# COSTAR GROUP, INC. (CSGP) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from COSTAR GROUP, INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1057352/000105735222000027/csgp-20211231.htm
Accession: 0001057352-22-000027
Filing date: 2022-02-23
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/CSGP/
All MD&A years: /company/CSGP/mda/
Next year: /company/CSGP/mda/fy2022/ (FY 2022)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements,” including statements about our beliefs and expectations. There are many risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Potential factors that could cause actual results to differ materially from those discussed in any forward-looking statements include, but are not limited to, those stated above in under the heading “Cautionary Statement Concerning Forward-Looking Statements” and in Item 1A. under the heading “Risk Factors,” as well as those described from time to time in our filings with the Securities and Exchange Commission.

All forward-looking statements are based on information available to us on the date of this filing and we assume no obligation to update such statements, whether as a result of new information, future events or otherwise. The following discussion should be read in conjunction with our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission and the consolidated financial statements and related notes included in this Annual Report on Form 10-K.

Overview

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

CoStar

CoStar® is our subscription-based integrated platform for commercial real estate intelligence, which includes information about office, industrial, retail, multifamily and student housing properties, properties for sale, comparable sales, tenants, space available for lease, industry professionals and their business relationships, industry news and market and lease analytical capabilities. CoStar's revenue growth rates increased in 2021 compared to 2020 as the average number of subscribers increased in 2021 compared to 2020 and we resumed annual price increases for contract renewals occurring in the third quarter of 2021 after a temporary suspension. We expect CoStar revenue growth rates to increase in 2022 compared to 2021 as a result of signing up new subscribers, existing subscribers upgrading their subscriptions and the resumption of annual price increases.

Information services

We provide real estate and lease management technology solutions, including lease administration, lease accounting and abstraction services, through our CoStar Real Estate Manager® service offerings, as well as portfolio and debt analysis, management and reporting capabilities through our CoStar Investment Analysis and CoStar Risk Analytics® service offerings. We also provide analytics and benchmarking reports for the hospitality industry. STARTM reports are provided on a subscription basis, but we also provide one-time or ad hoc reports or analysis on a transaction-basis. We provide information services internationally through our Grecam, Belbex and Thomas Daily businesses in France, Spain and Germany, respectively. Information services' revenue growth rates decreased in 2021 compared to 2020 primarily due to the STR acquisition in 2019 which resulted in a full year of results in 2020. We expect information services revenue growth rates in 2022 to remain consistent with 2021.

Multifamily

Apartments.comTM is part of our network of apartment marketing sites, which primarily includes ApartmentFinder®, ForRent.com®, ApartmentHomeLiving.comTM, Apartamentos.comTM and Westside Rentals®. Our network of subscription-based advertising services provides property management companies and landlords with a comprehensive advertising destination for their available rental units and offers renters a platform for searching for available rentals. Apartments.com also earns transaction-based revenue primarily from providing online tenant applications, including background and credit checks, and rental payment processing. Apartments.com has continued to successfully increase traffic to its network of sites, year-over-year, resulting in increased leads to customers. As leads per ad have increased, Apartments.com’s lower priced ad packages are generating more leads than top-level packages were generating approximately one year ago. In addition, rental vacancy rates have declined relative to historical averages reducing demand for top-level packages. As a result, customers began selecting lower-priced ad packages in the second half of 2021. Consequently, net new bookings declined year-over-year in 2021 resulting in a decrease in the Multifamily revenue growth rates in 2021 compared to 2020. We have implemented a revised pricing strategy to align prices at each product level with the value of the leads delivered. We expect multifamily revenue growth rates in 2022 to decrease when compared to 2021 due to lower net new booking activity in 2021.

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LoopNet

Our LoopNet network of commercial real estate websites offer subscription-based, online marketplace services that enable commercial property owners, landlords and real estate agents working on their behalf to advertise properties for sale or for lease and to submit detailed information about property listings. Commercial real estate agents, buyers and tenants use the LoopNet network of online marketplace services to search for available property listings that meet their criteria. This product offering also includes Realla in the United Kingdom and BureauxLocaux in France which was acquired on October 1, 2021. LoopNet's revenue growth rates decreased in 2021 when compared to 2020 as growth in the average price per listing declined in 2021 when compared to 2020. We expect LoopNet revenue growth rates in 2022 to decrease when compared to 2021.

Residential

On December 22, 2020, we acquired Homesnap®, an online and mobile software platform that provides subscription-based access to applications that manage residential real estate agent workflow and marketing campaigns delivered on third-party platforms. On May 24, 2021, we acquired Homes.com®, a residential advertising and marketing services company primarily operating through its portal, Homes.com. We expect residential revenue for 2022 to decline when compared to 2021 due to the discontinuation of certain Homes.com products and services, which is expected to be partially offset by expected increases in sales of Homesnap products and services.

Other Marketplaces

Our other marketplaces include Ten-X®, an online auction platform for commercial real estate which was acquired on June 24, 2020. Also included is our BizBuySell network, which includes BizQuest® and FindaFranchise and our Land.com network of sites, which includes LandsofAmerica, LandAndFarm and LandWatch®. The BizBuySell network provides online marketplaces for businesses for-sale and our Land.com network of sites provide online marketplaces for rural lands for-sale. Overall, revenues in other marketplaces increased during 2021 compared to 2020 primarily due to two additional quarters of Ten-X revenue included in 2021. We expect other marketplaces revenue for 2022 to increase over 2021 as more properties are sold on Ten-X .

Subscription-based Services

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

For the years ended December 31, 2021, 2020 and 2019, our annualized net new bookings of subscription-based services on all contracts were approximately $217 million, $184 million and $210 million, respectively, calculated based on the annualized amount of change in our sales resulting from all new subscription-based contracts or upgrades on all existing subscription-based contracts, less write-downs and cancellations, for the period reported. Net new bookings is considered a key indicator of future subscription revenue growth and is also used as a metric of sales force productivity by us and investors. However, information regarding net new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. Revenue from our subscription-based contracts was approximately 93%, 95% and 96% of total revenue for the years ended December 31, 2021, 2020 and 2019, respectively. The decline in the percentage of our revenue from subscription-based contracts from 2019 to 2020 and from 2020 to 2021 was primarily due to the acquisitions of companies which contained a higher percentage of transaction-based revenue than our legacy businesses.

For the trailing twelve months ended December 31, 2021, 2020 and 2019, our contract renewal rates for existing CoStar Group company-wide subscription-based services for contracts with a term of at least one year were approximately 92%, 89% and 90%, respectively, and; therefore, our cancellation rates for those services for the same periods were approximately 8%, 11% and 10%, respectively. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, we believe that the rate may be a reliable indicator of short-term and long-term performance absent extraordinary circumstances. Our trailing twelve-month contract renewal rate may decline as a result of negative economic conditions, consolidations among our clients, reductions in customer spending or decreases in our customer base. Revenue from our subscription-based contracts with a term of at least one year was approximately 77%, 80% and 82% of total revenue for the trailing twelve months ended December 31, 2021, 2020 and 2019, respectively. The decline in the percentage of our revenue from subscription-based contracts from 2019 to 2020 and from 2020 to 2021 was primarily due to the acquisitions of companies which contained a higher percentage of transaction-based revenue than our legacy businesses, as well as, increases in our sales of shorter term advertising products.

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Impact of the COVID-19 Pandemic

While the impact of the COVID-19 pandemic continues to evolve, it did not materially affect our consolidated financial statements during 2020 or 2021. We are closely and continually monitoring the impact of the COVID-19 pandemic on our business, employees, customers and communities. We continue to monitor the guidelines and mandates provided by governmental and health authorities and plan to continue adapting our business operations when and as deemed appropriate to comply with these guidelines and mandates and to respond to changing circumstances. Most of our workforce has been fully vaccinated against COVID-19 and, where permitted, has returned to the office. We have resumed in-person marketing events and some business travel. The global workforce has been operating in an extraordinary and mostly digital and remote manner as the world adapted during the COVID-19 pandemic. During this time, many working adults moved to different locations and adjusted to a different way of living. As we transitioned our employees back to the office, we experienced, and we expect to continue to experience, attrition among our workforce resulting in increased costs. Continued attrition or the inability to replenish and grow our work force may result in work disruptions in the future. Overall, the increased direct spend related to the COVID-19 pandemic, including office reconfiguration to enable social distancing and employee hiring and retention programs, has not been material to date and has had minimal impact on our financial position and operating results.

It is currently unclear how the commercial real estate industry will ultimately be impacted by the COVID-19 pandemic as businesses formulate and execute plans for employees to return to the office, implement hybrid work arrangements – allowing work from the office or home, or switch to all work from home. If the demand for office space decreases significantly, there could be a downturn in the commercial real estate market which may materially adversely affect many of our clients. A depressed commercial real estate market would have a negative impact on our core customer base, which could impact our customers’ ability to subscribe and pay for our services and reduce demand for our services. Reduced demand and increased cancellations could cause our revenues or our revenue growth rates to decline and reduce our profitability.

During 2021, excluding our multifamily service offering, which is discussed under Service Offerings above, our company-wide net new bookings and renewal rates for subscription-based services have returned to pre-pandemic levels. In addition, we saw improvements in collection trends along with improvements in the economy which led us to reduce our allowance for credit losses previously taken. Due to the uncertainty associated with the COVID-19 pandemic and any resulting economic impacts, we will continue to monitor these trends and the effect on our results of operations. Any anticipated changes in financial performance discussed in this report are based on our current observations and experience and involve estimates and assumptions. As the future extent and duration of the effects of the COVID-19 pandemic remain unclear, our estimates and assumptions may evolve as conditions change and actual results may vary.

The effects of the pandemic have not affected our ability to date to access funding on reasonably similar terms as were available to us prior to March 2020.We strengthened our liquidity position through an equity offering of common stock in May 2020 and an offering of Senior Notes and amendment and restatement of our credit facility in early July 2020. See Note 11 and Note 15 in this Annual Report on Form 10-K for further discussion of our equity and Senior Notes offerings in 2020 and the 2020 Credit Agreement.

Development, Investments and Expansion

We plan to continue to invest in our business and our services, evaluate strategic growth opportunities, and pursue our key priorities as described below, while we closely monitor the economic developments from the COVID-19 pandemic and manage our response to such developments. We are committed to supporting, improving and enhancing our information, analytics and online marketplace solutions, including expanding and improving our offerings for our client base and site users, including property owners, property managers, buyers, commercial tenants and residential renters and buyers. We expect to continue our software development efforts to improve existing services, introduce new services, integrate and cross-sell services, integrate recently completed acquisitions and expand and develop supporting technologies for our research, sales and marketing organizations. We may reevaluate our priorities as the COVID-19 pandemic and its economic impact continues to evolve.

Our key priorities for 2022 currently include:

•Continuing to develop and invest in residential marketplaces. Our residential team is creating new and improved tools to help consumers have a highly contextual experience when searching for homes supported by high quality media and in-depth attributes of homes and details of the surrounding neighborhoods, parks and schools and to help consumers collaborate with their agent and other consumers. We are also creating new and improved tools to help agents promote their residential listings, connect with buyers and sellers and streamline their daily workflow. In October 2021, we reached an agreement to create, maintain and market a consumer-facing search website and mobile app for the Real Estate Board of New York's Residential Listing Service. In accordance with that agreement, we are developing a

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custom version of the Homesnap platform, branded as Citysnap™, specifically for the five boroughs of New York City. To support the expanded product offering, we expect to increase our investment in residential products in 2022 by approximately $200 million. The most significant components of our investment are expected to be content development, marketing costs and technology resources.The increase in our investment in residential products in 2022 is expected to reduce our results of operations and cash flow from operations for the year ended December 31, 2022. We plan to continue to monitor and evaluate these investments and adjust our residential business strategy and level of investment as we determine appropriate.

•Continuing to invest in CoStar, including:

◦Enhancing benchmarking capabilities. We integrated STR's data into CoStar in 2021 and continue to develop dynamic analytics for and additional coverage of hospitality properties. We plan to apply STR's benchmarking capabilities within CoStar;

◦Developing CMBS Analytics, which will aggregate loan and property data across covered markets. The initial CMBS Analytics release is expected to include loan origination metrics, distressed loan levels and maturity volumes, as well as detailed revenue and expense information. In later releases of this solution, we plan to include detailed prepayment information on disposed loans;

◦Continuing to develop a solution for lenders that leverages CoStar's Risk Analytics capabilities to support lenders with risk management, underwriting, surveillance and compliance reporting. Lender was released in beta in February 2022 and provides a focus on portfolio risk analytics and surveillance to help lenders meet regulatory and accounting requirements. Subsequent releases are expected to focus on loan origination and underwriting; and

◦Expanding our international presence by hiring managers and teams of field researchers in European markets.

•Continuing to improve and market our Apartments.com service offerings to create the best and most comprehensive consumer rental search experience as well as continuing to advance the digital rental experience that allows renters to apply for leases and make rent payments, and for landlords to receive and assess tenant applications online through a single platform. We seek user feedback as we work to improve our services and continue to aggressively market our multifamily listing services in an effort to attract consumers and, in turn, provide more value to advertisers. Our Apartments.com marketing spending is focused on enhanced brand awareness and search engine marketing. As we continue to assess the success and effectiveness of our marketing campaign, we will continue to work to determine the optimal level and focus of our marketing investment for our multifamily listing services for future periods and may adjust our marketing spend and focus as we deem appropriate. Apartments.com has been successful in generating increased traffic to the network and as a result is delivering increased leads per ad to customers. We have implemented a new pricing strategy to align the product level prices with the value of the leads generated. We intend to monitor our new pricing strategy to determine whether current pricing reflects the increased lead generation we are delivering to our customers.

•Continuing to invest in the LoopNet marketplaces. To support the LoopNet marketplaces, we implemented training and incentive programs for our existing sales team to increase sales of LoopNet advertisements, with a focus on brokers and property owners. We have enhanced the content on LoopNet.com (including high-quality imagery), seeking targeted advertisements and are providing premium marketing services (such as LoopNet Diamond, Platinum and Gold Ads) that increase a property listing’s exposure, and adding more content for premium listings to better meet the needs of a broader cross section of the commercial real estate industry. We are continuing our plans to recruit and develop a dedicated LoopNet sales team to help support and grow the business. To generate brand awareness and site traffic for the LoopNet.com network, we expect to continue to incur costs in a multi-media marketing campaign, reinforced with search engine optimization efforts and will continue to work to determine the optimal level and focus of this marketing effort for future periods and may adjust the spend and focus as deemed appropriate.

•Continuing to invest in the Ten-X auction platform. We have integrated the Ten-X platform with both CoStar and LoopNet to expand the audience for Ten-X auctions to include our commercial real estate users. We also plan to enhance access to Ten-X's data room information from CoStar and LoopNet. To increase exposure of properties to be auctioned on Ten-X, we are allocating banner space on both our CoStar and LoopNet sites for advertising for Ten-X properties. We continue to execute our plan to expand the Ten-X sales force and focus on increasing the number of qualified bidders and the number of owners bringing properties to the site. To generate brand awareness and site traffic for the Ten-X platform, we expect to continue to incur costs in a multi-media marketing campaign, reinforced with search engine optimization efforts and will continue to work to determine the optimal level and focus of this marketing effort for future periods and may adjust the spend and focus as deemed appropriate.

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We intend to continue to assess the need for additional investments in our business in order to develop and distribute new services and functionality within our current platform or expand the reach of, or otherwise improve, our current service offerings. Any future product development or expansion of services, combination and coordination of services or elimination of services or corporate expansion, development or restructuring efforts could reduce our profitability and increase our capital expenditures. Any new investments, changes to our service offerings or other unforeseen events could cause us to experience reduced revenues or generate losses and negative cash flow from operations in the future. Any development efforts must comply with our credit facility, which contains restrictive covenants that restrict our operations and use of our cash flow and may prevent us from taking certain actions that we believe could increase our profitability or otherwise enhance our business.

For further discussion of our Company, strategy and products, see our business overview set forth in "Item 1. Business" in this Annual Report on Form 10-K.

Non-GAAP Financial Measures

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

We may disclose adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share on a consolidated basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors meaningfully evaluate and compare our results of operations to our previously reported results of operations or to those of other companies in our industry.

We view EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share as operating performance measures. We believe that the most directly comparable GAAP financial measure to EBITDA, adjusted EBITDA and non-GAAP net income is net income. We believe the most directly comparable GAAP financial measures to non-GAAP net income per diluted share and adjusted EBITDA margin are net income per diluted share and net income divided by revenue, respectively. In calculating EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share, we exclude from net income the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions and the material limitations on the use of these non-GAAP financial measures as a result of these exclusions. EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share are not measurements of financial performance under GAAP and should not be considered as a measure of liquidity, as an alternative to net income or as an indicator of any other measure of performance derived in accordance with GAAP. Investors and potential investors in our securities should not rely on EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share as a substitute for any GAAP financial measure, including net income and net income per diluted share. In addition, we urge investors and potential investors in our securities to carefully review the GAAP financial information included as part of our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are filed with the Securities and Exchange Commission, as well as our quarterly earnings releases, and compare the GAAP financial information with our EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share.

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EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share may be used by management to internally measure our operating and management performance and may be used by investors as supplemental financial measures to evaluate the performance of our business. We believe that these non-GAAP measures, when viewed with our GAAP results and accompanying reconciliations, provide additional information to investors that is useful to understand the factors and trends affecting our business without the impact of certain acquisition-related items. We have spent more than 30 years building our database of commercial real estate information and expanding our markets and services partially through acquisitions of complementary businesses. Due to these acquisitions, our net income has included significant charges for amortization of acquired intangible assets, depreciation and other amortization, acquisition- and integration-related costs, restructuring costs and loss on debt extinguishment. Adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share exclude these charges and provide meaningful information about the operating performance of our business, apart from charges for amortization of acquired intangible assets, depreciation and other amortization, acquisition- and integration-related costs, restructuring costs; settlement and impairment costs incurred outside our ordinary course of business. We believe the disclosure of non-GAAP measures can help investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year without the impact of these items. We also believe the non-GAAP measures we disclose are measures of our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest (expense) income, other (expense) income, income taxes, stock-based compensation expenses, acquisition- and integration-related costs, restructuring costs, loss on debt extinguishment and settlement and impairment costs incurred outside our ordinary course of business, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on EBITDA and may rely on adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income or non-GAAP net income per diluted share to provide a financial measure by which to compare our operating performance against that of other companies in our industry.

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

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

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

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

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

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

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

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

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

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

•The amount of settlement and impairment costs incurred outside of our ordinary course of business may be useful for investors to consider because they generally represent gains or losses from the settlement of litigation matters or impairments on acquired intangible assets. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

•The amount of restructuring costs incurred may be useful for investors to consider because they generally represent costs incurred in connection with a change in a contract or a change in the makeup of our properties or personnel. We do not consider the amount of restructuring related costs to be a representative component of the day-to-day operating performance of our business.

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

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

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Net income","$","292,564","","","$","227,128","","","$","314,963"],["Amortization of acquired intangible assets in cost of revenues","28,809","","","25,675","","","21,357"],["Amortization of acquired intangible assets in operating expenses","74,817","","","62,457","","","33,995"],["Depreciation and other amortization","29,018","","","28,812","","","25,813"],["Interest expense (income), net","31,621","","","17,395","","","(16,742)"],["Other (income) expense, net","(3,252)","","","827","","","(10,660)"],["Income tax expense","111,404","","","43,852","","","75,986"],["EBITDA","$","564,981","","","$","406,146","","","$","444,712"],["Net cash flows provided by (used in)"],["Operating activities","$","469,731","","","$","486,106","","","$","457,780"],["Investing activities","$","(381,343)","","","$","(464,163)","","","$","(483,753)"],["Financing activities","$","(15,679)","","","$","2,662,297","","","$","(4,154)"]]
[[/GREPCENT_TABLE]]

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Consolidated Results of Operations

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["Revenues","$","1,944,135","","","100","%","","$","1,659,019","","","100","%","","$","1,399,719","","","100","%"],["Cost of revenues","357,241","","","18","","","308,968","","","19","","","289,239","","","21"],["Gross profit","1,586,894","","","82","","","1,350,051","","","81","","","1,110,480","","","79"],["Operating expenses:"],["Selling and marketing (excluding customer base amortization)","622,007","","","32","","","535,778","","","32","","","408,596","","","29"],["Software development","201,022","","","10","","","162,916","","","10","","","125,602","","","9"],["General and administrative","256,711","","","13","","","299,698","","","18","","","178,740","","","13"],["Customer base amortization","74,817","","","4","","","62,457","","","4","","","33,995","","","2"],["Total operating expenses","1,154,557","","","59","","","1,060,849","","","64","","","746,933","","","53"],["Income from operations","432,337","","","22","","","289,202","","","17","","","363,547","","","26"],["Interest (expense) income, net","(31,621)","","","(2)","","","(17,395)","","","(1)","","","16,742","","","1"],["Other income (expense), net","3,252","","","\u2014","","","(827)","","","\u2014","","","10,660","","","1"],["Income before income taxes","403,968","","","21","","","270,980","","","16","","","390,949","","","28"],["Income tax expense","111,404","","","6","","","43,852","","","3","","","75,986","","","5"],["Net income","$","292,564","","","15","%","","$","227,128","","","14","%","","$","314,963","","","23","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["CoStar","$","722,821","","","37","%","","$","664,735","","","40","%","","$","617,798","","","44","%"],["Information services","141,655","","","7","","","130,070","","","8","","","88,446","","","6"],["Multifamily","678,680","","","35","","","598,555","","","36","","","490,631","","","35"],["LoopNet(1)","207,511","","","11","","","179,805","","","11","","","149,980","","","11"],["Residential(1)","74,583","","","4","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Other Marketplaces(1)","118,885","","","6","","","85,854","","","5","","","52,864","","","4"],["Total revenues(2)","$","1,944,135","","","100%","","$","1,659,019","","","100%","","$","1,399,719","","","100%"],["__________________________"]]
[[/GREPCENT_TABLE]]

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

(2)For further discussion of our Company, strategy and products, see our business overview set forth in "Item 1. Business" in this Annual Report on Form 10-K.

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Comparison of Year Ended December 31, 2021 and Year Ended December 31, 2020

The following table provides a comparison of our selected consolidated results of operations for the years ended December 31, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","2021","","2020","","Increase (Decrease)","","Increase (Decrease)"],["Revenues:"],["CoStar","$","722,821","","","$","664,735","","","$","58,086","","","9%"],["Information services","141,655","","","130,070","","","11,585","","","9"],["Multifamily","678,680","","","598,555","","","80,125","","","13"],["LoopNet (1)","207,511","","","179,805","","","27,706","","","15"],["Residential (1)","74,583","","","\u2014","","","74,583","","","NM"],["Other Marketplaces (1)","118,885","","","85,854","","","33,031","","","38"],["Total revenues","1,944,135","","","1,659,019","","","285,116","","","17"],["Cost of revenues","357,241","","","308,968","","","48,273","","","16"],["Gross profit","1,586,894","","","1,350,051","","","236,843","","","18"],["Operating expenses:"],["Selling and marketing (excluding customer base amortization)","622,007","","","535,778","","","86,229","","","16"],["Software development","201,022","","","162,916","","","38,106","","","23"],["General and administrative","256,711","","","299,698","","","(42,987)","","","(14)"],["Customer base amortization","74,817","","","62,457","","","12,360","","","20"],["Total operating expenses","1,154,557","","","1,060,849","","","93,708","","","9"],["Income from operations","432,337","","","289,202","","","143,135","","","49"],["Interest expense, net","(31,621)","","","(17,395)","","","14,226","","","82"],["Other income (expense), net","3,252","","","(827)","","","4,079","","","NM"],["Income before income taxes","403,968","","","270,980","","","132,988","","","49"],["Income tax expense","111,404","","","43,852","","","67,552","","","154"],["Net income","$","292,564","","","$","227,128","","","$","65,436","","","29%"],["__________________________"],["NM - Not meaningful"]]
[[/GREPCENT_TABLE]]

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

Revenues. Revenues increased to $1.9 billion in 2021, from $1.7 billion in 2020. The $285 million increase was attributable to increases across all of our primary service offerings, led by an $80 million, or 13%, increase in multifamily revenue. The multifamily increase was due to higher sales volume and upgrades of existing customers to higher value advertising packages earlier in 2021. Residential revenues were $75 million, and were solely comprised of operations from the acquisitions of Homesnap and Homes.com, which contributed revenues of $61 million and $14 million, respectively. CoStar revenues increased $58 million, or 9%, primarily due to higher sales volume driven by an increase in subscribers, as well as, subscribers upgrading their subscriptions, and the resumption of annual price increases for contract renewals that began in September 2021. Other marketplaces revenue increased $33 million, or 38%, primarily driven by Ten-X, which had an increase of $26 million due to two additional quarters of revenue compared to the prior year. LoopNet revenues increased $28 million, or 15%, as a result of stronger site traffic which drove an increase in the price per advertisement as compared to the prior year. Information services revenue increased $12 million, or 9%, primarily due to increases of $6 million and $4 million in revenue for our CoStar Real Estate Manager and STR service offerings, respectively.

Gross Profit. Gross profit increased to $1.6 billion in 2021, from $1.4 billion in 2020. The gross profit percentage was 82% for 2021 compared to 81% for 2020. The increase in gross profit was due to higher revenues partially impacted by an increase in cost of revenues of $48 million, or 16%, primarily due to an increase of $48 million due to the acquisitions of Homesnap, Homes.com and Ten-X. These additional costs primarily consisted of personnel and data costs, and to a lesser extent, amortization, software and equipment costs and bank and merchant fees.

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Selling and Marketing Expenses. Selling and marketing expenses increased to $622 million in 2021, from $536 million in 2020. The $86 million increase was attributable to a $46 million increase in marketing expenses, primarily driven by a $32 million increase in marketing agency spending, primarily for LoopNet and Ten-X, and to a lesser extent, increases in events, digital and other forms of marketing, partially offset by decreases in multifamily agency spending and search engine marketing. There was also a $34 million increase in personnel costs, primarily attributable to the acquisitions of Homesnap, Homes.com and Ten-X, and to a lesser extent, an increase in commissions expense for other products of $7 million, partially offset by a $4 million decrease in bonus expense.

Software Development Expenses. Software development expenses increased to $201 million in 2021, from $163 million in 2020, and remained consistent as a percentage of revenues at 10% in 2021 and 2020. The $38 million increase in the amount of software development expense was primarily due to a $33 million increase in personnel costs driven by the acquisitions of Homesnap, Homes.com and Ten-X, as well as, increased headcount to support the development of our products, and to a lesser extent, a $3 million increase in software equipment expense.

General and Administrative Expenses. General and administrative expenses decreased to $257 million in 2021, from $300 million in 2020, and decreased as a percentage of revenues to 13% in 2021 from 18% in 2020. The $43 million decrease in general and administrative expenses was primarily attributable to the $52 million break fee and $8 million in extension payments that were recognized in the prior year in connection with the Asset Purchase Agreement with RentPath, which was terminated in December 2020. In addition, there was a $14 million decrease in credit loss expense due to better than expected collections, resulting in updated assumptions regarding credit losses and a decrease in reserves previously increased due to uncertainty about the economic effects of COVID-19 pandemic. These decreases were partially offset by an increase of $13 million in general and administrative expenses due to the acquisitions of Homesnap, Homes.com and Ten-X, as well as, increases of $6 million in software and equipment expense, $3 million in personnel costs, $2 million each in depreciation, professional services, occupancy and travel costs.

Customer Base Amortization Expense. Customer base amortization expense increased to $75 million in 2021, from $62 million in 2020, and remained consistent as a percentage of revenues at 4% in 2021 and 2020. The increase in customer base amortization expense was primarily due to the acquisitions of Homesnap, Homes.com and Ten-X.

Interest Expense, net. Interest expense, net was $32 million in 2021, as compared to interest expense, net of $17 million in 2020. The increase of $14 million in 2021 was primarily due to interest expense of $28 million recognized during 2021 on our Senior Notes issued on July 1, 2020 as compared to $14 million in 2020. In addition, there was a decrease of $4 million in interest income caused by lower rates of return on our cash and cash equivalent balances compared to the prior year, partially offset by interest earned on higher average cash balances. These changes were partially offset by prior year interest expense of $5 million incurred on the $745 million draw on our revolving credit facility in the first quarter of 2020.

Other Income (Expense), net. Other income (expense), net was a net income of $3 million in 2021, as compared to net expense of $1 million in 2020. The increase in other income was due to rental income on the Richmond building, which was acquired in 2021, and to a lesser extent, increases in foreign exchange gains due to rate fluctuations.

Income Tax Expense. Income tax expense increased to $111 million in 2021, from $44 million in 2020, as a result of higher income before taxes and an increase in the effective tax rate for 2021 to 28%, compared to 16% in 2020. The increase in the effective tax rate was due to a tax restructuring gain, as well as, a decrease in excess tax benefits. These increases were partially offset by a reduction of reserves for uncertain tax positions previously recognized.

For a comparison of our results of operations for the fiscal year ended December 31, 2020 to the year ended December 31, 2019, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the U.S. Securities and Exchange Commission on February 24, 2021.

Comparison of Business Segment Results for Year Ended December 31, 2021 and Year Ended December 31, 2020

We manage our business geographically in two operating segments, with the primary areas of measurement and decision-making being North America, which includes the U.S. and Canada, and International, which primarily includes Europe, Asia-Pacific and Latin America. Management relies on an internal management reporting process that provides revenue and operating segment EBITDA, which is our net income before interest (expense) income and other (expense) income, loss on debt extinguishment, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of our operating segments. EBITDA is used by management to internally measure operating and management performance and to evaluate the performance of the business. However, this

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measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

Segment Revenues. North America revenues increased to $1.9 billion for the year ended December 31, 2021, from $1.6 billion for the year ended December 31, 2020. The $276 million increase in North America revenues was attributable to increases in revenues for several of our services. Multifamily revenues increased $80 million due to higher sales volume and upgrades of existing customers to higher value advertising packages earlier in 2021. Residential revenues increased $75 million due to the acquisitions of Homesnap and Homes.com, which contributed revenues of $61 million and $14 million, respectively. CoStar revenues increased $53 million, primarily due to higher sales volume driven by an increase in customers, as well as, customers upgrading their subscriptions, and the resumption of annual price increases for contract renewals that began in September 2021. Other marketplaces revenue increased $33 million, primarily driven by Ten-X, which had an increase of $26 million due to two additional quarters of revenue compared to the prior year. LoopNet revenues increased $25 million as a result of stronger site traffic which drove an increase in the price per advertisement as compared to the prior year. Information services revenue increased $10 million due to increases of $6 million and $2 million in revenue for our CoStar Real Estate Manager and STR service offerings, respectively. International revenues increased to $67 million in 2021, from $57 million in 2020. The $10 million increase in International revenues was driven by growth in CoStar and STR, which were partially due to favorable changes in foreign exchange rates, and to a lesser extent, increases in LoopNet products, including the acquisition of BureauxLocaux.

Segment EBITDA. North America EBITDA increased to $557 million for the year ended December 31, 2021, from $411 million for the year ended December 31, 2020. The increase in North America EBITDA was primarily due to an increase in revenue, partially offset by increases in personnel, marketing and general and administrative costs. International EBITDA increased to income of $8 million for the year ended December 31, 2021 from a loss of $5 million for the year ended December 31, 2020. The increase was due to increased revenue and lower general and administrative costs, partially offset by increases in personnel and marketing costs.

For a comparison of our business segment results of operations for the fiscal year ended December 31, 2020 to the year ended December 31, 2019, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the U.S. Securities and Exchange Commission on February 24, 2021.

Liquidity and Capital Resources

We believe the balance of cash, cash equivalents and restricted cash, which was $3.8 billion as of December 31, 2021, along with cash generated by ongoing operations and continued access to capital markets, will be sufficient to satisfy the Company's cash requirements over the next 12 months and beyond. The Company’s material cash requirements include the following contractual and other obligations.

Debt. As of December 31, 2021, the Company had outstanding an aggregate principal amount of $1.0 billion of 2.800% Senior Notes due July 15, 2030. Future interest payments associated with the Senior Notes are $252 million, with $28 million payable within 12 months.

Leases. The Company has lease arrangements for office facilities, data centers and certain vehicles. As of December 31, 2021, the Company had fixed lease payment obligations of $134 million, with $30 million payable within 12 months.

Purchase Obligations. The Company’s purchase obligations are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the transaction and have an original term greater than one year. The services acquired under these agreements primarily relate to web hosting, third party data or listings and software subscriptions. As of December 31, 2021, the Company had purchase obligations of $95 million, with $40 million payable within 12 months.

Our future capital requirements will depend on many factors, including, among others, our operating results, expansion and integration efforts and our level of acquisition activity or other strategic transactions. To date, we have grown in part by acquiring other companies, and we expect to continue to make acquisitions.

We currently plan to expand our Richmond, Virginia campus which may result in a material cash requirement in 2022 and beyond. We continue to assess financing options for the project.

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Cash, cash equivalents and restricted cash for the year ended December 31, 2021 increased $71 million to $3.8 billion primarily due to cash generated from operations of $470 million and proceeds from the exercise of stock options and participation in our employee stock purchase plan of $18 million, partially offset by, cash paid for acquisitions of $193 million, purchases of property and equipment and other intangibles of $189 million, including $123 million for the purchase of an office building and the underlying land located in Richmond, Virginia and corporate aircraft for $40 million, as well as, $33 million of repurchases of common stock from employees to satisfy the employees' minimum tax withholding obligations upon the vesting of restricted stock grants.

Net cash provided by operating activities for the year ended December 31, 2021 was $470 million compared to $486 million for the year ended December 31, 2020. The $16 million decrease was due to a decrease in working capital of $141 million driven by payment of the $52 million termination fee pursuant to the Asset Purchase Agreement with RentPath in the first quarter of 2021, partially offset by an increase in net income excluding certain non-cash expenses such as depreciation and amortization and deferred income taxes. We expect to increase our investment in residential products in 2022 by approximately $200 million, which is expected to reduce our cash flow from operations for the year ended December 31, 2022.

Net cash used in investing activities for the year ended December 31, 2021 was $381 million compared to $464 million for the year ended December 31, 2020. The $83 million decrease in cash used in investing activities was primarily due to a decrease in cash paid for acquisitions of $233 million, partially offset by an increase in purchases of property, equipment and other assets which included $123 million for the purchase of an office building and the underlying land located in Richmond, Virginia and corporate aircraft for $40 million, and proceeds from the sale of our ARS investments of $10 million received during 2020.

Net cash used in financing activities for the year ended December 31, 2021 was $15.7 million compared to net cash provided by financing activities of $2.7 billion for the year ended December 31, 2020. This decrease in cash provided by financing activities is primarily due to proceeds from our May 2020 equity offering, net of transaction costs, of $1.7 billion, as well as, proceeds from the issuance of our Senior Notes, net of transaction costs, of $983 million during 2020.

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

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Critical Accounting Policies

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

•Long-lived assets, intangible assets and goodwill;

•Income taxes;

•Revenue recognition; and

•Business combinations.

With respect to our accounting policy for long-lived assets, intangible assets and goodwill, we further supplement in Note 2 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K with the following:

We assess the impairment of long-lived assets, identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments made by management relate to the expected useful lives of long-lived assets and our ability to recover the carrying value of such assets. The accuracy of these judgments may be adversely affected by several factors, including the factors listed below:

•Significant underperformance relative to historical or projected future operating results;

•Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

•Significant negative industry or economic trends; or

•Significant decline in our market capitalization relative to net book value for a sustained period.

When we determine that the carrying value of long-lived and identifiable intangible assets may not be recovered based upon the existence of one or more of the above indicators, we test for impairment.

Goodwill and identifiable intangible assets that are not subject to amortization are tested annually for impairment by each reporting unit on October 1 of each year and are also tested for impairment more frequently based upon the existence of one or more of the above indicators.

Goodwill represents the future economic benefits arising from a business combination and is calculated as the excess of purchase consideration paid in a business combination over the fair value of assets of the net identifiable assets acquired. Goodwill is not amortized, but instead tested for impairment at least annually by each reporting unit, or more frequently if an event or other circumstance indicates that the fair value of a reporting unit may be below its carrying amount. We may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount or elect to bypass 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 we elect to bypass such assessment, we then determine the fair value of each reporting unit. We estimate the fair value of each reporting unit based on a projected discounted cash flow model that includes significant assumptions and estimates including our discount rate, growth rate and future financial performance. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies and determined by management to be commensurate with the risk in our current business model. Assumptions about the growth rate and future financial performance of a reporting unit are based on our forecasts, business plans, economic projections and anticipated future cash flows. These assumptions are subject to change from period to period and could be adversely impacted by the uncertainty surrounding global market conditions, commercial real estate conditions and the competitive environment in which we operate. Changes in these or other factors could negatively affect our reporting units' fair value and potentially result in impairment charges. Such impairment charges could have an adverse effect on our results of operations. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference.

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As of October 1, 2021, we performed an assessment of the relevant qualitative factors for our North America and International reporting units and concluded that it was not more likely than not that the fair value of each reporting unit was less than its respective carrying amounts. There have been no events or changes in circumstances as a result of our qualitative impairment analysis on October 1, 2021, that would indicate that the carrying value of each reporting unit may not be recoverable.

For an in-depth discussion of each of our significant accounting policies, including our critical accounting policies and further information regarding estimates and assumptions involved in their application, see Note 2 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K.

Recent Accounting Pronouncements

See Note 2 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for further discussion of recent accounting pronouncements, including the expected dates of adoption.