NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
CoStar Group, Inc. (the “Company” or “CoStar”) provides information, analytics and online marketplace services to the commercial real estate and related business community through its comprehensive, proprietary database of commercial real estate information covering the United States (“U.S.”), the United Kingdom (“U.K.”) and parts of Canada, Spain, Germany and France. The Company provides online marketplaces for commercial real estate, apartment rentals, lands for sale and businesses for sale. The Company operates within two operating segments, North America and International, and its services are typically distributed to its clients under subscription-based license agreements that renew automatically, a majority of which have a term of at least one year.
|
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Accounting policies are consistent for each operating segment.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. In the opinion of the Company’s management, the financial statements reflect all adjustments, consisting only of a normal recurring nature, necessary to present fairly the Company’s financial position at September 30, 2019 and December 31, 2018, the results of its operations for the three and nine months ended September 30, 2019 and 2018, its comprehensive income for the three and nine months ended September 30, 2019 and 2018, its changes in stockholders' equity for the three and nine months ended September 30, 2019 and 2018, and its cash flows for the nine months ended September 30, 2019 and 2018.
Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, the useful lives and recoverability of long-lived and intangible assets, and goodwill; income taxes, the fair value of auction rate securities, accounting for business combinations, stock-based compensation, estimating the Company's incremental borrowing rate for its leases, and contingencies, among others. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses. Actual results could differ from these estimates.
Revenue Recognition
The Company derives revenues primarily by (i) providing access to its proprietary database of commercial real estate information and (ii) providing online marketplaces for professional property management companies, property owners, brokers and landlords, in each case typically through a fixed monthly fee for its subscription-based services. The Company's subscription-based services consist primarily of information, analytics and online marketplace services offered over the Internet to commercial real estate industry and related professionals. Subscription contract rates are based on the number of sites, number of users, organization size, the client’s business focus, geography, 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. The Company’s subscription-based license agreements renew automatically, and a majority have a term of at least one year.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers, (ii) identification of distinct performance obligations in the contract, (iii) determination of contract transaction price, (iv) allocation of contract transaction price to the performance obligations, and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation(s).
The Company recognizes revenues upon the satisfaction of its performance obligation(s) (upon transfer of control of promised services to its customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those services. Revenues from subscription-based services are recognized on a straight-line basis over the term of the agreement.
In limited circumstances, the Company's contracts with customers include promises to transfer multiple services, such as contracts for our subscription-based services and professional services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct, which involves the determination of the standalone selling price for each distinct performance obligation.
Deferred revenue results from amounts billed in advance to customers or cash received from customers in advance of the Company's fulfillment of its performance obligation(s) and is recognized over the term of the license agreement.
Contract assets represent a conditional right to consideration for satisfied performance obligations that become a receivable when the conditions are satisfied. Contract assets are generated when contractual billing schedules differ from the timing of revenue recognition.
Certain sales commissions are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions incurred for obtaining new contracts are deferred and then amortized as selling and marketing expenses on a straight-line basis over a period of benefit that the Company has determined to be three years. The three-year amortization period was determined based on several factors, including the nature of the technology and proprietary data underlying the services being purchased, customer contract renewal rates, and industry competition. Certain commission costs are not capitalized as they do not represent incremental costs of obtaining a contract.
See Note 3 for further discussion of the Company's revenue recognition.
Cost of Revenues
Cost of revenues principally consists of salaries, benefits, bonuses and stock-based compensation expenses for the Company's researchers who collect and analyze the commercial real estate data that is the basis for the Company's information, analytics and online marketplaces. Additionally, cost of revenues includes the cost of data from third-party data sources, credit card and other transaction fees relating to processing customer transactions, which are expensed as incurred, and the amortization of acquired trade names, technology and other intangible assets.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs include e-commerce, television, radio, print and other media advertising. Advertising costs were approximately $44 million and $38 million for the three months ended September 30, 2019 and 2018, respectively, and $130 million and $108 million for the nine months ended September 30, 2019 and 2018, respectively.
Foreign Currency Translation
The Company’s reporting currency is the U.S. dollar. The functional currency of the Company's foreign subsidiaries is the local currency. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars using the exchange rates in effect as of the balance sheet date. Gains and losses resulting from translation are included in accumulated other comprehensive loss. Currency gains and losses on the translation of intercompany loans made to foreign subsidiaries that are of a long-term investment nature are also included in accumulated other comprehensive loss. Net gains or losses resulting from transactions denominated in a currency other than the functional currency of the entity are included in interest and other income (expense) in the condensed consolidated statements of operations using the average exchange rates in effect during the period. There were no material gains or losses from these transactions for the three and nine months ended September 30, 2019 and 2018.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Foreign currency translation adjustment
|
$
|
(13,506
|
)
|
|
$
|
(10,958
|
)
|
Net unrealized loss on investments, net of tax
|
(730
|
)
|
|
(730
|
)
|
Total accumulated other comprehensive loss
|
$
|
(14,236
|
)
|
|
$
|
(11,688
|
)
|
There were no amounts reclassified out of accumulated other comprehensive loss to the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018.
See Note 5 for additional information regarding unrealized gains and losses recognized on investments.
Income Taxes
Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in the Company's condensed consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates in effect during the year in which the Company expects differences to reverse. Valuation allowances are provided against assets, including net operating losses, if the Company determines it is more likely than not that some portion or all of an asset may not be realized. Interest and penalties related to income tax matters are recognized in income tax expense.
See Note 11 for additional information regarding income taxes.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period on a basic and diluted basis.
The following table sets forth the calculation of basic and diluted net income per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
Numerator:
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Net income
|
$
|
78,619
|
|
|
$
|
58,759
|
|
|
$
|
227,036
|
|
|
$
|
154,825
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share — weighted-average outstanding shares
|
36,333
|
|
|
36,129
|
|
|
36,293
|
|
|
36,032
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock awards
|
319
|
|
|
389
|
|
|
322
|
|
|
407
|
|
Denominator for diluted net income per share — weighted-average outstanding shares
|
36,652
|
|
|
36,518
|
|
|
36,615
|
|
|
36,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — basic
|
$
|
2.16
|
|
|
$
|
1.63
|
|
|
$
|
6.26
|
|
|
$
|
4.30
|
|
Net income per share — diluted
|
$
|
2.15
|
|
|
$
|
1.61
|
|
|
$
|
6.20
|
|
|
$
|
4.25
|
|
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The Company’s potentially dilutive securities include outstanding stock options and unvested performance-based restricted stock, restricted stock and restricted stock units. Shares underlying unvested restricted stock that vest based on performance conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share. Diluted net income per share considers the impact of potentially dilutive securities except when the inclusion of the potentially dilutive securities would have an anti-dilutive effect.
The following table summarizes the shares underlying the unvested performance-based restricted stock and anti-dilutive stock options excluded from the basic and diluted earnings per share calculations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Performance-based restricted stock
|
60
|
|
|
76
|
|
|
90
|
|
|
76
|
|
Anti-dilutive stock options
|
—
|
|
|
39
|
|
|
48
|
|
|
76
|
|
Stock-Based Compensation
Equity instruments issued in exchange for services performed by officers, directors, and employees of the Company are accounted for using a fair value based method where the fair value of such equity instruments is recognized as expense in the condensed consolidated statements of operations as they are earned.
For stock-based awards that vest over a specific service period, compensation expense is measured based on the fair value of the awards at the grant date, and is recognized on a straight-line basis over the vesting periods of the awards, net of an estimated forfeiture rate. For equity instruments that vest based on a performance condition, stock-based compensation expense is recognized based on the expected achievement of the related performance conditions at the end of each reporting period. If the Company's initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing may fluctuate from period to period based on those estimates. If the performance conditions are not met, no stock-based compensation expense will be recognized, and any previously recognized stock-based compensation expense will be reversed. For awards with both a performance and a market condition, the Company estimates the fair value of each equity instrument granted on the date of grant using a Monte-Carlo simulation model. This pricing model uses multiple simulations to evaluate the probability of achieving the market condition to calculate the fair value of the awards.
Stock-based compensation expense for stock options and restricted stock issued under equity incentive plans and stock purchases under the Employee Stock Purchase Plan included in the Company’s results of operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cost of revenues
|
$
|
2,281
|
|
|
$
|
1,382
|
|
|
$
|
6,899
|
|
|
$
|
4,410
|
|
Selling and marketing (excluding customer base amortization)
|
1,646
|
|
|
1,632
|
|
|
5,049
|
|
|
5,305
|
|
Software development
|
2,243
|
|
|
1,824
|
|
|
6,638
|
|
|
5,490
|
|
General and administrative
|
6,969
|
|
|
4,115
|
|
|
20,398
|
|
|
15,388
|
|
Total stock-based compensation expense
|
$
|
13,139
|
|
|
$
|
8,953
|
|
|
$
|
38,984
|
|
|
$
|
30,593
|
|
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Leases
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases, later codified as Accounting Standards Codification ("ASC") 842 ("ASC 842"), using the modified retrospective method. For periods presented prior to the adoption date, the Company continues to follow its previous policy under ASC 840, Leases. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission for further details of the Company’s policy prior to adoption of ASC 842.
The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at lease commencement, at which time the Company also measures and recognizes a right-of-use ("ROU") asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. For the purposes of recognizing ROU assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient to not recognize a ROU asset or lease liability for short-term leases, which are leases with a term of twelve months or less. The lease term is defined as the noncancelable portion of the lease term plus any periods covered by an option to extend the lease if it is reasonably certain that that the option will be exercised.
In determining the amount of lease payments used in measuring ROU assets and lease liabilities, the Company has elected the practical expedient not to separate non-lease components from lease components for all classes of underlying assets. Consideration considered part of the lease payments used to measure ROU assets and lease liabilities generally includes fixed payments and variable payments based on either an index or a rate. The ROU asset also includes any lease prepayments, offset by lease incentives. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The rates implicit within the Company's leases are generally not determinable, therefore, the Company's incremental borrowing rate is used to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. Because the Company currently has no outstanding debt, the incremental borrowing rate for each lease is primarily based on publicly-available information for companies within the same industry and with similar credit profiles as the Company. The rate is then adjusted for the impact of collateralization, the lease term and other specific terms included in the Company’s lease arrangements. The incremental borrowing rate is determined at lease commencement, or as of January 1, 2019 for operating leases in existence upon adoption of ASC 842. The incremental borrowing rate is subsequently reassessed upon a modification to the lease arrangement. ROU assets are subsequently assessed for impairment in accordance with the Company’s accounting policy for long-lived assets.
Lease costs related to the Company's operating leases are generally recognized as a single ratable lease cost over the lease term.
See Note 7 for further discussion of the Company’s accounting for leases.
Long-Lived Assets, Intangible Assets and Goodwill
Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Goodwill is tested annually for impairment by each reporting unit on October 1 of each year or more frequently if an event or other circumstance indicates that we may not recover the carrying value of the asset. The Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount or elect to bypass such assessment. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or the Company elects to bypass such assessment, the Company then determines the fair value of each reporting unit. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Debt Issuance Costs
Costs incurred in connection with the issuance of long-term debt are deferred and amortized as interest expense over the term of the related debt using the effective interest method for term debt and on a straight-line basis for revolving debt. To the extent that debt is outstanding, these amounts are reflected in the consolidated balance sheets as direct deductions from a combination of the current and long-term portions of debt, otherwise, they are reflected as current and long-term assets. Upon a refinancing or amendment, previously capitalized debt issuance costs are expensed and included in loss on extinguishment of debt if the Company determines that there has been a substantial modification of the related debt. If the Company determines that there has not been a substantial modification of the related debt, any previously capitalized debt issuance costs are amortized as interest expense over the term of the new debt instrument.
See Note 10 for additional information regarding the Company's revolving credit facility.
Business Combinations
The Company allocates the purchase consideration related to business combinations to the identifiable tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values. The purchase consideration is determined based on the fair value of the assets transferred, liabilities incurred and equity interests issued, after considering any transactions that are separate from the business combination. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and contingent liabilities. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer bases, acquired technology and acquired trade names and other intangible assets, useful lives, royalty rates and discount rates. Any adjustments to provisional amounts that are identified during the measurement period are recorded in the reporting period in which the adjustment amounts are determined. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
For a given acquisition, the Company may identify certain pre-acquisition contingencies as of the acquisition date and may extend its review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether the Company includes these contingencies as a part of the fair value estimates of assets acquired and liabilities assumed and, if so, determine their estimated fair value.
If the Company cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, which is generally the case given the nature of such matters, the Company will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been assumed at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period, changes in the Company's estimates of such contingencies will affect earnings and could have a material effect on its results of operations and financial position.
In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. The Company reevaluates these items based upon facts and circumstances that existed as of the acquisition date with any adjustments to its preliminary estimates being recorded to goodwill, provided that the Company is within the measurement period. Subsequent to the measurement period, changes to these uncertain tax positions and tax related valuation allowances will affect the Company's provision for income taxes in its condensed consolidated statements of operations and comprehensive income and could have a material impact on its results of operations and financial position.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
On January 1, 2019, the Company adopted ASU 2016-02, Leases, using the modified retrospective method which allows for the application of the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these condensed consolidated financial statements. As permitted by the guidance, the Company elected to retain the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date and did not reassess contracts entered into prior to the adoption date for the existence of a lease. The Company also did not recognize ROU assets and lease liabilities for short-term leases, which are leases in existence as of the adoption date with an original term of twelve months or less.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
As a result of the adoption of the standard, the Company recognized ROU assets of $116 million, including prepaid rent and deferred rent that was reclassified and recognized as of the adoption date as a component of the ROU assets, as well as lease liabilities of $150 million, on its condensed consolidated balance sheet. The assets and liabilities recognized upon application of the transition provisions were primarily associated with existing office leases. The Company also recognized a cumulative-effect adjustment to beginning retained earnings of $12 million, net of tax, as of January 1, 2019, to recognize the remaining deferred gain on the sale-leaseback of the Company's corporate headquarters building, pursuant to the guidance in ASC 842.
Recent Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (subsequent to adoption of ASU 2018-13, Fair Value Measurement). The ASU was issued to eliminate certain disclosure requirements for fair value measurements, and add and modify other disclosure requirements, as part of its disclosure framework project, including additional requirements for public companies to disclose certain information about the significant unobservable inputs for Level 3 fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to defer and recognize as an asset. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective on a modified retrospective basis for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its financial statements and related disclosures.
|
|
3.
|
REVENUE FROM CONTRACTS WITH CUSTOMERS
|
Disaggregated Revenue
The Company provides information, analytics and online marketplaces to the commercial real estate industry and related professionals. The revenues by operating segment and type of service consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2019
|
|
2018
|
|
North America
|
|
International
|
|
Total
|
|
North America
|
|
International
|
|
Total
|
Information and analytics
|
|
|
|
|
|
|
|
|
|
|
|
CoStar Suite
|
$
|
149,187
|
|
|
$
|
6,826
|
|
|
$
|
156,013
|
|
|
$
|
132,700
|
|
|
$
|
6,384
|
|
|
$
|
139,084
|
|
Information services
|
17,382
|
|
|
2,089
|
|
|
19,471
|
|
|
15,310
|
|
|
2,225
|
|
|
17,535
|
|
Online marketplaces
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
125,707
|
|
|
—
|
|
|
125,707
|
|
|
104,778
|
|
|
—
|
|
|
104,778
|
|
Commercial property and land
|
51,508
|
|
|
109
|
|
|
51,617
|
|
|
44,128
|
|
|
—
|
|
|
44,128
|
|
Total revenues
|
$
|
343,784
|
|
|
$
|
9,024
|
|
|
$
|
352,808
|
|
|
$
|
296,916
|
|
|
$
|
8,609
|
|
|
$
|
305,525
|
|
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
North America
|
|
International
|
|
Total
|
|
North America
|
|
International
|
|
Total
|
Information and analytics
|
|
|
|
|
|
|
|
|
|
|
|
CoStar Suite
|
$
|
436,070
|
|
|
$
|
20,469
|
|
|
$
|
456,539
|
|
|
$
|
383,876
|
|
|
$
|
19,381
|
|
|
$
|
403,257
|
|
Information services
|
52,632
|
|
|
6,466
|
|
|
59,098
|
|
|
41,544
|
|
|
6,881
|
|
|
48,425
|
|
Online marketplaces
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
360,463
|
|
|
—
|
|
|
360,463
|
|
|
297,254
|
|
|
—
|
|
|
297,254
|
|
Commercial property and land
|
148,418
|
|
|
475
|
|
|
148,893
|
|
|
127,325
|
|
|
—
|
|
|
127,325
|
|
Total revenues
|
$
|
997,583
|
|
|
$
|
27,410
|
|
|
$
|
1,024,993
|
|
|
$
|
849,999
|
|
|
$
|
26,262
|
|
|
$
|
876,261
|
|
Deferred Revenue
Changes in deferred revenue for the period were as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2018
|
$
|
51,459
|
|
Revenue recognized in the current period from the amounts in the beginning balance
|
(46,699
|
)
|
New deferrals, net of amounts recognized in the current period
|
59,224
|
|
Effects of foreign currency
|
(237
|
)
|
Balance at September 30, 2019(1)
|
$
|
63,747
|
|
__________________________
|
|
(1) Deferred revenue is comprised of $60 million of current liabilities and $4 million of noncurrent liabilities classified within lease and other long-term liabilities on the Company’s condensed consolidated balance sheet as of September 30, 2019.
Contract Assets
The Company had contract assets of $3 million and $2 million as of September 30, 2019 and December 31, 2018, respectively, which are generated when contractual billing schedules differ from revenue recognition timing. Contract assets represent a conditional right to consideration for satisfied performance obligations that becomes a receivable when the conditions are satisfied.
Commissions
Commissions expense is included in selling and marketing expense in the Company's condensed consolidated statements of operations. Commissions expense activity for the three and nine months ended September 30, 2019 and 2018 was as follows (in thousands). The Company determined that no deferred commissions were impaired as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Commissions incurred
|
$
|
20,371
|
|
|
$
|
15,311
|
|
|
$
|
62,766
|
|
|
$
|
56,700
|
|
Commissions capitalized in the current period
|
(15,394
|
)
|
|
(11,876
|
)
|
|
(48,791
|
)
|
|
(41,421
|
)
|
Amortization of deferred commissions costs
|
13,639
|
|
|
11,967
|
|
|
39,189
|
|
|
36,242
|
|
Total commissions expense
|
$
|
18,616
|
|
|
$
|
15,402
|
|
|
$
|
53,164
|
|
|
$
|
51,521
|
|
Unsatisfied Performance Obligations
Remaining contract consideration for which revenue has not been recognized due to unsatisfied performance obligations was approximately $213 million at September 30, 2019, which the Company expects to recognize over the next five years. This amount does not include contract consideration for contracts with a duration of one year or less.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
STR, Inc. and STR Global Ltd.
On September 30, 2019, the Company entered into a securities purchase agreement to acquire all of the issued and outstanding equity interests of STR, Inc. and STR Global, Ltd. (together with STR, Inc., referred to as "STR"), for $450 million in cash, subject to certain adjustments per the definitive agreements. STR is a global leader in benchmarking and analytics for the hospitality industry. The combination of STR's and CoStar's offerings is expected to allow for the creation of valuable new and improved tools for industry participants. The transaction closed on October 22, 2019. The Company is in the process of accounting for the acquisition, including identifying the assets and liabilities assumed as part of the transaction.
ForRent
On February 21, 2018 (the "Acquisition Date"), the Company acquired all of the issued and outstanding capital stock of DE Holdings, Inc., including its ForRent division ("ForRent"), a wholly owned subsidiary of Dominion Enterprises ("Seller"), for a purchase price of approximately $376 million. The purchase price was comprised of approximately $340 million in cash and 103,280 shares of Company common stock, valued at approximately $36 million. ForRent's primary service is digital advertising provided through a network of four multifamily websites. The acquisition has yielded increased revenue, significant cost synergies and an improved competitive position in the industry. The Company applied the acquisition method to account for the ForRent transaction, which requires that assets acquired and liabilities assumed be recorded at their fair values as of the Acquisition Date.
The following table summarizes the amounts recorded for acquired assets and assumed liabilities recorded at their fair values as of the Acquisition Date (in thousands):
|
|
|
|
|
|
|
|
Final:
February 21, 2018
|
Cash and cash equivalents
|
|
$
|
59
|
|
Accounts receivable
|
|
8,769
|
|
Indemnification asset
|
|
5,443
|
|
Goodwill
|
|
266,595
|
|
Intangible assets
|
|
141,300
|
|
Deferred tax liabilities
|
|
(34,032
|
)
|
Contingent sales tax liability
|
|
(6,260
|
)
|
State uncertain income tax position liability
|
|
(2,047
|
)
|
Other assets and liabilities
|
|
(3,535
|
)
|
Fair value of identifiable net assets acquired
|
|
$
|
376,292
|
|
The net assets of ForRent were recorded at their estimated fair values. In valuing acquired assets and assumed liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations, and appropriate discount rates. Measurement period adjustments related to the determination of working capital as of the Acquisition Date and recognized in 2018 were not material.
The acquired customer base for the acquisition is composed of acquired customer contracts and the related customer relationships, and has a weighted-average estimated useful life of ten years. The acquired technology has an estimated useful life of three years. The acquired trade name has a weighted-average estimated useful life of ten years. The acquired building photography had an estimated useful life of one year. Amortization of the acquired customer base is recognized on an accelerated basis related to the expected economic benefit of the intangible asset, while amortization of the acquired technology, acquired building photography and acquired trade names and other intangible assets is recognized on a straight-line basis over their respective estimated useful lives. Goodwill recorded in connection with this acquisition is not amortized but is subject to an annual impairment test. The $267 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment. $8 million of goodwill that was recognized is expected to be deductible for income tax purposes in future periods.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the ForRent acquisition includes but is not limited to: (i) the expected synergies and other benefits that the Company believes will result from combining its operations with ForRent's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce.
Upon acquisition, the Company assessed the (i) probability of a contingent sales tax liability and (ii) a state uncertain income tax position liability due to apportionment factors, and recorded accruals of $6 million and $2 million, respectively. The Company could not determine the fair value for the pre-acquisition state sales tax liability and therefore estimated a liability in accordance with ASC 450, Contingencies, using a state-by-state assessment. The uncertain income tax position was determined in accordance with the provisions of ASC 740, Income Tax, and was recorded as part of the purchase price allocation. The Seller has provided an indemnity for tax liabilities related to periods prior to the acquisition. The Seller's indemnification obligation for sales taxes in the state of Texas is limited to approximately $2 million. The total indemnification asset established as of the Acquisition Date was $5 million. $0.6 million and $0.9 million of the uncertain income tax position liability and related indemnification asset recognized as of the Acquisition Date was reversed during the three months ended September 30, 2019 and 2018, respectively, upon expiration of the statute of limitations applicable to the uncertain income tax position.
As part of the ForRent acquisition, the Company incurred $3 million of transaction costs during the nine months ended September 30, 2018. Additionally, the Company paid $12 million cash into a cash escrow account for retention compensation for certain ForRent employees, payable if they remained employed by the Company for a defined six-month period following the acquisition or were earlier terminated without cause or resigned for good reason. In the event funds remained in the escrow account after the employees were compensated and the defined six-month period ended, those funds were to be remitted to the Seller. The Company expensed all of the retention compensation as the services were performed in the post-combination period in 2018.
Other Acquisitions
On June 12, 2019, the Company acquired Off Campus Partners, LLC ("OCP"), a provider of student housing marketplace content and technology to U.S. universities for $16 million. The purchase agreement required an initial payment of $14 million, net of cash acquired, at the time of closing, with the remainder of the purchase price payable one year following the acquisition date, subject to offset for indemnification claims or adjustments to the purchase price after final determination of closing net working capital. As part of the acquisition, the Company recorded goodwill and intangibles assets of $8 million and $9 million, respectively. The net assets of OCP were recorded at their estimated fair value. The estimated fair values are preliminary, subject to the final determination of working capital and completion of the Company's assessment of certain tax matters.
On November 8, 2018, the Company acquired Cozy Services, Ltd. ("Cozy"), a provider of online rental solutions that provides a broad spectrum of services to both landlords and tenants, for $65 million, net of cash acquired. As part of the acquisition, the Company recorded goodwill and intangible assets of $52 million and $11 million, respectively. The net assets of Cozy were recorded at their estimated fair value. The estimated fair values are preliminary, subject to the Company's assessment of certain tax matters. Measurement period adjustments recognized in 2019 were not material.
On October 12, 2018, the Company acquired Realla Ltd. ("Realla"), the operator of a commercial property listings and data management platform in the U.K., for £12 million ($15 million). The purchase agreement required an initial payment of £10 million ($13 million), net of cash acquired, at the time of closing, with the remainder of the purchase price payable one year following the acquisition date, subject to offset for claims under the purchase agreement. In connection with the acquisition, the Company recorded goodwill and intangible assets of £8 million ($10 million) and £4 million ($5 million), respectively. The net assets of Realla were recorded at their estimated fair value. The estimated fair values are preliminary, subject to the Company's assessment of certain tax matters. Measurement period adjustments recognized in 2019 were not material.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Pro Forma Financial Information
The unaudited pro forma financial information presented below summarizes the combined results of operations for the Company and ForRent as though the companies were combined as of January 1, 2017. The unaudited pro forma financial information for all periods presented includes amortization charges from acquired intangible assets, retention compensation, as referenced above, and the related tax effects, along with certain other accounting effects, but excludes the impacts of any expected operational synergies. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2017.
The unaudited pro forma financial information for the nine months ended September 30, 2018 combine the historical results of the Company and ForRent and the effects of the pro forma adjustments listed above.
The unaudited pro forma financial information was as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2018
|
Revenue
|
|
$
|
890,013
|
|
Net income
|
|
$
|
166,553
|
|
Net income per share - basic
|
|
$
|
4.62
|
|
Net income per share - diluted
|
|
$
|
4.57
|
|
Revenue attributable to ForRent from February 21, 2018 through September 30, 2018 was $50 million. Subsequent to the acquisition, the Company implemented an integration plan which included transitioning ForRent customers to arrangements in which the customer is able to advertise across the Company’s network of multifamily listing sites, including the legacy ForRent sites, for a single price. These arrangements do not specify revenues by site; however, all increases and decreases in combined revenue were allocated to ForRent for purposes of this pro forma financial information. This amount represents an estimate of ForRent revenue and is not necessarily indicative of how ForRent would have performed on a stand-alone basis. The Company began integrating the sales force and operations of ForRent after the closing of the acquisition in an effort to create operating synergies. As a result of these integration activities, it is impracticable to disclose revenue and earnings from ForRent from the Acquisition Date through September 30, 2018.
The Company's investments consist of long-term variable rate debt instruments with an auction reset feature, referred to as auction rate securities ("ARS"), classified as available-for-sale and carried at fair value.
Scheduled maturities of investments classified as available-for-sale as of September 30, 2019 are as follows (in thousands):
|
|
|
|
|
|
Maturity
|
|
Fair Value
|
Due:
|
|
|
October 1, 2019 — September 30, 2020
|
|
$
|
—
|
|
October 1, 2020 — September 30, 2024
|
|
—
|
|
October 1, 2024 — September 30, 2029
|
|
—
|
|
After September 30, 2029
|
|
10,070
|
|
Available-for-sale investments
|
|
$
|
10,070
|
|
The Company had no realized gains or losses on its investments for each of the three and nine months ended September 30, 2019 and 2018, respectively. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.
Changes in unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive loss in stockholders’ equity until realized. A decline in market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned.
As of September 30, 2019, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Auction rate securities
|
$
|
10,800
|
|
|
$
|
—
|
|
|
$
|
(730
|
)
|
|
$
|
10,070
|
|
Available-for-sale investments
|
$
|
10,800
|
|
|
$
|
—
|
|
|
$
|
(730
|
)
|
|
$
|
10,070
|
|
As of December 31, 2018, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Auction rate securities
|
$
|
10,800
|
|
|
$
|
—
|
|
|
$
|
(730
|
)
|
|
$
|
10,070
|
|
Available-for-sale investments
|
$
|
10,800
|
|
|
$
|
—
|
|
|
$
|
(730
|
)
|
|
$
|
10,070
|
|
The unrealized losses on the Company’s investments as of September 30, 2019 and December 31, 2018 were generated primarily from changes in interest rates and ARS that failed to settle at auction, due to adverse conditions in the global credit markets. The losses are considered temporary, as the contractual terms of these investments do not permit the issuer to settle the security at a price less than the amortized cost of the investment. Because the Company does not intend to sell these instruments and it is not more likely than not that the Company will be required to sell these instruments prior to anticipated recovery, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired as of September 30, 2019 and December 31, 2018. See Note 6 for further discussion of the fair value of the Company’s financial assets.
The components of the Company’s investments in an unrealized loss position for twelve months or longer were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Aggregate
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Aggregate
Fair
Value
|
|
Gross
Unrealized
Losses
|
Auction rate securities
|
$
|
10,070
|
|
|
$
|
(730
|
)
|
|
$
|
10,070
|
|
|
$
|
(730
|
)
|
Investments in an unrealized loss position
|
$
|
10,070
|
|
|
$
|
(730
|
)
|
|
$
|
10,070
|
|
|
$
|
(730
|
)
|
The Company did not have any investments in an unrealized loss position for less than twelve months as of September 30, 2019 and December 31, 2018.
Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. There is a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The following table represents the Company's fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
640,810
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
640,810
|
|
Auction rate securities
|
—
|
|
|
—
|
|
|
10,070
|
|
|
10,070
|
|
Total assets measured at fair value
|
$
|
640,810
|
|
|
$
|
—
|
|
|
$
|
10,070
|
|
|
$
|
650,880
|
|
The following table represents the Company's fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
590,567
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
590,567
|
|
Auction rate securities
|
—
|
|
|
—
|
|
|
10,070
|
|
|
10,070
|
|
Total assets measured at fair value
|
$
|
590,567
|
|
|
$
|
—
|
|
|
$
|
10,070
|
|
|
$
|
600,637
|
|
The carrying value of accounts receivable, accounts payable and accrued expenses approximates fair value.
The Company’s Level 3 assets consist of ARS, whose underlying assets are primarily student loan securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education.
The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31, 2017 to September 30, 2019 (in thousands):
|
|
|
|
|
|
Auction
Rate
Securities
|
Balance at December 31, 2017
|
$
|
10,070
|
|
Decrease in unrealized loss included in accumulated other comprehensive loss
|
—
|
|
Balance at December 31, 2018
|
10,070
|
|
Decrease in unrealized loss included in accumulated other comprehensive loss
|
—
|
|
Balance at September 30, 2019
|
$
|
10,070
|
|
ARS are variable rate debt instruments whose interest rates are reset approximately every 28 days. The underlying securities have contractual maturities greater than twenty years. The ARS are recorded at fair value.
As of September 30, 2019, the Company held ARS with $11 million par value, all of which failed to settle at auction. The majority of these investments are of high credit quality and are primarily student loan securities supported by guarantees from the FFELP of the U.S. Department of Education. The Company may not be able to liquidate and fully recover the carrying value of the ARS in the near term. As a result, these securities are classified as long-term investments on the Company’s condensed consolidated balance sheet as of September 30, 2019. See Note 5 for further discussion of the scheduled maturities of investments classified as available-for-sale.
While the Company continues to earn interest on its ARS investments at the contractual rate, these investments are not currently actively trading and therefore do not currently have a readily determinable market value. The estimated fair value of the ARS no longer approximates par value. The Company used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of September 30, 2019. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of contractual cash flows, liquidity risk premiums, expected holding periods
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
and default risk. The Company updates the discounted cash flow model on a quarterly basis to reflect any changes in the assumptions used in the model and settlements of ARS investments that occurred during the period.
The only significant unobservable input in the discounted cash flow model is the discount rate. The discount rate used represents the Company's estimate of the yield expected by a market participant from the ARS investments. The weighted average discount rate used in the discounted cash flow models as of September 30, 2019 and December 31, 2018 was approximately 5% and 6%, respectively. Selecting another discount rate within the range used in the discounted cash flow model would not result in a significant change to the fair value of the ARS.
Based on this assessment of fair value, as of September 30, 2019, the Company determined there was no decline in the fair value of its ARS investments. If the issuers are unable to successfully close future auctions and/or their credit ratings deteriorate, the Company may be required to record unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments.
7. LEASES
The Company has operating leases for its office facilities, data centers and certain vehicles, as well as finance leases for office equipment. The Company's leases have remaining terms of less than one year to ten years. The leases contain various renewal and termination options. The period which is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. The period which is subject to an option to terminate the lease is included if it is reasonably certain that the option will not be exercised.
Lease costs related to the Company's operating leases included in the condensed consolidated statements of operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
Operating lease costs:
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Cost of revenues
|
$
|
2,690
|
|
|
$
|
3,088
|
|
|
$
|
9,080
|
|
|
$
|
8,983
|
|
Software development
|
1,091
|
|
|
857
|
|
|
3,070
|
|
|
2,482
|
|
Selling and marketing (excluding customer base amortization)
|
2,198
|
|
|
2,089
|
|
|
6,568
|
|
|
7,027
|
|
General and administrative
|
995
|
|
|
791
|
|
|
2,237
|
|
|
2,826
|
|
Total operating lease costs
|
$
|
6,974
|
|
|
$
|
6,825
|
|
|
$
|
20,955
|
|
|
$
|
21,318
|
|
The impact of lease costs related to finance leases and short-term leases was not material for the three and nine months ended September 30, 2019.
Supplemental balance sheet information related to operating leases was as follows (in thousands):
|
|
|
|
|
|
Balance
|
Balance Sheet Location
|
September 30, 2019
|
Long-term lease liabilities
|
Lease and other long-term liabilities
|
$
|
110,477
|
|
|
|
|
Weighted-average remaining lease term in years
|
|
5.2
|
|
Weighted-average discount rate
|
|
4.1
|
%
|
Balance sheet information related to finance leases was not material as of September 30, 2019.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
|
|
|
|
Nine Months Ended
September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows used in operating leases
|
$
|
24,114
|
|
|
|
ROU assets obtained in exchange for lease obligations:
|
|
Operating leases
|
$
|
7,048
|
|
Maturities of operating lease liabilities at September 30, 2019 were as follows (in thousands):
|
|
|
|
|
October 1, 2019 - September 30, 2020
|
$
|
32,345
|
|
October 1, 2020 - September 30, 2021
|
30,368
|
|
October 1, 2021 - September 30, 2022
|
27,540
|
|
October 1, 2022 - September 30, 2023
|
26,388
|
|
October 1, 2023 - September 30, 2024
|
22,968
|
|
Thereafter
|
13,926
|
|
Total lease payments
|
153,535
|
|
Less imputed interest
|
(15,921
|
)
|
Present value of lease liabilities
|
$
|
137,614
|
|
Future minimum lease payments as of December 31, 2018 were as follows (in thousands):
|
|
|
|
|
2019
|
$
|
30,485
|
|
2020
|
29,255
|
|
2021
|
27,421
|
|
2022
|
25,634
|
|
2023
|
24,515
|
|
Thereafter
|
31,768
|
|
Total future minimum lease payments
|
$
|
169,078
|
|
8. GOODWILL
The changes in the carrying amount of goodwill by operating segment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
International
|
|
Total
|
Goodwill, December 31, 2017
|
$
|
1,253,494
|
|
|
$
|
29,963
|
|
|
$
|
1,283,457
|
|
Acquisitions
|
319,594
|
|
|
10,344
|
|
|
329,938
|
|
Effect of foreign currency translation
|
—
|
|
|
(1,860
|
)
|
|
(1,860
|
)
|
Goodwill, December 31, 2018
|
1,573,088
|
|
|
38,447
|
|
|
1,611,535
|
|
Acquisitions, including measurement period adjustments
|
6,428
|
|
|
—
|
|
|
6,428
|
|
Effect of foreign currency translation
|
—
|
|
|
(1,425
|
)
|
|
(1,425
|
)
|
Goodwill, September 30, 2019
|
$
|
1,579,516
|
|
|
$
|
37,022
|
|
|
$
|
1,616,538
|
|
The Company recorded goodwill of approximately $8 million in connection with the June 2019 acquisition of OCP, a provider of student housing marketplace content and technology to universities in the United States.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The Company recorded goodwill of approximately $53 million in connection with the November 8, 2018 acquisition of Cozy, a provider of online rental solutions that provides a broad spectrum of services to both landlords and tenants, including property listings, rent estimates, rental applications, tenant screening, online rent payments and expense tracking. The Company recorded a measurement period adjustment during the nine months ended September 30, 2019 which resulted in a $1 million reduction to the initial amount of Cozy goodwill recognized.
The Company recorded goodwill of approximately $10 million in connection with the October 12, 2018 acquisition of Realla, the operator of a commercial property listings and data management platform in the U.K., including a free-to-list search engine for commercial property listings.
The Company recorded goodwill of approximately $267 million in connection with the February 21, 2018 acquisition of ForRent, a digital advertising service provided through a network of four multifamily websites.
9. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands, except amortization period data):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Weighted-
Average
Amortization
Period (in years)
|
Acquired technology
|
$
|
101,892
|
|
|
$
|
103,128
|
|
|
5
|
Accumulated amortization
|
(88,841
|
)
|
|
(85,344
|
)
|
|
|
Acquired technology, net
|
13,051
|
|
|
17,784
|
|
|
|
|
|
|
|
|
|
Acquired customer base
|
346,924
|
|
|
339,574
|
|
|
10
|
Accumulated amortization
|
(221,033
|
)
|
|
(199,405
|
)
|
|
|
Acquired customer base, net
|
125,891
|
|
|
140,169
|
|
|
|
|
|
|
|
|
|
Acquired trade names and other intangible assets
|
199,818
|
|
|
199,752
|
|
|
12
|
Accumulated amortization
|
(79,316
|
)
|
|
(68,794
|
)
|
|
|
Acquired trade names and other intangible assets, net
|
120,502
|
|
|
130,958
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
$
|
259,444
|
|
|
$
|
288,911
|
|
|
|
10. LONG-TERM DEBT
On October 19, 2017, the Company entered into an amended and restated 2017 Credit Agreement (the "2017 Credit Agreement"), which amended and restated in its entirety, the existing 2014 Credit Agreement dated April 1, 2014 (the "2014 Credit Agreement"). The 2017 Credit Agreement provides for a $750 million revolving credit facility with a term of five years from a syndicate of financial institutions as lenders and issuing banks. The 2017 facility may be used for working capital and other general corporate purposes of the Company and its subsidiaries.
Up to $20 million of the revolving credit facility is available for the issuance of letters of credit. The Company had an irrevocable standby letter of credit outstanding totaling $0.2 million as of September 30, 2019 and December 31, 2018, which was required to secure its San Francisco office lease. The letter of credit was established in 2014 and automatically renews through January 31, 2025.
The loans under the 2017 Credit Agreement bear interest during any interest period selected by the Company, at either (i) the London interbank offered rate for deposits in U.S. dollars with a maturity comparable to such interest period, adjusted for statutory reserves (“LIBOR”), plus an initial spread of 1.25% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio (as defined in the 2017 Credit Agreement) of the Company, or (ii) at the greatest of (x) the prime rate from time to time announced by JPMorgan Chase Bank, N.A., (y) the federal funds effective rate plus half of 1% and (z) LIBOR for a one-month interest period plus 1.00%, plus an initial spread of 0.25% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio of the Company. If an event of default occurs under the 2017 Credit Agreement, the interest rate on overdue amounts will increase by 2.00% per annum. The obligations under the 2017 Credit Agreement are guaranteed by all material subsidiaries of the Company and are secured by a lien on substantially all of the assets of the Company and its material subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee agreements entered into on the closing date of the 2017 Credit Agreement.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The 2017 Credit Agreement requires the Company to maintain (i) a First Lien Secured Leverage Ratio not exceeding 3.50 to 1.00 and (ii) after the incurrence of additional indebtedness under certain specified exceptions in the 2017 Credit Agreement, a Total Leverage Ratio (as defined in the 2017 Credit Agreement) not exceeding 4.50 to 1.00. The 2017 Credit Agreement also includes other covenants, including ones that, subject to certain exceptions, restrict the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends, distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. The Company was in compliance with the covenants in the 2017 Credit Agreement as of September 30, 2019.
The Company had no outstanding long-term debt at September 30, 2019 and December 31, 2018. For the three and nine months ended September 30, 2019, the Company recognized interest expense of $0.7 million and $2.1 million, including amortization of debt issuance costs of $0.2 million and $0.7 million and commitment fees of $0.5 million and $1.4 million, on its revolving credit facility, respectively. For the three and nine months ended September 30, 2018, the Company recognized interest expense of $0.7 million and $2.1 million, including amortization of debt issuance costs of $0.2 million and $0.7 million and commitment fees of $0.5 million and $1.4 million, on its revolving credit facility, respectively. The Company had $3 million and $3 million of deferred debt issuance costs included in deposits and other assets on the Company's condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively.
11. INCOME TAXES
The income tax provision reflects an effective tax rate of approximately 21% and 20% for the three months ended September 30, 2019 and 2018, respectively, and 18% and 11% for the nine months ended September 30, 2019 and 2018, respectively. The increase in the effective tax rate for the three and nine months ended September 30, 2019, was primarily due to higher income before income taxes during those periods, as well as, discrete items for state research and development tax credits recognized for the nine months ended September 30, 2018.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under various non-cancelable operating leases. The leases contain various renewal options. See Note 7 for further discussion of the Company's operating lease commitments. In addition, the Company has other commitments related to purchase obligations for goods and services.
Currently, and from time to time, the Company is involved in litigation incidental to the conduct of its business. In accordance with GAAP, the Company records a provision for a liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated. While it is reasonably possible that an unfavorable outcome may occur as a result of one or more of the Company’s current litigation matters, at this time management has concluded that the resolutions of these matters are not expected to have a material adverse effect on the Company's consolidated financial position, future results of operations or liquidity. Legal defense costs are expensed as incurred.
13. SEGMENT REPORTING
Segment Information
The Company manages its business geographically in two operating segments, with the primary areas of measurement and decision-making being North America, which includes the U.S. and Canada, and International, which includes the U.K., Spain, Germany and France. Management relies on an internal management reporting process that provides revenue and operating segment net income before interest and other income (expense), loss on debt extinguishment, income taxes, depreciation and amortization (“EBITDA”). Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of the Company’s operating segments. EBITDA is used by management to internally measure operating and management performance and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Summarized information by operating segment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
115,973
|
|
|
$
|
94,088
|
|
|
$
|
326,648
|
|
|
$
|
229,905
|
|
International
|
(2,882
|
)
|
|
(2,967
|
)
|
|
(6,852
|
)
|
|
(3,998
|
)
|
Total EBITDA
|
$
|
113,091
|
|
|
$
|
91,121
|
|
|
$
|
319,796
|
|
|
$
|
225,907
|
|
The reconciliation of net income to EBITDA consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income
|
$
|
78,619
|
|
|
$
|
58,759
|
|
|
$
|
227,036
|
|
|
$
|
154,825
|
|
Amortization of acquired intangible assets in cost of revenues
|
4,957
|
|
|
5,310
|
|
|
15,503
|
|
|
15,242
|
|
Amortization of acquired intangible assets in operating expenses
|
7,586
|
|
|
8,329
|
|
|
22,443
|
|
|
22,948
|
|
Depreciation and other amortization
|
6,279
|
|
|
6,794
|
|
|
19,289
|
|
|
19,810
|
|
Interest and other income
|
(5,358
|
)
|
|
(3,035
|
)
|
|
(16,216
|
)
|
|
(8,674
|
)
|
Interest and other expense
|
704
|
|
|
717
|
|
|
2,133
|
|
|
2,135
|
|
Income tax expense
|
20,304
|
|
|
14,247
|
|
|
49,608
|
|
|
19,621
|
|
EBITDA
|
$
|
113,091
|
|
|
$
|
91,121
|
|
|
$
|
319,796
|
|
|
$
|
225,907
|
|
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Summarized information by operating segment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Property and equipment, net:
|
|
|
|
North America
|
$
|
104,239
|
|
|
$
|
79,493
|
|
International
|
3,750
|
|
|
3,810
|
|
Total property and equipment, net
|
$
|
107,989
|
|
|
$
|
83,303
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
North America
|
$
|
1,579,516
|
|
|
$
|
1,573,088
|
|
International
|
37,022
|
|
|
38,447
|
|
Total goodwill
|
$
|
1,616,538
|
|
|
$
|
1,611,535
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
North America
|
$
|
3,638,588
|
|
|
$
|
3,253,035
|
|
International
|
76,803
|
|
|
59,922
|
|
Total assets
|
$
|
3,715,391
|
|
|
$
|
3,312,957
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
North America
|
$
|
385,254
|
|
|
$
|
272,776
|
|
International
|
30,971
|
|
|
18,239
|
|
Total liabilities
|
$
|
416,225
|
|
|
$
|
291,015
|
|