Cars.com Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; selected fourth-quarter results are also noted below. Amounts are in U.S. dollars.
Business context
Cars.com operates a two-sided digital automotive marketplace and provides dealer websites, digital retailing, marketing and reputation-management solutions through Cars.com, Dealer Inspire and DealerRater. Dealerships generated approximately 82% of 2018 revenue. In February 2018, the company acquired Dealer Inspire and Launch Digital Marketing, expanding its digital-solutions offering.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $662.1 million | $626.3 million |
| Operating income | $83.9 million | $134.3 million |
| Operating margin | 12.7% | 21.4% |
| Net income | $38.8 million | $224.4 million |
| Diluted EPS | $0.55 | $3.13 |
| Cash from operations | $163.5 million | $185.9 million |
Revenue increased 6%. Retail revenue rose 25% to $579.2 million, while wholesale revenue fell 49% to $82.9 million, largely reflecting affiliate-market conversions to direct sales. Direct revenue increased 37%, including $53.1 million from Dealer Inspire. National advertising revenue declined 8%, primarily due to lower spending by three automakers. Operating expenses increased 18%; acquisition-related costs and amortization, sales and marketing investments, activist-related costs and other items contributed to lower operating income. Net income fell sharply from 2017, which included a $102.3 million tax benefit; 2018 included $18.1 million of income tax expense.
Fourth quarter: Revenue was $164.3 million versus $156.6 million in Q4 2017; operating income was $23.9 million versus $38.8 million; net income was $9.4 million versus $151.8 million. The prior-year quarter’s net income included significant tax benefits, so the comparison is not representative of underlying operating performance.
Cash and cash equivalents were $25.5 million at year-end. Investing activities used $171.4 million, mainly reflecting the $157.2 million net cash payment for the acquisition. Financing activities provided $12.7 million, including net revolving-loan borrowings, and the company repurchased 3.8 million shares for $97.2 million during the year.
Reported long-term debt, including its current portion, was approximately $692.2 million on the balance sheet; contractual principal payments totaled $696.3 million. The company had $280.0 million drawn on its revolving facility and reported $170.0 million of additional borrowing capacity, subject to its leverage limit. Net leverage was 2.9x, and the company reported compliance with debt covenants. A $300 million interest-rate swap became effective at year-end; management estimated a 100-basis-point rate increase would add $4.0 million of annual interest expense on unhedged debt. Current assets were $153.9 million and current liabilities were $110.7 million.
Material changes and operating indicators
- Traffic increased 11% to 445.3 million visits; average monthly unique visitors rose 12% to 18.8 million. Mobile represented 67% of traffic.
- Dealer customers numbered 19,921, down 6% year over year. Direct monthly average revenue per dealer, excluding Dealer Inspire, increased 6% to $2,098.
- Approximately 3,500 dealers migrated from affiliate to direct sales; 84% of dealer customers were served through the direct sales force at year-end.
- Dealer Inspire contributed $53.1 million of revenue and an $11.3 million net loss after acquisition, including substantial incremental intangible amortization and acquisition-related costs.
- Goodwill and intangible assets totaled approximately $2.4 billion, about 92% of total assets. No impairment was recorded in 2018.
Outlook, risks and unusual items
- The company gave no quantified financial guidance in the provided filing text. Management described a shift from listings toward a broader digital-solutions marketplace and plans to invest in product, marketing and technology.
- In January 2019, Cars.com disclosed a review of strategic alternatives, including a potential sale. No transaction or timetable was assured.
- A technology-team restructuring announced in February 2019 was expected to cost $8–$10 million before tax, mostly in 2019; management expected cost efficiencies after completion.
- Management reported early signs of a U.S. auto-market downturn affecting vehicle sales and dealer and OEM spending. Other key risks include competition, dealer churn, dependence on search traffic and third-party data, technology and cybersecurity risks, regulatory uncertainty, and variable-rate debt.
- Affiliate agreements remaining after conversions were due to expire between October 2019 and June 2020. Operating lease commitments totaled $56.1 million; the company expected to recognize approximately $35–$45 million of lease assets and liabilities upon adopting the new lease standard in 2019.
- 2018 included $9.8 million of activist-settlement consulting and related costs, $13.2 million of transaction costs, $4.4 million of sales-transformation costs, and $6.8 million of incremental stock-based compensation, among other items.
- Auditors issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded Dealer Inspire from the 2018 internal-control assessment; it represented 7% of assets and 8% of revenue.
Investor verification points
- Separate organic growth from the effects of Dealer Inspire acquisition and affiliate-to-direct conversions; assess underlying dealer retention and revenue per dealer.
- Review the causes and persistence of lower operating income and cash from operations, including acquisition costs, amortization, marketing spend and interest expense.
- Verify debt capacity, leverage, 2022 maturity exposure, covenant headroom and the effectiveness of the interest-rate swap.
- Track the strategic-alternatives review, technology restructuring costs and whether expected efficiencies materialize.
- Assess sensitivity to auto-market weakness, OEM advertising reductions, dealer cancellations and the company’s substantial goodwill and intangible-asset balance.