Item 16. Form 10-K Summary

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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 24, 2021		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 24, 2021
Michael R. Klein

/s/ Andrew C. Florance	Chief Executive Officer and	February 24, 2021
Andrew C. Florance	President and a Director
	(Principal Executive Officer)

/s/ Scott T. Wheeler	Chief Financial Officer	February 24, 2021
Scott T. Wheeler	(Principal Financial and Accounting Officer)

/s/ Michael J. Glosserman	Director	February 24, 2021
Michael J. Glosserman

/s/ John W. Hill	Director	February 24, 2021
John W. Hill

/s/ Laura Cox Kaplan	Director	February 24, 2021
Laura Cox Kaplan

/s/ Christopher J. Nassetta	Director	February 24, 2021
Christopher J. Nassetta

/s/ Louise S. Sams	Director	February 24, 2021
Louise S. Sams

/s/ Robert W. Musslewhite	Director	February 24, 2021
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-11

F-1

Report of Independent Registered Public Accounting Firm

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of CoStar Group, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, change in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 24, 2021 expressed an unqualified opinion thereon.

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 5 to the consolidated financial statements, during the year ended December 31, 2020, the Company completed the acquisition of Ten-X Holding Company, Inc. ("Ten-X") for $187.7 million in cash. The Company’s accounting for the acquisition included determining the fair value of the acquired intangible assets, including customer relationships of $46 million. Auditing the accounting for the acquired intangible assets of Ten-X 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 fair value to the underlying assumptions, including customer attrition rates and projected revenue and expense growth rates. Prospective financial information used in determining the fair value of customer relationship intangible assets could be affected by changes in 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 24, 2021

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, 2020, 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, 2020, 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 Ten-X and Homesnap, which are included in the 2020 consolidated financial statements of CoStar Group, Inc., and collectively constituted less than 1% of total assets as of December 31, 2020 and less than 2% of total revenues and total operating costs 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 Ten-X and Homesnap.

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, 2020 and 2019, 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, 2020 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 24, 2021 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 24, 2021

F-5

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	Year Ended December 31,
	2020		2019		2018

Revenues	$	1,659,019	$	1,399,719	$	1,191,832
Cost of revenues	308,968		289,239		269,933
Gross profit	1,350,051		1,110,480		921,899

Operating expenses:
Selling and marketing (excluding customer base amortization)	535,778		408,596		359,858
Software development	162,916		125,602		100,937
General and administrative	299,698		178,740		156,659
Customer base amortization	62,457		33,995		30,881
	1,060,849		746,933		648,335
Income from operations	289,202		363,547		273,564
Interest (expense) income	(17,395)		16,742		10,539
Other (expense) income	(827)		10,660		(88)
Income before income taxes	270,980		390,949		284,015
Income tax expense	43,852		75,986		45,681
Net income	$	227,128	$	314,963	$	238,334

Net income per share — basic	$	5.97	$	8.67	$	6.61
Net income per share — diluted	$	5.93	$	8.60	$	6.54

Weighted-average outstanding shares — basic	38,073		36,310		36,058
Weighted-average outstanding shares — diluted	38,326		36,630		36,448

See accompanying notes.

F-6

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	Year Ended December 31,
	2020		2019		2018
Net income	$	227,128	$	314,963	$	238,334
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment	6,966		3,103		(2,668)
Unrealized gain on investments	189		—		—
Reclassification adjustment for realized loss on investments included in net income	541		—		—
Total other comprehensive income (loss)	7,696		3,103		(2,668)
Total comprehensive income	$	234,824	$	318,066	$	235,666

See accompanying notes.

F-7

COSTAR GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)


	December 31,
	2020		2019
ASSETS
Current assets:
Cash, cash equivalents and restricted cash	$	3,755,912	$	1,070,731

Accounts receivable	119,059		96,788
Less: Allowance for credit losses	(15,110)		(4,548)
Accounts receivable, net	103,949		92,240
Prepaid expenses and other current assets	28,651		36,194
Total current assets	3,888,512		1,199,165

Long-term investments	—		10,070
Deferred income taxes, net	4,983		5,408
Lease right-of-use assets	108,740		115,084
Property and equipment, net	126,325		107,529
Goodwill	2,235,999		1,882,020
Intangible assets, net	426,745		421,196
Deferred commission costs, net	93,274		89,374
Deposits and other assets	15,856		9,232
Income tax receivable	14,986		14,908
Total assets	$	6,915,420	$	3,853,986
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,732	$	7,640
Accrued wages and commissions	80,998		53,087
Accrued expenses	110,305		38,680

Income taxes payable	16,316		10,705

Lease liabilities	32,648		29,670
Deferred revenue	74,851		67,274
Total current liabilities	330,850		207,056

Long-term debt, net	986,715		—

Deferred income taxes, net	72,991		87,096
Income taxes payable	25,282		20,521
Lease and other long-term liabilities	124,223		133,720
Total liabilities	1,540,061		448,393

Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding	—		—
Common stock, $0.01 par value; 60,000 shares authorized; 39,414 and 36,668 issued and outstanding as of December 31, 2020 and 2019, respectively	394		366
Additional paid-in capital	4,208,252		2,473,338
Accumulated other comprehensive loss	(889)		(8,585)
Retained earnings	1,167,602		940,474
Total stockholders’ equity	5,375,359		3,405,593
Total liabilities and stockholders’ equity	$	6,915,420	$	3,853,986

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, 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


Net income	—	—		—		—		227,128		227,128
Other comprehensive income	—	—		—		7,696				7,696
Exercise of stock options	96	1		21,870		—		—		21,871
Restricted stock grants	100	1		(1)		—		—		—
Restricted stock grants surrendered	(97)	—		(38,867)		—		—		(38,867)
Stock-based compensation expense	—	—		52,624		—		—		52,624

Employee stock purchase plan	13	—		9,343		—		—		9,343
Stock issued for equity offerings, net of transaction costs	2,634	26		1,689,945		—		—		1,689,971
Balance at December 31, 2020	39,414	$	394	$	4,208,252	$	(889)	$	1,167,602	$	5,375,359

See accompanying notes.

F-9

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year Ended December 31,
	2020		2019		2018
Operating activities:
Net income	$	227,128	$	314,963	$	238,334
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	116,944		81,165		77,743
Amortization of deferred commissions costs	60,516		53,421		48,313
Amortization of senior notes discount and issuance costs	1,658		876		876
Non-cash lease expense	26,326		22,748		—





Stock-based compensation expense	53,450		52,255		41,214

Deferred income taxes, net	(11,530)		8,220		3,666
Credit loss expense	25,212		10,978		6,542
Other operating activities, net	288		105		73
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(36,118)		(5,014)		(27,819)
Prepaid expenses and other current assets	1,936		(14,244)		(1,651)
Deferred commissions	(64,355)		(66,688)		(53,497)

Accounts payable and other liabilities	100,846		17,751		(14,132)
Lease liabilities	(30,497)		(25,442)		—
Income taxes payable	10,352		(577)		9,632
Deferred revenue	2,188		7,911		7,879
Other assets	1,762		(648)		(1,715)
Net cash provided by operating activities	486,106		457,780		335,458

Investing activities:
Proceeds from sale and settlement of investments	10,259		—		—

Purchases of property and equipment and other assets	(48,347)		(46,197)		(29,632)
Cash paid for acquisitions, net of cash acquired	(426,075)		(437,556)		(418,369)
Net cash used in investing activities	(464,163)		(483,753)		(448,001)

Financing activities:
Proceeds from long-term debt	1,744,210		—		—
Payments of long-term debt	(745,000)		—		—
Payments of debt issuance costs	(16,647)		—		—


Repurchase of restricted stock to satisfy tax withholding obligations	(38,867)		(27,577)		(24,327)
Proceeds from equity offering, net of transaction costs	1,689,971		—		—
Proceeds from exercise of stock options and employee stock purchase plan	30,280		25,080		27,071
Other financing activities	(1,650)		(1,657)		—
Net cash provided by (used in) financing activities	2,662,297		(4,154)		2,744

Effect of foreign currency exchange rates on cash and cash equivalents	941		442		(1,248)
Net increase (decrease) in cash and cash equivalents	2,685,181		(29,685)		(111,047)
Cash, cash equivalents and restricted cash at beginning of year	1,070,731		1,100,416		1,211,463
Cash, cash equivalents and restricted cash at end of year	$	3,755,912	$	1,070,731	$	1,100,416

Supplemental cash flow disclosures:
Interest paid	$	5,948	$	1,998	$	1,421
Income taxes paid	$	45,783	$	68,935	$	35,980

Supplemental non-cash investing and financing activities:
Stock issued in connection with acquisition - ForRent	$	—	$	—	$	36,366
Consideration owed for acquisitions	$	793	$	1,650	$	1,534

See accompanying notes.

F-10

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

**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. On June 24, 2020, the Company acquired Ten-X Holding Company, Inc. and its subsidiaries ("Ten-X"), which operate an online auction platform for commercial real estate. On October 26, 2020, the Company acquired Emporis GmbH, a Germany-based provider of international commercial real estate data and images. On December 22, 2020, the Company acquired Homesnap, Inc (“Homesnap”), which operates an online mobile software platform for residential real estate agents and brokers. See Notes 5 and 9 to the accompanying Notes to the Consolidated Financial Statements for further discussion of these acquisitions.

**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, 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 the 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 (i) market research, portfolio and debt analysis, management and reporting capabilities, (ii) real estate and lease management solutions, including lease administration and abstraction services, to commercial customers,

F-11

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

real estate investors, and lenders, (iii) benchmarking and analytics for the hospitality industry through STR, (iv) an online auction platform for commercial real estate through Ten-X and its subsidiaries, which were acquired in June 2020, and (v) an online and mobile software platform that provides applications to optimize residential real estate agent workflow through Homesnap, which was acquired in December 2020. See Note 5 for details of the acquisitions.

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 obligations.

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 as those obligations are satisfied.

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.

Cost of Revenues

Cost of revenues principally consists of salaries, benefits, bonuses and stock-based compensation expenses and other indirect costs 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 and for employees that support these products. Additionally, cost of revenues includes the cost of data from third-party data sources and costs related to advertising purchased on behalf of customers, credit card and other transaction fees relating to processing customer transactions, which are expensed as incurred, and the amortization of acquired trade names, technology and other intangible assets.

Foreign Currency Translation

The Company’s 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. Gains and losses resulting from transactions denominated in a currency other than the functional currency of the entity are included in other (expense) income in the consolidated statements of operations using the average exchange rates in effect during the period. The Company recognized net foreign currency losses of $0.2 million, $0.6 million and $0.1 million for the years ended December 31, 2020, 2019 and 2018, respectively, which are included in other (expense) income on the consolidated statement of operations.

F-12

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,
	2020		2019
Foreign currency translation adjustment	$	(889)	$	(7,855)
Net unrealized loss on investments, net of tax	—		(730)
Total accumulated other comprehensive loss	$	(889)	$	(8,585)

During the year ended December 31, 2020, the Company sold its long-term variable debt instruments with an auction reset feature, referred to as auction rate securities ("ARS") and reclassified out of accumulated other comprehensive loss a realized loss of $0.5 million to earnings which is included in other (expense) income in the consolidated statement of operations. There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statements of operations for the years ended December 31, 2019 and 2018.

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 $270 million, $168 million and $125 million for the years ended December 31, 2020, 2019 and 2018, 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 outstanding stock options, and unvested stock-based awards which include restricted stock awards that vest over a specific service period, restricted stock awards with a performance and market conditions, restricted stock units and awards of 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 stock-based awards. 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. 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-13

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, restricted stock awards and restricted stock units issued under equity incentive plans, stock purchases under the Employee Stock Purchase Plan, Deferred Stock Units ("DSUs") and Matching RSUs awarded under the MSPP included in the Company’s results of operations were as follows (in thousands):


	Year Ended December 31,
	2020		2019		2018
Cost of revenues	$	10,879	$	9,273	$	7,688
Selling and marketing (excluding customer base amortization)	5,194		6,809		6,881
Software development	10,325		8,985		7,454
General and administrative	27,706		27,188		20,695
Total stock-based compensation expense (1)	$	54,104	$	52,255	$	42,718
__________________________

(1) Stock-based compensation expense for the years ended December 31, 2020 and 2018 includes $0.7 million and $1.5 million of expense related to the cash settlement of stock options in connection with the acquisitions of Ten-X and Cozy Services, Ltd, respectively. See Note 5 for details of the acquisitions.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash, cash equivalents, and restricted cash consisted of the following as of December 31, 2020 and 2019 (in thousands):


	As of December 31,
	2020		2019
Cash and cash equivalents	$	3,693,813	$	1,070,731
Restricted cash:
RentPath break fee held in escrow under the terms of the Asset Purchase Agreement	58,750		—
Other restricted cash related to acquisitions	3,349		—


Total restricted cash	62,099		—
Cash, cash equivalents and restricted cash	$	3,755,912	$	1,070,731

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. As of December 31, 2019, the Company's investments consisted of long-term variable rate debt instruments with an auction reset feature, referred to as auction rate securities. The Company's auction rate security investments were classified as available-for-sale and carried at fair value, with any changes in unrealized holding gains and losses, net of the related tax effect excluded from earnings and 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.

F-14

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2020, 2019, and 2018. 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 diversifying cash holdings across AAA rated Government and Treasury Money Market Funds and multiple 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.

Allowance for Credit Losses

On January 1, 2020, the Company adopted Accounting Standards Updates ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses; ASU 2019-04, Codification Improvements to Financial Instruments - Credit Losses (Topic 326); ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument; ASU 2019-11, Codification Improvements to Financial Instruments - Credit Losses (Topic 326) and ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842), later codified as Accounting Standards Codification ("ASC") 326 ("ASC 326"), using the modified retrospective transition approach. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on February 26, 2020, for further details of the Company’s policy prior to the adoption of ASC 326.

As of January 1, 2020, the Company maintained an allowance for credit losses to cover its current expected credit losses ("CECL") on its trade receivables and contract assets arising from the failure of customers to make contractual payments. The Company estimates credit losses expected over the life of its trade receivables and contract assets based on historical information combined with current conditions that may affect a customer’s ability to pay and reasonable and supportable forecasts. While the Company uses various credit quality metrics, it primarily monitors collectability by reviewing the duration of collection pursuits on its delinquent trade receivables. Based on the Company’s experience, the customer's delinquency status is the strongest indicator of the credit quality of the underlying trade receivables, which is analyzed monthly. In most instances, the Company’s policy is to write-off trade receivables when they are deemed uncollectible. A majority of the Company's trade receivables are less than 365 days outstanding.

Under the CECL impairment model, the Company develops and documents its allowance for credit losses on its trade receivables based on four portfolio segments. The determination of portfolio segments is based primarily on the qualitative consideration of the nature of the Company’s business operations and the characteristics of the underlying trade receivables, as follows:

CoStar Suite Portfolio Segment - The CoStar Suite portfolio segment consists of two classes of trade receivables based on geographical location: CoStar Suite, North America and CoStar Suite, International.
Information Services Portfolio Segment - The information services portfolio segment consists of four classes of trade receivables: Real Estate Manager; information services, North America; STR, US; and STR, International.
Multifamily Portfolio Segment - The multifamily portfolio segment consists of one class of trade receivables.
Commercial Property and Land Portfolio Segment - The commercial property and land portfolio segment consists of two classes of trade receivables: LoopNet; and other commercial property and land online marketplaces.

See Note 4 for further discussion of the Company’s accounting for allowance for credit losses.

F-15

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Leases

The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at the commencement of the arrangement, 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 deemed 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, offset by lease incentives. Upon commencement, the initial ROU asset also includes any lease prepayments. 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 and 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.

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.

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:



Buildings						Twenty to thirty-nine years
Land						Indefinite
Aircrafts						Ten to twenty years
Furniture and office equipment						Five to ten years
Vehicles						Five years
Computer hardware and software						Three to five years
Leasehold improvements						Shorter of lease terms or useful life

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 the 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 undiscounted 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.

F-16

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired technology and data, customer base assets, trade names and other intangible assets are related to the Company’s acquisitions (see Notes 5, 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 the net identifiable 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, 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.

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. The Company made a policy election to classify deferred issuance costs on the revolving credit facility as a long-term asset on its consolidated balance sheets. 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 regarding the Company's 2020 Credit Agreement and Senior Notes issuance.

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. The Company applies significant assumptions, estimates, and judgments in determining the fair value of assets acquired and liabilities assumed on the acquisition date, 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.

F-17

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2020, the Company adopted ASU 2019-12, Simplifying the Accounting for Income Taxes, on a prospective basis. The amounts related to the reclassification of franchise taxes from income from operations to income tax expense for the year ended December 31, 2020 did not have a material impact on the Company's consolidated financial statements and related disclosures.

On January 1, 2020, the Company adopted 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, on a prospective basis. 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. The adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective method. This accounting standard replaced the prior incurred loss accounting model with a current expected credit loss approach. As of January 1, 2020, no cumulative transition adjustment was recorded to the beginning balance of retained earnings, as the adoption did not result in a higher allowance for credit losses under the CECL impairment model. The adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.

Recent Accounting Pronouncements Not Yet Adopted

On January 16, 2020, the Financial Accounting Standards Board issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company will adopt this guidance in the first quarter of 2021 and does not expect it to have a material impact on its consolidated financial statements.

On March 12, 2020, the Financial Accounting Standards Board issued ASU 2020-04, Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASC 848 contains optional expedients and exceptions for applying GAAP to debt, contracts, hedging relationships, and other transactions affected by reference rate reform. The provisions of ASC 848 must be applied to all contracts that are accounted for under a Topic, Subtopic or Industry Subtopic for all transactions other than derivatives, which may be applied at a hedging relationship level. This guidance is effective for fiscal years beginning after January 1, 2021, including interim periods within those fiscal years. The Company's 2020 Credit Agreement provides for a $750 million revolving credit facility and a letter of credit sublimit of $20 million, with interest rates benchmarked to LIBOR. As of December 31, 2020, no amounts were issued or drawn under this facility. The Company's Senior Notes have a fixed interest rate and will not be impacted by this standard. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

F-18

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregated Revenue

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


	Year Ended December 31,
	2020						2019
	North America		International		Total		North America		International		Total
Information and analytics
CoStar Suite	$	634,205	$	30,530	$	664,735	$	590,222	$	27,576	$	617,798
Information services	104,117		25,953		130,070		76,950		11,496		88,446
Online marketplaces
Multifamily	598,555		—		598,555		490,631		—		490,631
Commercial property and land	265,225		434		265,659		202,264		580		202,844
Total revenues	$	1,602,102	$	56,917	$	1,659,019	$	1,360,067	$	39,652	$	1,399,719

Deferred Revenue

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


Balance at December 31, 2019	$	70,620
Revenue recognized in the current period from the amounts in the beginning balance	(66,140)
New deferrals, net of amounts recognized in the current period	72,328
Effects of foreign currency	555

Balance at December 31, 2020(1)	$	77,363
__________________________

(1) Deferred revenue was comprised of $74.9 million of current liabilities and $2.5 million of noncurrent liabilities classified within lease and other long-term liabilities on the Company’s consolidated balance sheet as of December 31, 2020. This balance includes $4 million of net new deferrals recognized in connection with business acquisitions made in 2020. See Note 5 for details.

Contract Assets

The Company had contract assets of $9 million and $4 million as of December 31, 2020 and December 31, 2019, 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. The Company recognized revenue of $5 million from contract assets for the year ended December 31, 2020.

F-19

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, 2020. Commissions expense activity as of December 31, 2020 and December 31, 2019 was as follows (in thousands):


	Year Ended December 31,
	2020		2019
Commissions incurred	$	97,183	$	87,043
Commissions capitalized in the current period	(64,355)		(66,688)
Amortization of deferred commissions costs	60,516		53,421
Total commissions expense	$	93,344	$	73,776

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 $268 million at December 31, 2020, 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.

F-20

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**4.**ALLOWANCE FOR CREDIT LOSSES

The following table details the activity related to the allowance for credit losses for trade receivables by portfolio segment (in thousands):


	Year Ended December 31, 2020
	CoStar Suite		Information services		Multifamily		Commercial property and land		Total
Beginning balance at December 31, 2019	$	1,264	$	624	$	1,195	$	1,465	$	4,548
Current-period provision for expected credit losses(1), (2)	11,622		2,649		7,644		3,297		25,212
Write-offs charged against the allowance, net of recoveries and other	(7,355)		(534)		(4,452)		(2,309)		(14,650)
Ending balance at December 31, 2020	$	5,531	$	2,739	$	4,387	$	2,453	$	15,110
__________________________

(1) Credit loss expense is included in general and administrative expenses on the consolidated statement of operations.

(2) Credit loss expense related to contract assets was not material for the year ended December 31, 2020.

F-21

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. ACQUISITIONS

Homesnap

On December 22, 2020, pursuant to the Agreement and Plan of Merger, dated November 20, 2020, by and among CoStar Realty Information, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“CRI”), Snapped Halo Merger Sub Corp., a Delaware corporation and wholly-owned subsidiary of CRI (“Merger Sub”), and Homesnap, Inc., a Delaware corporation ("Homesnap"), Merger Sub was merged with and into Homesnap (the “Homesnap Merger”), with Homesnap surviving the merger as a wholly-owned subsidiary of CRI. In connection with the Homesnap Merger, the Company acquired all of the issued and outstanding equity interests in Homesnap for a purchase price of $250 million in cash. Homesnap is an industry-leading online and mobile software platform that provides user-friendly applications to optimize residential real estate agent workflow and reinforce the agent-client relationship. Homesnap has relationships, data, software, and tools for residential real estate professionals that are complementary to CoStar’s existing offerings. The acquisition of Homesnap enables CoStar to enter the residential real estate market and expand the markets in which the Company competes.

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: December 22, 2020
Cash, cash equivalents and restricted cash	$	10,225
Accounts receivable	595
Lease right-of-use assets	3,437
Goodwill	211,114
Intangible assets	32,000
Deferred tax assets, net	7,502
Lease liabilities	(3,375)
Deferred revenue	(4,000)
Other assets and liabilities	(7,144)
Fair value of identifiable net assets acquired	$	250,354

The net assets of Homesnap 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 primarily to the Company's assessment of certain tax matters and intangibles valuation. The estimated fair value of 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 attrition rates and profit margins.

The following table summarizes the fair values (in thousands) of the identifiable intangible assets included in the Company's North America operating segment, their related estimated useful lives (in years) and their respective amortization methods:


	Estimated Fair Value		Estimated Useful Life	Amortization Method
Customer base	$	10,000	6	Accelerated
Trade name	7,000		10	Straight-line
Technology	15,000		6	Straight-line
Total intangible assets	$	32,000

F-22

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

intangible assets that do not qualify for separate recognition, such as the assembled workforce. The $211 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment. Goodwill recorded in connection with this acquisition is not amortized, but is subject to an annual impairment test. Goodwill recognized is not deductible for income tax purposes.

As of December 31, 2020, transaction costs associated with the Homesnap acquisition were not material.

Ten-X

On June 24, 2020, pursuant to the Agreement and Plan of Merger, dated May 13, 2020, by and among CoStar Realty Information, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“CRI”), Crescendo Sub, Inc., a Delaware corporation and wholly-owned subsidiary of CRI (“Merger Sub”), Ten-X Holding Company, Inc., a Delaware corporation ("Ten-X Holding"), and Thomas H. Lee Equity Fund VII L.P., a Delaware limited partnership, solely in its capacity as representative thereunder, Merger Sub was merged with and into Ten-X Holding (the “Merger”), with Ten-X Holding surviving the Merger as a wholly-owned subsidiary of CRI. In connection with the Merger, the Company acquired all of the issued and outstanding equity interests in Ten-X Holding and Ten-X Holding's subsidiaries (collectively, "Ten-X") for a purchase price of $188 million in cash. Ten-X operates an online auction platform for commercial real estate. The Ten-X acquisition is expected to enable the Company to create an end-to-end commercial real estate platform, combining LoopNet and the Company's online audience of buyers with Ten-X’s leadership in online auctions for performing and distressed assets.

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: June 24, 2020		Measurement Period Adjustments		Preliminary: June 24, 2020
Cash and cash equivalents	$	3,290	$	—	$	3,290
Accounts receivable	131		—		131
Lease right-of-use assets	4,945		—		4,945
Goodwill	135,446		254		135,700
Intangible assets	58,000		—		58,000
Lease liabilities	(4,945)		—		(4,945)
Deferred tax liabilities, net	(4,810)		(6)		(4,816)
Other assets and liabilities	(4,697)		107		(4,590)
Fair value of identifiable net assets acquired	$	187,360	$	355	$	187,715

The net assets of Ten-X 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, primarily subject to the Company's assessment of certain tax matters. The estimated fair value of 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 attrition rates and profit margins.


	Estimated Fair Value		Estimated Useful Life	Amortization Method
Customer base	$	46,000	6	Accelerated
Technology	11,000		5	Straight-line
Other intangible assets	1,000		2	Straight-line
Total intangible assets	$	58,000

F-23

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Ten-X 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 Ten-X's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce. The $136 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment. Goodwill recorded in connection with this acquisition is not amortized, but is subject to an annual impairment test. Goodwill recognized is not deductible for income tax purposes.

As of December 31, 2020, transaction costs associated with the Ten-X acquisition were not material. The Company paid $3 million in incentive compensation to Ten-X employees; this payment was negotiated as part of the acquisition and the expense was recognized in the post-combination period.

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 $436 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):


	Final: October 22, 2019
Cash and cash equivalents	$	11,620
Accounts receivable	8,067
Lease right-of-use assets	7,306
Goodwill	261,868
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	$	435,794

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 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 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

F-24

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $262 million of goodwill recorded as part of the acquisition, $159 million and $103 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 on the acquisition date. In the event some or all of those employees were not entitled to their retention bonus, the funds were to be remitted to the seller. During 2020, the retention bonus was paid to active and eligible employees and funds otherwise payable to any employees who were not entitled to their retention bonus were remitted to the seller.

Off Campus Partners, LLC

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. During 2020, the Company paid the remaining purchase price in full. 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. Measurement period adjustments recognized in 2019 were not material.

Pro Forma Financial Information (unaudited)

The unaudited pro forma financial information presented below summarizes the combined results of operations for the Company, the ForRent acquisition which closed during 2018, and the STR, Ten-X and Homesnap acquisitions, in each case, as though the companies were combined as of January 1, 2017, 2018, 2019 and 2019, respectively. The impact of the October 2020 Emporis GmbH and OCP acquisitions on the pro forma financial information was not material and therefore 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 had taken place on January 1, 2017, 2018, 2019 and 2019, respectively.

The unaudited pro forma financial information for the years ended December 31, 2020, 2019 and 2018 combine the historical results of the Company for the years ended December 31, 2020, 2019 and 2018, the historical results of the Company, Homesnap, Ten-X, STR and ForRent 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,
		2020		2019		2018
Revenue		$	1,719,552	$	1,534,452	$	1,264,696
Net income		$	216,245	$	265,843	$	223,830
Net income per share - basic		$	5.68	$	7.32	$	6.21
Net income per share - diluted		$	5.64	$	7.26	$	6.14

Revenue and net loss attributable to Homesnap and STR from December 22, 2020 through December 31, 2020 and October 22, 2019 through December 31, 2019, respectively was not material. Revenue and net loss attributable to Ten-X from June 24, 2020 through December 31, 2020 was $32 million and $10 million, respectively.

F-25

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. INVESTMENTS AND FAIR VALUE MEASUREMENTS

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.

As of December 31, 2020, the Company's financial assets comprise Level 1 cash equivalents with original maturities of three months or less in the amount of $3,394 million. As of December 31, 2020, the Company had no Level 2 or Level 3 financial assets measured at fair value.

During the year ended December 31, 2020, the Company sold its ARS investments for $10.3 million and recognized a realized loss of $0.5 million for the year ended December 31, 2020 which was included in other (expense) income on the Company's consolidated statements of operations.

The following table represents the Company's investments in marketable securities and fair value measurements by investment category reported as cash equivalents and investments as of December 31, 2019 (in thousands):


	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Level 1		Level 2		Level 3
Cash equivalents	$	576,761	$	—	$	—	$	576,761	$	576,761	$	—	$	—
Auction rate securities	10,800		—		(730)		10,070		—		—		10,070
Total cash equivalents and long-term investments	$	587,561	$	—	$	(730)	$	586,831	$	576,761	$	—	$	10,070

The Company’s Level 3 assets consisted of ARS; whose underlying assets were primarily student loan securities supported by guarantees from the Federal Family Education Loan Program of the U.S. Department of Education. As of December 31, 2019, these investments were in an unrealized loss position for a period of twelve months or greater. The unrealized losses 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 were 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. The Company had no realized gains or losses on its investments during the year ended December 31, 2019.

In addition to the financial instruments listed above, the Company holds other financial instruments, including cash equivalents, cash deposits, accounts receivable, accounts payable, accrued expenses and senior notes. The carrying value for such financial instruments, other than the senior notes, each approximated their fair values as of December 31, 2020 and December 31, 2019. The estimated fair value of the Company's outstanding senior notes using quoted prices from the over-the-counter markets, considered Level 2 inputs, was $1.04 billion as of December 31, 2020.

F-26

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 eight 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,
	2020		2019		2018









Operating lease costs:
Cost of revenues	$	11,632	$	11,407	$	11,926
Software development	6,020		4,209		3,335
Selling and marketing (excluding customer base amortization)	10,356		8,678		9,068
General and administrative	4,827		3,299		3,789
Total operating lease costs	$	32,835	$	27,593	$	28,118

The impact of lease costs related to finance leases and short-term leases was not material for the years ended December 31, 2020, 2019 and 2018.

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


		Year Ended December 31,
Balance	Balance Sheet Location	2020			2019
Operating lease liabilities		$	148,975		$	165,542
Less: imputed interest		(10,998)			(15,719)
Present value of lease liabilities		137,977			149,823
Less: current portion of lease liabilities	Lease liabilities	32,648			29,670
Long-term lease liabilities	Lease and other long-term liabilities	$	105,329		$	120,153

Weighted-average remaining lease term in years		4.0			5.0
Weighted-average discount rate		3.6		%	4.0		%

Balance sheet information related to finance leases was not material as of December 31, 2020.

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


	Year Ended December 31,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases	$	37,006	$	30,287

ROU assets obtained in exchange for lease obligations:
Operating leases	$	19,746	$	22,629

F-27

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. PROPERTY AND EQUIPMENT

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


	December 31,
	2020		2019
Leasehold improvements	$	80,963	$	73,918
Furniture, office equipment and vehicles	68,587		60,768
Computer hardware and software	86,755		80,947
Aircrafts	28,561		27,657
Land	24,642		—
Buildings	2,970		—
Property and equipment, gross	292,478		243,290
Accumulated depreciation and amortization	(166,153)		(135,761)
Property and equipment, net	$	126,325	$	107,529

Depreciation expense for property and equipment was approximately $29 million, $26 million and $26 million, for the years ended December 31, 2020, 2019 and 2018, 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, 2018	$	1,573,088	$	38,447	$	1,611,535
Acquisitions, including measurement period adjustments(1)	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
Acquisitions, including measurement period adjustments(2)	347,134		1,273		348,407
Effect of foreign currency translation	—		5,572		5,572
Goodwill, December 31, 2020	$	2,085,494	$	150,505	$	2,235,999
__________________________

(1) In connection with the acquisition of Cozy Services, LLC, during 2019 the Company recorded a measurement period adjustment which resulted in a $1 million reduction to the initial amount of goodwill of approximately $53 million.

(2) North America goodwill for the year ended December 31, 2020 includes goodwill recorded in connection with the acquisitions of Ten-X and Homesnap, as well as STR measurement period adjustments to goodwill of $0.3 million. International goodwill for the year ended December 31, 2020 includes goodwill recorded in connection with the acquisition of Emporis GmbH of $1.2 million and STR measurement period adjustments of $0.1 million.

The Company recorded goodwill of approximately $211 million and $136 million in connection with the December 2020 Homesnap and June 2020 Ten-X acquisitions, respectively. The Company recorded goodwill of approximately $262 million and $8 million in connection with the October 2019 STR and June 2019 OCP acquisitions, respectively.

Goodwill generated from acquisitions completed in 2020 was not deductible for tax purposes as of December 31, 2020.

No impairments of the Company's goodwill were recognized during the years ended December 31, 2020, 2019 and 2018.

F-28

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. INTANGIBLE ASSETS

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


	December 31,				Weighted- Average Amortization Period (in years)
	2020		2019
Acquired technology and data	$	131,551	$	105,168	5
Accumulated amortization	(97,791)		(90,542)
Acquired technology, net	33,760		14,626

Acquired customer base	545,643		487,532		11
Accumulated amortization	(296,758)		(233,202)
Acquired customer base, net	248,885		254,330

Acquired trade names and other intangible assets	249,465		236,358		12
Accumulated amortization	(105,365)		(84,118)
Acquired trade names and other intangible assets, net	144,100		152,240

Intangible assets, net	$	426,745	$	421,196

Amortization expense for intangible assets was approximately $88 million, $55 million and $52 million for the years ended December 31, 2020, 2019 and 2018, respectively.

In the aggregate, the Company expects the future amortization expense for intangible assets existing as of December 31, 2020 to be approximately $89 million, $70 million, $58 million, $48 million and $39 million for the years ending December 31, 2021, 2022, 2023, 2024 and 2025, 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, 2020, 2019 and 2018.

F-29

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. LONG-TERM DEBT

The table below presents the components of outstanding debt (in thousands):


	December 31, 2020		December 31, 2019
2.800% Senior Notes due July 15, 2030	$	1,000,000	$	—
2020 Credit Agreement, due July 1, 2025	—		—
Total face amount of long-term debt	1,000,000		—
Senior notes unamortized discount and issuance costs	(13,285)
Long-term debt, net	$	986,715	$	—

Senior Notes

On July 1, 2020, the Company issued $1.0 billion aggregate principal amount of 2.800% Senior Notes due July 15, 2030 (the “Senior Notes”). The Senior Notes were sold to a group of financial institutions as initial purchasers who subsequently resold the Senior Notes to non-U.S. persons pursuant to Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), and to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act at a purchase price equal to 99.921% of their principal amount. Interest on the Senior Notes is payable semi-annually in arrears beginning on January 15, 2021. The Senior Notes may be redeemed in whole or in part by the Company (a) at any time prior to April 15, 2030 at a redemption price equal to 100% of the principal amount of the Senior Notes, plus the Applicable Premium (as calculated in accordance with the indenture governing the Senior Notes) as of, and any accrued and unpaid interest, if any, on the principal amount of Senior Notes being redeemed to, but excluding, the redemption date, and (b) on or after April 15, 2030 at a redemption price equal to 100% of the principal amount of the Senior Notes, plus any accrued and unpaid interest, if any, on the principal amount of Senior Notes being redeemed to, but excluding, the redemption date. The Company’s obligations under the Senior Notes are guaranteed on a senior, unsecured basis by the Company’s domestic wholly owned subsidiaries. The Company’s obligations under the Senior Notes are guaranteed on a senior, unsecured basis by the Company’s domestic wholly owned subsidiaries and contain covenants, events of default and other customary provisions for which the Company was in compliance with as of December 31, 2020.

In connection with the issuance of the Senior Notes, the Company incurred approximately $13 million in debt issuance costs.

Revolving Credit Facility

On July 1, 2020, the Company also entered into a second amended and restated credit agreement (the "2020 Credit Agreement"), which amended and restated in its entirety the then-existing credit agreement originally entered into in April 1, 2014 and amended and restated on October 19, 2017 (the “2017 Credit Agreement”). The 2020 Credit Agreement provides for a $750 million revolving credit facility with a term of five years (maturing July 1, 2025) and a letter of credit sublimit of $20 million from a syndicate of financial institutions as lenders and issuing banks. On July 1, 2020, the Company repaid in full the balance on its existing $750 million revolving credit facility under the 2017 Credit Agreement using the proceeds from the issuance of the Senior Notes. A commitment fee of 0.25% to 0.30% per annum, depending on the Total Leverage Ratio (defined in 2020 Credit Agreement), is payable quarterly in arrears based on the unused revolving commitment.

Subject to certain conditions, on no more than five occasions, the Company may request increases in the amount of revolving commitments and/or the establishment of term commitments under the 2020 Credit Agreement. Borrowings under the 2020 Credit Agreement will bear interest at a floating rate which can be, at the Company’s option, either (a) an alternate base rate plus an applicable rate ranging from 0.50% to 1.25% or (b) a LIBOR or EURIBOR (with a floor of 0.0%) for the specified interest period plus an applicable rate ranging from 1.50% to 2.25%, in each case depending on the Company's Total Leverage Ratio (as defined in the 2020 Credit Agreement). As LIBOR may not always be available to the Company as a base interest rate for borrowings under the credit facility, the 2020 Credit Agreement allows for an amendment to replace LIBOR with one or more Secured Overnight Financing Rate (“SOFR”) based rates or another alternative benchmark rate. Funds drawn down on the revolving credit facility pursuant to the 2020 Credit Agreement may be used for working capital and other general corporate purposes of the Company and its restricted subsidiaries. The obligations under the 2020 Credit Agreement are guaranteed by each of the Company’s current and future direct or indirect wholly owned restricted domestic subsidiaries, other than certain excluded subsidiaries, in each case subject to certain exceptions, pursuant to guarantee agreements.

F-30

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The 2020 Credit Agreement includes covenants, including ones that, subject to certain exceptions, restrict the ability of the Company and its subsidiaries to (i) merge and consolidate with other companies, (ii) incur indebtedness, (iii) grant liens or security interests on assets, (iv) make investments, acquisitions, loans or advances, (v) pay dividends and (vi) sell or otherwise transfer assets. During any period of time that the Company has obtained and maintained a corporate investment grade rating from at least two designated rating agencies and no Event of Default is continuing, the Company will not be subject to certain of these covenants such as restrictions on the ability to incur indebtedness (such period, a “Covenant Suspension Period”). As of December 31, 2020, the Company is in a Covenant Suspension Period. The 2020 Credit Agreement also requires the Company to maintain a Total Leverage Ratio (as defined in the 2020 Credit Agreement) not exceeding 4.50 to 1.00. The Company was in compliance with the covenants in the 2020 Credit Agreement as of December 31, 2020.

In connection with the 2020 Credit Agreement, the Company incurred approximately $3.6 million in debt issuance costs. As of December 31, 2020, the Company had not drawn any amounts under this facility.

The Company had an irrevocable standby letter of credit outstanding totaling $0.2 million as of December 31, 2020 and December 31, 2019, which is required to secure its San Francisco office lease. The letter of credit was established in 2014 and automatically renews annually through January 31, 2025.

For the years ended December 31, 2020, 2019 and 2018 the Company recognized interest expense as follows (in thousands):


	Year Ended December 31,
	2020		2019		2018
Interest on outstanding borrowings	$	18,509	$	—	$	—
Amortization of senior notes discount and issuance costs	1,658		874		950
Commitment fees and other	1,627		1,741		1,880
Total interest expense	$	21,794	$	2,615	$	2,830

The Company had $4.9 million and $2.5 million of deferred debt issuance costs as of December 31, 2020 and 2019 in connection with the 2020 Credit Agreement and 2017 Credit Agreement, respectively. These amounts are included in deposits and other assets on the Company's consolidated balance sheets.

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,
	2020		2019		2018
Current:
Federal	$	43,461	$	53,039	$	36,167
State	11,726		13,422		5,140
Foreign	195		1,305		708
Total current	55,382		67,766		42,015
Deferred:
Federal	(9,599)		6,881		6,576
State	(926)		2,424		(2,582)
Foreign	(1,005)		(1,085)		(328)
Total deferred	(11,530)		8,220		3,666
Total provision for income taxes	$	43,852	$	75,986	$	45,681

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


	December 31,
	2020		2019
Deferred tax assets:
Allowance for credit losses	$	3,698	$	1,312
Accrued compensation	4,934		4,297
Stock compensation	15,289		13,877
Net operating losses	38,498		20,555
Accrued reserve and other	5,900		4,177
Lease liabilities	34,758		36,472



Research and development credits	6,059		6,341
Accrued transaction fees	13,334		—
Total deferred tax assets, prior to valuation allowance	122,470		87,031

Valuation allowance	(11,170)		(13,553)
Total deferred tax assets, net of valuation allowance	111,300		73,478

Deferred tax liabilities:
Deferred commission costs, net	(23,691)		(22,612)
Lease right-of-use assets	(27,168)		(30,830)
Prepaid expenses	(2,384)		(1,548)
Property and equipment, net	(13,078)		(8,891)
Intangible assets, net	(112,987)		(91,285)
Total deferred tax liabilities	(179,308)		(155,166)

Net deferred tax assets (liabilities)	$	(68,008)	$	(81,688)

For the years ended December 31, 2020 and 2019, the Company has not recognized deferred tax liabilities for temporary differences related to investments in foreign subsidiaries that were deemed permanent reinvested. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, depends on certain circumstances existing if and when remittance occurs. A deferred tax liability will be recognized if and when the Company no longer plans to permanently reinvest these undistributed earnings.

As of December 31, 2020 and 2019, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance as of December 31, 2020 includes an allowance for acquired net operating

F-32

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

losses and foreign deferred tax assets. The valuation allowance as of December 31, 2019 includes an allowance for foreign deferred tax assets and state net operating losses and tax credits.

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 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. The Company has established a valuation allowance for certain acquired net operating losses where Section 382 limitations will impact the ability of the Company to utilize the net operating losses before they expire.

The Company’s change in valuation allowance was a decrease of approximately $2.4 million for the year ended December 31, 2020 and a decrease of approximately $0.7 million for the year ended December 31, 2019. The decrease for the year ended December 31, 2020 is primarily due to the removal of the valuation allowance for the D.C. qualified high technology company tax credits which expired in 2020, partially offset by an increase in the valuation allowance for acquired net operating losses. 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 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.

The Company had U.S. income before income taxes of approximately $291 million, $403 million and $294 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company had foreign losses before income taxes of approximately $20 million, $12 million, and $10 million for the years ended December 31, 2020, 2019 and 2018, 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,
	2020		2019		2018
Expected federal income tax provision at statutory rate	$	56,906	$	82,099	$	59,643
State income taxes, net of federal benefit	11,409		14,884		10,312


Increase (decrease) in valuation allowance	(4,848)		(693)		1,214


Research credits	(14,322)		(12,188)		(15,373)
Excess tax benefit	(21,038)		(15,282)		(14,227)
Tax reserves	4,762		3,135		1,870
Nondeductible compensation	5,949		1,777		949
Other adjustments	5,034		2,254		1,293
Income tax expense	$	43,852	$	75,986	$	45,681

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 $48 million, which do not expire. The Company has federal net operating loss carryforwards of approximately $111 million that begin to expire in 2029, state net operating loss carryforwards with a tax value of approximately $6 million that begin to expire in 2029 and state income tax credit carryforwards with a tax value of approximately $6 million primarily relating to state research and development credits that do not expire. The Company realized a cash benefit relating to the use of its tax loss carryforwards of approximately $5 million, $6 million and $6 million in December 31, 2020, 2019 and 2018, 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, 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
Increase for current year tax positions	4,213
Increase for prior year tax positions	452
Expiration of the statute of limitation for assessment of taxes	(1,259)
Unrecognized tax benefit as of December 31, 2020	$	28,873

Approximately $29 million and $25 million of the unrecognized tax benefits as of December 31, 2020 and 2019, 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 $5 million for the year ended December 31, 2020 is primarily attributable to research credits. The decrease for expiration of the statute of limitation of $1 million for the year ended December 31, 2020 is primarily attributable to the reserve for the D.C. qualified high technology company tax credits. The Company recognized $0.4 million, $0.2 million, and $0.2 million for interest and penalties in its consolidated statement of operations for the years ended December 31, 2020, 2019, 2018 respectively. The Company had liabilities of $1.0 million, $0.6 million, and $0.4 million for interest and penalties in its consolidated balance sheets as of December 31, 2020, 2019, 2018 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 2019 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 2017 through 2019 remain open to examination. For states that have a four-year statute of limitations, the state income tax returns for tax years 2016 through 2019 remain open to examination. The Company’s U.K. income tax return for tax year 2019 remains 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 following summarizes our significant contractual obligations, including related payments due by period, as of December 31, 2020 (in thousands):


Year Ending December 31,	Operating lease obligations		Long-term debt principal payments		Long-term debt principal interest payments
2021	$	37,013	$	—	$	29,089
2022	35,257		—		28,000
2023	34,470		—		28,000
2024	28,343		—		28,000
2025	10,544		—		28,000
Thereafter	3,348		1,000,000		140,000
Total	$	148,975	$	1,000,000	$	281,089

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.

F-34

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RentPath

On February 11, 2020, the Company and RentPath Holdings, Inc. (“RentPath”) 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, the Company agreed to acquire for $588 million in cash all of the equity interests of RentPath, upon the completion of reorganization of RentPath under Chapter 11 proceedings in process with the U.S. Bankruptcy Court for the District of Delaware and other closing conditions. As required by the Asset Purchase Agreement, the Company paid a $59 million termination fee into a cash escrow account which was payable to the sellers of RentPath in the event of certain circumstances resulting the Asset Purchase Agreement being terminated. The break fee deposited into escrow was recorded as restricted cash within cash, cash equivalents and restricted cash on the Company's consolidated balance sheets. On April 29, 2020, the Company and RentPath each received a request for additional information from the U.S. Federal Trade Commission (“FTC”) with respect to the acquisition. The FTC’s additional request extended the waiting period imposed by the Hart-Scott Rodino Antitrust Improvements Act of 1976 until the parties completed the compliance process and the FTC completed its review of the substance of the parties' submission. Bankruptcy court approval was obtained on June 9, 2020. On July 29, 2020, the Company exercised its option pursuant to the Asset Purchase Agreement to extend the date after which either the Sellers or the Company may terminate the Asset Purchase Agreement if the transaction has not closed (the “Outside Date”) for an additional three months until November 12, 2020 in exchange for payment of $7.5 million which was recorded within other current assets. On November 30, 2020, the FTC filed an administrative complaint and authorized a suit in federal court (which was filed on December 2, 2020), to block the Company's proposed acquisition of RentPath. Subsequently, the Sellers notified the Company of their intent to terminate the Asset Purchase Agreement on December 29, 2020. The Company terminated the Asset Purchase Agreement on December 31, 2020 as the closing of the transactions contemplated had not occurred by the Outside Date. The Company commenced an adversary proceeding against Sellers seeking a declaratory judgment that RentPath was in breach of the Asset Purchase Agreement and that the Company is not obligated to pay the termination fee. In February 2021, the Company and the Sellers agreed that the Company would pay $52 million of the $59 million, subject to bankruptcy court approval. The Company recorded $52 million termination fee and $7.5 million extension payment made to RentPath within selling, general and administrative expenses in consolidated statement of operations for the year ended December 31, 2020.

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.

14. SEGMENT REPORTING

Segment Information

The Company manages its business geographically in two operating segments, with the primary areas of measurement and decision-making being North America, which includes the U.S. and Canada, and International, which 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.

F-35

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


	Year Ended December 31,
	2020		2019		2018









EBITDA
North America	$	410,852	$	451,699	$	358,036
International	(4,706)		(6,987)		(6,729)
Total EBITDA	$	406,146	$	444,712	$	351,307

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


	Year Ended December 31,
	2020		2019		2018
Net income	$	227,128	$	314,963	$	238,334
Amortization of acquired intangible assets in cost of revenues	25,675		21,357		20,586
Amortization of acquired intangible assets in operating expenses	62,457		33,995		30,881
Depreciation and other amortization	28,812		25,813		26,276
Interest (expense) income	17,395		(16,742)		(10,539)
Other (expense) income	827		(10,660)		88
Income tax expense	43,852		75,986		45,681
EBITDA	$	406,146	$	444,712	$	351,307

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


	December 31,
	2020		2019
Property and equipment, net
North America	$	123,634	$	103,383
International	2,691		4,146
Total property and equipment, net	$	126,325	$	107,529

Goodwill
North America	$	2,085,494	$	1,738,360
International	150,505		143,660
Total goodwill	$	2,235,999	$	1,882,020

Assets
North America	$	6,674,974	$	3,615,258
International	240,446		238,728
Total assets	$	6,915,420	$	3,853,986







Liabilities
North America	$	1,496,894	$	402,759
International	43,167		45,634
Total liabilities	$	1,540,061	$	448,393

F-36

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. STOCKHOLDER'S EQUITY

Preferred Stock

The Company has 2 million shares of preferred stock, $0.01 par value, authorized for issuance as of December 31, 2020. 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

On May 28, 2020, the Company completed a public equity offering of 2.6 million shares of common stock for $655 per share. Net proceeds from the public equity offering were approximately $1.7 billion, after deducting approximately $35 million of underwriting fees, commissions and other stock issuance costs. The Company intends to use the net proceeds from the sale of the securities to fund all or a portion of the costs of any strategic acquisitions it pursues in the future, to finance the growth of its business and for working capital and other general corporate purposes. General corporate purposes may include additions to working capital, capital expenditures, repayment of debt, investments in the Company’s subsidiaries, and the repurchase, redemption or retirement of securities, including the Company’s common stock.

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,
	2020		2019		2018
Numerator:
Net income	$	227,128	$	314,963	$	238,334
Denominator:
Denominator for basic net income per share — weighted-average outstanding shares	38,073		36,310		36,058
Effect of dilutive securities:
Stock options, restricted stock awards and restricted stock units	253		320		390
Denominator for diluted net income per share — weighted-average outstanding shares	38,326		36,630		36,448

Net income per share — basic	$	5.97	$	8.67	$	6.61
Net income per share — diluted	$	5.93	$	8.60	$	6.54

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,
	2020	2019	2018
Performance-based restricted stock awards	53	60	53
Anti-dilutive securities	54	42	100

17. EMPLOYEE BENEFIT PLANS

Stock Incentive Plans

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The 2016 Plan provides for the grant of stock options, restricted stock, restricted stock units, and stock appreciation rights to officers, directors and employees of the Company and its subsidiaries. Stock options granted under the 2016 Plan may be non-qualified or may qualify as incentive stock options. Except in limited circumstances related to a merger or other acquisition, the exercise price for an option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period for each grant of options, restricted stock, restricted stock units and stock appreciation rights under the 2016 Plan is determined by the Board of Directors or a committee thereof and is generally three to four years, subject to minimum vesting periods for restricted stock and restricted stock units of at least one year. In some cases, vesting of awards under the 2016 Plan may be based on performance conditions. The Company has issued and/or reserved the following shares of common stock for issuance under the 2016 Plan: (a) 1,450,000 shares of common stock, plus (b) 815,464 shares of common stock that were authorized for issuance under the 2007 Plan that, as of June 9, 2016, remained available for issuance under the 2007 Plan (not including any Shares that were subject as of such date to outstanding awards under the 2007 Plan), and (c) any shares of common stock subject to outstanding awards under the 2007 Plan as of June 9, 2016, that on or after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). Unless terminated sooner, the 2016 Plan will terminate in June 2026, but will continue to govern unexercised and unexpired awards issued under the 2016 Plan prior to that date. Approximately 1.6 million shares were available for future grant under the 2016 Plan as of December 31, 2020.

At December 31, 2020, there was approximately $81 million of unrecognized compensation cost related to stock incentive plans, net of estimated forfeitures, which the Company expects to recognize over a weighted-average-period of 2.4 years. The income tax benefit realized from stock-based compensation was $20 million, $17 million and $17 million for the years ended December 31, 2020, 2019 and 2018, respectively. See Notes 2 and 12 for further discussion of stock-based compensation expense and income taxes, respectively.

F-38

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

Option activity was as follows:


	Number of Shares	Range of Exercise Price	Weighted- Average Exercise Price		Weighted- Average Remaining Contract Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2017	453,843	$36.73 - $204.91	$	156.24	6.67	$	63,861
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	7.03	$	43,418
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
Granted	34,100	$666.52	$	666.52
Exercised	(95,313)	$193.69 - $398.15	$	229.46
Canceled or expired	(12,135)	$342.13 - $666.52	$	443.05
Outstanding at December 31, 2020	202,310	$102.16 - $666.52	$	341.78	6.99	$	117,846

Exercisable at December 31, 2018	185,405	$54.51 - $204.91	$	165.31	5.79	$	31,895
Exercisable at December 31, 2019	147,620	$102.16 - $342.13	$	210.96	5.84	$	57,180
Exercisable at December 31, 2020	122,806	$102.16 - $398.15	$	246.76	6.18	$	83,204

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. The aggregate intrinsic value of options exercised, determined as of the date of option exercise, was approximately $49 million, $40 million and $45 million for the years ended December 31, 2020, 2019 and 2018, 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,
	2020			2019			2018
Dividend yield	0		%	0		%	0		%
Expected volatility	26		%	27		%	28		%
Risk-free interest rate	1.45		%	2.46		%	2.65		%
Expected life (in years)	5			5			5
Weighted-average grant date fair value	$	172.05		$	115.17		$	101.02

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, 2020:

F-39

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	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	2.19	$	102.16	3,522	$	102.16
$142.46 - $188.22	36,600	5.19	$	182.75	36,600	$	182.75
$188.23 - $199.30	1,032	4.17	$	193.69	1,032	$	193.69
$199.31 - $273.52	41,622	6.16	$	204.91	41,622	$	204.91
$273.53 - $370.14	46,368	7.16	$	342.13	25,199	$	342.13
$370.15 - $532.34	41,966	8.10	$	398.15	14,831	$	398.15
$532.35 - $666.52	31,200	9.10	$	666.52	—	$	—
	202,310		$	341.78	122,806	$	246.76

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 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,
	2020			2019			2018
Dividend yield	0		%	0		%	0		%
Expected volatility	27		%	27		%	28		%
Risk-free interest rate	1.43		%	2.45		%	2.38		%
Expected life (in years)	3			3			3
Weighted-average grant date fair value	$	726.85		$	429.63		$	380.24

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

F-40

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

consistent with the performance measurement period of the performance-based restricted common stock awards with a market condition.

As of December 31, 2020, the Company determined that it was probable that at least the minimum performance goals associated with restricted stock awards with performance and market conditions granted during 2020, 2019 and 2018 would be met by their forfeiture dates. The Company recorded a total of approximately $4 million, $8 million and $5 million of stock-based compensation expense related to restricted stock awards with a market condition for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, the Company expects to record an aggregate stock-based compensation expense of approximately $6 million for restricted stock awards with a market condition over the periods 2021, 2022 and 2023.

The following table presents unvested restricted stock awards activity for the year ended December 31, 2020:


	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, 2019	267,219	$	365.27	89,280	$	290.87
Granted	75,634	$	717.86	24,480	$	726.85
Vested	(115,176)	$	309.37	(29,280)	$	218.59
Canceled	(24,813)	$	420.43	(12,000)	$	466.34
Unvested restricted stock awards at December 31, 2020	202,864	$	521.71	72,480	$	438.26

Restricted Stock Units

The following table presents unvested restricted stock units activity for the year ended December 31, 2020:


	Number of Units	Weighted-Average Grant Date Fair Value per Share
Unvested restricted stock units at December 31, 2019	854	$	344.10
Granted	499	$	764.00
Vested	(438)	$	264.75
Canceled	(51)	$	477.50
Unvested restricted stock units at December 31, 2020	864	$	618.97

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 Company granted 3,384 and 7441 DSUs during the years 2020 and 2019, respectively. The expense related to the Matching RSUs is recognized over the four years vesting period following the grant date.

F-41

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables presents the Matching RSU activity for the year ended December 31, 2020:


	Number of Matching RSU Shares	Weighted-Average Grant Date Fair Value per Share
Unvested MSPP restricted stock units at December 31, 2019	7,166	$	469.13
Granted	3,384	$	663.93
Vested	—	$	—
Canceled	(1,233)	$	534.54
Unvested MSPP restricted stock units at December 31, 2020	9,317	$	531.23

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 2020, 2019 and 2018, 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, 2020, 2019 and 2018 were approximately $15 million, $12 million and $12 million, respectively. The Company had no administrative expenses in connection with the 401(k) plan for the years ended December 31, 2020, 2019 and 2018.

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 2020, 2019 and 2018, 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, 2020, 2019 and 2018, were approximately $0.9 million, $0.6 million and $0.5 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 2020, 2019 and 2018, 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 were approximately $0.1 million for the years ended December 31, 2020, 2019 and 2018.

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 38,591 and 51,584 shares available for purchase under the ESPP as of December 31, 2020 and 2019, respectively, and approximately 12,993 and 13,590 shares of the Company’s common stock were purchased under the ESPP during 2020 and 2019, 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, 2020 and 2019. 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 5.


	2020
	Mar. 31		Jun. 30		Sep. 30		Dec. 31
Revenues	$	391,847	$	397,159	$	425,620	$	444,393
Cost of revenues	78,909		74,040		77,865		78,154
Gross profit	312,938		323,119		347,755		366,239
Operating expenses	237,074		241,800		270,946		311,029
Income from operations	75,864		81,319		76,809		55,210
Interest (expense) income	1,651		(3,596)		(7,537)		(7,913)
Other (expense) income	841		(474)		(338)		(856)

Income before income taxes	78,356		77,249		68,934		46,441
Income tax expense	5,563		16,889		10,748		10,652
Net income	$	72,793	$	60,360	$	58,186	$	35,789
Net income per share — basic	$	2.00	$	1.61	$	1.49	$	0.91
Net income per share — diluted	$	1.98	$	1.60	$	1.48	$	0.91


	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 (expense) income	4,212		4,677		4,414		3,439
Other (expense) income	1		539		240		9,880
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

19. SUBSEQUENT EVENTS

On December 9, 2020, the Company entered into a Purchase and Sale agreement with Sir Properties Trust, a Maryland real estate investment trust to purchase an office building and the underlying land located in Richmond, Virginia. The agreement allowed the Company an inspection period from the effective date of the agreement to February 8, 2021. The closing of the transaction was completed on January 22, 2021 for the amount of $131 million, inclusive of property taxes, titling insurance and other transaction costs, after satisfying inspection conditions defined therein.

F-43

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