Cargurus, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. CarGurus operates online automotive marketplaces and digital retail services; its U.S. business also includes CarOffer, a digital wholesale platform in which it acquired a 51% controlling interest in January 2021. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $222.9 | $147.5 | $612.0 | $399.9 |
| Gross profit / margin | $162.9 / 73% | $137.7 / 93% | $477.6 / 78% | $368.6 / 92% |
| Operating income / margin | $40.1 / 18% | $43.6 / 30% | $104.3 / 17% | $64.3 / 16% |
| Consolidated net income / margin | $29.3 / 13% | $32.6 / 22% | $76.2 / 12% | $52.4 / 13% |
| Adjusted EBITDA | $62.5 | $57.0 | $179.5 | $112.2 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $135.1 | $108.8 |
Adjusted EBITDA is a non-GAAP measure; the company reconciles it to consolidated net income and excludes, among other items, stock-based compensation, depreciation and amortization, and taxes.
- Revenue mix and growth: Q3 revenue rose 51%. Marketplace subscription revenue increased 11% to $144.6 million; wholesale and other revenue rose to $78.3 million from $17.5 million, primarily because of CarOffer. For the nine months, subscription revenue grew 22% and wholesale and other revenue grew 282%.
- Costs and margins: Q3 cost of revenue increased to $60.0 million from $9.8 million, largely reflecting CarOffer wholesale activity. Gross margin fell to 73% from 93%. Q3 operating income declined 8% despite higher revenue; acquired-intangible amortization and higher operating expenses contributed to the change.
- Cash and debt: At September 30, cash and cash equivalents were $231.1 million, investments were $90.0 million, and restricted cash was $16.1 million. Current assets were $441.5 million and current liabilities $102.5 million. The company reported no long-term borrowings and repaid $14.3 million on a line of credit during the nine months.
- Cash flows and spending: Nine-month investing cash flow was a $63.4 million use, including $64.3 million of acquisition cash payments, partly offset by certificate-of-deposit maturities net of purchases. Financing cash flow was a $25.1 million use, including the line-of-credit repayment and share-settlement tax payments. Cash, cash equivalents, and restricted cash increased $46.3 million.
- Per-share results: Q3 diluted EPS was $0.24 versus $0.29. Nine-month diluted EPS was $0.66 versus $0.46.
Material changes versus the prior comparable period
- CarOffer contributed $63.0 million of Q3 wholesale revenue and $135.8 million from its acquisition date through September 30. Its purchase consideration was $173.2 million: $69.5 million cash and $103.6 million in stock. The acquisition added $127.5 million of goodwill and $104.1 million of identifiable intangible assets in the preliminary purchase-price allocation.
- Marketplace subscription revenue benefited from dealer pricing increases, product upgrades, and higher-revenue new dealers. Quarterly average revenue per subscribing dealer rose 9% to $4,704 overall, 9% in the U.S. to $5,602, and 21% internationally to $1,524.
- Engagement measures weakened even as dealer metrics improved: average monthly unique users declined to 36.3 million from 46.4 million, and monthly sessions to 88.3 million from 112.6 million. Paying dealers increased to 30,754 from 30,162.
- Nine-month year-over-year revenue growth also reflects the prior-year comparison: COVID-19-related subscription fee reductions materially reduced 2020 revenue. The company said such reductions had no material revenue impact in the 2021 periods reported.
- Stock-based compensation expense was $15.2 million in Q3 and $53.1 million for the nine months, compared with $11.0 million and $34.6 million, respectively, in 2020.
Outlook, management commentary, risks, and unusual items
- Guidance: The filing provides no specific revenue, earnings, or cash-flow guidance. Management said existing liquidity should fund operations for at least the next 12 months.
- Industry and operating risks: Management highlighted COVID-19 uncertainty and automotive inventory constraints, including the semiconductor shortage. Reduced vehicle supply may affect listings, consumer traffic, dealer advertising demand, wholesale transaction volumes, and CarOffer’s growth. Dealer cancellations, delinquencies, and subscription spending remain risks.
- CarOffer ownership obligations: The company has a discretionary call right in the second half of 2022 to acquire up to 25% of CarOffer’s fully diluted equity, priced using a formula based on trailing gross profit. In the second half of 2024, call and put rights apply to the remaining equity, with value tied to contractual formulas including EBITDA. Future consideration may be cash and/or Class A shares.
- Acquisition and cost items: Q3 depreciation and amortization rose sharply, primarily due to acquired CarOffer intangible assets. The company also recorded a $2.4 million impairment of website development costs during the nine months. The CarOffer purchase-price allocation was preliminary.
- Other risks and contingencies: The filing identifies competition, data privacy and cybersecurity, regulatory compliance, intellectual-property claims, dependence on third-party data and services, and international operations as risks. Management reported no pending or threatened litigation expected to have a material adverse effect and no material off-balance-sheet arrangements. Disclosure controls were deemed effective.
- Corporate governance: Class B shares carry ten votes per share versus one vote for Class A. Founder and Executive Chairman Langley Steinert controls a majority of voting power, and the company qualifies as a Nasdaq controlled company.
Important facts for investors to verify
- How much of reported growth and future profitability is attributable to CarOffer versus the core subscription marketplace, and whether CarOffer’s wholesale volumes and margins are sustainable.
- Whether declining user traffic affects dealer connections, subscription renewals, pricing power, and advertising revenue.
- The impact of wholesale revenue mix and acquired-intangible amortization on margins, and the recurring effect of stock-based compensation excluded from Adjusted EBITDA.
- CarOffer’s performance against the contractual valuation formulas and the possible cash, share-issuance, and dilution consequences of the 2022 and 2024 call/put rights.
- Whether automotive inventory shortages, COVID-19 developments, or renewed dealer fee relief could weaken demand, revenue, or cash generation.