Cargurus, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars.
Business context
CarGurus operates online automotive marketplaces connecting car buyers and sellers. Revenue comes mainly from dealer marketplace subscriptions, with additional advertising and other revenue. Its markets include the United States, Canada, the U.K., Germany, Italy, and Spain.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $150.5m | $119.1m | $430.8m | $328.0m |
| Gross profit / margin | $141.1m / 93.8% | $112.7m / 94.6% | $405.0m / 94.0% | $310.1m / 94.5% |
| Operating income / margin | $9.7m / 6.4% | $5.9m / 4.9% | $20.7m / 4.8% | $16.3m / 5.0% |
| Net income | $10.4m | $13.9m | $29.0m | $52.7m |
| Adjusted EBITDA (non-GAAP) | $20.6m | $12.7m | $51.7m | $35.0m |
| Operating cash flow | Not separately stated | Not separately stated | $49.6m | $34.6m |
Q3 diluted EPS was $0.09 versus $0.12; nine-month diluted EPS was $0.26 versus $0.47. Q3 revenue increased 26%, while net income decreased 25%. For the nine months, revenue grew 31%, while net income fell 45%. The lower net income comparisons principally reflect much smaller income tax benefits than in 2018; the nine-month tax benefit was $4.8m versus $34.8m.
Marketplace subscription revenue grew 28% in Q3 and 32% year to date; advertising and other revenue grew 13% and 29%, respectively. Subscription revenue was 90% of Q3 revenue. The company reported 35,199 paying dealers, up 15%, and U.S. average annual revenue per subscribing dealer of $16,967, up 21%.
Liquidity, cash flow, and debt
At September 30, 2019, cash and cash equivalents were $29.5m and short-term certificates of deposit were $134.8m, totaling $164.3m in cash, cash equivalents, and investments. Total current assets were $206.2m and current liabilities $72.4m. The company reported no long-term borrowings. Net cash decreased $5.9m during the first nine months, ending at $31.7m including restricted cash.
Year-to-date investing cash use was $44.0m, including $19.1m for the PistonHeads acquisition and capital spending; financing cash use was $11.3m, mainly employee equity-award tax withholding. Operating cash flow improved to $49.6m from $34.6m. Lease liabilities were $65.6m at September 30, 2019; adoption of the new lease standard added lease assets and liabilities to the balance sheet.
Material changes and management commentary
- U.S. revenue rose 24% in Q3; International revenue rose 98%, partly reflecting PistonHeads. International operations remained loss-making: Q3 operating loss was $10.3m, versus $8.6m, as the company continued investing in expansion.
- Q3 operating income increased 65%, but cost of revenue grew 46% and product, technology, and development expense grew 39%. Sales and marketing remained the largest operating expense, at $100.1m for the quarter.
- Advertising revenue growth was supported by 26% more impressions in Q3, partly offset by a 19% decline in average price per thousand impressions.
- Average monthly unique users were 48.2m, up from 41.5m; international user and dealer metrics include PistonHeads, acquired in January 2019.
- Management said available liquidity and expected operating cash generation should fund operations for at least 12 months from the filing date. The filing provides no specific revenue, earnings, or margin guidance.
Risks, contingencies, and unusual items
- Dealer subscriptions generally have short committed terms and may be cancelled, making retention, dealer value, and pricing important risks. The company also depends on advertising budgets, search-engine traffic, third-party data and hosting, and a reliable consumer experience.
- International growth entails continuing investment and execution risks. Competition, privacy and regulatory requirements, cybersecurity and service interruptions, and automotive-industry and macroeconomic conditions could affect results.
- The PistonHeads acquisition cost approximately $19.1m; preliminary purchase accounting included $14.8m of goodwill and $4.0m of net intangible assets at September 30.
- Lease commitments were $88.0m in undiscounted future payments, before $22.4m of imputed interest; additional signed leases not yet commenced represented estimated payments of $14.1m.
- No pending or threatened litigation was identified as likely to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether dealer growth and higher U.S. subscription revenue per dealer are sustainable, especially given the generally short subscription commitments.
- Whether marketing and development spending can support growth while preserving operating profitability and gross margin.
- Whether international expansion, including PistonHeads, can improve from operating losses and deliver expected benefits.
- How much reported earnings comparisons reflect tax benefits and stock-based compensation; Q3 stock-based compensation was $8.8m and nine-month expense was $25.4m.
- The company’s cash and investment availability, lease obligations, customer receivable concentration (one customer represented 26% of net receivables), and exposure to the risks described in the filing.