CoStar Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. CoStar provides commercial real estate information, analytics and online marketplaces, alongside residential, apartment, land and business-for-sale services. Most revenue is subscription-based; the company reports North America and International segments.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $624.7 million (+12%) | $556.9 million | $1,814.9 million (+13%) | $1,609.1 million |
| Gross profit / margin | $501.0 million / 80% | $448.6 million / 81% | $1,459.7 million / 80% | $1,304.2 million / 81% |
| Operating income | $61.6 million (-28%) | $85.3 million | $213.0 million (-34%) | $323.8 million |
| Net income | $90.6 million (+25%); diluted EPS $0.22 | $72.3 million; diluted EPS $0.18 | $278.2 million (+14%); diluted EPS $0.68 | $245.1 million; diluted EPS $0.62 |
| Operating cash flow | Not presented quarterly in the filing text | — | $341.0 million | $293.6 million |
- Revenue growth was led by Multifamily: Q3 revenue rose 24% to $235.3 million, supported by more listed properties and higher renewal pricing. CoStar grew 10% to $233.4 million; LoopNet grew 15% to $67.5 million.
- Residential revenue fell 47% to $10.3 million in Q3 as the company discontinued products it considered non-strategic. Other Marketplaces fell 5% to $33.6 million, mainly on lower Ten-X auction volumes.
- Q3 selling and marketing expense increased 44% to $266.9 million, including $68 million more brand advertising; software development expense rose 19%. These costs weighed on operating income. The prior-year quarter also included a $16.3 million accelerated Homesnap customer-base amortization charge, contributing to lower amortization expense in 2023.
- Net income grew despite lower operating income, primarily because net interest income rose to $58.4 million in Q3 and $153.9 million for the nine-month period, reflecting interest earned on cash. Nine-month segment EBITDA, a non-GAAP measure, declined to $291.8 million from $427.6 million.
- Gross margin eased to 80% from 81%; Q3 operating margin was approximately 9.9%, versus 15.3% a year earlier. Subscription services represented about 95% of Q3 revenue, compared with 92% in Q3 2022.
Liquidity, debt and commitments
- Cash and cash equivalents were $5.23 billion at September 30, 2023, up from $4.97 billion at year-end 2022. Nine-month operating cash flow was $341.0 million; investing activities used $76.0 million and financing activities used $3.0 million.
- Long-term debt, net, was $990.2 million, consisting of $1.0 billion of 2.8% Senior Notes due 2030, net of discount and issuance costs. The $750 million revolving credit facility, maturing in 2025, was undrawn. The company reported compliance with covenants and was in a Covenant Suspension Period.
- Management said cash, operating cash generation and access to capital should meet cash requirements for the next 12 months and beyond. Purchase obligations totaled $270 million, including $100 million due within 12 months.
- The Richmond campus expansion is expected to cost $450–$600 million net of estimated tax incentives over 2023–2032. As of September 30, $73 million had been paid and another $488 million was committed under existing contracts; expected 2023 cash expenditures were approximately $170 million.
Outlook, management commentary and risks
- Management expects 2023 revenue growth to slow for CoStar and Information Services, while Multifamily and LoopNet growth is expected to accelerate. Residential and Other Marketplaces revenue are expected to decline, reflecting discontinued products and lower expected Ten-X transaction revenue. These are directional expectations; the filing text does not provide clear numerical full-year revenue or earnings guidance.
- The company plans continued investment in Homes.com and residential marketplaces, LoopNet, international expansion and CoStar products. Management expects higher selling and marketing expense and lower operating income in 2023 versus 2022 due to investment priorities and the full-year effect of sales-force expansion.
- Annualized net new subscription bookings were $65 million in Q3, down from $76 million a year earlier. Trailing 12-month renewal rates for contracts of at least one year were approximately 90%, versus 91%.
- Management cited high interest rates and elevated office vacancies as contributing to weaker commercial real estate transaction activity and lower prices in some asset classes. It reported increased credit-loss expense and lower Ten-X transaction revenue; a prolonged downturn could weaken customer demand, renewals and collections. The allowance for credit losses rose to $20.9 million from $12.2 million at year-end 2022.
- On October 19, 2023, CoStar announced a recommended cash offer for U.K. portal operator OnTheMarket for approximately £99 million (about $120 million), subject to customary conditions including shareholder approval. The company expected to fund it with cash on hand and anticipated closing in Q4 2023.
- Litigation matters were described as incidental, with management not expecting their resolution to materially affect financial position, results or liquidity. The filing also highlights risks involving listing-data access and MLS compliance, competition, economic conditions, acquisitions, the Richmond project, cybersecurity, and foreign currency. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether heavy Homes.com, brand-marketing and sales-force investment generates sufficient traffic, bookings and revenue growth to support margins.
- Trends in subscription bookings, renewal rates, customer credit losses and Ten-X auction activity as commercial real estate conditions evolve.
- Actual Richmond campus spending, remaining commitments, project timing and realization of tax incentives tied to job and capital-spending targets.
- Completion, final cost and integration effects of the OnTheMarket offer, including required shareholder approval.
- The sustainability of elevated interest income on the company’s cash balance and the impact of interest-rate changes on cash yields.