Cargurus, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. CarGurus operates an online automotive marketplace in the U.S., Canada, U.K., and Germany. Financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $83.0m | $53.1m | $226.3m | $137.4m |
| Gross profit / margin | $78.3m / 94.3% | $50.3m / 94.6% | $213.9m / 94.5% | $130.7m / 95.1% |
| Operating income / margin | $2.9m / 3.5% | $3.3m / 6.1% | $15.2m / 6.7% | $4.0m / 2.9% |
| Net income / margin | $2.4m / 2.9% | $2.1m / 4.0% | $10.9m / 4.8% | $2.7m / 1.9% |
| Adjusted EBITDA (non-GAAP) | $4.0m | $3.9m | $18.1m | $5.6m |
| Operating cash flow | Not presented by quarter | $18.5m | $20.5m |
- Q3 revenue grew 56%; marketplace subscriptions rose 59% to $73.9m and advertising and other revenue rose 36% to $9.1m. For the nine months, revenue grew 65%, led by subscription growth of 71% to $201.9m.
- Growth was supported by 37% more paying dealers (26,553 at September 30) and 16% growth in U.S. average annual revenue per subscribing dealer, to $11,526. Average monthly unique users rose to 25.95m in the U.S. and 2.61m internationally.
- Q3 operating income declined year over year despite higher sales. Sales and marketing expense rose 58% to $63.9m, including $19.4m of additional advertising expense. Product, technology, and development expense rose 94% to $5.8m.
- U.S. generated $9.3m of Q3 operating income; International recorded a $6.5m operating loss, versus a $5.1m loss in Q3 2016. Management attributed the international losses to continued investment and expansion.
- At September 30, cash and cash equivalents were $25.6m and investments were $60.0m; current assets were $99.2m and current liabilities $38.6m. There was no long-term borrowing or material capital lease debt. The company reported no material off-balance-sheet arrangements apart from ordinary-course operating leases.
- Cash, cash equivalents, and restricted cash declined $4.1m over the first nine months. Investing used $21.0m, including net certificate-of-deposit purchases and capital spending; financing used $1.8m, primarily IPO costs. Operating cash flow was lower than the prior-year period, partly reflecting a $4.0m increase in receivables.
Material changes, outlook, and risks
- IPO after quarter-end: On October 16, 2017, the company sold 3.205m shares at $16 per share, receiving approximately $43.0m net proceeds. Selling shareholders sold a further 7.605m shares. Preferred stock converted into common stock; none remained outstanding after closing. Management said available liquidity, including IPO proceeds, should fund operations for at least 12 months.
- The IPO included a related-party element: Allen & Company, an underwriter, and its associated persons had beneficially owned 13.5% of preferred stock before the IPO; the firm purchased shares in the offering. The filing notes this may be a related-person transaction.
- No numerical revenue or earnings guidance is provided. Management expects expenses to increase with audience growth, product development, international expansion, and public-company compliance. It says future capital needs depend on growth, marketing, development, and international investment.
- Management reported disclosure controls and procedures were effective at period-end and no material change in internal control over financial reporting occurred during the quarter. The company was an emerging growth company and elected the extended transition period for new accounting standards.
- Key risks include dealer subscriptions that can generally be terminated on short notice; dependence on traffic, search-engine rankings, third-party vehicle data, and advertising demand; competition; execution and losses in international markets; privacy, cybersecurity, and regulatory exposure; and possible deceleration in growth. The founder’s control and the 10-to-1 voting structure limit other shareholders’ influence.
- Legal matters are not expected by management to have a material adverse effect. The filing describes a Canadian copyright case concerning vehicle photos: a court awarded CAD$305,064 in statutory damages, dismissed punitive damages and injunctive relief, and the parties agreed not to appeal.
- The company entered a Dublin office lease in September 2017, ending August 2023; first-year rent, excluding operating costs, is $0.5m, with a rent review in August 2018.
Most important facts for investors to verify
- Whether dealer growth and higher subscription revenue can continue, and whether dealers renew or upgrade despite short contractual terms.
- Whether marketing spending can support growth without further compressing operating margins, particularly as Q3 operating income fell year over year.
- Whether international revenue can scale enough to offset continuing operating losses.
- Post-IPO share count, dilution from equity awards, and the effects of the dual-class voting structure and founder control.
- Liquidity and cash conversion: operating cash flow declined year over year, while receivables increased; assess subsequent-period trends and the use of IPO proceeds.
- Potential changes from adopting the new revenue standard, particularly capitalization and amortization of certain contract-acquisition costs; management’s assessment was preliminary.