Cars.com Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Cars.com operates a digital automotive marketplace and provides media and digital solutions to dealers, OEMs and advertisers. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $144.4 million | $152.1 million | $394.5 million | $454.5 million |
| Operating income (loss) | $19.1 million | $(447.7) million | $(903.2) million | $(450.8) million |
| Net income (loss) | $(12.3) million | $(426.2) million | $(824.3) million | $(441.2) million |
| Diluted loss per share | $(0.18) | $(6.38) | $(12.27) | $(6.58) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $96.9 million | $80.6 million |
- Q3 operating margin was approximately 13.2%; net margin was approximately negative 8.5%. For the nine-month period, operating and net margins were approximately negative 228.9% and negative 208.9%, respectively, heavily affected by impairment charges.
- Nine-month investing cash outflow was $12.6 million, primarily capital expenditures; financing cash outflow was $54.0 million. Cash increased $30.2 million to $43.8 million.
- At September 30, cash was $43.8 million and reported liquidity was $258.8 million, including $215.0 million available on the revolver. Debt principal was $597.8 million: $362.8 million under the term loan and $235.0 million under the revolver. The company reported compliance with its covenants at quarter-end.
- Working capital was $41.2 million, based on current assets of $154.0 million and current liabilities of $112.9 million.
Changes versus comparable periods
- Revenue declined 5% in Q3 and 13% for the first nine months. Q3 retail revenue decreased 2%; national advertising fell 12%, principally due to cancellations associated with COVID-19. Nine-month retail revenue decreased 6%.
- Q3 direct revenue increased 1%, reflecting affiliate conversions and digital-solutions growth, partly offset by fewer dealer customers. Direct revenue includes converted affiliate dealers; all affiliates had been converted by October 1, 2019, so wholesale revenue was zero in 2020 versus $5.4 million in Q3 2019.
- Dealer customers were 18,130 at September 30, down 3% year over year but up 1% from June 30. Q3 traffic and average monthly unique visitors each grew 10% year over year. Direct monthly average revenue per dealer was $2,183, up 51% sequentially, largely because Q2 invoice credits ended and pricing returned to normal.
- Q3 net loss was substantially smaller than a year earlier because Q3 2019 included $461.5 million of goodwill and intangible impairment. The nine-month 2020 net loss worsened year over year, principally because of $905.9 million of 2020 impairment charges, compared with $461.5 million in 2019.
- Operating cash flow increased to $96.9 million from $80.6 million for the nine months. Marketing and sales expense fell 19%, and general and administrative expense fell 26%, partly reflecting expense management and lower one-time costs.
Outlook, management commentary and material items
- Management provided no quantified revenue, earnings or cash-flow guidance. It cautioned that 2020 results may not indicate full-year results and that the pandemic’s duration and economic effects remain uncertain.
- COVID-19 reduced dealer activity and advertising demand. Cars.com granted dealers invoice credits of 50% in April and 30% in May and June; the credits ended after June. The company also used furloughs, workforce and salary reductions, hiring and spending controls, and vendor cost reductions. Management said some expense-reduction measures had been restored, but further measures might be needed.
- In March 2020, the company recorded $905.9 million of goodwill and intangible impairment, including a full $505.9 million goodwill write-down and a $400.0 million write-down of the Cars.com trade name. Goodwill was zero at September 30. It also impaired a non-marketable investment by $9.4 million.
- Q3 included $22.5 million of income tax expense despite pretax income of $10.2 million. This included an additional $30.9 million valuation allowance charge to correct an error related to the Q1 impairment tax calculation; management said the correction was not material in the context of Q1’s loss. The company also recognized an $8.5 million tax benefit from CARES Act loss carrybacks. A full valuation allowance was recorded against deferred tax assets.
- On October 30, 2020, after quarter-end, Cars.com issued $400.0 million of 6.375% senior notes due 2028 and used proceeds and cash on hand to repay $235.0 million of revolver borrowings and $162.8 million of term-loan borrowings, plus fees. It also refinanced its secured facilities with a $230.0 million revolver and $200.0 million term loan, extending maturity to May 31, 2025 and ending the prior covenant-adjustment period.
- Key risks include continued pandemic effects on dealer subscriptions and OEM advertising, consumer and automotive-market weakness, competition, dealer retention, technology and cybersecurity dependence, impairment of intangible assets, floating-rate debt and covenant compliance. The company reported no material off-balance-sheet arrangements and no material change in market-risk exposure since year-end.
Important facts for investors to verify
- Post-quarter-end debt refinancing: final balances, interest costs, fees, covenants and the effect of replacing secured debt with $400.0 million of senior unsecured notes.
- Dealer retention, subscription revenue and national advertising trends after invoice credits ended, including the sustainability of Q3 traffic growth and sequential ARPD recovery.
- Cash generation and covenant headroom under changing automotive-market conditions, along with any further pandemic-related expense or customer-support actions.
- Assumptions underlying the March impairment tests and recoverability of remaining intangible assets; the size and future reassessment of the deferred-tax valuation allowance.
- Results and timing of the GM dealer website rollout and the contribution of newer digital offerings, including FUEL.