Cars.Com Inc. quarterly report, Q1 FY2019

Cars.com Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Cars.com operates a digital automotive marketplace and dealer digital-solutions businesses, including Dealer Inspire and DealerRater. Figures below are in millions, except per-share and operating metrics.

Financial and operating results

MetricQ1 2019Q1 2018Change
Revenue$154.2$160.0Down 3.6%
Operating income (loss)$(4.1)$7.2Down $11.2
Operating margin(2.6%)4.5%Down 7.1 percentage points
Net income (loss)$(9.0)$0.9Down $10.0
Diluted earnings (loss) per share$(0.13)$0.01—
Operating cash flow$38.4$26.7Up $11.7
Cash and cash equivalents at quarter-end$28.3—Up from $25.5 at Dec. 31, 2018
  • Revenue mix: Retail revenue was $139.3 million, up 5%; wholesale revenue was $14.9 million, down 46%. Direct revenue rose 13% to $115.1 million, while national advertising fell 24% to $20.3 million.
  • Expenses and margins: Operating expenses increased 4% to $158.3 million. Cost of revenues and operations rose 42% to $25.6 million; depreciation and amortization increased 17% to $28.1 million. The filing does not provide a gross-margin figure.
  • Cash flow and investment: Investing activities used $4.0 million, mainly for property and equipment; financing activities used $31.5 million, including $20.0 million of share repurchases and $10.6 million of debt repayments. Cash increased $2.9 million during the quarter.
  • Debt and liquidity: Term Loan principal was $410.6 million and revolving borrowings were $275.0 million; $175.0 million remained available under the revolver, subject to the credit agreement’s net-leverage limits. Net leverage was 3.0x and the company reported compliance with debt covenants. Balance-sheet debt, including current and long-term portions, was $681.8 million. Interest rates were 4.3% on the Term Loan, including the swap’s impact, and 4.1% on the revolver.
  • Other balance-sheet items: Current assets were $140.9 million and current liabilities were $120.0 million. Adoption of the new lease standard resulted in $34.4 million of operating lease liabilities and $17.9 million of lease assets at quarter-end.

Material changes versus the prior period

  • Total revenue declined despite higher retail revenue. The company attributed the retail increase mainly to converting affiliate markets to direct relationships and the full-quarter contribution from Dealer Inspire. Excluding those effects, direct revenue declined $11.1 million, or 14%.
  • Wholesale revenue fell as converted affiliate markets shifted from wholesale to direct revenue. The filing reports $13.2 million of incremental direct revenue and an $11.4 million reduction in wholesale revenue from the conversions, including the unfavorable-contract amortization effect.
  • National advertising weakened as OEMs reduced or shifted spending, lowered upfront commitments and the company experienced a lower close rate on new sales.
  • Net results moved from a small profit to a loss. Management cited lower national advertising revenue, higher amortization following the Dealer Inspire acquisition and shortened useful lives of certain technology assets, and higher interest expense.
  • Traffic increased 17% to 132.5 million visits and average monthly unique visitors rose 16% to 22.4 million. Dealer customers declined 6% year over year to 19,300; direct monthly average revenue per dealer rose 9% to $2,225, with the metric newly including Dealer Inspire digital-solutions revenue.

Outlook, management commentary, risks and unusual items

  • Strategy and outlook: Management described a multi-year shift from listings toward a digital media and solutions platform, with planned investment in product and marketing. It cited recent softness in U.S. new-car sales and dealer profitability. The filing provides no quantified financial guidance.
  • Strategic alternatives: The company was reviewing a broad range of alternatives to enhance shareholder value, including a potential sale. It gave no timetable and cautioned that there was no assurance of a sale or other outcome.
  • Transformations: A technology restructuring announced in February 2019 aimed to modernize systems, migrate to cloud infrastructure, improve product delivery and achieve cost efficiencies. A sales-team reorganization was intended to support expanded digital-solutions offerings.
  • Unusual costs: Q1 2019 included $6.5 million of severance, transformation and other exit costs; $2.7 million related to a stockholder activist campaign; and $2.0 million of transaction-related costs. Comparable Q1 2018 costs were $0.5 million, $3.8 million and $10.1 million, respectively.
  • Interest-rate hedge: A swap fixed the rate at 2.96% plus the applicable margin on $300 million of Term Loan notional. Its quarter-end fair value was an unrealized loss of $7.3 million, recorded in other comprehensive loss; $0.3 million was reclassified to interest expense during the quarter.
  • Principal risks: Automotive demand and dealer economics; competition and customer cancellations; national advertising weakness; dependence on third-party data, search and technology systems; execution of the digital-solutions strategy; leverage and variable-rate debt; and uncertainty around strategic alternatives. The company said there were no material changes to the risk factors in its 2018 Form 10-K. Legal matters are described as incidental proceedings; the filing does not provide a clear quantified exposure.

Important facts for investors to verify

  • Whether dealer cancellations and weaker national advertising continue, and whether direct revenue growth persists after separating affiliate-conversion and Dealer Inspire effects.
  • Progress and costs of the technology and sales transformations, including whether expected efficiencies are realized.
  • Any developments or outcome from the strategic-alternatives review; none was assured or scheduled in the filing.
  • Debt repayment capacity, revolver availability and covenant headroom, especially given $685.6 million of reported loan principal and exposure to interest rates.
  • Share-repurchase activity and remaining authorization: $20.0 million was spent in Q1, with $82.8 million remaining after January purchases.