CoStar Group, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2013, CoStar provided commercial real estate information, analytics and marketing services in the U.S., U.K. and France. Most services are sold through automatically renewing subscriptions. Results include LoopNet, acquired April 30, 2012, so the prior-year comparison does not include LoopNet revenue.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $104.0 million | $68.6 million; up $35.4 million (about 52%) |
| Gross margin | $70.4 million; 67.7% | $44.3 million; 64.5% |
| Operating income (loss) | $(2.6) million | $8.6 million |
| Net income (loss) | $(2.4) million; $(0.09) per diluted share | $5.1 million; $0.20 per diluted share |
| EBITDA (non-GAAP) | $7.6 million | $11.9 million |
| Cash from operations | $10.7 million | $6.4 million |
| Cash and cash equivalents | $167.4 million at March 31 | $156.0 million at December 31, 2012 |
| Debt | $166.3 million term loan; no revolver borrowings | $4.4 million principal repaid in Q1 |
Investing activities used $4.6 million and financing activities provided $5.2 million. Gross margin improved, but operating and net results fell into losses. The company attributed the earnings decline principally to higher personnel and operating costs, including stock-based compensation, and to interest on the LoopNet term loan. The $1.8 million net income tax benefit reflected lower pretax income. Cash and expected operating cash flow were considered sufficient to fund operations for at least 12 months; the company reported compliance with debt covenants.
Material changes versus the prior period
- Revenue growth was driven in part by approximately $25.9 million of LoopNet revenue, as well as subscription penetration, cross-selling and high renewal rates.
- Operating expenses increased substantially: selling and marketing to $27.0 million from $15.6 million; software development to $12.1 million from $5.0 million; and general and administrative to $29.8 million from $14.5 million.
- Stock-based compensation rose to $17.3 million from $2.2 million. This included $11.3 million related to performance-based restricted stock awards; the company expected to recognize a further estimated $12.4 million during the remainder of 2013 and in 2014.
- U.S. revenue increased to $99.3 million from $64.0 million, while International external revenue edged up to $4.7 million from $4.6 million. U.S. EBITDA declined to $9.3 million from $13.2 million; the International EBITDA loss widened to $1.7 million from $1.3 million.
Outlook, risks and unusual items
- Management expected current services to remain profitable and generate substantial cash flow, with initiatives intended to support growth in 2013 and beyond. It gave no specific numerical revenue or earnings guidance.
- Expected 2013 capital expenditures were approximately $20–25 million, primarily for leased office build-outs. CoStar planned product upgrades and further integration and cross-selling; it expected to offer services in Toronto in late 2013 or early 2014.
- Management warned that integration, product development, international expansion or other investments could reduce profitability and potentially cause losses or negative operating cash flow. It cited slow commercial real estate recovery, customer cancellations or business failures, competition, execution and foreign-currency risks.
- The $24.3 million par value of auction-rate securities was illiquid after failed auctions; fair value was $21.7 million, including an approximately $1.8 million temporary unrealized loss. A further decline could result in additional losses or an impairment charge.
- The $175 million term loan bears variable interest; a 25-basis-point rate change was estimated to change annual interest expense by approximately $0.4 million. Debt covenants restrict certain activities.
- LoopNet-related patent litigation with Civix sought unspecified damages; management said it could not predict the outcome and intended to defend the claims. A proposed settlement of shareholder litigation was not preliminarily approved by the court; plaintiffs had not indicated whether they would proceed.
Important facts for investors to verify
- How much reported growth reflects LoopNet versus underlying subscription growth and cross-selling.
- Whether operating costs and performance-award compensation moderate, and whether revenue growth converts to improved GAAP earnings and EBITDA.
- Progress on LoopNet integration, product launches, cross-selling and international expansion against the planned spending.
- Cash generation, debt amortization, variable-rate exposure and ongoing compliance with credit-agreement covenants.
- Recoverability and liquidity of auction-rate securities, and developments in the Civix and shareholder litigation.