Cars.com Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2022. Cars.com operates a digital automotive marketplace and provides dealers and automakers with advertising and digital solutions, including financing and vehicle appraisal technologies. Financial statements are unaudited; amounts below are in millions except per-share data and operating metrics.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $162.9 | $155.5 | $321.1 | $308.8 |
| Operating income | $15.4 | $15.7 | $26.3 | $32.2 |
| Net income | $5.5 | $6.0 | $9.9 | $11.2 |
| Diluted EPS | $0.08 | $0.08 | $0.14 | $0.16 |
| Operating margin | 9.4% | 10.1% | 8.2% | 10.4% |
Q2 revenue rose 5%; dealer revenue increased 5% to $144.0 million, while OEM and national revenue declined 13% to $14.1 million. Other revenue grew to $4.7 million from $2.3 million. For the first half, total revenue increased 4%, with dealer revenue up 5% and OEM and national revenue down 15%. Revenue by product in Q2 included subscription advertising and digital solutions of $135.4 million, display advertising of $20.9 million, and pay-per-lead of $2.1 million.
Operating expenses grew 5% in Q2 and 7% for the first half, outpacing revenue over the six-month period. Product and technology costs and general and administrative costs rose, while depreciation and amortization declined. Q2 net income fell 7%; first-half net income fell 12%. The first-half tax benefit of $1.8 million partly offset lower operating income.
Cash flow, debt and liquidity
- Cash and liquidity: Cash was $18.1 million at June 30, down from $39.1 million at year-end 2021. Including $185.0 million available on the revolver, reported total liquidity was $203.1 million.
- Six-month cash flows: Operating cash flow was $42.3 million versus $79.6 million in 2021; investing cash outflow was $73.3 million versus $13.1 million; financing cash inflow was $10.1 million versus an $82.1 million outflow. Cash declined $20.9 million during the period.
- Investing outflow included $64.8 million for the Accu-Trade acquisition. Operating cash flow was lower primarily because of working-capital timing, including an additional week of vendor payments, and the prior-year period’s $9.1 million tax refund.
- Debt: Aggregate principal debt was $517.5 million: $72.5 million term loan, $45.0 million revolver borrowings, and $400.0 million of 6.375% senior notes due 2028. The term loan and revolver rates were 4.3% and 3.7%, respectively; the company reported a 5.8% weighted rate. The filing states $185.0 million remained available under the revolver and the company was covenant-compliant. Leverage and interest coverage ratios were 0.7x and 5.2x.
- The interest-rate swap expired May 31, 2022. The filing reports debt fair value of approximately $449.1 million versus carrying value of $517.5 million.
Material changes and unusual items
- Cars.com acquired Accu-Trade in March 2022. Preliminary total consideration was $94.0 million, including $64.8 million cash, $5.3 million other consideration, and $23.9 million contingent consideration. The acquisition added valuation, appraisal and logistics technology; preliminary goodwill was approximately $77.0 million.
- The company authorized a three-year share repurchase program of up to $200 million. It repurchased 2.1 million shares for $23.3 million during the first half, at an average $11.34 per share; $176.7 million remained authorized at June 30.
- In Q1 2022, the company corrected a prior-period deferred-tax valuation allowance overstatement originating in 2020. It reduced December 2021 liabilities and increased stockholders’ equity by $31.1 million. The company said the correction was not material to previously issued statements and did not affect reported income, EPS or cash flows for the 2021 periods shown.
- A valuation allowance remained against deferred tax assets at June 30, 2022, based on management’s assessment that recent losses constituted significant negative evidence. The first-half effective tax rate was negative 22.0%, primarily reflecting a partial valuation-allowance release, stock-based compensation and uncertain tax positions.
Operating trends, outlook and risks
Traffic declined 7% in Q2 and 6% for the first half, which management attributed primarily to elevated prior-year traffic following federal stimulus and stronger consumer demand. Average monthly unique visitors increased 3% in Q2. Dealer customers rose 4% year over year to 19,517, and monthly average revenue per dealer increased 1% to $2,326. Management attributed dealer-revenue growth to customer additions and higher revenue per dealer; OEM revenue weakness reflected spending pullbacks associated with production delays and supply-chain shortages.
Management emphasized its strategy of expanding digital solutions, including financing, vehicle appraisal, virtual showrooms and targeted advertising. It cited continuing uncertainty around vehicle inventory and supply chains, inflation, higher interest rates, potential recession, automotive sales and advertising demand, and the COVID-19 pandemic. Other identified risks include competition, dependence on search traffic and third-party services, privacy and data regulation, cybersecurity, acquisitions and integration, litigation, and variable-rate debt. The filing provides no specific financial guidance or numerical outlook.
Important facts for investors to verify
- Whether dealer-customer and revenue-per-dealer growth can offset falling traffic and continued OEM advertising weakness.
- Accu-Trade integration, performance against earn-out targets, and the eventual cash or share cost of contingent consideration; also track CreditIQ earn-out exposure of up to $50 million.
- Cash generation, working-capital trends, revolver usage and covenant headroom, especially with $517.5 million of reported principal debt and floating-rate borrowings.
- Future tax expense and realizability of deferred tax assets given the valuation allowance and the prior-period tax correction.
- Share repurchases and potential dilution from stock compensation and acquisition-related contingent share consideration.
- Material litigation or contingency developments; the filing describes proceedings generally but does not provide a clear quantified loss estimate.