Cars.com Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Cars.com operates a digital automotive marketplace and provides dealer websites, advertising, and other digital solutions. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $153.3 million | $148.1 million | Up 4% |
| Operating income (loss) | $16.5 million | $(905.1) million | Prior period included impairment |
| Net income (loss) | $5.3 million | $(787.4) million | Prior period included impairment |
| Diluted EPS | $0.08 | $(11.76) | Prior period included impairment |
| Operating cash flow | $50.4 million | $28.9 million | Up $21.5 million |
| Capital expenditures | $6.2 million | $5.8 million | Cash used in investing |
Operating margin was approximately 10.8% and net margin approximately 3.4% in Q1 2021. The filing does not present a gross margin figure. Revenue growth was led by Dealer revenue, up 6% to $133.0 million; OEM and National revenue declined 7% to $18.1 million, and Other revenue declined 32% to $2.3 million.
Subscription advertising and digital solutions revenue was $125.4 million versus $117.3 million; display advertising was $22.0 million versus $23.4 million; pay-per-lead revenue was $3.8 million versus $5.7 million. Traffic declined 1% to 156.6 million visits, while average monthly unique visitors rose 4% to 26.0 million. Dealer customers were 18,823, down 1% year over year but up 2% from year-end 2020. Monthly average revenue per dealer was $2,268, up 8% year over year and flat sequentially.
Liquidity and debt
Cash and cash equivalents were $53.7 million at March 31, 2021, down from $67.7 million at December 31, 2020. Including $230.0 million available under the revolving loan, reported liquidity was $283.7 million. Cash declined by $14.0 million overall: operating cash flow of $50.4 million was more than offset by $58.1 million of financing outflows and $6.2 million of capital expenditures.
Debt principal totaled $545.0 million: $145.0 million under the term loan and $400.0 million of 6.375% senior unsecured notes due 2028. The company repaid $52.5 million of term-loan principal during the quarter, including $50.0 million voluntarily. The filing reports a 5.4% effective interest rate on total debt, excluding the interest rate swap. The term loan rate was 2.8%; the swap fixes the rate on a $300 million notional amount at 2.96% plus the applicable margin. The company reported compliance with debt covenants. Its senior secured leverage ratio was 0.86x and consolidated interest coverage ratio was 5.86x.
Material changes and unusual items
- Q1 2020 results included $905.9 million of goodwill and intangible-asset impairment charges related to COVID-19 impacts, including $505.9 million for goodwill and $400.0 million for an indefinite-lived intangible asset. This largely explains the large year-over-year swing to profit and makes headline earnings comparisons atypical.
- Q1 2020 also included a $9.4 million impairment of a non-marketable investment. No comparable impairment was recorded in Q1 2021.
- Interest expense rose $2.5 million to $10.0 million, primarily due to a higher overall interest rate on outstanding debt, partly offset by lower debt outstanding.
- Dealer revenue increased with higher average revenue per dealer, including growth in digital solutions and FUEL, partly offset by fewer dealer customers. OEM and National revenue fell mainly because of reduced OEM spending amid the pandemic.
- The company received a $9.1 million tax refund related to carryback of net operating losses under the CARES Act. It maintained a full valuation allowance against deferred tax assets, citing its history of recent losses.
Outlook, commentary, and risks
The filing provides no quantified revenue, earnings, or cash-flow guidance. Management said the duration and effects of COVID-19 remain uncertain, while describing its marketplace and digital solutions as important tools for customers. The company is continuing a technology transformation toward cloud-based infrastructure; the pandemic extended its timeline, and management expects further cost efficiencies upon completion.
Management highlighted semiconductor-related pressure on vehicle inventory supply and broader automotive-market conditions as factors that could affect vehicle sales, customer spending, pricing, and revenue mix. Other principal risks include competition, dealer retention and cancellations, advertising demand, reliance on search traffic and third parties, technology and cybersecurity, privacy regulation, interest-rate exposure, debt restrictions, and potential impairment of intangible assets. The company reported no material changes to the risk factors in its 2020 Form 10-K and no material off-balance-sheet arrangements. It announced in April 2021 that FordDirect selected it as a preferred website and technology platform provider for approximately 3,000 U.S. dealerships.
Important facts for investors to verify
- Whether dealer-customer retention and digital-solutions growth can offset ongoing dealer losses and weaker OEM advertising.
- How semiconductor shortages, vehicle inventory, consumer demand, and the continuing effects of COVID-19 influence customer spending and revenue.
- Cash generation, planned capital needs, debt repayments, covenant capacity, and the cost and availability of revolving credit.
- Execution and timing of the technology transformation and whether expected efficiencies are realized.
- Potential deferred-tax-asset realization and impairment risk, given the full valuation allowance and substantial remaining intangible assets.
- The effects of the interest-rate swap and LIBOR transition on interest costs and reported results.