Cargurus, Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022. Unless otherwise noted, financial figures below are in millions of dollars. CarGurus operates vehicle-listing marketplaces, digital retail products and CarOffer, in which it owns 51%. It changed from two reportable segments to one in Q1 2022; geographic revenue is still disclosed.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $511.2 | $217.7 | $941.8 | $389.1 |
| Gross profit | $187.9 | $167.4 | $369.7 | $314.7 |
| Operating income | $23.5 | $38.5 | $50.2 | $64.3 |
| Consolidated net income | $18.1 | $27.4 | $36.9 | $46.9 |
| Adjusted EBITDA | $54.0 | $66.4 | $111.9 | $117.0 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $87.6 | $81.3 |
- Revenue mix, Q2: Marketplace $163.9 million (+2% year over year); wholesale $75.9 million (+42%); product $271.4 million, versus $3.8 million a year earlier. Product revenue primarily reflects vehicle sales through CarOffer and CarGurus Instant Max Cash Offer (IMCO).
- Margins and earnings: Gross margin was approximately 36.8% in Q2, versus 76.9% in Q2 2021, as low-margin product vehicle sales made up a much larger share of revenue. Operating income and consolidated net income declined despite higher revenue. Adjusted EBITDA is a non-GAAP measure and declined year over year.
- Common-stockholder result: Net loss attributable to common stockholders was $10.3 million in Q2 and $72.4 million for the first half, despite positive consolidated net income. The difference principally reflects accretion of redeemable noncontrolling interest to redemption value: $29.6 million in Q2 and $111.6 million for the first half.
- Cash and liquidity at June 30: Cash and cash equivalents were $338.2 million, short-term investments $30.0 million, and restricted cash $22.9 million. Current assets were $629.5 million and current liabilities $176.0 million. Operating cash flow for the first half was $87.6 million; investing activities provided $51.8 million, largely from certificate-of-deposit maturities, and financing activities used $25.6 million.
- Debt and obligations: The company reported no long-term borrowings. Operating lease liabilities totaled $68.5 million, including current and non-current portions. CarOffer guarantees had a maximum potential future payment amount of $100.7 million; none was considered probable, and no contingent loss liability was recorded.
Changes versus the comparable period
- Revenue grew 135% in Q2 and 142% for the first half, principally reflecting expanded CarOffer activity and IMCO vehicle sales. Product revenue represented 53% of Q2 revenue, compared with 2% a year earlier; reported growth therefore reflects a significant shift in business mix, not just expansion of the listings marketplace.
- Marketplace revenue grew modestly: Q2 paying dealers totaled 31,143 versus 30,727 a year earlier, while quarterly average revenue per subscribing dealer was $4,862 versus $4,657. Average monthly unique users declined to 36.1 million from 40.6 million; average monthly sessions declined to 95.0 million from 99.1 million.
- Sales and marketing expense rose 45% in Q2 to $95.6 million, with management citing increased advertising, brand and IMCO marketing, as well as headcount and compensation costs. Stock-based compensation expense increased, including from revaluation of liability-classified CarOffer awards.
- Cash and cash equivalents increased from $231.9 million at December 31, 2021 to $338.2 million at June 30, 2022; investments declined from $90.0 million to $30.0 million.
Outlook, risks and other notable items
- Outlook: The filing provides no specific revenue or earnings guidance. Management stated existing liquidity should fund operations for at least 12 months from the filing date. Future funding needs may depend on operating performance, investment plans and the potential exercise of CarOffer call rights.
- CarOffer call right: CarGurus could elect in the second half of 2022 to acquire up to 25% of CarOffer’s fully diluted capitalization at a value tied to seven times CarOffer’s trailing 12-month gross profit as of June 30, 2022. Consideration could be cash and/or shares; a cash payment could reduce future net cash.
- Operating and market risks: Management highlighted vehicle inventory constraints, semiconductor shortages and broader macroeconomic conditions, including rising interest rates and lower consumer confidence. These may affect dealer spending, consumer traffic, wholesale volumes and IMCO activity. The filing also discusses COVID-19-related uncertainty, competition, and regulatory, privacy and cybersecurity risks.
- Financial reporting controls: Disclosure controls and procedures were deemed ineffective at June 30, 2022 because of a material weakness at CarOffer involving IT access and change-management controls and review of journal entries and reconciliations. The company said the weakness did not cause a material misstatement and described a remediation plan; it is not considered remediated until controls operate effectively for a sufficient period and testing supports that conclusion.
- Leadership change: CFO Scot Fredo announced his resignation on August 2, effective October 3, 2022. CEO Jason Trevisan is designated to serve as principal financial officer from that date until a successor CFO is appointed.
- Concentration and valuation items: One customer represented 42% of net accounts receivable at June 30. Two customers each represented 11% of Q2 revenue. The redeemable noncontrolling interest and related CarOffer awards are subject to valuation assumptions and potential future put/call rights.
- Legal matters: The company reported no pending or threatened litigation it believed would reasonably be expected to have a material adverse effect. It cautioned that litigation outcomes are inherently unpredictable.
Investor verification priorities
- Reconcile revenue growth and gross-profit trends by marketplace, wholesale and product, with particular attention to IMCO vehicle volumes, resale economics, sales allowances and return/cancellation reserves.
- Review the terms, valuation effects and potential cash or share impact of CarOffer’s redemption and call rights, including the contemplated 2022 call right.
- Track remediation and testing of the CarOffer material weakness, and assess the CFO transition and any subsequent control disclosures.
- Monitor liquidity and cash conversion, including the role of certificate-of-deposit maturities, tax distributions, and any cash required for CarOffer transactions.
- Assess customer concentration, CarOffer guarantee exposure and dealer/consumer activity trends against inventory, pricing and macroeconomic risks.