Workflow
CoStar Group(CSGP) - 2020 Q2 - Quarterly Report

markdown PART I FINANCIAL INFORMATION [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for CoStar Group, Inc., including statements of operations, comprehensive income, balance sheets, changes in stockholders' equity, and cash flows for the periods ended June 30, 2020 and 2019. It also includes detailed notes explaining the company's organization, significant accounting policies, revenue recognition, credit losses, acquisitions, investments, leases, goodwill, intangible assets, long-term debt, income taxes, commitments, segment reporting, stockholders' equity, and subsequent events [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section provides the condensed consolidated statements of operations, detailing revenues, gross profit, income from operations, and net income for the three and six months ended June 30, 2020 and 2019 Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $397,159 | $343,760 | $789,006 | $672,185 | | Gross profit | $323,119 | $271,842 | $636,057 | $529,114 | | Income from operations| $81,319 | $74,800 | $157,183 | $168,292 | | Net income | $60,360 | $63,248 | $133,153 | $148,417 | | Net income per share - basic | $1.61 | $1.74 | $3.60 | $4.09 | | Net income per share - diluted | $1.60 | $1.73 | $3.57 | $4.06 | - For the three months ended June 30, 2020, revenues increased by **$53.40 million** (15.5%) year-over-year, while net income decreased by **$2.89 million** (4.6%)[11](index=11&type=chunk) - For the six months ended June 30, 2020, revenues increased by **$116.82 million** (17.4%) year-over-year, while net income decreased by **$15.26 million** (10.3%)[11](index=11&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents the condensed consolidated statements of comprehensive income, including net income and other comprehensive income components, for the three and six months ended June 30, 2020 and 2019 Metric (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $60,360 | $63,248 | $133,153 | $148,417 | | Foreign currency translation adjustment | $863 | $(767) | $(12,086) | $(387) | | Unrealized gain on investments | — | — | $189 | — | | Reclassification adjustment for realized loss on investments included in net income | — | — | $541 | — | | Total other comprehensive income (loss) | $863 | $(767) | $(11,356) | $(387) | | Total comprehensive income | $61,223 | $62,481 | $121,797 | $148,030 | - Total comprehensive income for the three months ended June 30, 2020, was **$61.22 million**, a decrease from **$62.48 million** in the prior year period[13](index=13&type=chunk) - For the six months ended June 30, 2020, total comprehensive income was **$121.80 million**, significantly lower than **$148.03 million** in the same period last year, primarily due to a large foreign currency translation adjustment loss[13](index=13&type=chunk) [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides the condensed consolidated balance sheets, detailing assets, liabilities, and stockholders' equity as of June 30, 2020, and December 31, 2019 Metric (in thousands) | June 30, 2020 | December 31, 2019 | :-------------------- | :------------ | :---------------- | | Total current assets | $3,690,648 | $1,199,165 | | Total assets | $6,479,030 | $3,853,986 | | Total current liabilities | $263,365 | $207,056 | | Long-term debt | $745,000 | — | | Total liabilities | $1,254,709 | $448,393 | | Total stockholders' equity | $5,224,321 | $3,405,593 | - Total assets increased significantly to **$6.48 billion** as of June 30, 2020, from **$3.85 billion** at December 31, 2019, driven by a substantial increase in cash, cash equivalents, and restricted cash[17](index=17&type=chunk) - Long-term debt increased to **$745 million** as of June 30, 2020, from zero at December 31, 2019[17](index=17&type=chunk) [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) This section outlines the changes in CoStar's stockholders' equity, including common shares, additional paid-in capital, and retained earnings, from December 31, 2019, to June 30, 2020 Metric (in thousands) | Balance at Dec 31, 2019 | Balance at June 30, 2020 | :-------------------- | :---------------------- | :----------------------- | | Common Shares | 36,668 | 39,383 | | Stock Amount | $366 | $393 | | Additional Paid-In Capital | $2,473,338 | $4,170,242 | | Retained Earnings | $940,474 | $1,073,627 | | Total Stockholders' Equity | $3,405,593 | $5,224,321 | - Total stockholders' equity increased by over **$1.8 billion** from December 31, 2019, to June 30, 2020, primarily due to a **$1.69 billion** increase from an equity offering and net income[19](index=19&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents the condensed consolidated statements of cash flows, detailing net cash provided by or used in operating, investing, and financing activities for the six months ended June 30, 2020 and 2019 Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $248,646 | $233,567 | | Net cash used in investing activities | $(187,025) | $(28,108) | | Net cash provided by (used in) financing activities | $2,416,358 | $(7,653) | | Net increase in cash, cash equivalents and restricted cash | $2,477,674 | $197,396 | | Cash, cash equivalents and restricted cash at end of period | $3,548,405 | $1,297,812 | - Net cash provided by operating activities increased by **$15 million** to **$248.6 million** for the six months ended June 30, 2020, compared to the prior year[26](index=26&type=chunk) - Net cash provided by financing activities saw a significant increase to **$2.42 billion**, primarily due to proceeds from an equity offering and long-term debt, contrasting with a net use of cash in the prior year[26](index=26&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed notes explaining CoStar's organization, significant accounting policies, revenue recognition, credit losses, acquisitions, investments, leases, goodwill, intangible assets, long-term debt, income taxes, commitments, segment reporting, stockholders' equity, and subsequent events [1. ORGANIZATION](index=12&type=section&id=1.%20ORGANIZATION) CoStar Group, Inc. provides information, analytics, online marketplace, and auction services to the commercial real estate and related business community. The company operates in two segments: North America (U.S. and Canada) and International (Europe, Asia-Pacific, Latin America), primarily through subscription-based license agreements - CoStar Group, Inc. offers information, analytics, online marketplace, and auction services for commercial real estate[28](index=28&type=chunk) - Services are primarily subscription-based, with most agreements having a term of at least one year and automatic renewal[28](index=28&type=chunk) - The company operates in two segments: North America (U.S. and Canada) and International (Europe, Asia-Pacific, and Latin America)[28](index=28&type=chunk) [2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=12&type=section&id=2.%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This section outlines CoStar's key accounting policies, including the basis of presentation for its condensed consolidated financial statements, the use of estimates, revenue recognition principles for its subscription-based services, and the accounting for cost of revenues, advertising, foreign currency, income taxes, net income per share, stock-based compensation, allowance for credit losses, leases, long-lived assets, intangible assets, goodwill, debt issuance costs, and business combinations. It also details recently adopted and not-yet-adopted accounting pronouncements - Revenue from subscription-based services is recognized on a straight-line basis over the agreement term, typically a fixed monthly fee[38](index=38&type=chunk) - Sales commissions for new contracts are deferred and amortized as selling and marketing expenses over a three-year benefit period[41](index=41&type=chunk) - The company adopted ASC 326 (CECL model) for credit losses on January 1, 2020, using a modified retrospective approach, which did not result in a material cumulative transition adjustment[59](index=59&type=chunk)[82](index=82&type=chunk) [3. REVENUE FROM CONTRACTS WITH CUSTOMERS](index=21&type=section&id=3.%20REVENUE%20FROM%20CONTRACTS%20WITH%20CUSTOMERS) This note disaggregates CoStar's revenue by operating segment and service type, showing significant growth in North America across all service lines. It also details changes in deferred revenue, contract assets, and commissions expense, and reports on unsatisfied performance obligations Disaggregated Revenue (in thousands) | Service Type | North America (3M Jun 2020) | International (3M Jun 2020) | Total (3M Jun 2020) | North America (3M Jun 2019) | International (3M Jun 2019) | Total (3M Jun 2019) | | :------------- | :-------------------------- | :-------------------------- | :------------------ | :-------------------------- | :-------------------------- | :------------------ | | CoStar Suite | $157,793 | $7,260 | $165,053 | $145,910 | $6,915 | $152,825 | | Info services | $25,022 | $5,514 | $30,536 | $18,659 | $2,118 | $20,777 | | Multifamily | $145,541 | — | $145,541 | $120,488 | — | $120,488 | | Commercial property and land | $56,006 | $23 | $56,029 | $49,505 | $165 | $49,670 | | **Total Revenues** | **$384,362** | **$12,797** | **$397,159** | **$334,562** | **$9,198** | **$343,760** | Commissions Expense (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Commissions incurred | $21,174 | $23,844 | $43,611 | $42,395 | | Commissions capitalized | $(15,599) | $(19,668) | $(32,122) | $(33,397) | | Amortization of deferred commissions costs | $14,915 | $13,143 | $29,662 | $25,550 | | **Total commissions expense** | **$20,490** | **$17,319** | **$41,151** | **$34,548** | - Remaining contract consideration for unsatisfied performance obligations was approximately **$281 million** at June 30, 2020, expected to be recognized over the next five years[90](index=90&type=chunk) [4. ALLOWANCE FOR CREDIT LOSSES](index=22&type=section&id=4.%20ALLOWANCE%20FOR%20CREDIT%20LOSSES) This section details the activity in the allowance for credit losses for trade receivables, disaggregated by portfolio segment. The total allowance increased significantly from December 31, 2019, to June 30, 2020, primarily due to a higher current-period provision for expected credit losses Allowance for Credit Losses Activity (in thousands) | Portfolio Segment | Beginning Balance (Dec 31, 2019) | Current-Period Provision (Six Months Ended Jun 30, 2020) | Write-offs, net of recoveries | Ending Balance (Jun 30, 2020) | | :---------------- | :------------------------------- | :------------------------------------------------------- | :---------------------------- | :---------------------------- | | CoStar Suite | $1,264 | $7,046 | $(3,450) | $4,860 | | Information services | $624 | $2,975 | $(76) | $3,523 | | Multifamily | $1,195 | $3,677 | $(2,152) | $2,720 | | Commercial property and land | $1,465 | $1,990 | $(1,195) | $2,260 | | **Total** | **$4,548** | **$15,688** | **$(6,873)** | **$13,363** | - The total allowance for credit losses increased from **$4.5 million** at December 31, 2019, to **$13.4 million** at June 30, 2020[91](index=91&type=chunk) - The current-period provision for expected credit losses for the six months ended June 30, 2020, was **$15.7 million**, reflecting increased expectations of delinquent trade receivables due to the COVID-19 pandemic[91](index=91&type=chunk)[220](index=220&type=chunk)[234](index=234&type=chunk) [5. ACQUISITIONS](index=23&type=section&id=5.%20ACQUISITIONS) This note details CoStar's acquisition activities, including the completed acquisition of Ten-X for $187 million in cash, the pending acquisition of RentPath for $588 million (subject to regulatory approvals), and the completed acquisition of STR for $435 million. It also mentions the acquisition of Off Campus Partners for $16 million and provides unaudited pro forma financial information for the combined entities - Acquired Ten-X Holding Company, Inc. on June 24, 2020, for **$187 million** in cash, aiming to create an end-to-end commercial real estate platform by combining with LoopNet[93](index=93&type=chunk) Ten-X Preliminary Purchase Price Allocation (in thousands) | Asset/Liability | Preliminary Fair Value (June 24, 2020) | | :---------------- | :------------------------------------- | | Cash and cash equivalents | $3,290 | | Accounts receivable | $131 | | Lease right-of-use assets | $4,945 | | Goodwill | $135,446 | | Intangible assets | $58,000 | | Lease liabilities | $(4,945) | | Deferred tax liabilities | $(4,810) | | Other assets and liabilities | $(4,697) | | **Fair value of identifiable net assets acquired** | **$187,360** | - Pending acquisition of RentPath Holdings, Inc. for **$588 million** in cash, with the transaction expected to close on or before February 12, 2021, subject to antitrust and bankruptcy approvals. A **$59 million** break fee is held in escrow[99](index=99&type=chunk)[182](index=182&type=chunk)[246](index=246&type=chunk) - Acquired STR for **$435 million** on October 22, 2019, to provide benchmarking and analytics for the hospitality industry, with **$262 million** recorded as goodwill[100](index=100&type=chunk)[105](index=105&type=chunk) Unaudited Pro Forma Financial Information (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $406,107 | $375,999 | $810,745 | $725,691 | | Net income | $50,373 | $56,730 | $120,240 | $128,270 | | Net income per share - basic | $1.34 | $1.56 | $3.25 | $3.53 | | Net income per share - diluted | $1.34 | $1.55 | $3.22 | $3.51 | [6. INVESTMENTS AND FAIR VALUE MEASUREMENTS](index=27&type=section&id=6.%20INVESTMENTS%20AND%20FAIR%20VALUE%20MEASUREMENTS) This note describes the company's financial assets and their fair value measurements, categorized into a three-tier hierarchy. As of June 30, 2020, the company's financial assets primarily consisted of Level 1 cash equivalents. The company sold its auction rate securities (ARS) during the six months ended June 30, 2020, recognizing a realized loss - As of June 30, 2020, financial assets primarily comprised Level 1 cash equivalents totaling **$3.25 billion**[113](index=113&type=chunk) - During the six months ended June 30, 2020, the company sold its auction rate securities (ARS) for **$10.3 million**, realizing a loss of **$0.5 million**[114](index=114&type=chunk) Investments and Fair Value Measurements (in thousands) as of December 31, 2019 | Category | Amortized Cost | Gross Unrealized Losses | Fair Value | Level 1 | Level 3 | | :--------- | :------------- | :---------------------- | :--------- | :------ | :------ | | Cash equivalents | $576,761 | — | $576,761 | $576,761| — | | Auction rate securities | $10,800 | $(730) | $10,070 | — | $10,070 | | **Total** | **$587,561** | **$(730)** | **$586,831** | **$576,761** | **$10,070** | [7. LEASES](index=29&type=section&id=7.%20LEASES) This note details CoStar's operating leases for office facilities, data centers, and vehicles, with remaining terms up to nine years. It provides a breakdown of operating lease costs by expense category and supplemental balance sheet and cash flow information related to leases, including the present value of lease liabilities Operating Lease Costs (in thousands) | Expense Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenues | $2,846 | $3,152 | $5,740 | $6,390 | | Software development | $1,388 | $1,027 | $2,784 | $1,979 | | Selling and marketing | $2,550 | $2,179 | $5,089 | $4,370 | | General and administrative | $1,176 | $950 | $2,350 | $1,242 | | **Total operating lease costs** | **$7,960** | **$7,308** | **$15,963** | **$13,981** | - Long-term lease liabilities were **$112.48 million** as of June 30, 2020, with a weighted-average remaining lease term of 4.5 years and a weighted-average discount rate of 3.8%[119](index=119&type=chunk) Maturities of Operating Lease Liabilities (in thousands) at June 30, 2020 | Period | Amount | | :------- | :----- | | Remainder of 2020 | $18,935 | | 2021 | $34,477 | | 2022 | $32,930 | | 2023 | $31,433 | | 2024 | $25,754 | | Thereafter | $13,041 | | **Total lease payments** | **$156,570** | | Less imputed interest | $(13,183) | | **Present value of lease liabilities** | **$143,387** | [8. GOODWILL](index=30&type=section&id=8.%20GOODWILL) This note outlines the changes in the carrying amount of goodwill by operating segment. Goodwill increased significantly due to acquisitions, particularly Ten-X and STR, with no impairment recognized during the reported periods Changes in Goodwill by Operating Segment (in thousands) | Metric | North America (Dec 31, 2019) | International (Dec 31, 2019) | Total (Dec 31, 2019) | North America (Jun 30, 2020) | International (Jun 30, 2020) | Total (Jun 30, 2020) | | :------- | :--------------------------- | :--------------------------- | :------------------- | :--------------------------- | :--------------------------- | :------------------- | | Goodwill, beginning balance | $1,738,360 | $143,660 | $1,882,020 | $1,738,360 | $143,660 | $1,882,020 | | Acquisitions, including measurement period adjustments | $135,765 | $113 | $135,878 | $135,765 | $113 | $135,878 | | Effect of foreign currency translation | — | $(8,781) | $(8,781) | — | $(8,781) | $(8,781) | | **Goodwill, ending balance** | **$1,874,125** | **$134,992** | **$2,009,117** | **$1,874,125** | **$134,992** | **$2,009,117** | - Goodwill increased by **$135.9 million** to **$2.01 billion** at June 30, 2020, primarily due to the Ten-X acquisition (**$135 million**)[123](index=123&type=chunk)[124](index=124&type=chunk) - No impairments of goodwill were recognized during the three and six months ended June 30, 2020 and 2019[125](index=125&type=chunk) [9. INTANGIBLE ASSETS](index=31&type=section&id=9.%20INTANGIBLE%20ASSETS) This note provides a breakdown of CoStar's intangible assets, including acquired technology and data, customer base, and trade names. The net value of intangible assets increased from December 31, 2019, to June 30, 2020, with no impairments recognized Intangible Assets, Net (in thousands) | Intangible Asset Category | June 30, 2020 | December 31, 2019 | Amortization Period (in years) | | :------------------------ | :------------ | :---------------- | :----------------------------- | | Acquired technology and data, net | $22,523 | $14,626 | 5 | | Acquired customer base, net | $271,264 | $254,330 | 11 | | Acquired trade names and other intangible assets, net | $143,763 | $152,240 | 12 | | **Intangible assets, net** | **$437,550** | **$421,196** | | - Net intangible assets increased by **$16.35 million** to **$437.55 million** at June 30, 2020, from **$421.20 million** at December 31, 2019[128](index=128&type=chunk) - No impairments of intangible assets were recognized during the three and six months ended June 30, 2020 and 2019[128](index=128&type=chunk) [10. LONG-TERM DEBT](index=31&type=section&id=10.%20LONG-TERM%20DEBT) This note details CoStar's long-term debt, including the $745 million borrowed under its revolving credit facility as of June 30, 2020. It also outlines the terms of the 2017 Credit Agreement, which was subsequently amended and restated by the 2020 Credit Agreement in July 2020, and provides a breakdown of interest expense - The company had **$745 million** of debt outstanding at June 30, 2020, borrowed under its **$750 million** revolving credit facility, with a weighted average interest rate of 2.2%[130](index=130&type=chunk)[135](index=135&type=chunk) - The 2017 Credit Agreement, under which the debt was outstanding, required maintaining specific leverage ratios and included restrictive covenants[134](index=134&type=chunk) Total Interest Expense (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest on outstanding borrowings | $4,233 | — | $4,509 | — | | Amortization of debt issuance costs | $216 | $219 | $508 | $438 | | Commitment fees and other | $37 | $478 | $641 | $991 | | **Total interest expense** | **$4,486** | **$697** | **$5,658** | **$1,429** | [11. INCOME TAXES](index=32&type=section&id=11.%20INCOME%20TAXES) This note provides information on CoStar's income tax provision and effective tax rates. The effective tax rate for the six months ended June 30, 2020, decreased primarily due to lower income before income taxes and increased excess tax benefits, while the three-month rate increased due to lower excess tax benefits - The effective tax rate was approximately **22%** for Q2 2020 (vs. **21%** in Q2 2019) and **14%** for H1 2020 (vs. **16%** in H1 2019)[137](index=137&type=chunk) - The decrease in the effective tax rate for the six months ended June 30, 2020, was primarily due to lower income before income taxes and an increase in excess tax benefits[137](index=137&type=chunk) - The CARES Act did not have a material impact on the condensed consolidated financial statements for the six months ended June 30, 2020[138](index=138&type=chunk) [12. COMMITMENTS AND CONTINGENCIES](index=32&type=section&id=12.%20COMMITMENTS%20AND%20CONTINGENCIES) This note addresses CoStar's commitments, primarily related to non-cancelable operating leases, and contingencies, including ongoing litigation. Management believes that the resolution of current litigation matters is not expected to materially affect the company's financial position or results of operations - The company leases office facilities under various non-cancelable operating leases[139](index=139&type=chunk) - CoStar is involved in litigation incidental to its business but does not expect these matters to have a material adverse effect on its financial position or results of operations[140](index=140&type=chunk) [13. SEGMENT REPORTING](index=33&type=section&id=13.%20SEGMENT%20REPORTING) This note provides financial information by CoStar's two operating segments: North America and International. It presents summarized EBITDA, property and equipment, goodwill, assets, and liabilities for each segment, highlighting North America's significant contribution to revenue and EBITDA Summarized EBITDA by Operating Segment (in thousands) | Segment | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :-------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $112,292 | $95,001 | $214,705 | $210,269 | | International | $(2,994) | $(1,447) | $(5,287) | $(3,564) | | **Total EBITDA** | **$109,298** | **$93,554** | **$209,418** | **$206,705** | Summarized Assets and Liabilities by Operating Segment (in thousands) | Metric | North America (2020) | International (2020) | Total (2020) | North America (2019) | International (2019) | Total (2019) | | :------- | :------------------- | :------------------- | :----------- | :------------------- | :------------------- | :----------- | | Goodwill | $1,874,125 | $134,992 | $2,009,117 | $1,738,360 | $143,660 | $1,882,020 | | Assets | $6,260,750 | $218,280 | $6,479,030 | $3,615,258 | $238,728 | $3,853,986 | | Liabilities | $1,208,740 | $45,969 | $1,254,709 | $402,759 | $45,634 | $448,393 | - North America revenues increased to **$384 million** for Q2 2020 (from **$335 million** in Q2 2019), primarily due to multifamily and CoStar Suite growth. International revenues increased to **$13 million** (from **$9 million**), mainly due to the STR acquisition[225](index=225&type=chunk) [14. STOCKHOLDERS' EQUITY](index=34&type=section&id=14.%20STOCKHOLDERS'%20EQUITY) This note discusses the company's equity offering completed in May 2020, which generated approximately $1.7 billion in net proceeds. These proceeds are intended to fund strategic acquisitions, business growth, working capital, and other general corporate purposes - On May 28, 2020, CoStar completed a public equity offering of 2,633,587 shares of common stock at **$655** per share, generating approximately **$1.7 billion** in net proceeds[146](index=146&type=chunk) - The net proceeds are intended for strategic acquisitions, business growth, working capital, and other general corporate purposes, including debt repayment and securities repurchase[146](index=146&type=chunk) [15. SUBSEQUENT EVENTS](index=34&type=section&id=15.%20SUBSEQUENT%20EVENTS) This note details significant events occurring after June 30, 2020, including the issuance of $1.0 billion in 2.800% Senior Notes due 2030 and the entry into a new $750 million revolving credit facility (2020 Credit Agreement). Proceeds from the Senior Notes were used to repay existing debt and will fund future acquisitions and corporate purposes - On July 1, 2020, CoStar issued **$1.0 billion** aggregate principal amount of 2.800% Senior Notes due July 15, 2030[148](index=148&type=chunk) - Proceeds from the Senior Notes were used to repay outstanding borrowings under the 2017 Credit Agreement and will be used for strategic acquisitions, business growth, and general corporate purposes[150](index=150&type=chunk) - On July 1, 2020, the company also entered into the 2020 Credit Agreement, providing a new **$750 million** revolving credit facility with a five-year term, replacing the 2017 Credit Agreement[151](index=151&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=37&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on CoStar's financial condition and results of operations, including an overview of its business, the impact of the COVID-19 pandemic, details on service offerings, development and investment strategies, and a comparison of financial results for the three and six months ended June 30, 2020, versus 2019. It also discusses liquidity, critical accounting policies, and forward-looking statements [Overview](index=37&type=section&id=Overview) CoStar Group, Inc. is a leading provider of information, analytics, and online marketplaces for the commercial real estate industry in the U.S. and U.K. The company's services span various property types and are primarily offered through subscription-based license agreements. Key brands include CoStar, LoopNet, Apartments.com, STR, Ten-X, BizBuySell, and LandsofAmerica - CoStar is the leading provider of information, analytics, and online marketplaces for commercial real estate in the U.S. and U.K[156](index=156&type=chunk) - Services are typically distributed under subscription-based license agreements, mostly with terms of at least one year and automatic renewal[157](index=157&type=chunk) - Primary brands include CoStar, LoopNet, Apartments.com, STR, Ten-X, BizBuySell, and LandsofAmerica, covering various commercial property types[158](index=158&type=chunk) [Impact of the COVID-19 Pandemic](index=37&type=section&id=Impact%20of%20the%20COVID-19%20Pandemic) The COVID-19 pandemic did not materially affect CoStar's financial statements for the three and six months ended June 30, 2020, but the company is closely monitoring its evolving impact. Operations shifted to a remote workplace, and cost management steps were implemented. While near-term revenues are predictable, future effects may include decreased new sales and increased cancellations, leading to a higher allowance for credit losses - The COVID-19 pandemic did not materially affect the company's condensed consolidated financial statements for the three and six months ended June 30, 2020[159](index=159&type=chunk) - The company shifted to a digital, remote workplace in mid-March 2020 and implemented cost management measures, including minimizing hiring and restricting business travel[161](index=161&type=chunk)[162](index=162&type=chunk) - An increase in customer requests for cancellations and suspensions was observed from late Q1 through May 2020, and the allowance for credit loss was increased due to higher credit risk[164](index=164&type=chunk) [Service Offerings](index=38&type=section&id=Service%20Offerings) CoStar's principal service offerings include Information and Analytics (CoStar Suite, CoStar Real Estate Manager, STR) and Online Marketplaces (Apartments.com, LoopNet, BizBuySell, Land.com). While Multifamily sales remained strong, CoStar Suite and CoStar Real Estate Manager experienced declining growth rates, and LoopNet sales volumes declined in early Q2 2020 due to COVID-19, though cancellations later returned to pre-pandemic levels - CoStar Suite revenue growth is anticipated to decline through the end of the year due to a sales force shift to LoopNet Signature Ads and COVID-19 impacts[167](index=167&type=chunk) - CoStar Real Estate Manager's growth rates declined in H1 2020 as demand for new lease accounting compliance eased and economic conditions caused delays in new service implementations[168](index=168&type=chunk) - STR's revenue growth rates are impacted by the severe effects of COVID-19 on the hospitality industry, particularly a decline in ad hoc transaction fees[169](index=169&type=chunk) - Multifamily sales (Apartments.com network) were not adversely impacted by COVID-19 in H1 2020[170](index=170&type=chunk) - LoopNet.com sales volumes declined from late March through May 2020 due to COVID-19, but cancellations returned to pre-pandemic levels in June 2020[173](index=173&type=chunk) - Net bookings of subscription-based services were approximately **$35 million** for the six months ended June 30, 2020, down from **$59 million** in the prior year[174](index=174&type=chunk) - Contract renewal rates for existing CoStar subscription services on annual contracts were approximately **89%** for the six months ended June 30, 2020, a slight decrease from **90%** in the prior year[175](index=175&type=chunk) [Development, Investments and Expansion](index=40&type=section&id=Development,%20Investments%20and%20Expansion) CoStar plans continued investment in its business, services, and strategic growth opportunities for the second half of 2020, focusing on integrating recent acquisitions (STR, Ten-X), enhancing LoopNet and CoStar Suite, and developing Apartments.com digital rental services. The company recently strengthened its liquidity through a $1.7 billion equity offering and a $1.0 billion Senior Notes issuance, along with a new $750 million revolving credit facility, to support growth and future acquisitions - Key priorities for H2 2020 include integrating STR and Ten-X, enhancing LoopNet with premium listings, expanding CoStar Suite in Europe, and developing Apartments.com digital rental services[177](index=177&type=chunk)[178](index=178&type=chunk)[179](index=179&type=chunk)[181](index=181&type=chunk) - A public equity offering in May 2020 generated approximately **$1.7 billion** in net proceeds for strategic acquisitions, business growth, and general corporate purposes[183](index=183&type=chunk) - On July 1, 2020, CoStar issued **$1.0 billion** in Senior Notes and entered into a new **$750 million** revolving credit facility, using proceeds to repay existing debt and fund future growth and acquisitions[184](index=184&type=chunk)[185](index=185&type=chunk) [Non-GAAP Financial Measures](index=42&type=section&id=Non-GAAP%20Financial%20Measures) CoStar uses non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, and non-GAAP net income per diluted share to supplement GAAP results. These measures exclude items like amortization of acquired intangibles, stock-based compensation, and acquisition-related costs to provide additional insight into the company's core operating performance, despite their limitations as non-GAAP metrics - Non-GAAP measures include EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, and non-GAAP net income per diluted share[189](index=189&type=chunk) - These measures exclude items such as amortization of acquired intangible assets, depreciation, stock-based compensation, and acquisition- and integration-related costs to provide a clearer view of operating performance[193](index=193&type=chunk)[194](index=194&type=chunk)[195](index=195&type=chunk)[196](index=196&type=chunk)[200](index=200&type=chunk)[203](index=203&type=chunk) Reconciliation of Net Income to EBITDA (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $60,360 | $63,248 | $133,153 | $148,417 | | Amortization of acquired intangible assets in cost of revenues | $6,054 | $5,033 | $12,059 | $10,546 | | Amortization of acquired intangible assets in operating expenses | $14,935 | $7,175 | $26,419 | $14,857 | | Depreciation and other amortization | $6,990 | $6,546 | $13,757 | $13,010 | | Interest expense (income) | $3,596 | $(4,678) | $1,945 | $(8,890) | | Other expense (income) | $474 | $(538) | $(367) | $(539) | | Income tax expense | $16,889 | $16,768 | $22,452 | $29,304 | | **EBITDA** | **$109,298** | **$93,554** | **$209,418** | **$206,705** | [Comparison of Three Months Ended June 30, 2020 and Three Months Ended June 30, 2019](index=46&type=section&id=Comparison%20of%20Three%20Months%20Ended%20June%2030,%202020%20and%20Three%20Months%20Ended%20June%2030,%202019) For the three months ended June 30, 2020, CoStar reported a 16% increase in total revenues to $397 million, driven by growth in multifamily, CoStar Suite, information services (including STR acquisition), and commercial property and land. Gross profit increased by 19%, but net income decreased by 5% due to higher operating expenses, particularly in selling and marketing, software development, general and administrative (including credit loss expense), and customer base amortization Consolidated Results of Operations (in thousands) | Metric | 2020 | 2019 | Increase (Decrease) ($) | Increase (Decrease) (%) | | :------- | :--- | :--- | :---------------------- | :---------------------- | | Revenues | $397,159 | $343,760 | $53,399 | 16 % | | Cost of revenues | $74,040 | $71,918 | $2,122 | 3 % | | Gross profit | $323,119 | $271,842 | $51,277 | 19 % | | Selling and marketing | $130,461 | $119,075 | $11,386 | 10 % | | Software development | $39,001 | $28,455 | $10,546 | 37 % | | General and administrative | $57,403 | $42,337 | $15,066 | 36 % | | Customer base amortization | $14,935 | $7,175 | $7,760 | NM | | Income from operations | $81,319 | $74,800 | $6,519 | 9 % | | Net income | $60,360 | $63,248 | $(2,888) | (5) % | - Multifamily revenue increased by **$25 million** (21%), CoStar Suite by **$12 million** (8%), Information services by **$10 million** (47%), and Commercial property and land by **$6 million** (13%)[214](index=214&type=chunk) - General and administrative expenses increased by **$15 million**, primarily due to a **$6 million** increase in credit loss expense related to the COVID-19 pandemic and a **$4 million** increase in personnel costs from the STR acquisition[220](index=220&type=chunk) [Comparison of Business Segment Results for Three Months Ended June 30, 2020 and Three Months Ended June 30, 2019](index=47&type=section&id=Comparison%20of%20Business%20Segment%20Results%20for%20Three%20Months%20Ended%20June%2030,%202020%20and%20Three%20Months%20Ended%20June%2030,%202019) In Q2 2020, North America revenues increased to $384 million, driven by multifamily, CoStar Suite, and LoopNet growth, contributing to a $112 million EBITDA. International revenues rose to $13 million, primarily due to the STR acquisition, but its EBITDA remained a loss of $3 million due to increased personnel and administrative costs - North America revenues increased to **$384 million** (from **$335 million** in Q2 2019), primarily due to a **$25 million** increase in multifamily revenues and a **$12 million** increase in CoStar Suite revenues[225](index=225&type=chunk) - International revenues increased to **$13 million** (from **$9 million** in Q2 2019), primarily due to the acquisition of STR[225](index=225&type=chunk) - North America EBITDA increased to **$112 million** (from **$95 million** in Q2 2019), while International EBITDA was a loss of **$3 million** (compared to a **$1 million** loss in Q2 2019) due to increased costs from the STR acquisition[227](index=227&type=chunk) [Comparison of Six Months Ended June 30, 2020 and Six Months Ended June 30, 2019](index=49&type=section&id=Comparison%20of%20Six%20Months%20Ended%20June%2030,%202020%20and%20Six%20Months%20Ended%20June%2030,%202019) For the six months ended June 30, 2020, total revenues increased by 17% to $789 million, primarily from multifamily, CoStar Suite, and information services (including STR). Gross profit grew by 20%. However, net income decreased by 10% due to significant increases in operating expenses, including selling and marketing, software development, general and administrative (with higher credit loss expense), and customer base amortization Consolidated Results of Operations (in thousands) | Metric | 2020 | 2019 | Increase (Decrease) ($) | Increase (Decrease) (%) | | :------- | :--- | :--- | :---------------------- | :---------------------- | | Revenues | $789,006 | $672,185 | $116,821 | 17 % | | Cost of revenues | $152,949 | $143,071 | $9,878 | 7 % | | Gross profit | $636,057 | $529,114 | $106,943 | 20 % | | Selling and marketing | $255,568 | $207,169 | $48,399 | 23 % | | Software development | $80,611 | $56,383 | $24,228 | 43 % | | General and administrative | $116,276 | $82,413 | $33,863 | 41 % | | Customer base amortization | $26,419 | $14,857 | $11,562 | 78 % | | Income from operations | $157,183 | $168,292 | $(11,109) | (7) % | | Net income | $133,153 | $148,417 | $(15,264) | (10) % | - Multifamily revenue increased by **$48 million** (21%), CoStar Suite by **$29 million** (10%), Information services by **$23 million** (59%), and Commercial property and land by **$16 million** (13%)[229](index=229&type=chunk) - General and administrative expenses increased by **$34 million**, primarily due to a **$14 million** increase in personnel costs (including **$9 million** from STR acquisition) and a **$10 million** increase in credit loss expense[234](index=234&type=chunk) [Comparison of Business Segment Results for Six Months Ended June 30, 2020 and Six Months Ended June 30, 2019](index=50&type=section&id=Comparison%20of%20Business%20Segment%20Results%20for%20Six%20Months%20Ended%20June%2030,%202020%20and%20Six%20Months%20Ended%20June%2030,%202019) For the six months ended June 30, 2020, North America revenues increased to $762 million, driven by strong growth in multifamily, CoStar Suite, and LoopNet, leading to a $215 million EBITDA. International revenues increased to $27 million, mainly due to the STR acquisition and subscription service growth, but its EBITDA showed a larger loss of $5 million due to increased costs - North America revenues increased to **$762 million** (from **$654 million** in H1 2019), primarily due to a **$48 million** increase in multifamily revenues and a **$28 million** increase in CoStar Suite revenues[239](index=239&type=chunk) - International revenues increased to **$27 million** (from **$18 million** in H1 2019), primarily due to the STR acquisition and growth in subscription-based services[239](index=239&type=chunk) - North America EBITDA increased to **$215 million** (from **$210 million** in H1 2019), while International EBITDA decreased to a loss of **$5 million** (from a **$4 million** loss in H1 2019) due to increased personnel and general and administrative costs[240](index=240&type=chunk) [Liquidity and Capital Resources](index=51&type=section&id=Liquidity%20and%20Capital%20Resources) CoStar's liquidity significantly increased, with cash and cash equivalents rising to $3.5 billion as of June 30, 2020, primarily from a $1.7 billion equity offering and $745 million in revolving credit facility borrowings. Operating cash flow also increased. The company deferred $21 million in income tax payments and payroll taxes under the CARES Act. Future capital needs depend on operations, acquisitions, and the ongoing impact of COVID-19 - Total cash and cash equivalents increased to approximately **$3.5 billion** as of June 30, 2020, from **$1.1 billion** at December 31, 2019[242](index=242&type=chunk) - The increase was primarily driven by **$1.7 billion** from an equity offering and **$745 million** from revolving credit facility borrowings[242](index=242&type=chunk) - Net cash provided by operating activities increased by **$15 million** to **$249 million** for the six months ended June 30, 2020, compared to the prior year[243](index=243&type=chunk) - The company deferred approximately **$21 million** in income tax payments and is deferring payroll taxes under the CARES Act[250](index=250&type=chunk) [Critical Accounting Policies](index=52&type=section&id=Critical%20Accounting%20Policies) CoStar identifies several critical accounting policies that involve significant management estimates and assumptions, including those related to long-lived assets, intangible assets, goodwill, revenue recognition, income taxes, and business combinations. These policies are crucial due to their dependence on uncertain future events and the potential for material impact on financial statements - Critical accounting policies include those for long-lived assets, intangible assets, goodwill, revenue recognition, income taxes, and business combinations[252](index=252&type=chunk) - These policies require significant management estimates and assumptions about highly uncertain matters, which could materially impact financial condition and results of operations[252](index=252&type=chunk) [Recent Accounting Pronouncements](index=52&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to Note 2 for details on recently adopted and not-yet-adopted accounting pronouncements. The company adopted ASU 2019-12 (Simplifying Income Taxes) and ASU 2018-15 (Cloud Computing Implementation Costs) on January 1, 2020, with no material impact. It also adopted ASU 2016-13 (Credit Losses) using the modified retrospective method, also with no material impact. The company is currently evaluating ASU 2020-04 (Reference Rate Reform) - Adopted ASU 2019-12 (Simplifying Income Taxes) and ASU 2018-15 (Cloud Computing Implementation Costs) on January 1, 2020, with no material impact[79](index=79&type=chunk)[81](index=81&type=chunk) - Adopted ASU 2016-13 (Credit Losses) on January 1, 2020, using the modified retrospective method, which did not result in a material cumulative transition adjustment[82](index=82&type=chunk) - Currently evaluating ASU 2020-04 (Reference Rate Reform), effective for fiscal years beginning after January 1, 2021, for its potential impact[83](index=83&type=chunk) [Cautionary Statement Concerning Forward-Looking Statements](index=52&type=section&id=Cautionary%20Statement%20Concerning%20Forward-Looking%20Statements) This section highlights that the report contains forward-looking statements subject to various risks and uncertainties, including the ongoing impact of the COVID-19 pandemic, commercial real estate market conditions, acquisition integration, and regulatory approvals. Readers are cautioned not to place undue reliance on these statements, which are estimates and not guarantees of future performance, and the company assumes no obligation to update them - The report contains forward-looking statements regarding financial outlook, operations, acquisitions, and market conditions, which are subject to risks and uncertainties[254](index=254&type=chunk)[256](index=256&type=chunk) - Key risks include the length and severity of the COVID-19 pandemic, its impact on the economy and credit markets, and the success of acquisition integrations (e.g., RentPath)[256](index=256&type=chunk) - Readers should not place undue reliance on these statements, as actual results could differ materially, and the company does not undertake to update them[256](index=256&type=chunk)[258](index=258&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=55&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) CoStar is exposed to market risks primarily from foreign currency fluctuations (British Pound, Canadian dollar, Euro) and interest rate changes on its variable-rate debt. While foreign currency translation adjustments resulted in a $20 million loss, the company does not currently hedge these exposures. Interest rate risk is associated with its $750 million revolving credit facility, where a 0.125% rate change could impact interest expense by $1.0 million annually. The company also monitors the recoverability of its $2.4 billion in goodwill and intangible assets - Revenues denominated in foreign currencies (British Pound, Canadian dollar, Euro) were approximately **4%** and **5%** of total revenue for the three and six months ended June 30, 2020, respectively[261](index=261&type=chunk) - A **10%** strengthening of the U.S. dollar would have decreased revenues by approximately **$2 million** and **$4 million** for the three and six months ended June 30, 2020, respectively[261](index=261&type=chunk) - As of June 30, 2020, accumulated other comprehensive loss included a **$20 million** loss from foreign currency translation adjustments[261](index=261&type=chunk) - The company has interest rate market risk related to its **$750 million** revolving credit facility; a **0.125%** change in interest rates could impact annual interest expense by approximately **$1.0 million** if fully drawn[262](index=262&type=chunk) - CoStar had approximately **$2.4 billion** in goodwill and intangible assets as of June 30, 2020, and continuously monitors their recoverability, especially given economic changes from COVID-19[263](index=263&type=chunk) [Item 4. Controls and Procedures](index=56&type=section&id=Item%204.%20Controls%20and%20Procedures) CoStar's management, including the CEO and CFO, evaluated the effectiveness of its disclosure controls and procedures as of June 30, 2020, concluding they were effective at a reasonable assurance level. The company is also implementing a new financial system to enhance operational and financial accounting processes and internal controls, with no material changes to internal control over financial reporting noted during the quarter, apart from this ongoing implementation - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of June 30, 2020[266](index=266&type=chunk) - The company is implementing a new financial system to improve efficiency and effectiveness of operational and financial accounting processes, which is expected to enhance internal controls[267](index=267&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter, other than the ongoing financial system implementation[268](index=268&type=chunk) PART II OTHER INFORMATION [Item 1. Legal Proceedings](index=57&type=section&id=Item%201.%20Legal%20Proceedings) CoStar is involved in routine litigation incidental to its business. Management, after consulting legal counsel, believes that none of these current legal proceedings are likely to have a material adverse effect on the company's financial position or results of operations - The company is involved in litigation incidental to its business[270](index=270&type=chunk) - Management does not expect current legal proceedings to have a material adverse effect on financial position or results of operations[270](index=270&type=chunk) [Item 1A. Risk Factors](index=57&type=section&id=Item%201A.%20Risk%20Factors) This section updates the risk factors, emphasizing the material adverse impact of the COVID-19 pandemic on CoStar's business, operations, and financial condition, including potential decreases in new sales and increased cancellations. It also highlights risks associated with the company's significant indebtedness, including restrictive covenants, variable interest rates (LIBOR transition), and the potential for credit rating downgrades - The COVID-19 pandemic has created significant economic volatility and uncertainty, with potential for material adverse impacts on CoStar's business, including decreased new customer sales and increased cancellations[272](index=272&type=chunk)[273](index=273&type=chunk) - CoStar has significant indebtedness, with approximately **$1 billion** in Senior Notes and **$750 million** available under the 2020 Credit Agreement as of July 1, 2020[277](index=277&type=chunk) - The 2020 Credit Agreement contains restrictive covenants, including a total net leverage ratio not exceeding **4.50 to 1.00**, which could limit business flexibility[278](index=278&type=chunk)[279](index=279&type=chunk) - Borrowings under the 2020 Credit Agreement carry variable interest rates based on LIBOR, which is subject to reform and potential discontinuance, posing a risk of increased borrowing costs[281](index=281&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=60&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section summarizes the company's repurchases of common stock during the quarter ended June 30, 2020. These repurchases were primarily shares tendered by employees to satisfy tax withholding obligations related to restricted stock vesting and were not part of a publicly announced buyback program Issuer Purchases of Equity Securities (Quarter Ended June 30, 2020) | Month, 2020 | Total Number of Shares Purchased | Average Price Paid per Share | | :------------ | :------------------------------- | :--------------------------- | | April 1 through April 30 | 368 | $562.99 | | May 1 through May 31 | 4,621 | $662.97 | | June 1 through June 30 | 246 | $664.15 | | **Total** | **5,235** | **$659.39** | - The shares purchased were tendered by employees to satisfy minimum tax withholding obligations from restricted stock vesting and were not part of a publicly announced repurchase program[287](index=287&type=chunk) [Item 3. Defaults Upon Senior Securities](index=60&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period [Item 4. Mine Safety Disclosures](index=60&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company [Item 5. Other Information](index=60&type=section&id=Item%205.%20Other%20Information) The company reported no other information for this period [Item 6. Exhibits](index=61&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including organizational documents, indenture for Senior Notes, merger agreements, credit agreements, certifications, and XBRL documents - Exhibits include the Third Amended and Restated Certificate of Incorporation and By-Laws[292](index=292&type=chunk) - Key agreements filed are the Indenture for **2.800%** Senior Notes due 2030, the Agreement and Plan of Merger for Ten-X, and the Second Amended and Restated Credit Agreement[292](index=292&type=chunk) - Certifications from the Principal Executive Officer and Principal Financial Officer (Sarbanes-Oxley Act Sections 302 and 906) are included[292](index=292&type=chunk) [Signatures](index=62&type=section&id=Signatures) This section contains the required signatures for the Form 10-Q, confirming its submission on behalf of CoStar Group, Inc. by its Chief Financial Officer, Scott T. Wheeler, on July 29, 2020 - The report was signed by Scott T. Wheeler, Chief Financial Officer, on July 29, 2020[297](index=297&type=chunk)