Cars.com Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Cars.com operates an automotive digital marketplace and provides digital solutions to dealers and OEMs. This filing reports the quarter and six months ended June 30, 2020; financial amounts below are in millions of dollars unless noted. The company had converted all former affiliate markets to direct relationships by October 2019, so it reported no wholesale revenue in 2020.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $102.0 | $148.2 | $250.1 | $302.4 |
| Operating income (loss) | ($17.2) | $1.0 | ($922.3) | ($3.1) |
| Net income (loss) | ($24.6) | ($6.0) | ($812.1) | ($15.1) |
| Diluted loss per share | ($0.37) | ($0.09) | ($12.10) | ($0.22) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $57.6 | $50.8 |
- Q2 revenue declined 31% year over year. Retail revenue fell 24% to $102.0 million; national advertising revenue fell 17% to $16.0 million. Subscription and digital-solutions revenue was $79.4 million, down from $116.4 million.
- Q2 operating expenses fell 19% to $119.2 million, including lower marketing and sales costs. The operating loss was $17.2 million. Interest expense was $7.9 million.
- First-half results included a $905.9 million goodwill and indefinite-lived intangible impairment, largely explaining the $812.1 million net loss. The company also impaired a non-marketable investment by $9.4 million. These charges substantially distort comparison with 2019.
- Cash and equivalents were $56.9 million at June 30, up from $13.5 million at year-end 2019. Current assets were $141.5 million and current liabilities $95.0 million.
- Debt carrying value was $646.3 million: $371.3 million under the term loan and $275.0 million under the revolver. The revolver had $175.0 million available. Credit-agreement liquidity was approximately $232.2 million. The company reported compliance with covenants at quarter-end.
- Stockholders’ equity fell to $328.8 million from $1,141.1 million at year-end, principally reflecting impairment charges and accumulated losses.
Material changes versus the prior comparable period
- Dealer invoice credits of 50% for April and 30% for May and June, alongside dealer cancellations and weaker advertising demand, drove much of the Q2 revenue decline.
- Direct monthly average revenue per dealer was $1,442, down 33% year over year and 31% from Q1 2020. Dealer customers totaled 18,033, down 5% from both March 31, 2020 and June 30, 2019.
- Consumer engagement indicators were stronger: Q2 visits grew 10% to 144.0 million and average monthly unique visitors increased 6% to 22.8 million. Management attributed traffic growth partly to increased online vehicle research and shopping.
- First-half operating cash flow rose to $57.6 million from $50.8 million. Investing cash use was $8.7 million; financing cash use was $5.5 million. No shares were repurchased in 2020; the prior-year six-month period included $40.0 million in repurchases.
Outlook, management commentary, risks and unusual items
- Management gave no quantified revenue or earnings guidance and said the duration and severity of COVID-19 impacts remained uncertain. It cautioned that first-half results may not indicate full-year results.
- Expense actions included furloughs, a permanent reduction in force of approximately 170 employees, salary and hiring measures, lower marketing spend, vendor savings and reduced discretionary spending. Q2 included $4.8 million of severance, transformation and other exit costs.
- A June credit-agreement amendment waived leverage and interest-coverage tests through December 31, 2020. It imposed a $75 million minimum liquidity requirement and required specified excess unrestricted cash to prepay revolving loans. Revised leverage limits apply beginning March 31, 2021, initially at 6.50x, with step-downs thereafter. The company’s debt matures May 31, 2022.
- The impairment assessment followed a COVID-19-related triggering event in March. Management’s valuation relied on estimates of future cash flows and other assumptions; further deterioration could prompt additional impairment. A full valuation allowance was recorded against U.S. deferred tax assets.
- The interest-rate swap had a $16.1 million unrealized loss at quarter-end. The credit amendment ended hedge accounting, so subsequent fair-value changes are recorded in earnings.
- Key risks include prolonged pandemic effects, dealer closures or reduced spending, automotive-market and advertising weakness, competition, liquidity and covenant compliance, and the potential inability to obtain financing on acceptable terms. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether dealer retention and revenue per dealer stabilize as invoice credits end, and whether OEM and national advertising demand recovers.
- Whether traffic growth converts into revenue and whether the reported growth in digital-solutions customers offsets marketplace customer losses.
- Cash generation, availability under the revolver, compliance with the amended liquidity and covenant requirements, and progress toward 2022 debt maturity.
- Whether the assumptions behind the $905.9 million impairment remain appropriate and whether further impairments or deferred-tax valuation changes arise.
- The operating and financial effects of cost reductions, the workforce reduction and the technology transformation.