Cars.com Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Figures are unaudited and in millions of dollars unless noted. Comparisons require care: 2018 includes Dealer Inspire and Launch Digital Marketing after their February 21 acquisition, and 2017 included pre-separation combined results.
Key financial results
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $169.3 | $159.9 | $497.8 | $469.7 |
| Operating income | $28.3 | $39.4 | $60.1 | $95.4 |
| Operating margin | 16.7% | 24.6% | 12.1% | 20.3% |
| Net income | $15.8 | $21.0 | $29.5 | $72.7 |
| Diluted EPS | $0.23 | $0.29 | $0.41 | $1.01 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $121.1 | $147.2 |
Q3 revenue grew 6%, while operating income fell 28% and net income fell 25%. For the nine months, revenue rose 6%, but operating income declined 37% and net income declined 59%. Higher operating expenses and interest expense weighed on earnings. Nine-month capital expenditures were $10.0 million; operating cash flow less capital expenditures was approximately $111.1 million, versus $119.6 million in 2017.
Q3 retail revenue increased 28% to $151.6 million, while wholesale revenue fell 57% to $17.7 million. Direct revenue rose 45%, reflecting acquired businesses and affiliate-market conversions; excluding those impacts, direct revenue declined, mainly due to fewer dealer customers. National advertising fell 12%, with OEM display spending cited as a factor. Traffic increased 12% in Q3, while average vehicle listings declined 4%.
Balance sheet, liquidity and capital allocation
- At September 30, cash was $17.8 million; current assets were $146.7 million and current liabilities $113.9 million.
- Balance-sheet debt was $702.4 million, including $24.0 million current and $678.4 million long-term. Management reported term-loan principal of $421.9 million at 3.9% and revolving borrowings of $285.0 million at 3.8%. The company had $165.0 million of additional revolver capacity and a net leverage ratio of 2.9x; it reported compliance with debt covenants.
- During the first nine months, the company paid $19.5 million of interest, repurchased and retired 3.0 million shares for $77.2 million, and ended with 68.9 million shares issued and outstanding. The board-authorized repurchase program totals up to $200 million.
- Cash declined $2.8 million during the nine months. Investing cash outflow was $167.1 million, principally reflecting the $157.2 million net acquisition payment; financing cash inflow was $43.3 million.
Material changes, outlook and risks
- Acquisition: DI and LDM were acquired for total consideration of $160.8 million, including $2.2 million estimated contingent consideration. The company recorded $96.2 million of goodwill. Acquired businesses contributed $36.0 million of revenue and a $10.1 million net loss for the post-acquisition period through September 30. Acquisition costs, acquired-award settlements and incremental amortization affected reported results.
- Affiliate conversions: McClatchy, tronc and Washington Post markets moved to direct sales, shifting revenue classification from wholesale to retail. The company said 84% of dealer customers were served through its direct sales force after completing the remaining McClatchy conversions on October 1, 2018. Conversion-related support fees increased affiliate revenue-share expense.
- Management commentary: Management cited the beginning of a cyclical U.S. auto-market downturn affecting new-car sales and OEM and dealer spending. It also anticipated near-term margin pressure from public-company infrastructure and costs, and said it would focus on efficiency, growth and free cash flow. The filing provides no quantified financial guidance.
- Unusual costs: General and administrative expense included $7.8 million of activist-settlement consulting and other costs for the nine months; Q3 included $2.9 million. The filing also cites acquisition costs, higher public-company costs, and increased interest expense.
- Other risks and contingencies: The company described ordinary-course legal and administrative proceedings but did not give a clear quantified exposure. Key disclosed risks include automotive-market cyclicality, competition, dealer customer retention, advertising demand, technology and cybersecurity, acquisitions, debt restrictions and variable-rate interest exposure. Management reported no material change in risk factors from the 2017 Form 10-K and no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much of reported revenue growth and direct-channel growth is organic, versus acquisition contributions and affiliate conversions?
- Whether dealer-customer declines, lower vehicle listings and weaker OEM advertising spending persist, and whether traffic growth converts into revenue.
- Whether acquired businesses improve profitability and cash generation, including the effects of amortization, contingent consideration and performance-based awards.
- Debt repayment capacity, variable-rate exposure, covenant headroom and remaining share-repurchase spending, given cash of $17.8 million and debt of $702.4 million.
- Whether operating margins recover as activist, acquisition and public-company costs change, and how the auto-market downturn affects the outlook.