Company Quick10K Filing
CoStar Group
Price594.58 EPS8
Shares37 P/E70
MCap21,793 P/FCF62
Net Debt-1,390 EBIT389
TEV20,403 TEV/EBIT52
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-04-29
10-K 2019-12-31 Filed 2020-02-26
10-Q 2019-09-30 Filed 2019-10-23
10-Q 2019-06-30 Filed 2019-07-24
10-Q 2019-03-31 Filed 2019-04-24
10-K 2018-12-31 Filed 2019-02-28
10-Q 2018-09-30 Filed 2018-10-24
10-Q 2018-06-30 Filed 2018-07-25
10-Q 2018-03-31 Filed 2018-04-25
10-K 2017-12-31 Filed 2018-02-23
10-Q 2017-09-30 Filed 2017-10-26
10-Q 2017-06-30 Filed 2017-07-27
10-Q 2017-03-31 Filed 2017-04-27
10-K 2016-12-31 Filed 2017-02-24
10-Q 2016-09-30 Filed 2016-10-27
10-Q 2016-06-30 Filed 2016-07-28
10-Q 2016-03-31 Filed 2016-04-28
10-K 2015-12-31 Filed 2016-02-26
10-Q 2015-09-30 Filed 2015-10-29
10-Q 2015-06-30 Filed 2015-07-30
10-Q 2015-03-31 Filed 2015-04-30
10-K 2014-12-31 Filed 2015-02-26
10-Q 2014-09-30 Filed 2014-10-30
10-Q 2014-06-30 Filed 2014-07-25
10-Q 2014-03-31 Filed 2014-04-24
10-K 2013-12-31 Filed 2014-02-20
10-Q 2013-09-30 Filed 2013-10-24
10-Q 2013-06-30 Filed 2013-07-24
10-Q 2013-03-31 Filed 2013-04-25
10-K 2012-12-31 Filed 2013-03-01
10-Q 2012-09-30 Filed 2012-10-25
10-Q 2012-06-30 Filed 2012-07-26
10-Q 2012-03-31 Filed 2012-04-27
10-K 2011-12-31 Filed 2012-02-23
10-Q 2011-09-30 Filed 2011-10-27
10-Q 2011-06-30 Filed 2011-07-28
10-Q 2011-03-31 Filed 2011-04-29
10-K 2010-12-31 Filed 2011-02-25
10-Q 2010-09-30 Filed 2010-10-22
10-Q 2010-06-30 Filed 2010-07-23
10-Q 2010-03-31 Filed 2010-04-23
10-K 2009-12-31 Filed 2010-02-26
8-K 2020-05-13 Enter Agreement, Exhibits
8-K 2020-04-29 Other Events, Exhibits
8-K 2020-04-28 Earnings, Exhibits
8-K 2020-03-25 Off-BS Arrangement, Exhibits
8-K 2020-02-25 Earnings, Exhibits
8-K 2020-02-11 Enter Agreement, Exhibits
8-K 2019-12-12 Officers, Exhibits
8-K 2019-10-22
8-K 2019-09-30 Enter Agreement, Exhibits
8-K 2019-09-30 Regulation FD, Exhibits
8-K 2019-07-23 Earnings, Exhibits
8-K 2019-06-05 Shareholder Vote
8-K 2019-04-23 Earnings, Exhibits
8-K 2019-02-26 Earnings, Exhibits
8-K 2018-10-23 Earnings, Exhibits
8-K 2018-07-24 Earnings, Officers, Exhibits
8-K 2018-06-06 Shareholder Vote
8-K 2018-04-23 Earnings, Exhibits
8-K 2018-02-21 Earnings, Sale of Shares, Other Events, Exhibits
8-K 2018-01-17 Regulation FD

CSGP 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 csgp-03312020xex311.htm
EX-31.2 csgp-03312020xex312.htm
EX-32.1 csgp-03312020xex321.htm
EX-32.2 csgp-03312020xex322.htm

CoStar Group Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
3.83.02.31.50.80.02012201420172020
Assets, Equity
0.40.30.20.10.0-0.12012201420172020
Rev, G Profit, Net Income
0.80.50.2-0.0-0.3-0.62012201420172020
Ops, Inv, Fin

Document
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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 March 31, 2020

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
 csgp-logoa01a21.jpg
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,
DC
20005
(Address of principal executive offices) (Zip Code)

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

(877) 739-0486
(Registrant’s facsimile number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:  
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock ($0.01 par value)
CSGP
Nasdaq 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 April 24, 2020, there were 36,726,443 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
March 31,
 
2020
 
2019
Revenues                                                                          
$
391,847

 
$
328,425

Cost of revenues                                                                          
78,909

 
71,153

Gross profit                                                                          
312,938

 
257,272

 
 
 
 
Operating expenses:
 

 
 

Selling and marketing (excluding customer base amortization)
125,107

 
88,094

Software development                                                                       
41,610

 
27,928

General and administrative                                                                       
58,873

 
40,076

Customer base amortization                                                                       
11,484

 
7,682

 
237,074

 
163,780

Income from operations                                                                          
75,864

 
93,492

Interest and other income                                                                        
4,518

 
4,945

Interest and other expense                                                                          
(2,026
)
 
(732
)
Income before income taxes                                                                          
78,356

 
97,705

Income tax expense
5,563

 
12,536

Net income                                                      
$
72,793

 
$
85,169

 
 
 
 
Net income per share - basic                                                                          
$
2.00

 
$
2.35

Net income per share - diluted                                                                          
$
1.98

 
$
2.33

 
 
 
 
Weighted-average outstanding shares - basic                                                                          
36,471

 
36,237

Weighted-average outstanding shares - diluted
36,776

 
36,567


See accompanying notes.


4



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

 
Three Months Ended
March 31,
 
2020
 
2019
Net income
$
72,793

 
$
85,169

Other comprehensive (loss) income, net of tax
 
 
 
Foreign currency translation adjustment
(12,949
)
 
380

Unrealized gain on investments
189

 

Reclassification adjustment for realized loss on investments included in net income
541

 

Total other comprehensive (loss) income
(12,219
)
 
380

Total comprehensive income
$
60,574

 
$
85,549


See accompanying notes.


5



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

 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash, cash equivalents and restricted cash
$
1,927,923

 
$
1,070,731

Accounts receivable
120,559

 
96,788

Less: Allowance for credit losses
(8,311
)
 
(4,548
)
Accounts receivable, net
112,248

 
92,240

Prepaid expenses and other current assets
30,219

 
36,194

Total current assets
2,070,390

 
1,199,165

 
 
 
 
Long-term investments

 
10,070

Deferred income taxes, net
4,762

 
5,408

Property and equipment, net
106,409

 
107,529

Lease right-of-use assets
112,811

 
115,084

Goodwill
1,873,987

 
1,882,020

Intangible assets, net
400,689

 
421,196

Deferred commission costs, net
91,000

 
89,374

Deposits and other assets
9,743

 
9,232

Income tax receivable
14,806

 
14,908

Total assets
$
4,684,597

 
$
3,853,986

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
22,486

 
$
7,640

Accrued wages and commissions
49,302

 
53,087

Accrued expenses
40,310

 
38,680

Income taxes payable
12,183

 
10,705

Lease liabilities
27,681

 
29,670

Deferred revenue
84,717

 
67,274

Total current liabilities
236,679

 
207,056

 
 
 
 
Long-term debt
745,000

 

Deferred income taxes, net
88,799

 
87,096

Income taxes payable
20,611

 
20,521

Lease and other long-term liabilities
130,697

 
133,720

Total liabilities
1,221,786

 
448,393

 
 
 
 
Total stockholders’ equity
3,462,811

 
3,405,593

Total liabilities and stockholders’ equity
$
4,684,597

 
$
3,853,986


See accompanying notes.

6



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

 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Other
Comprehensive Loss
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2019
36,668

 
366

 
$
2,473,338

 
$
(8,585
)
 
$
940,474

 
$
3,405,593

Net income

 

 

 

 
72,793

 
72,793

Other comprehensive loss

 

 

 
(12,219
)
 

 
(12,219
)
Exercise of stock options
41

 
1

 
9,232

 

 

 
9,233

Restricted stock grants
83

 
1

 
(1
)
 

 

 

Restricted stock grants surrendered
(56
)
 
(1
)
 
(30,144
)
 

 

 
(30,145
)
Stock-based compensation expense

 

 
15,006

 

 

 
15,006

Employee stock purchase plan
4

 

 
2,550

 

 

 
2,550

Balance at March 31, 2020
36,740

 
367

 
$
2,469,981

 
$
(20,804
)
 
$
1,013,267

 
$
3,462,811


See accompanying notes.

7



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

 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Other
Comprehensive Loss
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
36,446

 
364

 
$
2,419,812

 
$
(11,688
)
 
$
613,454

 
$
3,021,942

Cumulative effect of adoption of new accounting standard, net of tax

 

 

 

 
12,057

 
12,057

Balance at January 1, 2019
36,446

 
364

 
2,419,812

 
(11,688
)
 
625,511

 
3,033,999

Net income

 

 

 

 
85,169

 
85,169

Other comprehensive income

 

 

 
380

 

 
380

Exercise of stock options
79

 
1

 
10,637

 

 

 
10,638

Restricted stock grants
132

 
1

 
(1
)
 

 

 

Restricted stock grants surrendered
(43
)
 

 
(18,679
)
 

 

 
(18,679
)
Stock-based compensation expense

 

 
12,034

 

 

 
12,034

Management stock purchase plan

 

 
3,491

 

 

 
3,491

Employee stock purchase plan
4

 

 
1,582

 

 

 
1,582

Balance at March 31, 2019
36,618

 
366

 
$
2,428,876

 
$
(11,308
)
 
$
710,680

 
$
3,128,614


See accompanying notes.

8



COSTAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
March 31,
 
2020
 
2019
Operating activities:
 
 
 
Net income
$
72,793

 
$
85,169

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
24,256

 
19,659

Amortization of deferred commissions costs
14,747

 
12,407

Amortization of debt issuance costs
292

 
219

Realized loss on investments
541

 

Non-cash lease expense
6,261

 
5,197

Stock-based compensation expense
15,180

 
12,029

Deferred income taxes, net
2,825

 
3,702

Credit loss expense
6,183

 
2,185

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Accounts receivable
(26,613
)
 
(5,835
)
Income taxes payable
1,624

 
8,311

Prepaid expenses and other current assets
1,838

 
206

Deferred commissions
(16,523
)
 
(13,729
)
Other assets
1,215

 
(59
)
Accounts payable and other liabilities
15,564

 
15,068

Lease liabilities
(6,967
)
 
(4,743
)
Deferred revenue
18,248

 
8,708

Net cash provided by operating activities
131,464

 
148,494

 
 
 
 
Investing activities:
 

 
 

Proceeds from sale and settlement of investments
10,259

 

Purchases of property and equipment and other assets
(7,133
)
 
(9,429
)
Cash paid for acquisitions, net of cash acquired
(432
)
 

Net cash provided by (used in) investing activities
2,694

 
(9,429
)
 
 
 
 
Financing activities:
 

 
 

Proceeds from long-term debt
745,000

 

Repurchase of restricted stock to satisfy tax withholding obligations
(30,144
)
 
(18,679
)
Proceeds from exercise of stock options and employee stock purchase plan
10,295

 
12,061

Net cash provided by (used in) financing activities
725,151

 
(6,618
)
 
 
 
 
Effect of foreign currency exchange rates on cash and cash equivalents
(2,117
)
 
(46
)
Net increase in cash, cash equivalents and restricted cash
857,192

 
132,401

Cash, cash equivalents and restricted cash at the beginning of period
1,070,731

 
1,100,416

Cash, cash equivalents and restricted cash at the end of period
$
1,927,923

 
$
1,232,817

 
 
 
 
Supplemental cash flow disclosures:
 
 
 
Interest paid
$
499

 
$
519

Income taxes paid
$
1,111

 
$
521


See accompanying notes.

9



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

1.
ORGANIZATION

CoStar Group, Inc. (the “Company” or “CoStar”) provides information, analytics and online marketplace services to the commercial real estate and related business community through its comprehensive, proprietary database of commercial real estate information. 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.

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 March 31, 2020 and December 31, 2019, the results of its operations for the three months ended March 31, 2020 and 2019, its comprehensive income for the three months ended March 31, 2020 and 2019, its changes in stockholders' equity for the three months ended March 31, 2020 and 2019, and its cash flows for the three months ended March 31, 2020 and 2019.

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, 2019.

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, and 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.



10


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


The Company also provides (i) market research, portfolio and debt analysis, management and reporting capabilities and (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, as well as (iii) benchmarking and analytics for the hospitality industry through STR, LLC (formerly known as STR, Inc.) and STR Global, Ltd. (together with STR, LLC, referred to as “STR”), which were acquired in the fourth quarter of 2019.

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 obligation(s).

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.

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, 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, company-sponsored events, print and other media advertising. Advertising costs were approximately $53 million and $33 million for the three months ended March 31, 2020 and 2019, respectively.


11


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


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 loss. 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 loss. Net gains or losses resulting from transactions denominated in a currency other than the functional currency of the entity are included in interest and other income (expense) in the condensed consolidated statements of operations using the average exchange rates in effect during the period. For the three months ended March 31, 2020, the Company recognized net foreign currency gains of $1.4 million included in interest and other income (expense) on the condensed consolidated statements of operations. There were no material gains or losses from these transactions for the three months ended March 31, 2019.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (in thousands):
 
March 31,
2020
 
December 31,
2019
Foreign currency translation adjustment
$
(20,804
)
 
$
(7,855
)
Net unrealized loss on investments, net of tax

 
(730
)
Total accumulated other comprehensive loss
$
(20,804
)
 
$
(8,585
)


During the three months ended March 31, 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 interest and other income expense in the condensed consolidated statements of operations. There were no amounts reclassified out of accumulated other comprehensive loss to the condensed consolidated statements of operations for the three months ended March 31, 2019.

See Note 6 for additional information regarding investments.

Income Taxes

Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in the Company’s consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates in effect during the year in which the Company expects differences to reverse. Valuation allowances are provided against assets, including net operating losses, if the Company 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.



12


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


The following table sets forth the calculation of basic and diluted net income per share (in thousands, except per share data):
 
Three Months Ended
March 31,
 
Numerator:
2020

2019
 
 
 
Net income
$
72,793

 
$
85,169

Denominator:
 

 
 

Denominator for basic net income per share — weighted-average outstanding shares
36,471

 
36,237

Effect of dilutive securities:
 

 
 

Stock options, restricted stock awards and restricted stock units
305

 
330

Denominator for diluted net income per share — weighted-average outstanding shares
36,776

 
36,567

 
 

 
 

Net income per share — basic 
$
2.00

 
$
2.35

Net income per share — diluted 
$
1.98

 
$
2.33


 
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 that vest based on achievement of a performance condition, restricted stock awards with a performance and a market condition, restricted stock units and matching restricted stock units awarded under the Company's Management Stock Purchase Plan. Shares underlying unvested restricted stock awards that vest based on performance and market conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share. 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
March 31,
 
2020
 
2019
Performance-based restricted stock awards
84

 
89

Anti-dilutive securities
96

 
141



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 a performance condition, stock-based compensation expense is recognized based on the expected achievement of the related performance conditions at the end of each reporting period over the vesting period of the awards. 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.

13


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



Stock-based compensation expense for stock options and restricted stock awards issued under equity incentive plans and stock purchases under the Employee Stock Purchase Plan included in the Company’s results of operations were as follows (in thousands):

 
Three Months Ended
March 31,
 
2020
 
2019
Cost of revenues
$
2,472

 
$
2,058

Selling and marketing (excluding customer base amortization)
2,024

 
1,638

Software development
2,528

 
2,056

General and administrative
8,156

 
6,277

Total stock-based compensation expense
$
15,180

 
$
12,029



Allowance for Credit Losses

On January 1, 2020, the Company adopted Accounting Standards Updates ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses; ASU 2019-04, Codification Improvements to Financial Instruments - Credit Losses (Topic 326); ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument; ASU 2019-11, Codification Improvements to Financial Instruments - Credit Losses (Topic 326) and ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842), later codified as Accounting Standards Codification ("ASC") 326 ("ASC 326"), using the modified retrospective transition approach. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on February 26, 2020, for further details of the Company’s policy prior to the adoption of ASC 326.

As of January 1, 2020, the Company maintained 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 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 collectibility 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. In most instances, 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.
 
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 Suite Portfolio Segment - The CoStar Suite portfolio segment consists of two classes of trade receivables based on geographical location: CoStar Suite, North America and CoStar Suite, 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 two classes of trade receivables: LoopNet and other commercial property and land online marketplaces.

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

14


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



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 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 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.

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 revolving credit facility.


15


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


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.

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.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

On January 1, 2020, the Company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes on a prospective basis. The amounts related to the reclassification of franchise taxes from income from operations to income tax expense for the three months ended March 31, 2020 did not have a material impact on the Company's condensed consolidated financial statements and related disclosures.

On January 1, 2020, the Company adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract on a prospective basis. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to defer and recognize as an asset. The adoption did not have a material impact on the Company's condensed consolidated financial statements and related disclosures.

On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments using the modified retrospective method. This accounting standard replaced the prior incurred loss accounting model with a current expected credit loss approach. As of January 1, 2020, no cumulative transition adjustment was recorded to the beginning balance of retained earnings, as the adoption did not result in a higher allowance for credit losses under the CECL impairment model. The adoption did not have a material impact on the Company's condensed consolidated financial statements and related disclosures.


16


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. The revenues by operating segment and type of service consist of the following (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
 
North America
 
International
 
Total
 
North America
 
International
 
Total
Information and analytics
 
 
 
 
 
 
 
 
 
 
 
CoStar Suite
$
157,335

 
$
7,621

 
$
164,956

 
$
140,973

 
$
6,728

 
$
147,701

Information services
25,690

 
6,692

 
32,382

 
16,591

 
2,259

 
18,850

Online marketplaces
 
 
 
 
 
 
 
 
 
 

Multifamily
137,460

 

 
137,460

 
114,268

 

 
114,268

Commercial property and land
56,962

 
87

 
57,049

 
47,405

 
201

 
47,606

Total revenues
$
377,447

 
$
14,400

 
$
391,847

 
$
319,237

 
$
9,188

 
$
328,425



Deferred Revenue

Changes in deferred revenue for the period were as follows (in thousands):
Balance at December 31, 2019
$
70,620

Revenue recognized in the current period from the amounts in the beginning balance
(38,354
)
New deferrals, net of amounts recognized in the current period
56,602

Effects of foreign currency
(824
)
Balance at March 31, 2020(1)
$
88,044

__________________________
 

(1) Deferred revenue is comprised of $85 million of current liabilities and $3 million of noncurrent liabilities classified within lease and other long-term liabilities on the Company’s condensed consolidated balance sheet as of March 31, 2020.

Contract Assets

The Company had contract assets of $5 million and $4 million as of March 31, 2020 and December 31, 2019, respectively, which are generated when contractual billing schedules differ from revenue recognition timing. Contract assets represent a conditional right to consideration for satisfied performance obligations that becomes a receivable when the conditions are satisfied. Current contract assets are included in prepaid expenses and other current assets, and non-current contract assets are included in deposits and other assets on the Company's condensed consolidated balance sheets. The Company recognized revenue of $1 million from contract assets for the three months ended March 31, 2020.


17


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




Commissions

Commissions expense is included in selling and marketing expense in the Company's condensed consolidated statements of operations. Commissions expense activity for the three months ended March 31, 2020 and 2019 was as follows (in thousands). The Company determined that no deferred commissions were impaired as of March 31, 2020:
 
Three Months Ended
March 31,
 
2020
 
2019
Commissions incurred
$
22,437

 
$
18,551

Commissions capitalized in the current period
(16,523
)
 
(13,729
)
Amortization of deferred commissions costs
14,747

 
12,407

Total commissions expense
$
20,661

 
$
17,229



Unsatisfied Performance Obligations

Remaining contract consideration for which revenue has not been recognized due to unsatisfied performance obligations was approximately $249 million at March 31, 2020, which the Company expects to recognize over the next five years. This amount does not include contract consideration for contracts with a duration of one year or less.


4.
ALLOWANCE FOR CREDIT LOSSES

The following table details the activity related to the allowance for credit losses for trade receivables by portfolio segment (in thousands):

 
Three Months Ended March 31, 2020
 
 
 
CoStar Suite
 
Information services
 
Multifamily
 
Commercial property and land
 
Total
Beginning balance at December 31, 2019
$
1,264

 
$
624

 
$
1,195

 
$
1,465

 
$
4,548

Current-period provision for expected credit losses(1), (2)
2,634

 
1,247

 
1,403

 
899

 
6,183

Write-offs charged against the allowance, net of recoveries and other
(1,372
)
 

 
(565
)
 
(483
)
 
(2,420
)
Ending balance at March 31, 2020
$
2,526

 
$
1,871

 
$
2,033

 
$
1,881

 
$
8,311

__________________________
 
 
 
 
 
 
 
 
 
(1) Credit loss expense is included in general and administrative expenses on the condensed consolidated statement of operations.
(2) Credit loss expense related to contract assets was not material for the three months ended March 31, 2020.

5.    ACQUISITIONS

RentPath

On February 11, 2020, RentPath Holdings, Inc. (“RentPath”), certain direct or indirect wholly-owned subsidiaries of RentPath (together with RentPath, the “Sellers”), and, solely for the purposes set forth therein, CSGP Holdings, LLC (“CSGP”), an indirect wholly owned subsidiary of the Company ("Buyer") entered into an asset purchase agreement (the “Asset Purchase Agreement”) dated as of February 12, 2020. Pursuant to the Asset Purchase Agreement, and subject to the terms and conditions set forth therein, CSGP agreed to acquire for $588 million in cash all of the equity interests of RentPath, as reorganized following an internal restructuring of the Sellers (“Reorganized RentPath") pursuant to and under the joint chapter 11 plan of reorganization of the Sellers and certain of their affiliates to be filed in the U.S. Bankruptcy Court for the District of Delaware. Under the terms of the

18


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

Asset Purchase Agreement, the Company agreed to guarantee the full and timely performance of CSGP’s obligations under the Asset Purchase Agreement. The completion of the transaction is subject to customary conditions, including the expiration or termination of any applicable waiting period under applicable antitrust laws and bankruptcy court approvals. As required by the purchase agreement, the Company paid a $59 million break fee 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, this amount is not refundable to the Company. As the transaction had not closed as of March 31, 2020, the break fee is recorded as restricted cash within cash, cash equivalents and restricted cash on the Company's condensed consolidated balance sheets.

STR, LLC and STR Global Ltd.

On October 22, 2019, the Company acquired all of the issued and outstanding equity interests of STR for a purchase price of $435 million. STR is a global provider of benchmarking and analytics for the hospitality industry. The combination of STR's and CoStar's offerings is expected to allow for the creation of valuable new and improved tools for industry participants. The Company applied the acquisition method to account for the STR transaction, which requires that assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date.

The following table summarizes the amounts recorded for acquired assets and assumed liabilities recorded at their fair values as of the acquisition date (in thousands):
 
Preliminary:
October 22, 2019
 
Measurement Period Adjustments
 
Updated Preliminary:
October 22, 2019
Cash and cash equivalents
$
11,710

 
$
(90
)
 
$
11,620

Accounts receivable
8,067

 


 
8,067

Lease right-of-use assets
7,306

 


 
7,306

Goodwill
261,436

 
432

 
261,868

Intangible assets
178,000

 


 
178,000

Lease liabilities
(7,306
)
 

 
(7,306
)
Deferred revenue
(10,966
)
 

 
(10,966
)
Deferred tax liabilities
(7,980
)
 

 
(7,980
)
Other assets and liabilities
(4,815
)
 

 
(4,815
)
Fair value of identifiable net assets acquired
$
435,452

 
$
342

 
$
435,794



The net assets of STR were recorded at their estimated fair values. In valuing the acquired assets and assumed liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations and appropriate discount rates. Measurement period adjustments primarily relate to the determination of working capital as of the acquisition date. The purchase price allocation is preliminary, subject to the completion of the Company's assessment of certain tax matters. The customer base assets incorporated significant assumptions that had a material impact on the estimated fair value, such as discount rates, projected revenue growth rates, customer attrition rates and projected profit margins. The following table summarizes the fair values (in thousands) of the identifiable intangible assets included in each of the Company's operating segments, their related estimated useful lives (in years) and their respective amortization methods:
 
North America
 
International
 
 
 
Estimated Fair Value
 
Estimated Useful Life
 
Estimated Fair Value
 
Estimated Useful Life
 
Amortization Method
Customer base
$
97,000

 
13
 
$
42,000

 
10
 
Accelerated
Trade name
24,000

 
15
 
 
 
 
 
Straight-line
Other intangible assets
10,000

 
5
 
5,000

 
5
 
Straight-line
Total intangible assets
$
131,000

 
 
 
$
47,000

 
 
 
 



19


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

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the STR acquisition includes but is not limited to: (i) the expected synergies and other benefits that the Company believes will result from combining its operations with STR's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce. Goodwill recorded in connection with this acquisition is not amortized, but is subject to an annual impairment test. Of the $262 million of goodwill recorded as part of the acquisition, $159 million and $103 million are associated with the Company's North America and International operating segments, respectively. The goodwill recognized in the North America operating segment is expected to be deductible for income tax purposes in future periods.

As part of the STR acquisition, the Company incurred $2 million of transaction costs. Additionally, the Company paid $15 million into a cash escrow account for deferred compensation for certain STR employees, to be paid to active employees after a defined one year period following the acquisition or when earlier terminated by the Company without cause or by the employee for good reason. In the event some or all of those employees are not entitled to their retention bonus, the funds will be remitted to the seller. The Company is recognizing compensation expense for the deferred compensation over the one-year post-combination period.

Off Campus Partners, LLC Acquisition

On June 12, 2019, the Company acquired Off Campus Partners, LLC ("OCP"), a provider of student housing marketplace content and technology to U.S. universities for $16 million. The purchase agreement required an initial payment of $14 million, net of cash acquired, at the time of closing, with the remainder of the purchase price payable one year following the acquisition date, subject to offset for indemnification claims or adjustments to the purchase price after final determination of closing net working capital. As part of the acquisition, the Company recorded goodwill and intangibles assets of $8 million and $9 million, respectively. The net assets of OCP were recorded at their estimated fair value. The estimated fair values are preliminary, subject to the Company's assessment of certain tax matters. Measurement period adjustments recognized in 2019 were not material.

Pro Forma Financial Information

The unaudited pro forma financial information presented below summarizes the combined results of operations for the Company and STR as though the companies were combined as of January 1, 2018. The unaudited pro forma financial information for all periods presented includes amortization charges from acquired intangible assets, retention compensation, as referenced above, and the related tax effects, along with certain other accounting effects, but excludes the impacts of any expected operational synergies. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2018.

The unaudited pro forma financial information for the three months ended March 31, 2019 combine the historical results of the Company and STR for the periods prior to the acquisition date, and the effects of the pro forma adjustments listed above.
The unaudited pro forma financial information, in the aggregate, was as follows (in thousands, except per share data):
 
 
Three Months Ended
March 31, 2019
Revenue
 
$
340,180

Net income
 
$
79,423

Net income per share - basic
 
$
2.19

Net income per share - diluted
 
$
2.17




6.    INVESTMENTS AND FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. There is a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or

20


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


indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of March 31, 2020, the Company's financial assets comprise Level 1 cash equivalents with original maturities of three months or less in the amount of $586 million. As of March 31, 2020, the Company had no Level 2 or Level 3 financial assets measured at fair value.

During the first quarter of 2020, the Company sold its ARS investments for $10.3 million and recognized a realized loss of $0.5 million for the three months ended March 31, 2020 included in interest and other expense on the Company's condensed consolidated statements of operations.

The following table represents the Company's investments in marketable securities and fair value measurements by investment category reported as cash equivalents and investments as of December 31, 2019 (in thousands):
 
December 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
 Unrealized
Losses
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
$
576,761

 
$

 
$

 
$
576,761

 
$
576,761

 
$

 
$

Auction rate securities
10,800

 

 
(730
)
 
10,070

 

 

 
10,070

Total cash equivalents and long-term investments
$
587,561

 
$

 
$
(730
)
 
$
586,831

 
$
576,761

 
$

 
$
10,070



The Company’s Level 3 assets consisted of ARS, whose underlying assets were primarily student loan securities supported by guarantees from the Federal Family Education Loan Program of the U.S. Department of Education. As of December 31, 2019, these investments were in an unrealized loss position for a period of twelve months or greater. The unrealized losses were generated primarily from changes in interest rates and ARS that failed to settle at auction due to adverse conditions in the global credit markets. The losses were considered temporary, as the contractual terms of these investments do not permit the issuer to settle the security at a price less than the amortized cost of the investment. The Company had no realized gains or losses on its investments during the year ended December 31, 2019.

The carrying value of cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value as of March 31, 2020 and December 31, 2019.


21


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




7.    LEASES

The Company has operating leases for its office facilities, data centers and certain vehicles, as well as finance leases for office equipment. The Company's leases have remaining terms of less than one year to nine years. The leases contain various renewal and termination options. The period that is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. The period that is subject to an option to terminate the lease is included if it is reasonably certain that the option will not be exercised.

Lease costs related to the Company's operating leases included in the condensed consolidated statements of operations were as follows (in thousands):
 
Three Months Ended
March 31,
Operating lease costs:
2020
 
2019
 
 
 
   Cost of revenues
$
2,894

 
$
3,238

   Software development
1,396

 
952

   Selling and marketing (excluding customer base amortization)
2,539

 
2,191

   General and administrative
1,174

 
292

Total operating lease costs
$
8,003

 
$
6,673



The impact of lease costs related to finance leases and short-term leases was not material for the three months ended March 31, 2020.

Supplemental balance sheet information related to operating leases was as follows (in thousands):
Balance
Balance Sheet Location
March 31, 2020
 
December 31, 2019
Long-term lease liabilities
Lease and other long-term liabilities
$
116,785

 
$
120,153

 
 
 
 
 
Weighted-average remaining lease term in years
 
4.8

 
5.0

Weighted-average discount rate
 
3.9
%
 
4.0
%


Balance sheet information related to finance leases was not material as of March 31, 2020.

Supplemental cash flow information related to leases was as follows (in thousands):
 
Three Months Ended
March 31,
Cash paid for amounts included in the measurement of lease liabilities:
2020
 
2019
 
 
 
Operating cash flows used in operating leases
$
8,709

 
$
7,716

 
 
 
 
ROU assets obtained in exchange for lease obligations:
 
 
 
Operating leases
$
5,080