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 I of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , 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 for the year endedDecember 31, 2020 , our subsequent 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. With our recent acquisition ofHomesnap, Inc. ("Homesnap") we also offer an online mobile software platform for residential real estate agents and brokers. We manage our business geographically in two operating segments, with our primary areas of measurement and decision-making beingNorth America , which includes theU.S. andCanada , and International, which primarily includesEurope ,Asia-Pacific andLatin America . Our most recent strategic acquisitions includeTen-X Holding Company, Inc. and its subsidiaries ("Ten-X"), which operate an online auction platform for commercial real estate;Emporis GmbH , aGermany -based provider of international commercial real estate data and images, and Homesnap. See Notes 5 and 8 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion of theTen-X and Homesnap acquisitions. Our services are typically distributed to our clients under subscription-based license agreements that renew automatically, a majority of which have a term of at least one year. Upon renewal, many of the subscription contract rates may change in accordance with contract provisions or as a result of contract renegotiations. To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based services rather than charging fees based on actual system usage or number of paid clicks. Depending on the type of service, contract rates are generally based on one or more of the following factors: the number of sites, number of users, organization size, the client's business focus, the client's geographic location, the number and types of services to which a client subscribes, the number of properties a client advertises and the prominence and placement of a client's advertised properties in the search results. Our subscription clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. Auction transaction fees from our newly acquired online auction platform,Ten-X , are generally charged upon the successful closure of an auction as a percentage of the winning buyer's offer price for the commercial real estate property sold. Our primary brands include CoStar®, LoopNet®, Apartments.comTM, STR®, Ten-X®, BizBuySell®, LandsofAmericaTM, and HomeSnap®, which are accessible via the Internet and through our mobile applications. Our principal service offerings are discussed in more detail below.
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 30 --------------------------------------------------------------------------------
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.
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. As our employees receive COVID-19 vaccinations, we are planning for a safe return to the office in the upcoming months for those job activities that may be done safely and in compliance with social distancing guidelines to protect our employees, our customers and our communities. We 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 took 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. 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. The global workforce has been operating in an extraordinary and mostly digital and remote manner as the world adapted to protect individuals' health and safety during the COVID-19 pandemic. During this time, many working adults have moved to different locations and adjusted to a different way of living. As a result, as we begin to transition our business back to the office, we have experienced and expect to continue to experience attrition among our workforce resulting in disruption and the potential for increased costs. During 2020, we experienced the effects of the COVID-19 pandemic on our business, results of operations and overall financial performance. Such effects included, among others, a decrease in new customer sales, increases in customer cancellations, service reductions and failures to pay or delays in payments of amounts owed to us. During the first quarter of 2021, our company-wide net new bookings of subscription-based services and renewal rates returned to pre-pandemic levels. In addition, we saw some improvements in collection trends along with improvements in the economy which has led to some reduction in the allowance for credit losses previously taken. Due to the uncertainty associated with the COVID-19 pandemic, we will continue to monitor these trends and the impact on our results of operations. Any expected changes in financial results discussed in this report 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, the Company's estimates and assumptions may evolve as conditions change. See Note 4 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q and the "Comparison of Three Months EndedMarch 31, 2021 and Three Months EndedMarch 31, 2020 " below for further discussion. It is currently unclear how the commercial real estate industry will ultimately be impacted by the virus as businesses formulate plans to return to the office, implement hybrid work arrangements - allowing work from the office or home, or switch to all work from home. If the demand for office space decreases significantly, there could be a downturn in the real estate market and many of our clients could be materially adversely affected. A depressed real estate market has a negative impact on our core customer base, which could impact our customers' ability to subscribe and pay for our services and reduce demand for our services. Reduced demand and increased cancellations could cause our revenues or our revenue growth rate to decline and reduce our profitability. The COVID-19 pandemic did not materially affect our consolidated financial statements during 2020 or the three months endedMarch 31, 2021 . We strengthened our liquidity position through an equity offering of common stock inMay 2020 and an offering of Senior Notes and amendment and restatement of our credit facility in earlyJuly 2020 . See Note 10 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q and the "Development, Investments and Expansion" below for further discussion of our recent equity and Senior Notes offerings and the 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 toMarch 2020 . 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:
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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. CoStar Suite first quarter 2021 revenue growth rates remained relatively flat when compared to the first quarter of 2020. We expect revenue growth rates to increase throughout 2021 as both subscription renewal rates and net new bookings of subscription-based services returned to 2019 pre-pandemic levels in the first quarter of 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.STR, Inc. andSTR Global, Ltd. (together withSTR, Inc. , "STR") provides benchmarking and analytics for 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 hospitality industry is slowly recovering from the impacts of COVID-19, as a result, STR revenue was relatively flat during the first quarter of 2021 when compared to the first quarter of 2020, but we expect it to improve during the second half of 2021. Overall, we expect moderate increases in information services revenue growth for the remainder of 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 the first quarter of 2021, multifamily revenue growth rates remained relatively consistent with 2020 revenue growth rates as tenants, property owners and landlords continued to transact in our digital environment. We expect multifamily revenue growth rates to remain relatively consistent throughout 2021. 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. OnDecember 22, 2020 , we acquired Homesnap, an 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. Revenues in commercial property and land increased during the first quarter of 2021 compared to the first quarter of 2020 primarily due to revenue from our recentTen-X and Homesnap acquisitions and, to a lesser extent, revenue growth from LoopNet.com. Overall, we expect commercial property and land revenue growth rates to increase in 2021 primarily due to the Homesnap acquisition and the continued impact of theTen-X acquisition. As ofMarch 31, 2021 and 2020, our annualized net new bookings of subscription-based services on all contracts were approximately$52 million and$48 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 three months endedMarch 31, 2021 and 2020, our contract renewal rates for existing CoStar subscription-based services on annual contracts for both periods were approximately 90%, and therefore our cancellation rates for those services for the same periods were approximately 10%. Our contract renewal rate is a quantitative measurement that is typically closely 32 -------------------------------------------------------------------------------- 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. Our trailing twelve-month contract renewal rate may decline as a result of COVID-19 developments, particularly if the resulting 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, brokers, agents and residential renters. We expect to continue our software development efforts to improve existing services, introduce new services, integrate and cross-sell services, integrate recently completed acquisitions and expand and develop supporting technologies for our research, sales and marketing organizations. We reevaluate our priorities on a regular basis and may reevaluate our priorities as the COVID-19 pandemic continues to evolve.
Our key priorities for the remainder of 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 and creating 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 cross-market our services. The acquisition of Homesnap enables us to enter the residential real estate market and expand the markets in which we compete. 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. We are currently evaluating potential increased investments in residential marketplace services and assessing and formulating our business plan and go-forward strategies. We believe the pending acquisition ofHomes.com is an important part of our residential investment and growth strategy. •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. Our plans to recruit and develop a dedicatedLoopNet sales team to help support and grow the business were interrupted by the COVID-19 pandemic, however we plan to resume our recruiting and training activities when it is safe to do so in-person. To support theLoopNet marketplace, we implemented training and incentive programs for our existing 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 in 2021, as compared to 2020, and utilize a multi-media marketing campaign, reinforced with search engine optimization efforts. We expect to 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 a global CoStar platform for all users of CoStar Suite. As we begin to offer a global platform, we plan to expand our international presence. We enhanced CoStar Suite by integrating STR hospitality information and commercial mortgage-backed securities ("CMBS") data and expect to further enhance these capabilities during the year. We recently acquiredEmporis GmbH , aGermany -based provider of international commercial real estate data and images and we are integrating this content into CoStar Suite. •Continuing to develop, improve and market ourApartments.com service offerings to create the best and most comprehensive consumer rental search experience as well as continuing to advance the digital rental experience that allows renters to apply for leases and make rent payments, and for landlords to 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 33 -------------------------------------------------------------------------------- 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 2,633,587 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 continue to 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 beginning onJanuary 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. OnJuly 1, 2020 , we also entered into a second amended and restated credit agreement (the "2020 Credit Agreement"), which amended and restated in its entirety our existing credit agreement (the "2017 Credit Agreement"). The 2020 Credit 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. 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 Note 10 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion of our 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.
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. 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
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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 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:
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•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
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
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--------------------------------------------------------------------------------2021 and 2020, 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.
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,
2021 2020
Net income $ 74,212 $ 72,793
Amortization of acquired intangible assets in cost of revenues 7,408 6,005
Amortization of acquired intangible assets in operating expenses 18,419
11,484
Depreciation and other amortization 8,500 6,767
Interest expense (income) 7,878 (1,651)
Other expense (income) 50 (841)
Income tax expense 19,069 5,563
EBITDA $ 135,536 $ 100,120
Net cash flows provided by (used in)
Operating activities $ 87,853 $ 131,464
Investing activities (134,320) 2,694
Financing activities (18,543) 725,151
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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, 2021 and 2020 (in thousands): Three Months Ended March 31, Increase Increase (Decrease) 2021 2020 (Decrease) ($) (%) Revenues: CoStar Suite$ 172,184 $ 164,956 $ 7,228 4 % Information services 34,696 32,382 2,314 7 Multifamily 166,147 137,460 28,687 21 Commercial property and land 84,670 57,049 27,621 48 Total revenues 457,697 391,847 65,850 17 Cost of revenues 88,748 78,909 9,839 12 Gross profit 368,949 312,938 56,011 18 Operating expenses: Selling and marketing (excluding customer base amortization) 138,687 125,107 13,580 11 Software development 46,784 41,610 5,174 12 General and administrative 63,850 58,873 4,977 8 Customer base amortization 18,419 11,484 6,935 60 Total operating expenses 267,740 237,074 30,666 13 Income from operations 101,209 75,864 25,345 33 Interest (expense) income (7,878) 1,651 (9,529) NM Other (expense) income (50) 841 (891) NM Income before income taxes 93,281 78,356 14,925 19 Income tax expense 19,069 5,563 13,506 NM Net income$ 74,212 $ 72,793 $ 1,419 2
__________________________
NM - Not meaningful
Revenues. Revenues increased to$458 million for the three months endedMarch 31, 2021 , from$392 million for the three months endedMarch 31, 2020 . The$66 million increase was attributable to increases in revenues for several of our services, including a$29 million , or 21%, increase in multifamily revenue. The increase in multifamily revenues was primarily due to higher sales volume as a result of recent investments in marketing and upgrades of existing customer packages to higher value advertising packages. Commercial property and land revenue increased$28 million , or 48%, driven by the acquisitions of Homesnap andTen-X , which contributed revenues of$11 million and$10 million , respectively, in addition to growth in sales of ourLoopNet online marketplace services as a result of stronger traffic, which drove sales of higher value advertisements as compared to the prior year. CoStar Suite revenues increased$7 million , or 4%, primarily due to an increase in the average revenue per subscriber due to different factors, including changes in product and customer mix. Information services revenue increased$2 million , or 7%, primarily due to increased revenue of$2 million fromCoStar Real Estate Manager service offerings. Gross Profit. Gross profit increased to$369 million for the three months endedMarch 31, 2021 , from$313 million for the three months endedMarch 31, 2020 , and the gross profit percentage was 81% for the three months endedMarch 31, 2021 , compared to 80% for the three months endedMarch 31, 2020 . The increase in gross profit was due to higher revenues partially impacted by an increase in cost of revenues of$10 million , or 12%, primarily due to a combined increase of$7 million for data and content costs and customer base amortization driven by the acquisition of Homesnap, and to a lesser extent, increases in bank and merchant fees of$2 million . 38 -------------------------------------------------------------------------------- Selling and Marketing Expenses. Selling and marketing expenses increased to$139 million for the three months endedMarch 31, 2021 , from$125 million for the three months endedMarch 31, 2020 . The$14 million increase was primarily attributable to a$11 million increase in marketing expenses, driven by a$7 million increase in marketing agency spending, primarily forTen-X andLoopNet , and a$3 million increase in digital marketing spending, as well as, a$7 million increase in personnel costs driven by the acquisitions of Homesnap andTen-X . These increases were partially offset by decreases of$3 million in conference and event spending and travel and entertainment expense. Software Development Expenses. Software development expenses increased to$47 million for the three months endedMarch 31, 2021 , from$42 million for the three months endedMarch 31, 2020 , and decreased as a percentage of revenues to 10% for the three months endedMarch 31, 2021 , from 11% for the three months endedMarch 31, 2020 . The$5 million increase was primarily due to a$5 million increase in personnel costs driven by the acquisitions of Homesnap andTen-X , as well as increased headcount to enhance our product offerings. General and Administrative Expenses. General and administrative expenses increased to$64 million for the three months endedMarch 31, 2021 , from$59 million for the three months endedMarch 31, 2020 , and decreased as a percentage of revenues to 14% for the three months endedMarch 31, 2021 from 15% for the three months endedMarch 31, 2020 . The$5 million increase in the amount of general and administrative expense was primarily due to a$6 million increase in professional services, driven by expenses in connection with the Company's bid to acquire CoreLogic and termination of the Asset Purchase Agreement withRentPath , and a$2 million increase in software and equipment. These increases were offset by a$4 million decrease in credit loss expense driven by better than expected collections resulting in updated assumptions on reserves previously taken due to the COVID-19 pandemic. Customer Base Amortization Expense. Customer base amortization expense increased to$18 million for the three months endedMarch 31, 2021 from$11 million for the three months endedMarch 31, 2020 , and increased as a percentage of revenues to 4% for the three months endedMarch 31, 2021 from 3% for the three months endedMarch 31, 2020 . The increase in customer base amortization expense was primarily due to theTen-X and Homesnap acquisitions. Interest (Expense) Income. Interest (expense) income was a net expense of$8 million for the three months endedMarch 31, 2021 , as compared to net income of$2 million for the three months endedMarch 31, 2020 . The decrease for the three months endedMarch 31, 2021 was primarily due to interest expense of$7 million on our Senior Notes issued onJuly 1, 2020 , as well as a decrease of$3 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, which is comprised primarily of foreign exchange gains and losses and other non-operating income and expenses, did not change materially for the three months endedMarch 31, 2021 andMarch 31, 2020 .
Income Tax Expense. Income tax expense increased to
Comparison of Business Segment Results for Three Months Ended
We manage our business geographically in two operating segments, with our primary areas of measurement and decision-making beingNorth America , which includes theU.S. andCanada , and International, which primarily includesEurope ,Asia-Pacific , andLatin America . Management relies on an internal management reporting process that provides revenue and operating segment EBITDA, which is our net income before interest (expense) income and other (expense) income, loss on debt extinguishment, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of our operating segments. EBITDA is used by management to internally measure our operating and management performance and to evaluate the performance of our business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP. Segment Revenues.North America revenues increased to$442 million for the three months endedMarch 31, 2021 , from$377 million for the three months endedMarch 31, 2020 . The increase inNorth America revenues was attributable to increases in revenues for several of our services, including a$29 million increase in multifamily revenues driven by higher sales volume as a result of recent investments in marketing and upgrades of existing customer packages to higher value advertising packages, and an increase in commercial property and land revenues of$27 million , driven by the acquisitions of Homesnap andTen-X , 39 -------------------------------------------------------------------------------- and to a lesser extent, stronger traffic, which drove sales of higher value advertisements in ourLoopNet service offering. CoStar Suite revenue increased$6 million , primarily due to an increase in the average revenue per subscriber due to different factors, including changes in product and customer mix. Information services increased by$2 million , primarily due to growth in sales of ourCoStar Real Estate Manager service offerings. International revenues increased to$16 million for the three months endedMarch 31, 2021 , from$14 million for the three months endedMarch 31, 2020 . The increase in International revenues was primarily due to changes in foreign exchange rates, and to a lesser extent, growth in the CoStar Suite product. Segment EBITDA. North America EBITDA increased to$136 million for the three months endedMarch 31, 2021 , from$102 million for the three months endedMarch 31, 2020 . The increase in North America EBITDA was primarily due to an increase in revenue, partially offset by increases in personnel, marketing and general and administrative costs. International EBITDA for the three months endedMarch 31, 2021 was a loss of$0.3 million , as compared to a loss of$2 million for the three months endedMarch 31, 2020 , as a result of increased revenue and decreased general and administrative costs, partially offset by increases in personnel and marketing costs.
Liquidity and Capital Resources
Our principal sources of ongoing liquidity are cash from operations and proceeds from our debt and equity offerings. Total cash, cash equivalents and restricted cash decreased to approximately$3.7 billion as ofMarch 31, 2021 , compared to cash and cash equivalents of approximately$3.8 billion as ofDecember 31, 2020 . The decrease in cash, cash equivalents and restricted cash for the three months endedMarch 31, 2021 was primarily due to purchases of property and equipment of$134 million , which includes$123 million for the purchase of an office building and the underlying land located inRichmond, Virginia , as well as, repurchases of restricted stock to satisfy tax withholding obligations of$28 million . These cash outflows were partially offset by cash generated from operations of$88 million . Net cash provided by operating activities for the three months endedMarch 31, 2021 was approximately$88 million compared to approximately$131 million for the three months endedMarch 31, 2020 . The$44 million decrease was primarily due to a decrease in net working capital of$55 million , driven by payment of the$52 million termination fee pursuant to the Asset Purchase Agreement withRentPath . These decreases were partially offset by an increase in net income excluding certain non-cash expenses such as depreciation and amortization. Net cash used in investing activities for the three months endedMarch 31, 2021 was approximately$134 million compared to approximately$3 million of cash provided by investing activities for the three months endedMarch 31, 2020 . The$137 million increase in cash used in investing activities during the three months endedMarch 31, 2021 was primarily due to an increase in purchases of property, equipment and other assets which included$123 million for the purchase of an office building and the underlying land located inRichmond, Virginia , and proceeds from the sale of our ARS investments of$10 million received during the three months endedMarch 31, 2020 . Net cash used in financing activities for the three months endedMarch 31, 2021 was approximately$19 million compared to approximately$725 million provided by financing activities for the three months endedMarch 31, 2020 . The$744 million increase in cash used in financing activities is primarily due to a$745 million draw on our revolving credit facility made during the three months endedMarch 31, 2020 . 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. OnMarch 27, 2020 , theU.S. Congress passed 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 the end of 2021 and 2022. As of the filing date of this Quarterly Report on Form 10-Q, 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 40 -------------------------------------------------------------------------------- workplace closures, worker turn over, worker absenteeism, remote work policies, 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.
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 our Annual Report on Form 10-K for the year endedDecember 31, 2020 and Note 2 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
None.
Cautionary Statement Concerning Forward-Looking Statements
We have made forward-looking statements in this Quarterly Report on Form 10-Q and make forward-looking statements in our press releases, investor conference calls, Annual Reports on Form 10-K, other Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with theSecurities and Exchange Commission that are subject to risks and uncertainties. Forward-looking statements include information that is not purely historic fact and include, without limitation, statements concerning our financial outlook for 2021 and beyond, our possible or assumed future results of operations generally, and other statements and information regarding assumptions or expectations about our revenues, revenue growth rates, gross margin percentage, net income, net income per share, fully diluted net income per share, EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-generally accepted accounting principles ("GAAP") net income, non-GAAP net income per share, weighted-average outstanding shares, cash flow from operating activities, operating costs, capital and other expenditures, the current and future impacts of COVID-19 on our operations, our actions in response to the COVID-19 pandemic, key priorities for 2021, trends in customer behavior, legal proceedings and claims, legal costs, effective tax rate, pending acquisitions, the anticipated benefits of completed or proposed acquisitions, the anticipated timing of acquisition closings and integrations, the anticipated benefits of cross-selling efforts, product development and release, geographic and product expansion, planned service enhancements, planned sales and marketing activities and investments, the impact or results of sales and marketing initiatives, product integrations, elimination and de-emphasizing of services, plans related to theTen-X business, potential increased investments in residential marketplace services, net new sales, contract renewal rates, use of proceeds from equity and debt offerings, the use of proceeds of any draws under our$750 million credit facility (the "2020 Credit Agreement"), employee relations and retention, management's plans, goals and objectives for future operations, deferral of tax payments, sources and adequacy of liquidity, and growth and markets for our stock. Sections of this Report which contain forward-looking statements include the Financial Statements and related Notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures About Market Risk," "Controls and Procedures," "Legal Proceedings" and "Risk Factors." 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 41 -------------------------------------------------------------------------------- comparable terminology. You should understand that these forward-looking statements are estimates reflecting our judgment, beliefs and expectations, not guarantees of future performance. They are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. The following important factors, in addition to those discussed or referred to under the heading "Risk Factors," and other unforeseen events or circumstances, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements: the effects of and uncertainty surrounding the COVID-19 pandemic, including the length and severity of the economic downturn associated with the COVID-19 pandemic, including disruption of the international and national economy and credit markets; actions taken by governments, businesses and individuals in response to the COVID-19 pandemic such as office and other workplace closures, worker absenteeism or decreased productivity, quarantines, mass-transit disruptions or other travel or health-related restrictions; how quickly economies, including the real estate industry in particular, recover after the COVID-19 pandemic subsides; real estate market conditions, including commercial real estate office vacancies; general economic conditions, both domestic and international, including the impacts of "Brexit" and uncertainty from the expected discontinuance of LIBOR and the transition to any other interest rate benchmarks; our ability to identify, acquire and integrate additional acquisition candidates; our ability to realize the expected benefits, cost savings or other synergies from acquisitions, including STR,Ten-X and Homesnap, on a timely basis or at all; our ability to combine acquired businesses successfully or in a timely and cost-efficient manner; the possibility that the acquisition ofHomes Group, LLC does not close when expected or at all; business disruption relating to integration of acquired businesses or other business initiatives; the risk that expected investments in acquired businesses, or the timing of any such investments, may change or may not produce the expected results; our ability to transition acquired service platforms to our model in a timely manner or at all; changes and developments in business plans or operations; theft of any personally identifiable information we, or the businesses that we acquire, maintain, store or process; any actual or perceived failure to comply with privacy or data protection laws, regulations or standards; any disruption of our systems, including due to any cyberattack or other similar event; the amount of investment for sales and marketing and our ability to realize a return on investments in sales and marketing; our ability to effectively and strategically combine, eliminate or de-emphasize service offerings; reductions in revenues as a result of service changes; the time and resources required to develop upgraded or new services and to expand service offerings; changes or consolidations within the real estate industry; customer retention; our ability to attract new clients and to sell additional services to existing clients; our ability to develop, successfully introduce and cross-sell new products or upgraded services inU.S. and foreign markets; our ability to attract consumers to our online marketplaces; our ability to increase traffic on our network of sites; the success of our marketing campaigns in generating brand awareness and site traffic; our ability to protect and defend our intellectual property, including against unauthorized or unlicensed use of our services; competition; foreign currency fluctuations; global credit market conditions affecting investments; our ability to continue to expand successfully, timely and in a cost-efficient manner, including internationally; our ability to effectively penetrate and gain acceptance in new sectors and geographies; our ability to control costs; litigation or government investigations in which we become involved; changes in accounting policies or practices; release of new and upgraded services or entry into new markets by us or our competitors; data quality; our ability to expand, develop or reorganize or reorient of our sales force; employee retention, including retention of key employees and employees of acquired businesses; technical problems with our services; managerial execution; changes in relationships with real estate agents, brokers, owners, property managers and other strategic partners; legal and regulatory issues, including any actual or perceived failure to comply withU.S. or international laws, rules or regulations; successful adoption of and training on our services; and the availability of capital. Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of, and are based on information available to us on, the date of this Quarterly Report on Form 10-Q (unless otherwise indicated). All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to update any such statements or release publicly any revisions to these forward-looking statements to reflect new information or events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. 42
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