CoStar Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; filed October 30, 2014. CoStar provides commercial real estate information, analytics and marketing services, alongside online commercial property and apartment marketplaces. Results are unaudited.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $153.1 million | $112.3 million | $419.8 million | $325.3 million |
| Gross margin | $112.1 million; 73.3% | $80.6 million; 71.8% | $305.8 million; 72.8% | $227.9 million; 70.1% |
| Operating income | $23.5 million | $19.8 million | $57.5 million | $32.5 million |
| Net income | $13.0 million | $11.1 million | $30.9 million | $16.9 million |
| Diluted EPS | $0.40 | $0.39 | $1.03 | $0.60 |
| Operating cash flow | Not separately stated in the filing text | Not separately stated in the filing text | $96.0 million | $72.8 million |
- Q3 revenue rose about 36% year over year and nine-month revenue rose about 29%. Net income increased about 17% and 83%, respectively.
- At September 30, cash and cash equivalents were $486.2 million; total debt was $390.0 million, including $20.0 million current and $370.0 million long-term. No revolving-credit borrowings were outstanding; the facility provides $225.0 million of capacity.
- Current assets were $562.8 million and current liabilities $120.2 million. Cash exceeded reported debt by approximately $96.2 million.
- Nine-month investing cash outflow was $603.9 million, primarily the $584.2 million net cash acquisition cost for Apartments.com. Financing cash inflow was $738.2 million, mainly reflecting debt proceeds and the $529.4 million net equity offering proceeds.
Material changes versus the prior comparable period
- The April 1 acquisition of Apartments.com added $26.0 million of Q3 revenue and $51.1 million for the nine-month period. It contributed pre-tax losses of $7.5 million and $15.7 million, respectively, and increased sales and marketing costs, development spending and purchase amortization.
- Revenue growth also reflected subscription-service penetration, cross-selling and renewals. North America revenue was $146.9 million in Q3; International revenue was $6.2 million. International EBITDA improved to $0.8 million from a $1.1 million loss in Q3 2013.
- Gross margin percentage improved, but Q3 selling and marketing expense increased to 26.6% of revenue from 21.0%. Purchase amortization rose to $8.4 million from $3.7 million, while operating income grew more slowly than revenue.
- Subscription renewal rate was approximately 92% for the twelve months ended September 30, versus 93% a year earlier. Annualized net new subscription sales were approximately $15.4 million versus $13.7 million.
Outlook, risks, contingencies and unusual items
- Management expects existing services to remain profitable and generate earnings and substantial cash flow in 2014, and believes available cash and operating cash flow should fund operations for at least 12 months. It expects 2014 capital expenditures of approximately $25–$30 million. These are expectations, not guaranteed results.
- Management plans continued Apartments.com integration, product development, cross-selling, sales and marketing investment, and geographic expansion. It cautions these investments and service changes could reduce profitability; a possible LoopNet transition to a paid-listings marketing model could cause short-term revenue and earnings reductions.
- The $390 million term loan bears variable interest. Management estimated that a 25-basis-point rate change would alter annual interest expense by approximately $1.0 million. Credit-agreement leverage tests and other restrictive covenants apply; the company reported compliance at quarter-end.
- $23.2 million par value of auction-rate securities had failed auctions and is not readily liquid. The securities were carried at $21.1 million, including an approximately $1.3 million temporary unrealized impairment; further valuation losses remain possible.
- In the Civix patent litigation, CoStar offered $1.5 million to settle; a settlement conference was scheduled for November 20, 2014. The company said an adverse outcome could produce a loss up to $2.2 million in excess of the amount accrued. A separate LoopNet shareholder case had a dismissal request pending; CoStar expected to bear approximately $200,000 of legal-fee reimbursement upon dismissal.
- Trade-name impairment charges were approximately $0.7 million in Q3 and $1.1 million in Q1. Nine-month acquisition-related costs were approximately $1.4 million. The new revenue-recognition standard was not yet effective; CoStar was evaluating its impact.
- Risks include commercial real estate and broader economic conditions, customer retention, competition, acquisition integration and synergies, foreign-currency movements, litigation, and execution of product and service changes. The company does not hedge foreign-currency exposure and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported growth and future profitability is attributable to Apartments.com versus legacy subscription growth, and whether the acquired business can improve from its reported pre-tax losses.
- Whether renewal rates, annualized net new sales and cross-selling trends stabilize or improve after the reported renewal-rate decline.
- Debt amortization, variable-rate exposure, covenant headroom and cash needs for planned investment or further acquisitions.
- The liquidity and fair-value assumptions for auction-rate securities, including the possibility of additional impairment.
- The final resolution and financial exposure of the Civix litigation and the LoopNet shareholder matter.
- The costs, timing and customer impact of planned service, branding and LoopNet marketplace changes.