Cargurus, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. CarGurus operates online automotive marketplaces, principally in the United States, with businesses in Canada and the United Kingdom. It exited Germany, Italy, and Spain during Q2 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $147.5 | $150.5 | -2% |
| Gross profit / gross margin | $137.7 / 93.4% | $141.1 / 93.8% | Margin down 0.4 percentage points |
| Operating income / margin | $43.6 / 29.5% | $9.7 / 6.4% | Operating income up $33.9 |
| Net income / diluted EPS | $32.6 / $0.29 | $10.4 / $0.09 | Net income up $22.2 |
| Adjusted EBITDA / margin | $57.0 / 38.7% | $20.6 / 13.7% | Non-GAAP measure |
For the nine months, revenue was $399.9, down 7%; operating income was $64.3 versus $20.7; net income was $52.4 versus $29.0; and Adjusted EBITDA was $112.2 versus $51.9. Nine-month gross margin was 92.2%, compared with 94.0% in 2019. Adjusted EBITDA excludes, among other items, stock-based compensation and restructuring costs; it is not a GAAP substitute.
Revenue and operating drivers
- Q3 marketplace subscription revenue decreased 4% to $130.0, while advertising and other revenue rose 17% to $17.5. Growth in financing-partnership revenue and Autolist contributed to the latter; advertising revenue itself declined slightly.
- Paying dealers fell 9% year over year to 30,162. Average monthly unique users were 46.4 million versus 48.2 million; average monthly sessions were 112.6 million versus 129.6 million.
- Q3 sales and marketing expense fell 42% to $57.6, mainly due to lower advertising spend and other cost savings. Product, technology, and development expense increased 17% to $20.8; general and administrative expense increased 16% to $14.3.
- United States Q3 revenue declined 2% to $138.4; International revenue increased 3% to $9.1. U.S. operating income was $46.5; International recorded an operating loss of $2.9.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $245.9, with no short-term investments; restricted cash was $10.9. Current assets were $281.4 and current liabilities $55.9.
- Net cash provided by operating activities for the first nine months was $108.8, versus $49.6 in 2019. Investing activities provided $84.9, largely reflecting $111.7 of certificate-of-deposit maturities, offset by $21.1 paid for the Autolist acquisition. Financing activities used $7.7.
- The company reported no long-term borrowings. Lease liabilities totaled $73.5, including $11.5 current and $62.0 non-current.
- Management said existing liquidity should fund operations for at least 12 months from the filing date. Additional capital could be needed if cash flows or business conditions deteriorate.
Material changes, outlook, and risks
- COVID-19-related dealer fee reductions of at least 50% for April and May, and reduced June fees, materially affected Q2 revenue; their impact on Q3 was immaterial. Normal contractual billings resumed in July. Dealer cancellations, delinquency, reduced inventory, and market uncertainty remained risks.
- The April expense-reduction plan included an approximately 13% workforce reduction, lower discretionary and marketing spend, and closure of the German, Italian, and Spanish marketplaces. The plan generated $3.2 of severance and $1.0 of asset write-offs during the first nine months; no restructuring charges were recorded in Q3.
- CarGurus acquired Autolist in January for approximately $21.1 net of cash acquired. The acquisition added $12.5 of goodwill and $7.6 of identifiable intangible assets; the company said the acquisition’s pro forma impact was not material.
- Management said it expected further year-over-year revenue declines in 2020 and that the pandemic made revenue beyond 2020 uncertain. The filing gives no quantitative revenue or earnings guidance. Marketing spend was increased sequentially as consumer activity recovered, but remained below prior-year levels in Q2 and Q3.
- Other risks include used-car inventory constraints and auction-price increases, dealer retention and advertising demand, competition, international-market performance, privacy and cybersecurity, regulatory and tax matters, and the founder’s majority voting control. The company reported no pending or threatened litigation expected to have a material adverse effect and no material change in disclosure controls; management deemed those controls effective.
- The CARES Act NOL carryback claim generated a $3.9 tax refund in Q3. Federal employment-tax, 2017 corporate income-tax, and New York sales-and-use-tax audits were ongoing.
Important facts for investors to verify
- Whether paying-dealer counts, subscription revenue, and dealer retention continued to recover after normal billings resumed in July.
- Whether COVID-19, dealer inventory shortages, or renewed restrictions further affected marketplace activity, revenue, or customer collections.
- How much of the improved operating profit and Adjusted EBITDA reflects sustainable performance versus temporary marketing cuts and other cost reductions.
- Whether international losses, Autolist integration costs, and the exited-market write-offs develop as expected.
- Any material outcomes from the disclosed tax audits, and the potential effect of the company’s dual-class voting structure on shareholder influence.