CARS.COM INC. condition, results of operations and quantitative and qualitative disclosures should be read in conjunction with our Consolidated and Combined Financial Statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in "Note About Forward-Looking Statements" and "Risk Factors" in this Annual Report on Form 10-K. The financial information discussed below and included elsewhere in this Annual Report on Form 10-K may not necessarily reflect what our financial condition, results of operations and cash flows would have been had we been a stand-alone company during the applicable periods presented or what our financial condition, results of operations and cash flows may be in the future.
References in this discussion and analysis to "CARS", "we," "us," "our" and
similar terms refer to
Business Overview. We are a leading digital marketplace and solutions provider
for the automotive industry that connects car shoppers with sellers and original
equipment manufacturers ("OEM"s). Our marketplace empowers shoppers with the
resources and information to make confident car buying decisions while our
digital solutions and technology platform help sellers improve operational
efficiency, profitability and sales. Our portfolio of brands includes Cars.com ,
Dealer Inspire and DealerRater, in addition to Auto.com, PickupTrucks.com and
NewCars.com.
In May 2017 , we separated from our former parent company, TEGNA Inc. ("TEGNA")
by means of a spin-off of a newly formed company, Cars.com Inc. , which now owns
TEGNA's former digital automotive marketplace business (the "Separation"). Our
common stock began trading "regular way" on the New York Stock Exchange on June
1, 2017 . In February 2018 , the Company acquired all of the outstanding stock of
Dealer Inspire, Inc. and substantially all of the net assets of Launch Digital
Marketing LLC (the "DI Acquisition").
Overview of Results.
Year Ended December 31,
(In thousands, except percentages) 2019 2018 2017
Revenue $ 606,682 $ 662,127 $ 626,262
Net (loss) income (1) (2) (3) (445,324 ) 38,809 224,443
Retail revenue as % of total revenue 94 % 87 % 74 %
Wholesale revenue as % of total revenue 6 % 13 % 26 %
(1) The net loss for the year ended
the $427.3 million (net of tax benefit of $34.2 million ) goodwill and
indefinite-lived intangible asset impairment.
(2) The year ended
consulting services and other costs incurred as part of our settlement
agreement with our stockholder activist;
primarily related to the acquisition of
process to explore strategic alternatives to enhance shareholder value;
million related to the sales transformation;
stock-based compensation; the addition of Dealer Inspire's business and the
incremental costs of being a public company. These increases were partially
offset by the prior year impacts of
Separation and
headquarters location.
(3) The year ended
being a public company upon our separation from TEGNA.
2019 and Recent Highlights.
Fourth Quarter Dealer Count Growth. In the fourth quarter of 2019, dealer
customers grew by almost 200 to 18,834 as of December 31, 2019 , as compared with
18,635 as of September 30, 2019 . This increase was a result of improved
retention rates as well as growth in new dealer customers added during the
fourth quarter. We experienced growth in both local dealer customers and our
solutions-only customers.
Increases in Traffic. Traffic is critical to our business. Traffic to
the CARS network of websites and mobile apps provides value to our advertisers
in terms of audience, awareness, consideration and conversion. Traffic provides
an indication of our consumer reach. Although our consumer reach does not
directly result in revenue, we believe our ability to reach in-market car
shoppers is attractive to our dealers and national advertisers. We have been
diligently focused on growing our audience, the fundamental deliverable of any
marketplace business.
In 2019, we had record SEO Traffic growth. During this period, we achieved 24%
growth in Traffic and 21% growth in Average Monthly Unique Visitors. Driven by
our product innovations and investments in and efficiencies gained in search
engine optimization,
18
-------------------------------------------------------------------------------- brand awareness and paid channels, we have experienced consistent year-over-year Traffic growth sinceJanuary 2018 , and inAugust 2019 we recorded the highest-trafficked month in our history and subsequently broke that record inJanuary 2020 . In addition, we have been increasing our share of unique visitors throughout 2019. New OEM Agreement. In 2019, we were selected as a preferred website provider to General Motors ("GM"). This allowed us to begin selling our website solutions to more than 4,100GM dealers. This program is non-exclusive and providesGM dealers a choice in provider for the first time in 15 years. Currently in the pilot phase, we expect to launch websites forGM customers in 2020. This new agreement provides us with the opportunity to substantially increase our current website customer base, which was approximately 3,200 as ofDecember 31, 2019 . Affiliate Conversions. As ofOctober 1, 2019 , we have successfully converted all affiliates to our direct control. We amended five of our affiliate agreements (Gannett, the McClatchy Company ("McClatchy"), TEGNA, tronc, Inc. ("tronc"), and theWashington Post ). The Belo affiliate agreement expired onOctober 1, 2019 . We now have a direct relationship with all dealer customers and recognize the revenue associated with converted dealers as Retail revenue, rather than Wholesale revenue, in the Consolidated and Combined Statements of (Loss) Income. BeginningJuly 2020 , upon the expiration of the affiliate agreements, we will realize incremental Free Cash Flow, as we will no longer be required to make any further payments to the affiliates under these agreements. Free Cash Flow is defined as net cash provided by operating activities less capital expenditures, including purchases of property and equipment and capitalization of internal-use software and website development costs. For information related to the Unfavorable contracts liability, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Credit Agreement Amendment. InOctober 2019 , we entered into an amendment to our Credit Agreement to increase the total net leverage covenant during the remaining term of the Credit Agreement while preserving the favorable pricing structure from the original agreement. The amendment increases our maximum total net leverage ratio from 3.75x to 4.50x with incremental step downs through maturity onMay 31, 2022 . Completion of Strategic Alternatives Review. InAugust 2019 , we announced the conclusion of the strategic alternatives review process first announced onJanuary 16, 2019 . The strategic alternatives review process was public, comprehensive and deliberate, lasting ten months. After extensive negotiations and discussions, no actionable proposals for a sale were available to us. As a result, our Board of Directors unanimously concluded that the best interests of our stockholders are served by continuing to focus on the execution of our strategic plan and opportunities to drive growth and stockholder returns as an independent public company. We remain open to all potential value-creating opportunities. Technology Transformation. InFebruary 2019 , we announced a restructuring of the product and technology teams (the "Technology Transformation"). This restructuring is primarily focused on shifting our technology spend towards innovation to improve our speed of product delivery, to enable integration across current and future systems, and to migrate our systems to the cloud. In connection with the Technology Transformation, we have aligned our product and technology teams with our long-term growth strategy to expand beyond listings to a digital solutions marketplace. As part of this process, we have streamlined the existing teams as we modernize our technology platform and invest in a more efficient cloud-based infrastructure focused on machine learning, product innovation and growth. Further, we expect to achieve cost efficiencies upon completion of the Technology Transformation. Sales Transformation. InDecember 2018 , we restructured the sales team (the "Sales Transformation"), with the primary goal of better serving our customers. We reorganized the sales force into teams designed to provide the full range of enhanced services to current customers and a more tailored structure to win new customers. These changes reflect the expansion of our business beyond car listings to include value-added digital solutions such as innovations from Dealer Inspire and DealerRater. The Sales Transformation also reflects a realignment of territories following the conversion of the affiliate agreements. 19
--------------------------------------------------------------------------------
Key Operating Metrics. We regularly review a number of key metrics to evaluate
our business, measure our performance, identify trends affecting our business,
formulate financial projections and make operating and strategic
decisions. Information regarding Traffic, Average Monthly Unique Visitors and
Direct Monthly Average Revenue Per Dealer is as follows:
Year Ended December 31,
2019 2018 % Change
Traffic (Visits) 553,660,000 445,282,000 24 %
Average Monthly Unique Visitors 22,629,000 18,778,000 21 %
Direct Monthly Average Revenue Per
Dealer (1) $ 2,179 $ 2,098 4 %
(1) Beginning in the first quarter of 2019, this key operating metric includes
revenue from dealer websites and related digital solutions.
Information regarding our Dealer Customers is as follows:
As of December 31,
2019 2018 % Change
Dealer Customers 18,834 19,921 (5 )%
Traffic (Visits). Traffic is critical to our business. Traffic to
the CARS network of websites and mobile apps provides value to our advertisers
in terms of audience, awareness, consideration and conversion. In addition to
tracking traffic volume and sources, we monitor activity on our properties,
allowing us to innovate and refine our consumer-facing offerings. Traffic is
defined as the number of visits to CARS desktop and mobile properties
(responsive sites and mobile apps), using Adobe Analytics. Traffic does not
include traffic to Dealer Inspire websites. Visits refers to the number of times
visitors accessed CARS properties during the period, no matter how many visitors
make up those visits. Traffic provides an indication of our consumer reach.
Although our consumer reach does not directly result in revenue, we believe our
ability to reach in-market car shoppers is attractive to our dealer customers
and national advertisers.
The growth in Traffic was driven by our product innovations and investments in
and efficiencies gained in search engine optimization, brand awareness and paid
channels. For the years ended December 31, 2019 and December 31, 2018 , mobile
traffic accounted for 72% and 67% of total Traffic, respectively.
Average Monthly Unique Visitors ("UVs"). Growth in unique visitors and consumer
traffic to our network of websites and mobile apps increases the number of
impressions, clicks, leads and other events we can monetize to generate revenue.
We define UVs in a given month as the number of distinct visitors that engage
with our platform during that month. Visitors are identified when a user first
visits an individual CARS property on an individual device/browser combination,
or installs one of our mobile apps on an individual device. If a visitor
accesses more than one of our web properties or apps or uses more than one
device or browser, each of those unique property/browser/app/device combinations
counts towards the number of UVs. UVs do not include Dealer Inspire UVs. We
measure UVs using Adobe Analytics.
The growth in UVs was driven by the same factors as our traffic growth, our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels.
Average Revenue Per Dealer ("ARPD"). We believe that our ability to grow ARPD is
an indicator of the value proposition of our products. We define ARPD as Direct
retail revenue during the period divided by the average number of direct Dealer
Customers during the same period. Beginning the first quarter of 2019, this key
operating metric includes revenue from dealer websites and related digital
solutions. ARPD prior to the first quarter of 2019 has not been recast to
include Dealer Inspire as it would be impracticable to do so.
ARPD decreased 2% from
ARPD increased 4% fromDecember 31, 2018 , primarily driven by the addition of dealer websites and related digital solutions, as 2018 ARPD did not include these revenue sources. ARPD excluding revenue from dealer websites and related digital solutions was$2,070 , down 1% from the prior year. Dealer Customers. Dealer Customers represent dealerships using our products as of the end of each reporting period. Each physical or virtual dealership location is counted separately, whether it is a single-location proprietorship or part of a large consolidated dealer group. Multi-franchise dealerships at a single location are counted as one dealer. 20 -------------------------------------------------------------------------------- Total Dealer Customers increased 1% fromSeptember 30, 2019 . Dealer Customers increased, primarily due to growth in direct local dealer customers, reflecting improved retention rates and a stabilization in cancellation rates.
Total Dealer Customers declined 5% from
Factors Affecting Our Performance. Our business is impacted by the ever-changing larger automotive environment, including consumer demand and other macroeconomic factors, and changes related to automotive digital advertising solutions. We have observed softness in new car sales inthe United States and reduced dealer profitability, which has impacted OEMs' and dealerships' willingness to increase spend with automotive marketplaces likeCars.com . Our success will depend in part on our ability to continue to transform our business toward a multi-faceted suite of digital solutions that complement our media offerings. We are adapting our go-to-market sales and technology infrastructure, as described in the Sales and Technology Transformations discussions above, to support the execution of our strategy. The foundation of our continued success is the value we deliver to customers, and we believe that our large and growing audience of in-market, undecided car shoppers and innovative solutions deliver significant value to our customers. Results of Operations. For both comparative tables below, the year endedDecember 31, 2018 has been reclassified to conform to the current year presentation. There is no change to Operating (loss) income as a result of these reclassifications. No such adjustments were required for the year endedDecember 31, 2017 . For further information, see Note 2 (Significant Accounting Policies) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Year Ended
Increase
(In thousands, except
percentages) 2019 2018 (Decrease) % Change
Revenue:
Direct $ 477,095 $ 457,651 $ 19,444 4 %
National advertising 80,774 105,381 (24,607 ) (23 )%
Other 14,442 16,156 (1,714 ) (11 )%
Retail 572,311 579,188 (6,877 ) (1 )%
Wholesale 34,371 82,939 (48,568 ) (59 )%
Total revenue 606,682 662,127 (55,445 ) (8 )%Operating expenses:
Cost of revenue and operations 99,549 90,433 9,116 10 % Product and technology 62,859 68,789 (5,930 ) (9 )% Marketing and sales 217,432 226,740 (9,308 ) (4 )% General and administrative 73,772 72,943 829 1 % Affiliate revenue share 20,790 15,488 5,302 34 % Depreciation and amortization 116,877 103,810 13,067 13 %Goodwill and intangible asset impairment 461,463 - 461,463 *** Total operating expenses 1,052,742 578,203 474,539 82 % Operating (loss) income (446,060 ) 83,924 (529,984 ) *** Nonoperating (expense) income: Interest expense, net (30,774 ) (27,717 ) (3,057 ) 11 % Other income, net 1,555 722 833 115 % Total nonoperating expense, net (29,219 ) (26,995 ) (2,224 ) 8 % (Loss) income before income taxes (475,279 ) 56,929 (532,208 ) *** Income tax (benefit) expense (29,955 ) 18,120 (48,075 ) *** Net (loss) income$ (445,324 ) $ 38,809 $ (484,133 ) *** ***Not meaningful
Retail Revenue-Direct. Direct revenue consists of marketplace and digital
solutions sold to dealer customers. Direct revenue is our largest revenue
stream, representing 78.6% and 69.1% of total revenue for the years ended
21
--------------------------------------------------------------------------------
McClatchy, TEGNA, tronc, and the Washington Post ). The Belo affiliate agreement
expired on October 1, 2019 . We now have a direct relationship with all dealer
customers and recognize the revenue associated with converted dealer customers
as Retail revenue, rather than Wholesale revenue, in the Consolidated and
Combined Statements of (Loss) Income. During the year ended December 31, 2019 ,
the affiliate market conversions contributed an incremental $52.5 million to
Direct revenue measured at the month of each of the conversions, while reducing
Wholesale revenue by $39.2 million (of which $5.1 million relates to the
Unfavorable contracts liability amortization). For information related to the
affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to
the accompanying Consolidated and Combined Financial Statements included in Part
II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report
on Form 10-K.
Also included in Retail Revenue - Direct is dealer websites and related digital
solutions and digital marketing services, which grew 45% year over year or 25%
on a pro forma basis, for the year ended December 31, 2019 , as compared to the
year ended December 31, 2018 .
These increases were partially offset by a 5% decline in direct dealer customers
from
Retail Revenue-National Advertising . National advertising revenue consists of display advertising and other solutions sold to OEMs, advertising agencies and automotive adjacencies. National advertising revenue represents 13.3% and 15.9% of total revenue for the years endedDecember 31, 2019 and 2018, respectively. National advertising revenue declined 23%, as OEMs reduced their full year 2019 upfront commitments, reduced their advertising budgets and shifted their spending to programmatic. Incremental sales to OEMs have been lower in volume and rate. Wholesale Revenue. Wholesale revenue represents the fees we charge for marketplace and digital solutions sold to dealer customers by affiliates. The fees represent approximately 60% of the retail value for the same marketplace subscription advertising sold by our direct sales team. Wholesale revenue represents 5.7% and 12.5% of total revenue for the years endedDecember 31, 2019 and 2018, respectively. Wholesale revenue decreased 59%, primarily due to affiliate market conversions from Wholesale revenue ($39.2 million , which includes$5.1 million of Unfavorable contracts liability amortization) to Direct revenue ($52.5 million ). Excluding the affiliate market conversions, Wholesale revenue was impacted by a 17% decline in affiliate dealer customers. As ofOctober 1, 2019 , we have successfully converted all affiliates to our direct control and going forward, we will no longer record Wholesale revenue. For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Cost of revenue and operations. Cost of revenue and operations expense primarily consists of expenses related to our pay-per-lead products, third-party costs for product fulfillment and dealer vehicle inventory processing, and compensation costs. Cost of revenue and operations expense represents 16.4% and 13.7% of total revenue for the years endedDecember 31, 2019 and 2018, respectively. Cost of revenue and operations expense increased$9.1 million , primarily due to higher third-party costs and compensation, principally due to growth in dealer websites and related digital solutions and social product offerings, which have an inherently higher cost of revenue. Product and technology. The product team creates and manages consumer and dealer-facing innovation, manages consumer user experience and includes the costs associated with our editorial, SEO and data strategy teams. The technology team develops and supports our products and websites. Product and technology expense includes compensation costs, as well as license fees for vehicle specifications, search engine optimization, hardware/software maintenance, software licenses, data center and other infrastructure costs. Product and technology expense represents 10.4% of total revenue for the years endedDecember 31, 2019 and 2018. Product and technology expense decreased$5.9 million , primarily due to cost efficiencies as a result of the Technology Transformation. Marketing and sales. Marketing and sales expense primarily consists of traffic and lead acquisition costs (including search engine and other online marketing), TV and digital display/video advertising and creative production, market research, trade events and compensation costs for the marketing, sales and sales support teams. Marketing and sales expense represents 35.8% and 34.2% of total revenue for the years endedDecember 31, 2019 and 2018, respectively. Marketing and sales expense decreased$9.3 million , primarily due to lower personnel-related costs as a result of the Sales Transformation, partially offset by strategic marketing investments aimed at consumer acquisitions, consumer engagement and brand awareness. General and administrative. General and administrative expense primarily consists of compensation costs for the executive, finance, legal, human resources, facilities and other administrative employees. In addition, general and administrative expense includes office space rent, legal and accounting services, other professional services, as well as severance, transformation and other exit costs, costs associated with stockholder activist campaign, and transaction-related costs and costs related to the write-off and loss on assets, excluding the goodwill and intangible asset impairment discussed below. General and administrative expense represents 12.2% and 11.0% of total revenue for the years endedDecember 31, 2019 and 2018, respectively. General and administrative expenses increased 22
--------------------------------------------------------------------------------$0.8 million and 1% versus the prior year. During the years endedDecember 31, 2019 and 2018, General and administrative expense included the following costs (in thousands): Year EndedDecember 31, 2019 2018
Severance, transformation and other exit costs
5,771
Costs associated with stockholder activist campaign 8,825
9,806 Transaction-related costs (1) 5,582 13,182 Total$ 24,995 $ 28,759
(1) Transaction-related costs are certain expense items resulting from actual or
potential transactions such as business combinations, mergers, acquisitions,
dispositions, spin-offs, financing transactions, and other strategic
transactions, including, without limitation, (a) transaction-related bonuses
and (b) expenses for advisors and representatives such as investment
bankers, consultants, attorneys and accounting firms. Transaction-related
costs may also include, without limitation, transition and integration costs
such as retention bonuses and acquisition-related milestone payments to
acquired employees, in addition to consulting, compensation and other
incremental costs associated with integration projects.
Excluding these costs, General and administrative expense increased
Affiliate revenue share. Affiliate revenue share expense represents payments made to affiliates pursuant to our affiliate agreements and amortization of the Unfavorable contracts liability related to the markets converted prior to the contractual date. Affiliate revenue share expense increased$5.3 million , primarily due to an increase in payments to the affiliates due to an increase in the number of affiliate markets converted as well as a decrease in the amortization of the Unfavorable contract liability due to the liability becoming fully amortized onOctober 1, 2019 . This amortization is recorded as a reduction of Affiliate revenue share expense, rather than Wholesale revenue for the markets that were converted early. During the years endedDecember 31, 2019 and 2018, the impact of this amortization is the following (in thousands): Year Ended December 31, 2019 2018 Affiliate revenue share expense, gross$ 38,317 $
34,231
Less: Amortization of the Unfavorable contracts liability (17,527 ) (18,743 ) Affiliate revenue share expense, as reported$ 20,790 $ 15,488 For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Depreciation and amortization. Depreciation and amortization expense increased 13%, primarily due to the reduction of the useful lives of certain assets related to the Technology Transformation and the full year impact of the DI Acquisition.
Goodwill and intangible asset impairment. As ofSeptember 1, 2019 , we determined there was a triggering event, primarily caused by a sustained decrease in our stock price after the completion of the strategic alternatives review process, and performed an interim quantitative impairment test. The results of the goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus, we recorded an impairment of$379.2 million and$82.3 million , respectively in the third quarter of 2019. For information related to the impairment, see Note 6 (Goodwill and Other Intangible Assets) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Interest expense, net. In order to manage the risk associated with changes in interest rates on our borrowing under the Term Loan, we entered into an interest rate Swap (the "Swap") effectiveDecember 31, 2018 . Interest expense, net increased, primarily due to additional interest expense associated with the higher fixed rates and the full year impact of interest related to the borrowing utilized to fund the DI Acquisition. For information related to our Term and Revolving Loans and interest rate swap, see Note 8 (Debt) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Income tax (benefit) expense. The effective income tax rate, expressed by calculating the income tax (benefit) expense as a percentage of Income (Loss) before income tax, was 6% for the year endedDecember 31, 2019 and differed from theU.S. federal statutory rate of 21%, primarily due to the impairment of goodwill. For information related to income taxes, see Note 14 (Income Taxes) to the Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 23 --------------------------------------------------------------------------------
Year Ended
Increase
(In thousands, except percentages) 2018 2017 (Decrease) % Change
Revenue:
Direct $ 457,651 $ 333,248 $ 124,403 37 %
National advertising 105,381 114,178 (8,797 ) (8 )%
Other 16,156 15,854 302 2 %
Retail 579,188 463,280 115,908 25 %
Wholesale 82,939 162,982 (80,043 ) (49 )%
Total revenue 662,127 626,262 35,865 6 %
Operating expenses:
Cost of revenue and operations 90,433 65,541 24,892 38 %
Product and technology 68,789 74,162 (5,373 ) (7 )%
Marketing and sales 226,740 209,813 16,927 8 %
General and administrative 72,943 44,903 28,040 62 %
Affiliate revenue share 15,488 8,948 6,540 73 %
Depreciation and amortization 103,810 88,639 15,171 17 %
Total operating expenses 578,203 492,006 86,197 18 %
Operating income 83,924 134,256 (50,332 ) (37 )%
Nonoperating (expense) income:
Interest expense, net (27,717 ) (12,371 ) (15,346 ) ***
Other income, net 722 277 445 161 %
Total nonoperating expense, net (26,995 ) (12,094 ) (14,901 ) *** Income before income taxes
56,929 122,162 (65,233 ) (53 )%
Income tax expense (benefit) 18,120 (102,281 ) 120,401 ***
Net income $ 38,809 $ 224,443 $ (185,634 ) (83 )%
***Not meaningful
Retail Revenue-Direct. Direct revenue grew by $124.4 million , or 37%, compared
to the prior year. The addition of Dealer Inspire's business since the date of
the DI Acquisition contributed $53.1 million to the Direct revenue increase.
Excluding Dealer Inspire, Direct revenue grew $71.3 million , or 21%, from 2017
to 2018 driven by an 11% increase in dealer customers and a 6% increase in ARPD.
The affiliate market conversions contributed $88.9 million to Direct revenue
measured at the time of each of the conversions, while reducing Wholesale
revenue by $78.8 million (of which $18.7 million relates to the Unfavorable
contracts liability amortization). Excluding Dealer Inspire and affiliate market
conversions, Direct revenue declined $16.5 million , primarily due to a 10%
decline in Dealer customers.
Retail Revenue-National Advertising . National advertising revenue decreased 8%
from 2017 to 2018, as OEMs reduced their spending mostly due to the cyclical
nature of the auto industry. The majority of the decline relates to reductions
by three OEM customers.
Wholesale Revenue. Wholesale revenue decreased primarily due to the affiliate
market conversions from Wholesale revenue ($78.8 million , which includes $18.7
million of unfavorable contracts liability amortization) to Direct revenue
($88.9 million ). Excluding the affiliate market conversions, Wholesale revenue
declined due to a 13% decline in Dealer customers.
Cost of revenue and operations. Cost of revenue and operations expense
represents 13.7% and 10.5% of total revenue for the years ended December 31,
2018 and 2017, respectively. The addition of Dealer Inspire's business
contributed $22.2 million to the overall increase. Excluding Dealer Inspire,
Cost of revenue and operations expense increased $2.7 million , primarily due to
higher third-party costs related to new product offerings, partially offset by
reduced compensation costs associated with lower headcount.
Product and technology. Product and technology expense represents 10.4% and
11.8% of total revenue for the years ended
Marketing and sales. Marketing and sales expense represents 34.2% and 33.5% of total revenue for the years endedDecember 31, 2018 and 2017, respectively. The addition of Dealer Inspire's business contributed$13.6 million to the overall increase, as we expanded our salesforce to support our new product offerings and the additional affiliate markets. Excluding Dealer Inspire, 24 -------------------------------------------------------------------------------- Marketing and sales expense increased$3.3 million , primarily due to planned strategic marketing investments aimed at consumer acquisition, consumer engagement, brand awareness amongst auto shopping audiences and search engine optimization. Sales compensation costs decreased despite serving approximately 3,500 incremental dealer customers from converted markets. General and administrative. General and administrative expense increased$28.0 million and 62%, primarily due to$9.8 million in consulting services and other costs incurred as part of our settlement agreement with our stockholder activist;$7.6 million in incremental transaction costs, primarily related to the DI Acquisition and the process to explore strategic alternatives to enhance stockholder value;$6.8 million in incremental stock-based compensation and$3.8 million in costs associated with the Separation of certain employees.
Affiliate revenue share. Affiliate revenue share expense increased 73%,
primarily due to an increase in costs associated with the early conversions of
the McClatchy, tronc and
Depreciation and amortization. Depreciation and amortization expense increased 17%, primarily due to the incremental amortization expense related to the DI Acquisition. Interest expense, net. Interest expense, net increased due to interest associated with the Credit Agreement principally utilized to fund the Separation and the DI Acquisition. Prior to the Separation, the Company had no debt. For additional information, see Note 8 (Debt) to the Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Income tax expense (benefit). Effective with the Separation inMay 2017 , we established a corporate legal entity structure that is subject toU.S. federal corporate income tax on a stand-alone basis post-Separation. The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income taxes, was 31.8% for the year endedDecember 31, 2018 and differed from theU.S. federal statutory rate of 21%, primarily due to changes in apportionment factors upon the finalization of the post-Spin 2017 state tax returns in the fourth quarter of 2018. The income tax benefit for the year endedDecember 31, 2017 is based upon seven months ofCars.com, LLC information and twelve months of DealerRater information. For information related to income taxes, see Note 14 (Income Taxes) to the Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Liquidity and Capital Resources
Overview. Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity available under our credit facilities. Our operations have generated positive operating cash flows in 2019 and 2018 which, along with our Term and Revolving Loans described below, provides adequate liquidity to meet our business needs, including those for investments and strategic acquisitions. In addition, we may raise additional funds through other public or private debt or equity financings. See Part I, Item 1A., "Risk Factors" of this Annual Report on Form 10-K. Affiliate Agreements. As ofOctober 1, 2019 , we have successfully converted all affiliates to our direct control. We amended five of our affiliate agreements (Gannett, the McClatchy Company ("McClatchy"), TEGNA, tronc, Inc. ("tronc"), and theWashington Post ). The Belo affiliate agreement expired onOctober 1, 2019 . We now have a direct relationship with all dealer customers and recognize the revenue associated with converted dealers as Retail revenue, rather than Wholesale revenue, in the Consolidated and Combined Statements of (Loss) Income. BeginningJuly 2020 , upon the expiration of the affiliate agreements, we will realize incremental Free Cash Flow, as we will no longer be required to make any further payments to the affiliates under these agreements. Term Loan and Revolving Loan. As ofDecember 31, 2019 , the outstanding principal amount was$648.1 million , at an effective interest rate of 4.2%, including$388.1 million of outstanding principal under the Term Loan, with an effective interest rate of 4.5%, including the impact of the interest rate swap, and outstanding borrowings under the Revolving Loan of$260.0 million , at an effective interest rate of 3.7%. During the year endedDecember 31, 2019 , we made$28.1 million in mandatory Term Loan payments and$20.0 million in voluntary Revolving Loan payments, net of borrowings. As ofDecember 31, 2019 ,$190.0 million was available to borrow under the Revolving Loan. Our borrowings are limited by our total net leverage ratio, which is calculated in accordance with our Credit Agreement, and was 3.8x as ofDecember 31, 2019 . The Credit Agreement requires a total maximum total net leverage of 4.5x with incremental step downs through the maturities of the Term Loan and the Revolving Loan onMay 31, 2022 . For further information, see Note 8 (Debt) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Interest Rate Swap. The interest rate on borrowings under our Term Loan and Revolving Loan is floating and, therefore, subject to fluctuations. As a result, 53.7% of our interest rates are variable as ofDecember 31, 2019 . Under the terms of the Swap, we are locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in our Credit Agreement, on a notional amount of$300 25
-------------------------------------------------------------------------------- million. As ofDecember 31, 2019 , the fair value of the Swap was an unrealized loss of$10.2 million . The Swap is designated as a cash flow hedge of interest rate risk and recorded at fair value in Other accrued liabilities and Other noncurrent liabilities on the Consolidated Balance Sheets. Any gains or losses, net of tax on the Swap are reported as a component of Accumulated other comprehensive loss until reclassed to Interest expense, net in the same period the hedge transaction impacts earnings. For further information, see "Derivative Financial Instrument" under Note 2 (Significant Accounting Polices) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Share Repurchase Program. InMarch 2018 , our Board of Directors authorized a share repurchase program to acquire up to$200 million of our common stock over a two-year period. We may repurchase shares from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. The timing and amounts of any purchases under the share repurchase program will be based on market conditions and other factors including price. The repurchase program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. During the years endedDecember 31, 2019 and 2018, we repurchased and subsequently retired 1.7 million shares for$40.0 million and 3.8 million shares for$97.2 million , respectively.
Cash Flows. Details of our cash flows are as follows (in thousands):
Year Ended December 31,
2019 2018 Change
Net cash provided by (used in):
Operating activities $ 101,484 $ 163,548 $ (62,064 )
Investing activities (21,856 ) (171,375 ) 149,519
Financing activities (91,542 ) 12,727
(104,269 )
Net change in cash and cash equivalents
Operating Activities. The decrease in cash provided by operating activities was primarily related to the reduction of net income, excluding the impact of non-cash items, partially offset by changes in operating assets and liabilities. In addition, the net loss for the year endedDecember 31, 2019 and the net income for the year endedDecember 31, 2018 was impacted by the following costs (in thousands): Year EndedDecember 31, 2019 2018
Severance, transformation and other exit costs
5,771
Costs associated with stockholder activist campaign 8,825
9,806 Transaction-related costs (1) 5,582 13,182 Total$ 24,995 $ 28,759
(1) Transaction-related costs are certain expense items resulting from actual or
potential transactions such as business combinations, mergers, acquisitions,
dispositions, spin-offs, financing transactions, and other strategic
transactions, including, without limitation, (a) transaction-related bonuses
and (b) expenses for advisors and representatives such as investment
bankers, consultants, attorneys and accounting firms. Transaction-related
costs may also include, without limitation, transition and integration costs
such as retention bonuses and acquisition-related milestone payments to
acquired employees, in addition to consulting, compensation and other
incremental costs associated with integration projects.
Investing Activities. The decrease in cash used in investing activities is
primarily due to the DI Acquisition in
Financing Activities. During the year endedDecember 31, 2019 , cash used in financing activities is primarily related to$48.1 million of loan repayments, net of borrowings, of which$30.0 million was voluntarily paid and$40.0 million in share repurchase. During the year endedDecember 31, 2018 , cash provided by financing activities is primarily due to net revolving loan borrowings of$135.0 million , principally related to the DI Acquisition inFebruary 2018 , partially offset by$97.2 million in share repurchases. For further information, see Note 8 (Debt) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. 26 --------------------------------------------------------------------------------
Contractual Obligations. As of
Payments due by Period
Contractual
Obligations Total 2020 2021 2022 2023 2024 Thereafter
Operating
leases (1) $ 51,100 $ 4,368 $ 4,013 $ 3,751 $ 3,850 $ 4,122 $ 30,996
Long-term
debt (2) 648,125 33,750 39,375 575,000 - - -
Interest on
debt (3) 64,002 27,479 26,157 10,366 - - -
Other
obligations
(4) 9,054 6,954 2,100 - - - -
Total $ 772,281 $ 72,551 $ 71,645 $ 589,117 $ 3,850 $ 4,122 $ 30,996 (1) In the first quarter of 2019, we adopted Accounting Standards Update 2016-02,
Leases (ASU 2016-02). As part of the adoption of ASU 2016-02, we recognized
right-of-use assets and lease liabilities for operating leases, which are
principally related to real estate on our Consolidated Balance Sheets, with
no material impact to our Consolidated and Combined Statements of (Loss)
Income and Consolidated and Combined Statements of Cash Flows. For further
information, see Note 3 (Recent Accounting Pronouncements) to the
accompanying Consolidated and Combined Financial Statements included in Part
II, Item 8., "Financial Statements and Supplementary Data" of this Annual
Report on Form 10-K.
(2) Long-term debt includes future principal payments on long-term borrowings
through scheduled maturity dates. Excluded from these amounts are the
amortization of debt issuance and other costs related to indebtedness.
(3) Interest payments for variable rate debt were calculated using interest rates
as of
primarily on the Term and Revolving loans.
(4) Other obligations represent commitments under certain vendor and other
contracts.
Commitments and Contingencies. For further information, see Note 10 (Commitments
and Contingencies) to the accompanying Consolidated and Combined Financial
Statements included in Part II, Item 8., "Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements. We do not have any material off-balance sheet arrangements.
Critical Accounting Policies and Estimates. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe the following discussion addresses our most critical accounting policies, which are those that are important to the presentation of our financial condition and results of operations and require management's most subjective and complex judgments. Revenue Recognition. We account for a customer arrangement when we and the customer have an approved contract that specifies the rights and obligations of each party and the payment terms, and we believe it is probable we will collect substantially all of the consideration to which we will be entitled in exchange for the services that will be provided to the customer. We allocate the contractual transaction price to each distinct performance obligation and recognize revenue when it satisfies a performance obligation by providing a service to a customer. Revenue is generated through our direct sales force (Retail revenue) and affiliate sales channels (Wholesale revenue). Marketplace Subscription Advertising Revenue. Our primary source of Retail revenue and Wholesale revenue are through the sale of marketplace subscription advertising to dealer customers through varying levels of subscription packages. Our subscription packages provide the dealer customer's available new and used vehicle inventory to in-market shoppers on theCars.com website. The subscription packages are generally a fixed price arrangement with a contract term ranging from three to six months that is automatically renewed, typically on a month-to month basis. We recognize subscription package revenue ratably as the service is provided over the contract term. Marketplace subscription advertising and services revenue is recorded in Retail revenue and Wholesale revenue in the Consolidated and Combined Statements of (Loss) Income. We also offer our customers several add-on products to the subscription packages. Add-on products include premium advertising products that can be uniquely tailored to an individual dealer customer's current needs. Substantially all of our add-on products are not sold separately from the subscription packages as the customer cannot benefit from add-on products on their own. Therefore, the subscription packages and add-on products are combined as a single performance obligation, and we recognize the related revenue ratably as the services are provided over the contract term. 27 --------------------------------------------------------------------------------
We also provide services, including hosting, related to flexible, custom designed website platforms supporting highly personalized digital marketing campaigns, digital retailing and messaging platform products. We recognize revenue related to these services ratably as the service is provided over the contract term. The related revenue is recorded in Retail revenue in the Consolidated and Combined Statements of (Loss) Income.
Prior toOctober 2019 , our affiliates also sold marketplace subscription advertising to dealer customers, and we earned Wholesale revenue through our affiliate agreements. Affiliates were assigned certain sales territories in which they sold our products. Under these agreements, we charged the affiliates 60% of the correspondingCars.com retail rate for products sold to affiliate dealer customers. We recognized Wholesale revenue ratably as the service is provided over the contract term. In situations where our direct sales force sold our products within an affiliate's assigned territory, we paid the affiliate a revenue share which was classified as Affiliate revenue share in the Consolidated and Combined Statements of (Loss) Income. Wholesale revenue also includes the amortization of the Unfavorable contracts liability. For information related to the Unfavorable contracts liability, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Display Advertising Products and Services Revenue. We also earn revenue through the sale of display advertising on our website to national advertisers, pursuant to transaction-based contracts, which are billed for impressions delivered or click-throughs on their advertisements. An impression is the display of an advertisement to an end-user on the website and is a measure of volume. A click-through occurs when an end-user clicks on an impression. We recognize revenue as the impressions or click-throughs are delivered. If the impressions or click-throughs delivered are less than the amount invoiced to the customer, the difference is recorded as deferred revenue and recognized as revenue when earned. We also provide services related to customized digital marketing and customer acquisition services, including paid, organic, social and creative services to dealer customers. We recognize revenue related to these services at the point in time the service is provided. Display advertising products revenue sold to dealer customers is recorded in Retail revenue in the Consolidated and Combined Statements of (Loss) Income. Pay Per Lead Revenue. We also sell leads, which are connections from consumers to dealer customers in the form of phone calls, emails and text messages, to dealer customers, OEMs and third-party resellers. We recognize pay per lead revenue primarily on a per-lead basis at the point in time in which the lead has been delivered. Revenue related to pay per lead is recorded in Retail and Wholesale revenue, in the Consolidated and Combined Statements of (Loss) Income. Other Revenue. Other revenue primarily includes revenue related to vehicle listing data sold to third-parties and peer-to-peer vehicle advertising. We recognize other revenue either ratably as the services are provided or at the point in time the services have been performed. Other revenue is recorded in Retail revenue in the Consolidated and Combined Statements of (Loss) Income.Goodwill .Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed.Goodwill is tested for impairment on an annual basis or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our goodwill is tested for impairment at a level referred to as the reporting unit. The level at which we test goodwill for impairment requires us to determine whether the operations below the business segment level constitute a business for which discrete financial information is available and segment management regularly reviews the operating results. We have determined that CARS operates as a single reporting unit. The process of estimating the fair value of goodwill is subjective and requires us to make estimates that may significantly impact the outcome of the analysis. A qualitative assessment is performed at least annually and considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company specifications. If after performing this assessment, we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then we perform the quantitative test. Under the quantitative test, a goodwill impairment is identified by comparing the fair value of the reporting unit to the carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill. We estimated the fair value of the reporting unit with an income approach using the discounted cash flow ("DCF") analysis and we also considered a market-based valuation methodology using comparable public company trading values. Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, the discount rate and relevant comparable public company earnings multiples. The cash flows employed in the DCF analysis are based on our best estimate of future sales, earnings and cash flows after considering factors such as general market conditions and recent operating performance. The discount rate utilized in the DCF analysis is based on the reporting unit's weighted-average cost of 28
--------------------------------------------------------------------------------
capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of our reporting unit.
Impairment assessment inherently involves management judgments regarding a number of assumptions described above. The reporting unit fair value also depends on the future strength of theU.S. economy. New and developing competition as well as technological change could also adversely affect future fair value estimates. Due to the many variables inherent in the estimation of a reporting unit's fair value and the relative size of our recorded goodwill, differences in assumptions could have a material effect on the estimated fair values. For information related to the goodwill impairment recorded during the year endedDecember 31, 2019 , see Note 6 (Goodwill and Other Intangible Assets) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Indefinite-Lived Intangible Asset. In connection with our acquisition by TEGNA, we recorded an intangible asset with an indefinite life associated with theCars.com trade name. The indefinite-lived intangible asset is tested annually, or more often if circumstances dictate, for impairment and is written down to fair value as required. The estimate of fair value is determined using the "relief from royalty" methodology, which is a variation of the income approach. The discount rate assumption is based on an assessment of the risk inherent in the projected future cash flows generated by the trade name intangible asset. For information related to the intangible asset impairment recorded during the year endedDecember 31, 2019 , see Note 6 (Goodwill and Other Intangible Assets) to the accompanying Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Definite Lived Amortizable Intangible Assets. Our amortizable intangible assets consist mainly of customer relationships and acquired software. These asset values are amortized systematically over their estimated useful lives. An impairment test of these assets would be triggered if the undiscounted cash flows from the related asset group (business unit) were to be less than the asset carrying value. Changes in circumstances, such as technological advances or changes to our business model or capital strategy, could result in actual useful lives differing from our estimates. If an impairment indicator is present, we review our amortizable intangible assets for potential impairment at the asset group level by comparing the carrying value of such assets with the expected undiscounted cash flows to be generated by the asset group. Recent Accounting Pronouncements. For information related to recent accounting pronouncements, see Note 3 (Recent Accounting Pronouncements) to the Consolidated and Combined Financial Statements included in Part II, Item 8., "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
© Edgar Online, source
