Cargurus, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. The filing is unaudited.
Business context
CarGurus operates online automotive marketplaces connecting car buyers and sellers. Revenue primarily comes from dealer marketplace subscriptions, with additional advertising and other revenue. The company reports U.S. and International segments and completed its acquisition of U.K. automotive website PistonHeads on January 8, 2019.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $135.3 | $98.6 | +37% |
| Marketplace subscription revenue | $120.8 | $89.2 | +36% |
| Advertising and other revenue | $14.4 | $9.4 | +53% |
| Gross profit / margin | $127.6 / 94% | $93.0 / 94% | Margin broadly unchanged |
| Operating income / margin | $7.4 / 5% | $6.5 / 7% | Income +15%; margin lower |
| Net income / diluted EPS | $12.6 / $0.11 | $5.5 / $0.05 | Net income more than doubled |
| Adjusted EBITDA / margin | $16.7 / 12.4% | $11.5 / 11.7% | +45% / +0.7 percentage points |
| Operating cash flow | $9.7 | $6.4 | Increased |
Operating expenses rose 39% to $120.1 million, led by sales and marketing (+33%), product, technology and development (+76%), and general and administrative (+49%). Sales and marketing spending included a $13.8 million increase in advertising costs. Stock-based compensation rose to $7.7 million from $3.8 million.
Liquidity, cash flow and obligations
- At March 31, cash and cash equivalents were $29.9 million and short-term certificates of deposit were $108.5 million, totaling $138.4 million in cash, cash equivalents and investments. This compared with $157.7 million at December 31, 2018.
- Cash, cash equivalents and restricted cash declined $5.0 million during the quarter. Investing used $11.4 million, including $19.1 million for PistonHeads and $5.7 million for property and equipment; financing used $3.3 million, mainly for employee tax withholding on equity awards.
- The company reported no long-term borrowings. Adoption of lease accounting brought operating lease right-of-use assets and liabilities onto the balance sheet; at March 31, operating lease liabilities totaled approximately $60.4 million. Future undiscounted lease payments were $83.7 million.
- Management said existing liquidity was expected to fund operations for at least 12 months from the filing date and expected to generate cash from operations for the foreseeable future. Future capital needs depend on growth, marketing, product development and international investment.
Material changes and operating trends
- U.S. revenue increased 35% to $128.4 million; International revenue increased 95% to $6.9 million. International operating loss widened to $9.9 million from $7.5 million as the company continued investing in international markets.
- Total paying dealers increased 15% year over year to 33,235. U.S. average annual revenue per subscribing dealer rose 24% to $15,440; International AARSD declined 3% to $4,883, excluding PistonHeads.
- Average monthly unique users increased to 49.6 million from 34.3 million, and average monthly sessions increased to 127.3 million from 92.9 million. International figures include PistonHeads from its acquisition date.
- The PistonHeads purchase price was approximately $19.1 million. Preliminary allocation included $15.5 million of goodwill and $4.5 million of intangible assets; the company recorded $0.6 million of acquisition-related costs through March 31.
- The company adopted ASC 842 on January 1, 2019, recording approximately $52.3 million of net lease assets and $63.3 million of lease liabilities at adoption. The standard did not materially affect the income statement or cash flows.
Management commentary, outlook and risks
No numerical full-year guidance is provided in the supplied filing text. Management attributed subscription growth mainly to more paying dealers and higher U.S. dealer revenue per subscriber, and advertising growth to increased impressions and modestly higher pricing. It expects investment-related expenses to rise as the company grows its audience, develops products and expands internationally; sales and marketing costs may fluctuate by quarter.
Q1 net income benefited from a $3.5 million income tax benefit, principally reflecting excess tax deductions from stock-based compensation and research and development credits. Other income included a reported $0.7 million unrealized gain connected with the PistonHeads acquisition and $0.2 million of sublease income. These items, along with stock-based compensation, are relevant when assessing recurring earnings and non-GAAP Adjusted EBITDA.
Key disclosed risks include dealer subscriptions that generally have short commitments and can be canceled; competition for dealer and advertiser spending; dependence on consumer traffic, search engines and third-party data; continued losses in International operations; acquisition integration and goodwill valuation; privacy, cybersecurity and regulatory compliance; foreign exchange exposure; and potential service disruption associated with a planned migration of some data hosting. The company disclosed IRS audits relating to its 2016 federal income taxes and federal employment taxes. It reported no pending or threatened litigation expected to have a material adverse effect and stated disclosure controls were effective.
Investor verification points
- Assess how much revenue and user growth is organic versus attributable to acquisitions, particularly PistonHeads, and track International monetization and operating losses.
- Review dealer retention, subscription-term mix, changes in U.S. AARSD and International AARSD, and the sustainability of advertising growth.
- Reconcile reported net income and Adjusted EBITDA for the tax benefit, acquisition-related gains and costs, and recurring stock-based compensation.
- Monitor cash and investment balances, capital expenditure, deferred contract costs, lease commitments and management’s stated liquidity outlook.
- Follow the IRS audits, PistonHeads integration and purchase-accounting estimates, and the planned data-hosting migration and related operational risks.