Item 16. Form 10-K Summary

None.

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 28th day of February 2019.

	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 28, 2019
Michael R. Klein
/s/ Andrew C. Florance		Chief Executive Officer and		February 28, 2019
Andrew C. Florance		President and a Director
		(Principal Executive Officer)
/s/ Scott T. Wheeler		Chief Financial Officer		February 28, 2019
Scott T. Wheeler		(Principal Financial and Accounting Officer)
/s/ Michael J. Glosserman		Director		February 28, 2019
Michael J. Glosserman
/s/ Warren H. Haber		Director		February 26, 2019
Warren H. Haber
/s/ John W. Hill		Director		February 28, 2019
John W. Hill
/s/ Laura Cox Kaplan		Director		February 28, 2019
Laura Cox Kaplan
/s/ Christopher J. Nassetta		Director		February 25, 2019
Christopher J. Nassetta
/s/ David J. Steinberg		Director		February 25, 2019
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	F-6
Consolidated Balance Sheets	F-7
Consolidated Statements of Changes in Stockholders’ Equity	F-8
Consolidated Statements of Cash Flows	F-9
Notes to Consolidated Financial Statements	F-11

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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 28, 2019 expressed an unqualified opinion thereon.

Adoption of ASU No. 2014-09

As discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizing revenue in 2018 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the related amendments.

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 28, 2019

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, 2018, 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, 2018, 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 ForRent, Realla Ltd. and Cozy Services, Ltd. related to accounts receivable and revenues, which are included in the 2018 consolidated financial statements of CoStar Group, Inc. and constituted less than 1% of total assets as of December 31, 2018 and less than 4% 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 ForRent, Realla Ltd. and Cozy Services, Ltd.

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, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018 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 28, 2019 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 28, 2019

F-4

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended December 31,
	2018				2017				2016
Revenues	$	1,191,832			$	965,230			$	837,630
Cost of revenues	269,933				220,403				173,814
Gross profit	921,899				744,827				663,816
Operating expenses:
Selling and marketing (excluding customer base amortization)	359,858				318,362				296,483
Software development	100,937				88,850				76,400
General and administrative	156,659				146,128				123,297
Customer base amortization	30,881				17,671				22,731
	648,335				571,011				518,911
Income from operations	273,564				173,816				144,905
Interest and other income	13,281				4,044				1,773
Interest and other expense	(2,830		)		(9,014		)		(10,016		)
Loss on debt extinguishment	—				(3,788		)		—
Income before income taxes	284,015				165,058				136,662
Income tax expense	45,681				42,363				51,591
Net income	$	238,334			$	122,695			$	85,071
Net income per share — basic	$	6.61			$	3.70			$	2.64
Net income per share — diluted	$	6.54			$	3.66			$	2.62
Weighted average outstanding shares — basic	36,058				33,200				32,167
Weighted average outstanding shares — diluted	36,448				33,559				32,436

See accompanying notes.

F-5

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

		Year Ended December 31,
		2018				2017				2016
Net income		$	238,334			$	122,695			$	85,071
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment		(2,668		)		3,901				(5,032		)
Net decrease in unrealized loss on investments		—				118				395
Reclassification adjustment for realized gains on investments included in net income		—				—				(808		)
Total other comprehensive (loss) income		(2,668		)		4,019				(5,445		)
Total comprehensive income		$	235,666			$	126,714			$	79,626

See accompanying notes.

F-6

COSTAR GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,
	2018				2017
ASSETS
Current assets:
Cash and cash equivalents	$	1,100,416			$	1,211,463
Accounts receivable, less allowance of $5,709 and $6,469 as of December 31, 2018 and December 31, 2017, respectively	89,192				60,900
Prepaid expenses and other current assets	23,690				15,572
Total current assets	1,213,298				1,287,935
Long-term investments	10,070				10,070
Deferred income taxes, net	7,469				5,431
Property and equipment, net	83,303				84,496
Goodwill	1,611,535				1,283,457
Intangible assets, net	288,911				182,892
Deferred commission costs, net	76,031				—
Deposits and other assets	7,432				6,179
Income tax receivable	14,908				12,981
Total assets	$	3,312,957			$	2,873,441
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	6,327				9,262
Accrued wages and commissions	45,588				54,104
Accrued expenses	29,821				22,193
Deferred gain on the sale of building	2,523				2,523
Income taxes payable	14,288				8,166
Deferred rent	4,153				4,732
Deferred revenue	51,459				45,686
Total current liabilities	154,159				146,666
Deferred gain on the sale of building	13,669				16,192
Deferred rent	31,944				33,909
Deferred income taxes, net	69,857				12,070
Income taxes payable	17,386				13,354
Other long-term liabilities	4,000				—
Total liabilities	291,015				222,191
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding	—				—
Common stock, $0.01 par value; 60,000 shares authorized; 36,446 and 36,107 issued and outstanding as of December 31, 2018 and 2017, respectively	364				361
Additional paid-in capital	2,419,812				2,339,253
Accumulated other comprehensive loss	(11,688		)		(9,020		)
Retained earnings	613,454				320,656
Total stockholders’ equity	3,021,942				2,651,250
Total liabilities and stockholders’ equity	$	3,312,957			$	2,873,441

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, 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-based compensation expense	—			—				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
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-based compensation expense	—			—				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
Cumulative effect of adoption of new accounting standard, net of tax	—			—				—				—				54,464				54,464
Balance at January 1, 2018	36,107			361				2,339,253				(9,020		)		375,120				2,705,714
Net income	—			—				—				—				238,334				238,334
Other comprehensive loss	—			—				—				(2,668		)		—				(2,668		)
Exercise of stock options	177			2				21,991				—				—				21,993
Restricted stock grants	160			1				(1		)		—				—				—
Restricted stock grants surrendered	(116	)		(1		)		(24,326		)		—				—				(24,327		)
Stock-based compensation expense	—			—				40,889				—				—				40,889
Employee stock purchase plan	15			—				5,641				—				—				5,641
Stock issued for acquisitions	103			1				36,365				—				—				36,366
Balance at December 31, 2018	36,446			$	364			$	2,419,812			$	(11,688	)		$	613,454			$	3,021,942

See accompanying notes.

F-8

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2018				2017				2016
Operating activities:
Net income	$	238,334			$	122,695			$	85,071
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	77,743				63,643				70,165
Amortization of deferred commissions costs	48,313				—				—
Amortization of debt issuance costs	876				2,303				3,227
Loss on extinguishment of debt	—				3,788				—
Impairment loss	—				—				23
Loss on disposal of property and equipment	73				129				839
Realized gain on investments	—				—				(808		)
Stock-based compensation expense	41,214				39,030				36,349
Deferred income taxes, net	3,666				(2,903		)		15,635
Bad debt expense	6,542				5,690				7,358
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(27,819		)		(17,524		)		(16,044		)
Prepaid expenses and other current assets	(1,651		)		(3,672		)		(1,157		)
Deferred commissions	(53,497		)		—				—
Income tax receivable	(1,927		)		(12,981		)		—
Accounts payable and other liabilities	(14,132		)		11,525				(1,520		)
Income taxes payable	9,632				16,937				2,816
Deferred revenue	7,879				6,004				(2,070		)
Deposits and other assets	212				39				758
Net cash provided by operating activities	335,458				234,703				200,642
Investing activities:
Proceeds from sale and settlement of investments	—				—				5,950
Purchases of property and equipment and other assets	(29,632		)		(24,499		)		(18,766		)
Cash paid for acquisitions, net of cash acquired	(418,369		)		(47,768		)		(10,443		)
Net cash used in investing activities	(448,001		)		(72,267		)		(23,259		)
Financing activities:
Payments of long-term debt	—				(345,000		)		(20,000		)
Payments of debt issuance costs	—				(3,467		)		—
Repurchase of restricted stock to satisfy tax withholding obligations	(24,327		)		(14,902		)		(16,424		)
Proceeds from equity offering, net of transaction costs	—				833,911				—
Proceeds from exercise of stock options and employee stock purchase plan	27,071				9,888				5,861
Net cash provided by (used in) financing activities	2,744				480,430				(30,563		)
Effect of foreign currency exchange rates on cash and cash equivalents	(1,248		)		1,374				(1,415		)
Net (decrease) increase in cash and cash equivalents	(111,047		)		644,240				145,405
Cash and cash equivalents at beginning of year	1,211,463				567,223				421,818
Cash and cash equivalents at end of year	$	1,100,416			$	1,211,463			$	567,223

F-9

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Supplemental cash flow disclosures:
Interest paid	$	1,421			$	6,445			$	6,712
Income taxes paid	35,980				41,283				34,132
Supplemental non-cash investing and financing activities:
Stock issued in connection with acquisition - ForRent	$	36,366			$	—			$	—
Consideration owed for acquisitions	1,534				—				—

See accompanying notes.

F-10

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

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, stock-based compensation 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

Subsequent to the Adoption of Accounting Standards Update (“ASU") 2014-09, Revenue from Contracts with Customers, later codified as Accounting Standards Codification 606 ("ASC 606"), on January 1, 2018

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

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

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

The Company's contracts with customers often include promises to transfer multiple services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. Determining whether services are considered distinct performance obligations may require significant judgment. Judgment is required to determine the standalone selling price (“SSP”)

F-11

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

for each distinct performance obligation. In instances where SSP is not directly observable, such as when the Company does not sell the services separately, the Company determines the SSP using available information, including market conditions and other observable inputs.

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

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

Certain sales commissions are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions incurred for obtaining new contracts are deferred and then amortized as selling and marketing expenses on a straight-line basis over a period of benefit that the Company has determined to be three years. The three-year amortization period was determined based on several factors, including the nature of the technology and proprietary data underlying the services being purchased, customer contract renewal rates and industry competition. Certain commission costs are not capitalized as they do not represent incremental costs of obtaining a contract. See Note 3 for further discussion on the impact of the adoption of ASC 606.

For details about the Company’s revenue recognition policy prior to the adoption of ASC 606, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on February 23, 2018.

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, technology and other intangible assets.

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, 2018, 2017, and 2016.

Accumulated Other Comprehensive Loss

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

	As of December 31,
	2018				2017
Foreign currency translation adjustment	$	(10,958	)		$	(8,290	)
Net unrealized loss on investments, net of tax	(730		)		(730		)
Total accumulated other comprehensive loss	$	(11,688	)		$	(9,020	)

There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statements of operations for the years ended December 31, 2018 and 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 $0.8 million.

F-12

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $124 million, $104 million and $109 million for the years ended December 31, 2018, 2017, and 2016, respectively.

Income Taxes

Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in the Company’s consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates in effect during the year in which the Company expects differences to reverse. Valuation allowances are provided against assets, including net operating losses, if the Company determines it is more likely than not that some portion or all of an asset may not be realized. Interest and penalties related to income tax matters are recognized in income tax expense. See Note 11 for additional information regarding income taxes.

Net Income Per Share

Net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period on a basic and diluted basis. The Company’s potentially dilutive securities include stock options and restricted stock awards. Diluted net income per share considers the impact of potentially dilutive securities except in periods in which there is a net loss, as the inclusion of the potentially dilutive common shares would have an anti-dilutive effect. See Note 15 for additional information on the Company's calculation of net income per share.

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 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 will 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.

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

	Year Ended December 31,
	2018				2017				2016
Cost of revenues (1)	$	7,688			$	4,971			$	5,495
Selling and marketing (excluding customer base amortization)	6,881				7,086				6,634
Software development	7,454				7,071				6,546
General and administrative	20,695				19,902				17,674
Total stock-based compensation	$	42,718			$	39,030			$	36,349
__________________________

(1) Includes $1.5 million of expense related to the cash settlement of stock options in connection with the acquisition of Cozy Services, Ltd. See Note 4 for details of the acquisition.

F-13

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 as of December 31, 2018 and 2017 consisted of money market funds.

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's investments consist of long-term variable rate debt instruments with an auction reset feature, referred to as auction rate securities, and are classified as available-for-sale. The Company's auction rate security investments are carried at fair value and any changes in unrealized holding gains and losses, net of the related tax effect, 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 investment 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 doubtful accounts, which have historically been immaterial to the Company's consolidated financial statements. Further, the large size of the Company’s customer base creates a lack of dependence on any individual customer that 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, 2018, 2017, and 2016. 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.

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		Three 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.

F-14

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Goodwill and Intangible Assets

Goodwill represents the future economic benefits arising from a business combination and is calculated as the excess of the purchase consideration paid in a business combination over the fair value of assets acquired. Goodwill is not amortized, but instead is assigned to each of the Company's reporting units and tested for impairment at least annually or when events and circumstances indicate that the fair value of a reporting unit may be below its carrying value. 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 performs a quantitative test that requires the determination of 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 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 technology, trade names and other intangible assets, and customer base assets are related to the Company’s acquisitions (see Notes 8 and 9). Acquired technology is amortized on a straight-line basis over periods ranging from two years to eight years. Acquired trade names and other intangible assets are amortized on a straight-line basis over periods ranging from one year to fifteen years. Acquired intangible assets characterized as customer base assets consist of acquired customer contracts and the related customer relationships and are amortized over periods ranging from five years to thirteen years. Acquired customer bases are amortized on an accelerated or straight-line basis depending on the expected economic benefit of the intangible asset.

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 are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale are 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. To the extent that debt is outstanding, 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. See Note 10 for additional information on the Company's long-term debt and related debt issuance costs.

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 purchase price is determined based on the fair value of the assets transferred, liabilities incurred and equity interests issued, after considering any transactions that are separate from the business combination. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and contingent liabilities. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired customer bases, acquired technology and acquired trade names, useful lives, royalty rates and

F-15

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

discount rates. Any adjustments to provisional amounts that are identified during the measurement period are recorded in the reporting period in which the adjustment amounts are determined. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

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

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

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

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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, later codified as Accounting Standards Codification ("ASC") 606 ("ASC 606"), that is designed to improve financial reporting by creating common recognition guidance for GAAP and International Financial Reporting Standards (“IFRS”). This guidance provides a robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those services.

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

F-16

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The impact of the adoption of ASC 606 on the condensed financial statements for the period ended December 31, 2018 was as follows (in thousands):

	As of December 31, 2018 without adoption of ASC 606				ASC 606 Adjustments				As Reported as of December 31, 2018
Assets
Accounts receivable, less allowance for doubtful accounts	$	91,122			$	(1,930	)		$	89,192
Prepaid expenses and other current assets	21,760				1,930				23,690
Deferred commissions costs, net	—				76,031				76,031
Liabilities
Deferred revenue	$	57,284			$	(5,825	)		$	51,459
Deferred income taxes, net	49,147				20,710				69,857
Retained earnings	552,308				61,146				613,454

If the Company had not adopted ASC 606, revenue recognized would have been $4 million lower and selling and marketing expense would have been $5 million higher for the year ended December 31, 2018. The impact on net income and basic and diluted earnings per share for the year ended December 31, 2018 would have been a decrease of approximately $7 million or $0.19 per share, respectively.

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

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

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

F-17

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of a share-based payment award. This guidance clarifies that an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as an equity instrument or liability instrument. This guidance is effective on a prospective basis for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. On January 1, 2018, the Company adopted this guidance and the adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases ("ASC 842"), to increase transparency and comparability among organizations' accounting for leases. The guidance requires a company to recognize right-of-use assets and lease liabilities on the balance sheet, as well as to disclose key quantitative and qualitative information about leasing arrangements. This guidance is effective on a modified retrospective basis for reporting periods beginning after December 15, 2018, with early adoption permitted. As permitted by the guidance, the Company will elect to retain the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. Furthermore, the Company will not have to reassess contracts entered into prior to the adoption date for the existence of a lease. The Company will also elect not to restate prior periods for the impact of the adoption of the new standard and will instead recognize a cumulative-effect adjustment to beginning retained earnings as of January 1, 2019 for any prior period income statement effects identified.

The Company assessed the changes required to support the adoption of the new standard, as well as the quantitative impact this guidance will have on its financial statements and related disclosures. As a result, the Company expects that the adoption of this standard will result in the recognition of Right of Use Assets between $100 million and $120 million, as well as Lease Liabilities between $140 million and $160 million on its consolidated balance sheet, primarily as a result of recognizing assets and liabilities associated with existing office leases. Lastly, the Company expects to recognize a cumulative-effect adjustment to beginning retained earnings of $12 million, net of tax, as of January 1, 2019 to recognize the remaining gain on the Company's outstanding deferred gain on the sale of building, pursuant to the guidance in ASC 842.

Beginning in 2019, the Company expects significant changes to its disclosed lease recognition policies and practices, as well as to other related financial statement disclosures due to the adoption of this standard. These revised disclosures will be made in the Company’s first quarterly report in 2019.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements (subsequent to adoption of ASU 2018-13, Fair Value Measurement. The ASU was issued to eliminate certain disclosure requirements for fair value measurements, and add and modify other disclosure requirements, as part of its disclosure framework project, including additional requirements for public companies to disclose certain information about the significant unobservable inputs for Level 3 fair value measurements. This guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. For public business entities, the guidance is effective for annual and interim periods beginning after December 15, 2019. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

F-18

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregated Revenue

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

	Year Ended December 31,
	2018												2017
	North America				International				Total				North America				International				Total
Information and analytics
CoStar Suite	$	519,661			$	25,534			$	545,195			$	440,534			$	22,651			$	463,185
Information services	58,708				8,916				67,624				64,503				8,115				72,618
Online marketplaces
Multifamily	405,795				—				405,795				279,855				—				279,855
Commercial property and land	173,137				81				173,218				149,572				—				149,572
Total revenues	$	1,157,301			$	34,531			$	1,191,832			$	934,464			$	30,766			$	965,230

Deferred Revenue

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

Balance at December 31, 2017	$	45,686
Cumulative effect of adoption of ASC 606	(1,716		)
Balance at January 1, 2018	43,970
Revenue recognized in the current period from the amounts in the beginning balance	(43,121		)
New deferrals, net of amounts recognized in the current period	51,000
Effects of foreign currency	(390		)
Balance at December 31, 2018	$	51,459

Contract Assets

The Company had contract assets of $2 million as of December 31, 2018 and January 1, 2018, which are generated when contractual billing schedules differ from revenue recognition timing. Contract assets represent a conditional right to consideration for satisfied performance obligations that becomes a receivable when the conditions are satisfied.

Commissions

The Company recognized $48 million of amortization of deferred commissions included in selling and marketing expense during the year ended months ended December 31, 2018. The Company determined that no deferred commissions were impaired as of December 31, 2018.

Commissions expense activity for the year ended December 31, 2018 was as follows (in thousands):

	Year Ended December 31, 2018
Commissions incurred	$	72,899
Commissions capitalized in the current period	(53,497		)
Amortization of deferred commissions costs	48,313
Total commissions expense	$	67,715

F-19

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Refer to Note 2 for the Company's policy on accounting for commissions.

Unsatisfied Performance Obligations

Remaining contract consideration for which revenue has not been recognized due to unsatisfied performance obligations was approximately $193 million at December 31, 2018, which the Company expects to recognize over the next three years. This amount does not include contract consideration for contracts with a duration of one year or less.

4. ACQUISITIONS

ForRent

On February 21, 2018 (the "Acquisition Date"), the Company acquired all of the issued and outstanding capital stock of DE Holdings, Inc., including its ForRent division ("ForRent"), a wholly owned subsidiary of Dominion Enterprises ("Seller"), for a purchase price of approximately $376 million. The purchase price was comprised of approximately $340 million in cash and 103,280 shares of Company common stock, valued at approximately $36 million. ForRent's primary service is digital advertising provided through a network of four multifamily websites. The acquisition is expected to yield increased revenue, significant cost synergies and an improved competitive position in the industry. The Company applied the acquisition method to account for the ForRent transaction, which requires that assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date.

The following table summarizes the amounts recorded for acquired assets and assumed liabilities recorded at their fair values as of the Acquisition Date (in thousands):

	Preliminary: February 21, 2018				Measurement Period Adjustments				Final: February 21, 2018
Cash and cash equivalents	$	59			$	—			$	59
Accounts receivable	8,769				—				8,769
Indemnification asset	5,443				—				5,443
Goodwill	266,720				(125		)		266,595
Intangible assets	141,300				—				141,300
Deferred tax liabilities	(34,032		)		—				(34,032		)
Contingent sales tax liability	(6,260		)		—				(6,260		)
State uncertain income tax position liability	(2,047		)		—				(2,047		)
Other assets and liabilities	(3,453		)		(82		)		(3,535		)
Fair value of identifiable net assets acquired	$	376,499			$	(207	)		$	376,292

The net assets of ForRent were recorded at their estimated fair values. In valuing acquired assets and assumed liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations and appropriate discount rates. Measurement period adjustments relate to the determination of working capital as of the Acquisition Date.

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

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the ForRent acquisition includes but is not limited to: (i) the expected synergies and other benefits

F-20

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

that the Company believes will result from combining its operations with ForRent's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce.

Upon acquisition, the Company assessed the (i) probability of a contingent sales tax liability and (ii) a state uncertain income tax position liability due to apportionment factors, and recorded accruals of $6 million and $2 million, respectively. The Company could not determine the fair value for the pre-acquisition state sales tax liability and therefore estimated a liability in accordance with ASC 450, using a state-by-state assessment. The uncertain income tax position was determined in accordance with the provisions of ASC 740 and was recorded as part of the purchase price allocation. The Seller has provided an indemnity for tax liabilities related to periods prior to the acquisition. The Seller's indemnification for sales taxes in the state of Texas is limited to approximately $2 million. The total indemnification asset established as of the acquisition date is $5 million. $1 million of the uncertain income tax position liability and related indemnification asset recognized as of the acquisition date were reversed during the year, upon expiration of the statute of limitations applicable to the uncertain income tax position.

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

Other Acquisitions

On October 12, 2018, the Company acquired Realla Ltd. ("Realla"), the operator of a commercial property listings and data management platform in the U.K. for £12 million ($15 million). The purchase agreement required an initial payment of £10 million ($13 million), net of cash acquired, at the time of closing, and the remainder is due one year following the acquisition date. In connection with the acquisition, the Company recorded goodwill and intangible assets of £8 million ($10 million) and £4 million ($5 million), respectively. The net assets of Realla were recorded at their estimated fair value. The estimated fair values are preliminary, subject to the finalization of the Company's assessment of the fair value of certain acquired intangible assets, the final determination of net working capital as of the acquisition date and completion of the Company's assessment of certain tax matters.

On November 8, 2018, the Company acquired Cozy Services, Ltd. ("Cozy"), a leading provider of online rental solutions that provides a broad spectrum of services to both landlords and tenants, for $65 million, net of cash acquired. As part of the acquisition, the Company recorded goodwill and intangible assets of $53 million and $11 million, respectively. The net assets of Cozy were recorded at their estimated fair value. The estimated fair values are preliminary, subject to the finalization of the Company's assessment of the fair value of certain acquired intangible assets, the final determination of net working capital as of the acquisition date and completion of the Company's assessment of certain tax matters.

Pro Forma Financial Information

The unaudited pro forma financial information presented below summarizes the combined results of operations for the Company and ForRent as though the companies were combined as of January 1, 2017. The impact of Realla and Cozy on the pro forma financial information was not material and therefore those acquisitions were not included. The unaudited pro forma financial information for all periods presented includes amortization charges from acquired intangible assets, retention compensation, as referenced above, and the related tax effects, along with certain other accounting effects, but excludes the impacts of any expected operational synergies. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2017.

The unaudited pro forma financial information for the year ended months ended December 31, 2018 and 2017 combine the historical results of the Company for the year ended months ended December 31, 2018 and 2017, the historical results of ForRent for the period prior to the Acquisition Date, and the effects of the pro forma adjustments listed above.

F-21

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Year Ended December 31,
	2018				2017
Revenue	$	1,205,584			$	1,067,742
Net income	$	251,196			$	103,000
Net income per share - basic	$	6.96			$	3.09
Net income per share - diluted	$	6.89			$	3.06

The Company began integrating the ForRent sales force and operations after the closing of the acquisition as part of its efforts to create operating synergies. As a result of these integration activities, it is impracticable to disclose revenue and earnings from ForRent from the Acquisition Date through December 31, 2018.

5. INVESTMENTS

The Company's investments consist of long-term variable rate debt instruments with an auction reset feature, referred to as auction rate securities ("ARS"), and are classified as available-for-sale and are carried at fair value.

Scheduled maturities of investments classified as available-for-sale as of December 31, 2018 are as follows (in thousands):

Maturity		Fair Value
Due in:
2019		$	—
2020 — 2023		—
2024 — 2028		—
2029 and thereafter		10,070
Available-for-sale investments		$	10,070

The Company had no realized gains or losses on its investments during the years ended December 31, 2018, 2017 and 2016. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.

As of December 31, 2018, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands):

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

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

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

The unrealized losses on the Company’s investments as of December 31, 2018 and 2017 were generated primarily from changes in interest rates and ARS that failed to settle at auction, due to adverse conditions in the global credit markets. The losses

F-22

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2018 and 2017. See Note 6 for further discussion of the fair value of the Company’s financial assets.

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

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

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

6. FAIR VALUE

Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. There is a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table represents the Company's fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2018 (in thousands):

	Level 1				Level 2				Level 3				Total
Assets:
Money market funds	$	590,567			$	—			$	—			$	590,567
Auction rate securities	—				—				10,070				10,070
Total assets measured at fair value	$	590,567			$	—			$	10,070			$	600,637

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

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

The carrying value of accounts receivable, accounts payable and accrued expenses approximates fair value.

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-23

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Auction Rate Securities
Balance at December 31, 2016	$	9,952
Decrease in unrealized loss included in accumulated other comprehensive loss	118
Balance at December 31, 2017	10,070
Decrease in unrealized loss included in accumulated other comprehensive loss	—
Settlements	—
Balance at December 31, 2018	$	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, 2018, 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 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, 2018. See Note 5 for further discussion of the scheduled maturities of investments classified as available-for-sale.

While the Company continues to earn interest on its ARS investments at the contractual rate, these investments are not currently actively trading and therefore do not currently have a readily determinable market value. The estimated fair value of the ARS no longer approximates par value. The Company used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of December 31, 2018. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of contractual cash flows, liquidity risk premiums, expected holding periods and default risk. The Company updates the discounted cash flow model on a quarterly basis to reflect any changes in the assumptions used in the model and settlements of ARS investments that occurred during the period.

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

Based on this assessment of fair value, as of December 31, 2018, the Company determined there was no decline in the fair value of its ARS investments. In addition, the ARS are of high credit quality, 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.

7. PROPERTY AND EQUIPMENT

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

	December 31,
	2018				2017
Leasehold improvements	$	65,332			$	59,447
Furniture, office equipment and vehicles	53,020				52,163
Computer hardware and software	74,742				71,281
Property and equipment, gross	193,094				182,891
Accumulated depreciation and amortization	(109,791		)		(98,395		)
Property and equipment, net	$	83,303			$	84,496

F-24

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Depreciation expense for property and equipment was approximately $26 million, $26 million and $24 million, for the years ended December 31, 2018, 2017 and 2016, respectively.

8. GOODWILL

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

	North America				International				Total
Goodwill, December 31, 2016	$	1,227,777			$	27,089			$	1,254,866
Acquisition	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
Acquisitions	319,594				10,344				329,938
Effect of foreign currency translation	—				(1,860		)		(1,860		)
Goodwill, December 31, 2018	$	1,573,088			$	38,447			$	1,611,535

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

The Company recorded goodwill of approximately $267 million in connection with the February 21, 2018 acquisition of ForRent, a digital advertising service provided through a network of four multifamily websites. The Company recorded goodwill of approximately $10 million in connection with the October 12, 2018 acquisition of Realla, the operator of a commercial property listings and data management platform in the U.K., including a free-to-list search engine for commercial property listings. The company recorded goodwill of approximately $53 million in connection with the November 8, 2018 acquisition of Cozy, a leading provider of online rental solutions that provides a broad spectrum of services to both landlords and tenants, including property listings, rent estimates, rental applications, tenant screening, online rent payments and expense tracking.

The total amount of goodwill that is expected to be deductible for tax purposes is approximately $16 million as of December 31, 2018.

No impairments of the Company's goodwill were recognized during the years ended December 31, 2018, 2017 and 2016.

F-25

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. INTANGIBLE ASSETS

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

	December 31,								Weighted- Average Amortization Period (in years)
	2018				2017
Capitalized product development cost	$	2,173			$	2,275			4
Accumulated amortization	(2,173		)		(2,262		)
Capitalized product development cost, net	—				13
Building photography	9,035				18,739				2
Accumulated amortization	(8,809		)		(18,212		)
Building photography, net	226				527
Acquired technology	103,128				83,469				4
Accumulated amortization	(85,344		)		(79,188		)
Acquired technology, net	17,784				4,281
Acquired customer base	339,574				225,879				10
Accumulated amortization	(199,405		)		(169,157		)
Acquired customer base, net	140,169				56,722
Acquired trade names and other intangible assets	190,717				167,718				12
Accumulated amortization	(59,985		)		(46,369		)
Acquired trade names and other intangible assets, net	130,732				121,349
Intangible assets, net	$	288,911			$	182,892

Amortization expense for intangible assets was approximately $52 million, $37 million and $46 million for the years ended December 31, 2018, 2017 and 2016, respectively.

In the aggregate, the Company expects the future amortization expense for intangible assets existing as of December 31, 2018 to be approximately $48 million, $42 million, $34 million, $29 million and $26 million for the years ending December 31, 2019, 2020, 2021, 2022 and 2023, 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. No impairments of the Company's intangible assets were recognized during the years ended December 31, 2018, 2017 and 2016.

F-26

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. LONG-TERM DEBT

On October 19, 2017, the Company entered into an amended and restated credit agreement (the ‘‘2017 Credit Agreement’’), which amended and restated in its entirety the then-existing credit agreement dated April 1, 2014 (the "2014 Credit Agreement"). The 2017 Credit Agreement provides for a $750 million revolving credit facility with a term of five years from a syndicate of financial institutions as lenders and issuing banks. The 2017 facility may be used for working capital and other general corporate purposes of the Company and its subsidiaries. In connection with the transaction, the Company incurred $4 million of issuance costs. Those costs along with the $4 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 Company had an irrevocable standby letter of credit outstanding totaling $0.2 million as of December 31, 2018 and December 31, 2017, which was required to secure its San Francisco office lease. The letter of credit was established in 2014 and automatically renews through January 31, 2025.

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

The 2017 Credit Agreement requires the Company to maintain (i) a First Lien Secured Leverage Ratio not exceeding 3.50 to 1.00 and (ii) after the incurrence of additional indebtedness under certain specified exceptions in the 2017 Credit Agreement, a Total Leverage Ratio (as defined in the 2017 Credit Agreement) not exceeding 4.50 to 1.00. The 2017 Credit Agreement also includes other covenants, including ones 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, 2018.

The Company had no outstanding long-term debt at December 31, 2018 and December 31, 2017. For the years ended December 31, 2018, 2017 and 2016, the Company recognized interest expense, including amortization of debt issuance costs and commitment fees, on its revolving credit facility and term loan of approximately $3 million, $9 million and $10 million, respectively. Interest expense included amortized debt issuance costs of approximately $1 million, $2 million and $3 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company had $3 million and $4 million of deferred debt issuance costs included in deposits and other assets at December 31, 2018 and December 31, 2017, respectively.

F-27

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. INCOME TAXES

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

	Year Ended December 31,
	2018				2017				2016
Current:
Federal	$	36,167			$	41,453			$	32,198
State	5,140				3,518				3,682
Foreign	708				295				76
Total current	42,015				45,266				35,956
Deferred:
Federal	6,576				(7,917		)		12,586
State	(2,582		)		4,695				3,014
Foreign	(328		)		319				35
Total deferred	3,666				(2,903		)		15,635
Total provision for income taxes	$	45,681			$	42,363			$	51,591

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

	December 31,
	2018				2017
Deferred tax assets:
Reserve for bad debts	$	1,457			$	1,636
Accrued compensation	4,803				6,706
Stock compensation	10,041				10,568
Net operating losses	26,349				25,899
Accrued reserve and other	1,773				1,578
Deferred rent	5,928				6,533
Deferred gain on the sale of building	4,140				4,741
Research and development credits	6,331				—
Total deferred tax assets, prior to valuation allowance	60,822				57,661
Valuation allowance	(14,246		)		(13,032		)
Total deferred tax assets, net of valuation allowance	46,576				44,629
Deferred tax liabilities:
Deferred commission costs, net	(19,314		)		—
Prepaid expenses	(2,204		)		(1,239		)
Property and equipment, net	(5,367		)		(6,229		)
Intangible assets, net	(82,079		)		(43,800		)
Total deferred tax liabilities	(108,964		)		(51,268		)
Net deferred tax assets (liabilities)	$	(62,388	)		$	(6,639	)

As of December 31, 2018 and 2017, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance as of December 31, 2018 and 2017 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

F-28

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $1 million for the year ended December 31, 2018 and a decrease of approximately $4 million for the year ended December 31, 2017. The increase for the year ended December 31, 2018 is due to an increase in the valuation allowance for state tax credits related to the D.C. qualified high technology company credit of approximately $1 million. 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 Company had U.S. income before income taxes of approximately $294 million, $167 million and $135 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Company had foreign losses before income taxes of approximately $10 million and $2 million for the years ended December 31, 2018 and December 31, 2017, respectively. The Company had foreign income before income taxes of approximately $2 million for the year ended December 31, 2016.

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,
	2018				2017				2016
Expected federal income tax provision at statutory rate	$	59,643			$	57,770			$	47,832
State income taxes, net of federal benefit	10,312				4,776				3,638
Foreign income taxes, net effect	(315		)		(3,540		)		(31		)
Increase (decrease) in valuation allowance	1,214				3,624				(103		)
Tax rate changes	141				(7,340		)		283
Research credits	(15,373		)		(20,547		)		(920		)
Excess tax benefit	(14,227		)		(7,010		)		—
Tax reserves	1,870				12,646				(150		)
Other adjustments	2,416				1,984				1,042
Income tax expense	$	45,681			$	42,363			$	51,591

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 recognized an income tax benefit during the year ended December 31, 2018 for state research credits of $14 million for tax years December 31, 2013 through December 31, 2018. 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 $53 million, which do not expire. The Company has federal net operating loss carryforwards of approximately $44 million that begin to expire in 2020, state net operating loss carryforwards with a tax value of approximately $4 million that begin to expire in 2020 and state income tax credit carryforwards with a tax value of approximately $11 million primarily relating to state research and development credits and the D.C. qualified high technology company tax credit that begin to expire in 2020. The Company realized a cash benefit relating to the use of its tax loss carryforwards of approximately $6 million, $7 million and $5 million in December 31, 2018, 2017 and 2016, respectively.

F-29

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Unrecognized tax benefit 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 benefit 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 benefit as of December 31, 2017	14,363
Increase for current year tax positions	9,561
Decrease for prior year tax positions	(70		)
Expiration of the statute of limitation for assessment of taxes	(1,482		)
Unrecognized tax benefit as of December 31, 2018	$	22,372

Approximately $22 million and $14 million of the unrecognized tax benefits as of December 31, 2018 and 2017, respectively, would favorably affect the annual effective tax rate, if recognized in future periods. The increase for current year tax positions of $9 million for the year ended December 31, 2018 is primarily attributable to research credits and state apportionment methodology reserve related to the ForRent acquisition. The decrease of $1 million for the year ended December 31, 2018 is primarily attributable to the expiration of the statute of limitation on the state apportionment methodology reserve. The Company recognized $224,000 for interest and penalties in its consolidated statement of operations for the year ended December 31, 2018. 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 had liabilities of $430,000, $205,000 and $133,000 for interest and penalties in its consolidated balance sheets as of December 31, 2018, 2017, 2016 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. federal jurisdiction and various states and foreign jurisdictions. The Company’s federal income tax returns for tax years 2013 through 2017 remain open to examination. The Company is under Internal Revenue Service examination for tax year 2013 related to the research and development credit. Most of the Company’s state income tax returns for tax years 2015 through 2017 remain open to examination. For states that have a four-year statute of limitations, the state income tax returns for tax years 2014 through 2017 remain open to examination. The Company’s U.K. income tax returns for tax years 2013 through 2017 remain open to examination. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations.

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 under section 951(a) and allows foreign-derived intangible income deduction under section 250(a). 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 provided a measurement period of up to one year from the Tax Act enactment date for companies to complete the accounting under ASC 740.

As of December 31, 2018, the Company's accounting for income tax effects of the Tax Act is complete and the Company has reflected all income tax effects of the Tax Act in the financial statements and related disclosures. Any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, may result in the Company deciding to make adjustments. Those adjustments may materially impact the provision for income taxes in the period in which the adjustments are made.

As of December 31, 2018 the Company has evaluated the global intangible low taxed income inclusion under section 951(a)("GILTI"). Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating 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 elected to record the GILTI income inclusion under the current-period cost method.

F-30

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. COMMITMENTS AND CONTINGENCIES

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, 2018, 2017 and 2016, was approximately $29 million, $26 million and $22 million, respectively.

Future minimum lease payments as of December 31, 2018 are as follows (in thousands):

2019	$	30,485
2020	29,255
2021	27,421
2022	25,634
2023	24,515
Thereafter	31,768
Total future minimum lease payments	$	169,078

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. 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, at this time management has concluded that the resolutions of these matters are not expected to have a material adverse effect on the Company's consolidated financial position, future results of operations or liquidity. Legal defense costs are expensed as incurred.

13. 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. Management relies on an internal management reporting process that provides revenue and operating segment net income before interest and other income (expense), loss on debt extinguishment, income taxes, depreciation and amortization (“EBITDA”). Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of the Company’s operating segments. EBITDA is used by management to internally measure operating and management performance and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

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

	Year Ended December 31,
	2018				2017				2016
EBITDA
North America	$	358,036			$	236,906			$	210,901
International	(6,729		)		553				4,169
Total EBITDA	$	351,307			$	237,459			$	215,070

F-31

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Year Ended December 31,
	2018				2017				2016
Net income	$	238,334			$	122,695			$	85,071
Amortization of acquired intangible assets in cost of revenues	20,586				19,707				22,819
Amortization of acquired intangible assets in operating expenses	30,881				17,684				22,731
Depreciation and other amortization	26,276				26,252				24,615
Interest and other income	(13,281		)		(4,044		)		(1,773		)
Interest and other expense	2,830				9,014				10,016
Loss on debt extinguishment	—				3,788				—
Income tax expense	45,681				42,363				51,591
EBITDA	$	351,307			$	237,459			$	215,070

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

	December 31,
	2018				2017
Property and equipment, net
North America	$	79,493			$	79,736
International	3,810				4,760
Total property and equipment, net	$	83,303			$	84,496
Goodwill
North America	$	1,573,088			$	1,253,494
International	38,447				29,963
Total goodwill	$	1,611,535			$	1,283,457
Assets
North America	$	3,253,035			$	2,816,156
International	59,922				57,285
Total assets	$	3,312,957			$	2,873,441
Liabilities
North America	$	272,776			$	201,831
International	18,239				20,360
Total liabilities	$	291,015			$	222,191

14. STOCKHOLDERS' EQUITY

Preferred Stock

The Company has 2 million shares of preferred stock, $0.01 par value, authorized for issuance as of December 31, 2018. 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 million 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.

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity Offering

In October 2017, the Company completed a public equity offering of 3.3 million shares of common stock for $260 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 used net proceeds from the public equity offering to fund the costs of strategic acquisitions, to finance business growth and for working capital and other general corporate purposes. The Company expects to use any remaining net proceeds from the equity offering to fund all or a portion of the costs of any additional strategic acquisitions the Company determines to pursue, 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.

15. NET INCOME PER SHARE

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

	Year Ended December 31,
	2018				2017				2016
Numerator:
Net income	$	238,334			$	122,695			$	85,071
Denominator:
Denominator for basic net income per share — weighted-average outstanding shares	36,058				33,200				32,167
Effect of dilutive securities:
Stock options and restricted stock awards	390				359				269
Denominator for diluted net income per share — weighted-average outstanding shares	36,448				33,559				32,436
Net income per share — basic	$	6.61			$	3.70			$	2.64
Net income per share — diluted	$	6.54			$	3.66			$	2.62

Stock options to purchase approximately 64,000, 87,000 and 194,000 shares that were outstanding for the years ended December 31, 2018, 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. 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,
	2018			2017			2016
Performance-based restricted stock awards	53			58			59
Service-based restricted stock units	1			1			1
Total shares excluded from computation	54			59			60

16. 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

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2018.

At December 31, 2018, there was approximately $66 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 2.4 years.

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 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
Granted	82,500			342.13		$	342.13
Exercised	(177,299	)		$36.73 - $204.91		$	125.16
Canceled or expired	(14,768	)		$182.75 - $342.13		$	261.20
Outstanding at December 31, 2018	344,276			$36.73 - $342.13		$	212.28			7.03		$	43,418
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
Exercisable at December 31, 2018	185,405			$54.51 - $204.91		$	165.31			5.79		$	31,895

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 177,299, 81,815, and 29,285, shares were exercised during the years ended 2018, 2017 and 2016, respectively. The aggregate intrinsic value of options exercised, determined as of the date of option exercise, was approximately $45 million, $13 million and $3 million for the years ended December 31, 2018, 2017 and 2016, respectively.

The weighted-average grant date fair value of each option granted during the years ended December 31, 2018, 2017 and 2016 using the Black-Scholes option-pricing model was $101.02, $59.06 and $54.34, 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,
	2018			2017			2016
Dividend yield	0	%		0	%		0	%
Expected volatility	28	%		28	%		31	%
Risk-free interest rate	3	%		2	%		1	%
Expected life (in years)	5			5			5

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,

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2018:

		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
$54.51 - $78.33		300			1.92		$	54.51			300			$	54.51
$78.34 - $142.45		58,844			4.19		$	102.16			58,844			$	102.16
$142.46 - $188.22		57,768			7.19		$	182.75			33,033			$	182.75
$188.23 - $197.37		34,264			6.17		$	193.69			34,264			$	193.69
$197.38 - $202.98		34,600			5.16		$	201.04			34,600			$	201.04
$202.99 - $273.52		82,500			8.16		$	204.91			24,364			$	204.91
$273.53 - $342.13		76,000			9.16		$	342.13			—			$	—
$54.51 - $342.13		344,276			7.03		$	212.28			185,405			$	165.31

Restricted Stock Awards

In February 2018, March 2017 and March 2016, 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 26,160, 32,160 and 25,680 shares of performance-based restricted common stock during the years ended December 31, 2018, 2017 and 2016, respectively.

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,
	2018				2017				2016
Dividend yield	0		%		0		%		0		%
Expected volatility	28		%		28		%		28		%
Risk-free interest rate	2		%		2		%		1		%
Expected life (in years)	3				3				3
Weighted-average grant date fair value	$	342.13			$	218.59			$	184.97

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2018, 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 2018, 2017 and 2016 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, $5 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, 2018, 2017 and 2016, 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 $7 million over the periods 2019, 2020 and 2021.

The following table presents unvested restricted stock awards activity for the year ended December 31, 2018:

	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, 2017	363,883			$	206.59			85,200			$	205.08
Granted	134,209			$	358.51			26,160			$	380.24
Vested	(151,995	)		$	193.70			(27,360	)		$	361.20
Canceled	(41,936	)		$	258.19			(7,680	)		$	361.20
Unvested restricted stock awards at December 31, 2018	304,161			$	272.95			76,320			$	193.44

Restricted Stock Units

The following table presents unvested restricted stock units activity for the year ended December 31, 2018:

	Number of Shares			Weighted-Average Grant Date Fair Value per Share
Unvested restricted stock units at December 31, 2017	962			$	190.27
Granted	214			$	342.13
Vested	(324	)		$	189.08
Canceled	—			$	—
Unvested restricted stock units at December 31, 2018	852			$	228.86

Management Stock Purchase Plan

The Board of Directors adopted the Company’s Management Stock Purchase Plan (the “MSPP”) in December 2017 with the intent of providing selected key employees of the Company and its subsidiaries, including the Company's executive officers, the opportunity to defer a portion of their cash incentive compensation and to align management and stockholder interests through awards of Deferred Stock Units (“DSUs”) under the MSPP and awards of matching restricted stock units (“Matching RSUs”) issued under the Company 2016 Plan. Commencing with cash incentive compensation for calendar year 2018, participants were

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

permitted to elect to defer up to 100% of their annual incentive bonus earned during the calendar year or commissions earned from March through December of 2018 by submitting an irrevocable election in accordance with Section 409A of the Internal Revenue Code, as amended. On the date the incentive bonus or commission would otherwise be paid in cash (typically during the following calendar year), the Company will award to the participant DSUs representing a number of shares of common stock having an aggregate fair market value on that date equal to the amount of compensation elected to be deferred under the MSPP. On the same date the DSUs are awarded, a participant will receive a grant of Matching RSUs covering a number of shares of common stock equal to 100% of the DSUs granted. The expense related to the DSUs will be recognized at the grant date and the expense related to the Matching RSUs will be recognized over the four year vesting period following the grant date. There were no grants of DSUs or Matching RSUs and no expense recognized under the MSPP in 2018.

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 2018, 2017 and 2016, 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, 2018, 2017 and 2016 were approximately $12 million, $10 million and $9 million, respectively. The Company had no administrative expenses in connection with the 401(k) plan for the years ended December 31, 2018, 2017 and 2016, 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 2018, 2017 and 2016, 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, 2018, 2017 and 2016, were approximately $0.5 million, $0.4 million and $0.4 million 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, 2018, 2017 and 2016 were approximately $58,000, $43,000 and $10,000 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 65,174 and 80,022 shares available for purchase under the ESPP as of December 31, 2018 and 2017, respectively, and approximately 14,848 and 13,790 shares of the Company’s common stock were purchased under the ESPP during 2018 and 2017, respectively.

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COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. QUARTERLY RESULTS OF OPERATIONS

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2018 and 2017. Information about prior period acquisitions and the adoption of recent accounting pronouncements that may affect the comparability of the quarterly financial information presented below are included in Note 2 and Note 4.

	2018
	Mar. 31				Jun. 30				Sep. 30				Dec. 31
Revenues	$	273,718			$	297,018			$	305,525			$	315,571
Cost of revenues	62,477				67,136				72,072				68,248
Gross profit	211,241				229,882				233,453				247,323
Operating expenses	157,796				186,108				162,765				141,666
Income from operations	53,445				43,774				70,688				105,657
Interest and other income	2,987				2,652				3,035				4,607
Interest and other expense	(690		)		(728		)		(717		)		(695		)
Income before income taxes	55,742				45,698				73,006				109,569
Income tax expense	3,511				1,863				14,247				26,060
Net income	$	52,231			$	43,835			$	58,759			$	83,509
Net income per share — basic	$	1.46			$	1.22			$	1.63			$	2.31
Net income per share — diluted	$	1.44			$	1.20			$	1.61			$	2.29

	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

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