CoStar Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. CoStar provides commercial real estate information, analytics and online marketplaces, primarily through subscription services. Amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $170.7 million | $147.7 million | $329.7 million | $266.8 million |
| Gross margin | $126.0 million; 73.8% | $108.2 million; 73.3% | $239.6 million; 72.7% | $193.7 million; 72.6% |
| Operating income (loss) | $(20.1) million | $16.9 million | $(23.6) million | $34.1 million |
| Net income (loss) | $(15.0) million; $(0.47) per diluted share | $8.2 million; $0.28 per diluted share | $(21.1) million; $(0.66) per diluted share | $18.0 million; $0.62 per diluted share |
| EBITDA (non-GAAP as defined by CoStar) | $(1.5) million | $37.6 million | $12.9 million | $64.6 million |
- Revenue increased 15.5% year over year in Q2 and 23.6% for the first half. Growth reflected subscription penetration, cross-selling and customer renewals; first-half revenue also included approximately $29.4 million from Apartments.com.
- Q2 and first-half losses contrast with prior-year profits. Management attributed the deterioration principally to the Apartments.com marketing campaign: selling and marketing expense rose to $92.4 million in Q2 from $40.9 million, and to $161.9 million for the half from $68.6 million. Advertising costs were $44.4 million in Q2 and $79.0 million for the half.
- Cash provided by operations was $27.0 million for the first half, down from $43.3 million. Investing used $189.2 million, including $172.7 million for Apartment Finder; financing used $13.1 million. Cash and equivalents fell to $351.8 million from $527.0 million at year-end 2014.
- At June 30, current assets were $450.3 million and current liabilities $141.3 million. Long-term debt totaled $375.0 million, including $20.0 million current; no revolving-credit borrowings were outstanding. The $225 million revolver remained available. CoStar reported compliance with its debt covenants.
Changes, acquisitions and management outlook
- CoStar acquired Apartment Finder on June 1 for approximately $172.7 million cash. Preliminary purchase accounting included $107.7 million goodwill and remains subject to change. The company is integrating and developing the business alongside Apartments.com.
- CoStar launched a redesigned Apartments.com site in February 2015 and is running a marketing campaign through year-end, with approximately $80 million of incremental investment above Apartments.com’s 2014 annualized marketing spend. Management expects investment in product development, integration and marketing to support growth, while acknowledging it may reduce profitability.
- Management forecast 2015 capital expenditures of approximately $35–$45 million, primarily for leased-office build-outs. The filing gives no specific revenue or earnings guidance. Management said available cash and expected operating cash flow should fund operations for at least the next 12 months.
- Annualized net new sales of annual subscription contracts were approximately $25.5 million at June 30, compared with $16.0 million a year earlier. CoStar’s trailing 12-month renewal rate was approximately 91%, versus 92%.
- Management was assessing a possible transition of LoopNet to a free-search, paid-listing marketing site, which could reduce revenue and earnings in the short term if implemented. It also planned to phase out Apartment Finder print advertising. On July 1, after quarter-end, CoStar expanded into Madrid through a small asset acquisition.
Risks, contingencies and unusual items
- Impairment charges totaled approximately $2.8 million in the first half: $1.4 million related to Apartments.com technology after its replacement, and approximately $1.4 million related to Apartment Finder assets and services CoStar decided to discontinue.
- Apartment Finder integration, retention of clients and key employees, realization of synergies, and returns on the large Apartments.com marketing investment are identified risks. Other risks include commercial real estate and economic conditions, competition, customer retention, foreign exchange and execution of product and geographic expansion.
- CoStar held auction-rate securities with $17.3 million par value that had failed to settle at auction; their June 30 fair value was $16.0 million. The $443,000 unrealized decline was treated as temporary. These investments may not be liquid in the near term and could incur further losses.
- Debt bears variable interest; management estimated a 25-basis-point rate change would change annual interest expense by approximately $900,000. Current litigation was not considered probable to result in a loss, and the company had not accrued a liability; possible loss amounts were not estimable.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether Apartments.com and Apartment Finder traffic, advertising demand and subscription sales justify the elevated marketing and integration spending.
- Monitor renewals, annualized net new sales and the effect of the 2015 marketing campaign on operating cash flow and margins.
- Review Apartment Finder purchase-accounting adjustments, integration costs, impairment risk and progress toward expected synergies.
- Verify debt amortization, covenant headroom, variable-rate exposure and liquidity, including the recoverability and marketability of auction-rate securities.
- Assess any decision to change LoopNet’s business model and the associated near-term revenue impact; distinguish GAAP results from CoStar’s non-GAAP EBITDA measure.