CarGurus, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; compared with the same periods in 2017. Unaudited results. Amounts below are in U.S. dollars.
Business context
CarGurus operates an online marketplace for new and used vehicles, earning most revenue from dealer subscriptions and the remainder from advertising and other services. It operates in the United States and Canada, the United Kingdom, Germany, Italy, and Spain.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $110.3m | $76.2m | $209.0m | $143.3m |
| Gross profit / margin | $104.4m / 94.6% | $71.9m / 94.3% | $197.5m / 94.5% | $135.6m / 94.7% |
| Operating income / margin | $1.4m / 1.3% | $6.0m / 7.9% | $5.4m / 2.6% | $12.4m / 8.6% |
| Net income | $31.3m | $4.3m | $34.9m | $8.6m |
| Adjusted EBITDA / margin | $8.3m / 7.5% | $7.0m / 9.2% | $17.2m / 8.3% | $14.1m / 9.9% |
| Operating cash flow | Not separately reported in the filing for Q2 | $23.8m | $10.1m |
Q2 marketplace subscription revenue was $97.7m, up 44%; advertising and other revenue was $12.6m, up 49%. Subscriptions represented 89% of revenue. Revenue growth reflected 20% growth in paying dealers to 29,969 and 15% growth in consolidated average annual revenue per subscribing dealer to $12,425. Average monthly unique users rose to 39.5m from 25.4m.
Q2 operating expenses rose 56% to $102.9m, led by sales and marketing ($80.9m, up 46%) and product, technology, and development ($11.8m, up 152%). Management attributed much of the spending increase to advertising, hiring, product investment, and stock-based compensation. U.S. operations remained profitable but operating income fell; international operating losses widened to $8.2m from $6.2m as the company invested in expansion.
Financial position and cash
At June 30, 2018, cash and cash equivalents were $31.8m and short-term certificates of deposit were $110.0m, for cash and investments of $141.8m. Total assets were $213.3m; total liabilities were $56.9m. The company reported no debt or material capital lease obligations. Cash, cash equivalents, and restricted cash declined $54.2m in the first half, principally reflecting purchases of certificates of deposit and $17.5m of employee tax withholding payments on net-settled equity awards. Management stated existing liquidity and operating cash generation should fund operations for at least 12 months from the filing date.
Material changes, outlook, and risks
- Reported net income includes a substantial, unusual income tax benefit: $29.1m in Q2 and $28.6m for the first half. The first-half benefit was principally associated with $28.9m in stock-based compensation windfall tax benefits, along with R&D credits and the lower federal tax rate. Consequently, net income and net margin are not representative of operating performance; pretax income declined year over year.
- Management provided no quantified revenue, earnings, or cash-flow guidance. It expects operating cash generation, while noting future capital needs depend on growth, marketing, product development, and international investment.
- A new Cambridge office lease signed June 19 has a non-cancellable term through 2033 and annual fixed rent of approximately $3.3m, subject to annual increases.
- International expansion remains loss-making. Other stated risks include dealer subscription churn and short contract terms, competition, dependence on search engines and third-party data, privacy and cybersecurity exposure, regulation, and automotive-market or macroeconomic weakness.
- The company expected to lose emerging growth company status on December 31, 2018, with increased compliance requirements, including independent auditor attestation of internal controls. Management reported disclosure controls effective and no material change in internal control during the quarter.
- Management said no pending or threatened litigation was expected to have a material adverse effect. The filing also describes a prior Canadian copyright case in which a court awarded Trader Corporation CAD $305,064 in statutory damages; punitive damages and an injunction were denied, and the parties agreed not to appeal.
Important facts for investors to verify
- How much of earnings growth is attributable to the one-time stock-based compensation tax benefit, and how operating performance trends excluding that benefit.
- Whether revenue growth and dealer economics can continue as sales and marketing and technology spending rise, and whether international losses narrow.
- The sustainability and cash-flow effects of equity compensation, including the $17.5m tax-withholding payment and ongoing dilution from awards.
- The full rent commitments and annual escalations under the new Cambridge lease, alongside future liquidity and investment needs.
- Progress on auditor-attested internal controls and compliance with new accounting standards, including revenue recognition and leases.