Cars.com Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Cars.com operates a two-sided digital automotive marketplace, earning primarily subscription advertising revenue from dealerships, with additional national advertising and other revenue. It completed its spin-off from TEGNA on May 31, 2017 and began regular-way NYSE trading June 1, 2017.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $626.3 million | $633.1 million | Down 1% |
| Operating income | $134.3 million | $176.7 million | Down 24% |
| Operating margin | 21.4% | 27.9% | Down 6.5 percentage points |
| Net income | $224.4 million | $176.4 million | Up 27% |
| Diluted EPS | $3.13 | $2.46 | Up 27% |
| Operating cash flow | $185.9 million | $199.2 million | Down 7% |
Net income and EPS growth were driven by a $102.3 million income tax benefit, including benefits from the tax-rate reduction and the change in Cars.com, LLC’s tax status. These noncash tax items more than offset lower operating income and $12.4 million of net interest expense. The filing reports no dividend for 2017 and says the company does not expect to pay cash dividends for the foreseeable future.
- Revenue mix: Retail revenue was $463.3 million, approximately 74% of total revenue, versus $462.8 million in 2016. Wholesale revenue was $163.0 million, approximately 26%, down 4%.
- Costs and margins: Operating expenses rose 8% to $492.0 million. General and administrative expense increased 88% to $44.9 million, including $8.0 million of incremental public-company costs and $12.9 million of costs primarily related to the spin-off and headquarters relocation. Cost of revenue and operations increased 15%.
- Cash and debt: Cash was $20.6 million at year-end. Balance-sheet debt, net of issuance costs, was $578.4 million; principal outstanding was approximately $583.8 million. The company had $305 million of revolving capacity available at year-end and reported net leverage of 2.4 to 1. Debt carried a 3.13% rate at year-end and matures in 2022. A 100-basis-point rate increase was estimated to add $5.8 million of annual interest expense.
- Cash uses and commitments: 2017 investing cash outflow was $32.8 million, primarily capital expenditures, including $23.0 million for the new headquarters. Contractual obligations totaled $749.6 million, including debt principal, estimated debt interest, operating leases and purchase obligations.
Material changes and Q4 results
- 2017 revenue was nearly flat in retail channels, while wholesale revenue declined. The company attributed direct revenue’s flat result to lower average revenue per dealer offset by more dealers; wholesale revenue reflected a decline in average dealer count.
- Operating income fell $42.4 million year over year, reflecting higher operating expenses, new standalone-company costs, separation and relocation costs, and interest expense after the company took on debt.
- Traffic declined to 400.9 million visits from 412.3 million in 2016; dealer customers decreased to 21,296 from 21,572. Average vehicle listings increased to 4.94 million from 4.74 million.
- Q4 2017: Revenue was $156.6 million versus $161.7 million in Q4 2016; operating income was $38.8 million versus $48.8 million. Net income was $151.8 million versus $48.8 million, largely reflecting the tax benefit recorded in Q4; diluted EPS was $2.11 versus $0.68.
- Cash provided by operations declined from $199.2 million to $185.9 million, partly due to separation and relocation costs, public-company costs, and interest and tax payments that were not incurred before the spin-off.
Outlook, management commentary, risks and unusual items
- Management said standalone-company transition costs may compress margins in the near term and stated it intends to manage incremental costs through operating efficiency and business growth. The filing provides no specific revenue, earnings or margin guidance.
- The company announced conversions of affiliate markets representing approximately 60% of wholesale revenue to direct sales. Management expects converted markets to increase revenue and profitability. McClatchy and tronc market conversions were announced or completed around the start of 2018.
- In February 2018, after the reporting period, Cars.com acquired Dealer Inspire and certain Launch Digital Marketing assets for $165 million in cash, with up to $40 million of additional performance-based consideration. It borrowed $165 million to fund the acquisition; 2017 results do not include the acquired businesses.
- Key business risks include intense competition for dealer advertising budgets, dependence on traffic and search platforms, dealer/OEM consolidation, third-party data and technology providers, privacy and cybersecurity threats, and regulatory uncertainty. Variable-rate debt, credit-agreement covenants, and tax-related restrictions following the spin-off may constrain flexibility.
- Goodwill and other intangible assets totaled approximately $2.32 billion, about 92% of total assets. No impairment was recorded; management reported goodwill fair-value headroom above 30%, while the Cars.com trade name’s fair value exceeded its carrying amount by only more than 4%, making it more sensitive to adverse assumptions.
- The spin-off was intended to be tax-free, but the company may face significant tax liabilities if the transaction fails to qualify. The Tax Matters Agreement restricts certain transactions for two years after the separation. The 2017 tax benefit includes provisional amounts related to the Tax Cuts and Jobs Act, subject to evaluation in 2018.
- Management reported no pending litigation expected to have a material adverse effect. Disclosure controls were deemed effective; however, the filing did not include management’s assessment or auditor attestation of internal control over financial reporting, citing the transition period for newly public companies and emerging-growth-company exemptions.
Important facts for investors to verify
- How much of reported 2017 net income and EPS reflects noncash, nonrecurring tax benefits, and whether any 2018 tax measurement adjustments were recorded.
- Whether dealer-market conversions increase direct revenue and profitability as management expects, and how wholesale revenue and dealer retention develop.
- Post-acquisition leverage, interest expense, covenant headroom and cash generation after funding Dealer Inspire and Launch Digital Marketing.
- Whether traffic and dealer-customer declines persist, and whether new products and mobile engagement translate into higher monetization.
- Assumptions supporting the carrying values of goodwill and especially the Cars.com trade name, given their significance to total assets and the trade name’s limited reported impairment headroom.
- Integration performance and any contingent consideration for the February 2018 acquisitions, which are not reflected in 2017 results.