Cargurus, Inc. — Q3 2022 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. Unaudited results are compared with the corresponding 2021 periods. CarGurus operates an automotive listings marketplace and digital retail offerings, including CarOffer, in which it owns 51%.
Financial performance
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $426.5 | $222.9 | $1,368.3 | $612.0 |
| Gross profit / gross margin | $150.8 / 35% | $162.9 / 73% | $520.5 / 38% | $477.6 / 78% |
| Operating income / margin | $28.7 / 7% | $40.1 / 18% | $78.9 / 6% | $104.3 / 17% |
| Consolidated net income | $18.8 | $29.3 | $55.7 | $76.2 |
| Adjusted EBITDA (non-GAAP) | $38.8 | $64.9 | $150.8 | $181.9 |
| Operating cash flow | Not separately stated | Not separately stated | $160.8 | $135.1 |
- Revenue mix, Q3: Marketplace revenue was $165.3 million (+3% year over year); wholesale was $47.0 million (+4%); product revenue was $214.1 million versus $17.8 million. Management attributed the product increase mainly to expansion of CarGurus Instant Max Cash Offer (IMCO).
- Margins and earnings: Q3 gross profit fell 7% despite revenue growth, as vehicle-related product costs rose sharply alongside IMCO volume. Sales and marketing expense increased 25% to $83.3 million. Q3 consolidated net income declined 36%; Adjusted EBITDA declined 40%.
- Cash and liquidity: Cash and cash equivalents were $404.4 million at September 30, 2022, versus $231.9 million at year-end 2021; restricted cash was an additional $22.9 million. Nine-month operating cash flow was $160.8 million. Investing activities provided $77.6 million, principally from $90.0 million of certificate-of-deposit maturities; financing activities used $57.7 million.
- Debt: No long-term debt or revolver borrowings were outstanding. A new secured revolving facility provides up to $400 million, matures September 26, 2027, and was covenant-compliant at quarter-end. The facility is secured by substantially all of specified company assets and includes financial covenants.
- Other balance-sheet items: Current assets were $603.8 million and current liabilities $148.9 million. Redeemable noncontrolling interest was $172.6 million.
Material changes versus the prior-year period
- Q3 revenue increased 91%, principally reflecting IMCO product revenue. Product revenue represented 50% of Q3 revenue, compared with 8% a year earlier; marketplace revenue fell from 72% to 39% of the total mix.
- The reported revenue surge was accompanied by a pronounced shift in mix and lower gross margin: product cost of revenue rose to $218.9 million from $19.4 million. CarGurus reports vehicle sale proceeds as product revenue, so this high-volume activity has substantially different economics from marketplace subscriptions.
- Marketplace revenue growth was modest. Management cited a 4% increase in quarterly average revenue per subscribing dealer (QARSD) to $4,889; average monthly unique users were approximately flat at 36.1 million, while paying dealers increased to 31,286 from 30,754.
- Q3 stock-based compensation included a $20.9 million benefit for CarOffer incentive and subject unit awards, reflecting a decrease in their fair value. This materially affected reported expenses and should be considered when assessing underlying performance.
- The company changed to one reportable segment in Q1 2022, reflecting how the chief operating decision maker now reviews the business.
Outlook, risks, contingencies and unusual items
- Outlook and liquidity: The filing provides no numerical revenue or earnings guidance. Management said cash, operating cash flow and access to the revolver should be sufficient to fund operations for at least the next 12 months.
- Macroeconomic and industry exposure: Risks include vehicle inventory and supply constraints, semiconductor shortages, COVID-19 effects, the war in Ukraine and related sanctions, rising interest rates, weaker consumer confidence, and reduced consumer access to auto financing. These conditions could affect marketplace traffic, dealer spending and CarOffer/IMCO transaction volumes.
- IMCO and guarantees: IMCO expansion increased the reserve for returns and cancellations by $11.5 million from year-end, primarily due to higher IMCO sales volume. Maximum potential future payments under dealer guarantees were $86.8 million; none were considered probable at quarter-end. Q3 net losses from exercised guarantees were $2.4 million.
- CarOffer ownership rights: CarGurus decided not to exercise its right to acquire up to an additional 25% of CarOffer. Valuation of related liability-classified awards is based on the 2024 call and put rights.
- Controls: Management concluded disclosure controls were not effective due to a material weakness at CarOffer involving IT access and change-management controls and review of journal entries and reconciliations. The weakness had not caused a material misstatement, and a remediation plan was underway; management had not yet deemed it remediated.
- Leadership: CFO Scot Fredo resigned effective October 3, 2022. Principal Accounting Officer Yann Gellot announced his resignation effective December 2, 2022; CEO Jason Trevisan was designated to serve as Principal Accounting Officer upon that departure until a successor is appointed.
- Legal matters: The company reported no pending or threatened litigation that it believed would reasonably be expected to have a material adverse effect, while noting that legal outcomes remain uncertain.
Most important facts for investors to verify
- How much of reported revenue growth and future cash generation comes from IMCO and other vehicle-sale activity, and what are the associated margins, returns and inventory risks?
- Whether marketplace subscription revenue, QARSD, paying dealers and consumer engagement can sustain growth independently of vehicle transaction volumes.
- How the CarOffer control weakness is remediated and whether future filings report effective controls.
- The valuation and potential dilution or cash consequences of CarOffer’s remaining ownership rights and redeemable noncontrolling interest.
- The terms and covenant headroom of the secured $400 million revolver, and the company’s ability to maintain liquidity if operating conditions weaken.
- Interpret Q3 EPS cautiously: the $86.6 million accretion of redeemable noncontrolling interest affected the basic common-stockholder numerator and produced reported basic EPS of $0.90 versus diluted EPS of $0.14. Consolidated net income was $18.8 million; the accretion is a valuation/accounting item, not operating income.