COSTAR GROUP, INC. (CSGP) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 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 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 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 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 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
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slow compared to the revenue growth rate for the year ended December 31, 2023 as a result of disruptions related to transitioning sales and service activities to a dedicated LoopNet field sales team.
Residential
Our Homes.com Network and the acquisition of OnTheMarket have enabled us to expand our offerings to the residential for sale market. Homes.com is a 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 2024, we began selling subscription memberships to promote the home listing as well as the agent in the sort order. OnTheMarket is a property portal in the U.K., which primarily offers subscriptions-based advertising services to agents. Residential's revenues for the year ended December 31, 2023 decreased compared to the year ended December 31, 2022, due to the discontinuation of certain non-strategic products and services. We expect Residential's revenues for the year ending December 31, 2024 to increase compared to the year ended December 31, 2023 due to the OnTheMarket Acquisition and the launch of our new Homes.com product.
Other Marketplaces
Our other marketplaces include Ten-X, an online auction platform for commercial real estate and our BizBuySell and Land.com networks. The BizBuySell network provides online marketplaces for businesses and franchises for sale, and THE Land.com network provides online marketplaces for rural land for 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.
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, 2023, 2022 and 2021, our annualized net new bookings of subscription-based services on all contracts were approximately $286 million, $305 million and $217 million, respectively. Net new bookings is calculated based on the annualized amount of change in the Company's sales bookings resulting from new subscription-based contracts, changes to existing subscription-based contracts and cancellations of subscription-based contracts for the period reported. Net new bookings is calculated on all subscription-based contracts without regard to contract term. Net new bookings is considered an operating metric that is an 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 were approximately 95%, 93% and 93% of total revenue for the years 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 growth in our subscription-based services.
For the trailing 12 months ended December 31, 2023, 2022 and 2021, our contract renewal rates for subscription-based services for contracts with a term of at least one year were approximately 90%, 90% and 92%, respectively; and, therefore, our cancellation rates for those services for the same 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, 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 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
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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 the year ending December 31, 2024 currently include:
•Continuing to develop and 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 intend to create an expanded dedicated sales force, to supplement the efforts of our sales team already in place. We plan to increase our residential marketing investment, including the launch of a brand campaign.
For OnTheMarket, we plan to integrate OnTheMarket into the Company’s operations including additional investment in marketing, content creation and enhancing 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 expansion in November 2022 and expect construction to be 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 over 1 million square feet when completed. We plan to increase our research, technology, operations, software development, marketing and sales teams in this location.
In February 2024, we closed on the purchase of a building in Arlington, Virginia and we 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 year ended December 31, 2023. 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.
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
In 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 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.
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,
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non-GAAP net income and non-GAAP net income per diluted 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 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 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 income or expense, net, other income or expense, net, 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
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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 income or expense, net and other income or expense, net 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 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.
•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 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. Because 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 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
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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 both 2023 and 2022, we assumed a 26% tax rate, 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.
See Note 14 of the Notes to Consolidated Financial Statements included in Part IV of this Report for the reconciliation of our net income to our EBITDA.
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Consolidated Results of Operations
The following table provides our selected consolidated results of operations for the indicated periods (in millions and as a percentage of total revenue):
| 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 millions 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.
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Comparison of Year Ended December 31, 2023 and Year Ended December 31, 2022
The following table provides a comparison of our selected consolidated results of operations for the years ended December 31, 2023 and 2022 (in 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 | % |
Revenues. Revenues increased $273 million, or 12.5%, to $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 the 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 subscribers,
•an increase in LoopNet revenues of $34 million, or 14.7%, due to an increase in the average price for listings,
•an increase in Information services revenues of $14 million, or 8.6%, primarily attributable to an 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 $28 million, or 37.4%, due to the discontinuation of certain products and 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 revenue of Land.com.
Gross Profit and Cost of Revenues. Gross profit increased $195 million, or 11.0%, to $2.0 billion in 2023, and the gross profit percentage decreased from 81% to 80%. The increase in gross 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:
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•an increase in personnel costs of $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 $25 million in technology costs to host our database and products and
•an decrease of $11 million in expenses related to advertising purchased on behalf of customers.
Selling and Marketing Expenses. Selling and marketing expenses increased $306 million, or 44.7%, to $990 million and, as a percentage of revenues, increased from 31% to 40%. The increase included:
•an increase in marketing expenses of $244 million for advertising our brands,
•an increase in personnel and events costs of $63 million related to rising headcount in our sales force and increases in 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 $268 million and, as a percentage of revenues, increased from 10% to 11%. The increase primarily included higher personnel costs of $42 million related to rising headcount to support our residential efforts and increases in salaries, bonus, stock-based compensation and benefits costs for our existing employees.
General and Administrative Expenses. General and administrative expenses increased $43 million, or 12.6%, to $382 million and, as a percentage of revenues, was consistent at 16%. The increase included:
•an increase of $17 million in credit 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 increases in salaries, bonus, stock-based compensation and benefits costs for our existing employees and rising headcount.
Customer Base Amortization Expense. Customer base amortization expense decreased $31 million, or 42.7%, to $42 million and, as a percentage of revenues, decreased from 3% to 2%. 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 years ended December 31, 2023, and 2022.
Income Tax Expense. Income tax expense increased $10 million, or 8.2%, to $127 million and the effective tax rate increased 1% to 25% of income before income taxes. The increase in income tax expense was primarily attributable to additional income before income taxes and a benefit recognized in 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 SEC on February 22, 2023.
Comparison of Business Segment Results for Year Ended December 31, 2023 and Year Ended December 31, 2022
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 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 operating and management performance and to evaluate the performance of our business.
Segment Revenues. North America revenues increased $260 million, or 12.3%, to $2.4 billion and included:
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•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, 2023, from $577 million for the year ended December 31, 2022. The decrease in North America EBITDA was primarily due to increases 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 $13 million for the year ended December 31, 2023 from $5 million for the year ended December 31, 2022. The decrease was due to increased personnel 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, 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 Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 22, 2023.
Liquidity and Capital Resources
We believe the balance of cash and cash equivalents, which was $5.2 billion as of December 31, 2023, 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, 2023, 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 certain vehicles. As of December 31, 2023, 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 relate to web 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.
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Construction Commitments. We are expanding our Richmond, Virginia campus, which is expected to result in material cash requirements in 2024 and beyond. We broke ground on the expansion in November 2022 and expect construction to be substantially completed in the first half of 2026. 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 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 – $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 December 31, 2023, we have paid $128 million and we have committed to spend 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 expenditures 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 Arlington, 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 property taxes, titling insurance and 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.
Cash and cash equivalents increased to $5.2 billion as of December 31, 2023, compared to cash and 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 for the year ended December 31, 2023 was $489.5 million compared to $478.7 million for the year ended December 31, 2022. The $10.8 million increase was primarily due to higher net income, excluding certain non-cash expenses.
Net cash used in investing activities for the year 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 $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 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 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:
•Intangible assets and goodwill;
•Income taxes;
•Revenue recognition; and
•Business combinations.
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With respect to our accounting policy for intangible assets and goodwill, we further supplement in Note 2 of the Notes to the Consolidated Financial Statements included in Part IV of this Report with the following:
We assess the impairment of 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 intangible 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 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, 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 unit in 2023, which indicated that the fair value of this unit exceeded its carrying value. There have been no events or changes in circumstances as a result of our qualitative impairment analysis on October 1, 2023, 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 Part IV of 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.