COSTAR GROUP, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements," including statements about our beliefs and expectations. There are many risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Potential factors that could cause actual results to differ materially from those discussed in any forward-looking statements include, but are not limited to, those stated under the heading "Cautionary Statement Concerning Forward-Looking Statements" at the end of this Item 2 and "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as well as those described from time to time in our filings with theSecurities and Exchange Commission . All forward-looking statements are based on information available to us on the date of this filing, and we assume no obligation to update such statements, whether as a result of new information, future events or otherwise, except as required by law. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2021 , our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and other filings with theSecurities and Exchange Commission and the condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. OverviewCoStar Group, Inc. (the "Company" or "CoStar Group ") is a leading provider of information, analytics and online marketplaces to the commercial real estate industry inthe United States ("U.S.") andUnited Kingdom ("U.K.") based on the fact that we offer the most comprehensive commercial real estate database available; have the largest research department in the industry; own and operate leading online marketplaces for commercial real estate and apartment listings in theU.S. , based on the numbers of unique visitors and site visits per month; and provide more information, analytics and marketing services than any of our competitors. We have created and compiled a standardized platform of information, analytics and online marketplace services where industry professionals and consumers of commercial real estate, including apartments, and the related business communities, can continuously interact and facilitate transactions by efficiently accessing and exchanging accurate and standardized real estate-related information. Our service offerings span all commercial property types, including office, retail, industrial, multifamily, commercial land, mixed-use and hospitality. With our recent acquisitions ofHomesnap, Inc. ("Homesnap") andHomes Group, LLC ("Homes.com") we also offer online platforms for marketing and workflow management for residential real estate agents and brokers and residential property listings for homebuyers. We manage our business geographically in two operating segments, with our primary areas of measurement and decision-making beingNorth America , which includes theU.S. andCanada , and International, which primarily includesEurope ,Asia-Pacific andLatin America . Our most recent strategic acquisitions includeHomes.com ; ComReal Info, the owner and operator of BureauxLocaux inFrance and BIH the owner and operator of Business Immo, a leading commercial real estate news service provider inFrance . See Notes 5, 8 and 14 to the accompanying Notes to the condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q for further discussion of these acquisitions. Our services are typically distributed to our clients under subscription-based license agreements that renew automatically, a majority of which have a term of at least one year. Upon renewal, many of the subscription contract rates may change in accordance with contract provisions or as a result of contract renegotiations. To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based services rather than charging fees based on actual system usage or number of paid clicks. Depending on the type of service, contract rates are generally based on one or more of the following factors: the number of sites, number of users, organization size, the client's business focus, geography, the number of properties reported on or analyzed, the number and types of services to which a client subscribes, the number of properties a client advertises and the prominence and placement of a client's advertised properties in the search results. Our subscription clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. Our transaction-based services primarily consist of auction fees from ourTen-X online auction platform, which are generally calculated as a percentage of the final sales price for the commercial real estate property sold and recognized as revenue upon the successful closure of an auction. Other transaction-based services are described by service offering below. Our primary brands include CoStar®, LoopNet®, Apartments.comTM, STR®, Ten-X®, BizBuySell®, LandsofAmericaTM, HomeSnap®, and Homes.com®, which are accessible via the Internet and through our mobile applications. Our principal service offerings are discussed in more detail below. 30 --------------------------------------------------------------------------------
Impact of the COVID-19 Pandemic
While the impact of the COVID-19 pandemic continues to evolve, it did not materially affect our consolidated financial statements during 2021 or our condensed consolidated financial statements forMarch 31, 2022 . It is currently unclear how the commercial real estate industry will ultimately be impacted by the COVID-19 pandemic as businesses formulate and execute plans for employees to return to the office, implement hybrid work arrangements - allowing work from the office or home, or switch to all work from home. If the demand for office space decreases significantly, there could be a downturn in the commercial real estate market which may materially adversely affect many of our clients. A depressed commercial real estate market would have a negative impact on our core customer base, which could impact our customers' ability to subscribe and pay for our services and reduce demand for our services. Reduced demand and increased cancellations could cause our revenues or our revenue growth rates to decline and reduce our profitability.
Service Offerings
Our portfolio of information, analytics and online marketplace services are branded and marketed to our customers and marketplace end users. Our services are primarily derived from a database of building-specific information and offer customers specialized tools for accessing, analyzing and using our information. Over time, we enhanced and expanded, and we expect to continue to enhance and expand, our existing information, analytics and online marketplace services and we have developed and we expect to continue to develop additional services that use our comprehensive database to meet the needs of our existing customers as well as potential new categories of customers.
Our principal information, analytics and online marketplace services are described in the following paragraphs by type of service:
CoStar
CoStar® is our subscription-based integrated platform for commercial real estate intelligence, which includes information about office, industrial, retail, multifamily and student housing properties, properties for sale, comparable sales, tenants, space available for lease, industry professionals and their business relationships, industry news, and market and lease analytical capabilities. CoStar's year-over-year revenue growth rate for the first quarter of 2022 increased compared to the first quarter of 2021. The number of subscribers has increased year-over-year and we have also realized the impact of pricing increases. We began applying price increases in late 2021, which had been temporarily suspended earlier in the COVID-19 pandemic. We expect CoStar's revenue growth rate for 2022 to increase compared to the revenue growth rate for 2021 as a result of expected increases in subscriber counts and price increases for renewing contracts. Information Services We provide real estate and lease management technology solutions, including lease administration, lease accounting and abstraction services, through our CoStar Real Estate Manager® service offerings, as well as portfolio and debt analysis, management and reporting capabilities through ourCoStar Investment Analysis and CoStar Risk Analytics® service offerings. We also provide benchmarking reports for the hospitality industry. STARTM reports are provided on a subscription basis, but we also provide one-time or ad hoc reports or analysis on a transaction basis. We provide information services internationally, through our Grecam,Belbex andThomas Daily businesses inFrance ,Spain andGermany , respectively. Information Services' year-over-year revenue growth rate for the first quarter of 2022 was consistent with the first quarter of 2021. We expect the Information Services revenue growth rate for 2022 to be consistent with the revenue growth rate for 2021.
Multifamily
Apartments.com™ is part of our network of apartment marketing sites, which primarily includes ApartmentFinder®, ForRent.com®, ApartmentHomeLiving.com™, Apartamentos.com™, Westside Rentals, andOff Campus Partners, LLC . Our network of subscription-based advertising services provides property management companies and landlords with a comprehensive advertising destination for their available rental units and offers renters a platform for searching for available rentals.Apartments.com also receives transaction-based revenue for tenant processing fees. Multifamily's year-over-year revenue growth rate in the first quarter of 2022 decreased compared to the first quarter of 2021 as a result of fewer properties being listed as multifamily vacancy rates have declined from historical averages. In late 2021, we began initiating a new pricing structure that partially offset the impact of the decline in properties listed. Therefore we expect Multifamily's year-over-year revenue growth rate for 2022 to decrease compared to the revenue growth rate for 2021.
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Our LoopNet.com network of commercial real estate websites offer
subscription-based online marketplace services that enable commercial property
owners, landlords and real estate agents working on their behalf to advertise
properties for sale or for lease and to submit detailed information about
property listings. Commercial real estate agents, buyers and tenants use the
LoopNet.com network of online marketplace services to search for available
property listings that meet their criteria. LoopNet's year-over-year revenue
growth rate for the first quarter of 2022 decreased compared with the first
quarter of 2021. We expect LoopNet's year-over-year revenue growth rate for 2022
to decrease compared to the revenue growth rate for 2021 as we continue to
develop a dedicated sales force for LoopNet .
Residential
OnDecember 22, 2020 , we acquired Homesnap, an online and mobile software platform that provides subscription-based access to applications that manage residential real estate agent workflow and marketing campaigns delivered on third-party platforms. Homesnap also receives transaction-based revenue for short-term advertising delivered on third-party platforms. OnMay 24, 2021 , we acquiredHomes.com , a residential advertising and marketing services company primarily operating through its portal,Homes.com . Residential's first quarter 2022 revenue increased compared to the first quarter of 2021 as a result of increased sales of Homesnap products and services. We expect Residential's revenue for the year endedDecember 31, 2022 to decline when compared to the year endedDecember 31, 2021 due to the discontinuation of certainHomes.com products and services that were inconsistent with our long term business strategy. This decline is expected to be partially offset by an increase in sales of Homesnap products and services.
Other Marketplaces
OnJune 24, 2020 , we acquiredTen-X , an online auction platform for commercial real estate. Our BizBuySell network, which includes BizQuest® and FindaFranchise, and our Land.com network of sites, which includes LandsofAmerica, LandAndFarm and LandWatch®, are also included in Other Marketplaces revenue. The BizBuySell network provides online marketplaces for businesses for-sale and our Land.com network of sites provide online marketplaces for rural lands for-sale. Other Marketplaces' revenue growth rate is expected to be lower in 2022 compared to 2021 given the impact of theTen-X acquisition in 2020. Subscription-based Services
The majority of our revenue is generated from service offerings which are distributed to our clients under subscription-based agreements that typically renew automatically and have a term of at least one year. We recognize subscription revenues on a straight-line basis over the life of the contract.
For the three months endedMarch 31, 2022 andMarch 31, 2021 , our annualized net new bookings of subscription-based services on all contracts were approximately$68 million and$52 million , respectively, calculated based on the annualized amount of change in our sales resulting from all new subscription-based contracts or upgrades on all existing subscription-based contracts, less write-downs and cancellations, for the period reported. Net new bookings is considered a key indicator of future subscription revenue growth and is also used as a metric of sales force productivity by us and investors. However, information regarding net new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. Revenue from our subscription-based contracts was approximately 93% of total revenue for the three months endedMarch 31, 2022 andMarch 31, 2021 . For the trailing twelve months endedMarch 31, 2022 and 2021, our contract renewal rates for existingCoStar Group subscription-based services for contracts with a term of at least one year were approximately 91% and 90%, respectively, and therefore our cancellation rates for those services for the same periods were approximately 9% and 10% respectively. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, we believe that the rate may be a reliable indicator of short-term and long-term performance absent extraordinary circumstances. Our trailing twelve-month contract renewal rate may decline as a result of negative economic conditions, consolidations among our clients, reductions in customer spending, or decreases in our customer base. Revenue from our subscription-based contracts with a term of at least one year was approximately 77% and 79% of total revenue for the trailing twelve months endedMarch 31, 2022 andMarch 31, 2021 , respectively. The decrease in the percentage of our revenue from subscription-based contracts for the trailing twelve months endedMarch 31, 2022 compared toMarch 31, 2021 was primarily due to the acquisition of companies which contained a higher percentage of transaction-based revenue than our legacy businesses, as well as, increases in our sales of shorter term advertising products. 32 --------------------------------------------------------------------------------
Development, Investments and Expansion
We plan to continue to invest in our business and our services, evaluate strategic growth opportunities, and pursue our key priorities as described below, while we closely monitor the economic impacts of the COVID-19 pandemic and manage our response. We are committed to supporting, improving and enhancing our information, analytics and online marketplace solutions, including expanding and improving our offerings for our client base and site users, including property owners, property managers, buyers, commercial tenants, brokers, agents and residential renters. We expect to continue our software development efforts to improve existing services, introduce new services, integrate and cross-sell services, integrate recently completed acquisitions and expand and develop supporting technologies for our research, sales and marketing organizations. We reevaluate our priorities on a regular basis and may reevaluate our priorities as the COVID-19 pandemic continues to evolve.
Our key priorities for the remainder of 2022 currently include:
•Continuing to develop and invest in residential marketplaces. Our residential team is creating new and improved tools to help consumers have a highly contextual experience when searching for homes supported by high quality media and in-depth attributes of homes and details of the surrounding neighborhoods, parks and schools and to help consumers collaborate with their agent and other consumers. We are also creating new and improved tools to help agents promote their residential listings, connect with buyers and sellers and streamline their daily workflow. InOctober 2021 , we reached an agreement to create, maintain and market a consumer-facing search website and mobile app for the Real Estate Board ofNew York's Residential Listing Service. In accordance with that agreement, we are developing a custom version of the Homesnap platform, branded as Citysnap™, specifically for the five boroughs ofNew York City . To support the expanded product offering, we expect to increase our investment in residential products in 2022 by approximately$200 million . The most significant components of our investment are expected to be content development, marketing costs and technology resources. The increase in our investment in residential products in 2022 is expected to reduce our results of operations and cash flow from operations for the year endedDecember 31, 2022 . We plan to continue to monitor and evaluate these investments and adjust our residential business strategy and level of investment as we determine appropriate.
•Continuing to invest in CoStar, including:
•Enhancing benchmarking capabilities. We integrated STR's data into CoStar in 2021 and plan to apply STR's benchmarking expertise within CoStar. We will continue to integrate the STR products into our core platform throughout 2022.
•Developing CMBS Analytics, which will aggregate loan and property data across covered markets. The initial CMBS Analytics release is expected to include loan origination metrics, distressed loan levels and maturity volumes, as well as detailed revenue and expense information. In later releases of this solution, we plan to include detailed prepayment information on disposed loans; •Continuing to develop a solution for lenders that leverages CoStar's Risk Analytics capabilities to support lenders with risk management, underwriting, surveillance and compliance reporting. We released our new Lender product in beta followed by the commercial release both in the first quarter of 2022. This solution provides a focus on portfolio risk analytics and surveillance to help lenders meet regulatory and accounting requirements. Subsequent releases are expected to focus on loan origination and underwriting;
•Expanding our international presence by hiring managers and teams of field researchers in European markets.
•Continuing to improve and market ourApartments.com service offerings to create the best and most comprehensive consumer rental search experience as well as continuing to advance the digital rental experience that allows renters to apply for leases and make rent payments, and for landlords to receive and assess tenant applications online through a single platform. We seek user feedback as we work to improve our services and continue to aggressively market our multifamily listing services in an effort to attract consumers and, in turn, provide more value to advertisers. OurApartments.com marketing spending is focused on enhanced brand awareness and search engine marketing. As we continue to assess the success and effectiveness of our marketing campaign, we will continue to work to determine the optimal level and focus of our marketing investment for our multifamily listing services for future periods and may adjust our marketing spend and focus as we deem appropriate.Apartments.com has been successful in generating increased traffic to the network and as a result is delivering increased leads per ad to customers. We have implemented a new pricing strategy to align the product level prices with the value of the leads generated. We intend to monitor our new pricing strategy to determine whether current pricing reflects the increased lead generation we are delivering to our customers. 33 -------------------------------------------------------------------------------- •Continuing to invest in theLoopNet marketplaces. To support theLoopNet marketplaces, we implemented training and incentive programs for our existing sales team to increase sales ofLoopNet advertisements, with a focus on brokers and property owners. We have enhanced the content on LoopNet.com (including high-quality imagery), seeking targeted advertisements, and are providing premium marketing services (such as LoopNet Diamond, Platinum, and Gold Ads) that increase a property listing's exposure, and adding more content for premium listings to better meet the needs of a broader cross section of the commercial real estate industry. We are continuing our plans to recruit and develop a dedicatedLoopNet sales team to help support and grow the business. To generate brand awareness and site traffic for the LoopNet.com network, we expect to continue to incur costs for a multi-media marketing campaign, reinforced with search engine optimization efforts and will continue to work to determine the optimal level and focus of this marketing effort for future periods and may adjust the spend and focus as deemed appropriate. •Continuing to invest in theTen-X auction platform. We have integrated theTen-X platform with both CoStar andLoopNet to expand the audience forTen-X auctions to include our commercial real estate users. We also plan to enhance access toTen-X's data room information from CoStar andLoopNet . To increase exposure of properties to be auctioned onTen-X , we are allocating banner space on both our CoStar andLoopNet sites for advertising forTen-X properties. We continue to execute our plan to expand theTen-X sales force and focus on increasing the number of qualified bidders and the number of owners bringing properties to the site. To generate brand awareness and site traffic for theTen-X platform, we expect to continue to incur costs for a multi-media marketing campaign, reinforced with search engine optimization efforts and will expect to continue to work to determine the optimal level and focus of this marketing effort for future periods and may adjust the spend and focus as deemed appropriate. We intend to continue to assess the need for additional investments in our business in order to develop and distribute new services and functionality within our current platform or expand the reach of, or otherwise improve, our current service offerings. Any future product development or expansion of services, combination and coordination of services or elimination of services or corporate expansion, development or restructuring efforts could reduce our profitability and increase our capital expenditures. Any new investments, changes to our service offerings or other unforeseen events could cause us to experience reduced revenues or generate losses and negative cash flow from operations in the future. Any development efforts must comply with our credit facility, which contains restrictive covenants that restrict our operations and use of our cash flow and may prevent us from taking certain actions that we believe could increase our profitability or otherwise enhance our business.
Non-GAAP Financial Measures
We prepare and publicly release quarterly unaudited financial statements
prepared in accordance with generally accepted accounting principles ("GAAP").
We also disclose and discuss certain non-GAAP financial measures in our public
releases, investor conference calls and filings with the Securities and Exchange
Commission . The non-GAAP financial measures that we may disclose include net
income before interest (expense) income, other (expense) income, loss on debt
extinguishment, income taxes, depreciation and amortization ("EBITDA"), adjusted
EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per
diluted share. EBITDA is our net income before interest (expense) income, other
(expense) income, loss on debt extinguishment, income taxes, depreciation and
amortization. We typically disclose EBITDA on a consolidated and an operating
segment basis in our earnings releases, investor conference calls and filings
with the Securities and Exchange Commission . Adjusted EBITDA is different from
EBITDA because we further adjust EBITDA for stock-based compensation expense,
acquisition- and integration-related costs, restructuring costs and settlements
and impairments incurred outside our ordinary course of business. Adjusted
EBITDA margin represents adjusted EBITDA divided by revenues for the period.
Non-GAAP net income is determined by adjusting our net income for stock-based
compensation expense, acquisition- and integration-related costs, restructuring
costs, settlement and impairment costs incurred outside our ordinary course of
business and loss on debt extinguishment, as well as amortization of acquired
intangible assets and other related costs, and then subtracting an assumed
provision for income taxes. Non-GAAP net income per diluted share is a non-GAAP
financial measure that represents non-GAAP net income divided by the number of
diluted shares outstanding for the period used in the calculation of GAAP net
income per diluted share.
We may disclose adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and
non-GAAP net income per diluted share on a consolidated basis in our earnings
releases, investor conference calls and filings with the Securities and Exchange
Commission . The non-GAAP financial measures that we use may not be comparable to
similarly titled measures reported by other companies. Also, in the future, we
may disclose different non-GAAP financial measures in order to help our
investors meaningfully evaluate and compare our results of operations to our
previously reported results of operations or to those of other companies in our
industry.
We view EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share as operating performance measures. We believe that the most directly comparable GAAP financial measure to
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EBITDA, adjusted EBITDA and non-GAAP net income is net income. We believe the
most directly comparable GAAP financial measures to non-GAAP net income per
diluted share and adjusted EBITDA margin are net income per diluted share and
net income divided by revenue, respectively. In calculating EBITDA, adjusted
EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per
diluted share, we exclude from net income the financial items that we believe
should be separately identified to provide additional analysis of the financial
components of the day-to-day operation of our business. We have outlined below
the type and scope of these exclusions and the material limitations on the use
of these non-GAAP financial measures as a result of these exclusions. EBITDA,
adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net
income per diluted share are not measurements of financial performance under
GAAP and should not be considered as a measure of liquidity, as an alternative
to net income or as an indicator of any other measure of performance derived in
accordance with GAAP. Investors and potential investors in our securities should
not rely on EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income
and non-GAAP net income per diluted share as a substitute for any GAAP financial
measure, including net income and net income per diluted share. In addition, we
urge investors and potential investors in our securities to carefully review the
GAAP financial information included as part of our Annual Reports on Form 10-K
and Quarterly Reports on Form 10-Q that are filed with the Securities and
Exchange Commission , as well as our quarterly earnings releases, and compare the
GAAP financial information with our EBITDA, adjusted EBITDA, adjusted EBITDA
margin, non-GAAP net income and non-GAAP net income per diluted share.
EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and
non-GAAP net income per diluted share may be used by management to internally
measure our operating and management performance and may be used by investors as
supplemental financial measures to evaluate the performance of our business. We
believe that these non-GAAP measures, when viewed with our GAAP results and
accompanying reconciliations, provide additional information to investors that
is useful to understand the factors and trends affecting our business without
the impact of certain acquisition-related items. We have spent more than 30
years building our database of commercial real estate information and expanding
our markets and services partially through acquisitions of complementary
businesses. Due to these acquisitions, our net income has included significant
charges for amortization of acquired intangible assets, depreciation and other
amortization, acquisition- and integration-related costs, restructuring costs,
and loss on debt extinguishment. Adjusted EBITDA, adjusted EBITDA margin,
non-GAAP net income and non-GAAP net income per diluted share exclude these
charges and provide meaningful information about the operating performance of
our business, apart from charges for amortization of acquired intangible assets,
depreciation and other amortization, acquisition- and integration-related costs,
restructuring costs; settlement and impairment costs incurred outside our
ordinary course of business. We believe the disclosure of non-GAAP measures can
help investors meaningfully evaluate and compare our performance from quarter to
quarter and from year to year without the impact of these items. We also believe
the non-GAAP measures we disclose are measures of our ongoing operating
performance because the isolation of non-cash charges, such as amortization and
depreciation, and other items, such as interest (expense) income and other
(expense) income, income taxes, stock-based compensation expenses, acquisition-
and integration-related costs, restructuring costs, loss on debt extinguishment
and settlement and impairment costs incurred outside our ordinary course of
business, provides additional information about our cost structure, and, over
time, helps track our operating progress. In addition, investors, securities
analysts and others have regularly relied on EBITDA and may rely on adjusted
EBITDA, adjusted EBITDA margin, non-GAAP net income or non-GAAP net income per
diluted share to provide a financial measure by which to compare our operating
performance against that of other companies in our industry.
Set forth below are descriptions of financial items that have been excluded from net income to calculate EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to net income:
•Amortization of acquired intangible assets in cost of revenues may be useful
for investors to consider because it represents the diminishing value of any
acquired trade names and other intangible assets and the use of our acquired
technology, which is one of the sources of information for our database of
commercial real estate information. We do not believe these charges necessarily
reflect the current and ongoing cash charges related to our operating cost
structure.
•Amortization of acquired intangible assets in operating expenses may be useful
for investors to consider because it represents the estimated attrition of our
acquired customer base. We do not believe these charges necessarily reflect the
current and ongoing cash charges related to our operating cost structure.
•Depreciation and other amortization may be useful for investors to consider
because they generally represent the wear and tear on our property and equipment
used in our operations. We do not believe these charges necessarily reflect the
current and ongoing cash charges related to our operating cost structure.
•The amount of interest (expense) income and other (expense) income we generate
and incur may be useful for investors to consider and may result in current cash
inflows and outflows. However, we do not consider the amount of
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--------------------------------------------------------------------------------interest (expense) income and other (expense) income to be a representative component of the day-to-day operating performance of our business.
•Income tax expense may be useful for investors to consider because it generally
represents the taxes which may be payable for the period and the change in
deferred income taxes during the period and may reduce the amount of funds
otherwise available for use in our business. However, we do not consider the
amount of income tax expense to be a representative component of the day-to-day
operating performance of our business.
•The amount of loss on our debt extinguishment may be useful for investors to
consider because it generally represents losses from the early extinguishment of
debt. However, we do not consider the amount of the loss on debt extinguishment
to be a representative component of the day-to-day operating performance of our
business.
Set forth below are descriptions of additional financial items that have been
excluded from EBITDA to calculate adjusted EBITDA and the material limitations
associated with using this non-GAAP financial measure as compared to net income:
•Stock-based compensation expense may be useful for investors to consider
because it represents a portion of the compensation of our employees and
executives. Determining the fair value of the stock-based instruments involves a
high degree of judgment and estimation and the expenses recorded may bear little
resemblance to the actual value realized upon the future exercise or termination
of the related stock-based awards. Therefore, we believe it is useful to exclude
stock-based compensation in order to better understand the long-term performance
of our core business.
•The amount of acquisition- and integration-related costs incurred may be useful
for investors to consider because such costs generally represent professional
service fees and direct expenses related to acquisitions. Because we do not
acquire businesses on a predictable cycle, we do not consider the amount of
acquisition- and integration-related costs to be a representative component of
the day-to-day operating performance of our business.
•The amount of settlement and impairment costs incurred outside of our ordinary
course of business may be useful for investors to consider because they
generally represent gains or losses from the settlement of litigation matters or
impairments on acquired intangible assets. We do not believe these charges
necessarily reflect the current and ongoing cash charges related to our
operating cost structure.
•The amount of restructuring costs incurred may be useful for investors to
consider because they generally represent costs incurred in connection with a
change in a contract or a change in the makeup of our properties or personnel.
We do not consider the amount of restructuring related costs to be a
representative component of the day-to-day operating performance of our
business.
The financial items that have been excluded from our net income to calculate
non-GAAP net income and non-GAAP net income per diluted share are amortization
of acquired intangible assets and other related costs, stock-based compensation,
acquisition- and integration-related costs, restructuring and related costs and
settlement and impairment costs incurred outside our ordinary course of
business. These items are discussed above with respect to the calculation of
adjusted EBITDA together with the material limitations associated with using
this non-GAAP financial measure as compared to net income. In addition to these
exclusions from net income, we subtract an assumed provision for income taxes to
calculate non-GAAP net income. In 2021 and 2022, we assumed a 25% and 26% tax
rate, respectively, which approximated our historical long-term statutory
corporate tax rate, excluding the impact of discrete items.
Management compensates for the above-described limitations of using non-GAAP
measures by using a non-GAAP measure only to supplement our GAAP results and to
provide additional information that is useful to investors to understand the
factors and trends affecting our business.
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The following table shows our net income reconciled to our EBITDA and our net
cash flows from operating, investing and financing activities for the indicated
periods (in thousands):
Three Months Ended
March 31,
2022 2021
Net income $ 89,318 $ 74,212
Amortization of acquired intangible assets in cost of revenues 7,098 7,408
Amortization of acquired intangible assets in operating expenses 16,092 18,419
Depreciation and other amortization 6,965 8,500
Interest expense, net 7,718 7,878
Other (income) expense (864) 50
Income tax expense 32,103 19,069
EBITDA $ 158,430 $ 135,536
Net cash flows provided by (used in)
Operating activities $ 130,707 $ 87,853
Investing activities $ (12,401) $ (134,320)
Financing activities $ (15,754) $ (18,543) Comparison of Three Months Ended
The following table provides a comparison of our selected consolidated results of operations for the three months endedMarch 31, 2022 andMarch 31, 2021 (in thousands): 37 -------------------------------------------------------------------------------- Three Months Ended March 31, Increase Increase (Decrease) 2022 2021 (Decrease) ($) (%) Revenues: CoStar$ 198,649 $ 172,184 $ 26,465 15 % Information Services 37,215 34,696 2,519 7 Multifamily 175,477 166,147 9,330 6 LoopNet(1) 54,447 49,230 5,217 11 Residential(1) 18,060 11,105 6,955 63 Other Marketplaces(1) 31,977 24,335 7,642 31 Total revenues 515,825 457,697 58,128 13 Cost of revenues 95,479 88,748 6,731 8 Gross profit 420,346 368,949 51,397 14 Operating expenses: Selling and marketing (excluding customer base amortization) 143,997 138,687 5,310 4 Software development 54,021 46,784 7,237 15 General and administrative 77,961 63,850 14,111 22 Customer base amortization 16,092 18,419 (2,327) (13) Total operating expenses 292,071 267,740 24,331 9 Income from operations 128,275 101,209 27,066 27 Interest expense, net (7,718) (7,878) (160) (2) Other income (expense) 864 (50) 914 NM Income before income taxes 121,421 93,281 28,140 30 Income tax expense 32,103 19,069 13,034 68 Net income$ 89,318 $ 74,212 $ 15,106 20 __________________________
NM - Not meaningful
(1) As of
Revenues. Revenues increased to$516 million for the three months endedMarch 31, 2022 , from$458 million for the three months endedMarch 31, 2021 . The$58 million increase was attributable to increases in revenues for several of our service offerings. CoStar revenues increased$26 million , or 15%, due to higher sales volume driven by an increase in subscribers, as well as, the impact of annual price increases for contract renewals. Multifamily revenues increased$9 million , or 6%, due to increases in pricing on renewals, partially offset by a reduction in the number of properties advertised. Other Marketplaces revenue increased$8 million , or 31%, driven by an increase inTen-X revenue of$5 million , as a result of an increase in the transaction value properties sold, and to a lesser extent, increased Land for Sale revenue of$2 million . Residential revenue increased$7 million , or 63%, primarily due to an increase in sales of Homesnap's products and services.LoopNet revenue increased$5 million or 11% as a result of an increase in average prices and the acquisition of BureauxLocaux. Information Services revenue increased$3 million , or 7%, primarily attributable to increased revenue of$2 million for our Real Estate Manager service offering. Gross Profit. Gross profit increased to$420 million for the three months endedMarch 31, 2022 , from$369 million for the three months endedMarch 31, 2021 , and the gross profit percentage was consistent at 81% for both the three months endedMarch 31, 2022 and 2021, The increase in gross profit was due to higher revenues that were partially offset by an increase in cost of revenues of$7 million , or 8%. The increase in cost of revenues was primarily due to an increase of$6 million related to our investment and further development of our residential marketplaces, including research equipment and software, as well as, an increase in data costs to support all of our product offerings. 38 -------------------------------------------------------------------------------- Selling and Marketing Expenses. Selling and marketing expenses increased to$144 million for the three months endedMarch 31, 2022 , from$139 million for the three months endedMarch 31, 2021 . The$5 million increase was attributable to a$10 million increase in conference, event, travel and entertainment costs, as well as, increases in personnel costs of$4 million , primarily due to an increase in headcount and an increase in commissions of$2 million . These increases were partially offset by a decrease in marketing spending of$8 million , primarily attributable to a decrease in agency fees, driven byTen-X andLoopNet . Software Development Expenses. Software development expenses increased to$54 million for the three months endedMarch 31, 2022 , from$47 million for the three months endedMarch 31, 2021 , and remained consistent as a percentage of revenues at 10% for the three months endedMarch 31, 2022 and 2021. The$7 million increase was primarily due to a$6 million increase in personnel costs, primarily related to our investment and further development of our residential marketplaces, as well as, increased headcount to support the development of our products. General and Administrative Expenses. General and administrative expenses increased to$78 million for the three months endedMarch 31, 2022 , from$64 million , for the three months endedMarch 31, 2021 and increased as a percentage of revenues to 15% for the three months endedMarch 31, 2022 from 14% for the three months endedMarch 31, 2021 . The increase of$14 million was due to a$5 million increase in personnel costs, driven by increased headcount, as well as, a$2 million increase in stock compensation expense . In addition, there were increases of$3 million in travel and entertainment costs, mostly due an increase in the amount and average cost of air travel, a$2 million increase in software expenses, and a$2 million increase in bad debt expense. Customer Base Amortization Expense. Customer base amortization expense decreased to$16 million for the three months endedMarch 31, 2022 from$18 million for the three months endedMarch 31, 2021 , and decreased as a percentage of revenues at 3% for the three months endedMarch 31, 2022 from 4% for the three months endedMarch 31, 2021 . The decrease was primarily attributable to a decrease in amortization expense related to the customer base assets acquired in the acquisitions of ForRent,Ten-X , and STR, which had been amortizing on an accelerated basis since their acquisitions. These decreases were offset by an increase in expense from intangibles acquired through the acquisition ofHomes.com . Interest Expense, net. Interest expense, net remained consistent for the three months endedMarch 31, 2022 and 2021. Other Income (Expense). Other income (expense) was$1 million in income for the three months endedMarch 31, 2022 and was$0.1 million of expense for the three months endedMarch 31, 2021 . The increase in other income was primarily due to increases in foreign exchange gains due to rate fluctuations. Income Tax Expense. Income tax expense increased to$32 million for the three months endedMarch 31, 2022 , from$19 million for the three months endedMarch 31, 2021 . The increase was mostly due to higher income before taxes, as well as, a decrease in excess tax benefits.
Comparison of Business Segment Results for Three Months Ended
We manage our business geographically in two operating segments, with our primary areas of measurement and decision-making beingNorth America , which includes theU.S. andCanada , and International, which primarily includesEurope ,Asia-Pacific , andLatin America . Management relies on an internal management reporting process that provides revenue and operating segment EBITDA, which is our net income before interest (expense) income and other (expense) income, loss on debt extinguishment, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of our operating segments. EBITDA is used by management to internally measure our operating and management performance and to evaluate the performance of our business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP. 39 -------------------------------------------------------------------------------- Segment Revenues.North America revenues increased to$498 million for the three months endedMarch 31, 2022 , from$442 million for the three months endedMarch 31, 2021 . The$56 million increase inNorth America revenues was attributable to increases in revenues for several of our service offerings, including an increase in CoStar revenues of$26 million due to higher sales volume driven by an increase in subscribers, as well as, the impact of annual price increases for contract renewals. Multifamily revenues increased$9 million , due to increases in pricing on renewals, offset by a reduction in the number of properties advertised. Other Marketplaces revenue increased$8 million , driven by an increase inTen-X and Land for Sale revenue. The increase in Residential revenue of$7 million was due to the increase in sales of Homesnap's products and services.LoopNet revenue increased$4 million as a result of price increases. Information Services revenue increased$3 million , due to increased revenue from our Real Estate Manager service offering. International revenues increased to$18 million for the three months endedMarch 31, 2022 , from$16 million for the three months endedMarch 31, 2021 . The increase in International revenues was mostly driven by the acquisition of BureauxLocaux, and to a lesser extent, due to growth in our CoStar product revenue. Segment EBITDA. North America EBITDA increased to$156 million for the three months endedMarch 31, 2022 , from$136 million for the three months endedMarch 31, 2021 . The increase in North America EBITDA was primarily due to an increase in revenue and decrease in marketing spending, partially offset by, increases in personnel and general and administrative costs. International EBITDA for the three months endedMarch 31, 2022 increased to income of$2 million from a loss of$0.3 million for the three months endedMarch 31, 2021 . The increase was due to an increase in revenue and decrease in general administrative costs, partially offset by, increases in personnel and marketing costs. 40 --------------------------------------------------------------------------------
Liquidity and Capital Resources
We believe the balance of cash, cash equivalents and restricted cash, which was
Our future capital requirements will depend on many factors, including, among others, our operating results, expansion and integration efforts, and our level of acquisition activity or other strategic transactions. To date, we have grown in part by acquiring other companies, and we expect to continue to make acquisitions.
We currently plan to expand our
Cash, cash equivalents and restricted cash increased to approximately$3.9 billion as ofMarch 31, 2022 , compared to cash, cash equivalents and restricted cash of approximately$3.8 billion as ofDecember 31, 2021 . The increase in cash, cash equivalents, and restricted cash for the three months endedMarch 31, 2022 was primarily due to cash generated from operations of$131 million and proceeds from participation in our employee stock purchase plan of$4 million , partially offset by,$20 million of repurchases of common stock from employees to satisfy the employees' minimum tax withholding obligations upon the vesting of restricted stock grants, as well as$13 million of purchases of property and equipment, including capitalized software development costs. Net cash provided by operating activities for the three months endedMarch 31, 2022 was approximately$131 million compared to approximately$88 million for the three months endedMarch 31, 2021 . The$43 million increase in cash provided by operating activities was primarily due to an increase from changes in net working capital of$39 million . Net cash used in investing activities for the three months endedMarch 31, 2022 was approximately$12 million compared to approximately$134 million of cash used in investing activities for the three months endedMarch 31, 2021 . The$121 million decrease in cash used in investing activities was primarily due to$123 million paid during the three months endedMarch 31, 2021 for the purchase of an office building and the underlying land located inRichmond, Virginia , partially offset by, an increase in cash used for the purchase of other property and equipment, including capitalized software development costs, during the three months endedMarch 31, 2022 . Net cash used in financing activities for the three months endedMarch 31, 2022 was approximately$16 million compared to approximately$19 million used in financing activities for the three months endedMarch 31, 2021 . The$3 million decrease in cash used in financing activities was due to a$8 million decrease in repurchases of restricted stock to satisfy employee tax withholding obligations upon vesting of restricted stock awards, partially offset by, a$5 million decrease in proceeds from the exercise of employee stock options, during the three months endedMarch 31, 2022 .
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the period reported. The following accounting policies involve a
"critical accounting estimate" because they are particularly dependent on
estimates and assumptions made by management about matters that are highly
uncertain at the time the accounting estimates are made. In addition, while we
have used our best estimates based on facts and circumstances available to us at
the time, different acceptable assumptions would yield different results.
Changes in the accounting estimates are reasonably likely to occur from period
to period, which may have a material impact on the presentation of our financial
condition and results of operations. We review these estimates and assumptions
periodically and reflect the effects of revisions in the period that they are
determined to be necessary. We consider policies relating to the following
matters to be critical accounting policies:
•Long-lived assets, intangible assets and goodwill;
•Income taxes;
•Revenue recognition; and
•Business combinations.
41-------------------------------------------------------------------------------- For an in-depth discussion of each of our significant accounting policies, including our critical accounting policies and further information regarding estimates and assumptions involved in their application, see our Annual Report on Form 10-K for the year endedDecember 31, 2020 and Note 2 to the accompanying Notes to the condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
See Note 2 to the accompanying Notes to the condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.
Cautionary Statement Concerning Forward-Looking Statements
We have made forward-looking statements in this Quarterly Report on Form 10-Q and make forward-looking statements in our press releases, investor conference calls, Annual Reports on Form 10-K, other Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with theSecurities and Exchange Commission that are subject to risks and uncertainties. Forward-looking statements include information that is not purely historic fact and include, without limitation, statements concerning our financial outlook for 2022 and beyond, our possible or assumed future results of operations generally, and other statements and information regarding assumptions or expectations about our revenues, revenue growth rates, gross margin percentage, net income, net income per share, fully diluted net income per share, EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-generally accepted accounting principles ("GAAP") net income, non-GAAP net income per share, weighted-average outstanding shares, cash flow from operating activities, operating costs, capital and other expenditures, the current and future impacts of COVID-19 on our operations, our actions in response to the COVID-19 pandemic, key priorities for 2022, trends in customer behavior, legal proceedings and claims, legal costs, effective tax rate, the anticipated benefits of completed or proposed acquisitions, the anticipated timing for integration of completed acquisitions, the anticipated benefits of cross-selling efforts, product development and release, geographic and product expansion, planned service enhancements, expansion and development of our sales forces, planned sales and marketing activities and investments, the impact or results of sales and marketing initiatives, product integrations, elimination and de-emphasizing of services, investments in residential marketplace services and our residential marketplace strategy, net new sales, contract renewal rates, use of proceeds from equity and debt offerings, the use of proceeds of any draws under our$750 million credit facility (the "2020 Credit Agreement"), employee relations, attrition and retention, management's plans, goals and objectives for future operations, deferral of tax payments, sources and adequacy of liquidity, and growth and markets for our stock. Sections of this Report which contain forward-looking statements include the Financial Statements and related Notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk," "Controls and Procedures," "Legal Proceedings" and "Risk Factors." 42 -------------------------------------------------------------------------------- Our forward-looking statements are also identified by words such as "hope," "anticipate," "may," "believe," "expect," "intend," "will," "should," "plan," "estimate," "predict," "continue" and "potential" or the negative of these terms or other comparable terminology. You should understand that these forward-looking statements are estimates reflecting our judgment, beliefs and expectations, not guarantees of future performance. They are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. The following important factors, in addition to those discussed or referred to under the heading "Risk Factors," and other unforeseen events or circumstances, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements: the effects of and uncertainty surrounding the COVID-19 pandemic, including the length and severity of the economic downturn associated with the COVID-19 pandemic, including disruption of the international and national economy and credit markets; actions taken by governments, businesses and individuals in response to the COVID-19 pandemic such as office and other workplace closures, worker absenteeism or decreased productivity, quarantines, mass-transit disruptions or other travel or health-related restrictions; how quickly economies, including the real estate industry in particular, recover after the COVID-19 pandemic subsides; real estate market conditions, including commercial real estate office vacancies; general economic conditions, both domestic and international, including the impacts of any international conflicts and uncertainty from the discontinuance of LIBOR and the transition to any other interest rate benchmarks; our ability to identify, acquire and integrate additional acquisition candidates; our ability to realize the expected benefits, cost savings or other synergies from acquisitions, including Homesnap,Homes.com , ComReal Info and BIH on a timely basis or at all; our ability to combine acquired businesses successfully or in a timely and cost-efficient manner; business disruption relating to integration of acquired businesses or other business initiatives; the risk that expected investments in acquired businesses, or the timing of any such investments, may change or may not produce the expected results; our ability to transition acquired service platforms to our model in a timely manner or at all; changes and developments in business plans or operations; theft of any personally identifiable information we, or the businesses that we acquire, maintain, store or process; any actual or perceived failure to comply with privacy or data protection laws, regulations or standards; any disruption of our systems, including due to any cyberattack or other similar event; the amount of investment for sales and marketing and our ability to realize a return on investments in sales and marketing; our ability to effectively and strategically combine, eliminate or de-emphasize service offerings; reductions in revenues as a result of service changes; the time and resources required to develop upgraded or new services and to expand service offerings; changes or consolidations within the real estate industry; customer retention; our ability to attract new clients and to sell additional or higher value services to existing clients; our ability to develop, successfully introduce and cross-sell new products or upgraded services inU.S. and foreign markets; our ability to attract consumers to our online marketplaces; our ability to increase traffic on our network of sites; the success of our marketing campaigns in generating brand awareness and site traffic; our ability to protect and defend our intellectual property, including against unauthorized or unlicensed use of our services; competition; foreign currency fluctuations; global credit market conditions affecting investments; our ability to continue to expand successfully, timely and in a cost-efficient manner, including internationally; our ability to effectively penetrate and gain acceptance in new sectors and international geographies; our ability to control costs; litigation or government investigations in which we become involved; changes in accounting policies or practices; release of new and upgraded services or entry into new markets by us or our competitors; data quality; our ability to expand, develop or reorganize or reorient of our sales forces; employee retention, including retention of key employees and employees of acquired businesses; our ability to hire additional employees to fill vacant or new roles; technical problems with our services; managerial execution; changes in relationships with real estate agents, brokers, owners, property managers and other strategic partners; legal and regulatory issues, including any actual or perceived failure to comply withU.S. or international laws, rules or regulations; successful adoption of and training on our services; and the availability of capital. Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of, and are based on information available to us on, the date of this Quarterly Report on Form 10-Q (unless otherwise indicated). All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to update any such statements or release publicly any revisions to these forward-looking statements to reflect new information or events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. 43
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