Business context and reporting period
CoStar Group, Inc. provides commercial real estate information, analytics and online marketplaces through subscription services and advertising platforms. This unaudited Form 10-Q covers the three months ended March 31, 2016; comparisons are with the first quarter of 2015 unless noted.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $199.7 million | $159.0 million |
| Gross profit / margin | $156.8 million / 79% | $113.6 million / 71% |
| Operating income (loss) | $30.3 million | $(3.5) million |
| Net income (loss) | $16.7 million; $0.52 per diluted share | $(6.1) million; $(0.19) per diluted share |
| Operating cash flow | $47.9 million | $30.2 million |
| Investing cash flow | $0.4 million provided | $11.1 million used |
| Cash and cash equivalents | $461.7 million | $421.8 million at Dec. 31, 2015 |
| Debt | $360 million principal; $350.9 million net carrying amount | $365 million principal at Dec. 31, 2015 |
Revenue increased about 26%. North America generated $193.3 million of revenue and $46.9 million of segment EBITDA, versus $153.0 million and $13.7 million, respectively. International revenue was $6.5 million versus $6.0 million, with segment EBITDA of $1.0 million versus $0.6 million. Consolidated EBITDA, a non-GAAP measure defined by the company, was $47.8 million versus $14.3 million.
Revenue by service included CoStar Suite $97.6 million (prior year $86.8 million), multifamily marketplaces $52.2 million ($26.1 million), commercial property and land marketplaces $30.4 million ($27.5 million), and other information services $19.4 million ($18.5 million). The filing reports total cash, cash equivalents and short-term investments of approximately $463 million. No amounts were drawn on the $225 million revolving facility. Management said available cash and expected operating cash flow should fund operations for at least 12 months.
Material changes versus the prior period
- Management attributed most of the $40.7 million revenue increase to approximately $26 million of additional Apartments Network revenue, alongside subscription penetration, cross-selling and renewals. Apartment Finder was acquired in June 2015, so results are not fully comparable year over year.
- Gross margin rose to 79% from 71%, helped by higher revenue and lower cost of revenue, including the nonrecurrence of a 2015 Apartments.com database amortization and impairment charge.
- Operating results turned profitable. The prior-year quarter included a $1.4 million impairment loss; none was recorded in Q1 2016.
- Operating cash flow rose by $17.8 million, principally due to higher net income and noncash adjustments. Investing cash flow improved as property and equipment purchases declined.
- Annualized net new sales on annual subscription contracts were approximately $25 million versus $16 million. The trailing 12-month renewal rate for existing CoStar subscriptions was 90% versus 91%.
Outlook, risks and unusual items
- Management expected 2016 capital expenditures of approximately $25–30 million, primarily for leased-office buildouts and technology, and planned continued sales and marketing investment, including Apartments.com advertising.
- The company was integrating CoStar and LoopNet backend systems and continued development, cross-selling and geographic expansion. It cautioned that integration, marketing, acquisitions and service changes may increase costs, reduce profitability or affect revenue; Apartment Finder print advertising and certain services had been phased out.
- Management planned to prepay $15 million of term-loan principal on April 29, 2016. Debt bears variable interest; a 25-basis-point rate change was estimated to affect annual interest expense by approximately $0.9 million. The company was in compliance with credit agreement covenants at quarter-end.
- Approximately $12 million par value of auction-rate securities had failed to settle at auction and may not be readily liquidated. Their $11.0 million carrying value included a $206,000 temporary unrealized loss; further valuation losses or an earnings impairment remain possible.
- Current litigation was not considered probable to result in a loss, but management could not estimate a possible loss range. Foreign currency movements, customer retention, competition, acquisition integration, marketing returns and intangible-asset recoverability are among the stated risks.
- The effective tax rate was approximately 40% in Q1 2016 versus (10)% in Q1 2015, primarily reflecting a local tax-law change in the prior-year quarter. The filing provides no specific revenue or earnings guidance for the full year.
Important facts for investors to verify
- How much reported growth reflects recurring organic subscription gains versus acquired Apartments Network revenue, and whether cross-selling and marketing investments are delivering returns.
- Whether the 90% renewal rate, annualized net new sales and multifamily marketplace growth persist in subsequent periods.
- Cash conversion, planned capital spending, the April 2016 debt prepayment, variable-rate exposure and compliance with leverage covenants.
- The liquidity, valuation assumptions and potential impairment exposure for auction-rate securities, and any developments in litigation or intangible-asset recoverability.
- Progress and costs of CoStar–LoopNet integration, Apartment Finder service changes, and adoption of new revenue-recognition, lease and share-based-payment accounting standards.