CoStar Group, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2023, compared with the same period in 2022. CoStar provides commercial real estate information, analytics, marketplaces and related services; most revenue comes from subscriptions. The company reports North America and International operating segments.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $584.4 million | $515.8 million | +13% |
| Gross profit / gross margin | $465.2 million / 80% | $420.3 million / 81% | Profit +11%; margin lower |
| Operating expenses | $392.9 million | $292.1 million | +35% |
| Income from operations | $72.2 million | $128.3 million | -44% |
| Net income | $87.1 million | $89.3 million | -2% |
| Diluted EPS | $0.21 | $0.23 | Down $0.02 |
| Operating cash flow | $123.2 million | $130.7 million | -$7.5 million |
Calculated net margin was approximately 14.9%, versus 17.3% a year earlier; operating margin was approximately 12.4%, versus 24.9%. Net interest income was $43.5 million, compared with net interest expense of $7.7 million in Q1 2022, primarily reflecting higher interest earned on cash equivalents. The effective tax rate was approximately 25%, versus 26%.
Revenue growth was led by Multifamily (+20% to $210.7 million), CoStar (+13% to $225.0 million) and LoopNet (+16% to $63.2 million). Information Services rose 12% to $41.6 million. Residential declined 27% to $13.2 million, and Other Marketplaces declined 4% to $30.6 million. Subscription services represented approximately 95% of revenue, versus 93% a year earlier. Annualized net new subscription bookings were $80 million, up from $68 million; trailing-twelve-month renewal rates were approximately 90%, versus 91%.
Cash and cash equivalents were $5.06 billion at March 31, 2023, up from $4.97 billion at year-end. The company reported $1.0 billion face value of 2.8% Senior Notes due 2030, with $989.5 million net debt carrying value, and no borrowings on its $750 million revolving facility. Management said cash, operating cash generation and capital-market access should cover cash requirements for the next 12 months and beyond.
Investing cash outflow was $19.6 million, including $15.7 million for Richmond campus assets; financing cash outflow was $15.9 million, primarily restricted-stock tax withholding. Cash flow from operations was lower year over year, mainly due to working-capital changes and slightly lower net income.
Material changes versus prior year
- Revenue increased 13%, while operating income fell 44% as costs grew faster than sales.
- Selling and marketing expense rose 57% to $226.2 million, including approximately $55 million more marketing expense, primarily SEM advertising for residential brands, and higher sales-force and events costs.
- Cost of revenue rose 25%, including higher personnel and technology-hosting costs. Software development expense increased 23%.
- Company EBITDA, a non-GAAP measure, fell to $97.8 million from $158.4 million. North America EBITDA declined to $96.7 million from $156.0 million; International EBITDA was $1.2 million versus $2.5 million.
Outlook, commentary and risks
Management expects continued investment in Homes.com, LoopNet, international expansion and CoStar products. It expects 2023 selling and marketing expense to rise and operating income to decline versus 2022, reflecting these priorities and the full-year effect of sales-force growth. Management expects CoStar growth to slow; Information Services growth to be consistent with 2022; Multifamily and LoopNet growth to accelerate; Residential revenue to decline; and Other Marketplaces growth to slow. These are directional expectations; the filing does not provide a clear consolidated revenue or earnings guidance figure.
The Richmond campus expansion is expected to cost $450–$550 million net of estimated tax incentives over 2023–2032. As of March 31, $33 million had been paid and a further $426 million was committed under existing contracts; 2023 cash expenditures were expected to be approximately $170 million. Incentives depend on meeting job-creation and capital-spending targets, and failure could reduce benefits or require repayment of prior tax reductions.
Management noted that higher interest rates, hybrid and remote work, and possible weaker real estate demand could pressure customers, renewals, revenue and profitability, though current conditions had not materially affected the reported quarter. Other disclosed risks include execution and returns on residential and other investments, competition, customer retention, acquisitions, cybersecurity and data reliability, foreign exchange exposure, and campus-project execution. Approximately 4% of quarterly revenue was denominated in foreign currencies; the company did not hedge that exposure. Current litigation was not expected by management to materially affect financial position, results or liquidity. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether substantial marketing and sales-force investment—particularly for Homes.com—translates into sustained traffic, listings, bookings and revenue growth without further material margin deterioration.
- Whether subscription renewal rates stabilize and the reported $80 million of net new bookings converts into recognized revenue; the $416 million of remaining performance obligations excludes contracts with terms of one year or less.
- How interest earned on the large cash balance affects earnings if rates change, and how the balance is held across financial institutions and money-market funds.
- Progress, final cost and tax-incentive conditions for the Richmond expansion, including the remaining commitments and planned 2023 cash outlay.
- Performance of the weaker Residential and Other Marketplaces businesses, and the assumptions underlying management’s product-level growth expectations.