Cargurus, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; filed November 7, 2018. CarGurus operates online automotive marketplaces in the U.S., Canada, the U.K., Germany, Italy, and Spain, earning most revenue from dealer subscriptions.
Financial performance
Amounts are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding 2017 period.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $119.0 | $83.0 | $328.1 | $226.3 |
| Gross profit / margin | $112.6 / 94.6% | $78.3 / 94.3% | $310.1 / 94.5% | $213.9 / 94.5% |
| Operating income / margin | $3.6 / 3.1% | $2.9 / 3.5% | $9.0 / 2.7% | $15.2 / 6.7% |
| Net income / diluted EPS | $12.1 / $0.11 | $2.4 / $0.02 | $47.1 / $0.42 | $10.9 / $0.10 |
| Adjusted EBITDA / margin | $10.5 / 8.8% | $4.0 / 4.8% | $27.7 / 8.4% | $18.1 / 8.0% |
| Operating cash flow | — | $34.6 | $18.5 |
- Q3 revenue rose 43%; marketplace subscriptions grew 43% and advertising and other revenue grew 46%. Subscription revenue remained 89% of total revenue.
- Growth reflected 15% more paying dealers (30,593) and 18% higher consolidated average annual revenue per subscribing dealer ($13,077). Average monthly unique users increased to 41.5 million from 28.6 million.
- Q3 operating expenses rose 44% to $109.0 million. Sales and marketing increased 33%, product, technology and development 120%, and general and administrative 112%. For the first nine months, operating expenses rose 52%, outpacing 45% revenue growth.
- U.S. revenue grew 43% in Q3 and 44% for nine months. International revenue grew 71% and 89%, respectively, but the international operating loss widened to $8.8 million in Q3 and $24.7 million for nine months.
- Q3 net income and nine-month net income benefited substantially from income tax benefits: $7.9 million and $36.5 million, respectively. The nine-month benefit principally reflected tax deductions from stock-based awards and R&D credits; reported earnings therefore are not a straightforward indication of operating performance.
Financial position and liquidity
- At September 30, cash and cash equivalents were $77.6 million, short-term investments were $70.0 million, and restricted cash was $3.7 million. Cash, cash equivalents, and investments totaled $147.6 million.
- Total assets were $234.0 million; total liabilities were $63.6 million. The company reported no debt or material capital lease obligations.
- Nine-month cash flow: $34.6 million provided by operations, $22.9 million used in investing, and $19.9 million used in financing. Financing outflow included $21.9 million of employee tax withholding on net share settlements.
- Operating cash flow included working-capital movements and a large noncash deferred-tax benefit. Management said existing liquidity and expected operating cash generation should fund operations for at least 12 months from the filing date.
Outlook, commentary, and risks
- No specific revenue, earnings, or cash-flow guidance is provided. Management expects continued investment in marketing, product development, and international expansion; it also expects sales and marketing and product-development costs to rise as the business grows.
- CarGurus expects international expansion to continue requiring investment; management attributed the larger international operating loss to continued investment and entry into new markets.
- A new Cambridge office lease signed in June 2018 covers 48,393 square feet through 2033, with annual fixed rent of approximately $3.3 million beginning August 2018 and annual increases thereafter.
- The company expected to cease being an emerging growth company on December 31, 2018, triggering additional public-company reporting requirements, including auditor attestation on internal control over financial reporting.
- Key risks include dealer subscription cancellations and limited contract commitments, competition, reliance on search engines and third-party data and hosting providers, international expansion, consumer and automotive-market conditions, privacy and cybersecurity, and evolving regulation. Management reported disclosure controls were effective and no material change in internal control during the quarter.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. A previously disclosed Canadian copyright case ended with a CAD $305,064 statutory-damages award; punitive damages and an injunction were denied, and neither party appealed.
Important facts for investors to verify
- Whether dealer growth and higher subscription revenue per dealer continue, and whether dealer retention supports recurring revenue.
- Whether marketing and other operating-cost growth can be managed without further pressure on operating margins.
- How international expansion affects losses, and what pace of investment management intends to maintain.
- The sustainability of reported net income and cash generation apart from the unusually large stock-based-compensation-related tax benefits and working-capital effects.
- The effects of the long-term office lease and the transition to auditor-attested internal-control reporting.