CoStar Group, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
CoStar provides commercial real estate information, analytics and marketing services, primarily through subscriptions, and operates the LoopNet property marketplace. Its two segments are U.S. and International (U.K. and France). LoopNet was acquired in April 2012, and the 2013 comparison includes a full year of LoopNet revenue.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $440.9 million | $349.9 million |
| Gross margin | $311.8 million; 70.7% | $235.1 million; 67.2% |
| Operating income | $54.2 million; 12.3% of revenue | $27.4 million; 7.9% |
| Net income | $29.7 million; diluted EPS $1.05 | $9.9 million; diluted EPS $0.37 |
| EBITDA (non-GAAP) | $94.2 million | $60.2 million |
| Cash from operating activities | $108.3 million | $86.1 million |
Revenue grew approximately 26%; management attributed the increase to LoopNet, subscription penetration and cross-selling, alongside strong renewals. Fourth-quarter revenue was $115.6 million versus $100.1 million in Q4 2012; net income was $12.8 million versus $4.7 million.
At year-end, cash and cash equivalents were $256.0 million, working capital was $196.9 million, total assets were $1.257 billion and stockholders’ equity was $927.9 million. Long-term debt, including current maturities, was $153.1 million, down from $170.6 million at year-end 2012; no revolving-credit balance was outstanding. The company reported $108.3 million of operating cash flow and $19.0 million of capital expenditures in 2013.
Material changes versus prior year
- Revenue increased $91.0 million; approximately $52.8 million was attributed to LoopNet, with the balance principally reflecting subscription growth and cross-selling.
- Gross margin rose 3.5 percentage points, while operating margin increased 4.4 percentage points.
- International EBITDA improved to a $3.1 million loss from a $10.0 million loss; the segment reported positive EBITDA in Q4.
- Subscription renewal rate eased to 93% from 94%. Annualized net new sales of subscription services on annual contracts rose to $15.8 million from $10.9 million.
- Stock-based compensation expense increased to $41.5 million from $12.3 million, including $21.8 million related to performance-based restricted stock. Software development expense rose to $46.8 million from $32.8 million.
Outlook, risks and unusual items
- Management expected revenue growth in 2014 and beyond from product upgrades, cross-selling and international expansion, including a planned Toronto launch. It also expected higher 2014 sales and marketing expense to promote new services. The filing does not provide clear numerical revenue or earnings guidance.
- Management forecast 2014 capital expenditures of approximately $18 million to $23 million, primarily for leased-office build-outs, and said cash plus expected operating cash flow should fund operations for at least 12 months.
- Management cited uneven commercial real estate recovery, client cancellations or consolidation, competition, data quality, product execution, acquisition integration, international expansion and foreign-exchange movements as risks. Foreign-currency revenue was 4.6% of total; the company did not hedge currency exposure.
- The $175 million term loan bears variable interest; year-end borrowings were $153.1 million. The company was in compliance with credit covenants and was not required to make an excess-cash-flow prepayment for 2013. A 25-basis-point rate increase was estimated to add about $0.4 million in annual interest expense.
- Auction-rate securities had $24.3 million par value and $22.0 million fair value at year-end; auctions had failed. The approximately $1.5 million fair-value decline was recorded as a temporary impairment in other comprehensive loss, not earnings. Liquidity is limited.
- In the Civix patent litigation, management said potential loss could reach $3.1 million above the amount accrued; outcome remained uncertain. A proposed settlement of LoopNet merger-related stockholder litigation was also unresolved.
- LoopNet merger consent-order requirements constrain certain product and licensing practices. Goodwill was $718.6 million; the annual impairment test found no impairment. No dividend was anticipated in the foreseeable future.
Important facts for investors to verify
- How much of continued revenue growth comes from organic subscription growth and cross-selling versus acquired businesses, and whether the 93% renewal rate stabilizes.
- Whether International operations achieve sustained positive EBITDA and whether the Toronto launch delivers returns without materially increasing costs.
- The persistence and cash impact of elevated stock compensation, including performance awards, and the effect of this expense on GAAP earnings.
- Debt amortization, variable-rate exposure, covenant headroom and the company’s ability to maintain cash generation while funding investment plans.
- The recoverability and liquidity of auction-rate securities, and developments in Civix and other legal matters.
Ernst & Young issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting as of December 31, 2013.