Cars.com Inc. — Q1 2020 Form 10-Q
Business and period: Cars.com operates a digital automotive marketplace and provides dealer and OEM digital solutions. This unaudited filing covers the three months ended March 31, 2020; comparisons are with Q1 2019. Results began reflecting COVID-19 effects in the second half of March.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $148.1 million | $154.2 million; down 4% |
| Operating loss | $905.1 million | $4.1 million loss |
| Net loss / diluted loss per share | $787.4 million / $11.76 | $9.0 million / $0.13 |
| Operating cash flow | $28.9 million | $38.4 million |
| Cash and equivalents at quarter-end | $187.3 million | $13.5 million at December 31, 2019 |
| Debt principal outstanding | $799.7 million | — |
Revenue mix and operating indicators: Retail revenue was $148.1 million, up 6%; wholesale revenue was zero versus $14.9 million a year earlier after all affiliate markets converted to direct relationships by October 2019. Direct revenue rose 9% to $125.4 million, including $17.4 million from those conversions. National advertising declined 4% to $19.4 million. Traffic increased 20% and average monthly unique visitors increased 11%; dealer customers were down 2% year over year to 18,938. Direct monthly average revenue per dealer was $2,092, down 6% year over year. The filing does not provide a single gross-margin figure; cost of revenue and operations was 17.6% of revenue, and marketing and sales was 37.1%.
Cash, debt and liquidity: Operating cash flow decreased by $9.5 million year over year. Investing used $5.8 million, mainly for property and equipment. Financing provided $150.7 million, including a $165.0 million revolver draw, partly offset by $13.4 million in debt payments. At March 31, the company had $420.0 million drawn on its revolver, $30.0 million of revolver capacity remaining, and a 4.1x total net leverage ratio against a 4.50x maximum covenant at that point in the agreement. The term loan rate was 4.3% and revolver rate 2.7%. The company reported covenant compliance at quarter-end. Cash was approximately $190.0 million on April 30.
Material changes and unusual items
- COVID-19 prompted interim impairment charges of $505.9 million for goodwill and $400.0 million for the Cars.com trade name, totaling $905.9 million. These charges drove the reported operating and net losses and were noncash.
- The company also recorded a $9.4 million impairment of a non-marketable investment. It established a full valuation allowance against its net deferred tax assets; the reported income tax benefit was $134.7 million.
- Revenue comparisons were affected by the completed affiliate conversions: retail revenue replaced wholesale revenue. Gross affiliate revenue-share expense was $6.4 million versus $8.3 million in Q1 2019, when $5.8 million of unfavorable-contract amortization reduced the reported expense.
- Cash increased substantially after the revolver draw; this was borrowing, not operating cash generation. Debt fair value was approximately $658.7 million versus $799.7 million carrying value.
Outlook, management commentary and risks
Management expected COVID-19 and dealer relief measures to weigh more heavily on Q2 and later results, cash flows and financial position, with impact dependent on the pandemic’s duration and severity. Dealer invoice credits were 50% for April and 30% for May and June. Management had no specific full-year financial guidance in the provided filing; it noted that, before the pandemic, it expected a robust second half and revenue growth exiting the year, but said that expectation was no longer assured.
Cost actions included furloughs, salary reductions, hiring and temporary-labor freezes, lower variable marketing and reduced discretionary spending. On April 29, the company announced a permanent reduction of approximately 170 employees, with estimated pretax costs of $4.0–$4.75 million expected in Q2. The technology transformation was deferred. Management said it was monitoring liquidity and debt covenants and was in discussions with lenders; future covenant compliance, access to financing, dealer cancellations and advertising cuts were material uncertainties. The company stated it did not expect its liquidity to prevent meeting business needs for the foreseeable future, while acknowledging substantial dependence on revenue, cost controls, collections and pandemic conditions.
Other risks include automotive-market weakness, competition, dealer and OEM concentration, reliance on digital traffic and third-party providers, technology and cybersecurity risks, and variable-rate debt. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether dealer credits, customer cancellations and reduced advertising materially affected Q2 revenue, ARPD and dealer counts.
- Cash burn, remaining revolver availability and headroom under the leverage covenant as operating conditions evolve.
- Assumptions underlying the $905.9 million impairment and whether further impairment is required.
- Timing and realized savings from workforce reductions, expense initiatives and the deferred technology transformation.
- Progress of GM dealer website launches and associated revenue expected to begin in the second half of 2020.