Cargurus, Inc. quarterly report, Q2 FY2023

Business context and reporting period

CarGurus, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2023. It operates online automotive marketplaces and digital retail services, and holds a 51% interest in CarOffer, its digital wholesale platform. Unless stated otherwise, financial amounts below are in U.S. dollars.

Financial performance and liquidity

Q2 operating margin was 7.4%, versus 4.6% a year earlier; the improvement in margin despite lower operating income reflects a substantially different revenue mix. Common-stockholder results in 2022 were reduced by $29.6m of accretion of redeemable noncontrolling interest in Q2 and $111.6m for the first half; these non-cash charges did not recur in 2023.

For the six months, operating cash flow was $95.7m, compared with $87.6m in 2022. Investing cash flow was $(104.3)m, including $95.5m of short-term investment purchases; financing cash flow was $(101.1)m, primarily reflecting share repurchases. Cash, cash equivalents and restricted cash declined $109.5m to $374.6m. At June 30, cash and cash equivalents were $363.1m and short-term investments were $90.5m. The company had no long-term debt or revolver borrowings; available revolver capacity was $399.3m.

Material changes versus the prior comparable period

• Q2 revenue fell 53%; first-half revenue fell 50%. Marketplace revenue grew 4% in Q2 and 3% in the first half, while wholesale revenue fell 58% and 66%, respectively, and product revenue fell 86% and 83%.
• Digital Wholesale revenue declined 80% in Q2 and 78% for the first half. Segment operating losses widened to $6.3m in Q2 and $17.5m for the first half. U.S. Marketplace revenue grew, but segment operating income declined 13% in Q2 and 12% for the first half.
• CarOffer transactions declined 68% in Q2 and 71% for the first half. Management cited a soft wholesale market, prior-year operational challenges, and a deliberate focus on process improvements and operational rigor over transaction volume.
• Marketplace engagement indicators improved: Q2 average monthly unique users rose to 39.3m from 36.1m and sessions to 101.5m from 95.0m. Paying dealers were nearly flat at 31,097 versus 31,143; consolidated quarterly average revenue per subscribing dealer increased 5% to $5,116.
• Share repurchases totaled $87.1m for the first half, excluding commissions and excise tax; $144.2m of the $250m authorization remained at quarter-end.

Outlook, risks and unusual items

• The filing provides no specific revenue, earnings or other numerical guidance. Management said available liquidity, including the revolver, should fund operations for at least the next 12 months.
• Management expects approximately $69.8m of spending, net of tenant reimbursements, for the new 1001 Boylston Street headquarters; the lease term is 15 years after commencement, and the company expects to move in during 2024.
• A material weakness in CarOffer’s financial reporting controls remained unremediated at June 30, 2023. Management stated it had not caused a known material misstatement, but concluded disclosure controls were not effective. Remediation is ongoing and effectiveness must be tested over time.
• The company disclosed a possible future CarOffer acquisition obligation: in the second half of 2024, the company may have a call right, and the remaining equity holders a put right, for all remaining equity interests.
• Maximum potential payments under CarOffer dealer guarantees were $19.4m; probable losses were immaterial. The company reported no pending or threatened litigation it believed would reasonably be expected to have a material adverse effect.
• Key risks include macroeconomic and vehicle-market conditions, lower wholesale activity, dealer retention and competition, execution of CarOffer and digital retail strategies, the material control weakness, data/privacy and cybersecurity exposure, and the cost of the new lease. Management noted that higher interest rates and vehicle affordability could weigh on demand.

Important facts for investors to verify

• Whether CarOffer transaction volumes and segment losses stabilize as operational improvements proceed, and how much of the revenue decline reflects deliberate volume reduction versus market weakness.
• Progress and testing results for remediation of the CarOffer internal-control material weakness.
• Cash generation after buybacks, headquarters spending and other commitments; confirm the distinction between cash, investments and restricted cash.
• Terms, valuation and funding implications of the CarOffer 2024 put/call rights.
• Underlying marketplace growth and dealer economics, including paying-dealer retention, QARSD and advertising demand.
• Non-GAAP Adjusted EBITDA reconciliations and the recurring impact of stock-based compensation; the filing cautions that these measures exclude significant expenses.