Cargurus, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are against Q1 2021. CarGurus operates online automotive marketplaces, digital retail offerings and, through its 51%-owned CarOffer business, a wholesale vehicle platform. Beginning in Q1 2022, the company reported one operating segment rather than separate U.S. and International segments.
Financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $430.6 million | $171.4 million |
| Gross profit / gross margin | $181.9 million / 42% | $147.3 million / 86% |
| Operating income / margin | $26.7 million / 6% | $25.8 million / 15% |
| Consolidated net income | $18.8 million | $19.6 million |
| Net income attributable to CarGurus | $19.9 million | $22.4 million |
| Net income (loss) attributable to common stockholders | $(62.1) million; $(0.53) per share | $22.4 million; $0.19 per share |
| Adjusted EBITDA (non-GAAP) | $58.0 million | $50.6 million |
| Cash from operating activities | $93.1 million | $43.9 million |
Revenue increased 151%. Marketplace revenue rose 5% to $163.3 million; wholesale revenue rose to $91.0 million from $13.8 million; and product revenue rose to $176.3 million from $1.8 million. Wholesale and product growth reflected CarOffer activity, including the launch of CarGurus Instant Max Cash Offer (IMCO). Product revenue largely reflects vehicle sale proceeds, with corresponding vehicle costs: product cost of revenue was $178.3 million, slightly exceeding product revenue. As a result, the revenue mix shift substantially reduced reported gross margin.
Operating expenses were $155.2 million, up from $121.5 million, including higher sales and marketing, technology and development, and general and administrative costs. Stock-based compensation expense rose to $27.8 million from $15.4 million, notably reflecting revaluation and continued vesting of CarOffer liability-classified awards. The common-stockholder loss resulted primarily from an $82.0 million accretion of redeemable noncontrolling interest to redemption value; it is distinct from consolidated net income.
Cash, liquidity and debt
At March 31, 2022, cash and cash equivalents were $315.0 million and short-term certificates of deposit were $60.0 million, for $375.0 million of cash, cash equivalents and investments. Total cash, cash equivalents and restricted cash was $330.5 million. Current assets were $572.7 million and current liabilities $148.9 million. The company reported no long-term borrowings; operating lease liabilities totaled $66.9 million, including $12.5 million current.
Operating cash flow was $93.1 million, supported in part by a $40.0 million decrease in accounts receivable and a $30.1 million increase in accrued expenses, taxes and other liabilities. Investing activities provided $26.3 million, primarily from $30.0 million of certificate-of-deposit maturities, offset by website development and equipment spending. Financing activities used $36.9 million, including payments to a third-party payment processor and tax distributions to redeemable noncontrolling interest holders. Management stated existing liquidity should fund operations for at least the next 12 months.
Changes, outlook and risks
- Marketplace QARSD increased 6% to $4,806, while average monthly unique users declined to 37.9 million from 44.2 million and paying dealers declined to 30,867 from 31,213. Average monthly sessions also fell, to 100.7 million from 108.9 million.
- No specific numerical revenue or earnings guidance was provided. Management expects investment in product development and stated that general and administrative costs may increase as the business scales.
- CarGurus could exercise a 2022 call right, at its discretion, to acquire up to 25% of CarOffer’s fully diluted capitalization. The stated valuation formula is seven times CarOffer’s trailing-twelve-month gross profit as of June 30, 2022; consideration could be cash and/or Class A shares, and a cash payment could reduce liquidity.
- Management highlighted automotive inventory constraints, the semiconductor shortage, COVID-19 effects and other macroeconomic issues. The filing also cites the war in Ukraine and related sanctions among industry risks. Lower vehicle availability or dealer pressure could affect platform traffic, dealer spending and CarOffer transaction volumes.
- Tax and unusual items include the new requirement to capitalize and amortize certain U.S. research and development costs, contributing to higher accrued income taxes, and an effective tax rate of 27.9%. CarOffer guarantee income was $3.3 million; maximum potential future payments under its guarantees were $162.1 million, with none considered probable and no contingent loss liability recorded.
- The company reported no pending or threatened litigation believed likely to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of the 151% revenue growth and reported cash generation is attributable to CarOffer/IMCO, vehicle sale proceeds and working-capital timing, rather than recurring marketplace growth.
- Whether CarOffer and IMCO can sustain transaction volumes and economics, given product cost of revenue exceeded product revenue in the quarter.
- The valuation, funding method and potential dilution or cash impact if CarGurus exercises the CarOffer call right.
- Trends in consumer traffic and dealer counts, and whether higher QARSD can offset declines in users, sessions and paying dealers.
- How inventory shortages, vehicle-price volatility, tax-law changes and the $82.0 million redemption-value accretion affect future results and common-stockholder economics.