Cars.com(US:CARS)2023-05-03 16:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Cars.com Inc., including balance sheets, statements of income, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies, business combinations, fair value measurements, debt, equity, and income taxes Consolidated Balance Sheets Consolidated Balance Sheets | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | Change (vs. Dec 31, 2022) | | :----------------------------- | :---------------------------- | :----------------------------- | :------------------------ | | Cash and cash equivalents | $18,838 | $31,715 | -$12,877 | | Accounts receivable, net | $114,035 | $107,930 | +$6,105 | | Total current assets | $144,651 | $148,627 | -$3,976 | | Intangible assets, net | $687,930 | $707,088 | -$19,158 | | Total assets | $1,002,221 | $1,024,870 | -$22,649 | | Total current liabilities | $107,348 | $106,012 | +$1,336 | | Long-term debt, net | $438,739 | $458,249 | -$19,510 | | Total liabilities | $617,234 | $640,440 | -$23,206 | | Stockholders' equity | $384,987 | $384,430 | +$557 | Consolidated Statements of Income Consolidated Statements of Income | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (YoY) | % Change (YoY) | | :----------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :------------- | | Total revenue | $167,068 | $158,207 | +$8,861 | 6% | | Operating income | $12,529 | $10,941 | +$1,588 | 15% | | Nonoperating expense, net | ($5) | ($9,122) | +$9,117 | ***% | | Income before income taxes | $12,524 | $1,819 | +$10,705 | ***% | | Net income | $11,479 | $4,340 | +$7,139 | ***% | | Basic EPS | $0.17 | $0.06 | +$0.11 | 183% | | Diluted EPS | $0.17 | $0.06 | +$0.11 | 183% | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (YoY) | | :----------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Net income | $11,479 | $4,340 | +$7,139 | | Total other comprehensive income | — | $1,202 | -$1,202 | | Comprehensive income | $11,479 | $5,542 | +$5,937 | Consolidated Statements of Stockholders' Equity Consolidated Statements of Stockholders' Equity | Metric | Balance at Dec 31, 2022 (in thousands) | Net Income (in thousands) | Repurchases of common stock (in thousands) | Stock-based compensation (in thousands) | Balance at Mar 31, 2023 (in thousands) | | :--------------------- | :------------------------------------- | :------------------------ | :----------------------------------------- | :-------------------------------------- | :------------------------------------- | | Stockholders' Equity | $384,430 | $11,479 | ($7,174) | $6,049 | $384,987 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (YoY) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | | Net cash provided by operating activities | $28,141 | $30,358 | -$2,217 | | Net cash used in investing activities | ($5,371) | ($68,778) | +$63,407 | | Net cash (used in) provided by financing activities | ($35,647) | $29,804 | -$65,451 | | Net decrease in cash and cash equivalents | ($12,877) | ($8,616) | -$4,261 | | Cash and cash equivalents at end of period | $18,838 | $30,453 | -$11,615 | Notes to the Consolidated Financial Statements (Unaudited) NOTE 1. Description of Business and Summary of Significant Accounting Policies - Cars.com Inc. (CARS) is a leading automotive marketplace platform providing digital solutions connecting car shoppers with sellers, empowering shoppers with data and tools, and enabling dealers and OEMs with innovative technical solutions and data-driven intelligence38103 - The Company's brands include Cars.com™, Dealer Inspire®, FUEL™, DealerRater®, CreditIQ®, Accu-Trade™, and NewCars.com®15104 - Significant accounting policies are consistent with those in the December 31, 2022 Financial Statements, prepared in conformity with U.S. GAAP and SEC rules for interim financial statements1639 NOTE 2. Revenue Revenue by Major Products and Services | Major products and services | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | Change (YoY) | % Change (YoY) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------- | :------------- | | Subscription advertising and digital solutions | $137,334 | $132,247 | +$5,087 | 4% | | Display advertising | $23,857 | $21,049 | +$2,808 | 13% | | Pay per lead | $2,275 | $2,417 | -$142 | (6%) | | Other | $3,602 | $2,494 | +$1,108 | 44% | | Total revenue | $167,068 | $158,207 | +$8,861 | 6% | NOTE 3. Business Combinations - On March 1, 2022, the Company acquired Accu-Trade, LLC and related entities, which provide VIN-specific vehicle valuation, appraisal data, instant offer capabilities, and logistics technology63 Accu-Trade Acquisition Fair Value | Item | Fair Value (in thousands) | | :----------------------------- | :------------------------ | | Cash consideration | $64,663 | | Other consideration | $5,300 | | Contingent consideration | $23,936 | | Total purchase consideration | $93,899 | | Assets acquired | $1,595 | | Identified intangible assets | $15,679 | | Liabilities assumed | ($235) | | Net identifiable assets | $17,039 | | Goodwill | $76,860 | - Goodwill of $76.9 million was recorded, primarily attributable to sales growth from existing and future technology, product offerings, customers, and the value of the acquired assembled workforce65 - The Company may pay up to $63.0 million in additional contingent consideration based on future performance over a three-year period, with a maximum of $15.0 million potentially in stock64 NOTE 4. Fair Value Measurements Contingent Consideration Fair Value | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----------------------------- | :---------------------------- | :----------------------------- | | Contingent consideration | $47,612 | $55,871 | - A fair value adjustment of ($8.3 million) was recorded for contingent consideration during the three months ended March 31, 2023, reflected in Other income, net4866 - The Company expects to make payments on contingent consideration in 2023, 2024, and 2025, with $6.2 million classified as current and $41.4 million as noncurrent as of March 31, 20234849 NOTE 5. Debt - As of March 31, 2023, the outstanding aggregate principal amount of indebtedness was $462.5 million at an effective interest rate of 6.5%124 - Debt components include $400.0 million of 6.375% Senior Unsecured Notes due 2028 and $62.5 million outstanding under the Term Loan (7.2% interest rate at March 31, 2023)7068124 - During Q1 2023, the Company made $3.8 million in Term Loan payments and repaid $15.0 million on the Revolving Loan6852125 - $230.0 million was available to borrow under the Revolving Loan as of March 31, 202352125 - The Company was in compliance with debt covenants as of March 31, 2023, with a Senior Secured Leverage Ratio of 0.3x and a Consolidated Interest Coverage Ratio of 5.7x5052125 NOTE 6. Interest Rate Swap - The interest rate swap expired on May 31, 2022, and is no longer recorded on the Consolidated Balance Sheets73 - Zero was reclassified from Accumulated other comprehensive loss to Interest expense, net in Q1 2023, compared to $1.4 million in Q1 202273 NOTE 7. Commitments and Contingencies - The Company is not currently involved in any pending or threatened litigation that would have a material adverse impact on its financial position, results of operations, or cash flows74 - A liability is recorded when a loss is both probable and the amount can be reasonably estimated74 NOTE 8. Stockholders' Equity - A three-year share repurchase program of up to $200 million was authorized by the Board of Directors on February 24, 2022, funded principally by cash from operations75126168 - During Q1 2023, the Company repurchased 0.4 million shares for $7.2 million at an average price of $17.38 per share75126 - During Q1 2022, the Company repurchased 0.3 million shares for $5.0 million at an average price of $14.78 per share76 NOTE 9. Stock-Based Compensation Restricted Stock Units (RSUs) Activity | Metric | Number of RSUs (in thousands) | Weighted-Average Grant Date Fair Value | | :----------------------------- | :---------------------------- | :------------------------------------- | | Outstanding as of Dec 31, 2022 | 3,771 | $12.88 | | Granted | 1,676 | $16.47 | | Vested and delivered | (1,496) | $10.53 | | Forfeited | (26) | $14.92 | | Outstanding as of Mar 31, 2023 | 3,925 | $15.29 | Performance Stock Units (PSUs) Activity | Metric | Number of PSUs (in thousands) | Weighted-Average Grant Date Fair Value | | :----------------------------- | :---------------------------- | :------------------------------------- | | Outstanding as of Dec 31, 2022 | 245 | $14.78 | | Granted | 267 | $16.47 | | Outstanding as of Mar 31, 2023 | 512 | $15.66 | - No stock options were granted during the three months ended March 31, 202392 NOTE 10. Earnings Per Share Earnings Per Share Calculation | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (in thousands) | $11,479 | $4,340 | | Basic weighted-average common shares outstanding (in thousands) | 66,530 | 69,463 | | Diluted weighted-average common shares outstanding (in thousands) | 67,747 | 70,899 | | Earnings per share, basic | $0.17 | $0.06 | | Earnings per share, diluted | $0.17 | $0.06 | - 554 thousand potential common shares were excluded from diluted EPS in Q1 2023 due to their anti-dilutive effect, compared to 1,738 thousand in Q1 202293 NOTE 11. Income Taxes - The effective income tax rate for Q1 2023 was 8.3%, primarily due to the incremental tax deduction from equity award vesting, compared to the statutory federal rate of 21%83147 - Income tax expense for Q1 2023 was $1.0 million95 - A valuation allowance is required against deferred tax assets due to the Company's history of recent losses, primarily from goodwill and indefinite-lived intangible asset impairments94 Note About Forward-Looking Statements This section provides a cautionary statement regarding forward-looking statements in the report, emphasizing that actual results may differ materially due to various risks and uncertainties beyond the company's control - All statements other than historical facts are forward-looking, using words such as "believe," "expect," "project," "anticipate," etc85 - Forward-looking statements are based on current expectations, beliefs, strategies, estimates, and assumptions, but are inherently uncertain85 - Actual results could differ materially due to various risks, including those related to the automotive ecosystem, market competition, technological advancements, data privacy, strategic acquisitions, and debt agreements859798 - The company undertakes no obligation to update or revise any forward-looking statements, other than as may be required by law98 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an in-depth analysis of Cars.com Inc.'s business, financial condition, and results of operations for the three months ended March 31, 2023, compared to the prior-year period Business Overview - Cars.com Inc. is a leading automotive marketplace platform providing digital solutions to connect car shoppers with sellers103 - The platform empowers shoppers with data and tools for informed buying decisions and connects them with automotive retailers, OEMs, and lenders103 - The Company's brand portfolio includes Cars.com™, Dealer Inspire®, FUEL™, DealerRater®, CreditIQ®, Accu-Trade™, and NewCars.com®104 Overview of Results Key Operating Metrics | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | % Change (YoY) | | :----------------------------- | :--------------------------------------- | :--------------------------------------- | :------------- | | Traffic | 164,782 | 148,491 | 11% | | Average Monthly Unique Visitors | 28,478 | 26,562 | 7% | | Dealer Customers (as of Mar 31) | 19,186 | 19,500 | (2%) | | Monthly Average Revenue Per Dealer (ARPD) | $2,386 | $2,291 | 4% | - Traffic and Average Monthly Unique Visitors (UVs) growth were driven by increased consumer demand, shifts in paid user acquisition strategy, and enhancements in App and Website experiences136 - Dealer Customers decreased 2% year-over-year and quarter-over-quarter due to elevated cancellations from digital dealers115 - Monthly Average Revenue Per Dealer (ARPD) increased 4% year-over-year, primarily driven by growth in digital solutions, offset by a reduction in FUEL revenue138 - Business performance is impacted by changes in the larger automotive ecosystem, including inventory supply, supply chain disruptions, vehicle acquisition costs, and OEM/dealership investment in technology solutions116 Results of Operations Revenue by Segment | Revenue Segment | Q1 2023 (in thousands) | Q1 2022 (in thousands) | Change (YoY) | % Change (YoY) | | :---------------------- | :--------------------- | :--------------------- | :----------- | :------------- | | Dealer | $149,843 | $140,416 | +$9,427 | 7% | | OEM and National | $13,543 | $15,174 | -$1,631 | (11%) | | Other | $3,682 | $2,617 | +$1,065 | 41% | | Total Revenue | $167,068 | $158,207 | +$8,861 | 6% | - Dealer revenue increased 7% year-over-year, primarily driven by an increase in digital solutions revenue109 - OEM and National revenue decreased 11% year-over-year due to pullbacks in spending from some insurance customers141 Operating Expenses by Category | Expense Category | Q1 2023 (in thousands) | Q1 2022 (in thousands) | Change (YoY) | % Change (YoY) | | :----------------------------- | :--------------------- | :--------------------- | :----------- | :------------- | | Cost of revenue and operations | $29,795 | $27,752 | +$2,043 | 7% | | Product and technology | $24,101 | $21,307 | +$2,794 | 13% | | Marketing and sales | $58,297 | $57,094 | +$1,203 | 2% | | General and administrative | $18,304 | $16,560 | +$1,744 | 11% | | Depreciation and amortization | $24,042 | $24,553 | -$511 | (2%) | | Total Operating Expenses | $154,539 | $147,266 | +$7,273 | 5% | - Net income significantly increased to $11.5 million in Q1 2023 from $4.3 million in Q1 2022140 - Interest expense, net, decreased by $1.1 million year-over-year due to the maturity of the interest rate swap and reduced indebtedness, partially offset by higher interest rates145 - Other income, net, increased significantly due to the change in fair value of contingent consideration associated with the CreditIQ and Accu-Trade acquisitions146 Liquidity and Capital Resources - Primary liquidity sources are cash flows from operations, available cash reserves, and borrowing capacity under credit facilities149 - Total liquidity as of March 31, 2023, was $248.8 million, including $18.8 million in cash and cash equivalents and $230.0 million available under the Revolving Loan123 - Outstanding aggregate principal amount of indebtedness was $462.5 million as of March 31, 2023124 - During Q1 2023, the Company made $3.8 million in Term Loan payments and repaid $15.0 million on its Revolving Loan125 - The Company repurchased 0.4 million shares for $7.2 million in Q1 2023 as part of its share repurchase program126 - The fair value of contingent consideration was $47.6 million as of March 31, 2023, with $6.7 million expected to be paid within the next twelve months127 Off-Balance Sheet Arrangements - The Company does not have any material off-balance sheet arrangements151 Commitments and Contingencies - Information related to commitments and contingencies is detailed in Note 7 to the Consolidated Financial Statements132165 Critical Accounting Policies - There have been no changes to the Company's critical accounting policies during the three months ended March 31, 2023159 Recent Accounting Pronouncements - There were no significant new accounting pronouncements applicable to the Company in the period133 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that the company's exposures to market risk have not materially changed since December 31, 2022, with further details available in the Annual Report on Form 10-K - The Company's exposures to market risk have not materially changed since December 31, 2022134 - Further quantitative and qualitative disclosures about market risk are available in Part II, Item 7A of the Annual Report on Form 10-K for the year ended December 31, 2022134 Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, providing reasonable assurance for timely and accurate information reporting - Management, with the participation of the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2023135 - Disclosure controls and procedures provide reasonable assurance that information required to be disclosed is recorded, processed, summarized, and reported within specified time periods135161 - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the period162 PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 7 (Commitments and Contingencies) in the Consolidated Financial Statements for information relating to legal proceedings - Information relating to legal proceedings is detailed in Note 7 (Commitments and Contingencies) to the Consolidated Financial Statements165 Item 1A. Risk Factors The company states that there have been no material changes from the risk factors previously described in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes from the risk factors described in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2022166 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and repurchased 412,759 shares of common stock for $7.2 million during Q1 2023 as part of its share repurchase program - There were no unregistered sales of equity securities by the issuer167 Common Stock Repurchases | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Dollar Value Remaining (in thousands) | | :-------------------------------- | :------------------------------- | :--------------------------- | :-------------------------------------------- | | January 1 - January 31, 2023 | 83,171 | $15.81 | $149,702 | | February 1 - February 28, 2023 | 111,934 | $17.80 | $147,710 | | March 1 - March 31, 2023 | 217,654 | $17.77 | $143,843 | | Total for Q1 2023 | 412,759 | | | - The share repurchases were conducted under a three-year program authorized for up to $200 million on February 24, 2022168 Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - There were no defaults upon senior securities169 Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable to the Company174 Item 5. Other Information This section indicates that no other information was reported - This section contains no additional information170 Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including various certifications, Inline XBRL documents, and corporate governance documents incorporated by reference - The exhibit list includes certifications (31.1, 31.2, 32.1, 32.2), Inline XBRL instance and taxonomy documents (101.INS, SCH, CAL, DEF, LAB, PRE), and the cover page (104)176 - Amended and Restated Certificate of Incorporation and Bylaws are incorporated by reference176 Signatures - The report was signed on May 4, 2023, by T. Alex Vetter, Chief Executive Officer, and Sonia Jain, Chief Financial Officer178