CarGurus, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017, with unaudited quarterly results including Q4. The filing was signed March 1, 2018. CarGurus operates an online automotive marketplace in the United States, Canada, the United Kingdom, and Germany, monetized mainly through dealer subscriptions and also through advertising. It completed its IPO in October 2017.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $316.9 million | $198.1 million | +60% |
| Marketplace subscription revenue | $282.7 million | $171.3 million | +65% |
| Advertising and other revenue | $34.2 million | $26.8 million | +27% |
| Gross profit / gross margin | $299.3 million / 94% | $188.6 million / 95% | Margin down about 1 percentage point |
| Operating income / operating margin | $15.3 million / 5% | $8.6 million / 4% | Operating income +78% |
| Net income | $13.2 million | $6.5 million | More than doubled |
| Adjusted EBITDA (non-GAAP) | $24.1 million; 8% margin | $11.0 million; 6% margin | More than doubled |
| Cash from operating activities | $25.7 million | $20.0 million | +28% |
Q4 2017 revenue was $90.6 million and net income was $2.3 million; gross profit was $85.4 million. The filing does not provide quarterly cash flow or Q4 operating income in its quarterly summary.
At year-end, cash and cash equivalents were $87.7 million and short-term investments were $50.0 million, for $137.7 million combined, versus $74.3 million a year earlier. Working capital was $114.2 million. Total liabilities were $49.6 million; the company reported no debt or material capital lease obligations. Operating lease commitments totaled $40.3 million.
Changes and operating drivers
- Subscription revenue grew to 89% of total revenue from 86%, reflecting the greater weight of recurring dealer subscription income.
- Total paying dealers increased 30% to 27,670. U.S. paying dealers grew 23%, and U.S. average annual revenue per subscribing dealer rose 16% to $12,055.
- U.S. revenue increased 57% to $307.5 million. International revenue rose to $9.4 million from $2.3 million, but remained only 3% of total revenue.
- U.S. operations generated $41.6 million of operating income; International operations recorded a $26.3 million operating loss, as the company continued investing in international expansion.
- Sales and marketing expense rose 53% to $236.2 million, including $173.2 million of advertising expense. Product, technology, and development expense increased 96% to $22.5 million; general and administrative expense increased 77% to $22.7 million.
Cash, capital, and unusual items
- Cash provided by operating activities was $25.7 million; investing activities used $12.6 million and financing activities provided $44.8 million, primarily reflecting IPO proceeds.
- The company received $43.2 million in net proceeds from its IPO primary share sale. The offering also included shares sold by existing stockholders; those proceeds went to the selling stockholders.
- Stock-based compensation expense increased to $5.0 million from $0.3 million, partly because the IPO satisfied performance conditions on previously granted restricted stock units. About $26.9 million of unrecognized RSU compensation remained at year-end.
- The 2017 effective tax rate was 16.7%, versus 27.4% in 2016. The company recorded a provisional $187,000 tax expense related to the Tax Cuts and Jobs Act.
Outlook, risks, and contingencies
The filing gives no numerical revenue or earnings guidance. Management expected existing liquidity to fund operations for at least 12 months from the filing date, while noting that future capital needs depend on growth, marketing, product development, international investment, and potential acquisitions. Management anticipated further investment in new markets and products and warned that growth rates would likely decline as the business scales.
- Dealer subscriptions are a key revenue source, but contracts generally have short committed terms and may be cancelled; dealer retention, pricing, and ROI are important sensitivities.
- Other disclosed risks include intense competition, dependence on search-engine traffic and third-party vehicle data, brand-building costs, cybersecurity and privacy exposure, and regulatory uncertainty around vehicle advertising, consumer protection, and text messaging.
- International expansion carries execution risk and ongoing losses. Consumer auto demand, seasonality, and macroeconomic conditions may also affect results.
- A Canadian copyright dispute with Trader Corporation resulted in a 2017 award of CAD$305,064 for infringement involving vehicle photos; punitive damages and a permanent injunction were denied, and neither party appealed. The company reported no pending or threatened litigation expected to have a material adverse effect.
- The founder and CEO controls a majority of voting power through the dual-class structure: Class B shares carry ten votes per share versus one vote for Class A. The company is a controlled company and has elected certain governance exemptions.
Important facts for investors to verify
- Whether paying-dealer growth and U.S. revenue per dealer can continue to offset slower overall growth and high marketing expenditure.
- Whether international growth can eventually narrow the $26.3 million segment operating loss, and how management allocates investment across markets.
- The sustainability of reported profitability and cash generation, considering stock-based compensation, IPO-related effects, and working-capital movements.
- Dealer receivables concentration: two customers represented 29% and 17% of net accounts receivable at year-end 2017.
- Potential dilution from outstanding options and RSUs; the filing reports 15.9 million shares reserved for future issuance, including available plan shares.
- Internal-control transition: disclosure controls were deemed effective, but the company did not include management’s assessment or an auditor attestation of internal control over financial reporting in this filing.