Cars.com Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Figures are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. Cars.com operates a digital automotive marketplace and provides dealer and manufacturer marketing and technology solutions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $152.1 | $169.3 | $454.5 | $497.8 |
| Operating income (loss) | $(447.7) | $28.3 | $(450.8) | $60.1 |
| Net income (loss) | $(426.2) | $15.8 | $(441.2) | $29.5 |
| Diluted earnings (loss) per share | $(6.38) | $0.23 | $(6.58) | $0.41 |
- Revenue declined 10% in Q3 and 9% year to date. Direct revenue increased 3% and 4%, respectively, while national advertising revenue fell 28% and 27%; wholesale revenue fell 69% and 49%.
- Reported operating margins were approximately (294%) in Q3 and (99%) for the nine-month period, heavily affected by a $461.5 million noncash goodwill and intangible-asset impairment. The reported net loss included this impairment, net of tax, of approximately $431.3 million.
- Operating cash flow was $80.6 million for the nine months, versus $121.1 million a year earlier. Investing cash outflow was $16.0 million, including $15.4 million of property and equipment purchases. Financing cash outflow was $70.2 million; cash decreased $5.7 million to $19.8 million.
- At September 30, cash was $19.8 million and total debt principal was approximately $666.6 million: $396.6 million under the term loan and $270.0 million under the revolver. The company reported $180.0 million of revolver availability and a 3.4x total net leverage ratio. It said it was compliant with credit covenants.
- Total assets were $2.06 billion and stockholders’ equity was $1.14 billion. Current assets were $129.6 million and current liabilities were $121.8 million. The company reported $34.2 million of operating lease liabilities.
Changes and operating trends
- Q3 traffic rose 27% to 144.4 million visits and average monthly unique visitors increased 22% to 23.1 million. For the nine months, traffic increased 20% and unique visitors 17%.
- Dealer customers were 18,635, down 9% year over year. Direct monthly average revenue per dealer was $2,174, up 3%; excluding websites and related digital solutions, it was $2,069, down 2% year over year.
- Affiliate market conversions shifted revenue from wholesale to retail/direct presentation. All affiliates were converted to direct control effective October 1, 2019, when the Belo agreement expired. The unfavorable contracts liability was fully amortized by September 30.
- The decline in national advertising reflected reduced OEM upfront commitments and budgets and a shift toward programmatic advertising. Direct revenue growth included affiliate conversions and expansion in dealer websites and digital solutions.
- Cash flow from operations fell year over year, while debt principal declined through scheduled and voluntary repayments. The company repurchased $40.0 million of shares in the first nine months of 2019.
Outlook, commentary, and risks
- No specific consolidated revenue or earnings guidance is provided in the filing. Cars.com said it expects to begin recognizing revenue from GM dealer website customers in Q1 2020; GM’s non-exclusive program makes its website solutions available to more than 4,100 dealers. The existing website customer base was approximately 3,000.
- Management said the strategic alternatives review concluded in August 2019 without actionable sale proposals; the company would continue executing its independent-company strategy while remaining open to value-creating opportunities.
- Management described technology and sales transformations intended to improve product delivery, modernize infrastructure, support digital solutions, and generate efficiencies. It also cited softness in U.S. new-car sales and dealer profitability as pressures on customer spending.
- In October 2019, the credit agreement was amended to raise the maximum total net leverage covenant from 3.75x to 4.50x, with step-downs through the May 31, 2022 loan maturities. The amendment preserves the original pricing structure.
- The interest-rate swap fixes the rate at 2.96% plus the applicable margin on $300 million of term-loan principal. Its September 30 fair value was an unrealized loss of $11.9 million.
- Key risks include competition, dealer and OEM spending, automotive-market conditions, customer retention, technology and cybersecurity, search-platform dependence, integration of converted affiliate markets, debt restrictions and interest rates, litigation, and the possibility of further impairment. Management identified the sustained stock-price decline as the trigger for the impairment assessment; fair-value estimates depend on assumptions about future cash flows, growth, discount rates, and market conditions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing describes legal proceedings generally but does not provide a clear quantified estimate of potential exposure.
Most important facts to verify
- Whether traffic growth and the GM dealer website opportunity translate into sustainable paid customer and revenue growth.
- Whether dealer and national advertising weakness continues, and how affiliate conversions affect comparable revenue and economics.
- Whether the company can meet the amended and subsequently stepping-down leverage covenants while managing debt maturities and interest costs.
- Whether the assumptions underlying the $461.5 million impairment remain appropriate and whether further impairment is possible.
- Whether operating cash flow can recover and fund investment, debt reduction, and any further share repurchases.