Cargurus, Inc. — Q1 2021 Form 10-Q
Period: Three months ended March 31, 2021; unaudited. Amounts below are in U.S. dollars. The company operates online automotive marketplaces and reports U.S. and International segments.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $171.4 million | $157.7 million | Up 9% |
| Gross profit / gross margin | $147.3 million / 86.0% | $146.1 million / 92.6% | Profit up 1%; margin down |
| Operating income / margin | $25.8 million / 15.1% | $12.0 million / 7.6% | Up 115% |
| Consolidated net income | $19.6 million | $12.7 million | Up 54% |
| Net income attributable to common stockholders | $22.4 million | $12.7 million | Up 76% |
| Diluted EPS | $0.19 | $0.11 | Up |
| Adjusted EBITDA (non-GAAP) | $50.6 million; 29.5% margin | $27.6 million; 17.5% margin | Up 83% |
Marketplace subscription revenue declined 2% to $139.6 million, while other revenue more than doubled to $31.8 million, primarily reflecting CarOffer wholesale activity. Subscription revenue was 81% of total revenue versus 90% a year earlier. U.S. revenue increased 10% to $163.0 million; International revenue fell 14% to $8.4 million. International operating loss narrowed to $3.6 million from $8.2 million.
Operating cash flow was $43.9 million, compared with $10.1 million. Investing used $68.1 million, principally for acquisitions; financing used $19.0 million, including repayment of a $14.3 million line of credit. Cash, cash equivalents, and restricted cash declined $43.4 million during the quarter to $157.5 million. At quarter-end, cash and cash equivalents were $140.7 million and short-term certificates of deposit were $100.0 million. The company reported no long-term borrowings.
At March 31, total assets were $719.4 million, including $157.2 million of goodwill and $108.2 million of intangible assets, both substantially increased by the CarOffer acquisition. Total liabilities were $155.5 million, including operating lease liabilities. Redeemable noncontrolling interest was $55.2 million.
Material changes and notable items
- CarOffer acquisition: On January 14, CarGurus acquired a 51% controlling interest for stated total consideration of $174.4 million: $70.8 million cash and $103.6 million in stock. CarOffer contributed $15.6 million of revenue and a $7.6 million net loss from acquisition through quarter-end. Purchase accounting remained preliminary.
- Acquisition-related effects: Cost of revenue rose 107%, primarily due to CarOffer wholesale costs. Depreciation and amortization increased to $7.7 million from $1.5 million, largely reflecting acquired intangibles. Future amortization expense is expected to be significant.
- Expense mix: Sales and marketing declined 27%, mainly from lower advertising spend and cost-saving measures. General and administrative expense rose 29%, including higher stock compensation and CarOffer expenses.
- Marketplace trends: Paying dealers declined 6% to 31,213. Average monthly unique users fell to 44.2 million from 49.1 million, and average monthly sessions to 108.9 million from 126.4 million. Consolidated quarterly average revenue per subscribing dealer rose to $4,513 from $4,243.
- Tax: The effective tax rate was 22.4%, versus 0.4% in Q1 2020, when discrete tax benefits applied.
Outlook, commentary, and risks
- The filing provides no specific numerical revenue or earnings guidance. Management stated existing liquidity should fund operations for at least the next 12 months.
- Management reported a return to normal contractual billings in all markets except the U.K. February 2021 service period, for which subscription fees were waived. Fee reductions had an immaterial revenue impact in Q1 2021.
- Management highlighted continued COVID-19 uncertainty and automotive inventory constraints, including the semiconductor shortage. Reduced vehicle availability and higher wholesale prices could affect consumer traffic, dealer demand, and CarOffer volumes.
- CarOffer’s remaining equity is subject to future call and put arrangements. Potential purchases in 2022 and 2024 are tied to contractual earnings-based formulas and may require cash, stock, or both; the eventual consideration is uncertain.
- Other key risks include dealer cancellations and delinquencies, competition, reliance on search and third-party data providers, privacy and cybersecurity requirements, and execution of CarOffer integration and expected synergies. The company reported no litigation expected to have a material adverse effect.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription revenue and paying-dealer trends stabilize, and whether user traffic recovers.
- How much reported growth and Adjusted EBITDA are attributable to CarOffer, and whether its wholesale economics and integration deliver the anticipated benefits.
- The final CarOffer purchase-price allocation, ongoing intangible amortization, and potential cash or share obligations under the put/call arrangements.
- Whether inventory shortages, wholesale price changes, and COVID-19 effects alter dealer demand, consumer activity, or CarOffer transaction volumes.
- Cash generation and liquidity after acquisition spending, lease commitments, and any future CarOffer equity purchases.
- The reconciliation of non-GAAP Adjusted EBITDA to GAAP results; it excludes items including stock-based compensation, depreciation and amortization, and taxes.