided for Q2 | Not separately provided for Q2 | $298.4 million | $212.1 million |
Q2 revenue rose 13% year over year, while operating income fell 28%. Selling and marketing expense rose 38% to $250.0 million, mainly from residential brand advertising and sales-force costs. Net income increased 20%, supported in part by a $51.9 million net interest-income benefit, versus $3.4 million net interest expense a year earlier. Q2 net margin was approximately 16.6%, compared with 15.6%.
For the first half, revenue grew 13%, but operating income declined 37% as operating expenses rose 31%. First-half net income increased 9%, also benefiting from the shift to net interest income.
Business performance and material changes
- Multifamily: Q2 revenue increased 23% to $224.3 million, attributed to renewal pricing and more listed properties.
- CoStar: Q2 revenue increased 11% to $229.2 million, supported by price increases, customer upgrades and subscriber growth.
- LoopNet: Q2 revenue rose 16% to $65.6 million, mainly from higher average listing prices.
- Residential: Q2 revenue decreased 37% to $12.7 million after discontinuation of products not aligned with the company’s long-term strategy.
- Other Marketplaces: Q2 revenue was nearly flat at $32.3 million; lower Ten-X transaction revenue weighed on the first-half comparison.
- Annualized net new subscription bookings were $82 million in Q2, versus $84 million in Q2 2022. Trailing 12-month renewal rates for subscriptions of at least one year were approximately 90%, down from 91%.
Liquidity, debt and cash flow
- Cash and cash equivalents were $5.205 billion at June 30, 2023, up from $4.968 billion at year-end 2022. Current assets were $5.445 billion and current liabilities were $442.8 million.
- Long-term debt, net, was $989.9 million, representing $1.0 billion of 2.8% senior notes due in 2030. The $750 million revolving facility, maturing in 2025, had no borrowings outstanding. The company reported compliance with debt covenants and was in a covenant suspension period.
- First-half operating cash flow was $298.4 million; investing cash outflow was $54.4 million and financing cash outflow was $6.3 million. Cash increased by $237.3 million.
- The Richmond campus expansion is expected to cost $450–$550 million net of estimated tax incentives from 2023 to 2032. By June 30, the company had paid $60 million and committed an additional $412 million under existing contracts; 2023 cash expenditures were expected to be about $170 million. Management expects to fund the project with cash on hand.
Outlook, commentary and risks
- The filing provides no consolidated numerical revenue or earnings guidance. Management expects 2023 CoStar and Information Services growth rates to slow versus 2022; Multifamily and LoopNet growth rates to accelerate; and Residential and Other Marketplaces revenue to decline.
- Management plans continued investment in Homes.com, LoopNet and CoStar products, sales capacity and marketing. It expects these investments, including the full-year impact of sales-force growth, to increase selling and marketing expense and reduce 2023 operating income versus 2022.
- Management said current economic conditions had not materially affected results through June 30, but warned that higher rates, hybrid or remote work and weaker real estate demand could hurt customers, subscriptions, renewals and profitability.
- Other cited risks include execution and returns on residential marketing and the Richmond campus project, competition, customer retention, data accuracy, cybersecurity, international currency exposure and acquisition integration. Approximately 4% of revenue was denominated in foreign currencies; the company did not hedge this exposure.
- Litigation is incidental to the business; management did not expect current matters to materially affect financial position, results or liquidity. No material subsequent events were identified, and no material risk-factor changes from the 2022 Form 10-K were reported.
Investor facts to verify
- Whether substantial marketing and hiring investment translates into durable Homes.com traffic, customer demand and revenue, and how it affects operating margins.
- Trends in subscription bookings and renewal rates, particularly given the year-over-year decline in both reported metrics.
- Whether Multifamily and LoopNet growth can offset declines in Residential and transaction-sensitive Ten-X revenue.
- Richmond campus spending against the $450–$550 million estimated net cost, committed obligations and conditional tax incentives.
- How much reported net income continues to depend on interest earned on the large cash balance, and the sensitivity of that income to rate changes.