CoStar Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. CoStar provides commercial real estate information, analytics and marketing services, primarily through subscriptions, and operates online property and apartment marketplaces.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $147.7 | $109.0 | $266.8 | $213.0 |
| Gross margin | $108.2; 73.3% | $76.9; 70.5% | $193.7; 72.6% | $147.3; 69.2% |
| Operating income | $16.9 | $15.3 | $34.1 | $12.7 |
| Net income | $8.2 | $8.3 | $18.0 | $5.9 |
| Diluted EPS | $0.28 | $0.29 | $0.62 | $0.21 |
| EBITDA (company-defined) | $37.6 | $25.3 | $64.6 | $32.9 |
- Q2 revenue grew about 36%, including $25.0 million from Apartments.com, acquired April 1. Management also cited subscription-service penetration, cross-selling and renewals.
- Despite higher Q2 operating income, net income was slightly lower year over year; interest expense rose to $3.8 million from $1.8 million, principally reflecting higher debt, while income tax expense was $5.0 million versus $5.3 million.
- For the first half, net cash from operating activities was $43.3 million versus $41.6 million. Investing cash outflow was $595.1 million, mainly the $584.2 million net acquisition outlay; financing cash inflow was $740.5 million.
Liquidity, debt and material changes
- Cash and cash equivalents were $444.9 million at June 30, up from $256.0 million at year-end 2013. The company also held $21.6 million of long-term investments, including auction-rate securities with $23.8 million par value that had failed to settle at auction.
- Total debt was $395.0 million: $20.0 million current and $375.0 million long-term. No revolving-facility borrowings were outstanding at quarter-end; the facility provides up to $225.0 million of additional borrowing capacity.
- The April 2014 five-year credit agreement includes a $400.0 million term loan and $225.0 million revolver, secured by substantially all company and material-subsidiary assets and subject to financial and other covenants. CoStar reported covenant compliance at June 30. Debt bears variable interest; management estimated a 25-basis-point rate change would change annual interest expense by about $1.0 million.
- CoStar acquired the Apartments.com business for $587.1 million in cash, subject to a $2.9 million working-capital adjustment received in July. Apartments.com contributed $25.0 million of revenue and an $8.2 million pretax loss for the reported 2014 periods. Purchase accounting was preliminary; the acquisition added $421.7 million of goodwill.
- A June public offering of 3.45 million shares at $160 per share generated approximately $529.4 million net proceeds. The company said proceeds may support strategic acquisitions, growth, working capital and other general corporate purposes.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is provided in the filing. Management expects ongoing product development, sales-force investment, Apartments.com integration and cross-selling, and said current services are expected to remain profitable and generate substantial cash flow in 2014. It cautioned that investments or other events could instead cause losses or negative operating cash flow.
- Management forecast 2014 capital expenditures of approximately $25–$30 million, primarily for IT equipment and leased-office build-outs, and stated available cash plus operating cash flow should fund operations for at least 12 months.
- Subscription renewal rates for the trailing 12 months fell to approximately 92% from 94% a year earlier. Management noted that economic weakness, customer consolidation, spending cuts and competition could pressure renewals and sales.
- Key execution and market risks include integrating Apartments.com and realizing expected synergies, commercial real estate conditions, customer retention, competition, data quality, product launches, international expansion and foreign-currency movements.
- CoStar recorded a $1.1 million first-quarter impairment charge for trade names discontinued under its branding initiative. Auction-rate securities carry valuation and liquidity risk; the company recorded a $1.3 million temporary unrealized loss in equity and warned further losses or an earnings impairment could occur.
- In the Civix patent litigation, CoStar said an unfavorable outcome could produce a loss of up to $2.5 million beyond the amount accrued; the outcome remains uncertain. A separate LoopNet merger-related settlement had not received preliminary court approval, with a further status conference scheduled for November 2014.
Important facts for investors to verify
- How much reported growth and future profitability depends on Apartments.com, and whether integration costs, acquisition amortization and the reported pretax loss improve as expected.
- Renewal rates, organic subscription growth and cross-selling performance, separately from acquired revenue.
- Cash generation and liquidity after acquisition spending, equity issuance, debt service and planned capital expenditures; assess covenant headroom and variable-rate exposure.
- The final purchase-price allocation and recoverability of the acquired goodwill and intangible assets.
- Developments in the Civix and merger-related litigation, and the liquidity and valuation of the failed-auction securities.