CarGurus, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a quarterly filing; unaudited fourth-quarter results are also disclosed. Amounts are in U.S. dollars.
Business context
CarGurus operates online automotive marketplaces connecting car buyers with dealers and private sellers. It earns most revenue from dealer marketplace subscriptions, with additional advertising and other revenue. Its markets include the United States, Canada, the United Kingdom, Germany, Italy and Spain; in the U.K. it also operates PistonHeads.
Financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $588.9 million | $454.1 million | +30% |
| Marketplace subscription revenue | $526.0 million | $405.8 million | +30%; 89% of revenue |
| Advertising and other revenue | $62.9 million | $48.3 million | +30%; 11% of revenue |
| Gross profit / gross margin | $552.6 million / 94% | $429.3 million / 95% | Margin down about 1 percentage point |
| Operating income / operating margin | $34.3 million / 6% | $23.2 million / 5% | Operating income +48% |
| Net income | $42.1 million | $65.2 million | Down 35% |
| Adjusted EBITDA (non-GAAP) | $77.0 million; 13% margin | $49.7 million; 11% margin | +55%; margin expanded |
| Operating cash flow | $70.1 million | $51.7 million | Up $18.4 million |
| Cash, cash equivalents and investments | $171.6 million | $157.7 million | Up $13.9 million |
| Working capital | $145.2 million | $131.4 million | Up $13.8 million |
Sales and marketing was $393.8 million, or 66% of revenue; product, technology and development was $69.5 million; and general and administrative expense was $50.4 million. Stock-based compensation totaled $34.3 million, up from $20.8 million. CarGurus reported no long-term borrowings or material debt at year-end. Current and non-current operating lease liabilities totaled approximately $69.6 million; separately, disclosed contractual operating lease obligations were $409.3 million, including leases signed but not yet commenced.
For Q4 2019, revenue was $158.2 million versus $126.1 million in Q4 2018; operating income was $13.6 million versus $6.9 million, and net income was $13.2 million versus $12.5 million.
Material changes versus prior periods
- U.S. and international paying dealers increased 15% overall to 36,115. U.S. average annual revenue per subscribing dealer rose 19% to $17,576; consolidated AARSD was $15,757.
- U.S. revenue grew 27% to $555.0 million. International revenue doubled to $33.9 million, but the International segment’s operating loss widened to $39.6 million from $35.2 million as the company continued investing in those markets.
- Advertising revenue benefited from a 31% increase in impressions, partly offset by a 12% decline in average price per thousand impressions. Financing partnership revenue increased $5.0 million.
- Net income fell despite higher operating income, primarily because the 2018 tax benefit was unusually large: $39.7 million, including $40.8 million of excess stock-compensation tax benefits, versus a $3.4 million tax benefit in 2019.
- CarGurus acquired U.K. marketplace PistonHeads in January 2019 for approximately $19.1 million. It acquired Autolist in January 2020 for approximately $22.0 million, after the reporting period.
Outlook, risks and unusual items
- Management said existing liquidity should fund operations for at least 12 months from the filing date and expected to generate cash from operations. No specific revenue or earnings guidance was provided. The company cautioned that its revenue growth rate is expected to decline as it scales and competition increases.
- Key risks include dealer subscriptions that are generally short-term and cancellable, dependence on consumer traffic and search-engine rankings, competition for dealer marketing budgets, international expansion losses, and sensitivity to automotive demand and broader economic conditions.
- Privacy and data-protection requirements, including GDPR and the CCPA, text-messaging rules under the TCPA, and state and foreign vehicle advertising or brokering regulations could increase costs or require product changes. Cybersecurity, third-party data access and service continuity are also material risks.
- Founder Langley Steinert and other Class B holders retain concentrated voting control through ten votes per Class B share. The filing notes this may limit other shareholders’ influence.
- The company disclosed an ongoing IRS employment-tax audit covering 2016–2018. Management reported no pending or threatened litigation expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls; critical audit matters included revenue recognition, deferred-tax-asset realizability and the PistonHeads acquisition valuation.
- Operating lease commitments are substantial, including future office space. The company entered into a large Boston lease and expanded Cambridge office space; portions of the commitments had not commenced at year-end.
Important facts for investors to verify
- Whether dealer retention, subscription pricing and AARSD growth can persist, given the short contractual commitments.
- Whether international growth can reduce operating losses, and how much of reported growth reflects acquisitions.
- How operating cash generation compares with ongoing marketing, product investment, stock-based compensation and lease commitments.
- The sustainability of earnings after separating operating performance from unusually favorable tax benefits, especially in 2018.
- Progress and financial impact of the Autolist acquisition, the IRS employment-tax audit, and compliance with evolving privacy and advertising regulations.