Cars.com Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Cars.com operates a digital automotive marketplace connecting car shoppers, dealers, and advertisers. The company became independent from TEGNA in May 2017; the comparable 2017 figures are combined historical results and include certain allocated TEGNA costs. In February 2018, Cars.com acquired Dealer Inspire (DI) and substantially all of Launch Digital Marketing (LDM).
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $160.0 million | $153.2 million |
| Operating income | $7.2 million | $27.2 million |
| Net income | $0.9 million | $26.9 million |
| Diluted EPS | $0.01 | $0.38 |
| Operating cash flow | $26.7 million | $43.7 million |
- Revenue increased 4%. Retail revenue rose 18% to $132.3 million, while wholesale revenue declined 33% to $27.6 million, primarily reflecting affiliate markets converted to direct sales. Direct revenue increased 21%; national advertising increased 8%.
- Operating margin was approximately 4.5%, versus 17.7% a year earlier. Operating expenses increased 21% to $152.8 million; general and administrative expense more than doubled to $18.1 million.
- Operating cash flow was $26.7 million. Investing cash use was $159.5 million, mainly the $157.0 million net acquisition payment; financing provided $123.8 million, including $165.0 million of revolver borrowings.
- Cash and equivalents were $11.5 million at quarter-end. Current assets were $148.0 million and current liabilities $109.1 million.
- Debt principal totaled approximately $708.1 million: $433.1 million term loan and $275.0 million revolver borrowings. Rates were 3.8% and 3.6%, respectively. The company had $175.0 million of additional revolver capacity, a 2.9-to-1.0 net leverage ratio, and reported compliance with credit covenants.
- Traffic visits increased 7% to 113.4 million; dealer customers declined 5% to 20,474 and average vehicle listings declined 2% to 4.876 million. Used-car listings increased 6%.
Material changes and unusual items
- The DI/LDM acquisition had a $160.6 million stated total consideration, including contingent consideration, and added $96.8 million of goodwill and $71.9 million of identified intangible assets. Acquired businesses contributed $5.7 million of revenue and a $5.7 million net loss from the acquisition date through quarter-end.
- Reported results included $4.1 million of acquisition-related costs and $5.7 million of cash-settled DI unvested awards recognized as compensation expense. Management also attributed increased G&A to $3.8 million of costs related to a stockholder activist campaign and $3.1 million of incremental public-company costs.
- McClatchy and tronc affiliate markets began transitioning to direct sales. More than 2,300 dealer customers had migrated by quarter-end. The changes shift revenue classification from wholesale to retail and affect affiliate revenue-share expenses.
- The board authorized a two-year share repurchase program of up to $200 million; no shares were repurchased in Q1. The company adopted ASC 606 effective January 1, 2018, with no material financial-statement impact.
Outlook, commentary, and risks
The filing provides no specific quantitative revenue or earnings guidance. Management said it expects near-term margin pressure from the transition to an independent public company and intends to focus on operating efficiency, growth, and free cash flow. It noted that debt incurred for the separation and acquisition reduces free cash flow and may constrain strategic flexibility. The company stated that operating cash flows and available borrowing capacity were adequate for business needs.
Key disclosed risks include automotive-market and consumer-demand conditions, intense competition, dealer retention and pricing, reliance on third-party data and search traffic, technology and cybersecurity, acquisition integration and leverage, variable-rate debt, and legal or regulatory matters. The filing reports no material changes to the risk factors in the 2017 Form 10-K, no material off-balance-sheet arrangements, and no material change in market-risk exposure. Legal proceedings are described generally; the filing does not provide a clear quantified exposure.
Important facts for investors to verify
- Whether dealer migrations and acquired DI/LDM operations produce sustained revenue growth and offset lower dealer counts and integration costs.
- How much of the sharp year-over-year earnings decline reflects acquisition, activist-campaign, and public-company costs versus ongoing operating trends.
- Debt repayment, interest-rate exposure, leverage covenant headroom, and the effect of the proposed buyback on liquidity and flexibility.
- Final acquisition purchase-price allocations, contingent consideration and performance-based awards, and any subsequent integration or impairment developments.