Cargurus, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021. Unless otherwise stated, financial amounts below are in U.S. dollars.
Business context
CarGurus operates online automotive marketplaces and digital retail products, with a U.S. and International reporting segment. In January 2021, it acquired a 51% controlling interest in CarOffer, an online wholesale vehicle platform. CarOffer is consolidated, and its results are included from the acquisition date.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $217.7 million | $94.7 million | $389.1 million | $252.4 million |
| Gross profit / margin | $167.4 million / 77% | $84.9 million / 90% | $314.7 million / 81% | $230.9 million / 91% |
| Operating income | $38.5 million | $8.7 million | $64.3 million | $20.7 million |
| Consolidated net income | $27.4 million | $7.1 million | $46.9 million | $19.8 million |
| Net income attributable to common stockholders | $28.1 million | $7.1 million | $50.4 million | $19.8 million |
| Adjusted EBITDA (non-GAAP) | $66.4 million | $27.5 million | $117.0 million | $55.2 million |
Q2 revenue rose 130% year over year; first-half revenue rose 54%. Subscription revenue was $144.2 million in Q2 (+80%) and $283.8 million in the first half (+28%). Other revenue was $73.5 million in Q2 and $105.3 million in the first half, largely reflecting CarOffer wholesale activity. The company attributed subscription growth to comparison against pandemic-related dealer fee reductions in 2020, as well as pricing, product upgrades, and dealer additions. CarOffer contributed $57.3 million of Q2 revenue and $72.9 million from its acquisition date through June 30.
Gross margin declined as wholesale activity increased the cost-of-revenue mix: CarOffer contributed $38.9 million of Q2 cost of revenue and $52.0 million for the first half. Q2 operating expenses increased 69% year over year to $129.0 million, including higher marketing spend, CarOffer costs, stock-based compensation, and acquired-intangible amortization. Q2 diluted EPS was $0.23, versus $0.06 a year earlier.
Cash, liquidity, and obligations
- At June 30, cash and cash equivalents were $184.6 million and short-term investments were $85.0 million; total cash, cash equivalents, and investments were $269.6 million. Restricted cash was an additional $19.4 million.
- First-half operating cash flow was $81.3 million, versus $34.9 million in 2020. Investing cash use was $56.1 million, including $64.3 million net cash paid for acquisitions; financing cash use was $22.1 million, including repayment of CarOffer’s $14.3 million line of credit.
- The company reported no long-term borrowings. Current liabilities were $103.5 million; operating lease liabilities totaled $75.9 million, current and non-current combined.
- Management stated existing liquidity should fund operations for at least the next 12 months. The filing does not provide numerical forward earnings or revenue guidance.
Material changes and operating indicators
- CarOffer acquisition consideration was $173.2 million: $69.5 million cash and $103.6 million in stock. The preliminary allocation included $104.1 million of identifiable intangible assets and $127.5 million of goodwill.
- CarOffer’s remaining equity is subject to future purchase rights. A 2022 call right may cover up to 25% of fully diluted equity; 2024 call/put arrangements can require purchase of the remaining interests, with consideration payable in cash and/or stock. Valuation formulas reference future gross profit or EBITDA.
- Marketplace subscription revenue remained the larger revenue source, but its share of total revenue fell to 66% in Q2 from 84% in the prior-year quarter as wholesale revenue expanded.
- Average monthly unique users were 40.6 million, down from 41.8 million; average monthly sessions were 99.1 million, down from 103.3 million. Paying dealers increased to 30,727 from 30,258. Consolidated quarterly average revenue per subscribing dealer (QARSD) increased to $4,657 from $2,517.
Outlook, risks, and unusual items
Management described continued uncertainty from COVID-19 effects and the automotive inventory shortage, including the semiconductor chip shortage. Lower vehicle inventory may reduce consumer traffic and dealer demand for advertising, while higher wholesale prices may affect dealer economics and CarOffer transaction volumes. Management said sales and marketing, product development, and general and administrative costs may increase as the company scales and invests in products.
Dealer fee reductions materially affected 2020 revenue; 2021 returned to normal contractual billings in most markets, although U.K. dealer fees were waived for February 2021. The 2020 fee reductions had no material impact on Q2 or first-half 2021 revenue. Q2 2021 tax expense reflected a 28.4% effective tax rate, above the 21% statutory rate, in part due to state and local taxes, stock-award tax shortfalls, and the expiration of an IPO-related transition period for Section 162(m).
The company reported no pending or threatened litigation it believed would have a material adverse effect. Tax matters include an IRS employment-tax audit expanded to include 2019 and a New York sales-tax audit covering 2014–2020. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing identifies risks including dealer cancellations, competition, privacy and cybersecurity, regulatory compliance, acquisition integration, and CarOffer’s ability to grow.
Important facts for investors to verify
- How much of revenue and profit growth is repeatable after accounting for 2020 fee-reduction comparisons and CarOffer’s partial-period contribution.
- CarOffer’s standalone economics, integration progress, and the funding and potential dilution implications of its future put/call arrangements.
- Whether vehicle inventory constraints, wholesale price volatility, and reduced marketplace traffic affect dealer retention, advertising demand, or CarOffer transaction volumes.
- Cash conversion and working-capital trends, particularly the $48.0 million first-half increase in accounts receivable.
- The sustainability of earnings after stock-based compensation and acquired-intangible amortization, and the assumptions underlying non-GAAP Adjusted EBITDA.