CARGURUS, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this report. Some of the information contained in this discussion and analysis or elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and our performance and future success, includes forwardlooking statements that involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements." You should review the "Risk Factors" section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forwardlooking statements contained in the following discussion and analysis. In this discussion, we use financial measures that are considered nonGAAP financial measures underSecurities and Exchange Commission rules. These rules regarding non-GAAP financial measures require supplemental explanation and reconciliation, which are included elsewhere in this Annual Report on Form 10-K. Investors should not consider nonGAAP financial measures in isolation from or in substitution for, financial information presented in compliance withUnited States generally accepted accounting principles, or GAAP. This section of this Annual Report on Form 10-K discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. This section of this Annual Report on Form 10-K also discusses 2021 and 2020 segment revenue and segment operating income (loss) from operations and year-to-year comparisons between 2021 and 2020 segment revenue and segment operating income (loss) from operations. Discussions of all other 2020 items and year-to-year comparisons between 2021 and 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . The periodtoperiod comparison of financial results is not necessarily indicative of future results. Company OverviewCarGurus, Inc. is a multinational, online automotive platform for buying and selling vehicles that is building upon its industry-leading listings marketplace with both digital retail solutions and the CarOffer digital wholesale platform. TheCarGurus platform gives consumers the confidence to buy and/or sell a vehicle either online or in-person, and it gives dealerships the power to accurately price, instantly acquire, effectively market, and quickly sell vehicles, all with a nationwide reach. We use proprietary technology, search algorithms and data analytics to bring trust, transparency and competitive pricing to the automotive shopping experience.
We are headquartered in
We operate principally inthe United States . Inthe United States , we also operate as independent brands the Autolist online marketplace, which we wholly own, and CarOffer digital wholesale marketplace, in which we hold a 51% equity interest. In addition tothe United States , we operate online marketplaces under the CarGurus brand inCanada and theUnited Kingdom . In theUnited Kingdom , we also operate as an independent brand the PistonHeads online marketplace, which we wholly own. We have subsidiaries inthe United States ,Canada ,Ireland , and theUnited Kingdom and, prior to the first quarter of 2022, we had two reportable segments -United States and International. Effective as of the first quarter of 2022, we revised our segment reporting from two reportable segments to one reportable segment. Effective as of the fourth quarter of 2022, we revised our segment reporting from one reportable segment to two reportable segments -U.S. Marketplace and Digital Wholesale. See Note 13 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further segment reporting and geographical information. We derive our revenue from marketplace revenue, wholesale revenue, and product revenue. Marketplace revenue is included in theU.S. Marketplace segment and Other category of segment reporting. Wholesale revenue and product revenue are included in the Digital Wholesale segment. We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages, Real-time Performance Marketing, or RPM, digital advertising suite, and Digital Retail, (ii) advertising revenue from auto manufacturers and other autorelated brand advertisers, and (iii) revenue from partnerships with financing services companies. We generate wholesale revenue primarily from (i) transaction fees earned from facilitating the purchase and sale of vehicles between dealers, or Dealer-to-Dealer transactions, (ii) transaction fees earned from sale of vehicles to dealers that we acquire at other marketplaces, and (iii) transaction fees earned from performing inspection and transportation services, inclusive of Dealer-to-Dealer transactions, other marketplace to dealer transactions, and IMCO transactions (as defined below). We generate product revenue primarily from (i) aggregate proceeds received from the sale of vehicles to dealers that were acquired directly from customers, or CarGurus InstantMax Cash Offer , or IMCO transactions, and (ii) proceeds received from the sale of vehicles that were acquired through arbitration. 38 -------------------------------------------------------------------------------- For the year endedDecember 31, 2022 , we generated revenue of$1,655.0 million , a 74% increase from$951.4 million of revenue for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , we generated consolidated net income of$79.0 million and Consolidated Adjusted EBITDA of$187.7 million , compared to consolidated net income of$110.4 million and Consolidated Adjusted EBITDA of$270.3 million for the year endedDecember 31, 2021 .
See "Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest" below for more information regarding our use of Adjusted EBITDA, a non-GAAP financial measure, and a reconciliation of Adjusted EBITDA to our consolidated net income.
COVID-19 Update
For the past three years, the COVID-19 pandemic and efforts to control its spread have resulted in significant disruptions to the global economy as well as businesses and capital markets around the world. The ultimate extent of the impact of the pandemic will depend on future developments that remain highly uncertain and cannot currently be predicted, including outbreaks of new variants and the availability and effectiveness of vaccines. Our operations have been affected by a range of factors related to the COVID-19 pandemic, including periodic changes in restrictions that vary from region to region in which we operate and may require rapid response to new or reinstated orders. Many of these orders resulted in changes to our on-site work policies and staffing and restrictions on the ability of consumers to buy and sell automobiles by restricting operations at dealerships and/or by closing or reducing the services provided by certain service providers upon which dealerships rely. In addition, these restrictions and continued concern about the spread of the disease have impacted car shopping by consumers and disrupted the operations of car dealerships, which has adversely affected the market for automobile purchases. These effects from the COVID-19 pandemic on our revenue caused us to implement certain cost-savings measures across our business, which previously disrupted our business and operations. We continue to monitor and assess the ongoing effects of the COVID-19 pandemic on our commercial operations, including the impact on our revenue. See the "Risk Factors" section of this Annual Report on Form 10-K for further discussion of the impacts of the COVID-19 pandemic on our business.
Key Business Metrics
We regularly review a number of metrics, including the key metrics listed below, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make operating and strategic decisions. We believe it is important to evaluate these metrics forthe United States and International geographic regions. The International region derives revenues from marketplace revenue from customers outside ofthe United States . International markets perform differently fromthe United States market due to a variety of factors, including our operating history in each market, our rate of investment, market size, market maturity, competition and other dynamics unique to each country. 39
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Monthly Unique Users
For each of our websites (excluding the CarOffer website), we define a monthly
unique user as an individual who has visited any such website within a calendar
month, based on data as measured by Google Analytics. We calculate average
monthly unique users as the sum of the monthly unique users of each of our
websites in a given period, divided by the number of months in that period. We
count a unique user the first time a computer or mobile device with a unique
device identifier accesses any of our websites during a calendar month. If an
individual accesses a website using a different device within a given month, the
first access by each such device is counted as a separate unique user. If an
individual uses multiple browsers on a single device and/or clears their cookies
and returns to our site within a calendar month, each such visit is counted as a
separate unique user. We view our average monthly unique users as a key
indicator of the quality of our user experience, the effectiveness of our
advertising and traffic acquisition, and the strength of our brand awareness.
Measuring unique users is important to us and we believe it provides useful
information to our investors because our marketplace revenue depends, in part,
on our ability to provide dealers with connections to our users and exposure to
our marketplace audience. We define connections as interactions between
consumers and dealers on our marketplace through phone calls, email, managed
text and chat, and clicks to access the dealer's website or map directions to
the dealership.
Year Ended December 31,
Average Monthly Unique Users 2022 2021
(in thousands)
United States 29,083 31,646
International 6,645 7,495
Total 35,728 39,141
Monthly Sessions
We define monthly sessions as the number of distinct visits to our websites
(excluding the CarOffer website) that take place each month within a given time
frame, as measured and defined by Google Analytics. We calculate average monthly
sessions as the sum of the monthly sessions in a given period, divided by the
number of months in that period. A session is defined as beginning with the
first page view from a computer or mobile device and ending at the earliest of
when a user closes their browser window, after 30 minutes of inactivity, or each
night at midnight (i) Eastern Time for our United States and Canada websites,
other than the Autolist website, (ii) Pacific Time for the Autolist website, and
(iii) Greenwich Mean Time for our U.K. websites. A session can be made up of
multiple page views and visitor actions, such as performing a search, visiting
vehicle detail pages, and connecting with a dealer. We believe that measuring
the volume of sessions in a time period, when considered in conjunction with the
number of unique users in that time period, is an important indicator to us of
consumer satisfaction and engagement with our marketplace, and we believe it
provides useful information to our investors because the more satisfied and
engaged consumers we have, the more valuable our service is to dealers.
Year Ended December 31,
Average Monthly Sessions 2022 2021
(in thousands)
United States 77,724 79,316
International 15,219 17,309
Total 92,943 96,625
Number of Paying Dealers
We define a paying dealer as a dealer account with an active, paid marketplace
subscription at the end of a defined period. The number of paying dealers we
have is important to us and we believe it provides valuable information to
investors because it is indicative of the value proposition of our marketplace
products, as well as our sales and marketing success and opportunity, including
our ability to retain paying dealers and develop new dealer relationships.
As of December 31,
Number of Paying Dealers 2022 2021
United States 24,567 23,860
International 6,740 6,770
Total 31,307 30,630
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Transactions
We define Transactions within the Digital Wholesale segment as the number of
vehicles processed from car dealers, consumers, and other marketplaces through
the CarOffer website within the applicable period. Transactions consists of each
unique vehicle (based on vehicle identification number) that reaches "sold and
invoiced" status on the CarOffer website within the applicable period, including
vehicles sold to car dealers, vehicles sold at third-party auctions, vehicles
ultimately sold to a different buyer, and vehicles that are returned to their
owners without completion of a sale transaction. We exclude vehicles processed
within CarOffer's intra-group trading solution (Group Trade) from the definition
of Transactions, and we only count any unique vehicle once even if it reaches
sold status multiple times. Digital Wholesale includes Dealer-to-Dealer
Transactions and IMCO Transactions. We view Transactions as a key business
metric, and we believe it provides useful information to investors, because it
provides insight into growth and revenue for the Digital Wholesale segment.
Transactions drive a significant portion of Digital Wholesale segment revenue.
We believe growth in Transactions demonstrates consumer and dealer utilization
and our market share penetration in the Digital Wholesale segment.
Year Ended December 31,
Transactions 2022 2021
Transactions 190,594 157,062
Quarterly Average Revenue per Subscribing Dealer (QARSD)
We define QARSD, which is measured at the end of a fiscal quarter, as the
marketplace revenue primarily from subscriptions to our Listings packages and
RPM digital advertising suite during that trailing quarter divided by the
average number of paying dealers in that marketplace during the quarter. We
calculate the average number of paying dealers for a period by adding the number
of paying dealers at the end of such period and the end of the prior period and
dividing by two. This information is important to us, and we believe it provides
useful information to investors, because we believe that our ability to grow
QARSD is an indicator of the value proposition of our products and the return on
investment, or ROI, that our paying dealers realize from our products. In
addition, increases in QARSD, which we believe reflect the value of exposure to
our engaged audience in relation to subscription cost, are driven in part by our
ability to grow the volume of connections to our users and the quality of those
connections, which result in increased opportunity to upsell package levels and
cross-sell additional products to our paying dealers.
As of December 31,
Quarterly Average Revenue per Subscribing Dealer (QARSD) 2022 2021 United States$ 5,842 $ 5,633 International$ 1,522 $ 1,546 Consolidated$ 4,921 $ 4,731
Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest
To provide investors with additional information regarding our financial results, we have presented within this Annual Report, Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest, each of which is a nonGAAP financial measures. These nonGAAP financial measures are not based on any standardized methodology prescribed byUnited States generally accepted accounting principles, or GAAP, and are not necessarily comparable to any similarly titled measures presented by other companies. We define Consolidated Adjusted EBITDA as consolidated net income, adjusted to exclude: depreciation and amortization, impairment of long-lived assets, stockbased compensation expense, acquisition-related expenses, other income, net, and provision for income taxes.
We define Adjusted EBITDA as Consolidated Adjusted EBITDA adjusted to exclude Adjusted EBITDA attributable to redeemable noncontrolling interest.
We define Adjusted EBITDA attributable to redeemable noncontrolling interest as
net (loss) income attributable to redeemable noncontrolling interest, adjusted
to exclude: depreciation and amortization, impairment of long-lived assets,
stockbased compensation expense, other expense (income), net, and provision for
income taxes. These exclusions are adjusted for redeemable noncontrolling
interest of 38% by taking the noncontrolling interest's full financial results
and multiplying each line item in the reconciliation by 38%. We note that we use
38%, versus 49%, to allocate the share of income (loss) because it represents
the portion attributable to the redeemable noncontrolling interest. The 38% is
exclusive of CO Incentive Units, Subject Units, and 2021 Incentive Units (as
each term is defined in Note 2 to our consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K) liability classified
awards which do not participate in the share of income/(loss).
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We have presented Consolidated Adjusted EBITDA and Adjusted EBITDA within this
Annual Report, because they are key measures used by our management and board of
directors to understand and evaluate our operating performance, generate future
operating plans, and make strategic decisions regarding the allocation of
capital. In particular, we believe that the exclusion of certain items in
calculating Consolidated Adjusted EBITDA and Adjusted EBITDA can produce a
useful measure for periodtoperiod comparisons of our business. We have
presented Adjusted EBITDA attributable to redeemable noncontrolling interest
because it is used by our management to reconcile Consolidated Adjusted EBITDA
to Adjusted EBITDA. It represents the portion of Consolidated Adjusted EBITDA
that is attributable to our noncontrolling interest. Adjusted EBITDA
attributable to redeemable noncontrolling interest is not intended to be
reviewed on its own.
We use Consolidated Adjusted EBITDA and Adjusted EBITDA to evaluate our
operating performance and trends and make planning decisions. We believe
Consolidated Adjusted EBITDA and Adjusted EBITDA help identify underlying trends
in our business that could otherwise be masked by the effect of the expenses
that we exclude. Accordingly, we believe that Consolidated Adjusted EBITDA and
Adjusted EBITDA provide useful information to investors and others in
understanding and evaluating our operating results, enhancing the overall
understanding of our past performance and future prospects, and allowing for
greater transparency with respect to key financial metrics used by our
management in its financial and operational decisionmaking. We use Adjusted
EBITDA attributable to redeemable noncontrolling interest to reconcile
Consolidated Adjusted EBITDA to Adjusted EBITDA. It enables an investor to gain
a clearer understanding of the portion of Consolidated Adjusted EBITDA that is
attributable to our noncontrolling interest.
Our Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA
attributable to redeemable noncontrolling interest, are not prepared in
accordance with GAAP, and should not be considered in isolation of, or as an
alternative to, measures prepared in accordance with GAAP. There are a number of
limitations related to the use of Consolidated Adjusted EBITDA, Adjusted EBITDA,
and Adjusted EBITDA attributable to redeemable noncontrolling interest rather
than consolidated net income and net (loss) income attributable to redeemable
noncontrolling interest, respectively, which are the most directly comparable
GAAP equivalents. Some of these limitations are:
•
Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest, exclude depreciation and amortization expense and, although these are noncash expenses, the assets being depreciated may have to be replaced in the future;
•
Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude impairment of long-lived assets and, although these are non-cash adjustments, the assets being impaired may have to be replaced in the future;
•
Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest, exclude stockbased compensation expense, which will be, for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;
•
Consolidated Adjusted EBITDA and Adjusted EBITDA exclude transaction and one-time acquisition-related expenses incurred by us during a reporting period, which may not be reflective of our operational performance during such period, for acquisitions that have been completed as of the filing date of our annual or quarterly report (as applicable) relating to such period;
•
Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude other (income) expense, net which consists primarily of interest income earned on our cash, cash equivalents and investments, foreign exchange gains and losses and interest expense;
•
Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest, exclude the provision for income taxes;
•
Adjusted EBITDA excludes Adjusted EBITDA attributable to redeemable noncontrolling interest, which is calculated as the net (loss) income attributable to redeemable noncontrolling interest, adjusted for all exclusions used to calculate Consolidated Adjusted EBITDA as described above; and
•
other companies, including companies in our industry, may calculate Consolidated
Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable
noncontrolling interest differently, which reduces their usefulness as a
comparative measure.
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•
Because of these limitations, we consider, and you should consider, Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest together with other operating and financial performance measures presented in accordance with GAAP.
For the years ended
Year Ended December 31,
2022 2021
(in thousands)Reconciliation of Consolidated Adjusted EBITDA and Adjusted EBITDA: Consolidated net income
$ 78,954 $ 110,373 Depreciation and amortization 45,334
40,476
Impairment of long-lived assets 165
3,128
Stock-based compensation expense 33,682 77,710 Acquisition-related expenses - 709 Other income, net (2,884 ) (1,092 ) Provision for income taxes 32,408 38,987 Consolidated Adjusted EBITDA 187,659 270,291 Adjusted EBITDA attributable to redeemable noncontrolling interest 1,006 20,784 Adjusted EBITDA$ 186,653 $ 249,507 For the years endedDecember 31, 2022 and 2021, the following table presents a reconciliation of Adjusted EBITDA attributable to redeemable noncontrolling interest to net (loss) income attributable to redeemable noncontrolling interest, the most directly comparable measure calculated in accordance with GAAP, for each of the periods presented. Year Ended December 31, 2022 2021 (in thousands) Reconciliation of Adjusted EBITDA attributable to redeemable noncontrolling interest: Net (loss) income attributable to redeemable noncontrolling interest$ (5,433 ) $ 1,129 Depreciation and amortization (1) 11,702
10,827
Impairment of long-lived assets (1) 63 - Stock-based compensation expense (1) (7,312 )
8,410
Other expense, net (1) 2,007
231
(Benefit from) provision for income taxes (1) (21 )
187
Adjusted EBITDA attributable to redeemable noncontrolling interest$ 1,006 $ 20,784 (1)
These exclusions are adjusted to reflect the noncontrolling interest of 38%.
Components of Consolidated Income Statements
Revenue
We derive our revenue from marketplace revenue, wholesale revenue, and product revenue. Marketplace revenue is included in theU.S. Marketplace segment and Other category of segment reporting. Wholesale revenue and product revenue are included in the Digital Wholesale segment. We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages, RPM, digital advertising suite, and Digital Retail, (ii) advertising revenue from auto manufacturers and other autorelated brand advertisers, and (iii) revenue from partnerships with financing services companies. We generate wholesale revenue primarily from (i) transaction fees earned from Dealer-to-Dealer transactions, (ii) transaction fees earned from sale of vehicles to dealers that we acquire at other marketplaces, and (iii) transaction fees earned from performing inspection and transportation services, inclusive of Dealer-to-Dealer transactions, other marketplace to dealer transactions, and IMCO transactions. We generate product revenue primarily from (i) aggregate proceeds received from the sale of vehicles that were acquired through IMCO transactions, and (ii) proceeds received from the sale of vehicles that were acquired through arbitration. 43
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Marketplace Revenue
We offer multiple types of marketplace Listings packages to our dealers for our CarGurusU.S. platform (availability varies on our other marketplaces): Restricted Listings, which is free; and various levels of Listings packages, which each require a paid subscription under a monthly, quarterly, semiannual, or annual subscription basis. Our subscriptions for customers generally auto-renew on a monthly basis and are cancellable by dealers with 30 days' advance notice prior to the commencement of the applicable renewal term. Subscription pricing is determined based on a dealer's inventory size, region, and our assessment of the connections and return on investment ("ROI") the platform will provide them and is subject to discounts and/or fee reductions that we may offer from time to time. We also offer all dealers on the platform access to our Dealer Dashboard, which includes a performance summary, Dealer Insights tool, and user review management platform. Only dealers subscribing to a paid Listings package have access to the Pricing Tool, Market Analysis tool and IMV Scan tool.
We offer paid Listings packages for the Autolist and PistonHeads websites.
In addition to displaying inventory in our marketplace and providing access to the Dealer Dashboard, we offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements marketed under our RPM digital advertising suite. Through RPM, dealers can buy advertising that appears in our marketplace, on other sites on the internet, and/or on high-converting social media platforms. Such advertisements can be targeted by the user's geography, search history,CarGurus website activity and a number of other targeting factors, allowing dealers to increase their visibility with in-market consumers and drive qualified traffic for dealers.
We also offer dealer advertising products for the PistonHeads website.
We also offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements such as Digital Retail, which allows shoppers to complete much of the vehicle-purchase process online through the Dealers' Listings page. Digital Retail is comprised of (i) the Digital Deal Platform, which gives dealers higher quality leads through upfront consumer-provided information, (ii) Area Boost/Geo Expansion, which expands the visibility of a dealer's inventory in the search results beyond its local market, and (iii) Hard Pull Financing, which provides loan information. Marketplace revenue also consists of non-dealer advertising revenue from auto manufacturers and other auto-related brand advertisers sold on a cost per thousand impressions, or CPM basis. An impression is an advertisement loaded on a web page. In addition to advertising sold on a CPM basis, we also have advertising sold on a cost per click basis, or CPC basis. Pricing is primarily based on advertisement size and position on our websites and mobile applications. Auto manufacturers and other brand advertisers can execute advertising campaigns that are targeted across a wide variety of parameters, including demographic groups, behavioral characteristics, specific auto brands, categories such as Certified Pre-Owned, and segments such as hybrid vehicles. We do not provide minimum impression guarantees or other types of minimum guarantees in our contracts with customers. Advertising is also sold indirectly through revenue sharing arrangements with advertising exchange partners.
We also offer non-dealer advertising products for the Autolist and PistonHeads websites.
Marketplace revenue also includes revenue from partnerships with certain financing services companies pursuant to which we enable eligible consumers on our CarGurusU.S. website to pre-qualify for financing on cars from dealerships that offer financing through such companies. We primarily generate revenue from these partnerships based on the number of funded loans from consumers who pre-qualify with our lending partners through our site.
Wholesale Revenue
The Buying Matrix on the CarOffer platform enables buying dealers to create standing buy orders and provides instant offers to selling dealers. Wholesale revenue includes transaction fees earned from Dealer-to-Dealer transactions, where we collect fees from both the buying and selling dealers. We also sell vehicles to dealers that we acquire at other marketplaces, where we collect a transaction fee from the buying dealers.
Wholesale revenue also includes fees earned from performing inspection and transportation services, where we collect fees from the buying dealer. Inspection and transportation service revenue is inclusive of Dealer-to-Dealer transactions, other marketplace to dealer transactions, and IMCO transactions.
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Wholesale revenue also includes arbitration in which the vehicle is rematched to a new buyer and not acquired by us. Arbitration is the process by which we investigate and resolve claims from buying dealers.
Wholesale revenue also includes fees earned from certain guarantees offered to dealers (which include 45-Day Guarantee and OfferGuard products), where we collect fees from the buying dealer or selling dealer, as applicable.
Product Revenue
The Buying Matrix on the CarOffer platform enables consumers who are selling vehicles to be instantly presented with an offer. Product revenue includes the aggregate proceeds received from the sale of vehicles through IMCO transactions, including vehicle sale price and transaction fees collected from the buying dealers. Product revenue also includes proceeds received from the sale of vehicles acquired through arbitration, including vehicle sale price and transaction fees collected from buying dealers. Arbitration is the process by which we investigate and resolve claims from buying dealers. We control the vehicle in these transactions and therefore act as the principal.
Cost of Revenue
Marketplace Cost of Revenue
Marketplace cost of revenue includes expenses related to supporting and hosting marketplace service offerings. These expenses include personnel and related expenses for our customer support team, including salaries, benefits, incentive compensation, and stock-based compensation; third-party service provider expenses such as advertising, data center and networking expenses; amortization of developed technology; amortization of capitalized website development; amortization of hosting arrangements; and allocated overhead expenses. We allocate overhead expenses, such as rent and facility expenses, information technology expense, and employee benefit expense, to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category.
Wholesale Cost of Revenue
Wholesale cost of revenue includes expenses related to supporting and hosting wholesale service offerings, including Dealer-to-Dealer transactions and vehicles sold to dealers acquired at other marketplaces, on the Buying Matrix on the CarOffer platform. These expenses include vehicle transportation and inspection expenses; net losses on vehicles related to guarantees offered to dealers through Dealer-to-Dealer transactions; personnel and related expenses for employees directly involved in the fulfillment and support of transactions, including salaries, benefits, incentive compensation and stock-based compensation; third-party service provider expenses; amortization of developed technology; amortization of capitalized website development; and allocated overhead expenses. We allocate overhead expenses, such as rent and facility expenses, information technology expense, and employee benefit expense, to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category.
Product Cost of Revenue
Product cost of revenue includes expenses related to vehicles sold to dealers through IMCO transactions and vehicles sold to dealers acquired through arbitration. These costs include the cost of the vehicle and transportation expenses.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related expenses
for our sales and marketing team, including salaries, benefits, incentive
compensation, commissions, and stock-based compensation; expenses associated
with consumer marketing, such as traffic acquisition, brand building, and public
relations activities; expenses associated with dealer marketing, such as content
marketing, customer and promotional events, and industry events; consulting
services; software subscription expenses; travel expenses; amortization of
hosting arrangements; and allocated overhead expenses. A portion of our
commissions that are related to obtaining a new contract are capitalized and
amortized over the estimated benefit period of customer relationships. All other
sales and marketing expenses are expensed as incurred. We expect sales and
marketing expenses to fluctuate from quarter to quarter as we respond to changes
in the macroeconomic and competitive landscapes affecting our existing dealers,
consumer audience and brand awareness, which will impact our results of
operations.
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Product, Technology, and Development
Product, technology, and development expenses, consist primarily of personnel and related expenses for our research and development team, including salaries, benefits, incentive compensation, and stock-based compensation; software subscription expenses; consulting services; and allocated overhead expenses. Other than website development, internal-use software, and hosting arrangement expenses, research and development expenses are expensed as incurred. We expect product, technology, and development expenses to increase as we invest in additional engineering resourcing to develop new solutions and make improvements to our existing platform. General and Administrative General and administrative expenses consist primarily of personnel and related expenses for our executive, finance, legal, people & talent, and administrative teams, including salaries, benefits, incentive compensation, and stock-based compensation; expenses associated with professional fees for audit, tax, external legal, and consulting services; payment processing and billing expenses; insurance expenses; software subscription expenses; and allocated overhead expenses. General and administrative expenses are expensed as incurred. We expect general and administrative expenses to increase as we continue to scale our business.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation on property and equipment and amortization of intangible assets and internal-use software.
Other Income, Net
Other income, net consists primarily of interest income earned on our cash, cash equivalents and investments, foreign exchange gains and losses and interest expense.
Provision for Income Taxes
We are subject to federal and state income taxes inthe United States and taxes in foreign jurisdictions in which we operate. For the years endedDecember 31, 2022 and 2021, a provision for income taxes was recognized as a result of the consolidated taxable income position. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. We regularly assess the need to recognize a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As ofDecember 31, 2022 and 2021, valuation allowances were immaterial. We assess our income tax positions and recognize an income tax benefit or expense based upon our evaluation of the facts, circumstances, and information available at the reporting date. For the year endedDecember 31, 2022 , income tax expense and liability related to uncertain tax positions, exclusive of immaterial interest or penalties related to uncertain tax provisions, was$0.6 million , which would favorably affect our effective tax rate, if recognized. For the year endedDecember 31, 2021 , no income tax expense and liability related to uncertain tax positions was recognized. 46
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Results of Operations For the years endedDecember 31, 2022 and 2021, our consolidated income statements are as follows: Year Ended December 31, 2022 2021 (dollars in thousands) Revenue: Marketplace$ 658,771 $ 636,942 Wholesale 237,635 195,127 Product 758,629 119,304 Total revenue 1,655,035 951,373 Cost of revenue: Marketplace 56,040 47,689 Wholesale 176,446 127,679 Product 764,996 118,647 Total cost of revenue 997,482 294,015 Gross profit 657,553 657,358 Operating expenses: Sales and marketing 336,708 290,574 Product, technology, and development 123,768
106,423
General and administrative 73,117
97,678
Depreciation and amortization 15,482 14,415 Total operating expenses 549,075 509,090 Income from operations 108,478 148,268 Other income, net: Interest income 3,845 120 Other (expense) income, net (961 ) 972 Total other income, net 2,884 1,092 Income before income taxes 111,362 149,360 Provision for income taxes 32,408 38,987 Consolidated net income 78,954 110,373 Net (loss) income attributable to redeemable noncontrolling interest (5,433 )
1,129
Net income attributable to CarGurus, Inc.$ 84,387
For the years ended
Year Ended December 31,
2022 2021
(dollars in thousands)
Segment Revenue
U.S. Marketplace $ 614,136 $ 594,602
Digital Wholesale 996,264 314,431
Other 44,635 42,340
Total $ 1,655,035 $ 951,373
Segment Income (loss) from Operations
U.S. Marketplace $ 125,796 $ 151,343
Digital Wholesale (9,174 ) 7,189
Other (8,144 ) (10,264 )
Total $ 108,478 $ 148,268
47--------------------------------------------------------------------------------
For the years ended
Year Ended December 31,
2022 2021
Revenue:
Marketplace 40 % 67 %
Wholesale 14 21
Product 46 13
Total revenue 100 100
Cost of revenue:
Marketplace 3 5
Wholesale 11 13
Product 46 12
Total cost of revenue 60 31
Gross profit 40 69
Operating expenses:
Sales and marketing 20 31
Product, technology, and development 7 11
General and administrative 4 10
Depreciation and amortization 1 2
Total operating expenses 33 54
Income from operations 7 16
Other income, net:
Interest income 0 0
Other (expense) income, net (0 ) 0
Total other income, net 0 0
Income before income taxes 7 16
Provision for income taxes 2 4
Consolidated net income 5 12
Net (loss) income attributable to redeemable
noncontrolling interest (0 ) 0
Net income attributable to CarGurus, Inc. 5 11
For the years ended December 31, 2022 and 2021, our segment revenue as a
percentage of total revenue and our segment income (loss) from operations as a
percentage of segment revenue are as follows (amounts in the table may not sum
due to rounding):
Year Ended December 31,
2022 2021
Segment Revenue
U.S. Marketplace 37 % 62 %
Digital Wholesale 60 33
Other 3 4
Total 100 % 100 %
Segment Income (loss) from Operations
U.S. Marketplace 20 % 25 %
Digital Wholesale (1 ) 2
Other (18 ) (24 )
Total 7 % 16 %
48--------------------------------------------------------------------------------
Year Ended
Revenue
Revenue by Source
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Revenue
Marketplace $ 658,771 $ 636,942 $ 21,829 3 %
Wholesale 237,635 195,127 42,508 22
Product 758,629 119,304 639,325 536
Total $ 1,655,035 $ 951,373 $ 703,662 74 %
Percentage of total revenue:
Marketplace 40 % 67 %
Wholesale 14 21
Product 46 13
Total 100 % 100 %
Overall revenue increased
Marketplace revenue increased$21.8 million , or 3%, in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 and represented 40% of total revenue for the year endedDecember 31, 2022 and 67% of total revenue for the year endedDecember 31, 2021 . The increase was due primarily to a$30.9 million increase in Listings revenue, as a result of a 4% growth in our QARSD for paying dealers to$4,921 for the three months endedDecember 31, 2022 from$4,731 for the three months endedDecember 31, 2021 . The increase in QARSD was due primarily to signing on new dealers with higher average monthly recurring revenue and revenue expansion through product upgrades for existing dealers. The increase in marketplace revenue was offset in part by a$9.3 million decrease in advertising revenue as a result of economic conditions and lower spend by our advertisers. Wholesale revenue increased$42.5 million , or 22%, in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 and represented 14% of total revenue for the year endedDecember 31, 2022 and 21% of total revenue for the year endedDecember 31, 2021 . The increase was due primarily to a 21% increase in Transactions to 190,594 for the year endedDecember 31, 2022 from 157,062 for the year endedDecember 31, 2021 The increase in Transactions resulted in an increase in transaction fee revenue as well as an increase in transportation revenue, inspection revenue, and guarantee revenue. Fee increases also contributed to the increase in transportation revenue. Product revenue increased$639.3 million , or 536%, in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 and represented 46% of the total revenue for the year endedDecember 31, 2022 and 13% of total revenue for the year endedDecember 31, 2021 . The increase was due primarily to a$546.4 million increase in proceeds received from the sale of vehicles through IMCO transactions, including vehicle sale price and transaction fees, as a result of the IMCO offering becoming available to approximately 93% of theU.S. population. The increase in product revenue was also due in part to a$92.9 million increase in proceeds received from the sale of vehicles acquired through arbitration, including vehicle sale price and transaction fees, as a result of increased arbitration claims due primarily to increased volume. 49
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Segment Revenue
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Revenue
U.S. Marketplace $ 614,136 $ 594,602 $ 19,534 3 %
Digital Wholesale 996,264 314,431 681,833 217
Other 44,635 42,340 2,295 5
Total $ 1,655,035 $ 951,373 $ 703,662 74 %
Percentage of total revenue:
U.S. Marketplace 37 % 62 %
Digital Wholesale 60 33
Other 3 4
Total 100 % 100 %
U.S. Marketplace segment revenue increased $19.5 million , or 3%, in the year
ended December 31, 2022 compared to the year ended December 31, 2021 and
represented 37% of total revenue for the year ended December 31, 2022 and 62% of
total revenue for the year ended December 31, 2021 . This increase was due
primarily to a $28.6 million increase in Listings revenue, as a result of a 4%
growth in our U.S. QARSD for paying dealers to $5,842 at December 31, 2022 from
$5,633 at December 31, 2021 . The increase in U.S. QARSD was due primarily to
signing on new dealers with higher average monthly recurring revenue and revenue
expansion through product upgrades for existing dealers. The increase in U.S.
Marketplace segment revenue was offset in part by a $9.7 million decrease in
advertising revenue as a result of economic conditions and lower spend by our
advertisers.
Digital Wholesale segment revenue, which is comprised of wholesale revenue and
product revenue, increased $681.8 million , or 217%, in the year ended December
31, 2022 compared to the year ended December 31, 2021 and represented 60% of
total revenue for the year ended December 31, 2022 and 33% of total revenue for
the year ended December 31, 2021 . Wholesale revenue increased $42.5 million in
the year ended December 31, 2022 , compared to the year ended December 31, 2021 .
The increase in wholesale revenue was due primarily to a 21% increase in
Transactions to 190,594 for the year ended December 31, 2022 from 157,062 for
the year ended December 31, 2021 . The increase in Transactions resulted in an
increase in transaction fee revenue as well as an increase in transportation
revenue, inspection revenue, and guarantee revenue. Fee increases also
contributed to the increase in transportation revenue. Product revenue increased
$639.3 million in the year ended December 31, 2022 compared to the year ended
December 31, 2021 . The increase in product revenue was due primarily to a $546.4
million increase in proceeds received from the sale of vehicles through IMCO
transactions, including vehicle sale price and transaction fees, as a result of
the IMCO offering becoming available to approximately 93% of the U.S.
population. The increase in product revenue was also due in part to a $92.9
million increase in proceeds received from the sale of vehicles acquired through
arbitration, including vehicle sale price and transaction fees, as a result of
increased arbitration claims due primarily to increased volume.
Cost of Revenue
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue
Marketplace $ 56,040 $ 47,689 $ 8,351 18 %
Wholesale 176,446 127,679 48,767 38
Product 764,996 118,647 646,349 545
Total $ 997,482 $ 294,015 $ 703,467 239 %
Percentage of total revenue:
Marketplace 3 % 5 %
Wholesale 11 13
Product 46 12
Total 60 % 31 %
Overall cost of revenue increased
50
--------------------------------------------------------------------------------
Marketplace cost of revenue increased $8.4 million , or 18%, in the year ended
December 31, 2022 compared to the year ended December 31, 2021 and represented
3% of total revenue for the year ended December 31, 2022 and 5% of total revenue
for the year ended December 31, 2021 . The increase was due primarily to a $4.6
million increase in fees related to provisioning advertising campaigns on our
websites from changing to more effective but slightly higher cost service
providers and a $3.4 million increase in data and hosting costs.
Wholesale cost of revenue increased $48.8 million , or 38%, in the year ended
December 31, 2022 compared to the year ended December 31, 2021 and represented
11% of total revenue for the year ended December 31, 2022 and 13% of total
revenue for the year ended December 31, 2021 . The increase was due primarily to
an increase in Dealer-to-Dealer transactions which resulted an increase in
transportation expenses, inspection expenses, third-party service provider
expenses, and guarantee expenses. Cost increases also contributed to the
increase in transportation expenses. The increase in wholesale cost of revenue
was also driven by an increase in amortization of capitalized website
development.
Product cost of revenue increased $646.3 million , or 545%, in the year ended
December 31, 2022 compared to the year ended December 31, 2021 and represented
46% of the total revenue for the year ended December 31, 2022 and 12% of total
revenue for the year ended December 31, 2021 . The increase was due primarily to
a $535.5 million increase in expenses related to vehicles sold to dealers
through IMCO transactions as a result of an increase in IMCO transactions. The
increase in IMCO transactions was due primarily to the offering becoming
available to approximately 93% of the U.S. population. The increase in product
cost of revenue was also due in part to a $110.8 million increase in expenses
related to vehicles sold to dealers acquired through arbitration as a result of
increased arbitration claims due primarily to increased volume.
Operating Expenses
Sales and Marketing Expenses
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Sales and marketing $ 336,708 $ 290,574 $ 46,134 16 %
Percentage of total revenue 20 % 31 %
Sales and marketing expenses increased $46.1 million , or 16%, in the year ended
December 31, 2022 compared to the year ended December 31, 2021 . The increase was
due primarily to a $38.8 million increase in marketing expenses, primarily
related to the marketing of IMCO in the first three quarters of 2022, search
engine performance marketing as part of our efforts to increase site traffic due
to a result of increased dealer inventory compared to the year ended December
31, 2021 , and creative expenses for future marketing campaigns. The increase was
also due in part to a $19.8 million increase in salaries and employee-related
expense, exclusive of stock-based compensation expense and commissions expenses,
which decreased $5.1 million and $2.1 million , respectively. The increase in
salaries and employee-related expense was due primarily to a 21% increase in
headcount. The decrease in stock-based compensation was due primarily to the
revaluation of liability-based stock awards. The decrease in commissions expense
was due primarily to higher capitalization on commissions as a result of
compensation plan changes, net of sales growth. The increase in sales and
marketing expenses was also due in part to a $1.7 million increase in software
subscription expenses, inclusive of amortization of hosting arrangements, a $1.2
million increase in allocated insurance and legal expenses, a $1.1 million
increase in travel expenses, and a $0.8 million increase in employee expenses
associated with the return to office. The increase in sales and marketing
expense was offset in part by a $10.8 million decrease in brand awareness
advertising costs due to decreased spend as a result of a change in advertising
strategy toward the end of 2022.
Product, Technology, and Development Expenses
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Product, technology, and development $ 123,768 $ 106,423 $ 17,345 16 %
Percentage of total revenue 7 % 11 %
51-------------------------------------------------------------------------------- Product, technology, and development expenses increased$17.3 million , or 16%, in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The increase was due primarily to a$20.4 million increase in salaries and employee-related expenses, exclusive of stock-based compensation, which decreased$2.7 million . The increase in salaries and employee-related expenses was due primarily to a 16% increase in headcount. The decrease in stock-based compensation was due primarily to the revaluation of liability-based stock awards. The increase in product, technology, and development expenses was also due in part to a$3.7 million increase in consulting expenses, a$1.6 million increase in software subscription expenses, a$0.6 million increase in employee expenses associated with the return to office and a$0.5 million increase in travel expenses. The increase in product, technology, and development expenses was offset in part by a$7.9 million decrease resulting from increased capitalized projects and a prior year impairment of website development costs.
General and Administrative Expenses
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
General and administrative $ 73,117 $ 97,678 $ (24,561 ) (25 )%
Percentage of total revenue 4 % 10 %
General and administrative expenses decreased $24.6 million , or 25%, in the year
ended December 31, 2022 compared to the year ended December 31, 2021 . The
decrease was due primarily to a $37.0 million decrease in stock-based
compensation. The decrease in stock-based compensation was due to the
revaluation of liability-based stock awards. The decrease in general and
administrative expenses was offset in part by a $6.0 million increase in
salaries and employee-related expenses, exclusive of stock-based compensation.
The increase in salaries and employee-related expenses was due primarily to a
23% increase in headcount. The decrease was also offset in part by a $2.2
million increase in audit, tax, legal and consulting expenses, a $1.1 million
increase in software subscription expenses, a $0.8 million increase in indirect
tax expenses, a $0.6 million increase in bad debt expense, and a $0.5 million
increase in payment processing and billing expense.
Depreciation and Amortization Expenses
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Depreciation and amortization
7 % Percentage of total revenue 1 % 2 % Depreciation and amortization expenses increased$1.1 million , or 7%, in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The increase was due primarily to internal-use software projects that went into service during the year endedDecember 31, 2022 . Other Income, net Year Ended December 31, Change 2022 2021 Amount % (dollars in thousands) Other income, net Interest income$ 3,845 $ 120 $ 3,725 3104 % Other (expense) income (961 ) 972 (1,933 ) (199 ) Total other income, net$ 2,884 $ 1,092 $ 1,792 164 % Percentage of total revenue: Interest income 0 % 0 % Other (expense) income (0 ) 0 Total other income, net 0 % 0 % Other income, net increased$1.8 million , or 164%, in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The$3.7 million increase in interest income was due primarily to the investment in new money market accounts as a result of interest rate increases during the year endedDecember 31, 2022 . The$1.9 million decrease in other (expense) income was due primarily to$1.5 million increase in realized and unrealized loss associated with the strengthening of the dollar against certain foreign currencies. 52
--------------------------------------------------------------------------------
Provision for Income Taxes
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Provision for income taxes $ 32,408 $ 38,987 $ (6,579 ) (17 )%
Percentage of total revenue 2 % 4 %
Provision for income taxes decreased $6.6 million , or 17% in year ended December
31, 2022 compared to the year ended December 31, 2021 . The decrease in provision
for income taxes recognized during the year ended December 31, 2021 was due
primarily to decreased profitability. This was offset by a $1.5 million tax
expense related to excess stock-based compensation deductions recognized during
2022, compared to $0.4 million tax expense recognized during 2021. Furthermore,
a $3.9 million tax expense was recognized during 2022 in connection with the
Section 162(m) excess officer compensation limitation, compared to $2.0 million
tax expense recognized during 2021.
Segment Income (loss) from Operations
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Segment Income (loss) from Operations
U.S. Marketplace $ 125,796 $ 151,343 $ (25,547 ) (17 )%
Digital Wholesale (9,174 ) 7,189 (16,363 ) (228 )
Other (8,144 ) (10,264 ) 2,120 21
Total $ 108,478 $ 148,268 $ (39,790 ) (27 )%
Percentage of segment revenue:
U.S. Marketplace 20 % 25 %
Digital Wholesale (1 ) 2
Other (18 ) (24 )
Total 7 % 16 %
U.S. Marketplace segment income from operations decreased $25.5 million , or 17%,
in the year ended December 31, 2022 compared to the year ended December 31, 2021
and represented 20% of U.S. Marketplace segment revenue for the year ended
December 31, 2022 and 25% of U.S. Marketplace segment revenue for the year ended
December 31, 2021 . The decrease was due to increases in revenue of $19.5
million , offset by increases in cost of revenue of $10.1 million and increases
in operating expenses of $34.9 million .
Digital Wholesale segment income from operations decreased $16.4 million , or
228%, in the year ended December 31, 2022 compared to the year ended December
31, 2021 and represented 1% of Digital Wholesale segment revenue for the year
ended December 31, 2022 and 2% of Digital Wholesale segment revenue for the year
ended December 31, 2021 . The decrease was due to increases in revenue of $681.8
million , offset by increases in cost of revenue of $692.5 million and increases
in operating expenses of $5.7 million .
53--------------------------------------------------------------------------------
Year Ended
Revenue
Segment Revenue
Year Ended December 31, Change
2021 2020 Amount %
(dollars in thousands)
Segment Revenue
U.S. Marketplace $ 594,602 $ 519,835 $ 74,767 14 %
Digital Wholesale 314,431 - 314,431 NM(1)
Other 42,340 31,616 10,724 34
Total $ 951,373 $ 551,451 $ 399,922 73 %
Percentage of segment revenue:
U.S. Marketplace 62 % 94 %
Digital Wholesale 33 NM(1)
Other 4 6
Total 100 % 100 %
(1)
NM - Not meaningful
U.S. Marketplace segment revenue increased $74.8 million , or 14%, in the year
ended December 31, 2021 compared to the year ended December 31, 2020 and
represented 62% of segment revenue for the year ended December 31, 2021 and 94%
of total revenue for the year ended December 31, 2020 . The increase was due to
approximately $44 million in revenue reductions during the second quarter of
2020 as a result of the impact of fee reductions that we provided to our United
States paying dealers during such quarter in response to the COVID-19 pandemic.
The increase was also due in part to product upgrades for existing dealers and
signing on new dealers with higher average monthly recurring revenue.
Digital Wholesale segment revenue increased $314.4 million in the year ended
December 31, 2021 compared to the year ended December 31, 2020 and represented
33% of segment revenue for the year ended December 31, 2021 . The increase was
primarily due to our acquisition of a 51% interest in CarOffer and launch of our
IMCO offering in 2021.
Segment Income (loss) from Operations
Year Ended December 31, Change
2021 2020 Amount %
(dollars in thousands)
Segment Income (loss) from Operations
U.S. Marketplace $ 151,343 $ 120,836 $ 30,507 25 %
Digital Wholesale 7,189 - 7,189 NM(1)
Other (10,264 ) (23,080 ) 12,816 56
Total $ 148,268 $ 97,756 $ 50,512 52 %
Percentage of segment revenue:
U.S. Marketplace 25 % 23 %
Digital Wholesale 2 NM(1)
Other (24 ) (73 )
Total 16 % 18 %
(1)
NM - Not meaningful
U.S. Marketplace segment income from operations increased $30.5 million , or 25%,
in the year ended December 31, 2021 compared to the year ended December 31, 2020
and represented 25% of U.S. Marketplace segment revenue for the year ended
December 31, 2021 and 23% of U.S. Marketplace segment revenue for the year ended
December 31, 2020 . The increase was due to increases in revenue of $74.8
million , offset by increases in cost of revenue of $7.4 million and increases in
operating expenses of $36.9 million .
Digital Wholesale segment income from operations increased $7.2 million in the
year ended December 31, 2021 compared to the year ended December 31, 2020 and
represented 2% of Digital Wholesale segment revenue for the year ended December
31, 2021 . The increase was primarily due to our acquisition of a 51% interest in
CarOffer and launch of our IMCO offering in 2021.
54--------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash, Cash Equivalents and Investments
As ofDecember 31, 2022 , our principal sources of liquidity were cash and cash equivalents of$469.5 million . As ofDecember 31, 2021 , our principal sources of liquidity were cash and cash equivalents of$231.9 million and investments in certificates of deposit with terms of greater than 90 days but less than one year of$90.0 million . Sources and Uses of Cash
During the years ended
Year Ended December 31,
2022 2021
(in thousands)
Net cash provided by operating activities $ 256,106 $ 98,292
Net cash provided by (used in) investing activities 72,730 (68,149 )
Net cash (used in) provided by financing activities (92,620 ) 17,808
Impact of foreign currency on cash (364 ) (597 ) Net increase in cash, cash equivalents, and restricted cash$ 235,852
Our operations have been financed primarily from operating activities. During the years endedDecember 31, 2022 and 2021, we generated cash from operating activities of$256.1 million and$98.3 million , respectively. We believe that our existing sources of liquidity, including access to our 2022 Revolver, will be sufficient to fund our operations for at least the next 12 months from the date of the filing of this Annual Report on Form 10-K. Our future capital requirements will depend on many factors, including, but not limited to: the further impact of the COVID-19 pandemic; our revenue; expenses associated with our sales and marketing activities and the support of our product, technology, and development efforts; expenses associated with our facilities build-out under our1001 Boylston Street lease that do not qualify for landlord reimbursement; payments received in advance from a third-party payment processor; activity under our Share Repurchase Program; and our investments in international markets. Our long-term future capital requirements will depend on many factors, including the future cash requirements described above, as well as the potential exercise of a call right to acquire all, and not less than all, of the remaining equity interests in CarOffer and the representative of the holders of the remaining equity will have a put right to sell to us, all, and not less than all, of the remaining equity interests of CarOffer. Details of this acquisition are more fully described in Note 2 to these consolidated financial statements. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, macroeconomic effects and other risks detailed in the "Risk Factors" section of this Annual Report on Form 10-K. OnSeptember 26, 2022 , we entered into a Credit Agreement withPNC Bank, National Association , as administrative agent and collateral agent and an L/C Issuer (as defined in the Credit Agreement), and the other lenders, L/C Issuers and parties thereto from time to time, or the Credit Agreement. The Credit Agreement consists of a revolving credit facility, or the 2022 Revolver, which allows us to borrow up to$400.0 million ,$50.0 million of which may be comprised of a letter of credit sub-facility. The borrowing capacity under the Credit Agreement may be increased in accordance with the terms and subject to the adjustments as set forth in the Credit Agreement. For example, the borrowing capacity may be increased by an amount up to the greater of$250.0 million or 100% of Four Quarter Consolidated EBITDA (as defined in the Credit Agreement) if certain criteria are met and subject to certain restrictions. Any such increase requires lender approval. Proceeds of any borrowings may be used for general corporate purposes. The 2022 Revolver is scheduled to mature onSeptember 26, 2027 . As ofDecember 31, 2022 , there were no borrowings and no letters of credit outstanding under the 2022 Revolver. 55 -------------------------------------------------------------------------------- OnDecember 8, 2022 , we announced that our Board of Directors authorized the Share Repurchase Program, pursuant to which we may, from time to time, purchase shares of our Class A common stock for an aggregate purchase price not to exceed$250 million . Share repurchases under the Share Repurchase Program may be made through a variety of methods, including but not limited to open market purchases, privately negotiated transactions and transactions that may be effected pursuant to one or more plans under Rule 10b5-1 and/or Rule 10b-18 of the Exchange Act. The Share Repurchase Program does not obligate us to repurchase any minimum dollar amount or number of shares. The Share Repurchase Program has an expiration date ofDecember 31, 2023 , and prior to its expiration may be modified, suspended, or discontinued by our Board of Directors at any time without prior notice. All repurchased shares under the Share Repurchase Program will be retired. We expect to fund share repurchases through cash on hand and cash generated from operations. During the year endedDecember 31, 2022 , we repurchased and retired 1,350,473 shares for$18,691 , at an average cost of$13.84 per share under this authorization. As ofDecember 31, 2022 , we had remaining authorization to purchase up to$231,309 of our common stock under the Share Repurchase Program. To the extent that existing cash, cash equivalents, and our borrowing capacity under the 2022 Revolver are insufficient to fund our future activities, we may need to raise additional funds through a public or private equity or debt financing. Additional funds may not be available on terms favorable to us, or at all. See "Risk Factors-Risks Related to Our Business and Industry- We may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances. If we are unable to generate sufficient cash flows or if capital is not available to us, our business, operating results, financial condition, and prospects could be adversely affected." Operating Activities Cash provided by operating activities of$256.1 million during the year endedDecember 31, 2022 was due primarily to consolidated net income of$79.0 million , adjusted for$54.8 million of stock-based compensation expense,$45.3 million of depreciation and amortization,$11.1 million of amortization of deferred contract costs, and$1.8 million of provision for doubtful accounts, offset in part by$22.1 million of deferred taxes. Cash provided by operating activities was also attributable to a$153.0 million decrease in accounts receivable and a$14.4 million decrease in inventory. The increases in cash flow from operations were partially offset by a$35.4 million decrease in accounts payable, a$25.1 million decrease in accrued expenses, accrued income taxes, and other liabilities, a$13.7 million increase in deferred contract costs, a$6.6 million increase in prepaid expenses, prepaid income taxes, and other assets, a$0.5 million decrease in lease obligations, and a$0.5 million decrease in deferred revenue. Cash provided by operating activities of$98.3 million during the year endedDecember 31, 2021 was due primarily to consolidated net income of$110.4 million , adjusted for$53.5 million of stock-based compensation expense,$40.5 million of depreciation and amortization,$12.7 million of amortization of deferred contract costs,$6.2 million of deferred taxes,$3.1 million of impairment of long-lived assets, and$1.0 million of provision for doubtful accounts. Cash provided by operating activities was also attributable to a$35.8 million increase in accrued expenses, accrued income taxes, and other liabilities, a$35.4 million increase in accounts payable, a$3.7 million increase in deferred revenue, and a$1.0 million increase in lease obligations. The increases in cash flow from operations were partially offset by a$174.8 million increase in accounts receivable due primarily to the acquisition of a 51% interest in CarOffer, a$17.3 million increase in inventory, a$7.7 million increase in gross deferred contract costs, and a$5.1 million increase in prepaid expenses, prepaid income taxes, and other assets.
Investing Activities
Cash provided by investing activities of
Cash used in investing activities of$68.1 million during the year endedDecember 31, 2021 was due to$64.3 million of acquisition cash payments, net of cash acquired,$7.7 million of purchases of property and equipment, and$6.2 million related to the capitalization of website development costs, offset in part by$130.0 million of maturities in certificates of deposit, net of investments in certificates of deposit of$120.0 million . 56
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Financing Activities
Cash used in financing activities of$92.6 million during the year endedDecember 31, 2022 was due primarily to a$40.3 million decrease in gross advance payments received from third-party payment processor,$19.9 million of payment of tax distributions to redeemable noncontrolling interest holders,$16.0 million of payment of withholding taxes on net share settlements of restricted stock units,$14.4 million of payment for the repurchase of our Class A common stock under the Share Repurchase Program, and$2.6 million of payment of deferred financing costs, partially offset by$0.7 million of proceeds from the issuance of common stock upon exercise of stock options. Cash provided by financing activities of$17.8 million during the year endedDecember 31, 2021 was due primarily to$46.8 million increase in gross advance payments received from third-party payment processor and$0.7 million related to the proceeds from the issuance of common stock upon exercise of stock options, partially offset by payment of withholding taxes on net share settlements of restricted stock units, of$15.4 million and CarOffer's repayment of a line of credit of$14.3 million
Contractual Obligations and Known Future Cash Requirements
Refer to Note 9 of our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for our contractual obligations and commitments.
Seasonality
Across the retail automotive industry, consumer purchases are typically greatest in the first three quarters of each year, due in part to the introduction of new vehicle models from manufacturers and the seasonal nature of consumer spending. Additionally, the volume of wholesale vehicle sales can fluctuate from quarter to quarter caused by several factors, including the timing of used vehicles available for sale from selling customers, the seasonality of the retail market for used vehicles and/or inventory challenges in the automotive industry, which affect the demand side of the wholesale industry. Macroeconomic conditions, such as slower growth or recession, higher interest rates, high unemployment, consumer confidence in the economy, consumer debt levels, the ongoing military conflict betweenRussia andUkraine , foreign currency exchange rate fluctuations and other matters that influence consumer spending and preferences, can also impact the volume of wholesale vehicle sales, as was evidenced by the global semiconductor chip shortage. The Digital Wholesale segment operating results have reflected the general seasonality of the wholesale vehicle sales market and macroeconomic conditions of the automotive industry.The U.S. Marketplace segment operating results have reflected the macroeconomic conditions of the automotive industry. However, to date, theU.S. Marketplace segment operating results have not been materially impacted by the general seasonality of the automotive industry. This could possibly change once our business and markets mature. As a result, revenue and cost of revenue related to volume will fluctuate accordingly on a quarterly basis. Typical seasonality trends may not be observed in periods where other external factors more significantly impact the wholesale industry.
OffBalance Sheet Arrangements
As ofDecember 31, 2022 and 2021, we did not have any off-balance sheet arrangements, other than leases signed but not commenced, or material leases that are less than twelve months in duration, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period.
57
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Although we regularly assess these estimates, actual results could differ
materially from these estimates. We base our estimates on historical experience
and various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from management's estimates if these
results differ from historical experience, or other assumptions do not turn out
to be substantially accurate, even if such assumptions are reasonable when made.
Changes in estimates are recognized in the period in which they become known.
Critical estimates relied upon in preparing the consolidated financial
statements include the determination of sales allowance and variable
consideration in our revenue recognition, allowance for doubtful accounts, the
impairment of long-lived assets, the capitalization of product, technology, and
development costs for website development, internal-use software and hosting
arrangements, the valuation of acquired assets and liabilities, the valuation
and recoverability of intangible assets and goodwill, the valuation of
redeemable noncontrolling interest, the recoverability of our net deferred tax
assets and related valuation allowance, the valuation of inventory, and the
valuation of equity and liability-classified compensation awards. Accordingly,
we consider these to be our critical accounting estimates, and believe that of
our significant accounting policies, these involve the greatest degree of
judgment and complexity.
Revenue Recognition - Sales Allowance and Variable Consideration
Our accounting policy relating to revenue recognition reflects the impact of the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers, or ASC 606, which is discussed further in the Notes to the Consolidated Financial Statements. As prescribed by ASC 606, we recognize revenue based on a five-step approach. We derive our revenue from marketplace revenue, wholesale revenue, and product revenue. Marketplace revenue is included in theU.S. Marketplace segment and Other category of segment reporting. Wholesale revenue and product revenue are included in the Digital Wholesale segment. We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages, RPM, digital advertising suite, and Digital Retail, (ii) advertising revenue from auto manufacturers and other autorelated brand advertisers, and (iii) revenue from partnerships with financing services companies. We generate wholesale revenue primarily from (i) transaction fees earned from Dealer-to-Dealer transactions, (ii) transaction fees earned from sale of vehicles to dealers that we acquire at other marketplaces, and (iii) transaction fees earned from performing inspection and transportation services, inclusive of Dealer-to-Dealer transactions, other marketplace to dealer transactions, and IMCO transactions. We generate product revenue primarily from (i) aggregate proceeds received from the sale of vehicles that were acquired through IMCO transactions, and (ii) proceeds received from the sale of vehicles that were acquired through arbitration. Critical accounting estimates associated with each of the three revenue sources are outlined below. Total consideration for marketplace revenue is stated within the contracts. There are no contractual cash refund rights, but credits may be issued to a customer at our sole discretion. Dealer customers do not have the right to take possession of our software. At the portfolio level, there is also variable consideration that needs to be included in the transaction price. Variable consideration consists of sales allowances, usage fees, and concessions that change the transaction price of the unsatisfied or partially unsatisfied performance obligation. We recognize that there are times when there is a customer satisfaction issue or other circumstances that will lead to a credit. Due to the known possibility of future credits, a monthly sales allowance review is performed to defer revenue at a portfolio level for such future adjustments in the period of incurrence. We establish sales allowances at the time of revenue recognition based on our history of adjustments and credits provided to our customers. In assessing the adequacy of the sales allowance, we evaluate our history of adjustments and credits made through the date of the issuance of the financial statements. Estimated sales adjustments, credits and losses may vary from actual results which could lead to material adjustments to the financial statements. Advertising contracts state the transaction price within the agreement with payment generally being based on the number of clicks or impressions delivered on our websites. Total consideration is based on output and deemed variable consideration constrained by an agreed upon delivery schedule and is allocated to the period in which the service was rendered. Additionally, there are generally no contractual cash refund rights. Certain contracts do contain the right for credits in situations in which impressions are not displayed in compliance with contractual specifications. At an individual contract level, we may give a credit for a customer satisfaction issue or other circumstance. Due to the known possibility of future credits, a monthly review is performed to defer revenue at an individual contract level for such future adjustments in the period of incurrence. Although these credits have not been material and have not changed significantly over the historical period, estimated sales adjustments credits and losses may vary from actual results which could lead to material adjustments to the financial statements. Other marketplace revenue includes revenue from contracts for which the performance obligation is a series of distinct services with the same level of effort daily. For these contracts, primarily related to our partnerships with financing services companies, we estimate the value of the variable consideration in determining the transaction price and allocate it to the performance obligation. Revenue is estimated and recognized on a ratable basis over the contractual term. We reassess the estimate of variable consideration at each reporting period. 58 -------------------------------------------------------------------------------- Within wholesale transactions, there are typically no contractual cash refund rights, but credits may be issued to a customer at our sole discretion and refunds may be required by law in the case of a vehicle defect. At the portfolio level, there is also variable consideration that needs to be included in the transaction price. Variable consideration consists of sales allowances and concessions that change the transaction price of the unsatisfied or partially unsatisfied performance obligation. We recognize that there are times when there is a customer satisfaction issue or other circumstance that will lead to a credit or arbitration. We establish sales allowances at the time of revenue recognition based on our history of adjustments and credits provided to our customers. In assessing the adequacy of the sales allowance, we evaluate our history of adjustments and credits made through the date of the issuance of the financial statements. Upon recognizing a sales transaction, we estimate the amount of transaction price that will be reversed in a subsequent period and record a reserve for returns and cancellations in other current liabilities in the consolidated income statements. Estimated sales adjustments, credits and losses may vary from actual results which could lead to material adjustments to the financial statements. Within product transactions, there are typically no contractual cash refund rights, but credits may be issued to a customer at our sole discretion. At the portfolio level, there is also variable consideration that needs to be included in the transaction price. Variable consideration consists of sales allowances and concessions that change the transaction price of the unsatisfied or partially unsatisfied performance obligation. We recognize that there are times when there is a customer satisfaction issue or other circumstance that will lead to a credit or arbitration. We establish sales allowances at the time of revenue recognition based on our history of adjustments and credits provided to our customers. In assessing the adequacy of the sales allowance, we evaluate our history of adjustments and credits made through the date of the issuance of the financial statements. Upon recognizing a sales transaction, we estimate the amount of transaction price that will be reversed in a subsequent period and record a reserve for returns and cancellations in other current liabilities in the consolidated income statements. Estimated sales adjustments, credits and losses may vary from actual results which could lead to material adjustments to the financial statements.
Accounts Receivable - Allowance for Doubtful Accounts
The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable and is based upon historical loss trends, the number of days that billings are past due, an evaluation of the potential risk of loss associated with specific accounts, current economic trends and conditions, and reasonable and supportable forecasts of economic conditions. If circumstances relating to specific customers change, or unanticipated changes occur in the general business environment, particularly as it affects auto dealers, our estimates of the recoverability of receivables could be further adjusted.
LongLived Assets - Impairment
We evaluate the recoverability of long-lived assets, such as property and equipment and intangible assets, for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. During this review, we reevaluate the significant assumptions used in determining the original cost and estimated lives of long-lived assets. Although the assumptions may vary from asset to asset, they generally include operating results, changes in the use of the asset, cash flows, and other indicators of value. Management then determines whether the remaining useful life continues to be appropriate, or whether there has been an impairment of longlived assets based primarily upon whether expected future undiscounted cash flows are sufficient to support the assets' recovery.
Capitalized website development and capitalized internal-use software costs are amortized on a straightline basis over their estimated useful life of three years beginning with the time when the product is ready for intended use. We evaluate the useful lives of these assets when each asset is ready for its intended use, and at least annually thereafter to ensure three years remains appropriate. We also test for impairment at least annually and whenever events or changes in circumstances occur that could impact the recoverability of these assets. Impairment is evaluated as discussed in the "Long-Lived Assets - Impairment" section above.
Hosting Arrangements - Capitalization
Capitalized implementation costs for hosting arrangements are amortized on a
straightline basis over an estimated useful life of the term of the hosting
arrangement, taking into consideration several other factors such as, but not
limited to, options to extend the hosting arrangement or options to terminate
the hosting arrangement, beginning with the time when the software is ready for
intended use.
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We evaluate the useful lives of these assets when each asset is ready for its
intended use, and at least annually thereafter to ensure the selected useful
life remains appropriate. We also test for impairment at least annually and
whenever events or changes in circumstances occur that could impact the
recoverability of these assets. Impairment is evaluated as discussed in the
"Long-Lived Assets - Impairment" section above.
Business Combinations
Acquired Assets and Liabilities - Valuation
We measure all consideration transferred in a business combination at its acquisition-date fair value. Consideration transferred is determined by the acquisition-date fair value of assets transferred, liabilities assumed, including contingent consideration obligations, as applicable. We measure goodwill as the excess of the consideration transferred over the net of the acquisition-date amounts of assets acquired less liabilities assumed.
We make significant assumptions and estimates in determining the fair value of the acquired assets and liabilities as of the acquisition date, especially the valuation of intangible assets and certain tax positions.
Intangible Assets - Valuation and Recoverability
Intangible assets are recognized at their estimated fair value at the date of acquisition. Fair value is determined based on inputs and assumptions such as discount rates, rates of return on assets, and long-term sales growth rates. We amortize intangible assets over their estimated useful lives on a straight-line basis. Useful lives are established based on analysis of all pertinent factors such as: the expected use of the asset, expected useful lives of related assets, provisions that may limit the useful life, historical experience with similar arrangements, effects of economic factors, demand, competition, obsolescence, and maintenance required to maintain the future cash flows.
We evaluate the useful lives of these assets as of the acquisition date and at least annually thereafter to ensure the selected useful life remains appropriate.
We monitor our long-lived assets for impairment indicators on an ongoing basis in accordance with GAAP, and test for impairment at least annually and whenever events or changes in circumstances occur that could impact the recoverability of these assets. Impairment is evaluated as discussed in the "Long-Lived Assets - Impairment" section above.
Goodwill is recognized when consideration paid in a purchase acquisition exceeds the fair value of the net assets acquired.Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and circumstances warrant a review. Conditions that could trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in certain agreements, significant underperformance relative to historical or projected future operating results, an economic downturn affecting automotive marketplaces, increased competition, a significant reduction in our stock price for a sustained period or a reduction of our market capitalization relative to net book value. We evaluate impairment annually onOctober 1 by comparing the estimated fair value of each reporting unit to its carrying value. For the first three quarters of fiscal year 2022, we determined that we had two reporting units: Marketplace and CarOffer. We elected to bypass the optional qualitative test for impairment and proceed to Step 1, which is a quantitative impairment test. We estimate fair value using a market approach, based on market multiples derived from public companies that we identify as peers. As ofOctober 1, 2022 , we estimated forecasted revenue and gross margin for fiscal year 2022, and estimated revenue and gross margin market multiples using publicly available information for each of our reporting units. Developing these assumptions required the use of judgment and estimates. Actual results may differ from these forecasts. Subsequent to our evaluation of impairment onOctober 1, 2022 , we revised our reporting units from two reporting units, Marketplace and CarOffer, to four reporting units,U.S. Marketplace , Digital Wholesale,United Kingdom Marketplace , andCanada Marketplace . Because of the change in reporting units, we performed an additional goodwill impairment evaluation as ofDecember 31 . A consistent methodology was utilized, calculating the fair value of our reporting units using the market approach described previously. Revenue and gross margin actuals were utilized for the year endedDecember 31, 2022 , and estimated revenue and gross margin market multiples were utilized based upon publicly available information for each of the reporting units. Developing these assumptions required the use of judgment and estimates. Actual results may differ from these forecasts. 60
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Redeemable Noncontrolling Interest - Valuation
In connection with our acquisition of a 51% interest in CarOffer onJanuary 14, 2021 , redeemable noncontrolling interest was recognized at fair value computed using the Least Square Monte Carlo Simulation approach. Significant inputs to the model included market price of risk, volatility, correlation and risk-free rate. Subsequent to our acquisition of the 51% interest onJanuary 14, 2021 , the redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value and its carrying amount adjusted for net income (loss) attributable to the noncontrolling interest and tax distributions to redeemable noncontrolling interest holders.
Income Taxes - Recoverability of Deferred Tax Assets and Related Valuation Allowance
We are subject to federal and state income taxes inthe United States and taxes in foreign jurisdictions in which we operate. Judgment is required in determining our worldwide income tax provision. In the ordinary course of a global business, there are many transactions and calculations where the ultimate outcome is uncertain. Although we believe our estimates are reasonable, there is no assurance that the final outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. Such differences could have a material impact on our income tax provision and net income in the period in which such determination is made. Significant judgment is also involved regarding the application of income tax laws and regulations to estimate the effective income tax rates. As a result, our actual annual effective income tax rates and related income tax liabilities may differ materially from our interim estimated effective tax rates and related income tax liabilities. Any resulting differences are recognized in the period they become known. We account for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. This method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In performing this analysis, we consider future taxable income and ongoing prudent and feasible tax planning strategies to assess realizability. Actual results may differ from these forecasts. Valuation allowances are reassessed periodically to determine whether it is more likely than not that the tax benefits will be realized in the future and if any existing valuation allowance should be released. We account for uncertain tax positions by prescribing a morelikelythannot threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We assess our income tax positions based upon management's evaluation of the facts, circumstances, and information available at the reporting date. The tax position is measured as the largest amount of benefit or expense that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority during examination. The ultimate resolution of these tax positions may be greater or less than the liabilities recognized. Inventory - Valuation Inventory is valued at the lower of cost or net realizable value. Cost is determined based on specific identification. In recording inventory at the lower of cost or net realizable value, we estimate potential future losses on inventory on hand based on historical losses and market trends. Estimated potential future losses on inventory may vary from actual results which could lead to material adjustments to the financial statements.
Stock-Based Compensation - Valuation
For RSUs granted subject to market-based vesting conditions, the fair value is determined on the date of grant using the Monte Carlo simulation lattice model. The determination of the fair value using this model is affected by our stock price performance relative to the companies listed on the S&P 500, and a number of assumptions including volatility, correlation coefficient, risk-free interest rate and expected dividends. RSUs previously granted subject to market-based vesting conditions vest upon achievement of specified levels of market conditions. During the year endedDecember 31, 2022 , we modified our market-based performance awards to contain only service-based vesting conditions in line with our other restricted stock unit awards. As a result, there are no market-based RSUs outstanding as ofDecember 31, 2022 . 61 -------------------------------------------------------------------------------- For stock options granted, the fair value is determined on the date of grant using the BlackScholes optionpricing model. The determination of the fair value is affected by our stock price and a number of assumptions including expected dividend yield, expected volatility, risk-free interest rate and expected term. For expected volatility, we use a blended volatility to combine the historical volatility of trading with the volatility for a peer group of companies as we do not have historical stock prices for a period that is at least equal to the expected term. Stock options granted generally have a term of ten years from the date of grant and generally vest over a four-year requisite service period. For liability-classified awards, the fair value was determined on the date of issuance using a Least Square Monte Carlo simulation model. Liability-classified awards are remeasured to fair value each period until settlement. UntilMarch 31, 2022 , the Least Square Monte Carlo simulation model was used for remeasurement. During the three months endedJune 30, 2022 , we refined our model for determining the fair value of liability-classified awards as a result of obtaining gross profit actuals through the trailing twelve-months endedJune 30, 2022 measurement period for the first call option. SinceMarch 31, 2022 , the fair value has typically been determined using a Monte Carlo simulation model. During the year endedDecember 31, 2022 , we determined not to exercise our call right to acquire up to an additional 25% of the fully diluted capitalization of CarOffer. The valuation of these liability awards is now derived from our 2024 call right and CarOffer's 2024 put right. The determination of the fair value is affected by CarOffer's equity value, EBITDA, andExcess Parent Capital (as defined in the CarOffer Operating Agreement, included as Exhibit 10.27 to the Annual Report on Form 10-K as ofDecember 31, 2021 filed onFebruary 25, 2022 ) that drive the exercise price of future call/put rights, as well as a number of assumptions including market price of risk, volatility, correlation, and risk-free interest rate. As a result of theEBITDA and Excess Parent Capital projections for CarOffer as ofDecember 31, 2022 , a Monte Carlo simulation model was not required as ofDecember 31, 2022 . We will continue to assess our valuation approach quarterly.
Recently Issued Accounting Pronouncements
Information concerning recently issued accounting pronouncements may be found in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
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