Cars.com Inc. — Q2 2023 Form 10-Q
Business and period: Cars.com operates an automotive marketplace and provides digital solutions, advertising, financing, and vehicle valuation products to dealers, OEMs, and shoppers. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are to the same 2022 periods unless noted.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $168.2 million | $162.9 million | $335.2 million | $321.1 million |
| Operating income | $12.3 million | $15.4 million | $24.9 million | $26.3 million |
| Operating margin | 7.3% | 9.4% | 7.4% | 8.2% |
| Net income | $94.1 million | $5.5 million | $105.6 million | $9.9 million |
| Diluted EPS | $1.37 | $0.08 | $1.55 | $0.14 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $56.2 million | $42.3 million |
- Revenue mix: Q2 dealer revenue rose 6% to $153.3 million; OEM and National revenue fell 12% to $12.4 million, and Other revenue fell 48% to $2.5 million. For the first half, total revenue increased 4%, led by 7% growth in dealer revenue.
- Profit and margins: Operating expenses grew 6% in Q2, faster than revenue growth of 3%, and operating income declined 20%. First-half operating income fell 6%. Net income and EPS rose sharply primarily because of a $93.1 million Q2 income tax benefit (a $92.0 million benefit for the first half), rather than stronger operating profit.
- Cash flow: First-half investing cash outflow was $10.6 million, mainly technology development; financing cash outflow was $48.7 million, including $22.5 million of debt payments and $17.2 million of repurchases. Cash declined $3.1 million to $28.6 million.
- Liquidity and debt: The company reported total liquidity of $258.6 million, including $230.0 million available on its revolver. Aggregate debt principal was $458.8 million, including $400.0 million of 6.375% notes due 2028 and a $58.8 million term loan at 7.3%. The reported effective interest rate was 6.5%. The company said it complied with debt covenants.
Material changes and operating trends
- Traffic increased 5% in Q2 and 8% for the first half; average monthly unique visitors were flat in Q2 and up 3% for the first half. Management attributed traffic gains to changes in paid user acquisition and improvements to the app and website.
- Dealer customers were 18,785 at June 30, down 4% year over year and 2% sequentially. Management cited anticipated churn from marketplace repackaging and prior pullback by digital dealers. Monthly average revenue per dealer increased 6% year over year, driven by higher-tier package adoption and digital solutions growth.
- OEM and insurance customer spending pullbacks reduced OEM and National revenue. Other revenue declined partly because the Accu-Trade license agreement expired in Q1 2023.
- Q2 marketing and sales costs increased partly due to a new advertising campaign; product and technology costs also rose on compensation and third-party spending. Interest expense declined year over year, reflecting lower debt and the prior expiration of an interest-rate swap, partly offset by higher rates.
Outlook, risks, and unusual items
- Tax item: The company released a significant portion of its deferred-tax-asset valuation allowance after evaluating recent performance and future projections. The release drove the unusually large tax benefit and materially elevated reported earnings. The filing provides no clear estimate of future earnings excluding this item.
- Outlook: No specific revenue, earnings, or cash-flow guidance is provided. Management said operating cash flow and available revolver capacity should provide adequate liquidity for the next 12 months and beyond, while noting dependence on revenue, cost control, receivables collection, and macroeconomic conditions.
- Contingent consideration: Acquisition-related contingent consideration was valued at $50.7 million at quarter-end; the company expected to pay $30.9 million within the next 12 months. The estimate uses significant unobservable inputs and may change with performance expectations.
- Debt amendment: A June 2023 credit-agreement amendment replaced LIBOR benchmark provisions with SOFR and included a more favorable credit spread adjustment.
- Other risks and contingencies: The filing highlights sensitivity to automotive demand and macroeconomic conditions, competition, dealer/OEM concentration, traffic acquisition and search visibility, privacy and cybersecurity, technology execution, interest rates, and debt restrictions. Management reported no material change to previously disclosed risk factors, no material pending or threatened litigation, and no material off-balance-sheet arrangements.
- The company repurchased 0.9 million shares for $17.2 million during the first half under its $200 million, three-year authorization. CEO Alex Vetter adopted a Rule 10b5-1 plan for possible sales of up to 212,000 shares between August 2023 and August 2024.
Important facts for investors to verify
- How much of reported net income and EPS reflects the valuation-allowance release, and what are the implications for future tax expense and deferred tax assets?
- Whether dealer-customer losses continue and whether higher revenue per dealer can offset churn, particularly following marketplace repackaging.
- Whether operating expenses can grow more slowly than revenue and support recovery in operating margin.
- The timing and final amounts of acquisition earnout payments, including the expected $30.9 million due within 12 months, and their effect on liquidity.
- Revolver availability and covenant capacity under changing interest rates, alongside scheduled debt service and planned repurchases.