Cargurus, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial amounts below are in U.S. dollars; figures are unaudited. CarGurus operates online automotive marketplaces, generating most revenue from dealer subscriptions.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $157.7 million | $135.3 million | +17% |
| Marketplace subscription revenue | $141.9 million | $120.8 million | +17% |
| Advertising and other revenue | $15.8 million | $14.4 million | +10% |
| Gross profit / gross margin | $146.1 million / 93% | $127.6 million / 94% | Margin down about 1 percentage point |
| Operating income / margin | $12.0 million / 8% | $7.4 million / 5% | Operating income +62% |
| Net income | $12.7 million | $12.6 million | Approximately flat |
| Diluted EPS | $0.11 | $0.11 | Unchanged |
| Adjusted EBITDA / margin | $27.6 million / 17.5% | $16.8 million / 12.4% | Non-GAAP measure |
| Cash from operations | $10.1 million | $9.7 million | +5% |
U.S. revenue was $148.0 million (+15%); International revenue was $9.7 million (+41%). International operations remained loss-making, with an $8.2 million operating loss, versus a $9.9 million loss a year earlier. Average monthly unique users were 49.1 million, versus 49.6 million; paying dealers numbered 35,317, versus 33,235. Consolidated average annual revenue per subscribing dealer was $16,051, versus $14,193.
Liquidity, debt and balance sheet
- At March 31, cash and cash equivalents were $74.5 million and short-term certificates of deposit were $81.3 million, totaling $155.7 million in cash, cash equivalents and investments. The comparable December 31, 2019 total was $171.6 million.
- Cash, cash equivalents and restricted cash increased $14.7 million during the quarter. Investing cash flow was positive $7.5 million, including $30.4 million of certificate-of-deposit maturities and $21.0 million paid, net of acquired cash, for Autolist.
- The company reported no long-term borrowings. Operating lease liabilities totaled $77.6 million, including $9.5 million current.
- Management said existing liquidity should fund operations for at least 12 months from the filing date, while anticipating greater near-term cash use due to COVID-19. No material off-balance-sheet arrangements were reported.
Material changes and unusual items
- Autolist was acquired on January 16 for $21.0 million net of acquired cash. The preliminary allocation included $12.4 million of goodwill and $7.6 million of identifiable intangible assets. Q1 acquisition-related expenses were approximately $0.9 million.
- The allowance for doubtful accounts rose to $1.247 million from $0.240 million at year-end, primarily reflecting pandemic-related collection risk. The filing also reports a $1.2 million increase in bad debt expense.
- Q1’s effective tax rate was 0.4%, versus a 38.6% tax benefit rate in Q1 2019. The 2020 rate reflected, among other items, a CARES Act benefit and stock-based compensation deductions; this difference helped keep net income nearly flat despite higher operating income.
- Gross margin declined as cost of revenue increased 50%, faster than revenue, including higher advertising provisioning, hosting and amortization costs. Product, technology and development expense rose 45%, and general and administrative expense rose 35%.
Outlook, management commentary and risks
- Management expected a year-over-year revenue decline in 2020 due to COVID-19. The company estimated that dealer subscription fee reductions for April, May and June would reduce Q2 2020 revenue by approximately $50 million. Q1 revenue impact from announced concessions was immaterial.
- Fee relief included 50% reductions for April and May subscriptions in the U.S., Canada and U.K.; June reductions were 20% in the U.S. and Canada and 50% in the U.K. Italy dealer charges were suspended as the marketplace was to close.
- An April 13 expense-reduction plan included a workforce reduction of approximately 13%, lower marketing and discretionary spending, and closure of marketplaces in Germany, Italy and Spain, with no new international expansion. Estimated Q2 pre-tax restructuring and related charges were $4.3 million, about $2.6 million expected to require future cash expenditure.
- Management cited dealer cancellations and delinquencies, reduced advertiser spending, lower consumer car-shopping activity, and potential declines in traffic and connections as key uncertainties. Most dealer subscriptions have short committed terms, increasing cancellation exposure. Additional financing may be needed if cash generation proves insufficient; availability and terms are uncertain.
- The company assessed goodwill and long-lived assets for pandemic-related impairment and reported no impairment as of March 31. It reported no pending or threatened litigation expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the anticipated approximately $50 million Q2 revenue impact and broader 2020 revenue decline materialized, and how dealer retention and delinquency trends evolved.
- Whether the workforce, marketing and international-marketplace reductions delivered expected savings, alongside the $4.3 million estimated restructuring charge and cash costs.
- Whether operating cash flow and the $155.7 million cash-and-investment balance remained sufficient as customer concessions and cancellations affected collections and revenue.
- How Autolist integration performed and whether its preliminary acquisition accounting, including goodwill and intangible assets, changed.
- Adjusted EBITDA is non-GAAP and excludes recurring stock-based compensation and other items; assess it alongside GAAP earnings and cash flow.