CarGurus, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparative periods ended June 30, 2018. Amounts below are in U.S. dollars unless noted.
Business context
CarGurus operates an online automotive marketplace connecting car buyers and sellers, primarily earning revenue from dealer subscriptions, with additional advertising and other revenue. It operates in the United States and Canada, the United Kingdom, Germany, Italy, and Spain. In January 2019, it acquired UK automotive website PistonHeads.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $145.0 million | $110.3 million | $280.3 million | $208.9 million |
| Gross profit / margin | $136.4 million / 94% | $104.3 million / 95% | $264.0 million / 94% | $197.3 million / 94% |
| Operating income / margin | $3.5 million / 2% | $4.0 million / 4% | $11.0 million / 4% | $10.4 million / 5% |
| Net income | $6.0 million | $33.3 million | $18.6 million | $38.8 million |
| Adjusted EBITDA / margin | $14.4 million / 9.9% | $10.8 million / 9.8% | $31.2 million / 11.1% | $22.3 million / 10.7% |
| Operating cash flow | Not separately presented for Q2 | $25.7 million | $23.8 million |
Adjusted EBITDA is a non-GAAP measure; the company cautions it excludes recurring stock-based compensation and other costs and should be considered alongside GAAP results.
At June 30, cash and cash equivalents were $27.8 million and short-term certificates of deposit were $119.3 million, totaling $147.2 million. Current assets were $188.8 million and current liabilities were $70.4 million. The company reported no long-term borrowings. Operating lease liabilities totaled approximately $59.2 million, including current and non-current portions; these are lease obligations, not borrowings.
Changes versus the prior comparable period
- Q2 revenue rose 31%; subscription revenue increased 32% to $129.1 million and advertising and other revenue increased 27% to $15.9 million. Subscription revenue remained 89% of total revenue.
- Growth reflected more paying dealers and higher U.S. revenue per subscribing dealer. Paying dealers increased 14% to 34,267; U.S. AARSD increased 23% to $16,188. U.S. revenue grew 29%, while international revenue grew 104%, partly reflecting PistonHeads.
- Operating expenses grew faster than gross profit in Q2: sales and marketing increased 30%, product, technology and development 46%, and general and administrative 31%. Operating income consequently declined 10% despite higher revenue.
- Net income fell sharply year over year primarily because the prior-year quarter included a much larger income-tax benefit: $28.7 million in Q2 2018 versus $1.6 million in Q2 2019. The six-month comparison is similarly affected by tax benefits of $27.4 million in 2018 versus $5.1 million in 2019.
- International operations remained loss-making: Q2 operating loss was $10.6 million versus $8.0 million a year earlier; the six-month loss was $20.5 million versus $15.5 million. Management attributed this to continued investment and expansion.
- Cash and investments decreased from $157.7 million at December 31, 2018 to $147.2 million at June 30, 2019. Six-month operating cash flow increased, while investing cash use included $19.1 million for PistonHeads and increased property and equipment spending.
Outlook, commentary, risks and unusual items
- Management said it expects to generate cash from operations for the foreseeable future and believes existing liquidity is sufficient to fund operations for at least 12 months from the filing date. The filing does not provide specific revenue or earnings guidance.
- The PistonHeads acquisition cost approximately $19.1 million and was intended to expand the UK consumer audience. The preliminary allocation included $15.4 million of goodwill and $4.3 million of net intangible assets at June 30. Acquisition-related costs incurred through that date were $0.7 million.
- Adoption of lease accounting in January 2019 added right-of-use assets and lease liabilities to the balance sheet. The company reported approximately $59.2 million of lease liabilities at June 30 and future undiscounted lease payments of $81.7 million.
- Key disclosed risks include dealer cancellations due to generally short subscription commitments, competition, reliance on search engines and third-party data and hosting providers, international expansion losses and currency exposure, privacy and cybersecurity risks, and potential disruption from a planned primary data-center migration. The filing also discusses automotive-market and macroeconomic risks.
- The IRS had commenced an audit of the company’s 2016 federal income taxes and a federal employment-tax audit covering 2016–2018. Management said it was not aware of pending or threatened litigation expected to have a material adverse effect.
- Management reported disclosure controls as effective at June 30, 2019, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether dealer growth and higher U.S. subscription revenue per dealer continue, given the generally short contract commitments and dependence on dealer retention.
- Whether revenue growth translates into improved operating leverage as marketing, technology, staffing, and international investment costs rise.
- How international losses develop, and what portion of reported international growth reflects PistonHeads versus underlying marketplace performance.
- The durability of cash generation and liquidity after acquisition spending, capital expenditures, lease commitments, and employee equity-related cash payments.
- Any material developments in the IRS audits, data-center migration, privacy or cybersecurity matters, or other contingencies disclosed in the filing.