CoStar Group(CSGP) - 2020 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Q1 2020, including operations, balance sheets, cash flows, and detailed notes on accounting policies, acquisitions, and debt Condensed Consolidated Statements of Operations Q1 2020 revenues grew 19.3% to $391.8 million, but increased operating expenses led to a decline in income from operations to $75.9 million and net income to $72.8 million Q1 2020 vs Q1 2019 Statement of Operations (in thousands, except per share data) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Revenues | $391,847 | $328,425 | | Gross Profit | $312,938 | $257,272 | | Income from Operations | $75,864 | $93,492 | | Net Income | $72,793 | $85,169 | | Net Income Per Share - Diluted | $1.98 | $2.33 | Condensed Consolidated Balance Sheets As of March 31, 2020, total assets increased to $4.68 billion, driven by a rise in cash to $1.93 billion, largely funded by $745 million in new long-term debt, increasing total liabilities to $1.22 billion Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $4,684,597 | $3,853,986 | | Cash, cash equivalents and restricted cash | $1,927,923 | $1,070,731 | | Goodwill | $1,873,987 | $1,882,020 | | Total Liabilities | $1,221,786 | $448,393 | | Long-term debt | $745,000 | $— | | Total Stockholders' Equity | $3,462,811 | $3,405,593 | Condensed Consolidated Statements of Cash Flows Q1 2020 net cash from operating activities decreased to $131.5 million, while $745 million in long-term debt proceeds significantly boosted the company's overall cash position Q1 2020 vs Q1 2019 Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $131,464 | $148,494 | | Net cash provided by (used in) investing activities | $2,694 | $(9,429) | | Net cash provided by (used in) financing activities | $725,151 | $(6,618) | | Net increase in cash | $857,192 | $132,401 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, revenue disaggregation, the pending RentPath acquisition, the $745 million debt incurrence, segment performance, and the emerging impact of the COVID-19 pandemic - The company operates in two segments: North America (U.S. and Canada) and International (Europe, Asia-Pacific, Latin America). Its services, primarily subscription-based, provide information, analytics, and online marketplaces for the commercial real estate industry[25] Disaggregated Revenue by Service (Q1 2020 vs Q1 2019, in thousands) | Service Type | Q1 2020 Revenue | Q1 2019 Revenue | | :--- | :--- | :--- | | CoStar Suite | $164,956 | $147,701 | | Information services | $32,382 | $18,850 | | Multifamily | $137,460 | $114,268 | | Commercial property and land | $57,049 | $47,606 | | Total Revenues | $391,847 | $328,425 | - On February 11, 2020, the company entered into an agreement to acquire RentPath Holdings, Inc. for $588 million in cash, subject to bankruptcy court and regulatory approvals[86][88] - In March 2020, the company borrowed $745 million under its revolving credit facility to fund the pending RentPath acquisition, other potential acquisitions, and for general corporate purposes[115] - The COVID-19 pandemic, declared in March 2020, did not materially affect the Q1 2020 financial statements, but the company acknowledges that future estimates and assumptions may evolve as the situation changes[130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 performance, noting a 19% revenue increase but a 15% net income decline due to increased operating expenses, while addressing the COVID-19 pandemic's impact and the strategic $745 million credit facility draw for the RentPath acquisition - The company is closely monitoring the impact of the COVID-19 pandemic, having shifted to a remote workplace in mid-March 2020. Management anticipates potential negative effects, including decreased new sales, increased customer cancellations, and higher credit losses[138][142] Q1 2020 vs Q1 2019 Performance Summary (in thousands) | Metric | Q1 2020 | Q1 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $391,847 | $328,425 | 19% | | Gross Profit | $312,938 | $257,272 | 22% | | Income from Operations | $75,864 | $93,492 | (19)% | | Net Income | $72,793 | $85,169 | (15)% | - Operating expenses rose significantly, driven by a $22 million increase in marketing spend (primarily for multifamily), a $13 million increase in sales personnel costs, and a $12 million increase in software development personnel costs[185][186] - The company's cash position increased to $1.9 billion, primarily due to a $745 million draw on its revolving credit facility, intended to fund the pending RentPath acquisition and provide financial flexibility amid COVID-19 uncertainty[197][200] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include foreign currency fluctuations, with foreign currency revenues representing approximately 5% of total revenue, and potential impairment of $2.3 billion in goodwill and intangible assets - Revenues denominated in foreign currencies accounted for approximately 5% of total revenue for Q1 2020, where a hypothetical 10% U.S. dollar strengthening would have decreased revenues by about $2 million[213] - As of March 31, 2020, the company had approximately $2.3 billion of goodwill and intangible assets, which are subject to impairment risk if economic conditions or business performance deteriorates[215] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2020, while the company implements a new financial system and monitors COVID-19's impact on internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2020[218] - The company is implementing a new financial system to improve operational and financial accounting processes and is monitoring the effects of the COVID-19 pandemic on its internal controls[219][220] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is involved in incidental litigation but does not anticipate any current proceedings to have a material adverse effect on its financial position or results - Management does not believe any current litigation is likely to have a material adverse effect on the company's financial position or results of operations[222] Item 1A. Risk Factors This section updates risk factors, primarily focusing on the COVID-19 pandemic's evolving risks and its potential material adverse impact on business operations, client demand, collections, and overall financial results - The global spread of COVID-19 is identified as a primary risk factor, creating significant economic volatility, uncertainty, and disruption that could materially adversely impact the business[224] - Specific pandemic-related risks include negative impacts on client demand, business failures among customers, clients' ability to pay, and disruptions to marketing and service delivery due to remote work and health restrictions[224] - The company began to see an increase in customer requests for cancellations or suspensions and a reduction in new sales towards the end of Q1 2020 as a result of the pandemic's economic impact[225] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2020, the company repurchased 45,971 shares of common stock, primarily to satisfy employees' minimum tax withholding obligations from restricted stock grants Issuer Purchases of Equity Securities (Q1 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2020 | 2,002 | $651.69 | | February 2020 | 14,537 | $670.83 | | March 2020 | 29,432 | $639.59 | | Total | 45,971 | $651.52 | Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the Asset Purchase Agreement for RentPath and Sarbanes-Oxley Act certifications from the CEO and CFO - Key exhibits filed with this report include the Asset Purchase Agreement for RentPath Holdings, Inc. and Sarbanes-Oxley Act certifications from the CEO and CFO[236]