Cargurus, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2023, compared with Q1 2022. CarGurus operates online automotive marketplaces and digital retail and wholesale services, including CarOffer, in which it owns 51%. Beginning in Q4 2022, it reports U.S. Marketplace and Digital Wholesale segments.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $232.0 million | $430.6 million |
| Gross profit / gross margin | $155.0 million / 66.8% | $181.9 million / 42.2% |
| Operating income / operating margin | $14.1 million / 6.1% | $26.7 million / 6.2% |
| Consolidated net income | $11.9 million | $18.8 million |
| Net income attributable to CarGurus | $16.1 million | $19.9 million |
| Operating cash flow | $66.3 million | $93.1 million |
| Consolidated Adjusted EBITDA (non-GAAP) | $40.8 million | $65.7 million |
- Revenue mix: Marketplace revenue rose 2% to $167.1 million; wholesale revenue fell 72% to $25.2 million; product revenue fell 78% to $39.7 million. Digital Wholesale revenue declined 76% to $64.8 million, while U.S. Marketplace revenue increased 2% to $155.6 million.
- Profitability: Gross margin rose as the business mix shifted away from vehicle resale revenue, which carries corresponding vehicle costs. Operating income fell 47%. Q1 2023 diluted EPS was $0.10; Q1 2022 basic and diluted loss per share was $0.53, including an $82.0 million accretion charge for redeemable noncontrolling interest.
- Cash and liquidity: Cash and cash equivalents were $456.7 million at March 31, down from $469.5 million at year-end. Cash, cash equivalents and restricted cash totaled $471.7 million. Operating cash flow decreased from $93.1 million; investing activities used $5.9 million and financing activities used $73.2 million, including share repurchases.
- Debt and obligations: No long-term debt or revolver borrowings were outstanding. The $400 million revolving facility had $399.3 million available after letters of credit; the company reported covenant compliance. Operating lease liabilities totaled $210.4 million, including the newly commenced Boston lease.
- Capital allocation: CarGurus repurchased and retired 3.99 million shares for $65.2 million, excluding commissions and excise tax, at an average $16.33 per share. $166.2 million remained under its $250 million authorization at quarter-end.
Material changes versus Q1 2022
- Total revenue declined 46%, primarily reflecting a purposeful reduction in Digital Wholesale transaction volume while CarGurus addressed prior operational challenges and emphasized process improvements and transaction quality. Transactions fell 75% to 17,505.
- Marketplace revenue was comparatively resilient: paying dealers increased to 31,291 from 30,867; average monthly unique users rose to 39.2 million from 37.9 million; and consolidated quarterly average revenue per subscribing dealer increased to $4,986 from $4,806.
- Digital Wholesale operating loss widened to $11.2 million from $2.1 million. U.S. Marketplace operating income decreased to $26.5 million from $29.8 million.
- Operating cash flow declined, while financing cash use increased, principally because of the 2023 repurchases. Interest income increased to $3.7 million from $0.04 million, principally reflecting higher interest rates.
Outlook, management commentary, risks and unusual items
- Management stated existing liquidity, including access to the revolver, should fund operations for at least the next 12 months. The filing provides no specific numerical revenue or earnings guidance.
- Management attributed the wholesale and product revenue declines to deliberate transaction-volume restraint, improved operating procedures and higher-quality inspections. Marketplace growth reflected higher subscription revenue and dealer upgrades; advertising and consumer financing revenue faced weaker spending and economic conditions.
- CarGurus expects approximately $69.8 million of spending, net of tenant reimbursements, for the 1001 Boylston Street office buildout. As of March 31, it had incurred $4.4 million and signed a further $3.6 million of commitments not yet incurred. Total disclosed future operating lease payments were $323.0 million before $112.6 million of imputed interest.
- Internal controls: A material weakness at CarOffer involving IT access and change-management controls and financial close procedures remained unremediated. Management concluded disclosure controls were not effective as of March 31, 2023. The weakness had not resulted in a known material misstatement; remediation efforts are ongoing.
- Risks and contingencies: Key risks include macroeconomic and interest-rate effects on vehicle demand, dealer and advertiser spending, vehicle supply and wholesale activity; competition; dependence on dealer relationships, data and third-party service providers; cybersecurity, privacy and regulatory exposure; and the CarOffer control weakness. CarOffer guarantees had a maximum potential future payment exposure of $27.6 million; probable losses were immaterial and no material contingent loss liability was recorded. The company reported no litigation expected to have a material adverse effect.
- Unusual items: A $175,000 write-off of Digital Wholesale website development costs related to technology no longer being developed. CarGurus also recorded $14.4 million of deferred tax assets and an increase in accrued income taxes associated principally with amended Section 174 research-cost capitalization rules.
Important facts for investors to verify
- Whether Digital Wholesale transaction volumes and losses stabilize as operational changes continue, and how much of the revenue decline reflects intentional restraint versus market conditions.
- Whether marketplace dealer growth and higher revenue per subscribing dealer continue, particularly given economic pressure on advertisers and consumers.
- Progress and testing results for remediation of CarOffer’s material weakness, and whether disclosure controls become effective.
- Cash generation and planned uses of cash, including remaining share repurchases, the Boston office buildout, and potential future CarOffer put/call rights.
- The terms, covenants and availability of the undrawn revolver, and the scale and duration of lease commitments.