CarGurus, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. CarGurus operates an online automotive marketplace in the U.S., Canada, the U.K., Germany and Italy. Figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $98.7 million | $67.0 million | +47% |
| Gross profit / gross margin | $93.1 million / 94% | $63.7 million / 95% | Margin down 1 percentage point |
| Operating income / margin | $3.9 million / 4% | $6.4 million / 10% | Income down 39% |
| Net income / margin | $3.7 million / 4% | $4.2 million / 6% | Income down 13% |
| Adjusted EBITDA (non-GAAP) | $9.0 million | $7.1 million | +26% |
| Operating cash flow | $6.4 million | $5.2 million | +$1.1 million |
Marketplace subscriptions contributed $89.3 million, or 90% of revenue, up 48%; advertising and other revenue was $9.4 million, up 37%. U.S. revenue rose 45% to $95.2 million. International revenue more than doubled to $3.5 million, while the international operating loss widened to $7.7 million from $5.7 million. U.S. operating income was $11.6 million, down from $12.1 million.
Average monthly unique users increased to 34.3 million from 25.2 million; paying dealers rose to 29,026 from 23,429. Consolidated average annual revenue per subscribing dealer increased to $11,887 from $10,454.
Financial position and liquidity
- At March 31, cash and cash equivalents were $62.0 million and short-term certificates of deposit were $80.0 million, totaling $142.0 million in cash, cash equivalents and investments. Total current assets were $161.5 million; current liabilities were $41.2 million.
- Total liabilities were $47.7 million and stockholders’ equity was $134.8 million. The company reported no debt or material capital lease obligations.
- Cash, cash equivalents and restricted cash decreased $25.7 million during the quarter, principally as $30.0 million net was invested in certificates of deposit. Investing cash outflow was $31.0 million; financing cash outflow was $1.1 million, mainly for IPO costs.
- Operating cash flow included $3.8 million of stock-based compensation and a $2.8 million increase in deferred revenue; it was partly offset by a $3.7 million decrease in accrued expenses and other current liabilities.
Material changes and unusual items
- Operating expenses rose 56% to $89.2 million. Sales and marketing increased 46%, including $17.2 million more in advertising costs; product, technology and development increased 149%; general and administrative increased 94%.
- Stock-based compensation increased to $3.8 million from $0.1 million, primarily reflecting RSU expense following the IPO. This contributed to the gap between GAAP net income and Adjusted EBITDA.
- The effective tax rate fell to 13.1% from 35.7%, reflecting the lower U.S. federal statutory rate following the Tax Cuts and Jobs Act, research credits and excess stock deductions. The company recorded an additional $0.2 million of tax expense related to its provisional TCJA assessment.
- On April 10, 2018, approximately 945,000 previously vested RSUs converted into Class A shares and IPO-related shareholder lock-up agreements expired—potentially increasing shares available for trading.
Outlook, risks and contingencies
Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It expects to generate cash from operations and believes existing liquidity and IPO proceeds are sufficient to fund operations for at least 12 months from the filing date. Future funding needs depend on growth, marketing, product development and international investment. The company expects sales and marketing, product development and public-company compliance costs to increase.
Key disclosed risks include dealer subscriptions that generally have short commitments and can be terminated; dependence on consumer traffic, search-engine rankings and third-party vehicle data; competition and execution risks in international expansion; privacy, cybersecurity and regulatory exposure; and the possibility of slower growth, seasonal fluctuations or future losses. The company also noted that the EU General Data Protection Regulation was due to take effect May 25, 2018.
Management said ordinary-course legal claims were not expected to have a material adverse effect. In a previously disclosed Canadian copyright case, a court awarded Trader Corporation CAD $305,064 in statutory damages; punitive damages and an injunction were denied, and neither party appealed. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth can continue while operating and net margins recover from their year-over-year declines.
- Whether dealer growth and higher subscription revenue per dealer are sustainable, given generally short subscription commitments.
- How international investment affects consolidated profitability and when international losses may narrow.
- The effect of advertising spend, RSU compensation and share releases after the April 10 lock-up expiry on earnings and share count.
- Whether the company’s liquidity, tax estimates and adoption assessments for new accounting standards change materially in later filings.
- The consequences of the founder’s voting control: Class B shares carry ten votes per share, versus one vote for Class A shares.