Cars.com Inc. (Cars Commerce) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Cars.com operates an automotive technology platform through Cars.com, Dealer Inspire, Accu-Trade and Cars Commerce Media Network. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance and liquidity
- Q3 revenue: $174.3 million, up 6% year over year. Dealer revenue was $157.1 million (+8%); OEM and National revenue was $14.5 million (-2%); Other revenue was $2.7 million (-38%).
- Q3 earnings and margins: Operating income was $14.3 million, down 28%; operating margin was approximately 8.2%, versus 12.1% a year earlier. Net income was $4.5 million, or $0.07 per diluted share, compared with a $2.9 million loss, or $0.04 loss per share.
- Nine-month results: Revenue was $509.6 million (+5%); operating income was $39.2 million (-15%), with an approximately 7.7% operating margin versus 9.5%. Net income was $110.1 million versus $6.9 million; the 2023 result included a $93.9 million income tax benefit, principally from releasing deferred-tax valuation allowance. The filing attributes the increase in nine-month earnings primarily to that release, not operating growth.
- Cash flow: Nine-month operating cash flow was $91.6 million, essentially flat with $91.3 million in 2022. Investing activities used $15.6 million, including $14.8 million for internally developed technology; financing activities used $58.6 million, including debt repayment and stock repurchases. Cash increased $17.4 million to $49.1 million.
- Debt and liquidity: Outstanding debt principal was $455.0 million at September 30, including $400.0 million of 6.375% notes due 2028 and a $55.0 million term loan bearing 7.4%. Cash plus $230.0 million available on the revolver represented stated total liquidity of $279.1 million. The company reported compliance with debt covenants; senior secured leverage and interest coverage ratios were 0.3x and 5.8x.
- Capital allocation: The company repurchased 1.3 million shares for $23.6 million during the first nine months, at an average $18.30 per share. It also paid $26.3 million of term and revolving debt principal.
Material changes and operating trends
- Dealer revenue growth was driven by digital solutions and marketplace growth, including the marketplace repackaging initiative; some reduction in digital-dealer revenue partly offset growth.
- Dealer customers fell 4% year over year to 18,715, which management attributed mainly to expected churn from marketplace repackaging and a pullback by digital dealers. Monthly average revenue per dealer rose 9% to $2,548, supported by higher-tier packages and digital solutions.
- Q3 traffic increased 1% to 151.4 million visits, while average monthly unique visitors declined 5% to 26.0 million. Management cited consumers’ longer purchase horizon amid elevated vehicle prices, financing costs and inflation, and the deprecation of Pickuptrucks.com and Auto.com. For the nine months, traffic increased 6%.
- Operating expenses rose 11% in Q3, faster than revenue, including increases in marketing and sales (+12%), product and technology (+18%) and depreciation and amortization (+11%). Management cited marketing campaigns, compensation and third-party costs.
- OEM and National revenue declined, with management citing reduced spending by some insurance customers amid macroeconomic factors. Other revenue declined primarily because an Accu-Trade license agreement expired in Q1 2023.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management stated that cash from operations and revolving-credit availability were adequate for business needs over the next 12 months and beyond, while noting liquidity depends on revenue, cost control, collections and macroeconomic conditions.
- On November 1, 2023, after quarter-end, Cars.com acquired Canadian digital solutions provider D2C Media for CA$105 million (approximately $76 million), funded with cash and revolver borrowings. Up to CA$35 million (approximately $25 million at closing) of additional performance-based consideration may be payable.
- Contingent consideration related to the CreditIQ and Accu-Trade acquisitions had a $54.6 million fair value at quarter-end; the company expected to pay $26.1 million within the next 12 months. The estimate uses significant unobservable assumptions and may change. Accu-Trade payments may include cash or shares.
- The nine-month tax benefit reflects release of a significant portion of the deferred-tax valuation allowance; the balance sheet reported $97.5 million of net deferred tax assets. This tax-related gain materially elevated reported net income.
- Management cited risks including automotive demand and macroeconomic conditions, dealer/OEM consolidation, competition, search and third-party platform dependence, privacy and cybersecurity, technology execution, acquisitions, goodwill and intangible-asset impairment, and variable-rate borrowing costs. No material changes to the annual-report risk factors were disclosed. Management reported no pending or threatened litigation expected to have a material adverse effect, and disclosure controls were effective.
Important facts for investors to verify
- Whether dealer-customer declines stabilize and ARPD gains translate into durable revenue growth.
- Underlying earnings and cash generation excluding the large deferred-tax valuation-allowance release; operating income declined despite higher revenue.
- The D2C acquisition’s impact on revolver borrowings, leverage, integration costs and any performance-based payments.
- Timing and final amount of the $54.6 million acquisition-related contingent consideration liability and expected near-term payments.
- Whether operating expenses, especially marketing and technology spending, can be managed as revenue grows, and how elevated vehicle prices, financing rates and insurance-advertising pullbacks affect demand.