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 discussed in "Cautionary Statement Concerning Forward-Looking Statements" at the end of this Item 2 and "Risk Factors" in Item 1A of Part II of this Quarterly Report on Form 10-Q, as well as those described from time to time in our filings with theSecurities and Exchange Commission . All forward-looking statements in this filing 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, Quarterly Reports on Form 10-Q, 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.
Overview
CoStar Group, Inc. (the "Company" or "CoStar") is the number one 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. 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 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. Our subscription clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. We generally see higher sales ofApartments.com listing services during the peak summer rental season and higher CoStar Suite sales towards the end of the year; however, sales fluctuate from period-to-period and year-to-year and our revenue is not generally seasonal because our services are typically sold on a subscription basis. Our primary brands include CoStar,LoopNet ,Apartments.com , STR, BizBuySell and LandsofAmerica. We also provide other services that complement those offered through our primary brands. These include real estate and lease management solutions, lease administration and abstraction services through ourCoStar Real Estate Manager service offerings; and market research, consulting and analysis, portfolio and debt analysis, and management and reporting capabilities through our CoStar Investment Analysis and CoStar Risk Analytics service offerings. Our principal service offerings are discussed in more detail below.
Impact of the COVID-19 Pandemic
We are closely monitoring the impact of the COVID-19 pandemic on our business, employees, customers, and communities. To protect the health and safety of our employees and to help stop the spread of the disease, we shifted to a digital, remote workplace inmid-March 2020 . As of that time, nearly all of our employees began to work from home. We temporarily shifted certain employees' job responsibilities so they can work from home, and modified our in-person research and sales processes so that they can be conducted safely and in compliance with social distancing guidelines to protect our employees, our customers and our communities. We believe our employees are operating at near normal levels of productivity in this digital environment. We continue to monitor events related to the pandemic, as well as the guidelines and mandates provided by governmental and health authorities. We plan to continue adapting our business operations when and as deemed appropriate to comply with these guidelines and mandates and to respond to changing circumstances. 28 -------------------------------------------------------------------------------- In connection with the shift to work from home, we incurred and may continue to incur expenses to help employees perform their jobs effectively and securely. Those expenses have not been material to date. In response to the COVID-19 pandemic, we have also taken steps to manage our costs including minimizing hiring to essential positions, restricting business travel and canceling in-person marketing events. As the situation evolves, we may implement additional cost reductions. Current general economic conditions in theU.S. and the world as a result of the COVID-19 pandemic are negatively affecting business operations for our clients and are expected to result in business consolidations and, in certain circumstances, failures. Customers are seeking to reduce expenses as a result of current economic conditions. The extent and duration of any future continued weakening of the global economy is unknown. There can be no assurance that any of the governmental or private sector initiatives designed to strengthen theU.S. and other economies will be successful or available to us and our customers, and, if successful, when the benefits will be available or seen. Because of the rapidly evolving nature of the COVID-19 pandemic and responses to it by, and the impact on, global economies, we are not able to accurately forecast our revenue or earnings for the full year 2020. Any expected changes in financial results discussed in this report, including any expected impact of COVID-19, are based on our current observations and experience and involve estimates and assumptions. Current observations and past experience and results may not be an indicator of on-going trends or future results. Our near-term revenues are relatively predictable as a result of our subscription-based business model; however, we expect that we will continue to experience the effects of the COVID-19 pandemic on our business, results of operations and overall financial performance. Such effects may include, among others, a decrease in new customer sales and increases in customer cancellations, suspensions, service reductions and failures to pay amounts owed to us. Towards the end of the first quarter of 2020, we began to see an increase in customer requests for cancellations or suspensions. We are more likely to incur asset impairment charges or restructuring charges, or increase our allowance for credit losses, as a result of this crisis and related economic downturn. The amount and frequency of such actions will be affected by the severity and duration of the COVID-19 pandemic. If we do take such actions, they are likely to adversely affect our results of operations.
We discuss the current and potential impact of select provisions of the CARES Act (defined below) in our liquidity discussion.
Service Offerings
Our principal information, analytics and online marketplace services are described in the following paragraphs by type of service:
Information and Analytics
CoStar Suite®. Our subscription-based information services consist primarily of CoStar Suite services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property®, CoStar COMPS®, CoStar Market Analytics, CoStar Tenant®, CoStar Lease Comps and CoStar Public Record through our online and mobile applications. Our integrated suite of online service offerings includes information about space available for lease, comparable sales information, information about properties for sale, tenant information, Internet marketing services, analytical capabilities, information for clients' websites, information about industry professionals and their business relationships, and industry news. Our commercial real estate sales force is responsible for selling multiple product lines, including CoStar Suite andLoopNet . Sales initiatives commenced in late 2019 shifted the focus of our sales force to sales ofLoopNet Signature Ads, a premium listing service. As a result of this as well as the impact of COVID-19 on our current and potential customer base, we anticipate CoStar Suite revenue growth rates will decline during the second quarter of 2020 relative to historical year-over-year growth rates. Information services. We provide real estate and lease management solutions, including lease administration and abstraction services, through our CoStar Real Estate Manager® service offerings, as well as portfolio and debt analysis, management and reporting capabilities through our CoStar Investment Analysis and CoStar Risk Analytics® service offerings. We provide information services internationally, through our Grecam,Belbex andThomas Daily businesses inFrance ,Spain andGermany , respectively. Sales ofCoStar Real Estate Manager represent a significant portion of our information services revenue.CoStar Real Estate Manager's revenue growth rates increased significantly in 2018 as new clients adopted, and existing clients expanded their use of,CoStar Real Estate Manager to manage compliance with new lease accounting and reporting requirements that became effective for public companies for financial reporting periods beginning afterDecember 15, 2018 .CoStar Real Estate Manager continued to experience high growth rates throughout 2019. We expect the growth rate forCoStar Real Estate Manager to decline during the second quarter of 2020 as the surge of the demand has eased and customer behavior changes in response to current economic conditions, which may include potential delays of the implementation of new services. OnOctober 22, 2019 , we acquired STR and we now also provide STR's complementary benchmarking and analytics services to the hospitality industry. Sales of STR also represent a significant portion of our information services revenue. STR sells the majority of its services on a subscription basis, but also has one-time or ad hoc transaction fee revenues. The hospitality industry has been severely impacted by COVID-19. 29 -------------------------------------------------------------------------------- As a result, we expect some impact to the revenue growth rates for STR during the second quarter of 2020, particularly as a result of a decline in ad hoc transaction fee revenues as customers delay purchases. Overall, we expect the information services growth rate to decline relative to historical year-over-year growth rates. See Note 5 to the accompanying Notes to the Condensed Consolidated Financial Statements for further discussion of this acquisition.
Online Marketplaces
Multifamily. Apartments.comTM is part of our network of apartment marketing sites, which primarily includes ApartmentFinder®, ForRent.com®, ApartmentHomeLiving.comTM, Apartamentos.comTM, Westside Rentals, andOff Campus Partners, LLC ("OCP"). 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. OnJune 12, 2019 , we acquired OCP, a provider of student housing marketplace content and technology toU.S. universities. We continue to integrate OCP and the services they offer into ourApartments.com network. During the second quarter of 2020, we expect the multifamily annual revenue growth rate to decline slightly relative to historical year-over-year growth rates due to current market conditions, but to remain relatively strong as market participants continue to utilize digital marketing for their properties. See Note 5 to the accompanying Notes to the Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion of these acquisitions. Commercial property and land. 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 list 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.com represents a majority of the commercial property and land revenue. As part of our rebuild and launch of the LoopNet Signature Ads product, we rolled out new ad packages in the fourth quarter of 2019 and shifted the focus of our commercial real estate sales force to LoopNet Signature Ads. As a result, the growth rate increased in the fourth quarter of 2019 and in the first quarter of 2020. As a result of COVID-19 and its impact on the commercial real estate industry, LoopNet.com sales volumes dropped during the second half ofMarch 2020 and remained at that lower level in April. Assuming sales volume remain at or near April levels, we expect growth rates to decline in the second quarter of 2020 relative to historical year-over-year growth rates. Our BizBuySell.com network, which includes BizQuest® and FindaFranchise, and our Land.com network of sites, which include LandsofAmerica, LandAndFarm and LandWatch®, are also included in our commercial property and land service revenue. The BizBuySell.com network provides online marketplaces for businesses for-sale and our Land.com network of sites provide online marketplaces for rural lands for-sale. As ofMarch 31, 2020 and 2019, our annualized net bookings of subscription-based services on all contracts were approximately$48 million , calculated based on the annualized amount of change in our sales resulting from all new subscription-based contracts or upsales on all existing subscription-based contracts, less write-downs and cancellations, for the period reported. We recognize subscription revenues on a straight-line basis over the life of the contract. Net bookings is considered a key indicator of future subscription revenue growth and is also used as a metric of salesforce productivity by management and investors. For the three months endedMarch 31, 2020 and 2019, our contract renewal rate for existing CoStar subscription-based services on annual contracts was approximately 90%, and therefore our cancellation rate for those services for the same periods was approximately 10%. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, management believes that the rate may be a reliable indicator of short-term and long-term performance absent extraordinary circumstances. We expect that our trailing twelve-month contract renewal rate may decline in light of the recent COVID-19 developments and the resulting negative economic conditions leading to greater business failures and/or consolidations among our clients, reductions in customer spending, or decreases in our customer base.
Development, Investments and Expansion
We plan to continue to invest in our business and our services and plan to continue to pursue our key priorities for 2020 as described below while we closely monitor the economic developments from the COVID-19 pandemic and manage our response to such developments. We are committed to supporting, improving and enhancing our information, analytics and online marketplace solutions, including expanding and improving our offerings for property owners, property managers and renters. We expect to continue our software development efforts to improve existing services, introduce new services, integrate and cross-sell services, and expand and develop supporting technologies for our research, sales and marketing organizations. We plan to continue to reevaluate our priorities as the COVID-19 pandemic continues to evolve.
Our key priorities for 2020 include:
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--------------------------------------------------------------------------------• Continue to develop, improve and market our recently launched
experience and enable renters to apply for leases and make rent payments,
and for landlords to run tenant credit and background checks, all online
through a single platform. We continue to aggressively market our
multifamily listing services in an effort to provide more value to
advertisers and, in turn, to attract advertisers. Our marketing investment
is focused on search engine marketing and enhanced brand awareness. As we
continue to assess the success and effectiveness of our marketing
campaign, we will continue to work to determine the optimal level andfocus of our marketing investment for our services for future periods and
may adjust our marketing spend as deemed appropriate.
• Obtaining necessary bankruptcy court and regulatory approvals to close the
pending acquisition of
subsidiary of the Company entered into an agreement to acquire for
million in cash all of the equity interests of
reorganized following an internal restructuring pursuant to and under the
joint chapter 11 plan of reorganization of
subsidiaries. Closing of the acquisition is subject to customary closing
conditions, including the expiration or termination of any applicable
waiting period under applicable antitrust laws and approval by the
bankruptcy court. See Note 5 to the accompanying Notes to the Consolidated
Financial Statements included in Part I of this Quarterly Report on Form
10-Q for further discussion.
• Continue to invest in the
the site (including high-quality imagery), seeking targeted
advertisements, providing premium listing services (such as
Signature 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. To support the
sales team to increase sales of LoopNet Signature Ads, with a focus on
property owners.
• Integrating recently completed acquisitions, including STR, with CoStar's
business operations. We plan to consolidate STR data and services with
CoStar Suite to create an integrated platform. We expect that the
combination of STR's and CoStar's offerings will allow us to create
valuable new and improved tools for industry participants. We plan todrive international expansion, in part, through STR's global operations
and to apply STR's benchmarking expertise to other commercial real estate
segments we serve.
• Continue to invest in CoStar Suite, including capabilities that allow us
to broaden the reach of CoStar Suite in
languages and currencies on the platform. We plan to enhance CoStar Suite
by making additional investments in analytical capabilities focused on
owners and lenders of commercial real estate. In addition, we plan to
invest in integrating the technology and infrastructure from other
existing service offerings into the CoStar Suite platform, including
CoStar Real Estate Manager, in order to leverage data and technologyacross our platforms and provide customers with additional functionality.
We intend to continue to assess the need for additional investments in our business, in addition to the investments discussed above, 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 and other income (expense), 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 and other income (expense), 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 for pending and completed acquisitions, restructuring
costs and settlements and impairments incurred outside our ordinary course of
business. Non-GAAP net income is determined by adjusting our net income for
stock-based compensation
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expense, acquisition- and integration-related costs for pending and completed
acquisitions, 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. 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, non-GAAP net income and non-GAAP net income per
diluted share as operating performance measures and, as such, we believe that
the most directly comparable GAAP financial measure to 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 items such as the following. 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 the expansion of our information, analytics and online marketplace
services, which has included acquisitions, our net income has included
significant charges for amortization of acquired intangible assets, depreciation
and other amortization, acquisition- and integration-related costs for pending
and completed acquisitions, 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 for pending and
completed acquisitions, 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, income
taxes, stock-based compensation expenses, acquisition- and integration-related
costs for pending and completed acquisitions, 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.
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• 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 thesecharges necessarily reflect the current and ongoing cash charges related
to our operating cost structure.
• The amount of interest and other income and expense 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 interest
and other income and expense 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 itgenerally 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 for pending and
completed acquisitions 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 for pending and completedacquisitions 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 oflitigation 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 for pending and completed
acquisitions, 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 2020 and 2019, we assumed a 25% tax rate, which approximated our historical
long-term statutory corporate tax rate, excluding the impact of discrete items.
Adjusted EBITDA margin represents adjusted EBITDA divided by revenues for the period.
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--------------------------------------------------------------------------------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.
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.
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,
2020 2019
Net income $ 72,793 $ 85,169
Amortization of acquired intangible assets in cost of revenues 6,005 5,513
Amortization of acquired intangible assets in operating expenses 11,484
7,682
Depreciation and other amortization 6,767 6,464 Interest and other income (4,518 ) (4,945 ) Interest and other expense 2,026 732 Income tax expense 5,563 12,536 EBITDA$ 100,120 $ 113,151 Net cash flows provided by (used in) Operating activities$ 131,464 $ 148,494 Investing activities 2,694 (9,429 ) Financing activities 725,151 (6,618 ) 34
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Comparison of Three Months Ended
The following table provides a comparison of our selected consolidated results of operations for the three months endedMarch 31, 2020 and 2019 (in thousands): Three Months Ended March 31, Increase Increase (Decrease) 2020 2019 (Decrease) ($) (%) Revenues: CoStar Suite$ 164,956 $ 147,701 $ 17,255 12 % Information services 32,382 18,850 13,532 72 Multifamily 137,460 114,268 23,192 20 Commercial property and land 57,049 47,606 9,443 20 Total revenues 391,847 328,425 63,422 19 Cost of revenues 78,909 71,153 7,756 11 Gross profit 312,938 257,272 55,666 22 Operating expenses: Selling and marketing (excluding customer base amortization) 125,107 88,094 37,013 42 Software development 41,610 27,928 13,682 49 General and administrative 58,873 40,076 18,797 47 Customer base amortization 11,484 7,682 3,802 49 Total operating expenses 237,074 163,780 73,294 45 Income from operations 75,864 93,492 (17,628 ) (19 ) Interest and other income 4,518 4,945 (427 ) (9 ) Interest and other expense (2,026 ) (732 ) 1,294 NM Income before income taxes 78,356 97,705 (19,349 ) (20 ) Income tax expense 5,563 12,536 (6,973 ) (56 ) Net income$ 72,793 $ 85,169 $ (12,376 ) (15 ) __________________________ NM - Not meaningful Revenues. Revenues increased to$392 million for the three months endedMarch 31, 2020 , from$328 million for the three months endedMarch 31, 2019 . The$63 million increase was attributable to increases in revenues for several of our services, including, a$23 million , or 20%, increase in multifamily revenue. The multifamily increase was due to upgrades of existing customer packages to higher value advertising packages and higher volume as a result of recent investments in marketing. CoStar Suite revenues increased$17 million , or 12%, primarily due to higher volume and, to a lesser extent, increases in pricing. Information services revenue increased$14 million , or 72%, primarily due to revenue of$14 million from the acquisition of STR. Commercial property and land revenue increased$9 million , or 20%, primarily due to growth in ourLoopNet online marketplace services of$8 million as a result of stronger pricing as compared to the prior year and, to a lesser extent, growth in our land and business for-sale services of$1 million . Gross Profit. Gross profit increased to$313 million for the three months endedMarch 31, 2020 , from$257 million for the three months endedMarch 31, 2019 , and the gross profit percentage was 80% for the three months endedMarch 31, 2020 , compared to 78% for the three months endedMarch 31, 2019 . The increase in gross profit was partially impacted by an increase in cost of revenues of$8 million , or 11%, primarily due to higher personnel costs of$4 million from increased wages, including$2 million from the acquisition of STR, additional merchant fees of$3 million , IT equipment of$2 million and software maintenance costs of$1 million , partially offset by lower data and content costs of$2 million during the current year.
Selling and Marketing Expenses. Selling and marketing expenses increased to
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to $22 million in additional marketing spend, including $16 million in search
engine marketing and $6 million in other forms of marketing, primarily for
multifamily. The increase was also due to a $13 million increase in personnel
costs driven by increased headcount, primarily due to additional sales personnel
and the acquisition of STR.
Software Development Expenses. Software development expenses increased to $42
million for the three months ended March 31, 2020 , from $28 million for the
three months ended March 31, 2019 , and increased as a percentage of revenues to
11% for the three months ended March 31, 2020 from 9% for the three months ended
March 31, 2019 . The $14 million increase in the amount of software development
expense was primarily due to a $12 million increase in personnel costs as a
result of increased headcount to enhance our product offerings, including $2
million due to the acquisition of STR, as well as a $1 million increase in
occupancy costs and a $1 million increase in supplies and office services costs.
General and Administrative Expenses. General and administrative expenses
increased to $59 million for the three months ended March 31, 2020 , from $40
million for the three months ended March 31, 2019 , and increased as a percentage
of revenues to 15% for the three months ended March 31, 2020 from 12% for the
three months ended March 31, 2019 . The $19 million increase in the amount of
general and administrative expense was primarily due to a $10 million
increase in personnel costs as a result of increased headcount, including $5
million as a result of the acquisition of STR, a $4 million increase in credit
loss expense primarily due to the Company's expectations that the economic
downturn caused by the COVID-19 pandemic will increase delinquent trade
receivables, a $2 million increase in professional services related to
acquisitions, and a $1 million increase in both software and equipment and
occupancy costs.
Customer Base Amortization Expense. Customer base amortization expense increased
to $11 million for the three months ended March 31, 2020 from $8 million for the
three months ended March 31, 2019 , and increased as a percentage of revenues to
3% for the three months ended March 31, 2020 from 2% for the three months ended
March 31, 2019 . The increase in customer base amortization expense was primarily
due to the STR acquisition.
Interest and Other Income. Interest and other income remained consistent at $5
million for the three months ended March 31, 2020 and March 31, 2019 , primarily
due to a $2 million decrease resulting from lower rates of return on our cash
and cash equivalent balances offset by foreign currency gains of $2 million .
Interest and Other Expense. Interest and other expense increased to $2 million
for the three months ended March 31, 2020 from $1 million for the three months
ended March 31, 2019 . The $1 million increase was primarily due to the realized
loss on the sale of our auction rate securities and interest expense related to
the $745 million draw on our revolving credit facility during the three months
ended March 31, 2020 .
Income Tax Expense. Income tax expense decreased to $6 million for the three
months ended March 31, 2020 from $13 million for the three months ended
March 31, 2019 . The $7 million decrease was primarily due to lower income before
income taxes for the three months ended March 31, 2020 as well as an increase 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 and other income (expense), 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. Segment Revenues.North America revenues increased to$377 million for the three months endedMarch 31, 2020 , from$319 million for the three months endedMarch 31, 2019 . The increase inNorth America revenues was primarily due to a$23 million increase in multifamily revenues driven by upgrades of existing customer packages to higher value advertising packages, higher volume as a result of recent investments in marketing, and continued organic growth of CoStar Suite revenues of$16 million . There were also increases of$10 million and$9 million in commercial property and land and information services, respectively, primarily due to growth in ourLoopNet service offering, and to a lesser extent, the acquisition of STR. International revenues increased to$14 million for the three months endedMarch 31, 2020 , from$9 million for the three months endedMarch 31, 2019 . 36 --------------------------------------------------------------------------------
The increase in International revenues was primarily due the acquisition of STR and further growth of our subscription-based services.
Segment EBITDA. North America EBITDA decreased to$102 million for the three months endedMarch 31, 2020 , from$115 million for the three months endedMarch 31, 2019 . The decrease in North America EBITDA was primarily due to an increase in in personnel, marketing and general and administrative costs, partially offset by an increase in revenues. International EBITDA for the three months endedMarch 31, 2020 was a loss of$2 million , consistent with the three months endedMarch 31, 2019 , as increases in personnel and general and administrative costs were partially offset by an increase in revenues.
Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents from operations. Total cash and cash equivalents increased to approximately$1.9 billion as ofMarch 31, 2020 , compared to cash and cash equivalents of approximately$1.1 billion as ofDecember 31, 2019 . The increase in cash and cash equivalents for the three months endedMarch 31, 2020 was primarily due to borrowings of$745 million under our revolving credit facility. In addition, the increase was due to net cash generated from operations of$131 million , proceeds from the exercise of employee stock options of approximately$10 million and proceeds from the sale of our ARS investments of$10 million . The increase was partially offset by repurchases of restricted stock to satisfy employee tax withholding obligations upon vesting of restricted stock awards valued at approximately$30 million and cash paid for purchases of property and equipment and other assets of$7 million . Net cash provided by operating activities for the three months endedMarch 31, 2020 was approximately$131 million compared to approximately$148 million for the three months endedMarch 31, 2019 . The$17 million decrease was mainly due to a decrease in net income of$12 million including a decrease in certain non-cash expenses such as income tax expense of$7 million and the timing of collections for accounts receivable, partially offset by an increase in deferred revenue, primarily due to the acquisition of STR. Net cash provided by investing activities for the three months endedMarch 31, 2020 was approximately$3 million compared to approximately$9 million of cash used in investing activities for the three months endedMarch 31, 2019 . The$12 million increase in cash provided by investing activities was primarily due to proceeds from the sale of our ARS investments of$10 million , as well as, a decrease in capital expenditures to$7 million compared to$9 million in the three months endedMarch 31, 2019 . Net cash provided by financing activities for the three months endedMarch 31, 2020 was approximately$725 million when compared to approximately$7 million used in financing activities for the three months endedMarch 31, 2019 . The$732 million increase is primarily due to a$745 million draw on our revolving credit facility. The Company expects to use the proceeds of the borrowing to fund the pending acquisition ofRentPath Holdings, Inc. , as well as other potential strategic acquisitions, and for other working capital and general corporate purposes. The increased cash position resulting from the borrowings allows for greater financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. See Note 10 to the accompanying Notes to the Condensed Consolidated Financial Statements for further discussion of the revolving credit facility. Our future capital requirements will depend on many factors, including, among others, our operating results, expansion and integration efforts, our level of acquisition activity or other strategic transactions, and the future impact of the COVID-19 pandemic. To date, we have grown in part by acquiring other companies, and we expect to continue to make other acquisitions in the future. OnFebruary 11, 2020 , our wholly owned subsidiary entered into a purchase agreement to acquire all of the equity interests of reorganizedRentPath , following an internal restructuring pursuant to a chapter 11 plan of reorganization, for$588 million in cash. In accordance with the purchase agreement, we paid$59 million into a cash escrow account. In the event the agreement is terminated under specified circumstances in which certain antitrust approvals are not obtained, or a governmental order related to antitrust or competition matters prohibits the consummation of the transaction, this amount will not be refunded to us. See Note 5 to the accompanying Notes to the Condensed Consolidated Financial Statements for further discussion. OnMarch 27, 2020 ,President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, includes provisions relating to the deferral of taxes, valuation allowances, and balance sheet classifications, as well as provisions relating to refundable payroll tax credits, deferral of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. As permitted under the CARES Act, we currently expect to defer approximately$21 million in income tax payments due in the second quarter, to the third quarter of 2020 and we expect to defer payroll taxes due in 2020 to 2021 and 2022. We will continue to assess the effects from the CARES Act on our condensed consolidated financial statements. 37 -------------------------------------------------------------------------------- As of the filing date of this Quarterly Report on Form 10-Q, we believe that our available cash combined with positive cash flows provided by operating activities should be sufficient for us to maintain and fund our operations for at least the next twelve months. Our ability to maintain adequate capital for our operations in the future is dependent upon numerous rapidly evolving factors, many of which we cannot accurately predict or assess, including, among others, 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 pandemic such as office and other workplace closures, worker absenteeism, quarantines, mass-transit disruptions or other travel or health-related restrictions; how quickly economies, including the real estate industry in particular, recover after the pandemic subsidies; sales of our services; collection of accounts receivables; and, financing costs on our revolving credit facility. We will continue to monitor and evaluate the financial impact of the COVID-19 pandemic as it evolves.
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
• Revenue recognition • Income taxes • Business combinations 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 the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 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 for information on recent accounting pronouncements, including the expected dates of adoption.
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, 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 the second quarter of 2020 and beyond, our possible or assumed future results of operations generally, and other statements and information regarding assumptions 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-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 potential impact of COVID-19 on our operations, our potential actions in response to the COVID-19 pandemic, key priorities for 2020, trends in customer behavior, effective tax rate, pending acquisitions, the anticipated benefits of completed or proposed acquisitions, the anticipated timing of acquisition closings, the anticipated benefits of cross-selling efforts, product development and release, planned service enhancements, planned sales and marketing activities and investments, the impact or results of sales initiatives, product integrations, net new sales, contract renewal rates, the use of proceeds of our draws, and the timing of future payments of principal, under our$750 million credit facility under the 2017 Credit Agreement, expectations regarding our compliance with financial and restrictive covenants in the 2017 Credit Agreement, geographic expansion, employee relations, management's plans, goals and objectives for future operations, deferral of tax payments, and sources and adequacy of liquidity. Sections of this Report which contain forward-looking statements include the Financial 38 -------------------------------------------------------------------------------- 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." 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 pandemic such as office and other workplace closures, worker absenteeism, quarantines, mass-transit disruptions or other travel or health-related restrictions; actions taken by governments, businesses and individuals in response to the COVID-19 pandemic; how quickly economies, including the real estate industry in particular, recover after the pandemic subsidies; commercial real estate market conditions; general economic conditions, both domestic and international, including the impacts of "Brexit" and uncertainty from the expected discontinuance of LIBOR and the transition to any other interest rate benchmark; our ability to identify and acquire additional acquisition candidates; the possibility that the acquisition ofRentPath does not close when expected or at all; the risk that the bankruptcy process may cause greater business disruption forRentPath than expected; our ability to realize the expected benefits, cost savings or other synergies from acquisitions, including STR, OCP andRentPath , 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 and 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 commercial real estate industry; customer retention; our ability to attract new clients and to sell additional services to existing clients; our ability to 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 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 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; expansion, growth, development or reorganization of our sales force; employee retention, including employees of acquired businesses; technical problems with our services; managerial execution; changes in relationships with real estate brokers, 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; and successful adoption of and training on our services; competitive conditions; 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. 39
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