Business context and reporting period
CoStar Group, Inc. (Nasdaq: CSGP) filed this Form 10-K for the fiscal year ended December 31, 2019. The company provides commercial real estate information, analytics and online marketplaces, including CoStar, LoopNet and Apartments.com. It reports North America and International segments. This is an annual filing; fourth-quarter figures below are unaudited.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1.400 billion | $1.192 billion |
| Gross profit / margin | $1.110 billion / 79% | $922 million / 77% |
| Operating income / margin | $364 million / 26% | $274 million / 23% |
| Net income | $315 million | $238 million |
| Diluted EPS | $8.60 | $6.54 |
| EBITDA (non-GAAP) | $445 million | $351 million |
| Operating cash flow | $458 million | $335 million |
| Cash and cash equivalents at year-end | $1.071 billion | $1.100 billion |
Revenue increased 17%; net income rose 32%. Revenue by service: CoStar Suite $618 million (+13%), information services $88 million (+31%), multifamily $491 million (+21%), and commercial property and land $203 million (+17%). Annualized net new subscription bookings were approximately $210 million, up from $169 million; the annual-contract renewal rate was 90%, unchanged from 2018.
Fourth-quarter 2019 revenue was $375 million versus $316 million in Q4 2018; net income was $88 million versus $84 million. Year-end working capital was $992 million. The company had no outstanding debt and had access to a $750 million revolving credit facility; it reported compliance with its covenants. Long-term investments included $10 million fair value of auction-rate securities, with $11 million par value unable to settle at auction.
Material changes versus the prior comparable period
- Multifamily revenue was the largest dollar contributor to growth, supported by higher-value advertising packages, marketing investment and, to a lesser extent, Cozy and Off Campus Partners (OCP).
- Gross margin expanded to 79% from 77%; operating expenses increased 15%, including higher marketing and software-development spending.
- Operating cash flow increased by about $123 million. Investing cash outflow was $484 million, including $438 million net cash paid for acquisitions and $46 million of capital expenditures.
- CoStar acquired OCP in June and STR, a hospitality benchmarking and analytics business, in October. STR’s purchase price was $435 million; its preliminary allocation included $261 million of goodwill.
Outlook, commentary, risks and unusual items
- Management expected 2020 multifamily revenue growth to remain consistent with 2019, while CoStar Suite growth was expected to moderate as sales efforts shifted toward LoopNet Signature Ads. These are qualitative expectations; the provided filing text does not give clear numerical earnings or revenue guidance.
- CoStar planned to increase Apartments.com marketing investment by approximately $100 million in 2020 and expand the multifamily sales force, warning that investment could pressure margins and profitability.
- On February 11, 2020, the company agreed to acquire reorganized RentPath for $588 million in cash, subject to bankruptcy court and regulatory approvals. A $59 million termination fee could apply in specified circumstances. The acquisition was not completed as of the filing.
- FY2019 interest and other income included $11 million of legal settlement proceeds. Management said current litigation was not expected to materially affect financial position, results or liquidity.
- Key risks include customer retention and subscription renewals, competition, real estate market and economic conditions, acquisition integration and goodwill valuation, data accuracy, cybersecurity and privacy compliance, foreign exchange, and the transition away from LIBOR. The company also cited $1.9 billion of goodwill and potential impairment sensitivity.
- Management reported effective disclosure controls and internal control over financial reporting. The assessment excluded unintegrated OCP and STR controls; those businesses represented less than 1% of assets and revenue and 2% of net income, in aggregate, for 2019.
Important facts for investors to verify
- Whether the planned $100 million increase in Apartments.com marketing spending produces advertiser growth and returns sufficient to offset margin pressure.
- Progress, financing and regulatory status of the $588 million RentPath acquisition, including potential exposure to the $59 million termination fee.
- Organic versus acquired contributions to growth, particularly for multifamily and information services, and the trend in bookings and renewal rates.
- STR and OCP integration progress, acquisition accounting and the carrying value of goodwill and acquired intangibles.
- Cash availability and investment risk: auction-rate securities remain illiquid, despite substantial cash balances and no outstanding borrowings.
- Use GAAP results alongside EBITDA and other non-GAAP measures; the company’s non-GAAP measures exclude, among other items, stock compensation and acquisition-related costs.