CoStar Group, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are included where available. CoStar provides commercial real estate information, analytics and online marketplaces, alongside apartment rental marketplaces. Its reporting segments are North America and International.
Financial and operating performance
| Metric | FY 2015 | FY 2014 | Change / context |
|---|---|---|---|
| Revenue | $711.8 million | $575.9 million | Up $135.8 million, or about 23.6%; Apartment Finder and Apartments.com contributed about $83.8 million of the increase. |
| Gross margin | $522.9 million; 73.5% | $419.0 million; 72.7% | Margin improved 0.8 percentage points. |
| Operating expenses | $511.4 million | $338.1 million | Increase was led by selling and marketing, including the Apartments.com campaign. |
| Operating income / margin | $11.5 million; 1.7% | $80.9 million; 14.1% | Significant decline despite higher revenue. |
| Net income (loss) | $(3.5) million; $(0.11) diluted EPS | $44.9 million; $1.46 diluted EPS | Moved to a net loss. |
| EBITDA (non-GAAP) | $90.0 million | $151.3 million | Down from prior year; not a substitute for GAAP results. |
| Cash from operating activities | $131.2 million | $143.9 million | Down $12.7 million. |
| Cash and cash equivalents | $421.8 million | $527.0 million | Decrease primarily reflected acquisition spending. |
| Working capital | $337.5 million | $480.5 million | Down year over year. |
| Long-term debt, gross principal | $365.0 million | $385.0 million | No revolving credit borrowings outstanding at year-end. |
Fourth quarter: Revenue was $193.0 million versus $156.1 million in Q4 2014. Operating income was $35.5 million versus $23.3 million, and net income was $23.0 million versus $13.9 million. Q4 gross margin was 76.6% of revenue.
North America revenue was $686.6 million and segment EBITDA was $87.1 million, down from $148.9 million. International revenue was $25.2 million and segment EBITDA was $2.9 million, up from $2.3 million.
Material changes versus prior period
- Revenue growth reflected acquisitions, subscription-service penetration, cross-selling and renewals. Annualized net new sales on annual subscription contracts rose to $29.2 million from $17.3 million.
- CoStar subscription renewal rate fell to about 90% from 92%; management attributed the decrease in part to LoopNet customers adopting annual contracts, who typically renew at lower rates.
- Selling and marketing expense rose to $302.2 million from $150.3 million, or 42.5% of revenue versus 26.1%. Advertising costs were $132.1 million versus $28.7 million.
- Apartment Finder was acquired on June 1, 2015 for $172.7 million; CoStar also acquired Belbex assets in Madrid and certain Apartment Finder distributor assets. Net cash paid for 2015 acquisitions was $182.3 million.
- Cash from operations declined, while cash used in investing activities was $215.5 million, primarily reflecting acquisitions and capital spending.
Outlook, risks and unusual items
- Management expects technology enhancements to support revenue growth in 2016 and beyond and expects to continue investing in sales and marketing, including apartment brands. Planned 2016 capital expenditures are approximately $30–$35 million. Management believes cash and operating cash flow should fund operations for at least 12 months.
- Management cautions that continued marketing, product development, geographic expansion and acquisition integration may pressure profitability and could result in losses or negative operating cash flow. The company expects short-term revenue and cost reductions from discontinuing certain Apartment Finder services and print advertising.
- CoStar is evaluating a possible transition of LoopNet toward a paid-listing marketing marketplace with free search; timing, financial impact and customer conversion are uncertain.
- 2015 included approximately $2.8 million of impairment charges related to replaced Apartments.com technology and discontinued Apartment Finder services or development. Goodwill was approximately $1.25 billion; the annual impairment test found no impairment.
- Debt bears variable interest and is secured by substantially all company and material-subsidiary assets, subject to exceptions. The company reported compliance with credit-facility covenants at year-end. A 25-basis-point rate increase was estimated to raise annual interest expense by about $0.9 million.
- $16.8 million par value of auction-rate securities remained illiquid at year-end; fair value was $15.5 million, with a $435,000 temporary unrealized loss. Management said it did not expect to need to sell below par to fund operations.
- Management reported no litigation matter considered probable of loss and no material adverse effect anticipated; it could not estimate a possible loss range for current litigation. The FTC consent order relating to the LoopNet merger continues to constrain certain business practices.
- Key risks include customer retention and marketplace traffic, competition, acquisition integration, data accuracy, privacy and cybersecurity, foreign-exchange exposure, and commercial real estate and economic conditions. Foreign-currency revenue was about 4.1% of total revenue; the company did not hedge currency exposure.
Important facts for investors to verify
- How much 2015 revenue growth was organic versus acquired, and whether subscription renewal rates stabilize or recover.
- Whether Apartments.com and Apartment Finder deliver advertiser growth and returns sufficient to justify the sharp increase in marketing spending.
- Whether operating profitability and cash generation improve as acquisition integration and marketing investments mature.
- Debt repayment, variable-rate exposure, covenant headroom and the company’s capacity for further acquisitions and planned capital expenditures.
- Realizability of acquisition-related goodwill and intangible assets, and liquidity and valuation of auction-rate securities.
- Progress on integrating CoStar and LoopNet systems, any LoopNet business-model changes, and the effects of the FTC consent order.