CoStar Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparative periods ended June 30, 2015. CoStar provides commercial real estate information, analytics and online marketplaces, primarily through subscription services. Its segments are North America and International.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $206.9m | $170.7m | $406.6m | $329.7m |
| Gross margin | $164.2m (79%) | $126.0m (74%) | $321.0m (79%) | $239.6m (73%) |
| Operating income (loss) | $28.1m | $(20.1)m | $58.4m | $(23.6)m |
| Net income (loss) | $15.6m | $(15.0)m | $32.3m | $(21.1)m |
| Diluted EPS | $0.48 | $(0.47) | $1.00 | $(0.66) |
| Operating cash flow | Not separately stated | Not separately stated | $82.4m | $27.0m |
Revenue growth was led by the Apartments Network: multifamily revenue rose to $54.9m in Q2 from $34.7m, and to $107.1m for the first half from $60.9m. CoStar Suite revenue was $101.1m for Q2 and $198.7m for the first half. Management attributed growth to apartment marketplace revenue, subscription penetration, cross-selling and high renewal rates.
Cash and cash equivalents were $464.2m at June 30, 2016, with $1.1m of short-term investments; total cash, cash equivalents and short-term investments were approximately $465m. Long-term debt principal was $345m, with no revolver borrowings; the $225m revolving facility remained available. The company repaid $20m of debt during the first half, including a $15m prepayment. Capital expenditures were $7.4m for the half.
Changes and management commentary
- Q2 revenue increased about 21% year over year; first-half revenue increased about 23%. The company returned to GAAP profitability compared with losses in the 2015 periods.
- Gross margin improved as revenue grew and cost of revenues declined. Selling and marketing expense fell year over year, partly because Apartments.com’s 2015 brand campaign had higher costs; software development spending increased to support product enhancements.
- Annual CoStar subscription renewal was approximately 91% for the trailing twelve months. Annualized net new sales on annual contracts were about $23m versus $25m a year earlier; net bookings were about $26m versus $34m.
- North America produced nearly all revenue growth. Q2 North America EBITDA was $45.1m versus a loss of $1.9m; International EBITDA was $0.4m versus $0.4m. These segment EBITDA figures are non-GAAP measures.
- Management expects 2016 capital expenditures of approximately $25m–$30m, primarily for leased-office build-outs and technology, and expects continued sales and marketing investment. It stated available cash and expected operating cash flow should fund operations for at least the next 12 months. No specific revenue or earnings guidance was provided in the filing.
Risks, contingencies and unusual items
- Management identified Brexit-related uncertainty, including potential currency volatility, weaker international customer spending and changes to regulation. The company does not hedge foreign-currency exposure; first-half foreign currency translation reduced other comprehensive income.
- Approximately $12m par value of auction-rate securities had failed auctions and may not be readily liquid. Their fair value was $11.0m, including a $206,000 unrealized loss considered temporary; further losses or an earnings impairment remain possible.
- Debt bears variable interest. The company estimated a 25-basis-point rate change would alter annual interest expense by approximately $0.9m. It reported compliance with credit-agreement covenants at June 30.
- Litigation is ongoing in the ordinary course. Management said an unfavorable outcome was reasonably possible but not probable, and it could not estimate a possible loss range; no liability was recorded.
- Management expects continued integration and product investment, but warned these initiatives, acquisitions, service changes and marketing spending could reduce profitability or cash flow. LoopNet/CoStar backend integration may lead to rebranding; certain Apartment Finder services and print advertising were discontinued.
Investor verification priorities
- Assess whether Apartments Network growth, subscription renewals and bookings can sustain revenue momentum, particularly given lower reported net bookings.
- Review the drivers and durability of the substantial year-over-year margin and earnings improvement, including marketing costs and acquisition-related comparisons.
- Monitor cash conversion, capital spending and debt amortization, including the disclosed $285m of expected maturities for the year ending June 30, 2019.
- Track the liquidity and valuation of auction-rate securities, variable-rate debt exposure and the financial effects of Brexit and foreign exchange movements.
- Evaluate execution and returns from CoStar/LoopNet integration, apartment marketplace investment, acquisitions and international expansion; review the company’s forthcoming adoption assessments for new accounting standards.