Cargurus, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise noted.
Business context
CarGurus operates online automotive marketplaces and digital retail and wholesale services. It reports U.S. Marketplace and Digital Wholesale segments. Marketplace revenue is primarily dealer subscriptions and advertising; Digital Wholesale revenue includes dealer-to-dealer transactions and vehicle sales through Instant Max Cash Offer (IMCO).
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $219.4m | $426.5m | $691.1m | $1,368.3m |
| Gross profit / margin | $164.3m / 74.9% | $150.8m / 35.4% | $483.4m / 69.9% | $520.5m / 38.0% |
| Operating income | $23.1m | $28.7m | $54.9m | $78.9m |
| Consolidated net income | $19.0m | $18.8m | $44.7m | $55.7m |
| Net income attributable to CarGurus | $22.3m | $20.4m | $54.8m | $59.6m |
| Adjusted EBITDA (non-GAAP) | $49.1m | $38.8m | $134.2m | $150.8m |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $122.0m | $160.8m |
Q3 diluted EPS was $0.17, versus $0.14; nine-month diluted EPS was $0.39, versus $0.28. Prior-year EPS comparisons were affected by accretion of redeemable noncontrolling interest: $86.6m in Q3 2022 and $25.1m in the first nine months of 2022. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
Material changes and operating trends
- Revenue fell 49% in both Q3 and the first nine months. The main driver was lower Digital Wholesale activity, not a comparable decline across all business lines: marketplace revenue rose 8% in Q3 and 5% year to date.
- Q3 wholesale revenue declined 54% and product revenue declined 91%. Management attributed lower wholesale and IMCO volume to a purposeful slowdown emphasizing operational rigor and process improvements, as well as less favorable market conditions and lower average selling prices. Transactions fell 66% in Q3 and 70% year to date.
- Marketplace growth reflected higher subscription revenue and dealer monetization. Consolidated quarterly average revenue per subscribing dealer rose to $5,317 from $4,889; paying dealers were 31,191 versus 31,286.
- Digital Wholesale reported an operating loss of $11.7m in Q3, compared with $3.6m a year earlier, and a $29.2m loss for the first nine months, compared with $8.3m. U.S. Marketplace operating income was $33.3m in Q3, down from $34.7m.
- Gross margin increased mainly because lower vehicle-sale volume reduced product revenue and its associated cost of revenue, changing the revenue mix toward the higher-margin marketplace business. Q3 operating expenses rose to $141.2m from $122.1m; general and administrative expense was particularly affected by stock-based compensation comparisons with the prior-year period.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $355.3m and short-term investments were $91.8m, compared with $469.5m of cash and no short-term investments at December 31, 2022. Cash, cash equivalents, and restricted cash totaled $367.0m.
- Nine-month operating cash flow was $122.0m, down from $160.8m. Investing activities used $115.0m, including $96.7m of short-term investment purchases, $11.8m of website development capitalization, and $9.0m of property and equipment purchases. Financing activities used $123.7m, including $107.4m for share repurchases.
- There was no debt outstanding. The $400m revolving credit facility had $399.3m of available capacity after letters of credit; the company reported compliance with its covenants. Management said existing liquidity and revolver access should fund operations for at least 12 months from the filing date.
- Operating lease liabilities totaled $205.3m, including $192.1m non-current. The new Boston headquarters lease has estimated spending of approximately $69.8m, net of tenant reimbursements; a $64.7m contract commitment was signed after quarter-end.
Outlook, risks, and unusual items
- The filing provides no numerical revenue, earnings, or margin guidance. Management cited macroeconomic and automotive-industry conditions, including higher interest rates, vehicle affordability, consumer confidence, and wholesale inventory and pricing, as factors that can affect results.
- On November 6, 2023, CarGurus agreed to acquire the remaining CarOffer interests for $75m in cash, subject to adjustments and closing conditions; closing was expected in Q4 2023. The company said the transaction could result in charges, some potentially material.
- On November 7, the board authorized a new share repurchase program of up to $250m for 2024. Under the prior program, the company repurchased 6.26m shares for $104.2m during the first nine months of 2023; $127.1m remained authorized at September 30.
- A material weakness in CarOffer’s financial reporting controls remained unremediated. Management concluded disclosure controls were ineffective, citing IT access and change-management controls and financial close-process deficiencies. The filing reports no known material misstatement, and remediation efforts were ongoing.
- CarOffer guarantee exposure had a maximum potential payment of $13.9m at quarter-end; probable losses were described as immaterial. The company reported no pending or threatened litigation expected to have a material adverse effect.
Important facts for investors to verify
- Whether CarOffer transaction volume and losses improve as operational changes continue, and how the planned buyout affects reported earnings, cash, and noncontrolling interests.
- Whether marketplace revenue and dealer monetization can continue to grow amid economic and automotive-market pressures.
- Progress and independent testing of the CarOffer control remediation plan, including whether the material weakness is fully resolved.
- Cash generation and liquidity after the headquarters buildout, share repurchases, and CarOffer acquisition; also monitor lease commitments and revolver covenant compliance.
- The sustainability of reported margin and adjusted EBITDA trends given the sharp shift in revenue mix and the non-GAAP exclusions.