Item 1. Financial Statements

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Item 1. Financial Statements

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenues	$	499,319	$	425,620	$	1,437,349	$	1,214,626
Cost of revenues	92,597		77,865		270,911		230,814
Gross profit	406,722		347,755		1,166,438		983,812

Operating expenses:
Selling and marketing (excluding customer base amortization)	180,055		146,634		483,354		402,202
Software development	53,143		40,732		148,500		121,343
General and administrative	64,671		65,322		186,747		181,598
Customer base amortization	19,121		18,258		55,885		44,677
	316,990		270,946		874,486		749,820
Income from operations	89,732		76,809		291,952		233,992
Interest expense, net	(7,943)		(7,537)		(23,698)		(9,482)
Other income (expense)	1,546		(338)		2,343		29
Income before income taxes	83,335		68,934		270,597		224,539
Income tax expense	19,031		10,748		70,933		33,200
Net income	$	64,304	$	58,186	$	199,664	$	191,339



Net income per share - basic(1)	$	0.16	$	0.15	$	0.51	$	0.51
Net income per share - diluted(1)	$	0.16	$	0.15	$	0.51	$	0.50

Weighted-average outstanding shares - basic(1)	392,419		391,586		392,101		377,177
Weighted-average outstanding shares - diluted(1)	394,295		394,013		394,036		379,704
__________________________

(1) Prior period amounts have been retroactively adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021. See Note 2 for details.

See accompanying notes.

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSI****VE INCOME

(in thousands)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	64,304	$	58,186	$	199,664	$	191,339
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment	(6,229)		7,535		(4,380)		(4,551)
Unrealized gain on investments	—		—		—		189
Reclassification adjustment for realized loss on investments included in net income	—		—		—		541
Total other comprehensive (loss) income	(6,229)		7,535		(4,380)		(3,821)
Total comprehensive income	$	58,075	$	65,721	$	195,284	$	187,518

See accompanying notes.

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)


	September 30, 2021		December 31, 2020
ASSETS
Current assets:
Cash, cash equivalents and restricted cash	$	3,761,587	$	3,755,912

Accounts receivable	128,700		119,059
Less: Allowance for credit losses	(13,049)		(15,110)
Accounts receivable, net	115,651		103,949



Prepaid expenses and other current assets	37,599		28,651

Total current assets	3,914,837		3,888,512


Deferred income taxes, net	1,975		4,983
Property and equipment, net	238,866		126,325
Lease right-of-use assets	105,964		108,740
Goodwill	2,293,514		2,235,999
Intangible assets, net	447,900		426,745
Deferred commission costs, net	96,303		93,274
Deposits and other assets	16,971		15,856
Income tax receivable	14,986		14,986

Total assets	$	7,131,316	$	6,915,420
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable	$	17,487	$	15,732
Accrued wages and commissions	82,905		80,998
Accrued expenses	86,788		110,305

Income taxes payable	11,828		16,316

Lease liabilities	29,878		32,648
Deferred revenue	92,631		74,851
Total current liabilities	321,517		330,850

Long-term debt, net	987,633		986,715


Deferred income taxes, net	83,399		72,991
Income taxes payable	26,188		25,282
Lease and other long-term liabilities	109,156		124,223
Total liabilities	1,527,893		1,540,061

Total stockholders' equity	5,603,423		5,375,359
Total liabilities and stockholders’ equity	$	7,131,316	$	6,915,420

See accompanying notes.

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


	Common Stock			Additional Paid-In Capital(1)		Accumulated Other Comprehensive (Loss) Income		Retained Earnings		Total Stockholders’ Equity
	Shares(1)	Amount(1)
Balance at December 31, 2020	394,285	$	3,943	$	4,204,703	$	(889)	$	1,167,602	$	5,375,359
Net income	—	—		—		—		74,212		74,212
Other comprehensive income	—	—		—		323		—		323
Exercise of stock options	206	2		6,339		—		—		6,341
Restricted stock grants	766	8		(7)		—		—		1
Restricted stock grants surrendered	(358)	(4)		(27,663)		—		—		(27,667)
Stock-based compensation expense	—	—		15,264		—		—		15,264
Employee stock purchase plan	36	—		3,092		—		—		3,092
Balance at March 31, 2021	394,935	$	3,949	$	4,201,728	$	(566)	$	1,241,814	$	5,446,925
Net income	—	—		—		—		61,148		61,148
Other comprehensive income	—	—		—		1,526		—		1,526

Restricted stock grants	50	—		—		—		—		—
Restricted stock grants surrendered	(75)	(1)		(737)		—		—		(738)
Stock-based compensation expense	—	—		14,811		—		—		14,811
Employee stock purchase plan	41	—		3,555		—		—		3,555
Balance at June 30, 2021	394,951	$	3,948	$	4,219,357	$	960	$	1,302,962	$	5,527,227
Net income	—	—		—		—		64,304		64,304


Other comprehensive income	—	—		—		(6,229)				(6,229)

Restricted stock grants	35	—		—		—		—		—
Restricted stock grants surrendered	(61)	(1)		(900)		—		—		(901)
Stock-based compensation expense	—	—		16,021		—		—		16,021
Employee stock purchase plan	35	—		3,001		—		—		3,001
Balance at September 30, 2021	394,960	$	3,947	$	4,237,479	$	(5,269)	$	1,367,266	$	5,603,423
__________________________

(1) Prior period amounts have been retroactively adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021. See Note 2 for details.

See accompanying notes.

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


	Common Stock			Additional Paid-In Capital(1)		Accumulated Other Comprehensive Loss		Retained Earnings		Total Stockholders’ Equity
	Shares(1)	Amount(1)
Balance at December 31, 2019	366,807	$	3,668	$	2,470,036	$	(8,585)	$	940,474	$	3,405,593


Net income	—	—		—		—		72,793		72,793


Other comprehensive loss	—	—		—		(12,219)		—		(12,219)
Exercise of stock options	406	4		9,229		—		—		9,233
Restricted stock grants	830	8		(8)		—		—		—
Restricted stock grants surrendered	(559)	(6)		(30,139)		—		—		(30,145)
Stock-based compensation expense	—	—		15,006		—		—		15,006

Employee stock purchase plan	40	1		2,549		—		—		2,550


Balance at March 31, 2020	367,524	$	3,675	$	2,466,673	$	(20,804)	$	1,013,267	$	3,462,811
Net income	—	—		$	—	$	—	$	60,360	$	60,360


Other comprehensive income	—	—		—		863		—		863
Exercise of stock options	109	1		2,923		—		—		2,924
Restricted stock grants	107	1		(1)		—		—		—
Restricted stock grants surrendered	(172)	(2)		(3,507)		—		—		(3,509)
Stock-based compensation expense	—	—		8,609		—		—		8,609
Employee stock purchase plan	35	—		2,292		—		—		2,292

Stock issued for equity offerings, net of transaction costs	26,336	263		1,689,708		—		—		1,689,971

Balance at June 30, 2020	393,939	$	3,938	$	4,166,697	$	(19,941)	$	1,073,627	$	5,224,321
Net income	—	—		—		—		58,186		58,186


Other comprehensive income	—	—		—		7,535		—		7,535
Exercise of stock options	438	4		9,710		—		—		9,714
Restricted stock grants	25	—		—		—		—		—
Restricted stock grants surrendered	(25)	—		(398)		—		—		(398)
Stock-based compensation expense	—	—		16,542		—		—		16,542
Employee stock purchase plan	28	1		2,157		—		—		2,158
Balance at September 30, 2020	394,405	$	3,943	$	4,194,708	$	(12,406)	$	1,131,813	$	5,318,058
__________________________

(1) Prior period amounts have been adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021. See Note 2 for details.

See accompanying notes.

COSTAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2021		2020
Operating activities:
Net income	$	199,664	$	191,339
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	102,390		83,911

Amortization of deferred commissions costs	46,728		45,017
Amortization of Senior Notes discount and issuance costs	1,742		1,082



Non-cash lease expense	21,118		18,801

Stock-based compensation expense	46,988		40,783
Deferred income taxes, net	16,255		6,812
Credit loss expense	7,797		21,395
Other operating activities, net	10		(12)


Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(17,715)		(34,131)
Prepaid expenses and other current assets	(18,820)		4,145
Deferred commissions	(49,798)		(48,704)
Accounts payable and other liabilities	(27,912)		47,341
Lease liabilities	(23,596)		(21,247)
Income taxes payable	(3,583)		(9,838)
Deferred revenue	15,800		7,123
Other assets	2,150		1,521
Net cash provided by operating activities	319,218		355,338

Investing activities:
Proceeds from sale and settlement of investments	—		10,259
Proceeds from sale of property and equipment and other assets	245		—
Purchase of Richmond assets and other intangibles	(123,623)		—
Purchases of property and equipment and other assets	(21,533)		(42,137)
Cash paid for acquisitions, net of cash acquired	(152,594)		(192,002)
Net cash used in investing activities	(297,505)		(223,880)

Financing activities:
Proceeds from long-term debt	—		1,744,210
Payments of debt issuance costs	—		(15,747)
Payments of long-term debt	—		(745,000)
Repurchase of restricted stock to satisfy tax withholding obligations	(29,306)		(34,051)
Proceeds from equity offering, net of transaction costs	—		1,689,971
Proceeds from exercise of stock options and employee stock purchase plan	15,025		28,169
Other financing activities	(57)		(1,650)
Net cash (used in) provided by financing activities	(14,338)		2,665,902

Effect of foreign currency exchange rates on cash and cash equivalents	(1,700)		(286)
Net increase in cash, cash equivalents and restricted cash	5,675		2,797,074
Cash, cash equivalents and restricted cash at the beginning of period	3,755,912		1,070,731
Cash, cash equivalents and restricted cash at the end of period	$	3,761,587	$	3,867,805

Supplemental cash flow disclosures:
Interest paid	$	31,030	$	5,948
Income taxes paid	$	58,234	$	36,475

Supplemental non-cash investing and financing activities:
Consideration owed for acquisitions	$	376	$	—
Accrued capital expenditures	$	660	$	393

See accompanying notes.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

**1.**ORGANIZATION

CoStar Group, Inc. (the “Company” or “CoStar Group”) provides information, analytics, online marketplace and auction services to the commercial real estate and related business community through its comprehensive, proprietary database of commercial real estate information and related tools. 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 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. On May 24, 2021, the Company acquired Homes.com ("Homes.com"), a residential real estate advertising and marketing services company primarily operating through its property listing and marketing portal, Homes.com. See Notes 5 and 8 to the accompanying Notes to the condensed consolidated financial statements for further discussion of these acquisitions.

**2.**SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed 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.

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. In the opinion of the Company’s management, the financial statements reflect all adjustments, consisting only of a normal recurring nature, necessary to present fairly the Company’s financial position at September 30, 2021 and December 31, 2020, the results of its operations for the three and nine months ended September 30, 2021 and 2020, its comprehensive income for the three and nine months ended September 30, 2021 and 2020, its changes in stockholders' equity for the three and nine months ended September 30, 2021 and 2020, and its cash flows for the nine months ended September 30, 2021 and 2020.

Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Common Stock Split

At the Company's 2021 Annual Meeting of Stockholders in June 2021, upon the recommendation of the Company's Board of Directors, the Company's stockholders approved the adoption of the Company's Fourth Amended and Restated Certificate of Incorporation, which increased the total number of shares of common stock that the Company is authorized to issue from 60 million to 1.2 billion. The Fourth Amended and Restated Certificate of Incorporation became effective on June 7, 2021. On June 7, 2021, the Board of Directors approved a ten-for-one stock split of the Company's outstanding shares of common stock to be effected in the form of a stock dividend. Each stockholder of record on June 17, 2021 received a dividend of nine additional shares of common stock for each then-held share, distributed after close of trading on June 25, 2021. The par value of the Company's common stock remained $0.01 per share. All applicable share and per-share amounts in the unaudited condensed consolidated financial statements and the accompanying notes have been retroactively adjusted to reflect the impact of the stock split.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Use of Estimates

The preparation of financial statements in conformity with 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 credit losses, the useful lives and recoverability of long-lived and intangible assets, 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 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, real estate investors, and lenders via the Company’s other service offerings, (iii) benchmarking and analytics for the hospitality industry through STR, LLC and STR Global, Ltd. (together with STR, LLC, referred to as “STR”), (iv) an online auction platform for commercial real estate through Ten-X, LLC and its subsidiaries, which were acquired in June 2020, (v) an online and mobile software platform that provides applications to manage residential real estate agent workflow through Homesnap, which was acquired in December 2020, and (vi) advertising and marketing services for residential properties through Homes.com which was acquired in May 2021. See Note 5 for details of the Homes.com, Homesnap and Ten-X 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. Revenues from transaction-based services are recognized when the promised product or services are delivered, which is at the time of a successful closing of the sale of the property for Ten-X revenues.

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.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs include digital marketing, television, radio, print and other media advertising. Advertising costs were approximately $97 million and $79 million for the three months ended September 30, 2021 and 2020, respectively, and $252 million and $202 million for the nine months ended September 30, 2021 and 2020, respectively.

Foreign Currency

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 income. Gains and losses resulting from transactions denominated in a currency other than the functional currency of the entity are included in other income (expense) in the condensed consolidated statements of operations using the average exchange rates in effect during the period. The Company recognized net foreign currency gains of $0.5 million and losses of $0.2 million for the three months ended September 30, 2021 and 2020, respectively, and net foreign currency gains of $0.1 million and $0.7 million for the nine months ended September 30, 2021 and 2020, respectively, which are included in other income (expense) on the condensed consolidated statements of operations.

Accumulated Other Comprehensive Loss

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


	September 30, 2021		December 31, 2020
Foreign currency translation adjustment	$	(5,269)	$	(889)



Total accumulated other comprehensive loss	$	(5,269)	$	(889)

There were no amounts reclassified out of accumulated other comprehensive loss to the condensed consolidated statements of operations for the three and nine months ended September 30, 2021. During the nine months ended September 30, 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 income (expense) in the condensed consolidated statements of operations.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

See Note 11 for additional information regarding income taxes.

Net Income Per Share

Net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period on a basic and diluted basis.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
Numerator:	2021		2020		2021		2020

Net income	$	64,304	$	58,186	$	199,664	$	191,339
Denominator:
Denominator for basic net income per share — weighted-average outstanding shares(1)	392,419		391,586		392,101		377,177
Effect of dilutive securities:
Stock options, restricted stock awards and restricted stock units(1)	1,876		2,427		1,935		2,527
Denominator for diluted net income per share — weighted-average outstanding shares(1)	394,295		394,013		394,036		379,704

Net income per share — basic(1)	$	0.16	$	0.15	$	0.51	$	0.51
Net income per share — diluted(1)	$	0.16	$	0.15	$	0.51	$	0.50
__________________________

(1) Prior period amounts have been retroactively adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021.

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

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

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Performance-based restricted stock awards(1)	718	794	718	794
Anti-dilutive securities(1)	192	367	433	708
__________________________

(1) Prior period amounts have been retroactively adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021.

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.

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 both a performance and market condition, stock-based compensation expense is recognized over the vesting period of the awards based on the expected achievement of the related performance condition at the end of each reporting period. 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 Company's Management Stock Purchase Plan included in the Company’s results of operations were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenues	$	2,835	$	3,007	$	8,283	$	8,009
Selling and marketing (excluding customer base amortization)	1,620		2,091		4,644		5,886
Software development	3,316		2,821		9,289		7,635
General and administrative	8,528		8,811		24,772		19,907
Total stock-based compensation expense(1)	$	16,299	$	16,730	$	46,988	$	41,437
__________________________

(1) Stock-based compensation expense for the nine months ended September 30, 2020 includes $0.7 million of expense related to the cash settlement of stock options in connection with the acquisition of Ten-X Holding Company, Inc. See Note 5 for details of the acquisition.

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 September 30, 2021 and December 31, 2020 (in thousands):

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


	September 30, 2021		December 31, 2020
Cash and cash equivalents	$	3,761,587	$	3,693,813
Restricted cash:
RentPath termination 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	$	3,761,587	$	3,755,912

Allowance for Credit Losses

The Company maintains 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 and historical write off trends. 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 periodically. 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 its 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 Portfolio Segment - The CoStar portfolio segment consists of two classes of trade receivables based on geographical location: North America and 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.
LoopNet Portfolio Segment - The LoopNet portfolio segment consists of one class of trade receivables.
Other Marketplaces Portfolio Segment - The Other Marketplaces portfolio segment consists of two classes of trade receivables: Ten-X and other marketplaces.

The majority of Residential revenue is e-commerce based and does not result in accounts receivable. Residential accounts receivable and the related allowance for credit losses are not material.

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

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Leases

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

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.

Goodwill is tested annually for impairment by each reporting unit on October 1 of each year or more frequently if an event or other circumstance indicates that we may not recover the carrying value of the asset. The Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or elect to bypass such assessment. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or the Company elects to bypass such assessment, the Company then determines the fair value of each reporting unit. The 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 condensed 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 10 for additional information regarding the Company's accounting for its outstanding debt, revolving credit facility, and related issuance costs.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Business Combinations

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

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

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

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

**3.**REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregated Revenue

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


	Three Months Ended September 30,
	2021						2020
	North America		International		Total		North America		International		Total

CoStar	$	174,071	$	9,194	$	183,265	$	158,235	$	7,753	$	165,988
Information Services	29,177		6,749		35,926		26,357		6,817		33,174

Multifamily	171,125		—		171,125		155,184		—		155,184
LoopNet(1)	52,103		424		52,527		44,938		146		45,084
Residential(1)	24,747		—		24,747		—		—		—
Other Marketplaces(1)	31,729		—		31,729		26,190		—		26,190
Total revenues	$	482,952	$	16,367	$	499,319	$	410,904	$	14,716	$	425,620
__________________________

(1) As of September 30, 2021, Commercial Property and Land revenue has been further disaggregated into LoopNet, Residential and Other Marketplaces.


	Nine Months Ended September 30,
	2021						2020
	North America		International		Total		North America		International		Total

CoStar	$	505,470	$	26,958	$	532,428	$	473,363	$	22,634	$	495,997
Information Services	84,959		20,820		105,779		77,069		19,023		96,092

Multifamily	508,629		—		508,629		438,185		—		438,185
LoopNet(1)	151,770		1,082		152,852		131,348		256		131,604
Residential(1)	53,939		—		53,939		—		—		—
Other Marketplaces(1)	83,722		—		83,722		52,748		—		52,748
Total revenues	$	1,388,489	$	48,860	$	1,437,349	$	1,172,713	$	41,913	$	1,214,626
__________________________

(1) As of September 30, 2021, Commercial Property and Land revenue has been further disaggregated into LoopNet, Residential and Other Marketplaces.

Deferred Revenue

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


Balance at December 31, 2020	$	77,363
Revenue recognized in the current period from the amounts in the beginning balance	(70,339)
New deferrals, net of amounts recognized in the current period	87,225
Effects of foreign currency	(231)

Balance at September 30, 2021(1)	$	94,018
__________________________

(1) Deferred revenue is comprised of $93 million of current liabilities and $1 million of noncurrent liabilities classified within lease and other long-term liabilities on the Company’s condensed consolidated balance sheet as of September 30, 2021. This balance includes $1 million of deferrals recognized in connection with business acquisitions made in 2021. See Note 5 for details.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Contract Assets

The Company had contract assets of $9 million as of September 30, 2021 and December 31, 2020, 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 condensed consolidated balance sheets. The revenue recognized from contract assets for the three and nine months ended September 30, 2021 was not material.

Commissions

Commissions expense is included in selling and marketing expense in the Company's condensed consolidated statements of operations. Commissions expense activity for the three and nine months ended September 30, 2021 and 2020 was as follows (in thousands). The Company determined that no deferred commissions were impaired as of September 30, 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Commissions incurred	$	30,337	$	25,436	$	83,983	$	69,047
Commissions capitalized in the current period	(17,876)		(16,582)		(49,798)		(48,704)
Amortization of deferred commissions costs	15,881		15,355		46,728		45,017
Total commissions expense	$	28,342	$	24,209	$	80,913	$	65,360

Unsatisfied Performance Obligations

Remaining contract consideration for which revenue has not been recognized due to unsatisfied performance obligations was approximately $319 million at September 30, 2021, which the Company expects to recognize over the next five years. This amount does not include contract consideration for contracts with a duration of one year or less.

**4.**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):


	Nine Months Ended September 30, 2021
	CoStar		Information Services		Multifamily		LoopNet(3)		Other Marketplaces(3)		Total
Beginning balance at December 31, 2020	$	5,531	$	2,739	$	4,387	$	1,667	$	786	$	15,110
Current-period provision (releases) for expected credit losses(1), (2)	3,932		(257)		2,167		1,955		—		7,797
Write-offs charged against the allowance, net of recoveries and other	(3,933)		(518)		(3,779)		(1,628)		—		(9,858)
Ending balance at September 30, 2021	$	5,530	$	1,964	$	2,775	$	1,994	$	786	$	13,049
__________________________

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

(2) Credit loss expense related to contract assets was not material for the nine months ended September 30, 2021.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(3) Amounts previously disclosed in the Commercial Property and Land portfolio segment have been further disaggregated into the LoopNet, Residential and Other Marketplaces portfolio segments. Majority of the Residential portfolio segment revenue is e-commerce based and does not result in accounts receivable.


	Nine Months Ended September 30, 2020
	CoStar		Information Services		Multifamily		LoopNet(3)		Other Marketplaces(3)		Total
Beginning balance at December 31, 2019	$	1,264	$	624	$	1,195	$	576	$	889	$	4,548
Current-period provision for expected credit losses(1), (2)	9,616		2,634		6,579		2,482		84		21,395
Write-offs charged against the allowance, net of recoveries and other	(5,457)		(350)		(4,135)		(1,607)		(189)		(11,738)
Ending balance at September 30, 2020	$	5,423	$	2,908	$	3,639	$	1,451	$	784	$	14,205
__________________________

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

(2) Credit loss expense related to contract assets was not material for the nine months ended September 30, 2020.

(3) Amounts previously disclosed in the Commercial Property and Land portfolio segment have been further disaggregated into the LoopNet and Other Marketplaces portfolio segments.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

**5.**ACQUISITIONS

Homes.com

On April 14, 2021, Landmark Media Enterprises, LLC (“Landmark”), Home Group, LLC ("Homes.com") and CoStar Realty Information, Inc., a Delaware corporation and wholly owned subsidiary of the Company entered into a securities purchase agreement, pursuant to which the Company agreed to acquire all of the outstanding equity interests in Homes.com from Landmark for a purchase price of $150 million in cash, subject to customary working capital and other post-closing adjustments. The Company's acquisition of Homes.com closed on May 24, 2021. The securities purchase agreement required an initial payment of $148 million, net of working capital adjustments, at the time of closing, with the remainder of the purchase price payable four months following the acquisition date, subject to offset for adjustments to the purchase price after final determination of closing net working capital. These amounts were settled in the third quarter of 2021. Homes.com is a residential real estate advertising and marketing services company primarily operating through its property listing and marketing portal, Homes.com.

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: May 24, 2021		Measurement Period Adjustments		Updated Preliminary: May 24, 2021
Cash, cash equivalents and restricted cash	$	—	$	—	$	—
Accounts receivable	1,798		—		1,798
Lease right-of-use assets	371		—		371
Goodwill	86,314		1,818		88,132
Intangible assets	53,400		—		53,400
Deferred tax assets	11,171		—		11,171
Lease liabilities	(371)		—		(371)
Deferred revenue	(1,086)		—		(1,086)
Other assets and liabilities	(1,240)		—		(1,240)
Fair value of identifiable net assets acquired	$	150,357	$	1,818	$	152,175

The net assets of Homes.com 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 contingencies. 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 of the identifiable intangible assets acquired in the Homes.com acquisition included in the Company's North America operating segment, their related estimated useful lives (in years) and their respective amortization methods (in thousands):


	Estimated Fair Value		Estimated Useful Life	Amortization Method
Customer base	$	32,000	8	Accelerated
Trade name	21,000		15	Straight-line
Technology	400		2	Straight-line
Total intangible assets	$	53,400

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 Homes.com 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 Homes.com operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce. The $88 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment, of which $17 million is expected to be deductible for income tax purposes.

As of September 30, 2021, transaction costs associated with the Homes.com acquisition were not material. In addition, the Company paid $5 million into a cash escrow account for stay bonuses for certain Homes.com employees, to be paid to active employees after the six month period following the acquisition or, if earlier, after the termination of a Homes.com employee's employment without cause or a Homes.com employee's resignation with good reason during the six month period following the acquisition. In the event some or all of those employees are not entitled to their stay bonus, the funds will be remitted to the seller. The Company is recognizing compensation expense for the stay bonus over the six month post-combination period. Upon acquisition, the Company assessed the probability Homes.com would be required to pay certain state tax liabilities and recorded an accrual of $7 million determined in accordance with the provisions of ASC 450, “Contingencies,” as the fair value was not determinable. Landmark has agreed to indemnify the Company for tax liabilities related to periods prior to the acquisition and an indemnification asset was established for $7 million in the purchase price allocation.

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 Group’s existing offerings.

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		Measurement Period Adjustments		Updated Preliminary: December 22, 2020
Cash, cash equivalents and restricted cash	$	10,225	$	—	$	10,225
Accounts receivable	662		—		662
Lease right-of-use assets	3,437		—		3,437
Goodwill	183,016		1,355		184,371
Intangible assets	67,000		—		67,000
Deferred tax assets (liabilities)	(1,423)		(1,355)		(2,778)
Lease liabilities	(3,375)		—		(3,375)
Deferred revenue	(4,000)		—		(4,000)
Other assets and liabilities	(5,188)		—		(5,188)
Fair value of identifiable net assets acquired	$	250,354	$	—	$	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 contingencies. 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. See Note 8 for measurement period impact on goodwill.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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


	Estimated Fair Value		Estimated Useful Life	Amortization Method
Customer base	$	45,000	10	Accelerated
Trade name	7,000		10	Straight-line
Technology	15,000		6	Straight-line
Total intangible assets	$	67,000

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the Homesnap 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 Homesnap's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce. The $184 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 September 30, 2021, 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 a new end-to-end commercial real estate platform, combining LoopNet and CoStar's online audience of buyers with Ten-X’s leadership in online auctions for performing and distressed assets.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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: June 24, 2020
Cash and cash equivalents	$	3,290
Accounts receivable	131
Lease right-of-use assets	4,945
Goodwill	134,322
Intangible assets	58,000
Lease liabilities	(4,945)
Deferred tax liabilities	(2,981)
Other assets and liabilities	(5,047)
Fair value of identifiable net assets acquired	$	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 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. See Note 8 for measurement period impact on goodwill.

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


	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

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 $134 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 September 30, 2021, transaction costs associated with the Ten-X acquisition were not material. The Company paid $3 million in incentive compensation to Ten-X employees negotiated as part of the acquisition, and this expense was recognized in the post-combination period during the three months ended September 30, 2020.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Pro Forma Financial Information

The unaudited pro forma financial information presented below summarizes the combined results of operations for the Company, Ten-X and Homesnap as though the companies were combined as of January 1, 2019, and the Company and Homes.com as though the companies were combined as of January 1, 2020. 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, 2019 for Ten-X and Homesnap and January 1, 2020 for Homes.com.

The unaudited pro forma financial information for the three and nine months ended September 30, 2021 and 2020 combine the historical results of the Company, Ten-X, Homesnap and Homes.com for the periods prior to the acquisition date, and the effects of the pro forma adjustments listed above.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

Revenue	$	499,319	$	446,791	$	1,455,316	$	1,280,143
Net income	$	64,303	$	50,821	$	193,595	$	159,330
Net income per share - basic(1)	$	0.16	$	0.13	$	0.49	$	0.43
Net income per share - diluted(1)	$	0.16	$	0.13	$	0.49	$	0.42
__________________________

(1) Prior period amounts have been retroactively adjusted to reflect the ten-for-one stock split effected in the form of a stock dividend in June 2021. See Note 2 for details.

The impact of the Homes.com acquisition on CoStar Group’s revenue in the condensed consolidated statements of operations was an increase of $8 million and $12 million for the three and nine months ended September 30, 2021, respectively. The impact of the Homes.com acquisition on CoStar Group’s net income in the condensed consolidated statements of operations was a decrease of $7 million and $10 million for the three and nine ended September 30, 2021. The impact of the Ten-X acquisition on CoStar Group’s revenue in the condensed consolidated statements of operations was an increase of $12 million and $12 million for the three and nine months ended September 30, 2020, respectively. The impact of the Ten-X acquisition on CoStar Group’s net income in the condensed consolidated statements of operations was a decrease of $5 million and $7 million for the three and nine months ended September 30, 2020.

**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 September 30, 2021, the Company's financial assets comprise Level 1 cash equivalents with original maturities of three months or less in the amount of $3.0 billion. As of September 30, 2021, the Company had no Level 2 or Level 3 financial assets measured at fair value.

During the nine months ended September 30, 2020, the Company sold its ARS investments for $10.3 million and recognized a realized loss of $0.5 million for the nine months ended September 30, 2020 included in other (expense) income on the Company's condensed consolidated statements of operations.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 September 30, 2021 and December 31, 2020. 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 $1.02 billion as of September 30, 2021.

**7.**LEASES

The Company has operating leases for its office facilities and data centers, as well as finance leases for office equipment. The Company's leases have remaining terms of less than one year to seven years. The leases contain various renewal and termination options. The period that 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 that 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 condensed consolidated statements of operations were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
Operating lease costs:	2021		2020		2021		2020

Cost of revenues	$	2,717	$	2,992	$	7,446	$	8,732
Software development	1,910		1,628		4,913		4,412
Selling and marketing (excluding customer base amortization)	3,452		2,636		8,876		7,725
General and administrative	1,594		1,259		4,369		3,609
Total operating lease costs	$	9,673	$	8,515	$	25,604	$	24,478

The impact of lease costs related to finance leases and short-term leases was not material for the three and nine months ended September 30, 2021.

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


Balance	Balance Sheet Location	September 30, 2021			December 31, 2020




Operating lease liabilities		$	139,315		$	148,975
Less: imputed interest		(8,779)			(10,998)
Present value of lease liabilities		130,536			137,977
Less: current portion of lease liabilities	Lease liabilities	(29,878)			(32,648)
Long-term lease liabilities	Lease and other long-term liabilities	$	100,658		$	105,329

Weighted-average remaining lease term in years		4.2			4.0
Weighted-average discount rate		2.8		%	3.6		%

Balance sheet information related to finance leases was not material as of September 30, 2021.

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

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


	Nine Months Ended September 30,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases	$	28,082	$	26,924

ROU assets obtained in exchange for lease obligations:
Operating leases	$	32,107	$	11,124

**8.**GOODWILL

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


	North America		International		Total
Goodwill, December 31, 2019	$	1,738,360	$	143,660	$	1,882,020
Acquisitions, including measurement period adjustments(1)	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
Acquisitions, including measurement period adjustments(2)	60,012		—		60,012
Effect of foreign currency translation	—		(2,497)		(2,497)
Goodwill, September 30, 2021	$	2,145,506	$	148,008	$	2,293,514
__________________________

(1) 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.

(2) North America goodwill during the nine months ended September 30, 2021, includes goodwill recorded in connection with the acquisition of Homes.com, offset by measurement period adjustments of $26 million recorded during the nine months ended September 30, 2021 primarily related to the measurement of the fair value of Homesnap customer relationships in the first quarter of 2021. See Note 5 for acquisition details.

The Company recorded goodwill of approximately $88 million, $184 million and $134 million in connection with the May 2021 Homes.com, December 2020 Homesnap and June 2020 Ten-X acquisitions, respectively.

No impairments of the Company's goodwill were recognized during the three and nine months ended September 30, 2021 and 2020.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

**9.**INTANGIBLE ASSETS

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


	September 30, 2021		December 31, 2020		Weighted- Average Amortization Period (in years)




Acquired technology and data	$	131,729	$	131,551	5
Accumulated amortization	(103,581)		(97,791)
Acquired technology and data, net	28,148		33,760

Acquired customer base	612,092		545,643		10
Accumulated amortization	(351,478)		(296,758)
Acquired customer base, net	260,614		248,885

Acquired trade names and other intangible assets	283,294		249,465		12
Accumulated amortization	(124,156)		(105,365)
Acquired trade names and other intangible assets, net	159,138		144,100

Intangible assets, net	$	447,900	$	426,745

No impairments of the Company's intangible assets were recognized during the three and nine months ended September 30, 2021 and 2020.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

**10.**LONG-TERM DEBT

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


	September 30, 2021		December 31, 2020
2.800% Senior Notes due July 15, 2030	$	1,000,000	$	1,000,000
2020 Credit Agreement, due July 1, 2025	—		—
Total face amount of long-term debt	1,000,000		1,000,000
Senior Notes unamortized discount and issuance costs	(12,367)		(13,285)
Long-term debt, net	$	987,633	$	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 and contain covenants and other customary provisions with which the Company was in compliance as of September 30, 2021.

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. 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 0.00%) 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 the Company and the administrative agent under the 2020 Credit Agreement to amend the 2020 Credit Agreement 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.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 is not subject to certain covenants, such as restrictions on the ability to incur indebtedness (such period, a “Covenant Suspension Period”). As of September 30, 2021, 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 September 30, 2021.

As of September 30, 2021, the Company had not drawn any amounts under this facility.

The Company had $4.1 million and $4.9 million of deferred debt issuance costs as of September 30, 2021 and December 31, 2020 in connection with the 2020 Credit Agreement. These amounts are included in deposits and other assets on the Company's condensed consolidated balance sheets.

For the three and nine months ended September 30, 2021 and 2020, the Company recognized interest expense as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest on outstanding borrowings	$	7,000	$	7,000	$	21,000	$	11,509
Amortization of Senior Notes discount and issuance costs	583		574		1,742		1,082
Commitment fees and other	522		492		1,499		1,133
Total interest expense	$	8,105	$	8,066	$	24,241	$	13,724

**11.**INCOME TAXES

The income tax provision reflects an effective tax rate of approximately 23% and 16% for the three months ended September 30, 2021 and 2020, respectively and 26% and 15% for the nine months ended September 30, 2021 and 2020, respectively. The increase in the effective tax rate for the nine months ended September 30, 2021 was due to a decrease in excess tax benefits for the nine months ended September 30, 2021, as well as a discrete restructuring gain. The increase in the effective tax rate for the three months ended September 30, 2021 was primarily due to a decrease in excess tax benefits for the three months ended September 30, 2021.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

**12.**COMMITMENTS AND CONTINGENCIES

The following summarizes the Company's significant contractual obligations, including related payments due by period, as of September 30, 2021 (in thousands):


Year Ending December 31,	Operating lease obligations		Long-term debt principal payments		Long-term interest payments
Remainder of 2021	$	7,889	$	—	$	—
2022	28,817		—		28,000
2023	36,032		—		28,000
2024	32,457		—		28,000
2025	15,704		—		28,000
Thereafter	18,416		1,000,000		140,000
Total	$	139,315	$	1,000,000	$	252,000

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.

**13.**SEGMENT REPORTING

Segment Information

The Company manages its business geographically in two operating segments, with the primary areas of measurement and decision-making being North America, which includes the U.S. and Canada, and International, which 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 expense (income) and other expense (income), loss on debt extinguishment, income taxes, depreciation and amortization (“EBITDA”). Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of the Company’s operating segments. EBITDA is used by management to internally measure operating and management performance, and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

North America	$	119,823	$	107,906	$	385,857	$	322,611
International	2,849		579		5,683		(4,708)
Total EBITDA	$	122,672	$	108,485	$	391,540	$	317,903

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

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	64,304	$	58,186	$	199,664	$	191,339
Amortization of acquired intangible assets in cost of revenues	7,209		6,612		21,565		18,671
Amortization of acquired intangible assets in operating expenses	19,121		18,258		55,885		44,677
Depreciation and other amortization	6,610		6,806		22,138		20,563
Interest expense, net	7,943		7,537		23,698		9,482
Other (income) expense	(1,546)		338		(2,343)		(29)

Income tax expense	19,031		10,748		70,933		33,200
EBITDA	$	122,672	$	108,485	$	391,540	$	317,903

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


	September 30, 2021		December 31, 2020
Property and equipment, net:
North America	$	237,010	$	123,634
International	1,856		2,691
Total property and equipment, net	$	238,866	$	126,325

Goodwill:
North America	$	2,145,506	$	2,085,494
International	148,008		150,505
Total goodwill	$	2,293,514	$	2,235,999

Assets:
North America	$	6,853,670	$	6,674,974
International	277,646		240,446
Total assets	$	7,131,316	$	6,915,420







Liabilities:
North America	$	1,484,686	$	1,496,894
International	43,207		43,167
Total liabilities	$	1,527,893	$	1,540,061

14. PURCHASE OF BUILDING

On January 22, 2021, the Company purchased an office building located in Richmond, Virginia (the "Richmond building"), together with the land and assumed an existing lease for a purchase price of $131 million, inclusive of property taxes, title insurance and other transaction costs. The purchase of the Richmond building was accounted for as an asset acquisition, including an intangible asset for the assumed lease. For the three and nine months ended September 30, 2021, the net impact from the lease arrangement is recorded in other (expense) income on the condensed consolidated statements of operations and was not material to the Company.

COSTAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

15. SUBSEQUENT EVENTS

BureauxLocaux

On October 1, 2021, CoStar UK Limited ("CoStar UK"), a wholly-owned subsidiary of the Company, purchased from M.A.J.E Marketing & Stratégie and an individual all of the outstanding equity interests in ComReal Info, a French société par actions simplifiéee, for €35 million, $41 million equivalent, in cash subject to customary working capital and other post-closing adjustments. Based in Paris, ComReal Info owns and operates BureauxLocaux, a leading commercial real estate digital marketplace in France. The Company used cash on hand to finance the acquisition and expects to record most of the purchase price to identifiable intangible assets and goodwill.

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