Cars.com Inc. — Q2 2019 Form 10-Q
Business and period: Cars.com operates a digital automotive marketplace and provides dealer websites, digital retailing, marketing and other solutions. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the same 2018 periods. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $148.2 | $168.5 | $302.4 | $328.5 |
| Operating income (loss) | $1.0 | $24.6 | ($3.1) | $31.7 |
| Net income (loss) | ($6.0) | $12.7 | ($15.1) | $13.7 |
| Diluted EPS | ($0.09) | $0.18 | ($0.22) | $0.19 |
| Operating margin | 0.7% | 14.6% | (1.0%) | 9.7% |
Revenue and profitability: Q2 revenue fell 12% year over year. Retail revenue declined 9% to $134.1 million, while wholesale revenue declined 35% to $14.1 million. National advertising revenue fell 29% in the quarter, as automakers reduced commitments and budgets and shifted spending to programmatic channels. For the first half, revenue declined 8%; operating results moved from income to loss.
Q2 operating expenses were $147.2 million, up 2%, despite lower product and technology and marketing and sales costs. General and administrative expense rose 54% to $22.0 million, including activist-campaign, transaction, severance and transformation costs. Depreciation and amortization increased 11%, partly because useful lives of certain assets were shortened in connection with the technology transformation. Q2 net loss included $8.9 million of the disclosed severance/transformation, activist-campaign and transaction-related costs; the comparable 2018 amount was $2.7 million.
Cash flow and liquidity: In the first half, operating cash flow was $50.8 million, down from $70.6 million. Capital expenditures were $9.4 million; investing cash outflow totaled $10.0 million, versus $163.4 million in 2018, which included the Dealer Inspire acquisition. Financing cash outflow was $56.7 million, including $40.0 million of share repurchases and net debt repayments. Cash declined $15.9 million to $9.5 million at June 30. Current assets were $112.8 million and current liabilities $112.5 million.
Debt: At June 30, principal debt was $405.0 million under the term loan and $275.0 million under the revolver. The company had $175.0 million available under the revolver, subject to its credit-agreement net leverage limit; its reported ratio was 3.25 to 1.0. The company stated it was in compliance with covenants. Term-loan interest was 4.3%, including the swap; revolver interest was 3.9%. The $300 million interest-rate swap had an $11.5 million unrealized loss at quarter-end.
Changes, operating developments and outlook
- Affiliate-market conversions shifted revenue from wholesale to retail presentation. Conversions involving McClatchy, tronc and the Washington Post contributed $6.4 million to Q2 direct revenue while reducing wholesale revenue by $5.4 million. In July, Cars.com agreed to convert Gannett and TEGNA markets early; it expected all dealer customers to be served directly by the fourth quarter of 2019 after the Belo conversion. The company cautioned that integration or market underperformance could impair expected returns.
- Traffic rose 16% year over year in Q2 to 130.6 million visits; average monthly unique visitors increased 13% to 21.6 million. Dealer customers declined 9% year over year to 18,891, primarily due to marketplace cancellations and affiliate customer declines. Direct monthly average revenue per dealer was $2,163, up 3% year over year, partly reflecting Dealer Inspire revenue; excluding its websites and related digital solutions, it was $2,052, down 2%.
- The February 2019 technology transformation restructured product and technology teams to emphasize innovation, system integration and cloud migration. Management said it expected cost efficiencies upon completion. The sales transformation was intended to improve customer service and support the broader digital-solutions offering. Management also reported increased investment in product and marketing.
- On August 5, 2019, after the quarter, Cars.com announced that its strategic-alternatives review had concluded without an actionable sale proposal. The board said it would continue executing the independent-company strategy while remaining open to value-creating opportunities.
- The filing provides no specific financial guidance. Management cited softness in U.S. new-car sales and reduced dealer profitability as factors affecting customer spending. The company identified competition, dealer and OEM consolidation, advertising demand, technology and traffic dependence, execution of affiliate conversions, and leverage and interest-rate exposure among its risks. It reported no material off-balance-sheet arrangements; legal proceedings were described generally, without a clear quantified exposure.
Important facts for investors to verify
- Whether national-advertising weakness and lower dealer counts continue, and whether audience growth converts into revenue.
- Results and costs of affiliate-market conversions, including integration of Gannett, TEGNA and Belo markets and the transition-service arrangements.
- Progress, remaining costs and expected savings from the technology and sales transformations; the reported period includes material one-time costs.
- Debt covenant headroom, revolver availability and cash generation relative to debt service, repurchases and investment needs.
- Whether the announced strategic-review outcome or other strategic opportunities lead to subsequent material developments.