Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements,” including statements about our beliefs and expectations. There are many risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Potential factors that could cause actual results to differ materially from those discussed in any forward-looking statements include, but are not limited to, those stated under the heading “Cautionary Statement Concerning Forward-Looking Statements” at the end of this Item 2 and “Risk Factors” in Item 1A of Part I of our 2022 Form 10-K, as well as those described from time to time in our filings with the SEC.

All forward-looking statements are based on information available to us on the date of this filing, and we assume no obligation to update such statements, whether as a result of new information, future events or otherwise, except as required by law. The following discussion should be read in conjunction with our 2022 Form 10-K, our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and other filings with the SEC and the condensed consolidated financial statements and related notes included in this Report.

Overview

CoStar Group, founded in 1987, is a leading provider of online real estate marketplaces, information and analytics in the U.S. and U.K., based on the fact that we own and operate leading online marketplaces for commercial real estate and apartment listings in the U.S., based on the numbers of unique visitors and site visits per month; provide more information, analytics and marketing services than any of our competitors; offer the most comprehensive commercial real estate database available and have the largest commercial real estate research department in the industry. We have created and compiled a standardized platform of information, analytics and online marketplace services where industry professionals and consumers of commercial real estate, including apartments, and the related business communities, can continuously interact and facilitate transactions by efficiently accessing and exchanging accurate and standardized real estate-related information. Our service offerings span all commercial property types, including office, retail, industrial, multifamily, land, mixed-use and hospitality. We also offer online platforms that manage workflow and marketing for residential real estate agents and brokers and provide portals for homebuyers to view residential property listings.

Our services are typically distributed to our clients under subscription-based license agreements that typically renew automatically, a majority of which have a term of at least one year. Upon renewal, many of the subscription contract rates may change in accordance with contract provisions or as a result of contract renegotiations. To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based services rather than charging fees based on actual platform usage or number of paid clicks. Depending on the type of service, contract rates are generally based on one or more of the following factors: the number of sites, number of users, organization size, the client’s business focus, the client's geographic location, the number of properties reported on or analyzed, 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. Our subscription clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. Our transaction-based services primarily consist of auction fees from our Ten-X online auction platform for commercial real estate, which are generally calculated as a percentage of the final sales price for the commercial real estate property sold and recognized as revenue upon the successful closure of an auction. Other transaction-based services are described by service offering below.

Services

Our portfolio of information, analytics and online marketplaces is branded and marketed to our customers and marketplace end users under the primary brands of CoStar®, LoopNet®, Apartments.com®, STR®, Ten-X®, BizBuySell®, Land.com®, Homesnap®, and Homes.com®. Our services are accessible via the internet and through our mobile applications. Our services are primarily derived from a database of building-specific information and offer customers specialized tools for accessing, analyzing and using our information. Over time, we have enhanced and expanded, and we expect to continue to enhance and expand, our existing information, analytics and online marketplace services. We have developed and we expect to continue to develop additional services leveraging our database to meet the needs of our existing customers as well as potential new categories of customers.

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

CoStar

CoStar is our subscription-based integrated platform for commercial real estate intelligence, which includes information about office, industrial, retail, multifamily, hospitality and student housing properties, properties for sale, comparable sales, tenants, space available for lease, industry professionals and their business relationships, industry news and market status and provides lease analytical and risk management capabilities. CoStar's revenue growth rate for the nine months ended September 30, 2023 slowed compared to the revenue growth rate for the nine months ended September 30, 2022. We expect CoStar's revenue growth rate for the year ended December 31, 2023 to slow compared to the revenue growth rate for the year ended December 31, 2022 as a result of less benefit from customer upgrades as the global product upgrade campaign is substantially complete, a decline in the sales levels to brokers and lower inflation-based price adjustments.

Information Services

We provide real estate and lease management technology solutions, including lease administration, lease accounting and abstraction services, through our CoStar Real Estate Manager service offerings, as well as portfolio and debt analysis, management and reporting capabilities through our CoStar Risk Analytics service offerings. We also provide benchmarking and analytics for the hospitality industry both on a subscription basis and an ad hoc basis. We earn revenue on ad hoc transactions as reports or data are delivered to customers. We provide information services internationally, through our Business Immo, Belbex and Thomas Daily businesses in France, Spain and Germany, respectively. Information Services' revenue growth rate for the nine months ended September 30, 2023 was consistent with the revenue growth rate for the nine months ended September 30, 2022 as a result of inclusion of the revenue from the Business Immo Acquisition and increased sales of STR products. We expect the Information Services revenue growth rate for the year ended December 31, 2023 to slow compared to the revenue growth rate for the year ended December 31, 2022 as a result of lower price adjustments on CoStar Real Estate Manager.

Multifamily

Apartments.com is the flagship brand of our apartment marketing network of subscription-based advertising services and provides property management companies and landlords with a comprehensive advertising destination for their available rental units and offers renters a platform for searching for available rentals. This network also earns transaction-based revenue primarily from providing online tenant applications, including background and credit checks and rental payment processing. Multifamily's revenue growth rate for the nine months ended September 30, 2023 accelerated compared to the revenue growth rate for the nine months ended September 30, 2022 as a result of higher sales volumes driven by increases in pricing on renewals and an increase in the number of properties listed on our network. We expect the Multifamily revenue growth rate for the year ended December 31, 2023 to accelerate compared to the revenue growth rate for the year ended December 31, 2022, primarily due to expected increases in sales levels from bringing additional properties on the network and customers upgrading ad packages as vacancy rates have risen.

LoopNet

Our LoopNet network of commercial real estate websites offers subscription-based, online marketplace services that enable commercial property owners, landlords and real estate agents working on their behalf to advertise properties for sale or for lease and to submit detailed information about property listings. Commercial real estate agents, buyers and tenants use the LoopNet network of online marketplace services to search for available property listings that meet their criteria. LoopNet's revenue growth rate for the nine months ended September 30, 2023 accelerated compared to the revenue growth rate for the nine months ended September 30, 2022 due to an increase in the average price per listing. We expect LoopNet's revenue growth rate for the year ended December 31, 2023 to accelerate compared to the revenue growth rate for the year ended December 31, 2022 due to an increase in the average price per listing.

Residential

The acquisitions of Homes.com and Homesnap enabled us to expand our offerings to the residential for sale market. Homes.com is a homes for sale listings site. Homesnap is an online and mobile software platform that provides residential real estate professionals access to applications that manage residential real estate agent workflow and marketing campaigns delivered on third-party platforms. Homesnap also receives transaction-based revenue for short-term advertising delivered on third-party platforms. Residential's revenues for the nine months ended September 30, 2023 decreased compared to the nine months ended September 30, 2022 due to the discontinuation of certain products and services that were inconsistent with our

long-term business strategy, partially offset by increased sales of Homesnap products and services. We expect Residential's revenues for the year ended December 31, 2023 to decrease compared to the year ended December 31, 2022 due to the discontinuation of certain non-strategic products and services.

Other Marketplaces

Our other marketplaces include Ten-X, an online auction platform for commercial real estate, our BizBuySell network of sites and our Land.com network of sites. The BizBuySell network provides online marketplaces for businesses and franchises for sale, and our Land.com Network provides online marketplaces for rural lands for sale. Other Marketplaces' revenues for the nine months ended September 30, 2023 decreased compared to the nine months ended September 30, 2022 due to lower Ten-X transaction revenue, partially offset by growth in other products. We expect other marketplaces revenue for the year ended December 31, 2023 to decrease compared to the year ended December 31, 2022, due to lower expected Ten-X transaction revenue, partially offset by growth in other products.

Subscription-based Services

The majority of our revenue is generated from service offerings that are distributed to our clients under subscription-based agreements that typically renew automatically and have a term of at least one year. We recognize subscription revenues on a straight-line basis over the life of the contract.

For the three months ended September 30, 2023 and 2022, our annualized net new bookings of subscription-based services on all contracts were $65 million and $76 million, respectively. Net new bookings is calculated based on the annualized amount of change in our sales bookings resulting from new subscription-based contracts, changes to existing subscription-based contracts and cancellations of subscription-based contracts for the period reported. Net new bookings is calculated on all subscription-based contracts without regard to contract term. Net new bookings is considered an operating metric that is an indicator of future subscription revenue growth and is also used as a metric of sales force productivity by us and investors. However, information regarding net new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. Revenues from our subscription-based contracts were approximately 95% and 92% of total revenues for the three months ended September 30, 2023 and 2022, respectively. The increase was due to increased sales in our multifamily subscription products.

For the trailing twelve months ended September 30, 2023 and 2022, our contract renewal rates for existing company-wide CoStar Group subscription-based services for contracts with a term of at least one year were approximately 90% and 91%, respectively, and, therefore, our cancellation rates for those services for the same periods were approximately 10% and 9%, respectively. Contract renewal rates are calculated on all subscription-based contracts with a term of at least one year. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, we believe that the rate may be a reliable indicator of short-term and long-term performance absent extraordinary circumstances. Our trailing twelve-month contract renewal rate may decline as a result of negative economic conditions, consolidations among our clients, reductions in customer spending or decreases in our customer base. Revenues from our subscription-based contracts with a term of at least one year were approximately 81% and 79% of total revenues for the trailing twelve months ended September 30, 2023 and 2022, respectively. The increase was primarily due to increased sales of CoStar and multifamily subscription products.

Development, Investments and Expansion

We plan to continue to invest in our business and our services, evaluate strategic growth opportunities and pursue our key priorities as described below. We are committed to supporting, improving and enhancing our information, analytics and online marketplace solutions, including expanding and improving our offerings for our client base and site users, including property owners, property managers, buyers, commercial tenants and residential renters and buyers. We expect to continue our software development efforts to improve existing services, introduce new services, integrate and cross-sell services, integrate recently completed acquisitions and expand and develop supporting technologies for our research, sales and marketing organizations. We may reevaluate our priorities as economic conditions continue to evolve.

Our key priorities for the remainder of 2023 currently include:

Continuing to develop and invest in residential marketplaces in both the U.S. and the U.K. In the U.S., our residential strategy involves creating new and improved tools for residential agents and brokers and to help homebuyers find a new home and connect with the agents of their choosing. We plan to increase our residential marketing investment over the course of the year to build traffic Homes.com. In October 2023, we have made an offer to purchase OnTheMarket which is the operator of the onthemarket.com, a leading U.K. residential property portal.
Continuing to invest in our LoopNet marketplace and international business. We plan to invest in additional sales capabilities and increase marketing investment to accelerate revenue growth in LoopNet. This includes further expansion of our LoopNet brand across Europe.
Continuing to invest in CoStar, including:

◦Enhancing benchmarking capabilities. We continue to integrate the STR products into our core platform. We have launched our STR benchmarking product in CoStar. This product combines the legacy STAR report with enhanced tools to allow users to perform ad hoc analysis and perform additional research with CoStar's data capabilities. We plan to continue transitioning customers from legacy STR products to the CoStar-based product.

◦Enhancing analytics capabilities. We are adding information on commercial property investment funds and linking property data to allow fund investors to perform detailed analysis on their property portfolios directly in the CoStar platform and have launched an enhancement to our Tenant products which allows users to query individual tenant occupiers to see aggregate rented locations, types of buildings occupied, building details, financial information for the tenet and credit risk.

We expect our investment in these priorities, and the full-year impact realized in 2023 from an increase in our sales force which occurred primarily in the second half of 2022, will increase our selling and marketing expense and reduce our income from operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. We intend to continue to assess the need for additional investments in our business to develop and distribute new services and functionality within our current platform or expand the reach of, or otherwise improve, our current service offerings. Any future product development or expansion of services, combination and coordination of services or elimination of services or corporate expansion, development or restructuring efforts could reduce our profitability and increase our capital expenditures. Any new investments, changes to our service offerings or other unforeseen events could cause us to experience reduced revenues or generate losses and negative cash flow from operations in the future. Any development efforts must comply with our credit facility, which contains restrictive covenants that restrict our operations and use of our cash flow and may prevent us from taking certain actions that we believe could increase our profitability or otherwise enhance our business.

Impacts of Current Economic Conditions

In response to concerns over inflation risk, the U.S. Federal Reserve has raised its target for interest rates rapidly with the target Federal Funds rate increased to 5.50% on July 26, 2023. The Federal Open Market Committee signaled that the federal reserve will maintain a sufficiently restrictive monetary policy in order to return to a modest inflation rate over time. Further, office vacancy rates remain elevated compared to pre-pandemic levels. These factors have contributed to a downturn in the commercial real estate markets with lower transaction volumes and reduced prices for certain asset classes. This downturn has resulted in an increase in the Company's credit loss expense for the nine months ended September 30, 2023 and a reduction in the expected revenue growth rate for CoStar and reduced transaction revenue in our Ten-X business for the full year of 2023 compared to the full year of 2022 as discussed in Management's Discussion and Analysis in Part I of this Report.

If there is a protracted continuation or further deterioration of these macroeconomic conditions, there could be a further downturn in the commercial real estate market that may materially adversely affect our core customer base. This could impact our customers’ ability to subscribe and pay for our services and reduce demand for our services. Reduced demand and increased cancellations could cause our revenues or our revenue growth rates to decline and reduce our profitability. Customers' inability to pay for existing services could further increase our credit loss expense.

Non-GAAP Financial Measures

We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. We also disclose and discuss certain non-GAAP financial measures in our public releases, investor conference calls and filings with the SEC. The non-GAAP financial measures that we may disclose include EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share. We typically disclose EBITDA on a consolidated and an operating segment basis in our earnings releases, investor conference calls and filings with the SEC. Adjusted EBITDA is different from EBITDA because we further adjust EBITDA for stock-based compensation expense, acquisition- and integration-related costs, restructuring costs and settlements and impairments incurred outside our ordinary course of business. Adjusted EBITDA margin represents adjusted EBITDA divided by revenues for the period. Non-GAAP net income is determined by adjusting our net income for stock-based compensation expense, acquisition- and integration-related costs, restructuring costs, settlement and impairment costs incurred outside our ordinary course of business and loss on debt extinguishment, as well as amortization of acquired intangible assets and other related costs, and then subtracting an assumed

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

We may disclose adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share on a consolidated basis in our earnings releases, investor conference calls and filings with the SEC. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors meaningfully evaluate and compare our results of operations to our previously reported results of operations or to those of other companies in our industry.

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

EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share may be used by management to internally measure our operating and management performance and may be used by investors as supplemental financial measures to evaluate the performance of our business. We believe that these non-GAAP measures, when viewed with our GAAP results and accompanying reconciliations, provide additional information to investors that is useful to understand the factors and trends affecting our business without the impact of certain acquisition-related items. We have spent more than 30 years building our database of commercial real estate information and expanding our markets and services partially through acquisitions of complementary businesses. Due to these acquisitions, our net income has included significant charges for amortization of acquired intangible assets, depreciation and other amortization, acquisition- and integration-related costs, restructuring costs and loss on debt extinguishment. Adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income and non-GAAP net income per diluted share exclude these charges and provide meaningful information about the operating performance of our business, apart from charges for amortization of acquired intangible assets, depreciation and other amortization; acquisition- and integration-related costs; restructuring costs and settlement and impairment costs incurred outside our ordinary course of business. We believe the disclosure of non-GAAP measures can help investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year without the impact of these items. We also believe the non-GAAP measures we disclose are measures of our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest income or expense, net, other income or expense, net, income taxes, stock-based compensation expenses, acquisition- and integration-related costs, restructuring costs, loss on debt extinguishment and settlement and impairment costs incurred outside our ordinary course of business, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on EBITDA and may rely on adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income or non-GAAP net income per diluted share to provide a financial measure by which to compare our operating performance against that of other companies in our industry.

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

Amortization of acquired intangible assets in cost of revenues may be useful for investors to consider because it represents the diminishing value of any acquired trade names and other intangible assets and the use of our acquired technology, which is one of the sources of information for our database of commercial real estate information. We do

not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

Amortization of acquired intangible assets in operating expenses may be useful for investors to consider because it represents the estimated attrition of our acquired customer base. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
Depreciation and other amortization may be useful for investors to consider because they generally represent the wear and tear on our property and equipment used in our operations. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
The amount of interest income or expense, net and other income or expense, net, we generate and incur may be useful for investors to consider and may result in current cash inflows and outflows. However, we do not consider the amount of interest income or expense, net, and other income or expense, net, to be a representative component of the day-to-day operating performance of our business.
Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes during the period and may reduce the amount of funds otherwise available for use in our business. However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business.
The amount of loss on our debt extinguishment may be useful for investors to consider because it generally represents losses from the early extinguishment of debt. However, we do not consider the amount of the loss on debt extinguishment to be a representative component of the day-to-day operating performance of our business.

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

Stock-based compensation expense may be useful for investors to consider because it represents a portion of the compensation of our employees and executives. Determining the fair value of the stock-based instruments involves a high degree of judgment and estimation and the expenses recorded may bear little resemblance to the actual value realized upon the future exercise or termination of the related stock-based awards. Therefore, we believe it is useful to exclude stock-based compensation in order to better understand the long-term performance of our core business.
The amount of acquisition- and integration-related costs incurred may be useful for investors to consider because such costs generally represent professional service fees and direct expenses related to acquisitions. Because we do not acquire businesses on a predictable cycle, we do not consider the amount of acquisition- and integration-related costs to be a representative component of the day-to-day operating performance of our business.
The amount of settlement and impairment costs incurred outside of our ordinary course of business may be useful for investors to consider because they generally represent gains or losses from the settlement of litigation matters or impairments on acquired intangible assets. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
The amount of restructuring costs incurred may be useful for investors to consider because they generally represent costs incurred in connection with a change in a contract or a change in the makeup of our properties or personnel. Because we do not carry out restructuring activities on a predictable cycle, we do not consider the amount of restructuring-related costs to be a representative component of the day-to-day operating performance of our business.

The financial items that have been excluded from our net income to calculate non-GAAP net income and non-GAAP net income per diluted share are amortization of acquired intangible assets and other related costs, stock-based compensation, acquisition- and integration-related costs, restructuring and related costs and settlement and impairment costs incurred outside our ordinary course of business. These items are discussed above with respect to the calculation of adjusted EBITDA together with the material limitations associated with using this non-GAAP financial measure as compared to net income. In addition to these exclusions from net income, we subtract an assumed provision for income taxes to calculate non-GAAP net income. In both 2023 and 2022, we assumed a 26% tax rate, which approximates our historical long-term statutory corporate tax rate, excluding the impact of discrete items.

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

See Note 13 of the Notes to Condensed Consolidated Financial Statements included in Part I of this Report for the reconciliation of our net income to our EBITDA.

Results of Operations

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The following table compares our selected consolidated results of operations for the three months ended September 30, 2023 and 2022 (in thousands, except percentages):


	Three Months Ended September 30,
	2023		2022		Increase (Decrease) ($)		Increase (Decrease) (%)
Revenues:
CoStar	$	233,360	$	212,690	$	20,670	10	%
Information Services	44,636		41,013		3,623		9
Multifamily	235,343		189,536		45,807		24
LoopNet	67,481		58,901		8,580		15
Residential	10,293		19,351		(9,058)		(47)
Other Marketplaces	33,556		35,430		(1,874)		(5)
Total revenues	624,669		556,921		67,748		12
Cost of revenues	123,666		108,364		15,302		14
Gross profit	501,003		448,557		52,446		12
Operating expenses:
Selling and marketing (excluding customer base amortization)	266,893		185,395		81,498		44
Software development	67,891		56,912		10,979		19
General and administrative	94,371		91,270		3,101		3
Customer base amortization	10,254		29,651		(19,397)		(65)
Total operating expenses	439,409		363,228		76,181		21
Income from operations	61,594		85,329		(23,735)		(28)
Interest income, net	58,422		10,656		47,766		448
Other income, net	465		1,389		(924)		(67)
Income before income taxes	120,481		97,374		23,107		24
Income tax expense	29,907		25,084		4,823		19
Net income	$	90,574	$	72,290	$	18,284	25

Revenues. Revenues increased $68 million, or 12%, to $625 million. The increase in our revenues included:

an increase in Multifamily revenues of $46 million, or 24%, due to higher sales volume driven by an increase in the number of properties listed on our network and increases in pricing on renewals,
an increase in CoStar revenues of $21 million, or 10%, due to higher sales volume driven by the impact of annual price increases and customer upgrades on contract renewals, as well as an increase in subscribers,
an increase in LoopNet revenues of $9 million, or 15%, due to an increase in the average price for listings,
an increase in Information Services revenues of $4 million, or 9%, primarily attributable to an increase of $3 million in STR sales and an increase of $1 million in CoStar Real Estate Manager revenues,
a decrease in Residential revenues of $9 million, or 47%, due to the discontinuation of certain products and services that were inconsistent with our long-term business strategy and
a decrease in Other Marketplaces revenues of $2 million, or 5%, driven by lower property volumes auctioned on Ten-X, partially offset by increases in revenue of Land.com.

Gross Profit. Gross profit increased $52 million, or 12%, to $501 million, and the gross profit margin decreased from 81% to 80%. The increase in gross profit was due to higher revenues partially offset by an increase in cost of revenues. Cost of revenues increased $15 million, or 14%, to $124 million and, as a percentage of revenues, increased from 19% to 20%. The increase in cost of revenues included:

an increase in personnel costs of $10 million related to rising headcount to support our residential research efforts, and increases in salaries and benefits costs for our existing employees,
an increase of $5 million in technology costs to host our database and products,
an increase of $3 million in equipment costs to support our research efforts and
a decrease of $4 million in expenses related to advertising purchased on behalf of customers.

Selling and Marketing Expenses. Selling and marketing expenses increased $81 million, or 44%, to $267 million and, as a percentage of revenues, increased from 33% to 43%. The increase included:

an increase in marketing expenses of $68 million for advertising our brands,
an increase in personnel costs of $14 million related to rising headcount in our sales force and increases in salaries, stock-based compensation and benefits costs for our existing employees and
an increase in occupancy costs of $1 million related to the expansion of our sales force.

Software Development Expenses. Software development expenses increased $11 million, or 19%, to $68 million and, as a percentage of revenues, increased from 10% to 11%. The increase was due to higher personnel costs of $10 million related to increases in salaries, stock-based compensation and benefits costs for our existing employees.

General and Administrative Expenses. General and administrative expenses increased $3 million, or 3%, to $94 million and, as a percentage of revenues, decreased from 16% to 15%. The increase included:

an increase of $5 million in credit loss expense primarily due to our expectations that the downturn in the commercial real estate market will increase delinquent trade receivables,
an increase in personnel costs of $1 million related to increases in salaries and benefits costs for our existing employees and rising headcount and
a decrease of $1 million in software and equipment costs.

Customer Base Amortization Expense. Customer base amortization expense decreased $19 million, or 65%, to $10 million and, as a percentage of revenues, decreased from 5% to 2%. The decrease was primarily attributable to acceleration of amortization of $16 million related to eliminating certain usage fees for agent access to the Homesnap product, as well as a reduction in amortization expense related to customer base assets acquired in the acquisitions of LoopNet, ForRent and Ten-X, which have been amortizing on an accelerated basis since the respective acquisitions.

Interest Income, net. Interest income, net increased $48 million, or 448%, to $58 million. The increase was primarily due to an increase in interest earned on our cash equivalents.

Other Income, net. Other income, net, was insignificant for the three months ended September 30, 2023 and 2022.

Income Tax Expense. Income tax expense increased $5 million, or 19%, to $30 million and the effective tax rate decreased 1% to 25% of income before income taxes. The increase in income tax expense was primarily attributable to additional income before income taxes.

Business Segment Results for Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

We manage our business geographically in two operating segments, with our 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 EBITDA. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of our operating segments. EBITDA is used by management to internally measure our operating and management performance and to evaluate the performance of our 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. See “Non-GAAP Financial Measures” for further information regarding our segment operating results.

Segment Revenues. North America revenues increased $65 million, or 12%, to $603 million and included:

an increase in Multifamily revenues of $46 million due to higher sales volume driven by an increase in the number of properties listed on our network and increases in pricing on renewals,
an increase in CoStar revenues of $20 million due to higher sales volume driven by the impact of annual price increases and customer upgrades on contract renewals, as well as an increase in subscribers,
an increase in LoopNet revenues of $8 million due to an increase in the average price for listings,
an increase in Information Services revenues of $3 million primarily attributable to an increase in sales of CoStar Real Estate Manager and STR,
a decrease in Residential revenues of $9 million due to the discontinuation of certain products and services that were inconsistent with our long-term business strategy and
a decrease in Other Marketplaces revenues of $2 million driven by lower property volumes auctioned on Ten-X, partially offset by increases in revenue of Land.com.

The $3 million, or 14%, increase in International revenues was primarily attributable to an increase in STR sales, as well as CoStar sales.

Segment EBITDA. North America EBITDA decreased $39 million, or 31%, to $89 million. The decrease in North America EBITDA was primarily due to increases in personnel costs, marketing costs, credit loss expense and occupancy costs partially offset by increases in revenues described above. International EBITDA decreased $1 million, or 116%, to a negligible amount. The decrease was due to an increase in personnel costs, partially offset by an increase in revenues described above.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The following table provides a comparison of our selected consolidated results of operations for the nine months ended September 30, 2023 and 2022 (in thousands):


	Nine Months Ended September 30,
	2023		2022		Increase (Decrease) ($)		Increase (Decrease) (%)
Revenues:
CoStar	$	687,542	$	617,905	$	69,637	11	%
Information Services	128,186		116,730		11,456		10
Multifamily	670,331		547,372		122,959		22
LoopNet	196,281		169,645		26,636		16
Residential	36,154		57,565		(21,411)		(37)
Other Marketplaces	96,447		99,837		(3,390)		(3)
Total revenues	1,814,941		1,609,054		205,887		13
Cost of revenues	355,224		304,814		50,410		17
Gross profit	1,459,717		1,304,240		155,477		12
Operating expenses:
Selling and marketing (excluding customer base amortization)	743,153		510,736		232,417		46
Software development	197,850		162,520		35,330		22
General and administrative	274,442		246,576		27,866		11
Customer base amortization	31,311		60,621		(29,310)		(48)
Total operating expenses	1,246,756		980,453		266,303		27
Income from operations	212,961		323,787		(110,826)		(34)
Interest income (expense), net	153,881		(461)		154,342		NM
Other income, net	1,655		3,596		(1,941)		(54)
Income before income taxes	368,497		326,922		41,575		13
Income tax expense	90,272		81,841		8,431		10
Net income	$	278,225	$	245,081	$	33,144	14
__________________________
NM - Not meaningful

Revenues. Revenues increased $206 million, or 13%, to $1.8 billion. The increase in our revenues included:

an increase in Multifamily revenues of $123 million, or 22%, due to higher sales volume driven by increases in pricing on renewals and an increase in the number of properties listed on our network,
an increase in CoStar revenues of $70 million, or 11%, due to higher sales volume driven by the impact of annual price increases and customer upgrades on contract renewals, as well as an increase in subscribers,
an increase in LoopNet revenues of $27 million, or 16%, due to an increase in the average price for listings,
an increase in Information Services revenues of $11 million, or 10%, primarily attributable to an increase in revenues for STR of $7 million, CoStar Real Estate Manager of $3 million and $3 million of revenue related to the Business Immo Acquisition,
a decrease in Residential revenues of $21 million, or 37%, due to the discontinuation of certain products and services that were inconsistent with our long-term business strategy and
a decrease in Other Marketplaces revenues of $3 million, or 3%,driven by lower property volumes auctioned on Ten-X partially offset by increases in revenue of Land.com.

Gross Profit. Gross profit increased $155 million, or 12%, to $1,460 million, and the gross profit percentage decreased from 81% to 80%. The increase in gross profit was due to higher revenues partially offset by an increase in cost of revenues. Cost of revenues increased $50 million, or 17%, to $355 million and, as a percentage of revenues, increased from 19% to 20%. The increase in cost of revenues included:

an increase in personnel costs of $45 million related to rising headcount to support our residential research efforts, and increases in salaries and benefits costs for our existing employees,
an increase of $12 million in technology costs to host our database and products and
a decrease of $9 million in expenses related to advertising purchased on behalf of customers.

Selling and Marketing Expenses. Selling and marketing expenses increased $232 million, or 46%, to $743 million and, as a percentage of revenues, increased from 32% to 41%. The increase included:

an increase in marketing expenses of $169 million for advertising our brands,
an increase in personnel and events costs of $58 million related to rising headcount in our sales force and increases in salaries, bonus, stock-based compensation and benefits costs for our existing employees and
an increase in occupancy costs of $5 million related to the expansion of our sales force.

Software Development Expenses. Software development expenses increased $35 million, or 22% to $198 million and, as a percentage of revenues, increased from 10% to 11%. The increase included higher personnel costs of $33 million related to rising headcount to support our residential efforts and increases in salaries, bonus, stock-based compensation and benefits costs for our existing employees.

General and Administrative Expenses. General and administrative expenses increased $28 million, or 11%, to $274 million and, as a percentage of revenues, was consistent at 15%. The increase included:

an increase of $12 million in credit loss expense primarily due to our expectations that the downturn in the commercial real estate market will increase delinquent trade receivables,
an increase in personnel costs of $9 million related to increases in salaries, stock-based compensation and benefits costs for our existing employees and rising headcount and
an increase of $7 million in professional service costs due to diligence efforts associated with potential acquisitions and legal fees to defend our intellectual property rights.

Customer Base Amortization Expense. Customer base amortization expense decreased $29 million, or 48%, to $31 million and, as a percentage of revenues, decreased from 4% to 2%. The decrease was primarily attributable to acceleration of amortization of $16 million related to eliminating certain usage fees for agent access to the Homesnap product, as well as a reduction in amortization expense related to customer base assets acquired in the acquisitions of LoopNet, ForRent and Ten-X, which have been amortizing on an accelerated basis since the respective acquisitions.

Interest Income (Expense), net. Interest income, net was $154 million for the nine months ended September 30, 2023, as compared to Interest expense, net which was negligible for the nine months ended September 30, 2022. This change was primarily due to an increase in interest earned on our cash equivalents.

Other Income, net. Other income, net was insignificant for the nine months ended September 30, 2023 and 2022.

Income Tax Expense. Income tax expense increased $8 million, or 10%, to $90 million and the effective tax rate decreased 1% to 24% of income before income taxes. The increase in income tax expense was primarily attributable to additional income before income taxes.

Business Segment Results for Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

the operational performance of our operating segments. EBITDA is used by management to internally measure our operating and management performance and to evaluate the performance of our business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

Segment Revenues. North America revenues increased $198 million, or 13%, to $1.8 billion and included:

an increase in Multifamily revenues of $123 million due to higher sales volume driven by increases in pricing on renewals and an increase in the number of properties listed on our network,
an increase in CoStar revenues of $69 million due to higher sales volume driven by the impact of annual price increases and customer upgrades on contract renewals, as well as an increase in subscribers,
an increase in LoopNet revenues of $25 million due to an increase in the average price for listings,
an increase in Information Services revenues of $6 million primarily attributable to an increase in CoStar Real Estate Manager and STR revenues,
a decrease in Residential revenues of $21 million due to the discontinuation of certain products and services that were inconsistent with our long-term business strategy and
a decrease in Other Marketplaces revenues of $3 million driven by lower property volumes auctioned on Ten-X, partially offset by increases in revenue of Land.com.

The $8 million, or 14%, increase in International revenues was primarily attributable to an increase in STR revenue and the Business Immo Acquisition.

Segment EBITDA. North America EBITDA decreased $132 million, or 31%, to $290 million. The decrease in North America EBITDA was primarily due to increases in personnel costs, marketing costs, technology hosting costs, professional service fees, sales events costs, credit loss expense and occupancy costs partially offset by increases in revenues described above. International EBITDA decreased $4 million, or 69%, to $2 million. The decrease was due to an increase in personnel costs, partially offset by an increase in revenues described above.

Liquidity and Capital Resources

We believe the balance of cash and cash equivalents, which was $5.2 billion as of September 30, 2023, along with cash generated by ongoing operations and continued access to capital markets, will be sufficient to satisfy our cash requirements over the next 12 months and beyond. Other than the construction commitments, purchase obligations and potential acquisition discussed below, our cash requirements have not changed materially from what is described in the 2022 Form 10-K.

Purchase Obligations. Our purchase obligations are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the transaction and have an original term greater than one year. The services acquired under these agreements primarily relate to web hosting, third-party data or listings, sponsorship agreements and software subscriptions. As of September 30, 2023, we had purchase obligations of $270 million, with $100 million payable within 12 months.

Construction Commitments. We are expanding our Richmond, Virginia campus, which is expected to result in a material cash requirement in 2023 and beyond. We broke ground on the expansion in November 2022 and expect construction to be substantially completed in the first half of 2026. We negotiated various tax incentives with the Commonwealth of Virginia and the City of Richmond including the allowance to use market-based income apportionment for income taxes and partial reimbursements of property tax assessments related to the value of the campus expansion. These incentives are conditional upon achieving job creation and capital expenditure targets from 2022 to 2029. Failure to meet these targets could result in a reduction of the value of the tax incentives and repayment of previous tax reductions. The value of the incentives is dependent on our taxable income.

We expect the total cost of construction, net of the estimated value of the tax incentives from 2023 to 2032, to be in the range of $450 – $600 million. We have engaged a project manager, architects and a general contractor on terms that generally require payments as services are provided or construction is performed. As of September 30, 2023, we have paid $73 million and we have committed to spend an additional $488 million as further work is performed under these contracts. We plan to

amend these contracts to include additional commitments as construction progresses. Total cash expenditures for 2023 are expected to be approximately $170 million. We expect to fund the expansion with cash on hand.

Our future capital requirements will depend on many factors, including, among others, our operating results, expansion and integration efforts, and our level of acquisition activity or other strategic transactions. To date, we have grown in part by acquiring other companies, and we expect to continue to make acquisitions.

Potential Acquisition. On October 19, 2023, pursuant to Rule 2.7 of the United Kingdom City Code on Takeovers and Mergers, the Company announced the terms of a recommended offer to acquire all of the issued and to be issued ordinary share capital of OnTheMarket for cash consideration of 110 pence per share or approximately £99 million in total (approximately $120 million at the exchange rate on the date of the announcement). The acquisition will be implemented by means of a court-sanctioned scheme of arrangement under the U.K. Companies Act 2006, and remains subject to customary closing conditions, including approval of OnTheMarket shareholders. OnTheMarket is the operator of onthemarket.com, a leading U.K. residential property portal. The Company expects the transaction to close in the fourth quarter of 2023 and to fund the acquisition with cash on hand.

Cash and cash equivalents increased to approximately $5.2 billion as of September 30, 2023, compared to cash and cash equivalents of approximately $5.0 billion as of December 31, 2022. The increase in cash and cash equivalents for the nine months ended September 30, 2023 was primarily due to cash provided by operating activities of $341 million. This increase was partially offset by $76 million of cash used in investing activities, primarily attributable to purchases of property and equipment, including the purchase of assets related to the expansion of our campus in Richmond, Virginia and cash used in financing activities of $3 million primarily related to repurchases of restricted stock to satisfy tax withholding obligations.

Net cash provided by operating activities for the nine months ended September 30, 2023 was $341 million compared to $294 million for the nine months ended September 30, 2022. The $47 million increase in cash provided by operating activities was primarily due to higher net income excluding non-cash expenses during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Net cash used in investing activities was consistent for the nine months ended September 30, 2023 and 2022.

Net cash used in financing activities for the nine months ended September 30, 2023 was $3 million compared to net cash provided by financing activities of $735 million for the nine months ended September 30, 2022. The change was primarily attributable to the S&P 500 equity raise in the nine months ended September 30, 2022.

Critical Accounting Policies and Estimates

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

Long-lived assets, intangible assets and goodwill;
Income taxes;
Revenue recognition and
Business combinations.

For an in-depth discussion of each of our significant accounting policies, including the related critical accounting estimates and further information regarding estimates and assumptions involved in their application, see the 2022 Form 10-K and Note 2 of the Notes to Condensed Consolidated Financial Statements included in Part I of this Report. During the nine months ended September 30, 2023, there were no material changes to our critical accounting estimates from those described in the 2022 Form 10-K.

Recent Accounting Pronouncements

See Note 2 of the Notes to Condensed Consolidated Financial Statements included in Part I of this Report.

Cautionary Statement Concerning Forward-Looking Statements

We have made forward-looking statements in this Report and will make forward-looking statements in our press releases, investor conference calls, Annual Reports on Form 10-K, other Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the SEC that are subject to risks and uncertainties. Forward-looking statements include information that is not purely historic fact and include, without limitation, statements concerning our financial outlook for 2023 and beyond, our possible or assumed future results of operations generally, and other statements and information regarding assumptions or expectations about our revenues, revenue growth rates, gross margin percentage, net income, net income per share, fully diluted net income per share, EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP net income, non-GAAP net income per diluted share, weighted-average outstanding shares, cash flow from operating activities, operating costs, capital and other expenditures, the impact of current economic conditions on our revenues, revenue growth rates and profitability, key priorities for 2023, trends in customer behavior, legal proceedings and claims, legal costs, effective tax rate, the anticipated benefits of completed or proposed acquisitions, the anticipated timing for integration of completed acquisitions, the anticipated benefits of cross-selling efforts, geographic and product expansion, planned service enhancements, expansion and development of our sales forces, planned sales and marketing activities and investments, the impact or results of sales and marketing initiatives, product integrations, elimination and de-emphasizing of services, investments in residential marketplace services and our residential marketplace strategy, net new bookings, contract renewal rates, use of proceeds from equity and debt offerings, the use of proceeds from any draws under our $750 million credit facility provided by the 2020 Credit Agreement, expectations regarding our compliance with financial and restrictive covenants in the 2020 Credit Agreement, employee relations, management’s plans, goals and objectives for future operations, sources and adequacy of liquidity and growth and markets for our stock. Sections of this Report that contain forward-looking statements include the Condensed Consolidated Financial Statements and related Notes, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” “Controls and Procedures,” “Legal Proceedings” and “Risk Factors.”

Our forward-looking statements are also identified by words such as “hope,” “anticipate,” “may,” “believe,” “expect,” “intend,” “will,” “should,” “plan,” “estimate,” “predict,” “continue” and “potential” or the negative of these terms or other comparable terminology. You should understand that these forward-looking statements are estimates reflecting our judgment, beliefs and expectations, not guarantees of future performance. They are subject to a number of assumptions, risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. The following important factors, in addition to those discussed or referred to under the heading “Risk Factors,” and other unforeseen events or circumstances, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:

our inability to attract and retain new clients;
our inability to successfully develop and introduce new or updated information, analytics and online marketplace services;
our inability to compete successfully against existing or future competitors in attracting advertisers and in general;
competition;
the effects of fluctuations and market cyclicality;
the effects of global economic uncertainties and downturns or a downturn or consolidation in the real estate industry;
our inability to hire qualified persons for, or retain and continue to develop, our sales force, or unproductivity of our sales force;
our inability to retain and attract highly capable management and operating personnel;
the downward pressure that our internal and external investments may place on our operating margins;
our inability in increasing brand awareness;
our inability to maintain or increase internet traffic to our marketplaces;
our inability to attract new advertisers;
our inability to successfully identify, finance, integrate and/or manage costs related to acquisitions;
the effects of cyberattacks and security vulnerabilities, and technical problems or disruptions;
the risks related to a large infrastructure project to build out our campus in Richmond, Virginia;
our inability to generate increased revenues from our current or future geographic expansion plans;
the effects of and uncertainty surrounding the COVID-19 pandemic and its effect on the global economy and the real estate industry;
the risks related to acceptance of credit cards and debit cards and facilitation of other customer payments;
the effects of climate change and other events beyond our control;
the effects related to increased attention to ESG matters;
our inability to obtain and maintain accurate, comprehensive or reliable data;
our ability to enforce or defend our ownership and use of intellectual property;
our inability to successfully halt the operation of websites that aggregate our data, data from other companies or “copycat” websites that may misappropriate our data;
our inability to defend against potential legal liability for collecting, displaying or distributing information;
our inability to obtain or retain listings from real estate brokers, agents, property owners and apartment property managers;
the risks related to international operations;
the effects of foreign currency fluctuations;
the effects of Brexit;
our indebtedness;
the effects of a lowering or withdrawal of the ratings assigned to our debt securities by rating agencies;
the effects of any actual or perceived failure to comply with privacy or data protection laws, regulations or standards;
the effects of changes in tax laws, regulations or fiscal and tax policies;
the effects of third-party claims, litigation, regulatory proceedings or government investigations;
risks related to return on investment;
our ability to maintain or establish relationships with third-party listing providers;
our ability to comply with the rules and compliance requirements of MLSs and
the risk that the methods, including Google Analytics, that we use to measure unique visitors to our portals may overstate the actual number of unique persons who visit our network of mobile applications and websites for a given month or may differ from the methods used by competitors, which may impact the comparability of unique visitors between companies.

Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of, and are based on information available to us on, the date of this Report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to update any such statements or release publicly any revisions to these forward-looking statements to reflect new information or events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.

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