CoStar Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results; amounts below are in U.S. dollars. CoStar provides commercial real estate information, analytics and marketing services, principally through subscription agreements. Its operating segments are U.S. and International.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $109.0M | $85.2M | $213.0M | $153.9M |
| Gross margin | $76.9M (70.5%) | $57.1M (66.9%) | $147.3M (69.2%) | $101.3M (65.9%) |
| Operating income (loss) | $15.3M | $(0.01)M | $12.7M | $8.6M |
| Net income (loss) | $8.3M | $(6.7)M | $5.9M | $(1.6)M |
| Diluted earnings (loss) per share | $0.29 | $(0.25) | $0.21 | $(0.06) |
| EBITDA (non-GAAP) | $25.3M | $8.2M | $32.9M | $20.1M |
For the six months, operating cash flow was $41.6M, compared with $30.6M in 2012. Investing activities used $8.8M, versus $636.6M in 2012, when the LoopNet acquisition required substantial cash. Financing activities provided $1.4M, compared with $164.1M in 2012, which included term-loan proceeds.
At June 30, 2013, cash and cash equivalents were $190.1M, compared with $156.0M at year-end 2012. Current assets were $244.7M and current liabilities $102.7M. Debt totaled approximately $161.9M, including $19.7M current and $142.2M long-term; the $50M revolving facility was undrawn. The company reported compliance with its credit covenants.
Changes versus prior comparable periods
- Q2 revenue increased about 28%; first-half revenue increased about 38%. Management attributed the growth to LoopNet, greater penetration and cross-selling of subscription services, and high renewal rates.
- LoopNet contributed approximately $14.8M of Q2 revenue and $40.7M for the first half. The acquisition closed April 30, 2012, making comparisons materially affected by acquisition timing.
- Gross margin improved in both periods. Q2 net income turned positive from a loss, while first-half net income improved to $5.9M from a $1.6M loss.
- First-half stock-based compensation rose to $24.5M from $4.9M, largely due to performance-based restricted stock awards. Management expected approximately $9.3M of additional related expense during the remainder of 2013 and in 2014.
- U.S. segment revenue rose to $104.2M in Q2 and $203.5M for the first half. International revenue was broadly flat at $4.8M and $9.5M, respectively. International EBITDA remained negative, though the loss narrowed.
Outlook, commentary and risks
- Management expects current services to remain profitable and generate substantial cash flow in 2013, and believes available cash plus operating cash flow should fund operations for at least 12 months. These are forward-looking expectations, not guarantees.
- Planned investment includes product upgrades, continued integration and cross-selling, international service expansion, and a possible Toronto launch in late 2013 or early 2014. CoStar forecast 2013 capital expenditures of approximately $18M–$22M, primarily for leased-office buildouts.
- Management said cross-selling initiatives had begun producing revenue synergies, while associated sales and marketing spending was expected to continue through 2013. Integration and product-development spending could pressure profitability and cash flow.
- Commercial real estate conditions, slower economic recovery, customer cancellations or spending reductions, competition, foreign exchange movements, and execution of LoopNet integration and international expansion are identified risks.
- The company held $24.3M par value of auction rate securities that had failed auctions, carried at $21.7M. The approximately $1.8M unrealized decline was treated as temporary and recorded in equity; the investments may not be readily liquidated at par.
- CoStar and LoopNet faced patent litigation from Civix; the company said outcomes could not be predicted and intended to defend the claims. A proposed settlement in LoopNet shareholder litigation, estimated to involve approximately $200,000, had not received preliminary court approval; a hearing was rescheduled for October 2013. Management said it did not believe pending matters were likely to have a material adverse effect.
- The $161.9M term debt bears variable interest. Management estimated a 25-basis-point rate change would alter annual interest expense by approximately $0.4M. The company does not hedge foreign-currency exposure.
Important facts for investors to verify
- How much of revenue growth reflects ongoing organic subscription growth and cross-selling versus LoopNet’s inclusion in the comparison period.
- Whether improved gross margins and segment EBITDA persist as sales, development and integration expenses continue.
- The cash and earnings effects of performance-based stock compensation, debt amortization and scheduled principal repayments.
- Progress toward the stated capital-spending, product-launch and international-expansion plans, and compliance with tightening leverage covenants.
- Developments in Civix litigation, the shareholder settlement process, and the liquidity and valuation of auction rate securities.