CoStar Group, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results and was signed February 22, 2018. CoStar provides commercial real estate information, analytics, and online marketplaces, principally through subscription services, across North America and selected European markets.
Financial and operating results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $965.2 million | $837.6 million |
| Gross profit / margin | $744.8 million / 77% | $663.8 million / 79% |
| Operating income / margin | $173.8 million / 18% | $144.9 million / 17% |
| Net income | $122.7 million | $85.1 million |
| Diluted EPS | $3.66 | $2.62 |
| EBITDA (non-GAAP) | $237.5 million | $215.1 million |
| Cash provided by operating activities | $234.7 million | $200.6 million |
FY2017 revenue grew 15%; net income grew 44%. CoStar Suite revenue increased 13% to $463.2 million, multifamily marketplace revenue increased 24% to $279.9 million, and commercial property and land revenue increased 18% to $149.6 million. Information services declined 6% to $72.6 million, mainly as LoopNet information products were wound down. North America generated $934.5 million of revenue and $236.9 million of segment EBITDA; International generated $30.8 million of revenue and $0.6 million of segment EBITDA.
Gross margin fell two percentage points to 77%, reflecting higher research staffing and occupancy costs, partly offset by lower acquired-intangible amortization. Operating expenses rose 10%, including higher sales, software development, and general and administrative costs. G&A included approximately $13 million of litigation-related legal costs. Net income also benefited from lower income-tax expense, including discrete tax items.
In Q4 2017, revenue was $254.0 million versus $218.3 million in Q4 2016; net income was $44.2 million versus $29.6 million; diluted EPS was $1.22 versus $0.91. Q4 included a $3.8 million loss on debt extinguishment.
Liquidity, debt, and capital
Cash and cash equivalents were $1.211 billion at year-end, versus $567.2 million a year earlier; working capital was $1.141 billion. Operating cash flow was $234.7 million, investing cash outflow was $72.3 million, and financing cash inflow was $480.4 million. Financing included $833.9 million of net proceeds from an October equity offering of 3.32 million shares, offset in part by $345 million of debt repayments. The company repaid the remaining $310 million term-loan balance in October and had no outstanding borrowings at year-end. Its new five-year facility provides $750 million of revolving capacity. Management said cash and expected operating cash flow should fund operations for at least 12 months.
Year-end assets were $2.873 billion, including $1.283 billion of goodwill and $182.9 million of net intangible assets. Total liabilities were $222.2 million. Contractual obligations included $178.4 million of operating lease payments and $12.0 million of purchase obligations. The company has never paid a dividend and does not expect to do so in the foreseeable future.
Material changes, outlook, and risks
- Management expects 2018 revenue growth to be in line with or slightly above 2017 and expects capital expenditures to increase, including for office build-outs and technology. It plans continued investment in product development, research, sales, and marketing; these investments may pressure profitability.
- CoStar integrated the LoopNet and CoStar databases in 2017 and is transitioning LoopNet to a paid-listing, free-search marketplace while moving information customers to CoStar Suite. Management anticipates near-term revenue and earnings reductions may occur; the timing and extent of any offsetting growth are uncertain.
- On February 21, 2018, after the reporting date, CoStar completed its ForRent acquisition for approximately $385 million: approximately $350 million cash and $35 million in CoStar shares, subject to post-closing adjustments. Integration and cross-selling benefits are not assured.
- The December 2017 Tax Cuts and Jobs Act produced a provisional net tax benefit of approximately $7 million in FY2017. The tax accounting remained incomplete, and later adjustments could materially affect tax expense. The federal statutory rate reduction to 21% was effective in 2018.
- CoStar held $11 million par value of auction-rate securities that had failed to settle at auction; their year-end fair value was $10.1 million, including a $0.7 million unrealized loss. These investments may not be readily liquidated at par.
- Key risks include customer cancellations and retention, competition, the LoopNet transition, acquisition integration, execution of marketing and product investments, commercial real estate and economic cycles, data accuracy and cybersecurity, privacy regulation (including GDPR effective May 2018), foreign-exchange exposure, and goodwill or intangible-asset impairment. Foreign-currency revenue was about 3% of total revenue; management reported no hedging.
- Management reported no current litigation loss as probable and estimable, and therefore recorded no liability for current litigation; an unfavorable outcome remains possible, but the company said it could not estimate a loss range. The FTC consent order relating to the LoopNet merger imposes ongoing conditions.
Investor verification points
- Confirm that subscription growth and renewals support the reported 15% revenue growth; annual CoStar subscription renewal rates were approximately 91% in 2017 versus 90% in 2016.
- Track gross-margin recovery and whether higher research, marketing, and development spending produces sustainable operating leverage.
- Assess the revenue, earnings, cash, and share-count effects of the LoopNet migration and the ForRent acquisition.
- Review the final Tax Act accounting and subsequent effective tax rates, given the provisional FY2017 estimates and research-credit benefits.
- Monitor cash deployment, acquisition spending, credit-facility covenants, and the liquidity and valuation of auction-rate securities.