CoStar Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. CoStar provides commercial real estate information, analytics and online marketplaces, primarily through subscription services. Its operating segments are North America and International.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $212.7 million | $189.1 million | $619.3 million | $518.8 million |
| Gross margin | $170.5 million; 80% | $135.4 million; 72% | $491.5 million; 79% | $375.0 million; 72% |
| Operating income (loss) | $39.6 million | $(0.4) million | $98.0 million | $(24.1) million |
| Net income (loss) | $23.2 million | $(5.4) million | $55.5 million | $(26.5) million |
| Diluted earnings (loss) per share | $0.72 | $(0.17) | $1.71 | $(0.83) |
| Operating cash flow | — | — | $143.7 million | $69.7 million |
Q3 revenue increased about 13% year over year; nine-month revenue increased about 19%. Management attributed growth to subscription penetration, cross-selling and high renewals. The nine-month increase also included approximately $55 million of Apartments Network revenue. Total EBITDA, a non-GAAP segment measure defined in the filing, was $57.7 million for Q3 versus $22.1 million and $151.1 million for the nine months versus $34.9 million.
At September 30, cash and cash equivalents were $522.1 million and short-term investments were $1.2 million. Current assets were $583.4 million versus current liabilities of $153.5 million. Long-term debt had a $345 million principal balance and a $337.5 million carrying value net of issuance costs; no revolving-credit borrowings were outstanding, and the facility provides $225 million of availability. CoStar reported $523 million of cash, cash equivalents and short-term investments in its liquidity discussion. Nine-month capital expenditures were approximately $12 million.
Changes, outlook and risks
- Profitability improved substantially versus the prior-year periods, when CoStar reported operating and net losses. Gross margin rose as revenue grew and cost of revenue declined; lower intangible amortization and research personnel costs contributed. Selling and marketing expense also fell, primarily because Apartments.com’s broad marketing campaign was lower than in 2015.
- North America generated $205.6 million of Q3 revenue and $56.3 million of Q3 EBITDA; International generated $7.1 million of revenue and $1.4 million of EBITDA. Foreign currency movements weighed on International results. Annualized net new sales on annual contracts were approximately $24 million, down from $31 million; annualized net bookings were approximately $26 million, down from $31 million. The trailing 12-month renewal rate improved to 91% from 90%.
- Management expected 2016 capital expenditures of $18–$23 million, mainly for leased office build-outs and technology, including the Richmond research headquarters. It planned continued investment in product development, sales and marketing, geographic expansion and acquisitions. Management said available cash and expected operating cash flows should fund operations for at least the next 12 months; this is not a specific earnings forecast.
- Debt bears variable interest. The company was in compliance with its credit-agreement covenants at quarter-end. A 25-basis-point rate increase was estimated to add about $0.9 million to annual interest expense. The agreement includes leverage limits and restrictions on certain activities.
- CoStar held auction-rate securities with $12 million par value that had failed to settle at auction; their reported fair value was $11.1 million. Management deemed the impairment temporary but noted potential further losses and limited near-term liquidity. The company did not hedge foreign-exchange exposure and identified Brexit-related currency, customer-spending and regulatory uncertainty as risks.
- Litigation was described as incidental; management did not consider a material adverse outcome likely, but said it could not estimate a possible loss range. Goodwill and other intangible-asset recoverability, acquisition integration, customer retention, competition and returns on marketing and expansion investments are also risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Check whether subscription bookings and renewal trends translate into sustained revenue growth, particularly given lower annualized net new sales and bookings.
- Assess how much growth and margin improvement reflects recurring operations versus acquisition effects, lower marketing expense and amortization changes.
- Review cash generation, planned capital spending, acquisition spending, debt amortization and covenant headroom; verify the stated revolver availability and debt maturity schedule.
- Monitor Apartments.com performance and returns on marketing, product development, integration and geographic expansion.
- Track foreign-exchange effects, Brexit developments, and the valuation and liquidity of the auction-rate securities.
- Review the full risk-factor discussion and subsequent filings for developments in litigation, goodwill or intangible impairment, and the new accounting standards under evaluation.