Item 16. Form 10-K Summary

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, District of Columbia, on the 22nd day of February 2018.

	COSTAR GROUP, INC.
	By:	/s/ Andrew C. Florance
		Andrew C. Florance
		President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Andrew C. Florance and Scott T. Wheeler, and each of them individually, as their true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto and to all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, herein by ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature		Capacity		Date
/s/ Michael R. Klein		Chairman of the Board		February 22, 2018
Michael R. Klein
/s/ Andrew C. Florance		Chief Executive Officer and		February 22, 2018
Andrew C. Florance		President and a Director
		(Principal Executive Officer)
/s/ Scott T. Wheeler		Chief Financial Officer		February 22, 2018
Scott T. Wheeler		(Principal Financial and Accounting Officer)
/s/ Michael J. Glosserman		Director		February 22, 2018
Michael J. Glosserman
/s/ Warren H. Haber		Director		February 22, 2018
Warren H. Haber
/s/ John W. Hill		Director		February 19, 2018
John W. Hill
/s/ Laura Cox Kaplan		Director		February 22, 2018
Laura Cox Kaplan
/s/ Christopher J. Nassetta		Director		February 20, 2018
Christopher J. Nassetta
/s/ David J. Steinberg		Director		February 21, 2018
David J. Steinberg

COSTAR GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations	F-5
Consolidated Statements of Comprehensive Income (Loss)	F-6
Consolidated Balance Sheets	F-7
Statement of Changes in Stockholders’ Equity	F-8
Consolidated Statements of Cash Flows	F-8
Notes to Consolidated Financial Statements	F-9

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of CoStar Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of CoStar Group, Inc. (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1994.

Tysons, Virginia

February 22, 2018

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of CoStar Group, Inc.

Opinion on Internal Control over Financial Reporting

We have audited CoStar Group, Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CoStar Group, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Westside Rentals, LandWatch and The Screening Pros related to accounts receivable and revenues, which are included in the 2017 consolidated financial statements of CoStar Group, Inc. and constituted less than 1% of total assets as of December 31, 2017 and less than 2% of revenues for the year then ended. Our audit of internal control over financial reporting of CoStar Group, Inc. did not include an evaluation of the internal control over financial reporting of Westside Rentals, LandWatch and The Screening Pros.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of CoStar Group, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (Collectively referred to as the “financial statements”) of CoStar Group, Inc. and our report dated February 22, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

F-3

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Tysons, Virginia

February 22, 2018

F-4

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended December 31,
	2017				2016				2015
Revenues	$	965,230			$	837,630			$	711,764
Cost of revenues	220,403				173,814				188,885
Gross profit	744,827				663,816				522,879
Operating expenses:
Selling and marketing (excluding customer base amortization)	318,362				296,483				302,226
Software development	88,850				76,400				65,760
General and administrative	146,128				123,297				115,507
Customer base amortization	17,671				22,731				27,931
	571,011				518,911				511,424
Income from operations	173,816				144,905				11,455
Interest and other income	4,044				1,773				537
Interest and other expense	(9,014		)		(10,016		)		(9,411		)
Loss on debt extinguishment	(3,788		)		—				—
Income before income taxes	165,058				136,662				2,581
Income tax expense	42,363				51,591				6,046
Net income (loss)	$	122,695			$	85,071			$	(3,465	)
Net income (loss) per share — basic	$	3.70			$	2.64			$	(0.11	)
Net income (loss) per share — diluted	$	3.66			$	2.62			$	(0.11	)
Weighted average outstanding shares — basic	33,200				32,167				31,950
Weighted average outstanding shares — diluted	33,559				32,436				31,950

See accompanying notes.

F-5

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

		Year Ended December 31,
		2017				2016				2015
Net income (loss)		$	122,695			$	85,071			$	(3,465	)
Other comprehensive loss, net of tax
Foreign currency translation adjustment		3,901				(5,032		)		(1,466		)
Net decrease in unrealized loss on investments		118				395				256
Reclassification adjustment for realized gains on investments included in net income		—				(808		)		—
Total other comprehensive income (loss)		4,019				(5,445		)		(1,210		)
Total comprehensive income (loss)		$	126,714			$	79,626			$	(4,675	)

See accompanying notes.

F-6

COSTAR GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,
	2017				2016
ASSETS
Current assets:
Cash and cash equivalents	$	1,211,463			$	567,223
Accounts receivable, net of allowance for doubtful accounts of approximately $6,469 and $6,344 as of December 31, 2017 and 2016, respectively	60,900				48,537
Income tax receivable	—				129
Prepaid expenses and other current assets	15,572				11,602
Total current assets	1,287,935				627,491
Long-term investments	10,070				9,952
Deferred income taxes, net	5,431				7,273
Property and equipment, net	84,496				87,568
Goodwill	1,283,457				1,254,866
Intangible assets, net	182,892				195,965
Deposits and other assets	6,179				1,948
Income tax receivable	12,981				—
Total assets	$	2,873,441			$	2,185,063
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	—			$	31,866
Accounts payable	9,262				11,478
Accrued wages and commissions	54,104				33,803
Accrued expenses	22,193				31,092
Deferred gain on the sale of building	2,523				2,523
Income taxes payable	8,166				3,814
Deferred rent	4,732				1,206
Deferred revenue	45,686				39,164
Total current liabilities	146,666				154,946
Long-term debt, less current portion	—				306,473
Deferred gain on the sale of building	16,192				18,715
Deferred rent	33,909				31,589
Deferred income taxes, net	12,070				18,386
Income taxes payable	13,354				741
Total liabilities	222,191				530,850
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding	—				—
Common stock, $0.01 par value; 60,000 shares authorized; 36,107 and 32,606 issued and outstanding as of December 31, 2017 and 2016, respectively	361				326
Additional paid-in capital	2,339,253				1,471,127
Accumulated other comprehensive loss	(9,020		)		(13,039		)
Retained earnings	320,656				195,799
Total stockholders’ equity	2,651,250				1,654,213
Total liabilities and stockholders’ equity	$	2,873,441			$	2,185,063

See accompanying notes.

F-7

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

	Common Stock							Additional Paid-In Capital				Accumulated Other Comprehensive Loss				Retained Earnings				Total Stockholders’ Equity
	Shares			Amount
Balance at December 31, 2014	32,318			$	323			$	1,405,414			$	(6,384	)		$	114,193			$	1,513,546
Net loss	—			—				—				—				(3,465		)		(3,465		)
Other comprehensive loss	—			—				—				(1,210		)		—				(1,210		)
Exercise of stock options	60			1				5,068				—				—				5,069
Restricted stock grants	239			2				(2		)		—				—				—
Restricted stock grants surrendered	(121	)		(1		)		(16,435		)		—				—				(16,436		)
Stock compensation expense, net of forfeitures	—			—				35,153				—				—				35,153
Employee stock purchase plan	13			—				2,595				—				—				2,595
Excess tax benefit from stock-based compensation	—			—				8,528				—				—				8,528
Balance at December 31, 2015	32,509			325				1,440,321				(7,594		)		110,728				1,543,780
Net income	—			—				—				—				85,071				85,071
Other comprehensive loss	—			—				—				(5,445		)		—				(5,445		)
Exercise of stock options	29			—				3,303				—				—				3,303
Restricted stock grants	195			2				(2		)		—				—				—
Restricted stock grants surrendered	(142	)		(1		)		(16,423		)		—				—				(16,424		)
Stock compensation expense, net of forfeitures	—			—				36,388				—				—				36,388
Employee stock purchase plan	15			—				2,842				—				—				2,842
Excess tax benefit from stock-based compensation	—			—				4,698				—				—				4,698
Balance at December 31, 2016	32,606			326				1,471,127				(13,039		)		195,799				1,654,213
Cumulative effect of adoption of new accounting standard	—			—				—				—				2,162				2,162
Net income	—			—				—				—				122,695				122,695
Other comprehensive income	—			—				—				4,019				—				4,019
Exercise of stock options	82			1				6,796				—				—				6,797
Restricted stock grants	187			2				(2		)		—				—				—
Restricted stock grants surrendered	(99	)		(1		)		(14,901		)		—				—				(14,902		)
Stock compensation expense, net of forfeitures	—			—				38,921				—				—				38,921
Stock issued for equity offering	3,317			33				833,878				—				—				833,911
Employee stock purchase plan	14			—				3,434				—				—				3,434
Balance at December 31, 2017	36,107			$	361			$	2,339,253			$	(9,020	)		$	320,656			$	2,651,250

See accompanying notes.

F-8

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2017				2016				2015
Operating activities:
Net income (loss)	$	122,695			$	85,071			$	(3,465	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	63,643				70,165				78,532
Amortization of debt issuance costs	2,303				3,227				3,311
Loss on extinguishment of debt	3,788				—				—
Impairment loss	—				23				2,778
Loss on disposal of property and equipment	129				839				681
Realized gain on investments	—				(808		)		—
Stock-based compensation expense	39,030				36,349				34,537
Deferred income tax (benefit) expense, net	(2,903		)		15,635				(5,792		)
Bad debt expense	5,690				7,358				7,002
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(17,524		)		(16,044		)		(3,999		)
Prepaid expenses and other current assets	(3,672		)		(1,157		)		367
Income tax receivable	(12,981		)		—				—
Accounts payable and other liabilities	11,525				(1,520		)		9,938
Income taxes payable	16,937				2,816				11,380
Deferred revenue	6,004				(2,070		)		3,817
Deposits and other assets	39				758				686
Net cash provided by operating activities	234,703				200,642				139,773
Investing activities:
Proceeds from sale and settlement of investments	—				5,950				1,900
Purchases of property and equipment and other assets	(24,499		)		(18,766		)		(35,061		)
Acquisitions, net of cash acquired	(47,768		)		(10,443		)		(182,341		)
Net cash used in investing activities	(72,267		)		(23,259		)		(215,502		)
Financing activities:
Payments of long-term debt	(345,000		)		(20,000		)		(20,000		)
Payments of debt issuance costs	(3,467		)		—				—
Repurchase of restricted stock to satisfy tax withholding obligations	(14,902		)		(16,424		)		(16,436		)
Proceeds from equity offering, net of transaction costs	833,911				—				—
Proceeds from exercise of stock options and employee stock purchase plan	9,888				5,861				7,404
Net cash provided by (used in) financing activities	480,430				(30,563		)		(29,032		)
Effect of foreign currency exchange rates on cash and cash equivalents	1,374				(1,415		)		(433		)
Net increase (decrease) in cash and cash equivalents	644,240				145,405				(105,194		)
Cash and cash equivalents at beginning of year	567,223				421,818				527,012
Cash and cash equivalents at end of year	$	1,211,463			$	567,223			$	421,818

See accompanying notes.

F-8

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017

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 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 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.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“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 and intangible assets, 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 contingencies, among others. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses. Actual results could differ from these estimates.

Revenue Recognition

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

Revenues are recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed or determinable, (3) services have been rendered and payment has been contractually earned and (4) collectability is reasonably assured.

Revenues from subscription-based services are recognized on a straight-line basis over the term of the agreement. Deferred revenue results from advance cash receipts from customers or amounts billed in advance to customers from the sale of subscription licenses and is recognized over the term of the license agreement.

F-9

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Revenue Recognition — (Continued)

The Company analyzes contracts with multiple elements under the accounting guidance for multiple-element arrangements. The Company's multiple-element arrangements include information, analytics and/or online marketplace services that are generally provided to the customer over the same term. When identifying multiple-element arrangements, the Company considers multiple purchases made by the same customer within a short time frame and assesses whether the purchases were negotiated together as one overall arrangement. If a multiple-element arrangement is identified, then the arrangement consideration is allocated among the separate units of accounting based on their relative selling prices, which are estimated considering factors such as historical pricing, pricing strategy, market conditions and other factors. The Company accounts for each deliverable in the transaction separately. If the deliverables cannot be separated into multiple units of accounting, then the arrangement consideration is combined and recognition of revenue is determined for the combined unit of accounting. Multiple-element transactions require judgment to determine the selling price or fair value of the different elements. These judgments impact the amount of revenue recognized over the term of the contract, as well as the period in which they are recognized.

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 transaction 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.

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 consolidated statements of operations. There were no material gains or losses from foreign currency exchange transactions for the years ended December 31, 2017, 2016, and 2015.

Accumulated Other Comprehensive Loss

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

	As of December 31,
	2017				2016
Foreign currency translation adjustment	$	(8,290	)		$	(12,191	)
Net unrealized loss on investments, net of tax	(730		)		(848		)
Total accumulated other comprehensive loss	$	(9,020	)		$	(13,039	)

There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statement of operations for the year ended December 31, 2017. The amount of realized gain from the redemption of available-for-sale securities reclassified out of accumulated other comprehensive loss to the consolidated statement of operations for the year ended December 31, 2016 was approximately $808,000. There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statements of operations for the year ended December 31, 2015.

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 $104 million, $109 million and $132 million for the years ended December 31, 2017, 2016, and 2015, respectively.

F-10

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

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 9 for additional information regarding income taxes.

Net Income (Loss) Per Share

Net income (loss) per share is computed by dividing net income (loss) 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 and restricted stock. Diluted net income (loss) 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.

Stock-Based Compensation

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

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-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.

In March 2017, March 2016 and March 2015, the Compensation Committee of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the Company’s achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by the end of each respective three-year period. These grants of restricted common stock are also subject to continuing employment requirements and a market condition based on total shareholder return (“TSR”). The actual number of shares that vest at the end of each respective three-year period is determined based on the Company’s achievement of the three-year performance goals described above, as well as its TSR relative to the Russell 1000 Index over the same three-year performance period. Each reporting period, the Company reassesses the probability of achieving the performance and market conditions and determines whether it is probable that the performance and market conditions for the awards would be met. The Company recorded a total of approximately $5 million, $3 million and $3 million of stock-based compensation expense related to the performance-based restricted common stock awards with a market condition for the years ended December 31, 2017, 2016, and 2015, respectively. The Company expects to record estimated stock-based compensation expense related to the performance-based restricted common stock awards of approximately $6 million in aggregate over the periods 2018, 2019 and 2020.

F-11

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Stock-Based Compensation — (Continued)

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

	Year Ended December 31,
	2017				2016				2015
Cost of revenues	$	4,971			$	5,495			$	5,815
Selling and marketing (excluding customer base amortization)	7,086				6,634				5,114
Software development	7,071				6,546				5,712
General and administrative	19,902				17,674				17,896
Total stock-based compensation	$	39,030			$	36,349			$	34,537

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of money markets and commercial paper.

Investments

The Company determines the appropriate classification of debt and equity 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 auction rate securities. Investments are carried at fair value. 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.

Concentration of Credit Risk and Financial Instruments

The Company performs ongoing assessments of its customers’ financial conditions and generally does not require that its customers’ obligations to the Company be secured. The Company maintains reserves for estimated inherent credit losses, and such losses have been within management’s expectations. The large size and widespread nature of the Company’s customer base and the Company’s lack of dependence on any individual customer mitigates the risk of nonpayment of the Company’s accounts receivable. No single customer accounted for more than 5% of the Company’s revenues for each of the years ended December 31, 2017, 2016, and 2015. The carrying amount of the accounts receivable approximates the net realizable value.

The Company holds cash at major financial institutions that often exceed Federal Deposit Insurance Corporation insured limits. The Company manages its credit risk associated with cash concentrations by concentrating its cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions holding such deposits. The carrying value of cash approximates fair value. Historically, the Company has not experienced any losses due to such cash concentrations.

F-12

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Accounts Receivable, Net of Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount net of credits due. Accounts receivable payment terms vary and amounts due from customers are stated in the financial statements net of an allowance for doubtful accounts. When evaluating the adequacy of the allowance for doubtful accounts, the Company analyzes historical collection experience, changes in customer payment profiles and the aging of receivable balances, as well as current economic conditions, all of which may affect a customer’s ability to pay.

Property and Equipment, Net

Property and equipment are stated at cost, net of accumulated depreciation and amortization. All repairs and maintenance costs are expensed as incurred. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets:

Leasehold improvements		Shorter of lease term or useful life
Furniture and office equipment		Five to ten years
Vehicles		Five to ten years
Computer hardware and software		Two to five years

Qualifying internal-use software costs incurred during the application development stage, which consist primarily of internal product development costs, outside services and purchased software license costs are capitalized and amortized over the estimated useful life of the asset. All other costs are expensed as incurred.

Goodwill and Intangible Assets

Goodwill represents the excess of costs over the fair value of assets of acquired businesses. Goodwill is not amortized, but instead tested for impairment at least annually by each reporting unit. The Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount or elect to bypass such assessment. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or the Company elects to bypass such assessment, the Company then determines the fair value of each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates including the Company's discount rate, growth rate and future financial performance. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies. Assumptions about the growth rate and future financial performance of a reporting unit are based on the Company's forecasts, business plans, economic projections and anticipated future cash flows. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference.

Acquired database technology, customer base and trade names and other intangible assets are related to the Company’s acquisitions (see Notes 6 and 7). Acquired database technology is amortized on a straight-line basis over periods ranging from three years to eight years. Acquired trade names and other intangible assets are amortized on a straight-line basis over periods ranging from three years to fifteen years. See Note 7 for further details on the reclassification of the acquired trade names recorded in connection with the LoopNet acquisition from an indefinite-lived intangible asset to a definite-lived intangible asset. Acquired intangible assets characterized as customer base consists of acquired customer contracts and the related customer relationships and are amortized over periods ranging from ten years to thirteen years. Acquired customer bases are typically amortized on an accelerated basis related to the expected economic benefit of the intangible asset. The cost of capitalized building photography is amortized on a straight-line basis over periods ranging from three years to five years. Intangible assets are reviewed for impairment at least annually, and more frequently whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

F-13

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Long-Lived Assets

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

Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

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 direct deductions from a combination of the current and long-term portions of debt for term debt and as current and 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. The Company had capitalized debt issuance costs, net of amortization, of approximately $4 million and $7 million as of December 31, 2017 and 2016, respectively. The debt issuance costs are associated with our various previous credit agreements, and the current amended and restated 2017 Credit Agreement (the "2017 Credit Agreement"). See Note 8 for additional information regarding the term loan and revolving credit facility. The Company recognized debt issuance costs of approximately $2 million, $3 million, and $3 million and included in interest expense for each of the years ended December 31, 2017, 2016, and 2015.

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. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer bases, acquired database technology, and acquired trade names from a market participant's perspective, useful lives and discount rates. During the measurement period, the Company may record adjustments to the assets acquired and liabilities assumed. 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.

F-14

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of share-based payment transactions on the statement of cash flows. The guidance requires a company to (i) recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the statement of operations using a prospective transition method, (ii) recognize excess tax benefits in the current period regardless of whether the benefit reduces taxes payable using a modified retrospective transition method, and (iii) classify all excess tax benefits as operating activities within the statement of cash flows using either a prospective transition method or a retrospective transition method. The guidance also allows a company to (i) elect whether to estimate the number of share-based awards expected to vest or account for forfeitures when they occur, and (ii) withhold up to the maximum statutory tax rate in the applicable jurisdiction for awards, both of which should be applied using a modified retrospective transition method. Finally, the guidance requires a company to classify the cash paid by an employer when directly withholding shares for tax withholding purposes as a financing activity within the statement of cash flows using a retrospective transition method. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.

The Company adopted the new guidance on January 1, 2017. The adoption of the new standard resulted in a $2 million cumulative-effect adjustment as of January 1, 2017 to record a deferred tax asset with the offset to retained earnings on the balance sheet, representing the amount of the Company's net operating loss carryforwards attributable to excess tax benefits that it was not able to record under the prior guidance. The Company elected to continue to estimate the number of awards expected to be forfeited and adjust the estimate when it is no longer probable that the service or performance conditions will be met.

Additionally, the Company elected to apply the presentation requirements for statement of cash flows related to excess tax benefits retrospectively to all periods presented, which resulted in an increase to both net cash provided by operating activities and net cash used in financing activities of approximately $5 million and $9 million for the twelve months ended December 31, 2016 and 2015, respectively. The presentation requirements related to employee taxes paid by withholding shares had no impact on any of the periods presented in the Company's consolidated cash flows statements since such cash flows have historically been presented as a financing activity.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350: Simplifying the Test for Goodwill Impairment, which is designed to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The guidance indicates that an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective on a prospective basis for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this guidance during the first quarter of 2017 and the early adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

Recent Accounting Pronouncements Not Yet Adopted

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 (Topic 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 goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequently, 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

F-15

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

(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 would be applied only to the most current period presented along with a cumulative-effect adjustment at the date of adoption. This guidance will be effective for annual reporting periods beginning after December 15, 2017, although companies may adopt the standard as early as annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.

The Company currently intends to adopt the new guidance using the modified retrospective approach. Under this adoption method, the Company will recognize a cumulative effect adjustment to retained earnings as of January 1, 2018 and will account for its contracts with customers under the new guidance prospectively beginning on January 1, 2018. The Company used several available practical expedients provided in the new guidance, including assessing contracts with similar terms and conditions on a “portfolio” basis. Based on the Company’s preliminary analysis, the Company believes that the potential impact of adopting this guidance on reported revenue in any period will not be material. The primary impact of adopting the new guidance relates to the deferral of incremental costs of obtaining customer contracts which is primarily commission costs on new sales. Under existing guidance, the Company expensed all commission costs in the periods they were earned, whereas under the new guidance the Company will defer commission costs on new sales and amortize them on a straight-line basis over 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 renewals rates; and industry competition. The Company currently estimates that the cumulative effect of adoption will result in the recognition of deferred commission cost asset between $48 million to $58 million, net of appropriate taxes, as of January 1, 2018.

Beginning in 2018, the Company expects significant changes to its disclosed revenue recognition policies and practices, as well as to other related financial statement disclosures. These revised disclosures will be made in the Company’s first quarterly report in 2018.

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 application is permitted. The Company is currently evaluating the impact this guidance will have on its financial statements and related disclosures, but expects that the adoption of this standard may result in a material increase in assets and liabilities on its consolidated balance sheets.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective on a modified retrospective basis for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Companies may adopt the standard as early as annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact this guidance will have on its financial statements and related disclosures.

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. The Company will adopt this guidance in the first quarter of 2018. This guidance is not expected to have a material impact on the Company's consolidated statements of cash flows 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. The Company will adopt this guidance in the first quarter of 2018 and this guidance is not expected to have a material impact on the Company's consolidated financial statements and related disclosures.

F-16

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

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. The Company will adopt this guidance in the first quarter of 2018. This guidance is not expected to have a material impact on the Company's consolidated financial statements and related disclosures.

3.	INVESTMENTS

The Company determines the appropriate classification of debt and equity 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.

F-17

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

3.	INVESTMENTS — (CONTINUED)

Scheduled maturities of investments classified as available-for-sale as of December 31, 2017 are as follows (in thousands):

Maturity		Fair Value
Due in:
2018		$	—
2019 — 2022		—
2023 — 2027		—
2028 and thereafter		10,070
Available-for-sale investments		$	10,070

The Company had no realized gains on its investments during the year ended December 31, 2017. The Company realized gains of $0.8 million related to an ARS that was redeemed at a par value of $1 million for the year ended December 31, 2016. The Company had no realized gains on its investments for the year ended December 31, 2015. The Company had no realized losses on its investments for the years ended December 31, 2017, 2016, and 2015. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.

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

As of December 31, 2016, 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			$	—			$	(848	)		$	9,952
Available-for-sale investments	$	10,800			$	—			$	(848	)		$	9,952

The unrealized losses on the Company’s investments as of December 31, 2017 and 2016 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 December 31, 2017 and 2016. See Note 4 for further discussion of the fair value of the Company’s financial assets.

F-18

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

3.	INVESTMENTS — (CONTINUED)

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

	December 31,
	2017								2016
	Aggregate Fair Value				Gross Unrealized Losses				Aggregate Fair Value				Gross Unrealized Losses
Auction rate securities	$	10,070			$	(730	)		$	9,952			$	(848	)
Investments in an unrealized loss position	$	10,070			$	(730	)		$	9,952			$	(848	)

The Company did not have any investments in an unrealized loss position for less than twelve months as of December 31, 2017 and 2016, respectively.

4.	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 December 31, 2017 (in thousands):

	Level 1				Level 2				Level 3				Total
Assets:
Money markets	$	586,084			$	—			$	—			$	586,084
Commercial paper	351,098				—				—				351,098
Auction rate securities	—				—				10,070				10,070
Total assets measured at fair value	$	937,182			$	—			$	10,070			$	947,252

The carrying value of accounts receivable, accounts payable, accrued expenses and long-term debt approximates fair value.

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, 2016 (in thousands):

	Level 1				Level 2				Level 3				Total
Assets:
Money markets	$	175,344			$	—			$	—			$	175,344
Commercial paper	6,383				—				—				6,383
Auction rate securities	—				—				9,952				9,952
Total assets measured at fair value	$	181,727			$	—			$	9,952			$	191,679

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.

F-19

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

4.	FAIR VALUE — (CONTINUED)

The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31, 2015 to December 31, 2017 (in thousands):

	Auction Rate Securities
Balance at December 31, 2015	$	15,507
Decrease in unrealized loss included in accumulated other comprehensive loss	395
Settlements	(5,950		)
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

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

As of December 31, 2017, the Company held ARS with $11 million par value, all of which failed to settle at auction. The majority of these investments are of high credit quality with AA to AAA credit ratings 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 consolidated balance sheet as of December 31, 2017. See Note 3 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 used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of December 31, 2017. 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 December 31, 2017 and 2016 was approximately 6% and 5%, respectively. 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 December 31, 2017, the Company determined there was a decline in the fair value of its ARS investments of approximately $730,000. The decline was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. In addition, while a majority of the ARS are currently rated AAA, if the issuers are unable to successfully close future auctions and/or their credit ratings deteriorate, 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.

F-20

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

5.	PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

	December 31,
	2017				2016
Leasehold improvements	$	59,447			$	53,073
Furniture, office equipment and vehicles	52,163				45,035
Computer hardware and software	71,281				64,577
Property and equipment, gross	182,891				162,685
Accumulated depreciation and amortization	(98,395		)		(75,117		)
Property and equipment, net	$	84,496			$	87,568

Depreciation expense for property and equipment was approximately $26 million, $24 million and $20 million, for the years ended December 31, 2017, 2016, and 2015, respectively.

6.	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, 2015	$	1,227,310			$	25,635			$	1,252,945
Acquisition	467				5,933				6,400
Effect of foreign currency translation	—				(4,479		)		(4,479		)
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

The Company recorded goodwill of approximately $6 million in connection with the May 3, 2016 acquisition of Thomas Daily GmbH (“Thomas Daily”), a commercial real estate news and information provider operating in Freiburg, Germany. Additionally, the Company recorded goodwill of approximately $0.5 million during the year ended December 31, 2016 in connection with the acquisition of certain assets related to the business operations of Apartment Finder's independent distributors within various markets.

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 purchase accounting for the acquisitions of Westside Rentals®, LandWatch®, and The Screening ProsTM is preliminary, subject to the completion of the accounting for certain tax related items and working capital adjustments.

The total amount of goodwill that is expected to be deductible for tax purposes is approximately $24 million as of December 31, 2017. No goodwill was deductible as of December 31, 2016.

During the fourth quarters of 2017, 2016 and 2015, the Company completed the annual impairment test of goodwill and concluded that goodwill was not impaired.

F-21

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

7.	INTANGIBLE ASSETS

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

	December 31,								Weighted- Average Amortization Period (in years)
	2017				2016
Capitalized product development cost	$	2,275			$	2,275			4
Accumulated amortization	(2,262		)		(2,217		)
Capitalized product development cost, net	13				58
Building photography	18,739				17,271				4
Accumulated amortization	(18,212		)		(16,351		)
Building photography, net	527				920
Acquired database technology	83,469				78,151				5
Accumulated amortization	(79,188		)		(72,691		)
Acquired database technology, net	4,281				5,460
Acquired customer base	225,879				220,749				10
Accumulated amortization	(169,157		)		(150,445		)
Acquired customer base, net	56,722				70,304
Acquired trade names and other intangible assets	167,718				153,607				13
Accumulated amortization	(46,369		)		(34,384		)
Acquired trade names and other intangible assets, net	121,349				119,223
Intangible assets, net	$	182,892			$	195,965

Amortization expense for intangible assets was approximately $37 million, $46 million and $59 million for the years ended December 31, 2017, 2016, and 2015, respectively.

In the aggregate, the Company expects amortization for intangible assets existing as of December 31, 2017 for future periods to be approximately $29 million, $24 million, $21 million, $20 million and $17 million for the years ending December 31, 2018, 2019, 2020, 2021 and 2022, respectively.

Intangible assets are reviewed for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. During the first quarter of 2016, the Company determined that the acquired trade names recorded in connection with the LoopNet acquisition on April 30, 2012 should be reclassified from an indefinite-lived intangible asset to a definite-lived intangible asset due to work being performed to integrate the backend systems of LoopNet and CoStar, which may result in a future re-branding effort if aspects of the LoopNet and CoStar services are ultimately combined. The Company estimated the fair value of the LoopNet trade names using the relief from royalty method and concluded that no impairment existed as of March 31, 2016. The Company estimated a useful life of fifteen years for the LoopNet trade names, which are being amortized on a straight-line basis.

F-22

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

8.	LONG-TERM DEBT

On April 1, 2014 (the “Closing Date”), the Company entered into the 2014 Credit Agreement by and among the Company, as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. The 2014 Credit Agreement provided for a $400 million term loan and a $225 million revolving credit facility, each with a term of five years. The Company repaid the remaining balance of $310 million and accrued interest on its existing term loan under the 2014 Credit Agreement on October 19, 2017 from existing cash balances.

The revolving credit facility includes a subfacility for swingline loans of up to $10 million, and up to $10 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 December 31, 2017 and December 31, 2016, which was required to secure its San Francisco office lease. The letter of credit was established in 2014 related to the San Francisco office lease, and automatically renews through January 31, 2025.

The term loan was amortized in quarterly installments in amounts resulting in an annual amortization of 5% during each of the first, second and third years, 10% during the fourth year and 15% during the fifth year after the Closing Date, with the remainder payable at final maturity. The loans under the 2014 Credit Agreement bore interest, at the Company's option, either (i) during any interest period selected by the Company, at 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 2% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio (as defined in the 2014 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 0.5% and (z) LIBOR for a one-month interest period plus 1%, plus an initial spread of 1% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio of the Company. If an event of default occurred under the 2014 Credit Agreement, the interest rate on overdue amounts increased by 2% per annum. The obligations under the 2014 Credit Agreement were guaranteed by all material subsidiaries of the Company and were secured by a lien on substantially all of the assets of the Company and those of its material subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee documents entered into on the Closing Date.

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 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 the $5 million of unamortized costs related to the prior 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 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.

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 December 31, 2017.

F-23

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

As of December 31, 2017 and 2016, no amounts were outstanding under the Company's credit facility. Total interest expense for the term loan and revolving credit facilities was approximately $9 million, $10 million and $9 million for the years ended December 31, 2017, 2016, and 2015, respectively. Interest expense included amortized debt issuance costs of approximately $2 million, $3 million, and $3 million for the years ended December 31, 2017, 2016, and 2015. Total interest paid for the term loan and revolving credit facilities was approximately $6 million, $7 million, and $6 million for the years ended December 31, 2017, 2016, and 2015, respectively.

F-24

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

8.	LONG-TERM DEBT — (CONTINUED)

The Company had no outstanding long-term debt at December 31, 2017 as it had not drawn any amounts under its 2017 Credit Agreement. At December 31, 2017, the Company had $4 million of deferred debt issuance costs included in deposits and other assets.

The following table represents the Company's long-term debt at December 31, 2016 (in thousands):

	December 31,
	2016
Term loan	$	345,000
Debt issuance costs, net	(6,661		)
Total debt	338,339
Current maturities of long-term debt	(35,000		)
Current debt issuance costs, net	3,134
Total long-term debt, less current portion	$	306,473

9.	INCOME TAXES

The components of the provision for income taxes attributable to operations consist of the following (in thousands):

	Year Ended December 31,
	2017				2016				2015
Current:
Federal	$	41,453			$	32,198			$	10,295
State	3,518				3,682				1,503
Foreign	295				76				40
Total current	45,266				35,956				11,838
Deferred:
Federal	(7,917		)		12,586				(8,382		)
State	4,695				3,014				2,590
Foreign	319				35				—
Total deferred	(2,903		)		15,635				(5,792		)
Total provision for income taxes	$	42,363			$	51,591			$	6,046

F-25

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

9.	INCOME TAXES — (CONTINUED)

The components of deferred tax assets and liabilities consist of the following (in thousands):

	December 31,
	2017				2016
Deferred tax assets:
Reserve for bad debts	$	1,636			$	2,437
Accrued compensation	6,706				5,562
Stock compensation	10,568				14,268
Net operating losses	25,899				30,319
Accrued reserve and other	1,393				2,097
Unrealized loss on securities	185				326
Deferred rent	6,533				7,814
Deferred gain on the sale of building	4,741				8,166
Total deferred tax assets, prior to valuation allowance	57,661				70,989
Valuation allowance	(13,032		)		(8,557		)
Total deferred tax assets, net of valuation allowance	44,629				62,432
Deferred tax liabilities:
Prepaids	(1,239		)		(1,753		)
Depreciation	(6,229		)		(13,045		)
Intangibles	(43,800		)		(58,747		)
Total deferred tax liabilities	(51,268		)		(73,545		)
Net deferred tax assets (liabilities)	$	(6,639	)		$	(11,113	)

As of December 31, 2017 and 2016, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance as of December 31, 2017 and 2016 includes an allowance for unrealized losses on ARS investments, foreign deferred tax assets and state net operating losses and tax credits. The valuation allowance for the deferred tax asset for unrealized losses on ARS has been recorded as an adjustment to accumulated other comprehensive loss.

The Company established the valuation allowance because it is more likely than not that a portion of the deferred tax asset for certain items will not be realized based on the weight of available evidence. A valuation allowance was established for the unrealized losses on securities as the Company has not historically generated capital gains, and it is uncertain whether the Company will generate sufficient capital gains in the future to absorb the capital losses. A valuation allowance was established for the foreign deferred tax assets due to the cumulative loss in recent years in those jurisdictions. The Company has not had sufficient taxable income historically to utilize the foreign deferred tax assets, and it is uncertain whether the Company will generate sufficient taxable income in the future to utilize the deferred tax assets. Similarly, the Company has established a valuation allowance for net operating losses and tax credits in certain states where it is uncertain whether the Company will generate sufficient taxable income to utilize the net operating losses and tax credits before they expire.

The Company’s change in valuation allowance was an increase of approximately $4 million for the year ended December 31, 2017 and a decrease of approximately $1 million for the year ended December 31, 2016. The increase for the year ended December 31, 2017 is due to an increase in the valuation allowance for foreign deferred tax assets related to foreign net operating losses of approximately $4 million . The decrease for the year ended December 31, 2016 is due to a decrease in the valuation allowance for foreign deferred tax assets of approximately $1 million.

The Company had U.S. income before income taxes of approximately $167 million, $135 million , and $2 million for the years ended December 31, 2017, 2016 and 2015, respectively. The Company had a foreign loss before income taxes of approximately $2 million for the year ended December 31, 2017. The Company had foreign income before income taxes of approximately $2 million and $1 million for the years ended December 31, 2016 and 2015, respectively.

F-26

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

9.	INCOME TAXES — (CONTINUED)

The Company’s provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate as follows (in thousands):

	Year Ended December 31,
	2017				2016				2015
Expected federal income tax provision at statutory rate	$	57,770			$	47,832			$	903
State income taxes, net of federal benefit	4,776				3,638				(678		)
Foreign income taxes, net effect	(3,540		)		(31		)		469
Increase (decrease) in valuation allowance	3,624				(103		)		1,956
Nondeductible compensation	230				141				574
Nondeductible transaction costs	—				103				229
Meals and entertainment	958				712				1,032
Tax rate changes	(7,340		)		283				1,203
Research credits	(20,547		)		(920		)		—
Excess tax benefit	(7,010		)		—				—
Tax reserves	12,646				(150		)		71
Other adjustments	796				86				287
Income tax expense	$	42,363			$	51,591			$	6,046

The Company’s U.K. subsidiaries with foreign losses are disregarded entities for U.S. income tax purposes. Accordingly, the losses from these disregarded entities are included in the Company’s consolidated federal income tax provision at the statutory rate. Federal income taxes attributable to income from these disregarded entities are reduced by foreign taxes paid by those disregarded entities.

The Company paid approximately $41 million, $34 million , and $1 million in income taxes for the years ended December 31, 2017, 2016, and 2015, respectively.

The Company recognized an income tax benefit during the year ended December 31, 2017 for research credits of $21 million for tax years December 31, 2013 through December 31, 2017. These research credits relate to eligible activities including the development of new products, product enhancements and new or improved processes.

The Company has net operating loss carryforwards for international income tax purposes of approximately $49 million, which do not expire. The Company has federal net operating loss carryforwards of approximately $38 million that begin to expire in 2020, state net operating loss carryforwards with a tax value of approximately $6 million that begin to expire in 2020 and state income tax credit carryforwards with a tax value of approximately $3 million that begin to expire in 2020. The Company realized a cash benefit relating to the use of its tax loss carryforwards of approximately $7 million, $5 million, and $1 million in December 31, 2017, 2016, and 2015, respectively.

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):

F-27

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

Unrecognized tax benefits as of December 31, 2014	$	5,749
Increase for current year tax positions	—
Increase for prior year tax positions	1,954
Expiration of the statute of limitation for assessment of taxes	(39		)
Unrecognized tax benefits as of December 31, 2015	7,664
Increase for current year tax positions	368
Decrease for prior year tax positions	(6,115		)
Expiration of the statute of limitation for assessment of taxes	(74		)
Unrecognized tax benefits as of December 31, 2016	1,843
Increase for current year tax positions	12,620
Decrease for prior year tax positions	(34		)
Expiration of the statute of limitation for assessment of taxes	(66		)
Unrecognized tax benefits as of December 31, 2017	$	14,363

F-28

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

9.	INCOME TAXES — (CONTINUED)

Approximately $14 million and $1 million of the unrecognized tax benefits as of December 31, 2017 and 2016, respectively, would favorably affect the annual effective tax rate, if recognized in future periods. The increase for current year tax positions of $13 million for the year ended December 31, 2017 is primarily attributable to research credits. The Company recognized $72,000 for interest and penalties in its consolidated statement of operations for the year ended December 31, 2017. The Company reversed interest and penalties of $416,000 in its consolidated statement of operations for the year ended December 31, 2016. The Company recognized $83,000 for interest and penalties in its consolidated statements of operations for the year ended December 31, 2015. The Company had liabilities of $205,000, $133,000, and $549,000 for interest and penalties in its consolidated balance sheets as of December 31, 2017, 2016, 2015 respectively. The Company does not anticipate the amount of the unrecognized tax benefits will change significantly over the next twelve months.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company’s federal income tax returns for tax years 2011 through 2016 remain open to examination. Most of the Company’s state income tax returns for tax years 2014 through 2016 remain open to examination. For states that have a four-year statute of limitations, the state income tax returns for tax years 2013 through 2016 remain open to examination. The Company’s U.K. income tax returns for tax years 2012 through 2016 remain open to examination.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Tax Act”), which significantly changed U.S. tax law. The Tax Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Tax Act also created a new minimum tax on certain future foreign earnings. 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.

In connection with the Company's initial analysis of the impact of the Tax Act, the Company recorded a provisional discrete net tax benefit of $7 million in the period ending December 31, 2017. This net benefit primarily consists of a net benefit for the corporate tax rate reduction of $7.4 million and a net expense for the repatriation tax of $400,000. For various reasons, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. The Company was able to make reasonable estimates of the effects of elements for which the Company's analysis is not yet complete and recorded provisional adjustments. As the Company completes its analysis of the Tax Act, collects and prepares necessary data, and interprets any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Those adjustments may materially impact the provision for income taxes in the period in which the adjustments are made.

Global intangible low taxed income (GILTI): Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the measurement of deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or its business, the Company is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI.

10.	COMMITMENTS AND CONTINGENCIES

F-29

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

The Company leases office facilities and office equipment under various non-cancelable operating leases. The leases contain various renewal options. Rent expense for the years ended December 31, 2017, 2016 and 2015, was approximately $26 million, $22 million and $21 million, respectively.

Future minimum lease payments as of December 31, 2017 are as follows (in thousands):

2018	$	30,853
2019	27,925
2020	26,136
2021	24,544
2022	22,883
Thereafter	46,061
Total future minimum lease payments	$	178,402

Currently, and from time to time, the Company is involved in litigation incidental to the conduct of its business. In accordance with GAAP, 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 consolidated financial statements for unfavorable results, if any. Legal defense costs are expensed as incurred.

F-30

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

11.	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. The Company’s 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 the Company's mobile application, CoStar Go®. 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 (loss) before interest and other income (expense), 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.

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

	Year Ended December 31,
	2017				2016				2015
Revenues
North America	$	934,464			$	809,492			$	686,573
International
External customers	30,766				28,138				25,191
Intersegment revenue	42				40				41
Total International revenue	30,808				28,178				25,232
Intersegment eliminations	(42		)		(40		)		(41		)
Total revenues	$	965,230			$	837,630			$	711,764
EBITDA
North America	$	236,906			$	210,901			$	87,092
International	553				4,169				2,895
Total EBITDA	$	237,459			$	215,070			$	89,987

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

	Year Ended December 31,
	2017				2016				2015
Net income (loss)	$	122,695			$	85,071			$	(3,465	)
Amortization of acquired intangible assets in cost of revenues	19,707				22,819				30,077
Amortization of acquired intangible assets in operating expenses	17,684				22,731				27,931
Depreciation and other amortization	26,252				24,615				20,524
Interest and other income	(4,044		)		(1,773		)		(537		)
Interest and other expense	9,014				10,016				9,411
Loss on debt extinguishment	3,788				—				—
Income tax expense	42,363				51,591				6,046
EBITDA	$	237,459			$	215,070			$	89,987

F-31

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

11.	SEGMENT REPORTING — (CONTINUED)

Segment Information — (Continued)

Intersegment revenues 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.

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

	December 31,
	2017				2016
Property and equipment, net
North America	$	79,736			$	84,727
International	4,760				2,841
Total property and equipment, net	$	84,496			$	87,568
Goodwill
North America	$	1,253,494			$	1,227,777
International	29,963				27,089
Total goodwill	$	1,283,457			$	1,254,866
Assets
North America	$	2,816,156			$	2,139,896
International	57,285				45,167
Total assets	$	2,873,441			$	2,185,063
Liabilities
North America	$	201,831			$	520,833
International	20,360				10,017
Total liabilities	$	222,191			$	530,850

F-32

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

11.	SEGMENT REPORTING — (CONTINUED)

Revenues by Services

The Company provides information, analytics and online marketplaces to the commercial real estate industry. The revenues by type of service consists of the following (in thousands):

	Year Ended December 31,
	2017				2016				2015
Information and analytics
CoStar Suite(1)	$	463,185			$	408,456			$	360,440
Information services(2)	72,618				77,178				75,790
Online marketplaces
Multifamily(3)	279,855				224,835				160,630
Commercial property and land(4)	149,572				127,161				114,904
Total revenues	$	965,230			$	837,630			$	711,764

(1) CoStar Suite is comprised of: CoStar Property Professional, CoStar COMPS Professional, CoStar Tenant; and CoStar Portfolio Strategy.

(2) Information services is comprised of: LoopNet Premium Searcher; CoStar Real Estate Manager; CoStar Risk Analytics COMPASS; CoStar Investment Analysis Portfolio Maximizer; CoStar Investment Analysis Request; CoStar Brokerage Applications; PROPEX; Grecam; Belbex; and Thomas Daily.

(3) Multifamily is comprised of Apartments.com, ApartmentFinder.com and ApartmentHomeLiving.com; WestsideRentals.com; Apartamentos.com; and The Screening Pros.

(4) Commercial property and land is comprised of: LoopNet Premium Lister; LoopLink; CoStar Advertising; BizBuySell and BizQuest; LandsofAmerica,LandAndFarm, and LandWatch; and CoStar Private Sale Network.

12.	STOCKHOLDERS’ EQUITY

Preferred Stock

The Company has 2,000,000 shares of preferred stock, $0.01 par value, authorized for issuance as of December 31, 2017. The Board of Directors may issue the preferred stock from time to time as shares of one or more classes or series.

Common Stock

The Company has 60,000,000 shares of common stock, $0.01 par value, authorized for issuance. Dividends may be declared and paid on the common stock, subject in all cases to the rights and preferences of the holders of preferred stock and authorization by the Board of Directors. In the event of liquidation or winding up of the Company and after the payment of all preferential amounts required to be paid to the holders of any series of preferred stock, any remaining funds shall be distributed among the holders of the issued and outstanding common stock.

Equity Offering

In October 2017, the Company completed a public equity offering of 3,317,308 shares of common stock for $260.00 per share. Net proceeds from the public equity offering were approximately $834 million, after deducting approximately $29 million of underwriting discounts and other fees. The Company expects to use the net proceeds from the public equity offering to fund all or a portion of the costs of any strategic acquisitions we determine to pursue in the future, to finance the growth of its business and for working capital and other general corporate purposes. General corporate purposes may include additions to working capital, capital expenditures, repayment of debt, investments in the Company’s subsidiaries, possible acquisitions and the repurchase, redemption or retirement of securities, including the Company’s common stock.

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

13.	NET INCOME (LOSS) PER SHARE

The following table sets forth the calculation of basic and diluted net income (loss) per share (in thousands except per share data):

	Year Ended December 31,
	2017				2016				2015
Numerator:
Net income (loss)	$	122,695			$	85,071			$	(3,465	)
Denominator:
Denominator for basic net income (loss) per share — weighted-average outstanding shares	33,200				32,167				31,950
Effect of dilutive securities:
Stock options and restricted stock	359				269				—
Denominator for diluted net income (loss) per share — weighted-average outstanding shares	33,559				32,436				31,950
Net income (loss) per share — basic	$	3.70			$	2.64			$	(0.11	)
Net income (loss) per share — diluted	$	3.66			$	2.62			$	(0.11	)

Stock options to purchase approximately 87,000 and 194,000 shares that were outstanding for the years ended December 31, 2017 and December 31, 2016, 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. The Company did not consider the impact of potentially dilutive securities for the year ended December 31, 2015 when calculating the diluted net loss 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 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):

	Year Ended December 31,
	2017			2016			2015
Performance-based restricted stock awards	58			59			55
Service-based restricted stock units	1			1			1
Total shares excluded from computation	59			60			56

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

14.	EMPLOYEE BENEFIT PLANS

Stock Incentive Plans

In April 2007, the Company’s Board of Directors adopted the CoStar Group, Inc. 2007 Stock Incentive Plan (as amended, the “2007 Plan”), subject to stockholder approval, which was obtained on June 7, 2007. In April 2016, the Company’s Board of Directors adopted the CoStar Group, Inc. 2016 Stock Incentive Plan (as amended, the “2016 Plan”), subject to stockholder approval, which was obtained on June 9, 2016. All shares of common stock that were authorized for issuance under the 2007 Plan that, as of June 9, 2016, remained available for issuance under the 2007 Plan (excluding shares subject to outstanding awards) were rolled into the 2016 Plan and, as of that date, no shares of common stock were available for new awards under the 2007 Plan. The 2007 Plan continues to govern unexercised and unexpired awards issued under the 2007 Plan prior to June 9, 2016. The 2007 Plan provided for the grant of stock options, restricted stock, restricted stock units and stock appreciation rights to officers, directors and employees of the Company and its subsidiaries. Stock options granted under the 2007 Plan could be incentive or non-qualified, and except in limited circumstances related to a merger or other acquisition, the exercise price for a stock option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period of the options, restricted stock and restricted stock unit grants under the 2007 Plan was determined by the Board of Directors or a committee thereof and was generally three to four years. In some cases, vesting of restricted stock awards under the 2007 Plan is subject to performance conditions. Upon the occurrence of a Change of Control, as defined in the 2007 Plan, all outstanding unexercisable options and restricted stock grants under the 2007 Plan immediately become exercisable.

The 2016 Plan provides for the grant of stock options, restricted stock, restricted stock units, and stock appreciation rights to officers, directors and employees of the Company and its subsidiaries. Stock options granted under the 2016 Plan may be non-qualified or may qualify as incentive stock options. Except in limited circumstances related to a merger or other acquisition, the exercise price for an option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period for each grant of options, restricted stock, restricted stock units and stock appreciation rights under the 2016 Plan is determined by the Board of Directors or a committee thereof and is generally three to four years, subject to minimum vesting periods for restricted stock and restricted stock units of at least one year. In some cases, vesting of awards under the 2016 Plan may be based on performance conditions. The Company has issued and/or reserved the following shares of common stock for issuance under the 2016 Plan: (a) 1,450,000 shares of common stock, plus (b) 815,464 shares of common stock that were authorized for issuance under the 2007 Plan that, as of June 9, 2016, remained available for issuance under the 2007 Plan (not including any Shares that were subject as of such date to outstanding awards under the 2007 Plan), and (c) any shares of common stock subject to outstanding awards under the 2007 Plan as of June 9, 2016, that on or after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). Unless terminated sooner, the 2016 Plan will terminate in June 2026, but will continue to govern unexercised and unexpired awards issued under the 2016 Plan prior to that date. Approximately 2 million shares were available for future grant under the 2016 Plan as of December 31, 2017.

At December 31, 2017, there was approximately $57 million of unrecognized compensation cost related to stock incentive plans, net of estimated forfeitures, which the Company expects to recognize over a weighted-average-period of 2.2 years.

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

14.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Stock Options

Option activity was as follows:

	Number of Shares			Range of Exercise Price		Weighted- Average Exercise Price				Weighted- Average Remaining Contract Life (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2014	370,179			$36.48 - $201.04		$	99.12
Granted	89,500			$193.69 - $193.69		$	193.69
Exercised	(59,602	)		$36.48 - $201.04		$	85.48
Outstanding at December 31, 2015	400,077			$36.48 - $201.04		$	122.30
Granted	82,400			$182.75 - $182.75		$	182.75
Exercised	(29,285	)		$36.48 - $201.04		$	112.78
Canceled or expired	(13,034	)		$193.69 - $201.04		$	195.78
Outstanding at December 31, 2016	440,158			$36.48 - $201.04		$	132.08
Granted	95,500			$204.91		$	204.91
Exercised	(81,815	)		$36.48 - $201.04		$	83.07
Outstanding at December 31, 2017	453,843			$36.73 - $204.91		$	156.24			6.67		$	63,861
Exercisable at December 31, 2015	220,107			$36.48 - $201.04		$	77.63
Exercisable at December 31, 2016	284,489			$36.48 - $201.04		$	100.94
Exercisable at December 31, 2017	278,239			$36.73 - $201.04		$	130.91			5.47		$	46,199

The aggregate intrinsic value is calculated as the difference between (i) the closing price of the common stock at the end of the period and (ii) the exercise prices of the underlying awards, multiplied by the shares underlying options as of the end of the period that had an exercise price less than the closing price on that date. Options to purchase 81,815, 29,285, and 59,602, shares were exercised during the years ended 2017, 2016, and 2015, respectively. The aggregate intrinsic value of options exercised, determined as of the date of option exercise, was approximately $13 million, $3 million, and $7 million for the years ended December 31, 2017, 2016, and 2015, respectively.

The weighted-average grant date fair value of each option granted during the years ended December 31, 2017, 2016, and 2015 using the Black-Scholes option-pricing model was $59.06, $54.34 and$56.53, respectively.

The Company estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, using the assumptions in the following table:

	Year Ended December 31,
	2017			2016			2015
Dividend yield	0	%		0	%		0	%
Expected volatility	28	%		31	%		30	%
Risk-free interest rate	2	%		1	%		2	%
Expected life (in years)	5			5			5

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

14.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Stock Options — (Continued)

The expected dividend yield is determined based on the Company's past cash dividend history and anticipated future cash dividend payments. The Company has never declared or paid any dividends on its common stock and does not anticipate paying any dividends on its common stock during the foreseeable future, but intends to retain any earnings for future growth of its business. Expected volatility is calculated based on historical volatility of the daily closing price of the Company's common stock over a period consistent with the expected life of the options granted. The risk-free interest rate is based on the U.S. Treasury rate with terms similar to the expected life of the options granted. The expected life for the options is determined based on multiple factors, including historical employee behavior patterns of exercising options and post-employment termination behavior as well as expected future employee option exercise patterns.

The following table summarizes information regarding options outstanding at December 31, 2017:

		Options Outstanding									Options Exercisable
Range of Exercise Price		Number of Shares			Weighted-Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price				Number of Shares			Weighted- Average Exercise Price
$36.73 - $58.06		41,359			3.13		$	56.64			41,359			$	56.64
$58.07 - $59.59		40,004			4.14		$	58.95			40,004			$	58.95
$59.60 - $81.19		1,000			3.42		$	60.23			1,000			$	60.23
$81.20 - $142.45		70,944			5.19		$	102.16			70,944			$	102.16
$142.46 - $188.22		76,934			8.19		$	182.75			21,999			$	182.75
$188.23 - $197.37		65,802			7.17		$	193.69			40,633			$	193.69
$197.38 - $202.98		62,300			6.16		$	201.04			62,300			$	201.04
$202.99 - $204.91		95,500			9.16		$	204.91			—			$	—
$36.73 - $204.91		453,843			6.67		$	156.24			278,239			$	130.91

Restricted Stock Awards

In March 2017, March 2016, and March 2015, the Compensation Committee of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the Company’s achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by the end of each respective three-year period. The number of shares that may be earned ranges between 0% (if the specified threshold performance level is not attained) and 200% (if performance meets or exceeds the maximum achievement level) of the target award. If actual performance exceeds the pre-established threshold, the number of shares earned is calculated based on the relative performance between specified levels of achievement. These awards support the Company’s goals of aligning executive incentives with long-term stockholder value and ensuring that executive officers have a continuing stake in the long-term success of the Company.

These grants of restricted common stock are subject to continuing employment requirements and to a market condition. The actual number of shares that vest at the end of the respective three-year period is determined based on the Company’s achievement of the three-year performance goals described above, as well as its TSR relative to the Russell 1000 Index over the same three-year performance period. At the end of the three-year performance period, if the performance condition is achieved at or above the pre-established threshold, the number of shares earned is further adjusted by a TSR payout percentage, which ranges between 80% and 120%, based on the Company’s TSR performance relative to that of the Russell 1000 Index over the respective three-year period. The Company granted a total of 32,160, 25,680 and 32,400 shares of performance-based restricted common stock during the years ended December 31, 2017, 2016, and 2015, respectively.

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

14.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Restricted Stock Awards — (Continued)

The Company estimates the fair value of its performance-based restricted common stock awards with a market condition on the date of grant using a Monte-Carlo simulation valuation model. This pricing model uses multiple simulations to evaluate the probability of the Company achieving various stock price levels to determine the expected TSR performance ranking. Expense is only recorded for awards that are expected to vest, net of estimated forfeitures. The assumptions used to estimate the fair value of performance-based restricted common stock awards with a market condition granted were as follows:

	Year Ended December 31,
	2017				2016				2015
Dividend yield	0		%		0		%		0		%
Expected volatility	28		%		28		%		26		%
Risk-free interest rate	2		%		1		%		1		%
Expected life (in years)	3				3				3
Weighted-average grant date fair value	$	218.59			$	184.97			$	208.08

The expected dividend yield is determined based on the Company's past cash dividend history and anticipated future cash dividend payments. The Company has never declared or paid any dividends on its common stock and does not anticipate paying any dividends on its common stock during the foreseeable future, but intends to retain any earnings for future growth of its business. Expected volatility is calculated based on historical volatility of the daily closing price of the common stock of the companies within the Russell 1000 Index over a period consistent with the expected life of the performance-based restricted common stock awards with a market condition. The risk-free interest rate is based on the U.S. Treasury rate with terms similar to the expected life of the performance-based restricted common stock awards with a market condition. The expected life is consistent with the performance measurement period of the performance-based restricted common stock awards with a market condition.

As of December 31, 2017, the Company reassessed the probability of achieving the performance and market conditions and determined that it was probable that the performance and market conditions for the 2017, 2016 and 2015 performance-based restricted common stock awards would be met by their forfeiture dates. As a result, the Company recorded a total of approximately $5 million, $3 million, and $3 million of stock-based compensation expense related to the performance-based restricted common stock awards with a market condition for the years ended December 31, 2017, 2016 and 2015, respectively. The Company expects to record an aggregate amount of stock-based compensation expense related to the performance-based restricted common stock awards of approximately $6 million over the periods 2018, 2019 and 2020.

The following table presents unvested restricted stock awards activity for the year ended December 31, 2017:

	Restricted Stock Awards — without Market Condition							Restricted Stock Awards — with Market Condition
	Number of Shares			Weighted-Average Grant Date Fair Value per Share				Number of Shares			Weighted-Average Grant Date Fair Value per Share
Unvested restricted stock awards at December 31, 2016	394,712			$	192.38			72,480			$	202.07
Granted	156,238			$	211.69			32,160			$	218.59
Vested	(156,240	)		$	177.72			(13,477	)		$	216.20
Canceled	(30,827	)		$	196.87			(5,963	)		$	216.20
Unvested restricted stock awards at December 31, 2017	363,883			$	206.59			85,200			$	205.08

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

14.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Restricted Stock Units

The following table presents unvested restricted stock units activity for the year ended December 31, 2017:

	Number of Shares			Weighted-Average Grant Date Fair Value per Share
Unvested restricted stock units at December 31, 2016	1,199			$	182.64
Granted	69			$	291.82
Vested	(306	)		$	183.28
Canceled	—			$	—
Unvested restricted stock units at December 31, 2017	962			$	190.27

Employee 401(k) Plan

The Company maintains a 401(k) Plan (the “401(k)”) as a defined contribution retirement plan for all eligible employees. The 401(k) provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual amount as established by the IRS. In addition to the traditional 401(k), effective January 1, 2015, eligible employees have the option of making an after-tax contribution to a Roth 401(k) plan or a combination of both. In 2017, 2016 and 2015, the Company matched 100% of employee contributions up to a maximum of 4% of total compensation. Amounts contributed to the 401(k) by the Company to match employee contributions for the years ended December 31, 2017, 2016, and 2015 were approximately $10 million, $9 million and $8 million, respectively. The Company had no administrative expenses in connection with the 401(k) plan for the years ended December 31, 2017, 2016, and 2015, respectively.

Employee Pension Plan

The Company maintains a Group Personal Pension Plan (the “Plan”) for all eligible employees in the Company’s U.K. offices. The Plan is a defined contribution plan. Employees are eligible to contribute a portion of their salaries, subject to a maximum annual amount as established by Her Majesty's Revenue and Customs. In 2017, 2016 and 2015, the Company's matching contribution was based on the percentage contributed by the employee, up to a maximum of 6% of total compensation. Amounts contributed to the Plan by the Company to match employee contributions for the years ended December 31, 2017, 2016, and 2015, were approximately $380,000, $380,000 and $420,000 respectively.

Registered Retirement Savings Plan

As of January 1, 2015, the Company introduced a registered retirement savings plan (“RRSP”) for all eligible employees in the Company’s Canadian offices. In 2017, 2016, and 2015, the Company matched 100% of employee contributions up to a maximum of 4% of total compensation. Amounts contributed to the RRSP by the Company to match employee contributions for the years ended December 31, 2017, 2016, and 2015 were approximately $43,000, $10,000, and $40,000 respectively.

Employee Stock Purchase Plan

As of August 1, 2006, the Company introduced an Employee Stock Purchase Plan (“ESPP”), pursuant to which eligible employees participating in the plan authorize the Company to withhold specified amounts from the employees’ compensation and use the withheld amounts to purchase shares of the Company's common stock at 90% of the market price. Participating employees are able to purchase common stock under this plan during each offering period. An offering period begins the second Saturday before each of the Company’s regular pay dates and ends on each of the Company’s regular pay dates. On June 3, 2015, the Company’s stockholders approved an amendment to the ESPP to increase the number of shares available for purchase under the ESPP by 100,000 shares. On September 14, 2015, the Company registered the issuance of these additional shares under the ESPP pursuant to the registration statement filed September 14, 2015. There were 80,022 and 93,812 shares available for purchase under the ESPP as of December 31, 2017 and 2016, respectively, and approximately 13,790 and 14,735 shares of the Company’s common stock were purchased under the ESPP during 2017 and 2016, respectively.

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

15.	QUARTERLY RESULTS OF OPERATIONS

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2017 and 2016.

	2017
	Mar. 31				Jun. 30				Sep. 30				Dec. 31
Revenues	$	226,553			$	237,153			$	247,533			$	253,991
Cost of revenues	51,346				55,273				55,483				58,301
Gross profit	175,207				181,880				192,050				195,690
Operating expenses	137,545				153,997				134,537				144,932
Income from operations	37,662				27,883				57,513				50,758
Interest and other income	429				605				555				2,455
Interest and other expense	(2,686		)		(2,693		)		(2,901		)		(734		)
Loss on debt extinguishment	—				—				—				(3,788		)
Income before income taxes	35,405				25,795				55,167				48,691
Income tax expense	13,275				3,611				20,990				4,487
Net income	$	22,130			$	22,184			$	34,177			$	44,204
Net income per share — basic	$	0.69			$	0.68			$	1.05			$	1.24
Net income per share — diluted	$	0.68			$	0.68			$	1.04			$	1.22

	2016
	Mar. 31				Jun. 30				Sep. 30				Dec. 31
Revenues	$	199,739			$	206,869			$	212,711			$	218,311
Cost of revenues	42,900				42,679				42,222				46,013
Gross profit	156,839				164,190				170,489				172,298
Operating expenses	126,538				136,071				130,893				125,409
Income from operations	30,301				28,119				39,596				46,889
Interest and other income	84				159				344				1,186
Interest and other expense	(2,509		)		(2,455		)		(2,498		)		(2,554		)
Income before income taxes	27,876				25,823				37,442				45,521
Income tax expense	11,155				10,247				14,241				15,948
Net income	$	16,721			$	15,576			$	23,201			$	29,573
Net income per share — basic	$	0.52			$	0.48			$	0.72			$	0.92
Net income per share — diluted	$	0.52			$	0.48			$	0.72			$	0.91

16.	SUBSEQUENT EVENTS

On February 21, 2018, the Company completed the acquisition of ForRent, a division of Dominion Enterprises, pursuant to which the Company acquired all of the issued and outstanding shares of common stock, no par value per share, of DE Holdings, Inc., for a purchase price of approximately $385 million, payable approximately $350 million in cash and approximately $35 million in shares of Company common stock, subject to a customary working capital adjustment and other post-closing adjustments.

F-41