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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021

OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______

Commission file number 0-24531
 
CoStar Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
52-2091509
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1331 L Street, NW
Washington,DC20005
(Address of principal executive offices) (Zip Code)

(202) 346-6500
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock ($0.01 par value)CSGPNasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer
x
Accelerated filer
Non-accelerated filer  
Smaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No x

As of July 23, 2021, there were 394,955,148 shares of the registrant’s common stock outstanding.






COSTAR GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
 
PART I FINANCIAL INFORMATION 
Item 1. 
  
  
  
Item 2. 
Item 3. 
Item 4. 
PART II OTHER INFORMATION
Item 1. 
Item 1A. 
Item 2. 
Item 3. 
Item 4. 
Item 5. 
Item 6. 

3


PART I — FINANCIAL INFORMATION

Item 1.Financial Statements

COSTAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
 2021202020212020
Revenues$480,333 $397,159 $938,030 $789,006 
Cost of revenues89,566 74,040 178,314 152,949 
Gross profit390,767 323,119 759,716 636,057 
Operating expenses:  
Selling and marketing (excluding customer base amortization)164,612 130,461 303,299 255,568 
Software development48,573 39,001 95,357 80,611 
General and administrative58,226 57,403 122,076 116,276 
Customer base amortization18,345 14,935 36,764 26,419 
289,756 241,800 557,496 478,874 
Income from operations101,011 81,319 202,220 157,183 
Interest expense (7,877)(3,596)(15,755)(1,945)
Other income (expense) 847 (474)797 367 
Income before income taxes93,981 77,249 187,262 155,605 
Income tax expense32,833 16,889 51,902 22,452 
Net income$61,148 $60,360 $135,360 $133,153 
Net income per share - basic(1)
$0.16 $0.16 $0.35 $0.36 
Net income per share - diluted(1)
$0.16 $0.16 $0.34 $0.36 
Weighted-average outstanding shares - basic(1)
392,306 375,239 391,942 369,972 
Weighted-average outstanding shares - diluted(1)
394,098 377,336 393,906 372,548 
__________________________
(1) Prior period amounts have been retroactively adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021. See Note 2 for details.

See accompanying notes.

4


COSTAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Net income$61,148 $60,360 $135,360 $133,153 
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment1,526 863 1,849 (12,086)
Unrealized gain on investments   189 
Reclassification adjustment for realized loss on investments included in net income
   541 
Total other comprehensive income (loss)1,526 863 1,849 (11,356)
Total comprehensive income$62,674 $61,223 $137,209 $121,797 
See accompanying notes.

5


COSTAR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

June 30,
2021
December 31,
2020
ASSETS 
Current assets:  
Cash, cash equivalents and restricted cash$3,674,909 $3,755,912 
Accounts receivable122,702 119,059 
Less: Allowance for credit losses(14,433)(15,110)
Accounts receivable, net108,269 103,949 
Prepaid expenses and other current assets34,753 28,651 
Total current assets3,817,931 3,888,512 
Deferred income taxes, net3,034 4,983 
Property and equipment, net239,125 126,325 
Lease right-of-use assets119,290 108,740 
Goodwill2,294,452 2,235,999 
Intangible assets, net476,179 426,745 
Deferred commission costs, net94,387 93,274 
Deposits and other assets16,230 15,856 
Income tax receivable14,986 14,986 
Total assets$7,075,614 $6,915,420 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Current liabilities:  
Accounts payable$16,376 $15,732 
Accrued wages and commissions76,014 80,998 
Accrued expenses89,284 110,305 
Income taxes payable25,527 16,316 
Lease liabilities28,779 32,648 
Deferred revenue92,698 74,851 
Total current liabilities328,678 330,850 
Long-term debt, net987,325 986,715 
Deferred income taxes, net76,979 72,991 
Income taxes payable25,480 25,282 
Lease and other long-term liabilities129,925 124,223 
Total liabilities1,548,387 1,540,061 
Total stockholders' equity5,527,227 5,375,359 
Total liabilities and stockholders’ equity$7,075,614 $6,915,420 
See accompanying notes.
6


COSTAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
Common Stock
Additional
Paid-In Capital(1)
Accumulated
Other
Comprehensive (Loss) Income
Retained
Earnings
Total
Stockholders’
Equity
Shares(1)
Amount(1)
Balance at December 31, 2020394,285 $3,943 $4,204,703 $(889)$1,167,602 $5,375,359 
Net income— — — — 74,212 74,212 
Other comprehensive income— — — 323 — 323 
Exercise of stock options206 2 6,339 — — 6,341 
Restricted stock grants766 8 (7)— — 1 
Restricted stock grants surrendered(358)(4)(27,663)— — (27,667)
Stock-based compensation expense— — 15,264 — — 15,264 
Employee stock purchase plan36 — 3,092 — — 3,092 
Balance at March 31, 2021394,935 $3,949 $4,201,728 $(566)$1,241,814 $5,446,925 
Net income— — — — 61,148 61,148 
Other comprehensive income— — — 1,526 — 1,526 
Restricted stock grants50   — —  
Restricted stock grants surrendered(75)(1)(737)— — (738)
Stock-based compensation expense— — 14,811 — — 14,811 
Employee stock purchase plan41 — 3,555 — — 3,555 
Balance at June 30, 2021394,951 $3,948 $4,219,357 $960 $1,302,962 $5,527,227 
__________________________
(1) Prior period amounts have been retroactively adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021. See Note 2 for details.
See accompanying notes.
7


COSTAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)

Common Stock
Additional
Paid-In Capital(1)
Accumulated
Other
Comprehensive Loss
Retained
Earnings
Total
Stockholders’
Equity
Shares(1)
Amount(1)
Balance at December 31, 2019366,807 $3,668 $2,470,036 $(8,585)$940,474 $3,405,593 
Net income— — — — 72,793 72,793 
Other comprehensive loss— — — (12,219)— (12,219)
Exercise of stock options406 4 9,229 — — 9,233 
Restricted stock grants830 8 (8)— —  
Restricted stock grants surrendered(559)(6)(30,139)— — (30,145)
Stock-based compensation expense— — 15,006 — — 15,006 
Employee stock purchase plan40 2,549 — — 2,550 
Balance at March 31, 2020367,524 $3,675 $2,466,673 $(20,804)$1,013,267 $3,462,811 
Net income— — $— $— $60,360 $60,360 
Other comprehensive income— — — 863 — 863 
Exercise of stock options109 1 2,923 — — 2,924 
Restricted stock grants107 1 (1)— —  
Restricted stock grants surrendered(172)(2)(3,507)— — (3,509)
Stock-based compensation expense— — 8,609 — — 8,609 
Employee stock purchase plan35 — 2,292 — — 2,292 
Stock issued for equity offerings, net of transaction costs26,336 263 1,689,708 — — 1,689,971 
Balance at June 30, 2020393,939 $3,938 $4,166,697 $(19,941)$1,073,627 $5,224,321 
__________________________
(1) Prior period amounts have been adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021. See Note 2 for details.
See accompanying notes.
8


COSTAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
20212020
Operating activities:  
Net income$135,360 $133,153 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization68,516 52,235 
Amortization of deferred commissions costs30,847 29,662 
Amortization of Senior Notes discount and issuance costs1,159 508 
Realized loss on investments 541 
Non-cash lease expense13,136 12,400 
Stock-based compensation expense30,689 24,053 
Deferred income taxes, net9,929 3,569 
Credit loss expense6,086 15,688 
Other operating activities, net(24)(789)
Changes in operating assets and liabilities, net of acquisitions:  
Accounts receivable(8,526)(37,364)
Prepaid expenses and other current assets(14,567)4,371 
Deferred commissions(31,922)(32,122)
Accounts payable and other liabilities(32,474)37,793 
Lease liabilities(15,674)(14,126)
Income taxes payable9,415 12,328 
Deferred revenue16,148 13,503 
Other assets2,191 (6,757)
Net cash provided by operating activities220,289 248,646 
Investing activities:  
Proceeds from sale and settlement of investments 10,259 
Proceeds from sale of property and equipment and other assets201  
Purchase of Richmond assets and other intangibles(123,623) 
Purchases of property and equipment and other assets(13,093)(12,782)
Cash paid for acquisitions, net of cash acquired(148,275)(184,502)
Net cash used in investing activities(284,790)(187,025)
Financing activities:  
Proceeds from long-term debt 745,000 
Repurchase of restricted stock to satisfy tax withholding obligations(28,405)(33,653)
Proceeds from equity offering, net of transaction costs 1,690,148 
Proceeds from exercise of stock options and employee stock purchase plan12,324 16,513 
Other financing activities(57)(1,650)
Net cash (used in) provided by financing activities(16,138)2,416,358 
Effect of foreign currency exchange rates on cash and cash equivalents(364)(305)
Net (decrease) increase in cash, cash equivalents and restricted cash(81,003)2,477,674 
Cash, cash equivalents and restricted cash at the beginning of period3,755,912 1,070,731 
Cash, cash equivalents and restricted cash at the end of period$3,674,909 $3,548,405 
Supplemental cash flow disclosures:
Interest paid$16,510 $5,194 
Income taxes paid$32,545 $6,558 
Supplemental non-cash investing and financing activities:
Consideration owed for acquisitions$2,887 $ 
Accrued capital expenditures$3,184 $216 
See accompanying notes.
9


COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1.ORGANIZATION

CoStar Group, Inc. (the “Company” or “CoStar Group”) provides information, analytics, online marketplace and auction services to the commercial real estate and related business community through its comprehensive, proprietary database of commercial real estate information and related tools. The Company provides online marketplaces for commercial real estate, apartment rentals, lands for sale and businesses for sale, and its services are typically distributed to its clients under subscription-based license agreements that renew automatically, a majority of which have a term of at least one year. The Company operates within two operating segments, North America, which includes the United States ("U.S.") and Canada, and International, which primarily includes Europe, Asia-Pacific, and Latin America.

On June 24, 2020, the Company acquired Ten-X Holding Company, Inc. and its subsidiaries ("Ten-X"), which operate an online auction platform for commercial real estate. On October 26, 2020, the Company acquired Emporis GmbH, a Germany-based provider of international commercial real estate data and images. On December 22, 2020, the Company acquired Homesnap, Inc. (“Homesnap”), which operates an online mobile software platform for residential real estate agents and brokers. On May 24, 2021, the Company acquired Homes.com ("Homes.com"), a residential real estate advertising and marketing services company primarily operating through its property listing and marketing portal, Homes.com. See Notes 5 and 8 to the accompanying Notes to the Condensed Consolidated Financial Statements for further discussion of these acquisitions.


2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Accounting policies are consistent for each operating segment.

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. In the opinion of the Company’s management, the financial statements reflect all adjustments, consisting only of a normal recurring nature, necessary to present fairly the Company’s financial position at June 30, 2021 and December 31, 2020, the results of its operations for the three and six months ended June 30, 2021 and 2020, its comprehensive income for the three and six months ended June 30, 2021 and 2020, its changes in stockholders' equity for the three and six months ended June 30, 2021 and 2020, and its cash flows for the six months ended June 30, 2021 and 2020.

Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Common Stock Split

At the Company's 2021 Annual Meeting of Stockholders in June 2021, upon the recommendation of the Company's Board of Directors, the Company's stockholders approved the adoption of the Company's Fourth Amended and Restated Certificate of Incorporation, which increased the total number of shares of common stock that the Company is authorized to issue from 60 million to 1.2 billion. The Fourth Amended and Restated Certificate of Incorporation became effective on June 7, 2021. On June 7, 2021, the Board of Directors approved a ten-for-one stock split of the Company's outstanding shares of common stock to be effected in the form of a stock dividend. Each stockholder of record on June 17, 2021 received a dividend of nine additional shares of common stock for each then-held share, distributed after close of trading on June 25, 2021. The par value of the Company's common stock remained $0.01 per share. All applicable share and per-share amounts in the unaudited condensed consolidated financial statements and the accompanying notes have been retroactively adjusted to reflect the impact of the stock split.

10


COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition, allowance for credit losses, the useful lives and recoverability of long-lived and intangible assets, goodwill, income taxes, accounting for business combinations, stock-based compensation, estimating the Company's incremental borrowing rate for its leases, and contingencies, among others. The Company bases these estimates on historical and anticipated results, trends and various other assumptions that it believes are reasonable, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses. Actual results could differ from these estimates.

Revenue Recognition

The Company derives revenues primarily by (i) providing access to its proprietary database of commercial real estate information and (ii) providing online marketplaces for professional property management companies, property owners, brokers and landlords, in each case, typically through a fixed monthly fee for its subscription-based services. The Company's subscription-based services consist primarily of information, analytics and online marketplace services offered over the Internet to commercial real estate industry and related professionals. Subscription contract rates are based on the number of sites, number of users, organization size, the client’s business focus, geography, the number and types of services to which a client subscribes, the number of properties a client advertises and the prominence and placement of a client's advertised properties in the search results. The Company’s subscription-based license agreements typically renew automatically, and a majority have a term of at least one year.

The Company also provides (i) market research, portfolio and debt analysis, management and reporting capabilities, (ii) real estate and lease management solutions, including lease administration and abstraction services, to commercial customers, real estate investors, and lenders via the Company’s other service offerings, (iii) benchmarking and analytics for the hospitality industry through STR, LLC and STR Global, Ltd. (together with STR, LLC, referred to as “STR”), (iv) an online auction platform for commercial real estate through Ten-X, LLC and its subsidiaries, which were acquired in June 2020, (v) an online and mobile software platform that provides applications to optimize residential real estate agent workflow through Homesnap, which was acquired in December 2020, and (vi) advertising and marketing services for residential properties through Homes.com which was acquired in May 2021. See Note 5 for details of the Homes.com, Homesnap and Ten-X acquisitions.

The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers, (ii) identification of distinct performance obligations in the contract, (iii) determination of contract transaction price, (iv) allocation of contract transaction price to the performance obligations, and (v) determination of revenue recognition based on timing of satisfaction of the performance obligations.

The Company recognizes revenues upon the satisfaction of its performance obligation(s) (upon transfer of control of promised services to its customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those services. Revenues from subscription-based services are recognized on a straight-line basis over the term of the agreement.

In limited circumstances, the Company's contracts with customers include promises to transfer multiple services, such as contracts for its subscription-based services and professional services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct, which involves the determination of the standalone selling price for each distinct performance obligation.

Deferred revenue results from amounts billed in advance to customers or cash received from customers in advance of the Company's fulfillment of its performance obligation(s) and is recognized as those obligations are satisfied.

Contract assets represent a conditional right to consideration for satisfied performance obligations that become a receivable when the conditions are satisfied. Contract assets are generated when contractual billing schedules differ from revenue recognition timing.

11


COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Certain sales commissions are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions incurred for obtaining new contracts are deferred and then amortized as selling and marketing expenses on a straight-line basis over a period of benefit that the Company has determined to be three years. The three-year amortization period was determined based on several factors, including the nature of the technology and proprietary data underlying the services being purchased, customer contract renewal rates and industry competition. Certain commission costs are not capitalized as they do not represent incremental costs of obtaining a contract.

See Note 3 for further discussion of the Company's revenue recognition.

Cost of Revenues

Cost of revenues principally consists of salaries, benefits, bonuses and stock-based compensation expenses and other indirect costs for the Company's researchers who collect and analyze the commercial real estate data that is the basis for the Company's information, analytics and online marketplaces and for employees that support these products. Additionally, cost of revenues includes the cost of data from third-party data sources and costs related to advertising purchased on behalf of customers, credit card and other transaction fees relating to processing customer transactions, which are expensed as incurred, and the amortization of acquired trade names, technology and other intangible assets.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs include digital marketing, television, radio, print and other media advertising. Advertising costs were approximately $90 million and $70 million for the three months ended June 30, 2021 and 2020, respectively, and $155 million and $123 million for the six months ended June 30, 2021 and 2020, respectively.

Foreign Currency

The Company’s reporting currency is the U.S. dollar. The functional currency for the majority of its operations is the local currency, with the exception of certain international locations of STR for which the functional currency is the British Pound. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars using the exchange rates in effect as of the balance sheet date. Gains and losses resulting from translation are included in accumulated other comprehensive income. Currency gains and losses on the translation of intercompany loans made to foreign subsidiaries that are of a long-term investment nature are also included in accumulated other comprehensive income. Gains and losses resulting from transactions denominated in a currency other than the functional currency of the entity are included in other income (expense) in the condensed consolidated statements of operations using the average exchange rates in effect during the period. The Company recognized net foreign currency losses of $0.2 million and $0.5 million for the three months ended June 30, 2021 and 2020, respectively, and net foreign currency losses of $0.4 million and gains of $0.9 million for the six months ended June 30, 2021 and 2020, respectively, which are included in other income (expense) on the condensed consolidated statements of operations.

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows (in thousands):
June 30,
2021
December 31,
2020
Foreign currency translation adjustment$960 $(889)
Total accumulated other comprehensive income (loss)$960 $(889)
There were no amounts reclassified out of accumulated other comprehensive income (loss) to the condensed consolidated statements of operations for the three and six months ended June 30, 2021. During the six months ended June 30, 2020, the Company sold its long-term variable debt instruments with an auction reset feature, referred to as auction rate securities ("ARS") and reclassified out of accumulated other comprehensive loss a realized loss of $0.5 million to earnings which is included in other income (expense) in the condensed consolidated statements of operations.

Income Taxes

12


COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in the Company’s condensed consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates in effect during the year in which the Company expects differences to reverse. Valuation allowances are provided against assets, including net operating losses, if the Company determines it is more likely than not that some portion or all of an asset may not be realized. Interest and penalties related to income tax matters are recognized in income tax expense.

See Note 11 for additional information regarding income taxes.

Net Income Per Share

Net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period on a basic and diluted basis.

The following table sets forth the calculation of basic and diluted net income per share (in thousands, except per share data):
Three Months Ended
June 30,
Six Months Ended
June 30,

Numerator:
2021202020212020
Net income
$61,148 $60,360 $135,360 $133,153 
Denominator:
Denominator for basic net income per share — weighted-average outstanding shares(1)
392,306 375,239 391,942 369,972 
Effect of dilutive securities:
Stock options, restricted stock awards and restricted stock units(1)
1,792 2,097 1,964 2,576 
Denominator for diluted net income per share — weighted-average outstanding shares(1)
394,098 377,336 393,906 372,548 
 
Net income per share — basic(1) 
$0.16 $0.16 $0.35 $0.36 
Net income per share — diluted(1) 
$0.16 $0.16 $0.34 $0.36 
__________________________
(1) Prior period amounts have been retroactively adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021.
 
The Company’s potentially dilutive securities include outstanding stock options and unvested stock-based awards which include restricted stock awards that vest over a specific service period, restricted stock awards with a performance and a market condition, restricted stock units and awards of matching restricted stock units ("Matching RSUs") awarded under the Company's Management Stock Purchase Plan. Shares underlying unvested restricted stock awards that vest based on a performance and a market condition that have not been achieved as of the end of the period are not included in the computation of basic or diluted net income per share. Diluted net income per share considers the impact of potentially dilutive securities except when the inclusion of the potentially dilutive securities would have an anti-dilutive effect.

The following table summarizes the shares underlying the unvested performance-based restricted stock and anti-dilutive securities excluded from the basic and diluted earnings per share calculations (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Performance-based restricted stock awards(1)
718 794 718 794 
Anti-dilutive securities(1)
206 703 553 832 
__________________________
(1) Prior period amounts have been retroactively adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021.
13


COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Stock-Based Compensation

Equity instruments issued in exchange for services performed by officers, employees, and directors of the Company are accounted for using a fair-value based method and the fair value of such equity instruments is recognized as expense in the consolidated statements of operations.

For stock-based awards that vest over a specific service period, compensation expense is measured based on the fair value of the awards at the grant date and is recognized on a straight-line basis over the vesting period of the awards, net of an estimated forfeiture rate. For equity instruments that vest based on achievement of both a performance and market condition, stock-based compensation expense is recognized over the vesting period of the awards based on the expected achievement of the related performance condition at the end of each reporting period. If the Company's initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing may fluctuate from period to period based on those estimates. If the performance conditions are not met, no stock-based compensation expense will be recognized, and any previously recognized stock-based compensation expense will be reversed. For awards with both a performance and a market condition, the Company estimates the fair value of each equity instrument granted on the date of grant using a Monte-Carlo simulation model. This pricing model uses multiple simulations to evaluate the probability of achieving the market condition to calculate the fair value of the awards.

Stock-based compensation expense for stock options, restricted stock awards and restricted stock units issued under equity incentive plans, stock purchases under the Employee Stock Purchase Plan, Deferred Stock Units (“DSUs”) and Matching RSUs awarded under the Company's Management Stock Purchase Plan included in the Company’s results of operations were as follows (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Cost of revenues$2,479 $2,530 $5,448 $5,002 
Selling and marketing (excluding customer base amortization)1,561 1,770 3,023 3,794 
Software development3,059 2,287 5,973 4,815 
General and administrative8,045 2,940 16,245 11,096 
Total stock-based compensation expense(1)
$15,144 $9,527 $30,689 $24,707 
__________________________
(1) Stock-based compensation expense for the three and six months ended June 30, 2020 includes $0.7 million of expense related to the cash settlement of stock options in connection with the acquisition of Ten-X Holding Company, Inc. See Note 5 for details of the acquisition.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash, cash equivalents, and restricted cash consisted of the following as of June 30, 2021 and December 31, 2020 (in thousands):

June 30, 2021December 31, 2020
Cash and cash equivalents$3,674,909 $3,693,813 
Restricted cash:
RentPath termination fee held in escrow under the terms of the Asset Purchase Agreement 58,750 
Other restricted cash related to acquisitions 3,349 
Total restricted cash 62,099 
Cash, cash equivalents and restricted cash$3,674,909 $3,755,912 
Allowance for Credit Losses

The Company maintains an allowance for credit losses to cover its current expected credit losses ("CECL") on its trade receivables and contract assets arising from the failure of customers to make contractual payments. The Company estimates
14


COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

credit losses expected over the life of its trade receivables and contract assets based on historical information combined with current conditions that may affect a customer’s ability to pay and reasonable and supportable forecasts. While the Company uses various credit quality metrics, it primarily monitors collectability by reviewing the duration of collection pursuits on its delinquent trade receivables. Based on the Company’s experience, the customer's delinquency status is the strongest indicator of the credit quality of the underlying trade receivables, which is analyzed monthly. The Company’s policy is to write-off trade receivables when they are deemed uncollectible. A majority of the Company's trade receivables are less than 365 days outstanding.

Under the CECL impairment model, the Company develops and documents its allowance for credit losses on its trade receivables based on four portfolio segments. The determination of portfolio segments is based primarily on the qualitative consideration of the nature of the Company’s business operations and the characteristics of the underlying trade receivables, as follows:

CoStar Portfolio Segment - The CoStar portfolio segment consists of two classes of trade receivables based on geographical location: North America and International.

Information Services Portfolio Segment - The information services portfolio segment consists of four classes of trade receivables: Real Estate Manager; Information Services, North America; STR, US; and STR, International.

Multifamily Portfolio Segment - The multifamily portfolio segment consists of one class of trade receivables.

Commercial Property and Land Portfolio Segment - The commercial property and land portfolio segment consists of five classes of trade receivables: LoopNet; Ten-X; Homesnap; Homes.com; and other commercial property and land online marketplaces.

See Note 4 for further discussion of the Company’s accounting for allowance for credit losses.

Leases

The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at lease commencement, at which time the Company also measures and recognizes a right-of-use ("ROU") asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. For the purposes of recognizing ROU assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient to not recognize a ROU asset or lease liability for short-term leases, which are leases with a term of twelve months or less. The lease term is defined as the noncancelable portion of the lease term, plus any periods covered by an option to extend the lease if it is reasonably certain that the option will be exercised.

In determining the amount of lease payments used in measuring ROU assets and lease liabilities, the Company has elected the practical expedient not to separate non-lease components from lease components for all classes of underlying assets. Consideration deemed part of the lease payments used to measure ROU assets and lease liabilities generally includes fixed payments and variable payments based on either an index or a rate, offset by lease incentives. The ROU asset also includes any lease prepayments. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The rates implicit within the Company's leases are generally not determinable. Therefore, the Company's incremental borrowing rate is used to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment and is determined at lease commencement, or as of January 1, 2019 for operating leases in existence upon adoption of Accounting Standards Codification ("ASC") 842. The incremental borrowing rate is subsequently reassessed upon a modification to the lease arrangement.

Lease costs related to the Company's operating leases are generally recognized as a single ratable lease cost over the lease term.

See Note 7 for further discussion of the Company’s accounting for leases.

15


COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Long-Lived Assets, Intangible Assets and Goodwill

Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Goodwill is tested annually for impairment by each reporting unit on October 1 of each year or more frequently if an event or other circumstance indicates that we may not recover the carrying value of the asset. The Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or elect to bypass such assessment. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or the Company elects to bypass such assessment, the Company then determines the fair value of each reporting unit. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference.

Debt Issuance Costs

Costs incurred in connection with the issuance of long-term debt are deferred and amortized as interest expense over the term of the related debt using the effective interest method for term debt and on a straight-line basis for revolving debt. The Company made a policy election to classify deferred issuance costs on the revolving credit facility as a long-term asset on its condensed consolidated balance sheets. Upon a refinancing or amendment, previously capitalized debt issuance costs are expensed and included in loss on extinguishment of debt if the Company determines that there has been a substantial modification of the related debt. If the Company determines that there has not been a substantial modification of the related debt, any previously capitalized debt issuance costs are amortized as interest expense over the term of the new debt instrument.

See Note 10 for additional information regarding the Company's accounting for its outstanding debt, revolving credit facility, and related issuance costs.

Business Combinations

The Company allocates the purchase consideration related to business combinations to the identifiable tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values. The purchase consideration is determined based on the fair value of the assets transferred, liabilities incurred and equity interests issued, after considering any transactions that are separate from the business combination. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and contingent liabilities. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer bases, acquired technology and acquired trade names and other intangible assets, useful lives, royalty rates and discount rates. Any adjustments to provisional amounts that are identified during the measurement period are recorded in the reporting period in which the adjustment amounts are determined. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

For a given acquisition, the Company may identify certain pre-acquisition contingencies as of the acquisition date and may extend its review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether the Company includes these contingencies as a part of the fair value estimates of assets acquired and liabilities assumed and, if so, determine their estimated fair value.

If the Company cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, which is generally the case given the nature of such matters, the Company will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been assumed at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period, changes in the Company's estimates of such contingencies will affect earnings and could have a material effect on its results of operations and financial position.

16


COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. The Company reevaluates these items based upon facts and circumstances that existed as of the acquisition date with any adjustments to its preliminary estimates being recorded to goodwill, provided that the Company is within the measurement period. Subsequent to the measurement period, changes to these uncertain tax positions and tax related valuation allowances will affect the Company's provision for income taxes in its condensed consolidated statements of operations and comprehensive income and could have a material impact on its results of operations and financial position.


17


COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



3.REVENUE FROM CONTRACTS WITH CUSTOMERS    

Disaggregated Revenue

The Company provides information, analytics and online marketplaces to the commercial real estate industry and related professionals. Revenues by operating segment and type of service consist of the following (in thousands):
Three Months Ended June 30,
20212020
North AmericaInternationalTotalNorth AmericaInternationalTotal
Information and analytics
CoStar$167,845 $9,134 $176,979 $157,793 $7,260 $165,053 
Information services28,096 7,061 35,157 25,022 5,514 30,536 
Online marketplaces
Multifamily171,357  171,357 145,541  145,541 
Commercial property and land
96,476 364 96,840 56,006 23 56,029 
Total revenues$463,774 $16,559 $480,333 $384,362 $12,797 $397,159 
Six Months Ended June 30,
20212020
North AmericaInternationalTotalNorth AmericaInternationalTotal
Information and analytics
CoStar$331,399 $17,764 $349,163 $315,128 $14,881 $330,009 
Information services55,782 14,071 69,853 50,712 12,206 62,918 
Online marketplaces
Multifamily337,504  337,504 283,001  283,001 
Commercial property and land
180,852 658 181,510 112,968 110 113,078 
Total revenues$905,537 $32,493 $938,030 $761,809 $27,197 $789,006 
Deferred Revenue

Changes in revenue for the period were as follows (in thousands):
Balance at December 31, 2020$77,363 
Revenue recognized in the current period from the amounts in the beginning balance(61,486)
New deferrals, net of amounts recognized in the current period78,720 
Effects of foreign currency144