Cars.com Inc. — Q3 2022 Form 10-Q
Business context and period: Cars.com operates an automotive marketplace and provides digital advertising, dealer technology, financing, and vehicle appraisal solutions. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $164.6 million | $156.6 million | $485.7 million | $465.4 million |
| Operating income | $19.9 million | $12.1 million | $46.2 million | $44.3 million |
| Operating margin | 12.1% | 7.7% | 9.5% | 9.5% |
| Net income (loss) | $(2.9) million | $2.4 million | $6.9 million | $13.7 million |
| Diluted EPS | $(0.04) | $0.03 | $0.10 | $0.19 |
| Operating cash flow | Not separately stated | Not separately stated | $91.3 million | $116.2 million |
- Revenue and mix: Q3 revenue rose 5%. Dealer revenue increased 4% to $145.4 million; OEM and National revenue fell 2% to $14.9 million, reflecting OEM spending pullbacks amid production delays and supply shortages. Other revenue increased to $4.3 million, primarily due to the Accu-Trade license agreement. For the first nine months, revenue rose 4%, with Dealer revenue up 5% and OEM and National down 11%.
- Profitability: Q3 operating income grew 65%, while net results swung to a loss. Other expense was $13.4 million in Q3; management attributed the year-over-year change primarily to fair-value changes in contingent consideration for the CreditIQ and Accu-Trade acquisitions. For the nine months, net income declined 49% to $6.9 million.
- Cash flow and investment: Nine-month operating cash flow was $91.3 million, down from $116.2 million. Investing cash outflow was $79.2 million, including $64.8 million paid for Accu-Trade; capital expenditures were $14.4 million. Financing cash outflow was $19.3 million, including $39.9 million of share repurchases, partly offset by $45.0 million of revolving-credit borrowings. Cash declined $7.1 million to $31.9 million.
- Liquidity and debt: The company reported total liquidity of $226.9 million, including $195.0 million available on its revolving facility. Debt principal totaled $505.0 million: $70.0 million term loan, $35.0 million revolver borrowings, and $400.0 million senior unsecured notes. The reported weighted interest rate was 6.2%. The company was compliant with debt covenants; its senior secured leverage and interest coverage ratios were 0.6x and 5.7x, respectively.
- Capital and balance sheet: The company repurchased and retired 3.5 million shares for $40.0 million during the first nine months under a three-year, $200 million authorization. Total assets were $1.05 billion and stockholders’ equity was $376.5 million at September 30, 2022.
Material changes, outlook, and risks
- Accu-Trade was acquired in March 2022 for $64.8 million cash, with additional consideration potentially payable based on performance. The acquisition added $77.0 million of goodwill. The company’s contingent-consideration liability for CreditIQ and Accu-Trade was valued at $61.1 million at quarter-end; management expected to pay $10.0 million within the following 12 months. Some Accu-Trade consideration may be settled in cash or stock.
- Operating indicators were mixed: Q3 traffic increased 6% and average monthly unique visitors increased 12% year over year; dealer customers rose 3% to 19,585, while average monthly revenue per dealer was essentially flat at $2,334. Nine-month traffic declined 2%.
- Management cited vehicle inventory and supply-chain constraints, production delays, inflation, higher interest rates, and potential recession as factors that could affect customer demand, advertising spend, and the broader automotive market. It emphasized continued investment in digital solutions. The filing provides no specific numerical earnings or revenue guidance.
- The company recorded a valuation allowance against deferred tax assets at September 30, 2022, citing recent-loss history as significant negative evidence. It also corrected a prior-period deferred-tax valuation-allowance overstatement of $30.8 million; management deemed the correction immaterial, with no effect on prior-period net income or cash flows.
- Other risks include competition, reliance on search and third-party data or service providers, privacy and cybersecurity exposure, acquisition integration and contingent-payment uncertainty, interest-rate exposure on floating-rate debt, and possible impairment of intangible assets. Management reported no material change to the risk factors in its 2021 Form 10-K, no material off-balance-sheet arrangements, and effective disclosure controls.
Investor verification points
- Review the composition and quarter-specific drivers of the $13.4 million Q3 other expense, including fair-value assumptions for acquisition earn-outs.
- Track Accu-Trade and CreditIQ performance against earn-out targets, potential cash or share settlement, and the expected $10.0 million near-term contingent payment.
- Assess the durability of dealer revenue growth against OEM spending declines, flat revenue per dealer, and continued automotive inventory and supply-chain constraints.
- Monitor operating cash generation, debt and interest costs, available revolver capacity, and the pace of share repurchases and acquisition spending.
- Follow developments in deferred-tax-asset realizability and verify the effects of the disclosed prior-period tax correction in the company’s financial statements.