Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Cars.com Inc. and its subsidiaries, collectively, unless the context indicates otherwise.
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
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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(in thousands) |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenue |
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$ |
162,873 |
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$ |
155,530 |
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$ |
321,080 |
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$ |
308,825 |
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Net income |
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|
5,545 |
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|
|
5,966 |
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|
9,885 |
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11,244 |
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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:
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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(in thousands) |
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2022 |
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2021 |
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% Change |
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2022 |
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2021 |
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% Change |
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Traffic |
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148,010 |
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158,438 |
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(7 |
)% |
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296,500 |
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315,042 |
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(6 |
)% |
Average Monthly Unique Visitors |
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27,079 |
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26,391 |
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3 |
% |
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26,820 |
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26,174 |
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2 |
% |
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June 30, 2022 |
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June 30, 2021 |
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% Change |
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March 31, 2022 |
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% Change |
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Dealer Customers |
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19,517 |
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18,845 |
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4 |
% |
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19,500 |
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0 |
% |
Monthly Average Revenue Per Dealer |
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$ |
2,326 |
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$ |
2,299 |
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1 |
% |
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$ |
2,291 |
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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 June 30, 2022 was primarily due to elevated traffic in the prior year period related to an increase in consumer confidence and heightened consumer demand from the federal economic stimulus program that ran during the six months ended June 30, 2021.
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 June 30, 2021, driven by sustained high retention rates, strong new sales to Dealer Customers, as well as the inclusion of 180 Accu-Trade only dealers.
18
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 June 30, 2022 Compared to Three Months Ended June 30, 2021
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Three Months Ended June 30, |
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|
(In thousands, except percentages) |
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2022 |
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2021 |
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$ Change |
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% Change |
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Revenue: |
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Dealer |
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$ |
143,987 |
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$ |
136,866 |
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$ |
7,121 |
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5 |
% |
OEM and National |
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14,144 |
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16,329 |
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(2,185 |
) |
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(13 |
)% |
Other |
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4,742 |
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|
2,335 |
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|
2,407 |
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|
103 |
% |
Total revenue |
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162,873 |
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155,530 |
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|
7,343 |
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5 |
% |
Operating expenses: |
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Cost of revenue and operations |
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29,504 |
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28,219 |
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1,285 |
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5 |
% |
Product and technology |
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23,117 |
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19,434 |
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3,683 |
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19 |
% |
Marketing and sales |
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54,655 |
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51,309 |
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3,346 |
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7 |
% |
General and administrative |
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17,211 |
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15,615 |
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|
1,596 |
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10 |
% |
Depreciation and amortization |
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23,001 |
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25,298 |
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(2,297 |
) |
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(9 |
)% |
Total operating expenses |
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147,488 |
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139,875 |
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7,613 |
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5 |
% |
Operating income |
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15,385 |
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15,655 |
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(270 |
) |
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(2 |
)% |
Nonoperating expense: |
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Interest expense, net |
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(9,047 |
) |
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(9,839 |
) |
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|
792 |
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(8 |
)% |
Other expense, net |
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(54 |
) |
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(39 |
) |
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(15 |
) |
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|
38 |
% |
Total nonoperating expense, net |
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|
(9,101 |
) |
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|
(9,878 |
) |
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|
777 |
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(8 |
)% |
Income before income taxes |
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|
6,284 |
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|
5,777 |
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|
507 |
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9 |
% |
Income tax expense (benefit) |
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|
739 |
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|
(189 |
) |
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|
928 |
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*** |
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Net income |
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$ |
5,545 |
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|
$ |
5,966 |
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|
$ |
(421 |
) |
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(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.
19
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 ended June 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 June 30, 2022 Compared to Six Months Ended June 30, 2021
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|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
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|
|
|
|
|
|
(In thousands, except percentages) |
|
2022 |
|
|
2021 |
|
|
$ Change |
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|
% Change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Dealer |
|
$ |
284,403 |
|
|
$ |
269,824 |
|
|
$ |
14,579 |
|
|
|
5 |
% |
OEM and National |
|
|
29,318 |
|
|
|
34,398 |
|
|
|
(5,080 |
) |
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|
(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 ended June 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 ended December 31, 2021 as filed with the SEC on February 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 of June 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 of June 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 ended June 30, 2022, we made $5.0 million in mandatory Term Loan payments. As of June 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 of June 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 the October 2020 refinancing, we entered into an interest rate swap (the “Swap”) effective December 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 until May 31, 2022. Although the Swap was initially designated as a cash flow hedge of interest rate risk, hedge accounting was discontinued in June 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 on May 31, 2022 and, as such, is no longer recorded on the Consolidated Balance Sheets. As of December 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 ended June 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 ended June 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):