CoStar Group, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing also presents unaudited quarterly results, including Q4; it is not a standalone quarterly filing. CoStar provides commercial real estate information, analytics and online marketplaces, primarily through subscription services, and reports North America and International segments.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1.192 billion | $965.2 million | +23% |
| Gross profit / margin | $921.9 million / 77% | $744.8 million / 77% | Gross profit +24% |
| Operating income / margin | $273.6 million / 23% | $173.8 million / 18% | +57% |
| Net income / net margin | $238.3 million / 20% | $122.7 million / 13% | +94% |
| Diluted EPS | $6.54 | $3.66 | +79% |
| Operating cash flow | $335.5 million | $234.7 million | +43% |
Q4 2018 revenue was $315.6 million, versus $254.0 million in Q4 2017. Q4 2018 net income was $83.5 million. The filing’s quarterly-results presentation gives Q4 2017 net income as $48.0 million, but Note 17 gives $44.2 million; investors should verify the correct comparative figure.
Revenue growth reflected CoStar Suite (+18%), multifamily (+45%, including ForRent), and commercial property and land (+16%). Information-services revenue declined 7%, primarily as LoopNet information products were wound down. Annualized net bookings rose to approximately $50 million from $43 million; annual contract renewal was approximately 90%, versus 91%.
Cash, liquidity and debt
- Cash and cash equivalents were $1.100 billion at year-end, down from $1.211 billion; working capital was $1.059 billion. Cash, cash equivalents and long-term investments totaled approximately $1.110 billion.
- Investing cash outflow was $448.0 million, including $418.4 million net cash paid for ForRent, Realla and Cozy; capital expenditures were $29.6 million. Financing cash flow was $2.7 million.
- No long-term debt was outstanding at year-end. The company had a $750 million revolving credit facility and reported covenant compliance. Management said available cash and expected operating cash flow should fund operations for at least 12 months.
- Operating lease obligations totaled $169.1 million. The company held $10.1 million of auction-rate securities at fair value ($11 million par), all of which had failed to settle at auction and may not be readily liquidated at par.
Changes, outlook and notable items
- ForRent was acquired in February 2018 for approximately $376 million; Realla was acquired in October for £12 million; and Cozy was acquired in November for $65 million net of cash acquired. The acquisitions contributed to higher multifamily revenue and increased goodwill, which reached $1.612 billion. No goodwill or intangible-asset impairment was recorded in 2018.
- The effective tax rate fell to 16% from 26%, primarily reflecting the Tax Act, excess tax benefits on share payments and state research credits.
- Adoption of ASC 606 increased opening retained earnings by $54.5 million. For 2018, the company reported revenue about $4 million higher and selling and marketing expense about $5 million lower than under the former accounting method; estimated net income was about $7 million higher.
- Management’s 2019 priorities include further product development and integration, a digital rental platform using Cozy technology, continued sales and marketing investment, improvements to CoStar Suite and LoopNet, and international expansion. The filing provides no quantified 2019 financial guidance.
- Key risks include customer cancellations and retention, commercial real estate and broader economic downturns, competition, execution and integration of acquisitions, data accuracy, cybersecurity and privacy compliance, and foreign-exchange exposure. Brexit-related uncertainty was also cited. Foreign-currency-denominated revenue was approximately 3% of total revenue.
- Management said current litigation was not expected to have a material adverse effect on financial position, results or liquidity. ForRent purchase accounting included accruals for contingent sales-tax and uncertain income-tax liabilities, partly subject to seller indemnification.
Most important facts to verify
- Reconcile the Q4 2017 net-income discrepancy between the quarterly-results table and Note 17.
- Assess how much 2018 revenue growth was organic versus acquisition-related, particularly for multifamily, and whether renewal and net-booking trends continue.
- Review acquisition integration progress, anticipated synergies, and the carrying value and impairment sensitivity of the $1.612 billion goodwill balance.
- Confirm the liquidity and recoverability outlook for the failed auction-rate securities and monitor availability and covenants under the revolving facility.
- Track the effects of ASC 606 and the 2019 lease-accounting adoption, which management expected to add $100–$120 million of right-of-use assets and $140–$160 million of lease liabilities.