The market for information, analytics and online marketplaces generally is competitive and rapidly changing.extremely dynamic. In the commercial real estate, and apartment rentals and home for sale industries, we believe the principal competitive factors affecting these services and providers are:
We compete directly and indirectly for customers with the following categories of companies:
To protect our proprietary rights in our methodologies, database, software, trademarks and other intellectual property, we depend upon a combination of:
We seek to protect our software’s source code, our database and our photography as trade secrets and under copyright law. Although copyright registration is not a prerequisite for copyright protection, we have filed for copyright registration for many of our databases, photographs, software and other materials. Under current U.S. copyright law, the arrangement and selection of data may be protected, but the actual data itself may not be. Certain U.K. database protection laws provide additional protections for our U.K. databases. We license our services under license agreements that grant our clients non-exclusive, non-transferable rights. These agreements restrict the disclosure and use of our information and prohibit the unauthorized reproduction or transfer of any of our proprietary information, methodologies or analytics.
We also attempt to protect our proprietary databases, our trade secrets and our proprietary information through confidentiality and noncompetition agreements with our employees and consultants. Our services also include technical measures designed to detect, discourage and prevent unauthorized access to and/or copying of our intellectual property. We have established an internal antipiracy team that uses fraud-detection technology to continually monitor use of our services to detect and prevent unauthorized access, and we actively prosecute individuals and firms that engage in this unlawful activity.
In addition, we maintain a patent portfolio that protects certain of our systems and methodologies. We currently have one granted patentsix patents in the U.K.Canada, which expire in 2033 (1 patent), which expires in 2021,2035 (2 patents) and 2036 (3 patents), covering, among other things, certain features of our field research methodologies and sevenuser interface features, and 12 patents in the U.S. which expire in, 2020, 20212025 (1 patent), 2032 (2 patents), 2022 (22036 (4 patents), 20252037 (4 patents) and 2032, respectively,2038 (1 patent), covering, among other things, critical elementscertain features of CoStar’s proprietaryour field research technologymethodologies and mapping tools.user interface feature. We regard the rights protected by our patents as valuable to our business, but do not believe that our business is materially dependent on any single patent or on our portfolio of patents as a whole.
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Item 1A. | Item 1A. Risk Factors |
Cautionary Statement Concerning Forward-Looking Statements
We have made forward-looking statements in this Report and make forward-looking statements in our press releases and conference calls that are subject to risks and uncertainties. Forward-looking statements include information that is not purely historic fact and include, without limitation, statements concerning our financial outlook for 2018 and beyond, our possible or assumed future results of operations generally, and other statements and information regarding assumptions about our revenues, , revenue growth rates, gross margin percentage, net income, net income per share, fully diluted net income per share, EBITDA, adjusted EBITDA, non-generally accepted accounting principles (“GAAP”) net income, non-GAAP net income per share, weighted-average outstanding shares, taxable income (loss), cash flow from operating activities, available cash, operating costs, amortization expense, intangible asset recovery, capital and other expenditures, legal proceedings and claims, legal costs, effective tax rate, equity compensation charges, future taxable income, pending acquisitions, the anticipated benefits of completed or proposed acquisitions, the anticipated timing of acquisition closings, the anticipated benefits of cross-selling efforts, product development and release, planned product enhancements, sales and marketing campaigns, product integrations, elimination and de-emphasizing of services, contract renewal rate, the timing of future payments of principal under our $750 million credit facility available to us under the amended and restated credit agreement dated October 19, 2017 (the “2017 Credit Agreement”), expectations regarding our compliance with financial and restrictive covenants in the 2017 Credit Agreement, financing plans, geographic expansion, capital structure, contractual obligations, our database, database growth, services and facilities, employee relations, future economic performance, our ability to liquidate or realize our long-term investments, management’s plans, goals and objectives for future operations, and growth and markets for our stock. Sections of this Report which contain forward-looking statements include “Business,” “Risk Factors,” “Properties,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” “Controls and Procedures” and the Financial Statements andRisks related Notes.
Our forward-looking statements are also identified by words such as “hope,” “anticipate,” “may,” “believe,” “expect,” “intend,” “will,” “should,” “plan,” “estimate,” “predict,” “continue” and “potential” or the negative of these terms or other comparable terminology. You should understand that these forward-looking statements are estimates reflecting our judgment, beliefs and expectations, not guarantees of future performance. They are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. The following important factors, in addition to those discussed or referred to under the heading “Risk Factors,” and other unforeseen events or circumstances, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements: commercial real estate market conditions; general economic conditions, both domestic and international; our ability to identify, acquire and integrate acquisition candidates; our ability to realize the expected benefits, cost savings or other synergies from acquisitions, including ForRent, on a timely basis or at all; our ability to combine acquired businesses successfully or in a timely and cost-efficient manner; business disruption relating to integration of acquired businesses or other business initiatives; the businesses of CoStar, Apartments.com and ForRent may not be combined successfully or in a timely and cost-efficient manner; business disruption relating to the ForRent acquisition may be greater than expected; our ability to transition acquired service platforms to our model in a timely manner or at all; changes and developments in business plans; theft of any personally identifiable information we maintain or process; any actual or perceived failure to comply with privacy or data protection laws, regulations or standards; the amount of investment for sales and marketing and our ability to realize a return on investments in sales and marketing; our ability to effectively and strategically combine, eliminate or de-emphasize service offerings; reductions in revenues as a result of service changes; the time and resources required to develop upgraded or new services and to expand service offerings; changes or consolidations within the commercial real estate industry; customer retention; our ability to attract new clients; our ability to sell additional services to existing clients; our ability to integrate our North America and International product offerings; our ability to successfully transition LoopNet to a pure marketing site, where all listings are paid and searches are free, in a timely manner and minimize the impact of that transition on revenue; our ability to successfully introduce and cross-sell new products or upgraded services in U.S. and foreign markets; our ability to attract consumers to our online marketplaces; our ability to increase traffic on our network of sites; the success of our marketing campaigns in generating brand awareness and site traffic; competition; foreign currency fluctuations; global credit market conditions affecting investments; our ability to continue to expand successfully, timely and in a cost-efficient manner, including internationally; our ability to effectively penetrate and gain acceptance in new sectors and geographies; our ability to control costs; our ability to establish our research operations headquarters in Richmond, Virginia as a technology innovation hub; litigation litigation or government investigations in which we become involved; changes in accounting policies or practices; release of new and upgraded services or entry into new markets by us or our competitors; data quality; expansion, growth, development or reorganization of our sales force; employee retention; technical problems with our services; managerial execution; changes in relationships with real estate brokers, property managers and other strategic partners; legal and regulatory issues; and successful adoption of and training on our services.
Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of, and are based on information available to us on, the date of this Report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to update any such statements or release publicly any revisions to these forward-looking statements to reflect new information or events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
Risk Factors
Our revenues and financial position will be adversely affected if we are not able to attract and retain clients.clients. Our success and revenues depend on attracting and retaining subscribers to our information, analytics and online marketplaces.marketplace services. Our subscription-based information, analytics and online marketplacesservices generate the largest portion of our revenues. However, Our revenue may not grow, or could decrease, if we may be unable to attract new clients, and our existing clients may decide not to add, not to renew or to cancel subscription services. In addition, in order to increase our revenue, we must continue tocannot attract new customers, continue to keep our cancellation rate low and continue to sell new services to our existing customers. We may not be able to continue to grow our customer base, keep the cancellation rate for customers and services low or sell new services to existing customers as a result of several factors, including, without limitation:continuing global economic pressures;and geopolitical volatility, economic pressures and the impact of inflation on our costs and on customer spending; the business failure of a current clientclients; customer decisions that they do not need our services or clients; a decision that customers have no need for our services; a decision to use alternative services; customers’ and potential customers’ pricing and budgetary constraints; consolidation in the real estate and/or financial services industries; data quality; technical problems; competitive pressures; or competitive pressures.devaluation of the local currencies of international customers relative to the U.S. dollar which impairs the purchasing power of such customers. We compete against many other commercial real estate information, analytics and marketing service providers for business, including competitors that offer their services through rapidly changing methods of delivering real estate information.business. If clients cancel services or decide not to renew their subscription agreements and we do not sell new services to our existing clients or attract new clients, then our renewal rate, net new bookings and revenues may decline.decline or fail to meet expectations.
We may not be able to successfully develop and introduce new or upgraded information, analytics and online marketplace services that are attractive to our users and advertisers or successfully combine or shift focus from current services with less demand, which could decrease our revenues and our profitability.profitability. Our future business and financial success will depend on our ability to continue to anticipate the needs of customers and potential customers and to successfully introduce new and upgraded services, into the marketplace.including services that make our marketplaces useful for users and attractive to advertisers. To be successful, we must be able to quickly adapt to changes in the industry, as well as rapid technological changes, by continually enhancing our information, analytics and online marketplace services. As a result, we must continually invest resources in research and development to improve the appeal and comprehensiveness of our services and effectively incorporate new technologies.
Developing new services and upgrades to services, as well as integrating and coordinating current services, imposes heavy burdens on our systems department, product development team, management and researchers. The processes are costly, and our efforts to develop, integrate and enhance our services may not be successful. As we continue to combine our operations with those that we have acquired, we must continue to assess the purposes for which various services may be used alone or together, and how we can best address those uses through stand-alone services or combinations of coordinating applications thereof. In addition, successfully launching and selling a new or upgraded service puts pressureadditional strain on our sales and marketing resources. In 2015, we launched the current Apartments.com and the ApartmentFinder.com websites, both after completing extensive product development. To generate brand awareness and site traffic for Apartments.com, we utilize a multi-channel marketing campaign. The launch of the sites and/or the marketing campaign may not continue to increase brand awareness, site traffic and/or revenues. If we are unsuccessful in obtaining greater market share or in obtaining widespread adoption of new or upgraded services, we may not be able to offset the expenses associated with the development, launch and marketing campaign,of the new or upgraded service, which could have a material adverse effect on our financial results. For example, we have and will continue to invest significantly in developing our marketplaces and content and, to generate brand awareness and site traffic, we have and will continue to invest significant resources in multi-channel marketing campaigns for select marketplaces. If these development efforts and marketing campaigns do not increase brand awareness, site traffic, subscriptions for marketplaces services and/or revenues, the cost of these campaigns could have an adverse effect on our financial results.
In addition, as we integrate acquired businesses, we continue to assess which services we believe will best meet the needs of our customers. If we are unable to develop new or upgraded services or decide to combine, shift focus from,eliminate or phase out a service that overlaps or is redundant with other services weand are not able to offer then our customers may choose a competitiveand successfully market and sell an alternative service, over ours and our revenues may decline and our profitability may be reduced. For example, we continue to assess the impact of transitioning the LoopNet marketplace to a pure marketing site for commercial real estate where all listings are paid and users can search the site for free. We expect to see a short-term reduction in revenues and earnings, as well as reduced search engine optimization. We are working to convert customers to higher value, more profitable annual subscription information services,decrease, which should increase revenues and earnings over time, however we cannot predict with certainty whether we will be successful in shifting customers to higher value, more profitable subscriptions and, consequently, in offsetting any reduction in revenues and earnings. Therefore, our revenues and earnings may ultimately decline as a result of the LoopNet conversion to a pure marketing site. In addition, if we incur significant costs in developing new or upgraded services or combining and coordinating existing services, if we are not successful in marketing and selling these new services or upgrades, or if our customers fail to accept these new or combined and coordinating services, then there could behave a material adverse effect on our results of operations.
We may not be able to compete successfully against existing or future competitors in attracting advertisers, which could harm our business, results of operations dueand financial condition. We compete to a decreaseattract advertisers. Our competitors may have greater brand recognition or more direct sales personnel than we have and may generate more web traffic than we do, which may provide them with competitive advantages. To compete successfully for advertisers, we must continue to invest resources in developing our advertising platform and proving the effectiveness and relevance of our advertising services. Pressure from competitors seeking to acquire a greater share of our advertisers’ overall marketing budget could adversely affect our pricing and margins, lower our revenue and increase our research and development and marketing expenses. If we are unable to compete successfully against our existing or future competitors, our business, results of operations or financial condition could be adversely affected.
Competition could render our services uncompetitive and reduce our profitability. The markets for information systems and services and for online marketplaces in general are highly competitive and rapidly changing. Competition in these markets may increase further if economic conditions or other circumstances cause customer bases and customer spending to decrease and service providers to compete for fewer customer resources. Our existing or future competitors may have greater name recognition, larger customer bases, better technology or data, lower prices, easier access to data, greater user traffic or greater financial, technical or marketing resources than we have to provide services that users might view as superior to our offerings. Competitors may introduce different solutions that attract users away from our services or provide solutions similar to ours that
have the advantage of better branding or marketing resources. Our competitors may be able to undertake more effective marketing campaigns, obtain more data, adopt more aggressive pricing policies, make more attractive offers to potential employees, subscribers, advertisers, distribution partners and content providers or may be able to respond more quickly to new or emerging technologies or changes in user requirements. Increased competition could result in lower revenues and a reduction ofhigher expenses, which would reduce our profitability.
Our operating results and revenues are subject to fluctuations and our quarterly financial results may be subject to market cyclicality, each of which could negatively affect our stock price. The real estate market may be influenced by general economic conditions, economic cycles, changes in interest rates, seasonality and many other factors, which in turn may impact our financial results. The different sectors of the large and fragmented industry, such as office, industrial, retail, multifamily, single family and others, are influenced differently by different factors, and have historically moved through economic cycles with different timing. As such, it is difficult to estimate the potential impact of economic cycles and conditions or seasonality from year-to-year on our overall operating results. For example, we generally see higher sales of Apartments.com listing services during the peak summer rental season and higher CoStar sales towards the end of the year; however, sales fluctuate from year-to-year and may fluctuate more widely when there are changes in general economic conditions or the industry.The timing of widely observed holidays and vacation periods, particularly slowdowns during the end-of-year holiday period, and availability of real estate agents and related service providers during these periods, could significantly affect our quarterly operating results during that period. If we are unable to adequately respond to economic, seasonal or cyclical conditions, our revenues, expenses and operating results may fluctuate from quarter to quarter. Our operating results, revenues and expenses may fluctuate for many reasons, including those described in this paragraph and below:
•Rates of subscriber adoption and retention;
•Timing of our annual sales conference or significant marketing events;
A•Changes in our pricing strategy and timing of changes;
•The timing and success of new service introductions and enhancements;
•The shift of focus from certain services we offer or the phase out of services that overlap or are redundant with other services we offer;
•The amount and timing of our expenses and capital expenditures;
•The amount and timing of non-cash stock-based charges;
•Acquisition-related costs or impairment charges associated with investments and acquisitions;
•Competition;
•Changes or consolidation in the real estate industry;
•Interest rate fluctuations;
•Execution of our expansion and integration plans;
•The development of our sales force;
•Foreign currency exchange rate fluctuations;
•Inflation; and
•Changes in client budgets.
These fluctuations could negatively affect our results of operations during the period in question and/or future periods or cause our stock price to decline. In addition, changes in accounting policies or practices may affect our level of net income. Fluctuations in our financial results, revenues and expenses may cause the market price of our common stock to decline.
Global economic uncertainties and downturns or a downturn or consolidation in the commercial real estate industry may decrease customer demand for our services. and adversely affect our business and results of operations. Global economic uncertainties or downturns could adversely affect our business and results of operations, including financial and credit market fluctuations, changes in economic policy, increased inflation and responsive actions, rising interest rates or a period of elevated interest rates, labor shortages, supply chain disruptions, trade uncertainty, political unrest, geographical instability or other impacts from the macroeconomic environment. These macroeconomic conditions could cause a decrease in customer spending and negatively affect the rate of growth of our business. The commercial real estate market may be adversely impacted by many different factors, including lower than expected job growth or job losses resulting in reduced real estate demand; reduced real estate demand due to continued remote work policies or a period of elevated interest rates; rising interest rates, andinflation, slowing transaction volumes and other macroeconomic trends that negatively impact investment returns; excessive speculative new construction in localized markets resulting in increased vacancy rates and diminished rent growth; and unanticipated disasters or global health events; and other adverse events such as slowing of thedecreased growth in the working age population resulting in reduced demand for all types of real estate. In response to concerns over inflation, the U.S. Federal Reserve raised interest rates in each quarter of 2022 and the first, second and third quarters 2023. A reversal of improvementsdownturn in the commercial real estate industry’smarket, including as a result of increased interest rates or a decline in leasing activity and absorption rates or a renewed downturn in the commercial real estate market may affect our ability to generate revenues and may lead to more cancellations by our current or future customers, either of which could cause our revenues or our revenue growth rate to decline and reduce our profitability. A depressed commercial real estate market has a negative impact on our core customer base, which could decrease demand for
our information, analytics and online marketplaces. Also, companies in this industry may consolidate, often in order to reduce expenses. Consolidation, or other cost-cutting measures by our customers, may lead to cancellations of our information, analytics and online marketplace services by our customers, reduce the number of our existing clients, reduce the size of our target market or increase our clients’ bargaining power, all of which could cause our revenues to decline and reduce our profitability. If cancellations, reductions of services and failures to pay increase, and we are unable to offset the resulting decrease in revenues by increasing sales to new or existing customers, our revenues may decline or grow at lower rates.
Negative general economic conditions could increase our expenses and reduce our revenues. Our business and the commercial real estate industry are particularly affected by negative trends in the general economy. The success of our business depends on a number of factors relating to general global, national, regional and local economic conditions, including perceived and actual economic conditions, recessions, inflation, deflation, exchange rates, interest rates, taxation policies, availability of credit, employment levels, and wage and salary levels. Negative general economic conditions could adversely affect our business by reducing our revenues and profitability. If we experience greater cancellations or reductions of services and failures to timely pay, and we do not acquire new clients or sell new services to our existing clients, our revenues may decline and our financial position would be adversely affected. Adverse national and global economic events, as well as any significant terrorist attack, are likely to have a dampening effect on the economy in general, which could negatively affect our financial performance and our stock price. Further actions or inactions of the U.S. or other major national governments may also impact economic conditions, which could result in financial market disruptions or an economic downtown. Market disruptions may also contribute to extreme price and volume fluctuations in the stock market that may affect our stock price for reasons unrelated to our operating performance. In addition, a significant increase in inflation could increase our expenses more rapidly than expected, the effect of which may not be offset by corresponding increases in revenue. Conversely, deflation resulting in a decline of prices could reduce our revenues. In the current economic environment, it is difficult to predict whether we will experience significant inflation or deflation in the near future. A significant increase in either could have an adverse effect on our results of operations.
If we are unable to hire qualified persons for, or retain and continue to develop, our sales force, or if our sales force is unproductive, our revenues could be adversely affected. In order to support revenues and future revenue growth, we need to continue to develop, train and retain our sales force. Our ability to build and develop a strong sales force may be affected by a number of factors, including: our ability to attract, integrate and motivate sales personnel; our ability to effectively train our sales force; the ability of our sales force to sell an increased number and different types of services; our ability to manage effectively an outbound telesales group; the length of time it takes new sales personnel to become productive; the competition we face from other companies in hiring and retaining sales personnel; our ability to effectively structure our sales force; and our ability to effectively manage a multi-location sales organization, including field sales personnel. If we are unable to hire qualified sales personnel and develop and retain the members of our sales force, including sales force management, or if our sales force is unproductive, our revenues or growth rate could decline and our expenses could increase. We may face additional challenges in hiring employees in an increasingly competitive job market.
Our business depends on retaining and attracting highly capable management and operating personnel. Our success depends in large part on our ability to retain and attract management and operating personnel, including our President and Chief Executive Officer, Andrew Florance, and our other officers and key employees. Our business requires highly skilled technical, sales, management, web product and development, marketing and research personnel, who are in high demand and are often subject to competing offers. The measures we use to attract and retain key personnel may not be enough to attract and retain the personnel we need or to offset the impact on our business of the loss of the services of Mr. Florance or other key officers or employees. If Mr. Florance were to become unavailable for any reason, there could be a material adverse impact on our operations. The loss of other key personnel, including members of management as well as key technology, product development, and marketing personnel, could also disrupt our operations and have an adverse effect on our business.
We
Our internal and external investments may place downward pressure on our operating margins. To increase our revenue growth, we continue to invest significantly in our business, including internal investments in product and content development to expand the breadth and depth of services we provide to our customers and external investments in sales and marketing to generate brand awareness and traffic to our websites. Our operating margins may experience downward pressure in the short term as a result of these investments. Furthermore, our investments may not produce the expected results. If we are unable to successfully execute our investment strategy, we may experience decreases in our revenues or revenue growth rate and operating margins.
Introducing new products may be difficult and expensive. If we are unable to do so successfully, our brands may be adversely affected, and we may not be able to compete successfully against existingmaintain or future competitors in attracting advertisers, which could harmgrow our business, results of operationscurrent revenue and financial condition. profit levels. In February 2024 we launched our Homes.com monetization strategy. We competehave incurred, and expect to attract advertisers. Our competition for advertisers may have significant brand recognition as well as greater numbers of direct sales personnel than we have and may generate more web traffic than we do, which may provide a competitive advantage. To compete successfully for advertisers against future and existing competitors, we must continue to invest resources in developing our advertising platformincur, significant costs to develop and proving the effectiveness and relevance of our advertising services. Pressure from competitors seeking to acquire a greater share of our advertisers’ overall marketing budget could adversely affect our pricing and margins, lower our revenue, and increase our research and development and marketing expenses.market Homes.com. If we are unable to compete successfully againstattract and retain agent subscribers and consumers, we may not be able to execute our existinggrowth plans or future competitors,recognize a return on the investments we have made into Homes.com. Failure to gain market acceptance for Homes.com could impede our ability to maintain or grow current revenue levels or reduce profits for our other brands, adversely affect the image of our brands, erode our competitive position, and result in long-term harm to our business and financial results. Extrapolations annualizing initial sales results of operations or financial condition could be adversely affected.may differ materially from actual results realized in future periods and may not take into account other future market conditions that may negatively affect those results.
We may be unable to increase awareness of our brands, including CoStar, LoopNet, Apartments.com, Homes.com Land.com, BizBuySell, STR, Ten-X, and LandsofAmerica,OnTheMarket, which could adversely affect our business. We rely heavily on our brands, which we believe are key assets of our company. Awareness and differentiation of our brands are important for attracting and expanding the number of users of, and subscribers to, our online marketplaces, such as the LoopNet Network, the Apartments.com network of rental websites, CoStar Showcase,Network, our Homes.com and OnTheMarket residential marketplaces, the Land.com network of rural lands for sale.Network and our CoStar Showcase. We expect to continue to invest significantly in sales and marketing including sales and marketing for our other brands as we seek to grow the numbers of users of, subscribers to and advertisers on, our marketplaces. Our methods of advertising may not be successful in increasing brand awareness or, ultimately, be cost-effective. If we are unable to maintain or enhance user and advertiser awareness of our brands, or if we are unable to recover our marketing and advertising costs through increased usage of our services and increased advertising on the Apartments.com network of rentalour websites, our business, results of operations and financial condition could be adversely affected.
We rely on InternetIf internet search engines to drive traffic to our websites. If search results do not prominently feature our websites prominently,on the search engine results page, traffic to our websites would decrease and, if we are unable to maintain or increase traffic to our marketplaces, our business and operating results could be adversely affected. affected. Our ability to generate revenues from our marketplace business depends, in part, on our ability to
attract users to our websites. Google, Bing, Yahoo!DuckDuckGo and other Internetinternet search websitesengines drive traffic to our websites, including CoStar.com, the LoopNet Network, the Apartments.com network of rental websites, LoopNet.com, BizBuySell.comNetwork, our Homes.com and LandsofAmerica.com.OnTheMarket residential marketplaces, the Land.com Network, Ten-X.com and BizBuySell. For example, when a user typesenters in a search query for an apartment building name or address into an Internetinternet search engine, organicthe internet search engine’s ranking of our Apartments.com or Homes.com webpages will determine how prominently such webpages are displayed inon the search results. However, ourengine results page. Our ability to maintain high organicprominent search result rankings and positioning is not entirely within our control. Our competitors’ search engine optimization, or SEO and SEM efforts may result in webpages from their websites receiving a higher search result page rankingrankings than the rankingswebpages from our websites receive, orwebsites. Internet search engines could revise their algorithms and methodologies in a wayways that would adversely affect our search result rankings. Internet search engine providers could form partnerships or enter into other business relationships with our competitors resulting in competitors’ sites receiving higher search result rankings. Internet search engines are increasingly placing alternative search features (such as featured snippets, local map results and other immersive experiences) on the search engine results page above or more prominently than search engine results. If our search result rankings each ofare not prominently displayed, traffic to our websites may decline which could slow the growth of our user base. Further, search engine providers could align with our competitors, which could adversely affect traffic to our websites. Our websites have experienced fluctuations in search result rankings in the past and we anticipate similar fluctuations will occur in the future. If we experience a material reduction in the number of users directed to our websites through Internetinternet search engines our business, results of operations and financial condition could be adversely affected.
If we are unable to maintain or increase traffic to our marketplaces, our business and operating results could be adversely affected. Our ability to generate revenues from our marketplace businesses depends, in part, on our ability to attract users to our websites. If weotherwise fail to maintain or increase traffic to our marketplaces, our ability to acquire additional subscribers or advertisers and deliver leads to and retain existing subscribers and advertisers could be adversely affected. Our marketing expenses may increase in connection withAs a result, our efforts to maintain or increase traffic to our websites. Our efforts to maintain or generate additional traffic to our marketplaces may notbusiness, results of operations and financial condition could be successful. Even if we are able to attract additional users, increasesadversely affected. Increases in our operating expenses could negatively impact our operating results if we are unable to generate more revenues through increased sales of subscriptions to our marketplace products. We face competitionAdditionally, the methods, including Google Analytics, that we use to attract usersmeasure unique visitors to our marketplace websites. Our existingportals may misstate the actual number of unique persons who visit our network of mobile applications and potentialwebsites for a given month or may differ from the methods used by competitors, include companieswhich may impact the comparability of unique visitors between companies. Additionally, the methods, including Google Analytics, that could devote greater technical and other resources than we have availableuse to provide services that users might view as superiormeasure unique visitors to our offerings. Anyportals may misstate the actual number of unique persons who visit our futurenetwork of mobile applications and websites for a given month or existingmay differ from the methods used by competitors, which may introduce different solutions that attract users away from our services or provide solutions similar to our own that haveimpact the advantagecomparability of better branding or marketing resources. If we are unable to increase traffic to our marketplaces, or if we are unable to generate enough additional revenues to offset increases in expenses related to increasing traffic to our marketplaces, our business and operating results could be adversely affected.unique visitors between companies.
If real estate professionals or other advertisers reduce or cancel their advertising spending with us and we are unable to attract new advertisers, our operating results would be harmed. Our marketplace businesses, including the LoopNet Network, the Apartments.com network of rental websites,Network, our Homes.com and OnTheMarket residential marketplaces, CoStar Showcase and the Land.com network of rural lands for sale,Network, depend on advertising revenues generated primarily through sales to persons in the real estate industry, including broker, agents, property managers and owners, real estate agents, and other advertisers. Our ability to attract and retain advertisers, and ultimately to generate advertising revenue, depends on a number of factors, including:
increasing•Increasing the number of unique visitors to, and users of, our websites and mobile applications;
the•The quantity and quality of the leads that we provide to our advertisers;
the•The success of any marketing and product development efforts directed at attracting additional users and advertisers to our marketplaces;
keeping•Keeping pace with changes in technology and with our competitors; and
offering•Offering an attractive return on investment to our advertisers for their advertising dollars spent with us.
Further, with respect to the Apartments.com network of rental websites,Network and LoopNet Networks, our ability to attract and retain advertisers also depends on the current apartment rental market and apartment vacancy rates.rates and commercial rental market and vacancy rates, respectively. If vacancy rates are too high or too low, advertisers may not need to utilize our marketplace services.
Many of the advertisers who advertise on our marketplaces do not have long-term contracts. These advertisers could choose to modify or discontinue their relationships with us with little or no advance notice. In addition, asAs existing subscriptions for advertising expire, we may not be successful in renewing these subscriptions or securing new subscriptions. We may not succeed in retaining existing advertisers’ spending or capturing a greater share of such spending if we are unable to convince advertisers of the effectiveness of our services as compared to alternatives. In addition, future changes to our pricing methodology for advertising services may cause advertisers to reduce or discontinue their advertising with us. If current advertisers reduce or end their advertising spending with us and we are unable to attract new advertisers, our advertising revenues and business, results of operations and financial condition could be adversely affected.
If we do not invest in product development and provide services that are attractive to our users and to our advertisers, our business could be adversely affected. Our success depends on our continued improvements to provide services that make our marketplaces useful for users, and attractive to our advertisers. As a result, we must continually invest resources in research and development to improve the appeal and comprehensiveness of our services and effectively incorporate new technologies. If we are unable to provide services that users want to use, then users may become dissatisfied and use competitors’ websites. If we are unable to continue offering innovative services, we may be unable to attract additional users and advertisers or retain our current users and advertisers, which could harm our business, results of operations and financial condition.
If we are not able to successfully identify, finance, integrate and/or integratemanage costs related to acquisitions, our business operations and financial position could be adversely affected. affected. We have expanded our markets and services in part through acquisitions of complementary businesses, services, databases and technologies, and expect to continue to do so in the future. Our acquisition strategy to acquire complementary companies or assets depends on our ability to identify, and the availability of, suitable acquisition candidates. We mayare likely to incur costs in the preliminary stages of an acquisition,connection with proposed acquisitions, but may ultimately be unable or unwilling to consummate theany particular proposed transaction for various reasons. For example, in 2021, the FTC withheld approval for our proposed acquisition of RentPath, the purchase agreement was subsequently terminated and we incurred a termination fee of $52 million.
We are also likely to incur severance costs and other integration costs post-acquisition. Costs in connection with acquisitions and integrations may be higher than expected and could adversely affect our financial condition, results of operations or prospects of the combined business. In addition, acquisitions involve numerous risks, including the abilityrisks that we will not be able to realize or capitalize on synergies created through combinations; managingmanage the integration of personnel and products or services; managingmanage the integration of acquired infrastructure and controls; control potential increases in operating costs; managingmanage geographically remote operations; the diversion ofmaintain management’s attention fromon other business concerns and avoid potential disruptions in ongoing operations during integration; the inherent risks in enteringan acquisition process or integration efforts; successfully enter markets and sectors in which we have either limited or no direct experience;experience, including foreign markets whose practices, regulations or laws may pose increased risk; and the potential loss ofretain key employees, clients or vendors and other business partners of the acquired companies. We may not successfully integrate acquired businesses or assets and may not achieve anticipated benefits of an acquisition, including expected synergies. For example, we may be unable to fully integrate BureauxLocaux, Business Immo and OnTheMarket with CoStar Group when and as expected.
We were previously subject to a consent order agreed to among the FTC staff, CoStar Group and LoopNet on April 17, 2012 in connection with the LoopNet merger. This consent order expired in August 2022, but if we become subject to similar orders in the future, compliance with such orders could prevent us from closing certain acquisitions or add significant time and cost to such acquisitions, ultimately making an acquisition prohibitive or preventing us from realizing its anticipated benefits.
External factors, such as compliance with laws and regulations and shifting market preferences, may also impact the successful integration of an acquired business. An acquired business could strain our system of internal controls and diminish its effectiveness. Acquisitions could result in dilutive issuances of equity securities, the incurrence of debt one-time write-offs of goodwill and substantial amortization expenses of other intangible assets. We may be unable to obtain financing on favorable terms, or at all, if necessary to finance future acquisitions, making it impossible or more costly to acquire complementary businesses.complete future acquisitions. If we are able to obtain financing, the terms may be onerous and restrict our operations. Further, certain acquisitions may be subject to regulatory approval, which can be time consumingtime-consuming and costly to obtain or may be denied, and ifas in the case of RentPath. If regulatory approval is obtained, the terms of any such regulatory approvalsapproval may impose limitations on our ongoing operations or require us to divest assets or lines of business. If regulatory approval is denied, we may incur significant, additional costs payable to an acquisition target as a result of failure to close the transaction. For example, we incurred a termination fee of $52 million in connection with termination of the RentPath purchase agreement. Significant break-up fees incurred in the future may adversely affect our results of operations and financial condition.
As a result of our acquisitions, we had approximately $2.7 billion of goodwill and intangibles as of December 31, 2023. Future acquisitions may increase this amount. If we are required to recognize goodwill and intangibles impairment charges in the future, this would negatively affect our financial results in the periods of such charges, which may reduce our profitability.
Market volatilityCyberattacks and security vulnerabilities could result in serious harm to our reputation, business and financial condition. Our business relies on IT Systems and involves the generation, collection, storage, processing and transmission of Confidential Information, including personal information and proprietary business information, by us and by third-party providers we rely on. We own and manage IT Systems but also rely on third-party managed IT Systems and a broad array of third-party products and services to support our business operations. An increasing number of organizations, including large merchants, businesses, technology companies and financial institutions, as well as government institutions, have disclosed security incidents, disruptions to, and breaches of their or third-party providers’ IT Systems, some of which have involved sophisticated and highly targeted attacks, including on websites, mobile applications and infrastructure, following a trend of cyberattacks increasing in frequency and magnitude on a global basis.
Our IT Systems, or those of third parties on which we rely, may be disrupted or damaged and our Confidential Information may be compromised, corrupted, lost or stolen. The tools and techniques (including artificial intelligence) used to obtain unauthorized, improper or illegal access to a target’s systems, data or customers’ data, disable or degrade services, or sabotage systems are constantly evolving and have anbecome increasingly complex and sophisticated. It may be difficult to detect, investigate or remediate such cyber attacks quickly and such attacks often are not recognized or detected until after they have been launched against a target. We expect that unauthorized parties will continue to attempt to gain access to or disrupt our IT systems or facilities through various means, including hacking into IT Systems or facilities or those of our customers or vendors, malware (including ransomware) or attempting to fraudulently induce (for example, through spear phishing attacks or social engineering) our employees, customers, vendors or other users of IT Systems into disclosing access credentials or other sensitive information, which may in turn be used to access our IT Systems.
Numerous and evolving cybersecurity threats, including from diverse threat actors, such as state-sponsored organizations, opportunistic hackers and hacktivists, as well as through diverse attack vectors, such as advanced cyberattacks, phishing, social engineering schemes, malware (including ransomware), malfeasance by insiders, human or technological error, and as a result of bugs, misconfigurations or exploited vulnerabilities in software or hardware, could compromise the confidentiality, availability and integrity of Confidential Information and our IT systems. Our efforts to prevent, detect and respond to data
security incidents, may not be effective due to attackers increasingly using tools and techniques that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic evidence. Further, the security measures and procedures our customers, vendors and other users of our systems have in place to protect IT Systems and Confidential Information may not be successful or sufficient to counter all data breaches, cyberattacks or system failures. There can be no assurance that our cybersecurity risk management program and processes, including our policies, controls, or procedures, will be fully implemented, complied with or effective in protecting our IT Systems and Confidential Information.
Our IT Systems may be vulnerable to cyberattacks or security breaches, and third parties may be able to access our, our customers’ or our employees’ Confidential Information, including personal or proprietary information, that is stored on or accessible through those systems. We have experienced and expect to continue to experience in the future, cyberattacks as well as breaches of our security measures due to human error, malfeasance, system errors or vulnerabilities or other irregularities. In the past, one of our vendors providing IT infrastructure management software was compromised by cyberattacks. We are regularly exposed to vulnerabilities in widely deployed third-party software that we use in the ordinary course of business, such as the Log4J vulnerability. While these vulnerabilities did not have a material adverse effect on our stock price. The trading priceoperations, they and similar incidents require us to devote time and resources to monitoring and remediation on a regular basis.
In the past three years, we have not experienced a material cybersecurity incident, but any actual or perceived cybersecurity incidents or breaches of our common stock has fluctuated widelysecurity could result in any or all of the past,following, among other things, any of which could adversely affect our business and we expect that it will continue to fluctuate in the future. The price could fluctuate widely based on numerous factors, including: economic factors or conditions; quarter-to-quarter variationsresults of operations:
•Interrupt our operations;
•Result in our operating results; changessystems or services being unavailable;
•Result in analysts’ estimatesimproper disclosures of data;
•Result in improper payments;
•Materially harm our reputation and brands;
•Result in significant regulatory scrutiny, enforcement actions, legal proceedings and claims (including class action lawsuits) and other legal and financial exposure;
•Cause us to incur significant remediation, system restoration, incident response and compliance costs;
•Lead to loss of customer confidence in, or decreased use of, our earnings; announcements byproducts and services;
•Divert the attention of management from the operation of our business; and
•Result in significant contractual penalties or other payments as a result of third-party losses or claims.
In addition, any cyberattacks or data security breaches affecting companies that we acquire our customers or vendors (including data center and cloud computing providers) could have similar negative effects on our business. Further, we may not be able to recover any or all damages suffered as a result of such security breach or other security incident from such third-party providers. Notwithstanding our efforts, there can be no assurance that vulnerabilities in widely deployed software will not materially harm our business. Any breach of our security measures or the loss, inadvertent disclosure or unapproved dissemination of Confidential Information about us or our competitorscustomers, including the potential loss or disclosure of technological innovations, newsuch information or data, could result in litigation, regulatory enforcement and potential liability for us, damage our brand and reputation or otherwise materially harm our business, financial condition or competitive position.
The coverage under our insurance policies for cybersecurity and related issues may not be adequate to reimburse us for losses caused by cyberattacks or other security incidents or be available on economically reasonable terms or at all.
Technical problems or disruptions that affect either our customers’ ability to access our services, or other significant or strategic information; general conditions in the commercial real estate industry; general conditions of local, national or global economies; developments or disputes concerning copyrights or proprietary rights or other legal proceedings;software, internal applications, database and regulatory developments. In addition, the stock market in general,network systems underlying our services, could damage our reputation and the shares of Internet-related and other technology companies in particular, have historically experienced extreme price fluctuations. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelatedlead to the operating performance of the specific companies and may have the same effect on the market price of our common stock.
If we are not able to obtain and maintain accurate, comprehensive or reliable data, we could experience reduced demand for our information, analytics and online marketplace services,. lower revenues and increased costs. Our success dependsbusiness, brands and reputation depend upon the satisfactory performance, reliability and availability of our websites, the internet and our service providers. Interruptions in these systems, whether due to system failures, computer viruses, software errors, physical or electronic break-ins, or malicious hacks or attacks on our clients’ confidencesystems (such as denial of service attacks or use of malware such as ransomware) could affect the security and availability of our services on our mobile applications and our websites and prevent or inhibit users’ access to our services. Our operations also depend on our ability to protect our databases, computers and software, telecommunications equipment and facilities against damage from potential dangers such as fire, flood, power loss, security breaches, computer viruses, telecommunications failures, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses, earthquakes and similar events.
In addition, the software, internal applications and systems underlying our services are complex and may not be error-free. We may encounter technical problems when we attempt to enhance our software, internal applications and systems. Our users rely on our services to conduct their own businesses. Disruptions in, the comprehensiveness, accuracy and reliability of the data and analysis we provide. The task of establishing and maintaining accurate and reliable data and analysis is challenging. Iftechnical problems with, or reductions in ability to access our data, including the data we obtain from third partiesservices for any reason could damage our users’ businesses, harm our reputation, result in additional costs or directly from brokers through the Listing Manager feature on CoStar, or analysis is not current, accurate, comprehensive or reliable, we could experience reduced reduce
demand for our information, analytics and online marketplace services, or legal claims by our customers,any of which could result in lower revenues and higher expenses.
Competition could render our services uncompetitive. The markets for information systems and services and for online marketplaces in general is highly competitive and rapidly changing. Competition in these markets may increase further if economic conditions or other circumstances cause customer bases and customer spending to decrease and service providers to compete for fewer customer resources. Our existing competitors, or future competitors, may have greater name recognition, larger customer bases, better technology or data, lower prices, easier access to data, greater user traffic or greater financial, technical or marketing resources than we have. Our competitors may be able to undertake more effective marketing campaigns, obtain more data, adopt more aggressive pricing policies, make more attractive offers to potential employees, subscribers, advertisers, distribution partners and content providers or may be able to respond more quickly to new or emerging technologies or changes in user requirements. If we are unable to retain customers or obtain new customers, our revenues could decline. Increased competition could result in lower revenues and higher expenses, which would reduce our profitability.
Our focus on internal and external investments may place downward pressure on our operating margins. Over the past few years, we have increased the rate of investments in our business, including internal investments in product development to expand the breadth and depth of services we provide to our customers and investments in sales and marketing to generate brand awareness. Our investment strategy is intended to increase our revenue growth in the future. Our operating margins may experience downward pressure in the short term as a result of investments. Furthermore, our investments may not have their intended effect. In addition, our external investments may lose value and we may incur impairment charges with respect to such investments. Such impairment charges may negatively impact our profitability. If we are unable to successfully execute our investment strategy or if we fail to adequately anticipate and address potential problems, we may experience decreases in our revenues and operating margins.
If we are unable to enforce or defend our ownership and use of intellectual property, our business, brands, competitive position and operating results could be harmed. The success of our business depends in large part on our intellectual property, including intellectual property involved in our methodologies, database, services and software. We rely on a combination of trademark, trade secret, patent, copyright and other laws, nondisclosure and noncompetition provisions, license agreements and other contractual provisions and technical measures to protect our intellectual property rights. However, current law may not provide for adequate protection of our databases and the actual data. In addition, legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are uncertain and evolving, and changes in these standards may adversely impact the viability or value of our proprietary rights. If we are not successful in protecting our intellectual property, including our content, our brands andharm our business, results of operations and financial conditioncondition.
Amazon Web Services ("AWS") and Akamai Connected Cloud ("ACC") are distributed computing infrastructure platforms for business operations, commonly referred to as “cloud” computing services. We currently run a majority of our computing on AWS and ACC and have built our software and computer systems to use computing, storage capabilities, bandwidth, and other services provided by AWS and ACC. Given this, any significant disruption of or interference with AWS or ACC, whether temporary, regular, or prolonged, would negatively impact our operations and our business.
We also maintain communications, network and computer hardware used to operate some of our mobile applications and websites at facilities in Virginia and California. We do not own or control the operation of certain of these facilities. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, security breaches, computer viruses, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, earthquakes and similar events. These risks may be increased with respect to operations housed at facilities we do not own or control. The occurrence of any of the foregoing events could result in damage to our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for losses that may occur.
A failure of our systems at any site could result in reduced functionality for our users, and a total failure of our systems could cause our mobile applications or websites to be inaccessible. Problems faced or caused by our information technology service providers, including content distribution network providers, private network providers, internet service providers and third-party web-hosting providers, or with the systems by which they allocate capacity among their customers (as applicable), could adversely affect the experience of our users. Any financial difficulties, such as bankruptcy reorganization, faced by these third-party service providers or any of the service providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party service providers are unable to keep up with our growing needs for capacity, our business could be harmed. The same would be true if a court found that our services infringe other persons’ intellectual property rights. Any intellectual property lawsuits or threatened lawsuits in which we are involved, either as a plaintiff or as a defendant, could cost us a significant amount of time and money and distract management’s attention from operating our business. In addition, if we do not prevail on an intellectual property claim, thisdistribution channels for our mobile applications experience disruptions, such disruptions could result in a changeadversely affect the ability of users and potential users to access or update our methodology or information, analytics and online marketplace services and could reduce our profitability.
Effective trademark, trade secret, patent, and copyright protection may not be available in every country in which our services may be provided. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our intellectual property and our proprietary technology adequately against unauthorized third-party copying or use,mobile applications, which could harm our competitive position.business.
We seek to enforce our rights against people and entities that infringe our intellectual property, including through legal action. Taking such actionOur business interruption insurance may not cover certain events or may be costly, and we cannot ensure that such actions will be successful. Any increase ininsufficient to compensate us for the unauthorized usepotentially significant losses, including the potential harm to the future growth of our intellectual propertybusiness, which may result from interruptions in our service as a result of system failures or malicious attacks. Any errors, defects, disruptions or other performance problems with our services could make it more expensive for us to do business and harm our reputation, business, results of operations orand financial condition.
WeThe significant costs associated with undertaking a large infrastructure project to build out our campus in Richmond, Virginia, have impacted and will continue to impact our financial condition and results of operations. In December 2021, we announced our plans to expand our research and technology center in Richmond, Virginia. These plans have required and will continue to require significant capital expenditures over the next several years and our business plans may change. Future changes in growth or fluctuations in cash flow may also negatively impact our ability to finance this project. Additionally, actual capital expenditures could vary materially from our projected capital expenditures, which could negatively impact our business, operating results and financial condition. If we are provided with any grants, tax credits, abatements or other incentives related to this expansion effort and do not meet requirements associated with those incentives, we may not be able to successfully haltbenefit from those incentives, which could cause the operation of websites that aggregate our data, as well as data from other companies, such as copycat websites that may misappropriate our data. Third parties may misappropriate our data through website scraping, robots or other means and aggregate this data on their websites with data from other companies. In addition, “copycat” websites may misappropriate data on our website and attempt to imitate our brands or the functionality of our website. We may not be able to detect all such websites in a timely manner and, even if we could, technological and legal measures may be insufficient to stop their operations. In some cases, particularly in the case of websites operating outsidecost of the U.S., our available remedies may notproject to be adequate to protect us against the misappropriation of our data. Regardless of whether we can successfully enforce our rights against the operators of these websites, any measures that we may take could require us to expend significant financialsignificantly more than anticipated or other resources.
Third party claims, litigation or government investigations to which we are subject or in which we become involved may significantly increase our expensestaxes above what we currently expect. To date, we have financed construction with cash on hand and plan to finance the remainder of construction in the same way. Use of cash on hand to finance construction has and will continue to reduce the amount of cash available for other corporate uses and could also reduce our ability to meet our scheduled debt service obligations or to meet the covenants required to borrow additional funds under our 2020 Credit Agreement. Any of the foregoing may adversely affect our stock price. Currently and from time to time, we are a party to various third party claims, lawsuits, or government investigations. Any lawsuits, threatened lawsuits or government investigations in which we are involved, whether as plaintiff or defendant, could cost us a significant amount of time and money, could distract management’s attention away from operating our business, could result in negative publicity and could adversely affect our stock price. In addition, if any claims are determined against us or if a settlement requires us to pay a large monetary amount or take other action that materially restricts or impedes our operations, our profitability could be significantly reduced and our financial position could be adversely affected. and results of operations.
Our insurancecurrent or future geographic expansion plans may not be sufficient to cover any losses we incur in connection with litigation claims.
We may be subject to legal liability for collecting, displaying or distributing information. Because the content in our database is collected from various sources and distributed to others, we may be subject to claims for breach of contract, defamation, negligence, unfair competition or copyright or trademark infringement or claims based on other theories. We could also be subject to claims based upon the content that is accessible from our website through links to other websites or information on our website supplied by third parties. We could also be subject to claims that the collection or provision of certain information breached laws and regulations relating to privacy and data protection. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against any claims and we could be subject to public notice requirements that may affect our reputation in the marketplace. Our potential liability for information distributed by us to others could require us to implement measures to reduce our exposure to such liability,increased revenues, which may require us to expend substantial resourcesnegatively impact our business, results of operations and limitfinancial position. Expanding into new markets and increasing the attractivenessdepth of our information, analyticscoverage in existing markets imposes additional burdens on our research, systems development, sales, marketing and online marketplaces to users.
Our actual or perceived failure to comply with privacy laws and standards could adversely affect our business, financial condition and results of operations. We are dependent on information technology networks and systems to process, transmit and store electronic information and to communicate between our locations around the world and with our clients. We collect, use and disclose personally identifiable information, including among other things names, addresses, phone numbers and email addresses. We collect, store and use biometric data, sensitive or confidential transaction information and, in certain circumstances, credit card information. In addition, we collect personal information from tenants and landlords, including social security numbers, dates of birth, financial information, tax returns, employment information, background checks and credit scores, which is used in the apartment rental application process and for the verification of landlords. As a result,general managerial resources. If we are subjectunable to a variety of state, national,manage our expansion efforts effectively, if our expansion efforts take longer or are more expensive than planned or we are not successful in marketing and international laws and regulations that apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal data, including the Fair Credit Reporting Act. Laws and regulations related to privacy and data protection are evolving, withselling our services in existing or new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. For example, in 2016, the EU formally adopted the General Data Protection Regulation, or GDPR, which will apply in all EU member states effective May 25, 2018 and will replace the current EU Data Protection Directive effective on that date. The GDPR introduces new data protection requirements in the EU and substantial fines for breaches of the data protection rules. The GDPR will increasemarkets, our responsibility and liability in relation to personal data that we process, and weexpansion may be required to put in place additional mechanisms to ensure compliance with the new EU data protection rules. Any failure to comply with the rules arising from the EU Data Protection Directive, the GDPR, and related national laws of EU member states, could lead to government enforcement actions and significant penalties against us, and could adversely affect our business, financial condition, cash flows and results of operations. Compliance with any of the foregoing laws and regulations can be costly and can delay or impede the development of new products. A violation of any laws or regulations relating to the collection or use of personal information could result in the imposition of fines against us.
We have undertaken efforts to conform transfers of personal data from the EEA based on current regulatory obligations, the guidance of data protection authorities and evolving best practices. We continue to review our business practices and the evolving regulations and may find it necessary or desirable to make further changes to our personal data handling or engage in additional efforts to cause our transfer and receipt of EEA residents’ personal data to be legitimized under applicable law. As a result of the adoption of GDPR, we may find it necessary to establish systems to maintain EU-origin data in the European Economic Area, or EEA, which may involve substantial expense and distraction from other aspects of our business. Despite our efforts, we may be unsuccessful in establishing legitimate means of transferring certain data from the EEA, which may vary the current data protection landscape.
Our actual or alleged failure to comply with applicable privacy or data security laws, regulations and policies, or to protect personal data, could result in enforcement actions and significant penalties against us, which could result in negative publicity, increase our operating costs, subject us to claims or other remedies and have a material adverse effect on our business, financial conditionposition by increasing our expenses without increasing our revenues.
Our business and results of operations.
Because the interpretation and application of many privacy and data protection laws are uncertain, it is possible that these lawsoperations may be, interpreted and applied in a manner that is inconsistent with our existing data management practices orfinancial condition may be, impacted by the features
lasting effects of the COVID-19 pandemic on the global economy, the real estate industry, and our products. If so, in addition to the possibility of fines, lawsuitscustomers and other claims and penalties, wesuch impact could be requiredmaterially adverse and continue for an unknown period of time. The COVID-19 pandemic created significant economic volatility, uncertainty and disruption around the world, including in the real estate industry.
The demand for office space decreased during and following the COVID-19 pandemic as businesses implemented hybrid or all work-from-home arrangements in response to fundamentally changeemployee desire for more flexibility, which may lead to a downturn in the commercial real estate market. A depressed commercial real estate market would have a negative impact on our business activities and practices or modify our products,core customer base, which could harmimpact our business.
We expect that there will continuecustomers’ ability to be new proposed laws, regulationssubscribe and industry standards concerning privacy, data protectionpay for our services and information securityreduce demand for our services. Reduced demand and increased cancellations could cause our revenues or our revenue growth rates to decline and reduce our profitability. The extent and duration of any future weakening of the economy or future downturns in the United States and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. Our policies concerning the collection, use and disclosure of personally identifiable information are described on our websites. While we believe that our policies are appropriate and that we are in compliance with our policies, we could be subject to legal claims, government action, harm to our reputation or experience significant remediation costs if we experiencecommercial real estate market as a security breach or our practices fail, or are seen as failing, to comply with our policies or with applicable laws concerning personally identifiable information.
Concern of prospective customers regarding our uselasting result of the personal information collected onCOVID-19 pandemic is unknown, and there can be no assurance that any of the governmental or private sector initiatives designed to strengthen the economy will be successful or available to us and our websites or collectedcustomers and, if successful, when performing our services could keep prospective customers from subscribing to our services. Industry-wide incidents or incidents with respect to our websites, including misappropriation of third-party information, security breaches or changes in industry standards, regulations or laws, could deter people from using the Internet or our websites to conduct transactions that involve the transmission of confidential information, which could harm our business.benefits will be seen.
We are subject to a number of risks related to acceptance of credit cards and debit cards forand facilitation of other customer payments. We accept payments for our services through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees may require us to increase the prices we charge and would increase our cost of revenues, either of which could harm our business, financial condition or results of operations.
We depend on processing vendors to completeprocess a significant number of credit and debit card transactions.transactions and ACH payments, for payments made to us directly for our services, by renters to landlords using our online leasing services, or by real estate agents to purchase our Homes.com services. If we or our processing vendorsany one or more of these service providers fail to maintain adequate systems for the authorizationto authorize and processing ofprocess credit card transactions, it could cause one or more of the major credit card companies tocould disallow our continued use of their payment products. If we are unable to maintain our chargeback rate or refund rates at acceptable levels, our processing vendors may increase our transaction fees or terminate their relationships with us. We could lose customers if we are not able to continue to use payment products of the major credit card companies. Further, if we or any one or more of these service providers fail to maintain adequate systems for authorization and processing of credit, debit, ACH or similar payments or if any such service provider were to terminate or modify its relationship with us unexpectedly, our ability to process those customer transactions would be adversely affected, which could decrease sales, discourage customers away from our marketplace services, result in potential legal liability, and harm our business and reputation. In addition, if the systems for the authorization and processing of credit card transactions fail to work properly and, as a result, we do not charge our customers’ credit cards on a timely basis or at all, our business, revenue, results of operations and financial condition could be harmed.
We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted in ways that make it more difficult for us to comply. We are required to comply with payment card industry security standards. Failing to comply with those standards may violate payment card association operating rules, federal and state laws and regulations and the terms of our contracts with payment processors. Any failure to comply also may subject us to fines, penalties, damages and civil liability, and may result in the loss of our ability to accept credit and debit card payments. Further, there is no guarantee that such compliance will prevent illegal or improper use of our payment systems or the theft, loss, or misuse of data pertaining to credit and debit cards, cardholders and transactions.
The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data are compromised due to a breach of data, we may be liable for significant costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. If we fail to adequately control fraudulent credit cardpayment transactions, we may face civil liability, diminished public perception of our security measures and significantly higher credit card-related costs, each of which could harm our business, results of operations and financial condition.
If we are unable to maintain our chargeback rate or refund rates at acceptable levels, our processing vendors may increase our transaction fees or terminate their relationships with us. Any increases in our credit and debit card fees could harm our results of operations, particularly if we elect not to raise our rates for our services to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.
Climate change and other events beyond our control could harm our business. Natural disasters, disease outbreaks and pandemics, power shortages, terrorism, political unrest, telecommunications failure, vandalism, geopolitical instability, war, climate change, and other events beyond our control could negatively impact our operations or otherwise harm our business. Such events may result in damage or loss of service to our data centers or other infrastructure that our operations rely on, potentially reduce the attractiveness of real estate in areas we provide services, cause delays in product development or availability, or result in losses of critical data, any of which may adversely impact our operations.
In addition, the impacts of climate change on the global economy and our industry are rapidly evolving. Physical impacts of climate change (including, but not limited to, floods, droughts, more frequent and/or intense storms, and wildfires) may
disrupt our operations, as well as the operations of our suppliers and customers. Longer-term physical impacts may also result in changing consumer preferences, which may adversely impact demand for certain of our products. Transition impacts of climate change may subject us to increased regulations, reporting requirements (such as the SEC’s proposed climate change disclosure rule), standards, or expectations regarding the environmental impacts of our business. Failure to disclose accurate information in a timely manner may also adversely affect our reputation, business, or financial performance.
Increased attention to ESG matters may require us to incur additional costs or otherwise adversely impact our business. Increased attention to climate change; diversity, equity, and inclusion; and other ESG issues, as well as societal expectations regarding voluntary ESG initiatives and disclosures, may result in increased costs (including, but not limited to, increased costs related to compliance, stakeholder engagement, and contracting), impact our reputation, or otherwise affect our business performance. In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on ESG matters. Such ratings are used by some investors to inform their investment or voting decisions. Unfavorable ESG ratings could lead to negative investor sentiment toward us and/or our industry, which could have a negative impact on our access to and costs of capital. To the extent ESG matters negatively impact our reputation, we may also not be able to compete as effectively to recruit or retain employees. We may take certain actions, including the establishment of ESG-related goals or targets, to improve the ESG profile of our Company and/or offerings and/or to respond to stakeholder demand; however, such actions may be costly or be subject to numerous conditions that are outside our control, and we cannot guarantee that such actions will have the desired effect.
Moreover, while we may create and publish voluntary disclosures regarding ESG matters from time to time, many of the statements in those voluntary disclosures are based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying, measuring and reporting on many ESG matters. Such disclosures may also be at least partially reliant on third-party information that we have not independently verified or cannot be independently verified. In addition, we expect there will likely be increasing levels of regulation, disclosure-related and otherwise, with respect to ESG matters, and increased regulation will likely lead to increased compliance costs as well as scrutiny that could heighten all of the risks identified in this risk factor. Such ESG matters may also impact our suppliers or customers, which may adversely impact our business, financial condition, or results of operations.
Risks related to our data, intellectual property and listings
If we are not able to obtain and maintain accurate, comprehensive or reliable data, we could experience reduced demand for our information, analytics and online marketplace services. Our businesssuccess depends on retainingour clients’ confidence in the comprehensiveness, accuracy and attracting highly capable managementreliability of the data and analysis we provide.
Establishing and maintaining accurate and reliable data and analysis is challenging. If our data, including the data we obtain from third parties or directly from brokers through the Marketing Center feature on CoStar and LoopNet, or analysis is not current, accurate, comprehensive or reliable, we could experience reduced demand for our services or be subject to legal claims by our customers, either of which could result in lower revenues and higher expenses.
If we are unable to enforce or defend our ownership and use of intellectual property, our business, brands, competitive position and operating personnel. Ourresults could be harmed. The success of our business depends in large part on our abilityintellectual property, including intellectual property involved in our methodologies, databases, services and software. We rely on a combination of trademark, trade secret, patent, copyright and other laws, nondisclosure and noncompetition provisions, license agreements and other contractual provisions and technical measures to retainprotect our intellectual property rights. However, current law may not provide for adequate protection of our databases and attract managementthe actual data. In addition, legal standards relating to the validity, enforceability and operating personnel,scope of protection of proprietary rights in internet-related businesses are uncertain and evolving, and changes in these standards may adversely impact the viability or value of our proprietary rights. We find our proprietary content on competitors’ sites. If we are not successful in protecting our intellectual property, including our President and Chief Executive Officer, Andrew Florance,content, our brands and our other officers and key employees. Our business, requires highly skilled technical, sales, management, web product and development, marketing and research personnel, who are in high demand and are often subject to competing offers. To retain and attract key personnel, we use various measures, including employment agreements, awards under a stock incentive plan and incentive bonuses for key employees. These measures may not be enough to retain and attract the personnel we need or to offset the impact on our business of the loss of the services of Mr. Florance or other key officers or employees.
An impairment in the carrying value of goodwill could negatively impact our consolidated results of operations and net worth. Goodwillfinancial condition could be harmed. The same would be true if a court found that our services infringe other persons’ intellectual property rights. Any intellectual property lawsuits or threatened lawsuits in which we are involved, either as a plaintiff or as a defendant, have cost us and identifiable intangible assetscould continue to cost us a significant amount of time and money and distract management’s attention from operating our business. In addition, if we do not prevail on an intellectual property claim, this could result in a change to our methodology or information, analytics and online marketplace services and could reduce our profitability.
Effective trademark, trade secret, patent and copyright protection may not be available in every country in which we provide our services. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the U.S. and, therefore, in certain jurisdictions, we may be unable to protect our intellectual property and our proprietary technology
adequately against unauthorized third-party copying or use, which could harm our competitive position. This risk will increase as we continue to expand our business into new international jurisdictions.
We may not be able to successfully halt the operation of websites that aggregate our data, as well as data from other companies, or "copycat" websites that may misappropriate our data. We have expended significant resources to develop proprietary content and any misappropriation of our data could reduce that value of that content or our return on investment related to that content, which could harm our competitive position and results of operations. Third parties may misappropriate our data through website scraping, robots or other means and aggregate and display this data on their websites. Artificial intelligence is becoming increasingly powerful and sophisticated, and third parties may utilize artificial intelligence to misappropriate our data more quickly and at a larger scale than in the past. In addition, “copycat” websites may misappropriate data on our website and attempt to imitate our brands or the functionality of our website. We may not be able to detect all such websites in a timely manner and, even if we could, technological and legal measures available to us may be insufficient to stop their operations and the misappropriation of our data. Any measures that we may take to enforce our rights could require us to expend significant financial or other resources.
We may be subject to amortization are tested annually by each reporting unitlegal liability for collecting, displaying or distributing information. Because the content in our database is collected from various sources and distributed to others, we may be subject to claims for breach of contract, defamation, negligence, unfair competition or copyright or trademark infringement or claims based on October 1other theories, such as breach of each year for impairmentlaws related to privacy and are tested for impairment more frequentlydata protection. We could also be subject to claims based upon the existencecontent that is accessible from our website through links to other websites or information on our website supplied by third parties. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against any claims, and we could be subject to public notice requirements that may affect our reputation. Our potential liability for information distributed by us to others could require us to implement measures to reduce our exposure to such liability, which may require us to expend substantial resources and limit the attractiveness of one or more indicators. We assess the impairment of long-lived assets, identifiable intangiblesour information, analytics and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments made by management relateonline marketplaces to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows of the carrying amounts of such assets. The accuracy of these judgmentsusers. These risks may be adversely affected by several factors, including the factors listed below:
Significant underperformance relativeexacerbated from impacts, or perceived impacts, of emerging technologies (including, but not limited to, historicalmachine learning) on human rights, privacy, or projected future operating results;
Significant changes in the manner of our use of acquired assets or the strategy for our overall business;
Significant negative industry or economic trends; or
Significant decline in our market capitalization relative to net book value for a sustained period.
These types of events or indicators and the resulting impairment analysis couldother social considerations, which may result in goodwill impairment charges in the future, which would reducereputational harm, compliance costs for any new rules or interpretations, or other adverse impacts on our profitability. Impairment charges could negatively affect ouroperations and financial results in the periods of such charges, which may reduce our profitability. As of December 31, 2017, we had approximately $1.3 billion of goodwill, including $1 billion in our North America operating segment and $30 million in our International operating segment. performance.
If we are unable to obtain or retain listings from commercial real estate brokers, agents, property owners and apartment property managers, our commercial real estate ("CRE") marketplace services including but not limited to LoopNet, the Apartments.com network of rental websites, CoStar Showcase, LandandFarm.com and LandsofAmerica.com, could be less attractive to current or potential customers, which could reduce our revenues. The value of our CREreal estate marketplace services to our customers depends on our ability to increase the number of property listings provided and searches conducted. The success of our CRE marketplace services depends substantially onAs the number of property listings submitted byincreases, so does the utility of a marketplace’s search, listing and marketing services. We depend substantially on brokers, agents, property owners and, in the case of apartment rentals, property managers. This is because an increase in the number ofmanagers to submit listings increases the utility of the online service and of its associated search, listing and marketing services.to our marketplaces. If agents marketing large numbers of property listings, such as large brokers in key real estate markets,these parties choose not to continue their listings with us, or choose to list them with a competitor, our CRE marketplace services could be less attractive to other real estate industry transaction participants, resulting in reduced revenue. Similarly, the value and utility of our other marketplaces, including BizBuySell and BizQuest, are also dependent on attracting and retaining listings.
If we are unable to convince commercial real estate professionals that our CRE marketplace services are superior to traditional methods of listing, searching and marketing commercial real estate, they could choose not to use those services, which could reduce our revenues or increase our expenses. The primary source of new customers for our CRE marketplace services is participants in the commercial real estate community. Many commercial real estate professionals are used to listing, searching and marketing real estate in traditional and off-line ways, such as by distributing print brochures, sharing written lists, placing signs on properties, word-of-mouth and newspaper advertisements. Commercial real estate and investment professionals may prefer to continue to use traditional methods or may be slow to adopt and accept our online products and services. If we are not able to persuade commercial real estate participants of the efficacy of our online products and services, they may choose not to use our CRE marketplace services, which could negatively impact our business. Similarly, if we are unable to convince the business and investment community to utilize our online business for sale marketplaces rather than traditional methods of listing and marketing businesses for sale, our revenues could be negatively affected.
If we are unable to increase our revenues or our operating costs are higher than expected, our profitability may decline and our operating results may fluctuate significantly. We may not be able to accurately forecastmaintain or establish relationships with third-party listing providers, which could limit the information we have to power our revenuesproducts and services and impair our ability to attract or future revenue growth rate.retain customers. Our ability to attract agents and consumers to our Homes.com Network, its websites and mobile applications and other residential real estate tools depends, to some degree, on us providing timely access to comprehensive and accurate real estate listings and information. We get listings data primarily from MLSs in the markets we serve. We also source listings data from public records, other third-party listing providers, and other sources. Many of our expenses, particularly personnel costsagreements with real estate listing providers may be terminated with limited notice or cause. Many of our competitors and occupancy costs, are relatively fixed. As a result, weother real estate websites have similar access to MLSs and listing data and may not be able to adjust spending quickly enoughsource certain real estate information faster or more efficiently than we can. Because MLS participation is voluntary, brokers and homeowners may decline to offset any unexpected increase in expensespost their listings data to their local MLS or revenue shortfall. We may experience higher than expected operating costs, including increased personnel costs, occupancy costs, selling and marketing costs, investments in geographic expansion, acquisition costs, communications costs, travel costs, software development costs, professional feesseek to change or limit the way that data is distributed. Another industry participant or group could create a new listings data service, which could impact the relative quality or quantity of information of our listing providers. The loss of existing relationships with MLSs and other costs. If operating costs exceed our expectations and cannot be adjusted accordingly, our profitability may be reduced and our results of operations and financial position will be adversely affected. Additionally, we may not be able to sustain our revenue growth rates, and our percentage revenue growth rates may decline. Our ability to increase our revenues and operating profit will depend on increased demand for our services. Our sales are affected by, among other things, general economic and commercial real estate conditions. Reduced demand,listing providers, whether due to termination of agreements, loss of MLS memberships, or otherwise, changes in customer preference, a weakeningto our rights to use or timely access listing data or an inability to continue to add new listing providers or changes to the way real estate information is shared, may negatively impact our listing data quality. This could markedly decrease the quantity and quality of the U.S. or global economy, competition or other reasons, may resultsale and rental data we provide, reduce customer confidence in decreased revenuesour products and growth, adversely affecting our operating results.
Our current or future geographic expansion plans may not result in increased revenues,services and cause customers to go elsewhere for real estate listings and information, which may negatively impactcould severely harm our business, results of operations and financial positioncondition.
If we fail to comply with the rules and compliance requirements of MLSs, our access to and use of listings data may be restricted or terminated. Expanding into newOur products and services access and use listings data through MLS memberships and must comply with each MLS’s rules and compliance requirements to maintain their access to listings data and remain a member in good standing. Each MLS has adopted its own rules, policies, and agreement terms governing, among other things, how MLS data
may be used and how listings data must be displayed on our websites and mobile applications. MLS members are also subject to compliance operations requirements and, as a result, must respond to complaints lodged by the MLS or other MLS participants on required timelines. MLS rules vary among markets and investingare in some cases inconsistent between MLSs, such that we are required to customize our websites, mobile applications, or services to accommodate differences between MLS rules. Handling complaints received by MLS members across markets may create heightened operational or financial risks with short response and resolution deadlines. Complying with the rules and compliance requirements of each MLS requires significant investment, including personnel, technology and development resources, towards increasingand the depthexercise of considerable judgment. Rules and compliance requirements of MLSs may be changed across markets, including potential for targeted changes in response to our coverage within existing markets imposes additional burdens on our research, systems development, sales, marketing and general managerial resources.operations. If we are unabledeemed to managebe noncompliant with an MLS’s rules or to have provided improper responses to or resolution of complaints, we may face disciplinary sanctions by that MLS, which could include monetary fines, restricting or terminating our expansion efforts effectively, ifaccess to that MLS’s data, or other disciplinary measures. The loss or degradation of this listings data could materially and adversely affect traffic to our expansion efforts take longer than planned or ifwebsites and mobile applications, which could severely harm our costs for these efforts exceedbusiness, results of operations and financial condition.
Risks related to our expectations, our financial position could be adversely affected. In addition, if we incur significant costs to improve data quality within existing markets, or are not successful in marketing and selling our services in these markets or in new markets, our expansion may have a material adverse effect on our financial position by increasing our expenses without increasing our revenues, adversely affecting our profitability.international operations
International operations expose us to additional business risks, which may reduce our profitability. profitability. Our international operations and expansion subject us to additional business risks, including: currency exchange rate fluctuations; difficulty in adapting to the differing business practices and laws in foreign countries;countries, including differing laws regarding privacy and data protection; difficultiesdifficulty in managing foreign operations; limited protection for intellectual property rights in some countries; difficulty in collecting accounts receivable and longer collection periods; costs of enforcing contractual obligations; impact of recessions in economies outside the U.S.; geopolitical instability, terrorism and war; and potentially adverse tax consequences. In addition, international expansion imposes additional burdens on our executive and administrative personnel, systems development, research and sales departments and general managerial resources. If we are not able to manage our international operations successfully, we may incur higher expenses and our profitability may be reduced. Finally, the investment required for additional international expansion could exceedsometimes exceeds the profit generated from such expansion, which would reducereduces our profitability and may adversely affect our financial position.
Fluctuating foreign currenciescurrency exchange rates may negatively impact our business, results of operations and financial position. Due to our acquisitions of CoStar U.K. Limited (formerly FOCUS Information Limited), Property and Portfolio Research Ltd., Grecam S.A.S., the assets of Belbex Corporate, S.L., Thomas Daily, as well as our expansion into Canada, aA portion of our business is denominated in the British Pound, Euroforeign currencies. We translate sales and Canadian dollar. Asother results denominated in foreign currency into U.S. dollars for our financial statements. During periods of a result, fluctuations instrengthening U.S. dollar, our reported international sales and earnings could be reduced because foreign currencies may have an impact on our business, results of operations and financial position.translate into fewer U.S. dollars. Foreign currency exchange rates have fluctuated and may continue to fluctuate.
Significant foreign currency exchange rate fluctuations may negatively impact our international revenue, which in turn affects our consolidated revenue. Currencies may be affected by internal factors, general economic conditions and external developments in other countries, all of which can have an adverse impact on a country’s currency. Currently, we are not party to any hedging transactions intended to reduce our exposure to exchange rate fluctuations. We may seek to enter into hedging transactions in the future, but we may be unable to enter into these transactions successfully, on acceptable terms or at all. We cannot predict whether we will incur foreign exchange losses in the future. Further, significant foreign exchange rate fluctuations resulting in a decline in the respective local currency may decrease the value of our foreign assets, as well as decrease our revenues and earnings from our foreign subsidiaries, which would reduce our profitability and adversely affect our financial position.
Risks related to our indebtedness
The economic effectsWe have a significant amount of “Brexit” may affect relationships with existing and future customers and could have an adverse impact on our business and operating results. On June 23, 2016, the U.K held a referendum in which British citizens approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit.” On March 29, 2017, the United Kingdom provided its official notice to the European Council that it intends to leave the European Union, commencing a period of up to two years for the U.K. and the other E.U. member states to negotiate the terms of the withdrawal. Uncertainty over the terms of the U.K.’s withdrawal from the E.U. could cause political and economic uncertainty in the U.K. and the rest of Europe,indebtedness, which could harmdecrease our businessflexibility and financial results. In particular, Brexit could result in significant volatility in global equity markets, currency exchange rates and other asset prices, including those related to real property. The impact to us from Brexit will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. This impact may affect not only our U.K. operations but operations in other parts of the E.U. Any transitional or permanent agreements resulting from such negotiations could potentially disrupt the markets we serve and the tax jurisdictions in which we operate.
A potential devaluation of the local currencies of our international customers relative to the U.S. dollar may impair the purchasing power of our international customers and could cause international customers to decrease or cancel orders, or terminate or fail to renew subscriptions for our services.
We translate sales and other results denominated in foreign currency into U.S. dollars for our financial statements. During periods of a strengthening U.S. dollar, our reported international sales and earnings could be reduced because foreign currencies may translate into fewer U.S. dollars. Resulting asset price volatility that could follow the withdrawal of the U.K. from the E.U. may create global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budgets on our products and services. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K determines which E.U. laws to replace or replicate, and those laws and regulations may be cumbersome, difficult or costly in terms of compliance. Further, Brexit may lead other E.U. member countries to consider referendums regarding their E.U. membership. Any of these effects of Brexit, among others, could adversely affect our business, financial condition, operating results and cash flows.
Changes in laws, regulations or fiscal and tax policies or the manner of their interpretation or enforcement could adversely impact our financial performance. New laws or regulations, or changes in existing laws or regulations, or the manner of their interpretation or enforcement, could increase our cost of doing business. In particular, there may be significant changes in U.S. laws and regulations by the current U.S. presidential administration that could affect a wide variety of industries and businesses, including our business. The current U.S. presidential administration has called for substantial change to fiscal and tax policies, and recently adopted tax reform legislation. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for additional discussion of the impact of tax reform on the business. We cannot predict the impact, if any of potential future additional changes to our business. If the current U.S. presidential administration materially modifies U.S. laws and regulations or fiscal and other tax policies, our business, financial condition and results of operationsoperations. As of December 31, 2023, we had $1 billion of Senior Notes outstanding and an additional approximately $750 million available to be drawn under the 2020 Credit Agreement. Borrowings under the 2020 Credit Agreement bear interest at varying rates and expose us to interest rate risk. There can be no assurance that our future cash flows will be sufficient to make payments of interest or principal on the Senior Notes or any amounts due and payable under the 2020 Credit Agreement. If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be adversely affected.
In December 2017, the United States enacted The Tax Cutsforced to reduce or delay investments and Jobs Act (the "Tax Act"), and various provisionscapital expenditures or to dispose of the new law may adversely affect us. Certain aspects of Tax Reform are unclear andmaterial assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be clarified for some time. As required by Securitiesable to effect any such alternative measures on commercially reasonable terms or at all, and, Exchange Commission Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we have provided a provisional estimate on the effect of the Tax Act ineven if successful, those alternative actions may not allow us to meet our consolidated financial statements. However,scheduled debt service obligations. Furthermore, we may be required to change our provisional estimates as a result of new accounting guidance, regulatory guidance, judicial interpretationsincur substantial additional indebtedness, including secured indebtedness, and if we incur additional indebtedness or our continued analysis ofother liabilities, the application of the law, whichrelated risks that we face could materially affect our tax obligations and effective tax rate. In addition, if federal, state or foreign tax authorities change applicable tax laws or issue new guidance, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.intensify.
Our indebtedness could adversely affect us, including by decreasing our business flexibility and increasing our costs. On October 19, 2017, we entered into an amended and restated credit agreement (the ‘‘2017 Credit Agreement’’), which amended and restated in its entirety the existing credit agreement dated April 1, 2014 (the "2014 Credit Agreement"), by and among CoStar, as borrower, CoStar Realty Information, Inc., as co-borrower, the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent. 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 20172020 Credit Agreement contains customary restrictive covenants imposing operating and financial restrictions on us, including restrictions that may limit our ability to engage in acts that we believe may be in our long-term best interests. These covenants restrict our ability and the ability of our domestic subsidiaries to, among other things, (i) incur additional indebtedness, (ii) create, incur assume or permit to exist any liens, (iii) enter into mergers, consolidationspay dividends or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositionsother restricted payments, investments or acquisitions, (iv)
merge or consolidate with another person, and (v) sell, assign, lease or otherwise dispose of assets, (vi) make dividends, distributionsall or substantially all of our assets. In addition, the 2020 Credit Agreement requires us to comply with a maintenance covenant that we will not exceed a total net leverage ratio, calculated as total consolidated debt, net of up to $1.0 billion of unrestricted cash and prepaymentscash equivalents, to consolidated EBITDA, of certain indebtedness, and (vii) enter into certain transactions with affiliates.
4.50 to 1.00. The operating restrictions and financial covenants in the 20172020 Credit Agreement and any future financing agreements may limit our ability to finance future operations or capital needs, to engage in other business activities or to respond to changes in market conditions. Our ability to comply with any financial covenants could be affected materially by events beyond our control, and we may be unable to satisfy any such requirements. If we fail to comply with these covenants, we may need to seek waivers or amendments of such covenants, seek alternative or additional sources of financing or reduce our expenditures. We may be unable to obtain such waivers, amendments or alternative or additional financing on a timely basis or at all, or on favorable terms.
We are required to make periodic principal and interest payments pursuant to the termsA breach of the 2017covenants under the 2020 Credit Agreement. IfAgreement or the indenture that governs the Senior Notes could result in an event of default occurs, the interest rate on overdue amounts will increase and the lenders under the 2017applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration provision applies. In the event the holders of the Senior Notes or our other debt accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
In May 2023, we amended the 2020 Credit Agreement to replace LIBOR as the reference rate with Term SOFR for U.S. dollar-denominated borrowings, SONIA rates for Sterling-denominated borrowings and EURIBOR for Euro-denominated borrowings. It is unclear, however, whether SOFR, SONIA or EURIBOR will retain market acceptance as a LIBOR replacement tool, and we may declare all outstanding borrowings, together with accrued interest and other fees,need to be immediately due and payable and may exercise remedies in respect of the collateral. We may not be able to repay all amounts due under the 2017renegotiate our 2020 Credit Agreement if other LIBOR alternatives are established and become more widely adopted. Each of SOFR, SONIA and EURIBOR differ from LIBOR, both in the event these amounts are declared due upon an event of default.actual rate and how it is calculated. It is not possible to predict what effect the change to SOFR, SONIA and EURIBOR may have on our interest rates.
Negative conditions in the global credit markets may affect the liquidity ofOur indebtedness increases our vulnerability to general adverse economic and industry conditions; requires us to dedicate a portion of our long-term investments. Currently,cash flow from operations to payments on indebtedness, reducing the availability of cash flow to fund capital expenditures, marketing and other general corporate activities; limits our long-term investments include mostly AAA-rated auction rate securities (“ARS”), which are primarily student loan securities supported by guarantees fromability to borrow additional funds; and may limit our flexibility in planning for, or reacting to, changes in our business and the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education. Continuing negative conditions in the global credit markets have prevented some investors from liquidating their holdings of
auction rate securities because the amount of securities submitted for sale has exceeded the amount of purchase orders for such securities. As of December 31, 2017, we held $11 million par value of ARS, all of which failed to settle at auctions. When an auction fails for ARSindustries in which we have invested, weoperate.
A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may be unable to liquidate some or all of these securities at par. In the event we need or desire to immediately access these funds, we will not be able to do so until aincrease our future auction on these investments is successful, a buyer is found outside the auction process or an alternative action is determined. If a buyer is found but is unwilling to purchase the investments at par, we may incur a loss, which wouldborrowing costs, reduce our profitabilityaccess to capital or result in the loss of certain covenant suspensions. Our debt rating could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, warrant. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing.
In addition, during a Covenant Suspension Period, certain customary negative and affirmative covenants contained in the 2020 Credit Agreement are suspended, including the covenants restricting affiliate transactions, incurrence of indebtedness, investments, asset sales and restricted payments. A lowering of one or both of our investment grade ratings would result in increased compliance costs and would impose certain operating restrictions, either of which could be materially adverse to our operations and financial results.
Risks related to regulatory compliance and legal matters
Our actual or perceived failure to comply with privacy laws and standards could adversely affect our business, financial position.condition and results of operations. We depend on IT Systems. We own and manage some IT Systems but also rely on third-party service providers and vendors for a range of products and services, including cloud products/services, that are critical to internal and/or external customer-facing operations. In the course of our business, we and certain of our third-party providers collect, use, transmit and disclose Confidential Information, including personal data about our employees, current and potential customers and employees of third parties we work with.
Our ARS investmentsAs a result, we are subject to a variety of state, national and international laws and regulations that apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal information, including, but not currently actively tradinglimited to, the GDPR and therefore do not currently have a readily determinable market value. The estimated fair valueCCPA. These laws and regulations are evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. For example, the GDPR creates data protection requirements in the EU and UK and imposes substantial fines for breaches of the ARS no longer approximates par value. Wedata protection rules. The GDPR increased our responsibility and liability in relation to personal data that we process. The CCPA, among other things, provides the rights to California residents related to their personal information, places limitations on data uses and creates new audit requirements for higher risk data. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation. Other state privacy laws apply to operations, and similar laws have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of December 31, 2017. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timingbeen proposed, and amount of cash flows, liquidity risk premiums, expected holding periods and default risk of the ARS. We update 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. Based on this assessment of fair value, as of December 31, 2017, we determined there was a decline in the fair value of our ARS investments of approximately $730,000. The decline was deemedlikely will continue to be proposed, in other states and at the federal level, and if passed, may have potentially conflicting requirements that would make compliance challenging.
In addition to risks we face under applicable privacy laws, we are subject to evolving consumer protection and marketing laws and increased litigation and government enforcement by the Federal Trade Commission and state Attorneys General. These agencies are aggressively interpreting and enforcing federal and state consumer protection laws in relation to very broad sales and marketing and advertising contexts. There are also federal laws covering our activities that are a temporary impairmentsource of potential liability for our business, including the CAN-SPAM Act, the TCPA, and was recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. If the issuers of these ARS are unableFCRA. In particular, any claims that we have violated the TCPA could be costly to successfully close future auctions and/litigate and could expose us to substantial statutory damages or their credit ratings deteriorate, we may be requiredsettlement costs.
Any failure or alleged failure to record additional unrealized losses in accumulated other comprehensive losscomply with privacy, data protection or an other-than-temporary impairment chargeconsumer protection laws could lead to earnings on these investments, which would reduce our profitabilitygovernment enforcement actions and litigation and significant penalties against us, and could materially adversely affect our reputation, business, financial position.
We have not made any material changes in the accounting methodology used to determine the fair value of the ARS. We do not expect any material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of December 31, 2017. However, if changes in these assumptions occur,condition, cash flows and should those changes be significant, we may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments.
Technical problems or disruptions that affect either our customers’ ability to access our services, or the software, internal applications, database and network systems underlying our services, could damage our reputation and brands and lead to reduced demand for our information, analytics and online marketplace services, lower revenues and increased costs. Our business, brands and reputation depend upon the satisfactory performance, reliability and availability of our websites, the Internet and our service providers. Interruptions in these systems, whether due to system failures, computer viruses, software errors, physical or electronic break-ins, or malicious hacks or attacks on our systems (such as denial of service attacks), could affect the security and availability of our services on our mobile applications and our websites and prevent or inhibit the ability of users to access our services. Our operations also depend on our ability to protect our databases, computers and software, telecommunications equipment and facilities against damage from potential dangers such as fire, flood, power loss, security breaches, computer viruses, telecommunications failures, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses, earthquakes and similar events. Our users rely on our services when conducting their own businesses. Disruptions in, or reductions in ability to access, our services for whatever reason could damage our users’ businesses, harm our reputation, result in additional costs or result in reduced demand for our information, analytics and online marketplace services, any of which could harm our business, results of operations and financial condition.
In addition, the software, internal applications and systems underlying our services are complex and may not be error-free. Our careful development and testing may not be sufficient to ensure that we will not encounter technical problems when we attempt to enhance our software, internal applications and systems. Any inefficiencies, errors or technical problemsoperations. Compliance with our software, internal applications and systems could reduce the quality of our services or interfere with our customers’ access to our information, analytics and online marketplaces, which could reduce the demand for our services, lower our revenues and increase our costs.
The majority of the communications, network and computer hardware used to operate our mobile applications and websites are located at facilities in Virginia and California. We do not own or control the operation of certain of these facilities. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, security breaches, computer viruses, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, earthquakes and similar events. These risks may be increased with respect to operations housed at facilities we do not own or control. The occurrence of any of the foregoing events could result in damagelaws and regulations can be costly, can delay or impede the development of new products, and may require us to our systemschange the way we operate.
The interpretation and hardware or could cause them to fail completely,application of many privacy and our insurance may not cover such events ordata protection laws are uncertain. These laws may be insufficient to compensate us for lossesinterpreted and applied in a manner that may occur.
A failureis inconsistent with our existing data management practices or the features of our systems at any siteproducts. If so, in addition to the possibility of negative publicity, fines, lawsuits and other claims and penalties, we could result in reduced functionality for our users, and a total failure of our systems could cause our mobile applications or websitesbe required to be inaccessible. Problems faced or caused by our information technology service providers, including content distribution service providers, private network providers, Internet providers and third-party web-hosting providers, or with the systems by which they allocate capacity among their customers (as applicable), could adversely affect the experience of our users. Any financial difficulties, such as bankruptcy reorganization, faced by these third-party service providers or any of the service providers with whom they contract may have negative effects onfundamentally change our business the natureactivities and extent of which are difficult to predict. Ifpractices or modify our third-party service providers are unable to keep up with our growing needs for capacity, our business could be harmed. In addition, if distribution channels for our mobile applications experience disruptions, such disruptions could adversely affect the ability of users and potential users to access or update our mobile applications,products, which could harm our business.
Our business interruption insurance mayChanges in tax laws, regulations or fiscal and tax policies or the manner of their interpretation or enforcement could adversely impact our financial performance. New tax laws or regulations, or changes in existing laws or regulations, or the manner of their interpretation or enforcement, could increase our cost of doing business. In addition, from time to time, U.S. and foreign tax authorities, including state and local governments, consider legislation that could increase our effective tax rate. Further, the Organization for Economic Co-operation and Development has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar 2), with certain aspects of Pillar 2 effective January 1, 2024 and other aspects effective January 1, 2025. While it is uncertain whether the U.S. will enact legislation to adopt Pillar 2, certain countries in which we operate have adopted legislation, and other countries are in the process of introducing legislation to implement Pillar 2. Although we do not cover certain eventsexpect Pillar 2 to have a material impact on our effective tax rate or may be insufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business, which may result from interruptions in our service as a result of system failures or malicious attacks. Any errors, defects, disruptions or other performance problems with our services could harm our reputation, business,consolidated results of operations, financial position, and financial condition.cash flows at this time, certain implementation details have yet to be developed, and the enactment of certain of these changes has not yet taken effect in all jurisdictions in which we operate. As a result, these changes may have adverse consequences for us, may increase our compliance costs and may increase the amount of tax we are required to pay in certain jurisdictions.
Our operating results and revenuesThird-party claims, litigation, regulatory proceedings or government investigations to which we are subject or in which we become involved, regardless of their merit, may significantly increase our expenses and adversely affect our stock price. From time to fluctuations and our quarterly financial resultstime we may be subject to seasonalitythird-party claims, lawsuits, regulatory proceedings or government investigations into whether our business practices comport with applicable law, which may include claims with respect to intellectual property, cybersecurity, privacy, data protection, antitrust, breach of contract, employment, mergers and market cyclicality, eachacquisitions and other matters. Regardless of whichthe merit of such claims, proceedings or investigations, defending against them could causecost us a significant amount of time and money, result in negative publicity, and/or adversely affect our stock priceprice. In addition, if any claims or proceedings are decided against us or if a settlement requires us to pay a large monetary amount or take other action that materially restricts or impedes our operations, our profitability could be negatively affected. The commercial real estate market may be influenced by general economic conditions, economic cycles, annual seasonality factorssignificantly reduced and many other factors, which in turn may impact our financial results. The market is large and fragmented. The different sectors of the industry, such as office, industrial, retail, multifamily, and others, are influenced differently by different factors, and have historically moved through economic cycles with different timing. As such, it is difficultposition could be adversely affected.
We do not currently intend to estimate the potential impact of economic cycles and conditions or seasonality from year-to-yearpay dividends on our overall operating results. In addition, our results may be impacted by seasonality. The timing of widely observed holidayscommon stock and, vacation periods, particularly slowdowns during the end-of-year holiday period, and availability of real estate agents and related service providers during these periods, could significantly affect our quarterly operating results during that period. If we are unable to adequately respond to economic, seasonal or cyclical conditions, our revenues, expenses and operating results may fluctuate from quarter to quarter. Our operating results, revenues and expenses may fluctuate for many reasons, including those described below and elsewhere in this Annual Report on Form 10-K:
Rates of subscriber adoption and retention;
Timing of our sales conference or significant marketing events;
A slow-down during the end-of-year holiday period;
Changes in our pricing strategy and timing of changes;
The timing and success of new service introductions and enhancements;
The shift of focus from, or phase out of services that overlap or are redundant with other services we offer;
The amount and timing of our operating expenses and capital expenditures;
Ourconsequently, your ability to control expenses;
The amount and timing of non-cash stock-based charges;
Costs related to acquisitions of businesses or technologies or impairment charges associated with such investments and acquisitions;
Competition;
Changes or consolidationachieve a return on your investment will depend on appreciation in the real estate industry;
Our investments in geographic expansion and to increase coverage in existing markets;
Interest rate fluctuations;
Successful execution of our expansion and integration plans;
The development of our sales force;
Foreign currency and exchange rate fluctuations;
Inflation; and
Changes in client budgets.
These fluctuations or seasonality effects could negatively affect our results of operations during the period in question and/or future periods or cause our stock price to decline. In addition, changes in accounting policies or practices may affect our level of net income. Fluctuations in our financial results, revenues and expenses may cause the market price of our common stock. We have never declared or paid any cash dividends on our common stock and do not intend to decline.
The consent order approved bydo so for the Federal Trade Commission in connection with the LoopNet merger imposes conditions that could have an adverse effect on us andforeseeable future. We currently intend to invest our business, and failurefuture earnings, if any, to comply with the termsfinance our growth or share repurchases. In addition, provisions of the consent order may result in adverse consequences2020 Credit Agreement governing our credit facilities limit our ability to pay cash dividends. Therefore, you are not likely to receive any dividends on your common stock for the combined company.On April 26, 2012,foreseeable future and the FTC accepted the consent order in connection with the LoopNet merger that was previously agreed to among the FTC staff, CoStar, and LoopNet on April 17, 2012. The consent order was subject to a 30-day public comment period, and on August 29, 2012, the FTC issued its final acceptance of the consent order.
The consent order, which is publicly available on the FTC's website at http://www.ftc.gov/, requires CoStar to maintain certain business practices that the FTC believes are pro-competitive. For example, the consent order requires CoStar to license its products to customers who have bought its competitors' products on a non-discriminatory basis. In addition, CoStar is required to provide the FTC with advance written notification of certain acquisitions for which notification would not otherwise be required under the Hart-Scott-Rodino Premerger Notification Act. This provision of the consent order requiring CoStar to provide the FTC with advance written notification of certain acquisitions could prevent us from closing certain acquisitions or add significant time and cost to these potential acquisitions, ultimately making an acquisition prohibitive or preventing CoStar from realizing anticipated benefitssuccess of an acquisition. Ininvestment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the event that CoStar fails or is unable to comply with the terms of the consent order, CoStar could be subject to an enforcement proceeding that could result in substantial fines and/or injunctive relief.price at which our stockholders have purchased their shares.
We have incurred and will continue to incur acquisition-related costs.We have incurred severance costs and expect to incur additional costs to integrate prior acquisitions, such as IT integration expenses and costs related to the renegotiation of redundant vendor agreements. Costs in connection with acquisitions and integrations may be higher than expected, and we may also incur unanticipated acquisition-related costs. These costs could adversely affect our financial condition, results of operation or prospects of the combined business.
Changes in accounting and reporting policies or practices may affect our financial results or presentation of results, which may affect our stock price. Changes in accounting and reporting policies or practices could reduce our net income, which reductions may be independent of changes in our operations. These reductions in reported net income could cause our stock price to decline.
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Item 1B. | Item 1B. Unresolved Staff Comments |
None.
Item 1C. Cybersecurity
Cybersecurity Risk Management and Strategy
We have developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity, and availability of our critical systems and information.
Our cybersecurity risk management program is guided by the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF). This does not imply that we meet any particular technical standards, specifications, or requirements at all times, only that we use the NIST CSF as a guide to help us identify, assess, and manage cybersecurity risks relevant to our business. Additionally, we engage a third-party vendor regularly to benchmark our information security program’s maturity against the NIST CSF.
Our cybersecurity risk management program is integrated into our overall enterprise risk management program, and shares common methodologies, reporting channels and governance processes that apply across the enterprise risk management program to other legal, compliance, strategic, operational, and financial risk areas.
Key elements of our cybersecurity risk management program include, but are not limited to the following:
a.Internal and external asset identification, assessment, monitoring and classification procedures to evaluate cybersecurity risks and inform mitigation efforts.
b.A security team principally responsible for managing (1) our cybersecurity risk assessment processes, (2) our cyber processes, and (3) our cyber threat and incident response;
c.The use of external service providers, where appropriate, to assess defenses, analyze threat intelligence, or otherwise assist with aspects of our security controls;
d.Cybersecurity awareness training of our employees, software development teams, incident response personnel, and senior management;
e.A cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents; and regular tabletop exercises to assess our response readiness; and
f.A third-party risk management process for key service providers, suppliers, and vendors who access critical systems and data based on risk profile.
We have not identified material risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected us, including our operations, business strategy, results of operations, or financial condition. We face certain ongoing risks from cybersecurity threats that, if realized, are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition. See Risk Factors – “Cyberattacks and security vulnerabilities could result in serious harm to our reputation, business and financial condition.” and “Technical problems or disruptions that affect either our customers’ ability to access our services, or the software, internal applications, database and network systems underlying our services, could damage our reputation and lead to reduced demand for our information, analytics and online marketplace services, lower revenues and increased costs.”
Cybersecurity Governance
Our Board considers cybersecurity risk as part of its risk oversight function and has delegated to the Audit Committee oversight of cybersecurity and other information technology risks. The Audit Committee oversees management’s implementation of our cybersecurity risk management program.
Our Audit Committee receives reports from management on our cybersecurity risks. In addition, management updates the Audit Committee, as necessary, regarding any significant cybersecurity incidents. The Audit Committee reports to the full Board regarding its activities, including those related to cybersecurity.
Our management team is informed and monitors the prevention, detection, mitigation and remediation of cybersecurity threats. The team has primary responsibility for our overall cybersecurity risk management program and supervises both our internal cybersecurity personnel and our retained external cybersecurity consultants. Our management team’s experience includes industry-recognized certifications, such as CISSP, CISM, and CISA, decades of experience as part of our IT team, and previous cybersecurity leadership positions at various Fortune 500 companies and U.S. Defense contractors.
Our management team is informed about and monitors the prevention, detection, mitigation, and remediation of cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us; and alerts and reports produced by security tools deployed in the IT environment.
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Item 2. | Item 2. Properties |
Our headquarters is located at 1331 L Street, NW, in downtown Washington, DC, where we occupy approximately 157,480169,000 square feet of which 7,980 square feet is a sublease expiring January 31, 2019, and the remaining 149,500 square feet isoffice space, with a lease that expires on May 31, 2025 (with two 5-yearfive-year renewal options). Our headquarters is used primarily by our North America operating segment. Our principal facility in the U.K. is located in London, where we occupy approximately 15,90042,000 square feet of office space. Our lease for this facility has a term ending August 31, 2025. This facility is used by our International operating segment.segment, including our recent acquisition, OnTheMarket.
In addition to our downtown Washington, DC leased facility and our London facility, we established our research operations headquartersOur staff in Richmond, Virginia in 2016, in whichoccupy an owned building located at 501 S 5th Street, where we occupy 132,987approximately 310,000 square feet, an owned building located at 901 Semmes Avenue, where we own and occupy approximately 117,000 square feet; and leased space at 951 E Byrd St., where we occupy approximately 97,000 square feet. These locations house research, product development and sales functions. All of office space. In addition to the Richmond research facility, weour owned properties are held under fee simple ownership and are not materially encumbered.
We also operate certain of our research, development and sales functions out of additional leased office spaces in Irvine, California; San Diego, California; Columbia, Maryland;and Atlanta, Georgia; and Glasgow, Scotland.Georgia. Additionally, we lease office space in a variety of other metropolitan areas. These locations include, among others, the following: Austin, Texas;Hendersonville, Tennessee; Norfolk, Virginia; Boston, Massachusetts; Chicago, Illinois; Irvine,New York, New York; San Francisco, California; and Los Angeles, California; and San Francisco, California.
We believe these facilities are suitable and appropriately support our business needs.
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Item 3. | Item 3. Legal Proceedings |
Currently, and from time to time, we are involved in litigation incidental to the conduct of our business. We are not a partybusiness, including, among others, the legal actions discussed under “Contingencies” in Note 13 “Commitments and Contingencies” of the Notes to any lawsuit or proceedingour Consolidated Financial Statements. While our management presently believes that the ultimate outcome of these proceedings, individually and in the opinionaggregate, will not materially harm our business, financial position, future results of our management based on consultations withoperations or liquidity, legal counsel, is likely toproceedings are inherently uncertain, and unfavorable rulings could, individually or in the aggregate, have a material adverse effect on our business, financial position, orfuture results of operations.operations or liquidity.
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Item 4. | Item 4. Mine Safety Disclosures |
Not Applicable.
PART II
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Item 5. | Market for the Registrant’s Common Stock,Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Price Range of Common Stock.Our common stock is traded on the Nasdaq Global Select Market under the symbol “CSGP.” The following table sets forth, for the periods indicated, the high and low daily closing prices per share of our common stock, as reported by the Nasdaq Global Select Market.
|
| | | | | | | |
| | High | | Low |
| Year Ended December 31, 2016 | | | |
| First Quarter | $ | 199.73 |
| | $ | 148.90 |
|
| Second Quarter | $ | 218.66 |
| | $ | 176.85 |
|
| Third Quarter | $ | 224.10 |
| | $ | 204.82 |
|
| Fourth Quarter | $ | 215.75 |
| | $ | 180.29 |
|
| | | | |
| Year Ended December 31, 2017 | |
| | |
|
| First Quarter | $ | 211.37 |
| | $ | 186.15 |
|
| Second Quarter | $ | 266.93 |
| | $ | 204.52 |
|
| Third Quarter | $ | 287.02 |
| | $ | 263.60 |
|
| Fourth Quarter | $ | 310.19 |
| | $ | 271.63 |
|
As of February 1, 2018,January 31, 2024, there were 1,3421,654 holders of record of our common stock.
Dividend Policy. We have never declared or paid any dividends on our common stock. The 2017 Credit Agreement includes covenants that, subject to certain exceptions, restrict our ability and the ability of our subsidiaries to pay dividends or distributions. Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to applicable limitations under Delaware law, and will be dependent upon our results of operations, financial position and other factors deemed relevant by our Board of Directors. We do not anticipate paying any dividends on our common stock during the foreseeable future, but intend to retain any earnings for future growth of our business.
Recent Issues of Unregistered Securities. We did not issue any unregistered securities during the yearsyear ended December 31, 2016 and 2017.2023.
Issuer Purchases of Equity Securities. The following table is a summary of our repurchases of common stock during each of the three months infor the quarter ended December 31, 2017:2023:
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | Total Number of Shares Purchased(1) | | Average Price Paid
per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or
Programs |
| October 1 through 31 | | 12,677 | | | $ | 76.89 | | | — | | | — | |
| November 1 through 30 | | 14,445 | | | 73.48 | | | — | | | — | |
| December 1 through 31 | | 8,252 | | | 88.25 | | | — | | | — | |
| Total | | 35,374 | | | $ | 78.15 | | | — | | | — | |
| ___________________ | | | | | | | | |
|
| | | | | | | | | |
| Month, 2017 | | Total Number of Shares Purchased | | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
| October 1 through 31 | | 388 | | | $269.67 | | — | | — |
| November 1 through 30 | | — | | | — | | — | | — |
| December 1 through 31 | | 1,645 | | | 297.27 | | — | | — |
| Total | | 2,033 | (1) | | $292.00 | | — | | — |
(1)The number of shares purchased consists of shares of common stock tendered by employees to the Company to satisfy the employees’employees' minimum tax withholding obligations arising as a result of vesting of restricted stock grants under the Company’s 2016 Stock Incentive Plan, as amended, which shares were purchased by the Company based on their fair market value on the trading day immediately preceding the vesting date. None of these share purchases were part of a publicly announced program to purchase common stock of the Company.
Stock Price Performance Graph
The stock performance graph below shows how an initial investment of $100 in our common stock would have compared to:
•An equal investment in the Standards & Poor's StockS&P 500 (“S&P 500”) Index; and
•An equal investment in the S&P 500 Internet SoftwareServices & ServicesInfrastructure Index.
The comparison covers the period beginning December 31, 2012,2018 and ending on December 31, 2017,2023, and assumes the reinvestment of any dividends. Note that this performance is historical and is not necessarily indicative of future price performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company / Index | | 12/31/18 | | 12/31/19 | | 12/31/20 | | 12/31/21 | | 12/31/22 | | 12/31/23 |
| CoStar Group, Inc. | | $ | 100.00 | | | $ | 177.36 | | | $ | 273.99 | | | $ | 234.27 | | | $ | 229.09 | | | $ | 259.06 | |
| S&P 500 Index | | 100.00 | | | 131.49 | | | 155.68 | | | 200.37 | | | 164.08 | | | 207.21 | |
| S&P 500 Internet Services & Infrastructure Index | | 100.00 | | | 134.46 | | | 156.09 | | | 178.95 | | | 137.79 | | | 160.76 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Company / Index | | 12/31/12 | | 12/31/13 | | 12/31/14 | | 12/31/15 | | 12/31/16 | | 12/31/17 |
| CoStar Group, Inc. | | $ | 100.00 |
| | $ | 206.53 |
| | $ | 205.47 |
| | $ | 231.27 |
| | $ | 210.91 |
| | $ | 332.27 |
|
| S&P 500 Index | | 100.00 |
| | 132.39 |
| | 150.51 |
| | 152.59 |
| | 170.84 |
| | 208.14 |
|
| S&P 500 Internet Software & Services Index | | 100.00 |
| | 148.79 |
| | 158.60 |
| | 211.44 |
| | 222.39 |
| | 313.02 |
|
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Item 6. | Selected Consolidated Financial and Operating Data |
Item 6. Reserved
Selected Consolidated Financial and Operating Data
(in thousands, except per share data)
The following table provides selected consolidated financial and other operating data for the five years ended December 31, 2017. The consolidated statements of operations data shown below for each of the three years ended December 31, 2017, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 are derived from audited consolidated financial statements that are included in this report. The consolidated statements of operations data for each of the years ended 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 shown below are derived from audited consolidated financial statements for those years that are not included in this report. Information about prior period acquisitions that may affect the comparability of the selected financial information presented below is included in "Item 1. Business." The total assets and total long-term liabilities reported in the consolidated balance sheet data have been reclassified to conform to our current presentation as a result of the retrospective application of the authoritative guidance to simplify the presentation of debt issuance costs.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Consolidated Statements of Operations Data: | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| Revenues | $ | 440,943 |
| | $ | 575,936 |
| | $ | 711,764 |
| | $ | 837,630 |
| | $ | 965,230 |
|
| Cost of revenues | 129,185 |
| | 156,979 |
| | 188,885 |
| | 173,814 |
| | 220,403 |
|
| Gross profit | 311,758 |
| | 418,957 |
| | 522,879 |
| | 663,816 |
| | 744,827 |
|
| Operating expenses | 257,604 |
| | 338,079 |
| | 511,424 |
| | 518,911 |
| | 571,011 |
|
| Income from operations | 54,154 |
| | 80,878 |
| | 11,455 |
| | 144,905 |
| | 173,816 |
|
| Interest and other income | 326 |
| | 516 |
| | 537 |
| | 1,773 |
| | 4,044 |
|
| Interest and other expense | (6,943 | ) | | (10,481 | ) | | (9,411 | ) | | (10,016 | ) | | (9,014 | ) |
| Loss on debt extinguishment | — |
| | — |
| | — |
| | — |
| | (3,788 | ) |
| Income before income taxes | 47,537 |
| | 70,913 |
| | 2,581 |
| | 136,662 |
| | 165,058 |
|
| Income tax expense | 17,803 |
| | 26,044 |
| | 6,046 |
| | 51,591 |
| | 42,363 |
|
| Net income (loss) | $ | 29,734 |
| | $ | 44,869 |
| | $ | (3,465 | ) | | $ | 85,071 |
| | $ | 122,695 |
|
| Net income (loss) per share — basic | $ | 1.07 |
| | $ | 1.48 |
| | $ | (0.11 | ) | | $ | 2.64 |
| | $ | 3.70 |
|
| Net income (loss) per share — diluted | $ | 1.05 |
| | $ | 1.46 |
| | $ | (0.11 | ) | | $ | 2.62 |
| | $ | 3.66 |
|
| Weighted average shares outstanding — basic | 27,670 |
| | 30,215 |
| | 31,950 |
| | 32,167 |
| | 33,200 |
|
| Weighted average shares outstanding — diluted | 28,212 |
| | 30,641 |
| | 31,950 |
| | 32,436 |
| | 33,559 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| Consolidated Balance Sheet Data: | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| Cash, cash equivalents and long-term investments | $ | 277,943 |
| | $ | 544,163 |
| | $ | 437,325 |
| | $ | 577,175 |
| | $ | 1,221,533 |
|
| Working capital | 196,913 |
| | 480,521 |
| | 337,452 |
| | 472,545 |
| | 1,141,269 |
|
| Total assets | 1,250,440 |
| | 2,070,483 |
| | 2,079,571 |
| | 2,185,063 |
| | 2,873,441 |
|
| Total long-term liabilities | 213,674 |
| | 440,982 |
| | 400,510 |
| | 375,904 |
| | 75,525 |
|
| Stockholders’ equity | 927,862 |
| | 1,513,546 |
| | 1,543,780 |
| | 1,654,213 |
| | 2,651,250 |
|
| |
Item 7. | Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements,” including statements about our beliefs and expectations. There are many risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Potential factors that could cause actual results to differ materially from those discussed in any forward-looking statements include, but are not limited to, those stated above in Item 1A. under the headings “Risk Factors - Cautionaryheading “Cautionary Statement Concerning Forward-Looking Statements” and “ Riskin Item 1A. under the heading “Risk Factors,” as well as those described from time to time in our filings with the Securities and Exchange Commission.
SEC.
All forward-looking statements are based on information available to us on the date of this filing and we assume no obligation to update such statements, whether as a result of new information, future events or otherwise. The following discussion should be read in conjunction with our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the Securities and Exchange CommissionSEC and the consolidated financial statements and related notes included in this Annual Report on Form 10-K.Report.
Overview
CoStar Group, Inc. (the “Company” or “CoStar”) is the number one provider of information, analytics and online marketplaces to the commercial real estate industry in the United States (“U.S.”) and the United Kingdom (“U.K.”) based on the fact that we offer the most comprehensive commercial real estate database available; have the largest research department in the industry; own and operate leading online marketplaces for commercial real estate and apartment listings in the U.S. based on the numbers of unique visitors and site visits per month; provide more information, analytics and marketing services than any of our competitors and believe that we generate more revenues than any of our commercial real estate information and online marketplace competitors. We created and compiled our standardized platform ofOur principal information, analytics and online marketplace services where industry professionals and consumersare described in the following paragraphs by type of service:
CoStar
CoStar is our subscription-based integrated platform for commercial real estate including apartments, and the related business communities, can continuously interact and facilitate transactions by efficiently accessing and exchanging accurate and standardized real estate-related information.
We have five flagship brands - CoStar®, LoopNet®, Apartments.comTM, BizBuySell® and LandsofAmericaTM. Our subscription-based services consist primarily of information, analytics and online marketplace services offered over the Internet to commercial real estate industry and related professionals. Our subscription-based information services consist primarily of CoStar Suite® services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional®and CoStar Tenant® and through our mobile application, CoStar Go®. Our integrated suite of online service offeringsintelligence, which includes information about office, industrial, retail, multifamily, hospitality and student housing properties, properties for sale, comparable sales, tenants, space available for lease, comparable sales information, information about properties for sale, tenant information, Internet marketing services, analytical capabilities, information for clients' websites, information about industry professionals and their business relationships, data integrationindustry news and industry news. market status and provides lease analytical, risk management, and hospitality benchmarking capabilities. CoStar's revenue growth rate for the year ended December 31, 2023 slowed compared to the year ended December 31, 2022. We expect CoStar's revenue growth rate for the year ending December 31, 2024 to be consistent with the revenue growth rate for the year ended December 31, 2023 primarily due to converting legacy STR customers to our new CoStar based benchmarking product offsetting lower inflation-based price adjustments.
Information Services
We provide market research, consulting and analysis for commercial real estate investors and lenders vialease management technology solutions, including lease administration, lease accounting and abstraction services, through our CoStar Portfolio Strategy and CoStar SuiteReal Estate Manager service offerings;offerings, as well as portfolio and debt analysis, management and reporting capabilities through our CoStar Investment Analysis and CoStar Risk Analytics service offerings;offerings. We also provide benchmarking and analytics for the hospitality industry both on a subscription basis and an ad hoc basis. We earn revenue on ad hoc transactions as reports or data are delivered to customers. We provide information services internationally, through our Business Immo, Belbex and Thomas Daily businesses in France, Spain and Germany, respectively. Information Services revenue growth rate for the year ended December 31, 2023 slowed compared to the year ended December 31, 2022. We expect Information Services' revenue growth rate for the year ending December 31, 2024 to slow compared to the revenue growth rate for the year ended December 31, 2023 as a result of transitioning legacy STR customers to our new CoStar based benchmarking product.
Multifamily
Apartments.com is the flagship brand of our apartment marketing network of subscription-based advertising services and provides property management companies and landlords with a comprehensive advertising destination for their available rental units and offers renters a platform for searching for available rentals. This network also earns transaction-based revenue primarily from providing online tenant applications, including background and credit checks, and rental payment processing. Multifamily's revenue growth rate for the year ended December 31, 2023 accelerated compared to the year ended December 31, 2022 as a result of higher sales volumes driven by increases in pricing on renewals and an increase in the number of properties listed on our network. We expect Multifamily's revenue growth rate for the year ending December 31, 2024 to moderate compared to the revenue growth rate for the year ended December 31, 2023 due to lower inflation-based price adjustments.
LoopNet
Our LoopNet network of commercial real estate and lease management solutions, including lease administration and abstraction services, through our CoStar Real Estate Manager service offerings.
Our LoopNetwebsites offer subscription-based, online marketplace services that enable commercial property owners, landlords and real estate agents working on their behalf to listadvertise properties for sale or for lease and to submit detailed information about property listings. Commercial real estate agents, buyers and tenants also use LoopNet'sthe LoopNet network of online marketplace services to search for available property listings that meet their criteria. LoopNet's revenue growth rate for the year ended December 31, 2023 accelerated compared to the year ended December 31, 2022, due to an increase in the average price per listing. We expect LoopNet's revenue growth rate for the year ending December 31, 2024 to
Apartments.com is partslow compared to the revenue growth rate for the year ended December 31, 2023 as a result of our network of apartment marketing sites, which also includes ApartmentFinder.comTM, ForRent.com®, ApartmentHomeLiving.comTM, WestsideRentals.com®, AFTER55.com®, CorporateHousing.comTM, ForRentUniversity.com®disruptions related to transitioning sales and Apartamentos.comTM, our apartment-listing site offered exclusively in Spanish. service activities to a dedicated LoopNet field sales team.
Residential
Our apartment marketing network of subscription-based services offers renters a searchable database of over one million listingsHomes.com Network and provides professional property management companies and landlords with an advertising destination. Our apartment marketing network draws on and leverages CoStar’s multifamily database, which contains detailed information on apartment properties. We designed the Apartments.com, ApartmentFinder.com and Apartamentos.com websites to meet renter preferences and demands, creating qualified renter prospects for our advertisers. We acquired the ForRent.com, AFTER55.com, CorporateHousing.com and ForRentUniversity.com sites when we completed the acquisition of ForRent,OnTheMarket have enabled us to expand our offerings to the residential for sale market. Homes.com is a division of Dominion Enterprises,homes for sale listings site that combines our proprietary research with listing information to allow homebuyers an informative and collaborative experience finding homes for sale or lease. Homes.com provides residential real estate professionals subscription-based access to applications that manage residential real estate agent workflow and receives transaction-based revenue for marketing campaigns delivered on third-party platforms. In February 21, 2018. Our network of apartment marketing sites provide a comprehensive selection of rentals, information on actual availabilities and rents, and in-depth data on neighborhoods, including restaurants, nightlife, history, schools and other facts important2024, we began selling subscription memberships to renters. To help renters findpromote the information that meets their needs, the sites also offer innovative search tools suchhome listing as well as the PolygonTM Search tool,agent in the sort order. OnTheMarket is a property portal in the U.K., which allows rentersprimarily offers subscriptions-based advertising services to specifically defineagents. Residential's revenues for the area in which they wantyear ended December 31, 2023 decreased compared to find an apartment. The Screening ProsTM is an
online apartment leasing platform that includes tenant screening services, rental applicationsthe year ended December 31, 2022, due to the discontinuation of certain non-strategic products and payments processing and lease renewals. On February 21 2018, we completedservices. We expect Residential's revenues for the acquisition of ForRent, a division of Dominion Enterprises, for a purchase price of approximately $385 million, payable approximately $350 million in cash and approximately $35 million in shares of CoStar Group common stock, subjectyear ending December 31, 2024 to a customary working capital adjustment and other post-closing adjustments. Approximately $11 million ofincrease compared to the cash consideration was placed in escrowyear ended December 31, 2023 due to be used for potential employee stay bonuses.
Similar to our other past acquisitions, we have been, and plan to continue, integrating, further developing and cross-selling the services offered by Apartments.com, ApartmentFinder.com and Westside RentalsOnTheMarket Acquisition and the launch of our new Homes.com product.
Other Marketplaces
Our other services we offer, including but not limited to CoStar Suite. Now that we have completed the ForRent acquisition, we plan to develop and cross-sell the services offered by ForRent. We have incurred and plan to continue to incur product development costs to improve the online Apartments.com and ApartmentFinder.com platforms and Apartamentos.com. We have incurred and plan to continue to incur sales and marketing expenses in order to support the Apartments.com network and to increase brand awareness. To generate brand awareness and site traffic for the Apartments.com network, we utilize a multi-channel marketing campaign featuring television and radio advertising, online/digital advertising, social media and out-of-home ads and reinforced that advertising with Search Engine Marketing. We plan to continue to utilize these marketing methods and will continue to work to determine the optimal level of marketing investment for our services for future periods.
Our BizBuySell services, whichmarketplaces include BizQuest®, provideTen-X, an online marketplaceauction platform for commercial real estate and our BizBuySell and Land.com networks. The BizBuySell network provides online marketplaces for businesses and franchises for sale. Oursale, and THE Land.com network of sites, which provideprovides online marketplaces for rural landsland for sale, includes LandsofAmerica, LandAndFarm and LandWatch®.sale. Other marketplaces' revenues for the year ended December 31, 2023 decreased compared to the year ended December 31, 2022, due to lower Ten-X transaction revenue, partially offset by growth in other products. We expect other marketplaces' revenues for the year ending December 31, 2024 to be consistent with the revenues for the year ended December 31, 2023.
OurSubscription-based Services
The majority of our revenue is generated from service offerings span all commercial property types, including office, retail, industrial, multifamily, commercial land, mixed-use and hospitality.
Subscription-Based Services
Our subscription-based services consist primarily of information, analytics and online marketplace services offered over the Internet to commercial real estate industry and related professionals. Our servicesthat are typically distributed to our clients under subscription-based license agreements that typically renew automatically a majority of whichand have a term of at least one year. Upon renewal, manyWe recognize subscription revenues on a straight-line basis over the life of the subscription contract rates may change in accordance with contract provisions or as a result of contract renegotiations. To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based services rather than charging fees based on actual system usage or number of paid clicks. Depending oncontract.
For the type of service, contract rates are generally 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. Our subscription clients generally pay contract fees in advance on a monthly basis, but in some cases may pay us in advance on a quarterly or annual basis.
As ofyears ended December 31, 20172023, 2022 and 2016,2021, our annualized net new bookings of subscription-based services on all contracts were approximately $43$286 million, $305 million and $29$217 million, respectively,respectively. Net new bookings is calculated based on the annualized amount of change in ourthe Company's sales bookings resulting from all new subscription-based contracts, or upsales on allchanges to existing subscription-based contracts less write downs and cancellations of subscription-based contracts for the period reported. Our netNet new bookings is a quantitative measurement that is typically closely correlated with our subscription revenue results.calculated on all subscription-based contracts without regard to contract term. Net new bookings is considered a keyan operating metric that is an indicator of future subscription revenue growth and is also used as a metric of salesforcesales force productivity by managementus and investors. We recognize subscriptionHowever, information regarding net new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues on a straight-line basis over time. Revenue from our subscription-based contracts were approximately 95%, 93% and 93% of total revenue for the lifeyears ended December 31, 2023, 2022 and 2021, respectively. The increase in the percentage of our revenue from subscription-based contracts from 2022 to 2023 was primarily due to the contract.
growth in our subscription-based services.
For each of the twelvetrailing 12 months ended December 31, 20172023, 2022 and 2016,2021, our contract renewal raterates for existing CoStar subscription-based services on annualfor contracts waswith a term of at least one year were approximately 91%90%, 90% and 90%92%, respectively,respectively; and, therefore, our cancellation raterates for those services was approximately 9% and 10%, respectively, for the same time periods.periods were approximately 10%, 10% and 8%, respectively. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, management also believeswe believe that the rate may be a reliable indicator of short-term and long-term performance.performance absent extraordinary circumstances. Our trailing twelve-month12-month contract renewal rate may decline if, among other reasons,as a result of negative economic conditions, lead to greater business failures and/or consolidations among our clients, reductions in customer spending or decreases in our customer base. Revenue from our subscription-based contracts with a term of at least one year were approximately 82%, 80% and 77% of total revenue for the trailing 12 months ended December 31, 2023, 2022 and 2021, respectively. The increase in the percentage of our revenue from subscription-based contracts for contracts with a term of at least one year from 2022 to 2023 was due to increases in sales of longer term advertising products. The decrease in the percentage of our revenue from subscription-based contracts with a term of at least one year from 2023 to 2022 was primarily due to the acquisitions of companies that contained a higher percentage of transaction-based revenue than our legacy businesses, as well as increases in sales of shorter term advertising products.
Development, Investments and Expansion
We plan to continue to invest in our business and our services, evaluate strategic growth opportunities and pursue our key priorities as described below. We are committed to supporting, improving and enhancing our information, analytics and online marketplace solutions, including expanding and improving our information, news, analyticofferings for our client base and online marketplace solutions.site users, including property owners, property managers, buyers, commercial tenants and residential renters and buyers. We expect to continue our software development efforts to improve existing services, introduce new services, integrate and cross-sell services, integrate recently completed acquisitions and expand and develop supporting technologies for our research, sales and marketing organizations. To generate brand awareness and site traffic forWe may reevaluate our listing sites, we utilize a variety of marketing campaigns, including television and radio advertising, online/digital advertising, social media and out-of-home ads, and Search Engine Marketing. We expect topriorities as economic conditions continue to invest in sales and marketing in 2018. As we continue to assess the success and effectiveness of our marketing campaign, we will continue to work to determine the optimal level of marketing investment for our services for future periods.
evolve.
Our key priorities for 2018the year ending December 31, 2024 currently include:
•Continuing to develop and recent developments include:
•invest in our residential marketplaces. For Homes.com we are creating additional content for neighborhoods, parks, schools and condos. In February 2024, we launched our new Homes.com subscription memberships to promote the home listing as well as the agent in the sort order on the website. We are migrating allintend to create an expanded dedicated sales force, to supplement the efforts of our commercial real estate information capabilities to our flagship CoStar Suite product and winding down the legacy LoopNet Information products. This process begansales team already in the fall of 2017 with the integration of the CoStar and Loopnet databases. In addition, we are transitioning the LoopNet marketplace to a pure pay-to-list marketing site for commercial real estate. We completed integrating the backend systems of the LoopNet and CoStar databases during the second half of 2017; the two services now share a unified database of information, creating operating efficiencies and improving the data available to our customers. We also introduced new enhancements on the CoStar homepage, including a Listing Manager feature that we believe will increase the quantity and quality of the listing information available by enabling brokers and other industry participants to load information directly into the integrated system. This in turn is expected to reduce the time and costs associated with researching and maintaining our comprehensive database of commercial real estate information.
•On February 21, 2018, we completed the acquisition of ForRent, a division of Dominion Enterprises, ForRent’s primary service is digital advertising through a network of four multifamily websites - which includes ForRent.com, AFTER55.com, CorporateHousing.com and ForRentUniversity.com.place. We plan to increase our residential marketing investment, including the launch of a brand campaign.
For OnTheMarket, we plan to integrate developOnTheMarket into the Company’s operations including additional investment in marketing, content creation and cross-sellenhancing OnTheMarket’s website to improve performance and facilitate better search engine optimization.
•Continuing to enhance our facilities. We are expanding our research and technology center in Richmond, Virginia. We broke ground on the services offered by ForRent. ForRent.com is expectedexpansion in November 2022 and expect construction to remain a distinct, complementary brandbe substantially completed in the first half of 2026. The expansion includes construction of two new buildings spanning 750,000 square feet and will bring our campus footprint to Apartments.com, giving property managers and owners more exposure for their listings.
•over 1 million square feet when completed. We plan to continue developing new,increase our research, technology, operations, software development, marketing and improve existing, productsales teams in this location.
In February 2024, we closed on the purchase of a building in Arlington, Virginia and service offeringswe plan to build out a space for our employees. The lease on our current Washington, DC headquarters ends in 2025.
We expect our investment in these priorities will increase our research, selling and marketing and facilities expenses, including potential impairments of assets associated with the acquired building. Each of these will reduce our net income and may reduce our cash on hand for the year ending December 31, 2024 compared to the apartments industry. In particular, we expect to implement the ability for renters to apply for leases online, for landlords to run tenant credit and background checks and, eventually, for landlords and tenants to generate leases and process payments online.
•We continue to invest in our research operations to support continued growth of our information and analytics offerings. We established our research operations headquarters in Richmond, Virginia, in December 2016, which is developing into a technology innovation hub, powering the software development necessary to support the content within our information, analytics and marketing services. In connection with the opening of the Richmond research headquarters, we have expanded our research team to continue to meet the growing content needs of our clients. In addition, we expect to continue to invest in our International research operations in Madrid, Spain and the U.K.
In support of our continued expansion and development, in October 2017, we completed a public equity offering of 3,317,308 shares of common stock for $260.00 per share. Net proceeds from the public equity offering were approximately $834 million, after deducting approximately $29 million of underwriting discounts and fees. We expect to use the net proceeds from the public equity offering to fund all or a portion of the costs of any strategic acquisitions we determine to pursue in the future, to finance the growth of our business and for working capital and other general corporate purposes. General corporate purposes may include additions to working capital, capital expenditures, repayment of debt, investments in the Company’s subsidiaries, possible acquisitions and the repurchase, redemption or retirement of securities, including the Company’s common stock.
On October 19, 2017, the Company entered into an amended and restated credit agreement (the ‘‘2017 Credit Agreement’’), which amended and restated in its entirety the existing 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 Company also paid off the remaining balance of $310 million and interest on its existing $400 million term loan under the 2014 Credit Agreement on October 19, 2017 from existing cash balances. The 2017 revolving credit facility may be used for working capital and other general corporate purposes of the Company and its subsidiaries. The Company had no outstanding long-term debt atyear ended December 31, 2017 as it had not drawn any amounts under its 2017 Credit Agreement. The restructured credit facility, along with the proceeds from the October equity offering and cash generated by the Company’s business are expected to support the Company’s continued growth and give the Company flexibility to act on strategic acquisition opportunities that may arise.
2023. We intend to continue to assess the need for additional investments in our business in addition to the investments discussed above, in order to develop and distribute new services and functionality within our current platform or expand the reach of, or otherwise improve, our current service offerings. Any future product development or expansion of services, combination and coordination of services or elimination of services or corporate expansion, development or restructuring efforts could reduce our profitability and increase our capital expenditures. Any new investments, changes to our service offerings or other unforeseen events could cause us to experience reduced revenues or generate losses and negative cash flow from operations in the future. Any development efforts must comply with our credit facility, which contains restrictive covenants that restrict our operations and use of our cash flow and may prevent us from taking certain actions that we believe could increase our profitability or otherwise enhance our business.
For further discussion of our Company, strategy and products, see our business overview set forth in "Item 1. Business" in this Report.
Impacts of Current Economic Conditions
Property Developments
As we have doneIn response to the concerns over inflation risk, the U.S. Federal Reserve raised interest rates over the past two years. It is currently unclear how the commercial real estate industry will ultimately be impacted by the current economic conditions. Rising interest rates or a period of elevated interest rates may reduce demand for all types of real estate. If the demand for office space or other real estate decreases significantly, there could be a downturn in the past, we expect to continue to identify new facilities and consolidate existing facilities to better accommodate the changing demandscommercial real estate market that may materially adversely affect many of our business operationsclients. A depressed commercial real estate market would have a negative impact on our core customer base, which could impact our customers’ ability to subscribe and employees. As a result, we may incur additional lease restructuring chargespay for the abandonment of certain lease spaceour services and the impairment of leasehold improvements.reduce demand for our services. Reduced demand and increased cancellations could cause our revenues or our revenue growth rates to decline and reduce our profitability.
Non-GAAP Financial Measures
We prepare and publicly release quarterly unaudited financial statements prepared in accordance with generally accepted accounting principles ("GAAP").GAAP. We also disclose and discuss certain non-GAAP financial measures in our public releases, investor conference calls and filings with the Securities and Exchange Commission.SEC. The non-GAAP financial measures that we may disclose include net income before interest and other income (expense), income taxes, depreciation and amortization (“EBITDA”),EBITDA, adjusted EBITDA, adjusted EBITDA margin,
non-GAAP net income and non-GAAP net income per diluted share (also referred to as “non-GAAP EPS”).share. EBITDA is our net income before interest income or expense, net, other income or expense, net, loss on debt extinguishment, income taxes, depreciation and amortization. We typically disclose EBITDA on a consolidated and an operating segment basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission.SEC. Adjusted EBITDA is different from EBITDA because we further adjust EBITDA for stock-based compensation expense, acquisitionacquisition- and integration relatedintegration-related costs, restructuring costs and settlements and impairments incurred outside our ordinary course of business. Adjusted EBITDA margin represents adjusted EBITDA divided by revenues for the period. Non-GAAP net income and non-GAAPis determined by adjusting our net income per diluted share are similarly adjusted for stock-based compensation expense, acquisitionacquisition- and integration relatedintegration-related costs, restructuring costs, settlement and impairment costs and loss on debt extinguishment incurred outside our ordinary course of business and loss on debt extinguishment, as well as amortization of acquired intangible assets and other related costs. costs, and then subtracting an assumed provision for income taxes. Non-GAAP net income per diluted share is a non-GAAP financial measure that represents non-GAAP net income divided by the number of diluted shares outstanding for the period used in the calculation of GAAP net income per diluted share.
We may disclose adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share on a consolidated basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission.SEC. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors meaningfully evaluate and compare our results of operations to our previously reported results of operations or to those of other companies in our industry.
We view EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share as operating performance measures and as such wemeasures. We believe that the most directly comparable GAAP financial measure to EBITDA, adjusted EBITDA and non-GAAP net income is net income. We believe the most directly comparable GAAP financial measures to non-GAAP net income per diluted share and adjusted EBITDA margin are net income per diluted share and net income divided by revenue, respectively. In calculating EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share, we exclude from net income (loss) the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions and the material limitations on the use of these non-GAAP financial measures as a result of these exclusions. EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share are not measurements of financial performance under GAAP and should not be considered as a measure of liquidity, as an alternative to net income (loss) or as an indicator of any other measure of performance derived in accordance with GAAP. Investors and potential investors in our securities should not rely on EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share as a substitute for any GAAP financial measure, including net income.income and net income per diluted share. In addition, we urge investors and potential investors in our securities to carefully review the GAAP financial information included as part of our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are filed with the Securities and Exchange Commission,SEC, as well as our quarterly earnings releases, and compare the GAAP financial information with our EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share.
EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share may be used by management to internally measure our operating and management performance and may be used by investors as supplemental financial measures to evaluate the performance of our business. We believe that these non-GAAP measures, when viewed with our GAAP results and the accompanying reconciliation,reconciliations, provide additional information to investors that is useful to understand the factors and trends affecting our business.business without the impact of certain acquisition-related items. We have spent more than 30 years building our database of commercial real estate information and expanding our markets and services partially through acquisitions of complementary businesses. Due to the expansion of our information, analytics and online marketplace services, which has includedthese acquisitions, our net income has included significant charges for amortization of acquired intangible assets, depreciation and other amortization, acquisitionacquisition- and integration relatedintegration-related costs, restructuring costs and loss on debt extinguishment. Adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share exclude these charges and provide meaningful information about the operating performance of our business, apart from charges for amortization of acquired intangible assets, depreciation and other amortization, acquisitionacquisition- and integration relatedintegration-related costs, restructuring costs; settlement and impairment costs incurred outside our ordinary course of business. We believe the disclosure of non-GAAP measures can help investors meaningfully evaluate and compare our performance from quarter to quarterquarter-to-quarter and from year to year.year-to-year without the impact of these items. We also believe the non-GAAP measures we disclose are measures of our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest income or expense, net, other income or expense, net, income taxes, stock-based compensation expenses, acquisitionacquisition- and integration relatedintegration-related costs, restructuring costs;costs, loss on debt extinguishment and settlement and impairment costs incurred outside our ordinary course of business, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on EBITDA and may rely on adjusted EBITDA, adjusted
EBITDA margin, non-GAAP net income or non-GAAP net income per diluted share to provide a financial measure by which to compare our operating performance against that of other companies in our industry.
Set forth below are descriptions of financial items that have been excluded from net income to calculate EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to net income :income:
•Amortization of acquired intangible assets in cost of revenues may be useful for investors to consider because it represents the diminishing value of any acquired trade names and other intangible assets and the use of our acquired database technology, which is one of the sources of information for our database of commercial real estate information. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•Amortization of acquired intangible assets in operating expenses may be useful for investors to consider because it represents the estimated attrition of our acquired customer base. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•Depreciation and other amortization may be useful for investors to consider because they generally represent the wear and tear on our property and equipment used in our operations. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•The amount of interest income or expense, net and other income or expense, net we generate may be useful for investors to consider and may result in current cash inflows. However, we do not consider the amount of interest and other income to be a representative component of the day-to-day operating performance of our business.
The amount of interest and other expense we incur may be useful for investors to consider and may result in current cash inflows and outflows. However, we do not consider the amount of interest income or expense, net and other income or expense, net to be a representative component of the day-to-day operating performance of our business.
The amount of loss on our debt extinguishment may be useful for investors to consider and may result in current cash outflows. However, we do not consider the amount of the loss on debt extinguishment to be a representative component of the day-to-day operating performance of our business.
•Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes during the period and may reduce the amount of funds otherwise available for use in our business. However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business.
•The amount of loss on our debt extinguishment may be useful for investors to consider because it generally represents losses from the early extinguishment of debt. However, we do not consider the amount of the loss on debt extinguishment to be a representative component of the day-to-day operating performance of our business.
Set forth below are descriptions of additional financial items that have been excluded from EBITDA to calculate adjusted EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to net income:
•Stock-based compensation expense may be useful for investors to consider because it represents a portion of the compensation of our employees and executives. Determining the fair value of the stock-based instruments involves a
high degree of judgment and estimation and the expenses recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-based awards. Therefore, we believe it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business.
•The amount of acquisitionacquisition- and integration relatedintegration-related costs incurred may be useful for investors to consider because theysuch costs generally represent professional service fees and direct expenses related to acquisitions. Because we do not acquire businesses on a predictable cycle, we do not consider the amount of acquisitionacquisition- and integration relatedintegration-related costs to be a representative component of the day-to-day operating performance of our business.
•The amount of settlement and impairment costs incurred outside of our ordinary course of business may be useful for investors to consider because they generally represent gains or losses from the settlement of litigation matters, charges related to terminations of contracts or impairments of acquired intangible assets or other long lived assets. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•The amount of restructuring costs incurred may be useful for investors to consider because they generally represent costs incurred in connection with a change in a contract or a change in the makeup of our properties or personnel. WeBecause we do not carry out restructuring activities on a predictable cycle, we do not consider the amount of restructuring related costs to be a representative component of the day-to-day operating performance of our business.
The amount of settlement and impairment costs incurred outside of our ordinary course of business may be useful for investors to consider because they generally represent gains or losses from the settlement of litigation matters or impairments on acquired intangible assets. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
The amount of loss on our debt extinguishment may be useful for investors to consider because they generally represent gains or losses from the early extinguishment of debt. However, we do not consider the amount of the loss on debt extinguishment to be a representative component of the day-to-day operating performance of our business.
The financial items that have been excluded from our net income to calculate non-GAAP net income and non-GAAP net income per diluted share are amortization of acquired intangible assets and other related costs, stock-based compensation, acquisitionacquisition- and integration relatedintegration-related costs, restructuring and related costs and settlement and impairment costs and loss on debt extinguishment incurred outside
our ordinary course of business. These items are discussed above with respect to the calculation of adjusted EBITDA together with the material limitations associated with using this non-GAAP financial measure as compared to net income. In addition to these exclusions from net income, (loss). Wewe subtract an assumed provision for income taxes to calculate non-GAAP net income. In 2017, 2016,both 2023 and 2015,2022, we assumed a 38%26% tax rate, which approximatesapproximated our historical long-term statutory corporate tax rate, excluding the impact of discrete items.
Non-GAAP net income per diluted share is a non-GAAP financial measure that represents non-GAAP net income divided by the number of diluted shares outstanding for the period used in the calculation of GAAP net income per diluted share.
Management compensates for the above-described limitations of using non-GAAP measures by using a non-GAAP measure only to supplement our GAAP results and to provide additional information that is useful to investors to understand the factors and trends affecting our business.
The following table showsSee Note 14 of the Notes to Consolidated Financial Statements included in Part IV of this Report for the reconciliation of our net income reconciled to our EBITDA and our net cash flows from operating, investing and financing activities for the indicated periods (in thousands):EBITDA.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 122,695 |
| | $ | 85,071 |
| | $ | (3,465 | ) |
| Amortization of acquired intangible assets in cost of revenues | 19,707 |
| | 22,819 |
| | 30,077 |
|
| Amortization of acquired intangible assets in operating expenses | 17,684 |
| | 22,731 |
| | 27,931 |
|
| Depreciation and other amortization | 26,252 |
| | 24,615 |
| | 20,524 |
|
| Interest and other income | (4,044 | ) | | (1,773 | ) | | (537 | ) |
| Interest and other expense | 9,014 |
| | 10,016 |
| | 9,411 |
|
| Loss on debt extinguishment | 3,788 |
| | — |
| | — |
|
| Income tax expense | 42,363 |
| | 51,591 |
| | 6,046 |
|
| EBITDA | $ | 237,459 |
| | $ | 215,070 |
| | $ | 89,987 |
|
| | | | | | |
| Net cash flows provided by (used in) | | | | | |
|
| Operating activities | $ | 234,703 |
| | $ | 200,642 |
| | $ | 139,773 |
|
| Investing activities | $ | (72,267 | ) | | $ | (23,259 | ) | | $ | (215,502 | ) |
| Financing activities | $ | 480,430 |
| | $ | (30,563 | ) | | $ | (29,032 | ) |
Consolidated Results of Operations
The following table provides our selected consolidated results of operations for the indicated periods (in thousands of dollarsmillions and as a percentage of total revenue):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues | $ | 965,230 |
| | 100 | % | | $ | 837,630 |
| | 100 | % | | $ | 711,764 |
| | 100 | % |
| Cost of revenues | 220,403 |
| | 23 |
| | 173,814 |
| | 21 |
| | 188,885 |
| | 27 |
|
| Gross profit | 744,827 |
| | 77 |
| | 663,816 |
| | 79 |
| | 522,879 |
| | 73 |
|
| Operating expenses: | |
| | |
| | |
| | |
| | |
| | |
|
| Selling and marketing (excluding customer base amortization) | 318,362 |
| | 33 |
| | 296,483 |
| | 35 |
| | 302,226 |
| | 42 |
|
| Software development | 88,850 |
| | 9 |
| | 76,400 |
| | 9 |
| | 65,760 |
| | 9 |
|
| General and administrative | 146,128 |
| | 15 |
| | 123,297 |
| | 15 |
| | 115,507 |
| | 16 |
|
| Customer base amortization | 17,671 |
| | 2 |
| | 22,731 |
| | 3 |
| | 27,931 |
| | 4 |
|
| Total operating expenses | 571,011 |
| | 59 |
| | 518,911 |
| | 62 |
| | 511,424 |
| | 72 |
|
| Income from operations | 173,816 |
| | 18 |
| | 144,905 |
| | 17 |
| | 11,455 |
| | 1 |
|
| Interest and other income | 4,044 |
| | — |
| | 1,773 |
| | — |
| | 537 |
| | — |
|
| Interest and other expense | (9,014 | ) | | (1 | ) | | (10,016 | ) | | (1 | ) | | (9,411 | ) | | (1 | ) |
| Loss on debt extinguishment | (3,788 | ) | | (2 | ) | | — |
| | — |
| | — |
| | — |
|
| Income before income taxes | 165,058 |
| | 16 |
| | 136,662 |
| | 16 |
| | 2,581 |
| | — |
|
| Income tax expense | 42,363 |
| | 4 |
| | 51,591 |
| | 6 |
| | 6,046 |
| | 1 |
|
| Net income (loss) | $ | 122,695 |
| | 12 | % | | $ | 85,071 |
| | 10 | % | | $ | (3,465 | ) | | (1 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Revenues | $ | 2,455.0 | | | 100 | % | | $ | 2,182.4 | | | 100 | % | | $ | 1,944.1 | | | 100 | % |
| Cost of revenues | 491.5 | | | 20 | | | 414.0 | | | 19 | | | 357.2 | | | 18 | |
| Gross profit | 1,963.5 | | | 80 | | | 1,768.4 | | | 81 | | | 1,586.9 | | | 82 | |
| Operating expenses: | | | | | | | | | | | |
| Selling and marketing (excluding customer base amortization) | 989.9 | | | 40 | | | 684.2 | | | 31 | | | 622.0 | | | 32 | |
| Software development | 267.6 | | | 11 | | | 220.9 | | | 10 | | | 201.0 | | | 10 | |
| General and administrative | 381.5 | | | 16 | | | 338.7 | | | 16 | | | 256.8 | | | 13 | |
| Customer base amortization | 42.2 | | | 2 | | | 73.6 | | | 3 | | | 74.8 | | | 4 | |
Total operating expenses(1) | 1,681.2 | | | 68 | | | 1,317.4 | | | 60 | | | 1,154.6 | | | 59 | |
Income from operations(1) | 282.3 | | | 11 | | | 451.0 | | | 21 | | | 432.3 | | | 22 | |
| Interest income (expense), net | 213.6 | | | 9 | | | 32.1 | | | 1 | | | (31.6) | | | (2) | |
| Other income, net | 5.4 | | | — | | | 3.4 | | | — | | | 3.3 | | | — | |
Income before income taxes(1) | 501.3 | | | 20 | | | 486.5 | | | 22 | | | 404.0 | | | 21 | |
| Income tax expense | 126.6 | | | 5 | | | 117.0 | | | 5 | | | 111.4 | | | 6 | |
Net income(1) | $ | 374.7 | | | 15 | % | | $ | 369.5 | | | 17 | % | | $ | 292.6 | | | 15 | % |
| __________________________ | | | | | | | | | | | |
(1) Amounts may not foot due to rounding.The following table provides our revenues by type of service (in thousands of dollarsmillions and as a percentage of total revenue):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | | | |
| 2023 | | 2022 | | 2021 | | | | |
| CoStar | $ | 925.2 | | | 38 | % | | $ | 837.0 | | | 38 | % | | $ | 722.8 | | | 37 | % | | | | | | | | |
| Information services | 170.9 | | | 7 | | | 157.4 | | | 7 | | | 141.7 | | | 7 | | | | | | | | | |
| Multifamily | 914.2 | | | 37 | | | 745.4 | | | 34 | | | 678.7 | | | 35 | | | | | | | | | |
| LoopNet | 264.8 | | | 11 | | | 230.9 | | | 11 | | | 207.5 | | | 11 | | | | | | | | | |
| Residential | 46.1 | | | 2 | | | 73.7 | | | 3 | | | 74.6 | | | 4 | | | | | | | | | |
| Other marketplaces | 133.8 | | | 5 | | | 138.0 | | | 6 | | | 118.8 | | | 6 | | | | | | | | | |
Total revenues(1)(2) | $ | 2,455.0 | | | 100 | % | | $ | 2,182.4 | | | 100 | % | | $ | 1,944.1 | | | 100 | % | | | | | | | | |
| __________________________ | | | | | | | | | | | | | | | | | | | |
(1)For further discussion of our Company, strategy and products, see our business overview set forth in "Item 1. Business" in this Report.
(2) Totals may not foot due to rounding.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Information and analytics | | | | | | | | | | | |
CoStar Suite(1) | $ | 463,185 |
| | 48 | % | | $ | 408,456 |
| | 49 | % | | $ | 360,440 |
| | 50 | % |
Information services(2) | 72,618 |
| | 8 |
| | 77,178 |
| | 9 |
| | 75,790 |
| | 11 |
|
| Online marketplaces | | | | | | | | | | | |
Multifamily(3) | 279,855 |
| | 29 |
| | 224,835 |
| | 27 |
| | 160,630 |
| | 23 |
|
Commercial property and land(4) | 149,572 |
| | 15 |
| | 127,161 |
| | 15 |
| | 114,904 |
| | 16 |
|
| Total revenues | $ | 965,230 |
| | 100 | % | | $ | 837,630 |
| | 100 | % | | $ | 711,764 |
| | 100 | % |
(1) CoStar Suite is comprised of CoStar Property Professional, CoStar COMPS Professional, CoStar Tenant; and CoStar Portfolio Strategy.
(2) Information services is comprised of LoopNet Premium Searcher; CoStar Real Estate Manager; CoStar Risk Analytics COMPASS; CoStar Investment Analysis Portfolio Maximizer; CoStar Investment Analysis Request; CoStar Brokerage Applications; PROPEX; Grecam; Belbex and Thomas Daily.
(3) Multifamily is comprised of Apartments.com, ApartmentFinder.com, ApartmentHomeLiving.com, WestsideRentals.com; Apartamentos.com; and The Screening Pros.
(4) Commercial property and land is comprised of LoopNet Premium Lister; LoopLink; CoStar Advertising; BizBuySell and BizQuest; LandsofAmerica, LandAndFarm and LandWatch; and CoStar Private Sale Network.
Comparison of Year Ended December 31, 20172023 and Year Ended December 31, 20162022
The following table provides a comparison of our selected consolidated results of operations for the yearyears ended December 31, 20172023 and 20162022 (in thousands of dollars)millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | Increase (Decrease) | | Increase (Decrease) |
| Revenues: | | | | | | | |
| CoStar | $ | 925.2 | | | $ | 837.0 | | | $ | 88.2 | | | 10.5 | % |
| Information services | 170.9 | | | 157.4 | | | 13.5 | | | 8.6 | |
| Multifamily | 914.2 | | | 745.4 | | | 168.8 | | | 22.6 | |
| LoopNet | 264.8 | | | 230.9 | | | 33.9 | | | 14.7 | |
| Residential | 46.1 | | | 73.7 | | | (27.6) | | | (37.4) | |
| Other marketplaces | 133.8 | | | 138.0 | | | (4.2) | | | (3.0) | |
| Total revenues | 2,455.0 | | | 2,182.4 | | | 272.6 | | | 12.5 | |
| Cost of revenues | 491.5 | | | 414.0 | | | 77.5 | | | 18.7 | |
| Gross profit | 1,963.5 | | | 1,768.4 | | | 195.1 | | | 11.0 | |
| Operating expenses: | | | | | | | |
| Selling and marketing (excluding customer base amortization) | 989.9 | | | 684.2 | | | 305.7 | | | 44.7 | |
| Software development | 267.6 | | | 220.9 | | | 46.7 | | | 21.1 | |
| General and administrative | 381.5 | | | 338.7 | | | 42.8 | | | 12.6 | |
| Customer base amortization | 42.2 | | | 73.6 | | | (31.4) | | | (42.7) | |
| Total operating expenses | 1,681.2 | | | 1,317.4 | | | 363.8 | | | 27.6 | |
| Income from operations | 282.3 | | | 451.0 | | | (168.7) | | | (37.4) | |
| Interest income, net | 213.6 | | | 32.1 | | | 181.5 | | | 565.4 | |
| Other income, net | 5.4 | | | 3.4 | | | 2.0 | | | 58.8 | |
| Income before income taxes | 501.3 | | | 486.5 | | | 14.8 | | | 3.0 | |
| Income tax expense | 126.6 | | | 117.0 | | | 9.6 | | | 8.2 | |
| Net income | $ | 374.7 | | | $ | 369.5 | | | $ | 5.2 | | | 1.4 | % |
|
| | | | | | | | | | | | | | |
| | 2017 | | 2016 | | Increase (Decrease) ($) | | Increase (Decrease) (%) |
| Revenues | | | | | | | |
| CoStar Suite | $ | 463,185 |
| | $ | 408,456 |
| | $ | 54,729 |
| | 13 | % |
| Information services | 72,618 |
| | 77,178 |
| | (4,560 | ) | | (6 | ) |
| Multifamily | 279,855 |
| | 224,835 |
| | 55,020 |
| | 24 |
|
| Commercial property and land | 149,572 |
| | 127,161 |
| | 22,411 |
| | 18 |
|
| Total revenues | 965,230 |
| | 837,630 |
| | 127,600 |
| | 15 |
|
| Cost of revenues | 220,403 |
| | 173,814 |
| | 46,589 |
| | 27 |
|
| Gross profit | 744,827 |
| | 663,816 |
| | 81,011 |
| | 12 |
|
| Operating expenses: | |
| | |
| | | |
|
|
| Selling and marketing (excluding customer base amortization) | 318,362 |
| | 296,483 |
| | 21,879 |
| | 7 |
|
| Software development | 88,850 |
| | 76,400 |
| | 12,450 |
| | 16 |
|
| General and administrative | 146,128 |
| | 123,297 |
| | 22,831 |
| | 19 |
|
| Customer base amortization | 17,671 |
| | 22,731 |
| | (5,060 | ) | | (22 | ) |
| Total operating expenses | 571,011 |
| | 518,911 |
| | 52,100 |
| | 10 |
|
| Income from operations | 173,816 |
| | 144,905 |
| | 28,911 |
| | 20 |
|
| Interest and other income | 4,044 |
| | 1,773 |
| | 2,271 |
| | 128 |
|
| Interest and other expense | (9,014 | ) | | (10,016 | ) | | (1,002 | ) | | (10 | ) |
| Loss on extinguishment | (3,788 | ) | | — |
| | 3,788 |
| | NM |
|
| Income before income taxes | 165,058 |
| | 136,662 |
| | 28,396 |
| | 21 |
|
| Income tax expense | 42,363 |
| | 51,591 |
| | (9,228 | ) | | (18 | ) |
| Net income | $ | 122,695 |
| | $ | 85,071 |
| | $ | 37,624 |
| | 44 | % |
| __________________________ | | | | | | | |
| NM - Not meaningful | | | | | | | |
Revenues.Revenues. Revenues increased $273 million, or 12.5%, to $965$2.5 billion. The increase in our revenues included:
•an increase in Multifamily revenues of $169 million, or 22.6%, due to higher sales volume driven by an increase in 2017, from $838the number of properties listed on our network and increases in pricing on renewals,
•an increase in CoStar revenues of $88 million, or 10.5%, due to higher sales volume driven by the impact of annual price increases and customer upgrades on contract renewals, as well as an increase in 2016. The $127subscribers,
•an increase in LoopNet revenues of $34 million, or 14.7%, due to an increase wasin the average price for listings,
•an increase in Information services revenues of $14 million, or 8.6%, primarily attributable to increasedan increase in revenues for STR of $7 million, CoStar Real Estate Manager of $5 million and $2 million of revenue related to the Business Immo Acquisition,
•a decrease in Residential revenues of approximately $55$28 million, or 13% from continued organic growth in CoStar Suite as well as a movement of our Loopnet customers onto our CoStar platform as a result of the Loopnet integration. Information Services decreased $5M or 6% primarily37.4%, due to continued wind downthe discontinuation of Loopnet Informationcertain products including Premium Searcherand services that were inconsistent with our long-term business strategy partially offset by $2 million of revenue related to the OnTheMarket Acquisition and
•a decrease in Other marketplaces revenues of $4 million, or 3.0%, due to lower property volumes auctioned on Ten-X partially offset by increases in our Real Estate Manager offering. Multifamily year over year increasesrevenue of $55 million or 24% was primarily attributable to organic growth as well as some smaller increases for several acquisitions. Commercial PropertyLand.com.
Gross Profit and Land revenue increased $22 million or 18% over 2016 primarily due to organic growth as well as an increase due to the Landwatch acquisition. Overall, revenue growth rates are expected to be in line or slightly higher than 2017.
Gross Profit.Cost of Revenues. Gross profit increased $195 million, or 11.0%, to $745 million$2.0 billion in 2017, from $664 million in 2016. The2023, and the gross marginprofit percentage decreased from 81% to 77%80%. The increase in 2017, from 79% in 2016. Revenue growth ledgross profit was due to higher revenues partially offset by an increase in the cost of revenues. Cost of revenues increased $78 million, or 18.7% to $492 million and, as a percentage of revenues, increased from 19% to 20%. The increase in cost of revenues included:
•an increase in personnel costs of revenues$61 million related to rising headcount to support our residential research efforts, and increases in salaries, bonus, stock-based compensation and benefits costs for our existing employees,
•an increase of $38 million for additional research personnel costs, $5$25 million in occupancytechnology costs to host our database and products and
•an decrease of $11 million in expenses related costs from our new research office in Richmond offset by a decrease in the amortizationto advertising purchased on behalf of intangible assets of$4 million. Gross margins are impacted by the amortization of certain intangible assets acquired through acquisitions.customers.
Selling and Marketing Expenses. Selling and marketing expenses increased $306 million, or 44.7%, to $318$990 million in 2017, from $296 million in 2016, and, decreased as a percentage of revenues, increased from 31% to 33% from 35%40%. The increase included:
•an increase in the amount of selling and marketing expenses was primarily due to a $25of $244 million for advertising our brands,
•an increase in sales personnel and events costs of $63 million related to increased commission expense from higherrising headcount in our sales force and increases in 2017 partially offset by a $2 million decrease in digital marketing costs.salaries, bonus, stock-based compensation and benefits costs for our existing employees and
Software Development Expenses. Software development expenses increased $47 million, or 21.1% to $89$268 million in 2017, from $76 million in 2016, and, remained relatively consistent as a percentage of revenues, at 9% for both 2017 and 2016.increased from 10% to 11%. The increase in the amount of software development expense was primarily due to a $14 million increase inincluded higher personnel costs of $42 million related to rising headcount to support enhancementsour residential efforts and upgrades toincreases in salaries, bonus, stock-based compensation and benefits costs for our services and integration of the backend systems of the LoopNet and CoStar databases.existing employees.
General and Administrative Expenses. General and administrative expenses increased 19%$43 million, or 12.6%, to $146$382 million in 2017, from $123 million in 2016, and, remained relatively consistent as a percentage of revenues, was consistent at 15% in 2017 and 2016.16%. The increase included:
•an increase of $17 million in the amount of general and administrative expenses wascredit loss expense primarily due to our expectations that the downturn in the commercial real estate market will increase delinquent trade receivables,
•an increase of $19 million in professional service costs due to diligence efforts associated with potential acquisitions and legal fees to defend our intellectual property rights and
•an increase of $11 million in personnel costs related to litigation of approximately $13 million, an increaseincreases in administrative personnelsalaries, bonus, stock-based compensation and benefits costs of $5 million to support the ongoing growth of the business,for our existing employees and a $3 million increase in charitable donations.rising headcount.
Customer Base Amortization Expense.Expense. Customer base amortization expense decreased $31 million, or 42.7%, to approximately $18$42 million in 2017, from $23 million in 2016, and, decreased as a percentage of revenues, decreased from 3% to 2% in 2017, compared to 3% in 2016. The decrease in the amount and percentage of customer base amortization expense was primarily due to the accelerated amortization of acquired customer bases in 2016 as compared to 2017.
Interest and Other Income. Interest and other income increased to approximately $4 million in 2017 compared to approximately $2 million in 2016. The increase was primarily due to increased short term investments on a larger cash balance in 2017 than in 2016 mainly due to net proceeds of $834 million from the equity offering in October 2017.
Interest and Other Expense. Interest and other expense remained relatively consistent at $9 million in 2017 compared to $10 million in 2016.. The decrease was primarily attributable to acceleration of amortization of $16 million related to eliminating certain usage fees for agent access to the Homesnap product recorded in 2022, as well as a reduction in amortization expense related to customer base assets acquired in the acquisitions of LoopNet, ForRent and Ten-X, which have been amortizing on an accelerated basis since the respective acquisitions.
Interest Income, Net. Interest income, net increased $182 million, or 565.4%, to $214 million due to an increase in interest earned on our cash equivalents.
Other Income, Net. Other income, net was insignificant for both the repayment of outstanding debt in October 2017 in conjunction with the 2017 Credit Agreement offset by higher interest rates on outstanding debt in 2017 compared to 2016.years ended December 31, 2023, and 2022.
Loss on Extinguishment. The loss on extinguishment was due to the restatement and amendment of the 2014 Credit Agreement as the 2017 Credit Agreement, which resulted in a loss on debt extinguishment of approximately $4 million.
Income Tax Expense.Expense. Income tax expense decreasedincreased $10 million, or 8.2%, to $42$127 million in 2017 compared to $52 million in 2016. Withoutand the effect of discrete items, income tax expense would have increased by approximately $12 million. Discrete items resulted in a reduction in tax expense of approximately $22 million including the revaluation of the deferred tax liability at the lower federal statutoryeffective tax rate resulting in a $7 million benefit. We also recognized approximately $8 million benefit in net research and development tax benefits relatedincreased 1% to the periods 2013-2017. Finally, we recognized $7 million benefit from the impact25% of the accounting rule change in ASU 2016-09 that provided for recognizing excess tax benefitsincome before income taxes. The increase in income tax expense as comparedwas primarily attributable to additional paidincome before income taxes and a benefit recognized in capital,2022 for state tax credits.
For a comparison of our results of operations for the fiscal year ended December 31, 2022 to the year ended December 31, 2021, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on the Form 10-K for the year ended December 31, 2022, which was filed with the treatment prior to 2017.SEC on February 22, 2023.
Comparison of Business Segment Results for Year Ended December 31, 20172023 and Year Ended December 31, 2016
2022
We manage our business geographically in two operating segments, with ourthe primary areas of measurement and decision-making being North America, which includes the U.S. and Canada, and International, which primarily includes the U.K., Spain, GermanyEurope, Asia-Pacific and France.Latin America. Management relies on an internal management reporting process that provides revenuesrevenue and operating segment EBITDA, which is our net income (loss) before interest income or expense, net, other income or expense, net, loss on debt extinguishment, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of our operating segments. EBITDA is used by management to internally measure our operating and management performance and to evaluate the performance of our business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.
SegmentRevenues. North America revenues increased $260 million, or 12.3%, to $934$2.4 billion and included:
•an increase in CoStar revenues of $86 million, or 10.7%, due to higher sales volume driven by the impact of annual price increases and customer upgrades on contract renewals, as well as an increase in subscribers,
•an increase in Information services revenues of $7 million, or 5.9%, primarily attributable to an increase in revenues for CoStar Real Estate Manager of $5 million and STR of $3 million,
•an increase in Multifamily revenues of $169 million, or 22.7%, due to higher sales volume driven by increases in pricing on renewals and an increase in the number of properties listed on our network,
•an increase in LoopNet revenues of $32 million, or 14.2%, due to an increase in the average price for listings,
•a decrease in Residential revenues of $30 million, or 40.4%, due to the discontinuation of certain products and services that were inconsistent with our long-term business strategy and
•a decrease in Other marketplaces revenues of $4 million, or 3.0%, due to the lower property volumes auctioned on Ten-X partially offset by increases in revenue of Land.com..
International revenues increased $13 million, or 16.9%, to $89 million and primarily included:
•an increase in Information services revenues of $6 million, or 18.8%, primarily attributable to an increase in revenues for STR of $4 million and $2 million of revenue related to the Business Immo Acquisition,
•an increase in CoStar revenues of $2 million, or 6.5%, due to higher sales volume driven by the impact of annual price increases and customer upgrades on contract renewals, as well as an increase in subscribers,
•an increase in LoopNet revenues of $2 million, or 30.6%, due to an increase in the average price for listings and
•$2 million of revenue related to the OnTheMarket Acquisition.
Segment EBITDA. North America EBITDA decreased to $403 million for the year ended December 31, 2017, compared to $8092023, from $577 million for the year ended December 31, 2016. This increase2022. The decrease in North America revenuesEBITDA was primarily due to increasedincreases in personnel costs, marketing costs, technology hosting costs, professional service fees, sales events costs, credit loss expense and occupancy costs partially offset by increases in revenues described above. International EBITDA decreased to a loss of approximately $55 million from our Multifamily products, and an increase of $55 million in CoStar Suite from the continued growth of our subscription-based services due to successful cross-selling of our services to our customers in existing markets, combined with continued high renewal rates. International revenues increased to $31$13 million for the year ended December 31, 2017, compared to $282023 from $5 million for the year ended December 31, 2016. This increase2022. The decrease was primarily due to continued growthincreased personnel costs, partially offset by, an increase in revenue.
For a comparison of our subscription-based information services resulting from salesbusiness segment results of CoStar Suite.
Segment EBITDA. North America EBITDA increasedoperations for the fiscal year ended December 31, 2022 to $237 millionthe year ended December 31, 2021, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017, compared to $211 million for the year ended December 31, 2016. The increase in North America EBITDA2022, which was due primarily to an increase in revenues of $125 million primarily offset by increased personnel costs from additional investments in our research operations and the opening of our Richmond research headquarters as well as increased legal costs. International EBITDA decreased to $1 million
for the year ended December 31, 2017, compared to $4 million for the year ended December 31, 2016. This decrease in International EBITDA was primarily due to an increase in personnel costs from the relocation of our European research headquarters from Glasgow, Scotland to London, England and as a result of increased headcount from investments in our International research operations in Madrid, Spain and the U.K.
Comparison of Year Ended December 31, 2016 and Year Ended December 31, 2015
The following table provides a comparison of our selected consolidated results of operations for the year ended December 31, 2016 and 2015 (in thousands of dollars):
|
| | | | | | | | | | | | | | |
| | 2016 | | 2015 | | Increase (Decrease) ($) | | Increase (Decrease) (%) |
| Revenues | | | | | | | |
| CoStar Suite | $ | 408,456 |
| | $ | 360,440 |
| | $ | 48,016 |
| | 13 | % |
| Information services | 77,178 |
| | 75,790 |
| | 1,388 |
| | 2 |
|
| Multifamily | 224,835 |
| | 160,630 |
| | 64,205 |
| | 40 |
|
| Commercial property and land | 127,161 |
| | 114,904 |
| | 12,257 |
| | 11 |
|
| Total revenues | 837,630 |
| | 711,764 |
| | 125,866 |
| | 18 |
|
| Cost of revenues | 173,814 |
| | 188,885 |
| | (15,071 | ) | | (8 | ) |
| Gross profit | 663,816 |
| | 522,879 |
| | 140,937 |
| | 27 |
|
| Operating expenses: | |
| | | | | | |
| Selling and marketing (excluding customer base amortization) | 296,483 |
| | 302,226 |
| | (5,743 | ) | | (2 | ) |
| Software development | 76,400 |
| | 65,760 |
| | 10,640 |
| | 16 |
|
| General and administrative | 123,297 |
| | 115,507 |
| | 7,790 |
| | 7 |
|
| Customer base amortization | 22,731 |
| | 27,931 |
| | (5,200 | ) | | (19 | ) |
| Total operating expenses | 518,911 |
| | 511,424 |
| | 7,487 |
| | 1 |
|
| Income from operations | 144,905 |
| | 11,455 |
| | 133,450 |
| | NM |
|
| Interest and other income | 1,773 |
| | 537 |
| | 1,236 |
| | NM |
|
| Interest and other expense | (10,016 | ) | | (9,411 | ) | | 605 |
| | 6 |
|
| Income before income taxes | 136,662 |
| | 2,581 |
| | 134,081 |
| | NM |
|
| Income tax expense | 51,591 |
| | 6,046 |
| | 45,545 |
| | NM |
|
| Net income (loss) | $ | 85,071 |
| | $ | (3,465 | ) | | $ | 88,536 |
| | NM |
|
Revenues. Revenues increased to $838 million in 2016, from $712 million in 2015. The $126 million increase was primarily attributable to increased revenues of approximately $64 million from our Apartments Network primarily related to the acquisition of Apartment Finder on June 1, 2015 as well as continued organic growth in CoStar Suite and Multifamily revenues.
Gross Profit. Gross profit increased to $664 million in 2016, from $523 million in 2015. The gross margin percentage increased to 79% in 2016, from 73% in 2015. The increase in the gross profit amount and percentage was principally due to an increase in revenues as well as a decrease in cost of revenues of $15 million. The decrease in costs of revenues is primarily due to a $7 million decrease in the amortization of intangible assets and a $6 million decrease in research personnel costs.
Selling and Marketing Expenses. Selling and marketing expenses decreased to $296 million in 2016, from $302 million in 2015, and decreased as a percentage of revenues to 35% in 2016, from 42% in 2015. The decrease in the amount and percentage of selling and marketing expenses was primarily due to a $19 million decrease in marketing expense for the wide-scale marketing campaign to generate brand awareness and site traffic for Apartments.com, partially offset by a $14 million increase in sales personnel costs.
Software Development Expenses. Software development expenses increased to $76 million in 2016, from $66 million in 2015, and remained relatively consistent as a percentage of revenues at 9% in 2016 and 2015. The increase in the amount of software development expense was primarily due to an increase in personnel costs to support enhancements and upgrades to our services and continued work to integrate the backend systems of the LoopNet and CoStar databases.
General and Administrative Expenses. General and administrative expenses increased to $123 million in 2016, from $116 million in 2015, and decreased as a percentage of revenues to 15% in 2016 from 16% in 2015. The increase in the amount of general and administrative expenses was primarily due to legal costs related to litigation of approximately $6 million incurred during 2016 that did not occur during 2015, as well as an increase in lease restructuring charges of $2 million for the abandonment of certain lease space and the impairment of leasehold improvements in 2016 compared to 2015.
Customer Base Amortization Expense. Customer base amortization expense decreased to approximately $23 million in 2016, from $28 million in 2015, and decreased as a percentage of revenues to 3% in 2016, compared to 4% in 2015. The decrease in the amount and percentage of customer base amortization expense was primarily due to the accelerated amortization of acquired customer bases in 2015 as compared to 2016.
Interest and Other Income. Interest and other income increased to approximately $2 million in 2016 compared to approximately $537,000 in 2015. The increase was primarily due to a realized gain of approximately $808,000 on investments in auction rate securities (“ARS”) in 2016 that did not occur in 2015.
Interest and Other Expense. Interest and other expense remained relatively consistent at $10 million in 2016 compared to $9 million in 2015.
Income Tax Expense. Income tax expense increased to $52 million in 2016 compared to $6 million in 2015. This increase was primarily due to higher income before income taxes in 2016 as compared to 2015 as a result of our increased revenues.
Comparison of Business Segment Results for Year Ended December 31, 2016 and Year Ended December 31, 2015
We manage our business geographically in two operating segments, with our 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 revenues and operating segment EBITDA, which is our net income (loss) before interest, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of our operating segments. EBITDA is used by management to internally measure our operating and management performance and to evaluate the performance of our business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.
SegmentRevenues. North America revenues increased to $809 million for the year ended December 31, 2016, compared to $687 million for the year ended December 31, 2015. This increase in North America revenues was primarily due to increased revenues of approximately $64 million from our Apartments Network, as well as the further penetration of our subscription-based services and successful cross-selling of our services to our customers in existing markets, combined with continued high renewal rates. International revenues increased to $28 million for the year ended December 31, 2016, compared to $25 million for the year ended December 31, 2015. This increase was primarily due to further penetration of our subscription-based information services resulting from sales of CoStar Suite.
Segment EBITDA. North America EBITDA increased to $211 million for the year ended December 31, 2016, compared to $87 million for the year ended December 31, 2015. The increase in North America EBITDA was due primarily to an increase in revenues. International EBITDA increased to $4 million for the year ended December 31, 2016, compared to $3 million for the year ended December 31, 2015. This increase in International EBITDA was primarily due to an increase in revenues.
Consolidated Quarterly Results of Operations
The following tables present our unaudited consolidated results of operations on a quarterly basis for the indicated periods (in thousands, except per share amounts, and as a percentage of total revenues). These tables should be read in conjunctionfiled with the consolidated financial statements and related notes included in this Annual ReportSEC on Form 10-K. The quarterly results of historical periods are not necessarily indicative of quarterly results for any future period.February 22, 2023.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Mar. 31 | | Jun. 30 | | Sep. 30 | | Dec. 31 | | Mar. 31 | | Jun. 30 | | Sep. 30 | | Dec. 31 |
| Revenues | $ | 226,553 |
| | $ | 237,153 |
| | $ | 247,533 |
| | $ | 253,991 |
| | $ | 199,739 |
| | $ | 206,869 |
| | $ | 212,711 |
| | $ | 218,311 |
|
| Cost of revenues | 51,346 |
| | 55,273 |
| | 55,483 |
| | 58,301 |
| | 42,900 |
| | 42,679 |
| | 42,222 |
| | 46,013 |
|
| Gross profit | 175,207 |
| | 181,880 |
| | 192,050 |
| | 195,690 |
| | 156,839 |
| | 164,190 |
| | 170,489 |
| | 172,298 |
|
| Operating expenses | 137,545 |
| | 153,997 |
| | 134,537 |
| | 144,932 |
| | 126,538 |
| | 136,071 |
| | 130,893 |
| | 125,409 |
|
| Income from operations | 37,662 |
| | 27,883 |
| | 57,513 |
| | 50,758 |
| | 30,301 |
| | 28,119 |
| | 39,596 |
| | 46,889 |
|
| Interest and other income | 429 |
| | 605 |
| | 555 |
| | 2,455 |
| | 84 |
| | 159 |
| | 344 |
| | 1,186 |
|
| Interest and other expense | (2,686 | ) | | (2,693 | ) | | (2,901 | ) | | (734 | ) | | (2,509 | ) | | (2,455 | ) | | (2,498 | ) | | (2,554 | ) |
| Loss on debt extinguishment | — |
| | — |
| | — |
| | (3,788 | ) | | — |
| | — |
| | — |
| | — |
|
| Income (loss) before income taxes | 35,405 |
| | 25,795 |
| | 55,167 |
| | 48,691 |
| | 27,876 |
| | 25,823 |
| | 37,442 |
| | 45,521 |
|
| Income tax expense | 13,275 |
| | 3,611 |
| | 20,990 |
| | 4,487 |
| | 11,155 |
| | 10,247 |
| | 14,241 |
| | 15,948 |
|
| Net income | $ | 22,130 |
| | $ | 22,184 |
| | $ | 34,177 |
| | $ | 44,204 |
| | $ | 16,721 |
| | $ | 15,576 |
| | $ | 23,201 |
| | $ | 29,573 |
|
| Net income per share — basic | $ | 0.69 |
| | $ | 0.68 |
| | $ | 1.05 |
| | $ | 1.24 |
| | $ | 0.52 |
| | $ | 0.48 |
| | $ | 0.72 |
| | $ | 0.92 |
|
| Net income per share — diluted | $ | 0.68 |
| | $ | 0.68 |
| | $ | 1.04 |
| | $ | 1.22 |
| | $ | 0.52 |
| | $ | 0.48 |
| | $ | 0.72 |
| | $ | 0.91 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Mar. 31 | | Jun. 30 | | Sep. 30 | | Dec. 31 | | Mar. 31 | | Jun. 30 | | Sep. 30 | | Dec. 31 |
| Revenues | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| Cost of revenues | 23 |
| | 23 |
| | 22 |
| | 23 |
| | 21 |
| | 21 |
| | 20 |
| | 21 |
|
| Gross profit | 77 |
| | 77 |
| | 78 |
| | 77 |
| | 79 |
| | 79 |
| | 80 |
| | 79 |
|
| Operating expenses | 60 |
| | 65 |
| | 55 |
| | 58 |
| | 64 |
| | 65 |
| | 61 |
| | 58 |
|
| Income from operations | 17 |
| | 12 |
| | 23 |
| | 19 |
| | 15 |
| | 14 |
| | 19 |
| | 21 |
|
| Interest and other income | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Interest and other expense | (1 | ) | | (1 | ) | | (1 | ) | | — |
| | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
| Loss on debt extinguishment | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
| Income before income taxes | 16 |
| | 11 |
| | 22 |
| | 19 |
| | 14 |
| | 13 |
| | 18 |
| | 21 |
|
| Income tax expense | 6 |
| | 2 |
| | 8 |
| | 2 |
| | 6 |
| | 5 |
| | 7 |
| | 7 |
|
| Net income | 10 | % | | 9 | % | | 14 | % | | 17 | % | | 8 | % | | 8 | % | | 11 | % | | 14 | % |
Liquidity and Capital Resources
Our principal sourcesWe believe the balance of liquidity are cash and cash equivalents, and cash from operations. Total cash and cash equivalents increased to $1which was $5.2 billion atas of December 31, 2017 compared2023, along with cash generated by ongoing operations and continued access to capital markets, will be sufficient to satisfy our cash requirements over the next 12 months and beyond. Our material cash equivalentsrequirements include the following contractual and other obligations.
Debt. As of $567 million at December 31, 2016. The increase in cash2023, we had outstanding an aggregate principal amount of $1.0 billion of Senior Notes due July 15, 2030. Future interest payments associated with the Senior Notes are $196.0 million, with $28.0 million payable within 12 months.
Leases. We have lease arrangements for office facilities, data centers and cash equivalents for the year endedcertain vehicles. As of December 31, 2017 was2023, we had fixed lease payment obligations of $110 million, with $39 million payable within 12 months.
Purchase Obligations. Our purchase obligations are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the transaction and have an original term greater than one year. The services acquired under these agreements primarily duerelate to $834web hosting, sponsorship agreements, third-party data or listings and software subscriptions. As of December 31, 2023, we had purchase obligations of $264 million, with $81 million payable within 12 months.
Construction Commitments. We are expanding our Richmond, Virginia campus, which is expected to result in net proceeds from our public equity offeringmaterial cash requirements in October 20172024 and beyond. We broke ground on the expansion in November 2022 and expect construction to be substantially completed in the first half of 3,317,308 shares2026. We negotiated various tax incentives with the Commonwealth of common stockVirginia and the City of Richmond including the allowance to use market-based income apportionment for $260.00 per share after deducting underwriting discountsincome taxes and fees of $29 million. In addition, the Company generated net cash provided by operating activities of approximately $235 million, partially offset by debt payments of $345 million, purchasepartial reimbursements of property equipment and other assets of approximately $24 million, and payments made for acquisitions including LandWatch, Westside Rentals and The Screening Pros totaling approximately $48 million.
Changes in cash and cash equivalents are dependent upon changes in, among other things, working capital items such as accounts receivable, accounts payable, accrued expenses and deferred revenues, as well as proceeds from the exercise of stock options offset by issuance of shares to cover taxes.
Net cash provided by operating activities for the year ended December 31, 2017 was $235 million compared to $201 million for the year ended December 31, 2016 and $140 million for the year ended December 31, 2015. The $34 million and $61 million increase from December 31, 2016 to December 31, 2017 and from December 31, 2015 to December 31, 2016, respectively, is primarily due to higher income from operations in both periods. Income from operations was partially offset fluctuations in working capital.
Net cash used in investing activities for the year ended December 31, 2017 was $72 million compared to $23 million for the year ended December 31, 2016 and $216 million for the year ended December 31, 2015. The $49 million increase in investing activities in 2017 compared to 2016 was primarily due to the increase in cash used for acquisitions from 2016 to 2017. 2017 included cash payments for the acquisitions of Westside Rentals for $14 million, a $31 million payment for LandWatch and a $3 million payment for the acquisition of The Screening Pros. During 2017, we incurred capital expenditures of approximately $24 million primarily related to computer equipment and leasehold improvements for build out of sales office space. We expect capital expenditures to increase in 2018tax assessments related to the build out of leased office space, including the Richmond research headquarters, as well as investments in technology.
The $192 million decrease in investing activities in 2016 compared to 2015 was primarily due to the decrease in cash used for acquisitions from 2015 to 2016. The $182 million of net cash used for acquisitions in 2015 included $179 million for the acquisition of Apartment Finder and certain assets related to the business operations of Apartment Finder's independent distributors as well as $3 million for the acquisitionvalue of the assetscampus expansion. These incentives are conditional upon achieving job creation and capital expenditure targets from 2022 to 2029. Failure to meet these targets could result in a reduction of Belbex Corporate, S.L. In 2016, we spent $10 million for the acquisitionsvalue of Thomas Dailythe tax incentives and certain assets relatedrepayment of previous tax reductions. The value of the incentives is dependent on our taxable income.
We expect the total cost of construction, net of the estimated value of the tax incentives from 2023 to 2032, to be in the business operationsrange of Apartment Finder's independent distributors. During 2016, we incurred capital expenditures$450 – $600 million. We have engaged a project manager, architects and a general contractor on terms that generally require payments as services are provided or construction is performed. As of approximately $19 million primarily related to computer equipment and leasehold improvements for build out of sales office space.
Net cash provided by financing activities for the year ended December 31, 2017 was $4802023, we have paid $128 million comparedand we have committed to netspend an additional $437 million as further work is performed under these contracts. We plan to amend these contracts to include additional commitments as construction progresses. Total cash usedexpenditures for 2024 are expected to be approximately $385 million. We expect to fund the expansion with cash on hand.
In January 2024, the Company entered into a conditional purchase and sale agreement for an office building in financing activitiesArlington, Virginia. The Company closed on the transaction in February 2024 along with an agreement to purchase the land underlying the building. These transactions totaled $340.0 million, inclusive of $31 million for the year ended December 31, 2016property taxes, titling insurance and $29 million in December 31, 2015. This $511 million increase from 2016 to 2017 was primarily due to $834 million in net proceeds from our equity offering offset by an increase in debt repayments in 2017 of $325 million.
other transaction costs and were paid with cash on hand.
Our future capital requirements will depend on many factors, including, among others, our operating results, expansion and integration efforts and our level of acquisition activity or other strategic transactions. To date, we have grown in part by acquiring other companies, and we expect to continue to make acquisitions. On January 31, 2017, we acquired Westside Rentals; on May 10, 2017, we acquired LandWatch;
Cash and on July 18, 2017, we acquired The Screening Pros. On February 21, 2018, we completed the acquisition of ForRent, a division of Dominion Enterprises, for approximately $350 million in cash and approximately $35 million in CoStar Group stock, subjectequivalents increased to customary working capital and other post-closing adjustments. Our future acquisitions may vary in size and could be material to our current operations. We may use cash, stock, debt or other means of funding to make these acquisitions.
On October 19, 2017, the Company entered into the ‘‘2017 Credit Agreement’’, which amended and restated in its entirety the existing 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 Company had not drawn on the 2017 Credit Agreement$5.2 billion as of December 31, 2017.
Based on current plans, we believe that our available2023, compared to cash combined with positiveand cash equivalents of $5.0 billion as of December 31, 2022. The increase in cash and cash equivalents for the year ended December 31, 2023 was primarily due to cash flow from operations of $489.5 million, partially offset by spending on capital assets
Net cash provided by operating activities should be sufficient to fund our operations for at least the next 12 months.
Contractual Obligations. The following table summarizes our principal contractual obligations at year ended December 31, 2017 and2023 was $489.5 million compared to $478.7 million for the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | 2018 | | 2019-2020 | | 2021-2022 | | Thereafter |
| Operating leases | $ | 178,402 |
| | $ | 30,853 |
| | $ | 54,061 |
| | $ | 47,427 |
| | $ | 46,061 |
|
Purchase obligations(1) | 11,953 |
| | 4,408 |
| | 4,615 |
| | 2,284 |
| | 646 |
|
| Total contractual principal cash obligations | $ | 190,355 |
| | $ | 35,261 |
| | $ | 58,676 |
| | $ | 49,711 |
| | $ | 46,707 |
|
(1)Amounts do not include (i) contracts with terms of twelve months or less, (ii) multi-year contracts that may be terminated by a third-party or us, or (iii) employment agreements. Amounts do not include unrecognized tax benefits of $13.4year ended December 31, 2022. The $10.8 million increase was primarily due to uncertainty regardinghigher net income, excluding certain non-cash expenses.
Net cash used in investing activities for the timingyear ended December 31, 2023 was $238.6 million compared to $69.1 million for the year ended December 31, 2022. The change was primarily due to an increase in cash paid for acquisitions of future$93.3 million, increased spending for the Richmond campus of $82.3 million, and a decrease in proceeds from sale of property and equipment and other assets of $30.1 million.
Net cash payments.
used in financing activities for the year ended December 31, 2023 was $3.7 million compared to net cash provided by financing activities of $734.0 million for the year ended December 31, 2022. The change was primarily due to $745.7 million of net proceeds from our September 2022 equity offering.
Critical Accounting Policies
Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”)GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. The following accounting policies involve a “critical accounting estimate” because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different acceptable assumptions would yield different results. Changes in the accounting estimates are reasonably likely to occur from period to period, which may have a material impact on the presentation of our financial condition and results of operations. We review these estimates and assumptions periodically and reflect the effects of revisions in the period that they are determined to be necessary. We consider policies relating to the following matters to be critical accounting policies:
•Intangible assets and goodwill;
Valuation•Revenue recognition; and
•Business combinations.
With respect to our accounting policy for intangible assets and goodwill, we further supplement in Note 2 of Long-Lived and Intangible Assets and Goodwill
the Notes to the Consolidated Financial Statements included in Part IV of this Report with the following:
We assess the impairment of long-lived assets, identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments made by management relate to the expected useful lives of long-livedintangible assets and our ability to recover the carrying value of such assets. The accuracy of these judgments may be adversely affected by several factors, including the factors listed below:
•Significant underperformance relative to historical or projected future operating results;
•Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
•Significant negative industry or economic trends; or
•Significant decline in our market capitalization relative to net book value for a sustained period.
When we determine that the carrying value of long-lived and identifiable intangible assets may not be recovered based upon the existence of one or more of the above indicators, we test for impairment.
Goodwill and identifiable intangible assets that are not subject to amortization are tested annually for impairment by each reporting unit on October 1 of each year and are also tested for impairment more frequently based upon the existence of one or more of the above indicators.
Goodwill represents the future economic benefits arising from a business combination and is calculated as the excess of costspurchase consideration paid in a business combination over the fair value of assets of acquired businesses.the net identifiable assets acquired. Goodwill is not amortized, but instead tested for impairment at least annually by each reporting unit. The Companyunit, or more frequently if an event or other circumstance indicates that the fair value of a reporting unit may be below its carrying amount. We may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or elect to bypass suchthe qualitative 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 electswe elect to bypass suchthe qualitative assessment, the Companywe then determinesperform a quantitative assessment by determining the fair value of each reporting unit. We estimate the fair value of each reporting unit based on a projected discounted cash flow model that includes significant assumptions and estimates including our discount rate, growth rate and future financial performance. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies.companies and determined by management to be commensurate with the risk in our current business model. Assumptions about the growth rate and future financial performance of a reporting unit are based on our forecasts, business plans, economic projections and anticipated future cash flows. These assumptions are subject to change from period to periodperiod-to-period and could be adversely impacted by the uncertainty surrounding global market conditions, commercial real estate conditions and the competitive environment in which we operate. Changes in these or other factors could negatively affect our reporting units' fair value and potentially result in impairment charges. Such impairment charges could have an adverse effect on our results of operations.
The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference. We estimate
As of October 1, 2023, we assessed the relevant qualitative factors for our North America reporting unit and concluded that it was not more likely than not that the fair value of this reporting unit was less than its respective carrying amounts. We elected to bypass performing the qualitative screen and performed the first step quantitative analysis of the goodwill impairment test for our International reporting units based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate withunit in 2023, which indicated that the risk in our current business model. As of October 1, 2017, the date of our most recent impairment analysis, the estimated fair value of each of our reporting units substantiallythis unit exceeded theits carrying value of our reporting units.value. There have been no events or changes in circumstances since the dateas a result of our qualitative impairment analysis on October 1, 2017,2023, that would indicate that the carrying value of each reporting unit may not be recoverable.
Revenue Recognition
We recognize revenues when (1) there is persuasive evidenceFor an in-depth discussion of an arrangement, (2) the fee is fixed or determinable, (3) services have been rendered and payment has been contractually earned and (4) collectability is reasonably assured. Revenues from subscription-based services are recognized on a straight-line basis over the term of the agreement. We evaluate our allowance for doubtful accounts and estimate collectability of accounts receivable based on our analysis of historical collection experience, changes in customer payment profiles and the aging of receivable balances, as well as current economic conditions, all of which may affect a customer’s ability to pay. A credit reserve has also been established based on historical experience of credits issued to customers to ensure that revenue is recognized appropriately in the current period. Deferred revenue results from advance cash receipts from customers or amounts billed in advance to customers from the sale of subscription services and is recognized over the term of the service agreement.
We derive revenues by providing access to our proprietary database of commercial real estate information. We generally charge a fixed monthly amount for our subscription-based services. Our 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, as applicable. A majority of the subscription-based service agreements have a term of one year and renew automatically.
We analyze contracts with multiple elements under the accounting guidance for multiple-element arrangements. Our multiple-element arrangements include information, analytics and/or online marketplace services that are generally provided to the customer over the same term. When identifying multiple-element arrangements, we consider multiple purchases made by the same customer within a short time frame and assess whether the purchases were negotiated together as one overall arrangement. If a multiple-element arrangement is identified, then the arrangement consideration is allocated among the separate units of accounting based on their relative selling prices, which is estimated considering factors such as historical pricing, pricing strategy, market conditions and other factors. We account for each deliverable in the transaction separately. If the deliverables cannot be separated into multiple units of accounting, then the arrangement consideration is combined and recognition of revenues is determined for the combined unit of accounting. Multiple-element transactions require judgment to determine the selling price or fair value of the different elements. The judgments impact the amount of revenues recognized over the term of the contract, as well as the period in which they are recognized.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our current tax exposuresignificant accounting policies, including our critical accounting policies and assess the temporary differences resulting from differing treatment of items, such as deductibility of certain intangible assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that it is more-likely-than not that some portion or all of our deferred tax assets will not be realized, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance in a period, we must reflect the corresponding increase or decrease within the tax provision in the consolidated statements of operations.
We generally recognize the effect of the tax law changes in the period of enactment. Changes in existing tax laws and rates, their related interpretations, and the uncertainty generated by the current economic environment may affect the amounts of our deferred tax liabilities or the valuations of our deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates. In accordance with SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, we report provisional amounts if we are able to determine a reasonable estimate but do not have the necessaryfurther information available, prepared, and analyzed in reasonable detail to complete the accounting for Tax Reform. We may revise our estimates as we finalize our accounting during a measurement period of up to one year from the enactment of Tax Reform.
Stock-Based Compensation
We account for equity instruments issued in exchange for employee services using a fair-value based method and we recognize the fair value of such equity instruments as an expense in the consolidated statements of operations. We estimate the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, which requires us to estimate the dividend yield, expected volatility, risk-free interest rate and expected life of the stock option. For equity instruments that vest based on a market condition, we estimate the fair value of each equity instrument granted on the date of grant using a Monte-Carlo simulation model, which also requires us to estimate the dividend yield, expected volatility, risk-free interest rate and expected life of the equity instruments. These assumptions and the estimation of expected forfeitures are based on multiple factors, including historical employee behavior patterns of exercising options and post-employment termination behavior, expected future employee option exercise patterns, and the historical volatility of our stock price. For equity instruments that vest based on performance, we assess the probability of the achievement of the performance conditions at the end of each reporting period, or more frequently based upon the occurrence of events that may change the probability of whether the performance conditions would be met. If our initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing of recognition 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.
We do not expect any material changes in the near term to the underlying assumptions used to calculate stock-based compensation expense for the year ended December 31, 2017. However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our stock-based compensation expense.
Business Combinations
We allocate the purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. 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 significantregarding estimates and assumptions especially with respect to intangible assets. Significant estimatesinvolved in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer bases, acquired database technology, and acquired trade names from a market participant's perspective, useful lives and discount rates. Duringtheir application, see Note 2 of the measurement period, we may record adjustmentsNotes to the assets acquired and liabilities assumed. Any adjustments to provisional amounts that are identified during the measurement period are recordedConsolidated Financial Statements included in the reporting period in which the adjustment amounts are determined. Upon the conclusionPart IV of the measurement period, any subsequent adjustments are recorded to earnings.this Report.
Fair Value of Auction Rate Securities
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 assets and liabilities by the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; 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. Our Level 3 assets consist of auction rate securities ("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.
Our ARS 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. We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of December 31, 2017. 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 and default risk of the ARS. We update 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 our estimate of the yield expected by a market participant from the ARS investments. The weighted average discount rate used in the discounted cash flow model as of December 31, 2017 and 2016 was approximately 6% and 5%, 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 December 31, 2017, we determined there was a net decline in the fair value of our ARS investments of approximately $730,000. The decline was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. If the issuers of these ARS are unable to successfully close future auctions and/or their credit ratings deteriorate, we may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments, which would reduce our profitability and adversely affect our financial position.
We have not made any material changes in the accounting methodology used to determine the fair value of the ARS. We do not expect any material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of December 31, 2017. However, if changes in these assumptions occur, and, should those changes be significant, we may be exposed to additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments.
Recent Accounting Pronouncements
In March 2016, the FASB issued authoritative guidance to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of share-based payment transactions on the statement of cash flows. Effective the first quarter of 2017, the Company adopted the standard, which impacted our 2017 net income because excess tax benefits, which were previously reflected in additional paid in capital, are now reflected in income tax expense. The significance of the impact will depend on the intrinsic value at the time of vesting or exercise of equity instruments.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350: Simplifying the Test for Goodwill Impairment, which is designed to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The guidance indicates that an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective on a prospective basis for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this guidance during the first quarter of 2017 and the early adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.
See Note 2 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information onfurther discussion of recent accounting pronouncements, including the expected dates of adoption.
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Item 7A. | Item 7A. Quantitative and Qualitative Disclosures About Market Risk |
We provide information, analytics and online marketplace services to the commercial real estate and related business community incommunities within the U.S., the U.K.,regions where we operate which primarily include, North America, Europe, Asia-Pacific and parts of Canada, Spain, Germany and France. OurLatin
America. The functional currency for a majority of our operations in the U.K., Canada, Spain, Germany and France is the local currency. As such, fluctuationscurrency, with the exception of certain international locations for which the functional currency is the British Pound.
Fluctuations in the British Pound, Canadian dollar and Euro may have an impact on our business, results of operations and financial position. For both the yearyears ended December 31, 2017,2023 and December 31, 2022, revenues denominated in foreign currencies waswere approximately 3%4%, of total revenue. For the yearyears ended December 31, 2017,2023 and December 31, 2022, our revenues would have decreased by approximately $3$10 million and $8 million, respectively, if the U.S. dollar exchange rate used strengthened by 10%. For the yearyears ended December 31, 2017,2023 and December 31, 2022, our revenues would have increased by approximately $34% and $8 million, respectively, if the U.S. dollar exchange rate used weakened by 10%. Fluctuations in the exchange rates of revenues denominated in any other foreign currencies would have had an immaterial impact on our consolidated results. In addition, we have assets and liabilities denominated in foreign currencies. We currently do not use financial instruments to hedge our exposure to exchange rate fluctuations with respect to our foreign subsidiaries. We may seek to enter into hedging transactions in the future to reduce our exposure to exchange rate fluctuations, but we may be unable to enter into hedging transactions successfully, on acceptable terms or at all. As of December 31, 2017,2023, accumulated other comprehensive loss included a loss from foreign currency translation adjustments of approximately $8$17.6 million.
We do not believe we have material exposure to market risks associated with changes in interest rates related to cash equivalent securities held as of December 31, 2017.2023. As of December 31, 2017,2023, we had $1 billion of cash and cash equivalents and short-term investments.equivalents. If there is an increase or decrease in interest rates, there will be a corresponding increase or decrease in the amount of interest earned on our cash and cash equivalents.
Included within our short-term and long-term investments are investments in mostly AAA-rated student loan ARS. These securities are primarily securities supported by guarantees from the FFELP of the U.S. Department of Education. As of December 31, 2017, $11 million of our investments in ARS failed to settle at auction. As a result, we may not be able to sell these investments at par value until a future auction on these investments is successful. In the event we need to immediately liquidate these investments, we may have to locate a buyer outside the auction process, who may be unwilling to purchase the investments at par, resulting in a loss. Based on an assessment of fair value of these investments in ARS as of December 31, 2017, we determined that there was a decline in the fair value of our ARS investments of approximately $730,000, which was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. If the issuers are unable to successfully close future auctions and/or their credit ratings deteriorate, we may be required to adjust the carrying value of these investments as a temporary impairment and recognize a greater unrealized loss in accumulated other comprehensive loss or as an other-than-temporary impairment charge to earnings. Based on our ability to access We currently diversify our cash and cash equivalents holdings amongst multiple financial institutions and AAA-rated Government and Treasury Money Market Funds.
We are subject to interest rate market risk in connection with our expected operating cash flows,revolving credit facility. On July 1, 2020, we doentered into the 2020 Credit Agreement, which provides for variable rate borrowings of up to $750 million. On July 1, 2020, we issued $1.0 billion aggregate principal amount of Senior Notes. Changes in interest rates would not anticipate havinghave a material impact to sell these securities below par value in order to operate our business in the foreseeable future.current interest and debt financing expense, as all of our borrowings except for our credit facility are fixed rate, and no amounts were outstanding under our credit facility as of December 31, 2023. See Notes 3 and 4 toNote 11 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion.
additional information regarding our 2020 Credit Agreement.
We had approximately $1.5$2.7 billion inof goodwill and intangible assets as of December 31, 2017.2023. As of December 31, 2017,2023, we believe our intangible assets will be recoverable,recoverable; however, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability. In the event that we determine that an asset has been impaired, we would recognize an impairment charge equal to the amount by which the carrying amount of the assets exceeds the fair value of the asset. We continue to monitor these assumptions and their effect on the estimated recoverability of our intangible assets.
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Item 8. | Item 8. Financial Statements and Supplementary Data |
Financial Statements meeting the requirements of Regulation S-X, including reports of independent registered public accounting firm Ernst & Young LLP, are set forth beginning at page F-1. Supplementary data is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Consolidated Results of Operations” and “Consolidated Quarterly Results of Operations.”
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Item 9. | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
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Item 9A. | Item 9A. Controls and Procedures |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 31, 2017,2023, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.procedures as of the end of the fiscal year. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2023 and were operating at a reasonable assurance level.
During the fourth quarter of 2017, we commenced the implementation ofWe continue to implement a new financial system that is designed to improve the efficiency and effectiveness of the Company’sour operational and financial accounting processes. This implementation is expected to continue through 2019.be a multi-year project. Consistent with any process change that we implement, the design of the internal controls has and will continue to be evaluated for effectiveness as part of our overall assessment of the effectiveness of our disclosure controls and procedures. We expect that the implementation of this system will improve our internal controlscontrol over financial reporting.
Other than the implementation of a new financial system noted above, there have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management of CoStar Group is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission,SEC, internal control over financial reporting is a process designed by, or supervised by, the Company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.
The Company’s internal control over financial reporting is supported by written policies and procedures, thatwhich (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of the Company's annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 20172023 based on criteria established in Internal Control – Integrated Framework (2013 framework) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“the COSO Framework”).Commission. Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of the Company's internal control over financial reporting.
Based on this assessment, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2017.
2023.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company's financial statements included in this report, has issued an attestation report on the effectiveness of internal control over financial reporting, a copy of which is included in this Annual Report on Form 10-K.Report.
On January 31, 2017,In December 2023, we completed the acquisition of Westside Rentals. On May 10, 2017, we completed the acquisition of LandWatch. On July 18, 2017, we completed the acquisition of The Screening Pros.OnTheMarket Acquisition. As permitted by the Securities and Exchange Commission,SEC, we have elected to exclude the accounts receivableinternal controls of this acquisition, which has not been integrated into our existing processes and revenue of Westside Rentals, LandWatch, and The Screening Proscontrols, from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2017.2023. The excluded aggregate financial position of Westside Rentals, LandWatch, and The Screening ProsOnTheMarket represented less than 1% of our total assets as of December 31, 2017,2023, and less than 2%1% of our revenues and total operating costs for the year then ended. We will include the internal controls of Westside Rentals, LandWatch, and The Screening Pros accounts receivable and revenueOnTheMarket in our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018.2024.
During the fourth quarter of 2017, we commenced the implementation of a new financial system that is designed to improve the efficiency and effectiveness of the Company’s operational and financial accounting processes. This implementation is expected to continue through 2019. Consistent with any process change that we implement, the design of the internal controls has and will continue to be evaluated for effectiveness as part of our overall assessment of the effectiveness of our disclosure controls and procedures.
Other than the implementation of a new financial system noted previously, there have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 9B. | Item 9B. Other Information. |
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable.
PART III
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Item 10. | Item 10. Directors, Executive Officers and Corporate Governance |
CoStar Group has adopted a Code of Conduct for its directors. In addition, CoStar Group has adopted a separate Code of Business Conduct and Ethics for its officers and employees, including its principal executive, financial and accounting officers, or persons performing similar functions. Copies of each of these codes may be found in the “Investors” section of the Company’s website at http:https://www.costargroup.com/investors/governance.investors.costargroup.com/leadership. We intend to disclose future amendments to certain provisions of our Codes, or waivers of such provisions granted to executive officers and directors, as required by the SEC rules on the Company's website within four business days following the date of such amendment or waiver.
The remaining information required by this Item is incorporated by reference to our Proxy Statement for our 20182024 annual meeting of stockholders.stockholders under the captions “Director Nominees,” “Executive Officers,” Corporate Governance Highlights,” “Board Committees,” “Insider trading arrangements and policies,” and, if applicable, “Delinquent Section 16(a) Reports.”
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Item 11. | Item 11. Executive Compensation |
The information required by this Item is incorporated by reference to our Proxy Statement for our 20182024 annual meeting of stockholders.stockholders under the captions “Compensation Discussion and Analysis,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report.”
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Item 12. | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item is incorporated by reference to our Proxy Statement for our 20182024 annual meeting of stockholders.stockholders under the captions “Equity Compensation Plan Information” and “Stock Ownership Information.”
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Item 13. | Item 13. Certain Relationships and Related Transactions, and Director Independence |
The information required by this Item is incorporated by reference to our Proxy Statement for our 20182024 annual meeting of stockholders.stockholders under the captions “Certain Relationships and Related Transactions” and “Corporate Governance Matters.”
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Item 14. | Item 14. Principal Accountant Fees and Services |
The information required by this Item is incorporated by reference to our Proxy Statement for our 20182024 annual meeting of stockholders.stockholders under the caption “Ratification of the Appointment of Independent Registered Public Accounting Firm.”
PART IV
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Item 15. | Item 15. Exhibits and Financial Statement Schedules |
(a)(1) The following financial statements are filed as a part of this report:Report: CoStar Group, Inc. Consolidated Financial Statements.
(a)(2) Financial statement schedules:
Schedule II – Valuation and Qualifying Accounts
Years Ended December 31, 2017, 2016, and 2015 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
Allowance for Doubtful Accounts and Billing Adjustments (1) | | Balance at Beginning of Year | | Charged to Expense | | Charged to Other Accounts (2) | | Write-offs, Net of Recoveries | | Balance at End of Year |
| Year ended December 31, 2015 | | $ | 4,815 |
| | $ | 7,002 |
| | $ | 1,470 |
| | $ | 5,809 |
| | $ | 7,478 |
|
| Year ended December 31, 2016 | | $ | 7,478 |
| | $ | 7,358 |
| | $ | — |
| | $ | 8,492 |
| | $ | 6,344 |
|
| Year ended December 31, 2017 | | $ | 6,344 |
| | $ | 5,690 |
| | $ | — |
| | $ | 5,565 |
| | $ | 6,469 |
|
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(1)
| Additions to the allowance for doubtful accounts are charged to bad debt expense. |
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(2)
| Amounts represent opening balances from acquired businesses. |
Additional financial statement schedules are omitted because they are not applicable or not required or because the required information is incorporated herein by reference or included in the financial statements or related notes included elsewhere in this report.
(a)(3) The documents required to be filed as exhibits to this Report under Item 601 of Regulation S-K are listed as follows:
Exhibits
| | | | | | | | |
| Exhibit No. | | Description |
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| Exhibit No. | | Description
| | |
| | ThirdFourth Amended and Restated Certificate of Incorporation of CoStar Group, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed with the CommissionSEC on June 6, 2013)7, 2021). |
| | ThirdFourth Amended and Restated By-Laws of CoStar Group, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the CommissionSEC on September 24, 2013)May 9, 2022). |
| | Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of the Registrant (Reg. No. 333-174214) filed with the CommissionSEC on June 3, 2011). |
| | Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (Incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K filed with the SEC on February 23, 2022). |
| | Indenture, dated as of July 1, 2020, by and among CoStar Group, Inc., as issuer, the guarantors named therein and Wilmington Trust, National Association, as trustee, relating to the 2.800% Senior Notes due 2030, including the form of 2.800% Senior Notes due 2030 (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 1, 2020). |
| | CoStar Group, Inc. 2016 Stock Incentive Plan (Incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-8 of the Registrant (Reg. No. 333-212278) filed with the CommissionSEC on June 28, 2016). |
| | First Amendment to the CoStar Group, Inc. 2016 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed April 25, 2018). |
| | CoStar Group, Inc. 2007 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 8, 2012). |
| | CoStar Group, Inc. 2007 Stock Incentive Plan French Sub-Plan (Incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 10-K filed February 29, 2008). |
| | Form of CoStar Group, Inc. 2016 Plan Restricted Stock Grant Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed July 28, 2016). |
| | Form of CoStar Group, Inc. 2016 Plan Restricted Stock Grant Agreement for Service Awards between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed July 28, 2016). |
| | Form of CoStar Group, Inc. 2016 Plan Restricted Stock Unit Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed July 28, 2016). |
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Exhibit No. | | Description |
| | Form of CoStar Group, Inc. 2016 Plan Incentive Stock Option Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed July 28, 2016). |
| | Form of CoStar Group, Inc. 2016 Plan Incentive Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed July 28, 2016). |
| | Form of CoStar Group, Inc. 2016 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q filed July 28, 2016). |
| | | | | | | | |
| Exhibit No. | | Description |
| | Form of CoStar Group, Inc. 2016 Plan Nonqualified Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q filed July 28, 2016). |
| | Form of 2007 Plan Restricted Stock Grant Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed June 22, 2007). |
| | Form of 2007 Plan Restricted Stock Unit Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K filed February 20, 2014). |
| | Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K filed February 24, 2009). |
| | Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K filed February 24, 2009). |
| | Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed February 24, 2009). |
| | Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its directors (Incorporated by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed February 24, 2009). |
| | Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K filed February 24, 2009). |
| | Form of 2007 Plan French Sub-Plan Restricted Stock Agreement between the Registrant and certain of its employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K filed February 29, 2008). |
| | CoStar Group, Inc. 2016 Cash Incentive Plan (Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed July 28, 2016). |
| | CoStar Group, Inc.Second Amended and Restated Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 (No. 333-258220) filed with the CommissionSEC on September 14, 2015)July 28, 2021). |
| | Canadian Addendum to CoStar Group ESPP (filed herewith). |
| | CoStar Group, Inc. Management Stock Purchase Plan (filed herewith)(Incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed February 23, 2018). |
| | Summary of Non-Employee Director Compensation (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on October 24, 2013). |
| | Employment Agreement for Andrew C. Florance (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 of the Registrant (Reg. No. 333-47953) filed with the CommissionSEC on April 27, 1998). |
| | First Amendment to Andrew C. Florance Employment Agreement, effective January 1, 2009 (Incorporated by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form 10-K filed February 24, 2009). |
| | Form of Indemnification Agreement between the Registrant and each of its officers and directors (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 7, 2004). |
| | Deed of Office Lease by and between GLL L-Street 1331, LLC and CoStar Realty Information, Inc., dated February 18, 2011, and made effective as of June 1, 2010 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on form 10-Q filed on April 29, 2011). |
| | Securities PurchaseSecond Amended and Restated Credit Agreement, dated as of September 11, 2017,July 1, 2020, by and among CoStar Group, Inc., as borrower, CoStar Realty Information, Inc., CoStar Group, Inc.as co-borrower, the lenders party thereto and Bank of America, N.A., LTM Company Dominion, LLC, Dominion Enterprises, and Landmark Media Enterprises, LLCas administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the CommissionSEC on September 13, 2017). |
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Exhibit No. | | DescriptionJuly 1, 2020) |
| | First Amendment to the Second Amended and RestatementRestated Credit Agreement, dated as of October 19, 2017, by andMay 8, 2023, among CoStar Group, Inc., as borrower, CoStar Realty Information, Inc., as co-borrower, the Lenderslenders from time to time party thereto and JPMorgan Chase Bank of America, N.A., as Administrative Agentadministrative agent (Incorporated by referencedreference to Exhibit 10.1 to the Registrant’s CurrentQuarterly Report on Form 8-K10-Q filed with the Commission on October 25, 2017).July 26, 2023) |
| | Subsidiaries of the Registrant (filed herewith). |
| | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith). |
| | | | | | | | |
| Exhibit No. | | Description |
| | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | Certification of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed(furnished herewith). |
| | Certification of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
| | CoStar Group, Inc. Clawback Policy, effective September 13, 2023 (filed herewith). |
101101.INS | | The following materialsfinancial statements from CoStar Group, Inc.’sthe Company’s Annual Report on Form 10-K for the year ended December 31, 2017,2023, formatted in XBRL (eXtensible Business Reporting Language):Inline XBRL: (i) Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015, respectively;Operations; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015, respectively;Income; (iii) Consolidated Balance Sheets at December 31, 2017 and December 31, 2016, respectively;Sheets; (iv) Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015, respectively; (v) Consolidated Statements of Cash FlowsFlows; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | The cover page from the Registrant's Annual Report on Form 10-K for the yearsyear ended December 31, 2017, 2016 and 2015, respectively; (vi) Notes to the Consolidated Financial Statements that have been detail tagged; and (vii) Schedule II – Valuation and Qualifying Accounts (submitted electronically with this report)2023, formatted in Inline XBRL (included as Exhibit 101). |
* Management Contract or Compensatory Plan or Arrangement.
| |
Item 16. | Item 16. Form 10-K Summary |
Not applicable.None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, District of Columbia, on the 22nd day of February 2018.authorized.
| | | | | | | | |
| | |
| COSTAR GROUP, INC. |
| | |
| By: | By: | /s/ Andrew C. Florance |
| February 21, 2024 | | Andrew C. Florance |
| | | President and Chief Executive Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Andrew C. Florance and Scott T. Wheeler, and each of them individually, as their true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto and to all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, herein by ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Capacity | | Date |
| | | | | |
Signature | | | | Capacity | Date |
| | | | |
| | | | |
| /s/ Michael R. Klein | | Chairman of the Board | | February 22, 201821, 2024 |
| Michael R. Klein | | | | | |
| | | | | |
| /s/ Andrew C. Florance | | Chief Executive Officer and | | February 22, 201821, 2024 |
| Andrew C. Florance | | President and a Director | | |
| | (Principal Executive Officer) | | |
| | | | | |
| /s/ Scott T. Wheeler | | Chief Financial Officer | | February 22, 201821, 2024 |
| Scott T. Wheeler | | (Principal Financial and Accounting Officer) | | |
| | | | | |
| /s/ Angelique G. Brunner | | Director | | February 21, 2024 |
| Angelique G. Brunner | | | | |
| | | | |
| /s/ Michael J. Glosserman | | Director | | Director | February 22, 201821, 2024 |
| Michael J. Glosserman | | | | |
| | | | | |
/s/ Warren H. Haber | | Director | | February 22, 2018 |
Warren H. Haber | | | | |
| | | | |
| /s/ John W. Hill | | Director | | Director | February 19, 201821, 2024 |
| John W. Hill | | | | | |
| | | | |
| /s/ Laura Cox Kaplan | | Director | | Director | February 22, 201821, 2024 |
| Laura Cox Kaplan | | | | |
| | | | |
| | | | |
| /s/ Christopher J. Nassetta | | Director | | Director | February 20, 201821, 2024 |
| Christopher J. Nassetta | | | | |
| | | | |
| /s/ Louise S. Sams | | Director | | February 21, 2024 |
| Louise S. Sams | | | | |
| | | | |
| /s/ Robert W. Musslewhite | | Director | | February 21, 2024 |
/s/ David J. SteinbergRobert W. Musslewhite | | | | Director | February 21, 2018 |
David J. Steinberg | | | | |
COSTAR GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | |
| Reports of Independent Registered Public Accounting Firm (PCAOB ID Number 42) | |
| Consolidated Statements of Operations | |
Consolidated Statements of Comprehensive Income (Loss) | |
| Consolidated Balance Sheets | |
StatementConsolidated Statements of Changes in Stockholders’ Equity | |
| Consolidated Statements of Cash Flows | |
| Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of CoStar Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CoStar Group, Inc. (the Company) as of December 31, 20172023 and 2016, and2022, the related consolidated statements of operations, comprehensive income, (loss), stockholders'changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2023, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 20172023 and 2016,2022, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 201821, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
| | Highly Automated Revenue Systems related to Subscription Revenue |
| Description of the Matter | | As described in Note 2 to the consolidated financial statements, 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, real estate agents and brokers and landlords, in each case, typically through a fixed fee for its subscription-based services. Revenues from subscription-based contracts are approximately 95% of total revenues for the current year and are recognized on a straight-line basis over the term of the agreement. The Company’s revenue recognition process involves several applications responsible for the initiation, processing, and recording of transactions. These applications interface with the Company’s enterprise resource planning system through automated and manual journal entries to accurately reflect revenue. |
| | |
| | The process to calculate, aggregate, and record revenue relies on multiple internally developed and external software programs and systems and involves interfacing significant volumes of data across the systems. Auditing the Company's accounting for revenue from subscription-based contracts was challenging and complex due to the high volume of individually-low-monetary-value transactions, dependency on the effective design and operation of multiple applications, some of which are specifically designed for the Company's business, and the use of multiple data sources in the revenue recognition process. Given the complexity of the information technology (IT) environment, the required involvement of professionals with expertise in IT to identify, test, and evaluate the revenue data flows, systems, and automated controls, we considered the audit of the Company’s subscription revenue-generating transactions to be a critical audit matter. |
| | |
| How We Addressed the Matter in Our Audit | | We performed procedures related to the Company’s internal controls that included, among others, obtaining an understanding, evaluating the design, and testing the operating effectiveness of internal controls over the Company’s accounting for subscription revenue. We tested the controls over the initiation and billing of new and recurring subscriptions, the provisioning of customers, and the Company’s cash to billings reconciliation process. We tested the controls related to the key application interfaces between the provisioning, billing, and accounting systems and tested IT general controls related to access to the relevant applications and data, and changes made to the relevant systems, configurations and interfaces. |
| | |
| | We performed substantive audit procedures that included, among others, testing the Company’s accounting for revenue from contracts with customers, by testing, on a sample basis, the completeness and accuracy of the underlying data within the Company’s billing system. We performed data analytics by extracting data from the general ledger to evaluate the completeness and accuracy of recorded revenue and deferred revenue amounts, tracing a sample of sales transactions to source data, and testing a sample of cash to billings reconciliations. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1994.
Tysons, Virginia
February 22, 201821, 2024
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of CoStar Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited CoStar Group, Inc.’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CoStar Group, Inc.(the (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of CoStar Group, Inc. as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2023 and the related notes of CoStar Group, Inc. and our report dated February 21, 2024 expressed an unqualified opinion thereon.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Westside Rentals, LandWatch and The Screening Pros related to accounts receivable and revenues,OnTheMarket Plc., which areis included in the 20172023 consolidated financial statements of CoStar Group, Inc.the Company and constituted less than 1% and 1% of total and net assets, respectively, as of December 31, 20172023, and less than 2%1% and less than 1% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of CoStar Group, Inc.the Company also did not include an evaluation of the internal control over financial reporting of Westside Rentals, LandWatch and The Screening Pros.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of CoStar Group, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (Collectively referred to as the “financial statements”) of CoStar Group, Inc. and our report dated February 22, 2018 expressed an unqualified opinion thereon.OnTheMarket Plc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, Virginia
February 22, 201821, 2024
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands,millions, except per share data)
| | Year Ended December 31, | | | Year Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| | | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Revenues | |
| Revenues | |
| Revenues | $ | 965,230 |
| | $ | 837,630 |
| | $ | 711,764 |
|
| Cost of revenues | 220,403 |
| | 173,814 |
| | 188,885 |
|
| Gross profit | 744,827 |
| | 663,816 |
| | 522,879 |
|
| | | | | | |
| Operating expenses: | |
| | |
| | |
|
| Operating expenses: | |
| Operating expenses: | |
| Selling and marketing (excluding customer base amortization) | |
| Selling and marketing (excluding customer base amortization) | |
| Selling and marketing (excluding customer base amortization) | 318,362 |
| | 296,483 |
| | 302,226 |
|
| Software development | 88,850 |
| | 76,400 |
| | 65,760 |
|
| General and administrative | 146,128 |
| | 123,297 |
| | 115,507 |
|
| Customer base amortization | 17,671 |
| | 22,731 |
| | 27,931 |
|
| | 571,011 |
| | 518,911 |
| | 511,424 |
|
| Income from operations | 173,816 |
| | 144,905 |
| | 11,455 |
|
| Interest and other income | 4,044 |
| | 1,773 |
| | 537 |
|
| Interest and other expense | (9,014 | ) | | (10,016 | ) | | (9,411 | ) |
| Loss on debt extinguishment | (3,788 | ) | | — |
| | — |
|
| Interest income (expense), net | |
| Other income, net | |
| Income before income taxes | 165,058 |
| | 136,662 |
| | 2,581 |
|
| Income tax expense | 42,363 |
| | 51,591 |
| | 6,046 |
|
| Net income (loss) | $ | 122,695 |
| | $ | 85,071 |
| | $ | (3,465 | ) |
| Net income | |
| | | | | | |
| Net income (loss) per share — basic | $ | 3.70 |
| | $ | 2.64 |
| | $ | (0.11 | ) |
| Net income (loss) per share — diluted | $ | 3.66 |
| | $ | 2.62 |
| | $ | (0.11 | ) |
| Net income per share — basic | |
| Net income per share — basic | |
| Net income per share — basic | |
| Net income per share — diluted | |
| | | | | | |
| Weighted average outstanding shares — basic | 33,200 |
| | 32,167 |
| | 31,950 |
|
| Weighted average outstanding shares — diluted | 33,559 |
| | 32,436 |
| | 31,950 |
|
| Weighted-average outstanding shares — basic | |
| Weighted-average outstanding shares — basic | |
| Weighted-average outstanding shares — basic | |
| Weighted-average outstanding shares — diluted | |
See accompanying notes.
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)millions)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Net income (loss) | | $ | 122,695 |
| | $ | 85,071 |
| | $ | (3,465 | ) |
| Other comprehensive loss, net of tax | | | | | | |
| Foreign currency translation adjustment | | 3,901 |
| | (5,032 | ) | | (1,466 | ) |
| Net decrease in unrealized loss on investments | | 118 |
| | 395 |
| | 256 |
|
| Reclassification adjustment for realized gains on investments included in net income | | — |
| | (808 | ) | | — |
|
| Total other comprehensive income (loss) | | 4,019 |
| | (5,445 | ) | | (1,210 | ) |
| Total comprehensive income (loss) | | $ | 126,714 |
| | $ | 79,626 |
| | $ | (4,675 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Net income | | $ | 374.7 | | | $ | 369.5 | | | $ | 292.6 | |
| Other comprehensive income (loss), net of tax | | | | | | |
| Foreign currency translation adjustment | | 11.5 | | | (23.3) | | | (4.9) | |
| Total other comprehensive income (loss) | | 11.5 | | | (23.3) | | | (4.9) | |
| Total comprehensive income | | $ | 386.2 | | | $ | 346.2 | | | $ | 287.7 | |
See accompanying notes.
COSTAR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands,millions, except per share data)
| | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 5,215.9 | | | $ | 4,968.0 | |
| Accounts receivable | 213.2 | | | 166.1 | |
| Less: Allowance for credit losses | (23.2) | | | (12.2) | |
| Accounts receivable, net | 190.0 | | | 153.9 | |
| | | |
| Prepaid expenses and other current assets | 70.2 | | | 64.0 | |
| Total current assets | 5,476.1 | | | 5,185.9 | |
| Deferred income taxes, net | 4.3 | | | 9.7 | |
| Property and equipment, net | 472.2 | | | 321.3 | |
| Lease right-of-use assets | 79.8 | | | 80.4 | |
| Goodwill | 2,386.2 | | | 2,314.8 | |
| Intangible assets, net | 313.7 | | | 329.3 | |
| Deferred commission costs, net | 167.7 | | | 142.5 | |
| Deposits and other assets | 17.7 | | | 16.6 | |
| Income tax receivable | 2.0 | | | 2.0 | |
| Total assets | $ | 8,919.7 | | | $ | 8,402.5 | |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| | | |
| Accounts payable | $ | 23.1 | | | $ | 28.6 | |
| Accrued wages and commissions | 117.8 | | | 105.0 | |
| Accrued expenses | 163.0 | | | 89.1 | |
| Income taxes payable | 7.7 | | | 10.4 | |
| Lease liabilities | 40.0 | | | 36.0 | |
| Deferred revenue | 104.2 | | | 103.6 | |
| Total current liabilities | 455.8 | | | 372.7 | |
| | | |
| Long-term debt, net | 990.5 | | | 989.2 | |
| Deferred income taxes, net | 36.7 | | | 76.2 | |
| Income taxes payable | 18.2 | | | 14.0 | |
| Lease and other long-term liabilities | 79.9 | | | 80.4 | |
| Total liabilities | 1,581.1 | | | 1,532.5 | |
| | | |
| Stockholders’ equity: | | | |
| Preferred stock, $0.01 par value; 2 million shares authorized; zero outstanding | — | | | — | |
| Common stock, $0.01 par value; 1.2 billion shares authorized; 408.1 million and 406.7 million issued and outstanding as of December 31, 2023 and 2022, respectively | 4.1 | | | 4.1 | |
| Additional paid-in capital | 5,147.8 | | | 5,065.4 | |
| Accumulated other comprehensive loss | (17.6) | | | (29.1) | |
| Retained earnings | 2,204.3 | | | 1,829.6 | |
| Total stockholders’ equity | 7,338.6 | | | 6,870.0 | |
| Total liabilities and stockholders’ equity | $ | 8,919.7 | | | $ | 8,402.5 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,211,463 |
| | $ | 567,223 |
|
| Accounts receivable, net of allowance for doubtful accounts of approximately $6,469 and $6,344 as of December 31, 2017 and 2016, respectively | 60,900 |
| | 48,537 |
|
| Income tax receivable | — |
| | 129 |
|
| Prepaid expenses and other current assets | 15,572 |
| | 11,602 |
|
| Total current assets | 1,287,935 |
| | 627,491 |
|
| | | | |
| Long-term investments | 10,070 |
| | 9,952 |
|
| Deferred income taxes, net | 5,431 |
| | 7,273 |
|
| Property and equipment, net | 84,496 |
| | 87,568 |
|
| Goodwill | 1,283,457 |
| | 1,254,866 |
|
| Intangible assets, net | 182,892 |
| | 195,965 |
|
| Deposits and other assets | 6,179 |
| | 1,948 |
|
| Income tax receivable | 12,981 |
| | — |
|
| Total assets | $ | 2,873,441 |
| | $ | 2,185,063 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
| Current liabilities: | |
| | |
|
| Current portion of long-term debt | $ | — |
| | $ | 31,866 |
|
| Accounts payable | 9,262 |
| | 11,478 |
|
| Accrued wages and commissions | 54,104 |
| | 33,803 |
|
| Accrued expenses | 22,193 |
| | 31,092 |
|
| Deferred gain on the sale of building | 2,523 |
| | 2,523 |
|
| Income taxes payable | 8,166 |
| | 3,814 |
|
| Deferred rent | 4,732 |
| | 1,206 |
|
| Deferred revenue | 45,686 |
| | 39,164 |
|
| Total current liabilities | 146,666 |
| | 154,946 |
|
| | | | |
| Long-term debt, less current portion | — |
| | 306,473 |
|
| Deferred gain on the sale of building | 16,192 |
| | 18,715 |
|
| Deferred rent | 33,909 |
| | 31,589 |
|
| Deferred income taxes, net | 12,070 |
| | 18,386 |
|
| Income taxes payable | 13,354 |
| | 741 |
|
| Total liabilities | 222,191 |
| | 530,850 |
|
| | | | |
| Commitments and contingencies (Note 10) |
|
| |
|
|
| | | | |
| Stockholders’ equity: | |
| | |
|
| Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding | — |
| | — |
|
| Common stock, $0.01 par value; 60,000 shares authorized; 36,107 and 32,606 issued and outstanding as of December 31, 2017 and 2016, respectively | 361 |
| | 326 |
|
| Additional paid-in capital | 2,339,253 |
| | 1,471,127 |
|
| Accumulated other comprehensive loss | (9,020 | ) | | (13,039 | ) |
| Retained earnings | 320,656 |
| | 195,799 |
|
| Total stockholders’ equity | 2,651,250 |
| | 1,654,213 |
|
| Total liabilities and stockholders’ equity | $ | 2,873,441 |
| | $ | 2,185,063 |
|
See accompanying notes.
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated
Other
Comprehensive Loss | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Shares | | Amount | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance at January 1, 2021 | 394.3 | | | $ | 3.9 | | | $ | 4,204.7 | | | $ | (0.9) | | | $ | 1,167.5 | | | $ | 5,375.2 | |
| Net income | — | | | — | | | — | | | — | | | 292.6 | | | 292.6 | |
| Other comprehensive loss | — | | | — | | | — | | | (4.9) | | | — | | | (4.9) | |
| Exercise of stock options | 0.2 | | | — | | | 6.3 | | | — | | | — | | | 6.3 | |
| Restricted stock issued | 0.9 | | | — | | | — | | | — | | | — | | | — | |
| Restricted stock grants surrendered | (0.6) | | | — | | | (33.3) | | | — | | | — | | | (33.3) | |
| Stock-based compensation expense | — | | | — | | | 62.6 | | | — | | | — | | | 62.6 | |
| | | | | | | | | | | |
| Employee stock purchase plan | 0.2 | | | — | | | 13.0 | | | — | | | — | | | 13.0 | |
| | | | | | | | | | | |
| Balance at December 31, 2021 | 395.0 | | | 3.9 | | | 4,253.3 | | | (5.8) | | | 1,460.1 | | | 5,711.5 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | 369.5 | | | 369.5 | |
| Other comprehensive loss | — | | | — | | | — | | | (23.3) | | | — | | | (23.3) | |
| | | | | | | | | | | |
| Restricted stock issued | 1.5 | | | 0.1 | | | — | | | — | | | — | | | 0.1 | |
| Restricted stock grants surrendered | (0.7) | | | — | | | (23.1) | | | — | | | — | | | (23.1) | |
| Stock-based compensation expense | — | | | — | | | 74.6 | | | — | | | — | | | 74.6 | |
| | | | | | | | | | | |
| Employee stock purchase plan | 0.2 | | | — | | | 15.0 | | | — | | | — | | | 15.0 | |
| Stock issued for equity offerings, net of transaction costs | 10.7 | | | 0.1 | | | 745.6 | | | — | | | — | | | 745.7 | |
| Balance at December 31, 2022 | 406.7 | | | 4.1 | | | 5,065.4 | | | (29.1) | | | 1,829.6 | | | 6,870.0 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | 374.7 | | | 374.7 | |
| Other comprehensive income | — | | | — | | | — | | | 11.5 | | | — | | | 11.5 | |
| Exercise of stock options | 0.4 | | | — | | | 7.5 | | | — | | | — | | | 7.5 | |
| Restricted stock issued | 1.4 | | | — | | | — | | | — | | | — | | | — | |
| Restricted stock grants surrendered | (0.7) | | | — | | | (23.2) | | | — | | | — | | | (23.2) | |
| Stock-based compensation expense | — | | | — | | | 83.6 | | | — | | | — | | | 83.6 | |
| Management stock purchase plan | 0.1 | | | — | | | (3.2) | | | — | | | — | | | (3.2) | |
| Employee stock purchase plan | 0.2 | | | — | | | 17.7 | | | — | | | — | | | 17.7 | |
| | | | | | | | | | | |
| Balance at December 31, 2023 | 408.1 | | | $ | 4.1 | | | $ | 5,147.8 | | | $ | (17.6) | | | $ | 2,204.3 | | | $ | 7,338.6 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | |
| Balance at December 31, 2014 | 32,318 |
| | $ | 323 |
| | $ | 1,405,414 |
| | $ | (6,384 | ) | | $ | 114,193 |
| | $ | 1,513,546 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (3,465 | ) | | (3,465 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | (1,210 | ) | | — |
| | (1,210 | ) |
| Exercise of stock options | 60 |
| | 1 |
| | 5,068 |
| | — |
| | — |
| | 5,069 |
|
| Restricted stock grants | 239 |
| | 2 |
| | (2 | ) | | — |
| | — |
| | — |
|
| Restricted stock grants surrendered | (121 | ) | | (1 | ) | | (16,435 | ) | | — |
| | — |
| | (16,436 | ) |
| Stock compensation expense, net of forfeitures | — |
| | — |
| | 35,153 |
| | — |
| | — |
| | 35,153 |
|
| Employee stock purchase plan | 13 |
| | — |
| | 2,595 |
| | — |
| | — |
| | 2,595 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 8,528 |
| | — |
| | — |
| | 8,528 |
|
| Balance at December 31, 2015 | 32,509 |
| | 325 |
| | 1,440,321 |
| | (7,594 | ) | | 110,728 |
| | 1,543,780 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 85,071 |
| | 85,071 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | (5,445 | ) | | — |
| | (5,445 | ) |
| Exercise of stock options | 29 |
| | — |
| | 3,303 |
| | — |
| | — |
| | 3,303 |
|
| Restricted stock grants | 195 |
| | 2 |
| | (2 | ) | | — |
| | — |
| | — |
|
| Restricted stock grants surrendered | (142 | ) | | (1 | ) | | (16,423 | ) | | — |
| | — |
| | (16,424 | ) |
| Stock compensation expense, net of forfeitures | — |
| | — |
| | 36,388 |
| | — |
| | — |
| | 36,388 |
|
| Employee stock purchase plan | 15 |
| | — |
| | 2,842 |
| | — |
| | — |
| | 2,842 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | 4,698 |
| | — |
| | — |
| | 4,698 |
|
| Balance at December 31, 2016 | 32,606 |
| | 326 |
| | 1,471,127 |
| | (13,039 | ) | | 195,799 |
| | 1,654,213 |
|
| Cumulative effect of adoption of new accounting standard | — |
| | — |
| | — |
| | — |
| | 2,162 |
| | 2,162 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 122,695 |
| | 122,695 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | 4,019 |
| | — |
| | 4,019 |
|
| Exercise of stock options | 82 |
| | 1 |
| | 6,796 |
| | — |
| | — |
| | 6,797 |
|
| Restricted stock grants | 187 |
| | 2 |
| | (2 | ) | | — |
| | — |
| | — |
|
| Restricted stock grants surrendered | (99 | ) | | (1 | ) | | (14,901 | ) | | — |
| | — |
| | (14,902 | ) |
| Stock compensation expense, net of forfeitures | — |
| | — |
| | 38,921 |
| | — |
| | — |
| | 38,921 |
|
| Stock issued for equity offering | 3,317 |
| | 33 |
| | 833,878 |
| | — |
| | — |
| | 833,911 |
|
| Employee stock purchase plan | 14 |
| | — |
| | 3,434 |
| | — |
| | — |
| | 3,434 |
|
| Balance at December 31, 2017 | 36,107 |
| | $ | 361 |
| | $ | 2,339,253 |
| | $ | (9,020 | ) | | $ | 320,656 |
| | $ | 2,651,250 |
|
See accompanying notes.
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)millions)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Operating activities: | | | | | |
| Net income | $ | 374.7 | | | $ | 369.5 | | | $ | 292.6 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 107.5 | | | 137.9 | | | 139.6 | |
| Amortization of deferred commissions costs | 95.2 | | | 76.1 | | | 63.4 | |
| Amortization of Senior Notes discount and issuance costs | 2.4 | | | 2.4 | | | 2.3 | |
| Non-cash lease expense | 30.0 | | | 38.5 | | | 28.5 | |
| Stock-based compensation expense | 85.0 | | | 75.2 | | | 63.7 | |
| Deferred income taxes, net | (37.2) | | | (31.2) | | | 24.2 | |
| Credit loss expense | 35.0 | | | 18.3 | | | 10.9 | |
| Other operating activities, net | (3.2) | | | (2.4) | | | (0.7) | |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | |
| Accounts receivable | (66.6) | | | (46.4) | | | (29.6) | |
| Prepaid expenses and other current assets | (16.2) | | | (17.9) | | | (14.9) | |
| Deferred commissions | (120.2) | | | (116.8) | | | (72.0) | |
| Accounts payable and other liabilities | 33.9 | | | 23.2 | | | (30.2) | |
| Lease liabilities | (39.2) | | | (37.4) | | | (30.9) | |
| Income taxes payable, net | 10.7 | | | (19.3) | | | 5.9 | |
| Deferred revenue | (1.3) | | | 6.8 | | | 17.4 | |
| Other assets | (1.0) | | | 2.2 | | | (0.5) | |
| Net cash provided by operating activities | 489.5 | | | 478.7 | | | 469.7 | |
| | | | | |
| Investing activities: | | | | | |
| Proceeds from sale and settlement of investments | 3.8 | | | 0.9 | | | — | |
| Proceeds from sale of property and equipment and other assets | — | | | 30.1 | | | 0.6 | |
| Purchase and construction of Richmond assets | (117.5) | | | (35.2) | | | (123.7) | |
| Purchases of property and equipment and other assets | (25.3) | | | (58.6) | | | (65.2) | |
| Cash paid for acquisitions, net of cash acquired | (99.6) | | | (6.3) | | | (193.0) | |
| Net cash used in investing activities | (238.6) | | | (69.1) | | | (381.3) | |
| | | | | |
| Financing activities: | | | | | |
| Payments of long-term debt assumed in acquisition | — | | | (2.2) | | | — | |
| Repurchase of restricted stock to satisfy tax withholding obligations | (26.4) | | | (23.0) | | | (33.3) | |
| Proceeds from equity offering, net of transaction costs | — | | | 745.7 | | | — | |
| Proceeds from exercise of stock options and employee stock purchase plan | 23.4 | | | 13.5 | | | 18.0 | |
| Other financing activities | (0.7) | | | — | | | (0.4) | |
| Net cash (used in) provided by financing activities | (3.7) | | | 734.0 | | | (15.7) | |
| | | | | |
| Effect of foreign currency exchange rates on cash and cash equivalents | 0.7 | | | (2.7) | | | (1.5) | |
| Net increase in cash and cash equivalents | 247.9 | | | 1,140.9 | | | 71.2 | |
| Cash and cash equivalents at beginning of year | 4,968.0 | | | 3,827.1 | | | 3,755.9 | |
| Cash and cash equivalents at end of year | $ | 5,215.9 | | | $ | 4,968.0 | | | $ | 3,827.1 | |
| | | | | |
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Operating activities: | | | | | |
| Net income (loss) | $ | 122,695 |
| | $ | 85,071 |
| | $ | (3,465 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
| | |
| Depreciation and amortization | 63,643 |
| | 70,165 |
| | 78,532 |
|
| Amortization of debt issuance costs | 2,303 |
| | 3,227 |
| | 3,311 |
|
| Loss on extinguishment of debt | 3,788 |
| | — |
| | — |
|
| Impairment loss | — |
| | 23 |
| | 2,778 |
|
| Loss on disposal of property and equipment | 129 |
| | 839 |
| | 681 |
|
| Realized gain on investments | — |
| | (808 | ) | | — |
|
| Stock-based compensation expense | 39,030 |
| | 36,349 |
| | 34,537 |
|
| Deferred income tax (benefit) expense, net | (2,903 | ) | | 15,635 |
| | (5,792 | ) |
| Bad debt expense | 5,690 |
| | 7,358 |
| | 7,002 |
|
| Changes in operating assets and liabilities, net of acquisitions: | | | |
| | |
| Accounts receivable | (17,524 | ) | | (16,044 | ) | | (3,999 | ) |
| Prepaid expenses and other current assets | (3,672 | ) | | (1,157 | ) | | 367 |
|
| Income tax receivable | (12,981 | ) | | — |
| | — |
|
| Accounts payable and other liabilities | 11,525 |
| | (1,520 | ) | | 9,938 |
|
| Income taxes payable | 16,937 |
| | 2,816 |
| | 11,380 |
|
| Deferred revenue | 6,004 |
| | (2,070 | ) | | 3,817 |
|
| Deposits and other assets | 39 |
| | 758 |
| | 686 |
|
| Net cash provided by operating activities | 234,703 |
| | 200,642 |
| | 139,773 |
|
| | | | | | |
| Investing activities: | | | |
| | |
|
| Proceeds from sale and settlement of investments | — |
| | 5,950 |
| | 1,900 |
|
| Purchases of property and equipment and other assets | (24,499 | ) | | (18,766 | ) | | (35,061 | ) |
| Acquisitions, net of cash acquired | (47,768 | ) | | (10,443 | ) | | (182,341 | ) |
| Net cash used in investing activities | (72,267 | ) | | (23,259 | ) | | (215,502 | ) |
| | | | | | |
| Financing activities: | | | |
| | |
|
| Payments of long-term debt | (345,000 | ) | | (20,000 | ) | | (20,000 | ) |
| Payments of debt issuance costs | (3,467 | ) | | — |
| | — |
|
| Repurchase of restricted stock to satisfy tax withholding obligations | (14,902 | ) | | (16,424 | ) | | (16,436 | ) |
| Proceeds from equity offering, net of transaction costs | 833,911 |
| | — |
| | — |
|
| Proceeds from exercise of stock options and employee stock purchase plan | 9,888 |
| | 5,861 |
| | 7,404 |
|
| Net cash provided by (used in) financing activities | 480,430 |
| | (30,563 | ) | | (29,032 | ) |
| | | | | | |
| Effect of foreign currency exchange rates on cash and cash equivalents | 1,374 |
| | (1,415 | ) | | (433 | ) |
| Net increase (decrease) in cash and cash equivalents | 644,240 |
| | 145,405 |
| | (105,194 | ) |
| Cash and cash equivalents at beginning of year | 567,223 |
| | 421,818 |
| | 527,012 |
|
| Cash and cash equivalents at end of year | $ | 1,211,463 |
| | $ | 567,223 |
| | $ | 421,818 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Supplemental cash flow disclosures: | | | | | |
| Interest paid | $ | 30.7 | | | $ | 29.9 | | | $ | 31.5 | |
| Income taxes paid | $ | 163.2 | | | $ | 169.2 | | | $ | 82.1 | |
| | | | | |
| Supplemental non-cash investing and financing activities: | | | | | |
| Consideration owed for acquisitions | $ | 7.6 | | | $ | — | | | $ | 0.1 | |
| Accrued capital expenditures and non-cash landlord incentives | $ | 28.9 | | | $ | 14.7 | | | $ | 2.1 | |
See accompanying notes.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
1.ORGANIZATION
CoStar Group Inc. (the “Company” or “CoStar”) provides information, analytics, online marketplaces and online marketplaceauction 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.related tools. The Company provides online marketplaces for commercial real estate, apartment rentals, landsresidential real estate, land for sale and businesses for sale. The Company operates within two operating segments, North America and International,sale, and its services are typically distributed to its clients under subscription-based license agreements that typically renew automatically, a majority of which have a term of at least one year.year. The Company operates within two operating segments, North America, which includes the U.S. and Canada, and International, which primarily includes Europe, Asia-Pacific and Latin America.
The Company acquired Homes.com, BureauxLocaux, Business Immo, and OnTheMarket in May 2021, October 2021, April 2022 and December 2023, respectively. Through our Homes.com Acquisition and OnTheMarket Acquisition, we also offer online platforms that manage workflow and marketing for residential real estate agents and brokers and provide portals for homebuyers to view residential property listings. See Note 5 for further discussion of these acquisitions.
| |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation
The 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”)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,credit losses, the useful lives and recoverability of property and equipmentlong-lived and intangible assets, recoverability of long-lived assets and intangible assets with definite lives, goodwill, income taxes, fair value of equity instruments, fair value of auction rate securities (“ARS”), 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, real estate agents and brokers and landlords, in each case, typically through a fixed monthly fee for its subscription-based services. The Company'sOther subscription-based services consist primarily of information, analyticsinclude (i) real estate and online marketplace services offered over the Internetlease management solutions to commercial customers, real estate investors and lenders, (ii) access to applications to manage workflow and advertising and marketing services for residential real estate agents through its Homes.com Network and the acquisition of OnTheMarket, (iii) benchmarking and analytics for the hospitality industry and related professionals. (iv) market research, portfolio and debt analysis, management and reporting capabilities.
Subscription contract rates are generally based on the number of sites, number of users, organization size, the client’s business focus, geography, the number of properties reported on or analyzed, 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. A majority of theThe Company’s subscription-based license agreements typically renew automatically, and a majority have a term of at least one yearyear. Revenue from our subscription-based contracts was approximately 95%, 93% and renew automatically.93% of total revenue for the years ended December 31, 2023, 2022 and 2021, respectively.
The Company also derives revenues from transaction-based services including: (i) an online auction platform for commercial real estate through Ten-X, (ii) providing online tenant applications, including background and credit checks, and rental payment processing and (iii) ancillary products and services that are sold on an ad hoc basis.
Revenues are recognized when (1) there is persuasive evidenceThe 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)
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 obligations.
The Company recognizes revenues upon the satisfaction of its performance obligation(s) (upon transfer of control of promised services to its customers) in an arrangement, (2)amount that reflects the fee is fixed or determinable, (3) services have been rendered and payment has been contractually earned and (4) collectability is reasonably assured.
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. Revenues from transaction-based services are recognized when the promised product or services are delivered, which, in the case of Ten-X auctions, is at the time of a successful closing for the sale of the property.
In limited circumstances, the Company's contracts with customers include promises to transfer multiple services, such as contracts for its 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 advance cash receipts from customers or amounts billed in advance to customers or cash received from customers in advance of the saleCompany's fulfillment of subscription licensesits performance obligation(s) and is recognized as those obligations are satisfied.
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 revenue recognition timing.
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 termCompany has determined to be three years. The three-year amortization period was determined based on several factors, including the nature of the license agreement.technology and proprietary data underlying the services being purchased, customer contract renewal rates and industry competition. Sales commissions that do not represent incremental costs of obtaining a contract, or that would otherwise be amortized over a period of one year or less, are not subject to capitalization.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)
|
Revenue Recognition — (Continued)
The Company analyzes contracts with multiple elements under the accounting guidanceSee Note 3 for multiple-element arrangements. The Company's multiple-element arrangements include information, analytics and/or online marketplace services that are generally provided to the customer over the same term. When identifying multiple-element arrangements, the Company considers multiple purchases made by the same customer within a short time frame and assesses whether the purchases were negotiated together as one overall arrangement. If a multiple-element arrangement is identified, then the arrangement consideration is allocated among the separate units of accounting based on their relative selling prices, which are estimated considering factors such as historical pricing, pricing strategy, market conditions and other factors. The Company accounts for each deliverable in the transaction separately. If the deliverables cannot be separated into multiple units of accounting, then the arrangement consideration is combined and recognition of revenue is determined for the combined unit of accounting. Multiple-element transactions require judgment to determine the selling price or fair valuefurther discussion of the different elements. These judgments impact the amount ofCompany's revenue recognized over the term of the contract, as well as the period in which they are recognized.recognition.
Cost of Revenues
Cost of revenues principally consists of salaries, benefits, bonuses, and stock-based compensation expenses and other indirect costs for the Company’sCompany's researchers who collect and analyze the commercial real estate data that is the basis for the Company’sCompany's information, analytics and online marketplaces.marketplaces and for employees that support these products. Additionally, cost of revenues includes the cost of data from third-party data sources, product hosting costs, and costs related to advertising purchased on behalf of customers, 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 certain other intangible assets and database technology.assets.
Foreign Currency Translation
The Company’s reporting currency is the U.S. dollar. The functional currency infor the majority of its foreign locationsoperations is the local currency.currency, with the exception of certain international locations for which the functional currency is the British Pound. 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 dates. Revenues, expenses, gains and losses are translated at the average exchange rates in effect during each period.date. Gains and losses resulting from translation are included in accumulated other comprehensive loss. Currency gainsgains 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 orGains and losses resulting from foreigntransactions denominated in a currency exchange transactionsother than the functional currency of the entity are included in other income, net in the consolidated statements of operations. There were no material gains or losses fromoperations using the average exchange rates in effect during the period. The Company recognized net foreign currency exchange transactionsgains of $3.0 million, $1.4 million, and a loss of $0.3 million for the years ended December 31, 2017, 2016,2023, 2022 and 2015.2021, respectively, which are included in other income, net on the consolidated statements of operations.
Accumulated Other Comprehensive Loss
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of accumulated other comprehensive loss, net of tax, were as follows (in thousands)millions):
| | | | | | | | | | | |
| | As of December 31, |
| | 2023 | | 2022 |
| Foreign currency translation loss | $ | (17.6) | | | $ | (29.1) | |
| Total accumulated other comprehensive loss | $ | (17.6) | | | $ | (29.1) | |
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| Foreign currency translation adjustment | $ | (8,290 | ) | | $ | (12,191 | ) |
| Net unrealized loss on investments, net of tax | (730 | ) | | (848 | ) |
| Total accumulated other comprehensive loss | $ | (9,020 | ) | | $ | (13,039 | ) |
There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statement of operations for the year ended December 31, 2017. The amount of realized gain from the redemption of available-for-sale securities reclassified out of accumulated other comprehensive loss to the consolidated statement of operations for the year ended December 31, 2016 was approximately $808,000. There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statements of operations for both the yearyears ended December 31, 2015.2023 and 2022.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs include e-commerce,digital marketing, television, radio, print and other media advertising. Advertising costs were approximately $104$549.6 million, $109$305.7 million and $132$312.0 million for the years ended December 31, 2017, 2016,2023, 2022 and 2015,2021, respectively.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)
|
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 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 anticipatesdetermines it is more likely than not that some portion or all of an asset may not be realized through future taxable earnings or implementation of tax planning strategies.realized. Interest and penalties related to income tax matters are recognized in income tax expense.
The Company has elected to record the GILTI under the current-period cost method.
See Note 912 for additional information regardingfurther discussion of income taxes.
Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income (loss) by the weighted averageweighted-average number of common shares outstanding during the period on a basic and diluted basis. The Company’sCompany's potentially dilutive securities include outstanding stock options, unvested stock-based awards, which include restricted stock awards that vest over a specific service period, restricted stock awards with a performance and market condition, restricted stock.stock units and Matching RSUs awarded under the MSPP. Shares underlying unvested restricted stock awards that vest based on a performance and market condition 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 (loss) per share considers the impact of potentially dilutive securities except in periods in which there is a net loss, aswhen the inclusion of the potentially dilutive common sharessecurities would have an anti-dilutive effect.
See Note 16 for further discussion of the Company's calculation of net income per share.
Stock-Based Compensation
Equity instruments issued in exchange for services performed by officers, employees and directors of the Company are accounted for using a fair-value based method and the fair value of such equity instruments is recognized as expense in the consolidated statements of operations.
Stock-based compensation expense is measured at the grant date of theFor stock-based awards that vest over set time periodsa specific service period, compensation expense is measured based on theirthe fair values,value of the awards at the grant date and is recognized on a straight-line basis as expense over the vesting periodsservice period of the awards, net of an estimated forfeiture rate. For equity instruments that vest based on achievement of both a performance and market condition, stock-based compensation expense is recognized over the Company assesses the probabilityservice period of the awards based on the expected achievement of the related performance conditions at the end of each reporting period, or more frequently based upon the occurrence of events that may change the probability of whether the performance conditions would be met.period. If the Company's initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing of recognition 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 equity instruments that vest based onawards with both a performance condition 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 is updated based onawards which includes the expected achievementrecent market price and volatility of the related performance conditions at the end of each reporting period. 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.Company's shares. When
F-14
In March 2017, March 2016 and March 2015, the Compensation Committee of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the Company’s achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by the end of each respective three-year period. These grants of restricted common stock are also subject to continuing employment requirements and a market condition based on total shareholder return (“TSR”). The actual number of shares that vest at the end of each respective three-year period is determined based on the Company’s achievement of the three-year performance goals described above, as well as its TSR relative to the Russell 1000 Index over the same three-year performance period. Each reporting period, the Company reassesses the probability of achieving the performance and market conditions and determines whether it is probable that the performance and market conditions for the awards would be met. The Company recorded a total of approximately $5 million, $3 million and $3 million of stock-based compensation expense related to the performance-based restricted common stock awards with a market condition for the years ended December 31, 2017, 2016, and 2015, respectively. The Company expects to record estimated stock-based compensation expense related to the performance-based restricted common stock awards of approximately $6 million in aggregate over the periods 2018, 2019 and 2020.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
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2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)
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Stock-Based Compensation — (Continued)
determining the grant date fair value of all stock-based awards, the Company considers whether it is in possession of any material, non-public information that upon its release would have a material effect on its share price, and if so, whether the observable share price or expected volatility assumptions used in determining the fair value of the awards should be adjusted.
Stock-based compensation expense for stock options, restricted stock awards and restricted stock units issued under equity incentive plans, and stock purchases under the ESPP, DSUs and Matching RSUs awarded under the MSPP included in the Company’s resultsconsolidated statements of operations were as follows (in thousands)millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Cost of revenues | $ | 14.3 | | | $ | 12.6 | | | $ | 11.2 | |
| Selling and marketing (excluding customer base amortization) | 9.1 | | | 7.8 | | 7.8 | | 6.3 | |
| Software development | 17.5 | | | 13.0 | | | 12.5 | |
| General and administrative | 44.1 | | | 41.8 | | | 33.7 | |
| Total stock-based compensation expense | $ | 85.0 | | | $ | 75.2 | | | $ | 63.7 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cost of revenues | $ | 4,971 |
| | $ | 5,495 |
| | $ | 5,815 |
|
| Selling and marketing (excluding customer base amortization) | 7,086 |
| | 6,634 |
| | 5,114 |
|
| Software development | 7,071 |
| | 6,546 |
| | 5,712 |
|
| General and administrative | 19,902 |
| | 17,674 |
| | 17,896 |
|
| Total stock-based compensation | $ | 39,030 |
| | $ | 36,349 |
| | $ | 34,537 |
|
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consistwere $5.2 billion and $5.0 billion as of money marketsDecember 31, 2023 and commercial paper.
Investments
2022, respectively. The Company determines the appropriate classification of debt and equity investments at the time of purchase and re-evaluates such designationhad no restricted cash as of each balance sheet date. The Company considers all of its investments to be available-for-sale. The Company's investments consist of long-term variable rate debt instruments with an auction reset feature, referred to as auction rate securities. Investments are carried at fair value. Changes in unrealized holding gainsDecember 31, 2023 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 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.2022.
Concentration of Credit Risk and Financial Instruments
The Company performs ongoing assessments of its customers’ financial conditions and generally does not require that its customers’ obligations to the Company be secured. The Company maintains reserves for estimated inherent credit losses, and such losses have been within management’s expectations. The large size and widespread nature of the Company’s customer base and the Company’screates a lack of dependence on any individual customer that mitigates the risk of nonpayment of the Company’s accounts receivable. No single customer accounted for more than 5% of the Company’s revenues for each of the years ended December 31, 2017, 2016,2023, 2022 and 2015.2021. The carrying amount of the accounts receivable approximates the net realizable value.
The Company holds cash at major financial institutions that often exceed Federal Deposit Insurance Corporation insuredCorporation-insured limits. The Company manages its credit risk associated with cash concentrations by concentrating itsdiversifying cash deposits inholdings across AAA rated Government and Treasury Money Market Funds and multiple high quality financial institutions, and by periodically evaluating the credit quality of the primary financial institutions holding such deposits. The carrying value of cash approximates fair value. Historically, the Company has not experienced any losses due to such cash concentrations.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)
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Accounts Receivable, Net of Allowance for Doubtful AccountsCredit Losses
Accounts receivable are recorded at the invoiced amount net of credits due. Accounts receivable payment terms vary and amounts due from customers are stated in the financial statements net ofThe Company maintains an allowance for doubtful accounts. When evaluatingcredit losses to cover its current expected credit losses on its trade receivables and contract assets arising from the adequacyfailure of customers to make contractual payments. The Company estimates credit losses expected over the allowance for doubtful accounts, the Company analyzeslife of its trade receivables and contract assets based on historical collection experience, changes in customer payment profiles and the aging of receivable balances, as well asinformation combined with current economic conditions all of whichthat may affect a customer’s ability to pay. pay and reasonable and supportable forecasts. While the Company uses various credit quality metrics, it primarily monitors collectability by reviewing the duration of collection pursuits on its delinquent trade receivables and historical write-off trends. Based on the Company’s experience, the customer's delinquency status, which is analyzed periodically, is the strongest indicator of the credit quality of the underlying trade receivables. The Company’s policy is to write-off trade receivables when they are deemed uncollectible. A majority of the Company's trade receivables are less than 365 days outstanding.
Under the CECL impairment model, the Company develops and documents its allowance for credit losses on its trade receivables based on five portfolio segments. The determination of portfolio segments is based primarily on the qualitative consideration of the nature of the Company’s business operations and the characteristics of the underlying trade receivables, as follows:
•CoStar Portfolio Segment - The CoStar portfolio segment consists of two classes of trade receivables based on geographical location: North America and International.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Information Services Portfolio Segment - The Information Services portfolio segment consists of four classes of trade receivables: CoStar Real Estate Manager; Information Services, North America; STR, North America; and STR, International.
•Multifamily Portfolio Segment - The Multifamily portfolio segment consists of one class of trade receivables.
•LoopNet Portfolio Segment - The LoopNet portfolio segment consists of one class of trade receivables.
•Other Marketplaces Portfolio Segment - The Other Marketplaces portfolio segment consists of two classes of trade receivables: Ten-X and other marketplaces.
The majority of Residential revenue is e-commerce based and does not result in accounts receivable. Residential accounts receivable and the related allowance for credit losses are not material.
See Note 4 for further discussion of the Company’s accounting for allowance for credit losses.
Leases
The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at the commencement of the arrangement, at which time the Company also measures and recognizes an 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 12 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 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 deemed 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, offset by lease incentives. Upon commencement, the initial ROU asset also includes any lease prepayments. 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 and is determined at lease commencement and is subsequently reassessed upon a modification to the lease arrangement.
Lease costs related to the Company's operating leases are generally recognized as a single ratable lease cost over the lease term. ROU assets resulting from finance leases are accounted for as property and equipment, net.
See Note 7 for further discussion of the Company’s accounting for leases.
Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation and amortization. All repairs and maintenance costs are expensed as incurred. Costs related to acquisition of additional aircraft components or the replacement of existing aircraft components are capitalized and depreciated over the estimated useful life of the aircraft or the added or replaced component, whichever is less. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets:
| | | | | | | | |
| Buildings | | Twenty to thirty-nine years |
| Land | | Indefinite |
Leasehold improvementsAircrafts | | Shorter of lease term or useful lifeTen to twenty years |
| Furniture and office equipment | | Five to ten years |
| Vehicles | | FiveFour to tenfive years |
| Computer hardware and software | | Three to five years |
| Leasehold improvements | | Two to five yearsShorter of lease terms or useful life |
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Qualifying internal-use software costs incurred during the application development stage, which consist primarily of internal product development costs, outside services and purchased software license costs, are capitalized and amortized over the estimated useful life of the asset. All other costs are expensed as incurred. The Company removes fully depreciated property and equipment from the cost and accumulated depreciation amounts disclosed in the period they become fully depreciated.
In January 2021, the Company purchased an office building located in Richmond, Virginia, together with the land and assumed an existing lease for a purchase price of $131 million, inclusive of property taxes, title insurance and other transaction costs. The purchase of the Richmond building was accounted for as an asset acquisition, including an intangible asset for the assumed lease. The assumed lease terminated in the year ending December 31 2023. The net impact from the lease arrangement is recorded in other income, net on the consolidated statements of operations and was not material. The Company has broken ground on an expansion of its campus in Richmond, Virginia and acquired a small office building near the campus to facilitate employee staging while the expansion is being constructed. The capitalized spending associated with these efforts is recorded in the purchase and construction of Richmond assets line of the consolidated statements of cash flows.
Goodwill and
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. The Company capitalizes interest on borrowings during the active construction period of major capital projects. Capitalized interest is added to the cost of the underlying asset and amortized over the estimated useful life of the asset. 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.
During 2022, the Company ceased using leased properties in California and Maryland as part of efforts to centralize its workforce, which resulted in an impairment charge of $9 million for lease ROU assets and property and equipment related to abandoned leases. The impairment was recorded in the general and administrative expense line of the consolidated statements of operations. The leases related to the North America segment.
Acquired technology and data, customer base assets, trade names and other intangible assets are related to the Company’s acquisitions. Acquired technology and data is amortized on a straight-line basis over periods ranging from 2 years to 7 years. Acquired intangible assets characterized as customer base assets consist of acquired customer contracts and the related customer relationships and are amortized over periods ranging from 3 years to 13 years. Acquired customer bases are amortized on an accelerated or straight-line basis depending on the expected economic benefit of the intangible asset. Acquired trade names and other intangible assets are amortized on a straight-line basis over periods ranging from 3 years to 15 years. The Company removes fully amortized intangible assets from the cost and accumulated amortization amounts disclosed.
Goodwill represents the future economic benefits arising from a business combination and is calculated as the excess of coststhe purchase consideration paid in a business combination over the fair value of the net identifiable assets of acquired businesses.acquired. Goodwill is not amortized, but instead is assigned to each of the Company's reporting units and tested for impairment at least annually, by eachon October 1, or more frequently if an event or other circumstance indicates that the fair value of a reporting unit.unit may be below its carrying amount. 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 suchthe qualitative 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 suchthe qualitative assessment, the Company then determinesperforms a quantitative assessment by determining the fair value of each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates including the Company's discount rate, growth rate and future financial performance. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies. Assumptions about the growth rate and future financial performance of a reporting unit are based on the Company's forecasts, business plans, economic projections and anticipated future cash flows. 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.
Acquired database technology, customer baseSee Notes 5, 9 and trade names10 for further discussion of acquisitions, goodwill and other intangible assets, are related to the Company’s acquisitions (see Notes 6 and 7). Acquired database technology is amortized on a straight-line basis over periods ranging from three years to eight years. Acquired trade names and other intangible assets are amortized on a straight-line basis over periods ranging from three years to fifteen years. See Note 7 for further details on the reclassification of the acquired trade names recorded in connection with the LoopNet acquisition from an indefinite-lived intangible asset to a definite-lived intangible asset. Acquired intangible assets characterized as customer base consists of acquired customer contracts and the related customer relationships and are amortized over periods ranging from ten years to thirteen years. Acquired customer bases are typically amortized on an accelerated basis related to the expected economic benefit of the intangible asset. The cost of capitalized building photography is amortized on a straight-line basis over periods ranging from three years to five years. Intangible assets are reviewed for impairment at least annually, and more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable.respectively.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
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2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)
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Long-Lived Assets
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 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 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.
Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
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. These amounts are reflected inThe Company made a policy election to classify deferred issuance costs on the revolving credit facility as a long-term asset on its consolidated balance sheets as direct deductions from a combination of the current and long-term portions of debt for term debt and as current and long-term assets for costs related to revolving debt.sheets. 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. The Company had capitalized debt issuance costs, net of amortization, of approximately $4 million and $7 million as of December 31, 2017 and 2016, respectively. The debt issuance costs are associated with our various previous credit agreements, and the current amended and restated 2017 Credit Agreement (the "2017 Credit Agreement").
See Note 811 for additional information regardingfurther discussion of the term loan andCompany's accounting for its outstanding debt, revolving credit facility. The Company recognized debtfacility and related issuance costs of approximately $2 million, $3 million, and $3 million and included in interest expense for each of the years ended December 31, 2017, 2016, and 2015.costs.
Business Combinations
The Company includes the results of operations of the businesses that it acquires from the date of acquisition. The Company generally allocates the purchase consideration to the tangible assets acquired and liabilities assumed and intangible assets acquired based on their estimated fair values.values on the date of the acquisition. The purchase price is generally determined based on the fair value of the assets transferred, liabilities assumed 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 makeThe Company applies significant assumptions, estimates and assumptions,judgments in determining the fair value of assets acquired and liabilities assumed on the acquisition date, especially with respect to intangible assets.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 database technology and acquired trade names, from a market participant's perspective, useful lives, royalty rates and discount rates. During the measurement period, the CompanyEstimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may record adjustments to the assets acquired and liabilities assumed.differ from estimates. Any adjustments to provisional amounts that are identified during the measurement period, not to exceed one year from the date of acquisition, 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.
COSTAR GROUP, INC.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, to determine their estimated amounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
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 consolidated statements of operations and comprehensive income and could have a material impact on its results of operations and financial position.
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2. | Transaction costs associated with business combinations are expensed as incurred, and are included in general and administrative expenses in the consolidated statements of operations. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)
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Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In 2021, the Company adopted ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance requires contract assets and liabilities acquired or assumed in an acquisition be measured in accordance with the accounting framework for revenue from contracts with customers as if the
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company had originated the acquired contract. This is an exception to the general requirement to measure assets acquired and liabilities assumed at their fair value on the acquisition date. The Company applied this revised guidance to all acquisitions in the year ended December 31, 2021. The application of this guidance to contract assets and contract liabilities acquired or assumed in connection with the Company's acquisitions for the year ended December 31, 2021 did not have a material impact on the Company's consolidated financial statements and related disclosures.
In March 2016,2020, the FASB issued ASU 2016-09, Compensation - Stock Compensation2020-04, Reference Rate Reform (Topic 718)848): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspectsFacilitation of the Effects of Reference Rate Reform on Financial Reporting. ASC 848 contains optional expedients and exceptions for applying GAAP to debt, contracts, hedging relationships and other transactions affected by reference rate reform. The provisions of ASC 848 must be applied to all contracts that are accounted for under a Topic, Subtopic or Industry Subtopic for all transactions other than derivatives, which may be applied at a hedging relationship level. Originally, the guidance was effective for fiscal years beginning after January 1, 2021, including interim periods within those fiscal years. However, in response to the deferral of the cessation date for certain overnight LIBOR measures, the FASB issued ASU 2022-06 on December 21, 2022, which extends the sunset date of Topic 848 to December 31, 2024. The Company's 2020 Credit Agreement provides for a $750 million revolving credit facility and a letter of credit sublimit of $20 million, with interest rates previously benchmarked to LIBOR. The Company adopted this accounting pronouncement with the execution of the First Amendment to the 2020 Credit Agreement in May 2023. This guidance provides an optional practical expedient that allows a qualifying modification to be accounted for share-based payment transactions, includingas a debt modification rather than be analyzed under existing guidance to determine if the income tax consequences, classification of awardsmodification should be accounted for as either equity or liabilities, and classification of share-based payment transactionsa debt extinguishment. In adopting this accounting standard, we have elected to apply this optional expedient. Adopting this accounting standard did not have a material impact on the statementCompany's consolidated financial statements and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates prior guidance on troubled debt restructurings for creditors that have adopted ASU 2016-13, Measurement of cash flows. TheCredit Losses in Financial Statements, and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. In addition, the ASU amends guidance requires a companyon "vintage disclosures" to (i) recognize all excess tax benefits and tax deficiencies as income tax expense or benefit inrequire the statementdisclosure of operations using a prospective transition method, (ii) recognize excess tax benefits in the current period regardlessgross write offs by year of whether the benefit reduces taxes payable using a modified retrospective transition method, and (iii) classify all excess tax benefits as operating activities within the statement of cash flows using either a prospective transition method or a retrospective transition method. The guidance also allows a company to (i) elect whether to estimate the number of share-based awards expected to vest or account for forfeitures when they occur, and (ii) withhold up to the maximum statutory tax rate in the applicable jurisdiction for awards, both of which should be applied using a modified retrospective transition method. Finally, the guidance requires a company to classify the cash paid by an employer when directly withholding shares for tax withholding purposes as a financing activity within the statement of cash flows using a retrospective transition method.origination. This guidance is effective for fiscal years beginning after December 15, 2022. The Company expects there to be no material impact on its consolidated financial statements and related disclosures from the adoption of this ASU.
In November 2023, the FASB issued ASU No. 2023-07 (Topic 280), Improvements to Reportable Segment Disclosures. The ASU primarily will require enhanced disclosures about significant segment expenses. Additionally, it requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for annual reporting periods beginning after December 15, 2016, including2023, and interim periods within that reporting period.
The Company adopted the new guidance on January 1, 2017. The adoptionfiscal years beginning after December 15, 2024. Adoption of the new standard resulted in a $2 million cumulative-effect adjustment as of January 1, 2017 to record a deferred tax asset with the offset to retained earnings on the balance sheet, representing the amount of the Company's net operating loss carryforwards attributable to excess tax benefits that it was not able to record under the prior guidance. The Company elected to continue to estimate the number of awards expected toASU should be forfeited and adjust the estimate when it is no longer probable that the service or performance conditions will be met.
Additionally, the Company elected to apply the presentation requirements for statement of cash flows related to excess tax benefitsapplied retrospectively to all periods presented, which resulted in an increase to both net cash provided by operating activities and net cash used in financing activities of approximately $5 million and $9 million for the twelve months ended December 31, 2016 and 2015, respectively. The presentation requirements related to employee taxes paid by withholding shares had no impact on any of theprior periods presented in the Company'sfinancial statements. The Company is currently evaluating the impact this ASU will have on its consolidated cash flowsfinancial statements since such cash flows have historically been presented as a financing activity.and related disclosures.
In January 2017,December 2023, the FASB issued ASU 2017-04, Intangibles - Goodwill and OtherNo. 2023-09 (Topic 350: Simplifying the Test for Goodwill Impairment740), which is designedImprovements to simplify the subsequent measurementIncome Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as an expansion of goodwill by eliminating Step 2 from the goodwill impairment test.other income tax disclosures. The guidance indicates that an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidanceASU is effective on a prospective basis for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this guidance during the first quarter of 2017 and the early adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard, Accounting Standards Update (“ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) that is designed to improve financial reporting by creating common recognition guidance for GAAP and International Financial Reporting Standards (“IFRS”). This guidance provides a robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequently, amendments to the new revenue recognition standard were issued to clarify numerous accounting topics, including, but not limited to (i) the implementation guidance on principal versus agent considerations, (ii) the identification of performance obligations, (iii) the licensing implementation guidance, (iv) the objective of the collectability criterion, (v) the application of the variable consideration guidance and modified retrospective transition method, (vi) the way in which impairment testing is performed and
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(vii) the disclosure requirements for revenue recognized from performance obligations. This guidance permits the use of either a full retrospective method or a modified retrospective approach. The modified retrospective approach would be applied only to the most current period presented along with a cumulative-effect adjustment at the date of adoption. This guidance will be effective for annual reporting periods beginning after December 15, 2017, although companies may adopt the standard as early as annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.
The Company currently intends to adopt the new guidance using the modified retrospective approach. Under this adoption method, the Company will recognize a cumulative effect adjustment to retained earnings as of January 1, 2018 and will account for its contracts with customers under the new guidance prospectively beginning on January 1, 2018. The Company used several available practical expedients provided in the new guidance, including assessing contracts with similar terms and conditions on a “portfolio” basis. Based on the Company’s preliminary analysis, the Company believes that the potential impact of adopting this guidance on reported revenue in any period will not be material. The primary impact of adopting the new guidance relates to the deferral of incremental costs of obtaining customer contracts which is primarily commission costs on new sales. Under existing guidance, the Company expensed all commission costs in the periods they were earned, whereas under the new guidance the Company will defer commission costs on new sales and amortize them on a straight-line basis over 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 renewals rates; and industry competition. The Company currently estimates that the cumulative effect of adoption will result in the recognition of deferred commission cost asset between $48 million to $58 million, net of appropriate taxes, as of January 1, 2018.
Beginning in 2018, the Company expects significant changes to its disclosed revenue recognition policies and practices, as well as to other related financial statement disclosures. These revised disclosures will be made in the Company’s first quarterly report in 2018.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations’ accounting for leases. The guidance requires a company to recognize lease assets and lease liabilities on the balance sheet, as well as disclose key information about leasing arrangements. This guidance is effective on a modified retrospective basis for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early application is permitted.2024. The Company is currently evaluating the impact this guidanceASU will have on its financial statements and related disclosures, but expects that the adoption of this standard may result in a material increase in assets and liabilities on its consolidated balance sheets.
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 annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Companies may adopt the standard as early as annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact this guidance will have on its financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is designed to reduce the existing diversity in how certain cash receipts and cash payments are presented and classified in the consolidated statements of cash flows. This guidance is effective on a retrospective basis for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company will adopt this guidance in the first quarter of 2018. This guidance is not expected to have a material impact on the Company's consolidated statements of cash flows and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business,
which is designed to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance indicates that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. This guidance is effective on a prospective basis for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company will adopt this guidance in the first quarter of 2018 and this guidance is not expected to have a material impact on the Company's consolidated financial statements and related disclosures.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
| |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)
|
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
In May 2017,Disaggregated Revenue
The Company provides information, analytics and online marketplaces to the FASB issued ASU 2017-09, Compensation- Stock Compensation (Topic 718): Scopecommercial real estate industry, hospitality industry, residential industry and related professionals. Revenues by operating segment and type of Modification Accounting, which is designed to reduce the existing diversity and complexity in the accounting for changes to terms or conditions of a share-based payment award. This guidance clarifies that an entity will not apply modification accounting to a share-based payment award if allservice consist of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as an equity instrument or liability instrument. This guidance is effective on a prospective basis for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company will adopt this guidance in the first quarter of 2018. This guidance is not expected to have a material impact on the Company's consolidated financial statements and related disclosures.(in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| North America | | International | | Total | | North America | | International | | Total | | North America | | International | | Total |
| CoStar | $ | 886.0 | | | $ | 39.2 | | | $ | 925.2 | | | $ | 800.2 | | | $ | 36.8 | | | $ | 837.0 | | | $ | 686.9 | | | $ | 35.9 | | | $ | 722.8 | |
| Information services | 132.4 | | | 38.5 | | | 170.9 | | | 125.0 | | | 32.4 | | | 157.4 | | | 113.8 | | | 27.9 | | | 141.7 | |
| Multifamily | 914.2 | | | — | | | 914.2 | | | 745.4 | | | — | | | 745.4 | | | 678.7 | | | — | | | 678.7 | |
| LoopNet | 255.4 | | | 9.4 | | | 264.8 | | 223.7 | | 7.2 | | 230.9 | | 204.8 | | | 2.7 | | | 207.5 | |
| Residential | 43.9 | | | 2.2 | | | 46.1 | | 73.7 | | — | | 73.7 | | 74.6 | | | — | | | 74.6 | |
| Other Marketplaces | 133.8 | | | — | | | 133.8 | | | 138.0 | | | — | | | 138.0 | | | 118.8 | | | — | | | 118.8 | |
| Total revenues | $ | 2,365.7 | | | $ | 89.3 | | | $ | 2,455.0 | | | $ | 2,106.0 | | | $ | 76.4 | | | $ | 2,182.4 | | | $ | 1,877.6 | | | $ | 66.5 | | | $ | 1,944.1 | |
Deferred Revenue
The Company determines the appropriate classification of debt and equity investments at the time of purchase and re-evaluates such designationDeferred revenue as of eachDecember 31, 2023 and 2022 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | December 31, | | | |
| Balance | Balance Sheet Caption | | | | | | 2023 | | 2022 | | | |
| Current portion | Deferred revenue | | | | | | $ | 104.2 | | | $ | 103.6 | | | | |
| Non-current portion | Lease and other long-term liabilities | | | | | | 0.1 | | | 0.2 | | | | |
| Total deferred revenue | | | | | | | $ | 104.3 | | | $ | 103.8 | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Changes in deferred revenue for the period were as follows (in millions):
| | | | | |
Balance at December 31, 2022(1) | $ | 103.8 | |
| Revenue recognized in the current period from the amounts in the beginning balance | (103.8) | |
| New deferrals, net of amounts recognized in the current period | 103.4 | |
| Effects of foreign currency | 0.9 | |
| |
Balance at December 31, 2023(2) | $ | 104.3 | |
| __________________________ | |
(1) This balance sheet date. The Company considers allincludes $1.8 million of its investmentsnet new deferrals recognized in connection with business acquisitions made in 2022. See Note 5 for further discussion of acquisitions.
(2) This balance includes $1.0 million of net new deferrals recognized in connection with business acquisitions made in 2023. See Note 5 for further discussion of acquisitions.
Contract Assets
Contract assets are generated when contractual billing schedules differ from revenue recognition timing and represent a conditional right to be available-for-sale. The Company's investments consistconsideration for satisfied performance obligations that becomes a receivable when the conditions are satisfied. Contract assets as of long-term variable rate debt instruments with an auction reset feature, referred toDecember 31, 2023 and 2022 were as ARS. Investments are carried at fair value.follows (in millions):
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
| |
3. | INVESTMENTS — (CONTINUED) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | December 31, | | | |
| Balance | Balance Sheet Caption | | | | | | 2023 | | 2022 | | | |
| Current portion | Prepaid expenses and other current assets | | | | | | $ | 5.8 | | | $ | 4.0 | | | | |
| Non-current portion | Deposits and other assets | | | | | | 8.0 | | | 8.4 | | | | |
| Total contract assets | | | | | | | $ | 13.8 | | | $ | 12.4 | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Scheduled maturities of investments classified as available-for-sale as of December 31, 2017 are as follows (in thousands):
|
| | | | |
| Maturity | | Fair Value |
| Due in: | | |
| 2018 | | $ | — |
|
| 2019 — 2022 | | — |
|
| 2023 — 2027 | | — |
|
| 2028 and thereafter | | 10,070 |
|
| Available-for-sale investments | | $ | 10,070 |
|
The Company had no realized gains on its investments during the year ended December 31, 2017. The Company realized gains of $0.8 million related to an ARS that was redeemed at a par value of $1 million for the year ended December 31, 2016. The Company had no realized gains on its investments for the year ended December 31, 2015. The Company had no realized losses on its investmentsRevenue recognized from contract assets for the years ended December 31, 2017, 2016,2023 and 2015. Realized gains2022 were $1.4 million and losses from$3.2 million, respectively.
Commissions
Commissions expense is included in selling and marketing expense in the saleCompany's consolidated statements of available-for-sale securities areoperations. The Company determined on a specific-identification basis.
Asthat no deferred commissions were impaired as of both December 31, 2017,2023 and 2022. Commissions expense activity for the amortized cost basisyears ended December 31, 2023, 2022 and fair value of investments classified as available-for-sale were2021, was as follows (in thousands)millions):
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Commissions incurred | | | $ | 173.5 | | | $ | 162.1 | | | $ | 117.3 | |
| Commissions capitalized in the current period | | | (120.2) | | | (116.8) | | | (72.0) | |
| Amortization of deferred commissions costs | | | 95.2 | | | 76.1 | | | 63.4 | |
| Total commissions expense | | | $ | 148.5 | | | $ | 121.4 | | | $ | 108.7 | |
|
| | | | | | | | | | | | | | | |
| | 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 |
|
Unsatisfied Performance Obligations
As of December 31, 2016, 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 |
| | $ | — |
| | $ | (848 | ) | | $ | 9,952 |
|
| Available-for-sale investments | $ | 10,800 |
| | $ | — |
| | $ | (848 | ) | | $ | 9,952 |
|
The unrealized losses on the Company’s investmentsRemaining contract consideration for which revenue had not been recognized due to unsatisfied performance obligations was $409.6 million as of December 31, 20172023, 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 CONSOLIDATED FINANCIAL STATEMENTS
4.ALLOWANCE FOR CREDIT LOSSES
The following tables detail the activity related to the allowance for credit losses for trade receivables by portfolio segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2023 |
| CoStar | | Information Services | | Multifamily | | LoopNet | | Other Marketplaces | | | | Total |
| Beginning balance at December 31, 2022 | $ | 4.5 | | | $ | 1.1 | | | $ | 4.3 | | | $ | 1.4 | | | $ | 0.9 | | | | | $ | 12.2 | |
| Current-period provision (release) for expected credit losses | 22.1 | | | 1.4 | | | 4.9 | | | 6.0 | | | 0.6 | | | | | 35.0 | |
| Write-offs charged against the allowance, net of recoveries and other | (16.9) | | | — | | | (1.9) | | | (4.7) | | | (0.5) | | | | | (24.0) | |
| Ending balance at December 31, 2023 | $ | 9.7 | | | $ | 2.5 | | | $ | 7.3 | | | $ | 2.7 | | | $ | 1.0 | | | | | $ | 23.2 | |
- | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| CoStar | | Information Services | | Multifamily | | LoopNet | | Other Marketplaces | | | | Total |
| Beginning balance at December 31, 2021 | $ | 5.4 | | | $ | 1.8 | | | $ | 3.4 | | | $ | 2.0 | | | $ | 0.8 | | | | | $ | 13.4 | |
| Current-period provision (release) for expected credit losses | 9.2 | | | (0.6) | | | 5.8 | | | 3.8 | | | 0.1 | | | | | 18.3 | |
| Write-offs charged against the allowance, net of recoveries and other | (10.1) | | | (0.1) | | | (4.9) | | | (4.4) | | | — | | | | | (19.5) | |
| Ending balance at December 31, 2022 | $ | 4.5 | | | $ | 1.1 | | | $ | 4.3 | | | $ | 1.4 | | | $ | 0.9 | | | | | $ | 12.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| CoStar | | Information Services | | Multifamily | | LoopNet | | Other Marketplaces | | | | Total |
| Beginning balance at December 31, 2020 | $ | 5.6 | | | $ | 2.7 | | | $ | 4.4 | | | $ | 1.7 | | | $ | 0.8 | | | | | $ | 15.2 | |
| Current-period provision for expected credit losses | 5.6 | | | (0.4) | | | 3.1 | | | 2.6 | | | — | | | | | 10.9 | |
| Write-offs charged against the allowance, net of recoveries and other | (5.8) | | | (0.5) | | | (4.1) | | | (2.3) | | | — | | | | | (12.7) | |
| Ending balance at December 31, 2021 | $ | 5.4 | | | $ | 1.8 | | | $ | 3.4 | | | $ | 2.0 | | | $ | 0.8 | | | | | $ | 13.4 | |
Credit loss expense is included in general and 2016 were generated primarily from changes in interest ratesadministrative expenses on the consolidated statements of operations. Credit loss expense related to contract assets was not material for the years ended December 31, 2023, 2022 and ARS that failed to settle at auction, due to adverse conditions in the global credit markets.2021. 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 costmajority of the investment. Because the CompanyResidential portfolio segment revenue is e-commerce based and does not intendresult in accounts receivable.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACQUISITIONS
OnTheMarket
On December 12, 2023, CoStar UK acquired OnTheMarket, the operator of onthemarket.com, a U.K. residential property portal. At the time of closing, CoStar UK acquired all of the then issued ordinary share capital of OnTheMarket for cash consideration of 110 pence per share or £94.0 million ($117.9 million). OnTheMarket had certain share option contracts that had not been exercised at the time of closing for which CoStar UK has established a liability for £2.0 million ($2.6 million). This resulted in total consideration of £96.0 million ($120.4 million). Certain shares outstanding at the time of the closing resulted from contracts held by employees of OnTheMarket or its subsidiaries that required OnTheMarket to sell these instrumentswithhold income and it is not more likely than not thatemployment taxes of £4.0 million ($5.1 million) which represented consideration payable at December 31, 2023 and were remitted in January 2024.
The following table summarized the Company will be required to sell these instruments prior to anticipated recovery, which may beamounts recorded for acquired assets and assumed liabilities recorded at maturity, the Company does not consider these investments to be other-than-temporarily impairedtheir fair value as of December 31, 2017the closing date of the acquisition (in millions):
| | | | | | | | | |
| | | | | Preliminary: December 12, 2023 |
| Cash and cash equivalents | | | | | $ | 18.2 | |
| Accounts receivable | | | | | 2.3 | |
| Goodwill | | | | | 62.8 | |
| Intangible assets | | | | | 55.2 | |
| Accrued expenses | | | | | (12.7) | |
| Accrued wages and commissions | | | | | (2.0) | |
| Deferred income taxes, net | | | | | (3.0) | |
| Other assets and liabilities | | | | | (0.4) | |
| Fair value of identifiable net assets acquired | | | | | $ | 120.4 | |
The net assets of OnTheMarket were recorded at their estimated fair values. In valuing the acquired assets and 2016. See Note 4assumed liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for further discussioncontractual obligations and appropriate discount rates. The purchase price allocation is preliminary, subject primarily to the Company's assessment of thecertain tax matters, contingencies and intangibles valuation. The estimated fair value of the Company’s financial assets.customer base assets incorporated significant assumptions that had a material impact on the estimated fair value, such as discount rates, projected revenue growth rates, customer attrition rates and profit margins.
The following table summarizes the fair values (in millions) of the identifiable intangible assets acquired in the OnTheMarket Acquisition included in the Company's International operating segment, their related estimated useful lives (in years) and their respective amortization methods:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Estimated Fair Value | | Estimated Useful Life | | Amortization Method |
| Customer base | | | | | $ | 42.0 | | | 8 | | Accelerated |
| Trade name | | | | | 10.2 | | | 15 | | Straight-line |
| Technology | | | | | 3.0 | | | 2 | | Straight-line |
| Total intangible assets | | | | | $ | 55.2 | | | | | |
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
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 OnTheMarket 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 international operations and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce. The $62.8 million of goodwill recorded as part of the acquisition is associated with the Company's International operating segment, of which none is expected to be deductible for income tax purposes. Transaction costs associated with the OnTheMarket Acquisition were $11.0 million.
Business Immo
In April 2022, the Company acquired Business Immo, a leading commercial real estate news service provider in France, for €5.8 million ($6.3 million), net of cash acquired and the assumption of outstanding debt. As part of the acquisition, the Company recorded goodwill and intangible assets of $7.1 million and $3.9 million, respectively. The net assets of Business Immo were recorded at their estimated fair value. The Company retired the assumed debt in the second quarter of 2022. The net assets of Business Immo were recorded at their estimated fair value. The Company retired the assumed debt in the second quarter of 2022.
BureauxLocaux
In October 2021, CoStar UK acquired BureauxLocaux, a commercial real estate digital marketplace in France, for a base purchase price of €35.0 million ($40.6 million) in cash, subject to customary working capital and other post-closing adjustments which were settled in the fourth quarter of 2021. As part of the acquisition, the Company recorded goodwill and intangible assets of $27.4 million and $18.3 million, respectively, in the Company's International operating segment. The net assets of BureauxLocaux were recorded at their estimated fair value.
Homes.com
In May 2021, the Company closed the Homes.com Acquisition, in which the Company acquired all of the issued and outstanding equity interests in Homes Group for a purchase price of $150.0 million in cash, subject to customary working capital and other post-closing adjustments which resulted in total consideration of $152.2 million. Homes Group operates Homes.com, a residential marketplace hosted on the website Homes.com and mobile apps that provided real estate advertising and marketing services. In November 2022 CoStar Group integrated the operations of Homes.com and Homesnap.
The following table summarizes the amounts recorded for acquired assets and assumed liabilities recorded at their fair values as of the acquisition date (in millions):
| | | | | | | | | |
| | | | | Final: May 24, 2021 |
3.Cash and cash equivalents | | INVESTMENTS | | | $ | — (CONTINUED) | |
| Accounts receivable | | | | | 1.8 | |
| Lease right-of-use assets | | | | | 0.4 | |
| Goodwill | | | | | 91.9 | |
| Intangible assets | | | | | 53.4 | |
| Deferred income taxes, net | | | | | 7.9 | |
| Lease liabilities | | | | | (0.4) | |
| Deferred revenue | | | | | (1.5) | |
| Other assets and liabilities | | | | | (1.3) | |
| Fair value of identifiable net assets acquired | | | | | $ | 152.2 | |
The componentsnet assets of Homes Group were recorded at their estimated fair values. In valuing the 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. The estimated fair value of the Company’s investmentscustomer base assets incorporated significant assumptions that had a material impact on the estimated fair value, such as discount rates, projected revenue growth rates, customer attrition rates and profit margins.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the fair values (in millions) of the identifiable intangible assets acquired in the Homes.com Acquisition included in the Company's North America operating segment, their related estimated useful lives (in years) and their respective amortization methods:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Estimated Fair Value | | Estimated Useful Life | | Amortization Method |
| Customer base | | | | | $ | 32.0 | | | 8 | | Accelerated |
| Trade name | | | | | 21.0 | | | 15 | | Straight-line |
| Technology | | | | | 0.4 | | | 2 | | Straight-line |
| Total intangible assets | | | | | $ | 53.4 | | | | | |
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 Homes.com 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 Homes.com operations and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce. The $91.9 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment, of which $20.0 million is expected to be deductible for income tax purposes.
Transaction costs associated with the Homes.com Acquisition were not material. The Company paid $5.0 million into a cash escrow account for stay bonuses for certain Homes.com employees and recognized compensation expense for the stay bonus over the six-month post-combination period. Upon acquisition, the Company assessed the probability it would be required to pay certain state tax liabilities and recorded an unrealized loss positionaccrual of $6.6 million determined in accordance with the provisions of ASC 450, Contingencies, as the fair value was not determinable. Landmark has agreed to indemnify the Company for twelve months or longer weretax liabilities related to periods prior to the acquisition and an indemnification asset was established for $6.6 million in the purchase price allocation.
Pro Forma Financial Information (unaudited)
The unaudited pro forma financial information presented below reflects the consolidated results of operations of the Company assuming the OnTheMarket Acquisition had taken place on January 1, 2022 and was as follows (in thousands)millions, except per share data):
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | Aggregate Fair Value | | Gross Unrealized Losses | | Aggregate Fair Value | | Gross Unrealized Losses |
| Auction rate securities | $ | 10,070 |
| | $ | (730 | ) | | $ | 9,952 |
| | $ | (848 | ) |
| Investments in an unrealized loss position | $ | 10,070 |
| | $ | (730 | ) | | $ | 9,952 |
| | $ | (848 | ) |
| | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, |
| | | | | 2023 | | 2022 | | |
| Revenue | | | | | $ | 2,494.0 | | | $ | 2,224.3 | | | |
| Net income | | | | | $ | 371.9 | | | $ | 361.9 | | | |
| Net income per share - basic | | | | | $ | 0.91 | | | $ | 0.91 | | | |
| Net income per share - diluted | | | | | $ | 0.91 | | | $ | 0.91 | | | |
The Company did not have any investmentsimpact of the OnTheMarket Acquisition on the Company's revenue and net income in an unrealized loss position for less than twelve months asthe consolidated statements of operations from December 12, 2023 through December 31, 20172023 was not material.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma financial information presented below reflects the consolidated results of operations of the Company assuming the Homes.com Acquisition had taken place on January 1, 2020 and 2016, respectively.was as follows (in millions, except per share data):
| | | | | | | | | | | |
| | | Year Ended
December 31, |
| 4. | | | | 2021 | | FAIR VALUE |
| Revenue | | | | | $ | 1,962.1 | | | |
| Net income | | | | | $ | 286.7 | | | |
| Net income per share - basic | | | | | $ | 0.74 | | | |
| Net income per share - diluted | | | | | $ | 0.73 | | | |
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 above, is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisitions had not taken on place on the dates listed above.
The impact of the Homes.com Acquisition on the Company's revenues and net income in the consolidated statements of operations from May 24, 2021 through December 31, 2021 was an increase of $13.6 million and a decrease of $23.5 million, respectively.
The pro forma financial information of the BureauxLocaux Acquisition and Business Immo Acquisition was not material.
6. INVESTMENTS AND FAIR VALUE MEASUREMENTS
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.
The following table represents the Company's fair value hierarchy for its financial assets (cashcomprise Level 1 cash equivalents with original maturities of three months or less in the amount of $5.1 billion and investments)$4.8 billion as of December 31, 2023 and 2022, respectively. The Company had no Level 2 or Level 3 financial assets measured at fair value on a recurring basis as of December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Money markets | $ | 586,084 |
| | $ | — |
| | $ | — |
| | $ | 586,084 |
|
| Commercial paper | 351,098 |
| | — |
| | — |
| | 351,098 |
|
| Auction rate securities | — |
| | — |
| | 10,070 |
| | 10,070 |
|
| Total assets measured at fair value | $ | 937,182 |
| | $ | — |
| | $ | 10,070 |
| | $ | 947,252 |
|
value.
The carrying value ofCompany holds other financial instruments, including cash deposits, accounts receivable, accounts payable, accrued expenses and long-term debt approximates fair value.
Senior Notes. 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, 2016 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Money markets | $ | 175,344 |
| | $ | — |
| | $ | — |
| | $ | 175,344 |
|
| Commercial paper | 6,383 |
| | — |
| | — |
| | 6,383 |
|
| Auction rate securities | — |
| | — |
| | 9,952 |
| | 9,952 |
|
| Total assets measured at fair value | $ | 181,727 |
| | $ | — |
| | $ | 9,952 |
| | $ | 191,679 |
|
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.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
4. | FAIR VALUE — (CONTINUED)
|
The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31, 2015 to December 31, 2017 (in thousands):
|
| | | |
| | Auction Rate Securities |
| Balance at December 31, 2015 | $ | 15,507 |
|
| Decrease in unrealized loss included in accumulated other comprehensive loss | 395 |
|
| Settlements | (5,950 | ) |
| Balance at December 31, 2016 | 9,952 |
|
| Decrease in unrealized loss included in accumulated other comprehensive loss | 118 |
|
| Balance at December 31, 2017 | $ | 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 December 31, 2017, 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 with AA to AAA credit ratings 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 offor such financial instruments, other than the ARS in the near term. As a result, these securities are classified as long-term investments in the Company’s consolidated balance sheetSenior Notes, each approximated their fair values as of December 31, 2017. See Note 3 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 trading2023 and therefore do not currently have a readily determinable market value.2022. The estimated fair value of the ARS no longer approximates par value. The Company used a discounted cash flow model to determineCompany's outstanding Senior Notes using quoted prices from the estimated fair value of its investment in ARSover-the-counter markets, considered Level 2 inputs, was $0.9 billion and $0.8 billion as of December 31, 2017. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing2023 and amount of contractual cash flows, liquidity risk premiums, expected holding periods 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.2022, respectively.
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 model as of December 31, 2017 and 2016 was approximately 6% and 5%, 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 December 31, 2017, the Company determined there was a decline in the fair value of its ARS investments of approximately $730,000. The decline was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. In addition, while a majority of the ARS are currently rated AAA, if the issuers are unable to successfully close future auctions and/or their credit ratings deteriorate, the Company may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
7. LEASES
| |
5. | The Company has operating and finance leases for its office facilities, data centers, and vehicles. The Company's leases have remaining terms up to eight years. The leases contain various renewal and termination options. The period that 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 that 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 and finance leases included in the consolidated statements of operations were as follows (in millions): | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2023 | | 2022 | | 2021 | | Operating lease costs: | | | | | | | Cost of revenues | $ | 10.0 | | | $ | 8.4 | | | $ | 10.1 | | | Software development | 6.3 | | | 7.2 | | | 6.9 | | | Selling and marketing (excluding customer base amortization) | 15.4 | | | 12.6 | | | 11.9 | | | General and administrative | 4.0 | | | 5.4 | | | 5.9 | | | Total operating lease costs | 35.7 | | | 33.6 | | | 34.8 | | | Finance lease costs: | | | | | | | Amortization of ROU assets | 0.8 | | | — | | | — | | | Interest on lease liabilities | 0.2 | | | — | | | — | | | Total finance lease costs | 1.0 | | | — | | | — | | | Total lease costs | $ | 36.7 | | | $ | 33.6 | | | $ | 34.8 | |
Finance lease costs primarily relate to vehicles used by the Company's research teams, and the amortization of the ROU assets are recorded to cost of revenue in the consolidated statements of operations. The impact of lease costs related to short-term leases was not material for the years ended December 31, 2023, 2022 and 2021.
COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental balance sheet information related to operating leases was as follows ($ in millions): | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Balance | Balance Sheet Location | | 2023 | | 2022 | | Operating lease liabilities | | | $ | 109.9 | | | $ | 118.3 | | | Less: imputed interest | | | (7.0) | | | (6.2) | | | Present value of lease liabilities | | | 102.9 | | | 112.1 | | | Less: current portion of lease liabilities | Lease liabilities | | 36.9 | | | 36.0 | | | Long-term lease liabilities | Lease and other long-term liabilities | | $ | 66.0 | | | $ | 76.1 | | | | | | | | | Weighted-average remaining lease term in years | | | 3.9 | | 3.6 | | Weighted-average discount rate | | | 3.6 | % | | 3.1 | % | | ROU Assets | Lease right-of-use assets | | $ | 79.8 | | | $ | 80.4 | | | | | | | | | Finance lease liabilities | | | $ | 14.6 | | | $ | — | | | Less: imputed interest | | | (1.6) | | | — | | | Present value of lease liabilities | | | 13.0 | | | — | | | Less: current portion of lease liabilities | Lease liabilities | | 3.1 | | | — | | | Long-term lease liabilities | Lease and other long-term liabilities | | $ | 9.9 | | | $ | — | | | | | | | | | Weighted-average remaining lease term in years | | | 3.8 | | 0 | | Weighted-average discount rate | | | 7.8 | % | | — | % | | ROU Assets | Property and equipment, net | | $ | 10.8 | | | $ | — | |
Supplemental cash flow information related to leases was as follows (in millions): | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2023 | | 2022 | | 2021 | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | Operating cash flows used in operating leases | $ | 44.9 | | | $ | 41.6 | | | $ | 37.3 | | | Operating cash flows used in finance leases | $ | 0.2 | | | $ | — | | | $ | — | | | Financing cash flows used in finance leases | $ | 0.7 | | | $ | — | | | $ | — | | | | | | | | | ROU assets obtained in exchange for lease new obligations: | | | | | | | Operating leases | $ | 29.1 | | | $ | 20.0 | | | $ | 34.2 | | | Finance leases | $ | 13.6 | | | $ | — | | | $ | — | |
COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. PROPERTY AND EQUIPMENT |
Property and equipment consists of the following (in thousands)millions):
| | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Leasehold improvements | $ | 87.8 | | | $ | 108.9 | |
| Furniture, office equipment and vehicles | 73.4 | | | 52.6 | |
| Computer hardware and software | 56.3 | | | 43.8 | |
| Aircrafts | 44.2 | | | 44.2 | |
| Land | 52.2 | | | 52.2 | |
| Buildings | 263.8 | | | 105.1 | |
| Property and equipment, gross | 577.7 | | | 406.8 | |
| Accumulated depreciation and amortization | (105.5) | | | (85.5) | |
| Property and equipment, net | $ | 472.2 | | | $ | 321.3 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Leasehold improvements | $ | 59,447 |
| | $ | 53,073 |
|
| Furniture, office equipment and vehicles | 52,163 |
| | 45,035 |
|
| Computer hardware and software | 71,281 |
| | 64,577 |
|
| Property and equipment, gross | 182,891 |
| | 162,685 |
|
| Accumulated depreciation and amortization | (98,395 | ) | | (75,117 | ) |
| Property and equipment, net | $ | 84,496 |
| | $ | 87,568 |
|
Costs capitalized in connection with the expansion of our Richmond, Virginia campus were included in Buildings in the above table as of December 31, 2023. Depreciation expense for property and equipment was approximately $26$33.8 million, $24$29.1 million and $20$29.0 million, for the years ended December 31, 2017, 2016,2023, 2022 and 2015,2021, respectively. For the years ended December 31, 2023 and 2022, the Company removed $14.1 million and $27.6 million, respectively, of property and equipment that was fully depreciated from property and equipment, gross and accumulated depreciation and amortization, which had no net impact on the Company's financial results.
In August 2022, the Company entered into an agreement to sell an aircraft subject to customary condition and inspection terms. The sale of the aircraft closed in October 2022 for cash consideration of $24.9 million. The Company recorded a gain on the sale of the aircraft of $3.3 million, which was recorded to general and administrative expenses in the consolidated statements of operations. The aircraft related to the North America segment.
The changes in the carrying amount of goodwill by operating segment consist of the following (in thousands)millions):
| | | | | | | | | | | | | | | | | |
| | North America | | International | | Total |
| Goodwill, December 31, 2021 | $ | 2,145.8 | | | $ | 175.2 | | | $ | 2,321.0 | |
Acquisitions, including measurement period adjustments(1) | 3.4 | | | 7.1 | | | 10.5 | |
| Effect of foreign currency translation | — | | | (16.7) | | | (16.7) | |
| Goodwill, December 31, 2022 | 2,149.2 | | | 165.6 | | | 2,314.8 | |
| Acquisitions, including measurement period adjustments | — | | | 62.8 | | | 62.8 | |
| Effect of foreign currency translation | — | | | 8.6 | | | 8.6 | |
| Goodwill, December 31, 2023 | $ | 2,149.2 | | | $ | 237.0 | | | $ | 2,386.2 | |
| __________________________ | | | | | |
|
| | | | | | | | | | | |
| | North America | | International | | Total |
| Goodwill, December 31, 2015 | $ | 1,227,310 |
| | $ | 25,635 |
| | $ | 1,252,945 |
|
| Acquisition | 467 |
| | 5,933 |
| | 6,400 |
|
| Effect of foreign currency translation | — |
| | (4,479 | ) | | (4,479 | ) |
| Goodwill, December 31, 2016 | 1,227,777 |
| | 27,089 |
| | 1,254,866 |
|
| Acquisitions | 25,717 |
| | — |
| | 25,717 |
|
| Effect of foreign currency translation | — |
| | 2,874 |
| | 2,874 |
|
| Goodwill, December 31, 2017 | $ | 1,253,494 |
| | $ | 29,963 |
| | $ | 1,283,457 |
|
The Company(1) North America goodwill recorded goodwill of approximately $6 million in connection with the May 3, 2016 acquisition of Thomas Daily GmbH (“Thomas Daily”), a commercial real estate news and information provider operating in Freiburg, Germany. Additionally, the Company recorded goodwill of approximately $0.5 million during the year ended December 31, 20162022 relates to a measurement period adjustment for income taxes for Homes.com of $3.4 million. International goodwill recorded in connection with the acquisition of certain assets related toBusiness Immo Acquisition was $7.1 million.
(2) International goodwill generated during the business operations of Apartment Finder's independent distributors within various markets.year ended December 31, 2023 from the OnTheMarket Acquisition was $62.8 million.
The Company recorded goodwill of approximately $8 millionGoodwill generated from acquisitions completed in connection with the January 31, 2017 acquisition of Koa Lei, Inc. (doing business as Westside Rentals®2023 and now known as Westside Rentals, LLC), an online marketplace specializing in Southern California real estate rentals, and its affiliated entity Westside Credit Services, LLC, a provider of credit checks and tenant screening for landlords in the Southern California real estate rental market. The Company recorded goodwill of approximately $15 million in connection with the May 10, 2017 acquisition of certain assets and assumption of certain liabilities from Datasphere Technologies, Inc., in each case, related to the LandWatch.com® business (collectively referred to as “LandWatch”), a leading listing site dedicated to land and rural properties. The Company recorded goodwill of approximately $2 million in connection with the July 18, 2017 acquisition of The Screening Pros, LLC, an online apartment leasing platform that includes tenant screening services, rental applications and payments processing and lease renewals. The purchase accounting for the acquisitions of Westside Rentals®, LandWatch®, and The Screening ProsTM is preliminary, subject to the completion of the accounting for certain tax related items and working capital adjustments.
The total amount of goodwill that is expected to be2022 was not deductible for tax purposes is approximately $24 million aspurposes.
No impairments of the Company's goodwill were recognized during each of the years ended December 31, 2017. No goodwill was deductible as of December 31, 2016.2023, 2022 and 2021.
During the fourth quarters of 2017, 2016 and 2015, the Company completed the annual impairment test of goodwill and concluded that goodwill was not impaired.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
Intangible assets consist of the following (in thousands,millions, except amortization period data):
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | December 31, | | Weighted- Average
Amortization Period
(in years) |
| | December 31, | | Weighted- Average Amortization Period (in years) |
| Acquired technology and data | |
| Acquired technology and data | |
| Acquired technology and data | | $ | 36.3 | | | $ | 40.4 | | | 5 |
| Accumulated amortization | | Accumulated amortization | (21.0) | | | (20.7) | | | |
| Acquired technology and data, net | | Acquired technology and data, net | 15.3 | | | 19.7 | | | |
| | 2017 | | 2016 | | Weighted- Average Amortization Period (in years) |
| Capitalized product development cost | $ | 2,275 |
| | $ | 2,275 |
| |
| Accumulated amortization | (2,262 | ) | | (2,217 | ) | | |
| Capitalized product development cost, net | 13 |
| | 58 |
| | |
| | | | | |
| Building photography | 18,739 |
| | 17,271 |
| | 4 |
| Accumulated amortization | (18,212 | ) | | (16,351 | ) | | |
| Building photography, net | 527 |
| | 920 |
| | |
| | | | | |
| Acquired database technology | 83,469 |
| | 78,151 |
| | 5 |
| Accumulated amortization | (79,188 | ) | | (72,691 | ) | | |
| Acquired database technology, net | 4,281 |
| | 5,460 |
| | |
| | | | | |
| Acquired customer base | |
| Acquired customer base | |
| Acquired customer base | 225,879 |
| | 220,749 |
| | 10 | 509.5 | | | 464.2 | | 464.2 | | | 10 | | 10 |
| Accumulated amortization | (169,157 | ) | | (150,445 | ) | | | Accumulated amortization | (330.7) | | | (287.0) | | (287.0) | | | | | |
| Acquired customer base, net | 56,722 |
| | 70,304 |
| | | Acquired customer base, net | 178.8 | | | 177.2 | | 177.2 | | | | | |
| | | | | |
| Acquired trade names and other intangible assets | 167,718 |
| | 153,607 |
| | 13 |
| Acquired trade names and other intangible assets | |
| Acquired trade names and other intangible assets | | 258.9 | | | 247.4 | | | 13 |
| Accumulated amortization | (46,369 | ) | | (34,384 | ) | | | Accumulated amortization | (139.3) | | | (115.0) | | (115.0) | | | | | |
| Acquired trade names and other intangible assets, net | 121,349 |
| | 119,223 |
| | | Acquired trade names and other intangible assets, net | 119.6 | | | 132.4 | | 132.4 | | | | | |
| | | | | |
| Intangible assets, net | $ | 182,892 |
| | $ | 195,965 |
| | |
| Intangible assets, net | |
| Intangible assets, net | | $ | 313.7 | | | $ | 329.3 | | | |
Amortization expense for intangible assets was approximately $37$73.7 million, $46$102.6 million and $59$103.6 million for the years ended December 31, 2017, 2016,2023, 2022 and 2015,2021, respectively.
For the years ended December 31, 2023, 2022 and 2021, the Company removed $7.4 million, $87.7 million, and $171.0 million, respectively, of intangible assets that were fully amortized from the acquired intangible assets and accumulated amortization, which had no net impact on the Company's financial results.
In the aggregate, the Company expects the future amortization expense for intangible assets existing as of December 31, 2017 for future periods2023 to be approximately $29$70.8 million, $24$54.8 million, $21$43.3 million, $20$34.7 million and $17$30.8 million for the years ending December 31, 2018, 2019, 2020, 20212024, 2025, 2026, 2027 and 2022,2028, respectively.
Intangible assets are reviewed for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. DuringNo impairments of the first quarterCompany's intangible assets were recognized during each of 2016,the years ended December 31, 2023, 2022 and 2021. The Company decided to eliminate usage fees related to agent access to a Homesnap product charged to a specific customer class. This resulted in an acceleration of $16.3 million of amortization expense in 2022 for acquired customer base for this customer class.
11. LONG-TERM DEBT
The table below presents the components of outstanding debt (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | December 31, | | | |
| | | | | | 2023 | | 2022 | | | |
| 2.800% Senior Notes due July 15, 2030 | | | | | | $ | 1,000.0 | | | $ | 1,000.0 | | | | |
| 2020 Credit Agreement, due July 1, 2025 | | | | | | — | | | — | | | | |
| Total face amount of long-term debt | | | | | | 1,000.0 | | | 1,000.0 | | | | |
| Senior Notes unamortized discount and issuance costs | | | | | | (9.5) | | | (10.8) | | | | |
| Long-term debt, net | | | | | | $ | 990.5 | | | $ | 989.2 | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Senior Notes
On July 1, 2020, the Company determined thatissued $1.0 billion aggregate principal amount of 2.800% Senior Notes due July 15, 2030. The Senior Notes were sold to a group of financial institutions as initial purchasers who subsequently resold the acquired trade names recordedSenior Notes to non-U.S. persons pursuant to Regulation S under the Securities Act, and to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act at a purchase price equal to 99.921% of their principal amount. Interest on the Senior Notes is payable semi-annually in connectionarrears on January 15 and July 15. The Senior Notes may be redeemed in whole or in part by the Company (a) at any time prior to April 15, 2030 at a redemption price equal to 100% of the principal amount of the Senior Notes, plus the Applicable Premium (as calculated in accordance with the LoopNet acquisition on April 30, 2012 should be reclassified from an indefinite-lived intangible asset to a definite-lived intangible asset due to work being performed to integrate the backend systems of LoopNet and CoStar, which may result in a future re-branding effort if aspects of the LoopNet and CoStar services are ultimately combined. The Company estimated the fair value of the LoopNet trade names using the relief from royalty method and concluded that no impairment existed as of March 31, 2016. The Company estimated a useful life of fifteen years for the LoopNet trade names, which are being amortized on a straight-line basis.indenture governing
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
the Senior Notes), and any accrued and unpaid interest, if any, on the principal amount of Senior Notes being redeemed to, but excluding, the redemption date, and (b) on or after April 15, 2030 at a redemption price equal to 100% of the principal amount of the Senior Notes, plus any accrued and unpaid interest, if any, on the principal amount of Senior Notes being redeemed to, but excluding, the redemption date. The Company’s obligations under the Senior Notes are guaranteed on a senior, unsecured basis by the Company’s domestic wholly owned subsidiaries and the indenture governing the Senior Notes contains covenants, events of default and other customary provisions with which the Company was in compliance as of December 31, 2023.
Revolving Credit Facility
On AprilJuly 1, 2014 (the “Closing Date”),2020, the Company entered into the 20142020 Credit Agreement, by and among the Company, as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. The 2014 Credit Agreement provided for a $400 million term loan and a $225 million revolving credit facility, each with a term of five years. The Company repaid the remaining balance of $310 million and accrued interest on its existing term loan under the 2014 Credit Agreement on October 19, 2017 from existing cash balances.
The revolving credit facility includes a subfacility for swingline loans of up to $10 million, and up to $10 million of the revolving credit facility is available for the issuance of letters of credit. The Company has an irrevocable standby letter of credit outstanding totaling $0.2 million as of December 31, 2017 and December 31, 2016, which was required to secure its San Francisco office lease. The letter of credit was established in 2014 related to the San Francisco office lease, and automatically renews through January 31, 2025.
The term loan was amortized in quarterly installments in amounts resulting in an annual amortization of 5% during each of the first, second and third years, 10% during the fourth year and 15% during the fifth year after the Closing Date, with the remainder payable at final maturity. The loans under the 2014 Credit Agreement bore interest, at the Company's option, either (i) during any interest period selected by the Company, at 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 2% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio (as defined in the 2014 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 0.5% and (z) LIBOR for a one-month interest period plus 1%, plus an initial spread of 1% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio of the Company. If an event of default occurred under the 2014 Credit Agreement, the interest rate on overdue amounts increased by 2% per annum. The obligations under the 2014 Credit Agreement were guaranteed by all material subsidiaries of the Company and were secured by a lien on substantially all of the assets of the Company and those of its material subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee documents entered into on the Closing Date.
On October 19, 2017, the Company entered into an amended and restated credit agreement (the ‘‘2017 Credit Agreement’’), which amended and restated in its entirety the existing 2014 Credit Agreement. The 2017 Credit Agreement provides for a $750 million revolving credit facility with a term of five years (maturing July 1, 2025) and a letter of credit sublimit of $20 million from a syndicate of financial institutions as lenders and issuing banks. A commitment fee of 0.25% to 0.30% per annum, depending on the Total Leverage Ratio (defined in 2020 Credit Agreement), is payable quarterly in arrears based on the unused revolving commitment. The 2017Company and the syndicate of lenders and issuing banks entered into the First Amendment of the 2020 Credit Agreement in May 2023, which replaced LIBOR as the reference rate with Term SOFR for U.S. dollar denominated borrowings, SONIA rates for Sterling denominated borrowings and EURIBOR for Euro denominated borrowings.
Borrowings under the 2020 Credit Agreement can be on a revolving basis or term basis, not to exceed the remaining term of the facility, and denominated in U.S. dollars, sterling, euros or other allowed currency at the Company's option, subject to a limit of $250 million U.S. dollar equivalent for non-U.S. dollar denominated borrowings. Borrowings bear interest at a floating rate which can be, at the Company’s option, either (a) an alternate base rate plus an applicable rate ranging from 0.50% to 1.25% or (b) a Term SOFR, SONIA rate or EURIBOR (with a floor of 0.0%) for the specified interest period plus an applicable rate ranging from 1.50% to 2.25%, in each case depending on the Company's Total Leverage Ratio (as defined in the 2020 Credit Agreement). Any borrowing with a Term SOFR reference rate includes an additional 0.10% credit spread adjustment.
Funds drawn down on the revolving credit facility pursuant to the 2020 Credit Agreement may be used for working capital and other general corporate purposes of the Company and its restricted subsidiaries. In connection with the transaction, the Company incurred $4 million of issuance costs. Those costs along with the $5 million of unamortized costs related to the prior agreement were allocated between the extinguishment of the 2014 Credit Agreement and the 2017 Credit Agreement. This allocation resulted in the Company recognizing a loss of $4 million on the extinguishment with the remaining $4 million being deferred and amortized on a straight-line basis as interest expense over the term of the 2017 Credit Agreement.
Up to $20 million of the revolving credit facility is available for the issuance of letters of credit. 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 ½ 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 20172020 Credit Agreement are guaranteed by all material subsidiarieseach of the CompanyCompany’s current and are secured by a lien on substantially all of the assets of the Company and its materialfuture direct or indirect wholly owned restricted domestic subsidiaries, other than certain excluded subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee agreements entered into on the Closing Date.
agreements.
The 20172020 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 covenantsones 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, consolidationspay dividends or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositionsother restricted payments, investments or acquisitions, (iv) merge or consolidate with another person, and (v) sell, assign, lease or otherwise dispose of assets, (vi) make dividends, distributionsall or substantially all of our assets. In May 2023, the Company amended the 2020 Credit Agreement to replace LIBOR as the reference rate with Term SOFR for U.S. dollar-denominated borrowings, SONIA rates for Sterling-denominated borrowings and prepaymentsEURIBOR for Euro-denominated borrowings.
As of December 31, 2023, the Company is in a Covenant Suspension Period. During any Covenant Suspension Period, the Company will not be subject to certain indebtedness, and (vii) enter into certain transactions with affiliates.of these covenants such as restrictions on the ability to incur indebtedness. The 2020 Credit Agreement also requires the Company to maintain a Total Leverage Ratio (as defined in the 2020 Credit Agreement) not exceeding 4.50 to 1.00. The Company was in compliance with the covenants in the 20172020 Credit Agreement as of December 31, 2017.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
2023.
As of December 31, 2017 and 2016,2023, the Company had no amounts were outstandingdrawn under the Company's creditthis facility. Total interest expense for the term loan and revolving credit facilities was approximately $9 million, $10 million and $9 million for the years ended December 31, 2017, 2016, and 2015, respectively. Interest expense included amortized debt issuance costs of approximately $2 million, $3 million, and $3 million for the years ended December 31, 2017, 2016, and 2015. Total interest paid for the term loan and revolving credit facilities was approximately $6 million, $7 million, and $6 million for the years ended December 31, 2017, 2016, and 2015, respectively.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
8. | LONG-TERM DEBT — (CONTINUED) |
The Company had no outstanding long-term debt at December 31, 2017 as it had not drawn any amounts under its 2017 Credit Agreement. At December 31, 2017, the Company had $4$1.6 million and $2.7 million of deferred debt issuance costs as of December 31, 2023 and 2022, respectively, in connection with the 2020 Credit Agreement. These amounts are included in deposits and other assets.
The following table representsassets on the Company's long-term debt atconsolidated balance sheets.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 20162023, 2022 and 2021, the Company recognized interest expense as follows (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Interest on outstanding borrowings | | $ | 28.0 | | | $ | 28.0 | | | $ | 28.0 | |
| Amortization of Senior Notes discount and issuance costs | | 2.4 | | | 2.3 | | | 2.3 | |
| Interest capitalized for construction in process | | (1.6) | | | — | | | — | |
| Commitment fees and other | | 2.6 | | | 2.0 | | | 2.0 | |
| Total interest expense | | $ | 31.4 | | | $ | 32.3 | | | $ | 32.3 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | |
| | December 31, |
| | 2016 |
| Term loan | $ | 345,000 |
|
| Debt issuance costs, net | (6,661 | ) |
| Total debt | 338,339 |
|
| Current maturities of long-term debt | (35,000 | ) |
| Current debt issuance costs, net | 3,134 |
|
| Total long-term debt, less current portion | $ | 306,473 |
|
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the provision for income taxes attributable to operations consist of the following (in thousands)millions):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | 41,453 |
| | $ | 32,198 |
| | $ | 10,295 |
|
| State | 3,518 |
| | 3,682 |
| | 1,503 |
|
| Foreign | 295 |
| | 76 |
| | 40 |
|
| Total current | 45,266 |
| | 35,956 |
| | 11,838 |
|
| Deferred: | |
| | |
| | |
|
| Federal | (7,917 | ) | | 12,586 |
| | (8,382 | ) |
| State | 4,695 |
| | 3,014 |
| | 2,590 |
|
| Foreign | 319 |
| | 35 |
| | — |
|
| Total deferred | (2,903 | ) | | 15,635 |
| | (5,792 | ) |
| Total provision for income taxes | $ | 42,363 |
| | $ | 51,591 |
| | $ | 6,046 |
|
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
9. | INCOME TAXES — (CONTINUED)
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Current: | | | | | |
| Federal | $ | 126.3 | | | $ | 116.3 | | | $ | 61.3 | |
| State | 36.6 | | | 31.2 | | | 24.6 | |
| Foreign | 0.9 | | | 0.7 | | | 1.3 | |
| Total current | 163.8 | | | 148.2 | | | 87.2 | |
| Deferred: | | | | | |
| Federal | (31.7) | | | (20.4) | | | 22.9 | |
| State | (2.9) | | | (9.6) | | | 8.5 | |
| Foreign | (2.6) | | | (1.2) | | | (7.2) | |
| Total deferred | (37.2) | | | (31.2) | | | 24.2 | |
| Total provision for income taxes | $ | 126.6 | | | $ | 117.0 | | | $ | 111.4 | |
The components of deferred tax assets and liabilities consist of the following (in thousands)millions):
| | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Deferred tax assets: | | | |
| Allowance for credit losses | $ | 5.8 | | | $ | 3.4 | |
| Accrued compensation | 11.9 | | | 4.6 | |
| Stock compensation | 15.3 | | | 20.4 | |
| Net operating losses | 34.7 | | | 26.8 | |
| Accrued reserve and other | 5.8 | | | 6.7 | |
| Lease liabilities | 21.8 | | | 26.4 | |
| | | |
| | | |
| | | |
| Capitalized research and development costs | 92.4 | | | 45.4 | |
| Research and development credits | 4.5 | | | 6.1 | |
| | | |
| Total deferred tax assets, prior to valuation allowance | 192.2 | | | 139.8 | |
| | | |
| Valuation allowance | (9.0) | | | (5.2) | |
| Total deferred tax assets, net of valuation allowance | 183.2 | | | 134.6 | |
| | | |
| Deferred tax liabilities: | | | |
| Deferred commission costs, net | (42.3) | | | (36.1) | |
| Lease right-of-use assets | (16.0) | | | (18.2) | |
| Prepaid expenses | (4.1) | | | (3.2) | |
| Property and equipment, net | (25.1) | | | (25.8) | |
| Intangible assets, net | (128.1) | | | (117.8) | |
| Total deferred tax liabilities | (215.6) | | | (201.1) | |
| | | |
| Net deferred tax liabilities | $ | (32.4) | | | $ | (66.5) | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Deferred tax assets: | | | |
| Reserve for bad debts | $ | 1,636 |
| | $ | 2,437 |
|
| Accrued compensation | 6,706 |
| | 5,562 |
|
| Stock compensation | 10,568 |
| | 14,268 |
|
| Net operating losses | 25,899 |
| | 30,319 |
|
| Accrued reserve and other | 1,393 |
| | 2,097 |
|
| Unrealized loss on securities | 185 |
| | 326 |
|
| Deferred rent | 6,533 |
| | 7,814 |
|
| Deferred gain on the sale of building | 4,741 |
| | 8,166 |
|
| Total deferred tax assets, prior to valuation allowance | 57,661 |
| | 70,989 |
|
| | | | |
| Valuation allowance | (13,032 | ) | | (8,557 | ) |
| Total deferred tax assets, net of valuation allowance | 44,629 |
| | 62,432 |
|
| | | | |
| Deferred tax liabilities: | |
| | |
|
| Prepaids | (1,239 | ) | | (1,753 | ) |
| Depreciation | (6,229 | ) | | (13,045 | ) |
| Intangibles | (43,800 | ) | | (58,747 | ) |
| Total deferred tax liabilities | (51,268 | ) | | (73,545 | ) |
| | | | |
| Net deferred tax assets (liabilities) | $ | (6,639 | ) | | $ | (11,113 | ) |
As of both December 31, 20172023 and 2016,2022, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance as of both December 31, 20172023 and 20162022 includes an allowance for unrealized losses on ARS investments, foreign deferred tax assets and stateacquired net operating losses and tax credits. The valuation allowance for theforeign deferred tax asset for unrealized losses on ARS has been recorded as an adjustment to accumulated other comprehensive loss.assets.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company established the valuation allowance because it is more likely than not that a portion of the deferred tax asset for certain items will not be realized based on the weight of available evidence. A valuation allowance was established for the unrealized losses on securities as the Company has not historically generated capital gains, and it is uncertain whether the Company will generate sufficient capital gains in the future to absorb the capital losses. A valuation allowance was established for the foreign deferred tax assets due to the cumulative loss in recent years in those jurisdictions. The Company has not had sufficient taxable income historically to utilize the foreign deferred tax assets, and it is uncertain whether the Company will generate sufficient taxable income in the future to utilize the deferred tax assets. Similarly, theThe Company has established a valuation allowance for certain acquired net operating losses and tax credits in certain states where it is uncertain whetherSection 382 limitations will impact the ability of the Company will generate sufficient taxable income to utilize the net operating losses and tax credits before they expire.
The Company’s change in valuation allowance was an increase of approximately $4$3.8 million for the year ended December 31, 20172023 and a decrease of approximately $1$0.5 million for the year ended December 31, 2016.2022. The increase for the year ended December 31, 2017 is2023 was primarily due to an increase in the valuation allowance for foreign net operating loss deferred tax assets related to foreign net operating losses of approximately $4 million .for which a full valuation allowance has been established. The decrease for the year ended December 31, 2016 is2022 was primarily due to a decrease in the valuation allowance for foreign deferred tax assets of approximately $1 million.
an international restructuring.
The Company had U.S. income before income taxes of approximately $167$526.7 million, $135$493.2 million , and $2$408.8 million for the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively. The Company had a foreign losslosses before income taxes of approximately $2$25.4 million, for the year ended December 31, 2017. The Company had foreign income before income taxes of approximately $2$6.7 million and $1$4.8 million for the years ended December 31, 20162023, 2022 and 2015,2021, respectively.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
9. | INCOME TAXES — (CONTINUED)
|
The Company’s provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate as follows (in thousands)millions):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Expected federal income tax provision at statutory rate | $ | 57,770 |
| | $ | 47,832 |
| | $ | 903 |
|
| State income taxes, net of federal benefit | 4,776 |
| | 3,638 |
| | (678 | ) |
| Foreign income taxes, net effect | (3,540 | ) | | (31 | ) | | 469 |
|
| Increase (decrease) in valuation allowance | 3,624 |
| | (103 | ) | | 1,956 |
|
| Nondeductible compensation | 230 |
| | 141 |
| | 574 |
|
| Nondeductible transaction costs | — |
| | 103 |
| | 229 |
|
| Meals and entertainment | 958 |
| | 712 |
| | 1,032 |
|
| Tax rate changes | (7,340 | ) | | 283 |
| | 1,203 |
|
| Research credits | (20,547 | ) | | (920 | ) | | — |
|
| Excess tax benefit | (7,010 | ) | | — |
| | — |
|
| Tax reserves | 12,646 |
| | (150 | ) | | 71 |
|
| Other adjustments | 796 |
| | 86 |
| | 287 |
|
| Income tax expense | $ | 42,363 |
| | $ | 51,591 |
| | $ | 6,046 |
|
The Company’s U.K. subsidiaries with foreign losses are disregarded entities for U.S. income tax purposes. Accordingly, the losses from these disregarded entities are included in the Company’s consolidated federal income tax provision at the statutory rate. Federal income taxes attributable to income from these disregarded entities are reduced by foreign taxes paid by those disregarded entities.
The Company paid approximately $41 million, $34 million , and $1 million in income taxes for the years ended December 31, 2017, 2016, and 2015, respectively.
The Company recognized an income tax benefit during the year ended December 31, 2017 for research credits of $21 million for tax years December 31, 2013 through December 31, 2017. These research credits relate to eligible activities including the development of new products, product enhancements and new or improved processes.
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Expected federal income tax provision at statutory rate | $ | 105.3 | | | $ | 102.1 | | | $ | 84.8 | |
| State income taxes, net of federal benefit | 27.4 | | | 21.5 | | | 21.0 | |
| | | | | |
| | | | | |
| Increase (decrease) in valuation allowance | 1.9 | | | (0.5) | | | (5.0) | |
| | | | | |
| | | | | |
| Research credits | (20.2) | | | (17.5) | | | (13.1) | |
| Excess tax benefit | (5.9) | | | (1.8) | | | (10.9) | |
| Tax reserves | 4.2 | | | 1.5 | | | (12.8) | |
| Nondeductible compensation | 8.8 | | | 11.4 | | | 10.4 | |
| International restructuring | 0.1 | | | (3.9) | | | 34.9 | |
| Other adjustments | 5.0 | | | 4.2 | | | 2.1 | |
| Income tax expense | $ | 126.6 | | | $ | 117.0 | | | $ | 111.4 | |
The Company has net operating loss carryforwards for international income tax purposes of approximately $49$77.3 million whichthat do not expire. The Company has federal net operating loss carryforwards of approximately $38$71.3 million that begin to expire in 2020,2033, state net operating loss carryforwards with a tax value of approximately $6$0.4 million that begin to expire in 20202033 and state income tax credit carryforwards with a tax value of approximately $3$8.0 million primarily relating to state research and development credits and the D.C. qualified high technology company tax credit that begin to expire in 2020.2024. The Company realized a cash benefit relating to the use of its tax loss carryforwards of approximately $7$5.9 million, $5$12.6 million and $1$14.1 million in December 31, 2017, 2016,2023, 2022 and 2015,2021, respectively.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands)millions):
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
| | | |
| Unrecognized tax benefits as of December 31, 2014 | $ | 5,749 |
|
| Increase for current year tax positions | — |
|
| Increase for prior year tax positions | 1,954 |
|
| Expiration of the statute of limitation for assessment of taxes | (39 | ) |
| Unrecognized tax benefits as of December 31, 2015 | 7,664 |
|
| Increase for current year tax positions | 368 |
|
| Decrease for prior year tax positions | (6,115 | ) |
| Expiration of the statute of limitation for assessment of taxes | (74 | ) |
| Unrecognized tax benefits as of December 31, 2016 | 1,843 |
|
| Increase for current year tax positions | 12,620 |
|
| Decrease for prior year tax positions | (34 | ) |
| Expiration of the statute of limitation for assessment of taxes | (66 | ) |
| Unrecognized tax benefits as of December 31, 2017 | $ | 14,363 |
|
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| | | | | | |
9.Unrecognized tax benefit as of December 31, 2020 | INCOME TAXES — (CONTINUED)
$ | 28.9 | | |
| Increase for current year tax positions | 3.1 | | |
| Decrease for prior year tax positions | (5.4) | | |
| Decrease for settlements with taxing authorities | (9.9) | | |
| Expiration of the statute of limitation for assessment of taxes | (1.9) | | |
| Unrecognized tax benefit as of December 31, 2021 | 14.8 | | |
| Increase for current year tax positions | 3.4 | | |
| Increase for prior year tax positions | 0.3 | | |
| | |
| Expiration of the statute of limitation for assessment of taxes | (2.3) | | |
| Unrecognized tax benefit as of December 31, 2022 | 16.2 | | |
| Increase for current year tax positions | 4.4 | | |
| Increase for prior year tax positions | 1.7 | | |
| | |
| Expiration of the statute of limitation for assessment of taxes | (2.4) | | |
| Unrecognized tax benefit as of December 31, 2023 | $ | 19.9 | | |
| | |
| | |
| | |
| | |
| | |
Approximately $14$19.9 million and $1$16.2 million of the unrecognized tax benefits as of December 31, 20172023 and 2016,2022, respectively, would favorably affect the annual effective tax rate if recognized in future periods. The increase for current year tax positions of $13$4.4 million and increase for prior year tax positions of $1.7 million for the year ended December 31, 2017 is2023 were primarily attributable to research credits and state apportionment reserves. The decrease for expiration of the statute of limitation of $2.4 million for the year ended December 31, 2023 was attributable to research credits. The Company recognized $72,000 for interest$0.7 million, recognized $0.1 million and penalties in its consolidated statement of operations for the year ended December 31, 2017. The Company reversed interest and penalties of $416,000 in its consolidated statement of operations for the year ended December 31, 2016. The Company recognized $83,000$0.4 million for interest and penalties in its consolidated statements of operations for the yearyears ended December 31, 2015.2023, 2022 and 2021, respectively. The Company had liabilities of $205,000, $133,000,$1.4 million, $0.7 million, and $549,000$0.6 million for interest and penalties in its consolidated balance sheets as of December 31, 2017, 2016, 20152023, 2022 and 2021, respectively. The Company does not anticipate the amount of the unrecognized tax benefits will change significantly over the next twelve12 months.
The Company is subject to taxation in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company’s federal income tax returns for tax years 20112015 and 2020 through 20162022 remain open to examination. Most of the Company’s state income tax returns for tax years 20142020 through 20162022 remain open to examination. For states that have a four-year statute of limitations, the state income tax returns for tax years 20132019 through 20162022 remain open to examination. The Company’s U.K. income tax returnsreturn for tax years 2012 through 2016 remainyear 2022 remains open to examination. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which significantly changed U.S. tax law. 13. COMMITMENTS AND CONTINGENCIES
The Tax Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Tax Act also created a new minimum tax on certain future foreign earnings. The Securities and Exchange Commission staff issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740, ("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection withfollowing summarizes the Company's initial analysissignificant contractual obligations, including related payments due by period, as of the impact of the Tax Act, the Company recorded a provisional discrete net tax benefit of $7 million in the period ending December 31, 2017. This net benefit primarily consists of a net benefit for the corporate tax rate reduction of $7.4 million and a net expense for the repatriation tax of $400,000. For various reasons, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. The Company was able to make reasonable estimates of the effects of elements for which the Company's analysis is not yet complete and recorded provisional adjustments. As the Company completes its analysis of the Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Those adjustments may materially impact the provision for income taxes in the period in which the adjustments are made.2023 (in millions):
Global intangible low taxed income (GILTI): Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the measurement of deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or its business, the Company is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI.
| |
10. | COMMITMENTS AND CONTINGENCIES |
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ending December 31, | | Operating lease obligations | | Finance lease obligations | | Long-term debt principal payments | | Long-term debt principal interest payments | | | |
| 2024 | | $ | 39.0 | | | $ | 3.9 | | | $ | — | | | $ | 28.0 | | | | |
| 2025 | | 25.4 | | | 3.9 | | | — | | | 28.0 | | | | |
| 2026 | | 15.1 | | | 3.9 | | | — | | | 28.0 | | | | |
| 2027 | | 13.1 | | | 2.9 | | | — | | | 28.0 | | | | |
| 2028 | | 10.7 | | | — | | | — | | | 28.0 | | | | |
| Thereafter | | 6.6 | | | — | | | 1,000.0 | | | 56.0 | | | | |
| Total | | $ | 109.9 | | | $ | 14.6 | | | $ | 1,000.0 | | | $ | 196.0 | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The Company leases office facilities and office equipment under various non-cancelable operating leases.leases, as well as, data centers, and vehicles under finance lease arrangements. The leases contain various renewal options. Rent expense
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 7 for further discussion of the years ended December 31, 2017, 2016 and 2015, was approximately $26 million, $22 million and $21 million, respectively.
Future minimumCompany's lease payments as of December 31, 2017 are as follows (in thousands):
|
| | | |
| 2018 | $ | 30,853 |
|
| 2019 | 27,925 |
|
| 2020 | 26,136 |
|
| 2021 | 24,544 |
|
| 2022 | 22,883 |
|
| Thereafter | 46,061 |
|
| Total future minimum lease payments | $ | 178,402 |
|
commitments.
Currently, and from time to time, the Company is involved in litigation incidental to the conduct of its business. In accordance with GAAP, theThe 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. At the present time, whileWhile 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 it isthe resolutions of these matters are not probable thatexpected to have a loss has been incurred in connection withmaterial effect on the Company’s current litigation. In addition, the Company is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in the Company’s current litigation and accordingly, the Company has not recognized any liability in theCompany's consolidated financial statements for unfavorableposition, future results if any.of operations or liquidity. Legal defense costs are expensed as incurred.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
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 primarily includes the U.K., Spain, GermanyEurope, Asia-Pacific and France. The Company and its subsidiaries' subscription-based services consist primarily of information, analytics and online marketplace services offered over the Internet to commercial real estate industry and related professionals. The Company’s subscription-based information services consist primarily of CoStar Suite®services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional® and CoStar Tenant® and through the Company's mobile application, CoStar Go®. CoStar Suite is the Company’s primary service offering in the North America and International operating segments.Latin America. Management relies on an internal management reporting process that provides revenue and operating segment net income (loss) before interest and other income (expense), income taxes, depreciation and amortization (“EBITDA”).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.
Summarized EBITDA information by operating segment consists of the following (in millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| North America | $ | 403.0 | | | $ | 577.3 | | | $ | 557.1 | |
| International | (13.2) | | | 5.4 | | | 7.9 | |
| Total EBITDA | $ | 389.8 | | | $ | 582.7 | | | $ | 565.0 | |
The reconciliation of net income to EBITDA consists of the following (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| Net income | $ | 374.7 | | | $ | 369.5 | | | $ | 292.6 | |
| Amortization of acquired intangible assets in cost of revenues | 31.5 | | | 29.0 | | | 28.8 | |
| Amortization of acquired intangible assets in operating expenses | 42.2 | | | 73.6 | | | 74.8 | |
| Depreciation and other amortization | 33.8 | | | 29.1 | | | 29.1 | |
| Interest (income) expense, net | (213.6) | | | (32.1) | | | 31.6 | |
| Other (income), net | (5.4) | | | (3.4) | | | (3.3) | |
| Income tax expense | 126.6 | | | 117.0 | | | 111.4 | |
| EBITDA | $ | 389.8 | | | $ | 582.7 | | | $ | 565.0 | |
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized information by operating segment consists of the following (in thousands)millions):
| | | | | | | | | | | |
| | December 31, |
| | 2023 | | 2022 |
| Property and equipment, net | | | |
| North America | $ | 465.7 | | | $ | 320.3 | |
| International | 6.5 | | | 1.0 | |
| Total property and equipment, net | $ | 472.2 | | | $ | 321.3 | |
| | | |
| Goodwill | | | |
| North America | $ | 2,149.2 | | | $ | 2,149.2 | |
| International | 237.0 | | | 165.6 | |
| Total goodwill | $ | 2,386.2 | | | $ | 2,314.8 | |
| | | |
| Assets | | | |
| North America | $ | 8,505.5 | | | $ | 8,146.3 | |
| International | 414.2 | | | 256.2 | |
| Total assets | $ | 8,919.7 | | | $ | 8,402.5 | |
| | | |
| Liabilities | | | |
| North America | $ | 1,499.7 | | | $ | 1,486.3 | |
| International | 81.4 | | | 46.2 | |
| Total liabilities | $ | 1,581.1 | | | $ | 1,532.5 | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues | | | | | |
| North America | $ | 934,464 |
| | $ | 809,492 |
| | $ | 686,573 |
|
| International | |
| | |
| | |
| External customers | 30,766 |
| | 28,138 |
| | 25,191 |
|
| Intersegment revenue | 42 |
| | 40 |
| | 41 |
|
| Total International revenue | 30,808 |
| | 28,178 |
| | 25,232 |
|
| Intersegment eliminations | (42 | ) | | (40 | ) | | (41 | ) |
| Total revenues | $ | 965,230 |
| | $ | 837,630 |
| | $ | 711,764 |
|
| | | | | | |
| EBITDA | |
| | |
| | |
|
| North America | $ | 236,906 |
| | $ | 210,901 |
| | $ | 87,092 |
|
| International | 553 |
| | 4,169 |
| | 2,895 |
|
| Total EBITDA | $ | 237,459 |
| | $ | 215,070 |
| | $ | 89,987 |
|
The reconciliation of net income (loss) to EBITDA consists of the following (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 122,695 |
| | $ | 85,071 |
| | $ | (3,465 | ) |
| Amortization of acquired intangible assets in cost of revenues | 19,707 |
| | 22,819 |
| | 30,077 |
|
| Amortization of acquired intangible assets in operating expenses | 17,684 |
| | 22,731 |
| | 27,931 |
|
| Depreciation and other amortization | 26,252 |
| | 24,615 |
| | 20,524 |
|
| Interest and other income | (4,044 | ) | | (1,773 | ) | | (537 | ) |
| Interest and other expense | 9,014 |
| | 10,016 |
| | 9,411 |
|
| Loss on debt extinguishment | 3,788 |
| | — |
| | — |
|
| Income tax expense | 42,363 |
| | 51,591 |
| | 6,046 |
|
| EBITDA | $ | 237,459 |
| | $ | 215,070 |
| | $ | 89,987 |
|
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
| |
11. | SEGMENT REPORTING — (CONTINUED)
|
Segment Information — (Continued)
Intersegment revenues were attributable to services performed for the Company's wholly owned subsidiary, CoStar Portfolio Strategy by Grecam S.A.S. (“Grecam”), a wholly owned subsidiary of CoStar Limited, the Company’s wholly owned U.K. holding company. Intersegment revenues are recorded at an amount the Company believes approximates fair value. North America EBITDA includes a corresponding cost for the services performed by Grecam.
Summarized information by operating segment consists of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Property and equipment, net | | | |
| North America | $ | 79,736 |
| | $ | 84,727 |
|
| International | 4,760 |
| | 2,841 |
|
| Total property and equipment, net | $ | 84,496 |
| | $ | 87,568 |
|
| | | | |
| Goodwill | |
| | |
|
| North America | $ | 1,253,494 |
| | $ | 1,227,777 |
|
| International | 29,963 |
| | 27,089 |
|
| Total goodwill | $ | 1,283,457 |
| | $ | 1,254,866 |
|
| | | | |
| Assets | |
| | |
|
| North America | $ | 2,816,156 |
| | $ | 2,139,896 |
|
| International | 57,285 |
| | 45,167 |
|
| Total assets | $ | 2,873,441 |
| | $ | 2,185,063 |
|
| | | | |
| Liabilities | |
| | |
|
| North America | $ | 201,831 |
| | $ | 520,833 |
|
| International | 20,360 |
| | 10,017 |
|
| Total liabilities | $ | 222,191 |
| | $ | 530,850 |
|
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
11. | SEGMENT REPORTING — (CONTINUED)
|
Revenues by Services
The Company provides information, analytics and online marketplaces to the commercial real estate industry. The revenues by type of service consists of the following (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Information and analytics | | | | | |
CoStar Suite(1) | $ | 463,185 |
| | $ | 408,456 |
| | $ | 360,440 |
|
Information services(2) | 72,618 |
| | 77,178 |
| | 75,790 |
|
| Online marketplaces | | | | | |
Multifamily(3) | 279,855 |
| | 224,835 |
| | 160,630 |
|
Commercial property and land(4) | 149,572 |
| | 127,161 |
| | 114,904 |
|
| Total revenues | $ | 965,230 |
| | $ | 837,630 |
| | $ | 711,764 |
|
(1) CoStar Suite is comprised of: CoStar Property Professional, CoStar COMPS Professional, CoStar Tenant; and CoStar Portfolio Strategy.
(2) Information services is comprised of: LoopNet Premium Searcher; CoStar Real Estate Manager; CoStar Risk Analytics COMPASS; CoStar Investment Analysis Portfolio Maximizer; CoStar Investment Analysis Request; CoStar Brokerage Applications; PROPEX; Grecam; Belbex; and Thomas Daily.
(3) Multifamily is comprised of Apartments.com, ApartmentFinder.com and ApartmentHomeLiving.com; WestsideRentals.com; Apartamentos.com; and The Screening Pros.
(4) Commercial property and land is comprised of: LoopNet Premium Lister; LoopLink; CoStar Advertising; BizBuySell and BizQuest; LandsofAmerica,LandAndFarm, and LandWatch; and CoStar Private Sale Network.
| |
12. | STOCKHOLDERS’15. STOCKHOLDER'S EQUITY |
Preferred Stock
The Company has 2,000,0002 million shares of preferred stock, $0.01 par value, authorized for issuance as of December 31, 2017.issuance. The Board of Directors may issue the preferred stock from time to time as shares of one or more classes or series.
Common Stock
The Company has 60,000,0001.2 billion shares of common stock, $0.01 par value, authorized for issuance. Dividends may be declared and paid on the common stock, subject in all cases to the rights and preferences of the holders of preferred stock and authorization by the Board of Directors. In the event of liquidation or winding up of the Company and after the payment of all preferential amounts required to be paid to the holders of any series of preferred stock, any remaining funds shall be distributed among the holders of the issued and outstanding common stock.
Common Stock Split
At the Company's 2021 Annual Meeting of Stockholders in June 2021, upon the recommendation of the Company's Board of Directors, the Company's stockholders approved the adoption of the Company's Fourth Amended and Restated Certificate of Incorporation, which increased the total number of shares of common stock that the Company is authorized to issue from 60 million to 1.2 billion. The Fourth Amended and Restated Certificate of Incorporation became effective on June 7, 2021. On June 7, 2021, the Board of Directors approved a ten-for-one stock split of the Company's outstanding shares of common stock to be effected in the form of a stock dividend. Each stockholder of record on June 17, 2021 received a dividend of nine additional shares of common stock for each then-held share, distributed after close of trading on June 25, 2021. The par value of the Company's common stock remained $0.01 per share. All applicable share and per-share amounts in the consolidated financial statements and the accompanying notes have been retroactively adjusted to reflect the impact of the stock split.
Equity OfferingOfferings
In October 2017,On September 20, 2022, the Company completed a public equity offering of 3,317,30810.7 million shares of common stock for $260.00at an offering price of $70.38 per share. Net proceeds from the public equity offering were approximately $834$745.7 million, after deducting approximately $29$4.3 million of underwriting discountsfees, commissions and other fees.stock issuance costs. On May 28, 2020, the Company completed a public equity offering of 26.3 million shares of common stock for $65.50 per share. Net proceeds from the public equity offering were approximately $1.7 billion, after deducting approximately $35 million of underwriting fees, commissions and other stock issuance costs. The Company expectsintends to use the net proceeds from the public equity offeringsale of the securities to fund all or a portion of the costs of any strategic acquisitions we determine to pursueit pursues in the future, to finance the growth of its business and for working capital and other general corporate purposes. General corporate purposes may include additions to working capital, capital expenditures, repayment of debt, investments in the Company’s subsidiaries possible acquisitions and the repurchase, redemption or retirement of securities, including the Company’s common stock.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
13. | 16. NET INCOME (LOSS) PER SHARE |
The following table sets forth the calculation of basic and diluted net income (loss) per share (in thousandsmillions, except per share data):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Numerator: | | | | | |
| Net income | $ | 374.7 | | | $ | 369.5 | | | $ | 292.6 | |
| Denominator: | | | | | |
| Denominator for basic net income per share — weighted-average outstanding shares | 405.3 | | | 396.3 | | | 392.2 | |
| Effect of dilutive securities: | | | | | |
| Stock options, restricted stock awards and restricted stock units | 1.6 | | | 1.5 | | | 2.0 | |
| Denominator for diluted net income per share — weighted-average outstanding shares | 406.9 | | | 397.8 | | | 394.2 | |
| | | | | |
| Net income per share — basic | $ | 0.92 | | | $ | 0.93 | | | $ | 0.75 | |
| Net income per share — diluted | $ | 0.92 | | | $ | 0.93 | | | $ | 0.74 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | |
| Net income (loss) | $ | 122,695 |
| | $ | 85,071 |
| | $ | (3,465 | ) |
| Denominator: | |
| | |
| | |
|
| Denominator for basic net income (loss) per share — weighted-average outstanding shares | 33,200 |
| | 32,167 |
| | 31,950 |
|
| Effect of dilutive securities: | |
| | |
| | |
|
| Stock options and restricted stock | 359 |
| | 269 |
| | — |
|
| Denominator for diluted net income (loss) per share — weighted-average outstanding shares | 33,559 |
| | 32,436 |
| | 31,950 |
|
| | | | | | |
| Net income (loss) per share — basic | $ | 3.70 |
| | $ | 2.64 |
| | $ | (0.11 | ) |
| Net income (loss) per share — diluted | $ | 3.66 |
| | $ | 2.62 |
| | $ | (0.11 | ) |
Stock options to purchase approximately 87,000 and 194,000 shares that were outstanding for the years ended December 31, 2017 and December 31, 2016, respectively, were not included in the computation of diluted net income per share because the inclusion of the potentially dilutive common shares would have an anti-dilutive effect. The Company did not consider the impact of potentially dilutive securities for the year ended December 31, 2015 when calculating the diluted net loss per share because the inclusion of the potentially dilutive common shares would have an anti-dilutive effect. Shares underlying restricted common stock awards that vest based on Company performance and service 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. Shares underlying restricted stock units that vest based on Company service 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. The following table summarizes the shares underlying the unvested performance-based restricted stock awards and service-based restricted stock unitsanti-dilutive securities excluded from the basic and diluted calculationearnings per share calculations (in thousands)millions):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Performance-based restricted stock awards | 0.2 | | | 0.4 | | | 0.4 | |
| Anti-dilutive securities | 0.7 | | | 1.0 | | | 0.4 | |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Performance-based restricted stock awards | 58 |
| | 59 |
| | 55 |
|
| Service-based restricted stock units | 1 |
| | 1 |
| | 1 |
|
| Total shares excluded from computation | 59 |
| | 60 |
| | 56 |
|
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
14. | EMPLOYEE BENEFIT PLANS |
Stock Incentive Plans
In April 2007, the Company’s Board of Directors adopted the CoStar Group Inc. 2007 Stock Incentive Plan (as amended, the “2007 Plan”), subject to stockholder approval, which was obtained on June 7, 2007. In April 2016, the Company’s Board of Directors adopted the CoStar Group Inc. 2016 Stock Incentive Plan (as amended, the “2016 Plan”), subject to stockholder approval, which was obtained on June 9, 2016. All shares of common stock that were authorized for issuance under the 2007 Plan that, as of June 9, 2016, remained available for issuance under the 2007 Plan (excluding shares subject to outstanding awards) were rolled into the 2016 Plan and, as of that date, no shares of common stock were available for new awards under the 2007 Plan. The 2007 Plan continues to govern vested unexercised and unexpired awardsstock options issued under the 2007 Plan prior to June 9, 2016. The 2007 Plan provided for the grant of stock options, restricted stock, restricted stock units and stock appreciation rights to officers, directors and employees of the Company and its subsidiaries. Stock options granted under the 2007 Plan could be incentive or non-qualified, and except in limited circumstances related to a merger or other acquisition, the exercise price for a stock option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period of the options, restricted stock and restricted stock unit grants under the 2007 Plan was determined by the Board of Directors or a committee thereof and was generally three to four years. In some cases, vesting of restricted stock awards under the 2007 Plan is subject to performance conditions. Upon the occurrence of a Change of Control, as defined in the 2007 Plan, all outstanding unexercisable options and restricted stock grants under the 2007 Plan immediately become exercisable.
The 2016 Plan provides for the grant of stock options, restricted stock, restricted stock units and stock appreciation rights to officers, directorsemployees and employeesdirectors of the Company and its subsidiaries. Stock options granted under the 2016 Plan may be non-qualified or may qualify as incentive stock options. Except in limited circumstances related to a merger or other acquisition, the exercise price for an option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period for each grant of options, restricted stock, restricted stock units and stock appreciation rights under the 2016 Plan is determined by the Board of Directors or a committee thereof and is generally three to four years, subject to minimum vesting periods for restricted stock and restricted stock units of at least one year. In some cases, vesting of awards under the 2016 Plan may be based on performance conditions. The Company has issued and/orinitially reserved the followingapproximately 22.7 million shares of common stock for issuance under the 2016 Plan: (a) 1,450,000 shares of common stock, plus (b) 815,464Plan, which included shares of common stock that were authorized for issuance under the 2007 Plan that, as of June 9, 2016,and remained available for issuance under the 2007 Plan (not including any Shares that were subject as of such date to outstanding awards under the 2007 Plan), and (c) anyJune 9, 2016. Any shares of common stock subject to (a) outstanding awards under the 2007 Plan as of June 9, 2016 that on or (b) outstanding awards under the 2016 Plan after such dateJune 9, 2016, that cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). will become authorized and unissued under the 2016 Plan. Pursuant to the terms of the 2016 Plan, all amounts reserved or issued under the plan were adjusted to reflect the Company’s ten-for-one common stock split. Unless terminated sooner, the 2016 Plan will terminate in June 2026, but will continue to govern
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unexercised and unexpired awards issued under the 2016 Plan prior to that date. Approximately 213.4 million shares were available for future grant under the 2016 Plan as of December 31, 2017.
2023.
At December 31, 2017,2023, there was approximately $57$115.3 million of unrecognized compensation cost related to stock incentive plans, net of estimated forfeitures, which the Company expects to recognize over a weighted-average-period of 2.22.4 years. The income tax benefit realized from stock-based compensation was $6.8 million, immaterial and $2.4 million for the years ended December 31, 2023, 2022 and 2021, respectively.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
14. | EMPLOYEE BENEFIT PLANS — (CONTINUED)
|
See Notes 2 and 12 for further discussion of stock-based compensation expense and income taxes, respectively.
Stock Options
Option activity was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Shares | | Range of
Exercise Price | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contract
Life (in years) | | Aggregate
Intrinsic
Value
(in millions) |
| Outstanding at December 31, 2020 | 2,023,100 | | | $10.22 - $66.65 | | $ | 34.18 | | | 6.99 | | $ | 117.8 | |
| Granted | 159,000 | | | $91.98 | | $ | 91.98 | | | | | |
| Exercised | (206,000) | | | $20.49 - $39.82 | | $ | 30.78 | | | | | |
| | | | | | | | | |
| Outstanding at December 31, 2021 | 1,976,100 | | | $10.22 - $91.98 | | $ | 39.18 | | | 6.24 | | $ | 80.8 | |
| Granted | 202,100 | | | $67.29 | | $ | 67.29 | | | | | |
| Exercised | — | | | | | | | | | |
| Canceled or expired | — | | | | | | | | | |
| Outstanding at December 31, 2022 | 2,178,200 | | | $10.22 - $91.98 | | $ | 41.79 | | | 5.60 | | $ | 79.6 | |
| Granted | 140,800 | | | $76.78 | | $ | 76.78 | | | | | |
| Exercised | (419,340) | | | $10.22 - $34.21 | | $ | 17.77 | | | | | |
| Canceled or expired | — | | | | | | | | | |
| Outstanding at December 31, 2023 | 1,899,660 | | | $20.49 - $91.98 | | $ | 49.69 | | | 5.53 | | $ | 72.4 | |
| | | | | | | | | |
| Exercisable at December 31, 2021 | 1,473,420 | | | $10.22 - $66.65 | | $ | 29.55 | | | 5.59 | | $ | 72.9 | |
| Exercisable at December 31, 2022 | 1,766,070 | | | $10.22 - $91.98 | | $ | 34.40 | | | 4.96 | | $ | 76.5 | |
| Exercisable at December 31, 2023 | 1,571,105 | | | $20.49 - $91.98 | | $ | 44.32 | | | 4.93 | | $ | 68.1 | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | Number of Shares | | Range of Exercise Price | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contract Life (in years) | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at December 31, 2014 | 370,179 |
| | $36.48 - $201.04 | | $ | 99.12 |
| | | | |
| Granted | 89,500 |
| | $193.69 - $193.69 | | $ | 193.69 |
| | | | |
| Exercised | (59,602 | ) | | $36.48 - $201.04 | | $ | 85.48 |
| | | | |
| Outstanding at December 31, 2015 | 400,077 |
| | $36.48 - $201.04 | | $ | 122.30 |
| | | | |
| Granted | 82,400 |
| | $182.75 - $182.75 | | $ | 182.75 |
| | | | |
| Exercised | (29,285 | ) | | $36.48 - $201.04 | | $ | 112.78 |
| | | | |
| Canceled or expired | (13,034 | ) | | $193.69 - $201.04 | | $ | 195.78 |
| | | | |
| Outstanding at December 31, 2016 | 440,158 |
| | $36.48 - $201.04 | | $ | 132.08 |
| |
| |
|
|
| Granted | 95,500 |
| | $204.91 | | $ | 204.91 |
| | | | |
| Exercised | (81,815 | ) | | $36.48 - $201.04 | | $ | 83.07 |
| | | | |
| Outstanding at December 31, 2017 | 453,843 |
| | $36.73 - $204.91 | | $ | 156.24 |
| | 6.67 | | $ | 63,861 |
|
| | | | | | | | | | |
| Exercisable at December 31, 2015 | 220,107 |
| | $36.48 - $201.04 | | $ | 77.63 |
| | | | |
| Exercisable at December 31, 2016 | 284,489 |
| | $36.48 - $201.04 | | $ | 100.94 |
| |
| |
|
|
| Exercisable at December 31, 2017 | 278,239 |
| | $36.73 - $201.04 | | $ | 130.91 |
| | 5.47 | | $ | 46,199 |
|
The aggregate intrinsic value of outstanding options is calculated as the difference between (i) the closing price of the common stock at the end of the period and (ii) the exercise pricesprice of the underlying awards, multiplied by the shares underlyingnumber of outstanding options as of the end of the period that had an exercise price less than the closing price on that date. Options to purchase 81,815, 29,285, and 59,602, shares were exercised during the years ended 2017, 2016, and 2015, respectively. The aggregate intrinsic value of options exercised, determined as of the exercise date, of option exercise, was approximately $13 million, $3$24.3 million and $7$11.0 million for the years ended December 31, 2017, 2016,2023 and 2015,2021, respectively.
The weighted-average grant date fair value of each option granted during No options were exercised in the yearsyear ended December 31, 2017, 2016, and 2015 using the Black-Scholes option-pricing model was $59.06, $54.34 and$56.53, respectively.
2022.
The Company estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, using the assumptions in the following table:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Dividend yield | 0 | % | | 0 | % | | 0 | % |
| Expected volatility | 35 | % | | 31 | % | | 30 | % |
| Risk-free interest rate | 3.96 | % | | 1.89 | % | | 0.56 | % |
| Expected life (in years) | 5 | | 5 | | 5 |
| Weighted-average grant date fair value | $ | 28.87 | | | $ | 20.43 | | | $ | 25.09 | |
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Dividend yield | 0 | % | | 0 | % | | 0 | % |
| Expected volatility | 28 | % | | 31 | % | | 30 | % |
| Risk-free interest rate | 2 | % | | 1 | % | | 2 | % |
| Expected life (in years) | 5 |
| | 5 |
| | 5 |
|
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
| |
14. | EMPLOYEE BENEFIT PLANS — (CONTINUED)
|
Stock Options — (Continued)
The expected dividend yield is determined based on the Company's past cash dividend history and anticipated future cash dividend payments. The Company has never declared ornor paid any dividends on its common stock and does not anticipate paying any dividends on its common stock during the foreseeable future, but intends to retain any earnings for future growth of its business. Expected volatility is calculated based on historical volatility of the daily closing price of the Company's common stock over a period consistent with the expected life of the options granted. The risk-free interest rate is based on the U.S. Treasury rate with terms similar to the expected life of the options granted. The expected life for the options is determined based on multiple factors, including historical employee behavior patterns of exercising options and post-employment termination behavior as well as expected future employee option exercise patterns.
The following table summarizes information regarding options outstanding at December 31, 2017:2023:
|
| | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
Range of Exercise Price | | Number of Shares | | Weighted-Average Remaining Contractual Life (in years) | | Weighted- Average Exercise Price | | Number of Shares | | Weighted- Average Exercise Price |
| $36.73 - $58.06 | | 41,359 |
| | 3.13 | | $ | 56.64 |
| | 41,359 |
| | $ | 56.64 |
|
| $58.07 - $59.59 | | 40,004 |
| | 4.14 | | $ | 58.95 |
| | 40,004 |
| | $ | 58.95 |
|
| $59.60 - $81.19 | | 1,000 |
| | 3.42 | | $ | 60.23 |
| | 1,000 |
| | $ | 60.23 |
|
| $81.20 - $142.45 | | 70,944 |
| | 5.19 | | $ | 102.16 |
| | 70,944 |
| | $ | 102.16 |
|
| $142.46 - $188.22 | | 76,934 |
| | 8.19 | | $ | 182.75 |
| | 21,999 |
| | $ | 182.75 |
|
| $188.23 - $197.37 | | 65,802 |
| | 7.17 | | $ | 193.69 |
| | 40,633 |
| | $ | 193.69 |
|
| $197.38 - $202.98 | | 62,300 |
| | 6.16 | | $ | 201.04 |
| | 62,300 |
| | $ | 201.04 |
|
| $202.99 - $204.91 | | 95,500 |
| | 9.16 | | $ | 204.91 |
| | — |
| | $ | — |
|
| $36.73 - $204.91 | | 453,843 |
| | 6.67 | | $ | 156.24 |
| | 278,239 |
| | $ | 130.91 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
Range of
Exercise Price | | Number of
Shares | | Weighted-Average Remaining Contractual Life (in years) | | Weighted-
Average
Exercise Price | | Number of
Shares | | Weighted-
Average
Exercise Price |
| $20.49 - $27.35 | | 346,000 | | | 3.16 | | $ | 20.49 | | | 346,000 | | | $ | 20.49 | |
| $27.36 - $37.02 | | 354,090 | | | 4.16 | | $ | 34.21 | | | 354,090 | | | $ | 34.21 | |
| $37.03 - $53.24 | | 385,670 | | | 5.10 | | $ | 39.82 | | | 385,670 | | | $ | 39.82 | |
| $53.25 - $66.97 | | 312,000 | | | 6.10 | | $ | 66.65 | | | 312,000 | | | $ | 66.65 | |
| $66.98 - $91.98 | | 501,900 | | | 8.09 | | $ | 77.77 | | | 173,345 | | | $ | 82.39 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | 1,899,660 | | | 5.53 | | $ | 49.69 | | | 1,571,105 | | | $ | 44.32 | |
Restricted Stock Awards
In March 2017, March 2016, and March 2015, theThe Compensation Committee of the Board of Directors of the Company historically approved grants of restricted common stock to employees and directors of the Company that vest over a specific service period and to executive officers that vest based on the Company’sachievement of certain performance conditions, primarily, the achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoingdate. The grant of awards with performance condition is not met by the end of each respective three-year period. The number of shares that may be earned ranges between 0% (if the specified threshold performance level is not attained) and 200% (if performance meets or exceeds the maximum achievement level) of the target award. If actual performance exceeds the pre-established threshold, the number of shares earned is calculated based on the relative performance between specified levels of achievement. These awards supportconditions supports the Company’s goalsgoal of aligning executive incentives with long-term stockholder value and ensuring that executive officers have a continuing stake in the long-term success of the Company.
These grantsThe vesting of restricted common stock areis subject to continuing employment requirements andrequirements. Certain performance-based restricted common stock awards are also subject to a market condition. Thecondition such that the actual number of shares that vest at the end of the respective three-year period is determined based on the Company’s achievement of the three-year performance goals described above, as well as itsand an established Company specific TSR factor relative to the Russell 1000S&P 500 Index over the same three-year performance period. At the end of the three-year performance period, if the performance condition is achieved at or above the pre-established threshold, the number of shares earned is further adjusted by a TSR payout percentage, which ranges between 80% and 120%, based on the Company’s TSR performance relative to that of the Russell 1000S&P 500 Index over the respective three-year period. The Company granted a total of 32,160, 25,680 and 32,400 shares of performance-based restricted common stock during the years ended December 31, 2017, 2016, and 2015, respectively.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
14. | EMPLOYEE BENEFIT PLANS — (CONTINUED)
|
Restricted Stock Awards — (Continued)
The Company estimates the fair value of its performance-based restricted common stockequity awards with both a performance and market condition on the date of grant using a Monte-Carlo simulation valuation model. This pricing model uses multiple simulations to evaluate the probability of achieving the Company achieving various stock price levelsmarket condition to determinecalculate the expected TSR performance ranking.fair value of the awards. Expense is only recorded for awards that are expected to vest, net of estimated forfeitures. The assumptions used to estimate the fair value of performance-based restricted common stock awards with both a performance and a market condition granted were as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Dividend yield | 0 | % | | 0 | % | | 0 | % |
| Expected volatility | 37 | % | | 34 | % | | 42 | % |
| Risk-free interest rate | 4.31 | % | | 1.71 | % | | 0.20 | % |
| Expected life (in years) | 3 | | 3 | | 3 |
| Weighted-average grant date fair value | $ | 81.58 | | | $ | 71.19 | | | $ | 99.73 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Dividend yield | 0 | % | | 0 | % | | 0 | % |
| Expected volatility | 28 | % | | 28 | % | | 26 | % |
| Risk-free interest rate | 2 | % | | 1 | % | | 1 | % |
| Expected life (in years) | 3 |
| | 3 |
| | 3 |
|
| Weighted-average grant date fair value | $ | 218.59 |
| | $ | 184.97 |
| | $ | 208.08 |
|
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected dividend yield is determined based on the Company's past cash dividend history and anticipated future cash dividend payments. The Company has never declared ornor paid any dividends on its common stock and does not anticipate paying any dividends on its common stock during the foreseeable future, but intends to retain any earnings for future growth of its business. Expected volatility is calculated based on historical volatility of the daily closing price of the common stock of the companies within the Russell 1000S&P 500 Index over a period consistent with the expected life of the performance-based restricted common stock awards with a market condition.awards. The risk-free interest rate is based on the U.S. Treasury rate with terms similar to the expected life of the performance-based restricted common stock awards with a market condition.awards. The expected life is consistent with the performance measurement period of the performance-based restricted common stock awards with a market condition.
awards.
As of December 31, 2017,2023, the Company reassessed the probability of achieving the performance and market conditions and determined that it was probable that at least the minimum performance goals associated with restricted stock awards with performance and market conditions for the 2017, 2016granted during 2023, 2022 and 2015 performance-based restricted common stock awards2021 would be met by their forfeiture dates. As a result, theThe Company recorded a total of approximately $5$13.6 million, $3$11.9 million and $3$8.0 million of stock-based compensation expense related to the performance-based restricted common stock awards with aperformance and market conditionconditions for the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively. TheAs of December 31, 2023, the Company expects to record an aggregate amount of stock-based compensation expense related to the performance-basedof approximately $14.0 million for restricted common stock awards of approximately $6 millionwith performance and market conditions over the periods 2018, 20192024, 2025 and 2020.2026.
The following table presents unvested restricted stock awards activity for the year ended December 31, 2017:2023:
|
| | | | | | | | | | | | | |
| | Restricted Stock Awards — without Market Condition | | Restricted Stock Awards — with Market Condition |
| | Number of Shares | | Weighted-Average Grant Date Fair Value per Share | | Number of Shares | | Weighted-Average Grant Date Fair Value per Share |
| Unvested restricted stock awards at December 31, 2016 | 394,712 |
| | $ | 192.38 |
| | 72,480 |
| | $ | 202.07 |
|
| Granted | 156,238 |
| | $ | 211.69 |
| | 32,160 |
| | $ | 218.59 |
|
| Vested | (156,240 | ) | | $ | 177.72 |
| | (13,477 | ) | | $ | 216.20 |
|
| Canceled | (30,827 | ) | | $ | 196.87 |
| | (5,963 | ) | | $ | 216.20 |
|
| Unvested restricted stock awards at December 31, 2017 | 363,883 |
| | $ | 206.59 |
| | 85,200 |
| | $ | 205.08 |
|
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
| |
14. | EMPLOYEE BENEFIT PLANS — (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Awards — without Market Condition | | Restricted Stock Awards — with Market Condition |
| | Number of
Shares | | Weighted-Average
Grant Date
Fair Value per Share | | Number of
Shares | | Weighted-Average
Grant Date
Fair Value per Share |
| Unvested restricted stock awards at December 31, 2022 | 2,061,894 | | | $ | 67.15 | | | 620,880 | | | $ | 80.55 | |
| Granted | 1,096,446 | | | $ | 73.27 | | | 283,440 | | | $ | 81.58 | |
| Vested | (787,883) | | | $ | 66.51 | | | (90,408) | | | $ | 72.69 | |
| Canceled | (230,546) | | | $ | 68.58 | | | (132,792) | | | $ | 72.69 | |
| Unvested restricted stock awards at December 31, 2023 | 2,139,911 | | | $ | 70.38 | | | 681,120 | | | $ | 83.56 | |
Restricted Stock Units
The following table presents unvested restricted stock units activity for the year ended December 31, 2017:2023:
| | | | | | | | | | | |
| | Number of
Units | | Weighted-Average
Grant Date
Fair Value per Share |
| Unvested restricted stock units at December 31, 2022 | 21,560 | | | $ | 65.24 | |
| Granted | 10,465 | | | $ | 70.74 | |
| Vested | (8,129) | | | $ | 65.77 | |
| Canceled | (977) | | | $ | 68.34 | |
| Unvested restricted stock units at December 31, 2023 | 22,919 | | | $ | 67.43 | |
Management Stock Purchase Plan
The Board of Directors adopted the Company’s Management Stock Purchase Plan in December 2017 with the intent of providing selected key employees of the Company and its subsidiaries, including the Company's executive officers, the opportunity to defer a portion of their cash incentive compensation and to align management and stockholder interests through awards of DSUs under the MSPP and awards of Matching RSUs issued under the 2016 Plan. Under this plan participants are permitted to elect to defer up to 100% of their annual incentive bonus or commissions earned during the year by submitting an irrevocable election in accordance with Section 409A of the Internal Revenue Code, as amended. On the date the incentive bonus or commission would otherwise be paid in cash (typically during the following calendar year), the Company awards the participant DSUs representing the number of shares of common stock with an aggregate fair market value on that date equal to the amount of compensation elected to be deferred under the MSPP. On the same date the DSUs are awarded, the participant
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value per Share |
| Unvested restricted stock units at December 31, 2016 | 1,199 |
| | $ | 182.64 |
|
| Granted | 69 |
| | $ | 291.82 |
|
| Vested | (306 | ) | | $ | 183.28 |
|
| Canceled | — |
| | $ | — |
|
| Unvested restricted stock units at December 31, 2017 | 962 |
| | $ | 190.27 |
|
The following tables presents the Matching RSU activity for the year ended December 31, 2023:
| | | | | | | | | | | |
| | Number of Matching RSU
Shares | | Weighted-Average
Grant Date
Fair Value per Share |
| Unvested MSPP restricted stock units at December 31, 2022 | 180,431 | | | $ | 60.52 | |
| Granted | 82,374 | | | $ | 67.36 | |
| Vested | (52,710) | | | $ | 46.91 | |
| Canceled | (13,128) | | | $ | 66.67 | |
| Unvested MSPP restricted stock units at December 31, 2023 | 196,967 | | | $ | 66.61 | |
Employee 401(k) Plan
The Company maintains a 401(k) Plan (the “401(k)”) as a defined contribution retirement plan for all eligible employees. The 401(k) Plan provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual amount as established by the IRS. In addition to the traditional 401(k), effective January 1, 2015, eligible employees have the option of making an after-tax contribution to a Roth 401(k) plan or a combination of both. In 2017, 2016each of 2023, 2022 and 2015,2021, the Company matched 100% of employee contributions up to a maximum of 4% of total compensation. Amounts contributed to the 401(k) Plan by the Company to match employee contributions for the years ended December 31, 2017, 2016,2023, 2022 and 20152021 were approximately $10$25.5 million, $9$21.5 million and $8$17.6 million, respectively. The Company had no administrative expenses in connection with the 401(k) planPlan for each of the years ended December 31, 2017, 2016,2023, 2022 and 2015, respectively.
2021.
Employee Pension Plan
The Company maintains a Group Personal PensionGPP Plan (the “Plan”) for all eligible employees in the Company’s U.K. offices. The GPP Plan is a defined contribution plan. Employees are eligible to contribute a portion of their salaries, subject to a maximum annual amount as established by Her Majesty's Revenue and Customs. In 2017, 2016each of 2023, 2022 and 2015,2021, the Company's matching contribution was based on the percentage contributed by the employee, up to a maximum of 6% of total compensation. Amounts contributed to the GPP Plan by the Company to match employee contributions for the years ended December 31, 2017, 2016,2023, 2022 and 2015,2021, were approximately $380,000, $380,000$1.2 million, $1.0 million and $420,000$0.9 million, respectively.
Registered Retirement Savings Plan
As of January 1, 2015, the Company introduced a registered retirement savings plan (“RRSP”)RRSP for all eligible employees in the Company’s Canadian offices. In 2017, 2016,each of the years ended December 31, 2023, 2022 and 2015,2021, the Company matched 100% of employee contributions up to a maximum of 4% of total compensation. Amounts contributed to the RRSP by the Company to match employee contributions were approximately $0.2 million for the year ended December 31, 2023, and $0.1 million for both of the years ended December 31, 2017, 2016,2022 and 2015 were approximately $43,000, $10,000, and $40,000 respectively.2021.
Employee Stock Purchase Plan
As of August 1, 2006, the Company introduced an Employee Stock Purchase Plan (“ESPP”),ESPP, pursuant to which eligible employees participating in the plan authorize the Company to withhold specified amounts from the employees’ compensation and use the withheld amounts to purchase shares of the Company's common stock at 90% of the market price. Participating employees are able to purchase common stock under this plan during each offering period. An offering period begins the second Saturday before each of the Company’s regular pay dates and ends on each of the Company’s regular pay dates. On June 3, 2015,2, 2021, the Company’s stockholders approved an amendment to the ESPP to increase the number of shares available for purchase under the ESPP by 100,0001 million shares. On September 14, 2015, theThe Company registered the issuance of these additional shares under the ESPP pursuant to the registration statement filed September 14, 2015.on July 28, 2021. There were 80,022782,328 and 93,8121,010,267 shares available for purchase under the ESPP as of December 31, 20172023 and 2016,2022, respectively, and approximately 13,790227,939 and 14,735223,596 shares of the Company’s common stock were purchased under the ESPP during 20172023 and 2016,2022, respectively.
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (CONTINUED)
| |
15. | QUARTERLY RESULTS OF OPERATIONS |
18. SUBSEQUENT EVENTS
The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2017 and 2016.
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | Mar. 31 | | Jun. 30 | | Sep. 30 | | Dec. 31 |
| Revenues | $ | 226,553 |
| | $ | 237,153 |
| | $ | 247,533 |
| | $ | 253,991 |
|
| Cost of revenues | 51,346 |
| | 55,273 |
| | 55,483 |
| | 58,301 |
|
| Gross profit | 175,207 |
| | 181,880 |
| | 192,050 |
| | 195,690 |
|
| Operating expenses | 137,545 |
| | 153,997 |
| | 134,537 |
| | 144,932 |
|
| Income from operations | 37,662 |
| | 27,883 |
| | 57,513 |
| | 50,758 |
|
| Interest and other income | 429 |
| | 605 |
| | 555 |
| | 2,455 |
|
| Interest and other expense | (2,686 | ) | | (2,693 | ) | | (2,901 | ) | | (734 | ) |
| Loss on debt extinguishment | — |
| | — |
| | — |
| | (3,788 | ) |
| Income before income taxes | 35,405 |
| | 25,795 |
| | 55,167 |
| | 48,691 |
|
| Income tax expense | 13,275 |
| | 3,611 |
| | 20,990 |
| | 4,487 |
|
| Net income | $ | 22,130 |
| | $ | 22,184 |
| | $ | 34,177 |
| | $ | 44,204 |
|
| Net income per share — basic | $ | 0.69 |
| | $ | 0.68 |
| | $ | 1.05 |
| | $ | 1.24 |
|
| Net income per share — diluted | $ | 0.68 |
| | $ | 0.68 |
| | $ | 1.04 |
| | $ | 1.22 |
|
|
| | | | | | | | | | | | | | | |
| | 2016 |
| | Mar. 31 | | Jun. 30 | | Sep. 30 | | Dec. 31 |
| Revenues | $ | 199,739 |
| | $ | 206,869 |
| | $ | 212,711 |
| | $ | 218,311 |
|
| Cost of revenues | 42,900 |
| | 42,679 |
| | 42,222 |
| | 46,013 |
|
| Gross profit | 156,839 |
| | 164,190 |
| | 170,489 |
| | 172,298 |
|
| Operating expenses | 126,538 |
| | 136,071 |
| | 130,893 |
| | 125,409 |
|
| Income from operations | 30,301 |
| | 28,119 |
| | 39,596 |
| | 46,889 |
|
| Interest and other income | 84 |
| | 159 |
| | 344 |
| | 1,186 |
|
| Interest and other expense | (2,509 | ) | | (2,455 | ) | | (2,498 | ) | | (2,554 | ) |
| Income before income taxes | 27,876 |
| | 25,823 |
| | 37,442 |
| | 45,521 |
|
| Income tax expense | 11,155 |
| | 10,247 |
| | 14,241 |
| | 15,948 |
|
| Net income | $ | 16,721 |
| | $ | 15,576 |
| | $ | 23,201 |
| | $ | 29,573 |
|
| Net income per share — basic | $ | 0.52 |
| | $ | 0.48 |
| | $ | 0.72 |
| | $ | 0.92 |
|
| Net income per share — diluted | $ | 0.52 |
| | $ | 0.48 |
| | $ | 0.72 |
| | $ | 0.91 |
|
On February 21, 2018,In January 2024, the Company completedentered into a conditional purchase and sale agreement for an office building in Arlington, Virginia. The Company closed on the acquisitiontransaction in February 2024 along with an agreement to purchase the land underlying the building. These transactions totaled $340.0 million, inclusive of ForRent, a division of Dominion Enterprises, pursuant to which the Company acquired all of the issued and outstanding shares of common stock, no par value per share, of DE Holdings, Inc., for a purchase price of approximately $385 million, payable approximately $350 million in cash and approximately $35 million in shares of Company common stock, subject to a customary working capital adjustmentproperty taxes, titling insurance and other post-closing adjustments.
transaction costs and were paid with cash on hand.
