CoStar Group, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. Amounts below are in U.S. dollars.
Business context
CoStar provides subscription-based commercial real estate information, research and analytics in the U.S., U.K. and France. Subscription services generated approximately 94% of revenue. The company reported U.S. and International operating segments. It acquired Virtual Premise in October 2011 and had a pending, regulatory-reviewed acquisition of LoopNet.
Financial and operating metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $251.7 million | $226.3 million | +11.3% |
| Gross margin | $163.6 million; 65.0% | $142.7 million; 63.1% | Margin +1.9 percentage points |
| Operating income | $21.8 million; 8.6% margin | $22.8 million; 10.1% margin | -4.4% |
| Net income | $14.7 million | $13.3 million | +10.3% |
| Diluted EPS | $0.62 | $0.64 | Down $0.02 |
| EBITDA (non-GAAP) | $34.6 million | $36.4 million | -4.9% |
| Cash from operations | $25.7 million | $39.3 million | -34.6% |
Revenue growth reflected subscription penetration, cross-selling and strong renewals. Renewal rates rose to 93% from 90%; cancellations declined to 7% from 10%. U.S. revenue was $233.4 million, up from $208.5 million; International revenue was $18.4 million, up from $17.8 million, with the increase attributed primarily to currency movements. U.S. EBITDA fell to $38.1 million from $39.6 million; International EBITDA loss widened to $3.5 million from $3.2 million.
Fourth-quarter revenue was $66.2 million versus $58.2 million a year earlier; operating income was $7.8 million versus $7.0 million, and net income was $5.2 million versus $3.8 million. Diluted EPS was $0.20 versus $0.18.
At year-end, cash, cash equivalents and short-term investments totaled $548.8 million; including long-term investments, cash and investments totaled $573.4 million. Working capital was $521.4 million. Total liabilities were $111.9 million and stockholders’ equity was $659.2 million. The filing reports no year-end funded borrowings; a $175 million term loan and $50 million revolving facility were entered into after year-end and depend on closing the LoopNet merger. Operating cash flow declined, while investing cash flow was $58.4 million provided and financing cash flow was $254.8 million provided, principally reflecting the building sale and equity offering, respectively.
Material changes and unusual items
- June 2011 common-stock offering raised approximately $247.9 million net from 4.31 million shares at $60 per share.
- CoStar sold its Washington, DC headquarters building for $101 million in February 2011 and leased back most of the space. The $36 million sale gain was deferred and is being recognized as a reduction in rent expense over the lease term; approximately $2.2 million was recognized in 2011.
- Operating expenses rose to $141.8 million from $119.9 million. 2011 included $14.2 million of LoopNet acquisition costs, $3.4 million of CoStarGo launch marketing and $1.5 million of office-consolidation charges. A $1.2 million reversal of Resolve Technology deferred consideration partly offset expenses.
- Virtual Premise was acquired for approximately $17.2 million in cash, subject to post-closing adjustments; its results were not material to consolidated results for the year.
- Failed auctions left $27.3 million par value of auction-rate securities illiquid at year-end, with a $2.7 million unrealized loss recorded in accumulated other comprehensive loss.
Outlook, risks and contingencies
Management expected existing services to remain profitable and generate substantial cash flow in 2012, while continuing U.S. product investment, international expansion, CoStarGo marketing and integration of acquired analytics and real estate management products. The filing gives no clear quantified 2012 revenue or earnings guidance and cautions that new investment could reduce profitability or produce losses and negative operating cash flow.
The proposed LoopNet transaction had an indicated equity value of approximately $860 million and enterprise value of $762 million as of April 27, 2011. FTC review remained unresolved: the parties were discussing a possible consent order after receiving a second request, and completion was not assured. Either party could elect to terminate after April 30, 2012; in specified circumstances CoStar could owe a $51.6 million termination fee. The merger would add debt, integration demands and restrictive covenants. The post-year-end credit agreement includes leverage and debt-service covenants, collateral and guarantees.
Other key risks include commercial real estate market weakness, customer cancellations and consolidation, competition, data accuracy and service availability, acquisition integration, foreign exchange exposure, and the illiquidity or further impairment of auction-rate securities. A 10% strengthening of the U.S. dollar was estimated to reduce annual revenue by approximately $1.9 million. Management said available liquidity and expected operating cash flow should fund operations for at least 12 months. Contractual obligations included $124.3 million of operating lease payments and $8.6 million of purchase obligations. Management reported no material litigation expected to adversely affect financial position or results; a proposed settlement of LoopNet-related stockholder litigation could cost approximately $100,000, subject to merger completion and court approval.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at December 31, 2011.
Most important facts for investors to verify
- Current status and terms of FTC clearance, any consent order, closing timing, and termination rights or fees for the LoopNet acquisition.
- Expected post-merger debt, borrowing costs, covenant headroom and effect on liquidity, given the $175 million term facility and $50 million revolver are conditional on closing.
- Whether revenue growth and improved renewal rates continue, and whether operating costs—especially sales, development and acquisition-related costs—allow operating margins to recover.
- Cash-flow durability after separating recurring operating cash generation from the one-time equity offering and headquarters sale proceeds.
- Recoverability and liquidity of the auction-rate securities, including the assumptions underlying their estimated fair value and potential for further impairment.