CoStar Group, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing was signed February 24, 2021. This is an annual report, with unaudited quarterly results also provided. Dollar amounts below are U.S. dollars.
Business context
CoStar provides commercial real estate information, analytics and online marketplaces, alongside apartment-listing services and related offerings. Most services are sold through automatically renewing subscriptions. The company reports North America and International operating segments.
2020 acquisitions included Ten-X, Emporis and Homesnap; STR was acquired in 2019. The acquisitions expanded the company into commercial property auctions, international property data and residential-agent software.
Financial results and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $1,659.0 million | $1,399.7 million | +19% |
| Gross profit / gross margin | $1,350.1 million / 81% | $1,110.5 million / 79% | Margin +2 percentage points |
| Operating income / margin | $289.2 million / 17% | $363.5 million / 26% | -20% |
| Net income | $227.1 million | $315.0 million | -28% |
| Diluted EPS | $5.93 | $8.60 | Down from prior year |
| EBITDA (non-GAAP as defined by the company) | $406.1 million | $444.7 million | -9% |
| Cash from operating activities | $486.1 million | $457.8 million | +$28.3 million |
Revenue by service: CoStar Suite $664.7 million (+8%); information services $130.1 million (+47%); multifamily $598.6 million (+22%); and commercial property and land $265.7 million (+31%). Acquisitions contributed materially to information-services and commercial-property growth.
Operating cash flow was $486.1 million; investing activities used $464.2 million, including $426.1 million net cash paid for acquisitions; financing activities provided $2,662.3 million, primarily from the equity and debt offerings. Capital expenditures were $48.3 million.
At year-end, cash, cash equivalents and restricted cash totaled $3,755.9 million, including $62.1 million restricted cash. Working capital was $3,557.7 million. Long-term debt was $1,000 million face value ($986.7 million net of discount and issuance costs), consisting of 2.8% Senior Notes due 2030. The $750 million revolving credit facility, due 2025, was undrawn. The company reported compliance with its debt covenants.
Gross margin increased, but higher operating costs compressed operating and net margins. Selling and marketing expense rose 31% to $535.8 million, software development rose 30% to $162.9 million, and general and administrative expense rose 68% to $299.7 million. Net income also reflected higher interest expense and the absence of prior-year legal settlement proceeds.
Fourth-quarter results
Q4 revenue was $444.4 million versus $374.7 million in Q4 2019, up approximately 19%. Net income was $35.8 million versus $87.9 million, and diluted EPS was $0.91 versus $2.39. Q4 2020 operating income was $55.2 million, compared with $101.0 million a year earlier. Operating expenses reached $311.0 million, including the RentPath-related charges recorded during the year.
Material changes and unusual items
- In May, CoStar issued 2.6 million shares at $655 per share, generating approximately $1.7 billion net proceeds. In July, it issued $1.0 billion of 2.8% Senior Notes due 2030 and refinanced its revolving credit facility.
- The proposed RentPath acquisition did not close after FTC opposition. CoStar recorded a $52 million termination fee and a $7.5 million extension payment as expenses in 2020. In February 2021, CoStar and the sellers agreed that CoStar would pay $52 million of the $59 million contractual termination fee, subject to bankruptcy court approval.
- Goodwill and intangible assets totaled approximately $2.7 billion at year-end. No goodwill or intangible-asset impairment was recorded in 2020.
- The credit-loss allowance increased to $15.1 million from $4.5 million at year-end 2019; credit-loss expense was $25.2 million. Management said credit-loss expense normalized in Q4.
- Annualized net new subscription bookings were approximately $184 million, down from $210 million in 2019. The renewal rate for existing CoStar annual subscription contracts was approximately 89%, versus 90% in 2019.
Outlook, management commentary and risks
Management gave qualitative 2021 priorities rather than a numerical financial forecast in the provided filing text. Priorities include integrating STR, Ten-X and Homesnap; investing in LoopNet, Ten-X, CoStar Suite and Apartments.com; and expanding cross-selling and international capabilities. Management expected CoStar Suite growth rates similar to 2020, STR and information-services growth to moderate, LoopNet growth to continue at second-half 2020 levels, and commercial property and land growth to increase, partly reflecting Homesnap and Ten-X.
Management said the pandemic did not materially affect the consolidated 2020 financial statements, but reported weaker bookings and increased cancellation and suspension requests early in the pandemic. Those requests eased, and marketplace sales returned to pre-pandemic levels. Management cited continuing uncertainty around the pandemic, customer demand and collections, and noted that its estimates and expectations could change.
Key risks include a prolonged real estate or economic downturn, customer cancellations or payment delays, competition and marketing returns, acquisition integration and goodwill impairment, privacy and cybersecurity incidents, data accuracy, foreign-exchange exposure, and debt covenants and refinancing conditions. The company stated it believed cash and operating cash flow would fund operations for at least the next twelve months. It reported effective disclosure controls and internal control over financial reporting; Ten-X and Homesnap controls were excluded from management’s year-end assessment while integration remained incomplete.
Important facts for investors to verify
- How much of 2020 revenue growth reflects acquisitions versus organic growth, particularly for STR, Ten-X and Homesnap.
- Whether revenue growth can translate into improved operating margins after elevated marketing, development and acquisition-related costs.
- Trends in subscription bookings, renewal rates, cancellations, credit losses and customer collections as pandemic effects evolve.
- Integration progress and returns on investment for recent acquisitions, and the assumptions supporting approximately $2.7 billion of goodwill and intangible assets.
- Final resolution and payment of the RentPath termination fee, including the stated bankruptcy court approval condition.
- Use of the substantial cash balance, ongoing acquisition plans, debt-service capacity and compliance with credit-facility covenants.
- The company’s non-GAAP EBITDA is supplemental and is not a substitute for GAAP results; review the reconciliation and excluded costs when comparing performance.