Edgar Filing: COSTAR GROUP INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 0-24531

CoStar Group, Inc.

(Exact name of registrant as specified in its charter)



Delaware		52-2091509
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1331 L Street, NW

Washington, 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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, 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 Securities Exchange Act of 1934.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o
	Emerging growth company o

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 o No x

As of July 20, 2018, there were 36,391,084 shares of the registrant’s common stock outstanding.

COSTAR GROUP, INC.

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Statements of Operations	3

	Condensed Consolidated Statements of Comprehensive Income	4

	Condensed Consolidated Balance Sheets	5

	Condensed Consolidated Statement of Changes in Stockholders’ Equity	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	44

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

Signatures		48

PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenues	$	297,018		$	237,153		$	570,736		$	463,706
Cost of revenues	67,136			55,273			129,613			106,619
Gross profit	229,882			181,880			441,123			357,087

Operating expenses:
Selling and marketing (excluding customer base amortization)	112,965			91,726			201,455			168,128
Software development	26,271			23,144			49,184			45,518
General and administrative	38,056			34,557			78,646			68,552
Customer base amortization	8,816			4,570			14,619			9,344
	186,108			153,997			343,904			291,542
Income from operations	43,774			27,883			97,219			65,545
Interest and other income	2,652			605			5,639			1,034
Interest and other expense	(728		)	(2,693		)	(1,418		)	(5,379		)
Income before income taxes	45,698			25,795			101,440			61,200
Income tax expense	1,863			3,611			5,374			16,886
Net income	$	43,835		$	22,184		$	96,066		$	44,314

Net income per share - basic	$	1.22		$	0.68		$	2.67		$	1.37
Net income per share - diluted	$	1.20		$	0.68		$	2.64		$	1.36

Weighted average outstanding shares - basic	36,073			32,406			35,983			32,341
Weighted average outstanding shares - diluted	36,450			32,739			36,400			32,651

See accompanying notes.

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
Net income	$	43,835		$	22,184	$	96,066		$	44,314
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment	(2,059		)	1,831		(1,108		)	2,242
Total other comprehensive (loss) income	(2,059		)	1,831		(1,108		)	2,242
Total comprehensive income	$	41,776		$	24,015	$	94,958		$	46,556

See accompanying notes.

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)



	June 30, 2018		December 31, 2017
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	966,278	$	1,211,463
Accounts receivable, less allowance for doubtful accounts of approximately $5,065 and $6,469 as of June 30, 2018 and December 31, 2017, respectively	69,984		60,900
Prepaid expenses and other current assets	39,723		15,572
Total current assets	1,075,985		1,287,935

Long-term investments	10,070		10,070
Deferred income taxes, net	4,046		5,431
Property and equipment, net	84,648		84,496
Goodwill	1,549,517		1,283,457
Intangible assets, net	299,611		182,892
Deferred commission costs, net	76,159		—
Deposits and other assets	7,660		6,179
Income tax receivable	14,878		12,981
Total assets	$	3,122,574	$	2,873,441
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,394	$	9,262
Accrued wages and commissions	45,593		54,104
Accrued expenses	37,343		22,193
Deferred gain on the sale of building	2,523		2,523
Income taxes payable	94		8,166
Deferred rent	4,632		4,732
Deferred revenue	46,341		45,686
Total current liabilities	145,920		146,666

Deferred gain on the sale of building	14,930		16,192
Deferred rent	32,230		33,909
Deferred income taxes, net	62,830		12,070
Income taxes payable	16,046		13,354
Total liabilities	271,956		222,191

Total stockholders’ equity	2,850,618		2,651,250
Total liabilities and stockholders’ equity	$	3,122,574	$	2,873,441

See accompanying notes.

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT 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		Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings		Total Stockholders’ Equity
Balance at December 31, 2017	36,107		$	361	$	2,339,253		$	(9,020	)	$	320,656	$	2,651,250
Cumulative effect of adoption of new accounting standard, net of tax	—		—		—			—			54,464		54,464
Balance at January 1, 2018	36,107		$	361	$	2,339,253		$	(9,020	)	$	375,120	$	2,705,714
Net income	—		—		—			—			96,066		96,066
Other comprehensive income	—		—		—			(1,108		)	—		(1,108		)
Exercise of stock options	123		1		11,588			—			—		11,589
Restricted stock grants	126		1		(1		)	—			—		—
Restricted stock grants surrendered	(76	)	—		(22,394		)	—			—		(22,394		)
Stock-based compensation expense, net of forfeitures	—		—		21,470			—			—		21,470
Employee stock purchase plan	8		—		2,915			—			—		2,915
Stock issued for acquisitions	103		1		36,365			—			—		36,366
Balance at June 30, 2018	36,391		$	364	$	2,389,196		$	(10,128	)	$	471,186	$	2,850,618

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six Months Ended June 30,
	2018			2017
Operating activities:
Net income	$	96,066		$	44,314
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	37,567			33,158
Amortization of deferred commissions costs	24,275			—
Amortization of debt issuance costs	436			1,487
Stock-based compensation expense	21,640			19,460
Deferred income tax expense, net	4,291			3,434
Bad debt expense	2,857			2,349
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(5,089		)	(5,177		)
Prepaid expenses and other current assets	(17,655		)	(7,887		)
Deferred commissions	(29,554		)	—
Deposits and other assets	(1,444		)	(103		)
Accounts payable and other liabilities	(16,619		)	605
Deferred revenue	2,546			3,723
Net cash provided by operating activities	119,317			95,363

Investing activities:
Purchases of property and equipment and other assets	(15,851		)	(12,674		)
Cash paid for acquisitions, net of cash acquired	(340,074		)	(45,068		)
Net cash used in investing activities	(355,925		)	(57,742		)

Financing activities:
Payments of long-term debt	—			(35,000		)
Repurchase of restricted stock to satisfy tax withholding obligations	(22,394		)	(13,456		)
Proceeds from exercise of stock options and employee stock purchase plan	14,214			7,683
Net cash used in financing activities	(8,180		)	(40,773		)

Effect of foreign currency exchange rates on cash and cash equivalents	(397		)	567
Net (decrease) in cash and cash equivalents	(245,185		)	(2,585		)
Cash and cash equivalents at the beginning of period	1,211,463			567,223
Cash and cash equivalents at the end of period	$	966,278		$	564,638

Supplemental cash flow disclosures:
Interest paid	$	381		$	3,890
Income taxes paid	24,776			26,241

Supplemental non-cash investing and financing activities:
Stock issued in connection with acquisition - ForRent	$	36,366		$	—

See accompanying notes.

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 covering the United States (“U.S.”), the United Kingdom (“U.K.”), and parts of Canada, Spain, Germany and France. The Company also provides online marketplaces for commercial real estate, apartment rentals, lands for sale and businesses for sale. The Company operates within two operating segments, North America and International, 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 one year.


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 necessary to present fairly the Company’s financial position at June 30, 2018 and December 31, 2017, the results of its operations for the three and six months ended June 30, 2018 and 2017, its comprehensive income for the three and six months ended June 30, 2018 and 2017, its changes in stockholders' equity for the six months ended June 30, 2018 and its cash flows for the six months ended June 30, 2018 and 2017. These adjustments are of a normal recurring nature.

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, 2017.

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 doubtful accounts, useful lives of property and equipment, intangible assets and deferred commissions, recoverability of long-lived assets and intangible assets with definite lives, goodwill, income taxes, fair value of equity instruments, fair value of auction rate securities (“ARS”), accounting for business combinations and loss 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

Subsequent to the Adoption of Accounting Standards Codification Revenue from Contracts with Customers (“ASC 606") on January 1, 2018

The Company derives revenues primarily by (i) providing access to its proprietary database of commercial real estate information and (ii) providing an online marketplace for professional property management companies, property owners, brokers, and landlords 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

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

advertises and the prominence and placement of a client's advertised properties in the search results. A majority of the subscription-based license agreements have a term of one year and renew automatically.

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.

The Company's contracts with customers often include promises to transfer multiple services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. Determining whether services are considered distinct performance obligations may require significant judgment. Judgment is required to determine the standalone selling price (“SSP”) for each distinct performance obligation. In instances where SSP is not directly observable, such as when the Company does not sell the service separately, the Company determines the SSP using information that may include market conditions and other observable inputs.

Deferred revenue results from amounts billed in advance to customers or cash received from customers in advance of the sale of subscription licenses and is recognized over the term of the license agreement.

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

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 commissions costs are not capitalized as they do not represent incremental costs of obtaining a contract. See Note 3 for further discussion on the impact of the adoption of ASC 606.

For details about the Company’s revenue recognition policy prior to the adoption of ASC 606, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Cost of Revenues

Cost of revenues principally consists of salaries, benefits, bonuses and stock-based compensation expenses 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. Additionally, cost of revenues includes the cost of data from third-party data sources, credit card and other transactions fees relating to processing customer transactions, which are expensed as incurred, and the amortization of acquired trade names and other intangible assets and database technology.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs include e-commerce, television, radio, print and other media advertising. Advertising costs were approximately $47 million and $38 million for the three months ended June 30, 2018 and 2017, respectively. Advertising costs were approximately $70 million and $62 million for the six months ended June 30, 2018 and 2017, respectively.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Foreign Currency Translation

The Company’s functional currency in its foreign locations is the local currency. Assets and liabilities are translated into U.S. dollars using the exchange rates as of the balance sheet dates. Revenues, expenses, gains and losses are translated at the average exchange rates in effect during each period. 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 foreign currency exchange transactions are included in the condensed consolidated statements of operations. There were no material gains or losses from foreign currency exchange transactions for the three and six months ended June 30, 2018 and 2017.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (in thousands):



	June 30, 2018			December 31, 2017
Foreign currency translation adjustment	$	(9,398	)	$	(8,290	)
Accumulated net unrealized loss on investments, net of tax	(730		)	(730		)
Total accumulated other comprehensive loss	$	(10,128	)	$	(9,020	)

There were no amounts reclassified out of accumulated other comprehensive loss to the condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017. The foreign currency translation adjustment includes intra-entity foreign currency transactions that are of a long-term investment nature.

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 anticipates that some or all of an asset may not be realized through future taxable earnings or implementation of tax planning strategies. Interest and penalties related to income tax matters are recognized in income tax expense. See Note 10 for additional information regarding income taxes.

Net Income Per Share

Net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period on a basic and diluted basis. The Company’s potentially dilutive securities include stock options, unvested performance-based restricted stock and restricted stock units. Diluted net income per share considers the impact of potentially dilutive securities except in periods in which there is a net loss, as the inclusion of the potentially dilutive common shares would have an anti-dilutive effect.

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 June 30,				Six Months Ended June 30,
Numerator:	2018		2017		2018		2017
Numerator:
Net income	$	43,835	$	22,184	$	96,066	$	44,314
Denominator:
Denominator for basic net income per share — weighted-average outstanding shares	36,073		32,406		35,983		32,341
Effect of dilutive securities:
Stock options and restricted stock awards	377		333		417		310
Denominator for diluted net income per share — weighted-average outstanding shares	36,450		32,739		36,400		32,651

Net income per share — basic	$	1.22	$	0.68	$	2.67	$	1.37
Net income per share — diluted	$	1.20	$	0.68	$	2.64	$	1.36

Stock options to purchase approximately 83,000 and 96,000 shares that were outstanding for the three months ended June 30, 2018 and 2017, respectively, were not included in the computation of diluted net income per share because the inclusion of the potentially dilutive common shares would have an anti-dilutive effect. Stock options to purchase approximately 83,000 and 174,000 shares that were outstanding for the six months ended June 30, 2018 and 2017, respectively, were not included in the computation of diluted net income per share because the inclusion of the potentially dilutive common shares would have an anti-dilutive effect. Shares underlying restricted common stock awards that vest based on Company performance, market and service 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. Shares underlying restricted stock units that vest based on Company service 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.

The following table summarizes the shares underlying the performance-based restricted stock awards and service-based restricted stock units excluded from the basic and diluted calculation (in thousands):



	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Performance-based restricted stock awards	84	85	84	85
Service-based restricted stock units	1	1	1	1
Total shares excluded from computation	85	86	85	86

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 condensed consolidated statements of operations.

Stock-based compensation expense is measured at the grant date of the stock-based awards that vest over set time periods based on their fair values, and is recognized on a straight line basis as expense over the vesting periods of the awards, net of an estimated forfeiture rate. For equity instruments that vest based on performance, the Company assesses the probability of the achievement of the performance conditions at the end of each reporting period, or more frequently based upon the occurrence of events that may change the probability of whether the performance conditions would be met. If the Company's initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing of recognition may fluctuate from period to period based on those estimates. For equity instruments that vest based on a performance condition and a market condition, the Company estimates the fair value of each equity instrument granted on the date of grant using a Monte-

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Carlo simulation model. This pricing model uses multiple simulations to evaluate the probability of achieving the market condition to calculate the fair value of the awards. Stock-based compensation expense is updated based on the expected achievement of the related performance conditions at the end of each reporting period. 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.

Stock-based compensation expense for stock options, performance-based restricted stock awards, restricted stock units 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 June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Cost of revenues	$	1,597	$	1,339	$	3,028	$	2,510
Selling and marketing	1,838		1,887		3,673		3,539
Software development	1,937		1,840		3,666		3,650
General and administrative	5,856		5,037		11,273		9,761
Total stock-based compensation expense	$	11,228	$	10,103	$	21,640	$	19,460

Options to purchase 11,984 and 69,993 shares were exercised during the three months ended June 30, 2018 and 2017, respectively. Options to purchase 122,775 and 78,283 shares were exercised during the six months ended June 30, 2018 and 2017, respectively.

The Company adopted the Management Stock Purchase Plan on December 7, 2017. This plan is intended to provide selected key employees of the Company and its subsidiaries the opportunity to defer a portion of their bonus and commission compensation and to align management and shareholder interests through awards of deferred stock units under this plan and awards of matching restricted stock units under the Company's 2016 Stock Incentive Plan or its successor plan(s) starting with bonuses and commission compensation for 2018. The plan does not currently have an impact on the financial statements.

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. These amounts are reflected in the consolidated balance sheets as long-term assets for costs related to revolving debt. 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 using the appropriate method. The Company had capitalized debt issuance costs, net of amortization, of approximately $4 million and $4 million as of June 30, 2018 and December 31, 2017, respectively. The debt issuance costs are associated with the Company's previous credit agreements, and the current amended and restated 2017 Credit Agreement (the "2017 Credit Agreement"). See Note 9 for additional information regarding the revolving credit facility. The Company amortized debt issuance costs and commitment fees of approximately $710 thousand and $877 thousand for the three months ended June 30, 2018 and 2017, respectively. The Company amortized debt issuance costs and commitment fees of approximately $1 million and $2 million for the six months ended June 30, 2018 and 2017, respectively.

Business Combinations

The Company allocates the purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. 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 database technology, acquired trade names and building photography, useful lives 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.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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, to determine their estimated amounts.

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 incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our 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 our 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 our provision for income taxes in our consolidated statement of operations and comprehensive income and could have a material impact on our results of operations and financial position.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

There have been no developments to the Recent Accounting Pronouncements discussion included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, including the expected dates of adoption and estimated effects on the Company’s condensed consolidated financial statements, except for the following:

In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard, Accounting Standards Update (“ASU") 2014-09, Revenue from Contracts with Customers (ASC 606) that is designed to improve financial reporting by creating common recognition guidance for GAAP and International Financial Reporting Standards (“IFRS”). This guidance provides a robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those services. From March to December 2016, amendments to the new revenue recognition standard were issued to clarify numerous accounting topics, including, but not limited to (i) the implementation guidance on principal versus agent considerations, (ii) the identification of performance obligations, (iii) the licensing implementation guidance, (iv) the objective of the collectability criterion, (v) the application of the variable consideration guidance and modified retrospective transition method, (vi) the way in which impairment testing is performed and (vii) the disclosure requirements for revenue recognized from performance obligations. This guidance permits the use of either a full retrospective method or a modified retrospective approach. The modified retrospective approach is applied only to the most current period presented along with a cumulative-effect adjustment at the date of adoption. This guidance is effective for annual reporting periods beginning after December 15, 2017.

On January 1, 2018, the Company adopted ASC 606, using the modified retrospective method. Results for reporting periods beginning subsequent to December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting policies prior to adoption. In adopting the guidance, the Company applied the guidance to all customer contracts and used several available practical expedients including assessing contracts with similar terms and conditions on a “portfolio” basis and not including contracts with a duration of one year or less in the unsatisfied performance obligations disclosure.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The Company recorded a net cumulative increase to beginning retained earnings of $54 million. The Company adjusted the condensed consolidated financial statements from amounts previously reported due to the adoption of ASC 606. Select condensed consolidated balance sheet line items which were adjusted upon adoption were as follows (in thousands):



	As of December 31, 2017		ASC 606 Adjustments			As of January 1, 2018
Assets
Accounts receivable, net	$	60,900	$	(1,867	)	$	59,033
Prepaid expenses and other current assets	15,572		1,867			17,439
Deferred commissions costs	—		71,118			71,118
Liabilities
Deferred revenue	$	45,686	$	(1,716	)	$	43,970
Deferred income taxes, net	12,070		18,370			30,440
Retained earnings	320,656		54,464			375,120

The impact of the adoption of ASC 606 on the condensed financial statements for the period ended June 30, 2018 was as follows (in thousands):



	As of June 30, 2018 without adoption of ASC 606		ASC 606 Adjustments			As Reported as of June 30, 2018
Assets
Accounts receivable, net	$	74,508	$	(4,524	)	$	69,984
Prepaid expenses and other current assets	35,199		4,524			39,723
Deferred commissions costs	—		76,159			76,159
Liabilities
Deferred revenue	$	48,195	$	(1,854	)	$	46,341
Deferred income taxes, net	43,093		19,737			62,830
Retained earnings	412,910		58,276			471,186

If the Company had not adopted ASC 606, revenue recognized would have been $181 thousand lower and selling and marketing expense would have been $1 million higher for the three months ended June 30, 2018. For the six months ended June 30, 2018, revenue recognized would have been $138 thousand lower and selling and marketing expense would have been $5 million higher. The impact on net income and basic and diluted earnings per share for the three months ended June 30, 2018 would have been a decrease of approximately $1 million or $0.02 per share. For the six months ended June 30, 2018, the impact on net income and basic and diluted earnings per share would have been a decrease of approximately $4 million or $0.11 per share.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is designed to reduce the existing diversity in how certain cash receipts and cash payments are presented and classified in the consolidated statements of cash flows. This guidance is effective on a retrospective basis for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. On January 1, 2018, the Company adopted this guidance and the adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which is designed to clarify the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance indicates that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. This guidance is effective on a prospective basis for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. On January 1, 2018, the Company adopted this guidance and the adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

In May 2017, the FASB issued ASU 2017-09, Compensation- Stock Compensation (Topic 718): Scope of Modification Accounting, which is designed to reduce the existing diversity and complexity in the accounting for changes to terms or conditions of a share-based payment award. This guidance clarifies that an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as an equity instrument or liability instrument. This guidance is effective on a prospective basis for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. On January 1, 2018, the Company adopted this guidance and the adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations' accounting for leases. The guidance requires a company to recognize lease assets and lease liabilities on the balance sheet, as well as disclose key information about leasing arrangements. This guidance is effective on a modified retrospective basis for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its financial statements and related disclosures, and expects that the adoption of this standard may result in a material increase in assets and liabilities on its consolidated balance sheets.


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 June 30,
	2018						2017
	North America		International		Total		North America		International		Total
Information and analytics
CoStar Suite	$	127,289	$	6,523	$	133,812	$	108,374	$	5,420	$	113,794
Information services	13,474		2,207		15,681		16,405		1,907		18,312
Online marketplaces
Multifamily	104,793		—		104,793		68,076		—		68,076
Commercial property and land	42,732		—		42,732		36,971		—		36,971
Total revenues	$	288,288	$	8,730	$	297,018	$	229,826	$	7,327	$	237,153

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



	Six Months Ended June 30,
	2018						2017
	North America		International		Total		North America		International		Total
Information and analytics
CoStar Suite	$	251,176	$	12,997	$	264,173	$	213,261	$	10,512	$	223,773
Information services	26,234		4,656		30,890		32,621		4,027		36,648
Online marketplaces
Multifamily	192,476		—		192,476		132,067		—		132,067
Commercial property and land	83,197		—		83,197		71,218		—		71,218
Total revenues	$	553,083	$	17,653	$	570,736	$	449,167	$	14,539	$	463,706

Deferred Revenue

Changes in deferred revenue for the period were as follows (in thousands):



Balance at December 31, 2017	$	45,686
Cumulative effect of adoption of ASC 606	(1,716		)
Balance at January 1, 2018	43,970
Revenue recognized in the current period from the amounts in the beginning balance	(37,508		)
New deferrals, net of amounts recognized in the current period	39,879
Balance at June 30, 2018	$	46,341

Contract Assets

The Company had contract assets of $5 million and $2 million as of June 30, 2018 and January 1, 2018, 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 billed receivable when the conditions are satisfied.

Commissions

The Company recognized $12 million and $24 million of amortization of deferred commissions included in selling and marketing expense during the three and six months ended June 30, 2018, respectively. The Company determined that no deferred commissions were impaired as of June 30, 2018.

Commissions expense activity for the three and six months ended June 30, 2018 was as follows (in thousands):



	June 30, 2018
	Three Months Ended			Six Months Ended
Commissions incurred	$	17,794		$	41,389
Commissions capitalized in the current period	(13,282		)	(29,545		)
Amortization of deferred commissions costs	12,269			24,275
Total commissions expense	$	16,781		$	36,119

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Unsatisfied Performance Obligations

Remaining contract consideration for which revenue has not been recognized due to unsatisfied performance obligations was approximately $89 million at June 30, 2018, which the Company expects to recognize over the next three years. This amount does not include contract consideration for contracts with a duration of one year or less.


4.	ACQUISITION

On February 21, 2018 (the "Acquisition Date"), the Company acquired all of the issued and outstanding capital stock of DE Holdings, Inc., including its ForRent division ("ForRent"), a wholly owned subsidiary of Dominion Enterprises ("Seller"), for a purchase price of approximately $376 million. The purchase price was comprised of approximately $340 million in cash and 103,280 shares of Company common stock, valued at approximately $36 million, and is subject to a customary working capital adjustment. ForRent's primary service is digital advertising provided through a network of four multifamily websites. The acquisition is expected to yield increased revenue, significant cost synergies and an improved competitive position in the industry.

The Company applied the acquisition method to account for the ForRent 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):



Cash and cash equivalents	$	59
Accounts receivable	8,769
Indemnification asset	5,443
Goodwill	266,720
Intangible assets	141,300
Deferred tax liabilities	(34,032		)
Contingent sales tax liability	(6,260		)
State uncertain income tax position liability	(2,047		)
Other assets and liabilities	(3,453		)
Fair value of identifiable net assets acquired	$	376,499

The net assets of ForRent were recorded at their estimated fair value. In valuing 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. The estimated fair values are preliminary, subject to the completion of the accounting for certain tax related items and working capital adjustments.

The acquired customer base for the acquisition is composed of acquired customer contracts and the related customer relationships, and has a weighted average estimated useful life of ten years. The acquired database technology had an estimated useful life of three years. The acquired trade name has a weighted average estimated useful life of ten years. The acquired building photography had an estimated useful life of one year. Amortization of the acquired customer base is recognized on an accelerated basis related to the expected economic benefit of the intangible asset, while amortization of the acquired database technology, acquired building photography and acquired trade names and other intangible assets is recognized on a straight-line basis over their respective estimated useful lives. Goodwill recorded in connection with this acquisition is not amortized, but is subject to annual impairment tests. The $267 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment. $8 million of the goodwill recognized is expected to be deductible for income tax purposes in future periods.

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 ForRent 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 ForRent's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The Company has assessed the (i) probability of a contingent sales tax liability and (ii) a state uncertain income tax position liability due to apportionment factors, and has recorded accruals of $6 million and $2 million, respectively. The Company could not determine the fair value for the pre-acquisition state sales tax liability and therefore estimated a liability in accordance with ASC 450, using a state-by-state assessment. The uncertain income tax position was determined in accordance with the provisions of ASC 740 and was recorded as part of purchase price allocation. The Seller has provided an indemnity for tax liabilities related to periods prior to the acquisition. Seller's indemnification for sales taxes in the state of Texas is limited to approximately $2 million. The total indemnification asset established as of the acquisition date is $5 million.

As part of the ForRent acquisition, the Company incurred $3 million of transaction costs. Additionally, the Company paid $12 million cash into a cash escrow account for retention compensation for certain ForRent employees, provided they remain employed by the Company for a defined six month period following the acquisition or are earlier terminated without cause or resign for good reason. In the event some or all of those employees are not entitled to their retention bonus, those funds will be remitted to the Seller. The Company will expense the retention compensation as the services are performed in the post-combination period.

The unaudited pro forma financial information presented below summarizes the combined results of operations for the Company and ForRent as though the companies were combined as of January 1, 2017. The unaudited pro forma financial information for all periods presented include amortization charges from acquired intangible assets, retention compensation for stay pay, 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, 2017.

The unaudited pro forma financial information for the three and six months ended June 30, 2018 and 2017 combine the historical results of the Company for the three and six months ended June 30, 2018 and 2017 and the historical results of ForRent for the period January 1, 2018 through February 20, 2018 and three and six months ended June 30, 2017 and the effects of the pro forma adjustments listed above.

The unaudited pro forma financial information was as follows (in thousands, except per share data):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Revenue	$	297,018	$	263,103	$	584,488	$	515,998
Net income	$	50,992	$	13,963	$	103,831	$	29,932
Net income per share - basic	$	1.41	$	0.43	$	2.88	$	0.92
Net income per share - diluted	$	1.40	$	0.42	$	2.85	$	0.91

Revenue attributable to ForRent from February 21, 2018 through June 30, 2018 was approximately $30 million. Subsequent to the acquisition, the Company executed an integration plan which includes transitioning ForRent customers to arrangements in which the customer is able to advertise across the Company’s network of multi-family listing sites, including the legacy ForRent sites, for a single price. These arrangements do not specify revenues by site, however, all increases and decreases in combined revenue were allocated to ForRent for purposes of this disclosure.

Net loss attributable to ForRent from February 21, 2018 through June 30, 2018 was approximately $21 million. The net loss was primarily due to personnel costs, including severance and retention compensation, and the amortization of intangible assets upon acquisition. As the Company began integrating the sales force and operations after the closing of the acquisition in an effort to create operating synergies, these amounts represent estimates of ForRent revenue and net loss, and are not necessarily indicative of how ForRent would have performed on a stand-alone basis.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


5.	INVESTMENTS

The Company determines the appropriate classification of debt investments at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company considers all of its investments to be available-for-sale. The Company's investments consist of long-term variable rate debt instruments with an auction reset feature, referred to as ARS. Investments are carried at fair value.

Scheduled maturities of investments classified as available-for-sale as of June 30, 2018 are as follows (in thousands):



Maturity	Fair Value
Due:
July 1, 2018 — June 30, 2019	$	—
July 1, 2019 — June 30, 2023	—
July 1, 2023 — June 30, 2028	—
After June 30, 2028	10,070
Available-for-sale investments	$	10,070

The Company had no realized gains on its investments for each of the three and six months ended June 30, 2018 and 2017, respectively. The Company had no realized losses on its investments for each of the three and six months ended June 30, 2018 and 2017, respectively. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.

Changes in unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive loss in stockholders’ equity until realized. A decline in market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned.

As of June 30, 2018, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Auction rate securities	$	10,800	$	—	$	(730	)	$	10,070
Available-for-sale investments	$	10,800	$	—	$	(730	)	$	10,070

As of December 31, 2017, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Auction rate securities	$	10,800	$	—	$	(730	)	$	10,070
Available-for-sale investments	$	10,800	$	—	$	(730	)	$	10,070

The unrealized losses on the Company’s investments as of June 30, 2018 and December 31, 2017 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 are 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. Because the Company does not intend to sell these instruments and it is not more likely than not that the Company will be required to sell these instruments prior to anticipated recovery, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2018 and December 31, 2017. See Note 6 for further discussion of the fair value of the Company’s financial assets.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

The components of the Company’s investments in an unrealized loss position for twelve months or longer were as follows (in thousands):



	June 30, 2018					December 31, 2017
	Aggregate Fair Value		Gross Unrealized Losses			Aggregate Fair Value		Gross Unrealized Losses
Auction rate securities	$	10,070	$	(730	)	$	10,070	$	(730	)
Investments in an unrealized loss position	$	10,070	$	(730	)	$	10,070	$	(730	)

The Company did not have any investments in an unrealized loss position for less than twelve months as of June 30, 2018 and December 31, 2017.


6.	FAIR VALUE

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 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.

The following table represents the Company's fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of June 30, 2018 (in thousands):



	Level 1		Level 2		Level 3		Total
Assets:
Money market	$	585,533	$	—	$	—	$	585,533
Auction rate securities	—		—		10,070		10,070
Total assets measured at fair value	$	585,533	$	—	$	10,070	$	595,603

The following table represents the Company's fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2017 (in thousands):



	Level 1		Level 2		Level 3		Total
Assets:
Money market	$	586,084	$	—	$	—	$	586,084
Auction rate securities	—		—		10,070		10,070
Total assets measured at fair value	$	586,084	$	—	$	10,070	$	596,154

The Company’s Level 3 assets consist of ARS, whose underlying assets are primarily student loan securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education.

The following tables summarize changes in fair value of the Company’s Level 3 assets for the three and six months ended June 30, 2018 and 2017 (in thousands):

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Balance at beginning of period	$	10,070	$	9,952	$	10,070	$	9,952
Decrease in unrealized loss included in accumulated other comprehensive loss	—		—		—		—
Settlements	—		—		—		—
Balance at end of period	$	10,070	$	9,952	$	10,070	$	9,952

The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31, 2016 to June 30, 2018 (in thousands):



	Auction Rate Securities
Balance at December 31, 2016	$	9,952
Decrease in unrealized loss included in accumulated other comprehensive loss	118
Balance at December 31, 2017	10,070
Decrease in unrealized loss included in accumulated other comprehensive loss	—
Settlements	—
Balance at June 30, 2018	$	10,070

ARS are variable rate debt instruments whose interest rates are reset approximately every 28 days. The majority of the underlying securities have contractual maturities greater than twenty years. The ARS are recorded at fair value.

As of June 30, 2018, the Company held ARS with $11 million par value, all of which failed to settle at auction. The investments are of high credit quality and are primarily student loan securities supported by guarantees from the FFELP of the U.S. Department of Education. The Company may not be able to liquidate and fully recover the carrying value of the ARS in the near term. As a result, these securities are classified as long-term investments in the Company’s condensed consolidated balance sheet as of June 30, 2018. See Note 5 for further discussion of the scheduled maturities of investments classified as available-for-sale.

While the Company continues to earn interest on its ARS investments at the contractual rate, these investments are not currently actively trading and therefore do not currently have a readily determinable market value. The estimated fair value of the ARS no longer approximates par value. The Company obtained a third party valuation which used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of June 30, 2018. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of contractual cash flows, liquidity risk premiums, expected holding periods and default risk. The Company updates the discounted cash flow model on a quarterly basis to reflect any changes in the assumptions used in the model and settlements of ARS investments that occurred during the period.

The only significant unobservable input in the discounted cash flow model is the discount rate. The discount rate used represents the Company's estimate of the yield expected by a market participant from the ARS investments. The weighted average discount rate used in the discounted cash flow model as of June 30, 2018 and December 31, 2017 was approximately 6%. Selecting another discount rate within the range used in the discounted cash flow model would not result in a significant change to the fair value of the ARS.

Based on this assessment of fair value, as of June 30, 2018, the Company determined there was no decline in the fair value of its ARS investments. In addition, while the ARS are of high credit quality, if the issuers are unable to successfully close future auctions and/or their credit ratings deteriorate, then the Company may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — (CONTINUED)


7.	GOODWILL

The changes in the carrying amount of goodwill by operating segment consist of the following (in thousands):



	North America		International			Total
Goodwill, December 31, 2016	$	1,227,777	$	27,089		$	1,254,866
Acquisitions	25,717		—			25,717
Effect of foreign currency translation	—		2,874			2,874
Goodwill, December 31, 2017	1,253,494		29,963			1,283,457
Acquisition	266,720		—			266,720
Effect of foreign currency translation	—		(660		)	(660		)
Goodwill, June 30, 2018	$	1,520,214	$	29,303		$	1,549,517

The Company recorded goodwill of approximately $8 million in connection with the January 31, 2017 acquisition of Koa Lei, Inc. (doing business as Westside Rentals and now known as Westside Rentals, LLC), an online marketplace specializing in Southern California real estate rentals, and its affiliated entity Westside Credit Services, LLC, a provider of credit checks and tenant screening for landlords in the Southern California real estate rental market. The Company recorded goodwill of approximately $15 million in connection with the May 10, 2017 acquisition of certain assets and assumption of certain liabilities from Datasphere Technologies, Inc., in each case, related to the LandWatch.com® business (collectively referred to as “LandWatch”), a leading listing site dedicated to land and rural properties. The Company recorded goodwill of approximately $2 million in connection with the July 18, 2017 acquisition of The Screening Pros, LLC, an online apartment leasing platform that includes tenant screening services, rental applications and payments processing and lease renewals. The Company recorded goodwill of approximately $267 million in connection with the February 21, 2018 acquisition of ForRent, a digital advertising service provided through a network of four multifamily websites. The purchase accounting for the acquisition of ForRent is preliminary, subject to the completion of the accounting for certain tax related items and working capital adjustments.


8.	INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands, except amortization period data):



	June 30, 2018			December 31, 2017			Weighted- Average Amortization Period (in years)
Capitalized product development cost	$	2,173		$	2,275		4
Accumulated amortization	(2,167		)	(2,262		)
Capitalized product development cost, net	6			13

Building photography	9,116			18,739			2
Accumulated amortization	(8,653		)	(18,212		)
Building photography, net	463			527

Acquired database technology	93,390			83,469			4
Accumulated amortization	(81,941		)	(79,188		)
Acquired database technology, net	11,449			4,281

Acquired customer base	335,594			225,879			10
Accumulated amortization	(183,513		)	(169,157		)
Acquired customer base, net	152,081			56,722

Acquired trade names and other intangible assets	188,632			167,718			13
Accumulated amortization	(53,020		)	(46,369		)
Acquired trade names and other intangible assets, net	135,612			121,349

Intangible assets, net	$	299,611		$	182,892

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


9.	LONG-TERM DEBT

On October 19, 2017, the Company entered into an amended and restated credit agreement (the ‘‘2017 Credit Agreement’’), which amended and restated in its entirety the existing credit agreement dated April 1, 2014 (the "2014 Credit Agreement"). The 2017 Credit Agreement provides for a $750 million revolving credit facility with a term of five years from a syndicate of financial institutions as lenders and issuing banks. The 2017 facility may be used for working capital and other general corporate purposes of the Company and its subsidiaries. In connection with the transaction, the Company incurred $4 million of issuance costs. Those costs, along with $5 million of unamortized costs related to the 2014 Credit Agreement, were allocated between the extinguishment of the 2014 Credit Agreement and the 2017 Credit Agreement. This allocation resulted in the Company recognizing a loss of $4 million on the extinguishment with the remaining $4 million being deferred and amortized on a straight-line basis as interest expense over the term of the 2017 Credit Agreement.

Up to $20 million of the revolving credit facility is available for the issuance of letters of credit. The Company has an irrevocable standby letter of credit outstanding totaling $0.2 million as of June 30, 2018 and December 31, 2017, respectively, which was required to secure its San Francisco office lease. The letter of credit was established in 2014 and automatically renews through January 31, 2025.

The loans under the 2017 Credit Agreement bear interest during any interest period selected by the Company, at either (i) the London interbank offered rate for deposits in U.S. dollars with a maturity comparable to such interest period, adjusted for statutory reserves (“LIBOR”), plus an initial spread of 1.25% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio (as defined in the 2017 Credit Agreement) of the Company, or (ii) at the greatest of (x) the prime rate from time to time announced by JPMorgan Chase Bank, N.A., (y) the federal funds effective rate plus ½ of 1% and (z) LIBOR for a one-month interest period plus 1.00%, plus an initial spread of 0.25% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio of the Company. If an event of default occurs under the 2017 Credit Agreement, the interest rate on overdue amounts will increase by 2.00% per annum. The obligations under the 2017 Credit Agreement are guaranteed by all material subsidiaries of the Company and are secured by a lien on substantially all of the assets of the Company and its material subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee agreements entered into on the closing date of the 2017 Credit Agreement.

The 2017 Credit Agreement requires the Company to maintain (i) a First Lien Secured Leverage Ratio not exceeding 3.50 to 1.00 and (ii) after the incurrence of additional indebtedness under certain specified exceptions in the 2017 Credit Agreement, a Total Leverage Ratio (as defined in the 2017 Credit Agreement) not exceeding 4.50 to 1.00. The 2017 Credit Agreement also includes other covenants, including covenants that, subject to certain exceptions, restrict the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends, distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. The Company was in compliance with the covenants in the 2017 Credit Agreement as of June 30, 2018.

The Company had no outstanding long-term debt at June 30, 2018 and December 31, 2017. For the three and six months ended June 30, 2018, the Company recognized interest expense, consisting of amortization of debt issuance costs and commitment fees, on its revolving credit facility of approximately $710,000 and $1 million, respectively. For the three and six months ended June 30, 2017, the Company incurred interest expense for the term loan and revolving credit facility of approximately $3 million and $5 million, respectively, including amortization of debt issuance costs and commitment fees of approximately $877,000 and $2 million, respectively. The Company had $4 million and $4 million of deferred debt issuance costs included in deposits and other assets at June 30, 2018 and December 31, 2017, respectively.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


10.	INCOME TAXES

The income tax provision for the six months ended June 30, 2018 and 2017 reflects an effective tax rate of approximately 5% and 28%, respectively. The decrease in the effective tax rate for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 was primarily due to the Tax Cuts and Jobs Act (the “Tax Act”), which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, excess tax benefits on share-based payments, and state research and development tax credits.

The Company’s accounting for the tax effects of the Tax Act is incomplete. The Securities and Exchange Commission staff issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740, (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. As noted in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, at year-end, the Company was able to reasonably estimate certain tax effects of the Tax Act and, therefore, recorded provisional adjustments.

The Company has not made any additional measurement-period adjustments related to the tax effects of the Tax Act during the six months ended June 30, 2018. The Company is continuing to gather additional information to complete its accounting for the tax effects of the Tax Act and expects to complete such accounting within the prescribed measurement period of up to one year from the enactment of the Tax Act.


11.	COMMITMENTS AND CONTINGENCIES

The Company leases office facilities and office equipment under various non-cancelable operating leases. The leases contain various renewal options.

Currently, and from time to time, the Company is involved in litigation incidental to the conduct of its business. The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome may occur as a result of one or more of the Company’s current litigation matters, management has concluded that it is not probable that a loss has been incurred in connection with the Company’s current litigation. In addition, the Company is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in the Company’s current litigation and accordingly, the Company has not recognized any liability in the condensed consolidated financial statements for potential losses, if any. Legal defense costs are expensed as incurred.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


12.	SEGMENT REPORTING

Segment Information

The Company manages its 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 includes the U.K., Spain, Germany and France. The Company and its subsidiaries' subscription-based services consist primarily of information, analytics and online marketplace services offered over the internet to commercial real estate industry and related professionals. CoStar Suite® is the Company’s primary service offering in the North America and International operating segments. Management relies on an internal management reporting process that provides revenue and operating segment net income before interest, loss on debt extinguishment, income taxes, depreciation and amortization (“EBITDA”). Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of the Company’s operating segments. EBITDA is used by management to internally measure operating and management performance and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

Intersegment revenues recorded were attributable to services performed for the Company’s wholly owned subsidiary, CoStar Portfolio Strategy, by Grecam S.A.S. (“Grecam”), a wholly owned subsidiary of CoStar Limited, the Company’s wholly owned U.K. holding company. Intersegment revenues are recorded at an amount the Company believes approximates fair value. North America EBITDA includes a corresponding cost for the services performed by Grecam for CoStar Portfolio Strategy. Summarized information by operating segment consists of the following (in thousands):



	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
EBITDA
North America	$	64,762		$	43,364	$	135,817		$	97,797
International	(404		)	379		(1,031		)	906
Total EBITDA	$	64,358		$	43,743	$	134,786		$	98,703

The reconciliation of net income to EBITDA consists of the following (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net income	$	43,835		$	22,184		$	96,066		$	44,314
Amortization of acquired intangible assets in cost of revenues	5,324			4,770			9,932			10,889
Amortization of acquired intangible assets in operating expenses	8,816			4,570			14,619			9,344
Depreciation and other amortization	6,444			6,520			13,016			12,925
Interest and other income	(2,652		)	(605		)	(5,639		)	(1,034		)
Interest and other expense	728			2,693			1,418			5,379
Income tax expense	1,863			3,611			5,374			16,886
EBITDA	$	64,358		$	43,743		$	134,786		$	98,703

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Summarized information by operating segment consists of the following (in thousands):



	June 30, 2018		December 31, 2017
Property and equipment, net
North America	$	80,359	$	79,736
International	4,289		4,760
Total property and equipment, net	$	84,648	$	84,496

Goodwill
North America	$	1,520,213	$	1,253,494
International	29,304		29,963
Total goodwill	$	1,549,517	$	1,283,457

Assets
North America	$	3,069,612	$	2,816,156
International	52,962		57,285
Total assets	$	3,122,574	$	2,873,441

Liabilities
North America	$	253,891	$	201,831
International	18,065		20,360
Total liabilities	$	271,956	$	222,191


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements,” including statements about our beliefs and expectations. There are many risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Potential factors that could cause actual results to differ materially from those discussed in any forward-looking statements include, but are not limited to, those discussed in “Cautionary Statement Concerning Forward-Looking Statements” at the end of this Item 2 and “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q, as well as those described from time to time in our filings with the Securities and Exchange Commission.

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

Overview

CoStar Group, Inc. (the “Company” or “CoStar”) is the number one provider of information, analytics and online marketplaces to the commercial real estate industry in the United States (“U.S.”) and the United Kingdom (“U.K.”) based on the fact that we offer the most comprehensive commercial real estate database available; have the largest research department in the industry; own and operate leading online marketplaces for commercial real estate and apartment listings in the U.S. based on the numbers of unique visitors and site visits per month; provide more information, analytics and marketing services than any of our competitors and believe that we generate more revenues than any of our commercial real estate information and online marketplace competitors. We created and compiled our standardized platform of information, analytics and online marketplace services where industry professionals and consumers of commercial real estate, including apartments, and the related business communities can continuously interact and facilitate transactions by efficiently accessing and exchanging accurate and standardized real estate-related information.

Subscription-Based Services

Our subscription-based services consist primarily of information, analytics and online marketplace services offered over the internet to commercial real estate industry and related professionals. Our services are typically distributed to our clients under subscription-based license agreements that renew automatically, a majority of which have a term of one year. Upon renewal, subscription contract rates may change in accordance with contract provisions or as a result of contract renegotiations. To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based services rather than charging fees based on actual system usage or number of paid clicks. Our service offerings span all commercial property types, including office, retail, industrial, multifamily, commercial land, mixed-use and hospitality. Depending on the type of service, contract rates are generally 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, as applicable. Our subscription clients generally pay contract fees in advance on a monthly basis, but in some cases may pay us in advance on a quarterly or annual basis.

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

Information and Analytics

CoStar Suite®. Our subscription-based information services consist primarily of CoStar Suite services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional®and CoStar Tenant® and through our mobile application, CoStar Go®. Our integrated suite of online service offerings includes information about space available for lease, comparable sales information, information about properties for sale, tenant information, internet marketing services, analytical capabilities, information for clients' websites, information about industry professionals and their business relationships and industry news. We provide market research, consulting and analysis for commercial real estate investors and lenders via our CoStar Portfolio Strategy and CoStar Suite service offerings. The 2018 revenue growth rates for our CoStar Suite services are expected to be consistent with historical rates.

Information services. We provide portfolio and debt analysis, management and reporting capabilities through our CoStar Investment Analysis and CoStar Risk Analytics service offerings; and, real estate and lease management solutions, including lease

administration and abstraction services, through our CoStar Real Estate Manager service offerings. We also provide information services internationally, through our Grecam, Belbex and Thomas Daily businesses in France, Spain and Germany, respectively. The revenue growth rate for our information services is expected to decline for the remainder of 2018 resulting from the elimination or phase out of the LoopNet information services as we seek to convert LoopNet information customers to higher value, more profitable annual subscription CoStar Suite information services.

Online Marketplaces

Multifamily. Apartments.com^TM is part of our network of apartment marketing sites, which also includes ApartmentFinder.com^TM, ForRent.com®, ApartmentHomeLiving.com^TM, WestsideRentals.com®, AFTER55.com®, CorporateHousing.com^TM, ForRentUniversity.com® and Apartamentos.com^TM, our apartment-listing site offered exclusively in Spanish. Our apartment marketing network of subscription-based services offers renters a searchable database of apartment listings and provides professional property management companies and landlords with an advertising destination. On February 21, 2018, we completed the acquisition of ForRent, a division of Dominion Enterprises, including the ForRent.com, AFTER55.com, CorporateHousing.com and ForRentUniversity.com apartment marketing sites. We are integrating and plan to continue to integrate, develop and cross-sell the services offered by ForRent. Multifamily revenue increased in 2017 and the first half of 2018 and is expected to continue to increase in the second half of 2018.

Commercial property and land. Our LoopNet subscription-based, online marketplace services enable commercial property owners, landlords and real estate agents working on their behalf to list properties for sale or for lease and to submit detailed information about property listings. Commercial real estate agents, buyers and tenants also use LoopNet's online marketplace services to search for available property listings that meet their criteria. Our BizBuySell services, which include BizQuest®, provide an online marketplace for businesses for sale. Our Land.com network of sites, which provide online marketplaces for rural lands for sale, includes LandsofAmerica, LandAndFarm and LandWatch®.

As of June 30, 2018 and 2017, our annualized net bookings of subscription-based services on all contracts were approximately $45 million and $37 million, respectively, calculated based on the annualized amount of change in our sales resulting from all new subscription-based contracts or upsales on all existing subscription-based contracts, less write downs and cancellations, for the period reported. We recognize subscription revenues on a straight-line basis over the life of the contract. Our net bookings is a quantitative measurement that is typically closely correlated with our subscription revenue results. Net bookings is considered a key indicator of future subscription revenue growth and also serves as a metric of salesforce productivity by management and investors.

For the six months ended June 30, 2018 our contract renewal rate for existing CoStar subscription-based services on annual contracts was approximately 91%, consistent with the six months ended June 30, 2017, and therefore our cancellation rate for those services was approximately 9% for the same time periods. We expect our contract renewal rate for existing CoStar subscription-based services on annual contracts to decrease slightly in future periods due to the increased scale of our Multifamily services, which currently have a lower renewal rate as compared to our CoStar Suite services. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, management also believes that the rate may be a reliable indicator of short-term and long-term performance. Our trailing twelve-month contract renewal rate may decline if, among other reasons, negative economic conditions lead to greater business failures and/or consolidations among our clients, reductions in customer spending, or decreases in our customer base.

Development, Investments and Expansion

We are committed to supporting, improving and enhancing our information, news, analytics and online marketplace solutions, including expanding and improving our offerings for property managers and renters. We expect to continue our software development efforts to improve existing services, introduce new services, integrate and cross-sell services, and expand and develop supporting technologies for our research, sales and marketing organizations. We have been, and plan to continue, integrating, further developing and cross-selling our services, including Apartments.com, ApartmentFinder.com, ForRent.com and CoStar Market Analytics. To generate brand awareness and site traffic for our listing sites, we utilize a variety of marketing campaigns, including television and radio advertising, online/digital advertising, social media and out-of-home ads, and search engine marketing. We expect to continue to invest in sales and marketing for the remainder of 2018. As we continue to assess the success and effectiveness of our marketing campaign, we will continue to work to determine the optimal level of marketing investment for our services for future periods, however, we plan to spend on advertising and marketing for the remainder of 2018, at a higher rate than 2017.

Our key priorities for 2018 include:

•

On February 21, 2018, we completed the acquisition of ForRent ("ForRent"), a division of Dominion Enterprises ("Seller"). ForRent's primary service is digital advertising provided through a network of four multifamily websites - which include ForRent.com, AFTER55.com, CorporateHousing.com and ForRentUniversity.com. We are integrating and plan to continue to integrate, develop and cross-sell the services offered by ForRent. ForRent.com is expected to remain a distinct, complementary brand to Apartments.com, giving property managers and owners more exposure for their listings.

•

We are migrating all of our commercial real estate information capabilities to our flagship CoStar Suite service and winding down the legacy LoopNet information services, as we transition the LoopNet marketplace to a pure pay to list marketing site for commercial real estate. We also introduced new enhancements on the CoStar homepage, including a Listing Manager feature that enables brokers and other industry participants to load listing information directly into our integrated system. Utilization of the Listing Manager feature is expected to reduce our time and costs associated with researching and maintaining our comprehensive database of commercial real estate information.


•	We plan to continue developing new, and improving existing, online rental property service offerings to the apartments industry. In particular, we expect to implement the ability for renters to apply for leases online, for landlords to run tenant credit and background checks online and, eventually, for landlords and tenants to generate leases and process payments online.

•

We continue to invest in our research operations to support continued growth of our information and analytics offerings. We established our research operations headquarters in Richmond, Virginia, in December 2016, which has developed into a technology innovation hub, powering software development necessary to support the content within our information, analytics and marketing services. Since the opening of our Richmond research headquarters, we have expanded our research team to continue to meet the growing content needs of our clients. In addition, we expect to continue to invest in our international research operations in the U.K and we are focused on centralizing management of and aligning our global research and other operations.

On October 19, 2017, we entered into an amended and restated credit agreement (the ‘‘2017 Credit Agreement’’), which amended and restated in its entirety our existing 2014 Credit Agreement. The 2017 Credit Agreement provides for a $750 million revolving credit facility with a term of five years from a syndicate of financial institutions as lenders and issuing banks. The 2017 revolving credit facility may be used for working capital and other general corporate purposes of the Company and its subsidiaries. We had no outstanding long-term debt at June 30, 2018. The restructured credit facility, along with the net proceeds of approximately $834 million from our October 2017 equity offering and cash generated by our business are expected to support our continued growth and give us flexibility to act on strategic acquisition opportunities that may arise.

We intend to continue to assess the need for additional investments in our business, in addition to the investments discussed above, in order to develop and distribute new services within our current platform or expand the reach of 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 result in reduced revenues, 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.

Property Developments

As we have done in the past, we expect to continue to identify new facilities and consolidate existing facilities to better accommodate the changing demands of our business operations and employees. As a result, we may incur additional lease restructuring charges for the abandonment of certain lease space and the impairment of leasehold improvements.

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 and other income (expense), income taxes, depreciation and amortization (“EBITDA”), adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share (also referred to as “non-GAAP EPS”). EBITDA is our net income before interest, 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. Non-GAAP net income and non-GAAP net income per diluted share are similarly adjusted for stock-based compensation expense, acquisition- and integration-related costs, restructuring costs, settlement and impairment costs and loss on debt extinguishment incurred outside our ordinary course of business as well as amortization of acquired intangible assets and other related costs. We may disclose adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share on a consolidated basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors meaningfully evaluate and compare our results of operations to our previously reported results of operations or to those of other companies in our industry.

We view EBITDA, adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share as operating performance measures and as such we believe that the most directly comparable GAAP financial measure is net income. In calculating EBITDA, adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share, we exclude from net income (loss) 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, 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 (loss) 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, non-GAAP net income and non-GAAP net income per diluted share as a substitute for any GAAP financial measure, including net income. 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, non-GAAP net income and non-GAAP net income per diluted share.

EBITDA, adjusted EBITDA, 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 the accompanying reconciliation, provide additional information that is useful to understand the factors and trends affecting our business. 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 the expansion of our information, analytics and online marketplace services, which has included 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, 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. We also believe the non-GAAP measures we disclose are measures of our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest, income 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, 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 database 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 and other income we generate may be useful for investors to consider and may result in current cash inflows. However, we do not consider the amount of interest and other income to be a representative component of the day-to-day operating performance of our business.


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

•

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


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

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

•

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

•

The amount of acquisition- and integration-related costs incurred may be useful for investors to consider because they 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 restructuring costs incurred may be useful for investors to consider because such costs 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 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 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, settlement and impairment costs, and loss on debt extinguishment 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. We subtract an assumed provision for income taxes to calculate non-GAAP net income. In 2017 and 2018, we assumed a 38% and 25% tax rate, respectively, which approximates our historical long-term statutory corporate tax rate, excluding the impact of discrete items. The 2018 rate incorporates the effects of the Tax Act which reduced the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018.

Non-GAAP net income per diluted share is a non-GAAP financial measure that represents non-GAAP net income divided by the number of diluted shares outstanding for the period used in the calculation of GAAP net income per diluted share.

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

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net income	$	43,835		$	22,184		$	96,066		$	44,314
Amortization of acquired intangible assets in cost of revenues	5,324			4,770			9,932			10,889
Amortization of acquired intangible assets in operating expenses	8,816			4,570			14,619			9,344
Depreciation and other amortization	6,444			6,520			13,016			12,925
Interest and other income	(2,652		)	(605		)	(5,639		)	(1,034		)
Interest and other expense	728			2,693			1,418			5,379
Income tax expense	1,863			3,611			5,374			16,886
EBITDA	$	64,358		$	43,743		$	134,786		$	98,703

Net cash flows provided by (used in)
Operating activities	$	46,332		$	30,806		$	119,317		$	95,363
Investing activities	(7,234		)	(37,923		)	(355,925		)	(57,742		)
Financing activities	(3,404		)	(1,226		)	(8,180		)	(40,773		)

Comparison of Three Months Ended June 30, 2018 and Three Months Ended June 30, 2017

The following table provides a comparison of our selected consolidated results of operations for the three months ended June 30, 2018 and 2017 (in thousands of dollars):



	Three Months Ended June 30,
	2018		2017		Increase (Decrease) ($)			Increase (Decrease) (%)
Revenues:
CoStar Suite	$	133,812	$	113,794	$	20,018		18	%
Information services	15,681		18,312		(2,631		)	(14	)
Multifamily	104,793		68,076		36,717			54
Commercial property and land	42,732		36,971		5,761			16
Total revenues	297,018		237,153		59,865			25
Cost of revenues	67,136		55,273		11,863			21
Gross profit	229,882		181,880		48,002			26
Operating expenses:
Selling and marketing (excluding customer base amortization)	112,965		91,726		21,239			23
Software development	26,271		23,144		3,127			14
General and administrative	38,056		34,557		3,499			10
Customer base amortization	8,816		4,570		4,246			93
Total operating expenses	186,108		153,997		32,111			21
Income from operations	43,774		27,883		15,891			57
Interest and other income	2,652		605