Cargurus, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Dollar amounts below are in millions unless otherwise noted. CarGurus operates online automotive marketplaces, earning primarily dealer subscription revenue, plus advertising and other revenue.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $94.7 | $145.0 | $252.4 | $280.3 |
| Gross profit / margin | $84.9 / 89.6% | $136.4 / 94.1% | $230.9 / 91.5% | $264.0 / 94.2% |
| Operating income / margin | $8.7 / 9.2% | $3.5 / 2.4% | $20.7 / 8.2% | $11.0 / 3.9% |
| Net income | $7.1 | $6.0 | $19.8 | $18.6 |
| Adjusted EBITDA / margin | $27.5 / 29.1% | $14.5 / 10.0% | $55.2 / 21.8% | $31.2 / 11.1% |
| Diluted EPS | $0.06 | $0.05 | $0.17 | $0.16 |
Adjusted EBITDA is a non-GAAP measure; the company excludes, among other items, stock compensation and restructuring costs. It should be considered alongside GAAP results.
Liquidity, cash flow and balance sheet
- At June 30, cash and cash equivalents were $133.2 million and short-term certificates of deposit were $43.0 million, together $176.2 million. Cash, cash equivalents and restricted cash totaled $144.2 million.
- Current assets were $216.1 million and current liabilities $43.1 million. Total liabilities were $111.6 million, including $76.6 million of operating lease liabilities. The company reported no long-term borrowings.
- For the six months, operating cash flow was $34.9 million (up from $25.7 million); investing cash flow was positive $43.4 million, largely reflecting $68.7 million of certificate-of-deposit maturities and offset by $21.0 million paid for the Autolist acquisition. Financing cash outflow was $4.9 million.
- Management said existing liquidity should fund operations for at least 12 months from the filing date, while noting that future needs depend on pandemic effects and operating performance.
Material changes and business developments
- Q2 revenue fell 35% year over year, mainly because marketplace subscription revenue declined 38% to $80.0 million. Advertising and other revenue fell 7% to $14.8 million. For the first half, revenue declined 10%, with subscription revenue down 11% and advertising and other revenue up 1%.
- U.S. revenue declined 34% in Q2 to $89.7 million; International revenue declined 38% to $5.0 million. International operating losses narrowed, but remained $6.6 million in Q2 and $14.9 million for the half year.
- Q2 operating income rose despite lower revenue, as sales and marketing expense fell 62%, primarily due to a $60.6 million reduction in advertising costs. Product, technology and development expense rose 26%; general and administrative expense rose 13%. Gross margin compressed as cost of revenue increased.
- Average monthly unique users were 41.8 million, down from 46.6 million; average monthly sessions were 103.3 million, down from 125.5 million. The company reported 30,258 paying dealers at quarter-end and Q2 consolidated QARSD of $2,517; comparable 2019 values were unavailable following a reporting-system change.
- In January, CarGurus acquired Autolist for $21.0 million net of cash acquired. It recorded $12.4 million of goodwill and $7.6 million of identifiable intangible assets; management said the acquisition’s financial impact was not material.
Outlook, risks and unusual items
- COVID-19 materially affected dealer subscriptions, advertising demand and consumer activity. CarGurus provided subscription fee reductions for April through June, returned to normal contractual billings in all markets for July, and said further revenue effects remained difficult to predict. The filing anticipates further revenue declines in 2020 and describes results beyond 2020 as uncertain; it provides no numerical financial guidance.
- The April expense-reduction plan cut approximately 13% of the workforce, reduced discretionary and marketing spending, halted new-market expansion and closed Germany, Italy and Spain marketplace operations. Q2 restructuring included $3.2 million of severance and $1.0 million of asset and contract-cost write-offs.
- Management cited risks from dealer cancellations and delinquencies, used-car inventory constraints and auction prices, possible renewed restrictions, advertising reductions, and uncertainty in the automotive economy. Dealer contracts are generally short-term and often cancellable after the committed term.
- The allowance for doubtful accounts increased to $0.7 million from $0.2 million at year-end; first-half bad-debt expense was $1.7 million. CarGurus reported no material pending or threatened litigation and no goodwill or long-lived-asset impairment as of June 30.
- The CARES Act tax carryback claim is expected to reduce gross NOLs by approximately $18.7 million and increase deferred federal R&D credits by approximately $2.6 million. The company disclosed open IRS audits, including a 2017 corporate income-tax audit begun in July 2020.
Important facts for investors to verify
- Whether July’s return to normal billing translated into subscription retention, dealer additions and revenue recovery.
- Whether consumer traffic, sessions and dealer inventory recovered, and whether dealer delinquencies or cancellations increased.
- How much of the improved operating income and Adjusted EBITDA reflects sustainable cost changes versus temporary marketing cuts and excluded items.
- Progress integrating Autolist and the financial consequences of exiting Germany, Italy and Spain.
- Cash-flow sustainability, including working-capital movements and the effect of lease commitments, and any developments in tax audits or the CARES Act claim.