CoStar Group, Inc. — Q3 2022 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the same 2021 periods. CoStar provides commercial real estate information, analytics, and marketplaces, plus residential platforms. Its reportable segments are North America and International; most revenue comes from recurring subscriptions.
Financial performance
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $556.9 | $499.3 | $1,609.1 | $1,437.3 |
| Gross profit / margin | $448.6 / 81% | $406.7 / 81% | $1,304.2 / 81% | $1,166.4 / 81% |
| Operating income | $85.3 | $89.7 | $323.8 | $292.0 |
| Net income | $72.3 | $64.3 | $245.1 | $199.7 |
| Diluted EPS | $0.18 | $0.16 | $0.62 | $0.51 |
| Operating cash flow | Not separately stated in the filing text | Not separately stated in the filing text | $293.6 | $319.2 |
- Q3 revenue rose 12%; gross profit rose 10%, while operating income declined 5%. Net income increased 12%, helped by net interest income of $10.7 million versus net interest expense of $7.9 million a year earlier.
- For the first nine months, revenue and net income increased 12% and 23%, respectively. Operating cash flow decreased about $25.6 million, primarily due to less favorable changes in working capital.
- At September 30, cash, cash equivalents and restricted cash were $4.77 billion, up from $3.83 billion at December 31, 2021. Current assets were $5.01 billion and current liabilities $325.9 million.
- Debt included $1.0 billion face value of 2.8% Senior Notes due 2030; net carrying value was $988.9 million. The $750 million revolving facility, due 2025, was undrawn. The company reported compliance with debt covenants.
Material changes and business drivers
- Q3 CoStar revenue grew 16%, Multifamily 11%, LoopNet 12%, Information Services 14%, and Other Marketplaces 12%. Residential revenue declined 22%, reflecting discontinued Homes.com offerings, partly offset by Homesnap sales.
- Growth reflected subscriber gains, price increases and customer upgrades, particularly for CoStar, as well as revised Multifamily pricing. International revenue also benefited from the BureauxLocaux and Business Immo acquisitions.
- Q3 general and administrative expense increased 41% to $91.3 million, including higher professional services, credit loss expense, travel and conference costs, and a $4 million contract termination fee. Customer-base amortization rose, including a $16 million acceleration after the company decided to eliminate certain Homesnap usage fees.
- On September 20, the company sold 10.66 million shares and received approximately $745.7 million net. It expects to use proceeds for potential acquisitions, business growth, working capital and other general corporate purposes.
Outlook, risks and unusual items
- Management expected 2022 CoStar revenue growth to increase versus 2021, Information Services growth to be consistent, and Multifamily, LoopNet, Other Marketplaces and Residential growth to be lower than their respective 2021 rates. These are qualitative outlook statements; the filing text does not provide clear numerical full-year guidance.
- Management planned approximately $125 million of additional residential-marketplace investment in 2022 versus 2021, expected to reduce 2022 operating results and operating cash flow. Other priorities included international expansion, sales-force growth, product development and the Richmond campus expansion, which the company planned to fund with cash on hand.
- Net new subscription bookings were approximately $76 million in Q3, versus $47 million a year earlier. Trailing-12-month renewal rates were approximately 91%, down from 92%. Subscription services represented approximately 92% of Q3 revenue.
- Management cited potential effects from inflation and rising interest rates, changing office-use patterns and a real estate downturn, which could pressure clients, demand and renewals. Other disclosed risks include competition, execution of investments and acquisitions, foreign exchange exposure, privacy and cybersecurity, and the Richmond campus project.
- Foreign-currency translation loss accumulated to $46.6 million; the company said a 10% strengthening of the U.S. dollar would have reduced nine-month revenue by approximately $6 million. It did not hedge foreign-exchange exposure.
- Management said pending litigation was not expected to materially affect financial position, results or liquidity. No goodwill or intangible impairment was recorded in the period. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile the reported $1.0 billion face amount of Senior Notes with the risk-factor discussion describing approximately $792 million of Senior Notes outstanding.
- Assess whether subscriber growth, pricing and bookings can sustain revenue growth while renewal rates have edged down and economic conditions may weaken customer demand.
- Track the returns, costs and cash-flow impact of the planned residential investment and Richmond campus expansion.
- Review the drivers of higher G&A expense and the Homesnap-related accelerated amortization, and distinguish recurring operating costs from unusual items.
- Evaluate the effect of the September equity offering on share count and per-share results, and the intended use of its proceeds.