CarGurus(CARG) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents CarGurus, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended June 30, 2022 Item 1. Financial Statements This section presents CarGurus, Inc.'s unaudited condensed consolidated financial statements for the quarter and six months ended June 30, 2022, including balance sheets, income statements, comprehensive income, stockholders' equity, and cash flows, along with detailed notes on accounting policies, revenue recognition, fair value measurements, and other financial disclosures Unaudited Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of June 30, 2022, and December 31, 2021 | Assets/Liabilities/Equity (in thousands) | At June 30, 2022 | At December 31, 2021 | |:-----------------------------------------|:-----------------|:---------------------| | Assets | | | | Cash and cash equivalents | $338,238 | $231,944 | | Investments | $30,000 | $90,000 | | Total current assets | $629,514 | $563,108 | | Total assets | $1,009,706 | $931,574 | | Liabilities | | | | Total current liabilities | $175,973 | $170,709 | | Total liabilities | $283,366 | $251,925 | | Redeemable noncontrolling interest | $264,505 | $162,808 | | Stockholders' Equity | | | | Total stockholders' equity | $461,835 | $516,841 | Unaudited Condensed Consolidated Income Statements This section outlines the company's financial performance, including total revenue, gross profit, and net income for the three and six months ended June 30, 2022 and 2021 | Metric (in thousands, except per share) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:----------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Total revenue | $511,229 | $217,748 | $941,837 | $389,116 | | Gross profit | $187,851 | $167,431 | $369,726 | $314,741 | | Income from operations | $23,542 | $38,477 | $50,201 | $64,268 | | Consolidated net income | $18,061 | $27,396 | $36,899 | $46,947 | | Net income attributable to CarGurus, Inc. | $19,284 | $28,052 | $39,194 | $50,413 | | Net (loss) income per share (Basic) | $(0.09) | $0.24 | $(0.61) | $0.43 | | Net (loss) income per share (Diluted) | $(0.09) | $0.23 | $(0.61) | $0.42 | Unaudited Condensed Consolidated Statements of Comprehensive Income This section details consolidated net income and other comprehensive income components, including foreign currency translation adjustments, for the periods ended June 30, 2022 and 2021 | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:----------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Consolidated net income | $18,061 | $27,396 | $36,899 | $46,947 | | Other comprehensive income: Foreign currency translation adjustment | $(1,586) | $248 | $(2,075) | $(835) | | Consolidated comprehensive income | $16,475 | $27,644 | $34,824 | $46,112 | | Comprehensive income attributable to CarGurus, Inc. | $17,698 | $28,300 | $37,119 | $49,578 | Unaudited Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders' Equity This section presents changes in redeemable noncontrolling interest and stockholders' equity, including common stock, additional paid-in capital, and retained earnings | Metric (in thousands, except share data) | Balance as of Dec 31, 2021 | Balance as of June 30, 2022 | |:-----------------------------------------|:---------------------------|:----------------------------| | Redeemable Noncontrolling Interest | $162,808 | $264,505 | | Class A Common Stock (shares) | 101,773,034 | 102,465,807 | | Class B Common Stock (shares) | 15,999,173 | 15,999,173 | | Additional Paid-in Capital | $387,868 | $407,363 | | Retained Earnings | $129,258 | $56,832 | | Accumulated Other Comprehensive Loss | $(403) | $(2,478) | | Total Stockholders' Equity | $516,841 | $461,835 | - Accretion of redeemable noncontrolling interest to redemption value was $29,620 thousand for the three months ended June 30, 2022, and $111,620 thousand for the six months ended June 30, 2022[26] Unaudited Condensed Consolidated Statements of Cash Flows This section summarizes cash flows from operating, investing, and financing activities, showing the net increase in cash and equivalents for the six months ended June 30, 2022 and 2021 | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:----------------------------------|:-------------------------------|:-------------------------------| | Net cash provided by operating activities | $87,595 | $81,335 | | Net cash provided by (used in) investing activities | $51,837 | $(56,054) | | Net cash used in financing activities | $(25,644) | $(22,073) | | Net increase in cash, cash equivalents, and restricted cash | $112,876 | $3,073 | | Cash, cash equivalents, and restricted cash at end of period | $361,156 | $203,999 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed disclosures on the company's operations, accounting policies, critical estimates, customer concentrations, lease obligations, and stock-based compensation - CarGurus operates as a multinational online automotive platform, including the CarGurus marketplace, Autolist, PistonHeads, and the CarOffer digital wholesale marketplace (51% interest)[31][33] - Effective Q1 2022, the company revised its segment reporting from two (United States and International) to one reportable segment, aligning with how the Chief Operating Decision Maker reviews performance[34][95] - Critical accounting estimates include revenue recognition (sales allowance, variable consideration), allowance for doubtful accounts, capitalization of product/technology/development costs, valuation of goodwill/intangible assets, redeemable noncontrolling interest, deferred tax assets, and stock-based compensation[43][216] - As of June 30, 2022, one customer accounted for 42% of net accounts receivable. For the three months ended June 30, 2022, two customers each accounted for 11% of total revenue due to CarOffer's growth[47][48] - The company's primary operating lease obligations are for office and data center spaces in various locations, with restricted cash held as collateral for letters of credit related to these leases[71][73] - CarOffer provides '45-Day Guaranteed Bid' (put option for sellers) and 'OfferGuard' (buyback offer for buyers) guarantees to dealers. As of June 30, 2022, the maximum potential future payments under these guarantees was $100,746 thousand, with no probable losses[77][78][80] | Stock-based Compensation Expense (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:------------------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Options | $646 | $635 | $1,290 | $1,252 | | Restricted stock units | $12,786 | $13,944 | $26,289 | $27,687 | | CO Incentive Units and Subject Units | $13,025 | $7,961 | $26,720 | $8,994 | | Total | $26,457 | $22,540 | $54,299 | $37,933 | - The company has two classes of common stock (Class A and Class B) with identical rights except for voting and conversion. Class B has ten votes per share, Class A has one. Basic and diluted EPS are equivalent across classes[86] | Revenue by Geographic Region (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:--------------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | United States | $500,056 | $206,584 | $919,264 | $369,595 | | International | $11,173 | $11,164 | $22,573 | $19,521 | | Total | $511,229 | $217,748 | $941,837 | $389,116 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of CarGurus' financial condition and results of operations, highlighting significant revenue growth driven by the CarOffer acquisition and the Instant Max Cash Offer (IMCO) launch, while also addressing the impact of macroeconomic factors like COVID-19 and the global chip shortage. It covers key business metrics, non-GAAP financial measures, and a comprehensive breakdown of revenue and expense trends Company Overview CarGurus operates as a multinational online automotive platform, offering marketplace, wholesale, and product solutions leveraging proprietary technology and data analytics - CarGurus is a multinational online automotive platform, evolving from a listings marketplace to include digital retail solutions and the CarOffer online wholesale platform. It uses proprietary technology and data analytics to provide trust, transparency, and competitive pricing[101] - The company generates revenue from marketplace (dealer subscriptions, advertising, financing partnerships), wholesale (CarOffer transaction fees), and product (vehicle sales proceeds) sources[105][139] | Financial Metric (in millions) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:-------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Revenue | $511.2 | $217.7 | $941.8 | $389.1 | | Consolidated Net Income | $18.1 | $27.4 | $36.9 | $46.9 | | Adjusted EBITDA | $54.0 | $66.4 | $111.9 | $117.0 | COVID-19 Update The COVID-19 pandemic and global chip shortage continue to impact the automotive industry, affecting vehicle inventory, pricing, and CarGurus' operations - The COVID-19 pandemic continues to disrupt the global economy and automotive industry, leading to temporary office closures, hybrid work, and restrictions impacting car shopping and dealership operations[110][111] - The automotive industry faces inventory supply problems due to COVID-19 and macroeconomic issues like the global semiconductor chip shortage, affecting vehicle availability and prices on CarGurus' websites[112] Key Business Metrics This section presents key operational metrics for the marketplace business, including average monthly unique users, sessions, paying dealers, and quarterly average revenue per subscribing dealer - Key business metrics exclude CarOffer as they are not applicable or meaningful for its business model[114] | Metric (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | |:----------------------|:---------------------------------|:---------------------------------| | Average Monthly Unique Users (Total) | 36,117 | 40,591 | | Average Monthly Sessions (Total) | 95,045 | 99,104 | | Number of Paying Dealers (Total) | 31,143 | 30,727 | | Quarterly Average Revenue per Subscribing Dealer (Consolidated) | $4,862 | $4,657 | - QARSD increased by 4% year-over-year, driven by new dealers with higher average monthly recurring revenue and product upgrades for existing dealers[168] Consolidated Adjusted EBITDA, Adjusted EBITDA and Adjusted EBITDA attributable to redeemable noncontrolling interest This section defines and reconciles Consolidated Adjusted EBITDA and Adjusted EBITDA, providing a non-GAAP measure of the company's operational performance - Consolidated Adjusted EBITDA is defined as consolidated net income, adjusted for depreciation and amortization, stock-based compensation, acquisition-related expenses, other expense (income), net, and provision for income taxes[127] - Adjusted EBITDA further excludes Adjusted EBITDA attributable to redeemable noncontrolling interest from Consolidated Adjusted EBITDA[127] | Reconciliation (in thousands) | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Consolidated net income | $18,061 | $27,396 | $36,899 | $46,947 | | Consolidated Adjusted EBITDA | $61,233 | $71,247 | $126,919 | $121,741 | | Adjusted EBITDA | $53,968 | $66,442 | $111,918 | $117,004 | Components of Unaudited Condensed Consolidated Income Statements This section details the disaggregation of revenue into Marketplace, Wholesale, and Product categories, along with the corresponding cost of revenue and operating expenses - Revenue is disaggregated into Marketplace (dealer subscriptions, advertising, financing partnerships), Wholesale (CarOffer transaction fees, inspection/transportation services, guarantees), and Product (proceeds from vehicle sales, primarily from CarGurus Instant Max Cash Offer (IMCO) and arbitration acquisitions)[139][140][146][150] - Cost of revenue is categorized similarly: Marketplace (support, hosting, personnel), Wholesale (transaction facilitation, transportation, inspection, personnel, net losses on guarantees), and Product (vehicle acquisition costs from customers and arbitration)[151][152][153] - Operating expenses include Sales and Marketing (personnel, advertising, brand building), Product, Technology, and Development (R&D personnel, website/software development), General and Administrative (executive, finance, legal, professional fees), and Depreciation and Amortization (property, equipment, intangible assets)[154][155][157][158] Results of Operations This section analyzes the company's financial performance, including revenue and expense trends, for the three and six months ended June 30, 2022 and 2021 For the three months ended June 30, 2022 and 2021 This section provides a detailed comparison of revenue, cost of revenue, and operating expenses for the three months ended June 30, 2022 and 2021, highlighting significant growth in product revenue | Revenue (in thousands) | June 30, 2022 | June 30, 2021 | Change Amount | % Change | |:-----------------------|:--------------|:--------------|:--------------|:---------| | Marketplace | $163,926 | $160,458 | $3,468 | 2% | | Wholesale | $75,937 | $53,514 | $22,423 | 42% | | Product | $271,366 | $3,776 | $267,590 | 7,087% | | Total Revenue | $511,229 | $217,748 | $293,481 | 135% | - Product revenue saw a dramatic increase of 7,087% due to the launch of CarGurus Instant Max Cash Offer (IMCO), contributing $248.1 million from consumer-to-dealer vehicle acquisitions[170] | Cost of Revenue (in thousands) | June 30, 2022 | June 30, 2021 | Change Amount | % Change | |:-------------------------------|:--------------|:--------------|:--------------|:---------| | Marketplace | $13,257 | $11,311 | $1,946 | 17% | | Wholesale | $46,518 | $35,226 | $11,292 | 32% | | Product | $263,603 | $3,780 | $259,823 | 6,874% | | Total Cost of Revenue | $323,378 | $50,317 | $273,061 | 543% | - Product cost of revenue increased by 6,874% primarily due to $227.8 million in expenses related to vehicles acquired through IMCO[174] | Operating Expenses (in thousands) | June 30, 2022 | June 30, 2021 | Change Amount | % Change | |:----------------------------------|:--------------|:--------------|:--------------|:---------| | Sales and marketing | $95,605 | $66,135 | $29,470 | 45% | | Product, technology, and development | $31,354 | $27,630 | $3,724 | 13% | | General and administrative | $33,514 | $26,167 | $7,347 | 28% | | Depreciation and amortization | $3,836 | $9,022 | $(5,186) | (57%) | - Sales and marketing expenses increased by 45% due to an $18.4 million increase in advertising and marketing for site traffic, brand awareness, and consumer-to-dealer product marketing, alongside a 32% headcount increase[176] - Depreciation and amortization decreased by 57% primarily due to a reclassification of amortization of acquired developed technology intangible assets to cost of revenue in Q4 2021[181] - Provision for income taxes decreased by 52% due to decreased profitability and lower tax expenses related to share-based awards and officer compensation limitations[183] For the six months ended June 30, 2022 and 2021 This section provides a detailed comparison of revenue, cost of revenue, and operating expenses for the six months ended June 30, 2022 and 2021, emphasizing the impact of the IMCO launch | Revenue (in thousands) | June 30, 2022 | June 30, 2021 | Change Amount | % Change | |:-----------------------|:--------------|:--------------|:--------------|:---------| | Marketplace | $327,215 | $316,259 | $10,956 | 3% | | Wholesale | $166,931 | $67,317 | $99,614 | 148% | | Product | $447,691 | $5,540 | $442,151 | 7,981% | | Total Revenue | $941,837 | $389,116 | $552,721 | 142% | - Product revenue increased by 7,981% for the six months, primarily driven by $399.8 million from the IMCO launch and $52.3 million from arbitration-acquired vehicles[188] | Cost of Revenue (in thousands) | June 30, 2022 | June 30, 2021 | Change Amount | % Change | |:-------------------------------|:--------------|:--------------|:--------------|:---------| | Marketplace | $25,466 | $22,299 | $3,167 | 14% | | Wholesale | $104,700 | $46,352 | $58,348 | 126% | | Product | $441,945 | $5,724 | $436,221 | 7,621% | | Total Cost of Revenue | $572,111 | $74,375 | $497,736 | 669% | - Product cost of revenue increased by 7,621% due to $373.5 million in expenses from IMCO-acquired vehicles and $62.7 million from arbitration-acquired vehicles[192] | Operating Expenses (in thousands) | June 30, 2022 | June 30, 2021 | Change Amount | % Change | |:----------------------------------|:--------------|:--------------|:--------------|:---------| | Sales and marketing | $183,186 | $134,309 | $48,877 | 36% | | Product, technology, and development | $62,007 | $52,794 | $9,213 | 17% | | General and administrative | $66,635 | $46,681 | $19,954 | 43% | | Depreciation and amortization | $7,697 | $16,689 | $(8,992) | (54%) | - Sales and marketing expenses increased by 36% due to a $21.9 million increase in advertising and marketing and a $13.9 million increase in salaries and employee-related expenses, driven by a 32% headcount increase[194] - Provision for income taxes decreased by 26% due to decreased profitability and lower tax expenses related to share-based awards and officer compensation limitations[200] Liquidity and Capital Resources This section discusses the company's cash position, investment activities, and future capital requirements, considering operational cash flows and industry seasonality - As of June 30, 2022, principal liquidity sources were $338.2 million in cash and cash equivalents and $30.0 million in short-term investments[201] | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |:----------------------------------|:-------------------------------|:-------------------------------| | Net cash provided by operating activities | $87,595 | $81,335 | | Net cash provided by (used in) investing activities | $51,837 | $(56,054) | | Net cash used in financing activities | $(25,644) | $(22,073) | | Net increase in cash, cash equivalents, and restricted cash | $112,876 | $3,073 | - Future capital requirements depend on revenue, sales & marketing, product development, facility build-out, payments from third-party processors, international investments, and potential exercise of the 2022 Call Right for CarOffer equity[204] - The automotive industry experiences seasonality, with consumer purchases typically highest in the first three quarters. Wholesale vehicle sales also fluctuate due to holidays, weather, inventory, and macroeconomic conditions like the global semiconductor chip shortage[211] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, including interest rate risk, inflation risk, and foreign currency exchange risk, noting that while international operations are growing, current foreign currency exposure is not significant - The company holds $368.2 million in cash, cash equivalents, and investments as of June 30, 2022, carrying interest rate risk, but fluctuations in interest income have not been material[221][222] - Inflation has not had a material effect on the business to date, but significant inflationary pressures could harm financial condition if not offset by price increases[223] - Foreign currency exposure in British pound, Euro, and Canadian dollar is not significant as of June 30, 2022, but risks may increase with growing international operations[224][226] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2022, due to a material weakness identified at the CarOffer subsidiary related to IT general controls and the financial statement close process. A remediation plan is being implemented to address these deficiencies - Disclosure controls and procedures were deemed ineffective as of June 30, 2022, due to a material weakness at the CarOffer subsidiary[228] - The material weakness includes deficiencies in IT general controls (user access, change management) and the financial statement close process (review of journal entries and reconciliations) at CarOffer[228] - A remediation plan is being implemented, including robust user access and change management reviews, and effective review of journal entries and account reconciliations. The material weakness will not be remediated until controls operate effectively for a sufficient period[229] PART II. OTHER INFORMATION This section covers legal proceedings, significant risk factors, recent corporate developments, and a list of exhibits filed with the quarterly report Item 1. Legal Proceedings The company is not currently subject to any pending or threatened litigation that is expected to have a material adverse effect on its business or financial results - No pending or threatened litigation is expected to have a material adverse effect on the company's business or financial results[233] Item 1A. Risk Factors This section details significant risks, including the adverse impact of the COVID-19 pandemic and macroeconomic issues on the automotive industry and company operations, dependence on dealer relationships, challenges in growing the CarOffer business and IMCO, reliance on internet search engines and data providers, the importance of brand protection, and the complexities of a rapidly changing regulatory environment. It also highlights risks related to key personnel, intellectual property disputes, seasonality, fraud, and the identified material weakness in internal controls - The business is adversely affected by the COVID-19 pandemic and macroeconomic issues (e.g., global semiconductor chip shortage, war in Ukraine), leading to inventory supply problems, increased costs, and reduced consumer demand[235][237][243] - Dependence on dealer relationships is critical; termination of subscriptions or dealer consolidations could materially harm the business[237][238] - Failure to realize transaction synergies from the CarOffer acquisition or to grow CarOffer and IMCO at expected rates would significantly harm revenue and business[239] - Reliance on internet search engines for traffic and third-party data providers for inventory data poses risks; disruptions could negatively impact consumer experience and business results[241][243] - The company is subject to a complex and evolving framework of laws and regulations (e.g., motor vehicle sales, advertising, consumer protection, privacy laws like GDPR, CCPA, CPRA), which could lead to claims, penalties, or business model challenges[248][249][252] - The identified material weakness in internal control over financial reporting at CarOffer could impact financial reporting accuracy and timing, potentially affecting business and stock price[264][265] - The founder controls a majority of voting power, limiting other stockholders' influence on corporate matters, and the Class A common stock trading price is volatile due to various internal and external factors[266][267][269] Item 5. Other Information Scot Fredo, the Chief Financial Officer, announced his resignation effective October 3, 2022. Jason Trevisan, the Chief Executive Officer, has been designated as the Principal Financial Officer until a successor CFO is appointed - CFO Scot Fredo announced his resignation, effective October 3, 2022[277] - CEO Jason Trevisan will serve as Principal Financial Officer following Fredo's departure until a new CFO is appointed[277] Item 6. Exhibits This section lists all exhibits filed or incorporated by reference into the Quarterly Report, including a corrective amendment to the CarOffer Operating Agreement and various certifications - Exhibits include a corrective amendment to the CarOffer Operating Agreement and certifications from the Principal Executive Officer and Principal Financial Officer[282] Signatures The report is duly signed by Jason Trevisan, Chief Executive Officer, and Scot Fredo, Chief Financial Officer, on August 8, 2022 - The report was signed by Jason Trevisan (CEO) and Scot Fredo (CFO) on August 8, 2022[288][289]