Business context and reporting period
CoStar Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company sells subscription-based commercial real estate information, analytics and online marketplace services, primarily in North America, with a smaller International segment.
Financial performance and position
Amounts are in millions except per-share data. Comparisons are year over year.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $237.2 | $206.9 | $463.7 | $406.6 |
| Gross profit / margin | $181.9 / 77% | $164.2 / 79% | $357.1 / 77% | $321.0 / 79% |
| Operating income | $27.9 | $28.1 | $65.5 | $58.4 |
| Net income | $22.2 | $15.6 | $44.3 | $32.3 |
| Diluted EPS | $0.68 | $0.48 | $1.36 | $1.00 |
| EBITDA | $43.7 | $45.6 | $98.7 | $93.4 |
| Operating cash flow | Not separately reported for Q2 | $95.4 | $86.7 |
- Q2 revenue rose 15%; six-month revenue rose 14%. Growth was led by CoStar Suite and Multifamily. Q2 operating income was slightly lower despite higher revenue, while six-month operating income increased 12%.
- Net income rose 42% in Q2 and 37% for the six months. Lower income tax expense materially contributed: the company recorded excess stock-compensation tax benefits of $6 million in Q2 and $7 million year to date. The reported effective tax rates were 14% for Q2 and 28% year to date, versus 40% in each 2016 comparison period.
- EBITDA, a non-GAAP measure, decreased 4% in Q2 and increased 6% year to date. The filing cautions that EBITDA is supplemental and not a substitute for GAAP measures.
- Cash and cash equivalents were $564.6 million at June 30, versus $567.2 million at December 31, 2016. Total debt was $310 million before unamortized issuance costs; the revolver was undrawn, with $225 million available. The company reported compliance with debt covenants.
- Six-month investing cash outflow was $57.7 million, including $45.1 million of net acquisition spending and $12.7 million for property, equipment and other assets. Financing cash outflow was $40.8 million, including $35 million of debt payments.
Material changes, outlook and commentary
- By service, Q2 CoStar Suite revenue grew 13%, Multifamily 24% and commercial property and land 17%; information services declined 6%. Six-month growth rates were 13%, 23%, 15% and negative 6%, respectively.
- Management expected 2017 CoStar Suite growth to remain consistent with historical rates; information-services growth to decline as LoopNet information services are phased out; Multifamily revenue to keep increasing, but at a slower rate than in 2016; and commercial property and land growth to strengthen in the second half following the LandWatch acquisition.
- Management expected gross margin percentage to decline in 2017 as it expands research operations. It also expected higher capital expenditures than in 2016, including spending on leased office space and technology, and planned continued investment in sales, marketing, product development and integrations.
- Annualized net bookings were approximately $37 million at June 30, 2017, versus $26 million a year earlier. The trailing 12-month renewal rate for annual CoStar subscriptions was approximately 91%; management anticipated a slight decrease as Multifamily becomes a larger part of the business.
- CoStar acquired Westside Rentals in January and LandWatch assets in May 2017. It acquired The Screening Pros on July 18, after quarter-end. Westside Rentals’ planned transition to an advertising model may involve integration losses.
Risks, contingencies and unusual items
- Approximately $11 million par value of auction-rate securities had failed to settle at auction and may not be liquid in the near term. Their recorded fair value was $10.0 million, including a $0.85 million unrealized loss considered temporary. Further auction failures or credit deterioration could lead to additional losses or an impairment charge.
- Management said current litigation loss was not probable, had recorded no liability, and could not estimate a possible loss range. Separately, the company expected legal costs from a matter it initiated in 2016 to continue through 2017.
- The 2014 credit agreement carries variable-rate debt. Management estimated that a 25-basis-point rate change would change annual interest expense by approximately $0.8 million. The company does not hedge foreign-currency exposure.
- The company expected the new revenue-recognition standard, scheduled for adoption January 1, 2018, to change disclosure and commission-cost accounting; capitalizing commissions could materially affect the financial statements, but the impact was still under evaluation.
- Management said available cash and operating cash flow should fund operations for at least the next 12 months. This is a forward-looking statement, not a guarantee; acquisitions, integration, customer retention, competition and investment needs could affect results.
Most important facts for investors to verify
- How much of earnings growth is sustainable operating improvement versus the nonrecurring benefit from stock-based compensation tax accounting.
- Whether revenue growth, bookings and renewal rates hold up as LoopNet services are phased out and Multifamily’s share grows.
- Whether research, marketing, integration and capital spending pressure gross margin and EBITDA, and whether acquired businesses meet expectations.
- The liquidity and eventual recoverability of the failed-auction securities, and the company’s capacity to service variable-rate debt and meet covenants.
- The eventual effects of commission capitalization under the new revenue standard, and any material development in litigation or other contingencies.