CoStar Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. CoStar provides commercial real estate information, analytics, and online marketplaces, primarily through automatically renewing subscriptions. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $397.2M (+16%) | $343.8M | $789.0M (+17%) | $672.2M |
| Gross profit / margin | $323.1M / 81% | $271.8M / 79% | $636.1M / 81% | $529.1M / 79% |
| Operating income / margin | $81.3M / 20% | $74.8M / 22% | $157.2M / 20% | $168.3M / 25% |
| Net income | $60.4M (-5%) | $63.2M | $133.2M (-10%) | $148.4M |
| Diluted EPS | $1.60 | $1.73 | $3.57 | $4.06 |
| Segment EBITDA (non-GAAP) | $109.3M | $93.6M | $209.4M | $206.7M |
For the six months, operating cash flow was $248.6M, compared with $233.6M. Investing activities used $187.0M, including $184.5M for acquisitions; financing activities provided $2.42B, primarily from the equity offering and revolver borrowing. Capital expenditures and other property purchases were $12.8M.
At June 30, cash, cash equivalents and restricted cash totaled $3.55B, including $59M escrowed for the pending RentPath transaction. Current assets were $3.69B and current liabilities $263.4M. Debt was $745M, borrowed under the prior revolving facility; no debt was outstanding at December 31, 2019.
Changes versus prior comparable periods
- Q2 revenue growth was led by Multifamily (+21%), CoStar Suite (+8%), Information Services (+47%) and Commercial Property and Land (+13%). Multifamily benefited from marketing investment and customer upgrades; Information Services growth included STR acquisition revenue.
- Q2 gross margin improved to 81% from 79%, while operating margin declined to about 20% from 22%. Higher sales and marketing, software development, general and administrative costs, and acquisition-related amortization more than offset revenue growth.
- Net income declined despite higher revenue, reflecting higher operating costs and the shift from interest income to interest expense after the $745M revolver draw. First-half results also included higher acquisition-related amortization and credit-loss expense.
- Net bookings of subscription services were approximately $35M in Q2 versus $59M a year earlier. First-half renewal rates on annual CoStar subscription contracts were approximately 89%, versus 90%.
Outlook, management commentary and risks
- Management said COVID-19 had not materially affected the reported-period financial statements, but warned that the pandemic and economic downturn could reduce new sales, increase cancellations, suspensions, service reductions and payment delays, and prompt customer failures. Cancellation and suspension requests increased through May, then eased; LoopNet sales volumes showed some recovery in June.
- Management expects CoStar Suite growth to slow through year-end and Real Estate Manager growth to decline relative to 2019. STR’s hospitality business faces weaker ad hoc demand. Multifamily had not been adversely affected in the first half. Management expected cost savings from reduced hiring, travel and in-person events in the second half. No specific numerical earnings or revenue guidance is provided in the filing.
- CoStar acquired Ten-X for $187M in cash on June 24, intending to integrate its commercial real estate auction platform with LoopNet and CoStar. Ten-X’s reported-period revenue was not material.
- The proposed $588M RentPath acquisition remained subject to antitrust review and other closing conditions. The FTC’s additional-information request extended its review; bankruptcy court approval had been obtained. CoStar extended the outside date on July 29, 2020, for up to $7.5M and said it expected closing by February 12, 2021. The $59M escrow may be nonrefundable in specified termination circumstances.
- After quarter-end, on July 1, CoStar issued $1.0B of 2.8% senior notes due 2030 and used part of the proceeds to repay the $745M prior revolver balance. It also replaced the prior facility with a $750M five-year revolving credit agreement. The filing identifies leverage covenants, variable-rate exposure and LIBOR transition risk.
- Credit-loss expense was $15.7M for the first half, and the allowance for credit losses rose to $13.4M from $4.5M at year-end. Management cited pandemic-related collection risk. It stated that cash and expected operating cash flows should fund operations for at least 12 months, while emphasizing uncertainty around the pandemic and recovery.
- Management reported no litigation expected to have a material effect on financial position, results or liquidity. Disclosure controls were assessed as effective at June 30, 2020.
Key facts for investors to verify
- Whether bookings, renewals, customer cancellations and collections stabilize as pandemic effects evolve; monitor credit-loss provisions and receivables.
- Revenue and profitability trends excluding acquisition contributions and incremental amortization, marketing and integration costs.
- RentPath regulatory progress, closing timing, total cost and the potential loss of the $59M escrow and extension payment.
- Post-refinancing debt, interest expense, covenant headroom and intended use of equity and note proceeds.
- Execution and expected returns from integrating STR and Ten-X, and whether planned investments and cost savings deliver the anticipated benefits.