Cargurus, Inc. — FY 2018 Form 10-K and Q4 results
Business context and reporting period. CarGurus operates an online automotive marketplace connecting car buyers and sellers, with dealer subscriptions as its primary revenue source. This 10-K covers the fiscal year ended December 31, 2018; quarterly figures below relate to the three months ended December 31, 2018. The company operated in the United States, Canada, the United Kingdom, Germany, Italy, and Spain.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $454.1 million | $316.9 million |
| Marketplace subscription revenue | $405.8 million; 89% of revenue | $282.7 million; 89% of revenue |
| Gross profit / gross margin | $429.3 million / approximately 95% | $299.3 million / approximately 94% |
| Operating income / margin | $23.2 million / approximately 5% | $15.3 million / approximately 5% |
| Net income | $65.2 million | $13.2 million |
| Adjusted EBITDA / margin (non-GAAP) | $49.0 million / approximately 11% | $24.1 million / approximately 8% |
| Cash from operating activities | $51.7 million | $25.7 million |
| Cash, cash equivalents, and investments | $157.7 million | $137.7 million |
| Working capital | $131.4 million | $114.2 million |
| Debt | No long-term borrowings reported | No long-term borrowings reported |
Q4 2018 revenue was $126.1 million, compared with $90.6 million in Q4 2017. Q4 operating income was $6.9 million versus $0.03 million, and net income was $12.5 million versus $2.3 million.
FY 2018 investing cash outflow was $80.3 million, primarily reflecting net purchases of certificates of deposit, along with equipment and website-development spending. Financing cash outflow was $23.4 million, mainly due to $25.9 million of withholding-tax payments on net share settlements. Operating lease commitments totaled $88.0 million, including $11.5 million due within one year.
Material changes versus the prior comparable period
- Revenue grew 43% year over year, slower than the 60% growth recorded in 2017. Subscription revenue increased 44%; advertising and other revenue rose 41%.
- Total paying dealers increased 14% to 31,472. U.S. average annual revenue per subscribing dealer increased 23% to $14,819.
- International revenue grew 80% to $16.9 million, but the segment’s operating loss widened to $35.2 million from $26.3 million as the company continued investing in international expansion.
- Sales and marketing expense rose 34% to $315.9 million, including a $65.5 million increase in advertising costs. Product, technology, and development expense more than doubled to $47.9 million.
- Net income included a $39.7 million income-tax benefit, principally associated with stock-based compensation tax benefits. It should not be read as a comparable increase in operating performance.
Outlook, commentary, risks, and unusual items
- Management said it expected to generate operating cash flow for the foreseeable future and considered existing liquidity sufficient for at least 12 months from the filing date. The filing provides no specific revenue or earnings guidance.
- Management cautioned that revenue growth rates would continue to decline as the business scales and competition increases. It expects continued investment in marketing, product development, and international markets.
- Dealer subscriptions are a key exposure: most dealer contracts have short committed terms and may be cancellable, generally with 30 days’ notice at the end of the committed term.
- Other disclosed risks include competition, dependence on search-engine traffic and third-party inventory data, privacy and cybersecurity obligations, and evolving vehicle advertising and consumer-protection rules. The company also noted seasonality in automotive purchases.
- CarGurus adopted ASC 606 in 2018 using the modified retrospective method. Adoption increased FY 2018 reported operating income by approximately $9.4 million and net income by approximately $7.0 million versus prior guidance; operating cash flow was unchanged.
- On January 8, 2019, the company completed its acquisition of UK automotive website PistonHeads for approximately $19.1 million, including funds held in escrow. The purchase-price allocation was still under evaluation at filing.
- The company reported no pending or threatened litigation it believed would reasonably be expected to have a material adverse effect. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of FY 2018 net income growth is attributable to the unusual tax benefit and ASC 606 adjustments, rather than recurring operations.
- Whether dealer growth and higher U.S. subscription revenue per dealer can persist, given short subscription commitments and rising marketing investment.
- Whether international expansion can generate returns as international operating losses widen.
- The effects of PistonHeads integration and acquisition accounting, and the forthcoming lease-accounting standard’s balance-sheet impact.
- Share-based compensation was $20.8 million in 2018; review its effect on dilution and on the company’s non-GAAP Adjusted EBITDA measure.