CoStar Group, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. The filing also reports fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
CoStar provides subscription-based commercial real estate information, analytics and online marketplaces, including CoStar, LoopNet and the Apartments.com network. It reports North America and International segments. The company identifies subscription renewals, cross-selling, database depth and marketplace traffic as key business drivers. Thomas Daily, a German real estate information provider, was acquired in May 2016; Westside Rentals was acquired after year-end, on January 31, 2017.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $837.6 million | $711.8 million | +18% |
| Gross margin | $663.8 million; 79% of revenue | $522.9 million; 73% | +27%; margin expanded |
| Operating income | $144.9 million; 17% of revenue | $11.5 million; 2% | Substantial recovery |
| Net income (loss) | $85.1 million; diluted EPS $2.62 | $(3.5) million; diluted EPS $(0.11) | Returned to profitability |
| EBITDA (non-GAAP) | $215.1 million | $90.0 million | Increased |
| Operating cash flow | $195.9 million | $131.2 million | +$64.7 million |
Revenue growth was led by multifamily marketplace revenue, up 40% to $224.8 million, including the contribution from Apartment Finder. CoStar Suite revenue grew 13% to $408.5 million. Information services grew 2% to $77.2 million, while commercial property and land revenue rose 11% to $127.2 million. Management attributed gross-margin improvement partly to lower cost of revenue, including reduced acquired-intangible amortization and research personnel costs. Selling and marketing expense declined 2% to $296.5 million; software development expense increased 16% to $76.4 million.
In Q4 2016, revenue was $218.3 million versus $193.0 million in Q4 2015; net income was $29.6 million versus $23.0 million, and diluted EPS was $0.91 versus $0.71.
Liquidity, debt and capital resources
Cash and cash equivalents were $567.2 million at year-end, compared with $421.8 million a year earlier. Cash, cash equivalents and long-term investments totaled $577.2 million; working capital was $472.5 million. Operating cash flow was $195.9 million, investing cash outflow was $23.3 million, and financing cash outflow was $25.9 million. Capital expenditures were approximately $18.8 million.
Long-term borrowings were $345.0 million before debt issuance costs; no revolving-credit borrowings were outstanding, and $225 million of revolving capacity remained available. The term loan carries a variable interest rate. CoStar repaid $20 million of principal in 2016 and reported compliance with credit-agreement covenants at year-end. Management said available cash and expected operating cash flow should fund operations for at least 12 months. Contractual obligations included $186.5 million of operating lease payments and $345.0 million of scheduled debt principal.
Changes, outlook and material matters
- FY 2015 results included substantial Apartments.com marketing investment: selling and marketing expense was $302.2 million in 2015 versus $296.5 million in 2016. Net income improved from a 2015 loss as revenue grew and expenses normalized.
- Annualized net new sales on annual contracts declined from approximately $29 million in 2015 to $27 million in 2016; net bookings across all contract terms increased from approximately $25 million to $29 million. CoStar subscription renewal rate on annual contracts was approximately 90% in both years.
- For 2017, management expected CoStar Suite and commercial property and land revenue growth rates to be consistent with historical rates; information-services growth to decline as LoopNet information products are phased out; and multifamily growth to continue at a lower rate than in 2016. It expected gross margin to decrease slightly, International EBITDA to decline due to research investment, and capital expenditures to increase. These are directional statements; the filing does not provide specific 2017 revenue or earnings guidance figures.
- CoStar was integrating LoopNet and CoStar backend systems and continued to assess converting LoopNet into a paid-listing marketplace with free search. Management warned of possible near-term revenue and earnings reductions during the transition.
- Legal costs of approximately $6 million were incurred in 2016, and further costs were expected in 2017. Management said current litigation losses were not probable and could not be reasonably estimated; no liability was recorded. The company stated no legal matter was then expected to have a material adverse effect, based on management’s assessment.
- Year-end auction-rate securities had $11 million par value and $9.95 million estimated fair value, including an $848,000 temporary unrealized loss. The securities had failed auctions and may not be readily liquidated at par.
- Other notable risks include customer retention and advertiser demand, real estate market weakness, competition, acquisition integration, data quality, cybersecurity and privacy compliance, foreign-exchange exposure, Brexit-related uncertainty, and potential impairment of goodwill or intangible assets. Goodwill was approximately $1.255 billion; the 2016 annual test found no impairment.
Key facts for investors to verify
- Reconcile the strong earnings rebound with the prior-year marketing-spend impact and review the company’s non-GAAP EBITDA adjustments.
- Track subscription renewals, annual-contract net new sales, bookings and multifamily growth as Apartment Finder acquisition comparisons become less favorable.
- Assess the timing and financial effect of LoopNet’s planned transition, including customer conversion, search traffic and potential revenue disruption.
- Monitor 2017 spending, research investment, capital expenditures and margin trends against management’s directional outlook.
- Review debt maturities, variable-rate exposure, covenant headroom, and the liquidity and valuation assumptions for auction-rate securities.
- Follow the outstanding litigation and expected legal costs, as well as acquisition integration and the company’s large goodwill and intangible-asset balances.