COSTAR GROUP, INC. (CSGP) FY 2022 MD&A

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 under the heading “Cautionary Statement Concerning Forward-Looking Statements” and in Item 1A. under the heading “Risk Factors,” as well as those described from time to time in our filings with the 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 SEC and the consolidated financial statements and related notes included in this Report.

Overview

Our principal information, analytics and online marketplace services are described in the following paragraphs by type of service:

CoStar

CoStar is our subscription-based integrated platform for commercial real estate intelligence, which includes information about office, industrial, retail, multifamily, hospitality and student housing properties, properties for sale, comparable sales, tenants, space available for lease, industry professionals and their business relationships, industry news and market status and provides lease analytical, risk management, and hospitality benchmarking capabilities. CoStar's year-over-year revenue growth rate for 2022 accelerated compared to 2021. The number of subscribers has increased year-over-year and we have also realized the impact of price increases and existing customers upgrading to our global service offering. We expect CoStar's revenue growth rate for 2023 to slow compared to the revenue growth rate for 2022 as a result of less benefit from customer upgrades as the global product upgrade campaign is substantially complete and lower inflation-based price adjustments.

Information services

We provide real estate and lease management technology solutions, including lease administration, lease accounting and abstraction services, through our CoStar Real Estate Manager service offerings, as well as portfolio and debt analysis, management and reporting capabilities through our CoStar Risk Analytics service 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' year-over-year revenue growth rate for 2022 accelerated compared to 2021 as a result of increased revenue from CoStar Real Estate Manager services and the results of the Business Immo acquisition. We expect Information Services' revenue growth rate for 2023 to slow compared to the revenue growth rate for 2022 as a result of lower price adjustments.

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 year-over-year revenue growth rate for 2022 slowed compared to 2021 due to customers selecting lower-priced ad packages in the second half of 2021 while rental vacancy rates declined relative to historical averages reducing demand for top-level packages. Quarterly sales of multifamily products increased over 2022 due to new properties being added to the network and the impact of a new pricing strategy implemented to align prices at each product level with the value of the leads delivered. We expect Multifamily's year-over-year revenue growth rate for 2023 to accelerate compared to the revenue growth rate for 2022 due to expected increases in sales levels from bringing additional properties on the network.

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LoopNet

Our LoopNet network of commercial real estate websites offer subscription-based, online marketplace services that enable commercial property owners, landlords and real estate agents working on their behalf to advertise properties for sale or for lease and to submit detailed information about property listings. Commercial real estate agents, buyers and tenants use the LoopNet network of online marketplace services to search for available property listings that meet their criteria. LoopNet's revenue growth rates slowed in 2022 when compared to 2021 as growth in the average price per listing declined in 2022 when compared to 2021. We expect LoopNet's year-over-year revenue growth rate for 2023 to accelerate compared to the revenue growth rate for 2022 due to expected increases in sales levels from increasing the number of listings in the network.

Residential

The acquisitions of Homes.com and Homesnap enabled us to expand our offerings to the residential for sale market. Homes.com is a homes for sale listings site. Homesnap is an online and mobile software platform that provides residential real estate professionals access to applications that manage residential real estate agent workflow and marketing campaigns delivered on third-party platforms. Homesnap also receives transaction-based revenue for short-term advertising delivered on third-party platforms. Residential revenue was consistent between 2022 and 2021. We expect residential revenue for 2023 to decrease when compared to 2022 due to the discontinuation of certain non-strategic products and services.

Other Marketplaces

Our other marketplaces include Ten-X, an online auction platform for commercial real estate that was acquired on June 24, 2020. Also included is our BizBuySell network, which includes BizQuest® and FindaFranchise and our Land.com Network of sites. The BizBuySell network provides online marketplaces for businesses and franchises for sale and our Land.com Network provides online marketplaces for rural lands for sale. Overall, other marketplaces' revenue growth rate slowed in 2022 compared to 2021 primarily due to the impact of the Ten-X acquisition closing in June 2020.We expect other marketplaces revenue growth rate for 2023 to slow compared to the growth rate for 2022 due to lower Ten-X transaction revenue.

Subscription-based Services

The majority of our revenue is generated from service offerings that are distributed to our clients under subscription-based agreements that typically renew automatically and have a term of at least one year. We recognize subscription revenues on a straight-line basis over the life of the contract.

For the years ended December 31, 2022, 2021 and 2020, our annualized net new bookings of subscription-based services on all contracts were approximately $305 million, $217 million and $184 million, respectively, calculated based on the annualized amount of change in our sales resulting from all new subscription-based contracts or upgrades on all existing subscription-based contracts, less write-downs and cancellations, for the period reported. Net new bookings is considered a key indicator of future subscription revenue growth and is also used as a metric of sales force productivity by us and investors. However, information regarding net new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. Revenue from our subscription-based contracts was approximately 93%, 93% and 95% of total revenue for the years ended December 31, 2022, 2021 and 2020, respectively. The declines in the percentage of our revenue from subscription-based contracts from 2020 to 2021 was primarily due to the acquisitions of companies that contained a higher percentage of transaction-based revenue than our legacy businesses.

For the trailing 12 months ended December 31, 2022, 2021 and 2020, our contract renewal rates for existing CoStar Group company-wide subscription-based services for contracts with a term of at least one year were approximately 90%, 92% and 89%, respectively; and, therefore, our cancellation rates for those services for the same periods were approximately 10%, 8% and 11%, respectively. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, we believe that the rate may be a reliable indicator of short-term and long-term performance absent extraordinary circumstances. Our trailing 12-month contract renewal rate may decline as a result of negative economic conditions, 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 was approximately 80%, 77% and 80% of total revenue for the trailing 12 months ended December 31, 2022, 2021 and 2020, respectively. The increase in the percentage of our revenue from subscription-based contracts for contracts with a term of at least one year from 2021 to 2022 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 2020 to 2021 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.

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Impacts of Current Economic Conditions

In response to the concerns over inflation risk, the U.S. Federal Reserve has raised interest rates in the first, second, third and fourth quarters of 2022 and the first quarter of 2023 and signaled it expects additional rate increases. Further, the COVID-19 pandemic has created significant economic volatility, uncertainty and disruption around the world. While the impacts of the COVID-19 pandemic and current economic conditions continue to evolve, they have not materially affected our consolidated financial statements during 2022, 2021 and 2020. It is currently unclear how the commercial real estate industry will ultimately be impacted by the COVID-19 pandemic as businesses formulate and execute plans for employees to return to the office, implement hybrid work arrangements – allowing work from the office or home, or switch to all work from home, or by the current economic conditions. These activities may result in reduced demand for office space and rising 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 commercial real estate market that may materially adversely affect many of our clients. 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 pay for our services and 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.

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 offerings for our client base and 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. We may reevaluate our priorities as economic conditions continue to evolve.

Our key priorities for 2023 currently include:

◦Continuing to develop and invest in the Homes.com residential marketplace. Our residential strategy involves creating new and improved tools for residential agents and brokers and to help homebuyers find a new home and connect with the agents of their choosing. We plan to increase our residential marketing investment over the course of the year to build traffic on the website.

◦Continuing to invest in our LoopNet marketplace and international business. We plan to invest in additional sales capabilities and increase marketing investment to accelerate revenue growth in LoopNet. This includes expansion of our LoopNet brand in the U.K., France and Spain.

◦Continuing to invest in CoStar, including:

▪Enhancing benchmarking capabilities. We continue to integrate the STR products into our core platform. We plan to apply STR's benchmarking expertise within CoStar by making STAR reports available in the CoStar environment and provide users with tools to perform ad hoc analysis.

▪Enhancing analytics capabilities. We are adding information on commercial property investment funds and linking property data to allow fund investors to perform detailed analysis on their property portfolios directly in the CoStar platform.

We expect our investment in these priorities, and the full-year impact realized in 2023 from an increase in our sales force which occurred primarily in the second half of 2022, will increase our selling and marketing expense and reduce our income from operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. We intend to continue to assess the need for additional investments in our business 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.

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For further discussion of our Company, strategy and products, see our business overview set forth in "Item 1. Business" in this Report.

Non-GAAP Financial Measures

We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. We also disclose and discuss certain non-GAAP financial measures in our public releases, investor conference calls and filings with the SEC. The non-GAAP financial measures that we may disclose include EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share. EBITDA is our net income before interest (expense) income, other (expense) income, 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 SEC. Adjusted EBITDA is different from EBITDA because we further adjust EBITDA for stock-based compensation expense, acquisition- and integration-related costs, restructuring costs and settlements and impairments incurred outside our ordinary course of business. Adjusted EBITDA margin represents adjusted EBITDA divided by revenues for the period. Non-GAAP net income is determined by adjusting our net income for stock-based compensation expense, acquisition- and integration-related costs, restructuring costs, settlement and impairment costs incurred outside our ordinary course of business and loss on debt extinguishment, as well as amortization of acquired intangible assets and other related costs, and then subtracting an assumed provision for income taxes. Non-GAAP net income per diluted share is a non-GAAP financial measure that represents non-GAAP net income divided by the number of diluted shares outstanding for the period used in the calculation of GAAP net income per diluted share.

We may disclose adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share on a consolidated basis in our earnings releases, investor conference calls and filings with the 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. We believe that the most directly comparable GAAP financial measure to EBITDA, adjusted EBITDA and non-GAAP net income is net income. We believe the most directly comparable GAAP financial measures to non-GAAP net income per diluted share and adjusted EBITDA margin are net income per diluted share and net income divided by revenue, respectively. In calculating EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share, we exclude from net income the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions and the material limitations on the use of these non-GAAP financial measures as a result of these exclusions. EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share are not measurements of financial performance under GAAP and should not be considered as a measure of liquidity, as an alternative to net income or as an indicator of any other measure of performance derived in accordance with GAAP. Investors and potential investors in our securities should not rely on EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share as a substitute for any GAAP financial measure, including net income and net income per diluted share. In addition, we urge investors and potential investors in our securities to carefully review the GAAP financial information included as part of our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are filed with the 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 accompanying reconciliations, provide additional information to investors that is useful to understand the factors and trends affecting our business without the impact of certain acquisition-related items. We have spent more than 30 years building our database of commercial real estate information and expanding our markets and services partially through acquisitions of complementary businesses. Due to these acquisitions, our net income has included significant charges for amortization of acquired intangible assets, depreciation and other amortization, acquisition- and integration-related costs, restructuring costs and loss on debt extinguishment. Adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share exclude these charges and provide meaningful information about the operating performance of our business, apart from charges for amortization of acquired intangible assets, depreciation and other amortization, acquisition- and integration-related costs, restructuring costs; settlement and impairment costs incurred outside our ordinary course of business. We believe the disclosure of non-GAAP measures can help investors meaningfully

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evaluate and compare our performance from quarter-to-quarter and from year-to-year without the impact of these items. We also believe the non-GAAP measures we disclose are measures of our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest (expense) income, other (expense) income, income taxes, stock-based compensation expenses, acquisition- and integration-related costs, restructuring costs, loss on debt extinguishment and settlement and impairment costs incurred outside our ordinary course of business, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on EBITDA and may rely on adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income or non-GAAP net income per diluted share to provide a financial measure by which to compare our operating performance against that of other companies in our industry.

Set forth below are descriptions of financial items that have been excluded from net income to calculate EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to net income:

•Amortization of acquired intangible assets in cost of revenues may be useful for investors to consider because it represents the diminishing value of any acquired trade names and other intangible assets and the use of our acquired technology, which is one of the sources of information for our database of commercial real estate information. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

•Amortization of acquired intangible assets in operating expenses may be useful for investors to consider because it represents the estimated attrition of our acquired customer base. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

•Depreciation and other amortization may be useful for investors to consider because they generally represent the wear and tear on our property and equipment used in our operations. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

•The amount of interest (expense) income and other (expense) income we generate and incur may be useful for investors to consider and may result in current cash inflows and outflows. However, we do not consider the amount of interest (expense) income and other (expense) income to be a representative component of the day-to-day operating performance of our business.

•Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes during the period and may reduce the amount of funds otherwise available for use in our business. However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business.

•The amount of loss on our debt extinguishment may be useful for investors to consider because it generally represents losses from the early extinguishment of debt. However, we do not consider the amount of the loss on debt extinguishment to be a representative component of the day-to-day operating performance of our business.

Set forth below are descriptions of additional financial items that have been excluded from EBITDA to calculate adjusted EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to net income:

•Stock-based compensation expense may be useful for investors to consider because it represents a portion of the compensation of our employees and executives. Determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expenses recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-based awards. Therefore, we believe it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business.

•The amount of acquisition- and integration-related costs incurred may be useful for investors to consider because such costs generally represent professional service fees and direct expenses related to acquisitions. Because we do not acquire businesses on a predictable cycle, we do not consider the amount of acquisition- and integration-related costs to be a representative component of the day-to-day operating performance of our business.

•The amount of settlement and impairment costs incurred outside of our ordinary course of business may be useful for investors to consider because they generally represent gains or losses from the settlement of litigation matters, charges

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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. We do not consider the amount of restructuring related costs to be a representative component of the day-to-day operating performance of our business.

The financial items that have been excluded from our net income to calculate non-GAAP net income and non-GAAP net income per diluted share are amortization of acquired intangible assets and other related costs, stock-based compensation, acquisition- and integration-related costs, restructuring and related costs and settlement and impairment costs incurred outside our ordinary course of business. These items are discussed above with respect to the calculation of adjusted EBITDA together with the material limitations associated with using this non-GAAP financial measure as compared to net income. In addition to these exclusions from net income, we subtract an assumed provision for income taxes to calculate non-GAAP net income. In 2022 and 2021, we assumed a 26% and 25% tax rate, respectively, which approximated our historical long-term statutory corporate tax rate, excluding the impact of discrete items.

Management compensates for the above-described limitations of using non-GAAP measures by using a non-GAAP measure only to supplement our GAAP results and to provide additional information that is useful to investors to understand the factors and trends affecting our business.

The following table shows our net income reconciled to our EBITDA and our net cash flows from operating, investing and financing activities for the indicated periods (in thousands):

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Consolidated Results of Operations

The following table provides our selected consolidated results of operations for the indicated periods (in thousands and as a percentage of total revenue):

The following table provides our revenues by type of service (in thousands and as a percentage of total revenue):

(1) As of September 30, 2021, Commercial Property and Land revenue has been further disaggregated into LoopNet, Residential and Other Marketplaces. Prior period amounts have been adjusted to reflect this presentation.

(2) For further discussion of our Company, strategy and products, see our business overview set forth in "Item 1. Business" in this Report.

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Comparison of Year Ended December 31, 2022 and Year Ended December 31, 2021

The following table provides a comparison of our selected consolidated results of operations for the years ended December 31, 2022 and 2021 (in thousands):

Revenues. Revenues increased to $2.2 billion in 2022, from $1.9 billion in 2021. The $238 million increase was attributable to increases across nearly all of our primary service offerings, led by a $114 million, or 16%, increase in CoStar revenue. The CoStar revenue increase was 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. Multifamily revenues increased $67 million, or 10%, primarily due to increases in pricing on renewals and, to a lesser extent, an increase in properties listed. LoopNet revenues increased $23 million, or 11%, primarily as a result of an increase in average prices and, to a lesser extent, due to the acquisition of BureauxLocaux. Other marketplaces revenue increased $19 million, or 16%, primarily driven by increases in Ten-X and Land for Sale revenue and, to a lesser extent, an increase in revenue for BizBuySell. Information services revenue increased $16 million, or 11%, primarily due to increased revenues from our CoStar Real Estate Manager and STR service offerings.

Gross Profit. Gross profit increased to $1.8 billion in 2022, from $1.6 billion in 2021. The gross profit percentage was 81% for 2022 compared to 82% for 2021. The increase in gross profit was due to higher revenue, partially offset by an increase in cost of revenues of $57 million, or 16%, mostly due to an increase of $28 million related to our investment and further development of our residential marketplaces, including personnel, research equipment, software and equipment, and data and content costs. There were also increases in costs supporting our other service offerings, including $19 million in personnel costs, driven by an increase in salaries, $6 million in software and equipment to support our researchers, $3 million in professional services and $2 million in travel expenses.

Selling and Marketing Expenses. Selling and marketing expenses increased to $684 million in 2022, from $622 million in 2021. The $62 million increase was mostly attributable to an increase of $40 million in personnel costs, due to a $21 million increase in salaries, driven by an increase in headcount, and an increase in commission expense of $13 million. There were also

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increases of $17 million in conferences and travel costs and $2 million each for occupancy, and computer equipment and other office supplies.

Software Development Expenses. Software development expenses increased to $221 million in 2022, from $201 million in 2021, and remained consistent as a percentage of revenues at 10% in 2022 and 2021. The $20 million increase was primarily due to an increase of $16 million in personnel costs, driven by increased headcount to support the development of our products, and to a lesser extent, to increases of $2 million in occupancy costs, and of $1 million in computer equipment and other office supplies.

General and Administrative Expenses. General and administrative expenses increased to $339 million in 2022, from $257 million in 2021, and increased as a percentage of revenues to 16% in 2022 from 13% in 2021. The $82 million increase in the amount of general and administrative expense was driven by an increase of $22 million in personnel costs, primarily due to increases in salaries and stock-based compensation expense, and to a lesser extent, increases of $16 million in professional services, driven by an increase in legal costs, $10 million in travel and conferences costs, driven partially by an increase in the average cost of air travel, $8 million in software and equipment, and $7 million in bad debt expense, and $2 million each in property taxes and charitable donations. Other non-recurring charges incurred in 2022 included, $9 million due to impairments of right-of-use assets and property and equipment related to abandoned leases, and $4 million for a fee paid to counterparty to terminate a contract. The increase in general and administrative expense was partially offset by a $3 million gain recognized for the sale of a corporate aircraft.

Customer Base Amortization Expense. Customer base amortization expense decreased to $74 million in 2022, from $75 million in 2021, and decreased as a percentage of revenues at 3% in 2022 from 4% in 2021. The decrease in customer base amortization expense was primarily attributable to decreases in amortization expense related to the customer base intangible assets acquired in the acquisitions of ForRent, Ten-X, STR and LoopNet, which had been amortizing on an accelerated basis since their acquisitions, partially offset by an increase of $13 million in amortization expense driven by intangible assets related to a Homesnap product for which we decided to eliminate usage fees related to a specific customer class.

Interest Income (Expense), net. Interest income, net was $32 million in 2022, as compared to interest expense, net of $32 million in 2021. The increase of $64 million in 2022 was primarily due to an increased rate of return on cash and cash equivalents.

Other Income, net. Other income, net was a net income of $3 million in 2022, consistent with net income of $3 million in 2021.

Income Tax Expense. Income tax expense increased to $117 million in 2022, from $111 million in 2021, as a result of higher income before income taxes, the release of reserves due to recent audit settlements which were recorded in 2021, and lower excess tax benefits on option exercises for the year ended December 31, 2022, partially offset by a decrease due to a gain recognized for the year ended December 31, 2021 related to an international restructuring.

For a comparison of our results of operations for the fiscal year ended December 31, 2021 to the year ended December 31, 2020, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Report for the year ended December 31, 2021, which was filed with the SEC on February 23, 2022.

Comparison of Business Segment Results for Year Ended December 31, 2022 and Year Ended December 31, 2021

We manage our 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 Europe, Asia-Pacific and Latin America. Management relies on an internal management reporting process that provides revenue and operating segment EBITDA, which is our net income before interest income (expense) and other income (expense), 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 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.

Segment Revenues. North America revenues increased to $2.1 billion for the year ended December 31, 2022, from $1.9 billion for the year ended December 31, 2021. The $138 million increase in North America revenues was attributable to increases in revenues for several of our services. CoStar revenues increased $113 million 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.

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Multifamily revenues increased $67 million, primarily due to increases in pricing on renewals and, to a lesser extent, an increase in properties listed. Other marketplaces revenue increased $19 million primarily driven by increases in Ten-X and Land for Sale revenue and, to a lesser extent, an increase in revenue for BizBuySell. LoopNet revenues increased $19 million, primarily as a result of stronger site traffic, which drove an increase in the price per advertisement as compared to the prior year. Information services revenue increased $11 million primarily due to increases of $7 million and $4 million in revenue for our CoStar Real Estate Manager and STR service offerings, respectively. International revenues increased to $76 million in 2022, from $67 million in 2021. The $10 million increase in International revenues was driven by increases in sales of LoopNet products, including the acquisition of BureauxLocaux, and, to a lesser extent, increased revenue from the acquisition of Business Immo.

Segment EBITDA. North America EBITDA increased to $577 million for the year ended December 31, 2022, from $557 million for the year ended December 31, 2021. The increase in North America EBITDA was primarily due to an increase in revenue and a decrease in marketing costs, partially offset by increases in general and administrative and personnel costs. International EBITDA decreased to $5 million for the year ended December 31, 2022 from $8 million for the year ended December 31, 2021. The decrease was due to increased personnel, general and administrative, and marketing costs, partially offset by, an increase in revenue.

For a comparison of our business segment results of operations for the fiscal year ended December 31, 2021 to the year ended December 31, 2020, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Report for the year ended December 31, 2021, which was filed with the SEC on February 23, 2022.

Liquidity and Capital Resources

We believe the balance of cash and cash equivalents, which was $5.0 billion as of December 31, 2022, 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 requirements include the following contractual and other obligations.

Debt. As of December 31, 2022, 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 $224 million, with $28 million payable within 12 months.

Leases. We have lease arrangements for office facilities, data centers and certain vehicles. As of December 31, 2022, we had fixed lease payment obligations of $118 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 relate to web hosting, third-party data or listings and software subscriptions. As of December 31, 2022, we had purchase obligations of $85 million, with $45 million payable within 12 months.

Construction Commitments. We plan to expand our Richmond, Virginia campus which is expected to result in a material cash requirement in 2023 and beyond. We broke ground on the expansion in November 2022 and expect construction to be completed in 2025. We negotiated various tax incentives with the Commonwealth of Virginia and the City of Richmond including the allowance to use market-based income apportionment for income taxes and partial reimbursements of property tax assessments related to the value of the campus 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 the value of the tax incentives and repayment of previous tax reductions. The value of the incentives is dependent on our expected 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 range of $450 – $550 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 December 31, 2022, we have paid $17 million and we have committed to spend an additional $148 million as further work is performed under these contracts. We plan to amend these contracts to include additional commitments as construction progresses. Total cash expenditures for 2023 are expected to be approximately $200 million. We expect to fund the expansion 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.

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Cash and cash equivalents increased to $5.0 billion as of December 31, 2022, compared to cash and cash equivalents of $3.8 billion as of December 31, 2021. The increase in cash and cash equivalents for the year ended December 31, 2022 was primarily due to $746 million of net proceeds from our September 2022 equity offering and cash flow from operations of $479 million.

Net cash provided by operating activities for the year ended December 31, 2022 was $479 million compared to $470 million for the year ended December 31, 2021. The $9 million increase was due to an increase in net income, excluding certain non-cash expenses such as amortization of deferred commission costs and stock-based compensation expense, partially offset by, a increase in working capital, excluding cash, of $51 million driven by an increase in capitalized commissions and decreases in income taxes payable, accounts receivable, and deferred revenue, partially offset by an increase in accounts payable and other accrued liabilities driven by payment of the $52 million termination fee pursuant to the Asset Purchase Agreement with RentPath in the first quarter of 2021.

Net cash used in investing activities for the year ended December 31, 2022 was $69 million compared to $381 million for the year ended December 31, 2021. The $312 million decrease in cash used in investing activities was primarily due to a decrease in cash paid for acquisitions of $187 million and for purchases of property, equipment and other assets including Richmond assets of $95 million, as well as, an increase in proceeds from sale of property and equipment and other assets of $29 million

Net cash provided by financing activities for the year ended December 31, 2022 was $734 million compared to net cash used in financing activities of $16 million for the year ended December 31, 2021. The increase in cash provided by financing activities was primarily due to $746 million of net proceeds from our September 2022 equity offering.

As permitted under the Coronavirus Aid, Relief and Economic Security Act, we deferred payroll taxes due in 2020; all amounts deferred were paid during the year ended December 31, 2021.

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Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. The following accounting policies involve a “critical accounting estimate” because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different acceptable assumptions would yield different results. Changes in the accounting estimates are reasonably likely to occur from period to period, which may have a material impact on the presentation of our financial condition and results of operations. We review these estimates and assumptions periodically and reflect the effects of revisions in the period that they are determined to be necessary. We consider policies relating to the following matters to be critical accounting policies:

•Long-lived assets, intangible assets and goodwill;

•Income taxes;

•Revenue recognition; and

•Business combinations.

With respect to our accounting policy for long-lived assets, intangible assets and goodwill, we further supplement in Note 2 of the Notes to the Consolidated Financial Statements included in 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-lived 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 purchase consideration paid in a business combination over the fair value of assets of the net identifiable assets acquired. Goodwill is not amortized, but instead tested for impairment at least annually by each reporting unit, 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 the 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 we elect to bypass the qualitative assessment, we then perform 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 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-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.

As of October 1, 2022, we performed an assessment of the relevant qualitative factors for our North America and International reporting units and concluded that it was not more likely than not that the fair value of each reporting unit was less

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than its respective carrying amounts. There have been no events or changes in circumstances as a result of our qualitative impairment analysis on October 1, 2022, that would indicate that the carrying value of each reporting unit may not be recoverable.

For an in-depth discussion of each of our significant accounting policies, including our critical accounting policies and further information regarding estimates and assumptions involved in their application, see Note 2 of the Notes to the Consolidated Financial Statements included in this Report.

Recent Accounting Pronouncements

See Note 2 of the Notes to the Consolidated Financial Statements included in this Report for further discussion of recent accounting pronouncements, including the expected dates of adoption.