Item 16. Form 10-K Summary

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	COSTAR GROUP, INC.
	By:	/s/ Andrew C. Florance
February 26, 2020		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 26, 2020
Michael R. Klein
/s/ Andrew C. Florance		Chief Executive Officer and		February 26, 2020
Andrew C. Florance		President and a Director
		(Principal Executive Officer)
/s/ Scott T. Wheeler		Chief Financial Officer		February 26, 2020
Scott T. Wheeler		(Principal Financial and Accounting Officer)
/s/ Michael J. Glosserman		Director		February 26, 2020
Michael J. Glosserman
/s/ John W. Hill		Director		February 26, 2020
John W. Hill
/s/ Laura Cox Kaplan		Director		February 26, 2020
Laura Cox Kaplan
/s/ Christopher J. Nassetta		Director		February 26, 2020
Christopher J. Nassetta
/s/ David J. Steinberg		Director		February 26, 2020
David J. Steinberg
/s/ Louise S. Sams		Director		February 26, 2020
Louise S. Sams
/s/ Robert W. Musslewhite		Director		February 21, 2020
Robert W. Musslewhite

COSTAR GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations	F-6
Consolidated Statements of Comprehensive Income	F-7
Consolidated Balance Sheets	F-8
Consolidated Statements of Changes in Stockholders’ Equity	F-9
Consolidated Statements of Cash Flows	F-10
Notes to Consolidated Financial Statements	F-12

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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 26, 2020 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.

Adoption of ASU No. 2016-02

As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F-2

		Valuation of Acquired Intangible Assets
Description of the Matter		As described in Note 4 to the consolidated financial statements, during the year ended December 31, 2019, the Company completed the acquisition of STR, Inc. and STR Global, Ltd. (together with STR, Inc. referred to as “STR”) for $435 million in cash. The Company’s accounting for the acquisition included determining the fair value of the acquired intangible assets including customer relationships of $139 million. Auditing the accounting for the acquired intangible assets of STR involved complex auditor judgment due to the estimation required in management’s determination of the fair value. The estimation was significant primarily due to the sensitivity of the respective fair values to the underlying assumptions, including discount rates, projected revenue growth rates, customer attrition rates and projected profit margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit		We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for accounting for acquired intangible assets. For example, we tested controls over management’s review of the valuation model and significant assumptions used in the valuation as well as controls over the completeness and accuracy of the data used in the model and assumptions. To test the fair value of these acquired intangible assets, our audit procedures included, among others, evaluating the Company's use of valuation methodologies, evaluating the significant assumptions, evaluating the prospective financial information and testing the completeness and accuracy of underlying data. We involved our valuation specialists to assist in testing certain significant assumptions used to value the acquired intangible assets. For example, we compared the significant assumptions to current industry and market trends, historical results of the acquired business and to other relevant factors. We also performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions.

/s/ Ernst & Young LLP

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

Tysons, Virginia

February 26, 2020

F-3

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, 2019, 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, 2019, 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 Off Campus Partners, LLC, STR, Inc. and STR Global, Ltd., which are included in the 2019 consolidated financial statements of CoStar Group, Inc., and collectively constituted less than 1% of total assets as of December 31, 2019 and less than 1% and 2% of total revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of CoStar Group, Inc. also did not include an evaluation of the internal control over financial reporting of Off Campus Partners, LLC, STR, Inc. and STR Global, 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, 2019 and 2018, 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, 2019 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 26, 2020 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-4

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 26, 2020

F-5

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended December 31,
	2019				2018				2017
Revenues	$	1,399,719			$	1,191,832			$	965,230
Cost of revenues	289,239				269,933				220,403
Gross profit	1,110,480				921,899				744,827
Operating expenses:
Selling and marketing (excluding customer base amortization)	408,596				359,858				318,362
Software development	125,602				100,937				88,850
General and administrative	178,740				156,659				146,128
Customer base amortization	33,995				30,881				17,671
	746,933				648,335				571,011
Income from operations	363,547				273,564				173,816
Interest and other income	30,017				13,281				4,044
Interest and other expense	(2,615		)		(2,830		)		(9,014		)
Loss on debt extinguishment	—				—				(3,788		)
Income before income taxes	390,949				284,015				165,058
Income tax expense	75,986				45,681				42,363
Net income	$	314,963			$	238,334			$	122,695
Net income per share — basic	$	8.67			$	6.61			$	3.70
Net income per share — diluted	$	8.60			$	6.54			$	3.66
Weighted-average outstanding shares — basic	36,310				36,058				33,200
Weighted-average outstanding shares — diluted	36,630				36,448				33,559

See accompanying notes.

F-6

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

		Year Ended December 31,
		2019				2018				2017
Net income		$	314,963			$	238,334			$	122,695
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment		3,103				(2,668		)		3,901
Net decrease in unrealized loss on investments		—				—				118
Total other comprehensive income (loss)		3,103				(2,668		)		4,019
Total comprehensive income		$	318,066			$	235,666			$	126,714

See accompanying notes.

F-7

COSTAR GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,
	2019				2018
ASSETS
Current assets:
Cash and cash equivalents	$	1,070,731			$	1,100,416
Accounts receivable, less allowance of $5,097 and $5,709 as of December 31, 2019 and December 31, 2018, respectively	92,240				89,192
Prepaid expenses and other current assets	36,194				23,690
Total current assets	1,199,165				1,213,298
Long-term investments	10,070				10,070
Deferred income taxes, net	5,408				7,469
Lease right-of-use assets	115,084				—
Property and equipment, net	107,529				83,303
Goodwill	1,882,020				1,611,535
Intangible assets, net	421,196				288,911
Deferred commission costs, net	89,374				76,031
Deposits and other assets	9,232				7,432
Income tax receivable	14,908				14,908
Total assets	$	3,853,986			$	3,312,957
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	7,640				6,327
Accrued wages and commissions	53,087				45,588
Accrued expenses	38,680				29,821
Deferred gain on the sale of building	—				2,523
Income taxes payable	10,705				14,288
Deferred rent	—				4,153
Lease liabilities	29,670				—
Deferred revenue	67,274				51,459
Total current liabilities	207,056				154,159
Deferred gain on the sale of building	—				13,669
Deferred rent	—				31,944
Deferred income taxes, net	87,096				69,857
Income taxes payable	20,521				17,386
Lease and other long-term liabilities	133,720				4,000
Total liabilities	448,393				291,015
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding	—				—
Common stock, $0.01 par value; 60,000 shares authorized; 36,668 and 36,446 issued and outstanding as of December 31, 2019 and 2018, respectively	366				364
Additional paid-in capital	2,473,338				2,419,812
Accumulated other comprehensive loss	(8,585		)		(11,688		)
Retained earnings	940,474				613,454
Total stockholders’ equity	3,405,593				3,021,942
Total liabilities and stockholders’ equity	$	3,853,986			$	3,312,957

See accompanying notes.

F-8

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, 2016	32,606			$	326			$	1,471,127			$	(13,039	)		$	195,799			$	1,654,213
Cumulative effect of adoption of new accounting standard	—			—				—				—				2,162				$	2,162
Net income	—			—				—				—				122,695				122,695
Other comprehensive income	—			—				—				4,019				—				4,019
Exercise of stock options	82			1				6,796				—				—				6,797
Restricted stock grants	187			2				(2		)		—				—				—
Restricted stock grants surrendered	(99	)		(1		)		(14,901		)		—				—				(14,902		)
Stock-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
Cumulative effect of adoption of new accounting standard, net of tax	—			—				—				—				12,057				12,057
Balance at January 1, 2019	36,446			364				2,419,812				(11,688		)		625,511				3,033,999
Net income	—			—				—				—				314,963				314,963
Other comprehensive income	—			—				—				3,103				—				3,103
Exercise of stock options	116			1				18,651				—				—				18,652
Restricted stock grants	168			2				(2		)		—				—				—
Restricted stock grants surrendered	(76	)		(1		)		(27,576		)		—				—				(27,577		)
Stock-based compensation expense	—			—				51,818				—				—				51,818
Management stock purchase plan	—			—				3,491				—				—				3,491
Employee stock purchase plan	14			—				7,144				—				—				7,144
Balance at December 31, 2019	36,668			$	366			2,473,338				(8,585		)		940,474				3,405,593

See accompanying notes.

F-9

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2019				2018				2017
Operating activities:
Net income	$	314,963			$	238,334			$	122,695
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	81,165				77,743				63,643
Amortization of deferred commissions costs	53,421				48,313				—
Amortization of debt issuance costs	876				876				2,303
Non-cash lease expense	22,748				—				—
Loss on extinguishment of debt	—				—				3,788
Loss on disposal of property and equipment	105				73				129
Stock-based compensation expense	52,255				41,214				39,030
Deferred income taxes, net	8,220				3,666				(2,903		)
Bad debt expense	10,978				6,542				5,690
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(5,014		)		(27,819		)		(17,524		)
Prepaid expenses and other current assets	(14,244		)		(1,651		)		(3,672		)
Deferred commissions	(66,688		)		(53,497		)		—
Income tax receivable	—				(1,927		)		(12,981		)
Accounts payable and other liabilities	17,751				(14,132		)		11,525
Lease liabilities	(25,442		)		—				—
Income taxes payable	(577		)		9,632				16,937
Deferred revenue	7,911				7,879				6,004
Other assets	(648		)		212				39
Net cash provided by operating activities	457,780				335,458				234,703
Investing activities:
Purchases of property and equipment and other assets	(46,197		)		(29,632		)		(24,499		)
Cash paid for acquisitions, net of cash acquired	(437,556		)		(418,369		)		(47,768		)
Net cash used in investing activities	(483,753		)		(448,001		)		(72,267		)
Financing activities:
Payments of long-term debt	—				—				(345,000		)
Payments of debt issuance costs	—				—				(3,467		)
Repurchase of restricted stock to satisfy tax withholding obligations	(27,577		)		(24,327		)		(14,902		)
Proceeds from equity offering, net of transaction costs	—				—				833,911
Proceeds from exercise of stock options and employee stock purchase plan	25,080				27,071				9,888
Other financing activities	(1,657		)		—				—
Net cash (used in) provided by financing activities	(4,154		)		2,744				480,430
Effect of foreign currency exchange rates on cash and cash equivalents	442				(1,248		)		1,374
Net (decrease) increase in cash and cash equivalents	(29,685		)		(111,047		)		644,240
Cash and cash equivalents at beginning of year	1,100,416				1,211,463				567,223
Cash and cash equivalents at end of year	$	1,070,731			$	1,100,416			$	1,211,463

F-10

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Supplemental cash flow disclosures:
Interest paid	$	1,998			$	1,421			$	6,445
Income taxes paid	$	68,935			$	35,980			$	41,283
Supplemental non-cash investing and financing activities:
Stock issued in connection with acquisition - ForRent	$	—			$	36,366			$	—
Consideration owed for acquisitions	$	1,650			$	1,534			$	—

See accompanying notes.

F-11

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

1.	ORGANIZATION

CoStar Group, Inc. (the “Company” or “CoStar”) provides information, analytics and online marketplace services to the commercial real estate and related business community through its comprehensive, proprietary database of commercial real estate information. The Company provides online marketplaces for commercial real estate, apartment rentals, lands for-sale and businesses for-sale, and its services are typically distributed to its clients under subscription-based license agreements that renew automatically, a majority of which have a term of at least one year. The Company operates within two operating segments, North America, which includes the United States (“U.S.”) and Canada, and International, which primarily includes Europe, Asia-Pacific and Latin America.

On October 22, 2019, the Company acquired STR, Inc. and STR Global, Ltd. (together with STR, Inc., referred to as "STR"). STR provides benchmarking and analytics for the hospitality industry. See Note 4 to the accompanying Notes to the Consolidated Financial Statements for further discussion of this acquisition.

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, the useful lives and recoverability of long-lived and intangible assets, and goodwill; income taxes, the fair value of auction rate securities, accounting for business combinations, stock-based compensation, estimating the Company's incremental borrowing rate for its leases, and contingencies, among others. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that it believes are reasonable, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses. Actual results could differ from these estimates.

Revenue Recognition

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

The Company also provides market research, portfolio and debt analysis, management and reporting capabilities, and real estate and lease management solutions, including lease administration and abstraction services, to commercial customers, real estate investors, lenders and hospitality customers via our other service offerings.

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).

F-12

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In limited circumstances, the Company's contracts with customers include promises to transfer multiple services, such as contracts for its subscription-based services and professional services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct, which involves the determination of the standalone selling price for each distinct performance obligation.

Deferred revenue results from amounts billed in advance to customers or cash received from customers in advance of the Company's fulfillment of its performance obligation(s) and is recognized 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 of the Company's revenue recognition.

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU") 2014-09, Revenue from Contracts with Customers, later codified as Accounting Standards Codification 606 ("ASC 606") using the modified retrospective method. Operating results for periods 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. 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, operating lease costs and the amortization of acquired trade names, technology and other intangible assets.

Foreign Currency Translation

The Company’s reporting currency is the U.S. dollar. The functional currency for the majority of its operations is the local currency, with the exception of certain international locations of STR for which the functional currency is the British Pound. Assets and liabilities denominated in a foreign currency are translated into U.S. dollars using the exchange rates in effect as of the balance sheet date. Gains and losses resulting from translation are included in accumulated other comprehensive loss. Currency gains and losses on the translation of intercompany loans made to foreign subsidiaries that are of a long-term investment nature are also included in accumulated other comprehensive loss. Net gains or losses resulting from transactions denominated in a currency other than the functional currency of the entity are included in interest and other income (expense) in the consolidated statements of operations using the average exchange rates in effect during the period. There were no material gains or losses from foreign currency exchange transactions for the years ended December 31, 2019, 2018, and 2017.

F-13

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accumulated Other Comprehensive Loss

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

	As of December 31,
	2019				2018
Foreign currency translation adjustment	$	(7,855	)		$	(10,958	)
Net unrealized loss on investments	(730		)		(730		)
Total accumulated other comprehensive loss	$	(8,585	)		$	(11,688	)

There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statements of operations for the years ended December 31, 2019, December 31, 2018 and December 31, 2017. See Note 5 for additional information regarding unrealized gains and losses recognized on investments.

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 $164 million, $124 million and $104 million for the years ended December 31, 2019, 2018 and 2017, 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.

The Company has elected to record the global intangible low taxed income inclusion ("GILTI") under the current-period cost method.

See Note 12 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 weighted-average number of common shares outstanding during the period used for purposes of calculating basic earnings per share excludes stock options and stock-based awards which include restricted stock awards that vest over a specific service period, restricted stock awards that vest based on achievement of a performance condition, restricted stock awards with a performance and a market condition, restricted stock units and Matching restricted stock units ("Matching RSUs) awarded under the Company's Management Stock Purchase Plan (the “MSPP”). The Company’s potentially dilutive securities include outstanding stock options and unvested restricted stock-based awards. Shares underlying unvested restricted stock-based awards that vest based on performance and market conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share. Diluted net income per share considers the impact of potentially dilutive securities except when the inclusion of the potentially dilutive securities would have an anti-dilutive effect. See Note 16 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.

F-14

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For stock-based awards that vest over a specific service period, compensation expense is measured based on the fair value of the awards at the grant date, and is recognized on a straight-line basis over the vesting period of the awards, net of an estimated forfeiture rate. For equity instruments that vest based on achievement of a performance condition, stock-based compensation expense is recognized based on the expected achievement of the related performance conditions at the end of each reporting period over the vesting period of the awards. If the Company's initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing may fluctuate from period to period based on those estimates. If the performance conditions are not met, no stock-based compensation expense will be recognized, and any previously recognized stock-based compensation expense will be reversed. For awards with both a performance and a market condition, the Company estimates the fair value of each equity instrument granted on the date of grant using a Monte-Carlo simulation model. This pricing model uses multiple simulations to evaluate the probability of achieving the market condition to calculate the fair value of the awards.

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,
	2019				2018				2017
Cost of revenues (1)	$	9,273			$	7,688			$	4,971
Selling and marketing (excluding customer base amortization)	6,809				6,881				7,086
Software development	8,985				7,454				7,071
General and administrative	27,188				20,695				19,902
Total stock-based compensation	$	52,255			$	42,718			$	39,030
__________________________

(1) For the year ended December 31, 2018, stock-based compensation expense 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.

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, 2019 and 2018 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’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, 2019, 2018, and 2017. 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

F-15

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Leases

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases, later codified as Accounting Standards Codification ("ASC") 842 ("ASC 842"), using the modified retrospective method. For periods presented prior to the adoption date, the Company continues to follow its previous policy under ASC 840, Leases. For details about the Company’s lease policy prior to the adoption of ASC 842, 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.

The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at lease commencement, at which time the Company also measures and recognizes a right-of-use ("ROU") asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. For the purposes of recognizing ROU assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient to not recognize a ROU asset or lease liability for short-term leases, which are leases with a term of twelve months or less. The lease term is defined as the noncancelable portion of the lease term plus any periods covered by an option to extend the lease if it is reasonably certain that that the option will be exercised.

In determining the amount of lease payments used in measuring ROU assets and lease liabilities, the Company has elected the practical expedient not to separate non-lease components from lease components for all classes of underlying assets. Consideration considered part of the lease payments used to measure ROU assets and lease liabilities generally includes fixed payments and variable payments based on either an index or a rate. The ROU asset also includes any lease prepayments, offset by lease incentives. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The rates implicit within the Company's leases are generally not determinable, therefore, the Company's incremental borrowing rate is used to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. Because the Company currently has no outstanding debt, the incremental borrowing rate for each lease is primarily based on publicly available information for companies within the same industry and with similar credit profiles as the Company. The rate is then adjusted for the impact of collateralization, the lease term and other specific terms included in the Company’s lease arrangements. The incremental borrowing rate is determined at lease commencement, or as of January 1, 2019 for operating leases in existence upon adoption of ASC 842. The incremental borrowing rate is subsequently reassessed upon a modification to the lease arrangement. ROU assets are subsequently assessed for impairment in accordance with the Company’s accounting policy for long-lived assets.

Lease costs related to the Company's operating leases are generally recognized as a single ratable lease cost over the lease term.

See Note 7 for further discussion of the Company’s accounting for leases.

F-16

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. Costs related to acquisition of additional aircraft components or the replacement of existing aircraft components are capitalized and depreciated over the estimated useful life of the aircraft or the added or replaced component, whichever is less. 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
Computer hardware and software		Three to five years
Furniture and office equipment		Five to ten years
Vehicles		Five years
Aircraft		Ten to twenty 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.

Long-Lived Assets, Intangible Assets and Goodwill

Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to 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.

Acquired technology and data, customer base assets, trade names and other intangible assets are related to the Company’s acquisitions (see Notes 4, 9 and 10). Acquired technology and data is amortized on a straight-line basis over periods ranging from one year to eight 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. Acquired trade names and other intangible assets are amortized on a straight-line basis over periods ranging from one year to fifteen years.

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 on October 1, or more frequently if an event or other circumstance indicates that the fair value of a reporting unit may be below its carrying amount. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or the Company elects to bypass such assessment, the Company then determines the fair value of each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates including the 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.

F-17

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Debt Issuance Costs

Costs incurred in connection with the issuance of long-term debt are deferred and amortized as interest expense over the term of the related debt using the effective interest method for term debt and on a straight-line basis for revolving debt. 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 11 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 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

On January 1, 2019, the Company adopted ASU 2016-02, Leases, using the modified retrospective method which allows for the application of the transition provisions at the beginning of the period of adoption, rather than at the beginning of the earliest comparative period presented in these consolidated financial statements. As permitted by the guidance, the Company elected to retain the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date and did not reassess contracts entered into prior to the adoption date for the existence of a lease. The Company also did not recognize ROU assets and lease liabilities for short-term leases, which are leases in existence as of the adoption date with an original term of twelve months or less.

As a result of the adoption of the standard, the Company recognized ROU assets of $116 million, including prepaid rent and deferred rent that was reclassified and recognized as of the adoption date as a component of the ROU assets, as well as lease

F-18

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

liabilities of $150 million on its consolidated balance sheet. The assets and liabilities recognized upon application of the transition provisions were primarily associated with existing office leases. The Company also recognized a cumulative-effect adjustment to beginning retained earnings of $12 million, net of tax, as of January 1, 2019, to recognize the remaining deferred gain on the sale-leaseback of the Company's corporate headquarters building, pursuant to the guidance in ASC 842.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740, Income Tax and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those periods. Early adoption is permitted. The Company evaluated the impact of this guidance on its financial statements and related disclosures and has elected to early adopt the guidance as of January 1, 2020. The guidance is not expected to have a material impact on the Company's financial statements and related disclosures. The exceptions removed as part of the standard were determined to be not applicable to the Company. The primary impact from adopting the standard will result in a reclassification of franchise taxes, which previously had been classified as a component of income from operations but will now be classified as a component of income tax expense beginning January 1, 2020.

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, including interim periods within those fiscal years. The guidance is not expected to have a material impact on the Company's 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 ASC 350-40 to determine which implementation costs to defer and recognize as an asset. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance is not expected to have a material impact on the Company's financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective on a modified retrospective basis for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The guidance is not expected to have a material impact on the Company's financial statements and related disclosures.

F-19

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,
	2019												2018
	North America				International				Total				North America				International				Total
Information and analytics
CoStar Suite	$	590,222			$	27,576			$	617,798			$	519,661			$	25,534			$	545,195
Information services	76,950				11,496				88,446				58,708				8,916				67,624
Online marketplaces
Multifamily	490,631				—				490,631				405,795				—				405,795
Commercial property and land	202,264				580				202,844				173,137				81				173,218
Total revenues	$	1,360,067			$	39,652			$	1,399,719			$	1,157,301			$	34,531			$	1,191,832

Deferred Revenue

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

Balance at December 31, 2018	$	51,459
Revenue recognized in the current period from the amounts in the beginning balance	(49,937		)
New deferrals, net of amounts recognized in the current period	68,814
Effects of foreign currency	284
Balance at December 31, 2019 (1)	$	70,620
__________________________

(1) Deferred revenue was comprised of $67 million of current liabilities and $3 million of noncurrent liabilities classified within lease and other long-term liabilities on the Company’s consolidated balance sheet as of December 31, 2019. The balance includes $11 million of net new deferrals recognized in connection with business acquisitions made in 2019. See Note 4 for details.

Contract Assets

The Company had contract assets of $4 million and $2 million as of December 31, 2019 and December 31, 2018, respectively; which are generated when contractual billing schedules differ from revenue recognition timing. Contract assets represent a conditional right to consideration for satisfied performance obligations that becomes a receivable when the conditions are satisfied. Current contract assets are included in prepaid expenses and other current assets and non-current contract assets are included in deposits and other assets on the Company's consolidated balance sheets.

F-20

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Commissions

Commissions expense is included in selling and marketing expense in the Company's consolidated statements of operations. The Company determined that no deferred commissions were impaired as of December 31, 2019. Commissions expense activity as of December 31, 2019 and December 31, 2018 was as follows (in thousands):

	Year Ended December 31,
	2019				2018
Commissions incurred	$	87,043			$	72,899
Commissions capitalized in the current period	(66,688		)		(53,497		)
Amortization of deferred commissions costs	53,421				48,313
Total commissions expense	$	73,776			$	67,715

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

Unsatisfied Performance Obligations

Remaining contract consideration for which revenue had not been recognized due to unsatisfied performance obligations was approximately $257 million at December 31, 2019, which the Company expects to recognize over the next five years. This amount does not include contract consideration for contracts with a duration of one year or less.

4. ACQUISITIONS

STR, Inc. and STR Global Ltd.

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

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

	Preliminary: October 22, 2019
Cash and cash equivalents	$	11,710
Accounts receivable	8,067
Lease right-of-use assets	7,306
Goodwill	261,436
Intangible assets	178,000
Lease liabilities	(7,306		)
Deferred revenue	(10,966		)
Deferred tax liabilities	(7,980		)
Other assets and liabilities	(4,815		)
Fair value of identifiable net assets acquired	$	435,452

The net assets of STR were recorded at their estimated fair values. In valuing the acquired assets and assumed liabilities, fair value estimates were based primarily on future expected cash flows, market rate assumptions for contractual obligations and appropriate discount rates. The purchase price allocation is preliminary, subject to the final determination of net working capital as of the acquisition date and the Company's assessment of certain tax matters. The customer base assets incorporated significant assumptions that had a material impact on the estimated fair value, such as discount rates, projected revenue growth rates, customer

F-21

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

attrition rates and projected profit margins. The following table summarizes the fair values (in thousands) of the identifiable intangible assets included in each of the Company's operating segments, their related estimated useful lives (in years) and their respective amortization methods:

	North America						International
	Estimated Fair Value				Estimated Useful Life		Estimated Fair Value				Estimated Useful Life		Amortization Method
Customer base	$	97,000			13		$	42,000			10		Accelerated
Trade name	24,000				15								Straight-line
Other intangible assets	10,000				5		5,000				5		Straight-line
Total intangible assets	$	131,000					$	47,000

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the STR acquisition includes but is not limited to: (i) the expected synergies and other benefits that the Company believes will result from combining its operations with STR's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce. Goodwill recorded in connection with this acquisition is not amortized, but is subject to an annual impairment test. Of the $261 million of goodwill recorded as part of the acquisition, $159 million and $102 million are associated with the Company's North America and International operating segments, respectively. The goodwill recognized in the North America operating segment is expected to be deductible for income tax purposes in future periods.

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

ForRent

On February 21, 2018, 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 has yielded 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.

F-22

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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):

	Final: February 21, 2018
Cash and cash equivalents	$	59
Accounts receivable	8,769
Indemnification asset	5,443
Goodwill	266,595
Intangible assets	141,300
Deferred tax liabilities	(34,032		)
Contingent sales tax liability	(6,260		)
State uncertain income tax position liability	(2,047		)
Other assets and liabilities	(3,535		)
Fair value of identifiable net assets acquired	$	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 related to the determination of working capital as of the acquisition date and recognized in 2018 were not material.

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 had an estimated useful life of one year. Amortization of the acquired customer base is recognized on an accelerated basis related to the expected economic benefit of the intangible asset, while amortization of the acquired 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 goodwill that was recognized is expected to be deductible for income tax purposes in future periods.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the ForRent acquisition includes but is not limited to: (i) the expected synergies and other benefits that the Company believes will result from combining its operations with ForRent's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce.

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, Contingencies, using a state-by-state assessment. The uncertain income tax position was determined in accordance with the provisions of ASC 740, Income Tax, 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 obligation for sales taxes in the state of Texas is limited to approximately $2 million. The total sales tax and uncertain income tax indemnification assets established as of the acquisition date were $5 million and $2 million, respectively. $0.9 million and $0.5 million of the contingent sales tax liability and related indemnification asset recognized as of the acquisition date were reversed during 2019 and 2018, respectively, upon expiration of the statute of limitations applicable to the contingent sales tax liability. $0.6 million and $0.9 million of the uncertain income tax position liability and related indemnification asset recognized as of the acquisition date were reversed during 2019 and 2018, respectively, 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 funds remained in the escrow account after the employees were compensated and the defined

F-23

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

six-month period ended, those funds were remitted to the Seller. The Company expensed all of the retention compensation as the services were performed in the post-combination period in 2018.

Other Acquisitions

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

On November 8, 2018, the Company acquired Cozy Services, Ltd. ("Cozy"), a 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 $52 million and $11 million, respectively. The net assets of Cozy were recorded at their estimated fair value. Measurement period adjustments recognized in 2019 were not material.

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, with the remainder of the purchase price paid one year following the acquisition date, subject to offset for claims under the purchase agreement. 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. Measurement period adjustments recognized in 2019 were not material.

Pro Forma Financial Information

The unaudited pro forma financial information presented below summarizes the combined results of operations for the Company, ForRent and STR as though the companies were combined as of January 1, 2017 and January 1, 2018, respectively. The impact of Realla, Cozy and OCP 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 acquisitions of ForRent and STR had taken place on January 1, 2017 and January 1, 2018, respectively.

The unaudited pro forma financial information for the years ended December 31, 2019, 2018 and 2017 combine the historical results of the Company for the years ended December 31, 2019, 2018 and 2017, the historical results of ForRent and STR for the periods prior to the acquisition dates, and the effects of the pro forma adjustments listed above.

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

	Year Ended December 31,
	2019				2018				2017
Revenue	$	1,450,954			$	1,264,696			$	1,067,742
Net income	$	306,755			$	226,305			$	103,000
Net income per share - basic	$	8.45			$	6.28			$	3.09
Net income per share - diluted	$	8.37			$	6.21			$	3.06

Revenue and net loss attributable to STR from October 22, 2019 through December 31, 2019 was not material. The Company began integrating the sales force and operations of ForRent after the closing of the acquisition in an effort 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.

F-24

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2019 are as follows (in thousands):

Maturity		Fair Value
Due in:
2020		$	—
2021 — 2024		—
2025 — 2029		—
2030 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, 2019, 2018 and 2017. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.

As of December 31, 2019, 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, 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

The unrealized losses on the Company’s investments as of December 31, 2019 and 2018 were generated primarily from changes in interest rates and ARS that failed to settle at auction, due to adverse conditions in the global credit markets. The losses are considered temporary, as the contractual terms of these investments do not permit the issuer to settle the security at a price less than the amortized cost of the investment. Because the Company does not intend to sell these instruments and it is not more likely than not that the Company will be required to sell these instruments prior to anticipated recovery, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2019 and 2018. See Note 6 for further discussion of the fair value of the Company’s financial assets.

F-25

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	December 31,
	2019								2018
	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, 2019 and 2018, 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, 2019 (in thousands):

	Level 1				Level 2				Level 3				Total
Assets:
Money market funds	$	576,761			$	—			$	—			$	576,761
Auction rate securities	—				—				10,070				10,070
Total assets measured at fair value	$	576,761			$	—			$	10,070			$	586,831

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 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-26

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, 2017 to December 31, 2019 (in thousands):

	Auction Rate Securities
Balance at December 31, 2017	$	10,070
Decrease in unrealized loss included in accumulated other comprehensive loss	—
Balance at December 31, 2018	10,070
Decrease in unrealized loss included in accumulated other comprehensive loss	—
Balance at December 31, 2019	$	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, 2019, 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, 2019. 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, 2019. 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, 2019 and 2018 was approximately 5% and 6%, respectively. Selecting another discount rate within the range used in the discounted cash flow model would not result in a significant change to the fair value of the ARS.

Based on this assessment of fair value, as of December 31, 2019, 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.

F-27

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. LEASES

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

Lease costs related to the Company's operating leases included in the consolidated statements of operations were as follows (in thousands):

	Year Ended December 31,
	2019				2018				2017
Operating lease costs:
Cost of revenues	$	11,407			$	11,926			$	10,214
Software development	4,209				3,335				2,721
Selling and marketing (excluding customer base amortization)	8,678				9,068				8,279
General and administrative	3,299				3,789				4,467
Total operating lease costs	$	27,593			$	28,118			$	25,681

The impact of lease costs related to finance leases and short-term leases was not material for the years ended December 31, 2019, 2018 and 2017.

Supplemental balance sheet information related to operating leases was as follows (in thousands):

Balance	Balance Sheet Location	December 31, 2019
Long-term lease liabilities	Lease and other long-term liabilities	$	120,153
Weighted-average remaining lease term in years		5.0
Weighted-average discount rate		4.0		%

Balance sheet information related to finance leases was not material as of December 31, 2019.

Supplemental cash flow information related to leases was as follows (in thousands):

	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases	$	30,287
ROU assets obtained in exchange for lease obligations:
Operating leases	$	22,629

F-28

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturities of operating lease liabilities at December 31, 2019 were as follows (in thousands):

January 1, 2020 - December 31, 2020	$	34,976
January 1, 2021 - December 31, 2021	33,760
January 1, 2022 - December 31, 2022	30,938
January 1, 2023 - December 31, 2023	29,663
January 1, 2024 - December 31, 2024	23,972
Thereafter	12,233
Total lease payments	165,542
Less imputed interest	(15,719		)
Present value of lease liabilities	$	149,823

8. PROPERTY AND EQUIPMENT

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

	December 31,
	2019				2018
Leasehold improvements	$	73,918			$	65,332
Furniture, office equipment and vehicles	60,768				50,224
Computer hardware and software	80,947				74,742
Aircraft	27,657				2,796
Property and equipment, gross	243,290				193,094
Accumulated depreciation and amortization	(135,761		)		(109,791		)
Property and equipment, net	$	107,529			$	83,303

Depreciation expense for property and equipment was approximately $26 million, $26 million and $26 million, for the years ended December 31, 2019, 2018 and 2017, respectively.

9. 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, 2017	$	1,253,494			$	29,963			$	1,283,457
Acquisition	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
Acquisitions	165,272				102,532				267,804
Effect of foreign currency translation	—				2,681				2,681
Goodwill, December 31, 2019	$	1,738,360			$	143,660			$	1,882,020

The Company recorded goodwill of approximately $261 million in connection with the October 22, 2019 acquisition of STR. The Company recorded goodwill of approximately $8 million in connection with the June 2019 acquisition of OCP. The Company recorded goodwill of approximately $53 million in connection with the November 8, 2018 acquisition of Cozy, a 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 Company recorded a measurement period adjustment during 2019 which resulted in a $1 million reduction to the initial amount of goodwill recognized in connection with this acquisition. The Company recorded goodwill of approximately $10 million in connection with the October 12, 2018 acquisition of Realla. The Company recorded goodwill of approximately $267 million in connection with the February 21, 2018 acquisition

F-29

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of ForRent. The total amount of goodwill that is expected to be deductible for tax purposes is approximately $166 million as of December 31, 2019.

No impairments of the Company's goodwill were recognized during the years ended December 31, 2019, 2018 and 2017.

10. INTANGIBLE ASSETS

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

	December 31,								Weighted- Average Amortization Period (in years)
	2019				2018
Acquired technology and data	105,168				103,128				5
Accumulated amortization	(90,542		)		(85,344		)
Acquired technology, net	14,626				17,784
Acquired customer base	487,532				339,574				11
Accumulated amortization	(233,202		)		(199,405		)
Acquired customer base, net	254,330				140,169
Acquired trade names and other intangible assets	236,358				199,752				12
Accumulated amortization	(84,118		)		(68,794		)
Acquired trade names and other intangible assets, net	152,240				130,958
Intangible assets, net	$	421,196			$	288,911

Amortization expense for intangible assets was approximately $55 million, $52 million and $37 million for the years ended December 31, 2019, 2018 and 2017, respectively.

In the aggregate, the Company expects the future amortization expense for intangible assets existing as of December 31, 2019 to be approximately $72 million, $61 million, $51 million, $45 million and $39 million for the years ending December 31, 2020, 2021, 2022, 2023 and 2024, 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, 2019, 2018 and 2017.

11. 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.

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, 2019 and December 31, 2018, 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.

F-30

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. LIBOR may not always be available to the Company as a base interest rate for the credit facility, and the transition away from LIBOR is anticipated to begin in 2021, though it may become unavailable even earlier. The Company may need or seek to negotiate with its lenders for an alternative rate. In doing so, the Company may not be able to agree with its lenders on a replacement reference rate that was favorable as LIBOR, which may increase our capital costs.

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, 2019.

The Company had no outstanding long-term debt at December 31, 2019 and December 31, 2018. For the years ended December 31, 2019, 2018 and 2017, the Company recognized interest expense of $3 million, $3 million and $9 million, including amortized debt issuance costs of approximately $0.9 million, $1 million and $2 million, respectively. The Company had $2 million and $3 million of deferred debt issuance costs included in deposits and other assets at December 31, 2019 and December 31, 2018, respectively.

F-31

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. INCOME TAXES

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

	Year Ended December 31,
	2019				2018				2017
Current:
Federal	$	53,039			$	36,167			$	41,453
State	13,422				5,140				3,518
Foreign	1,305				708				295
Total current	67,766				42,015				45,266
Deferred:
Federal	6,881				6,576				(7,917		)
State	2,424				(2,582		)		4,695
Foreign	(1,085		)		(328		)		319
Total deferred	8,220				3,666				(2,903		)
Total provision for income taxes	$	75,986			$	45,681			$	42,363

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

	December 31,
	2019				2018
Deferred tax assets:
Reserve for bad debts	1,312				1,457
Accrued compensation	4,297				4,803
Stock compensation	13,877				10,041
Net operating losses	20,555				26,349
Accrued reserve and other	4,177				1,773
Lease liabilities	36,472				—
Deferred rent	—				5,928
Deferred gain on the sale of building	—				4,140
Research and development credits	6,341				6,331
Total deferred tax assets, prior to valuation allowance	87,031				60,822
Valuation allowance	(13,553		)		(14,246		)
Total deferred tax assets, net of valuation allowance	73,478				46,576
Deferred tax liabilities:
Deferred commission costs, net	(22,612		)		(19,314		)
Lease right-of-use assets	(30,830		)		—
Prepaid expenses	(1,548		)		(2,204		)
Property and equipment, net	(8,891		)		(5,367		)
Intangible assets, net	(91,285		)		(82,079		)
Total deferred tax liabilities	(155,166		)		(108,964		)
Net deferred tax assets (liabilities)	$	(81,688	)		$	(62,388	)

As of December 31, 2019 and 2018, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance as of December 31, 2019 and 2018 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.

F-32

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company’s change in valuation allowance was a decrease of approximately $0.7 million for the year ended December 31, 2019 and an increase of approximately $1 million for the year ended December 31, 2018. The decrease for the year ended December 31, 2019 is due to a decrease in foreign net operating loss deferred tax assets for which a full valuation allowance of approximately $1.1 million had been established, partially offset by an increase in the valuation allowance for state tax credits related to the D.C. qualified high technology company credit of approximately $0.4 million. 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 Company had U.S. income before income taxes of approximately $403 million, $294 million and $167 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company had foreign losses before income taxes of approximately $12 million, $10 million, and $2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

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,
	2019				2018				2017
Expected federal income tax provision at statutory rate	$	82,099			$	59,643			$	57,770
State income taxes, net of federal benefit	14,884				10,312				4,776
Foreign income taxes, net effect	1,515				(315		)		(3,540		)
Increase (decrease) in valuation allowance	(693		)		1,214				3,624
Tax rate changes	(13		)		141				(7,340		)
Research credits	(12,188		)		(15,373		)		(20,547		)
Excess tax benefit	(15,282		)		(14,227		)		(7,010		)
Tax reserves	3,135				1,870				12,646
Other adjustments	2,529				2,416				1,984
Income tax expense	$	75,986			$	45,681			$	42,363

Certain of 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 has net operating loss carryforwards for international income tax purposes of approximately $45 million, which do not expire. The Company has federal net operating loss carryforwards of approximately $28 million that begin to expire in 2020, state net operating loss carryforwards with a tax value of approximately $2 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, $6 million and $7 million in December 31, 2019, 2018 and 2017, respectively.

F-33

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, 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
Increase for current year tax positions	3,487
Increase for prior year tax positions	440
Expiration of the statute of limitation for assessment of taxes	(832		)
Unrecognized tax benefit as of December 31, 2019	$	25,467

Approximately $25 million and $22 million of the unrecognized tax benefits as of December 31, 2019 and 2018, respectively, would favorably affect the annual effective tax rate, if recognized in future periods. The increase for current year and prior year tax positions of $4 million for the year ended December 31, 2019 is primarily attributable to research credits. The decrease for expiration of the statute of limitation of $1 million for the year ended December 31, 2019 is primarily attributable to a state apportionment methodology reserve. The Company recognized $0.2 million, $0.2 million, and $0.1 million for interest and penalties in its consolidated statement of operations for the years ended December 31, 2019, 2018, 2017 respectively. The Company had liabilities of $0.6 million, $0.4 million, and $0.2 million for interest and penalties in its consolidated balance sheets as of December 31, 2019, 2018, 2017 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 2018 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 2016 through 2018 remain open to examination. For states that have a four-year statute of limitations, the state income tax returns for tax years 2015 through 2018 remain open to examination. The Company’s U.K. income tax returns for tax years 2014 through 2018 remain open to examination. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations.

13. COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under various non-cancelable operating leases. The leases contain various renewal options. See Note 7 for further discussion of the Company's operating lease commitments.

.

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 effect on the Company's consolidated financial position, future results of operations or liquidity. Legal defense costs are expensed as incurred. During the year ended December 31, 2019, the Company received $11 million of legal settlement proceeds, which have been included in interest and other income on the Company's consolidated statements of operations.

14. SEGMENT REPORTING

Segment Information

F-34

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 primarily includes Europe, Asia-Pacific and Latin America. 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,
	2019				2018				2017
EBITDA
North America	$	451,699			$	358,036			$	236,906
International	(6,987		)		(6,729		)		553
Total EBITDA	$	444,712			$	351,307			$	237,459

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

	Year Ended December 31,
	2019				2018				2017
Net income	$	314,963			$	238,334			$	122,695
Amortization of acquired intangible assets in cost of revenues	21,357				20,586				19,707
Amortization of acquired intangible assets in operating expenses	33,995				30,881				17,684
Depreciation and other amortization	25,813				26,276				26,252
Interest and other income	(30,017		)		(13,281		)		(4,044		)
Interest and other expense	2,615				2,830				9,014
Loss on debt extinguishment	—				—				3,788
Income tax expense	75,986				45,681				42,363
EBITDA	$	444,712			$	351,307			$	237,459

F-35

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	December 31,
	2019				2018
Property and equipment, net
North America	$	103,383			$	79,493
International	4,146				3,810
Total property and equipment, net	$	107,529			$	83,303
Goodwill
North America	$	1,738,360			$	1,573,088
International	143,660				38,447
Total goodwill	$	1,882,020			$	1,611,535
Assets
North America	$	3,615,258			$	3,253,035
International	238,728				59,922
Total assets	$	3,853,986			$	3,312,957
Liabilities
North America	$	402,759			$	272,776
International	45,634				18,239
Total liabilities	$	448,393			$	291,015

15. STOCKHOLDERS' EQUITY

Preferred Stock

The Company has 2 million shares of preferred stock, $0.01 par value, authorized for issuance as of December 31, 2019. 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.

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.

F-36

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. 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,
	2019				2018				2017
Numerator:
Net income	$	314,963			$	238,334			$	122,695
Denominator:
Denominator for basic net income per share — weighted-average outstanding shares	36,310				36,058				33,200
Effect of dilutive securities:
Stock options, restricted stock awards and restricted stock units	320				390				359
Denominator for diluted net income per share — weighted-average outstanding shares	36,630				36,448				33,559
Net income per share — basic	$	8.67			$	6.61			$	3.70
Net income per share — diluted	$	8.60			$	6.54			$	3.66

The Company’s potentially dilutive securities include outstanding stock options, unvested stock-based awards which include restricted stock awards that vest over a specific service period, restricted stock awards that vest based on achievement of a performance condition, restricted stock awards with a performance and a market condition, restricted stock units and Matching RSUs awarded under the Company's Management Stock Purchase Plan. Shares underlying unvested restricted stock awards that vest based on performance and market conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share. Diluted net income per share considers the impact of potentially dilutive securities except when the inclusion of the potentially dilutive securities would have an anti-dilutive effect.

The following table summarizes the shares underlying the unvested performance-based restricted stock and anti-dilutive securities excluded from the basic and diluted earnings per share calculations (in thousands):

	Year Ended December 31,
	2019			2018			2017
Performance-based restricted stock awards	60			53			58
Anti-dilutive securities	42			100			126

17. EMPLOYEE BENEFIT PLANS

Stock Incentive Plans

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

F-37

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2019.

At December 31, 2019, there was approximately $82 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 2.5 years.

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, 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					$	212.28
Granted	48,300			$398.15		$	398.15
Exercised	(116,918	)		$54.51 - $342.13		$	159.52
Outstanding at December 31, 2019	275,658			$54.51 - $398.15		$	267.23			6.98		$	91,262
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
Exercisable at December 31, 2019	147,620			$102.16 - $342.13		$	210.96			5.84		$	57,180

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 116,918, 177,299, and 81,815, shares were exercised during the years ended 2019, 2018 and 2017, respectively. The aggregate intrinsic value of options exercised, determined as of the date of option exercise, was approximately $40 million, $45 million and $13 million for the years ended December 31, 2019, 2018 and 2017, respectively.

F-38

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The weighted-average grant date fair value of each option granted during the years ended December 31, 2019, 2018 and 2017 using the Black-Scholes option-pricing model was $115.17, $101.02 and $59.06, 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,
	2019			2018			2017
Dividend yield	0	%		0	%		0	%
Expected volatility	27	%		28	%		28	%
Risk-free interest rate	2	%		3	%		2	%
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, 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, 2019:

		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
$102.16 - $142.45		3,522			3.19		$	102.16			3,522			$	102.16
$142.46 - $188.22		36,600			6.19		$	182.75			36,600			$	182.75
$188.23 - $197.37		32,200			5.17		$	193.69			32,200			$	193.69
$197.38 - $202.98		33,600			4.16		$	201.04			33,600			$	201.04
$202.99 - $273.52		52,135			7.16		$	204.91			23,066			$	204.91
$273.53 - $370.14		69,301			8.16		$	342.13			18,632			$	342.13
$370.15 - $398.15		48,300			9.10		$	398.15			—			$	—
		275,658					$	267.23			147,620			$	210.96

Restricted Stock Awards

The Compensation Committee of the Board of Directors of the Company historically approved grants of restricted common stock to employees and directors of the Company that vest over a specific service period and to executive officers that vest based on the achievement of certain performance conditions, primarily, the achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by the end of each respective three-year period. These 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.

The vesting of restricted common stock is subject to continuing employment requirements. Certain performance-based restricted common stock awards are also subject to a market condition such that 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 performance goals and an established Company specific TSR factor 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

F-39

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

36,364, 26,160, and 32,160 shares of performance-based restricted common stock during the years ended December 31, 2019, 2018 and 2017, respectively.

The Company estimates the fair value of its equity awards with both a performance and 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 achieving the market condition to calculate the fair value of the awards. Expense is only recorded for awards that are expected to vest, net of estimated forfeitures. The assumptions used to estimate the fair value of awards with both a performance and a market condition were as follows:

	Year Ended December 31,
	2019				2018				2017
Dividend yield	0		%		0		%		0		%
Expected volatility	27		%		28		%		28		%
Risk-free interest rate	2		%		2		%		2		%
Expected life (in years)	3				3				3
Weighted-average grant date fair value	$	398.15			$	342.13			$	218.59

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, 2019, the Company determined that it was probable that the performance goals associated with restricted stock awards with performance and market conditions granted during 2019, 2018 and 2017 would be met by their forfeiture dates. The Company recorded a total of approximately $8 million, $5 million and $5 million of stock-based compensation expense related to restricted stock awards with a market condition for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, the Company expects to record an aggregate stock-based compensation expense of approximately $11 million for restricted stock awards with a market condition over the periods 2020, 2021 and 2022.

The following table presents unvested restricted stock awards activity for the year ended December 31, 2019:

	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, 2018	304,161			$	272.95			76,320			$	193.44
Granted	115,722			$	456.51			36,000			$	429.63
Vested	(134,361	)		$	241.65			(23,040	)		$	184.97
Canceled	(18,303	)		$	315.39			—			$	—
Unvested restricted stock awards at December 31, 2019	267,219			$	365.27			89,280			$	290.87

F-40

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

The following table presents unvested restricted stock units activity for the year ended December 31, 2019:

	Number of Units			Weighted-Average Grant Date Fair Value per Share
Unvested restricted stock units at December 31, 2018	852			$	228.86
Granted	413			$	459.41
Vested	(411	)		$	221.08
Canceled	—			$	—
Unvested restricted stock units at December 31, 2019	854			$	344.10

Management Stock Purchase Plan

The Board of Directors adopted the Company’s Management Stock Purchase Plan 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 RSUs issued under the Company 2016 Plan. Under this plan, participants are permitted to elect to defer up to 100% of their annual incentive bonus or commissions earned during the year 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 awards the participant DSUs representing the number of shares of common stock with 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, the participant receives a grant of Matching RSUs covering the number of shares of common stock equal up to 100% of the DSUs granted. The expense related to the DSUs is recognized on a straight-line basis during the period that the related incentive bonus or commission is earned. The stock-based compensation expense for 7,441 DSUs awarded during 2019 was fully recognized as of December 31, 2018. The expense related to the Matching RSUs is recognized over the four years vesting period following the grant date.

The following tables presents the RSU activity for the year ended December 31, 2019:

	Number of Matching RSU Shares			Weighted-Average Grant Date Fair Value per Share
Unvested MSPP restricted stock units at December 31, 2018	—			$	—
Granted	7,441			469.13
Vested	—			—
Canceled	(275	)		469.13
Unvested MSPP restricted stock units at December 31, 2019	7,166			$	469.13

F-41

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 2019, 2018 and 2017, 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, 2019, 2018 and 2017 were approximately $12 million, $12 million and $10 million, respectively. The Company had no administrative expenses in connection with the 401(k) plan for the years ended December 31, 2019, 2018 and 2017, 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 2019, 2018 and 2017, 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, 2019, 2018 and 2017, were approximately $0.6 million, $0.5 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, 2019, 2018 and 2017 were approximately $70 thousand, $58 thousand and $43 thousand, 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 51,584 and 65,174 shares available for purchase under the ESPP as of December 31, 2019 and 2018, respectively, and approximately 13,590 and 14,848 shares of the Company’s common stock were purchased under the ESPP during 2019 and 2018, respectively.

F-42

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. QUARTERLY RESULTS OF OPERATIONS

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2019 and 2018. 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.

	2019
	Mar. 31				Jun. 30				Sep. 30				Dec. 31
Revenues	$	328,425			$	343,760			$	352,808			$	374,726
Cost of revenues	71,153				71,918				71,172				74,996
Gross profit	257,272				271,842				281,636				299,730
Operating expenses	163,780				197,042				187,367				198,744
Income from operations	93,492				74,800				94,269				100,986
Interest and other income	4,945				5,913				5,358				13,801
Interest and other expense	(732		)		(697		)		(704		)		(482		)
Income before income taxes	97,705				80,016				98,923				114,305
Income tax expense	12,536				16,768				20,304				26,378
Net income	$	85,169			$	63,248			$	78,619			$	87,927
Net income per share — basic	$	2.35			$	1.74			$	2.16			$	2.42
Net income per share — diluted	$	2.33			$	1.73			$	2.15			$	2.39

	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

F-43

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. SUBSEQUENT EVENTS

On February 11, 2020, CSGP Holdings, LLC (“CSGP”), an indirect wholly owned subsidiary of the Company, RentPath Holdings, Inc. (“RentPath”), certain direct or indirect wholly-owned subsidiaries of RentPath (together with RentPath, the “Sellers”), and, solely for the purposes set forth therein, the Company, entered into an asset purchase agreement (the “Asset Purchase Agreement”) dated as of February 12, 2020. Pursuant to the Asset Purchase Agreement, and subject to the terms and conditions set forth therein, CSGP has agreed to acquire for $588 million in cash all of the equity interests of RentPath, as reorganized following an internal restructuring of the Sellers (“Reorganized RentPath") pursuant to and under the joint chapter 11 plan of reorganization of the Sellers and certain of their affiliates to be filed in the U.S. Bankruptcy Court for the District of Delaware. Under the terms of the Asset Purchase Agreement, the Company has agreed to guarantee the full and timely performance of CSGP’s obligations under the Asset Purchase Agreement. The completion of the transaction is subject to customary conditions, including the expiration or termination of any applicable waiting period under applicable antitrust laws and bankruptcy court approvals. The purchase agreement requires the Company to pay a $59 million fee in the event the purchase agreement is terminated under specified circumstances in which certain antitrust approvals are not obtained, or a governmental order related to antitrust or competition matters prohibits the consummation of the transaction. RentPath is a provider of digital marketing solutions for rental properties through a network of Internet listing websites, including Rent.com, ApartmentsGuide.com, Rentals.com and LiveLovely.com.

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