Item 2.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 discussed in “Cautionary Statement Concerning Forward-Looking Statements” at the end of this Item 2 and “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q, as well as those described from time to time in our filings with the Securities and Exchange Commission.
All forward-looking statements in this filing 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, except as required by law. The following discussion should be read in conjunction with our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission and the condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.
Overview
CoStar Group, Inc. (the “Company” or “CoStar”) is the number one provider of information, analytics and online marketplaces to the commercial real estate industry in the United States (“U.S.”) and United Kingdom (“U.K.”) based on the fact that we offer the most comprehensive commercial real estate database available; have the largest research department in the industry; own and operate leading online marketplaces for commercial real estate and apartment listings in the U.S. based on the numbers of unique visitors and site visits per month; and provide more information, analytics and marketing services than any of our competitors. We have created and compiled a standardized platform of information, analytics and online marketplace services where industry professionals and consumers of commercial real estate, including apartments, and the related business communities, can continuously interact and facilitate transactions by efficiently accessing and exchanging accurate and standardized real estate-related information. Our service offerings span all commercial property types, including office, retail, industrial, multifamily, commercial land, mixed-use and hospitality. We manage our business geographically in two operating segments, with our primary areas of measurement and decision-making being North America, which includes the U.S. and Canada, and International, which primarily includes Europe, Asia-Pacific and Latin America. On June 24, 2020, we acquired Ten-X Holding Company, Inc and its subsidiaries ("Ten-X"), which provide a leading platform for conducting commercial real estate online auctions and negotiated bids primarily for distressed properties. See Note 5 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion of this acquisition.
Our services are typically distributed to our clients under subscription-based license agreements that renew automatically, a majority of which have a term of at least one year. Upon renewal, many of the subscription contract rates may change in accordance with contract provisions or as a result of contract renegotiations. To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based services rather than charging fees based on actual system usage or number of paid clicks. Our subscription clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. We generally see higher sales of Apartments.com listing services during the peak summer rental season and higher CoStar Suite sales towards the end of the year; however, sales fluctuate from period-to-period and year-to-year and our revenue is not generally seasonal because our services are typically sold on a subscription basis.
Our primary brands include CoStar, LoopNet, Apartments.com, STR, Ten-X, BizBuySell and LandsofAmerica. We also provide other services that complement those offered through our primary brands. These include real estate and lease management solutions, lease administration and abstraction services through our CoStar Real Estate Manager service offerings; and market research, consulting and analysis, portfolio and debt analysis, and management and reporting capabilities through our CoStar Investment Analysis and CoStar Risk Analytics service offerings. Our principal service offerings are discussed in more detail below.
Impact of the COVID-19 Pandemic
A novel strain of coronavirus known as "COVID-19" was first identified in Wuhan, China in December 2019, and was subsequently declared a pandemic by the World Health Organization on March 11, 2020. COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas. The full impact of the COVID-19 pandemic is unknown. The COVID-19 pandemic did not materially affect the Company's condensed consolidated financial statements for the three and six months ended June 30, 2020.
We are closely and continually monitoring the impact of the COVID-19 pandemic on our business, employees, customers, and communities. To protect the health and safety of our employees and to help stop the spread of the disease, we shifted to a digital, remote workplace in mid-March 2020. As of that time, nearly all of our employees began to work from home and continue to do so as of the date of this filing. We have temporarily shifted certain employees’ job responsibilities so they can work from home, and modified our in-person research and sales processes so that they can be conducted safely and in compliance with social distancing guidelines to protect our employees, our customers and our communities. We believe our employees are operating at near normal levels of productivity in this digital environment. We continue to monitor events related to the pandemic, as well as the guidelines and mandates provided by governmental and health authorities. We plan to continue adapting our business operations when and as deemed appropriate to comply with these guidelines and mandates and to respond to changing circumstances.
In connection with the shift to work from home, we incurred and may continue to incur expenses to help employees perform their jobs effectively and securely. In preparation for an eventual return to work in the office, we have also incurred and expect to continue to incur expenses to help protect the health and safety of our employees and visitors. In response to the COVID-19 pandemic, we have also taken steps to manage our costs including minimizing hiring to essential positions, restricting business travel and canceling in-person marketing events. We expect to continue these steps and, therefore, to see these cost savings in the second half of the year. Overall, the increased spend related to COVID-19 has not been material and has had minimal impact as these expenses have been offset by the cost savings. As the situation evolves, we may implement additional cost reductions.
Current general economic conditions in the U.S. and the world as a result of the COVID-19 pandemic are negatively affecting business operations for our clients and are expected to result in business consolidations and, in certain circumstances, failures. In general, customers are seeking to reduce expenses as a result of current economic conditions. The extent and duration of any future continued weakening of the global economy is unknown. There can be no assurance that any of the governmental or private sector initiatives designed to strengthen the U.S. and other economies will ultimately be successful or available to us and our customers, and, if successful, when the benefits will be available or seen. Because of the rapidly evolving nature of the COVID-19 pandemic and responses to it by, and the impact on, global economies, our revenue or earnings forecasts may not prove to be accurate. Any expected changes in financial results discussed in this report, including any expected impact of COVID-19, are based on our current observations and experience and involve estimates and assumptions. As the extent and duration of the impacts from COVID-19 remain unclear, the Company's estimates and assumptions may evolve as conditions change. Our current observations and past experience and results may not be an indicator of ongoing trends or future results, and actual results could differ significantly from our estimates and expectations.
Our near-term revenues are relatively predictable as a result of our subscription-based business model; however, we expect that we will continue to experience the effects of the COVID-19 pandemic on our business, results of operations and overall financial performance. Such effects may include, among others, a decrease in new customer sales and increases in customer cancellations, suspensions, service reductions and failures to pay or delays in payments of amounts owed to us. We are more likely to incur asset impairment charges or restructuring charges, or increase our allowance for credit losses, as a result of this crisis and related economic downturn, which could adversely affect our results of operations. The amount and frequency of such actions will be affected by the severity and duration of the COVID-19 pandemic. We experienced an increase in customer requests for cancellations and suspensions towards the end of the first quarter of 2020 that continued through May 2020; however, those requests have eased since then. We also increased our allowance for credit loss during the first half of 2020 as a result of increased write-off trends as well as additional reserves for customers with higher credit risk. Due to the uncertainty associated with the COVID-19 pandemic, we will continue to monitor customer behavior and its impact on our results of operations. See Note 4 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q and the "Comparison of Three Months Ended June 30, 2020 and Three Months Ended June 30, 2019" below for further discussion.
Our recent equity offering of common stock completed in May 2020 and our offering of Senior Notes and amendment and restatement of our credit facility completed in early July 2020 strengthened our liquidity position. See Note 14 and Note 15 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q and the “Development, Investments and Expansion” below for further discussion of our recent equity and Senior Notes offerings and the 2020 Credit Agreement. Overall, we have not experienced significant COVID-19 related impacts that would affect our ability to access funding on reasonably similar terms as were available to the Company previously. We discuss the current and potential impact of select provisions of the CARES Act (defined below) in our liquidity discussion.
Service Offerings
Our principal information, analytics and online marketplace services are described in the following paragraphs by type of service:
Information and Analytics
CoStar Suite®. Our subscription-based information services consist primarily of CoStar Suite services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property®, CoStar COMPS®, CoStar Market Analytics, CoStar Tenant®, CoStar Lease Comps and CoStar Public Record through our online and mobile applications. Our integrated suite of online service offerings includes information about space available for lease, comparable sales information, information about properties for sale, tenant information, Internet marketing services, analytical capabilities, information for clients' websites, information about industry professionals and their business relationships, and industry news. Our commercial real estate sales force is responsible for selling multiple product lines, including CoStar Suite and LoopNet. Sales initiatives commenced in late 2019 shifted the focus of our sales force to sales of LoopNet Signature Ads, a premium listing service. As a result of this shift, as well as the continued impact of COVID-19 on our current and potential customer base, we currently anticipate CoStar Suite revenue growth rates to decline through the end of the year.
Information services. We provide real estate and lease management solutions, including lease administration 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 Investment Analysis and CoStar Risk Analytics® service offerings. We provide information services internationally, through our Grecam, Belbex and Thomas Daily businesses in France, Spain and Germany, respectively. Sales of CoStar Real Estate Manager represent a significant portion of our information services revenue. CoStar Real Estate Manager's revenue growth rates increased significantly in 2018 as new clients adopted, and existing clients expanded their use of, CoStar Real Estate Manager to manage compliance with new lease accounting and reporting requirements that became effective for public companies for financial reporting periods beginning after December 15, 2018. CoStar Real Estate Manager continued to experience high growth rates throughout 2019. In the first half of 2020, growth rates began to decline as the surge of the demand eased as companies passed the implementation date for the new requirements and customer behavior began to change in response to economic conditions, including potential delays in implementation of new services resulting in reduction of implementation fees. Accordingly, we expect the growth rate for CoStar Real Estate Manager to continue to decline throughout the year relative to 2019 growth rates.
On October 22, 2019, we acquired STR and we now also provide STR’s complementary benchmarking and analytics services to the hospitality industry. Sales of STR also represent a significant portion of our information services revenue. STR sells the majority of its services on a subscription basis, but also has one-time or ad hoc transaction fee revenues. The hospitality industry has been severely impacted by COVID-19. As a result, we have experienced and expect to continue to experience some impact to the revenue growth rates for STR, particularly as a result of a decline in ad hoc transaction fee revenues as customers delay purchases. We've offered payment extensions to certain customers of STR, and we will continue to monitor customer behavior and any resulting impact to our financial condition and results of operations. See Note 5 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion of this acquisition.
Online Marketplaces
Multifamily. Apartments.comTM is part of our network of apartment marketing sites, which primarily includes ApartmentFinder®, ForRent.com®, ApartmentHomeLiving.comTM, Apartamentos.comTM, Westside Rentals, and Off Campus Partners, LLC ("OCP"). Our network of subscription-based advertising services 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. On June 12, 2019, we acquired OCP, a provider of student housing marketplace content and technology to U.S. universities. We continue to integrate OCP and the services they offer into our Apartments.com network. Multifamily sales have not been adversely impacted by the COVID-19 pandemic in the first half of 2020, and tenants, property owners and landlords continued to transact in our digital environment. See Note 5 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion of the OCP acquisition.
Commercial property and land. Our LoopNet.com 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 list properties for sale or for lease and to submit detailed information about property listings. Commercial real estate agents, buyers and tenants use the LoopNet.com network of online marketplace services to search for available property listings that meet their criteria. Loopnet.com represents a majority of the commercial property and land revenue. As part of our rebuild and launch of the LoopNet Signature Ads product, we rolled out new ad packages in the fourth quarter of 2019 and shifted the focus
of our commercial real estate sales force to LoopNet Signature Ads. As a result, the growth rate increased in the fourth quarter of 2019 and in the first quarter of 2020. As a result of COVID-19 and its impact on the commercial real estate industry, LoopNet.com sales volumes began to decline in the second half of March 2020, and continued to decline through May 2020. In June 2020, we saw cancellations decline to pre-pandemic levels and some recovery in sales volume. Overall, we expect the revenues in commercial property and land to increase primarily due to revenue from our newly acquired online auction platform, Ten-X. Our BizBuySell.com network, which includes BizQuest® and FindaFranchise, and our Land.com network of sites, which include LandsofAmerica, LandAndFarm and LandWatch®, are also included in our commercial property and land service revenue. The BizBuySell.com network provides online marketplaces for businesses for-sale and our Land.com network of sites provide online marketplaces for rural lands for-sale.
As of June 30, 2020 and 2019, our net bookings of subscription-based services on all contracts were approximately $35 million and $59 million, respectively, calculated based on the annualized amount of change in our sales resulting from all new subscription-based contracts or upsales on all existing subscription-based contracts, less write-downs and cancellations, for the period reported. The factors resulting in this year-over-year change are discussed above. We recognize subscription revenues on a straight-line basis over the life of the contract. Net bookings is considered a key indicator of future subscription revenue growth and is also used as a metric of salesforce productivity by management and investors.
For the six months ended June 30, 2020 and 2019, our contract renewal rates for existing CoStar subscription-based services on annual contracts were approximately 89% and 90%, respectively, and therefore our cancellation rate for those services for the same periods were approximately 11% and 10%, respectively. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, management believes that the rate may be a reliable indicator of short-term and long-term performance absent extraordinary circumstances. Our trailing twelve-month contract renewal rate may decline in light of COVID-19 developments and the resulting negative economic conditions leading to greater business failures and/or consolidations among our clients, reductions in customer spending, or decreases in our customer base.
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 for 2020 as described below while we closely monitor the economic developments from the COVID-19 pandemic and manage our response to such developments. We are committed to supporting, improving and enhancing our information, analytics and online marketplace solutions, including expanding and improving our offerings for property owners, property managers and renters. 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 the COVID-19 pandemic continues to evolve.
Our key priorities for the second half of 2020 include:
•Integrating recently completed acquisitions, including STR and Ten-X, with our business operations. We plan to consolidate STR data and services with CoStar Suite to create an integrated platform. We expect that the combination of STR's and CoStar's offerings will allow us to create valuable new and improved tools for industry participants. We plan to drive international expansion, in part, through STR's global operations and to apply STR's benchmarking expertise to other commercial real estate segments we serve. We also plan to begin the integration of the Ten-X platform into both LoopNet and CoStar, to expand the audience for Ten-X auctions to include our online commercial real estate users.
•Continuing to invest in the LoopNet marketplace by enhancing the content on the site (including high-quality imagery), seeking targeted advertisements, providing premium listing services (such as LoopNet Signature Ads) that increase a property listing’s exposure, and adding more content for premium listings to better meet the needs of a broader cross section of the commercial real estate industry. To support the LoopNet marketplace, we implemented training and incentive programs for our sales team to increase sales of LoopNet Signature Ads, with a focus on property owners.
•Continuing to invest in CoStar Suite, including capabilities that allow us to broaden the reach of CoStar Suite in Europe by offering multiple languages and currencies on the platform. We plan to enhance CoStar Suite by making additional investments in analytical capabilities focused on owners and lenders of commercial real estate. In addition, we plan to invest in the technology and infrastructure of our other existing service offerings including CoStar Real Estate Manager in order to leverage data and technology across our platforms.
•Continuing to develop, improve and market our recently launched Apartments.com service offerings that focus on the digital rental experience and enable renters to apply for leases and make rent payments, and for landlords to run tenant credit and background checks, all online through a single platform. We seek user feedback and continue to aggressively market our multifamily listing services in an effort to provide more value to advertisers and, in turn, to attract advertisers. Our marketing investment is focused on search engine marketing and enhanced brand awareness. As we continue to assess the success and effectiveness of our marketing campaign, we will continue to work to determine the optimal level and focus of our marketing investment for our services for future periods and may adjust our marketing spend as we deem appropriate.
•Obtaining necessary regulatory approvals to close the pending acquisition of RentPath and integrating RentPath with the Apartments.com network post-closing. On February 11, 2020, a wholly owned subsidiary of the Company entered into an agreement to acquire for $588 million in cash all of the equity interests of RentPath Holdings, Inc., as reorganized following an internal restructuring pursuant to and under the joint chapter 11 plan of reorganization of RentPath and certain of its subsidiaries. The completion of the transaction is subject to customary conditions, including the expiration or termination of the applicable waiting period under applicable antitrust laws and bankruptcy approvals. On April 29, 2020, the Company and RentPath each received a request for additional information from the U.S. Federal Trade Commission (“FTC”) with respect to the acquisition. The FTC’s additional request extends the waiting period imposed by the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) until the parties complete the compliance process and the FTC has had an opportunity to review and engage with the parties on the substance of their submission. Bankruptcy court approval was obtained on June 9, 2020. On July 29, 2020, the Company exercised its option pursuant to the asset purchase agreement for the RentPath acquisition to extend the Outside Date under that agreement for an additional three months in exchange for a maximum potential payment of $7.5 million. The Company continues to expect the acquisition to close on or before February 12, 2021, subject to expiration or termination of the applicable waiting period under the HSR Act and the satisfaction or waiver of all closing conditions. See Note 5 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion.
To support our continued expansion and development, we recently completed a public equity offering, a senior notes offering and the refinancing of our revolving credit facility. In May 2020, we completed a public equity offering of 2,633,587 shares of common stock for $655 per share. Net proceeds from the public equity offering were approximately $1.7 billion, after deducting approximately $35.0 million of underwriting fees, commissions and other stock issuance costs. We expect to use the net proceeds from the public equity offering to fund all or a portion of the costs of any strategic acquisitions we pursue in the future, to finance the growth of our business and/or for working capital and other general corporate purposes. General corporate purposes may include additions to working capital, capital expenditures, repayment of debt, investments in our subsidiaries, and the repurchase, redemption or retirement of securities, including our common stock.
On July 1, 2020, we issued $1.0 billion aggregate principal amount of 2.800% Senior Notes due July 15, 2030 (the “Senior Notes”). Interest on the Senior Notes is payable semi-annually in arrears beginning on January 15, 2021. We may redeem the Senior Notes in whole or in part (a) at any time prior to April 15, 2030, at a redemption price equal to 100% of the principal amount of the Senior Notes, plus the Applicable Premium (as calculated in accordance with the indenture governing the Senior Notes) as of, and any accrued and unpaid interest, if any, on the principal amount of Senior Notes being redeemed to, but excluding, the redemption date, and (b) on or after April 15, 2030, at a redemption price equal to 100% of the principal amount of the Senior Notes, plus any accrued and unpaid interest, if any, on the principal amount of Senior Notes being redeemed to, but excluding, the redemption date. We used a portion of the net proceeds from the issuance of the Senior Notes to repay outstanding borrowings under the 2017 Credit Agreement, and we intend to use the remaining proceeds to fund all or a portion of the costs of any strategic acquisitions we pursue in the future, to finance the growth of our business and/or for working capital and other general corporate purposes.
On July 1, 2020, we also entered into a second amended and restated credit agreement (the “2020 Credit Agreement”), which amended and restated in its entirety our existing credit agreement (the "2017 Credit Agreement"). The 2020 Credit Agreement provides for a $750 million revolving credit facility with a term of five years and a letter of credit sublimit of $20 million from a syndicate of financial institutions as lenders and issuing banks. On July 1, 2020, we repaid the outstanding borrowings under our existing $750 million revolving credit facility pursuant to the 2017 Credit Agreement using the proceeds from the issuance of the Senior Notes. Funds drawn down on the revolving credit facility pursuant to the 2020 Credit Agreement may be used for working capital and other general corporate purposes. The 2020 Credit Agreement, along with the proceeds from the May equity offering, the July Senior Notes offering and cash generated by our business are expected to support our continued growth and give us flexibility to act on strategic acquisition opportunities that may arise. See Note 14 and
Note 15 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion of our recent equity and Senior Notes offerings and our 2020 Credit Agreement.
We intend to continue to assess the need for additional investments in our business, in addition to the investments discussed above, in order to develop and distribute new services and functionality within our current platform or expand the reach of, or otherwise improve, our current service offerings. Any future product development or expansion of services, combination and coordination of services or elimination of services or corporate expansion, development or restructuring efforts could reduce our profitability and increase our capital expenditures. Any new investments, changes to our service offerings or other unforeseen events could cause us to experience reduced revenues or generate losses and negative cash flow from operations in the future. Any development efforts must comply with our credit facility, which contains restrictive covenants that restrict our operations and use of our cash flow and may prevent us from taking certain actions that we believe could increase our profitability or otherwise enhance our business.
Non-GAAP Financial Measures
We prepare and publicly release quarterly unaudited financial statements prepared in accordance with generally accepted accounting principles (“GAAP”). We also disclose and discuss certain non-GAAP financial measures in our public releases, investor conference calls and filings with the Securities and Exchange Commission. The non-GAAP financial measures that we may disclose include net income before interest (expense) income and other (expense) income, loss on debt extinguishment, income taxes, depreciation and amortization (“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 and 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 Securities and Exchange Commission. Adjusted EBITDA is different from EBITDA because we further adjust EBITDA for stock-based compensation expense, acquisition- and integration-related costs for pending and completed acquisitions, restructuring costs and settlements and impairments incurred outside our ordinary course of business. Non-GAAP net income is determined by adjusting our net income for stock-based compensation expense, acquisition- and integration-related costs for pending and completed acquisitions, 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. We may disclose adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share on a consolidated basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission. 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, non-GAAP net income and non-GAAP net income per diluted share as operating performance measures and, as such, 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 Securities and Exchange Commission, 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 for pending and completed acquisitions, 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 for pending and completed acquisitions, 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 (expense) income and other (expense) income, income taxes, stock-based compensation expenses, acquisition- and integration-related costs for pending and completed acquisitions, 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 for pending and completed acquisitions 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 for pending and completed acquisitions to be a representative component of the day-to-day operating performance of our business.
•The amount of settlement and impairment costs incurred outside of our ordinary course of business may be useful for investors to consider because they generally represent gains or losses from the settlement of litigation matters or impairments on acquired intangible assets. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•The amount of 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 for pending and completed acquisitions, 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 2020 and 2019, we assumed a 25% tax rate, which approximated our historical long-term statutory corporate tax rate, excluding the impact of discrete items.
Adjusted EBITDA margin represents adjusted EBITDA divided by revenues for the period.
Non-GAAP net income per diluted share is a non-GAAP financial measure that represents non-GAAP net income divided by the number of diluted shares outstanding for the period used in the calculation of GAAP net income per diluted share.
Management compensates for the above-described limitations of using non-GAAP measures by using a non-GAAP measure only to supplement our GAAP results and to provide additional information that is useful to investors to understand the factors and trends affecting our business.
The following table 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Net income
|
$
|
60,360
|
|
|
$
|
63,248
|
|
|
$
|
133,153
|
|
|
$
|
148,417
|
|
|
|
Amortization of acquired intangible assets in cost of revenues
|
6,054
|
|
|
5,033
|
|
|
12,059
|
|
|
10,546
|
|
|
|
Amortization of acquired intangible assets in operating expenses
|
14,935
|
|
|
7,175
|
|
|
26,419
|
|
|
14,857
|
|
|
|
Depreciation and other amortization
|
6,990
|
|
|
6,546
|
|
|
13,757
|
|
|
13,010
|
|
|
|
Interest expense (income)
|
3,596
|
|
|
(4,678)
|
|
|
1,945
|
|
|
(8,890)
|
|
|
|
Other expense (income)
|
474
|
|
|
(538)
|
|
|
(367)
|
|
|
(539)
|
|
|
|
Income tax expense
|
16,889
|
|
|
16,768
|
|
|
22,452
|
|
|
29,304
|
|
|
|
EBITDA
|
$
|
109,298
|
|
|
$
|
93,554
|
|
|
$
|
209,418
|
|
|
$
|
206,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in)
|
|
|
|
|
|
|
|
|
|
Operating activities
|
$
|
117,182
|
|
|
$
|
85,073
|
|
|
$
|
248,646
|
|
|
$
|
233,567
|
|
|
|
Investing activities
|
(189,719)
|
|
|
(18,679)
|
|
|
(187,025)
|
|
|
(28,108)
|
|
|
|
Financing activities
|
1,691,207
|
|
|
(1,035)
|
|
|
2,416,358
|
|
|
(7,653)
|
|
|
Comparison of Three Months Ended June 30, 2020 and Three Months Ended June 30, 2019
The following table provides a comparison of our selected consolidated results of operations for the three months ended June 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Increase (Decrease) ($)
|
|
Increase (Decrease) (%)
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CoStar Suite
|
$
|
165,053
|
|
|
$
|
152,825
|
|
|
$
|
12,228
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
Information services
|
30,536
|
|
|
20,777
|
|
|
9,759
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
145,541
|
|
|
120,488
|
|
|
25,053
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Commercial property and land
|
56,029
|
|
|
49,670
|
|
|
6,359
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
397,159
|
|
|
343,760
|
|
|
53,399
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
74,040
|
|
|
71,918
|
|
|
2,122
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
323,119
|
|
|
271,842
|
|
|
51,277
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing (excluding customer base amortization)
|
130,461
|
|
|
119,075
|
|
|
11,386
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Software development
|
39,001
|
|
|
28,455
|
|
|
10,546
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
57,403
|
|
|
42,337
|
|
|
15,066
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Customer base amortization
|
14,935
|
|
|
7,175
|
|
|
7,760
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
241,800
|
|
|
197,042
|
|
|
44,758
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
81,319
|
|
|
74,800
|
|
|
6,519
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income
|
(3,596)
|
|
|
4,678
|
|
|
(8,274)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
(474)
|
|
|
538
|
|
|
(1,012)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
77,249
|
|
|
80,016
|
|
|
(2,767)
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
16,889
|
|
|
16,768
|
|
|
121
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
60,360
|
|
|
$
|
63,248
|
|
|
$
|
(2,888)
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
__________________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM - Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased to $397 million for the three months ended June 30, 2020, from $344 million for the three months ended June 30, 2019. The $53 million increase was attributable to increases in revenues for several of our services, including, a $25 million, or 21%, increase in multifamily revenue. The increase in multifamily revenues was primarily due to higher sales volume as a result of recent investments in marketing and upgrades of existing customer packages to higher value advertising packages. CoStar Suite revenues increased $12 million, or 8%, primarily due to renewal price increases from prior periods. Information services revenue increased $10 million, or 47%, primarily due to revenue of $12 million from the acquisition of STR, partially offset by a decrease in revenue from Real Estate Manager of $1 million. Commercial property and land revenue increased $6 million, or 13%, primarily due to growth in our LoopNet online marketplace services as a result of stronger pricing as compared to the prior year.
Gross Profit. Gross profit increased to $323 million for the three months ended June 30, 2020, from $272 million for the three months ended June 30, 2019, and the gross profit percentage was 81% for the three months ended June 30, 2020, compared to 79% for the three months ended June 30, 2019. The increase in gross profit was due to higher revenues partially impacted by an increase in cost of revenues of $2 million, or 3%, primarily due to higher personnel costs and intangible asset amortization of $1 million each, primarily due to the acquisition of STR.
Selling and Marketing Expenses. Selling and marketing expenses increased to $130 million for the three months ended June 30, 2020, from $119 million for the three months ended June 30, 2019. The $11 million increase was primarily attributable to a $9 million increase in personnel costs driven by increased headcount, primarily due to additional sales personnel and the acquisition of STR, as well as higher sales commissions. The increase was also due to an additional $12 million in search
engine marketing primarily for multifamily, as well as, a $3 million increase in other forms of marketing, partially offset by a $10 million decrease in events spending and a $4 million decrease in travel and entertainment expense.
Software Development Expenses. Software development expenses increased to $39 million for the three months ended June 30, 2020, from $28 million for the three months ended June 30, 2019, and increased as a percentage of revenues to 10% for the three months ended June 30, 2020 from 8% for the three months ended June 30, 2019. The $11 million increase in the amount of software development expense was primarily due to a $9 million increase in personnel costs as a result of increased headcount to enhance our product offerings, including $2 million due to the acquisition of STR, as well as a $1 million increase in supplies and office services costs and a $1 million increase in occupancy costs.
General and Administrative Expenses. General and administrative expenses increased to $57 million for the three months ended June 30, 2020, from $42 million for the three months ended June 30, 2019, and increased as a percentage of revenues to 14% for the three months ended June 30, 2020 from 12% for the three months ended June 30, 2019. The $15 million increase in the amount of general and administrative expense was primarily due to a $6 million increase in credit loss expense primarily due to the Company's expectation that the economic downturn caused by the COVID-19 pandemic will increase delinquent trade receivables, a $4 million increase in personnel costs as a result of increased headcount as a result of the acquisition of STR, and a $4 million increase in professional services driven by acquisitions.
Customer Base Amortization Expense. Customer base amortization expense increased to $15 million for the three months ended June 30, 2020 from $7 million for the three months ended June 30, 2019, and increased as a percentage of revenues to 4% for the three months ended June 30, 2020 from 2% for the three months ended June 30, 2019. The increase in customer base amortization expense was primarily due to the STR acquisition.
Interest (Expense) Income. Interest (expense) income was a net expense of $4 million for the three months ended June 30, 2020 as compared to net income of $5 million for the three months ended June 30, 2019. The decrease was primarily due to interest expense of $4 million for the three months ended June 30, 2020 related to the $745 million draw on our revolving credit facility in the first quarter of 2020, as well as, a decrease of $5 million in interest income caused by lower rates of return on our cash and cash equivalent balances compared to the prior year.
Other (Expense) Income. Other (expense) income, which is comprised primarily of foreign exchange gains and losses and other non-operating income and expenses, did not change materially for the three months ended June 30, 2020 and June 30, 2019.
Income Tax Expense. Income tax expense remained consistent at $17 million for the three months ended June 30, 2020 and the three months ended June 30, 2019 as a result of consistent pre-tax book income for each period.
Comparison of Business Segment Results for Three Months Ended June 30, 2020 and Three Months Ended June 30, 2019
We manage our business geographically in two operating segments, with our primary areas of measurement and decision-making being North America, which includes the U.S. and Canada, and International, which 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 (expense) income and other (expense) income, loss on debt extinguishment, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of our operating segments. EBITDA is used by management to internally measure our operating and management performance and to evaluate the performance of our business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.
Segment Revenues. North America revenues increased to $384 million for the three months ended June 30, 2020, from $335 million for the three months ended June 30, 2019. The increase in North America revenues was primarily due to a $25 million increase in multifamily revenues driven by higher sales volume as a result of recent investments in marketing and upgrades of existing customer packages to higher value advertising packages, and increases in CoStar Suite revenues of $12 million, primarily due to renewal price increases in prior periods. There were also increases of $6 million in both commercial property and land and information services. The information services increase was primarily due to growth in our LoopNet service offering, and to a lesser extent, the acquisition of STR. International revenues increased to $13 million for the three months ended June 30, 2020, from $9 million for the three months ended June 30, 2019. The increase in International revenues was primarily due to the acquisition of STR.
Segment EBITDA. North America EBITDA increased to $112 million for the three months ended June 30, 2020, from $95 million for the three months ended June 30, 2019. The increase in North America EBITDA was primarily due to an increase in revenues, partially offset by increases in personnel, marketing and general and administrative costs. International EBITDA for the three months ended June 30, 2020 was a loss of $3 million, as compared to a loss of $1 million for the three months ended June 30, 2019, as a result of increases in personnel and general and administrative costs due to the acquisition of STR.
Comparison of Six Months Ended June 30, 2020 and Six Months Ended June 30, 2019
The following table provides a comparison of our selected consolidated results of operations for the six months ended June 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Increase (Decrease) ($)
|
|
Increase (Decrease) (%)
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CoStar Suite
|
$
|
330,009
|
|
|
$
|
300,526
|
|
|
$
|
29,483
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
Information services
|
62,918
|
|
|
39,627
|
|
|
23,291
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Multifamily
|
283,001
|
|
|
234,756
|
|
|
48,245
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Commercial property and land
|
113,078
|
|
|
97,276
|
|
|
15,802
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
789,006
|
|
|
672,185
|
|
|
116,821
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
152,949
|
|
|
143,071
|
|
|
9,878
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
636,057
|
|
|
529,114
|
|
|
106,943
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing (excluding customer base amortization)
|
255,568
|
|
|
207,169
|
|
|
48,399
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
Software development
|
80,611
|
|
|
56,383
|
|
|
24,228
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
116,276
|
|
|
82,413
|
|
|
33,863
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Customer base amortization
|
26,419
|
|
|
14,857
|
|
|
11,562
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
478,874
|
|
|
360,822
|
|
|
118,052
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
157,183
|
|
|
168,292
|
|
|
(11,109)
|
|
|
(7)
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income
|
(1,945)
|
|
|
8,890
|
|
|
(10,835)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
Other income
|
367
|
|
|
539
|
|
|
(172)
|
|
|
(32)
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
155,605
|
|
|
177,721
|
|
|
(22,116)
|
|
|
(12)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
22,452
|
|
|
29,304
|
|
|
(6,852)
|
|
|
(23)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
133,153
|
|
|
$
|
148,417
|
|
|
$
|
(15,264)
|
|
|
(10)
|
|
|
|
|
|
|
|
|
|
|
__________________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM - Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. Revenues increased to $789 million for the six months ended June 30, 2020, from $672 million for the six months ended June 30, 2019. The $117 million increase was attributable to increases in revenues for several of our services, including, a $48 million, or 21%, increase in multifamily revenue. The multifamily increase was due to higher sales volume as a result of recent investments in marketing and upgrades of existing customer packages to higher value advertising packages. CoStar Suite revenues increased $29 million, or 10%, primarily due to renewal price increases from prior periods, and to a lesser extent, higher sales volume. Information services revenue increased $23 million, or 59%, primarily due to revenue of $26 million from the acquisition of STR, partially offset by a decrease in revenue from Real Estate Manager of $2 million. Commercial property and land revenue increased $16 million, or 16%, primarily due to growth in our LoopNet online marketplace services of $15 million as a result of stronger pricing as compared to the prior year and, to a lesser extent, growth in our land and business for-sale services of $1 million.
Gross Profit. Gross profit increased to $636 million for the six months ended June 30, 2020, from $529 million for the six months ended June 30, 2019, and the gross profit percentage was 81% for the six months ended June 30, 2020, compared to 79% for the six months ended June 30, 2019. The increase in gross profit was due to higher revenues partially offset by an increase in cost of revenues of $10 million, or 7%, primarily due to higher personnel costs of $5 million, including $4 million from the acquisition of STR, additional merchant fees of $5 million, IT equipment of $2 million and software maintenance costs of $1 million, partially offset by lower data and content costs of $4 million during the current year.
Selling and Marketing Expenses. Selling and marketing expenses increased to $256 million for the six months ended June 30, 2020, from $207 million for the six months ended June 30, 2019. The $48 million increase was attributable to a $28 million in search engine marketing, primarily for multifamily, and a $21 million increase in personnel costs driven by increased headcount, primarily due to additional sales personnel and the acquisition of STR, partially offset by a decrease of $1 million in other forms of marketing.
Software Development Expenses. Software development expenses increased to $81 million for the six months ended June 30, 2020, from $56 million for the six months ended June 30, 2019, and increased as a percentage of revenues to 10% for the six months ended June 30, 2020 from 8% for the six months ended June 30, 2019. The $24 million increase in the amount of software development expense was primarily due to a $21 million increase in personnel costs as a result of increased headcount to enhance our product offerings, including $4 million due to the acquisition of STR, as well as a $1 million increase in supplies and office services costs and a $1 million increase in occupancy costs.
General and Administrative Expenses. General and administrative expenses increased to $116 million for the six months ended June 30, 2020, from $82 million for the six months ended June 30, 2019, and increased as a percentage of revenues to 15% for the six months ended June 30, 2020 from 12% for the six months ended June 30, 2019. The $34 million increase in the amount of general and administrative expense was primarily due to a $14 million increase in personnel costs as a result of increased headcount, including $9 million as a result of the acquisition of STR, a $10 million increase in credit loss expense primarily due to the Company's expectations that the economic downturn caused by the COVID-19 pandemic will increase delinquent trade receivables, a $6 million increase in professional services related to acquisitions, and, to a lesser extent, additional increases in both software and equipment and occupancy costs.
Customer Base Amortization Expense. Customer base amortization expense increased to $26 million for the six months ended June 30, 2020 from $15 million for the six months ended June 30, 2019, and increased as a percentage of revenues to 3% for the six months ended June 30, 2020 from 2% for the six months ended June 30, 2019. The increase in customer base amortization expense was primarily due to the STR acquisition.
Interest (Expense) Income. Interest (expense) income was a net expense of $2 million for the six months ended June 30, 2020, as compared to net income of $9 million for the six months ended June 30, 2019. The $11 million change was primarily due to an increase in interest expense of $4 million for the six months ended June 30, 2020 related to the $745 million draw on our revolving credit facility in the first quarter of 2020, as well as, a decrease of $7 million in interest income caused by lower rates of return on our cash and cash equivalent balances compared to the prior year.
Other Income. Other income, which is comprised primarily of foreign exchange gains and losses and other non-operating income and expenses, did not change materially for the six months ended June 30, 2020 and June 30, 2019.
Income Tax Expense. Income tax expense decreased to $22 million for the six months ended June 30, 2020 from $29 million for the six months ended June 30, 2019. The $7 million decrease was primarily due to lower income before income taxes for the six months ended June 30, 2020, as well as, an increase in excess tax benefits.
Comparison of Business Segment Results for Six Months Ended June 30, 2020 and Six Months Ended June 30, 2019
Segment Revenues. North America revenues increased to $762 million for the six months ended June 30, 2020, from $654 million for the six months ended June 30, 2019. The increase in North America revenues was primarily due to a $48 million increase in multifamily revenues driven by higher sales volume as a result of recent investments in marketing and upgrades of existing customer packages to higher value advertising packages, and increases in CoStar Suite revenues of $28 million primarily due to renewal price increases in prior periods, and to a lesser extent, higher sales volume. There were also increases of $16 million and $15 million in commercial property and land and information services, respectively, primarily due to growth in our LoopNet service offering, and to a lesser extent, the acquisition of STR. International revenues increased to $27 million for the six months ended June 30, 2020, from $18 million for the six months ended June 30, 2019. The increase in International revenues was primarily due the acquisition of STR and further growth of our subscription-based services.
Segment EBITDA. North America EBITDA increased to $215 million for the six months ended June 30, 2020, from $210 million for the six months ended June 30, 2019. The increase in North America EBITDA was primarily due to an increase in revenue, partially offset by increases in personnel, marketing and general and administrative costs. International EBITDA decreased to a loss of $5 million for the six months ended June 30, 2020 from a loss of $4 million for the six months ended June 30, 2019, primarily as a result of increased personnel and general and administrative costs.
Liquidity and Capital Resources
Our principal sources of ongoing liquidity are cash and cash equivalents from operations. Total cash and cash equivalents increased to approximately $3.5 billion as of June 30, 2020, compared to cash and cash equivalents of approximately $1.1 billion as of December 31, 2019. The increase in cash and cash equivalents for the six months ended June 30, 2020 was primarily due to proceeds from our May 2020 equity offering, net of transaction costs, of $1.7 billion, as well as, borrowings of $745 million under our revolving credit facility. In addition, the increase was due to net cash generated from operations of $249 million, partially offset by cash paid for acquisitions, net of cash acquired, of $185 million.
Net cash provided by operating activities for the six months ended June 30, 2020 was approximately $249 million compared to approximately $234 million for the six months ended June 30, 2019. The $15 million increase was primarily due to an increase in net income excluding certain non-cash expenses such as depreciation and amortization and credit loss expense, partially offset by changes in working capital.
Net cash used in investing activities for the six months ended June 30, 2020 was approximately $187 million compared to approximately $28 million of cash used in investing activities for the six months ended June 30, 2019. The $159 million increase in cash used in investing activities was primarily due to an increase in cash paid for acquisitions, net of cash acquired, of $171 million as a result of the acquisition of Ten-X for $185 million during the six months ended June 30, 2020 as compared to $14 million used in the six months ended June 30, 2019. The increase was partially offset by proceeds from the sale of our ARS investments of $10 million, as well as, a decrease in capital expenditures to $13 million compared to $14 million in the six months ended June 30, 2019.
Net cash provided by financing activities for the six months ended June 30, 2020 was approximately $2.4 billion compared to approximately $8 million used in financing activities for the six months ended June 30, 2019. The $2.4 billion increase is primarily due to proceeds from our equity offering, net of transaction costs, of $1.7 billion, as well as, borrowings of $745 million under our revolving credit facility. The Company expected to use the borrowings under the revolving credit facility to fund all or a portion of the costs of any strategic acquisitions it pursues in the future, to finance the growth of its business and for working capital and other general corporate purposes. The increased cash position allows for greater financial flexibility in light of ongoing uncertainty in the global markets resulting from the COVID-19 pandemic. See Note 10 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion of the revolving credit facility.
Our future capital requirements will depend on many factors, including, among others, our operating results, expansion and integration efforts, our level of acquisition activity or other strategic transactions, and the future impact of the COVID-19 pandemic. To date, we have grown in part by acquiring other companies, and we expect to continue to make other acquisitions in the future. For example, on June 24, 2020, we acquired Ten-X for a purchase price of $187 million in cash. On February 11, 2020, our wholly owned subsidiary entered into a purchase agreement to acquire all of the equity interests of reorganized RentPath, following an internal restructuring pursuant to a chapter 11 plan of reorganization, for $588 million in cash. On July 29, 2020, the Company exercised its option pursuant to the asset purchase agreement for the RentPath acquisition to extend the Outside Date under that agreement for an additional three months in exchange for a maximum potential payment of $7.5 million. In accordance with the purchase agreement, we paid $59 million into a cash escrow account. In the event the agreement is terminated under specified circumstances in which certain antitrust approvals are not obtained, or a governmental order related to antitrust or competition matters prohibits the consummation of the transaction, the amount paid into escrow will not be refunded to us. See Note 5 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion.
In May 2020, we completed a public equity offering of 2,633,587 shares of common stock for $655 per share and on July 1, 2020, we issued $1.0 billion aggregate principal amount of Senior Notes, entered into the 2020 Credit Agreement, which amended and restated in its entirety the 2017 Credit Agreement, and repaid in full the balance on the existing $750 million revolving credit facility under the 2017 Credit Agreement. For further discussion of our recent equity and Senior Notes offerings and our 2020 Credit Agreement, see “—Overview—Development, Investments and Expansion” and Note 15 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for further discussion.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, includes provisions relating to the deferral of taxes, valuation allowances, and balance sheet classifications, as well as provisions relating to refundable payroll tax credits, deferral of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications
to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.
As permitted under the CARES Act, we deferred approximately $21 million in income tax payments due in the second quarter, to the third quarter of 2020, and we are deferring payroll taxes due in 2020 to 2021 and 2022.
As of the filing date of this Quarterly Report on Form 10-Q, we believe that our available cash combined with positive cash flows provided by operating activities should be sufficient for us to maintain and fund our operations for at least the next twelve months. Our ability to maintain adequate capital for our operations in the future is dependent upon numerous rapidly evolving factors, many of which we cannot accurately predict or assess, including, among others, the length and severity of the economic downturn associated with the COVID-19 pandemic, related disruption of the international and national economy and credit markets; actions taken by governments, businesses and individuals in response to the pandemic such as office and other workplace closures, worker absenteeism, quarantines, mass-transit disruptions or other travel or health-related restrictions; how quickly economies, including the real estate industry in particular, recover after the pandemic subsidies; sales of our services; and collection of accounts receivables. We plan to continue to monitor and evaluate the financial impact of the COVID-19 pandemic as it evolves.
Critical Accounting Policies
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
•Revenue recognition
•Income taxes
•Business combinations
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 our Annual Report on Form 10-K for the year ended December 31, 2019 and Note 2 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
See Note 2 to the accompanying Notes to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for information on recent accounting pronouncements, including the expected dates of adoption.
Cautionary Statement Concerning Forward-Looking Statements
We have made forward-looking statements in this Quarterly Report on Form 10-Q and make forward-looking statements in our press releases, conference calls, Annual Reports on Form 10-K, other Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission that are subject to risks and uncertainties. Forward-looking statements include information that is not purely historic fact and include, without limitation, statements concerning our financial outlook for the third quarter and full year of 2020 and beyond, our possible or assumed future results of operations generally, and other statements and information regarding assumptions about our revenues, revenue growth rates, gross margin percentage, net income, net income per share, fully diluted net income per share, EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP net income per share, weighted-average outstanding shares, cash flow from operating activities, operating costs, capital and other expenditures, the current and future impacts of COVID-19 on our operations, our actions in response to the COVID-19 pandemic, key priorities for the second half of 2020, trends in customer behavior, effective tax rate, pending acquisitions, the anticipated benefits of completed or proposed acquisitions, the anticipated
timing of acquisition closings, integration and anticipated benefits of completed acquisitions, the anticipated benefits of cross-selling efforts, product development and release, geographic and product expansion, planned service enhancements, planned sales and marketing activities and investments, the impact or results of sales initiatives, product integrations, net new sales, contract renewal rates, use of proceeds from equity and debt offerings, the use of proceeds of any draws under our $750 million credit facility under the 2020 Credit Agreement, expectations regarding our compliance with financial and restrictive covenants in the 2020 Credit Agreement, employee relations, management’s plans, goals and objectives for future operations, deferral of tax payments, and sources and adequacy of liquidity. Sections of this Report which contain forward-looking statements include the Financial Statements and related Notes, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” “Controls and Procedures,” “Legal Proceedings” and “Risk Factors.”
Our forward-looking statements are also identified by words such as “hope,” “anticipate,” “may,” “believe,” “expect,” “intend,” “will,” “should,” “plan,” “estimate,” “predict,” “continue” and “potential” or the negative of these terms or other comparable terminology. You should understand that these forward-looking statements are estimates reflecting our judgment, beliefs and expectations, not guarantees of future performance. They are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. The following important factors, in addition to those discussed or referred to under the heading “Risk Factors,” and other unforeseen events or circumstances, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements: the effects of and uncertainty surrounding the COVID-19 pandemic, including the length and severity of the economic downturn associated with the COVID-19 pandemic, including disruption of the international and national economy and credit markets; actions taken by governments, businesses and individuals in response to the pandemic such as office and other workplace closures, worker absenteeism or decreased productivity, quarantines, mass-transit disruptions or other travel or health-related restrictions; how quickly economies, including the real estate industry in particular, recover after the pandemic subsides; commercial real estate market conditions; general economic conditions, both domestic and international, including the impacts of “Brexit” and uncertainty from the expected discontinuance of LIBOR and the transition to any other interest rate benchmark; our ability to identify and acquire additional acquisition candidates; the possibility that the acquisition of RentPath does not close when expected or at all; the risk that the bankruptcy process may cause greater business disruption for RentPath than expected; our ability to realize the expected benefits, cost savings or other synergies from acquisitions, including STR, Ten-X and RentPath, on a timely basis or at all; our ability to combine acquired businesses, successfully or in a timely and cost-efficient manner; business disruption relating to integration of acquired businesses or other business initiatives; the risk that expected investments in acquired businesses, or the timing of any such investments, may change or may not produce the expected results; our ability to transition acquired service platforms to our model in a timely manner or at all; changes and developments in business plans and operations; theft of any personally identifiable information we, or the businesses that we acquire, maintain, store or process; any actual or perceived failure to comply with privacy or data protection laws, regulations or standards; any disruption of our systems, including due to any cyberattack or other similar event; the amount of investment for sales and marketing and our ability to realize a return on investments in sales and marketing; our ability to effectively and strategically combine, eliminate or de-emphasize service offerings; reductions in revenues as a result of service changes; the time and resources required to develop upgraded or new services and to expand service offerings; changes or consolidations within the commercial real estate industry; customer retention; our ability to attract new clients and to sell additional services to existing clients; our ability to develop, successfully introduce and cross-sell new products or upgraded services in U.S. and foreign markets; our ability to attract consumers to our online marketplaces; our ability to increase traffic on our network of sites; the success of our marketing campaigns in generating brand awareness and site traffic; our ability to protect and defend our intellectual property including unauthorized or unlicensed use of our services; competition; foreign currency fluctuations; global credit market conditions affecting investments; our ability to continue to expand successfully, timely and in a cost-efficient manner, including internationally; our ability to effectively penetrate and gain acceptance in new sectors and geographies; our ability to control costs; litigation or government investigations in which we become involved; changes in accounting policies or practices; release of new and upgraded services or entry into new markets by us or our competitors; data quality; expansion, growth, development or reorganization of our sales force; employee retention, including retention of employees of acquired businesses; technical problems with our services; managerial execution; changes in relationships with real estate brokers, property managers and other strategic partners; legal and regulatory issues, including any actual or perceived failure to comply with U.S. or international laws, rules or regulations; and successful adoption of and training on our services; competitive conditions; and the availability of capital.
Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of, and are based on information available to us on, the date of this Quarterly Report on Form 10-Q (unless otherwise indicated). All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to update any
such statements or release publicly any revisions to these forward-looking statements to reflect new information or events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.