CoStar Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. CoStar provides commercial real estate information, analytics and online marketplaces, alongside residential platforms. Most services are subscription-based. Comparisons are with 2020; per-share and share data reflect the June 2021 ten-for-one stock split.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $499.3 million | $425.6 million | $1,437.3 million | $1,214.6 million |
| Gross profit / margin | $406.7 million / 81% | $347.8 million / 82% | $1,166.4 million / 81% | $983.8 million / 81% |
| Operating income / margin | $89.7 million / 18% | $76.8 million / 18% | $292.0 million / 20% | $234.0 million / 19% |
| Net income | $64.3 million | $58.2 million | $199.7 million | $191.3 million |
| Diluted EPS | $0.16 | $0.15 | $0.51 | $0.50 |
| Operating cash flow | $98.9 million | $106.7 million | $319.2 million | $355.3 million |
For the nine-month period, investing cash outflow was $297.5 million, including $152.6 million net cash paid for acquisitions and $123.6 million for the Richmond building and related assets. Financing cash outflow was $14.3 million. Cash, cash equivalents and restricted cash totaled $3.762 billion at September 30, 2021, versus $3.756 billion at year-end 2020.
Long-term debt was $1.0 billion principal, or $987.6 million net of issuance costs, consisting of 2.8% senior notes due 2030. The $750 million revolving facility due 2025 was undrawn. Cash exceeded debt principal by approximately $2.762 billion. Management said available cash and operating cash flow should fund operations for at least 12 months.
Material changes versus the prior comparable period
- Q3 revenue increased 17%; net income rose 11%. Nine-month revenue increased 18%, while net income rose 4%, reflecting higher operating costs, interest expense and tax expense.
- Revenue growth included acquisitions: Homesnap and Homes.com contributed $25 million of Q3 residential revenue; Homesnap and Homes.com contributed $54 million for the nine months. Ten-X drove much of the nine-month Other Marketplaces increase. Acquisition contributions mean reported growth is not wholly organic.
- Q3 segment revenue rose across CoStar (10%), Multifamily (10%), LoopNet (17%), Information Services (8%) and Other Marketplaces (21%). Residential generated $24.7 million, compared with none in the prior-year quarter. Nine-month Multifamily revenue grew 16% and LoopNet 16%.
- Sales and marketing expense rose 23% in Q3 and 20% year to date, driven by marketing investment and staffing. Software development expense rose 30% in Q3 and 22% year to date. Nine-month gross margin remained 81%.
- Nine-month operating cash flow declined by $36 million, primarily due to working-capital effects, including a $52 million RentPath termination-fee payment in Q1 2021. The prior-year period included substantial equity and debt offering proceeds; hence the large year-over-year change in financing cash flow is not a like-for-like operating comparison.
Outlook, management commentary and risks
The filing gives directional, product-specific expectations rather than numerical company-wide guidance. CoStar growth was expected to increase through the remainder of 2021, supported by new customers, upgrades and resumed annual renewal price increases. Management expected Multifamily growth to slow as low vacancy rates led customers to choose lower-priced advertising packages; LoopNet growth was expected to ease while sales resources shifted and a dedicated team was recruited. Information Services revenue was expected to remain near Q3 levels in Q4; Residential revenue was expected to decline seasonally; Other Marketplaces revenue was expected to remain broadly consistent.
Management reported that, excluding Multifamily, company-wide net new bookings and renewal rates had returned to pre-pandemic levels. Trailing 12-month subscription renewal rates were 92%, versus 89% a year earlier. However, quarterly annualized net new subscription bookings fell to approximately $47 million from $53 million. Management cited increased Apartments.com leads but weaker net new bookings and customer preference for lower-priced packages.
- COVID-19 and commercial real estate uncertainty remain risks, particularly a sustained reduction in office demand, customer spending or collections. Management said the pandemic had not materially affected reported financial statements to date, but workforce attrition and hiring costs could continue.
- Acquisition integration, realizing expected synergies, sales and marketing returns, customer retention, competition, data quality, cybersecurity and privacy, and employee hiring and retention are identified risks. Approximately $2.7 billion of goodwill and intangible assets is exposed to potential impairment if assumptions or market conditions change.
- The effective tax rate increased to 23% in Q3 and 26% year to date, from 16% and 15%, respectively, mainly due to fewer excess tax benefits; the year-to-date change also reflected a discrete tax restructuring gain.
- Foreign-currency-denominated revenue was approximately 4% of total revenue. The company does not currently hedge foreign-exchange exposure. Litigation was not expected by management to materially affect financial position, results or liquidity; no material risk-factor changes from the 2020 Form 10-K were reported.
- Unusual and subsequent items: the company acquired Homes.com for approximately $150 million in May and purchased the Richmond office building for approximately $131 million in January. On October 1, after quarter-end, it acquired French marketplace BureauxLocaux for €35 million, approximately $41 million, using cash on hand. The company planned to remit $10 million of deferred payroll taxes in Q4 2021.
Important facts for investors to verify
- How much of revenue growth and future earnings reflects underlying subscription growth versus acquisitions, pricing and changes in product mix.
- Whether subscription bookings recover and renewal rates remain strong, especially in Multifamily, where customers shifted to lower-priced packages.
- Whether elevated marketing, development and acquisition-related spending generates expected customer growth and returns, and how acquisition integration affects margins and cash flow.
- Cash conversion and capital allocation, including acquisition spending, building investment, the RentPath payment and the post-quarter BureauxLocaux acquisition.
- Tax-rate normalization, the outlook for office-market demand and pandemic-related impacts, and the recoverability of goodwill and intangible assets.