CoStar Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. CoStar provides commercial real estate information, analytics and online marketplaces, primarily through automatically renewing, subscription-based services. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $343.8 | $297.0 | $672.2 | $570.7 |
| Gross profit / margin | $271.8 / 79.1% | $229.9 / 77.4% | $529.1 / 78.7% | $441.1 / 77.3% |
| Operating income / margin | $74.8 / 21.8% | $43.8 / 14.7% | $168.3 / 25.0% | $97.2 / 17.0% |
| Net income / margin | $63.2 / 18.4% | $43.8 / 14.8% | $148.4 / 22.1% | $96.1 / 16.8% |
| Diluted EPS | $1.73 | $1.20 | $4.06 | $2.64 |
| EBITDA (company-reported non-GAAP measure) | $93.6 | $64.4 | $206.7 | $134.8 |
- Q2 revenue grew 16%; net income rose 44%. For the first half, revenue grew 18% and net income rose 54%.
- Q2 revenue growth was broad-based: CoStar Suite +14%, information services +32%, multifamily +15%, and commercial property and land +16% year over year. First-half increases were 14%, 28%, 22%, and 17%, respectively.
- North America generated $335 million of Q2 revenue and $95 million of EBITDA; International revenue was $9 million, with a $1 million EBITDA loss. First-half International EBITDA loss widened to $4 million from $1 million.
- Operating cash flow was $233.6 million for the first half, versus $119.3 million in 2018. Investing cash outflow was $28.1 million, versus $355.9 million, primarily reflecting the prior-year ForRent acquisition. Financing cash outflow was $7.7 million. Quarterly cash flow figures are not separately provided in the filing text.
Financial position and liquidity
- Cash and cash equivalents were $1.298 billion at June 30, up from $1.100 billion at year-end 2018. Current assets were $1.414 billion and current liabilities $197.3 million.
- No long-term debt was outstanding. The company had a $750 million revolving credit facility and reported compliance with its covenants. Management said available cash and expected operating cash flow should fund operations for at least the next 12 months.
- Total liabilities were $416.5 million. Adoption of lease accounting in January 2019 added $116 million of right-of-use assets and $150 million of lease liabilities at transition; reported lease liabilities were $143.6 million at June 30.
- Capital expenditures were $14.4 million for the first half. Cash paid for the OCP acquisition was approximately $14 million, net of cash acquired.
Material changes and management commentary
- CoStar Suite growth reflected continued organic growth, stronger pricing and cross-selling. Multifamily growth included organic gains, marketing-driven volume, and Cozy; first-half growth also reflected a full six months of ForRent results.
- Gross margin improved year over year. First-half selling and marketing expense rose $5.7 million, including a $20 million increase in marketing spend offset in part by lower personnel costs. Management expects 2019 marketing investment to exceed 2018 levels but remain consistent as a percentage of revenue.
- Management expects lower multifamily year-over-year revenue growth in the remaining 2019 quarters, reflecting the ForRent anniversary and discontinuation of certain ForRent services. It also expects growth in CoStar Real Estate Manager to slow as the market moves past new lease-accounting requirements.
- Key 2019 priorities include developing a broader online rental experience, enhancing CoStar Suite and LoopNet, investing in research and marketing, and integrating acquired businesses. No specific numeric revenue or earnings guidance is provided in the filing text.
Risks, contingencies and unusual items
- The effective tax rate increased to approximately 21% in Q2 2019 from 4% in Q2 2018, and to 16% for the first half from 5%. The filing attributes the change to higher pretax income and prior-year state R&D tax-credit items.
- The company reported approximately $59 million in annualized net bookings at June 30, compared with $45 million a year earlier. Its six-month renewal rate for annual CoStar subscriptions was approximately 90%, versus 91% in 2018.
- Approximately $212 million of remaining contract consideration was associated with unsatisfied performance obligations, expected to be recognized over five years; contracts with durations of one year or less are excluded.
- Long-term auction rate securities had a $10.1 million fair value against $10.8 million amortized cost; all had failed to settle at auction. CoStar said it did not expect to need to sell them below par to fund operations, but liquidation may be difficult and future impairment remains possible.
- Management said current litigation was not expected to have a material adverse effect. Identified risks include acquisition integration and synergy execution, marketing returns, customer retention, economic and commercial real estate conditions, competition, cybersecurity and privacy, data quality, foreign exchange, and potential impairment of goodwill and intangible assets.
- Disclosure controls were assessed as effective. Implementation of a new financial system was continuing beyond 2019; the filing reported no other quarterly change in internal control over financial reporting that materially affected, or was reasonably likely to materially affect, those controls.
Important facts for investors to verify
- Whether revenue growth and improved margins continue as acquisition-related comparisons normalize and marketing investment rises.
- Whether subscription bookings and renewal rates remain strong, particularly given the slight year-over-year decline in renewals.
- Progress integrating ForRent, Cozy, Realla and OCP, and whether management realizes expected synergies without disrupting services.
- How the expected slowdown in multifamily and CoStar Real Estate Manager growth affects future results, and whether international losses narrow.
- Whether the illiquid auction rate securities recover in value, and whether goodwill and acquired intangibles remain recoverable.