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 above in Item 1A. under the headings "Risk Factors - Cautionary Statement Concerning Forward-Looking Statements" and "Risk Factors," 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. The following discussion should be read in conjunction with our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with theSecurities and Exchange Commission and the consolidated financial statements and related notes included in this Annual Report on Form 10-K.
Overview
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 currently responsible for selling multiple product lines, including CoStar Suite andLoopNet . Starting in late 2019, we shifted the focus of our sales force to sales ofLoopNet Diamond, Platinum and Gold Ads. As a result of this shift, as well as the continued impact of COVID-19 on our current and potential customer base, we saw a decline in CoStar Suite revenue growth rates in 2020 compared to 2019 growth rates and expect similar growth rates throughout 2021. 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 our CoStar Investment Analysis and CoStar Risk Analytics® service offerings. OnOctober 22, 2019 , we acquired STR and we now also provide STR's complementary benchmarking and analytics services to the hospitality industry. STR sells the majority of its services on a subscription basis, but also receives one-time or ad hoc transaction fee revenues. We provide information services internationally, through our Grecam,Belbex andThomas Daily businesses inFrance ,Spain andGermany , respectively. The growth rates of information services increased in 2020 compared to 2019 primarily due to the STR acquisition. The hospitality industry has been severely impacted by COVID-19, as a result, revenue for STR declined in the second quarter of 2020 and increased moderately during the remainder of the year. We anticipate STR revenue and overall information services growth rates to moderate during 2021.
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. During 2020, multifamily revenue growth rates generally continued to increase relative to 2019 revenue growth rates as tenants, property owners and landlords continued to transact in our digital environment. 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 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. OnJune 24, 2020 , we acquiredTen-X , an online auction platform for commercial real estate. On 34 --------------------------------------------------------------------------------December 22, 2020 , we acquired Homesnap, an industry-leading online and mobile software platform that provides user-friendly applications to optimize residential real estate agent workflow and reinforce the agent-client relationship. 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 our commercial property and land service 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. As part of our rebuild and launch of the LoopNet Diamond, Platinum and Gold Ads products during the fourth quarter of 2019, we shifted the focus of our commercial real estate sales force to LoopNet Ads. As a result, theLoopNet revenue growth rate increased in the fourth quarter of 2019. Growth was flat during the first half of 2020 as LoopNet.com sales volumes declined and cancellations increased as a result of COVID-19 and its impact on the commercial real estate industry. During the second half of 2020, we saw an increase in sales and expectLoopNet revenue growth rates to continue at those levels in 2021. Overall, revenues in commercial property and land increased during 2020 compared to 2019 primarily due to revenue from our newly acquired online auction platform,Ten-X and, to a lesser extent, revenue growth from LoopNet.com. Overall, we expect an increase in the commercial property and land growth rates in 2021 compared to 2020 primarily due to the Homesnap acquisition and continued impact of theTen-X acquisition.
Impact of the COVID-19 Pandemic
A novel strain of coronavirus known as "COVID-19" was first identified inWuhan, China inDecember 2019 , and was subsequently declared a pandemic by theWorld Health Organization onMarch 11, 2020 . COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas. The full impact of the COVID-19 pandemic is unknown and is evolving as the pandemic continues. The COVID-19 pandemic did not materially affect our consolidated financial statements for the year endedDecember 31, 2020 . We are closely and continually 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 and continue to do so as of the date of this filing. We have 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. 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. In preparation for an eventual return to work in the office, we have also incurred and expect to continue to incur expenses to help protect the health and safety of our employees and visitors. In response to the COVID-19 pandemic, we have taken steps to manage our costs, including minimizing hiring to essential positions, restricting business travel and canceling in-person marketing events. We expect to continue to minimize travel and restrict in-person marketing events during the first half of 2021. Overall, the increased direct spend related to the COVID-19 pandemic, including office reconfiguration, has not been material to date and has had minimal impact on our financial position and operating results as these expenses have been generally offset by the cost savings described above. 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. In general, 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 ultimately 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, our revenue or earnings forecasts may not prove to be accurate. 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. As the extent and duration of the impacts from COVID-19 remain unclear, our estimates and assumptions may evolve as conditions change. Our current observations and past experience and results may not be an indicator of ongoing trends or future results, and actual results could differ significantly from our estimates and expectations.
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
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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 or delays in payments of amounts owed to us. We
are more likely to incur asset impairment charges or restructuring charges, or
further increase our allowance for credit losses, as a result of this crisis and
related economic downturn, which could adversely affect our results of
operations. The amount and frequency of such actions will be affected by the
severity and duration of the COVID-19 pandemic. We experienced a decrease in net
new bookings of subscription-based services and an increase in customer requests
for cancellations and suspensions towards the end of the first quarter of 2020
that continued through May 2020 ; however, those requests have eased since then,
and sales related to marketplace service offerings have returned to pre-pandemic
levels. During 2020, we increased the allowance for credit loss as a result of
increased write-off trends and increased the forecasted credit loss estimate on
high credit risk customers to reflect the uncertainty around the duration and
speed of an economic recovery in the first three quarters of 2020. However, the
credit loss expense normalized in the fourth quarter of 2020. Due to the
uncertainty associated with the COVID-19 pandemic, we will continue to monitor
customer behavior and its impact on our results of operations. See Note 3 in
this Annual Report on Form 10-K for further discussion.
We strengthened our liquidity position through an equity offering of common
stock in May 2020 and an offering of Senior Notes and amendment and restatement
of our credit facility in early July 2020 . See Note 11 and Note 15 in this
Annual Report on Form 10-K for further discussion of our recent equity and
Senior Notes offerings and our 2020 Credit Agreement. The effects of the
pandemic have not affected our ability to date to access funding on reasonably
similar terms as were available to us prior to March 2020 . We discuss the
current and potential impact of select provisions of the CARES Act (defined
below) in our liquidity discussion.
For the years ended December 31, 2020 , 2019 and 2018 our annualized net new
bookings of subscription-based services on all contracts were approximately $184
million , $210 million and $169 million , respectively, 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 years ended December 31, 2020 , 2019 and 2018, our contract renewal rate
for existing CoStar subscription-based services on annual contracts was
approximately 89%, 90% and 90% respectively, and, therefore, our cancellation
rate for those services was approximately 11%, 10%, and 10%, respectively. Our
contract renewal rate is a quantitative measurement that is typically closely
correlated with our revenue results. As a result, management also believes that
the rate may be a reliable indicator of short-term and long-term performance.
Our trailing twelve-month contract renewal rate may decline if, among other
reasons, negative economic conditions lead 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, evaluate strategic growth opportunities, and pursue our key priorities 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 our client base and site users, including property owners, property managers, buyers, commercial tenants 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 may reevaluate our priorities as the COVID-19 pandemic continues to evolve.
Our key priorities for 2021 currently include:
•Integrating and developing service offerings of recently completed acquisitions, including STR,Ten-X and Homesnap, with our business operations. We are consolidating 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 to drive international expansion, in part, through STR's global operations and to apply STR's benchmarking expertise to other commercial real estate segments we serve. We are working on integrating theTen-X platform with bothLoopNet and CoStar, to expand the audience forTen-X auctions to include our online commercial real estate users. To increase exposure, we have upgradedLoopNet listings for properties to be auctioned onTen-X and are allocating banner space on both our CoStar andLoopNet sites toTen-X to 36 --------------------------------------------------------------------------------
cross-market our services. Our Homesnap team is creating new and improved tools to help agents promote their residential listings, connect with buyers and sellers and streamline their daily workflow.
•Continuing to invest in theLoopNet marketplace and theTen-X auction platform. We are enhancing the content on LoopNet.com (including high-quality imagery), seeking targeted advertisements, providing premium listing 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 have started recruiting and developing a dedicated sales team to help support and grow the business. To support theLoopNet marketplace, we implemented training and incentive programs for our sales team to increase sales of LoopNet Ads, with a focus on brokers and property owners. We plan to expand theTen-X sales force during 2021 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 the LoopNet.com network andTen-X , we plan to significantly increase our investment in marketing and utilize a multi media marketing campaign, reinforced with search engine optimization efforts. We will continue to work to determine the optimal level of marketing investment for each of these services for future periods. •Continuing to invest in CoStar Suite, including capabilities that allow us to broaden the reach of CoStar Suite internationally by offering multiple languages and currencies on the platform. We plan to enhance CoStar Suite by making additional investments in analytical and service capabilities focused on lenders and owners of commercial real estate. We also recently acquiredEmporis GmbH , aGermany -based provider of international commercial real estate data and images that we are integrating into CoStar. In addition, we plan to invest in the technology and infrastructure of our other existing service offerings and the backend systems that support our offerings. •Continuing to develop, improve and market ourApartments.com service offerings that focus on creating 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 run tenant credit and background checks, all 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 provide more value to consumers and, in turn, to attract advertisers. OurApartments.com marketing investment 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 services for future periods and may adjust our marketing spend and focus as we deem appropriate. To support our continued expansion and development, in 2020, we completed a public equity offering, a senior notes offering and the refinancing of our revolving credit facility. InMay 2020 , we completed a public equity offering of 2.6 million shares of common stock for$655 per share. Net proceeds from the public equity offering were approximately$1.7 billion , after deducting approximately$35 million of underwriting fees, commissions and other stock issuance costs. We expect to use the net proceeds from the public equity offering to fund all or a portion of the costs of any strategic acquisitions we pursue in the future, to finance the growth of our business and/or for working capital and other general corporate purposes. General corporate purposes may include additions to working capital, capital expenditures, repayment of debt, investments in our subsidiaries, and the repurchase, redemption or retirement of securities, including our common stock. OnJuly 1, 2020 , we issued$1.0 billion aggregate principal amount of 2.800% Senior Notes dueJuly 15, 2030 (the "Senior Notes"). Interest on the Senior Notes is payable semi-annually in arrears beginningJanuary 15, 2021 . We may redeem the Senior Notes in whole or in part (a) at any time prior toApril 15, 2030 , at a redemption price equal to 100% of the principal amount of the Senior Notes, plus the Applicable Premium (as calculated in accordance with the indenture governing the Senior Notes) as of, and any accrued and unpaid interest, if any, on the principal amount of Senior Notes being redeemed to, but excluding, the redemption date, and (b) on or afterApril 15, 2030 , at a redemption price equal to 100% of the principal amount of the Senior Notes, plus any accrued and unpaid interest, if any, on the principal amount of Senior Notes being redeemed to, but excluding, the redemption date. We used a portion of the net proceeds from the issuance of the Senior Notes to repay outstanding borrowings under the 2017 Credit Agreement, and we intend to use the remaining proceeds to fund all or a portion of the costs of any strategic acquisitions we pursue in the future, to finance the growth of our business and/or for working capital and other general corporate purposes.
On
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Agreement provides for a $750 million revolving credit facility with a term of
five years and a letter of credit sublimit of $20 million from a syndicate of
financial institutions as lenders and issuing banks. On July 1, 2020 , we repaid
the outstanding borrowings under our existing $750 million revolving credit
facility pursuant to the 2017 Credit Agreement using the proceeds from the
issuance of the Senior Notes. Funds drawn down on the revolving credit facility
pursuant to the 2020 Credit Agreement may be used for working capital and other
general corporate purposes. The 2020 Credit Agreement, along with the proceeds
from the May equity offering, the July Senior Notes offering and cash generated
by our business are expected to support our continued growth and give us
flexibility to act on strategic acquisition opportunities that may arise. See
Notes 11 and 15 in this Annual Report on Form 10-K for further discussion of our
recent equity and Senior Notes offerings and our 2020 Credit Agreement.
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.
For further discussion of our Company, strategy and products, see our business overview set forth in "Item 1. Business" in this Annual Report on Form 10-K.
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 and 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 and
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 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
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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 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
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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 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.
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):
Year Ended December 31,
2020 2019 2018
Net income $ 227,128
25,675 21,357 20,586
Amortization of acquired intangible assets in operating expenses
62,457 33,995 30,881
Depreciation and other amortization 28,812 25,813 26,276
Interest (expense) income 17,395 (16,742) (10,539)
Other (expense) income 827 (10,660) 88
Income tax expense 43,852 75,986 45,681
EBITDA $ 406,146 $ 444,712 $ 351,307
Net cash flows provided by (used in)
Operating activities $ 486,106 $ 457,780 $ 335,458
Investing activities $ (464,163) $ (483,753) $ (448,001)
Financing activities $ 2,662,297 $ (4,154) $ 2,744
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Consolidated Results of Operations
The following table provides our selected consolidated results of operations for the indicated periods (in thousands and as a percentage of total revenue):
Year Ended December 31,
2020 2019 2018
Revenues $ 1,659,019 100 % $ 1,399,719 100 % $ 1,191,832 100 %
Cost of revenues 308,968 19 289,239 21 269,933 23
Gross profit 1,350,051 81 1,110,480 79 921,899 77
Operating expenses:
Selling and marketing (excluding customer base amortization) 535,778 32 408,596 29 359,858 30
Software development 162,916 10 125,602 9 100,937 8
General and administrative 299,698 18 178,740 13 156,659 13
Customer base amortization 62,457 4 33,995 2 30,881 3
Total operating expenses 1,060,849 64 746,933 53 648,335 54
Income from operations 289,202 17 363,547 26 273,564 23
Interest (expense) income (17,395) (1) 16,742 1 10,539 1
Other (expense) income (827) - 10,660 1 (88) -
Income before income taxes 270,980 16 390,949 28 284,015 24
Income tax expense 43,852 3 75,986 5 45,681 4
Net income $ 227,128 14 % $ 314,963 23 % $ 238,334 20 %
The following table provides our revenues by type of service (in thousands and as a percentage of total revenue):
Year Ended
2020 2019 2018
Information and analytics(1)
CoStar Suite$ 664,735 40 %$ 617,798 44 %$ 545,195 46 % Information services 130,070 8 88,446 6 67,624 6 Online marketplaces(1) Multifamily 598,555 36 490,631 35 405,795 34 Commercial property and land 265,659 16 202,844 15 173,218 14 Total revenues$ 1,659,019 100%$ 1,399,719 100%$ 1,191,832 100% __________________________
(1) For further discussion of our Company, strategy and products, see our business overview set forth in "Item 1. Business" in this Annual Report on Form 10-K.
42
--------------------------------------------------------------------------------
Comparison of Year Ended
The following table provides a comparison of our selected consolidated results of operations for the years endedDecember 31, 2020 and 2019 (in thousands): Increase 2020 2019 (Decrease) ($) Increase (Decrease) (%) Revenues CoStar Suite$ 664,735 $ 617,798 $ 46,937 8% Information services 130,070 88,446 41,624 47 Multifamily 598,555 490,631 107,924 22 Commercial property and land 265,659 202,844 62,815 31 Total revenues 1,659,019 1,399,719 259,300 19 Cost of revenues 308,968 289,239 19,729 7 Gross profit 1,350,051 1,110,480 239,571 22 Operating expenses: Selling and marketing (excluding customer base amortization) 535,778 408,596 127,182 31 Software development 162,916 125,602 37,314 30 General and administrative 299,698 178,740 120,958
68
Customer base amortization 62,457 33,995 28,462
84
Total operating expenses 1,060,849 746,933 313,916 42 Income from operations 289,202 363,547 (74,345) (20) Interest (expense) income (17,395) 16,742 (34,137) NM Other (expense) income (827) 10,660 (11,487) NM Income before income taxes 270,980 390,949 (119,969) (31) Income tax expense 43,852 75,986 (32,134) (42) Net income$ 227,128 $ 314,963 $ (87,835) (28)% __________________________ NM - Not meaningful Revenues. Revenues increased to$1.7 billion in 2020, from$1.4 billion in 2019. The$259 million increase was primarily attributable to an$108 million , or 22%, increase in multifamily revenue. The multifamily increase was due to upsells of existing customer packages to higher value advertising packages, and higher sales volume due to an increase in property listings as a result of recent investments in marketing. Commercial property and land revenue increased$63 million , or 31%, due to revenue of$32 million from the acquisition ofTen-X , and growth in ourLoopNet online marketplace services of$30 million as a result of stronger site traffic, driving sales of higher value advertisements. CoStar Suite revenues increased$47 million , or 8%, primarily due to renewal price increases from prior periods and, to a lesser extent, higher sales volume due to an increase in subscribers. Information services revenue increased$41 million , or 47%, primarily due to$44 million from the acquisition of STR, partially offset by a decrease of$2 million in revenue for ourCoStar Real Estate Manager service offerings. Gross Profit. Gross profit increased to$1.4 billion in 2020, from$1.1 billion in 2019. The gross profit percentage was 81% for 2020 compared to 79% for 2019. The increase in gross profit was due to higher revenues partially impacted by an increase in cost of revenues of$20 million , or 7%, mostly due to the acquisitions of STR andTen-X , which were the primary drivers of higher personnel costs of$12 million , and increased intangible asset amortization of$4 million , and to a lesser extent, increases in bank and merchant fees of$4 million and IT equipment and office supplies of$4 million related to employees directly supporting our customers as they transitioned to working from home during the COVID-19 pandemic. These increases were partially offset by a$4 million decrease in travel and entertainment expenses for research and product support employees. Selling and Marketing Expenses. Selling and marketing expenses increased to$536 million in 2020, from$409 million in 2019. The increase was primarily attributable to$92 million in additional marketing spend, including$57 million in search engine marketing, primarily forApartments.com andLoopNet , a$40 million increase in marketing agency fees, and a$6 million increase in other forms of marketing, led by digital, partially offset by a decrease in event spending of$11 million . In addition, the increase in expenses was caused by higher personnel costs of$40 million driven by the acquisitions of STR andTen-X , as well as, higher sales commissions, in addition to$2 million increases in each of occupancy and supplies. These increases were partially offset by a$9 million decrease in travel and entertainment expense. 43 -------------------------------------------------------------------------------- Software Development Expenses. Software development expenses increased to$163 million in 2020, from$126 million in 2019, and increased as a percentage of revenues to 10% in 2020, compared to 9% in 2019. The increase in the amount of software development expense was primarily due to a$33 million increase in personnel costs as a result of increased headcount and temporary services to enhance our product offerings, including$11 million due to the acquisitions of STR andTen-X , as well as a$2 million increase in occupancy costs. General and Administrative Expenses. General and administrative expenses increased to$300 million in 2020, from$179 million in 2019, and increased as a percentage of revenues to 18% in 2020 from 13% in 2019. The increase in general and administrative expenses was partially attributable to the$52 million break fee and$8 million in extension payments that we were contractually obligated to pay under the Asset Purchase Agreement withRentPath , which we terminated inDecember 2020 . In addition, there were increases in personnel costs of$27 million due to increased headcount driven by the acquisitions of STR andTen-X , credit loss expense of$14 million primarily due to our expectations that the economic downturn caused by the COVID-19 pandemic will increase delinquent trade receivables, professional services of$14 million driven by an increase in other acquisition related costs, and additional software and equipment of$5 million . Customer Base Amortization Expense. Customer base amortization expense increased to$62 million in 2020, from$34 million in 2019, and increased as a percentage of revenues to 4% in 2020, compared to 2% in 2019. The increase in customer base amortization expense was primarily due to the STR andTen-X acquisitions. Interest (Expense) Income. Interest (expense) income was a net expense of$17 million in 2020, as compared to net income of$17 million in 2019. The change from the prior year was due to an increase in interest expense of$19 million , of which,$5 million was related to the$745 million draw on the 2017 Credit Agreement in the first quarter of 2020 and$14 million related to our Senior Notes issued onJuly 1, 2020 , respectively. In addition, there was a decrease of$15 million in interest income caused by lower rates of return on our cash and cash equivalent balances compared to the prior year.
Other (Expense) Income. Other (expense) income was a net expense of
Income Tax Expense. Income tax expense decreased to$44 million in 2020, from$76 million in 2019. The decrease was primarily due to lower income before income taxes for 2020, as well as an increase in excess tax benefits. The effective tax rate for 2020 was 16%, compared to 19% in 2019 and lower than the statutory rates due to research and development credits as well as excess tax benefits. For a comparison of our results of operations for the fiscal year endedDecember 31, 2019 to the year endedDecember 31, 2018 , see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theU.S. Securities and Exchange Commission onFebruary 26, 2020 .
Comparison of Business Segment Results for Year Ended
We manage our business geographically in two operating segments, with the 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 operating and management performance and to evaluate the performance of the 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$1.6 billion for the year endedDecember 31, 2020 , from$1.4 billion for the year endedDecember 31, 2019 . The increase inNorth America revenues was primarily due to a$108 million increase in multifamily revenues driven by upsells of existing customer packages to higher value advertising packages and higher sales volume as a result of recent investments in marketing. Commercial property and land revenues increased$63 million primarily due to the acquisition ofTen-X , as well as growth in ourLoopNet service offering. Costar Suite revenues increased$44 million primarily due to price increases upon renewal of subscriptions in the past year, and to a lesser extent, higher sales volume. Information services increased$27 million due to the acquisition ofSTR. International revenues increased 44 --------------------------------------------------------------------------------
to
Segment EBITDA. North America EBITDA decreased to$411 million for the year endedDecember 31, 2020 , from$452 million for the year endedDecember 31, 2019 . The decrease in North America EBITDA was due primarily to the$52 million break fee and$8 million in extension payments that we were contractually obligated to pay under the Asset Purchase Agreement withRentPath , which we terminated inDecember 2020 . Additionally, increases in personnel, general and administrative, and marketing costs were offset by an increase in revenue. International EBITDA increased to a loss of$5 million for the year endedDecember 31, 2020 from a loss of$7 million December 31, 2019 primarily as a result of increased revenue, offset by increases in personnel and general and administrative costs. For a comparison of our business segment results of operations for the fiscal year endedDecember 31, 2019 to the year endedDecember 31, 2018 , see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theU.S. Securities and Exchange Commission onFebruary 26, 2020 . 45 --------------------------------------------------------------------------------
Consolidated Quarterly Results of Operations
The following tables present our unaudited consolidated results of operations on
a quarterly basis for the indicated periods (in thousands, except per share
amounts, and as a percentage of total revenues). These tables should be read in
conjunction with the consolidated financial statements and related notes
included in this Annual Report on Form 10-K. The quarterly results of historical
periods are not necessarily indicative of quarterly results for any future
period.
2020 2019
Mar. 31 Jun. 30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31
Revenues $ 391,847 $ 397,159 $ 425,620 $ 444,393 $ 328,425 $ 343,760 $ 352,808 $ 374,726
Cost of revenues 78,909 74,040 77,865 78,154 71,153 71,918 71,172 74,996
Gross profit 312,938 323,119 347,755 366,239 257,272 271,842 281,636 299,730
Operating expenses 237,074 241,800 270,946 311,029 163,780 197,042 187,367 198,744
Income from operations 75,864 81,319 76,809 55,210 93,492 74,800 94,269 100,986
Interest (expense) income 1,651 (3,596) (7,537) (7,913) 4,212 4,677 4,414 3,439
Other (expense) income 841 (474) (338) (856) 1 539 240 9,880
Income before income taxes 78,356 77,249 68,934 46,441 97,705 80,016 98,923 114,305
Income tax expense 5,563 16,889 10,748 10,652 12,536 16,768 20,304 26,378
Net income $ 72,793 $ 60,360 $ 58,186 $ 35,789 $ 85,169 $ 63,248 $ 78,619 $ 87,927
Net income per share - basic $ 2.00 $ 1.61 $ 1.49 $ 0.91 $ 2.35 $ 1.74 $ 2.16 $ 2.42
Net income per share - diluted $ 1.98 $ 1.60 $ 1.48 $ 0.91 $ 2.33 $ 1.73 $ 2.15 $ 2.39
2020 2019
Mar. 31 Jun. 30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31
Revenues 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenues 20 19 18 18 22 21 20 20
Gross profit 80 81 82 82 78 79 80 80
Operating expenses 61 61 64 70 50 57 53 53
Income from operations 19 20 18 12 28 22 27 27
Interest (expense) income - (1) (2) (2) 2 1 1 1
Other (expense) income - - - - - - - 3
Income before income taxes 19 19 16 10 30 23 28 31
Income tax expense 1 4 2 2 4 5 6 7
Net income 18 % 15 % 14 % 8 % 26 % 18 % 22 % 24 %
Liquidity and Capital Resources
Our principal sources of liquidity are cash from operations and more recently, proceeds from our debt and equity offerings. Total cash, cash equivalents and restricted cash increased to approximately$3.8 billion as ofDecember 31, 2020 , compared to approximately$1.1 billion as ofDecember 31, 2019 . The increase in cash, cash equivalents and restricted cash for the year endedDecember 31, 2020 was primarily due to proceeds from ourMay 2020 equity offering, net of transaction costs, of$1.7 billion , as well as proceeds from theJuly 2020 issuance of our Senior Notes, net of transaction costs, of$983 million . In addition, cash generated from operations contributed$486 million , partially offset by cash paid for acquisitions, net of cash acquired, of$426 million . InMay 2020 , we completed a public equity offering of 2.6 million shares of common stock for$655 per share and onJuly 1, 2020 , we issued$1.0 billion aggregate principal amount of Senior Notes, entered into the 2020 Credit Agreement, which amended and restated in its entirety the 2017 Credit Agreement, and repaid in full the balance on the existing$750 million revolving credit facility under the 2017 Credit Agreement. For further discussion of our recent equity and Senior Notes offerings and our 2020 Credit Agreement, see "-Overview-Development, Investments and Expansion" and Notes 11 and 15 to the accompanying Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K for further discussion. 46 -------------------------------------------------------------------------------- Net cash provided by operating activities for the year endedDecember 31, 2020 was$486 million compared to$458 million for the year endedDecember 31, 2019 . The approximately$29 million increase fromDecember 31, 2019 toDecember 31, 2020 was primarily due to changes in working capital, partially offset by a decrease in net income excluding certain non-cash expenses such as depreciation and amortization and credit loss expense, as well as a decrease in deferred income taxes. Net cash used in investing activities for the year endedDecember 31, 2020 was$464 million compared to$484 million for the year endedDecember 31, 2019 . The$20 million decrease in cash used in investing activities was primarily due to$438 million net cash paid for acquisitions in 2019, which included the acquisitions ofSTR and Off Campus Partners , compared to$426 million net cash paid during 2020, including the acquisitions of Homesnap,Ten-X andEmporis GmbH , as well as, the sale of our ARS investments of$10 million in 2020. This was partially offset by an increase in capital expenditures to$48 million in 2020 compared to$46 million during 2019. Net cash provided by financing activities for the year endedDecember 31, 2020 was$2.7 billion compared to net cash used in financing activities of$4 million for the year endedDecember 31, 2019 . This$2.7 billion increase is primarily due to proceeds from ourMay 2020 equity offering, net of transaction costs, of$1.7 billion , as well as, proceeds from the issuance of ourJuly 1, 2020 Senior Notes, net of transaction costs, of$983 million . We expect to use the proceeds from these transactions to fund all or a portion of the costs of any strategic acquisitions we pursue in the future, to finance the growth of our business and for working capital and other general corporate purposes. The increased cash position allows for greater financial flexibility in light of ongoing uncertainty in the global markets resulting from the COVID-19 pandemic. See Notes 11 and 15 to the accompanying Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K for further discussion. 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. 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. The purchase agreement required us to deposit a$59 million termination fee into an escrow account in the event the purchase agreement is terminated prior to closing under specified circumstances. InDecember 2020 , the sellers gave notice of termination of the purchase agreement and we commenced an adversary proceeding against the sellers seeking a declaratory judgment thatRentPath was in breach of the agreement and that we were not obligated to pay the termination fee. InFebruary 2021 , we and the sellers settled the adversary proceeding and agreed that we would pay$52 million of the$59 million contractual termination fee. See Note 13 to the accompanying Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K 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 deferred payroll taxes due in 2020 to 2021 and 2022. As of the filing date of this Annual Report on Form 10-K, we believe that our available cash combined with positive cash flow 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 depends 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, related 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 commercial real estate industry in particular, recover after the pandemic subsidies; sales of our services; and collection of accounts receivables. We plan to continue to monitor and evaluate the financial impact of the COVID-19 pandemic as it evolves. Contractual Obligations. The following table summarizes our principal contractual obligations atDecember 31, 2020 , excluding theRentPath termination fee and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands): 47 -------------------------------------------------------------------------------- Total 2021 2022-2023 2024-2025 Thereafter Long-term debt principal payments$ 1,000,000
$ - $ - $ -
281,089 29,089 56,000 56,000 140,000
Operating leases 148,975 37,013 69,726 38,888 3,348
Purchase obligations (1) 65,403 30,938 28,413 6,052 -
Total contractual principal cash obligations $ 1,495,467
(1) Amounts do not include (i) contracts with terms of twelve months or less,
(ii) multi-year contracts that may be terminated by a third-party or us, or
(iii) employment agreements. Amounts do not include income taxes payable due to
uncertainty regarding the timing of future cash payments.
48
--------------------------------------------------------------------------------Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity withU.S. generally accepted accounting principles ("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 •Business combinations With respect to our accounting policy for long-lived assets, intangible assets and goodwill, we further supplement in Note 2 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K with the following: We assess the impairment of long-lived assets, identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments made by management relate to the expected useful lives of long-lived assets and our ability to recover the carrying value of such assets. The accuracy of these judgments may be adversely affected by several factors, including the factors listed below: •Significant underperformance relative to historical or projected future operating results; •Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; •Significant negative industry or economic trends; or •Significant decline in our market capitalization relative to net book value for a sustained period.
When we determine that the carrying value of long-lived and identifiable intangible assets may not be recovered based upon the existence of one or more of the above indicators, we test for impairment.
Goodwill and identifiable intangible assets that are not subject to amortization are tested annually for impairment by each reporting unit onOctober 1 of each year and are also tested for impairment more frequently based upon the existence of one or more of the above indicators.Goodwill represents the excess of costs over the fair value of assets of acquired businesses.Goodwill is not amortized, but instead tested for impairment at least annually by each reporting unit. We may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount or elect to bypass such assessment. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or we elect to bypass such assessment, we then determine the fair value of each reporting unit. We estimate the fair value of each reporting unit based on a projected discounted cash flow model that includes significant assumptions and estimates including our discount rate, growth rate and future financial performance. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies. Assumptions about the growth rate and future financial performance of a reporting unit are based on our forecasts, business plans, economic projections and anticipated future cash flows. These assumptions are subject to change from period to period and could be adversely impacted by the uncertainty surrounding global market conditions, commercial real estate conditions and the competitive environment in which we operate. Changes in these or other factors could negatively affect our reporting units' fair value and potentially result in impairment charges. Such impairment charges could have an adverse effect on our results of operations. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference. We estimate the fair value of our reporting units based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk in our current business model. As ofOctober 1, 2020 , we assessed the relevant qualitative factors for ourNorth America reporting unit and concluded that it was not more likely than not that the fair value of this reporting unit was less than its respective carrying amounts. We elected to bypass performing the qualitative screen and performed the first 49 -------------------------------------------------------------------------------- step quantitative analysis of the goodwill impairment test for our International reporting unit in the current year, which indicated that the fair value of this unit exceeded its carrying value.
There have been no events or changes in circumstances as a result of our
qualitative impairment analysis on
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 Note 2 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for information on recent accounting pronouncements, including the expected dates of adoption.
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