CARS.COM INC. The following discussion and analysis of our business, financial condition, results of operations and quantitative and qualitative disclosures should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis also contains forward-looking statements and should be read in conjunction with the disclosures and information contained in "Note About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. The financial information discussed below and included elsewhere in this Quarterly Report on Form 10-Q may not necessarily reflect what our financial condition, results of operations and cash flows may be in the future.
References in this discussion and analysis to "we," "us," "our" and similar
terms refer to
Business Overview
We are a leading automotive marketplace platform that provides a robust set of
digital solutions that connect car shoppers with sellers. We empower shoppers
with the data, resources and digital tools needed to make informed buying
decisions and seamlessly connect with automotive retailers. In a rapidly
changing market, we enable dealerships and automotive manufacturers ("OEMs"),
with innovative technical solutions and data-driven intelligence, to better
reach and influence ready-to-buy shoppers, increase inventory turn and gain
market share.
In addition to Cars.com™, our brands include Dealer Inspire®, a website and
digital solutions provider enabling dealerships to be more efficient through
connected digital experiences; FUEL™, an advertising solution providing dealers
and OEMs the benefit of leveraging targeted digital video marketing to
Cars.com's audience of in-market car shoppers; DealerRater®, a leading car
dealer review and reputation management technology solution; CreditIQ™, digital
financing technology and Accu-Trade™, vehicle valuation and appraisal
technology. Our portfolio of brands also includes Auto.com™, PickupTrucks.com™
and NewCars.com®.
Overview of Results
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2022 2021 2022 2021
Revenue $ 162,873 $ 155,530 $ 321,080 $ 308,825
Net income 5,545 5,966 9,885 11,244
2022 Highlights and Trends
Accu-Trade Acquisition. In March 2022 , we acquired certain assets and assumed
certain liabilities of Accu-Trade, LLC ; Accu-Trade Canada, LLC ; Galves Market
Data; and Headstart Logistics, LLC d/b/a MADE Logistics (collectively,
"Accu-Trade"), which includes real-time, VIN-specific appraisal and valuation
data, instant guaranteed offer capabilities and logistics technology (the
"Accu-Trade Acquisition"). Consideration for the transaction was composed of
$64.8 million of cash and $5.3 million in other consideration. As part of the
transaction, upon achievement of certain financial targets, we may be required
to pay additional cash and stock consideration to the former owners.
CreditIQ Acquisition. In November 2021 , we acquired all the outstanding stock of
CreditIQ, Inc. (the "CIQ Acquisition"), an automotive fintech platform that
provides instant online loan screening and approvals to facilitate online car
buying. Through the CIQ Acquisition, we will provide dealers with access to
advanced digital financing technology across the CARS platform. Using cash on
hand, we paid $30.0 million at the closing excluding transaction fees and
expenses. As part of the transaction, we may be required to pay additional cash
consideration of up to $50.0 million based on future performance over a
three-year period with a mutually agreed upon option for a fourth year.
Share Repurchase Program. In February 2022 , our Board of Directors authorized a
three-year share repurchase program to acquire up to $200 million of the
Company's common stock. We may repurchase shares from time to time in open
market transactions or through privately negotiated transactions in accordance
with applicable federal securities laws and other applicable legal requirements,
and subject to our blackout periods. We will fund the share repurchase program
principally with cash from operations. During the six months ended June 30,
2022 , the Company repurchased and subsequently retired 2.1 million shares for
$23.3 million at an average price paid per share of $11.34 .
17
--------------------------------------------------------------------------------Key Operating Metrics
We regularly review a number of key metrics to evaluate our business, measure
our performance, identify trends affecting our business, formulate financial
projections and make operating and strategic decisions. The most critical of
these key metrics are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2022 2021 % Change 2022 2021 % Change
Traffic 148,010 158,438 (7 )% 296,500 315,042 (6 )%
Average Monthly
Unique Visitors 27,079 26,391 3 % 26,820 26,174 2 %
June 30, 2022 June 30, 2021 % Change March 31, 2022 % Change
Dealer Customers 19,517 18,845 4 % 19,500 0 %
Monthly Average
Revenue Per Dealer $ 2,326 $ 2,299 1 % $ 2,291 2 %
Traffic ("Visits"). Traffic is fundamental to our business. Traffic to the CARS
network of websites and mobile apps provides value to our advertisers in terms
of audience, awareness, consideration and conversion. In addition to tracking
traffic volume and sources, we monitor activity on our properties, allowing us
to innovate and refine our consumer-facing offerings. Traffic is defined as the
number of visits to CARS desktop and mobile properties (responsive sites and
mobile apps), measured using Adobe Analytics. Traffic does not include traffic
to Dealer Inspire websites. Traffic provides an indication of our consumer
reach. Although our consumer reach does not directly result in revenue, we
believe our ability to reach in-market car shoppers is attractive to our dealer
customers and national advertisers.
The decline in traffic for the three and six months ended
Average Monthly Unique Visitors ("UVs"). Growth in unique visitors and consumer
traffic to our network of websites and mobile apps increases the number of
impressions, clicks, leads and other events we can monetize to generate revenue.
We define UVs in a given month as the number of distinct visitors that engage
with our platform during that month. Visitors are identified when a user first
visits an individual CARS property on an individual device/browser combination
or installs one of our mobile apps on an individual device. If a visitor
accesses more than one of our web properties or apps or uses more than one
device or browser, each of those unique property/browser/app/device combinations
counts toward the number of UVs. UVs do not include Dealer Inspire UVs. We
measure UVs using Adobe Analytics.
The growth in UVs for the three and six months ended June 30, 2022 as compared
to the decline in Traffic was primarily related to changes in our traffic mix
and to shifts in our marketing strategy to drive greater growth in market share.
In addition, due to the continued lower vehicle inventory levels, we believe our
users now have a shorter shopping lifecycle and are purchasing cars with fewer
visits.
Average Revenue Per Dealer ("ARPD"). We believe that our ability to grow ARPD is
an indicator of the value proposition of our platform. We define ARPD as Dealer
revenue, excluding digital advertising services, during the period divided by
the monthly average number of Dealer Customers during the same period. For the
three months ended June 30, 2022 , Accu-Trade is included in our ARPD metric,
which had an immaterial impact on ARPD; however, no prior period has been recast
as it would be impracticable to do so.
For the three months ended June 30, 2022 , ARPD increased 1% and 2% compared to
the three months ended June 30, 2021 and March 31, 2022 , respectively, primarily
driven by growth in digital solutions, as well as growth in FUEL revenue.
Dealer Customers. Dealer Customers represent dealerships using our products as
of the end of each reporting period. Each physical or virtual dealership
location is counted separately, whether it is a single-location proprietorship
or part of a large, consolidated dealer group. Multi-franchise dealerships at a
single location are counted as one dealer. As of June 30, 2022 , this key
operating metric includes Accu-Trade; however, no prior period has been recast
as it would be impracticable to do so.
Dealer Customers increased 4% from
18
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Dealer Customers was essentially flat from March 31, 2022 as the inclusion of
180 Accu-Trade only dealers was offset by cancellations related to a single
digital dealer. Excluding the impact of the inclusion of Accu-Trade and
cancellations related to a single digital dealer, Dealer Customers would have
slightly increased in the period.
Factors Affecting Our Performance. Our business is impacted by the changes in
the larger automotive ecosystem, including inventory supply and supply-chain
disruptions, which continue to be under pressure due to shortages of key
materials, and changes related to automotive advertising as well as other
macroeconomic factors including inflation, rising interest rates and a potential
recession. Changes in vehicle sales volumes in the United States also influence
OEMs' and dealerships' willingness to increase investments in technology
solutions and automotive marketplaces like Cars.com and could impact our pricing
strategies and/or revenue mix.
Our long-term success will depend in part on our ability to continue to evolve
our business toward a multi-faceted suite of digital solutions that complement
our online marketplace offerings. We believe our core strategic strengths,
including our strong brand portfolio, growing high-quality audience, and suite
of specialized digital solutions for advertisers and sales and service teams
will assist us as we navigate a rapidly changing automotive environment.
Additionally, we are focused on equipping our dealer customers with digital
solutions to enable them to compete in an environment in which an increasing
number of car-buying customers are shopping online. These solutions include
digital financing, vehicle appraisal, virtual showrooms and digital advertising
product targeting in-market buyers. The foundation of our continued success is
the value we deliver to customers, and we believe that our large audience of
in-market car shoppers and innovative solutions deliver significant value to our
customers.
The future effects of the COVID-19 pandemic continue to be unknown and depend on
numerous factors outside of our control. However, we believe our marketplace,
advertising and digital solutions remain critical in helping our customers
navigate certain challenges of the pandemic. We also believe our solutions will
continue to be important tools for our customers in the future and, in
particular, may help mitigate potential future impacts of the pandemic.
Results of Operations
Three Months Ended
Three Months Ended June 30,
(In thousands, except percentages) 2022 2021 $ Change % Change
Revenue:
Dealer $ 143,987 $ 136,866 $ 7,121 5 %
OEM and National 14,144 16,329 (2,185 ) (13 )%
Other 4,742 2,335 2,407 103 %
Total revenue 162,873 155,530 7,343 5 %Operating expenses:
Cost of revenue and operations 29,504 28,219 1,285 5 %
Product and technology 23,117 19,434 3,683 19 %
Marketing and sales 54,655 51,309 3,346 7 %
General and administrative 17,211 15,615 1,596 10 %
Depreciation and amortization 23,001 25,298 (2,297 ) (9 )%
Total operating expenses 147,488 139,875 7,613 5 %
Operating income 15,385 15,655 (270 ) (2 )%
Nonoperating expense:
Interest expense, net (9,047 ) (9,839 ) 792 (8 )%
Other expense, net (54 ) (39 ) (15 ) 38 %
Total nonoperating expense, net (9,101 ) (9,878 ) 777 (8 )%
Income before income taxes 6,284 5,777 507 9 %
Income tax expense (benefit) 739 (189 )
928 ***
Net income $ 5,545 $ 5,966 $ (421 ) (7 )%
*** Not meaningful
Dealer revenue. Dealer revenue consists of marketplace and digital solutions
sold to dealer customers. Dealer revenue is our largest revenue stream,
representing 88% of total revenue for the three months ended June 30, 2022 and
2021. Dealer revenue increased $7.1 million or 5% compared to the three months
ended June 30, 2021 , driven by a 4% increase in Dealer Customers, as well as a
1% increase in ARPD from June 30, 2021 .
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OEM and National revenue. OEM and National revenue consists of display
advertising and other solutions sold to OEMs, advertising agencies, automotive
dealer associations and auto adjacent businesses. OEM and National revenue
represents 9% and 10% of total revenue for the three months ended June 30, 2022
and 2021, respectively. OEM and National revenue decreased 13%, primarily due to
pullbacks in certain OEM spending associated with production delays and
shortages, both driven by supply-chain disruptions.
Cost of revenue and operations. Cost of revenue and operations expense primarily
consists of costs related to processing dealer vehicle inventory, pay-per-lead
products, product fulfillment and compensation costs for the product fulfillment
and customer service teams. Cost of revenue and operations expense represents
18% of total revenue for the three months ended June 30, 2022 and 2021. Cost of
revenue and operations expense increased, primarily due to higher compensation
costs.
Product and technology. The product team creates and manages consumer and
dealer-facing innovation and user experience. The technology team develops and
supports our products, websites and mobile apps. Product and technology expense
includes compensation costs, consulting costs, hardware and software
maintenance, software licenses, data center and other infrastructure costs.
Product and technology expense represents 14% and 12% of total revenue for the
three months ended June 30, 2022 and 2021, respectively. Product and technology
expense increased, primarily due to higher compensation and consulting costs,
including costs related to the Accu-Trade and CreditIQ Acquisitions.
Marketing and sales. Marketing and sales expense primarily consists of traffic
and lead acquisition costs (including search engine and other online marketing),
TV and digital display and video advertising and creative production, market
research, trade events, compensation costs and travel for the marketing, sales
and sales support teams, as well as bad debt expense related to the allowance
for doubtful accounts. Marketing and sales expense represents 34% and 33% of
total revenue for the three months ended June 30, 2022 and 2021, respectively.
Marketing and sales expense increased, primarily due to continued investment in
traffic generation in 2022.
General and administrative. General and administrative expense primarily
consists of compensation costs for certain of the executive, finance, legal,
human resources, facilities and other administrative employees. In addition,
general and administrative expense includes office space rent, legal, accounting
and other professional services, transaction-related costs, severance,
transformation and other exit costs and costs related to the write-off and loss
on assets. General and administrative expense represents 11% and 10% of total
revenue for the three months ended June 30, 2022 and 2021, respectively. General
and administrative expense increased, primarily due to higher third-party costs
and higher compensation costs.
Depreciation and amortization. Depreciation and amortization expense decreased, primarily due to certain assets being fully depreciated and amortized as compared to the prior-year period, partially offset by depreciation and amortization on additional assets acquired.
Interest expense, net. Interest expense, net decreased by$0.8 million compared to the prior year period due to the maturity of the interest rate swap and a reduction in total indebtedness. For information related to our debt, see Note 4 (Debt) and Note 5 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., "Financial Statements (unaudited)" of this Quarterly Report on Form 10-Q. Income tax expense (benefit). The effective income tax rate, expressed by calculating the Income tax expense (benefit) as a percentage of Income before income taxes, was 11.8% for the three months endedJune 30, 2022 , and the Income tax expense was$0.7 million . The effective income tax rate was lower than the statutory federal income tax rate of 21%, primarily due to the tax benefits realized on a partial release of the valuation allowance, partially offset by the impact of state income taxes. 20 --------------------------------------------------------------------------------
Six Months Ended
Six Months Ended June 30,
(In thousands, except percentages) 2022 2021 $ Change % Change
Revenue:
Dealer $ 284,403 $ 269,824 $ 14,579 5 %
OEM and National 29,318 34,398 (5,080 ) (15 )%
Other 7,359 4,603 2,756 60 %
Total revenue 321,080 308,825 12,255 4 %
Operating expenses:
Cost of revenue and operations 57,256 56,050 1,206 2 %
Product and technology 44,424 36,194 8,230 23 %
Marketing and sales 111,749 104,520 7,229 7 %
General and administrative 33,771 28,881 4,890 17 %
Depreciation and amortization 47,554 50,978 (3,424 ) (7 )%
Total operating expenses 294,754 276,623 18,131 7 %
Operating income 26,326 32,202 (5,876 ) (18 )%
Nonoperating expense:
Interest expense, net (18,377 ) (19,840 ) 1,463 (7 )%
Other income (expense), net 154 (1 ) 155 ***
Total nonoperating expense, net (18,223 ) (19,841 ) 1,618 (8 )%
Income before income taxes 8,103 12,361 (4,258 ) (34 )%
Income tax (benefit) expense (1,782 ) 1,117
(2,899 ) ***
Net income $ 9,885 $ 11,244 $ (1,359 ) (12 )%
*** Not meaningful
Dealer revenue. Dealer revenue is our largest revenue stream, representing 89%
and 87% of total revenue for the six months ended June 30, 2022 and 2021,
respectively. Dealer revenue increased $14.6 million or 5% compared to the six
months ended June 30, 2021 , driven by a 4% increase in Dealer Customers, as well
as a 1% increase in ARPD from June 30, 2021 .
OEM and National revenue. OEM and National revenue represents 9% and 11% of
total revenue for the six months ended June 30, 2022 and 2021, respectively. OEM
and National revenue decreased 15%, primarily due to pullbacks in certain OEM
spending associated with continued production delays and shortages, both driven
by supply-chain disruptions.
Cost of revenue and operations. Cost of revenue and operations expense
represents 18% of total revenue for the six months ended June 30, 2022 and 2021,
respectively. Cost of revenue and operations expense increased, primarily due to
higher compensation costs, partially offset by lower third-party costs.
Product and technology. Product and technology expense represents 14% and 12% of
total revenue for the six months ended June 30, 2022 and 2021, respectively.
Product and technology expense increased, primarily due to higher compensation
and consulting costs, including costs associated with the Accu-Trade and
CreditIQ Acquisitions, as well as higher licensing and other technology costs.
Marketing and sales. Marketing and sales expense represents 35% and 34% of total
revenue for the six months ended June 30, 2022 and 2021, respectively. Marketing
and sales expense increased, primarily due to continued investment in marketing
in 2022, including a return to in-person industry events that had been curtailed
due to the pandemic.
General and administrative. General and administrative expense represents 11%
and 9% of total revenue for the six months ended June 30, 2022 and 2021,
respectively. General and administrative expense increased, primarily due to
higher compensation costs, including stock-based compensation, as well as
third-party costs and transaction-related costs related to the Accu-Trade
Acquisition.
Depreciation and amortization. Depreciation and amortization expense decreased, primarily due to certain assets being fully depreciated and amortized as compared to the prior year period, partially offset by depreciation and amortization on additional assets acquired.
Interest expense, net. Interest expense, net decreased by$1.5 million compared to the prior year period due to a reduction in total indebtedness and the expiration of the Swap. For information related to our debt, see Note 4 (Debt) and Note 5 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q. 21
-------------------------------------------------------------------------------- Income tax (benefit) expense. The effective income tax rate, expressed by calculating the Income tax (benefit) expense as a percentage of Income before income taxes, was (22.0)% for the six months endedJune 30, 2022 , and the Income tax benefit was$1.8 million . The effective income tax rate was lower than the statutory federal income tax rate of 21%, primarily due to the tax benefits realized on a partial release of the valuation allowance, stock-based compensation and the impact of uncertain tax positions. 22 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview. Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity available under our credit facilities. Our positive operating cash flow, along with our Revolving Loan described below, provide adequate liquidity to meet our business needs, including those for investments, share repurchases and strategic acquisitions. However, our ability to maintain adequate liquidity for our operations in the future is dependent upon a number of factors, including our revenue, macroeconomic conditions, our ability to contain costs, including capital expenditures, and to collect accounts receivable, and various other factors, many of which are beyond our direct control. As discussed below, we are subject to certain financial and other covenants contained in our debt agreements, as amended, including by the Third Amendment to the Credit Agreement. For information related to the Credit Amendment, as amended, see Note 7 (Debt) in Part II, Item 8., "Financial Statements and Supplementary Data", of our Annual Report on Form 10-K for the year endedDecember 31, 2021 as filed with theSEC onFebruary 25, 2022 . We may also seek to raise funds through debt or equity financing in the future to fund operations, significant investments or acquisitions that are consistent with our strategy. If we need to access the capital markets, there can be no assurance that financing may be available on attractive terms, if at all. As ofJune 30, 2022 , Cash and cash equivalents were$18.1 million and including our undrawn Revolving Loan, our total liquidity was$203.1 million . Indebtedness. As ofJune 30, 2022 , the outstanding aggregate principal amount of our debt was$517.5 million , with an interest rate of 5.8%, including$72.5 million of outstanding principal under our Term Loan, with an interest rate of 4.3%,$45.0 million of outstanding borrowings on our Revolving Loan, with an interest rate of 3.7% and outstanding Senior Unsecured Notes of$400.0 million , with an interest rate of 6.375%. During the six months endedJune 30, 2022 , we made$5.0 million in mandatory Term Loan payments. As ofJune 30, 2022 , we had$185.0 million available to borrow under our Revolving Loan. Our borrowings are limited by our Senior Secured Leverage Ratio and Consolidated Interest Coverage Ratio, which are calculated in accordance with our Credit Agreement, and were 0.7x and 5.2x as ofJune 30, 2022 , respectively. Interest Rate Swap. The interest rate on borrowings under our Term Loan and Revolving Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on our borrowing under the Term Loan prior to theOctober 2020 refinancing, we entered into an interest rate swap (the "Swap") effectiveDecember 31, 2018 . Under the terms of the Swap, we were locked into a fixed rate of interest of 2.96% plus an applicable margin, on a notional amount of$300 million untilMay 31, 2022 . Although the Swap was initially designated as a cash flow hedge of interest rate risk, hedge accounting was discontinued inJune 2020 . The loss on the hedge that was recorded in Accumulated other comprehensive loss at that time was amortized into the Consolidated Statements of Income over the remaining term of the Swap. The Swap expired onMay 31, 2022 and, as such, is no longer recorded on the Consolidated Balance Sheets. As ofDecember 31, 2021 , the fair value of the Swap was an unrealized loss of$3.5 million , which was recorded in Other accrued liabilities on the Consolidated Balance Sheets. During the six months endedJune 30, 2022 and 2021,$2.4 million and$2.8 million was reclassified from Accumulated other comprehensive loss and recorded in Interest expense, net, respectively. During the six months endedJune 30, 2022 , we made payments of$3.3 million related to the Swap and$0.4 million was reclassified as a tax benefit from Accumulated other comprehensive loss into Income tax expense (benefit) on the Consolidated Statements of Income.
Cash Flows. Details of our cash flows are as follows (in thousands):
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