CoStar Group, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. CoStar provides commercial real estate information, analytics and online marketplaces, primarily through subscription services. Its operating segments are North America and International.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $273.7 million | $226.6 million | +21% |
| Gross profit / margin | $211.2 million / 77% | $175.2 million / 77% | Gross profit +21% |
| Operating income / margin | $53.4 million / 19.5% | $37.7 million / 16.6% | +42% |
| Net income | $52.2 million | $22.1 million | +136% |
| Diluted EPS | $1.44 | $0.68 | +$0.76 |
| Operating cash flow | $73.0 million | $64.6 million | +$8.4 million |
| Investing cash flow | $(348.7) million | $(19.8) million | Primarily ForRent acquisition |
| Cash and cash equivalents, March 31 | $931.4 million | — | Down from $1,211.5 million at year-end 2017 |
| Long-term debt, March 31 | None outstanding | — | $750 million revolving facility available |
Management-reported EBITDA, a non-GAAP measure, was $70.4 million versus $55.0 million. North America generated $264.8 million in revenue and $71.1 million in EBITDA; International generated $8.9 million in revenue and had an EBITDA loss of $0.6 million.
Material changes and key developments
- Revenue growth was led by CoStar Suite (+19%), Multifamily (+37%), and Commercial Property and Land (+19%). Information Services revenue fell 18%, principally as legacy LoopNet information products were phased out.
- CoStar acquired ForRent on February 21 for approximately $376 million, comprising about $340 million cash and $36 million in stock, subject to working-capital adjustment. It also placed $12 million in cash in escrow for employee retention compensation. ForRent contributed $8 million of revenue and an $8 million net loss from acquisition through quarter-end.
- ForRent added approximately $266.7 million of preliminary goodwill and $141.3 million of intangible assets. Purchase accounting remains preliminary; the company recorded acquisition-related sales-tax and uncertain-tax liabilities, partly offset by a seller indemnification asset.
- The company adopted ASC 606 using the modified retrospective method, recording a $54.5 million cumulative increase to opening retained earnings. The company said that without adoption, Q1 revenue would have been about $0.5 million higher, selling and marketing expense about $4 million higher, and net income about $3 million lower (approximately $0.08 per share).
Liquidity, outlook and risks
- Current assets were $1.03 billion and current liabilities were $165.6 million at March 31. CoStar had no borrowings under its $750 million five-year revolving credit facility and reported compliance with its covenants.
- Management expects available cash and operating cash flow to fund operations for at least the next 12 months. It expects 2018 revenue growth to be higher, mainly because of ForRent, with organic growth rates expected to remain similar or be slightly higher. CoStar expects Multifamily revenue to continue increasing, while Information Services growth is expected to decline as LoopNet products are wound down.
- Management plans to integrate and cross-sell ForRent services, continue product development and sales-and-marketing investment, and expects capital expenditures to rise in 2018 for office build-outs and technology. No specific full-year revenue or earnings guidance is provided in the filing.
- The effective tax rate was approximately 6%, versus 37% in Q1 2017, primarily reflecting the Tax Cuts and Jobs Act and excess tax benefits from share-based payments. Accounting for the tax law changes remained incomplete, and the rate may fluctuate.
- Risks include successful ForRent integration and realization of expected synergies; customer retention and renewal trends; the LoopNet transition; marketing effectiveness; competition and economic conditions; protection of proprietary data and intellectual property; foreign-exchange movements; and impairment risk for goodwill and intangible assets. Management said current litigation losses were not probable or reasonably estimable and recorded no liability. The company also noted that failed auctions could impair the value or liquidity of its $10.1 million carrying-value auction-rate securities.
Important facts for investors to verify
- Whether ForRent integration delivers the expected revenue, cost synergies and competitive benefits, and how preliminary purchase accounting changes.
- Organic growth, renewal rates and cancellation trends: annual-contract renewal was about 91%, compared with 90% a year earlier; management expects a slight future decline as Multifamily becomes a larger portion of the business.
- How much reported earnings growth reflects ongoing operations versus the lower tax rate and ASC 606 adoption; review GAAP results alongside management’s non-GAAP measures.
- Cash generation and liquidity after acquisition spending, planned investment and any further acquisitions.
- Progress migrating LoopNet information customers to CoStar Suite and transitioning LoopNet to a paid-listing marketplace, including effects on revenue and customer retention.