CoStar Group, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. CoStar provides commercial real estate information, analytics and online marketplaces, primarily through subscriptions, and has expanded into residential real estate software through Homesnap. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $457.7 million | $391.8 million | +17% |
| Gross profit / margin | $368.9 million / 80.6% | $312.9 million / 79.9% | Margin +0.7 percentage points |
| Operating income / margin | $101.2 million / 22.1% | $75.9 million / 19.4% | Income +33% |
| Net income | $74.2 million | $72.8 million | +2% |
| Diluted EPS | $1.88 | $1.98 | Down 5% |
| Operating cash flow | $87.9 million | $131.5 million | Down $43.6 million |
| Cash, cash equivalents and restricted cash, at quarter-end | $3.69 billion | $3.76 billion at Dec. 31, 2020 | Down $65.6 million |
Revenue growth was strongest in multifamily (+21% to $166.1 million) and commercial property and land (+48% to $84.7 million). The latter included $11 million from Homesnap and $10 million from Ten-X. CoStar Suite revenue rose 4% to $172.2 million; information services grew 7% to $34.7 million. North America revenue was $441.8 million and International revenue was $15.9 million. Segment EBITDA was $135.9 million in North America and a loss of $0.3 million internationally.
Net income rose only modestly despite higher operating income, as interest shifted from $1.7 million of income to $7.9 million of expense, largely reflecting the 2020 Senior Notes, and income tax expense increased to $19.1 million from $5.6 million. The effective tax rate was approximately 20%, versus 7%. Diluted weighted-average shares increased to 39.4 million from 36.8 million.
Operating cash flow fell primarily due to working-capital changes, including the $52 million RentPath termination fee. Investing activities used $134.3 million, including $123.3 million for the Richmond office building and land. Financing activities used $18.5 million, mainly for tax withholding on vested restricted stock.
Financial position and debt
At March 31, 2021, total assets were $6.94 billion, total liabilities $1.50 billion, and stockholders’ equity $5.45 billion. Long-term debt was $1.00 billion face value ($987.0 million net of discount and issuance costs), consisting of 2.8% Senior Notes due July 2030. The $750 million revolving credit facility, due July 2025, was undrawn; the company reported covenant compliance. Cash and cash equivalents were $3.69 billion, alongside $3.35 million of restricted cash.
Material changes and management outlook
- Management said company-wide annualized net new subscription bookings and renewal rates returned to pre-pandemic levels in Q1. Annualized net new bookings were approximately $52 million, compared with $48 million a year earlier; renewal rates were approximately 90% in both periods.
- Management expects CoStar Suite growth to improve through 2021, moderate growth in information services, multifamily growth to remain broadly consistent with 2020, and commercial property and land growth to increase, primarily due to Homesnap and Ten-X. STR hospitality revenue was relatively flat in Q1; management expected improvement in the second half. These are qualitative expectations, not formal consolidated financial guidance.
- Priorities include integrating STR, Ten-X and Homesnap; investing further in LoopNet, Ten-X, CoStar Suite and Apartments.com; and increasing marketing investment in 2021 compared with 2020. Management said it was assessing potential additional investment in residential marketplaces.
- On April 14, 2021, CoStar agreed to acquire Homes.com for $156 million in cash, subject to closing conditions and regulatory review. The company expected closing in the first half of 2021.
Risks, contingencies and unusual items
- Management reported that COVID-19 had not materially affected consolidated financial statements through Q1, but warned that a prolonged downturn, commercial real estate weakness, reduced office demand, customer cancellations, delayed payments or lower demand could harm revenue, collections and liquidity. Workforce attrition and integration challenges were also cited.
- Management believed available cash and operating cash flow would fund operations for at least the next 12 months. The filing noted that future needs depend on operating performance, acquisitions and economic conditions.
- Q1 general and administrative expense included professional services related to CoStar’s bid for CoreLogic and termination of the RentPath asset purchase agreement. The filing also identifies the $52 million RentPath termination fee as a major factor in operating cash-flow decline.
- Management said current litigation was not expected to have a material effect on financial position, results or liquidity. Goodwill and intangible assets totaled approximately $2.7 billion; impairment assumptions remain sensitive to economic and company performance.
- Foreign-currency-denominated revenue was approximately 4% of total revenue. The company did not hedge foreign-exchange exposure and reported no material current interest-rate sensitivity, with its revolving facility undrawn.
Important facts for investors to verify
- Whether subscription bookings and renewal rates remain at pre-pandemic levels, and whether the stated service-line growth expectations materialize.
- Revenue contribution, integration costs and realized benefits from Homesnap, Ten-X and STR, alongside the status and cost of the proposed Homes.com acquisition.
- Whether higher marketing and residential-marketplace investment produces adequate traffic, sales and returns while margins and cash generation are maintained.
- Cash-flow trends after the RentPath payment and Richmond property purchase, and the company’s capital-allocation plans given substantial cash, $1 billion of notes and the undrawn credit facility.
- Changes in COVID-19-related real estate demand, customer collections and attrition, as well as the recoverability of goodwill and intangible assets.