CoStar Group
Annual Report 2014

Plain-text annual report

Connecting information and communities 2014 Annual Report CoStar Group 2014 Annual Report 01 FINANCIAL HIGHLIGHTS IN 2014 • Revenue for 2014 was $576 million. This is an increase of $135 million from 2013. Fourth quarter revenue was $156 million, which is approximately 35% year-over-year growth. • EBITDA for 2014 was $151 million. This is a 61% increase over 2013 and by far the most annual EBITDA we have generated in our history. • Adjusted EBITDA for 2014 was $188 million, an increase of 38% over the full-year of 2013. Margin expansion continued throughout 2014 even while we continued to aggressively invest in the business. We achieved 35% adjusted EBITDA margin in the fourth quarter of 2014. • Our 12-month trailing renewal rate on annual subscription contracts was approximately 92%, and 98% for customers who have been with us for over 5 years. • We added $63 million of annualized net new sales of subscription services in 2014. In the fourth quarter of 2014, net new sales were $17.3 million, the highest in our history. • In 2014, we raised $1.2 billion in the capital markets, to finance the $585 million acquisition of the Apartments.com business and for future potential acquisitions. • We ended the year with approximately $544 million in cash, cash equivalents and long-term investments. 5-Year CAGR: High Margin Incremental Revenue Annual Revenue In millions $600 $500 $400 $300 $200 $100 $0 2010 2011 2012 2013 2014 Annual Adjusted EBITDA In millions $200 $150 $100 $50 $0 2010 2011 2012 2013 2014 26% CAGR 38% CAGR 92% 12-MONTH TRAILING RENEWAL RATE 98% FOR 5 YRS + CUSTOMERS Dear Shareholders, 2014 was an outstanding year for CoStar Group in all aspects of the business. Financially, it was our strongest year ever. Our ability to achieve excellent financial results is a direct result of the commitment to excellence from our entire organization of nearly 3,000 people. These individuals worked together as a team to deliver high quality services with exceptional value for our customers that exceeded our already high expectations. Under our flagship brands CoStar®, LoopNet®, Apartments.com™, Lands of America™ and BizBuySell®, we are providing the commercial real estate community and business professionals with services that deliver better communication, more transparency and increased efficiency. Ultimately, we believe this enables our clients to close more transactions. Most importantly, 2014 was a transformational year, one that we believe positions CoStar Group for significant, profitable growth for many years to come. 02 CoStar Group 2014 Annual Report 03 The Power of Combining Information and Marketing Deeper Penetration with a Larger Sales Force We are the number one provider of mission-critical information, analytics and online marketplaces for the commercial real estate industry. This innovative combination is powerful in many ways. Our innovative approach – combining people and technology – has built an outstanding unparalleled platform that is a valuable resource for all industry participants. In addition to our financial success, I am very proud that this has resulted in CoStar Group being recognized by Forbes as one of the most innovative growth companies in the world in 2014. We ranked 27th for all companies and in the top ten software and service companies. Our marketplaces are an excellent source of potential new clients for our sales force. They also provide new services for us to bring to our existing client bases. With LoopNet, I am very pleased that we have already achieved over $80 million in revenue synergies since the acquisition closed in 2012. Most of these synergies resulted from cross-selling CoStar information and analytics to brokers and owners using LoopNet. We believe the acquisition of Apartments.com in April 2014 will result in similar strong cross-selling opportunities. Data flows between the marketing sites and CoStar information services, and this strengthens both. For example, CoStar has over 1.3 million for sale or for lease listings that have been researched and verified by CoStar’s 1,500 researchers. Occasionally, a new property is entered in LoopNet that is not already in CoStar. We are able to add it to CoStar once it has been reviewed by a CoStar researcher thus strengthening the CoStar information offering. In order to service the needs of the vast market in which we operate, we needed to grow our sales force. At the end of 2013 and again at the time of the acquisition of Apartments.com in April 2014, we significantly increased the size of our field sales force. As a result, we added $63 million of annualized net new sales on annual subscription services in 2014. In the fourth quarter of 2014, we achieved the highest annualized net new sales on annual subscriptions in our history. As these new salespeople gain more experience, we expect increased sales productivity for many years to come. managers and owners. Our recently launched CoStar Market Analytics™ service combines CoStar information and analytics with the forecasting and market analysis services of our CoStar Portfolio Strategy™ business to create a powerful service specifically geared toward the institutional users of CoStar. One notable sales hire in 2014 was Max Linnington who joined us as Executive Vice President, Sales. Max has an outstanding track record of driving revenue growth across broad customer segments and regions. Previously he spent many years as the head of sales for Bloomberg for the Americas. Part of the success of our subscription story lies in the increased penetration into client verticals. We have meaningfully increased the number of sales people dedicated to selling high value products to institutional clients such as banks, institutional investors, large property Total Subscription Revenue In millions $400 $350 $300 $250 $200 $150 $100 2010 2011 2012 2013 2014 04 CoStar Group 2014 Annual Report 05 The Apartments.com Acquisition A Success Story: The LoopNet Integration We closed the Apartments.com acquisition in April 2014 and in less than 12 months, we have created a formidable presence in the expanding $1 billion online apartment marketing business. The new Apartments.com was launched on February 16, 2015 with the consumers experience foremost in mind. For the first time in the online apartment marketing industry, consumers have been given access to high quality data and information on availabilities and communities so that they can choose their new apartment with more knowledge than they have been offered previously. We are committed to providing consumers with an excellent user experience that is unmatched on the Internet in this space. To raise consumer awareness, drive traffic and increase the efficiency of the advertising spend by property managers and owners by delivering higher quality leads, we are investing an incremental $75 million in 2015 for an extensive marketing campaign that features acclaimed actor Jeff Goldblum. We are using a combination of television, radio, outdoor, online, and social media to reach consumers with the largest advertising campaign ever in the apartment industry. We also are supporting Apartments.com with the industry’s largest search engine marketing (SEM) program so that we may capture the dominant share of renters using a search engine like Google, Yahoo! or Bing to start their search. Not only does Apartments.com provide obvious advertising sales potential, we also expect it to be a strong driver of sales of the CoStar information services to multifamily property managers and owners. Essentially, we expect that our clients will use a combination of Apartments.com and CoStar information and analytics to obtain renters, set rents and manage their portfolio of multifamily properties. We believe the sales opportunity for multifamily information, analytics and forecasting is even greater than what we have achieved with LoopNet. Paid listings are up 62% since the acquisition and now represent 52% of all listings on LoopNet, up from 31% of total listings in March 2012. We plan to have all listings on LoopNet as paid listings, and we also have plans to discontinue LoopNet’s Premium Searcher™, Property Comps™ and Property Facts™ offerings over time since we believe that the CoStar information services provide significantly more value for our customers. LoopNet.com is the number one commercial real estate marketplace in the United States and draws by far the most traffic in commercial real estate. In January 2015, we had over 5.8 million monthly unique visitors to the site. This is up 66% from the 3.5 million monthly unique visitors LoopNet.com had just before our acquisition closed. Also, since the close of the acquisition of LoopNet, we grew the number of registered LoopNet.com users by almost 60% from 5.8 million to over 9.3 million. Average monthly profile views increased to 17.4 million in January 2015 representing a gain of 45% over average monthly views in the first quarter of 2012. Financially, the LoopNet acquisition and integration has been extremely successful. Since the close of the acquisition at the end of April 2012, the combination has resulted in $80 million in revenue synergies and over $20 million in cost synergies. On the marketing side, we are also increasing the sales of LoopNet Premium Lister™ to new clients and existing CoStar clients. We are now offering three differentiated advertising levels for advertisers which allow them to increase exposure to this valuable online audience with larger ads and higher placement in relevant searches. We also provide LoopNet Pro Video™ property videos and LoopNet Targeted Advertising™ services for brokers, properties and companies to gain more exposure. LoopNet Paid Listings In thousands 300 250 200 150 100 2011 2012* 2013 2014 *acquisition completed in April 2012 LoopNet Registered Members In millions 10 9 8 7 6 5 4 3 2 1 0 2011 2012* 2013 2014 *acquisition completed in April 2012 07 06 CoStar Group 2014 Annual Report The 2014 Rebrand In 2014, we introduced a brand structure that we believe will accelerate sales growth across our entire family of products. As CoStar Group experienced dramatic growth in recent years, both organically and through acquisitions, the number of brands in our portfolio seemed to grow exponentially. Therefore, we have realigned the CoStar Group brand portfolio in a way that more accurately reflects the many ways we help our customers, providing them with information and insight, and connecting them to the communities they need to move their businesses forward. The new structure also makes it easier for customers to recognize and access opportunities across our portfolio. CoStar Group now serves as the parent brand that plays a strong connective role across our portfolio. We have realigned our businesses under five primary flagships. CoStar serves as the single flagship brand for our information, analytics and software, and we have migrated all other information, analytics and software brands to supportive offerings under the CoStar flagship. For example, Property & Portfolio Research (PPR) has become CoStar Portfolio Strategy; Virtual Premise has become CoStar Real Estate Manager™; REApps is now CoStar Brokerage Applications™ and Resolve is called CoStar Investment Analysis™. These services are already benefitting from closer alignment with the CoStar brand. We plan to invest in LoopNet as the flagship brand for marketing. Apartments.com is our flagship brand for the residential rental space, BizBuySell is our flagship brand in the businesses for sale market, and Lands of America has become the flagship for the rural land market. I should note that these Internet marketplaces play an important role in our move to consolidate brands, as the secondary and tertiary brands we own control valuable shelf space on the Internet and in search traffic results. 09 08 CoStar Group 2014 Annual Report Research Expansion As our product range and the number of communities and verticals we serve increased, so did our research organization. In 2014, we hired nearly 300 researchers to meet the new demands for coverage in the multifamily sector, as well as to support our further expansion in Canada, and to further strengthen our services for owners, lenders and investors. In April 2014, we launched a new regional research hub in Atlanta where many of our multifamily researchers are located. This commitment to strengthening our information provides the foundation for future growth particularly in the CoStar information services. We continue to develop innovative research techniques that enhance the quality and efficiency of our research, while providing outstanding and accessible services to our information clients. International CRE Market We are also seeing a solid acceleration of our brand expansion outside of the United States. After two years of offering CoStar Suite™ and CoStarGo® in the United Kingdom, we have been successfully moving existing clients from legacy services at nearly a 34% increase in price. These customers are clearly seeing the power of CoStar’s integrated and comprehensive platform. As a result, we are now operating profitably in the United Kingdom with strong margins. Trends in the economy and capital markets combined to produce an excellent year for U.S. commercial real estate in 2014. In the United States, commercial real estate sales volume surged to a record high in 2014 in the apartment, industrial and retail sectors, while office sector sales grew by a healthy 16% to near 2006 levels. All four major property sectors benefited from strong net absorption rates, which have supported rent growth of 3% or higher during 2014. We launched CoStar at the beginning of 2014 in Toronto, Canada. It has been the fastest uptake by customers in a newly launched market in the history of our company. Demand is so strong that we expect to expand into five additional cities in Canada. The key trends that supported strong commercial real estate performance in 2014 are likely to remain for several years. 2015 and Beyond I am very excited about the prospects for CoStar Group in 2015 and beyond. We believe that our strategic moves through 2014 have positioned us for an excellent period of growth for many years to come. We continue to believe that we are on our way to reaching our goal of $1 billion in revenue with a 40% margin as we exit 2018. Overall, I am very pleased with our progress and we continue to position CoStar Group for robust future growth while delivering strong top line growth at high margins. This comes with a high commitment to innovation and investment to grow and move the business forward. Andrew C. Florance Founder & Chief Executive Officer CoStar Group, Inc. 11 10 CoStar Group 2014 Annual Report COSTAR INFORMATION SERVICES “ Information like ours doesn’t exist anywhere else, which makes it extremely valuable to our clients. We are making the CRE asset class more transparent, which we believe will in turn attract more players to it and increase its overall value.” Frank Carchedi, Executive Vice President, Operations Content is key to providing the foundation for our unique comprehensive platform of services to the industry. We have demonstrated that the way to obtain unmatched information is by continuing to build and facilitate the communication network within the commercial real estate community. To do so, we are relentlessly combining innovative research techniques and the largest, most experienced group of research professionals in the industry with an unwavering commitment to client service. Our research team of approximately 1,500 people is in contact with tens of thousands of commercial real estate professionals every day, and our field researchers canvass commercial real estate all over North America and the United Kingdom, to constantly add to this wealth of knowledge. $1 BILLION INVESTED IN RESEARCH TO DATE 13 12 CoStar Group 2014 Annual Report MARKETPLACES “ We are changing the way marketplaces deliver value. By aggregating the most comprehensive availability information, we are creating transparency, which means more efficiency and the reduction of friction in our entire network of marketplaces.” Fred Saint, President of LoopNet Our content advantage in each of our sectors drives more searchers to our websites and thus more value to all of our marketplaces. For example, on Apartments.com, by providing renters with real-time availabilities, actual rents and vast amounts of valuable information, we are able to deliver better informed, higher quality leads to owners and property managers. Likewise, our massive commercial real estate content drives a tremendous amount of traffic to LoopNet. This traffic results in properties leasing and selling significantly faster when marketed with our LoopNet Premium Lister service. LoopNet Average Monthly Unique Visitors In millions 6 5 4 3 2 1 0 2011 2012* 2013 2014 *acquisition completed in April 2012 LoopNet The number one website by traffic in commercial real estate by far is LoopNet.com. With over 5.8 million unique visitors and 9.3 million registered users in January 2015, LoopNet is the marketplace where owners and brokers list their properties for sale or for lease. Marketing these properties on LoopNet attracts interested people such as potential tenants, small investors, real estate managers at corporations and many more. Apartments.com For the property manager and owner, we are committed to driving more traffic and delivering high quality leads that we expect will lead to more leases being signed. We have invested the most money in the industry in search engine marketing and are building the brand with an extensive advertising and marketing campaign that is the largest ever committed in the apartment space. In addition to the premium marketing services we offer, we believe the multifamily sector will also benefit from our deep, granular information and analytics, so property managers and owners can effectively price the leases in their communities to stay ahead of market trends. Land And Business Marketplaces We also offer the leading land and small business marketplaces in the United States. Lands of America and LandAndFarm™ combined generate the most traffic in the aggregate in land marketing. BizBuySell is number one in traffic for small businesses. 15 14 CoStar Group 2014 Annual Report TECHNOLOGY “ In 2014, we were able to transfer our online expertise to the apartments community by building a marketplace that is transforming the industry for the better. We are in a unique position now, where our software solutions can benefit multiple verticals simultaneously.” Frank Simuro, Chief Technology Officer Through constantly evolving software and technology solutions, we provide the back-end architecture that brings CoStar Group’s data and analytics and our marketplaces to life for each of the customer verticals we service. Recently, we have developed incredibly powerful tools and services such as CoStar Lease Analysis™, CoStar Market Analytics™ and CoStar Lease Comps™ that make the CoStar platform even more valuable to our users. Our mobile platforms for Android and iOS applications provide access for our clients wherever, whenever they are. 17 16 CoStar Group 2014 Annual Report SALES “There is a tremendous opportunity in front of us to bring CoStar Group services to more customer verticals in commercial real estate. We are excited to deliver an increasingly strong suite of CoStar services and marketplaces.” Max Linnington, Executive Vice President, Sales Broadening Demand: 2014 % CoStar Annual Revenue In the past 15 months, we have aggressively increased the number of field sales people at CoStar and Apartments.com and added a robust layer of sales management to expand our reach and drive topline sales. We expect that our marketing investment to raise awareness for Apartments.com will not only drive renters to our website but also inform property managers and owners that Apartments.com is committed to generating higher quality leads for them. Most importantly, the new website is expected to accelerate the cross-sell of CoStar information and analytics to these customers. Brokers Property Management Institutional Investors Owners Lender Appraisers Vendors, Governments, Consultants, Education, etc. 19 18 CoStar Group 2014 Annual Report INTERNATIONAL “ Our ability to successfully export the CoStar brand and business model to markets outside of the United States makes us more important to our international clients. We expect this will eventually unlock tremendous revenue and margin opportunities for many years to come.” Giles Newman, Managing Director, CoStar U.K. Ltd. We have demonstrated that the CoStar core services can be successfully sold outside the United States. CoStar Suite and CoStarGo have been very well received in the United Kingdom, and since their launch in early 2013 nearly one thousand firms have adopted the new solution, making it the fastest growing platform of its kind in the country. We have now moved to operating profitably in the United Kingdom with strong margins that we expect will increase over time. IN 2014, THE U.K. MOVED TO PROFITABILITY CoStar Suite Demand Growth: United Kingdom In millions £2.0 £1.5 £1.0 £0.5 £0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2014 21 20 CoStar Group 2014 Annual Report PEOPLE “ In a world increasingly driven by technology, what makes CoStar Group absolutely unique is our people. Commercial real estate is a relationship-based business. Our goal is to hire and develop talent that is intelligent, excels at relationship building and is passionate about what they do.” Donna Tanenbaum, Vice President, Human Resources PEOPLE ARE THE FOUNDATION OF OUR SUCCESS Our nearly 3,000 people are an extremely active and integral part of the commercial real estate community. Our researchers have built and continue to grow the biggest and highest quality commercial real estate database in the world. Our world-class team of developers and designers build incredible software technology that translates data into incredibly valuable information and analytics. Our people have built massively popular marketplaces for anyone interested in office, industrial, retail, multifamily, land and small businesses. Our sales force delivers amazing services to individuals who rely on them to manage and grow their business. Through all these interactions we enable the CRE community to operate with more transparency and greater efficiency. 23 22 CoStar Group 2014 Annual Report FINANCE “ CoStar has an excellent financial track record with a proven business model that generates strong and consistent cash flow.” Brian Radecki, Chief Financial Officer 2014 was an excellent year financially for CoStar Group. Revenue grew 31% year-over-year to $576 million. We generated the highest annual EBITDA in our history and adjusted EBITDA margin was 35% in the fourth quarter of 2014. Our financial credentials have historically provided for investment in organic growth and a long series of successful acquisitions. We expect this to continue. Our strong financial results also allow us to access the capital markets efficiently and at very favorable rates to finance strategic acquisitions. In 2014, we raised both debt and equity capital totaling $1.2 billion. We financed the $585 million Apartments.com acquisition with cash and debt at an extremely favorable interest rate. IN 2014, WE RAISED $1.2 BILLION IN DEBT AND EQUITY 24 CoStar Group 2014 Annual Report FINANCIAL HIGHLIGHTS Operations In thousands, except in share data Revenues Net Income 2010 2011 2012 2013 2014 $226,260 $251,738 $349,936 $440,943 $575,936 $13,289 $14,656 $9,915 $29,734 $44,869 Net Income per share-diluted $0.64 $0.62 $0.37 $1.05 $1.46 Weighted average outstanding shares-diluted 20,707 23,527 26,949 28,212 30,641 Balance sheet In thousands, except in share data 2010 2011 2012 2013 2014 Cash, cash equivalents and investments $239,316 $573,379 $177,726 $277,943 $544,163 Total Assets Stockholders’ equity $439,648 $771,035 $1,165,139 $1,256,982 $2,083,682 $381,502 $659,177 $826,343 $927,862 $1,513,546 Reconciliation of quarterly EBITDA with 2013-2014 quarterly net income In millions Net Income Purchase amortization Depreciation and other amortization Interest income Interest expense Income tax expense (benefit), net EBITDA 2013 Q2 Q1 Q3 Q4 $(2.4) $8.3 $11.1 $12.8 7.1 3.0 6.9 3.1 6.6 3.4 6.4 3.4 2014 Q2 Q3 Q4 $8.2 $13.0 $13.9 17.0 3.7 16.1 4.1 15.5 4.2 Q1 $9.7 6.2 3.7 (0.1) (0.1) (0.0) (0.1) (0.1) (0.1) (0.0) (0.3) 1.8 (1.8) $7.6 1.8 5.3 1.7 7.0 1.7 7.3 1.6 5.9 3.8 5.0 2.7 7.8 2.4 7.3 $25.3 $29.8 $31.5 $27.0 $37.6 $43.7 $43.0 Quarterly EBITDA In millions Five Year Revenue Growth In millions $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 $600 $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 2013 2014 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 Commission file number 0-24531 CoStar Group, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 52-2091509 (I.R.S. Employer Identification No.) 1331 L Street, NW, Washington, DC 20005 (Address of principal executive offices) (zip code) (202) 346-6500 (Registrant’s telephone number, including area code) (877) 739-0486 (Registrant’s facsimile number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $.01 par value Name of Each Exchange on Which Registered NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. Large accelerated filer Non-accelerated filer Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Based on the closing price of the common stock on June 30, 2014 on the Nasdaq Stock Market, Nasdaq Global Select Market, the aggregate market value of registrant’s common stock held by non-affiliates of the registrant was approximately $4.9 billion. As of February 20, 2015, there were 32,311,866 shares of the registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2014, are incorporated by reference into Part III of this Report. 2 TABLE OF CONTENTS PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. Properties Legal Proceedings Mine Safety Disclosures PART II Item 5. Item 6. Item 7. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Consolidated Financial and Operating Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk Item 8. Item 9. Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules Signatures Index to Exhibits Index to Consolidated Financial Statements 4 18 31 31 32 32 33 35 36 54 55 55 55 56 57 57 57 57 57 58 59 61 F-1 3 Item 1. Business PART I In this report, the words “we,” “our,” “us,” “CoStar” or the “Company” refer to CoStar Group, Inc. and its direct and indirect wholly owned subsidiaries. This report also refers to our websites, but information contained on those sites is not part of this report. CoStar Group, Inc., a Delaware corporation, founded in 1987, is the number one provider of information, analytics and online marketplaces to the commercial real estate industry in the United States (“U.S.”) and United Kingdom (“U.K.”) based on the fact that we offer the most comprehensive commercial real estate database available; have the largest research department in the industry; own and operate the leading online marketplaces for commercial real estate in the U.S. based on the number of unique visitors per month; provide more information, analytics and marketing services than any of our competitors and believe that we generate more revenues than any of our competitors. We created and compiled our standardized platform of information, analytics and online marketplace services where members of the commercial real estate and related business community can continuously interact and facilitate transactions by efficiently exchanging accurate and standardized commercial real estate information. Our service offerings span all commercial property types, including office, retail, industrial, multifamily, commercial land, mixed-use properties and hospitality. 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 includes the U.K. and France. Strategy Since our founding, our strategy has been to provide commercial real estate professionals with critical knowledge to explore and complete transactions by offering the most comprehensive, timely and standardized information on U.S. commercial real estate. As we have grown and further developed our plans, we have expanded our services for commercial real estate information, analytics and online marketplaces in an effort to continue to meet the needs of this industry as it grows and evolves. We have also extended our offering of comprehensive commercial real estate information to include London and other parts of the U.K., Toronto, Canada, and parts of France, through acquisitions and internal growth and development. Information about CoStar’s revenues from, and long-lived assets and total assets located in, foreign countries is included in Notes 2 and 12 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. The revenues; net income before interest, income taxes, depreciation and amortization (“EBITDA”); and total assets and liabilities for each of our segments are set forth in Note 12 to our consolidated financial statements. Information about risks associated with our foreign operations is included in “Item 1A. Risk Factors” and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.” We deliver our commercial real estate content to our U.S. customers primarily via an integrated suite of online service offerings that includes information about space available for lease, comparable sales information, information about properties for sale, tenant information, internet marketing services, analytical capabilities, information for clients’ websites, information about industry professionals and their business relationships, data integration and industry news. We also operate complementary online marketplaces for commercial real estate listings and apartment rentals. LoopNet, our subsidiary, operates an online marketplace that enables commercial property owners, landlords, and real estate agents working on their behalf to list properties for sale or for lease and to submit detailed information about property listings. Commercial real estate agents, buyers and tenants also use LoopNet's online marketplace to search for available property listings that meet their criteria. Apartments, LLC (doing business as Apartments.com), our subsidiary, operates an online apartment marketplace for renters that matches apartment seekers with apartment homes and provides property managers and owners a platform for marketing their properties. Apartments.com draws on CoStar’s multifamily database, which contains detailed information on apartment properties, and a research effort to document the apartment industry in the U.S. CoStar designed the new Apartments.com site, which was launched in February 2015, around the needs of the renter in order to drive traffic to the site and attract advertisers who prefer to advertise on heavily trafficked apartment websites. The newly launched site provides a comprehensive selection of rentals, information on actual rental availabilities and rents, and in-depth data on neighborhoods, including restaurants, nightlife, history, schools and other important facts. To help renters find the information that meets their needs, the new site also offers innovative search tools. 4 We provide market research and analysis for commercial real estate investors and lenders via our CoStar Portfolio Strategy and CoStar Market Analytics service offerings, portfolio and debt analysis, management and reporting capabilities through our CoStar Investment Analysis and CoStar Risk Analytics service offerings; and real estate and lease management solutions, including lease administration and abstraction services, through our CoStar Real Estate Manager service offerings. We have created and are continually improving our standardized platform of information, analytics and online marketplaces where members of the commercial real estate and related business community can continuously interact and facilitate transactions by efficiently exchanging accurate and standardized commercial real estate information. Our standardized platform includes the most comprehensive proprietary database in the industry; the largest research department in the industry; proprietary data collection, information management and quality control systems; a large in-house product development team; a broad suite of web-based information, analytics and online marketplaces; a large team of analysts and economists; and a large base of clients. Our database has been developed and enhanced for more than 27 years by a research department that makes thousands of daily database updates. In addition to our internal efforts to grow the database, we have obtained and assimilated over 90 proprietary databases. We have five flagship brands - CoStar, LoopNet, Apartments.com, BizBuySell and LandsofAmerica. Our subscription-based information services consist primarily of CoStar SuiteTM services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional® and CoStar Tenant® and through our mobile application, CoStarGo®. CoStar Suite is our primary service offering in our North America and International operating segments. Prior to the third quarter of 2014, FOCUSTM was our primary service offering in our International operating segment. We introduced CoStar Suite in the U.K. in the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013. Our subscription-based services consist primarily of similar services offered over the Internet to commercial real estate industry and related professionals. Our services are typically distributed to our clients under subscription-based license agreements that renew automatically, a majority of which have a term of 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 information services rather than charging fees based on actual system usage. Contract rates are generally based on the number of sites, number of users, organization size, the client's business focus, geography and the number and types of services to which a client subscribes. Our subscription clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. Expansion and Growth Acquisitions We have continually expanded the geographical coverage of our existing information services and developed new information, analytics and online marketplace services. In addition to internal growth, we have grown our business through strategic acquisitions. Historically, our expansion includes the acquisitions of Chicago ReSource in Chicago in 1996 and New Market Systems in San Francisco in 1997. In August 1998, we expanded into the Houston region through the acquisition of Houston-based real estate information provider C Data Services. In January 1999, we expanded further into the Midwest and Florida by acquiring LeaseTrend and into Atlanta and Dallas/Fort Worth by acquiring Jamison Research. In February 2000, we acquired COMPS.COM, a San Diego-based provider of commercial real estate information. In November 2000, we acquired First Image Technologies, a California-based provider of commercial real estate software. In September 2002, we expanded further into Portland, Oregon through the acquisition of certain assets of Napier Realty Advisors (doing business as REAL-NET). In January 2003, we established a base in the U.K. with our acquisition of London-based FOCUS Information Limited. In May 2004, we expanded into Tennessee through the acquisition of Peer Market Research, and in June 2004, we extended our coverage of the U.K. through the acquisition of Scottish Property Network. In September 2004, we strengthened our position in Denver, Colorado through the acquisition of substantially all of the assets of RealComp, a local comparable sales information provider. 5 In January 2005, we acquired National Research Bureau, a Connecticut-based provider of U.S. shopping center information. In December 2006, our U.K. subsidiary, CoStar Limited, acquired Grecam S.A.S. (“Grecam”), a provider of commercial property information and market-level surveys, studies and consulting services located in Paris, France. In February 2007, CoStar Limited also acquired Property Investment Exchange Limited (“Propex”), a provider of commercial property information and operator of an electronic platform that facilitates the exchange of investment property located in London, England. In April 2008, we acquired the assets of First CLS (doing business as the Dorey Companies and DoreyPRO), an Atlanta-based provider of local commercial real estate information. In July 2009, we acquired Massachusetts-based CoStar Portfolio Strategy (formerly known as Property and Portfolio Research), a provider of real estate analysis, market forecasts and credit risk analytics to the commercial real estate industry, and its wholly owned U.K. subsidiary Property and Portfolio Research Ltd., and in October 2009, we acquired Massachusetts-based CoStar Investment Analysis (formerly known as Resolve Technology), a provider of business intelligence and portfolio management software serving the institutional real estate investment industry. In October 2011, we acquired CoStar Real Estate Manager (formerly known as Virtual Premise), a Software as a Service, or on-demand software provider of real estate and lease management solutions located in Atlanta, Georgia. In April 2012, we completed the acquisition of LoopNet, an online marketplace that enables property owners, landlords, and commercial real estate agents working on their behalf to list properties for sale or for lease and to submit detailed information about property listings. More recently, on April 1, 2014, we purchased certain assets and assumed certain liabilities related to the Apartments.com business (collectively, the “Apartments.com Business”), a national online apartment rentals resource for renters, property managers and owners, from Classified Ventures, LLC (“CV”). Expansion and Development We expect to continue our software development efforts to improve existing services, introduce new services, integrate products and services, cross-sell existing services, and expand and develop supporting technologies for our research, sales and marketing organizations. We are committed to supporting and improving our information, analytics and online marketplace solutions. In October 2013, we introduced technology enhancements to CoStar Suite, our platform of service offerings consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant. The enhancements improve Costar Suite's user interface, search functionality and analytic capabilities. For example, the CoStar Multifamily® information search feature allows users to access our extensive multifamily property database. In addition, CoStar Lease AnalysisTM, an integrated workflow tool, provides users a simple way to produce understandable cash flows for any proposed or existing lease. We plan to continue our software development efforts to enhance our new Lease Analysis workflow tool and to develop other potential lease comparable services in 2015. In October 2013, we also released CoStarGo® 2.0, the next generation of our mobile application, which was launched in the U.S. on August 15, 2011 and introduced in the U.K. on November 5, 2012. CoStarGo is our iPad application that integrates and provides CoStar Suite subscribers mobile access to our comprehensive property, tenant and comparable sales information. CoStarGo 2.0 adds powerful analytic capabilities to our comprehensive mobile solution. In 2014, we introduced enhancements to our flagship marketing platform, LoopNet.com. For example, we added a targeted advertising service that allows brokers or firms to purchase advertisements based on geographic and property type criteria. Additionally, we introduced ProVideo, a service that enables owners and brokers to enhance their LoopNet listings with high quality videos of interior spaces, amenities and exterior features. In February 2015, as a result of our product development efforts, we launched a new Apartments.com website with a cleaner look, information about actual rental availabilities, rents and other fees, and better search functionality. In conjunction with the launch, we plan to embark on a wide-scale marketing campaign commencing during the first quarter of 2015 and running throughout the remainder of 2015 to generate brand awareness and site traffic for Apartments.com, including an incremental investment of $75.0 million above Apartments.com’s 2014 annualized marketing spend since the close of the acquisition of the Apartments.com Business. The marketing campaign is expected to feature television and radio advertising, online/digital advertising, social media and out-of-home ads and will be reinforced by Search Engine Marketing. We continue to integrate, develop and cross-sell the services offered by the businesses we have acquired, including Apartments.com and LoopNet. We evaluate potential changes to our service offerings from time to time in order to better align the services we offer with customers’ needs. Further, in some cases, when integrating and coordinating our services and assessing industry and client needs, we may decide to combine, shift focus from, de-emphasize, phase out, or eliminate a service that, among other things, overlaps or is redundant with other services we offer. For example, we are currently assessing whether to transition the LoopNet marketplace to a pure marketing site for commercial real estate where, eventually, all listings would be paid and users could search the site for free. 6 To more fully integrate and connect our services and, ultimately, to provide improved access to our resources, we launched a new brand identity in May 2014. The new branding is designed to unite our flagship brands - CoStar, LoopNet, Apartments.com, BizBuySell and LandsofAmerica - with a modern, cohesive look that will enhance customers’ access to the full breadth of our information, analytics and marketplace solutions. The resulting streamlined network of platforms is expected to improve the customer experience and make it easier for customers to find the most useful tools for their commercial real estate information, analytic and marketplace needs. The new brand identity was unveiled in connection with the launch of our new corporate website and newly designed website interfaces for CoStar, LoopNet and Apartments.com. Our new website interfaces provide streamlined navigation and search functions for visitors and enable customers to quickly access our market-leading services. Internationally, we continue to integrate our operations more fully with those in the U.S. Similar to our North America operating segment, we intend to continue to upgrade our international platform of services and expand the coverage of our service offerings within our International segment. To further those initiatives, we introduced CoStar Suite in the U.K. during the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013. CoStar Suite is sold as a consistent international platform of service offerings consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant and through the Company's mobile application, CoStarGo. CoStarGo 2.0 was released in the U.K. in October 2013 simultaneous with its release in the U.S. Additionally, we upgraded our back-end research operations, fulfillment and Customer Relationship Management systems to support these new U.K. services. The financial performance of our International operating segment continues to improve. During the twelve months ended December 31, 2014, International EBITDA increased to a positive amount as a result of increased revenue and decreased operating expenses as compared to the twelve months ended December 31, 2013. See the “Non-GAAP Financial Measures” section included in this Annual Report on Form 10-K for further details on the non-GAAP financial measures. We recently expanded the geographic reach of our North America services. In 2014, we began offering our services in Toronto, Canada. Building on our experience in Toronto, we plan to expand our research into additional Canadian cities. We believe that our integration efforts and continued investments in our services, including expansion of our existing service offerings, have created a platform for long-term revenue growth. We expect these investments to result in further penetration of our subscription- based information services and the successful cross-selling of our services to customers in existing markets. We have invested in the expansion and development of our field sales force to support the growth and expansion of our company in North America and internationally. We plan to continue to invest in, evaluate and strategically position our sales force as the Company continues to develop and grow. We are also investing in our research capacity to support continued growth of our information and analytics offerings, to support the Apartments.com Business and to expand into additional Canadian markets. In support of our continued expansion and development, during June 2014, we completed a public equity offering of 3,450,000 shares of common stock for $160.00 per share, resulting in net proceeds to the Company of approximately $529.4 million. We intend to use the net proceeds from the public equity offering to fund all or a portion of the costs of any strategic acquisitions we decide to pursue in the future, to finance the growth of our business and for working capital and other general corporate purposes. Industry Overview The market for commercial real estate information and analysis is vast based on the variety, volume and value of transactions related to commercial real estate. Each transaction has multiple participants and multiple information requirements, and in order to facilitate transactions, industry participants must have extensive, accurate and current information and analysis. Members of the commercial real estate and related business community require daily access to current data such as space availability, properties for sale, rental units available, rental rates, vacancy rates, tenant movements, sales comparables, supply, new construction, absorption rates and other important market developments to carry out their businesses effectively. Market research (including historical and forecast conditions) and applied analytics have also become instrumental to the success of commercial real estate industry participants operating in the current economic environment. There is a strong need for an efficient marketplace, where commercial real estate professionals can exchange information, evaluate opportunities using standardized data and interpretive analyses, and interact with each other on a continuous basis. 7 A large number of parties involved in the commercial real estate and related business community make use of the services we provide in order to obtain information they need to conduct their businesses, including: • Sales and leasing brokers • Property owners • Property managers • Government agencies • Mortgage-backed security issuers • Appraisers • Design and construction professionals • Pension fund managers • Real estate developers • Reporters • Real estate investment trust managers • Tenant vendors • Investment bankers • Commercial bankers • Mortgage bankers • Mortgage brokers • Retailers • Building services vendors • Communications providers • • • Insurance companies’ managers Institutional advisors Investors and asset managers The commercial real estate and related business community generally has operated in an inefficient marketplace because of the fragmented approach to gathering and exchanging information within the marketplace. Various organizations, including hundreds of brokerage firms, directory publishers and local research companies, collect data on specific markets and develop software to analyze the information they have independently gathered. This highly fragmented methodology has resulted in duplication of effort in the collection and analysis of information, excessive internal cost and the creation of non-standardized data containing varying degrees of accuracy and comprehensiveness, resulting in a formidable information gap. The creation of a standardized information platform for commercial real estate requires an infrastructure including a standardized database, accurate and comprehensive research capabilities, experienced analysts, easy to use technology and intensive participant interaction. By combining our extensive database, approximately 1,481 researchers and outside contractors, our experienced team of analysts and economists, technological expertise and broad customer base, we believe that we have created such a platform. Within the apartment rental community, most apartment websites primarily supply only the listings that property owners pay to advertise and often return results that are inconsistent with the renter's search criteria. These limited results generally do not provide information about the actual rental availabilities. We believe that consumers expect accurate, actionable and comprehensive apartment rental information. To create the new Apartments.com website, we have drawn on our multifamily database and undertaken a research effort collecting and verifying information and visiting and photographing properties. With the launch of the new Apartments.com website, we believe that we have created an easily searchable site with a comprehensive selection of rentals, information on actual rental availabilities and rents, and in-depth data on neighborhoods, including restaurants, nightlife, history, schools and other important facts. CoStar’s Comprehensive Database CoStar has spent more than 27 years building and acquiring a database of commercial real estate information, which includes information on leasing, sales, comparable sales, tenants, and demand statistics, as well as digital images. As of January 30, 2015, our database of real estate information covered the U.S., London, England and other parts of the U.K., and contained information about: • Approximately 1.3 million sale and lease listings; • Approximately 4.5 million total properties; • Approximately 8.2 billion square feet of sale and lease listings; • Approximately 5.8 million tenants; • Approximately 2.3 million sales transactions valued in the aggregate at approximately $5.7 trillion; and • Approximately 16.5 million digital attachments, including building photographs, aerial photographs, plat maps and floor plans. 8 This highly complex database is comprised of hundreds of data fields, tracking such categories as: • Location • Site and zoning information • Mortgage and deed information • For-sale information • Building characteristics • Income and expense histories • Space availability • Tax assessments • Ownership • Tenant names • Lease expirations • Contact information • Sales and lease comparables • Historical trends • Space requirements • Number of retail stores • Demographic information • Retail sales per square foot CoStar Research We have developed a sophisticated data collection organization utilizing a multi-faceted research process. In 2014, our full time researchers and contractors drove millions of miles, conducted hundreds of thousands of on-site building inspections, and conducted millions of interviews of brokers, owners, tenants, apartment community owners and property managers. Research Department. As of January 30, 2015, we had approximately 1,481 commercial real estate research professionals and outside contractors performing research. Our research professionals undergo an extensive training program so that we can maintain consistent research methods and processes throughout our research department. Our researchers collect and analyze commercial real estate information through millions of phone calls, e-mails and internet updates each year, in addition to field inspections, public records review, news monitoring and direct mail. Each researcher is responsible for maintaining the accuracy and reliability of database information. As part of their update process, researchers develop cooperative relationships with industry professionals that allow them to gather useful information. Because of the importance commercial real estate professionals place on our data and our prominent position in the industry, many of these professionals routinely take the initiative and proactively report available space and transactions to our researchers. CoStar has an extensive field research effort that includes physical inspection of properties in order to research new markets, find additional property inventory, photograph properties and verify existing information. CoStar's field research effort also includes creating high quality videos of interior spaces (including walk-through videos of apartment communities), amenities and exterior features of properties. CoStar utilizes 146 high-tech, field research vehicles across the U.S., Canada and the U.K. A significant majority of these vehicles are customized energy efficient hybrid cars that are equipped with computers, proprietary Global Positioning System tracking software, high resolution digital cameras and handheld laser instruments to help precisely measure buildings, geo-code them and position them on digital maps. Some of our researchers also use custom-designed trucks with the same equipment as well as pneumatic masts that extend up to an elevation of twenty-five feet to allow for unobstructed building photographs from “birds-eye” views. Each CoStar vehicle uses wireless technology to track and transmit field data. A typical site inspection consists of photographing the building, measuring the building, geo-coding the building, capturing “For Sale” or “For Lease” sign information, counting parking spaces, assessing property condition and construction, and gathering tenant information. Certain researchers canvass properties, collecting tenant data suite by suite. Our subsidiary, CoStar Field Research, LLC, recently entered into an agreement to purchase a low-flying airplane capable of conducting aerial research of commercial real estate. In 2015, we plan to place researchers on the low-flying aircraft to scout additional commercial developments and take aerial photographs. Data and Image Providers. We license a small portion of our data and images from public record providers and third party data sources. Licensing agreements with these entities provide for our use of a variety of commercial real estate information, including property ownership, tenant information, demographic information, maps and aerial photographs, all of which enhance various CoStar services. These license agreements generally grant us a non-exclusive license to use the data and images in the creation and supplementation of our information, analytics and online marketplaces and include what we believe are standard terms, such as a contract term ranging from one to five years, automatic renewal of the contract and fixed periodic license fees or a combination of fixed periodic license fees plus additional fees based upon our usage. 9 Management and Quality Control Systems. Our research processes include automated and non-automated controls to ensure the integrity of the data collection process. A large number of automated data quality tests check for potential errors, including occupancy date conflicts, available square footage greater than building area, typical floor space greater than land area and expired leases. We also monitor changes to critical fields of information to ensure all information is kept in compliance with our standard definitions and methodology. Our non-automated quality control procedures include: • • • • calling our information sources on recently updated properties to re-verify information; performing periodic research audits and field checks to determine if we correctly canvassed buildings; providing training and retraining to our research professionals to ensure accurate data compilation; and compiling measurable performance metrics for research teams and managers for feedback on data quality. Finally, one of the most important and effective quality control measures we rely on is feedback provided by the commercial real estate professionals using our data every day. Proprietary Technology As of January 30, 2015, CoStar had a staff of 417 product development, database and network professionals. CoStar’s information technology professionals focus on developing new services for our customers, integrating our current services, and delivering research automation tools that improve the quality of our data and increase the efficiency of our research analysts. Our subscription-based information services consist primarily of CoStar SuiteTM services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional® and CoStar Tenant® and through our mobile application, CoStarGo®. Our information technology team is responsible for developing, improving and maintaining CoStar services, including but not limited to CoStar Property Professional®, CoStar COMPS Professional®, CoStar Tenant®, CoStar Showcase®, CoStarGo®, CoStar Connect®, CoStar Lease AnalysisTM, CoStar Multifamily®, LoopNet Premium ListerTM, LoopNet Premium SearcherTM, LoopLink®, CoStar Portfolio StrategyTM products and services, CoStar Market AnalyticsTM products and services, CoStar Investment AnalysisTM Portfolio Maximizer and CoStar Investment AnalysisTM Request, CoStar Real Estate ManagerTM products and services, and Apartments.com products and services. Our information technology team is responsible for developing the infrastructure necessary to support CoStar’s business processes, our comprehensive database of commercial real estate information, analytics and online marketplaces and our extensive image library. The team implements technologies and systems that introduce efficient workflows and controls that increase the production capacity of our research teams and improve the quality of our data. Over the years, the team has developed data collection and quality control mechanisms that we believe are unique to the commercial real estate industry. The team continues to develop and modify our enterprise information management system that integrates CoStar sales, research, field research, customer support and accounting information. We use this system to maintain our commercial real estate research information, manage contacts with the commercial real estate community, provide research workflow automation and conduct daily automated quality assurance checks. In addition, our information technology team has also developed fraud-detection technology to detect and prevent unauthorized access to our services. Our information technology professionals also maintain the servers and network components necessary to support CoStar services and research systems. CoStar's core services are served from multiple data centers to support uninterrupted service for our customers. CoStar’s services are continually monitored in an effort to ensure our customers fast and reliable access. CoStar's comprehensive data protection policy provides for use of secure networks, strong passwords, encrypted data fields, off-site storage and other protective measures in an effort to ensure the availability and security of all core systems. Services Our suite of information, analytics and online marketplaces is branded and marketed to our customers. 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 expect to continue to enhance our existing information, analytics and online marketplaces and develop additional services that make use of our comprehensive database to meet the needs of our existing customers as well as potential new categories of customers. 10 Our principal information, analytics and online marketplaces as of January 30, 2015, are described in the following paragraphs: CoStar CoStar Property Professional® CoStar Property Professional, or “CoStar Property,” is the Company’s flagship service. It provides subscribers a comprehensive inventory of office, industrial, retail and multifamily properties and land in markets throughout the U.S., U.K. and Toronto, Canada, including for-lease and for-sale listings, historical data, building photographs, maps and floor plans. Commercial real estate professionals use CoStar Property to identify available space for lease, evaluate leasing and sale opportunities, value assets and position properties in the marketplace. Our clients also use CoStar Property to analyze market conditions by calculating current vacancy rates, absorption rates or average rental rates, and forecasting future trends based on user selected variables. CoStar Property provides subscribers with powerful map-based search capabilities as well as a user controlled, password protected extranet (or electronic “file cabinet”) where brokers may share space surveys and transaction-related documents online, in real time, with team members. When used together with CoStar Connect, CoStar Property enables subscribers to share space surveys and transaction-related documents with their clients, accessed through their corporate website. CoStar Property, along with all of CoStar’s other core information, analytics and online marketplaces, is delivered solely via the Internet. • CoStar Multifamily® CoStar Multifamily information, included as part of CoStar Property Professional, provides subscribers a comprehensive multifamily property database combined with analytic and forecasting tools that enable them to make investment decisions about multifamily properties. CoStar Multifamily provides information about buildings with 20 or more units including rents and occupancy rates, comparable sales transactions, construction locations, floor plans, high-resolution property images and detailed information on amenities and concessions. • CoStar Lease AnalysisTM CoStar Lease Analysis is an integrated workflow tool that allows subscribers to incorporate CoStar data with their own data to perform in depth lease analyses. CoStar Lease Analysis can be used to produce an understandable cash flow analysis as well as key metrics about any proposed or existing lease. It combines financial modeling with CoStar’s comprehensive property information, enabling the subscriber to compare lease alternatives. CoStar COMPS Professional® CoStar COMPS Professional, or “COMPS Professional,” provides comprehensive coverage of comparable commercial real estate sales information in the U.S., U.K. and Toronto, Canada. It is the industry’s most comprehensive database of comparable sales transactions and is designed for professionals who need to research property comparables, identify market trends, expedite the appraisal process and support property valuations. COMPS Professional offers subscribers numerous fields of property information, access to support documents (e.g., deeds of trust) for new comparables, demographics and the ability to view for-sale properties alongside sold properties in three formats – plotted on a map, aerial image or in a table. CoStar Tenant® CoStar Tenant is a detailed online business-to-business prospecting and analytical tool providing commercial real estate professionals with the most comprehensive commercial real estate-related U.S., U.K. and Toronto, Canada tenant information available. CoStar Tenant profiles tenants occupying space in commercial buildings and provides updates on lease expirations - one of the service’s key features - as well as occupancy levels, growth rates and numerous other facts. Delivering this information via the Internet allows users to target prospective clients quickly through a searchable database that identifies only those tenants meeting certain criteria. CoStarGo® CoStarGo is an iPad application that integrates and provides subscribers of Costar Suite mobile access to our comprehensive property, comparable sales and tenant information in our suite of online service offerings – consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant. CoStarGo provides a single, location-centric mobile interface that allows users to access and display comprehensive information on millions of properties and gain instant access to analytic data and demographic information from the field. CoStar Advertising® CoStar Advertising offers property owners and brokers a highly targeted and cost effective way to market a space for lease or a property for sale directly to CoStar subscribers looking for that type of space through interactive advertising. Our advertising model is based on varying levels of exposure, enabling the advertiser to target as narrowly or broadly as its budget permits. With the CoStar Advertising program, when the advertiser’s listings appear in a results set, they receive priority positioning and are enhanced to stand out. The advertiser can also purchase exposure in additional submarkets, or the entire market area so that this ad will appear even when this listing would not be returned in a results set. 11 CoStar Portfolio StrategyTM and CoStar Market AnalyticsTM Our subsidiary, CoStar Portfolio Strategy, offers products and services designed to meet the research needs of commercial real estate owners, investors and lenders. CoStar Portfolio Strategy and CoStar Market Analytics cover metropolitan areas throughout the U.S., the U.K., Toronto, Canada and Europe, with offerings including historical and forecast market data and analysis by market and property type, and services including access to CoStar Portfolio Strategy’s analysts, economists, and strategists to develop and deliver custom research solutions. Key tools include analysis of underlying property data, assessment of current market fundamentals, forecasts of future market performance, and credit default models. • CoStar Risk AnalyticsTM COMPASS is CoStar Portfolio Strategy’s premier commercial real estate risk management tool. It allows users to calculate Probability of Default, Loss Given Default, Expected Loss, and Confidence Interval (of Expected Loss) results for a loan or a portfolio. It provides direct comparisons of credit risk and refinance risk across Time, Market, Property Type, and Loan Structure for all macroeconomic forecast scenarios. COMPASSCRE is used by lenders, issuers, ratings agencies, and regulators to estimate required loss reserves and economic capital, target lending opportunities, set pricing strategy, objectively compare/price loans, more effectively allocate capital, and manage refinance risk. CoStar Investment AnalysisTM Portfolio Maximizer CoStar Investment Analysis Portfolio Maximizer is an industry leading real estate portfolio management software solution. CoStar Investment Analysis Portfolio Maximizer allows users to model partnership structures, calculate waterfall distributions and fees, model and analyze debt obligations, and create multiple “what if” scenarios for alternative investment decisions. CoStar Investment AnalysisTM Request CoStar Investment Analysis Request is the first business intelligence software solution built specifically for managing commercial real estate investments. CoStar Investment Analysis Request helps users eliminate some of the difficulties of consolidating real estate investment data from disparate sources and facilitates standardization of information presentation and reporting across an organization. CoStar Investment Analysis Request also provides a platform for users to develop business intelligence and reporting capabilities. CoStar Real Estate ManagerTM Corporate Edition CoStar Real Estate Manager Corporate Edition is a real estate management software solution designed for corporate real estate managers, company executives, business unit directors, brokers and project managers. CoStar Real Estate Manager Corporate Edition helps users connect real estate initiatives with company strategic goals, streamline portfolio operations, automate the process for collecting and managing space requests, reduce occupancy costs with analytics that track location performance against targets, and maximize location performance through proactive portfolio management. CoStar Real Estate Manager also provides lease abstraction and data review services in order to facilitate the effective implementation of this software solution. CoStar Real Estate ManagerTM Retail Edition CoStar Real Estate Manager Retail Edition is a real estate management software solution designed for company executives, real estate dealmakers and store planning and construction managers. CoStar Real Estate Manager Retail Edition helps users to utilize comprehensive and real-time data to establish goals and store strategies, manage the execution of real estate strategies, summarize critical portfolio data to drive cost-saving decisions, and benchmark prerequisite store-level information and metrics for maximizing location performance through proactive portfolio management. CoStar Real Estate Manager also provides lease abstraction and data review services in order to facilitate the effective implementation of this software solution. CoStar Private Sale NetworkTM CoStar Private Sale Network provides clients with custom-designed and branded websites to market their listings directly to investors. CoStar Private Sale Network allows investors to customize a commercial real estate website and build and send email communications to announce listings, calls for offers, and bid deadlines. CoStar Brokerage ApplicationsTM CoStar Brokerage Applications provides users with access to the latest tools to effectively manage and optimize business operations. These structured and consistent project management tools allow users to track critical dates, employee or organization-wide results, and current and prospective projects. LoopNet LoopNet® Basic and Premium Membership Our subsidiary, LoopNet, offers two types of memberships on the LoopNet marketplace, basic and premium. Basic membership is available free-of-charge to anyone who registers at our LoopNet website and enables members to experience some of the benefits of the LoopNet offering, with limited functionality. As of January 30, 2015, LoopNet had approximately 9.4 million registered members, of which 81,856 were premium members. 12 LoopNet Premium ListerTM LoopNet Premium Lister is designed for commercial real estate professionals and • other customers who seek the broadest possible exposure for their listings, access to leads lists, and advanced marketing and searching tools. LoopNet Premium Lister provides subscribers with the ability to market their listings to all LoopNet.com visitors, as well as numerous other features. LoopNet Premium Lister is available for a quarterly or annual subscription. LoopNet Premium SearcherTM LoopNet Premium Searcher is designed for members searching for commercial • real estate who need commercial real estate marketplace searching access, reports and other marketing and searching tools. LoopNet Premium Searcher provides subscribers with full access to all LoopNet property listings, including Premium and Basic Listings, as well as numerous other features. LoopNet Premium Searcher is available for a monthly, quarterly or annual subscription. LoopLink® LoopLink is an online real estate marketing and database services suite that enables commercial real estate firms to showcase their available properties both on the LoopNet marketplace and on the brokerage firm’s own website using hosted search software. Within LoopNet, each LoopLink listing is branded with the client’s logo and is hyperlinked to the client’s website. Additionally, the LoopLink service provides customizable, branded property search and results screens that can be integrated into the client’s website. The LoopNet import service offers the opportunity to simplify the process of submitting listings to LoopNet from the client’s internal databases, and features advanced data matching and data integrity rules and file conversion capabilities. LoopNet charges a monthly subscription fee to commercial real estate firms for the LoopLink service. Key features of LoopLink include comprehensive reporting and listing administration tools, a searchable and seamlessly integrated professional directory, property mapping for geographic and feasibility analysis, thumbnail photos and expanded property descriptions in search results. Apartments.com Apartments.comTM Our subsidiary, Apartments, LLC (doing business as Apartments.com), operates an online apartment marketplace for renters that matches apartment seekers with apartment homes and provides property managers and owners a platform for marketing their properties. Apartments.com provides a variety of ad packages and enhancements that allow property managers and owners to fully showcase their apartment community through increased exposure and interactions that allow renters to view, engage and connect with the community, including featured community listings, customized flyers and brochures, and special offer coupons. ApartmentHomeLiving.comTM ApartmentHomeLiving.com provides renters with another national online apartment rentals resource that showcases apartments for rent with official prices, pictures, floor plans and detailed information on each apartment. LandsofAmerica LandsofAmericaTM and LandAndFarmTM LandsofAmerica.com and LandAndFarm.com are leading online marketplaces for rural land for sale. Sellers pay a fee to list their land for sale, and interested buyers can search the respective sites' listings for free. BizBuySell BizBuySell® and BizQuest® BizBuySell.com and BizQuest.com are leading online marketplaces for operating businesses for sale. Business sellers pay a fee to list their operating businesses for sale, and interested buyers can search the respective sites' listings for free. The BizBuySell and BizQuest Franchise Directories allow interested business buyers to search hundreds of franchise opportunities, and franchisors can list their availabilities in the directory on a cost per lead basis. 13 Clients We draw clients from across the commercial real estate and related business community. Commercial real estate brokers have traditionally formed the largest portion of CoStar clients, however, we also provide services to owners, developers, landlords, property managers, financial institutions, retailers, vendors, appraisers, investment banks, government agencies and other parties involved in commercial real estate. The following chart lists U.S. and U.K. clients that are well known or have the highest annual subscription fees in each of the various categories, each as of January 30, 2015: Brokers Lenders, Investment Bankers Institutional Advisors, Asset Managers Avison Young Binswanger BNP Paribas — U.K. CB Richard Ellis CB Richard Ellis — U.K. Charles Dunn Company Coldwell Banker Commercial NRT Colliers Colliers International UK — U.K. CRESA Cushman & Wakefield Cushman & Wakefield — U.K. DAUM Commercial Real Estate Services Drivers Jonas Deloitte — U.K. DTZ, a UGL company Gerald Eve — U.K. GVA Grimley — U.K. HFF Jones Lang LaSalle Jones Lang LaSalle — U.K. Kidder Mathews Knight Frank LLP — U.K. Lambert Smith Hampton — U.K. Lee & Associates Marcus & Millichap Mohr Partners Montagu Evans — U.K. NAI Global Newmark Grubb Knight Frank Re/Max Savills Commercial — U.K. Savills Studley Sperry Van Ness Transwestern USI Real Estate Brokerage Services Voit Real Estate Services Weichert Commercial Brokerage AEGON USA Realty Advisors Bank of America, N.A. Capital One Bank Citibank Citigroup Global Markets — U.K. Deutsche Bank JP Morgan Chase Bank Key Bank Q10 Capital LLC Suntrust TD Bank Wells Fargo Wells Fargo — U.K. Bravo Strategies — U.K. AEW Capital Management LP BlackRock Hartford Investment Management Company ING Investment Management Lasalle Investment Management — U.K. Manulife Financial MetLife Real Estate Investment NorthMarq Capital Progressive Casualty Insurance Co. Prudential Standard Life Investments — U.K. USAA Real Estate Company Owners, Developers Europa Capital Partners — U.K. Hines Industrial Developments LNR Property Corp Shorenstein Properties, LLC Tishman Speyer Appraisers, Accountants Deloitte Integra KPMG Marvin F. Poer Price Waterhouse Coopers Ryan LLC Retailers 7-Eleven Carter's Dollar General Corporation Jos. A Bank Massage Envy Petco Rent-A-Center Sony Spencer Gifts LLC Walgreens Government Agencies City of Chicago Cook County Assessor’s Office County of Los Angeles Federal Deposit Insurance Corporation Federal Reserve Bank of New York Internal Revenue Service Transportation Security Administration U.S. Department of Housing and Urban Development U.S. General Services Administration Valuation Office Agency — U.K. REITs Boston Properties Brandywine Realty Trust Duke Realty Corporation KBS Realty Advisors Kimco Realty Corporation Simon Property Group Vornado/Charles E. Smith Property Managers AP Commercial Elliott Associates Leggat McCall Properties Lincoln Property Company Navisys Group Osprey Management Company PM Realty Group Vendors Comcast Corporation Cox Communications Kastle Systems Regus Time Warner Cable Turner Construction Company Verizon Communications For the years ended December 31, 2012, 2013 and 2014, no single client accounted for more than 5% of our revenues. 14 Sales and Marketing As of January 30, 2015, CoStar had a staff of 751 sales, marketing and customer support professionals, with the majority of our direct sales force located in field sales offices. Our sales teams are primarily located in 31 field sales offices throughout the U.S. and in offices located in London, England; Manchester, England; Glasgow, Scotland; Paris, France and Toronto, Canada. Our inside sales teams are located in our Washington, DC; San Francisco, California; and Chicago, Illinois offices. These teams prospect for new clients and perform service demonstrations exclusively by telephone and over the Internet to support the direct sales force. A portion of the inside sales teams are also responsible for selling some of our services. Our local offices typically serve as the platform for our in-market sales, customer support and field research operations for their respective regions. The sales force is responsible for selling to new prospects, training new and existing clients, providing ongoing customer support, renewing existing client contracts and identifying cross-selling opportunities. In addition, the sales force has primary front line responsibility for customer care. Our customer service and support staff is charged with ensuring high client satisfaction by providing ongoing customer support. Our sales strategy is to aggressively attract new clients, while providing ongoing incentives for existing clients to subscribe to additional services. We actively manage client accounts in order to retain clients by providing frequent service demonstrations as well as company-client contact and communication. We place a premium on training new and existing client personnel on the use of our services so as to promote maximum client utilization and satisfaction with our services. Our strategy also involves entering into multi-year, multi-market license agreements with our larger clients. We seek to make our services essential to our clients’ businesses. To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based information services rather than fees based on actual system usage. Contract rates for subscription-based services are generally based on the number of sites, number of users, organization size, the client’s business focus, geography and the number and types of services to which a client subscribes. 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 primary marketing methods include: service demonstrations; face to face networking; web-based marketing; direct marketing; communication via our corporate website and news services; participation in trade show and industry events; Company- sponsored events; print advertising in trade magazines and other business publications; client referrals; CoStar AdvisorTM, LoopNewsTM and other company newsletters distributed via email to our clients and prospects. In addition, we recently launched an improved Apartments.com website with a cleaner look, information about actual rental availabilities, rents and other fees, and better search functionality. In conjunction with the launch, we plan to embark on a wide-scale marketing campaign commencing during the first quarter of 2015 and running throughout the remainder of 2015 to generate brand awareness and site traffic for Apartments.com, including an incremental investment of $75.0 million above Apartments.com’s 2014 annualized marketing spend since the close of the acquisition of the Apartments.com Business. The marketing campaign is expected to feature television and radio advertising, online/digital advertising, social media and out-of-home ads and will be reinforced by Search Engine Marketing. Web-based marketing and direct marketing are effective means for us to find prospective clients. Our web-based marketing efforts include search engine optimization, paid advertising with major search engines and display advertising on commercial real estate news and business websites and mobile applications, and our direct marketing efforts include direct mail, email and telemarketing, and make extensive use of our unique, proprietary database. Once we have identified a prospective client, our most effective sales method is a service demonstration. We use various forms of advertising to build brand identity and reinforce the value and benefits of our services. We also sponsor and attend local association activities and events, including industry-leading events for commercial real estate brokers, owner/investors and retail and financial services institutions, and attend and/or exhibit at industry trade shows and conferences to reinforce our relationships with our core user groups. We currently offer dozens of webinars each year aimed at helping customers learn more about the commercial real estate industry and how to use our services. The webinars are available both as live presentations and as on-demand programs hosted on our website. On a monthly basis, we issue the CoStar Commercial Repeat Sales Index ("CCRSI"), a comprehensive set of benchmarks that investors and other market participants can use to better understand commercial real estate price movements. The Index is produced using our underlying data and is publicly distributed by CoStar through the news media and made available online at http://www.costargroup.com/costar-news/ccrsi. Our sales and marketing efforts have focused and will continue to focus on cross-selling and marketing our services. We continue to cross-sell the services offered by the businesses we have acquired, including Apartments.com and LoopNet. Our goal is to upsell clients to the services that best meet their needs and to create further cross-selling revenue synergies. 15 Competition The market for information, analytics and online marketplaces generally is competitive and rapidly changing. In the commercial real estate and apartment rentals industries, we believe the principal competitive factors affecting these services and providers are: • • • • • • • • • • • • • • quality and depth of the underlying databases; ease of use, flexibility, and functionality of the software; intuitiveness and appeal of the user interface; timeliness of the data, including listings; breadth of geographic coverage and services offered; completeness and accuracy of content; client service and support; perception that the service offered is the industry standard; price; effectiveness of marketing and sales efforts; proprietary nature of methodologies, databases and technical resources; vendor reputation; brand loyalty among customers; and capital resources. We compete directly and indirectly for customers with the following categories of companies: • • • • • • • • online marketing services or websites targeted to commercial real estate brokers, buyers and sellers of commercial real estate properties, insurance companies, mortgage brokers and lenders, such as commercialsearch.com, PropertyLine.com, Reed Business Information Limited, officespace.com, MrOfficeSpace.com, TenantWise, www.propertyshark.com, Rofo, BuildingSearch.com, CIMLS, CompStak, Rightmove, WorkplaceIQ, RealPoint LLC and estatesgazette.com; publishers and distributors of information, analytics and marketing services, including regional providers and national print publications, such as Xceligent, eProperty Data, CBRE Economic Advisors, Marshall & Swift, Yale Robbins, Reis, Real Capital Analytics, The Smith Guide, Pierce Eislen and Axiometrics, Inc.; internet listing services featuring apartments for rent, such as ApartmentGuide.com, ApartmentFinder.com, ForRent.com, Zillow Rentals, Trulia Rent, Craigslist, ApartmentList.com, Rent.com, and Move.com; locally controlled real estate boards, exchanges or associations sponsoring property listing services and the companies with whom they partner, such as Xceligent, eProperty Data, Catalyst, the National Association of Realtors, CCIM Institute, Society of Industrial and Office Realtors, the Commercial Association of Realtors Data Services and the Association of Industrial Realtors; real estate portfolio management software solutions, such as Cougar Software, MRI Software, Altus and Intuit; real estate lease management and administration software solutions, such as Accruent, Tririga, Manhattan Software and AMT; in-house research departments operated by commercial real estate brokers; and public record providers. As the market for information, analytics and online marketplaces develops, additional competitors (including companies which could have greater access to data, financial, product development, technical, analytic or marketing resources than we do) may enter the market and competition may intensify. For example, a company like Bloomberg L.P. has the resources, and has previously announced an intention, to move into the commercial real estate information business. Further, a company like Google, which has a far-reaching web presence and substantial data aggregation capabilities, could enter the commercial real estate marketing arena. A company like Zillow, which already has a presence in residential real estate and the apartment rentals industry, could use its resources to further expand in the online apartment rentals industry creating greater competition among internet listing services for the marketing budgets of property managers and property owners. While we believe that we have successfully differentiated ourselves from existing competitors, current or future competitors could materially harm our business. 16 Proprietary Rights To protect our proprietary rights in our methodologies, database, software, trademarks and other intellectual property, we depend upon a combination of: • • • • • • trade secret, misappropriation, copyright, trademark, computer fraud, database protection and other laws; registration of copyrights and trademarks; nondisclosure, noncompetition and other contractual provisions with employees and consultants; license agreements with customers; patent protection; and technical measures. We seek to protect our software’s source code, our database and our photography as trade secrets and under copyright law. Although copyright registration is not a prerequisite for copyright protection, we have filed for copyright registration for many of our databases, photographs, software and other materials. Under current U.S. copyright law, the arrangement and selection of data may be protected, but the actual data itself may not be. Certain U.K. database protection laws provide additional protections for our U.K. databases. We license our services under license agreements that grant our clients non-exclusive, non-transferable rights. These agreements restrict the disclosure and use of our information and prohibit the unauthorized reproduction or transfer of any of our proprietary information, methodologies or analytics. We also attempt to protect our proprietary databases, our trade secrets and our proprietary information through confidentiality and noncompetition agreements with our employees and consultants. Our services also include technical measures designed to detect, discourage and prevent unauthorized copying of our intellectual property. We have established an internal antipiracy team that uses fraud-detection technology to continually monitor use of our services to detect and prevent unauthorized access, and we actively prosecute individuals and firms that engage in this unlawful activity. We maintain U.S. and international trademark registrations for CoStar’s core service names and proactively file U.S. and international trademark applications covering our new and planned service names. Our federally registered trademarks include CoStar®, CoStar Property®, CoStar COMPS Professional®, CoStar Tenant®, CoStarGo®, CoStar Showcase®, and LoopNet®, among many others. In the U.S., trademarks are generally valid as long as they are in use and have not been found to be generic. We consider our trademarks in the aggregate to constitute a valuable asset. In addition, we maintain a patent portfolio that protects certain of our systems and methodologies. We currently have one granted patent in the U.K., which expires in 2021, covering, among other things, certain of our field research methodologies and six patents in the U.S. which expire in 2020, 2021 (2 patents), 2022 (2 patents) and 2025, respectively, covering, among other things, critical elements of CoStar’s proprietary field research technology and mapping tools. We regard the rights protected by our patents as valuable to our business, but do not believe that our business is materially dependent on any single patent or on our portfolio of patents as a whole. Employees As of January 30, 2015, we employed 2,444 employees. None of our employees are represented by a labor union. We have experienced no work stoppages. We believe that our employee relations are excellent. Available Information Our investor relations internet website is http://www.costargroup.com/investors. The reports we file with or furnish to the Securities and Exchange Commission, including our annual report, quarterly reports and current reports, as well as amendments to those reports, are available free of charge on our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. You may review and copy any of the information we file with the Securities and Exchange Commission at the Commission's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information regarding the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at http://www.sec.gov. 17 Item 1A. Risk Factors Cautionary Statement Concerning Forward-Looking Statements We have made forward-looking statements in this Report and make forward-looking statements in our press releases and conference calls 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 2015 and beyond, our possible or assumed future results of operations generally, and other statements and information regarding assumptions about our revenues, EBITDA, adjusted EBITDA, non-generally accepted accounting principles (“GAAP”) net income, non-GAAP net income per share, net income, net income per share, fully diluted net income per share, weighted-average outstanding shares, taxable income, cash flow from operating activities, available cash, operating costs, amortization expense, intangible asset recovery, capital and other expenditures, effective tax rate, equity compensation charges, future taxable income, purchase amortization, the anticipated benefits of completed acquisitions, the anticipated benefits of cross-selling efforts, product development and release, sales and marketing campaigns, product integrations, elimination and de-emphasizing of services, contract renewal rate, the timing of future payments of principal under our $400.0 million term loan facility available to us under a credit agreement dated April 1, 2014 (the “2014 Credit Agreement”), expectations regarding our compliance with financial and restrictive covenants in the 2014 Credit Agreement, acquisitions, financing plans, geographic expansion, capital structure, contractual obligations, legal proceedings and claims, our database, database growth, services and facilities, employee relations, future economic performance, our ability to liquidate or realize our long-term investments, management’s plans, goals and objectives for future operations, and growth and markets for our stock. Sections of this Report which contain forward-looking statements include “Business,” “Risk Factors,” “Properties,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” “Controls and Procedures” and the Financial Statements and related Notes. 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: commercial real estate market conditions; the pace of recovery in the commercial real estate market; general economic conditions; our ability to identify, acquire and integrate acquisition candidates; our ability to realize the expected benefits, cost savings or other synergies from acquisitions, including the Apartments.com acquisition, on a timely basis or at all; our ability to combine acquired businesses successfully or in a timely and cost-efficient manner; business disruption relating to integration of acquired businesses or other business initiatives; the amount of investment for sales and marketing and our ability to realize a return on investments in sales and marketing; our ability to effectively and strategically combine, eliminate or de-emphasize service offerings; reductions in revenues as a result of service changes; the time and resources required to develop upgraded services and expand service offerings; changes or consolidations within the commercial real estate industry; customer retention; our ability to attract new clients; our ability to sell additional services to existing clients; our ability to integrate our North America and International product offerings; our ability to successfully introduce new products or upgraded services in U.S. and foreign markets; our ability to attract consumers to our online marketplaces; competition; foreign currency fluctuations; global credit market conditions affecting investments; our ability to continue to expand successfully, timely and in a cost-efficient manner, including internationally; our ability to effectively penetrate and gain acceptance in new sectors; our ability to control costs; litigation; changes in accounting policies or practices; release of new and upgraded services or entry into new markets by us or our competitors; data quality; expansion, growth, development and reorganization of our sales force; employee retention; technical problems with our services; managerial execution; changes in relationships with real estate brokers and other strategic partners; legal and regulatory issues; and successful adoption of and training on our services. 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. 18 Risk Factors Risks Related to our Business Our revenues and financial position will be adversely affected if we are not able to attract and retain clients. Our success and revenues depend on attracting and retaining subscribers to our information, analytics and online marketplaces. Our subscription- based information, analytics and online marketplaces generate the largest portion of our revenues. However, we may be unable to attract new clients, and our existing clients may decide not to add, not to renew or to cancel subscription services. In addition, in order to increase our revenue, we must continue to attract new customers, continue to keep our cancellation rate low and continue to sell new services to our existing customers. We may not be able to continue to grow our customer base, keep the cancellation rate for customers and services low or sell new services to existing customers as a result of several factors, including without limitation: economic pressures; the business failure of a current client or clients; a decision that customers have no need for our services; a decision to use alternative services; customers’ and potential customers’ pricing and budgetary constraints; consolidation in the real estate and/or financial services industries; data quality; technical problems; or competitive pressures. We compete against many other commercial real estate information, analytics, and marketing service providers for business, including competitors that offer their services through rapidly changing methods of delivering real estate information. If clients cancel services or decide not to renew their subscription agreements, and we do not sell new services to our existing clients or attract new clients, then our renewal rate and revenues may decline. A downturn or consolidation in the commercial real estate industry may decrease customer demand for our services. The commercial real estate market may be adversely impacted by many different factors, including lower than expected job growth or job losses resulting in reduced real estate demand; rising interest rates and slowing transaction volumes that negatively impact investment returns; excessive speculative new construction in localized markets resulting in increased vacancy rates and diminished rent growth; and unanticipated disasters and other adverse events such as slowing of the growth in the working age population resulting in reduced demand for all types of real estate. A reversal of improvements in the commercial real estate industry’s leasing activity and absorption rates or a renewed downturn in the commercial real estate market may affect our ability to generate revenues and may lead to more cancellations by our current or future customers, either of which could cause our revenues or our revenue growth rate to decline and reduce our profitability. A depressed commercial real estate market has a negative impact on our core customer base, which could decrease demand for our information, analytics and online marketplaces. Also, companies in this industry are consolidating, often in order to reduce expenses. Consolidation, or other cost-cutting measures by our customers, may lead to cancellations of our information, analytics and online marketplace services by our customers, reduce the number of our existing clients, reduce the size of our target market or increase our clients’ bargaining power, all of which could cause our revenues to decline and reduce our profitability. If cancellations, reductions of services, and failures to pay increase, and we are unable to offset the resulting decrease in revenue by increasing sales to new or existing customers, our revenues may decline or grow at lower rates. If we are unable to hire qualified persons for, or retain and continue to develop, our sales force, or if our sales force is unproductive, our revenues could be adversely affected. In order to support revenues and future revenue growth, we need to continue to develop, train and retain our sales force. Our ability to build and develop a strong sales force may be affected by a number of factors, including: our ability to attract, integrate and motivate sales personnel; our ability to effectively train our sales force; the ability of our sales force to sell an increased number and different types of services; our ability to manage effectively an outbound telesales group; the length of time it takes new sales personnel to become productive; the competition we face from other companies in hiring and retaining sales personnel; our ability to effectively structure our sales force; and our ability to effectively manage a multi-location sales organization. If we are unable to hire qualified sales personnel and develop and retain the members of our sales force, including sales force management, or if our sales force is unproductive, our revenues or growth rate could decline and our expenses could increase. 19 Negative general economic conditions could increase our expenses and reduce our revenues. Our business and the commercial real estate industry are particularly affected by negative trends in the general economy. The success of our business depends on a number of factors relating to general global, national, regional and local economic conditions, including perceived and actual economic conditions, recessions, inflation, deflation, exchange rates, interest rates, taxation policies, availability of credit, employment levels, and wage and salary levels. Negative general economic conditions could adversely affect our business by reducing our revenues and profitability. If we experience greater cancellations or reductions of services and failures to timely pay, and we do not acquire new clients or sell new services to our existing clients, our revenues may decline and our financial position would be adversely affected. Adverse national and global economic events, as well as any significant terrorist attack, are likely to have a dampening effect on the economy in general, which could negatively affect our financial performance and our stock price. Market disruptions may also contribute to extreme price and volume fluctuations in the stock market that may affect our stock price for reasons unrelated to our operating performance. In addition, a significant increase in inflation could increase our expenses more rapidly than expected, the effect of which may not be offset by corresponding increases in revenue. Conversely, deflation resulting in a decline of prices could reduce our revenues. In the current economic environment, it is difficult to predict whether we will experience significant inflation or deflation in the near future. A significant increase in either could have an adverse effect on our results of operations. We may not be able to compete successfully against existing or future competitors in attracting advertisers, which could harm our business, results of operations and financial condition. We compete to attract advertisers. Large companies with significant brand recognition have large numbers of direct sales personnel and web traffic, which may provide a competitive advantage. To compete successfully for advertisers against future and existing competitors, we must continue to invest resources in developing our advertising platform and proving the effectiveness and relevance of our advertising services. Pressure from competitors seeking to acquire a greater share of our advertisers’ overall marketing budget could adversely affect our pricing and margins, lower our revenue, and increase our research and development and marketing expenses. If we are unable to compete successfully against our existing or future competitors, our business, results of operations or financial condition could be adversely affected. We may be unable to increase awareness of our brands, including CoStar, LoopNet or Apartments.com, which could adversely affect our business. We rely heavily on our brands, which we believe are key assets of our Company. Awareness and differentiation of our brands are important for attracting and expanding the number of users of, and subscribers to, our online marketplaces, such as Apartments.com and LoopNet.com. In 2015, we expect to increase our investment in sales and marketing activities by approximately $75.0 million to increase brand awareness and grow traffic in conjunction a wide-scale marketing campaign commencing during the first quarter of 2015 and running throughout the remainder of 2015 to generate brand awareness and site traffic for the improved Apartments.com website. Further, we expect that sales and marketing expenses for our other brands will continue to increase as we seek to grow the number of subscribers or advertisers to our marketplaces. Increased advertising may not be successful in increasing brand awareness or, ultimately, be cost-effective. If we are unable to maintain or enhance user and advertiser awareness of our brands, or if we are unable to recover our additional marketing and advertising costs through increased usage of our services, our business, results of operations and financial condition could be adversely affected. We rely on Internet search engines to drive traffic to our websites. If search results do not feature our websites prominently, traffic to our websites would decrease and our business could be adversely affected. Google, Bing, Yahoo! and other Internet search websites drive traffic to our websites, including Apartments.com and LoopNet.com. For example, when a user types an apartment building address into an Internet search engine, organic search ranking of our Apartments.com webpages will determine how prominently such webpages are displayed in the search results. However, our ability to maintain high organic search result rankings is not entirely within our control. Our competitors’ search engine optimization, or SEO, efforts may result in their websites receiving a higher search result page ranking than the rankings our websites receive, or Internet search engines could revise their methodologies in a way that would adversely affect our search result rankings, each of which could slow the growth of our user base. Further, search engine providers could align with our competitors, which could adversely affect traffic to our websites. Our websites have experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. If we experience a material reduction in the number of users directed to our websites through Internet search engines, our business, results of operations and financial condition could be adversely affected. 20 If we are unable to maintain or increase traffic to our marketplaces, our business and operating results could be adversely affected. Our ability to generate revenue from our marketplace businesses depends, in part, on our ability to attract users to our websites. If we fail to maintain or increase traffic to our marketplaces, our ability to acquire additional subscribers or advertisers and deliver leads to existing subscribers and advertisers could be adversely affected. We expect that our marketing expenses may increase in connection with our efforts to maintain or increase traffic to our websites. Our efforts to maintain or generate additional traffic to our marketplaces may not be successful. Even if we are able to attract additional users, increases in our operating expenses could negatively impact our operating results if we are unable to generate more revenue through increased sales of subscriptions to our marketplace products. We also face competition to attract users to our marketplace websites. Our existing and potential competitors include companies that could devote greater technical and other resources than we have available to provide services that users might view as superior to our offerings. Any of our future or existing competitors may introduce different solutions that attract users away from our services or provide solutions similar to our own that have the advantage of better branding or marketing resources. If we are unable to increase traffic to our marketplaces, or if we are unable to generate enough additional revenue to offset increases in expenses related to increasing traffic to our marketplaces, our business and operating results could be adversely affected. If real estate professionals or other advertisers reduce or cancel their advertising spending with us and we are unable to attract new advertisers, our operating results would be harmed. Our marketplace businesses, including the Apartments.com Business and LoopNet.com, depend on advertising revenue generated primarily through sales to persons in the real estate industry, including property managers and owners, and other advertisers. Our ability to attract and retain advertisers, and ultimately to generate advertising revenue, depends on a number of factors, including: • • • • • increasing the number of unique visitors to, and users of, our websites and mobile applications; the quantity and quality of the leads that we provide to our advertisers; the success of any increased marketing and product development efforts directed at attracting additional users and advertisers to our marketplaces; keeping pace with changes in technology and with our competitors; and offering an attractive return on investment to our advertisers for their advertising spending with us. Further, with respect to the Apartments.com marketplace, our ability to attract and retain advertisers also depends on the current apartment rental market and apartment vacancy rates. If vacancy rates are too high or too low, advertisers may not need to utilize our marketplace services. We do not have long-term contracts with most of the advertisers who advertise on our marketplaces. These advertisers could choose to modify or discontinue their relationships with us with little or no advance notice. In addition, as existing subscriptions for advertising expire, we may not be successful in renewing these subscriptions or securing new subscriptions. We may not succeed in retaining existing advertisers’ spending or capturing a greater share of such spending if we are unable to convince advertisers of the effectiveness of our services as compared to alternatives. In addition, future changes to our pricing methodology for advertising services may cause advertisers to reduce or discontinue their advertising with us. If current advertisers reduce or end their advertising spending with us and we are unable to attract new advertisers, our advertising revenue and business, results of operations and financial condition could be adversely affected. If we do not invest in product development and provide services that are attractive to our users and to our advertisers, our business could be adversely affected. Our success depends on our continued improvements to provide services that make our marketplaces useful for users, and attractive to our advertisers. As a result, we must continually invest resources in research and development to improve the appeal and comprehensiveness of our services and effectively incorporate new technologies. If we are unable to provide services that users want to use, then users may become dissatisfied and use competitors’ websites. If we are unable to continue offering innovative services, we may be unable to attract additional users and advertisers or retain our current users and advertisers, which could harm our business, results of operations and financial condition. 21 If we are not able to successfully finance and/or integrate acquisitions, our business operations and financial position could be adversely affected. We have expanded our markets and services in part through acquisitions of complementary businesses, services, databases and technologies, and expect to continue to do so in the future. Our strategy to acquire complementary companies or assets depends on our ability to identify, and the availability of, suitable acquisition candidates. We may incur costs in the preliminary stages of an acquisition, but may ultimately be unable or unwilling to consummate the proposed transaction for various reasons. In addition, acquisitions involve numerous risks, including the ability to realize or capitalize on synergy created through combinations; managing the integration of personnel and products; potential increases in operating costs; managing geographically remote operations; the diversion of management’s attention from other business concerns and potential disruptions in ongoing operations during integration; the inherent risks in entering markets and sectors in which we have either limited or no direct experience; and the potential loss of key employees, clients or vendors and other business partners of the acquired companies. We may not successfully integrate acquired businesses or assets and may not achieve anticipated benefits of an acquisition, including expected synergies. Acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, one-time write-offs of goodwill and substantial amortization expenses of other intangible assets. We may be unable to obtain financing on favorable terms, or at all, if necessary to finance future acquisitions making it impossible or more costly to acquire complementary businesses. If we are able to obtain financing, the terms may be onerous and restrict our operations. Further, certain acquisitions may be subject to regulatory approval, which can be time consuming and costly to obtain, and the terms of such regulatory approvals may impose limitations on our ongoing operations or require us to divest assets or lines of business. The failure to successfully integrate the Apartments.com Business and/or fully realize expected synergies from the acquisition in the expected time frame or at all may adversely affect our future results and our business. The success of the Apartments.com acquisition will depend, in part, on our ability to successfully integrate the Apartments.com Business and realize the benefits and synergies we anticipate to result from the combination of our business and the Apartments.com Business, including anticipated growth opportunities and cost savings. We may not be able to achieve these objectives in whole or in part. Any failure to timely realize these anticipated benefits could have a material adverse effect on our revenues, expenses and operating results. The success of the acquisition will also depend in part on our ability to minimize or eliminate any difficulties that may occur in connection with the integration of our business and the Apartments.com Business. The integration process could result in the loss of key employees, loss of key clients, loss of key vendors and other business partners, increases in operating costs, increases in taxes, or the disruption of each company's ongoing businesses, any or all of which could adversely affect our ability to achieve the anticipated benefits and synergies of the acquisition. Our efforts to integrate the two businesses will divert management's attention and other resources from uses that could otherwise have been beneficial to the Company. In addition, management may decide to combine or eliminate products or services currently offered by Apartments.com, which could also result in the loss of revenues, key employees, key clients, key vendors or other business partners. During the integration process, we will depend on CV to provide certain services to us during a transitional period, including, among others, billing and collection services. If these services are not provided to us, we may incur additional expense to replicate or procure these services from other third parties. Our current or future geographic expansion plans may not result in increased revenues, which may negatively impact our business, results of operations and financial position. Expanding into new markets and investing resources towards increasing the depth of our coverage within existing markets imposes additional burdens on our research, systems development, sales, marketing and general managerial resources. During 2015, we plan to continue to increase the depth of our coverage in the U.S., Canada and the U.K. If we are unable to manage our expansion efforts effectively, if our expansion efforts take longer than planned or if our costs for these efforts exceed our expectations, our financial position could be adversely affected. In addition, if we incur significant costs to improve data quality within existing markets, or are not successful in marketing and selling our services in these markets or in new markets, our expansion may have a material adverse effect on our financial position by increasing our expenses without increasing our revenues, adversely affecting our profitability. If we are not able to obtain and maintain accurate, comprehensive or reliable data, we could experience reduced demand for our information, analytics and online marketplace services. Our success depends on our clients’ confidence in the comprehensiveness, accuracy and reliability of the data and analysis we provide. The task of establishing and maintaining accurate and reliable data and analysis is challenging. If our data, including the data we obtain from third parties, or analysis is not current, accurate, comprehensive or reliable, we could experience reduced demand for our services or legal claims by our customers, which could result in lower revenues and higher expenses. Our U.S. researchers use integrated internal research processes to update our database. Any inefficiencies, errors, or technical problems with this application could reduce the quality of our data, which could result in reduced demand for our services, lower revenues and higher costs. 22 We may not be able to successfully introduce new or upgraded information, analytics and online marketplace services or combine or shift focus from services with less demand, which could decrease our revenues and our profitability. Our future business and financial success will depend on our ability to continue to anticipate the needs of, and to introduce new and upgraded services into the marketplace. To be successful, we must adapt to changes in the industry, as well as rapid technological changes by continually enhancing our information, analytics and online marketplace services. Developing new services and upgrades to services, as well as integrating and coordinating current services, imposes heavy burdens on our systems department, management and researchers. The processes are costly, and our efforts to develop, integrate and enhance our services may not be successful. As we continue to combine our operations with those that we have acquired, we must continue to assess the purposes for which various services may be used alone or together, and how we can best address those uses through stand-alone services or combinations or coordinating applications thereof. In addition, successfully launching and selling a new or upgraded service puts pressure on our sales and marketing resources. We recently launched the new Apartments.com website after undergoing extensive product development. We also plan to launch a wide-scale marketing campaign in an effort to increase brand awareness and site traffic. The launch of the new site and/or the new marketing campaign may not result in increased brand awareness, site traffic and/or revenues. If we are unsuccessful in obtaining greater market share, we may not be able to offset the expense associated with the new launch and marketing campaign, which could have a material adverse effect on our financial results. If we are unable to develop new or upgraded services or decide to combine, shift focus from, or phase out a service that overlaps or is redundant with other services we offer, then our customers may choose a competitive service over ours and our revenues may decline and our profitability may be reduced. For example, we are currently assessing whether to transition the LoopNet marketplace to a pure marketing site for commercial real estate where, eventually, all listings would be paid and users could search the site for free. We would expect to see a short-term reduction in revenues and earnings if we implement this transition. Although we are assessing the best strategy to implement this shift and will seek to convert customers to higher value, more profitable annual subscription information services to increase revenues and earnings over time, we cannot predict with certainty whether we will be successful in shifting customers to higher value, more profitable subscriptions and, consequently, in offsetting any reduction in revenue and earnings; therefore, if we make this transition, our revenues and earnings may ultimately decline. In addition, if we incur significant costs in developing new or upgraded services or combining and coordinating existing services, are not successful in marketing and selling these new services or upgrades, or our customers fail to accept these new or combined and coordinating services, it could have a material adverse effect on our results of operations by decreasing our revenues and reducing our profitability. Competition could render our services uncompetitive. The market for information systems and services in general is highly competitive and rapidly changing. Competition in this market may increase further if economic conditions or other circumstances cause customer bases and customer spending to decrease and service providers to compete for fewer customer resources. Our existing competitors, or future competitors, may have greater name recognition, larger customer bases, better technology or data, lower prices, easier access to data, greater user traffic or greater financial, technical or marketing resources than we have. Our competitors may be able to undertake more effective marketing campaigns, obtain more data, adopt more aggressive pricing policies, make more attractive offers to potential employees, subscribers, distribution partners and content providers or may be able to respond more quickly to new or emerging technologies or changes in user requirements. If we are unable to retain customers or obtain new customers, our revenues could decline. Increased competition could result in lower revenues and higher expenses, which would reduce our profitability. Our focus on internal and external investments may place downward pressure on our operating margins. Over the past few years, we have increased the rate of investments in our business, including internal investments in product development and sales and marketing, to expand the breadth and depth of services we provide to our customers. Our investment strategy is intended to increase our revenue growth in the future. Our operating margins may experience downward pressure in the short term as a result of investments. Furthermore, our investments may not have their intended effect. For instance, our external investments may lose value and we may incur impairment charges with respect to such investments. Such impairment charges may negatively impact our profitability. If we are unable to successfully execute our investment strategy or if we fail to adequately anticipate and address potential problems, we may experience decreases in our revenues and operating margins. 23 If we are unable to enforce or defend our ownership and use of intellectual property, our business, brands, competitive position and operating results could be harmed. The success of our business depends in large part on our intellectual property, including intellectual property involved in our methodologies, database, services and software. We rely on a combination of trademark, trade secret, patent, copyright and other laws, nondisclosure and noncompetition provisions, license agreements and other contractual provisions and technical measures to protect our intellectual property rights. However, current law may not provide for adequate protection of our databases and the actual data. In addition, legal standards relating to the validity, enforceability and scope of protection of proprietary rights in internet related businesses are uncertain and evolving, and changes in these standards may adversely impact the viability or value of our proprietary rights. If we are not successful in protecting our intellectual property, including our content, our brands and our business, results of operations and financial condition could be harmed. The same would be true if a court found that our services infringe other persons’ intellectual property rights. Any intellectual property lawsuits or threatened lawsuits in which we are involved, either as a plaintiff or as a defendant, could cost us a significant amount of time and money and distract management’s attention from operating our business. In addition, if we do not prevail on any intellectual property claims, this could result in a change to our methodology or information, analytics and online marketplace services and could reduce our profitability. Effective trademark, trade secret, patent, and copyright protection may not be available in every country in which our services may be provided. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our intellectual property and our proprietary technology adequately against unauthorized third-party copying or use, which could harm our competitive position. In addition, we seek to enforce our rights against people and entities that infringe our intellectual property, including through legal action. Taking such action may be costly, and we cannot ensure that such actions will be successful. Any increase in the unauthorized use of our intellectual property could make it more expensive for us to do business and harm our results of operations or financial condition. We are subject to a number of risks related to acceptance of credit cards and debit cards for customer payments. We accept payments for our services through credit and debit card transactions. For credit and debit card payments, we pay interchange and other fees, which may increase over time. An increase in those fees may require us to increase the prices we charge and would increase our cost of revenues, either of which could harm our business, financial condition or results of operations. We depend on processing vendors to complete credit and debit card transactions. If we or our processing vendors fail to maintain adequate systems for the authorization and processing of credit card transactions, it could cause one or more of the major credit card companies to disallow our continued use of their payment products. We could lose customers if we are not able to continue to use payment products of the major credit card companies. In addition, if the systems for the authorization and processing of credit card transactions fail to work properly and, as a result, we do not charge our customers’ credit cards on a timely basis or at all, our business, revenue, results of operations and financial condition could be harmed. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted in ways that make it more difficult for us to comply. We are required to comply with payment card industry security standards. Failing to comply with those standards may violate payment card association operating rules, federal and state laws and regulations, and the terms of our contracts with payment processors. Any failure to comply also may subject us to fines, penalties, damages and civil liability, and may result in the loss of our ability to accept credit and debit card payments. Further, there is no guarantee that such compliance will prevent illegal or improper use of our payment systems or the theft, loss, or misuse of data pertaining to credit and debit cards, card holders and transactions. If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures, and significantly higher credit card-related costs, each of which could harm our business, results of operations and financial condition. If we are unable to maintain our chargeback rate or refund rates at acceptable levels, our processing vendors may increase our transaction fees or terminate their relationships with us. Any increases in our credit and debit card fees could harm our results of operations, particularly if we elect not to raise our rates for our services to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business. 24 We may not be able to successfully halt the operation of websites that aggregate our data, as well as data from other companies, such as copycat websites that may misappropriate our data. Third parties may misappropriate our data through website scraping, robots or other means and aggregate this data on their websites with data from other companies. In addition, “copycat” websites may misappropriate data on our website and attempt to imitate our brands or the functionality of our website. We may not be able to detect all such websites in a timely manner and, even if we could, technological and legal measures may be insufficient to stop their operations. In some cases, particularly in the case of websites operating outside of the U.S., our available remedies may not be adequate to protect us against the misappropriation of our data. Regardless of whether we can successfully enforce our rights against the operators of these websites, any measures that we may take could require us to expend significant financial or other resources. Litigation or government investigations in which we become involved may significantly increase our expenses and adversely affect our stock price. Currently and from time to time, we are a party to various lawsuits. Any lawsuits, threatened lawsuits or government investigations in which we are involved could cost us a significant amount of time and money to defend, could distract management’s attention away from operating our business, could result in negative publicity and could adversely affect our stock price. In addition, if any claims are determined against us or if a settlement requires us to pay a large monetary amount or take other action that materially restricts or impedes our operations, our profitability could be significantly reduced and our financial position could be adversely affected. Our insurance may not be sufficient to cover any losses we incur in connection with litigation claims. If we fail to protect confidential information against security breaches, or if customers or potential customers are reluctant to use our services because of privacy concerns, we might face additional costs and could lose customers or potential customers. We collect, use and disclose personally identifiable information, including among other things names, addresses, phone numbers, and email addresses. We also collect, store and use sensitive or confidential transaction information and, in certain circumstances, credit card information. Our policies concerning the collection, use and disclosure of these types of information are described on our websites. While we believe that our policies are appropriate and that we are in compliance with our policies, we could be subject to legal claims, government action, harm to our reputation or experience significant remediation costs if we experience a security breach or our practices fail, or are seen as failing, to comply with our policies or with applicable laws concerning personally identifiable information. We may be subject to legal liability for collecting, displaying or distributing information. Because the content in our database is collected from various sources and distributed to others, we may be subject to claims for breach of contract, defamation, negligence, unfair competition or copyright or trademark infringement or claims based on other theories. We could also be subject to claims based upon the content that is accessible from our website through links to other websites or information on our website supplied by third parties. We could also be subject to claims that the collection or provision of certain information breached laws and regulations relating to privacy and data protection. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against any claims. Our potential liability for information distributed by us to others could require us to implement measures to reduce our exposure to such liability, which may require us to expend substantial resources and limit the attractiveness of our information, analytics and online marketplaces to users. Concern of prospective customers regarding our use of the personal information collected on our websites could keep prospective customers from subscribing to our services. Industry-wide incidents or incidents with respect to our websites, including misappropriation of third-party information, security breaches, or changes in industry standards, regulations or laws, could deter people from using the Internet or our websites to conduct transactions that involve the transmission of confidential information, which could harm our business. Under various state laws, if there is a breach of our computer systems and we know or suspect that unencrypted personal customer data has been stolen, we are required to inform any customers whose data was stolen, which could result in significant costs and harm our reputation and business. In addition, certain state laws require businesses that maintain personal information in electronic databases to implement reasonable measures to keep that information secure. Various states have enacted different and sometimes contradictory requirements for protecting personal information collected and maintained electronically. Compliance with numerous and contradictory requirements of the different states is particularly difficult for an online business such as ours which collects personal information from customers in multiple jurisdictions. 25 We may face adverse publicity and loss of consumer confidence if we are not able to comply with laws requiring us to take adequate measures to assure the confidentiality of the personally identifiable information that our customers have given to us. This could result in a loss of customers and revenue that could jeopardize our success. Even if we are in full compliance with all relevant laws and regulations, we may face liability or disruption of business if we do not comply in every instance or if the security of the customer data that we collect is compromised, regardless of whether our practices comply or not. If we were required to pay any significant amount of money in satisfaction of claims under these laws, or if we were forced to suspend operations for any length of time due to our inability to comply fully with any such laws, our business, operating results and financial condition could be adversely affected. Our business depends on retaining and attracting highly capable management and operating personnel. Our success depends in large part on our ability to retain and attract management and operating personnel, including our President and Chief Executive Officer, Andrew Florance, and our other officers and key employees. Our business requires highly skilled technical, sales, management, web development, marketing and research personnel, who are in high demand and are often subject to competing offers. To retain and attract key personnel, we use various measures, including employment agreements, awards under a stock incentive plan and incentive bonuses for key employees. These measures may not be enough to retain and attract the personnel we need or to offset the impact on our business of the loss of the services of Mr. Florance or other key officers or employees. We may have difficulty attracting, motivating and retaining executives and other key employees in light of the acquisition of the Apartments.com Business. Uncertainty about the effect of the acquisition on our employees, including employees who joined the Company as a result of the acquisition of the Apartments.com Business, may have an adverse effect on the combined business. This uncertainty may impair our ability to attract, retain and motivate key personnel. If our key employees or Apartments.com key employees depart, we may incur costs in identifying, hiring, training and retaining replacements for departing employees, which could reduce our ability to realize the anticipated benefits of the acquisition of the Apartments.com Business. An impairment in the carrying value of goodwill could negatively impact our consolidated results of operations and net worth. Goodwill and identifiable intangible assets not subject to amortization are tested annually by each reporting unit on October 1 of each year for impairment and are tested for impairment more frequently based upon the existence of one or more indicators. We consider our operating segments, North America and International, as our reporting units under Financial Accounting Standards Board (“FASB”) authoritative guidance for consideration of potential impairment of goodwill. We assess the impairment of long- lived assets, identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments made by management relate to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows of the carrying amounts of such assets. The accuracy of these judgments may be adversely affected by several factors, including the factors listed below: • • • • Significant underperformance relative to historical or projected future operating results; Significant changes in the manner of our use of acquired assets or the strategy for our overall business; Significant negative industry or economic trends; or Significant decline in our market capitalization relative to net book value for a sustained period. These types of events or indicators and the resulting impairment analysis could result in goodwill impairment charges in the future, which would reduce our profitability. Impairment charges could negatively affect our financial results in the periods of such charges, which may reduce our profitability. As of December 31, 2014, we had approximately $1.1 billion of goodwill, including $1.1 billion in our North America segment and $24.4 million in our International segment. As a result of the consolidation of certain of our facilities, we may incur additional costs. We have taken, and may continue to take, actions that may increase our cost structure in the short-term but are intended to reduce certain portions of our long-term cost structure, such as consolidation of office space. As a result of consolidation of office space, we may reduce our long-term occupancy costs, but incur restructuring charges. If our long-term cost reduction efforts are ineffective or our estimates of cost savings are inaccurate, our profitability could be negatively impacted. Expected savings from relocating facilities can be highly variable and uncertain. Further, we may not be successful in achieving the operating efficiencies or operating cost reductions expected from these efforts in the amounts or at the times we anticipate. 26 If we are unable to obtain or retain listings from commercial real estate brokers, agents, property owners, and apartment property managers, our commercial real estate ("CRE") marketplace services, including but not limited to LoopNet, Apartments.com, CoStar Showcase, LandandFarm.com and Lands of America, could be less attractive to current or potential customers, which could reduce our revenues. The value of our CRE marketplace services to our customers depends on our ability to increase the number of property listings provided and searches conducted. The success of our CRE marketplace services depends substantially on the number of property listings submitted by brokers, agents, property owners and, in the case of apartment rentals, property managers. This is because an increase in the number of listings increases the utility of the online service and of its associated search, listing and marketing services. If agents marketing large numbers of property listings, such as large brokers in key real estate markets, choose not to continue their listings with us, or choose to list them with a competitor, our CRE marketplace services could be less attractive to other real estate industry transaction participants, resulting in reduced revenue. Similarly, the value and utility of our other marketplaces, including BizBuySell and BizQuest, are also dependent on attracting and retaining listings. If we are unable to convince commercial real estate professionals that our CRE marketplace services are superior to traditional methods of listing, searching, and marketing commercial real estate, they could choose not to use those services, which could reduce our revenues or increase our expenses. The primary source of new customers for our CRE marketplace services is participants in the commercial real estate community. Many commercial real estate professionals are used to listing, searching and marketing real estate in traditional and off-line ways, such as by distributing print brochures, sharing written lists, placing signs on properties, word-of-mouth, and newspaper advertisements. Commercial real estate and investment professionals may prefer to continue to use traditional methods or may be slow to adopt and accept our online products and services. If we are not able to persuade commercial real estate participants of the efficacy of our online products and services, they may choose not to use our CRE marketplace services, which could negatively impact our business. Similarly, if we are unable to convince the business and investment community to utilize our online business for sale marketplaces rather than traditional methods of listing and marketing businesses for sale, our revenues could be negatively affected. The number of LoopNet's registered members is higher than the number of actual members. The number of registered members in LoopNet's network is higher than the number of actual members because some members have multiple registrations or others may have registered under fictitious names. Given the challenges inherent in identifying these accounts, we do not have a reliable system to accurately identify the number of actual members, and thus we rely on the number of registered members as a measure of the size of the LoopNet marketplace. If the number of LoopNet's actual members does not continue to grow and those members do not convert to premium members, then the LoopNet marketplace business may not grow as fast as we expect, which could harm our operating and financial results. If we are unable to increase our revenues or our operating costs are higher than expected, our profitability may decline and our operating results may fluctuate significantly. We may not be able to accurately forecast our revenues or future revenue growth rate. Many of our expenses, particularly personnel costs and occupancy costs, are relatively fixed. As a result, we may not be able to adjust spending quickly enough to offset any unexpected increase in expenses or revenue shortfall. We may experience higher than expected operating costs, including increased personnel costs, occupancy costs, selling and marketing costs, investments in geographic expansion, acquisition costs, communications costs, travel costs, software development costs, professional fees and other costs. If operating costs exceed our expectations and cannot be adjusted accordingly, our profitability may be reduced and our results of operations and financial position will be adversely affected. Additionally, we may not be able to sustain our historic revenue growth rates, and our percentage revenue growth rates may decline. Our ability to increase our revenues and operating profit will depend on increased demand for our services. Our sales are affected by, among other things, general economic and commercial real estate conditions. Reduced demand, whether due to changes in customer preference, a weakening of the U.S. or global economy, competition or other reasons, may result in decreased revenue and growth, adversely affecting our operating results. International operations expose us to additional business risks, which may reduce our profitability. Our international operations and expansion subject us to additional business risks, including: currency exchange rate fluctuations; adapting to the differing business practices and laws in foreign countries; difficulties in managing foreign operations; limited protection for intellectual property rights in some countries; difficulty in collecting accounts receivable and longer collection periods; costs of enforcing contractual obligations; impact of recessions in economies outside the U.S.; and potentially adverse tax consequences. In addition, international expansion imposes additional burdens on our executive and administrative personnel, systems development, research and sales departments, and general managerial resources. If we are not able to manage our international operations successfully, we may incur higher expenses and our profitability may be reduced. Finally, the investment required for additional international expansion could exceed the profit generated from such expansion, which would reduce our profitability and adversely affect our financial position. 27 Fluctuating foreign currencies may negatively impact our business, results of operations and financial position. Due to our acquisitions of CoStar U.K. Limited (formerly FOCUS Information Limited), Grecam S.A.S., and Property and Portfolio Research Ltd., as well as our expansion into Canada, a portion of our business is denominated in the British Pound, Euro and Canadian dollar. As a result, fluctuations in foreign currencies may have an impact on our business, results of operations and financial position. Foreign currency exchange rates have fluctuated and may continue to fluctuate. Significant foreign currency exchange rate fluctuations may negatively impact our international revenue, which in turn affects our consolidated revenue. Currencies may be affected by internal factors, general economic conditions and external developments in other countries, all of which can have an adverse impact on a country’s currency. Currently, we are not party to any hedging transactions intended to reduce our exposure to exchange rate fluctuations. We may seek to enter into hedging transactions in the future, but we may be unable to enter into these transactions successfully, on acceptable terms or at all. We cannot predict whether we will incur foreign exchange losses in the future. Further, significant foreign exchange fluctuations resulting in a decline in the respective, local currency may decrease the value of our foreign assets, as well as decrease our revenues and earnings from our foreign subsidiaries, which would reduce our profitability and adversely affect our financial position. Our indebtedness could adversely affect us, including by decreasing our business flexibility and increasing our costs. On April 1, 2014 (the “Closing Date”), we entered into the 2014 Credit Agreement by and among CoStar, as borrower, CoStar Realty Information, Inc., as co-borrower, the lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The 2014 Credit Agreement provides for a $400.0 million term loan facility and a $225.0 million revolving credit facility, each with a term of five years. The proceeds of the term loan facility and the initial borrowing under the revolving credit facility on the Closing Date in an amount of $150.0 million were used to refinance the term loan facility and revolving credit facility established under a credit agreement dated February 16, 2012 (the “2012 Credit Agreement”), including related fees and expenses, and pay a portion of the consideration and transaction costs related to the acquisition. The 2014 Credit Agreement contains customary restrictive covenants imposing operating and financial restrictions on us, including restrictions that may limit our ability to engage in acts that we believe may be in our long-term best interests. These covenants restrict our ability and the ability of our subsidiaries to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends, distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. The operating restrictions and financial covenants in the 2014 Credit Agreement and any future financing agreements may limit our ability to finance future operations or capital needs, to engage in other business activities or to respond to changes in market conditions. Our ability to comply with any financial covenants could be affected materially by events beyond our control, and we may be unable to satisfy any such requirements. If we fail to comply with these covenants, we may need to seek waivers or amendments of such covenants, seek alternative or additional sources of financing or reduce our expenditures. We may be unable to obtain such waivers, amendments or alternative or additional financing on a timely basis or at all, or on favorable terms. We are required to make periodic principal and interest payments pursuant to the terms of the 2014 Credit Agreement. If an event of default occurs, the interest rate on overdue amounts will increase and the lenders under the 2014 Credit Agreement may declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable and may exercise remedies in respect of the collateral. We may not be able to repay all amounts due under the 2014 Credit Agreement in the event these amounts are declared due upon an event of default. Negative conditions in the global credit markets may affect the liquidity of a portion of our long-term investments. Currently, our long-term investments include mostly AAA-rated auction rate securities (“ARS”), which are primarily student loan securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education. Continuing negative conditions in the global credit markets have prevented some investors from liquidating their holdings of auction rate securities because the amount of securities submitted for sale has exceeded the amount of purchase orders for such securities. As of December 31, 2014, we held $18.7 million par value of ARS, all of which failed to settle at auctions. When an auction fails for ARS in which we have invested, we may be unable to liquidate some or all of these securities at par. In the event we need or desire to immediately access these funds, we will not be able to do so until a future auction on these investments is successful, a buyer is found outside the auction process or an alternative action is determined. If a buyer is found but is unwilling to purchase the investments at par, we may incur a loss, which would reduce our profitability and adversely affect our financial position. 28 Our ARS investments are not currently actively trading and therefore do not currently have a readily determinable market value. The estimated fair value of the ARS no longer approximates par value. We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of December 31, 2014. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of cash flows, liquidity risk premiums, expected holding periods and default risk of the ARS. We update the discounted cash flow model on a quarterly basis to reflect any changes in the assumptions used in the model and settlements of ARS investments that occurred during the period. Based on this assessment of fair value, as of December 31, 2014, we determined there was a decline in the fair value of our ARS investments of approximately $691,000. The decline was deemed to be a temporary impairment and was recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. If the issuers of these ARS are unable to successfully close future auctions and/or their credit ratings deteriorate, we may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments, which would reduce our profitability and adversely affect our financial position. We have not made any material changes in the accounting methodology used to determine the fair value of the ARS. We do not expect any material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of December 31, 2014. However, if changes in these assumptions occur, and, should those changes be significant, we may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments. U.S. political, credit and financial market conditions may negatively impact or impair the value of our current portfolio of cash, cash equivalents and investments, including U.S. Treasury securities and U.S.-backed investments, as well as our access to credit. Our cash, cash equivalents and investments are held in a variety of common financial instruments, including U.S. treasury securities. Deterioration in the U.S. credit and financial markets may result in losses or deterioration in the fair value of our cash, cash equivalents, or investments. On August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the U.S. from AAA to AA+. This downgrade, and any future downgrades of the U.S. credit rating, could impact the stability of future U.S. treasury auctions, affect the trading market for U.S. government securities, result in increased interest rates and impair access to credit. These factors could negatively impact the liquidity or valuation of our current portfolio of cash, cash equivalents, and investments, which may affect our ability to fund future obligations. Further, these factors may result in an increase in interest rates and borrowing costs and make it more difficult to obtain credit on acceptable terms, which may affect our ability to fund future obligations and increase the costs of obtaining financing for future obligations. Technical problems or disruptions that affect either our customers’ ability to access our services, or the software, internal applications, database and network systems underlying our services, could damage our reputation and brands and lead to reduced demand for our information, analytics and online marketplace services, lower revenues and increased costs. Our business, brands and reputation depend upon the satisfactory performance, reliability and availability of our websites, the Internet and our service providers. Interruptions in these systems, whether due to system failures, computer viruses, software errors, physical or electronic break-ins, or malicious hacks or attacks on our systems (such as denial of service attacks), could affect the security and availability of our services on our mobile applications and our websites and prevent or inhibit the ability of users to access our services. Our operations also depend on our ability to protect our databases, computers and software, telecommunications equipment and facilities against damage from potential dangers such as fire, flood, power loss, security breaches, computer viruses, telecommunications failures, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses, earthquakes and similar events. Our users rely on our services when conducting their own businesses. Disruptions in, or reductions in ability to access, our services for whatever reason could damage our users’ businesses, harm our reputation, result in additional costs or result in reduced demand for our information, analytics and online marketplace services, any of which could harm our business, results of operations and financial condition. In addition, the software, internal applications and systems underlying our services are complex and may not be error-free. Our careful development and testing may not be sufficient to ensure that we will not encounter technical problems when we attempt to enhance our software, internal applications and systems. Any inefficiencies, errors or technical problems with our software, internal applications and systems could reduce the quality of our services or interfere with our customers’ access to our information, analytics and online marketplaces, which could reduce the demand for our services, lower our revenues and increase our costs. 29 The majority of the communications, network and computer hardware used to operate our mobile applications and websites are located at facilities in Virginia and California. We do not own or control the operation of certain of these facilities. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, security breaches, computer viruses, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, earthquakes and similar events. These risks may be increased with respect to operations housed at facilities we do not own or control. The occurrence of any of the foregoing events could result in damage to our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient to compensate us for losses that may occur. A failure of our systems at any site could result in reduced functionality for our users, and a total failure of our systems could cause our mobile applications or websites to be inaccessible. Problems faced or cause by our information technology service providers, including content distribution service providers, private network providers, internet providers and third-party web- hosting providers, or with the systems by which they allocate capacity among their customers (as applicable), could adversely affect the experience of our users. Any financial difficulties, such as bankruptcy reorganization, faced by these third-party service providers or any of the service providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party service providers are unable to keep up with our growing needs for capacity, our business could be harmed. In addition, if distribution channels for our mobile applications experience disruptions, such disruptions could adversely affect the ability of users and potential users to access or update our mobile applications, which could harm our business. Our business interruption insurance may not cover certain events or may be insufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business, which may result from interruptions in our service as a result of system failures or malicious attacks. Any errors, defects, disruptions or other performance problems with our services could harm our reputation, business, results of operations and financial condition. Our operating results and revenues are subject to fluctuations and our quarterly financial results may be subject to seasonality and market cyclicality, each of which could cause our stock price to be negatively affected. The commercial real estate market may be influenced by general economic conditions, economic cycles, annual seasonality factors and many other factors, which in turn may impact our financial results. The market is large and fragmented. The different sectors of the industry, such as office, industrial, retail, multifamily, and others, are influenced differently by different factors, and have historically moved through economic cycles with different timing. As such, it is difficult to estimate the potential impact of economic cycles and conditions or seasonality from year-to-year on our overall operating results. In addition, our results may be impacted by seasonality. The timing of widely observed holidays and vacation periods, particularly slow downs during the end-of-year holiday period, and availability of real estate agents and related service providers during these periods, could significantly affect our quarterly operating results during that period. If we are unable to adequately respond to economic, seasonal or cyclical conditions, our revenues, expenses and operating results may fluctuate from quarter to quarter. Our operating results, revenues and expenses may fluctuate for many reasons, including those described below and elsewhere in this Annual Report on Form 10-K: • Rates of subscriber adoption and retention; • Timing of our sales conference or significant marketing events; • A slow-down during the end-of-year holiday period; • Changes in our pricing strategy and timing of changes; • The timing and success of new service introductions and enhancements; • The shift of focus from, or phase out of services that overlap or are redundant with other services we offer; • The amount and timing of our operating expenses and capital expenditures; • Our ability to control expenses; • The amount and timing of non-cash stock-based charges; • Costs related to acquisitions of businesses or technologies or impairment charges associated with such investments and acquisitions; • Competition; • Changes or consolidation in the real estate industry; • Our investments in geographic expansion and to increase coverage in existing markets; • • • The development of our sales force; • • • Changes in client budgets. Interest rate fluctuations; Successful execution of our expansion and integration plans; Foreign currency and exchange rate fluctuations; Inflation; and 30 These fluctuations or seasonality effects could negatively affect our results of operations during the period in question and/ or future periods or cause our stock price to decline. In addition, changes in accounting policies or practices may affect our level of net income. Fluctuations in our financial results, revenues and expenses may cause the market price of our common stock to decline. The consent order approved by the Federal Trade Commission in connection with the LoopNet merger imposes conditions that could have an adverse effect on us and our business, and failure to comply with the terms of the consent order may result in adverse consequences for the combined company. On April 26, 2012, the FTC accepted the consent order in connection with the LoopNet merger that was previously agreed to among the FTC staff, CoStar, and LoopNet on April 17, 2012. The consent order was subject to a 30-day public comment period, and on August 29, 2012, the FTC issued its final acceptance of the consent order. The consent order, which is publicly available on the FTC's website at http://www.ftc.gov/, requires CoStar to maintain certain business practices that the FTC believes are pro-competitive. For example, the consent order requires CoStar to maintain its customary practice of selling its products separately and on a market-by-market basis. It also requires CoStar to license its products to customers who have bought its competitors' products on a non-discriminatory basis. In addition, CoStar is required to maintain its customary licensing practices with respect to the length of its contracts, to allow customers with multi-year contracts to cancel with one year's advance notice, and to agree to reduce the cost of any litigation with customers by offering to arbitrate certain disputes. In the event that CoStar fails or is unable to comply with the terms of the consent order, CoStar could be subject to an enforcement proceeding that could result in substantial fines and/or injunctive relief. Further, the provisions of the consent order may result in unanticipated adverse effects on the combined company and, therefore, reduce our ability to realize the anticipated benefits of the merger. For example, the terms of the consent order that require us to continue to sell our products separately may prohibit us from combining or eliminating certain business lines, products or services that we believe would result in a long-term positive impact on our revenue and earnings. We have incurred and will continue to incur acquisition-related costs. We have incurred severance costs and expect to incur additional costs to integrate prior acquisitions, such as IT integration expenses and costs related to the renegotiation of redundant vendor agreements. Costs in connection with acquisitions and integrations may be higher than expected, and we may also incur unanticipated acquisition-related costs. These costs could adversely affect our financial condition, results of operation or prospects of the combined business. Changes in accounting and reporting policies or practices may affect our financial results or presentation of results, which may affect our stock price. Changes in accounting and reporting policies or practices could reduce our net income, which reductions may be independent of changes in our operations. These reductions in reported net income could cause our stock price to decline. For example, in 2006, we adopted authoritative guidance for stock compensation, which required us to expense the value of granted stock options. Market volatility may have an adverse effect on our stock price. The trading price of our common stock has fluctuated widely in the past, and we expect that it will continue to fluctuate in the future. The price could fluctuate widely based on numerous factors, including: economic factors; quarter-to-quarter variations in our operating results; changes in analysts’ estimates of our earnings; announcements by us or our competitors of technological innovations, new services, or other significant or strategic information; general conditions in the commercial real estate industry; developments or disputes concerning copyrights or proprietary rights or other legal proceedings; and regulatory developments. In addition, the stock market in general, and the shares of internet-related and other technology companies in particular, have experienced extreme price fluctuations. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the specific companies and may have the same effect on the market price of our common stock. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our headquarters is located at 1331 L Street, NW, in downtown Washington, DC, where we occupy approximately 149,500 square feet of office space. Our lease for our headquarters expires May 31, 2025 (with two 5-year renewal options). Our headquarters is used primarily by our North America operating segment. Our principal facility in the U.K. is located in London, England, where we occupy approximately 7,000 square feet of office space. Our lease for this facility has a maximum term ending July 8, 2023, with early termination at our option on July 9, 2018, with advance notice. This facility is used primarily by our International operating segment. 31 In addition to two downtown Washington, DC leased facilities (including our headquarters) and our London, England facility, our research operations are principally run out of leased spaces in San Diego, California; Columbia, Maryland; Atlanta, Georgia; Glasgow, Scotland; and Paris, France. Additionally, we lease office space in a variety of other metropolitan areas. These locations include, without limitation, the following: New York; Los Angeles; Chicago; San Francisco; Sacramento; Boston; Orange County, California; Philadelphia; Houston; Phoenix; Detroit; Pittsburgh; Miami; Orlando; Denver; Dallas; Kansas City; Cleveland; Cincinnati; Indianapolis; Austin; Salt Lake City; Las Vegas; Seattle; Portland; St. Louis; Louisville; Minneapolis; San Luis Obispo, California; Ontario, California; Charlotte; Durham, North Carolina; Manchester, England and Toronto, Canada. We believe these facilities are suitable and appropriately support our business needs. Item 3. Legal Proceedings Currently, and from time to time, we are involved in litigation incidental to the conduct of our business. Certain pending legal proceedings are discussed in Note 11 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. We are not a party to any lawsuit or proceeding that, in the opinion of our management based on consultations with legal counsel, is likely to have a material adverse effect on our financial position or results of operations. Item 4. Mine Safety Disclosures Not Applicable. 32 PART II Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common Stock. Our common stock is traded on the Nasdaq Global Select Market under the symbol “CSGP.” The following table sets forth, for the periods indicated, the high and low daily closing prices per share of our common stock, as reported by the Nasdaq Global Select Market. Year Ended December 31, 2013 First Quarter Second Quarter Third Quarter Fourth Quarter Year Ended December 31, 2014 First Quarter Second Quarter Third Quarter Fourth Quarter High Low $ $ $ $ $ $ $ $ 109.46 129.51 170.09 186.62 214.00 188.95 160.10 188.39 $ $ $ $ $ $ $ $ 89.28 105.73 131.03 161.29 166.78 150.55 138.76 137.60 As of February 2, 2015, there were 900 holders of record of our common stock. Dividend Policy. We have never declared or paid any dividends on our common stock. The 2014 Credit Agreement includes covenants that, subject to certain exceptions, restrict our ability and the ability of our subsidiaries to pay dividends or distributions. Any future determination to pay dividends will be at the discretion of our Board of Directors, subject to applicable limitations under Delaware law, and will be dependent upon our results of operations, financial position and other factors deemed relevant by our Board of Directors. We do not anticipate paying any dividends on our common stock during the foreseeable future, but intend to retain any earnings for future growth of our business. Recent Issues of Unregistered Securities. We did not issue any unregistered securities during the year ended December 31, 2014. Issuer Purchases of Equity Securities. The following table is a summary of our repurchases of common stock during each of the three months in the quarter ended December 31, 2014: ISSUER PURCHASES OF EQUITY SECURITIES Month, 2014 October 1 through 31 November 1 through 30 December 1 through 31 Total Total Number of Shares Purchased Average Price Paid per Share 58 — 3,273 3,331 $148.32 — 167.10 $166.78 (1) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs — — — — — — — — (1) The number of shares purchased consists of shares of common stock tendered by employees to the Company to satisfy the employees’ minimum tax withholding obligations arising as a result of vesting of restricted stock grants under the Company’s 2007 Stock Incentive Plan, as amended, which shares were purchased by the Company based on their fair market value on the vesting date. None of these share purchases were part of a publicly announced program to purchase common stock of the Company. 33 Stock Price Performance Graph The stock performance graph below shows how an initial investment of $100 in our common stock would have compared to: • An equal investment in the Standards & Poor's Stock 500 (“S&P 500”) Index; • An equal investment in the S&P 500 Internet Software & Services Index; and The comparison covers the period beginning December 31, 2009, and ending on December 31, 2014, and assumes the reinvestment of any dividends. You should note that this performance is historical and is not necessarily indicative of future price performance. Company / Index CoStar Group, Inc. S&P 500 Index S&P 500 Internet Software & Services Index 12/31/09 100 100 100 12/31/10 137.80 115.06 102.56 12/31/11 159.76 117.49 107.95 12/31/12 213.96 136.30 129.36 12/31/13 441.90 180.44 192.46 12/31/14 439.62 205.14 205.16 34 Item 6. Selected Consolidated Financial and Operating Data Selected Consolidated Financial and Operating Data (in thousands, except per share data) The following table provides selected consolidated financial and other operating data for the five years ended December 31, 2014. The consolidated statement of operations data shown below for each of the three years ended December 31, 2012, 2013, and 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 are derived from audited consolidated financial statements that are included in this report. The consolidated statement of operations data for each of the years ended December 31, 2010 and 2011 and the consolidated balance sheet data as of December 31, 2010, 2011, and 2012 shown below are derived from audited consolidated financial statements for those years that are not included in this report. Information about prior period acquisitions that may affect the comparability of the selected financial information presented below is included in "Item 1. Business." Consolidated Statement of Operations Data: Revenues Cost of revenues Gross margin Operating expenses Income from operations Interest and other income Interest and other expense Income before income taxes Income tax expense, net Net income Net income per share — basic Net income per share — diluted Weighted average shares outstanding — basic Weighted average shares outstanding — diluted Consolidated Balance Sheet Data: Cash, cash equivalents, short-term and long-term investments Working capital Total assets Total long-term liabilities Stockholders’ equity $ $ $ $ $ 2010 226,260 83,599 142,661 119,886 22,775 735 — 23,510 10,221 13,289 0.65 0.64 20,330 20,707 $ $ $ $ $ $ Year Ended December 31, 2012 349,936 114,866 235,070 207,630 27,440 526 (4,832) 23,134 13,219 9,915 0.37 0.37 26,533 26,949 2011 251,738 88,167 163,571 141,800 21,771 798 — 22,569 7,913 14,656 0.63 0.62 23,131 23,527 2013 440,943 129,185 311,758 257,604 54,154 326 (6,943) 47,537 17,803 29,734 1.07 1.05 27,670 28,212 $ $ $ $ $ $ $ $ $ $ 2014 575,936 156,979 418,957 338,079 80,878 516 (10,481) 70,913 26,044 44,869 1.48 1.46 30,215 30,641 2010 2011 As of December 31, 2012 2013 2014 $ 239,316 188,279 439,648 7,252 381,502 573,379 521,401 771,035 50,076 659,177 $ 177,726 97,925 1,165,139 237,158 826,343 $ 277,943 196,913 1,256,982 217,567 927,862 $ 544,163 480,521 2,083,682 450,846 1,513,546 35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward- looking statements,” including statements about our beliefs and expectations. There are many risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Potential factors that could cause actual results to differ materially from those discussed in any forward-looking statements include, but are not limited to, those stated above in Item 1A. under the headings “Risk Factors - Cautionary Statement Concerning Forward-Looking Statements” and “- Risk Factors,” as well as those described from time to time in our filings with the Securities and Exchange Commission. All forward-looking statements are based on information available to us on the date of this filing and we assume no obligation to update such statements, whether as a result of new information, future events or otherwise. The following discussion should be read in conjunction with our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission and the consolidated financial statements and related notes included in this Annual Report on Form 10-K. Overview CoStar Group, Inc. (the “Company” or “CoStar”) is the number one provider of information, analytics and online marketplaces to the commercial real estate industry in the United States ("U.S.") and the United Kingdom ("U.K.") based on the fact that we offer the most comprehensive commercial real estate database available; have the largest research department in the industry; own and operate the leading online marketplaces for commercial real estate in the U.S. based on the number of unique visitors per month; provide more information, analytics and marketing services than any of our competitors and believe that we generate more revenues than any of our competitors. We created and compiled our standardized platform of information, analytics and online marketplace services where members of the commercial real estate and related business community can continuously interact and facilitate transactions by efficiently exchanging accurate and standardized commercial real estate information. We have five flagship brands - CoStar, LoopNet, Apartments.com, BizBuySell and LandsofAmerica. Our subscription-based information services consist primarily of CoStar SuiteTM services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional® and CoStar Tenant® and through our mobile application, CoStarGo®. Our integrated suite of online service offerings includes information about space available for lease, comparable sales information, information about properties for sale, tenant information, internet marketing services, analytical capabilities, information for clients' websites, information about industry professionals and their business relationships, data integration and industry news. We provide market research and analysis for commercial real estate investors and lenders via our CoStar Portfolio Strategy and CoStar Market Analytics service offerings, portfolio and debt analysis, management and reporting capabilities through our CoStar Investment Analysis and CoStar Risk Analytics service offerings, and real estate and lease management solutions, including lease administration and abstraction services, through our CoStar Real Estate Manager service offerings. LoopNet, our subsidiary, operates an online marketplace that enables commercial property owners, landlords, and real estate agents working on their behalf to list properties for sale or for lease and to submit detailed information about property listings. Commercial real estate agents, buyers and tenants also use LoopNet's online marketplace to search for available property listings that meet their criteria. Apartments, LLC (doing business as Apartments.com), our subsidiary, operates an online apartment marketplace for renters that matches apartment seekers with apartment homes and provides property managers and owners a platform for marketing their properties. BizBuySell is an online marketplace for operating businesses for sale, and LandsofAmerica is an online marketplace for rural land for sale. Our service offerings span all commercial property types, including office, retail, industrial, multifamily, commercial land, mixed-use and hospitality. 36 To more fully integrate and connect our services and, ultimately, to provide improved access to our resources, we launched a new brand identity in May 2014. The new branding is designed to unite our flagship brands - CoStar, LoopNet, Apartments.com, BizBuySell and LandsofAmerica - with a modern, cohesive look that will enhance customers’ access to the full breadth of our information, analytics and online marketplace solutions. The resulting streamlined network of platforms is expected to improve the customer experience and make it easier for customers to find the most useful tools for their commercial real estate information, analytics and online marketplace needs. The new brand identity was unveiled in connection with the launch of our new corporate website and newly designed website interfaces for CoStar, LoopNet and Apartments.com. Our new website interfaces provide streamlined navigation and search functions for visitors and enable customers to quickly access our market-leading services. Since introducing our new brand identity in May 2014, we have relaunched the Apartments.com website. Subscription-Based Services Our subscription-based information services consist primarily of CoStar SuiteTM services. CoStar Suite is our primary service offering in our North America and International operating segments. Prior to the third quarter of 2014, FOCUSTM was our primary service offering in our International operating segment. We introduced CoStar Suite in the U.K. in the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013. Our subscription-based services consist primarily of similar services offered over the Internet to commercial real estate industry and related professionals. Our services are typically distributed to our clients under subscription-based license agreements that renew automatically, a majority of which have a term of 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 information services rather than charging fees based on actual system usage. Contract rates are generally based on the number of sites, number of users, organization size, the client's business focus, geography and the number and types of services to which a client subscribes. Our subscription clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly or annual basis. As of December 31, 2013 and 2014, our annualized net new sales of subscription-based services on annual contracts were approximately $15.8 million and $17.3 million, respectively, calculated based on the annualized amount of change in our sales resulting from new annual subscription-based contracts or upsales on existing annual subscription-based contracts, less write downs and cancellations, for the period reported. We recognize subscription revenue on a straight-line basis over the life of the contract. Annual and quarterly advance payments result in deferred revenue, substantially reducing the working capital requirements generated by accounts receivable. For the twelve months ended December 31, 2013 and 2014, our contract renewal rate for existing CoStar subscription-based services was approximately 93% and 92%, respectively, and therefore our cancellation rate for those services was approximately 7% and 8%, respectively, for the same time periods. Our contract renewal rate is a quantitative measurement that is typically closely correlated with our revenue results. As a result, management also believes that the rate may be a reliable indicator of short- term and long-term performance. Our trailing twelve-month contract renewal rate may decline if, among other reasons, negative economic conditions lead to greater business failures and/or consolidations among our clients, reductions in customer spending, or decreases in our customer base. Recent Acquisition On April 1, 2014 (the “Closing Date”), we increased our presence in the multifamily vertical by acquiring the Apartments.com Business, a national online apartment rentals resource for renters, property managers and owners. We purchased from CV the Apartments.com Business for $584.2 million in cash, after taking into account net working capital adjustments. Apartments.com offers renters a database of apartment listings and provides professional property management companies and landlords with an advertising destination. Renters can conduct personalized searches of apartment listings and view video demonstrations and community reviews through the Apartments.com website and mobile applications. The Apartments.com network of rental websites also includes ApartmentHomeLiving.com, another national online apartment rentals resource. 37 Apartments.com draws on CoStar’s multifamily database, which contains detailed information on apartment properties, and a research effort to document the apartment industry in the U.S. CoStar designed the new Apartments.com website, which was launched in February 2015, around the needs of the renter in order to drive traffic to the site and attract advertisers who prefer to advertise on heavily trafficked apartment websites. The newly launched site provides a comprehensive selection of rentals, information on actual availabilities and rents, and in-depth data on neighborhoods, including restaurants, nightlife, history, schools and other important facts. To help renters find the information that meets their needs, the new site also offers innovative search tools. Similar to our other past acquisitions, we plan to integrate, further develop and cross-sell the services offered by the Apartments.com Business and the other services we offer. We have incurred and plan to continue to incur product development costs to improve the online Apartments.com platform, and we plan to increase our sales and marketing expenses in order to support the Apartments.com Business and to increase brand awareness. In conjunction with the launch of the new Apartments.com website, we plan to embark on a wide-scale marketing campaign commencing during the first quarter of 2015 and running throughout the remainder of 2015 to generate brand awareness and site traffic for Apartments.com, including an incremental investment of $75.0 million above Apartments.com’s 2014 annualized marketing spend since the close of the acquisition of the Apartments.com Business. The marketing campaign is expected to feature television and radio advertising, online/digital advertising, social media and out-of-home ads and will be reinforced by Search Engine Marketing. On the Closing Date, we also entered into the 2014 Credit Agreement by and among CoStar, as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. The 2014 Credit Agreement provides for a $400.0 million term loan facility and a $225.0 million revolving credit facility, each with a term of five years. The proceeds of the term loan facility and the initial borrowing of $150.0 million under the revolving credit facility on the Closing Date were used to refinance the term loan facility and revolving credit facility established under a credit agreement dated February 16, 2012 (the “2012 Credit Agreement”), including related fees and expenses, and to pay a portion of the consideration and transaction costs related to the acquisition of the Apartments.com Business. The undrawn proceeds of the revolving credit facility are available for our working capital needs and other general corporate purposes. The obligations under the 2014 Credit Agreement are guaranteed by all of our material subsidiaries and are secured by a lien on substantially all of our assets and those of our material subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee documents entered into on the Closing Date. Expansion and Development We expect to continue our software development efforts to improve existing services, introduce new services, integrate products and services, cross-sell existing services, and expand and develop supporting technologies for our research, sales and marketing organizations. We are committed to supporting and improving our information, news, analytic and online marketplace solutions. The launch of the new Apartments.com website in February 2015 is one example of our software development efforts to improve existing services, introduce new services, integrate products and services, and cross-sell existing services. We believe the improved site, enhanced search capabilities, and real-time vacancies will draw more consumers, making the service more valuable to property managers and increasing cross-selling opportunities. Another example is our introduction in October 2013 of technology enhancements to CoStar Suite, our platform of service offerings consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant. The enhancements improve CoStar Suite's user interface, search functionality and analytic capabilities. For example, the CoStar Multifamily® information search allows users to access our extensive multifamily property database. In addition, CoStar Lease AnalysisTM, an integrated workflow tool, provides users a simple way to produce understandable cash flows for any proposed or existing lease. We plan to continue our software development efforts to enhance our new Lease Analysis workflow tool and to develop other potential lease comparable services in 2015. We believe this greater functionality will make our services valuable to an even broader audience and help us increase sales of our services to brokers, banks, owners and institutional investors. These technology enhancements are expected to drive continued revenue growth in 2015 and for the foreseeable future. In October 2013, we also released CoStarGo® 2.0, the next generation of our mobile application, which was launched in the U.S. on August 15, 2011 and introduced in the U.K. on November 5, 2012. CoStarGo is our iPad application that integrates and provides CoStar Suite subscribers mobile access to our comprehensive property, tenant and comparable sales information. CoStarGo 2.0 adds powerful analytic capabilities to our comprehensive mobile solution. In 2014, we introduced enhancements to our flagship marketing platform, LoopNet.com. For example, we added a targeted advertising service that allows brokers or firms to purchase advertisements based on geographic and property type criteria. Additionally, we introduced ProVideo, a service that enables owners and brokers to enhance their LoopNet listings with high quality videos of interior spaces, amenities and exterior features. 38 We continue to integrate, develop and cross-sell the services offered by the businesses we have acquired, including Apartments.com and LoopNet. Our goal is to upsell clients to the services that best meet their needs and to create further cross- selling revenue synergies. We evaluate potential changes to our service offerings from time to time in order to better align the services we offer with customers’ needs. Further, in some cases, when integrating and coordinating our services and assessing industry and client needs, we may decide to combine, shift focus from, de-emphasize, phase out, or eliminate a service that, among other things, overlaps or is redundant with other services we offer. In the event that we eliminate or phase out service offerings, we may experience reduced revenues and earnings. The decision to eliminate or phase out a service offering may also ultimately result in increased revenues and earnings from sales of other services we offer in lieu of the eliminated or phased out services. For example, we are currently assessing whether to transition the LoopNet marketplace to a pure marketing site for commercial real estate where, eventually, all listings would be paid and users could search the site for free. We would expect to see a short-term reduction in revenues and earnings if we implement this transition. Although we are assessing the best strategy to implement this shift and will seek to convert customers to higher value, more profitable annual subscription information services to increase revenues and earnings over time, we cannot predict with certainty the amount or timing of any reductions in revenues and earnings or subsequent increases in revenues and earnings, if any, resulting from eliminations or phasing out of the LoopNet information services or any other service offering, if implemented. Our revenues have increased as a result of revenue from acquired businesses and from cross-selling opportunities among the customers of CoStar and the acquired companies. We expect to continue to achieve revenue synergies from acquisitions as a result of cross-selling opportunities. We may incur increased expenses in connection with any related marketing and sales campaigns involving cross-selling opportunities and initiatives and in connection with promotion of our new services and brands. Internationally, we continue to integrate our operations more fully with those in the U.S. Similar to our North America operating segment, we intend to continue to upgrade our international platform of services and expand the coverage of our service offerings within our International segment. To further those initiatives, we introduced CoStar Suite in the U.K. during the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013. CoStar Suite is sold as a consistent international platform of service offerings consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant and through the Company's mobile application, CoStarGo. CoStarGo 2.0 was released in the U.K. in October 2013 simultaneous with its release in the U.S. Additionally, we have upgraded our back-end research operations, fulfillment and Customer Relationship Management systems to support these new U.K. services. The financial performance of our International operating segment continues to improve. During the twelve months ended December 31, 2014, International EBITDA increased to a positive amount as a result of increased revenue and decreased operating expenses as compared to the twelve months ended December 31, 2013. See the “Non-GAAP Financial Measures” section included in this Annual Report on Form 10-K for further details on the non-GAAP financial measures. We recently expanded the geographic reach of our North America services. In 2014, we began offering our services in Toronto, Canada. Building on our experience in Toronto, we plan to expand our research into additional Canadian cities. We believe that our integration efforts and continued investments in our services, including expansion of our existing service offerings, have created a platform for long-term revenue growth. We expect these investments to result in further penetration of our subscription- based information services and the successful cross-selling of our services to customers in existing markets. We have invested in the expansion and development of our field sales force to support the growth and expansion of our company in North America and internationally. We plan to continue to invest in, evaluate and strategically position our sales force as the Company continues to develop and grow. We are also investing in our research capacity to support continued growth of our information and analytics offerings, to support the Apartments.com Business and to expand into additional Canadian markets. While we believe investments we make in our business create a platform for growth, those investments may reduce our profitability and adversely affect our financial position. We intend to continue to assess the need for additional investments in our business, in addition to the investments discussed above in order to develop and distribute new services within our current platform or expand the reach of our current service offerings. Any future product development or expansion of services, combination and coordination of services or elimination of services or internal expansion, development or restructuring efforts could reduce our profitability and increase our capital expenditures. Therefore, while we expect current service offerings to remain profitable, driving overall earnings in 2015 and providing substantial cash flow for our business, it is possible that any new investments, changes to our service offerings or other unforeseen events could cause us to generate losses and negative cash flow from operations in the future. Further, our credit facilities contain restrictive covenants that restrict our operations and use of our cash flow, which may prevent us from taking certain actions that we believe could increase our profitability or otherwise enhance our business. 39 In support of our continued expansion and development, during June 2014, we completed a public equity offering of 3,450,000 shares of common stock for $160.00 per share, resulting in net proceeds to the Company of approximately $529.4 million. We intend to use the net proceeds from the public equity offering to fund all or a portion of the costs of any strategic acquisitions we decide to pursue in the future, to finance the growth of our business and for working capital and other general corporate purposes. Financial Matters Our financial reporting currency is the U.S. dollar. Changes in exchange rates can significantly affect our reported results and consolidated trends. We believe that our increasing diversification beyond the U.S. economy through our international businesses benefits our stockholders over the long term. We also believe it is important to evaluate our operating results before and after the effect of currency changes, as it may provide a more accurate comparison of our results of operations over historical periods. Currency exchange rate volatility may continue, which may impact (either positively or negatively) our reported financial results and consolidated trends and period-to-period comparisons of our consolidated operations. We currently issue stock options and/or restricted stock to our officers, directors and employees, and as a result we record compensation expense in our consolidated statements of operations. The amount and timing of the compensation expense that we record depends on the amount and types of equity grants made. We plan to continue to use stock-based compensation for our officers, directors and employees, which may include, among other things, restricted stock, restricted stock units or stock option grants that typically will require us to record additional compensation expense in our consolidated statements of operations and reduce our net income. Grants of equity awards may vest over time or based on achievement of pre-approved performance conditions or market conditions. In February 2014, the Compensation Committee (the “Committee”) of our Board of Directors approved grants of restricted common stock to our executive officers that vest based on our achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by December 31, 2016.These grants of restricted common stock are also subject to continuing employment requirements and a market condition based on total shareholder return (“TSR”). The actual number of shares that vest at the end of the respective three-year period is determined based on our achievement of the three-year performance goals described above, as well as our TSR relative to the Russell 1000 Index over the related three-year performance period. As of December 31, 2014, we reassessed the probability of achieving the performance and market conditions and determined that it was still probable that the performance and market conditions for these awards would be met by the December 31, 2016 forfeiture date. As a result, we recorded a total of approximately $1.1 million of stock-based compensation expense related to the performance-based restricted common stock for the year ended December 31, 2014. No stock-based compensation expense related to the grant of 2014 performance-based restricted common stock was recorded for the years ended December 31, 2012 and 2013. We expect to record an estimated unrecognized stock-based compensation expense related to the performance-based restricted common stock awards of approximately $2.7 million over the periods 2015, 2016 and 2017. Property Developments As in the past, we expect to continue to identify new facilities and consolidate existing facilities to better accommodate the changing demands of our business and employees. As a result, we may incur additional lease restructuring charges for the abandonment of certain lease space and the impairment of leasehold improvements. Application of Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. The following accounting policies involve a “critical accounting estimate” because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different acceptable assumptions would yield different results. Changes in the accounting estimates are reasonably likely to occur from period to period, which may have a material impact on the presentation of our financial condition and results of operations. We review these estimates and assumptions periodically and reflect the effects of revisions in the period that they are determined to be necessary. 40 Fair Value of Auction Rate Securities 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 assets and liabilities by the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; 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. Our Level 3 assets consist of auction rate securities (“ARS”), whose underlying assets are primarily student loan securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education. Our ARS investments are not currently actively trading and therefore do not currently have a readily determinable market value. The estimated fair value of the ARS no longer approximates par value. We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of December 31, 2014. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of contractual cash flows, liquidity risk premiums, expected holding periods and default risk of the ARS. We update the discounted cash flow model on a quarterly basis to reflect any changes in the assumptions used in the model and settlements of ARS investments that occurred during the period. The only significant unobservable input in the discounted cash flow model is the discount rate. The discount rate used represents our estimate of the yield expected by a market participant from the ARS investments. The weighted average discount rate used in the discounted cash flow model as of December 31, 2013 and 2014 was approximately 4.9% and 4.1%, respectively. Selecting another discount rate within the range used in the discounted cash flow model would not result in a significant change to the fair value of the ARS. Based on this assessment of fair value, as of December 31, 2014, we determined there was a decline in the fair value of our ARS investments of approximately $691,000. The decline was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. If the issuers of these ARS are unable to successfully close future auctions and/or their credit ratings deteriorate, we may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments, which would reduce our profitability and adversely affect our financial position. We have not made any material changes in the accounting methodology used to determine the fair value of the ARS. We do not expect any material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of December 31, 2014. However, if changes in these assumptions occur, and, should those changes be significant, we may be exposed to additional unrealized losses in accumulated other comprehensive loss or an other- than-temporary impairment charge to earnings on these investments. Stock-Based Compensation We account for equity instruments issued in exchange for employee services using a fair-value based method and we recognize the fair value of such equity instruments as an expense in the consolidated statements of operations. We estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, which requires us to estimate the dividend yield, expected volatility, risk-free interest rate and expected life of the stock option. For equity instruments that vest based on a market condition, we estimate the fair value of each equity instrument granted on the date of grant using a Monte-Carlo simulation model, which also requires us to estimate the dividend yield, expected volatility, risk-free interest rate and expected life of the equity instruments. These assumptions and the estimation of expected forfeitures are based on multiple factors, including historical employee behavior patterns of exercising options and post-employment termination behavior, expected future employee option exercise patterns, and the historical volatility of our stock price. For equity instruments that vest based on performance, we assess the probability of the achievement of the performance conditions at the end of each reporting period, or more frequently based upon the occurrence of events that may change the probability of whether the performance conditions would be met. If our initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing of recognition 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. We do not expect any material changes in the near term to the underlying assumptions used to calculate stock-based compensation expense for the year ended December 31, 2014. However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our stock-based compensation expense. 41 Valuation of Long-Lived and Intangible Assets and Goodwill We assess the impairment of long-lived assets, identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments made by management relate to the expected useful lives of long-lived assets and our ability to realize any undiscounted cash flows of the carrying amounts of such assets. The accuracy of these judgments may be adversely affected by several factors, including the factors listed below: • • • • Significant underperformance relative to historical or projected future operating results; Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; Significant negative industry or economic trends; or Significant decline in our market capitalization relative to net book value for a sustained period. When we determine that the carrying value of long-lived and identifiable intangible assets may not be recovered based upon the existence of one or more of the above indicators, we test for impairment. Goodwill and identifiable intangible assets that are not subject to amortization are tested annually for impairment by each reporting unit on October 1 of each year and are also tested for impairment more frequently based upon the existence of one or more of the above indicators. We consider our operating segments, North America and International, as our reporting units under Financial Accounting Standards Board (“FASB”) authoritative guidance for consideration of potential impairment of goodwill. To determine whether it is necessary to perform the two-step goodwill impairment test, we may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if we elect not to assess qualitative factors, then we perform the two-step process. The first step is to determine the fair value of each reporting unit. We estimate the fair value of each reporting unit based on a projected discounted cash flow model that includes significant assumptions and estimates including our discount rate, growth rate and future financial performance. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies. Assumptions about the growth rate and future financial performance of a reporting unit are based on our forecasts, business plans, economic projections and anticipated future cash flows. Our assumptions regarding the future financial performance of the International reporting unit reflect our expectation as of October 1, 2014, that revenues will continue to increase as a result of further penetration of our international subscription-based information services and the successful cross-selling of our services to our customers in existing markets due to the release of our upgraded international platform and expansion of coverage of our international service offerings. These assumptions are subject to change from period to period and could be adversely impacted by the uncertainty surrounding global market conditions, commercial real estate conditions, and the competitive environment in which we operate. Changes in these or other factors could negatively affect our reporting units' fair value and potentially result in impairment charges. Such impairment charges could have an adverse effect on our results of operations. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then the second step of the process is performed to measure the impairment loss. We measure impairment loss based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk in our current business model. As of October 1, 2014, the date of our most recent impairment analysis, the estimated fair value of each of our reporting units substantially exceeded the carrying value of our reporting units. There have been no events or changes in circumstances since the date of our impairment analysis on October 1, 2014 that would indicate that the carrying value of each reporting unit may not be recoverable. To determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets, we may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying amount. If we conclude that it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying amount or if we elect not to assess qualitative factors, then we perform the quantitative impairment test similar to the test performed on goodwill discussed above. As of October 1, 2014, the date of our most recent annual impairment analysis, the estimated fair value of our indefinite-lived intangible assets substantially exceeded the carrying value. There have been no events or changes in circumstances since the date of our impairment analysis on October 1, 2014 that would indicate that the carrying value of the indefinite-lived intangible asset may not be recoverable. 42 During the first quarter of 2014, we finalized a branding initiative plan that included, among other things, re-branding some of the services provided by our wholly owned subsidiaries, in order to better organize, update, streamline and optimize our branding strategy. We launched the branding initiative externally in the second quarter of 2014. Following the external launch of the branding initiative, we ceased using certain of our trade names. We evaluated these assets for impairment during the first quarter of 2014 and determined that the carrying value of trade names we ceased using exceeded the fair value. The adjusted carrying value of our trade name intangible assets associated with the branding initiative was amortized through the date of the external launch of the branding initiative and the fully amortized gross carrying amount was written off during the three months ended June 30, 2014. During the third quarter of 2014, we finalized and launched a separate marketing plan that included the re-branding of a service provided by another one of our wholly owned subsidiaries, in order to provide our customers with a more enhanced experience. Following the external launch of the branding initiative, we ceased using one of our trade names. We evaluated the asset for impairment during the third quarter of 2014 and determined that the carrying value of the trade name that we ceased using exceeded the fair value. As a result of these branding and marketing plans during 2014, we recorded impairment charges of approximately $1.8 million in cost of revenues in the consolidated statements of operations within our North America operating segment for the year ended December 31, 2014. Accounting for Income Taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure and assess the temporary differences resulting from differing treatment of items, such as deferred revenue or deductibility of certain intangible assets, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that it is more-likely-than not that some portion or all of our deferred tax assets will not be realized, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance in a period, we must reflect the corresponding increase or decrease within the tax provision in the consolidated statements of operations. 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 Securities and Exchange Commission. The non-GAAP financial measures that we may disclose include EBITDA, adjusted EBITDA, non- GAAP net income and non-GAAP net income per diluted share (also referred to as "non-GAAP EPS"). EBITDA is our net income before interest, income taxes, depreciation and amortization. We typically disclose EBITDA on a consolidated and an operating segment basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission. Adjusted EBITDA is different from EBITDA because we further adjust EBITDA for stock-based compensation expense, acquisition- and integration-related costs, restructuring costs and settlements and impairments incurred outside our ordinary course of business. Non-GAAP net income and non-GAAP net income per diluted share are similarly adjusted for stock-based compensation expense, acquisition- and integration-related costs, restructuring costs, settlement and impairment costs incurred outside our ordinary course of business as well as purchase amortization and other related costs. We may disclose adjusted EBITDA, non- GAAP net income and non-GAAP net income per diluted share on a consolidated basis in our earnings releases, investor conference calls and filings with the Securities and Exchange Commission. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors more meaningfully evaluate and compare our results of operations to our previously reported results of operations or to those of other companies in our industry. 43 We view EBITDA, adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share as operating performance measures and as such we believe that the most directly comparable GAAP financial measure is net income. In calculating EBITDA, adjusted EBITDA, 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, 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, non-GAAP net income and non-GAAP net income per diluted share as a substitute for any GAAP financial measure, including net income. In addition, we urge investors and potential investors in our securities to carefully review the GAAP financial information included as part of our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are filed with the Securities and Exchange Commission, as well as our quarterly earnings releases, and compare the GAAP financial information with our EBITDA, adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share. EBITDA, adjusted EBITDA, 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 the accompanying reconciliation, provide additional information that is useful to understand the factors and trends affecting our business. We have spent more than 27 years building our database of commercial real estate information and expanding our markets and services partially through acquisitions of complementary businesses. Due to the expansion of our information, analytics and online marketplace services, which has included acquisitions, our net income has included significant charges for purchase amortization, depreciation and other amortization, acquisition- and integration-related costs and restructuring costs. Adjusted EBITDA, 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 purchase amortization, 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. We also believe the non-GAAP measures we disclose are measures of our ongoing operating performance because the isolation of non-cash charges, such as amortization and depreciation, and other items, such as interest, income taxes, stock-based compensation expenses, acquisition- and integration-related costs, restructuring costs 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, 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 the financial items that have been excluded from our net income to calculate EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to net income: • • Purchase amortization in cost of revenues may be useful for investors to consider because it represents the use of our acquired database 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. Purchase amortization in operating expenses may be useful for investors to consider because it represents the estimated attrition of our acquired customer base and the diminishing value of any acquired trade names. 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 we generate may be useful for investors to consider and may result in current cash inflows. However, we do not consider the amount of interest income to be a representative component of the day-to-day operating performance of our business. • The amount of interest expense we incur may be useful for investors to consider and may result in current cash outflows. However, we do not consider the amount of interest expense to be a representative component of the day-to-day operating performance of our business. 44 • 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. Set forth below are descriptions of the financial items that have been excluded from our net income to calculate adjusted EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to net income: • • Purchase amortization in cost of revenues, purchase amortization in operating expenses, depreciation and other amortization, interest income, interest expense, and income tax expense as previously described above with respect to the calculation of EBITDA. 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 they generally represent professional service fees and direct expenses related to the acquisition. 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 restructuring costs incurred may be useful for investors to consider because they generally represent costs incurred in connection with a change in the makeup of our properties or personnel. We do not consider the amount of restructuring related costs to be a representative component of the day-to-day operating performance of our business. • The amount of material 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. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure. 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 purchase amortization and other related costs, stock-based compensation, acquisition- and integration- related costs, restructuring 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. We subtract an assumed provision for income taxes to calculate non-GAAP net income. In 2012, 2013 and 2014, we assumed a 38% tax rate in order to approximate our long-term effective corporate tax rate. Non-GAAP net income per diluted share is a non-GAAP financial measure that represents non-GAAP net income divided by the number of diluted shares outstanding for the period used in the calculation of GAAP net income per diluted share. Management compensates for the above-described limitations of using non-GAAP measures by using a non-GAAP measure only to supplement our GAAP results and to provide additional information that is useful to understand the factors and trends affecting our business. 45 The following table shows our EBITDA reconciled to our net income and our net cash flows from operating, investing and financing activities for the indicated periods (in thousands): Year Ended December 31, 2013 2014 2012 Net income Purchase amortization in cost of revenues Purchase amortization in operating expenses Depreciation and other amortization Interest income Interest expense Income tax expense, net EBITDA Net cash flows provided by (used in) Operating activities Investing activities Financing activities Consolidated Results of Operations $ $ 9,915 8,634 13,607 10,511 (526) 4,832 13,219 60,192 $ $ 29,734 11,883 15,183 12,992 (326) 6,943 17,803 94,212 $ $ 44,869 26,290 28,432 15,650 (516) 10,481 26,044 151,250 $ $ 86,126 $ (640,398) $ $ 164,941 $ 108,298 143,909 $ (18,966) $ (605,987) 733,513 $ 10,405 The following table provides our selected consolidated results of operations for the indicated periods (in thousands of dollars and as a percentage of total revenue): 2012 Year Ended December 31, 2013 2014 Revenues $ 349,936 Cost of revenues 114,866 Gross margin 235,070 Operating expenses: 84,113 Selling and marketing 32,756 Software development 77,154 General and administrative Purchase amortization 13,607 Total operating expenses 207,630 27,440 Income from operations Interest and other income 526 (4,832) Interest and other expense 23,134 Income before income taxes Income tax expense, net 13,219 9,915 Net income $ 100.0% $ 32.8 67.2 440,943 129,185 311,758 100.0% $ 29.3 70.7 575,936 156,979 418,957 100.0% 27.3 72.7 24.0 9.4 22.0 3.9 59.3 7.9 0.2 (1.4) 6.7 3.9 2.8% $ 98,708 46,757 96,956 15,183 257,604 54,154 326 (6,943) 47,537 17,803 29,734 22.4 10.6 22.0 3.4 58.4 12.3 0.1 (1.6) 10.8 4.1 6.7% $ 150,305 55,426 103,916 28,432 338,079 80,878 516 (10,481) 70,913 26,044 44,869 26.1 9.6 18.0 4.9 58.6 14.1 0.1 (1.8) 12.4 4.6 7.8% Comparison of Year Ended December 31, 2014 and Year Ended December 31, 2013 Revenues. Revenues increased to $575.9 million in 2014, from $440.9 million in 2013. The $135.0 million increase was primarily attributable to increased revenue of approximately $76.8 million from our April 1, 2014 acquisition of the Apartments.com Business as well as the further penetration of our subscription-based information services and successful cross-selling of our services to our customers in existing markets, combined with continued high renewal rates. 46 Gross Margin. Gross margin increased to $419.0 million in 2014, from $311.8 million in 2013. The gross margin percentage increased to 72.7% in 2014, from 70.7% in 2013. The increase in the gross margin amount and percentage was principally due to an increase in revenue partially offset by an increase in cost of revenues of $27.8 million primarily due to the additional cost of revenues from our April 1, 2014 acquisition of the Apartments.com Business. Selling and Marketing Expenses. Selling and marketing expenses increased to $150.3 million in 2014, from $98.7 million in 2013, and increased as a percentage of revenues to 26.1% in 2014, from 22.4% in 2013. The increase in the amount and percentage of selling and marketing expenses was primarily due to the additional selling and marketing expenses from our April 1, 2014 acquisition of the Apartments.com Business. Software Development Expenses. Software development expenses increased to $55.4 million in 2014, from $46.8 million in 2013, and decreased as a percentage of revenues to 9.6% in 2014, from 10.6% in 2013. The increase in the amount of software development expense was primarily due to the additional software development expenses from our April 1, 2014 acquisition of the Apartments.com Business. General and Administrative Expenses. General and administrative expenses increased to $103.9 million in 2014, from $97.0 million in 2013, and decreased as a percentage of revenues to 18.0% in 2014 from 22.0% in 2013. The increase in the amount of general and administrative expenses was principally due to additional general and administrative expenses from our April 1, 2014 acquisition of the Apartments.com Business. Purchase Amortization Expense. Purchase amortization expense increased to approximately $28.4 million in 2014, from $15.2 million in 2013, and increased as a percentage of revenue to 4.9% in 2014, compared to 3.4% in 2013. The increase in the amount and percentage of purchase amortization expense was due to additional purchase amortization expenses from our April 1, 2014 acquisition of the Apartments.com Business. Interest and Other Income. Interest and other income increased to approximately $516,000 in 2014 compared to approximately $326,000 in 2013. The increase was primarily due to our higher cash and cash equivalent balance in 2014 resulting from the public equity offering completed in June 2014. Interest and Other Expense. Interest and other expense increased to $10.5 million in 2014 compared to $6.9 million in 2013. The increase was due to the increase in interest expense resulting from a higher outstanding long-term debt balance during 2014, compared to 2013. Income Tax Expense, Net. Income tax expense, net increased to $26.0 million in 2014, from $17.8 million in 2013. This increase was primarily due to higher income before income taxes in 2014 as a result of our increased profitability. Comparison of Business Segment Results for Year Ended December 31, 2014 and Year Ended December 31, 2013 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 includes the U.K. and France. Management relies on an internal management reporting process that provides revenue and operating segment EBITDA, which is our net income before interest, income taxes, depreciation and amortization. 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. 47 Segment Revenues. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant and through our mobile application, CoStarGo, and is our primary service offering in our North America and International operating segments. Prior to the third quarter of 2014, FOCUS was our primary service offering in our International operating segment. We introduced CoStar Suite in the U.K. in the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013. North America revenues increased to $552.1 million for the year ended December 31, 2014, compared to $420.8 million for the year ended December 31, 2013. This increase in North America revenues was primarily due to increased revenues of approximately $76.8 million from our April 1, 2014 acquisition of the Apartments.com Business as well as further penetration of our subscription-based information services and successful cross-selling of our services to our customers in existing markets, combined with continued high renewal rates. International revenues increased to $23.8 million for the year ended December 31, 2014, compared to $20.1 million for the year ended December 31, 2013. This increase was primarily due to further penetration of our subscription-based information services resulting from sales of CoStar Suite. Intersegment revenue decreased to $57,000 for the year ended December 31, 2014, compared to $339,000 for the year ended December 31, 2013. Intersegment revenue recorded during 2014 was attributable to services performed for CoStar Portfolio Strategy by Grecam S.A.S. (“Grecam”), a wholly owned subsidiary of CoStar Limited, the Company's wholly owned U.K. holding company. Intersegment revenue recorded during 2013 was attributable to services performed for our wholly owned subsidiary, CoStar Portfolio Strategy by Property and Portfolio Research Ltd., a wholly owned subsidiary of CoStar Portfolio Strategy. Intersegment revenue is recorded at an amount we believe approximates fair value. Intersegment revenue is eliminated from total revenues. Segment EBITDA. North America EBITDA increased to $148.9 million for the year ended December 31, 2014, compared to $97.3 million for the year ended December 31, 2013. The increase in North America EBITDA was due primarily to an increase in revenues in 2014 compared to 2013. International EBITDA increased to $2.3 million for the year ended December 31, 2014, compared to a loss of $3.1 million for the year ended December 31, 2013. This increase in International EBITDA was primarily due to an increase in revenue and a decrease in operating expenses. North America EBITDA includes an allocation of approximately $1.1 million and $800,000 for the years ended 2014 and 2013, respectively. This allocation represents costs incurred for International employees involved in development activities of our North America operating segment. International EBITDA includes a corporate allocation of approximately $300,000 and $400,000 for the years ended December 31, 2014 and 2013, respectively. This allocation represents costs incurred for North America employees involved in management and expansion activities of our International operating segment. See the “Non-GAAP Financial Measures” section included in this Annual Report on Form 10-K for further details on the non-GAAP financial measures. Comparison of Year Ended December 31, 2013 and Year Ended December 31, 2012 Revenues. Revenues increased to $440.9 million in 2013, from $349.9 million in 2012. The $91.0 million increase was primarily attributable to increased revenue of approximately $52.8 million from our April 30, 2012 acquisition of LoopNet as well as the further penetration of our subscription-based information services and successful cross-selling of our services to our customers in existing markets, combined with continued high renewal rates. Gross Margin. Gross margin increased to $311.8 million in 2013, from $235.1 million in 2012. The gross margin percentage increased to 70.7% in 2013, from 67.2% in 2012. The increase in the gross margin amount and percentage was principally due to an increase in revenue partially offset by an increase in cost of revenues of $14.3 million primarily due to an increase in research personnel costs of approximately $6.4 million and an increase of approximately $3.5 million in purchase amortization from our April 30, 2012 acquisition of LoopNet. Selling and Marketing Expenses. Selling and marketing expenses increased to $98.7 million in 2013, from $84.1 million in 2012, and decreased as a percentage of revenues to 22.4% in 2013, from 24.0% in 2012. The increase in the amount of selling and marketing expenses was primarily due to the additional selling and marketing expenses from our April 30, 2012 acquisition of LoopNet. Software Development Expenses. Software development expenses increased to $46.8 million in 2013, from $32.8 million in 2012, and increased as a percentage of revenues to 10.6% in 2013, from 9.4% in 2012. The increase in the amount and percentage of software development expense was primarily due to increased personnel costs to support enhancements and upgrades to our services. General and Administrative Expenses. General and administrative expenses increased to $97.0 million in 2013, from $77.2 million in 2012, and remained relatively constant as a percentage of revenues at approximately 22.0% in 2013 and 2012. The increase in the amount of general and administrative expenses was principally due to an increase in stock-based compensation expense. 48 Purchase Amortization Expense. Purchase amortization expense increased to approximately $15.2 million in 2013, from $13.6 million in 2012, and decreased as a percentage of revenue to 3.4% in 2013, compared to 3.9% in 2012. The increase in the amount of purchase amortization expense was due to additional purchase amortization expenses from our April 30, 2012 acquisition of LoopNet. Interest and Other Income. Interest and other income decreased to approximately $326,000 in 2013 compared to approximately $526,000 in 2012. The decrease was primarily due to our lower cash and cash equivalent balance in 2013 resulting from the net cash paid for our April 30, 2012 acquisition of LoopNet. Interest and Other Expense. Interest and other expense increased to $6.9 million in 2013 compared to $4.8 million in 2012. The increase was due to the additional interest expense incurred in 2013 compared to 2012, resulting from the $175.0 million borrowed under the term loan facility on April 30, 2012 and used to fund a portion of the merger consideration and transaction costs for the LoopNet acquisition. Income Tax Expense, Net. Income tax expense, net increased to $17.8 million in 2013, from $13.2 million in 2012. This increase was primarily due to higher income before income taxes in 2013 as a result of our increased profitability, partially offset by a lower effective tax rate in 2013. The higher effective tax rate in 2012 was primarily due to costs related to the LoopNet acquisition that reduced income from operations but were not deductible for tax purposes. Comparison of Business Segment Results for Year Ended December 31, 2013 and Year Ended December 31, 2012 Segment Revenues. North America revenues increased to $420.8 million from $330.8 million for the years ended December 31, 2013 and 2012 respectively. This increase in North America revenue was primarily due to increased revenue of approximately $52.8 million from our April 30, 2012 acquisition of LoopNet as well as further penetration of our subscription-based information services and successful cross-selling of our services to our customers in existing markets, combined with continued high renewal rates. International revenues increased to $20.1 million from $19.1 million for the years ended December 31, 2013 and 2012, respectively. This increase was primarily due to further penetration of our subscription-based information services resulting from sales of CoStar Suite. Intersegment revenue decreased to $339,000 for the year ended December 31, 2013, compared to $1.5 million for the year ended December 31, 2012. Intersegment revenue is attributable to services performed for CoStar Portfolio Strategy by Property and Portfolio Research Ltd. Intersegment revenue is recorded at an amount we believe approximates fair value. Intersegment revenue is eliminated from total revenues. Segment EBITDA. North America EBITDA increased to $97.3 million from $70.2 million for the years ended December 31, 2013 and 2012, respectively. The increase in North America EBITDA was due primarily to an increase in revenues in 2013 compared to 2012, partially offset by an increase in personnel costs, including the stock-based compensation expense we recorded in 2013. International EBITDA increased to a lower loss of $3.1 million for the year ended December 31, 2013 from a $10.0 million loss for the year ended December 31, 2012. This lower loss was primarily due to a decrease in personnel costs. The International operating segment continues to experience improved financial performance and during the three months ended December 31, 2013, International EBITDA increased to a positive amount as a result of increased revenue and decreased operating expenses. North America EBITDA includes an allocation of approximately $800,000 and $0 for the years ended 2013 and 2012, respectively. This allocation represents costs incurred for International employees involved in development activities of our North America operating segment. International EBITDA includes a corporate allocation of approximately $400,000 and $5.3 million for the years ended December 31, 2013 and 2012, respectively. This allocation represents costs incurred for North America employees involved in management and expansion activities of our International operating segment. The corporate allocation for the year ended December 31, 2012 consists primarily of development costs incurred for services of North America employees to upgrade the international platform of services and expand the coverage of service offerings within the International reporting unit. 49 Consolidated Quarterly Results of Operations The following tables summarize our consolidated results of operations on a quarterly basis for the indicated periods (in thousands, except per share amounts, and as a percentage of total revenues): Revenues Cost of revenues Gross margin Operating expenses Income (loss) from operations Interest and other income 2013 2014 Mar. 31 Jun. 30 Sep. 30 Dec. 31 Mar. 31 Jun. 30 Sep. 30 Dec. 31 $104,033 $108,999 $112,301 $115,610 $119,076 $147,708 $153,056 $156,096 33,606 70,427 73,025 (2,598) 104 32,101 76,898 61,615 15,283 83 31,724 80,577 60,807 19,770 52 (1,736) 31,754 83,856 62,157 21,699 87 (1,694) 33,643 85,433 68,292 17,141 137 (1,615) 39,481 40,932 42,923 108,227 112,124 113,173 91,318 16,909 62 (3,753) 88,644 23,480 46 (2,698) 89,825 23,348 271 (2,415) Interest and other expense (1,755) (1,758) Income (loss) before income taxes (4,249) 13,608 18,086 20,092 15,663 13,218 20,828 21,204 Income tax expense (benefit), net Net income (loss) (1,839) 5,315 $ (2,410) $ 8,293 7,034 $ 11,052 7,293 $ 12,799 5,923 $ 9,740 4,969 $ 8,249 7,871 $ 12,957 7,281 $ 13,923 Net income (loss) per share — basic Net income (loss) per share — diluted $ $ (0.09) $ 0.30 (0.09) $ 0.29 $ $ 0.40 0.39 $ $ 0.46 0.45 $ $ 0.34 0.34 $ $ 0.28 0.28 $ $ 0.41 0.40 $ $ 0.44 0.43 2013 2014 Revenues Cost of revenues Gross margin Operating expenses Income (loss) from operations Interest and other income Interest and other expense Income (loss) before income taxes Income tax expense (benefit), net Jun. 30 Mar. 31 Dec. 31 Mar. 31 100.0 % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 32.3 Jun. 30 Dec. 31 Sep. 30 Sep. 30 29.5 27.5 28.2 27.5 26.7 26.7 28.3 67.7 70.2 (2.5) 0.1 (1.7) (4.1) (1.8) 70.5 56.5 14.0 0.1 (1.6) 12.5 4.9 71.8 54.1 17.7 — (1.5) 16.2 6.4 72.5 53.7 18.8 0.1 (1.5) 17.4 6.3 11.1% 71.7 57.3 14.4 0.1 (1.3) 13.2 5.0 8.2% 73.3 61.9 11.4 0.1 (2.5) 9.0 3.4 73.3 57.9 15.4 — (1.8) 13.6 5.1 5.6% 8.5% 72.5 57.6 14.9 0.2 (1.5) 13.6 4.7 8.9% Net income (loss) (2.3)% 7.6% 9.8% Recent Acquisitions Apartments.com. On April 1, 2014, we purchased from CV certain assets and assumed certain liabilities, in each case, related to the Apartments.com Business, for $584.2 million in cash, after taking into account net working capital adjustments. 50 Accounting Treatment. We have applied the acquisition method to account for the Apartments.com transaction which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The purchase price was allocated to trade names, customer base, database technology, building photography, goodwill and various other asset and liability accounts. The acquired customer base for the acquisition consists of one distinct intangible asset, is composed of acquired customer contracts and the related customer relationships, and has an estimated useful life of 10 years. The acquired database technology has an estimated useful life of 1 year due to our intent to replace the existing database technology in 2015. The acquired trade names and other intangible assets have a weighted average estimated useful life of 13 years. The acquired building photography has an estimated useful life of 3 years. Amortization of the acquired customer base is recognized on an accelerated basis related to the expected economic benefit of the intangible asset, while amortization of the acquired database technology, acquired building photography and acquired trade names and other intangible assets are recognized on a straight-line basis over the estimated useful life. Goodwill for the acquisition is not amortized, but is subject to annual impairment tests. The results of operations of Apartments.com have been consolidated with those of the Company since the date of the acquisition. See Note 3 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further details on the acquisition of the Apartments.com Business. Liquidity and Capital Resources Our principal sources of liquidity are cash, cash equivalents and debt from our term loan and revolving credit facility. Total cash and cash equivalents were $527.0 million at December 31, 2014 compared to cash and cash equivalents of $256.0 million at December 31, 2013. The increase in cash and cash equivalents for the year ended December 31, 2014 was primarily due to $529.4 million in net proceeds from our public equity offering in June 2014 of 3,450,000 shares of common stock for $160.00 per share and borrowings of $400.0 million under the 2014 Credit Agreement, partially offset by the net cash paid for our April 1, 2014 acquisition of the Apartments.com Business of $584.2 million and the $148.8 million repayment of the amounts owed under the 2012 Credit Agreement. Changes in cash and cash equivalents are dependent upon changes in, among other things, working capital items such as accounts receivable, accounts payable, various accrued expenses and deferred revenues, as well as changes in our capital structure due to stock option exercises and similar events. Net cash provided by operating activities for the year ended December 31, 2014 was $143.9 million compared to $108.3 million for the year ended December 31, 2013. The $35.6 million increase in net cash provided by operating activities is primarily due to an increase of approximately $40.2 million from net income plus non-cash items, partially offset by a net decrease of approximately $4.6 million in changes in operating assets and liabilities due to differences in timing of collection of receipts and payments of disbursements. Net cash used in investing activities for the year ended December 31, 2014 was $606.0 million compared to $19.0 million for the year ended December 31, 2013. This $587.0 million increase in net cash used in investing activities in 2014 was primarily due to $584.2 million of cash used for the acquisition of the Apartments.com Business on April 1, 2014. Net cash provided by financing activities was $733.5 million for the year ended December 31, 2014, compared to $10.4 million for the year ended December 31, 2013. This $723.1 million increase in net cash provided by financing activities was primarily due to proceeds of $550.0 million received under the term loan facility and revolving credit facility on April 1, 2014 and the $529.4 million in net proceeds from our public equity offering in June 2014 less the $148.8 million repayment of amounts owed under the 2012 Credit Agreement, $150.0 million repayment of the revolving credit facility associated with the 2014 Credit Agreement and the $10.0 million payment of debt issuance costs associated with the 2014 Credit Agreement which did not occur during 2013. 51 Contractual Obligations. The following table summarizes our principal contractual obligations at December 31, 2014 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands): Operating leases Long-term debt obligations(1) Purchase obligations(2) Total contractual principal cash obligations Total 166,297 385,000 10,565 561,862 $ $ $ $ 2015 19,442 20,000 8,513 47,955 2016-2017 37,390 $ 55,000 2,006 94,396 $ 2018-2019 33,587 $ 310,000 46 343,633 $ 2020 and thereafter 75,878 $ — — 75,878 $ (1)Long-term debt obligations include scheduled principal payments and exclude interest payments, which are based on a variable rate of interest as defined in the Credit Agreement. (2)Amounts do not include (i) contracts with terms of twelve months or less, or (ii) multi-year contracts that may be terminated by a third party or us. Amounts do not include unrecognized tax benefits of $4.7 million due to uncertainty regarding the timing of future cash payments. 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. During 2014, we incurred capital expenditures of approximately $27.4 million. We expect to make aggregate capital expenditures in 2015 of approximately $30.0 million to $40.0 million, primarily related to the build out of leased office space. In conjunction with the launch of the improved Apartments.com website, we plan to embark on a wide-scale marketing campaign commencing during the first quarter of 2015 and running throughout the remainder of 2015, to generate brand awareness and site traffic for Apartments.com, including an incremental investment of $75.0 million above Apartments.com’s 2014 annualized marketing spend since the close of the acquisition of the Apartments.com Business. To date, we have grown in part by acquiring other companies and we may continue to make acquisitions. Our acquisitions may vary in size and could be material to our current operations. We may use cash, stock, debt or other means of funding to make these acquisitions. On April 1, 2014, we purchased the Apartments.com Business from CV for a purchase price of $587.1 million, which was later reduced by approximately $2.9 million following the final determination of the net working capital of the Apartments.com Business as of the Closing Date. On the Closing Date, we entered into the 2014 Credit Agreement by and among CoStar, as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. We funded the purchase price for the Apartments.com Business at closing through a combination of cash on hand and the proceeds of the term loan facility and the initial borrowing under the revolving credit facility under the 2014 Credit Agreement. The 2014 Credit Agreement provides for a $400.0 million term loan facility and a $225.0 million revolving credit facility, each with a term of five years. The proceeds of the term loan facility and the initial borrowing of $150.0 million under the revolving credit facility on the Closing Date were also used to refinance the term loan facility and revolving credit facility established under the 2012 Credit Agreement, including related fees and expenses. The undrawn proceeds of the revolving credit facility are available for our working capital needs and other general corporate purposes. As of December 31, 2014, maturities of our borrowings under the 2014 Credit Agreement for each of the next five years ended December 31, 2015 to 2019, are expected to be $20.0 million, $20.0 million, $35.0 million, $55.0 million and $255.0 million, respectively. During June 2014, we repaid the $150.0 million initial borrowing under the revolving credit facility. 52 The revolving credit facility includes a subfacility for swingline loans of up to $10.0 million, and up to $10.0 million of the revolving credit facility is available for the issuance of letters of credit. The term loan facility will amortize in quarterly installments in amounts resulting in an annual amortization of 5% during each of the first, second and third years, 10% during the fourth year and 15% during the fifth year after the Closing Date, with the remainder payable at final maturity. The loans under the 2014 Credit Agreement bear interest, at our option, either (i) during any interest period selected by us, at the London interbank offered rate for deposits in U.S. dollars with a maturity comparable to such interest period, adjusted for statutory reserves (“LIBOR”), plus an initial spread of 2.00% per annum, subject to adjustment based on our First Lien Secured Leverage Ratio (as defined in the 2014 Credit Agreement), or (ii) at the greatest of (x) the prime rate from time to time announced by JPMorgan Chase Bank, N.A., (y) the federal funds effective rate plus ½ of 1% and (z) LIBOR for a one-month interest period plus 1.00%, plus an initial spread of 1.00% per annum, subject to adjustment based on our First Lien Secured Leverage Ratio. If an event of default occurs under the 2014 Credit Agreement, the interest rate on overdue amounts will increase by 2.00% per annum. The obligations under the 2014 Credit Agreement are guaranteed by all of our material subsidiaries and are secured by a lien on substantially all of our assets and those of our material subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee documents entered into on the Closing Date. The 2014 Credit Agreement requires us to maintain (i) a First Lien Secured Leverage Ratio (as defined in the 2014 Credit Agreement) not exceeding 4.00 to 1.00 during each full fiscal quarter after the Closing Date through the three months ended March 31, 2016, and 3.50 to 1.00 thereafter and (ii) after the incurrence of additional indebtedness under certain specified exceptions in the 2014 Credit Agreement, a Total Leverage Ratio (as defined in the 2014 Credit Agreement) not exceeding 5.00 to 1.00 during each full fiscal quarter after the Closing Date through the three months ended March 31, 2016, and 4.50 to 1.00 thereafter. The 2014 Credit Agreement also includes other covenants, including covenants that, subject to certain exceptions, restrict our ability to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends, distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. In connection with obtaining the term loan facility and revolving credit facility pursuant to the 2014 Credit Agreement, we incurred approximately $10.1 million in debt issuance costs as of April 1, 2014. The debt issuance costs were comprised of approximately $9.7 million in underwriting fees and approximately $400,000 primarily related to legal fees associated with the debt issuance. Approximately $10.0 million of the fees associated with the refinancing, along with the unamortized debt issuance cost from the 2012 Credit Agreement, were capitalized and are amortized as interest expense over the term of the 2014 Credit Agreement using the effective interest method. As of December 31, 2013 and 2014, no amounts were outstanding under our revolving credit facilities. Total interest expense for our term loan facilities and revolving credit facilities was approximately $4.8 million, $6.9 million and $10.5 million for the years ended December 31, 2012, 2013 and 2014, respectively. Interest expense included amortized debt issuance costs of approximately $2.0 million, $3.0 million and $3.3 million for the years ended December 31, 2012, 2013 and 2014, respectively. Total interest paid for the term loan facilities was approximately $2.5 million, $4.3 million and $7.0 million for the years ended December 31, 2012, 2013 and 2014, respectively. In 2012, we granted a total of 399,413 shares pursuant to performance-based restricted common stock awards with a forfeiture date of March 31, 2017. Upon vesting of these awards during the first quarter of 2014, consistent with minimum tax withholding requirements, a portion of the shares subject to the awards were remitted by the employees for payment of their individual income tax obligations. The shares remitted were canceled and we made a cash tax payment equivalent to the fair market value of the canceled shares of approximately $31.9 million during the three months ended March 31, 2014. Based on current plans, we believe that our available cash combined with positive cash flow provided by operating activities should be sufficient to fund our operations for at least the next 12 months. As of December 31, 2014, we had $18.7 million par value of long-term investments in student loan ARS, which failed to settle at auctions. The majority of these investments are of high credit quality with AAA credit ratings and are primarily securities supported by guarantees from the FFELP of the U.S. Department of Education. While we continue to earn interest on these investments, the investments are not liquid in the short-term. In the event we need to immediately access these funds, we may have to sell these securities at an amount below par value. Based on our ability to access our cash and cash equivalents and our expected operating cash flows, we do not anticipate having to sell these investments below par value in order to operate our business in the foreseeable future. 53 As more fully described in Note 11 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, on January 3, 2012, LoopNet, our wholly owned subsidiary, was sued by CIVIX-DDI, LLC (“Civix”) for alleged patent infringement, and the complaint was later amended to add CoStar as a defendant. The complaint sought unspecified damages, attorneys' fees and costs. On December 1, 2014, we settled all outstanding litigation with Civix for $2.9 million, which was paid on December 9, 2014. Recent Accounting Pronouncements In May 2014, the FASB and International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard that will improve financial reporting by creating common recognition guidance for U.S. GAAP and International Financial Reporting Standards (“IFRS”). This guidance provides a more robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective on a retrospective basis for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. This guidance permits the use of either a full retrospective method or a modified retrospective approach in which it would be applied only to the most current period presented along with a cumulative- effect adjustment at the date of adoption. We have not yet selected a transition method and are currently evaluating the impact this guidance will have on our financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We provide information, analytics and online marketplace services to the commercial real estate and related business community in the U.S., U.K., Toronto, Canada and France. Our functional currency for our operations in the U.K., Canada and France is the local currency. As such, fluctuations in the British Pound, Canadian dollar and Euro may have an impact on our business, results of operations and financial position. For the year ended December 31, 2014, revenue denominated in foreign currencies was approximately 4.7% of total revenue. For the year ended December 31, 2014, our revenue would have decreased by approximately $236,000 if the U.S. dollar exchange rate used strengthened by 10%. In addition, we have assets and liabilities denominated in foreign currencies. A 10% strengthening of the U.S. dollar exchange rate against all currencies with which we have exposure at December 31, 2014 would have resulted in an increase of approximately $3.3 million in the carrying amount of net assets. For the year ended December 31, 2014, our revenue would have increased by approximately $236,000 if the U.S. dollar exchange rate used weakened by 10%. In addition, we have assets and liabilities denominated in foreign currencies. A 10% weakening of the U.S. dollar exchange rate against all currencies with which we have exposure at December 31, 2014 would have resulted in a decrease of approximately $3.3 million in the carrying amount of net assets. We currently do not use financial instruments to hedge our exposure to exchange rate fluctuations with respect to our foreign subsidiaries. We may seek to enter hedging transactions in the future to reduce our exposure to exchange rate fluctuations, but we may be unable to enter into hedging transactions successfully, on acceptable terms or at all. As of December 31, 2014, accumulated other comprehensive loss included a loss from foreign currency translation adjustments of approximately $5.7 million. We do not have material exposure to market risks associated with changes in interest rates related to cash equivalent securities held as of December 31, 2014. As of December 31, 2014, we had $527.0 million of cash and cash equivalents. If there is an increase or decrease in interest rates, there will be a corresponding increase or decrease in the amount of interest earned on our cash and cash equivalents. As of December 31, 2014, we had $385.0 million of long-term debt bearing interest at a variable rate of LIBOR plus 2.00%, subject to adjustment based on our First Lien Secured Leverage Ratio (as defined in the 2014 Credit Agreement). If there is an increase or decrease in interest rates, there will be a corresponding increase or decrease in the amount of interest expense on our long-term debt. Based on our outstanding borrowings as of December 31, 2014, an increase in the interest rate by 25 basis points would result in an increase of approximately $1.0 million in interest expense annually. Based on our outstanding borrowings as of December 31, 2014, a decrease in the interest rate by 25 basis points would result in a decrease of approximately $1.0 million in interest expense annually. Based on our ability to access our cash and cash equivalents, and our expected operating cash flows, we do not believe that increases or decreases in interest rates will impact our ability to operate our business in the foreseeable future. 54 Included within our long-term investments are investments in mostly AAA-rated student loan ARS. These securities are primarily securities supported by guarantees from the FFELP of the U.S. Department of Education. As of December 31, 2014, auctions for $18.7 million of our investments in auction rate securities failed to settle at auction. As a result, we may not be able to sell these investments at par value until a future auction on these investments is successful. In the event we need to immediately liquidate these investments, we may have to locate a buyer outside the auction process, who may be unwilling to purchase the investments at par, resulting in a loss. Based on an assessment of fair value of these investments in ARS as of December 31, 2014, we determined that there was a decline in the fair value of our ARS investments of approximately $691,000, which was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. If the issuers are unable to successfully close future auctions and/or their credit ratings deteriorate, we may be required to adjust the carrying value of these investments as a temporary impairment and recognize a greater unrealized loss in accumulated other comprehensive loss or as an other-than-temporary impairment charge to earnings. Based on our ability to access our cash and cash equivalents, and our expected operating cash flows, we do not anticipate having to sell these securities below par value in order to operate our business in the foreseeable future. See Notes 4 and 5 to the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion. We have approximately $1.4 billion in intangible assets as of December 31, 2014. As of December 31, 2014, we believe our intangible assets will be recoverable, however, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability. In the event that we determine that an asset has been impaired, we would recognize an impairment charge equal to the amount by which the carrying amount of the assets exceeds the fair value of the asset. We continue to monitor these assumptions and their effect on the estimated recoverability of our intangible assets. Item 8. Financial Statements and Supplementary Data Financial Statements meeting the requirements of Regulation S-X are set forth beginning at page F-1. Supplementary data is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Consolidated Results of Operations” and "Consolidated Quarterly Results of Operations." Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of December 31, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at the reasonable assurance level. Management’s Report on Internal Control over Financial Reporting Management of CoStar is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or supervised by, the Company’s principal executive and principal financial officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. 55 The Company’s internal control over financial reporting is supported by written policies and procedures, that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. limitations, inherent its In connection with the preparation of the Company's annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control – Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”). Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of the Company's internal control over financial reporting. Based on this assessment, management did not identify any material weakness in the Company's internal control, and management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2014. Ernst & Young LLP, the independent registered public accounting firm that audited the Company's financial statements included in this report, has issued an attestation report on the effectiveness of internal control over financial reporting, a copy of which is included in this Annual Report on Form 10-K. There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None. 56 Item 10. Directors, Executive Officers and Corporate Governance PART III CoStar has adopted a Code of Conduct for its directors. In addition, CoStar has adopted a separate Code of Conduct for its officers and employees, including its principal executive, financial and accounting officers, or persons performing similar functions. Copies of each of these codes may be found in the “Investors” section of the Company’s website at http://www.costargroup.com/ investors/governance. We intend to disclose future amendments to certain provisions of our Codes, or waivers of such provisions granted to executive officers and directors, as required by SEC rules on the website within four business days following the date of such amendment or waiver. The remaining information required by this Item is incorporated by reference to our Proxy Statement for our 2015 annual meeting of stockholders. Item 11. Executive Compensation The information required by this Item is incorporated by reference to our Proxy Statement for our 2015 annual meeting of stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated by reference to our Proxy Statement for our 2015 annual meeting of stockholders. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated by reference to our Proxy Statement for our 2015 annual meeting of stockholders. Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated by reference to our Proxy Statement for our 2015 annual meeting of stockholders. 57 Item 15. Exhibits and Financial Statement Schedules PART IV (a)(1) The following financial statements are filed as a part of this report: CoStar Group, Inc. Consolidated Financial Statements. (a)(2) Financial statement schedules: Schedule II – Valuation and Qualifying Accounts Years Ended December 31, 2012, 2013, and 2014 (in thousands): Allowance for Doubtful Accounts and Billing Adjustments (1) Year ended December 31, 2012 Year ended December 31, 2013 Year ended December 31, 2014 Balance at Beginning of Year Charged to Expense $ $ $ 2,524 2,935 3,397 $ $ $ 1,456 2,317 4,822 Write-offs, Charged to Net of Other Accounts (2) Recoveries 1,520 475 $ $ 1,855 — $ $ 4,285 $ 881 $ Balance at End of Year 2,935 $ 3,397 $ 4,815 $ (1) Additions to the allowance for doubtful accounts are charged to bad debt expense. (2) Amounts represent opening balances from acquired businesses. Additional financial statement schedules are omitted because they are not applicable or not required or because the required information is incorporated herein by reference or included in the financial statements or related notes included elsewhere in this report. (a)(3) The documents required to be filed as exhibits to this Report under Item 601 of Regulation S-K are listed in the Exhibit Index included elsewhere in this report, which list is incorporated herein by reference. 58 Pursuant to the requirements of Section 13 of the Securities Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, District of Columbia, on the 26th day of February 2015. SIGNATURES COSTAR GROUP, INC. By: /s/ Andrew C. Florance Andrew C. Florance President and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Andrew C. Florance and Brian J. Radecki, and each of them individually, as their true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto and to all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, herein by ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 59 Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Capacity Date /s/ Michael R. Klein Michael R. Klein /s/ Andrew C. Florance Andrew C. Florance /s/ Brian J. Radecki Brian J. Radecki /s/ David Bonderman David Bonderman /s/ Michael J. Glosserman Michael J. Glosserman /s/ Warren H. Haber Warren H. Haber /s/ John W. Hill John W. Hill /s/ Christopher J. Nassetta Christopher J. Nassetta /s/ David J. Steinberg David J. Steinberg Chairman of the Board February 26, 2015 Chief Executive Officer and President and a Director (Principal Executive Officer) February 26, 2015 Chief Financial Officer (Principal Financial and Accounting Officer) February 26, 2015 February 26, 2015 February 22, 2015 February 24, 2015 February 22, 2015 February 23, 2015 February 23, 2015 Director Director Director Director Director Director 60 Exhibit No. 2.1 2.2 3.1 3.2 4.1 *10.1 *10.2 *10.3 *10.4 *10.5 *10.6 *10.7 *10.8 *10.9 *10.10 *10.11 *10.12 *10.13 *10.14 INDEX TO EXHIBITS Description Agreement and Plan of Merger, dated as of April 27, 2011, by and among CoStar Group, Inc., Lonestar Acquisition Sub, Inc. and LoopNet, Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8- K filed with the Commission on April 28, 2011). Amendment No. 1 to the Agreement and Plan of Merger, dated as of May 20, 2011, among LoopNet, Inc., the Registrant and Lonestar Acquisition Sub, Inc. (Incorporated by referenced to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed May 23, 2011). Third Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June 6, 2013). Third Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on September 24, 2013). Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of the Registrant (Reg. No. 333-174214) filed with the Commission on June 3, 2011). CoStar Group, Inc. 1998 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2005). CoStar Group, Inc. 2007 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 8, 2012). CoStar Group, Inc. 2007 Stock Incentive Plan French Sub-Plan (Incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007). Form of Stock Option Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004). Form of Stock Option Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.8.1 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004). Form of Restricted Stock Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004). Form of 2007 Plan Restricted Stock Grant Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 99.1 to the Registrant’s Report on Form 8-K filed June 22, 2007). Form of 2007 Plan Restricted Stock Unit Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.8 to the Registrant's Report on Form 10-K for the year ended December 31, 2013). Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its directors (Incorporated by reference to Exhibit 10.11 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.12 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). Form of 2007 Plan French Sub-Plan Restricted Stock Agreement between the Registrant and certain of its employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007). *10.15 CoStar Group, Inc. 2011 Incentive Bonus Plan (Incorporated by referenced to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed June 8, 2011). *10.16 CoStar Group, Inc. Employee Stock Purchase Plan, as amended (Incorporated by reference to Exhibit 10.14 to the Registrant’s Report on Form 10-K for the year ended December 31, 2010). 61 INDEX TO EXHIBITS — (CONTINUED) Exhibit No. *10.17 *10.18 *10.19 *10.20 *10.21 *10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 21.1 23.1 31.1 31.2 32.1 32.2 Description Summary of Non-Employee Director Compensation (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2013). Employment Agreement for Andrew C. Florance (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registration Statement on Form S-1 of the Registrant (Reg. No. 333-47953) filed with the Commission on April 27, 1998). First Amendment to Andrew C. Florance Employment Agreement, effective January 1, 2009 (Incorporated by reference to Exhibit 10.16 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). Executive Service Contract dated February 16, 2007, between Property Investment Exchange Limited and Paul Marples (Incorporated by reference to Exhibit 10.14 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007). Leaving Agreement dated February 27, 2013, between CoStar U.K. Limited and Paul Marples (Incorporated by reference to Exhibit 10.19 to the Registrant's Report on Form 10-K for the year ended December 31, 2012). Separation Agreement and General Release dated October 6, 2013, between CoStar Realty Information, Inc. and Jennifer Kitchen (Incorporated by reference to Exhibit 10.22 to the Registrant's Report on Form 10-K for the year ended December 31, 2013). Form of Indemnification Agreement between the Registrant and each of its officers and directors (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2004). Agreement for Lease between CoStar UK Limited and Wells Fargo & Company, dated August 25, 2009 (Incorporated by reference to Exhibit 10.26 to the Registrant’s Report on Form 10-K for the year ended December 31, 2009). Sub-Underlease between CoStar UK Limited and Wells Fargo & Company, dated November 18, 2009 (Incorporated by reference to Exhibit 10.28 to the Registrant’s Report on Form 10-K for the year ended December 31, 2009). Deed of Office Lease by and between GLL L-Street 1331, LLC and CoStar Realty Information, Inc., dated February 18, 2011, and made effective as of June 1, 2010 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on form 10-Q for the quarter ended March 31, 2011). Credit Agreement dated February 16, 2012, by and among the Registrant, as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2012). First Amendment dated as of April 25, 2012, to the Credit Agreement dated as of February 16, 2012, among the Registrant, CoStar Realty Information, Inc., the Lenders from time to time party thereto and JPMorgan Chase Bank N.A., as Administrative Agent (Incorporated by referenced to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed April 30, 2012). Asset Purchase Agreement, dated as of February 28, 2014, by and between Classified Ventures, LLC and CoStar Group, Inc. (Incorporated by reference to Exhibit 10.1 to CoStar’s Current Report on Form 8-K, filed March 3, 2014). Credit Agreement, dated as of April 1, 2014, by and among CoStar Group, Inc., as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1 to CoStar’s Current Report on Form 8-K, filed April 4, 2014). Subsidiaries of the Registrant (filed herewith). Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith). Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). Certification of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). Certification of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 62 INDEX TO EXHIBITS — (CONTINUED) Exhibit No. 101 Description The following materials from CoStar Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statement of Operations for the years ended December 31, 2012, 2013 and 2014, respectively; (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2013 and 2014, respectively; (iii) Consolidated Balance Sheets at December 31, 2013 and December 31, 2014, respectively; (iv) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2013 and 2014, respectively; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014, respectively; (vi) Notes to the Consolidated Financial Statements that have been detail tagged; and (vii) Schedule II – Valuation and Qualifying Accounts (submitted electronically with this report). * Management Contract or Compensatory Plan or Arrangement. 63 COSTAR GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm F-2 Consolidated Statements of Operations for the years ended December 31, 2012, 2013 and 2014 Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2013 and 2014 F-4 F-5 Consolidated Balance Sheets as of December 31, 2013 and 2014 F-6 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2013 and 2014 Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2013 and 2014 Notes to Consolidated Financial Statements F-7 F-8 F-9 F-1 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of CoStar Group, Inc. We have audited the accompanying consolidated balance sheets of CoStar Group, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoStar Group, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CoStar Group, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP McLean, Virginia February 26, 2015 F-2 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of CoStar Group, Inc. We have audited CoStar Group, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). CoStar Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, CoStar Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CoStar Group, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 26, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP McLean, Virginia February 26, 2015 F-3 COSTAR GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Revenues Cost of revenues Gross margin Operating expenses: Selling and marketing Software development General and administrative Purchase amortization Income from operations Interest and other income Interest and other expense Income before income taxes Income tax expense, net Net income Net income per share — basic Net income per share — diluted Weighted average outstanding shares — basic Weighted average outstanding shares — diluted See accompanying notes. Year Ended December 31, 2013 2014 2012 $ $ 349,936 114,866 235,070 $ 440,943 129,185 311,758 575,936 156,979 418,957 84,113 32,756 77,154 13,607 207,630 27,440 526 (4,832) 23,134 13,219 9,915 0.37 0.37 26,533 26,949 $ $ $ 98,708 46,757 96,956 15,183 257,604 54,154 326 (6,943) 47,537 17,803 29,734 1.07 1.05 27,670 28,212 $ $ $ 150,305 55,426 103,916 28,432 338,079 80,878 516 (10,481) 70,913 26,044 44,869 1.48 1.46 30,215 30,641 $ $ $ F-4 COSTAR GROUP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Net income Other comprehensive income (loss), net of tax Foreign currency translation adjustment Net decrease in unrealized loss on investments Total other comprehensive income (loss) Total comprehensive income See accompanying notes. Year Ended December 31, 2012 2013 2014 $ 9,915 $ 29,734 $ 44,869 1,277 773 2,050 610 378 988 $ 11,965 $ 30,722 $ (1,690) 836 (854) 44,015 F-5 COSTAR GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) Current assets: ASSETS Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of approximately $3,397 and $4,815 as of December 31, 2013 and 2014, respectively Deferred and other income taxes, net Income tax receivable Prepaid expenses and other current assets Debt issuance costs, net Total current assets Long-term investments Property and equipment, net Goodwill Intangible assets, net Deposits and other assets Debt issuance costs, net Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt Accounts payable Accrued wages and commissions Accrued expenses Deferred gain on the sale of building Income taxes payable Deferred revenue Total current liabilities Long-term debt, less current portion Deferred gain on the sale of building Deferred rent Deferred income taxes, net Income taxes payable Total liabilities December 31, 2013 2014 $ 255,953 $ 527,012 $ $ 20,761 22,506 — 6,597 2,649 308,466 21,990 57,719 718,587 144,472 1,855 3,893 1,256,982 24,063 4,939 20,104 23,200 2,523 2,362 34,362 111,553 129,062 26,286 22,828 34,582 4,809 329,120 $ $ 38,694 20,007 1,027 9,736 3,335 599,811 17,151 73,753 1,138,805 241,622 2,676 9,864 2,083,682 20,000 8,608 23,155 27,001 2,523 — 38,003 119,290 365,000 23,762 27,032 30,349 4,703 570,136 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding Common stock, $0.01 par value; 60,000 shares authorized; 28,848 and 32,318 issued and outstanding as of December 31, 2013 and 2014, respectively Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes. — — 288 863,780 (5,530) 69,324 927,862 1,256,982 $ 323 1,405,414 (6,384) 114,193 1,513,546 2,083,682 $ F-6 COSTAR GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Balance at December 31, 2011 Net income Foreign currency translation adjustment Net decrease in unrealized loss on investments Exercise of stock options Restricted stock grants Restricted stock grants surrendered Stock compensation expense, net of forfeitures Employee stock purchase plan Consideration for LoopNet Excess tax benefit from stock-based compensation Balance at December 31, 2012 Net income Foreign currency translation adjustment Net decrease in unrealized loss on investments Exercise of stock options Restricted stock grants Restricted stock grants surrendered Stock compensation expense, net of forfeitures Employee stock purchase plan Excess tax benefit from stock-based compensation Balance at December 31, 2013 Net income Foreign currency translation adjustment Net decrease in unrealized loss on investments Exercise of stock options Restricted stock grants Restricted stock grants surrendered Stock compensation expense, net of forfeitures Stock issued for equity offering Employee stock purchase plan Excess tax benefit from stock-based compensation Balance at December 31, 2014 Common Stock Shares Amount 254 $ 25,426 — — — — Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total Stockholders’ Equity $ $ 637,816 — — (8,568) $ — 1,277 $ 29,675 9,915 — 659,177 9,915 1,277 — 273 855 (96) — 10 1,880 — 28,348 — — — 409 238 (158) — 11 — 28,848 — — — 68 260 (321) — 3,450 13 — 2 8 — — — 19 — 283 — — — 3 2 — — — — 288 — — — 1 2 (2) — 34 — — 9,194 (8) (4,204) 12,207 749 137,036 198 792,988 — — — 16,820 (2) (8,469) 41,403 1,455 19,585 863,780 — — — 3,802 (2) (50,553) 28,503 529,326 2,152 773 — — — — — — — (6,518) — 610 378 — — — — — — (5,530) — (1,690) 836 — — — — — — — — — — — — — — 39,590 29,734 — — — — — — — — 69,324 44,869 — — — — — — — — 773 9,196 — (4,204) 12,207 749 137,055 198 826,343 29,734 610 378 16,823 — (8,469) 41,403 1,455 19,585 927,862 44,869 (1,690) 836 3,803 — (50,555) 28,503 529,360 2,152 — 32,318 $ — 323 28,406 $ 1,405,414 $ — (6,384) $ — 114,193 $ 28,406 1,513,546 See accompanying notes. F-7 COSTAR GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Year Ended December 31, 2012 2013 2014 $ 9,915 $ 29,734 $ 44,869 Depreciation Amortization Amortization of debt issuance costs Impairment loss Property and equipment write-off Excess tax benefit from stock-based compensation Stock-based compensation expense Deferred income tax expense (benefit), net Provision for losses on accounts receivable Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Income taxes payable Prepaid expenses and other current assets Deposits and other assets Accounts payable and other liabilities Deferred revenue Net cash provided by operating activities Investing activities: Proceeds from sale and settlement of investments Purchases of property and equipment and other assets Acquisitions, net of cash acquired Net cash used in investing activities Financing activities: Proceeds from long-term debt Payments of long-term debt Payments of debt issuance costs Payments of deferred consideration Excess tax benefit from stock-based compensation Repurchase of restricted stock to satisfy tax withholding obligations Proceeds from equity offering, net of transaction costs Proceeds from exercise of stock options and employee stock purchase plan Net cash provided by financing activities Effect of foreign currency exchange rates on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See accompanying notes. F-8 10,053 22,699 1,989 — 122 (198) 12,282 13,643 1,456 1,295 7,598 (3,316) 1,172 1,629 5,787 86,126 15,365 (14,834) (640,929) (640,398) 175,000 (4,375) (11,546) — 198 (4,204) — 9,868 164,941 78 (389,253) 545,280 12,495 27,563 3,014 — 104 (19,585) 41,549 (12,740) 2,317 (6,607) 29,295 2,934 399 (3,882) 1,708 108,298 76 (19,042) — (18,966) — (17,500) — (1,344) 19,585 (8,469) — 18,133 10,405 189 99,926 156,027 $ 156,027 $ 255,953 $ 15,111 55,261 3,312 1,799 1,004 (28,406) 28,267 (1,366) 4,822 (12,353) 24,542 (2,846) (157) 6,078 3,972 143,909 5,675 (27,444) (584,218) (605,987) 550,000 (318,125) (9,969) (1,344) 28,406 (50,555) 529,360 5,740 733,513 (376) 271,059 255,953 527,012 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2014 1. ORGANIZATION CoStar Group, Inc. (the “Company” or “CoStar”) provides information, analytics and online marketplace services to the commercial real estate and related business community through its comprehensive, proprietary database of commercial real estate information covering the United States (“U.S.”), the United Kingdom (“U.K.”), Toronto, Canada and parts of France. The Company provides online marketplaces for commercial real estate listings, apartment rentals, lands for sale and businesses for sale. The Company operates within two operating segments, North America and International, 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 one year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Accounting policies are consistent for each operating segment. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition The Company primarily derives revenues by providing access to its proprietary database of commercial real estate information. The Company generally charges a fixed monthly amount for its subscription-based services. Subscription contract rates are based on the number of sites, number of users, organization size, the client’s business focus, geography and the number and types of services to which a client subscribes. A majority of the subscription-based license agreements typically have a term of one year and renew automatically. Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed and determinable, (3) services have been rendered and payment has been contractually earned and (4) collectability is reasonably assured. Revenues from subscription-based services are recognized on a straight-line basis over the term of the agreement. Deferred revenue results from advance cash receipts from customers or amounts billed in advance to customers from the sale of subscription licenses and is recognized over the term of the license agreement. Cost of Revenues Cost of revenues principally consists of salaries and related expenses for the Company’s researchers who collect and analyze the commercial real estate data that is the basis for the Company’s information, analytics and online marketplaces. Additionally, cost of revenues includes the cost of data from third party data sources, credit card and other transaction fees relating to processing customer transactions, which are expensed as incurred, and the amortization of acquired trade names and other intangible assets and database technology. Foreign Currency Translation The Company’s functional currency in its foreign locations is the local currency. Assets and liabilities are translated into U.S. dollars as of the balance sheet dates. Revenues, expenses, gains and losses are translated at the average exchange rates in effect during each period. Gains and losses resulting from translation are included in accumulated other comprehensive loss. Net gains or losses resulting from foreign currency exchange transactions are included in the consolidated statements of operations. There were no material gains or losses from foreign currency exchange transactions for the years ended December 31, 2012, 2013 and 2014. F-9 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED) Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss were as follows (in thousands): Foreign currency translation adjustment, net of tax Accumulated net unrealized loss on investments, net of tax Total accumulated other comprehensive loss Year Ended December 31, 2013 2014 $ $ (4,003) $ (1,527) (5,530) $ (5,693) (691) (6,384) There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statements of operations for the years ended December 31, 2012, 2013 and 2014, respectively. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs, which includes e-commerce, television, radio, print and other media advertising, were approximately $6.2 million, $7.9 million and $28.7 million for the years ended December 31, 2012, 2013 and 2014, respectively. Income Taxes Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in the Company’s consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. Valuation allowances are provided against assets, including net operating losses, if it is anticipated that some or all of an asset may not be realized through future taxable earnings or implementation of tax planning strategies. Interest and penalties related to income tax matters are recognized in income tax expense. 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 Company’s potentially dilutive securities include stock options and restricted stock. Diluted net income per share considers the impact of potentially dilutive securities except in periods in which there is a net loss, as the inclusion of the potentially dilutive common shares would have an anti-dilutive effect. Stock-Based Compensation Equity instruments issued in exchange for employee services 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. Stock-based compensation expense is measured at the grant date of the stock-based awards that vest over set time periods based on their fair values, and is recognized on a straight-line basis as expense over the vesting periods of the awards, net of an estimated forfeiture rate. For equity instruments that vest based on performance, the Company assesses the probability of the achievement of the performance conditions at the end of each reporting period, or more frequently based upon the occurrence of events that may change the probability of whether the performance conditions would be met. If the Company's initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing of recognition may fluctuate from period to period based on those estimates. For equity instruments that vest based on a performance condition 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 is updated based on the expected achievement of the related performance conditions at the end of each reporting period. 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. F-10 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED) Stock-Based Compensation — (Continued) In 2012, the Company granted performance-based restricted common stock awards that vest upon the Company’s achievement of $90.0 million of cumulative net income before interest, income taxes, depreciation and amortization (“EBITDA”) over a period of four consecutive calendar quarters if such performance is achieved by March 31, 2017, subject to certain approvals under the CoStar Group, Inc. 2007 Stock Incentive Plan. As of March 31, 2014, the Company had satisfied all performance and service conditions, and as a result, the restricted common stock granted under these awards vested. The Company recorded approximately $0, $21.8 million and $2.2 million of stock-based compensation expense related to the 2012 performance-based restricted common stock awards for the years ended December 31, 2012, 2013 and 2014, respectively. In February 2014, the Compensation Committee (the “Committee”) of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the Company’s achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by December 31, 2016. These grants of restricted common stock are also subject to continuing employment requirements and a market condition based on total shareholder return (“TSR”). The actual number of shares that vest at the end of the respective three-year period is determined based on the Company’s achievement of the three-year performance goals described above, as well as its TSR relative to the Russell 1000 Index over the related three-year performance period. As of December 31, 2014, the Company reassessed the probability of achieving the performance and market conditions and determined that it was probable that the performance and market conditions for these awards would be met by the December 31, 2016 forfeiture date. As a result, the Company recorded a total of approximately $1.1 million of stock-based compensation expense related to the performance-based restricted common stock awards with a market condition for the year ended December 31, 2014. No stock-based compensation expense related to the grant of 2014 performance-based restricted common stock was recorded for the years ended December 31, 2012 and 2013. The Company expects to record an estimated unrecognized stock-based compensation expense related to the performance-based restricted common stock awards of approximately $2.7 million over the periods 2015, 2016 and 2017. Cash flows resulting from excess tax benefits are classified as part of cash flows from operating and financing activities. Excess tax benefits represent tax benefits for stock-based compensation in excess of the associated deferred tax asset for such equity compensation recorded as an increase to stockholders' equity. Net cash proceeds from the exercise of stock options and the purchase of shares under the Employee Stock Purchase Plan (“ESPP”) were approximately $9.9 million, $18.1 million and $5.7 million for the years ended December 31, 2012, 2013 and 2014, respectively. The Company realized approximately $198,000, $19.6 million and $28.4 million of excess tax benefits from stock options exercised and restricted stock awards vested for the years ended December 31, 2012, 2013 and 2014, respectively. Stock-based compensation expense for stock options and restricted stock issued under equity incentive plans and stock purchases under the ESPP included in the Company’s results of operations were as follows (in thousands): Year Ended December 31, 2013 2014 2012 2,556 Cost of revenues $ 1,966 Selling and marketing 2,241 Software development General and administrative 5,519 12,282 $ Total stock-based compensation $ $ 4,553 4,954 7,244 24,798 41,549 $ $ 4,759 3,776 5,095 14,637 28,267 Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of money market fund investments and commercial paper. As of December 31, 2013 and 2014, cash of approximately $105,000 and $0, respectively, was held to support letters of credit for security deposits. F-11 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED) Investments The Company determines the appropriate classification of debt and equity investments at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company considers all of its investments to be available-for-sale. The Company's investments consist of long-term variable rate debt instruments with an auction reset feature, referred to as auction rate securities (“ARS”). Investments are carried at fair value. Concentration of Credit Risk and Financial Instruments The Company performs ongoing credit evaluations of its customers’ financial conditions and generally does not require that its customers’ obligations to the Company be secured. The Company maintains reserves for estimated inherent credit losses, and such losses have been within management’s expectations. The large size and widespread nature of the Company’s customer base and the Company’s lack of dependence on any individual customer mitigates the risk of nonpayment of the Company’s accounts receivable. No single customer accounted for more than 5% of the Company’s revenues for each of the years ended December 31, 2012, 2013 and 2014. The carrying amount of the accounts receivable approximates the net realizable value. The carrying value of the accounts receivable, accounts payable, accrued expenses and long-term debt approximates fair value. Accounts Receivable, Net of Allowance for Doubtful Accounts Accounts receivable are recorded at the invoiced amount. Accounts receivable payment terms vary and amounts due from customers are stated in the financial statements net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the aging of the balances, and current economic conditions that may affect a customer’s ability to pay. Property and Equipment, Net Property and equipment are stated at cost, net of accumulated depreciation and amortization. All repairs and maintenance costs are expensed as incurred. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets: Leasehold improvements Furniture and office equipment Research vehicles Computer hardware and software Shorter of lease term or useful life Five to ten years Five years Two to five years Qualifying internal-use software costs incurred during the application development stage, which consist primarily of internal product development costs, outside services and purchased software license costs are capitalized and amortized over the estimated useful life of the asset. All other costs are expensed as incurred. F-12 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED) Goodwill and Intangible Assets Goodwill represents the excess of costs over the fair value of assets of acquired businesses. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually by each reporting unit. The Company’s operating segments, North America and International, are the reporting units tested for potential impairment. To determine whether it is necessary to perform the two-step goodwill impairment test, 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. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to assess qualitative factors, then the Company performs the two-step process. The first step is to determine the fair value of each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates including the Company's discount rate, growth rate and future financial performance. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies. Assumptions about the growth rate and future financial performance of a reporting unit are based on the Company's forecasts, business plans, economic projections and anticipated future cash flows. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then the second step of the process is performed to measure the impairment loss. The impairment loss is measured based on a projected discounted cash flow method using a discount rate determined by the Company’s management to be commensurate with the risk in its current business model. To determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets, the Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying amount. If the Company concludes that it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying amount or if the Company elects not to assess qualitative factors, then the Company performs the quantitative impairment test similar to the test performed on goodwill discussed above. Intangible assets with estimable useful lives that arose from acquisitions on or after July 1, 2001 are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, and are reviewed at least annually for impairment. Acquired database technology, customer base and trade names and other intangible assets are related to the Company’s acquisitions (see Notes 3, 7 and 8). Acquired database technology is amortized on a straight-line basis over periods ranging from one to eight years. With the exception of the acquired trade name recorded in connection with the acquisition of LoopNet, acquired trade names and other intangible assets are amortized on a straight-line basis over periods ranging from two to fifteen years. The acquired trade name recorded in connection with the LoopNet acquisition has an indefinite estimated useful life and is not amortized, but is subject to annual impairment tests. The acquired intangible asset characterized as customer base consists of one distinct intangible asset composed of acquired customer contracts and the related customer relationships. Acquired customer bases are typically amortized on an accelerated basis related to the expected economic benefit of the intangible asset. The cost of capitalized building photography is amortized on a straight-line basis over periods ranging from three to five years. Long-Lived Assets Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. F-13 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED) Capitalized Product Development Costs Product development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized. Costs are capitalized, to the extent that the capitalizable costs do not exceed the realizable value of such costs, until the product is available for general release to customers. The Company defines the establishment of technological feasibility as the completion of all planning, designing, coding and testing activities that are necessary to establish products that meet design specifications including functions, features and technical performance requirements. The Company’s capitalized product development costs had a total net book value of approximately $111,000 and $0 as of December 31, 2013 and 2014, respectively. These capitalized product development costs are included in intangible and other assets in the Company’s consolidated balance sheets. Amortization is computed using a straight-line method over the remaining estimated economic life of the product, typically three to five years after the software is ready for its intended use. The Company amortized capitalized product development costs of approximately $191,000, $191,000 and $111,000 for the years ended December 31, 2012, 2013 and 2014, respectively. Debt Issuance Costs Costs incurred in connection with the issuance of long-term debt are capitalized and amortized as interest expense over the term of the related debt using the effective interest method. Upon a refinancing, 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 using the effective interest method. The Company had capitalized debt issuance costs of approximately $6.5 million and $13.2 million as of December 31, 2013 and 2014, respectively. The debt issuance costs are associated with the financing commitment received from JPMorgan Chase Bank, N.A. (“J.P. Morgan Bank”) on April 27, 2011, the subsequent term loan facility and revolving credit facility established under a credit agreement dated February 16, 2012 (the “2012 Credit Agreement”), the financing commitment received from J.P. Morgan Bank, Bank of America, N.A., SunTrust Bank and Wells Fargo Bank, National Association on February 28, 2014, and the subsequent term loan facility and revolving credit facility established under a credit agreement dated April 1, 2014 (the “2014 Credit Agreement”). See Note 9 for additional information regarding the term loan facility and revolving credit facility. The Company amortized debt issuance costs of approximately $2.0 million, $3.0 million and $3.3 million for the years ended December 31, 2012, 2013 and 2014, respectively. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) jointly issued a new revenue recognition standard that will improve financial reporting by creating common recognition guidance for U.S. GAAP and International Financial Reporting Standards (“IFRS”). This guidance provides a more robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective on a retrospective basis for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. This guidance permits the use of either a full retrospective method or a modified retrospective approach in which it would be applied only to the most current period presented along with a cumulative-effect adjustment at the date of adoption. The Company has not yet selected a transition method and is currently evaluating the impact this guidance will have on its financial statements. F-14 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 3. ACQUISITION On February 28, 2014, the Company and Classified Ventures, LLC (“CV”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”). Pursuant to the Asset Purchase Agreement, on April 1, 2014 (the “Closing Date”), the Company purchased from CV certain assets and assumed certain liabilities, in each case, related to the Apartments.com business (collectively, the “Apartments.com Business”). Apartments.com is a national online apartment rentals resource for renters, property managers and owners. Apartments.com offers renters a database of apartment listings and provides professional property management companies and landlords with an advertising destination. Renters can conduct personalized searches of apartment listings and view video demonstrations and community reviews through the Apartments.com website and mobile applications. The Apartments.com network of rental websites also includes ApartmentHomeLiving.com, another national online apartment rentals resource. The acquisition increased the Company's presence in the multifamily vertical. In consideration for the purchase of the Apartments.com Business, on April 1, 2014, the Company paid $587.1 million in cash, including an estimated $2.1 million in connection with a preliminary net working capital adjustment as of the Closing Date. Pursuant to the terms of the Asset Purchase Agreement, the purchase price was reduced by approximately $2.9 million following the final determination of the net working capital of the Apartments.com Business as of the Closing Date, and CV paid the Company $2.9 million on July 9, 2014. The Company applied the acquisition method to account for the Apartments.com transaction, which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The following table summarizes the amounts for acquired assets and liabilities recorded at their fair values as of the acquisition date (in thousands): Accounts receivable Goodwill Acquired trade names and other intangible assets Acquired customer base Acquired database technology Acquired building photography Other assets and liabilities Fair value of identifiable net assets acquired $ 11,402 421,724 71,779 69,684 11,489 1,006 (2,866) $ 584,218 The net assets of Apartments.com were recorded at their estimated fair value. In valuing acquired assets and liabilities, fair value estimates were based on, but were not limited to, future expected cash flows, market rate assumptions for contractual obligations, and appropriate discount rates. The acquired customer base for the acquisition consists of one distinct intangible asset, is composed of acquired customer contracts and the related customer relationships, and has an estimated useful life of ten years. The acquired database technology has an estimated useful life of one year due to the Company's intent to replace the existing database technology in 2015. The acquired trade names and other intangible assets have a weighted average estimated useful life of thirteen years. The acquired building photography has an estimated useful life of three years. Amortization of the acquired customer base is recognized on an accelerated basis related to the expected economic benefit of the intangible asset, while amortization of the acquired database technology, acquired building photography and acquired trade names and other intangible assets are recognized on a straight-line basis over the estimated useful life. Goodwill recorded in connection with this acquisition is not amortized, but is subject to annual impairment tests. The $421.7 million of goodwill recorded as part of the acquisition is associated with the Company's North America operating segment and the entire amount of goodwill is expected to be deductible for income tax purposes in future periods. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the Apartments.com acquisition includes: (i) the expected synergies and other benefits that the Company believes will result from combining its operations with Apartments.com's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce. F-15 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 3. ACQUISITIONS — (CONTINUED) The Company's consolidated revenue for the year ended December 31, 2014, included $76.8 million from the Apartments.com Business. The Company's consolidated income before income taxes for the year ended December 31, 2014, included a $23.9 million loss before income taxes from the Apartments.com Business. The Company's consolidated revenue and income before income taxes for the years ended December 31, 2012 and 2013 did not include any amount from the Apartments.com Business. The following unaudited pro forma amounts present consolidated information as if the acquisition had been completed as of January 1, 2013 (in thousands except per share data): Revenue Net income Net income per share — basic Net income per share — diluted Year Ended December 31, 2013 526,811 14,432 0.52 0.51 $ $ $ $ 2014 598,340 51,649 1.71 1.69 $ $ $ $ This information is based on historical results of operations, adjusted for the allocation of purchase price and other acquisition accounting adjustments, including: (i) the amortization associated with the acquired intangible assets; (ii) interest expense associated with debt used to fund a portion of the acquisition; and (iii) income tax expense associated with pro forma adjustments and the historical results of Apartments.com calculated at a tax rate of 38%. The unaudited pro forma results do not include: (i) any potential synergies, cost savings or other expected benefits of the acquisition and (ii) the non-recurring acquisition costs incurred through the date of acquisition. Accordingly, the unaudited pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations which would have resulted had the acquisition been completed at the beginning of the applicable period and may not be indicative of the results that will be attained in the future. As a result of the acquisition of the Apartments.com Business, the Company recorded approximately $1.4 million in acquisition- related costs for the year ended December 31, 2014. These costs include expenses directly related to acquiring the Apartments.com Business, are expensed as incurred and are recorded in general and administrative expense. The Company did not record any acquisition-related costs for the year ended December 31, 2013 and recorded approximately $5.2 million in acquisition-related costs for the year ended December 31, 2012 as a result of the acquisition of LoopNet on April 30, 2012. 4. INVESTMENTS The Company determines the appropriate classification of debt and equity investments at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company considers all of its investments to be available-for-sale. The Company's investments consist of long-term variable rate debt instruments with an auction reset feature, referred to as ARS. Investments are carried at fair value. Scheduled maturities of investments classified as available-for-sale as of December 31, 2014 are as follows (in thousands): Maturity Due in: 2015 2016 — 2019 2020 — 2024 2025 and thereafter Available-for-sale investments Fair Value $ $ — 822 — 16,329 17,151 The Company had no realized gains on its investments for the years ended December 31, 2012, 2013 and 2014, respectively. The Company had no realized losses on its investments for the years ended December 31, 2012, 2013 and 2014, respectively. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis. F-16 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 4. INVESTMENTS — (CONTINUED) Changes in unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive loss in stockholders’ equity until realized. A decline in market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned. As of December 31, 2014, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands): Auction rate securities Available-for-sale investments Amortized Cost $ $ 17,842 17,842 $ $ Gross Unrealized Gains Gross Unrealized Losses Fair Value 380 380 $ $ (1,071) $ (1,071) $ 17,151 17,151 As of December 31, 2013, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands): Auction rate securities Available-for-sale investments Amortized Cost $ $ 23,517 23,517 $ $ Gross Unrealized Gains Gross Unrealized Losses Fair Value 411 411 $ $ (1,938) $ (1,938) $ 21,990 21,990 The unrealized losses on the Company’s investments as of December 31, 2013 and 2014 were generated primarily from changes in interest rates and ARS that failed to settle at auction, due to adverse conditions in the global credit markets. The losses are considered temporary, as the contractual terms of these investments do not permit the issuer to settle the security at a price less than the amortized cost of the investment. Because the Company does not intend to sell these instruments and it is not more likely than not that the Company will be required to sell these instruments prior to anticipated recovery, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2013 and 2014. See Note 5 for further discussion of the fair value of the Company’s financial assets. The components of the Company’s investments in an unrealized loss position for twelve months or longer were as follows (in thousands): Auction rate securities Investments in an unrealized loss position December 31, 2013 2014 Aggregate Fair Value Gross Unrealized Losses Aggregate Fair Value Gross Unrealized Losses $ $ 21,137 21,137 $ $ (1,938) $ (1,938) $ 16,329 16,329 $ $ (1,071) (1,071) The Company did not have any investments in an unrealized loss position for less than twelve months as of December 31, 2013 and 2014, respectively. F-17 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 5. FAIR VALUE Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. There is a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. The following table represents the Company's fair value hierarchy for its financial assets (cash, cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2014 (in thousands): Assets: Cash Money market funds Commercial paper Auction rate securities Total assets measured at fair value Level 1 Level 2 Level 3 Total $ $ 160,275 310,482 56,255 — 527,012 $ $ — $ — — — — $ — $ — — 17,151 17,151 $ 160,275 310,482 56,255 17,151 544,163 The following table represents the Company's fair value hierarchy for its financial assets (cash, cash equivalents and investments) and liabilities measured at fair value on a recurring basis as of December 31, 2013 (in thousands): Assets: Cash Money market funds Commercial paper Auction rate securities Total assets measured at fair value Liabilities: Deferred consideration Total liabilities measured at fair value Level 1 Level 2 Level 3 Total $ $ $ $ 134,989 50,593 70,371 — 255,953 $ $ — $ — $ — $ — — — — $ — $ — $ — $ — — 21,990 21,990 $ 134,989 50,593 70,371 21,990 277,943 1,344 1,344 $ $ 1,344 1,344 The Company’s Level 3 assets consist of ARS, whose underlying assets are primarily student loan securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education. F-18 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 5. FAIR VALUE — (CONTINUED) The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31, 2008 to December 31, 2014 (in thousands): Balance at December 31, 2008 Decrease in unrealized loss included in accumulated other comprehensive loss Settlements Balance at December 31, 2009 Decrease in unrealized loss included in accumulated other comprehensive loss Settlements Balance at December 31, 2010 Decrease in unrealized loss included in accumulated other comprehensive loss Settlements Balance at December 31, 2011 Auction rate securities upon acquisition Decrease in unrealized loss included in accumulated other comprehensive loss Settlements Balance at December 31, 2012 Decrease in unrealized loss included in accumulated other comprehensive loss Settlements Balance at December 31, 2013 Decrease in unrealized loss included in accumulated other comprehensive loss Settlements Balance at December 31, 2014 Auction Rate Securities 29,340 684 (300) 29,724 40 (575) 29,189 245 (4,850) 24,584 442 836 (4,200) 21,662 378 (50) 21,990 836 (5,675) 17,151 $ $ ARS are variable rate debt instruments whose interest rates are reset approximately every 28 days. The majority of the underlying securities have contractual maturities greater than twenty years. The ARS are recorded at fair value. As of December 31, 2014, the Company held ARS with $18.7 million par value, all of which failed to settle at auction. The majority of these investments are of high credit quality with AAA credit ratings and are primarily student loan securities supported by guarantees from the FFELP of the U.S. Department of Education. The Company may not be able to liquidate and fully recover the carrying value of the ARS in the near term. As a result, these securities are classified as long-term investments in the Company’s consolidated balance sheet as of December 31, 2014. While the Company continues to earn interest on its ARS investments at the contractual rate, these investments are not currently actively trading and therefore do not currently have a readily determinable market value. The estimated fair value of the ARS no longer approximates par value. The Company used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of December 31, 2014. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of contractual cash flows, liquidity risk premiums, expected holding periods and default risk. The Company updates the discounted cash flow model on a quarterly basis to reflect any changes in the assumptions used in the model and settlements of ARS investments that occurred during the period. The only significant unobservable input in the discounted cash flow model is the discount rate. The discount rate used represents the Company's estimate of the yield expected by a market participant from the ARS investments. The weighted average discount rate used in the discounted cash flow model as of December 31, 2013 and 2014 was approximately 4.9% and 4.1%, respectively. Selecting another discount rate within the range used in the discounted cash flow model would not result in a significant change to the fair value of the ARS. F-19 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 5. FAIR VALUE — (CONTINUED) Based on this assessment of fair value, as of December 31, 2014, the Company determined there was a decline in the fair value of its ARS investments of approximately $691,000. The decline was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. In addition, while a majority of the ARS are currently rated AAA, if the issuers are unable to successfully close future auctions and/or their credit ratings deteriorate, the Company may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than- temporary impairment charge to earnings on these investments. As of December 31, 2014, the Company had no Level 3 liabilities. As of December 31, 2013, the Company held Level 3 liabilities for deferred consideration that it acquired as a result of the April 30, 2012 acquisition of LoopNet. The deferred consideration included potential deferred cash payments in connection with acquisitions LoopNet completed in 2010 including: (i) potential deferred cash payments due to the sellers of LandsofAmerica.com, LLC ("LandsofAmerica") on March 31, 2014 based on LandsofAmerica's achievement of financial and operational milestones, resulting in undiscounted deferred consideration as of December 31, 2013 of approximately $1.0 million; and (ii) potential deferred cash payments due to the sellers of CoStar Private Sale NetworkTM (formerly known as Reaction Corp. (“Reaction Web”)) on March 31, 2014 based on CoStar Private Sale Network's achievement of revenue milestones, resulting in undiscounted deferred consideration as of December 31, 2013 of approximately $344,000. On March 28, 2013, the Company paid $1.0 million to the sellers of LandsofAmerica for the achievement of financial and operational milestones in 2012 and paid approximately $344,000 to the sellers of CoStar Private Sale Network for the achievement of revenue milestones in 2012. On March 31, 2014, the Company paid $1.0 million to the sellers of LandsofAmerica for the achievement of financial and operational milestones in 2013 and paid approximately $344,000 to the sellers of CoStar Private Sale Network for the achievement of revenue milestones in 2013. The following table summarizes changes in fair value of the Company’s Level 3 liabilities from December 31, 2012 to December 31, 2014 (in thousands): Balance at December 31, 2012 Accretion for 2013 Payments made in 2013 Balance at December 31, 2013 Payments made in 2014 Balance at December 31, 2014 Deferred Consideration 2,304 $ 384 (1,344) 1,344 (1,344) — $ The Company used a discounted cash flow model to determine the estimated fair value of its Level 3 liabilities. The assumptions used in preparing the discounted cash flow model include the discount rate and probabilities for completion of financial and operational milestones. The only significant unobservable input in the discounted cash flow model used to determine the estimated fair value of the Company's Level 3 liabilities was the discount rate. The discount rate used represented LoopNet's cost of equity at the time of each acquisition plus a margin for counterparty risk. F-20 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): Leasehold improvements Furniture, office equipment and research vehicles Computer hardware and software Property and equipment, gross Accumulated depreciation and amortization Property and equipment, net December 31, 2013 2014 36,933 27,395 36,391 100,719 (43,000) 57,719 $ $ 42,026 31,016 49,655 122,697 (48,944) 73,753 $ $ Depreciation expense for property and equipment was approximately $10.1 million, $12.5 million and $15.1 million for the years ended December 31, 2012, 2013 and 2014, respectively. 7. 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, 2012 $ 692,639 $ 25,439 $ Effect of foreign currency translation Goodwill, December 31, 2013 Acquisitions Effect of foreign currency translation — 692,639 421,724 — Goodwill, December 31, 2014 $ 1,114,363 $ 509 25,948 — (1,506) 24,442 $ 718,078 509 718,587 421,724 (1,506) 1,138,805 The Company recorded goodwill of approximately $421.7 million in connection with the April 1, 2014 acquisition of the Apartments.com Business. During the fourth quarters of 2012, 2013 and 2014, the Company completed the annual impairment test of goodwill and concluded that goodwill was not impaired. F-21 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 8. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands, except amortization period data): December 31, 2013 2014 Weighted- Average Amortization Period (in years) Capitalized product development cost Accumulated amortization Capitalized product development cost, net $ $ 2,140 (2,029) 111 Building photography Accumulated amortization Building photography, net Acquired database technology Accumulated amortization Acquired database technology, net Acquired customer base Accumulated amortization Acquired customer base, net Acquired trade names and other intangible assets(1) Accumulated amortization Acquired trade names and other intangible assets, net 13,743 (12,005) 1,738 77,368 (41,073) 36,295 130,960 (74,734) 56,226 59,336 (9,234) 50,102 4 5 4 10 13 2,140 (2,140) — 14,943 (12,665) 2,278 88,739 (60,498) 28,241 199,826 (102,443) 97,383 128,171 (14,451) 113,720 Intangible assets, net $ 144,472 $ 241,622 (1) The weighted-average amortization period for acquired trade names excludes $48.7 million for acquired trade names recorded in connection with the LoopNet acquisition on April 30, 2012, which amount is not amortized, but is subject to annual impairment tests. Amortization expense for intangible assets was approximately $22.7 million, $27.6 million and $55.3 million for the years ended December 31, 2012, 2013 and 2014, respectively. In the aggregate, amortization for intangible assets existing as of December 31, 2014 for future periods is expected to be approximately $48.5 million, $36.2 million, $22.4 million, $14.9 million and $12.9 million for the years ending December 31, 2015, 2016, 2017, 2018 and 2019, respectively. During the fourth quarter of 2014, the Company completed the annual impairment test of the acquired trade name recorded in connection with the LoopNet acquisition and concluded that this indefinite-lived intangible asset was not impaired. During the first quarter of 2014, the Company finalized a branding initiative plan that included, among other things, re- branding some of the services provided by its wholly owned subsidiaries, in order to better organize, update, streamline and optimize the Company’s branding strategy. The Company launched the branding initiative externally in the second quarter of 2014. Following the external launch of the branding initiative, the Company ceased using certain of its trade names. The Company evaluated these assets for impairment during the first quarter of 2014 and determined that the carrying value of trade names that the Company ceased using exceeded the fair value. The adjusted carrying value of the Company's trade name intangible assets associated with the branding initiative was amortized through the date of the external launch of the branding initiative and the fully amortized gross carrying amount was written off during the three months ended June 30, 2014. F-22 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 8. INTANGIBLE ASSETS — (CONTINUED) During the third quarter of 2014, the Company finalized and launched a separate marketing plan that included the re-branding of a service provided by another one of its wholly owned subsidiaries, in order to provide its customers with a more enhanced experience. Following the external launch of the marketing plan, the Company ceased using one of its trade names. The Company evaluated the asset for impairment during the third quarter of 2014 and determined that the carrying value of the trade name that the Company ceased using exceeded the fair value. As a result of these branding and marketing plans, during 2014, the Company recorded impairment charges of approximately $1.8 million in cost of revenues in the consolidated statements of operations within its North America operating segment for the year ended December 31, 2014. 9. LONG-TERM DEBT On April 1, 2014, the Company entered into the 2014 Credit Agreement by and among the Company, as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. The 2014 Credit Agreement provides for a $400.0 million term loan facility and a $225.0 million revolving credit facility, each with a term of five years. The proceeds of the term loan facility and the initial borrowing of $150.0 million under the revolving credit facility on the Closing Date were used to refinance the 2012 Credit Agreement, including related fees and expenses, and to pay a portion of the consideration and transaction costs related to the acquisition of the Apartments.com Business. The undrawn proceeds of the revolving credit facility are available for the Company's working capital needs and other general corporate purposes. During June 2014, the Company repaid the $150.0 million initial borrowing under the revolving credit facility. The carrying value of the term loan facility approximates fair value and can be estimated through Level 3 unobservable inputs using an expected present value technique based on expected cash flows discounted using the current credit-adjusted risk- free rate, which approximates the rate of interest on the term loan facility at origination. Effective April 1, 2014, the Company terminated the 2012 Credit Agreement and repaid all amounts outstanding thereunder, which amounts totaled $148.8 million. The Company evaluated the debt modification and determined that the modification did not qualify as an extinguishment of debt because the change in the present value of future cash flows between the initial term loan facility under the 2012 Credit Agreement and the new term loan facility under the 2014 Credit Agreement was not considered a substantial modification. The revolving credit facility includes a subfacility for swingline loans of up to $10.0 million, and up to $10.0 million of the revolving credit facility is available for the issuance of letters of credit. The term loan facility will amortize in quarterly installments in amounts resulting in an annual amortization of 5% during each of the first, second and third years, 10% during the fourth year and 15% during the fifth year after the Closing Date, with the remainder payable at final maturity. The loans under the 2014 Credit Agreement bear interest, at the Company's option, either (i) during any interest period selected by the Company, at the London interbank offered rate for deposits in U.S. dollars with a maturity comparable to such interest period, adjusted for statutory reserves (“LIBOR”), plus an initial spread of 2.00% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio (as defined in the 2014 Credit Agreement) of the Company, or (ii) at the greatest of (x) the prime rate from time to time announced by JPMorgan Chase Bank, N.A., (y) the federal funds effective rate plus ½ of 1% and (z) LIBOR for a one-month interest period plus 1.00%, plus an initial spread of 1.00% per annum, subject to adjustment based on the First Lien Secured Leverage Ratio of the Company. If an event of default occurs under the 2014 Credit Agreement, the interest rate on overdue amounts will increase by 2.00% per annum. The obligations under the 2014 Credit Agreement are guaranteed by all material subsidiaries of the Company and are secured by a lien on substantially all of the assets of the Company and those of its material subsidiaries, in each case subject to certain exceptions, pursuant to security and guarantee documents entered into on the Closing Date. The 2014 Credit Agreement requires the Company to maintain (i) a First Lien Secured Leverage Ratio (as defined in the 2014 Credit Agreement) not exceeding 4.00 to 1.00 during each full fiscal quarter after the Closing Date through the three months ended March 31, 2016, and 3.50 to 1.00 thereafter and (ii) after the incurrence of additional indebtedness under certain specified exceptions in the 2014 Credit Agreement, a Total Leverage Ratio (as defined in the 2014 Credit Agreement) not exceeding 5.00 to 1.00 during each full fiscal quarter after the Closing Date through the three months ended March 31, 2016, and 4.50 to 1.00 thereafter. The 2014 Credit Agreement also includes other covenants, including covenants that, subject to certain exceptions, restrict the ability of the Company and its subsidiaries to (i) incur additional indebtedness, (ii) create, incur, assume or permit to exist any liens, (iii) enter into mergers, consolidations or similar transactions, (iv) make investments and acquisitions, (v) make certain dispositions of assets, (vi) make dividends, distributions and prepayments of certain indebtedness, and (vii) enter into certain transactions with affiliates. The Company was in compliance with the covenants in the 2014 Credit Agreement as of December 31, 2014. F-23 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 9. LONG-TERM DEBT — (CONTINUED) In connection with obtaining the term loan facility and revolving credit facility pursuant to the 2014 Credit Agreement, the Company incurred approximately $10.1 million in debt issuance costs as of April 1, 2014. The debt issuance costs were comprised of approximately $9.7 million in underwriting fees and approximately $400,000 primarily related to legal fees associated with the debt issuance. Approximately $10.0 million of the fees associated with the refinancing, along with the unamortized debt issuance cost from the 2012 Credit Agreement were capitalized and are amortized as interest expense over the term of the 2014 Credit Agreement using the effective interest method. As of December 31, 2013 and 2014, no amounts were outstanding under the revolving credit facilities. Total interest expense for the term loan facilities and revolving credit facilities was approximately $4.8 million, $6.9 million and $10.5 million for the years ended December 31, 2012, 2013 and 2014, respectively. Interest expense included amortized debt issuance costs of approximately $2.0 million, $3.0 million and $3.3 million for the years ended December 31, 2012, 2013 and 2014, respectively. Total interest paid for the term loan facilities was approximately $2.5 million, $4.3 million and $7.0 million for the years ended December 31, 2012, 2013 and 2014, respectively. Maturities of the Company's borrowings under the Credit Agreement for each of the next five years as of December 31, 2014 are as follows (in thousands): Year ending December 31, Due in: 2015 2016 2017 2018 2019 Long-term debt, including current maturities 10. INCOME TAXES Maturities $ $ 20,000 20,000 35,000 55,000 255,000 385,000 The components of the provision (benefit) for income taxes attributable to operations consist of the following (in thousands): Current: Federal State Foreign Total current Deferred: Federal State Foreign Total deferred Total provision for income taxes Year Ended December 31, 2013 2014 2012 $ $ (2,260) $ 1,974 55 (231) 15,512 (2,067) 5 13,450 13,219 $ 26,516 3,996 31 30,543 (10,919) (1,849) 28 (12,740) 17,803 $ $ 24,741 2,761 53 27,555 (698) (813) — (1,511) 26,044 F-24 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 10. INCOME TAXES — (CONTINUED) The components of deferred tax assets and liabilities consists of the following (in thousands): December 31, 2013 2014 Deferred tax assets: Reserve for bad debts Accrued compensation Stock compensation Net operating losses Accrued reserve and other Unrealized loss on securities Deferred rent Deferred revenue Deferred gain on the sale of building Total deferred tax assets Deferred tax liabilities: Prepaids Depreciation Intangibles Total deferred tax liabilities $ $ 1,274 6,725 13,381 17,457 4,284 786 4,329 1,538 11,499 61,273 (1,096) (6,033) (55,284) (62,413) Net deferred tax liabilities, prior to valuation allowance Valuation allowance Net deferred tax liabilities (1,140) (10,936) (12,076) $ $ 1,825 7,287 8,758 15,665 3,360 491 5,902 1,879 10,690 55,857 (1,258) (9,806) (47,720) (58,784) (2,927) (7,783) (10,710) As of December 31, 2013 and 2014, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance as of December 31, 2013 includes an allowance for unrealized losses on ARS investments, foreign deferred tax assets and certain state net operating loss carryforwards. The valuation allowance as of December 31, 2014 includes an allowance for unrealized losses on ARS investments and foreign deferred tax assets. The valuation allowance for the deferred tax asset for unrealized losses on ARS has been recorded as an adjustment to accumulated other comprehensive loss. The Company established the valuation allowance because it is more likely than not that a portion of the deferred tax asset for certain items will not be realized based on the weight of available evidence. A valuation allowance was established for the unrealized losses on securities as the Company has not historically generated capital gains, and it is uncertain whether the Company will generate sufficient capital gains in the future to absorb the capital losses. A valuation allowance was established for the foreign deferred tax assets due to the cumulative loss in recent years in those jurisdictions. The Company has not had sufficient taxable income historically to utilize the foreign deferred tax assets, and it is uncertain whether the Company will generate sufficient taxable income in the future to utilize the deferred tax assets. Similarly, the Company has established a valuation allowance for net operating losses in certain states where it is uncertain whether the Company will generate sufficient taxable income to utilize the net operating losses before the losses expire. The Company’s change in valuation allowance was an increase of approximately $446,000 for the year ended December 31, 2013 and a decrease of approximately $3.2 million for the year ended December 31, 2014. The decrease for the year ended December 31, 2014 is due to a decrease in the valuation allowance for U.S. deferred tax assets of approximately $2.3 million primarily related to the write-off of tax credits and state net operating loss carryforwards and a decrease in the amount of unrealized losses on investments as well as the decrease in the valuation allowance for foreign deferred tax assets of approximately $835,000. F-25 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 10. INCOME TAXES — (CONTINUED) The Company had U.S. income before income taxes of approximately $36.1 million, $53.2 million and $70.6 million for the years ended December 31, 2012, 2013 and 2014, respectively. The Company had foreign losses of approximately $13.0 million and $5.6 million for the years ended December 31, 2012 and 2013, respectively. The Company had foreign income before income taxes of approximately $273,000 for the year ended December 31, 2014. The Company’s provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate as follows (in thousands): Expected federal income tax provision at statutory rate State income taxes, net of federal benefit Foreign income taxes, net effect Stock compensation Increase (decrease) in valuation allowance Nondeductible compensation Nondeductible transaction costs Other adjustments Income tax expense, net Year Ended December 31, 2013 2014 2012 $ $ 8,097 (1,360) (2,971) (313) 2,978 656 5,829 303 13,219 $ $ 16,638 885 (724) (116) 588 431 — 101 17,803 $ $ 24,820 1,965 336 35 (2,397) 554 — 731 26,044 The Company’s U.K. subsidiaries with foreign losses are disregarded entities for U.S. income tax purposes. Accordingly, the losses from these disregarded entities are included in the Company’s consolidated federal income tax provision at the statutory rate. Federal income taxes attributable to income from these disregarded entities are reduced by foreign taxes paid by those disregarded entities. The Company paid approximately $2.6 million, $6.5 million, and $3.0 million in income taxes for the years ended December 31, 2012, 2013 and 2014, respectively. The Company has net operating loss carryforwards for international income tax purposes of approximately $27.9 million, which do not expire. The Company has federal net operating loss carryforwards of approximately $11.0 million that begin to expire in 2020, state net operating loss carryforwards with a tax value of approximately $4.4 million that begin to expire in 2020 and state income tax credit carryforwards with a tax value of approximately $1.9 million that begin to expire in 2020. The Company realized a cash benefit relating to the use of its tax loss carryforwards of approximately $4.2 million and $1.2 million in 2013 and 2014, respectively. The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands): Unrecognized tax benefits as of December 31, 2011 Increase for current year tax positions Decrease for prior year tax positions Expiration of the statute of limitation for assessment of taxes Unrecognized tax benefits as of December 31, 2012 Increase for current year tax positions Increase for prior year tax positions Expiration of the statute of limitation for assessment of taxes Unrecognized tax benefits as of December 31, 2013 Increase for current year tax positions Decrease for prior year tax positions Expiration of the statute of limitation for assessment of taxes Unrecognized tax benefits as of December 31, 2014 F-26 $ $ 3,347 792 (161) (69) 3,909 66 2,037 (55) 5,957 51 (189) (70) 5,749 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 10. INCOME TAXES — (CONTINUED) Approximately $1.6 million and $1.5 million of the unrecognized tax benefits as of December 31, 2013 and 2014, respectively, would favorably affect the annual effective tax rate, if recognized in future periods. The Company recognized $58,000, $62,000 and $62,000 for interest and penalties in its consolidated statements of operations for the years ended December 31, 2012, 2013 and 2014, respectively. The Company had liabilities of $342,000, $404,000 and $466,000 for interest and penalties in its consolidated balance sheets as of December 31, 2012, 2013 and 2014, respectively. The Company does not anticipate the amount of the unrecognized tax benefits to change significantly over the next twelve months. The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company’s federal and state income tax returns for tax years 2011 through 2013 remain open to examination. The Company’s U.K. income tax returns for tax years 2008 through 2013 remain open to examination. The Company was previously under an Internal Revenue Service (“IRS”) audit in the U.S. for tax year 2010. During September 2014, the statute of limitations for tax year 2010 expired with no adjustments proposed by the IRS. During July 2014, the IRS completed its audit of the tax returns filed by LoopNet, the Company's subsidiary, for tax years 2009, 2010, 2011 and the four months ended April 30, 2012. No adjustments were made to the financial statements as a result of the completion of the IRS audit. 11. COMMITMENTS AND CONTINGENCIES The Company leases office facilities and office equipment under various non-cancelable operating leases. The leases contain various renewal options. Rent expense for the years ended December 31, 2012, 2013 and 2014 was approximately $16.7 million, $18.3 million and $19.2 million, respectively. Future minimum lease payments as of December 31, 2014 are as follows (in thousands): 2015 2016 2017 2018 2019 2020 and thereafter Total future minimum lease payments $ $ 19,442 18,783 18,607 17,680 15,907 75,878 166,297 On April 1, 2014, the Company entered into the 2014 Credit Agreement. The 2014 Credit Agreement provides for a $400.0 million term loan facility and a $225.0 million revolving credit facility, each with a term of five years. See Note 9 for additional information regarding the term loan facility and revolving credit facility. F-27 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES — (CONTINUED) In May 2011, LoopNet, the Board of Directors of LoopNet (“the LoopNet Board”) and/or the Company were named as defendants in three purported class action lawsuits brought by alleged LoopNet stockholders challenging LoopNet's then-proposed merger with the Company. The stockholder actions alleged, among other things, that (i) each member of the LoopNet Board breached his fiduciary duties to LoopNet and its stockholders in authorizing the sale of LoopNet to the Company, (ii) the merger did not maximize value to LoopNet stockholders, (iii) LoopNet and the Company made incomplete or materially misleading disclosures about the transaction and (iv) LoopNet and the Company aided and abetted the breaches of fiduciary duty allegedly committed by the members of the LoopNet Board. The stockholder actions sought class action certification and equitable relief, including an injunction against consummation of the merger. The parties stipulated to the consolidation of the actions, and permitted the filing of a consolidated complaint. In June 2011, counsel for the parties entered into a memorandum of understanding in which they agreed on the terms of a settlement of this litigation, which could result in a loss to the Company of approximately $200,000. On March 20, 2013, the California Superior Court declined to grant preliminary approval to the proposed settlement and issued an order scheduling a hearing on June 11, 2013 to show good cause why the case should not be dismissed. Shortly before the hearing, the plaintiffs filed a third supplemental submission in support of their motion for preliminary approval of the proposed settlement. The show cause hearing took place on May 13, 2014 and a follow up hearing took place on July 16, 2014. At the July 16, 2014 hearing the Court again denied preliminary approval of the settlement and encouraged the parties to discuss a potential disposition of the case due to the mootness of plaintiffs’ disclosure claims. The parties engaged in such discussions, and on October 14, 2014, the plaintiffs requested that the Court dismiss their claims with prejudice. The Court dismissed the action and, pursuant to an agreement between the parties, the Company and its insurer reimbursed certain legal fees to plaintiffs’ counsel in the total amount of $300,000. The Company paid approximately $200,000 of this amount. On January 3, 2012, LoopNet, the Company’s wholly owned subsidiary, was sued by CIVIX-DDI, LLC (“Civix”) in the U.S. District Court for the Eastern District of Virginia for alleged infringement of U.S. Patent Nos. 6,385,622 and 6,415,291. The complaint sought unspecified damages, attorneys' fees and costs. On February 16, 2012, LoopNet filed an answer to Civix’s complaint and filed counterclaims against Civix seeking, among other things, declaratory relief that the asserted patents are invalid, not infringed, and that Civix committed inequitable conduct during the prosecution and re-examination of the asserted patents. On or about May 14, 2012, Civix filed a motion for leave to amend its complaint against LoopNet in the U.S. District Court for the Eastern District of Virginia seeking to add the Company as a defendant, alleging that the Company's products also infringe Civix’s patents. The Company filed a motion opposing Civix’s motion, and on June 21, 2012, the district court denied Civix’s motion to amend its complaint. On June 21, 2012, the Company filed an action in the U.S. District Court for the Northern District of Illinois seeking a declaratory judgment of non-infringement and invalidity against Civix. On August 14, 2012, the Company amended its complaint against Civix to assert an affirmative claim against Civix for breach of contract, alleging Civix violated its license agreement with, and covenant not to sue, one of the Company's technology licensors. On August 30, 2012, the Eastern District of Virginia transferred Civix’s case against LoopNet to the Northern District of Illinois,. On October 29, 2012, Civix filed a separate action against LoopNet in the Northern District of Illinois alleging infringement of U.S. Patent No. 8,296,335. That case was later consolidated with Civix’s original lawsuit against LoopNet. Civix amended its complaint against the Company on November 8, 2012 to add claims under Patent No. 8,296,335 as well. On November 15, 2012, LoopNet filed an amended answer and counterclaim against Civix, asserting an affirmative claim against Civix for breach of contract, alleging Civix violated its license agreement with, and covenant not to sue, one of LoopNet's technology licensors. The U.S. District Court for the Northern District of Illinois construed the language of the patent on September 23, 2013, but no trial date was set. On November 25, 2013, Civix submitted its expert’s report of damages, which estimated the payment it deemed appropriate in the event that the Company was found liable for infringement. The Company believed that Civix’s calculation of damages was based on improper assumptions and miscalculations, and was otherwise unsupported. The Company submitted its own expert’s report of damages, which concluded that the appropriate payment to be made in the event that the Company was found liable for infringement was significantly less than Civix’s estimate of appropriate damages. Moreover, the Company’s expert’s report of damages concluded that while Civix’s calculation of damages was fundamentally flawed and should not have been used to determine damages, simply applying certain necessary adjustments to Civix’s calculation as outlined in the Company’s report resulted in a significant reduction in Civix’s calculation of damages to approximately $3.7 million. The Court granted a motion submitted by the parties requesting a settlement conference, which took place on November 20, 2014. Subsequent to the settlement conference, on December 1, 2014 the Company settled all outstanding litigation with Civix for $2.9 million, which was paid on December 9, 2014. F-28 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES — (CONTINUED) 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. At the present time, 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, management has concluded that it is not probable that a loss has been incurred in connection with the Company’s current litigation other than as described above. In addition, other than as described above, the Company is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in the Company’s current litigation and accordingly, the Company has not recognized any liability in the consolidated financial statements for unfavorable results, if any, other than described above. Legal defense costs are expensed as incurred. 12. SEGMENT REPORTING 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 includes the U.K. and France. The Company’s subscription-based information services consist primarily of CoStar SuiteTM services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional® and CoStar Tenant® and through the Company's mobile application, CoStarGo®. CoStar Suite is the Company’s primary service offering in the North America and International operating segments. Prior to the third quarter of 2014, FOCUSTM was the Company’s primary service offering in the International operating segment. The Company introduced CoStar Suite in the U.K. in the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013. CoStar's and its subsidiaries' subscription-based services consist primarily of similar services offered over the Internet to commercial real estate industry and related professionals. Management relies on an internal management reporting process that provides revenue and operating segment EBITDA, which is the Company’s net income before interest, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of the Company’s operating segments. EBITDA is used by management to internally measure operating and management performance and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP. Summarized information by operating segment consists of the following (in thousands): Revenues North America International External customers Intersegment revenue Total International revenue Intersegment eliminations Total revenues EBITDA North America International Total EBITDA Year Ended December 31, 2013 2014 2012 $ 330,805 $ 420,817 $ 552,141 19,131 1,514 20,645 (1,514) 349,936 70,199 (10,007) 60,192 $ $ $ 20,126 339 20,465 (339) 440,943 97,348 (3,136) 94,212 $ $ $ 23,795 57 23,852 (57) 575,936 148,913 2,337 151,250 $ $ $ F-29 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 12. SEGMENT REPORTING — (CONTINUED) The reconciliation of EBITDA to net income consists of the following (in thousands): EBITDA Purchase amortization in cost of revenues Purchase amortization in operating expenses Depreciation and other amortization Interest income Interest expense Income tax expense, net Net income Year Ended December 31, 2013 2014 2012 $ $ 60,192 (8,634) (13,607) (10,511) 526 (4,832) (13,219) 9,915 $ $ 94,212 (11,883) (15,183) (12,992) 326 (6,943) (17,803) 29,734 $ $ 151,250 (26,290) (28,432) (15,650) 516 (10,481) (26,044) 44,869 Intersegment revenue recorded during 2014 was attributable to services performed for the Company’s wholly owned subsidiary, CoStar Portfolio Strategy by Grecam S.A.S. (“Grecam”), a wholly owned subsidiary of CoStar Limited, the Company's wholly owned U.K. holding company. Intersegment revenue recorded during 2012 and 2013 was attributable to services performed for CoStar Portfolio Strategy by Property and Portfolio Research Ltd., a wholly owned subsidiary of CoStar Portfolio Strategy. Intersegment revenue is recorded at an amount the Company believes approximates fair value. North America EBITDA includes a corresponding cost for the services performed by Grecam and Property and Portfolio Research Ltd. There were no costs allocated to North America EBITDA for the year ended December 31, 2012. North America EBITDA includes an allocation of approximately $800,000 and $1.1 million for the years ended December 31, 2013 and 2014, respectively. This allocation represents costs incurred for International employees involved in development activities of the Company's North America operating segment. International EBITDA includes a corporate allocation of approximately $5.3 million, $400,000 and $300,000 for the years ended December 31, 2012, 2013 and 2014, respectively. This allocation represents costs incurred for North America employees involved in management and expansion activities of the Company’s International operating segment. F-30 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 12. SEGMENT REPORTING — (CONTINUED) Summarized information by operating segment consists of the following (in thousands): December 31, 2013 2014 $ $ $ $ $ $ $ $ $ $ $ $ 53,733 3,986 57,719 692,639 25,948 718,587 1,311,292 43,464 1,354,756 1,354,756 (18,344) (79,430) 1,256,982 324,626 79,266 403,892 403,892 (74,772) 329,120 $ $ $ $ $ $ $ $ $ $ $ $ 71,209 2,544 73,753 1,114,363 24,442 1,138,805 2,138,768 41,896 2,180,664 2,180,664 (18,344) (78,638) 2,083,682 564,832 75,584 640,416 640,416 (70,280) 570,136 Property and equipment, net North America International Total property and equipment, net Goodwill North America International Total goodwill Assets North America International Total operating segment assets Reconciliation of operating segment assets to total assets Total operating segment assets Investment in subsidiaries Intersegment receivables Total assets Liabilities North America International Total operating segment liabilities Reconciliation of operating segment liabilities to total liabilities Total operating segment liabilities Intersegment payables Total liabilities F-31 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 13. STOCKHOLDERS’ EQUITY Preferred Stock The Company has 2,000,000 shares of preferred stock, $0.01 par value, authorized for issuance as of December 31, 2014. The Board of Directors may issue the preferred stock from time to time as shares of one or more classes or series. Common Stock The Company has 60,000,000 shares of common stock, $0.01 par value, authorized for issuance. Dividends may be declared and paid on the common stock, subject in all cases to the rights and preferences of the holders of preferred stock and authorization by the Board of Directors. In the event of liquidation or winding up of the Company and after the payment of all preferential amounts required to be paid to the holders of any series of preferred stock, any remaining funds shall be distributed among the holders of the issued and outstanding common stock. Equity Offering During June 2014, the Company completed a public equity offering of 3,450,000 shares of common stock for $160.00 per share. Net proceeds from the public equity offering were approximately $529.4 million, after deducting approximately $22.1 million of underwriting discounts and commissions and offering expenses of approximately $500,000. The Company intends to use the net proceeds from the sale of the securities to fund all or a portion of the costs of any strategic acquisitions it determines to pursue in the future, to finance the growth of its business and for general corporate purposes. General corporate purposes may include additions to working capital, capital expenditures, repayment of debt, investments in the Company’s subsidiaries, possible acquisitions and the repurchase, redemption or retirement of securities, including the Company’s common stock. 14. NET INCOME PER SHARE The following table sets forth the calculation of basic and diluted net income per share (in thousands except per share data): Numerator: Net income Denominator: Year Ended December 31, 2013 2014 2012 $ 9,915 $ 29,734 $ 44,869 Denominator for basic net income per share — weighted-average outstanding shares Effect of dilutive securities: Stock options and restricted stock Denominator for diluted net income per share — weighted-average outstanding shares 26,533 27,670 30,215 416 542 426 26,949 28,212 30,641 Net income per share — basic Net income per share — diluted $ $ 0.37 0.37 $ $ 1.07 1.05 $ $ 1.48 1.46 F-32 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 14. NET INCOME PER SHARE — (CONTINUED) Employee stock options with exercise prices greater than the average market price of the Company’s common stock for the period are excluded from the calculation of diluted net income per share as their inclusion would be anti-dilutive. Additionally, shares of restricted common stock that vest based on Company performance and service conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share. Finally, shares of restricted common stock units that vest based on Company service conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share. The following table summarizes the potential common shares excluded from the diluted calculation (in thousands): Employee stock options Performance-based restricted stock awards Service-based restricted stock units Total shares excluded from computation 15. EMPLOYEE BENEFIT PLANS Stock Incentive Plans Year Ended December 31, 2013 2014 2012 — 399 — 399 — 379 — 379 80 23 1 104 In June 1998, the Company’s Board of Directors adopted the 1998 Stock Incentive Plan (as amended, the “1998 Plan”) prior to consummation of the Company’s initial public offering. In April 2007, the Company’s Board of Directors adopted the CoStar Group, Inc. 2007 Stock Incentive Plan (as amended, the “2007 Plan”), subject to stockholder approval, which was obtained on June 7, 2007. All shares of common stock that were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan (excluding shares subject to outstanding awards) were rolled into the 2007 Plan and, as of that date, no shares of common stock were available for new awards under the 1998 Plan. The 1998 Plan continues to govern unexercised and unexpired awards issued under the 1998 Plan prior to June 7, 2007. The 1998 Plan provided for the grant of stock and stock options to officers, directors and employees of the Company and its subsidiaries. Stock options granted under the 1998 Plan could be incentive or non-qualified, and the exercise price for an incentive stock option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period of the options and restricted stock grants under the 1998 Plan was determined by the Board of Directors or a committee thereof and was generally three to four years. Upon the occurrence of a Change of Control, as defined in the 1998 Plan, all outstanding unexercisable options and restricted stock grants under the 1998 Plan immediately become exercisable. The 2007 Plan provides for the grant of stock options, restricted stock, restricted stock units, and stock appreciation rights to officers, employees, directors and consultants of the Company and its subsidiaries. Stock options granted under the 2007 Plan may be non-qualified or may qualify as incentive stock options. Except in limited circumstances related to a merger or other acquisition, the exercise price for an option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period for each grant of options, restricted stock, restricted stock units and stock appreciation rights under the 2007 Plan is determined by the Board of Directors or a committee thereof and is generally three to four years, subject to minimum vesting periods for restricted stock and restricted stock units of at least one year. In some cases, vesting of awards under the 2007 Plan may be based on performance conditions. The Company has issued and/or reserved the following shares of common stock for issuance under the 2007 Plan (including an increase of 1,300,000 shares of common stock pursuant to an amendment to the 2007 Plan approved by the Company’s stockholders on June 2, 2010 and an increase of 900,000 shares of common stock pursuant to an amendment to the 2007 Plan approved by the Company’s stockholders on June 5, 2012): (a) 3,200,000 shares of common stock, plus (b) 121,875 shares of common stock that were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan (not including any Shares that were subject as of such date to outstanding awards under the 1998 Plan), and (c) any shares of common stock subject to outstanding awards under the 1998 Plan as of June 7, 2007, that on or after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). Unless terminated sooner, the 2007 Plan will terminate in April 2017, but will continue to govern unexercised and unexpired awards issued under the 2007 Plan prior to that date. Approximately 1.2 million shares were available for future grant under the 2007 Plan as of December 31, 2013 and 2014. F-33 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 15. EMPLOYEE BENEFIT PLANS — (CONTINUED) Stock Incentive Plans — (Continued) At December 31, 2014, there was $51.3 million of unrecognized compensation cost related to stock-based payments, net of forfeitures, which is expected to be recognized over a weighted-average-period of 2.5 years. Stock Options Option activity was as follows: Outstanding at December 31, 2011 Granted Exercised Canceled or expired Number of Shares Range of Exercise Price 847,102 102,000 $17.34 - $60.23 $58.95 - $58.95 (274,842) $17.34 - $57.16 (541) $54.51 - $54.51 Outstanding at December 31, 2012 673,719 $25.00 - $60.23 Granted Exercised Canceled or expired 126,800 $102.16 - $102.16 (409,799) $25.00 - $58.95 (16,380) $36.48 - $58.95 Outstanding at December 31, 2013 374,340 $36.48 - $102.16 Granted Exercised Canceled or expired 87,700 $201.04 - $201.04 (68,126) $39.00 - $102.16 (23,735) $58.95 - $201.04 Outstanding at December 31, 2014 370,179 $36.48 - $201.04 Exercisable at December 31, 2012 Exercisable at December 31, 2013 Exercisable at December 31, 2014 432,196 146,161 188,656 $25.00 - $60.23 $36.48 - $60.23 $36.48 - $102.16 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Weighted- Average Exercise Price Weighted- Average Remaining Contract Life (in years) Aggregate Intrinsic Value (in thousands) 39.93 58.95 34.04 54.51 45.20 102.16 41.05 47.54 68.94 201.04 55.81 124.09 99.12 40.22 47.72 60.54 7.25 $ 32,677 6.09 $ 23,221 The aggregate intrinsic value is calculated as the difference between (i) the closing price of the common stock at the end of the period and (ii) the exercise prices of the underlying awards, multiplied by the shares underlying options as of the end of the period that had an exercise price less than the closing price on that date. Options to purchase 274,842, 409,799 and 68,126 shares were exercised during the years ended December 31, 2012, 2013, and 2014, respectively. The aggregate intrinsic value of options exercised, determined as of the date of option exercise, was $11.9 million, $39.0 million and $8.9 million for the years ended December 31, 2012, 2013, and 2014, respectively. The weighted-average grant date fair value of each option granted during the years ended December 31, 2012, 2013 and 2014 using the Black-Scholes option-pricing model was $20.99, $34.10 and $58.12 respectively. F-34 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 15. EMPLOYEE BENEFIT PLANS — (CONTINUED) Stock Options — (Continued) The Company estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, using the assumptions in the following table: Dividend yield Expected volatility Risk-free interest rate Expected life (in years) Year Ended December 31, 2013 2014 2012 0% 40% 0.9% 5 0% 37% 0.9% 5 0% 30% 1.5% 5 The assumptions above and the estimation of expected forfeitures are based on multiple factors, including historical employee behavior patterns of exercising options and post-employment termination behavior, expected future employee option exercise patterns, and the historical volatility of the Company’s stock price. The following table summarizes information regarding options outstanding at December 31, 2014: Range of Exercise Price $36.48 - $42.50 $42.51 - $55.83 $55.84 - $57.61 $57.62 - $58.51 $58.52 - $59.59 $59.60 - $81.19 $81.20 - $151.60 $151.61 - $201.04 $36.48 - $201.04 Options Outstanding Weighted- Average Remaining Contractual Life (in years) Number of Shares Options Exercisable Weighted- Average Exercise Price Number of Shares Weighted- Average Exercise Price 58,603 19,666 43,549 473 54,068 2,320 111,600 79,900 370,179 5.05 3.47 6.17 6.09 7.14 6.42 8.19 9.15 7.25 $ $ $ $ $ $ $ $ $ 41.20 49.24 57.16 58.06 58.95 60.23 102.16 201.04 99.12 58,603 19,666 43,549 100 27,800 1,740 37,198 $ $ $ $ $ $ $ — $ 188,656 $ 41.20 49.24 57.16 58.06 58.95 60.23 102.16 — 60.54 F-35 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 15. EMPLOYEE BENEFIT PLANS — (CONTINUED) Restricted Stock Awards In February 2012, the Committee approved grants of restricted common stock to the executive officers that vest based on the achievement of certain performance conditions. These awards support the Committee’s goals of aligning executive incentives with long-term stockholder value and ensuring that executive officers have a continuing stake in the long-term success of the Company. In May and December of 2012, the Company granted additional shares of restricted common stock that vest based on the achievement of certain performance conditions to other employees. These shares of performance-based restricted common stock vest upon the Company’s achievement of $90.0 million of cumulative EBITDA over a period of four consecutive calendar quarters, and are subject to forfeiture in the event the foregoing performance condition is not met by March 31, 2017. The Company granted a total of 399,413 shares of performance-based restricted common stock during the year ended December 31, 2012. No shares of the 2012 performance-based restricted common stock were granted by the Company during the years ended December 31, 2013 and 2014. All of the awards were made under the 2007 Plan and pursuant to the Company’s standard form of restricted stock grant agreement. The number of shares granted was based on the fair market value of the Company’s common stock on the grant date. As of March 31, 2013, the Company initially determined that it was probable that the performance condition for these performance- based restricted common stock awards would be met by the March 31, 2017 forfeiture date. As of March 31, 2014, the Company had satisfied all performance and service conditions, and as a result, the restricted common stock granted under these awards vested. The Company recorded approximately $0, $21.8 million and $2.2 million of stock-based compensation expense related to the 2012 performance-based restricted common stock for the years ended December 31, 2012, 2013 and 2014, respectively. In February 2014, the Committee approved grants of restricted common stock to the executive officers that vest based on the Company’s achievement of a three-year cumulative revenue goal established at the grant date, and are subject to forfeiture in the event the foregoing performance condition is not met by December 31, 2016. The number of shares that may be earned ranges between 0% (if the specified threshold performance level is not attained) and 200% (if performance meets or exceeds the maximum achievement level) of the target awards originally granted. If actual performance exceeds the pre-established threshold, the number of shares earned is calculated based on the relative performance between specified levels of achievement. These awards support the Committee’s goals of aligning executive incentives with long-term stockholder value and ensuring that executive officers have a continuing stake in the long-term success of the Company. The 2014 performance-based restricted common stock awards are subject to continuing employment requirements and to a market condition. The actual number of shares that vest at the end of the respective three-year period is determined based on the Company’s achievement of the three-year performance goals described above, as well as its TSR relative to the Russell 1000 Index over the related three-year performance period. At the end of the three-year performance period, if the performance condition is achieved at or above the pre-established threshold, the number of shares earned is further adjusted by a TSR payout percentage, which ranges between 80.0% and 120.0%, based on the Company’s TSR performance relative to that of the Russell 1000 Index over the respective three-year period. The Company granted a total of 24,720 shares of 2014 performance-based restricted common stock during the year ended December 31, 2014. The Company estimates the fair value of its performance-based restricted common stock awards with a market condition on the date of grant using a Monte-Carlo simulation valuation model. This pricing model uses multiple simulations to evaluate the probability of the Company achieving various stock price levels to determine the expected TSR performance ranking. Expense is only recorded for awards that are expected to vest, net of estimated forfeitures. The assumptions used to estimate the fair value of performance-based restricted common stock awards with a market condition granted during the year ended December 31, 2014 were as follows: Dividend yield Expected volatility Risk-free interest rate Expected life (in years) Weighted-average grant date fair value F-36 Year Ended December 31, 2014 0% 30% 0.6% 3 $ 216.20 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 15. EMPLOYEE BENEFIT PLANS — (CONTINUED) Restricted Stock Awards — (Continued) As of December 31, 2014, the Company reassessed the probability of achieving the performance and market conditions and determined that it was probable that the performance and market conditions for these awards would be met by December 31, 2016. As a result, the Company recorded a total of approximately $1.1 million of stock-based compensation expense related to the performance-based restricted common stock awards with a market condition for the year ended December 31, 2014. There was no stock-based compensation expense related to the grant of 2014 performance-based restricted common stock recorded for the years ended December 31, 2012 and 2013. The Company expects to record an estimated unrecognized stock-based compensation expense related to the performance-based restricted common stock awards of approximately $2.7 million over the periods 2015, 2016 and 2017. The following table presents unvested restricted stock awards activity without a market condition and performance-based restricted common stock awards activity with a market condition for the year ended December 31, 2014: Restricted Stock Awards — without Market Condition Weighted- Average Grant Date Fair Value per Share Number of Shares Restricted Stock Awards — with Market Condition Weighted- Average Grant Date Fair Value per Share Number of Shares $ Unvested restricted stock awards at December 31, 2013 968,270 Granted Vested Canceled Unvested restricted stock awards at December 31, 2014 Restricted Stock Units 234,282 $ (586,842) $ (58,917) $ $ 556,793 80.52 167.49 68.34 117.70 126.01 — $ 24,720 $ — $ (2,160) $ $ 22,560 — 216.20 — 216.20 216.20 The following table presents unvested restricted stock units activity for the year ended December 31, 2014: Unvested restricted stock units at December 31, 2013 Granted Vested Canceled Unvested restricted stock units at December 31, 2014 Employee 401(k) Plan Weighted- Average Grant Date Fair Value per Share Number of Shares — $ 887 $ — $ — $ — 169.16 — — 887 $ 169.16 The Company maintains a 401(k) Plan (the “401(k)”) as a defined contribution retirement plan for all eligible employees. The 401(k) provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual amount as established by the IRS. In 2012, the Company matched 50% of employee contributions up to a maximum of 6% of total compensation. In 2013 and 2014, the Company matched 100% of employee contributions up to a maximum of 4% of total compensation. Amounts contributed to the 401(k) by the Company to match employee contributions for the years ended December 31, 2012, 2013 and 2014 were approximately $2.7 million, $5.1 million and $6.1 million, respectively. The Company had no administrative expenses in connection with the 401(k) plan for the years ended December 31, 2012, 2013 and 2014, respectively. F-37 COSTAR GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED) 15. EMPLOYEE BENEFIT PLANS — (CONTINUED) Employee Pension Plan The Company maintains a Group Personal Pension Plan (the “Plan”) for all eligible employees in the Company’s U.K. offices. The Plan is a defined contribution plan. Employees are eligible to contribute a portion of their salaries, subject to a maximum annual amount as established by Her Majesty's Revenue and Customs. In 2012, the Company matched 50% of employee contributions up to a maximum of 6% of total compensation. In 2013 and 2014, the Company's matching contribution was based on the percentage contributed by the employee, up to a maximum of 6% of total compensation. Amounts contributed to the Plan by the Company to match employee contributions for the years ended December 31, 2012, 2013 and 2014 were approximately $180,000, $280,000 and $390,000, respectively. Employee Stock Purchase Plan As of August 1, 2006, the Company introduced an Employee Stock Purchase Plan (“ESPP”), pursuant to which eligible employees participating in the plan authorize the Company to withhold specified amounts from the employees’ compensation and use the withheld amounts to purchase shares of the Company's common stock at 90% of the market price. Participating employees are able to purchase common stock under this plan during each offering period. An offering period begins the second Saturday before each of the Company’s regular pay dates and ends on each of the Company’s regular pay dates. There were 34,895 and 21,774 shares available for purchase under the ESPP as of December 31, 2013 and 2014, respectively and approximately 11,291 and 13,121 shares of the Company’s common stock were purchased under the ESPP during 2013 and 2014, respectively. F-38 Board of Directors and Executive Officers Andrew C. Florance* President & Chief Executive Officer, CoStar Group, Inc. Michael R. Klein Chairman of the Board, CoStar Group, Inc. & Chairman of the Board The Sunlight Foundation David Bonderman Founding Partner, TPG Capital, L.P. Christopher J. Nassetta President & Chief Executive Officer, Hilton Worldwide Michael J. Glosserman Managing Member, The JBG Companies Warren H. Haber Chairman of the Board & Chief Executive Officer, Founders Equity, Inc. John W. Hill Founder and Chief Executive Officer, J Hill Group David J. Steinberg Chief Executive Officer, SnappCloud, Inc. Brian J. Radecki* Chief Financial Officer, CoStar Group, Inc. Max Linnington* Executive Vice President, Sales, CoStar Group, Inc. Frank A. Carchedi* Executive Vice President, Operations, CoStar Group, Inc. Jonathan A. Coleman General Counsel & Secretary CoStar Group, Inc. Frank A. Simuro Chief Technology Officer CoStar Group, Inc. Fred G. Saint President, LoopNet Donna G. Tanenbaum Vice President, Human Resources Giles R. Newman Managing Director, CoStar U.K. Ltd. Senior Management Susan E. Jeffress Vice President, Customer Service Mark A. Klionsky Senior Vice President, Marketing Simon Law Vice President, Research Brad Long President, Apartments.com Leah McMurtry Vice President, LoopNet Hans G. Nordby Managing Director, CoStar Portfolio Strategy Curtis M. Ricketts Senior Vice President, Product Design Eric Robinson Vice President, LoopNet Inside Sales Lisa Ruggles Vice President, Field Research M. Andy Thomas President of CoStar Real Estate Manager Wayne B. Warthen Chief Technology Officer & Senior Vice President, Information Technology, LoopNet Scott Yinger Vice President, Finance *DENOTES SECTION 16 AND EXECUTIVE OFFICER 1331 L Street, NW Washington, DC 20005 202-346-6500 costargroup.com About CoStar Group, Inc. Shareholder Information Investor Relations CoStar Group (NASDAQ: CSGP) is the leading provider Stock Listing of commercial real estate information, analytics and Symbol: CSGP NASDAQ Listed online marketplaces. Founded in 1987, CoStar conducts expansive, ongoing research to produce and maintain Independent Auditors the largest and most comprehensive database of Ernst & Young LLP commercial real estate information. Our suite of 8484 Westpark Drive McLean, online services enables clients to analyze, interpret VA 22102 and gain unmatched insight on commercial property values, market conditions and current availabilities. Transfer Agent and Registrar Through LoopNet, the Company operates the most American Stock Transfer & heavily trafficked commercial real estate marketplace Trust Company, LLC online with more than 9 million registered members. 6201 15th Avenue Brooklyn, Apartments.com is a premier online apartment NY 11219 resource for renters that matches apartment seekers with great apartment homes and provides property managers and owners a proven platform for marketing their properties. CoStar operates websites with over 19 million unique monthly visitors in aggregate during January 2015. Headquartered in Washington, DC, CoStar maintains offices throughout the U.S., Canada and Europe with a staff of nearly 3,000 worldwide, including the industry’s largest professional research organization. For more information, visit costargroup.com. © 2015 CoStar Group, Inc. Richard Simonelli Vice President, Investor Relations 202-346-6394 rsimonelli@costargroup.com 

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