CoStar Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. CoStar provides commercial real estate information, analytics and online marketplaces, primarily through subscription services.
Financial performance and position
- Revenue: Q3 revenue was $352.8 million, up 15% year over year. Nine-month revenue was $1.025 billion, up 17%. Q3 growth included multifamily revenue of $125.7 million (+20%), CoStar Suite of $156.0 million (+12%), commercial property and land of $51.6 million (+17%), and information services of $19.5 million (+11%).
- Profit and margins: Q3 net income was $78.6 million versus $58.8 million; diluted EPS was $2.15 versus $1.61. Nine-month net income was $227.0 million versus $154.8 million; diluted EPS was $6.20 versus $4.25. Gross margin was 80% in Q3 versus 76%, and 79% for nine months versus 77%. Operating income rose 33% to $94.3 million in Q3 and 56% to $262.6 million for nine months.
- Cash flow: Nine-month operating cash flow was $350.0 million, compared with $220.7 million. Investing activities used $57.9 million, versus $361.9 million in 2018, when the ForRent acquisition drove substantial spending. Capital expenditures were $44.2 million, including a corporate aircraft purchase. Cash and cash equivalents increased to $1.390 billion from $1.100 billion at year-end 2018.
- Debt and liquidity: The company had no outstanding debt and reported a $750 million revolving credit facility, with $0.2 million of letters of credit outstanding. It reported total current assets of $1.505 billion and current liabilities of $198.0 million. Management said cash and expected operating cash flow should fund operations for at least the next 12 months.
- Other metrics: Annualized net bookings were approximately $50 million, compared with $40 million a year earlier. The annual contract renewal rate was approximately 90% for the nine-month period. Management-reported EBITDA, a non-GAAP measure, was $113.1 million in Q3 and $319.8 million for nine months.
Material changes versus the prior comparable period
- Revenue growth was broad-based, led by multifamily and CoStar Suite. Management attributed multifamily growth to higher-priced customer packages, marketing-driven volume and Cozy-related growth; CoStar Suite growth reflected pricing and cross-selling.
- Q3 gross margin improved as revenue grew and cost of revenues declined slightly. Operating expenses increased: selling and marketing rose 14% in Q3, software development 25%, and general and administrative 17%, mainly reflecting personnel and marketing investment.
- Nine-month income tax expense increased to $49.6 million from $19.6 million; the effective tax rate was 18% versus 11%, partly reflecting 2018 state R&D tax credits and higher 2019 pretax income.
- CoStar adopted the new lease accounting standard in January 2019, recording $116 million of right-of-use assets and $150 million of lease liabilities at adoption. At September 30, lease right-of-use assets were $105.5 million and lease liabilities totaled $137.6 million.
Outlook, commentary and risks
- No specific numerical full-year revenue or earnings guidance is stated in the supplied filing text. Management expected lower multifamily annual revenue growth in the remainder of 2019 compared with earlier periods, partly because the ForRent acquisition anniversary had passed and certain ForRent services were discontinued. It also expected growth at CoStar Real Estate Manager to moderate as customers moved beyond new lease-accounting requirements.
- Management planned to increase Apartments.com marketing investment by approximately $100 million in 2020, which could reduce margins and profitability during the investment period. It also planned to expand sales efforts, develop online rental services, enhance LoopNet and integrate acquisitions.
- CoStar agreed on September 30 to acquire STR for $450 million in cash; the transaction closed October 22, 2019 and was funded with cash on hand. The purchase price and resulting acquisition accounting may affect subsequent liquidity and reported results; purchase accounting was still in process as of the filing.
- Key risks cited include commercial real estate and general economic conditions, customer retention, competition, the return on marketing spend, acquisition integration and expected synergies, product development, cybersecurity and privacy, foreign currency movements, and potential impairment of goodwill and intangible assets. Management reported no material changes to previously disclosed risk factors and no litigation expected to have a material adverse effect.
- The company held $10.1 million of auction-rate securities that had failed to settle at auction and may not be liquidated at par in the near term. Management did not consider them other-than-temporarily impaired, but noted that deteriorating credit or continued unsuccessful auctions could lead to further losses.
Important facts for investors to verify
- Review the STR acquisition’s final purchase accounting, integration progress, and cash and liquidity impact after its October 22 closing.
- Track multifamily growth and renewal rates as acquisition comparisons change, and assess the planned 2020 marketing increase against revenue growth and margins.
- Assess whether growth in CoStar Suite, LoopNet and information services can offset moderation in multifamily and Real Estate Manager growth.
- Monitor operating expense growth, capital spending, cash generation, and the impact of lease commitments.
- Review auction-rate security valuation and liquidity, foreign-currency exposure, and the assumptions supporting goodwill and intangible-asset recoverability.