CarGurus, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; the supplied text does not provide a complete standalone fourth-quarter income statement or cash-flow statement.
Business context
CarGurus operates online automotive marketplaces connecting car buyers with dealers and private sellers. Revenue is primarily from dealer marketplace subscriptions, with additional advertising and other revenue, including consumer-financing partnerships. The company reported U.S. and International segments; it ceased operations in Germany, Italy, and Spain during 2020.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $551.5 million | $588.9 million |
| Marketplace subscription revenue | $485.0 million | $526.0 million |
| Advertising and other revenue | $66.5 million | $62.9 million |
| Gross profit / gross margin | $508.7 million / 92% | $552.6 million / 94% |
| Income from operations | $97.8 million / 18% of revenue | $34.3 million / 6% of revenue |
| Net income | $77.6 million; diluted EPS $0.68 | $42.1 million; diluted EPS $0.37 |
| Adjusted EBITDA (non-GAAP) | $160.8 million; 29% margin | $77.0 million; 13% margin |
| Cash from operating activities | $156.7 million | $70.1 million |
- At year-end, cash and cash equivalents were $190.3 million and short-term investments were $100.0 million. The company reported no debt or material finance obligations and said existing liquidity was expected to fund operations for at least 12 months from the filing date.
- Net cash increased by $130.2 million in 2020. Investing activities used $16.9 million and financing activities used $10.1 million.
- U.S. revenue was $519.8 million, down 6%; International revenue was $31.6 million, down 7%. U.S. operating income rose to $120.8 million; International operating loss narrowed to $23.1 million.
- At December 31, the company had 30,631 paying dealers, down 9% year over year. U.S. Q4 quarterly average revenue per subscribing dealer rose 6% year over year to $5,304; consolidated Q4 QARSD was $4,382 versus $4,215.
Material changes versus 2019
- Revenue fell 6%, principally because COVID-19-related dealer fee concessions reduced marketplace subscription revenue by approximately $50 million, and paying dealers declined. Advertising and other revenue increased 6%, supported largely by financing-partnership revenue.
- Operating income and net income increased despite lower revenue, primarily as sales and marketing expense fell 35% amid reduced advertising spend and cost-saving measures. Product, technology, and development expense rose 23%, and general and administrative expense rose 23%.
- Operating cash flow more than doubled. Cash and investments totaled $290.3 million at year-end, versus $171.6 million in 2019.
- Average monthly users and sessions declined: total unique users were 44.6 million versus 47.2 million, and sessions were 110.2 million versus 124.4 million. U.S. connections and leads were 63.4 million and 38.3 million, respectively, compared with 65.3 million and 38.5 million in 2019.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific numerical revenue or earnings guidance. Management said the pandemic’s future effects were uncertain; results depend on consumer demand, dealer health and subscriptions, vehicle inventory, advertising activity, and the duration and effects of COVID-19.
- Dealer fee reductions of at least 50% for April and May 2020 and further reductions for June materially affected annual revenue. UK dealer fees were also suspended for the December 2020 and February 2021 service periods; management said these suspensions were not expected to materially affect 2021 revenue.
- The 2020 expense-reduction plan included a workforce reduction of approximately 13%, reduced discretionary and marketing spending, and exits from Germany, Italy, and Spain. Management cautioned that further disruption or cost reductions could be needed and that savings may not meet expectations.
- In January 2021, CarGurus acquired a 51% interest in CarOffer for $140.3 million, split between cash and CarGurus shares. Remaining ownership is subject to future call and put arrangements that may require additional cash and/or share consideration. Purchase accounting was still being evaluated when the filing was issued.
- Leadership changed in January 2021: Jason Trevisan became CEO, Langley Steinert became Executive Chairman, and Scot Fredo became CFO. The filing identifies transition-related execution and retention risks.
- Key risks include COVID-19 and vehicle-supply constraints; dealer cancellations and short subscription commitments; competition and dependence on search-engine traffic; accuracy of pricing and rating tools; privacy, cybersecurity, and regulatory compliance; and international execution. The company disclosed no pending or threatened litigation it believed would have a material adverse effect. It identified ongoing employment-tax and state tax audits; outcomes are uncertain.
- Operating lease commitments totaled $342.6 million, including a signed but not yet commenced Boston lease. The company reported no material off-balance-sheet arrangements. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether subscription revenue and paying-dealer counts recover after pandemic fee concessions, cancellations, and dealer inventory disruption.
- Whether improved profitability and cash generation persist as marketing investment and operating expenses normalize; Adjusted EBITDA is non-GAAP and excludes recurring stock-based compensation.
- CarOffer’s subsequent operating performance, integration, purchase-price allocation, and potential future consideration under its put/call arrangements.
- Whether the company realizes its deferred tax assets; management’s assessment relies on forecasts of future taxable income.
- Potential dilution and governance implications: CarOffer stock consideration, outstanding equity awards, and the founder’s majority voting control through Class B shares.