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

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

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

Overview

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

Information and Analytics

CoStar Suite®. Our subscription-based information services consist primarily of CoStar Suite services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property®, CoStar COMPS®, CoStar Market Analytics, CoStar Tenant®, CoStar Lease Comps and CoStar Public Record through our mobile applications. Our integrated suite of online service offerings includes information about space available for-lease, comparable sales information, information about properties for-sale, tenant information, Internet marketing services, analytical capabilities, information for clients' websites, information about industry professionals and their business relationships, and industry news. Our sales force is responsible for selling multiple product lines, including CoStar Suite and LoopNet. During 2020, we plan to shift the focus of our sales force to sales of LoopNet Signature Ads. As a result, we anticipate CoStar Suite revenue growth will moderate during the year.

Information services. We provide real estate and lease management solutions, including lease administration and abstraction services, through our CoStar Real Estate Manager® service offerings, as well as portfolio and debt analysis, management and reporting capabilities through our CoStar Investment Analysis and CoStar Risk Analytics® service offerings. We provide information services internationally, through our Grecam, Belbex and Thomas Daily businesses in France, Spain and Germany, respectively. Sales of CoStar Real Estate Manager represent a significant portion of our information services revenue. CoStar Real Estate Manager's revenue growth rates increased significantly in 2018 as new clients adopted, and existing clients expanded their use of, CoStar Real Estate Manager to manage compliance with new lease accounting and reporting requirements which became effective for public companies for financial reporting periods beginning after December 15, 2018. As a result, we expect the growth rate for CoStar Real Estate Manager to normalize as the initial surge of the demand has eased. On October 22, 2019, we acquired STR and we now also provide STR’s complementary benchmarking and analytics services to the hospitality industry. We expect that the acquisition of STR and the combination of STR's and CoStar's offerings will allow us to create valuable new and improved tools for industry participants. See Note 4 to the accompanying Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K for further discussion of the acquisition of STR.

Online Marketplaces

Multifamily. Apartments.comTM is part of our network of apartment marketing sites, which primarily includes ApartmentFinder®, ForRent.com®, ApartmentHomeLiving.comTM, Apartamentos.comTM, Westside Rentals and Off Campus Partners, LLC ("OCP"). Our apartment marketing network of subscription-based services offers renters a searchable database of apartment listings and provides professional property management companies and landlords with an advertising destination. On February 21, 2018, we completed the acquisition of ForRent, a division of Dominion Enterprises, including the ForRent.com, AFTER55.com, CorporateHousing.com and ForRentUniversity.com apartment marketing sites. On November 8, 2018, we acquired Cozy Services, Ltd. ("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. On June 12, 2019, we acquired OCP, a provider of student housing marketplace content and technology to U.S. universities. We expect the multifamily annual revenue growth rate to remain consistent with 2019 as we have fully integrated our ForRent and Cozy acquisitions into our service offerings. We continue to work on integrating the OCP acquisition and the

services they offer into our Apartments.com network. See Note 4 to the accompanying Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K for further discussion of these acquisitions.

Commercial property and land. Our LoopNet.com network of commercial real estate websites offer subscription-based, online marketplace services that enable commercial property owners, landlords and real estate agents working on their behalf to list properties for-sale or for-lease and to submit detailed information about property listings. Commercial real estate agents, buyers and tenants use the LoopNet.com network of online marketplace services to search for available property listings that meet their criteria. As part of our rebuild and launch of the LoopNet Signature Ads product, we rolled out new packages in the fourth quarter of 2019. As a result, the growth rate increased in the fourth quarter of 2019, and LoopNet is expected to continue to grow in the subsequent periods. In addition, on October 12, 2018, we acquired all of the issued share capital of Realla Ltd. ("Realla"), the operator of a commercial property listings and data management platform in the U.K., including a free-to-list search engine for commercial property listings. See Note 4 to the accompanying Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K for further discussion of the acquisition of Realla. Our BizBuySell.com network, which includes BizQuest® and FindaFranchise, provides online marketplaces for businesses for-sale. Our Land.com network of sites, which provides online marketplaces for rural lands for-sale, includes LandsofAmerica, LandAndFarm and LandWatch®.

For the years ended December 31, 2019, 2018 and 2017 our annualized net new bookings of subscription-based services on all contracts were approximately $210 million, $169 million and $148 million, respectively, calculated based on the annualized amount of change in our sales resulting from all new subscription-based contracts or upsales on all existing subscription-based contracts, less write downs and cancellations, for the period reported. We recognize subscription revenues on a straight-line basis over the life of the contract. Net bookings is considered a key indicator of future subscription revenue growth and is also used as a metric of salesforce productivity by management and investors.

For the years ended December 31, 2019, 2018 and 2017, our contract renewal rate for existing CoStar subscription-based services on annual contracts was approximately 90%, 90% and 91% respectively, and, therefore, our cancellation rate for those services was approximately 10%, 10%, and 9%, respectively. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, management also believes that the rate may be a reliable indicator of short-term and long-term performance. Our trailing twelve-month contract renewal rate may decline if, among other reasons, negative economic conditions lead to greater business failures and/or consolidations among our clients, reductions in customer spending, or decreases in our customer base.

Development, Investments and Expansion

We are committed to supporting, improving and enhancing our information, analytics and online marketplace solutions, including expanding and improving our offerings for property owners, property managers and renters. We expect to continue our software development efforts to improve existing services, introduce new services, integrate and cross-sell services, and expand and develop supporting technologies for our research, sales and marketing organizations.

Our key priorities for 2020 include:

•

Continue to develop, improve and market our recently launched Apartments.com service offerings that focus on the digital rental experience and enable renters to apply for-leases, and for landlords to run tenant credit and background checks and make rent payments, all online through a single platform. We plan to aggressively market our multifamily listing services in an effort to provide more value to advertisers and, in turn, to attract advertisers. As such, we plan to increase our investment in Apartments.com marketing in 2020 by approximately $100 million, which may reduce our margins and profitability while we invest in future growth. The increased investment is focused on search engine marketing and enhanced brand awareness. We also plan to continue to invest in our multifamily business by increasing the size of our sales force with a focus on increasing sales to midsize and smaller apartment communities.

•

Obtaining necessary bankruptcy court and regulatory approvals to close the pending acquisition of RentPath and integrating RentPath with the Apartments.com network post-closing. On February 11, 2020, a wholly owned subsidiary of the Company entered into an agreement to acquire for $588 million in cash all of the equity interests of RentPath Holdings, Inc., as reorganized following an internal restructuring pursuant to and under the joint chapter 11 plan of reorganization of RentPath and certain of its subsidiaries. Closing of the acquisition is subject to customary closing conditions, including the expiration or termination of any applicable waiting period under applicable antitrust laws and approval by the bankruptcy court. See Note 19 to the accompanying Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K for further discussion.

•

Continue to invest in the LoopNet marketplace by enhancing the content on the site (including high-quality imagery), seeking targeted advertisements, providing premium listing services (such as LoopNet Signature Ads) that increase a property listing’s exposure, and adding more content for premium listings to better meet the needs of a broader cross section of the commercial real estate industry. Additionally, we initiated training and incentive programs for our sales team to increase sales of LoopNet Signature Ads, with a focus on property owners.

•	Integrating recently completed acquisitions, including STR, with CoStar’s business operations. We plan to consolidate STR data and services with CoStar Suite to create an integrated platform. We plan to drive international expansion, in part, through STR's global operations and to apply STR's benchmarking expertise to other commercial real estate segments served by CoStar.

•

Continue to invest in CoStar Suite, including capabilities that allow us to broaden the reach of CoStar Suite in Europe by offering multiple languages and currencies on the platform. We plan to enhance CoStar Suite by making additional investments in analytical capabilities focused on owners and lenders of commercial real estate. In addition, we plan to invest in integrating the technology and infrastructure from other existing service offerings into the CoStar Suite platform, including CoStar Real Estate Manager, in order to leverage data and technology across our platforms and provide customers with additional functionality.

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

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

Non-GAAP Financial Measures

We prepare and publicly release quarterly unaudited financial statements prepared in accordance with generally accepted accounting principles (“GAAP”). We also disclose and discuss certain non-GAAP financial measures in our public releases, investor conference calls and filings with the Securities and Exchange Commission. The non-GAAP financial measures that we may disclose include net income before interest and other income (expense), loss on debt extinguishment, income taxes, depreciation and amortization (“EBITDA”), adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share. EBITDA is our net income before interest and other income (expense), loss on debt extinguishment, income taxes, depreciation and amortization. We typically disclose EBITDA on a consolidated and an operating segment basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission. Adjusted EBITDA is different from EBITDA because we further adjust EBITDA for stock-based compensation expense, acquisition- and integration-related costs for pending and completed acquisitions, restructuring costs and settlements and impairments incurred outside our ordinary course of business. Non-GAAP net income is determined by adjusting our net income for stock-based compensation expense, acquisition- and integration-related costs for pending and completed acquisitions, restructuring costs, settlement and impairment costs incurred outside our ordinary course of business and loss on debt extinguishment, as well as amortization of acquired intangible assets and other related costs, and then subtracting an assumed provision for income taxes. We may disclose adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share on a consolidated basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors meaningfully evaluate and compare our results of operations to our previously reported results of operations or to those of other companies in our industry.

We view EBITDA, adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share as operating performance measures and as such we believe that the most directly comparable GAAP financial measure to EBITDA, adjusted EBITDA and non-GAAP net income is net income. We believe the most directly comparable GAAP financial measures to non-GAAP net income per diluted share and adjusted EBITDA margin are net income per diluted share and net income divided by revenue, respectively. In calculating EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-

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

EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share may be used by management to internally measure our operating and management performance and may be used by investors as supplemental financial measures to evaluate the performance of our business. We believe that these non-GAAP measures, when viewed with our GAAP results and accompanying reconciliations, provide additional information to investors that is useful to understand the factors and trends affecting our business. We have spent more than 30 years building our database of commercial real estate information and expanding our markets and services partially through acquisitions of complementary businesses. Due to the expansion of our information, analytics and online marketplace services, which has included acquisitions, our net income has included significant charges for amortization of acquired intangible assets, depreciation and other amortization, acquisition- and integration-related costs for pending and completed acquisitions, restructuring costs, and loss on debt extinguishment. Adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share exclude these charges and provide meaningful information about the operating performance of our business, apart from charges for amortization of acquired intangible assets, depreciation and other amortization, acquisition- and integration-related costs for pending and completed acquisitions, restructuring costs; settlement and impairment costs incurred outside our ordinary course of business. We believe the disclosure of non-GAAP measures can help investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe the non-GAAP measures we disclose are measures of our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest, income taxes, stock-based compensation expenses, acquisition- and integration-related costs for pending and completed acquisitions, restructuring costs; loss on debt extinguishment and settlement and impairment costs incurred outside our ordinary course of business, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on EBITDA and may rely on adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income or non-GAAP net income per diluted share to provide a financial measure by which to compare our operating performance against that of other companies in our industry.

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

•

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

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

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

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

•

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

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

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

•

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

•

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

•

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

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

The financial items that have been excluded from our net income to calculate non-GAAP net income and non-GAAP net income per diluted share are amortization of acquired intangible assets and other related costs, stock-based compensation, acquisition- and integration- related costs for pending and completed acquisitions, restructuring and related costs and settlement and impairment costs incurred outside our ordinary course of business. These items are discussed above with respect to the calculation of adjusted EBITDA together with the material limitations associated with using this non-GAAP financial measure as compared to net income. In addition to these exclusions from net income, we subtract an assumed provision for income taxes to calculate non-GAAP net income. In 2019 and 2018, we assumed a 25% tax rate which approximated our historical long-term statutory corporate tax rate, excluding the impact of discrete items.

Adjusted EBITDA margin represents adjusted EBITDA divided by revenues for the period.

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

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

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

	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
Net cash flows provided by (used in)
Operating activities	$	457,780			$	335,458			$	234,703
Investing activities	$	(483,753	)		$	(448,001	)		$	(72,267	)
Financing activities	$	(4,154	)		$	2,744			$	480,430

Consolidated Results of Operations

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

	Year Ended December 31,
	2019							2018							2017
Revenues	$	1,399,719			100	%		$	1,191,832			100	%		$	965,230			100	%
Cost of revenues	289,239				21			269,933				23			220,403				23
Gross profit	1,110,480				79			921,899				77			744,827				77
Operating expenses:
Selling and marketing (excluding customer base amortization)	408,596				29			359,858				30			318,362				33
Software development	125,602				9			100,937				8			88,850				9
General and administrative	178,740				13			156,659				13			146,128				15
Customer base amortization	33,995				2			30,881				3			17,671				2
Total operating expenses	746,933				53			648,335				54			571,011				59
Income from operations	363,547				26			273,564				23			173,816				18
Interest and other income	30,017				2			13,281				1			4,044				—
Interest and other expense	(2,615		)		—			(2,830		)		—			(9,014		)		(1	)
Loss on debt extinguishment	—				—			—				—			(3,788		)		—
Income before income taxes	390,949				28			284,015				24			165,058				17
Income tax expense	75,986				5			45,681				4			42,363				4
Net income	$	314,963			23	%		$	238,334			20	%		$	122,695			13	%

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

	Year Ended December 31,
	2019							2018							2017
Information and analytics
CoStar Suite (1)	$617,798				44	%		$545,195				46	%		$	463,185			48	%
Information services (1)	88,446				6	%		67,624				6	%		72,618				8	%
Online marketplaces
Multifamily (1)	490,631				35	%		405,795				34	%		279,855				29	%
Commercial property and land (1)	202,844				15	%		173,218				14	%		149,572				15	%
Total revenues	$	1,399,719			100	%		$	1,191,832			100	%		$	965,230			100	%
__________________________

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

Comparison of Year Ended December 31, 2019 and Year Ended December 31, 2018

The following table provides a comparison of our selected consolidated results of operations for the year ended December 31, 2019 and 2018 (in thousands of dollars):

	2019				2018				Increase (Decrease) ($)				Increase (Decrease) (%)
Revenues
CoStar Suite	$	617,798			$545,195				$	72,603			13	%
Information services	88,446				67,624				20,822				31
Multifamily	490,631				405,795				84,836				21
Commercial property and land	202,844				173,218				29,626				17
Total revenues	1,399,719				1,191,832				207,887				17
Cost of revenues	289,239				269,933				19,306				7
Gross profit	1,110,480				921,899				188,581				20
Operating expenses:
Selling and marketing (excluding customer base amortization)	408,596				359,858				48,738				14
Software development	125,602				100,937				24,665				24
General and administrative	178,740				156,659				22,081				14
Customer base amortization	33,995				30,881				3,114				10
Total operating expenses	746,933				648,335				98,598				15
Income from operations	363,547				273,564				89,983				33
Interest and other income	30,017				13,281				16,736				NM
Interest and other expense	(2,615		)		(2,830		)		(215		)		(8	)
Income before income taxes	390,949				284,015				106,934				38
Income tax expense	75,986				45,681				30,305				66
Net income	$	314,963			$	238,334			$	76,629			32	%
__________________________
NM - Not meaningful

Revenues. Revenues increased to $1.4 billion in 2019, from $1.2 billion in 2018. The $208 million increase was primarily attributable to an $85 million, or 21%, increase in multifamily revenue. The multifamily increase was due to upgrades of existing customer packages to higher value advertising packages, higher volume as a result of recent investments in marketing, and to a lesser extent, growth from the acquisitions of Cozy and OCP. CoStar Suite revenues increased $73 million, or 13%, primarily due to further increases in pricing and, to a lesser extent, further market penetration and cross-selling of our services. Commercial property and land revenue increased $30 million, or 17%, primarily due to growth in our LoopNet online marketplace services of $23 million, as well as, growth in our land and businesses for-sale services of $6 million. Information services revenue increased $21 million, or 31%, primarily due to increased revenue of $13 million from our CoStar Real Estate Manager service offerings and $9 million due to the acquisition of STR.

Gross Profit. Gross profit increased to $1.1 billion in 2019, from $922 million in 2018. The gross profit percentage was 79% for 2019 compared to 77% for 2018 as revenues increased at a higher rate than cost of revenues. The increase in cost of revenues of $19 million, or 7%, was primarily due to additional merchant fees and data and content costs of $9 million, primarily attributable to the acquisition of Cozy, additional personnel costs of $8 million and additional costs for research equipment of $3 million. The increase from the prior year was partially offset by nonrecurring research personnel restructuring costs incurred in the prior year of $3 million.

Selling and Marketing Expenses. Selling and marketing expenses increased to $409 million in 2019, from $360 million in 2018. The increase was primarily attributable to $41 million in additional marketing spend, including $23 million in search engine marketing, $7 million in co-branding and $11 million in other forms of marketing, primarily for Apartments.com. The increase was also due to a $5 million increase in personnel costs driven by increased headcount, partially offset by higher severance and retention costs incurred in 2018 related to the acquisition of ForRent.

Software Development Expenses. Software development expenses increased to $126 million in 2019, from $101 million in 2018, and increased as a percentage of revenues to 9% in 2019, compared to 8% in 2018. The increase in the amount of software development expense was primarily due to a $22 million increase in personnel costs as a result of increased headcount to enhance our product offerings, including $2 million due to the acquisition of STR.

General and Administrative Expenses. General and administrative expenses increased to $179 million in 2019, from $157 million in 2018, and remained consistent as a percentage of revenues at 13% in 2019 and 2018. The increase in general and administrative expenses was primarily due to personnel costs of $12 million due to increased headcount, $4 million as a result of the acquisition of STR, bad debt expense of $4 million, additional software and equipment of $4 million, depreciation expense of $2 million and travel and conference expenses of $1 million each, partially offset by a $5 million decrease in professional services.

Customer Base Amortization Expense. Customer base amortization expense increased to $34 million in 2019, from $31 million in 2018, and decreased as a percentage of revenues to 2% in 2019, compared to 3% in 2018. The increase in customer base amortization expense was primarily due to the STR acquisition.

Interest and Other Income. Interest and other income increased to $30 million in 2019, from $13 million in 2018. The increase was primarily due to $11 million in legal settlement proceeds received during 2019, as well as, higher rates of return and average cash and cash equivalent balances during 2019 compared to 2018.

Interest and Other Expense. Interest and other expense remained consistent for 2019 and 2018, and primarily consists of commitment fees and amortization of debt issuance costs.

Income Tax Expense. Income tax expense increased to $76 million in 2019, from $46 million in 2018. The increase was primarily due to higher income before income taxes for 2019, and to a lesser extent, discrete items for higher state research and development tax credits recognized for 2018. The effective tax rate for 2019 was 19%, compared to 16% in 2018 and lower than the statutory rates due to discrete items including research and development credits as well as excess tax benefits.

For a comparison of the Company’s results of operations for the fiscal year ended December 31, 2018 to the year ended December 31, 2017, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities and Exchange Commission on February 28, 2019.

Comparison of Business Segment Results for Year Ended December 31, 2019 and Year Ended December 31, 2018

We manage our business geographically in two operating segments, with the primary areas of measurement and decision-making being North America, which includes the U.S. and Canada, and International, which primarily includes Europe, Asia-Pacific and Latin America. Management relies on an internal management reporting process that provides revenue and operating segment 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 our operating segments. EBITDA is used by management to internally measure operating and management performance and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

Segment Revenues. North America revenues increased to $1.4 billion for the year ended December 31, 2019, from $1.2 billion for the year ended December 31, 2018. The increase in North America revenues was primarily due to a $85 million increase in multifamily revenues driven by the sale of higher value advertising packages and volume, and to a lesser extent, the acquisition of Cozy, and continued organic growth in CoStar Suite revenues of $71 million. There were also increases of $29 million and $18 million in commercial property and land and information services, respectively, primarily due to growth in our LoopNet and CoStar Real Estate Manager service offerings, and to a lesser extent, the acquisition of STR. International revenues increased to $40 million for the year ended December 31, 2019, from $35 million for the year ended December 31, 2018. The increase in International revenues was primarily due the acquisition of STR and further growth of our subscription-based services.

Segment EBITDA. North America EBITDA increased to $452 million for the year ended December 31, 2019, from $358 million for the year ended December 31, 2018. The increase in North America EBITDA was due primarily to an increase in revenues, partially offset by increases in personnel and marketing costs. International EBITDA remained consistent at a loss of $7 million for the years ended December 31, 2019 and December 31, 2018.

For a comparison of the Company’s business segment results of operations for the fiscal year ended December 31, 2018 to the year ended December 31, 2017, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of

Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities and Exchange Commission on February 28, 2019.

Consolidated Quarterly Results of Operations

The following tables present our unaudited consolidated results of operations on a quarterly basis for the indicated periods (in thousands, except per share amounts, and as a percentage of total revenues). These tables should be read in conjunction with the consolidated financial statements and related notes included in this Annual Report on Form 10-K. The quarterly results of historical periods are not necessarily indicative of quarterly results for any future period.

	2019																2018
	Mar. 31				Jun. 30				Sep. 30				Dec. 31				Mar. 31				Jun. 30				Sep. 30				Dec. 31
Revenues	$	328,425			$	343,760			$	352,808			$	374,726			$	273,718			$	297,018			$	305,525			$	315,571
Cost of revenues	71,153				71,918				71,172				74,996				62,477				67,136				72,072				68,248
Gross profit	257,272				271,842				281,636				299,730				211,241				229,882				233,453				247,323
Operating expenses	163,780				197,042				187,367				198,744				157,796				186,108				162,765				141,666
Income from operations	93,492				74,800				94,269				100,986				53,445				43,774				70,688				105,657
Interest and other income	4,945				5,913				5,358				13,801				2,987				2,652				3,035				4,607
Interest and other expense	(732		)		(697		)		(704		)		(482		)		(690		)		(728		)		(717		)		(695		)
Income before income taxes	97,705				80,016				98,923				114,305				55,742				45,698				73,006				109,569
Income tax expense	12,536				16,768				20,304				26,378				3,511				1,863				14,247				26,060
Net income	$	85,169			$	63,248			$	78,619			$	87,927			$	52,231			$	43,835			$	58,759			$	83,509
Net income per share — basic	$	2.35			$	1.74			$	2.16			$	2.42			$	1.46			$	1.22			$	1.63			$	2.31
Net income per share — diluted	$	2.33			$	1.73			$	2.15			$	2.39			$	1.44			$	1.20			$	1.61			$	2.29

	2019												2018
	Mar. 31			Jun. 30			Sep. 30			Dec. 31			Mar. 31			Jun. 30			Sep. 30			Dec. 31
Revenues	100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%
Cost of revenues	22			21			20			20			23			23			24			22
Gross profit	78			79			80			80			77			77			76			78
Operating expenses	50			57			53			53			58			63			54			45
Income from operations	28			22			27			27			20			14			22			32
Interest and other income	2			2			2			4			1			1			1			1
Income before income taxes	30			24			29			31			21			15			23			33
Income tax expense	4			5			6			7			1			1			5			8
Net income	26	%		19	%		23	%		24	%		20	%		14	%		18	%		25	%

Liquidity and Capital Resources

Our principal sources of liquidity are cash and cash equivalents and cash from operations. We also have access to $750 million from our revolving credit facility. In total, cash and cash equivalents decreased by $30 million at December 31, 2019 compared to December 31, 2018, primarily due to the cash paid in connection with the acquisitions of STR and OCP for an aggregate amount of $438 million, cash paid for purchases of property and equipment of $46 million and repurchases of restricted stock to satisfy employee tax withholding obligations upon vesting of restricted stock awards valued at approximately $28 million. These decreases were partially offset by net cash generated from operations of $458 million and proceeds from the exercise of employee stock options of approximately $25 million.

Net cash provided by operating activities for the year ended December 31, 2019 was $458 million compared to $335 million for the year ended December 31, 2018. The approximately $123 million increase from December 31, 2018 to December 31, 2019 was primarily due to an increase in net income of $77 million including an increase in other non-cash expenses such as stock-based compensation expense and the timing of collections for accounts receivable, partially offset by $15 million placed into an escrow account for deferred compensation for certain STR employees.

Net cash used in investing activities for the year ended December 31, 2019 was $484 million compared to $448 million for the year ended December 31, 2018. The $36 million increase in cash used in investing activities was primarily due to approximately $418 million of net cash paid to acquire ForRent, Cozy and Realla during 2018, compared to $438 million net cash paid during 2019 for the STR and OCP acquisitions. During 2019, we made capital expenditures of approximately $46 million compared to approximately $30 million during 2018. The increase in capital expenditures during the year ended December 31, 2019 was partially driven by the purchase of a corporate aircraft, which is principally used for business travel by our executives.

Net cash used in financing activities for the year ended December 31, 2019 was $4 million compared to net cash provided by financing activities of $3 million for the year ended December 31, 2018. This $7 million increase in cash used in financing activities in 2019 compared to 2018 was primarily due to higher repurchases of restricted stock to satisfy employee tax withholding obligations upon vesting of restricted stock awards of $3 million, as well as a decrease in proceeds from the exercise of employee stock options of $2 million.

Our future capital requirements will depend on many factors, including, among others, our operating results, expansion and integration efforts, and our level of acquisition activity or other strategic transactions. To date, we have grown in part by acquiring other companies, and we expect to continue to make acquisitions. On February 11, 2020, our wholly owned subsidiary entered into a purchase agreement to acquire all of the equity interests of reorganized RentPath, following an internal restructuring pursuant to a chapter 11 plan of reorganization, for $588 million in cash. The purchase agreement requires us to pay a $59 million fee in the event the purchase agreement is terminated prior to closing under specified circumstances. The acquisition will be funded using cash on hand. See Note 19 to the accompanying Notes to the Consolidated Financial Statements included in Part IV of this Annual Report on Form 10-K for further discussion. Based on current plans, we believe that our available cash combined with positive cash flow provided by operating activities should be sufficient to fund our operations for at least the next twelve months.

Contractual Obligations. The following table summarizes our principal contractual obligations at December 31, 2019 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

	Total				2020				2021-2022				2023-2024				Thereafter
Operating leases	$	165,542			$	34,976			$	64,698			$	53,635			$	12,233
Purchase obligations (1)	41,284				20,798				18,762				1,152				572
Total contractual principal cash obligations	$	206,826			$	55,774			$	83,460			$	54,787			$	12,805
__________________________

(1) Amounts do not include (i) contracts with terms of twelve months or less, (ii) multi-year contracts that may be terminated by a third-party or us, or (iii) employment agreements. Amounts do not include income taxes payable due to uncertainty regarding the timing of future cash payments.

Critical Accounting Policies

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

•	Long-lived assets, intangible assets and goodwill

•	Revenue recognition

•	Income taxes

•	Business combinations

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

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

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

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

•	Significant negative industry or economic trends; or

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

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

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

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

The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference. We estimate the fair value of our reporting units based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk in our current business model. As of October 1, 2019, we assessed the relevant qualitative factors and concluded that it was not more likely than not that the fair value of our reporting units was less than their respective carrying amounts. There have been no events or changes in circumstances as a result of our qualitative impairment analysis on October 1, 2019, that would indicate that the carrying value of each reporting unit may not be recoverable.

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

Recent Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for information on recent accounting pronouncements, including the expected dates of adoption.