Cars.com Inc. — Q1 2017 Form 10-Q
Business and period: Unaudited combined results for the three months ended March 31, 2017, compared with Q1 2016. Cars.com operates a digital automotive marketplace, earning revenue primarily from dealer subscriptions and advertising. The statements reflect the business as if separate from TEGNA, its former parent; they include allocated parent costs and may not represent standalone costs. TEGNA completed the spin-off on May 31, 2017.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $153.2 million | $152.5 million | Up 0.5% |
| Operating income | $27.2 million | $33.8 million | Down 19.5% |
| Operating margin | 17.7% | 22.1% | Down 4.4 percentage points |
| Net income | $26.9 million | $33.7 million | Down 20.2% |
| Net margin | 17.6% | 22.1% | Down 4.5 percentage points |
| Operating cash flow | $43.7 million | $25.9 million | Up $17.9 million |
| Capital expenditures | $5.6 million | $2.1 million | Up $3.5 million |
Retail revenue rose 2% to $112.2 million; wholesale revenue fell 5% to $40.9 million. Operating expenses increased 6% to $126.0 million, led by general and administrative costs (up 38% to $10.3 million) and product, technology and operations costs (up 6% to $34.8 million). G&A included $1.1 million of additional public-company costs and $1.1 million of new office-space expense. Net income includes a $0.4 million income tax provision; Cars.com LLC historically operated as a pass-through entity, while DealerRater was subject to income taxes.
Liquidity, balance sheet and debt
At March 31, 2017, cash was $2.0 million, down from $8.9 million at year-end 2016; current assets were $105.5 million and current liabilities were $65.9 million. The balance sheet reported total liabilities of $116.4 million and no debt. Cash fell as $45.1 million of net cash was transferred to Parent through centralized cash management, partly offset by operating cash generation. The filing notes that historical cash balances do not reflect an independent cash-management structure.
Subsequent to quarter-end, Cars.com entered a five-year credit agreement on May 31, 2017, with a $450 million term loan and a $450 million revolving commitment (including up to $25 million of letters of credit). The filing says borrowings funded a $650 million cash transfer to TEGNA and separation-related fees and expenses; it does not clearly specify the revolver amount drawn. Term-loan amortization begins September 30, 2017. The debt is secured by substantially all assets and is subject to covenants. Management expected operating cash flow and the new facility to provide adequate liquidity. A 100-basis-point rate increase was estimated to add approximately $6.8 million to 2017 interest expense based on debt at separation.
Changes, outlook and risks
- Traffic visits declined 6.8% to 105.8 million, while dealer customers increased 3.4% to 21,552 and average vehicle listings grew 5.2% to 4.96 million. Mobile traffic rose to 56% from 51% a year earlier.
- Direct revenue grew 2%, partly from DealerRater, but was offset by lower subscription rates and products sold. Wholesale revenue declined amid cancellations related to competition and subscription rate increases. Management reported higher-than-usual customer migration away from product enhancements and services in 2016 and Q1 2017.
- Management expected no growth in new-car sales in 2017. It identified competition, dealer consolidation and advertising spend, macroeconomic conditions, changing mobile and social-media behavior, customer retention, product innovation, cybersecurity and third-party service dependence as risks. It also cautioned that standalone public-company costs could compress margins and debt service could reduce free cash flow and constrain acquisitions.
- No quantified earnings or revenue guidance is provided. The tax matters agreement generally restricts certain strategic transactions for two years after the spin-off, subject to exceptions.
- Other items: the Chicago office lease runs through June 2031, with minimum payments of $57.7 million. Management did not expect a material liability from pending legal matters and reported no material off-balance-sheet arrangements. Management expected no new LTIP contributions or SAR grants after the separation.
Important facts for investors to verify
- Actual term-loan and revolver borrowings, interest rates, leverage, amortization and covenant headroom after the spin-off.
- Whether weaker traffic and subscription retention persist, and whether growth in dealers and listings translates into revenue.
- Ongoing public-company and standalone operating costs compared with the costs allocated by TEGNA in these historical statements.
- Cash flow after interest, debt repayment, separation costs and required investment; the filing reports only pre-separation quarterly cash flows.
- Potential effects of the tax matters agreement, lease commitments and the RepairPal investment on future liquidity and strategic flexibility.