Cars.com Inc. files 10-Q

Cars.com Inc. filed 10-Q with SEC. Read ‘s full filing at 000156459019018530.

Principles of Consolidation. The accompanying Consolidated Financial Statements include the accounts of Cars.com Inc. and its 100% owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation.

Term Loan. As of March 31, 2019, the outstanding principal amount under the Term Loan was $410.6 million and the interest rate in effect was 4.3%, including the impact of the interest rate swap discussed in Note 5 (Interest Rate Swap). During the three months ended March 31, 2019, the Company made $5.6 million in mandatory quarterly Term Loan payments.

Revolving Loan. As of March 31, 2019, the outstanding borrowings under the Revolving Loan were $275.0 million and the interest rate in effect was 4.1%. During the three months ended March 31, 2019, the Company made $5.0 million in voluntary Revolving Loan payments. As of March 31, 2019, $175.0 million was available to borrow under the Revolving Loan. The Company’s borrowings are limited by its net leverage ratio, which is calculated in accordance with the credit agreement and was 3.0 to 1.0 as of March 31, 2019.

The interest rate on borrowings under the Company’s Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on its borrowing under the Term Loan, the Company entered into an interest rate swap (the ‘Swap’) effective December 31, 2018. Under the terms of the Swap, the Company is locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in the Credit Agreement, on a notional amount of $300 million. The Swap is designated as a cash flow hedge of interest rate risk. As of March 31, 2019, the fair value of the Swap was an unrealized loss of $7.3 million, of which $2.3 million and $5.0 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets. During the three months ended March 31, 2019, $0.3 million was reclassified from Accumulated other comprehensive (loss) into Interest expense, net.

Performance Stock Units (‘PSUs’). PSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting. The fair value of the PSUs is equal to the Company’s common stock price on the date of grant. During the three months ended March 31, 2019, the Company granted 207,000 PSUs at a weighted average grant date fair value of $24.02 per unit. These PSUs require continued employee service. The percentage of PSUs that shall vest will range from 0% to 200% of the number of PSUs granted based on the Company’s future performance related to certain revenue and adjusted earnings before interest, income taxes, depreciation and amortization targets over a three-year performance period. These PSUs are subject to cliff vesting at the end of the three-year performance period.

The growth in Traffic was driven by increases in both organic and paid traffic. Mobile traffic accounted for 71% and 65% of total Traffic for the three months ended March 31, 2019 and 2018, respectively.

Total Dealer Customers declined 3% from December 31, 2018. Dealer Customers decreased primarily due to higher cancellations of marketplace customers, offset in part by growth in Dealer Inspire only customers.

Total Dealer Customers declined 6% from March 31, 2018. Dealer Customers decreased primarily due to higher cancellations of marketplace customers, offset in part by incremental customers from the Acquisition and continued growth of Dealer Inspire only customers.

ARPD increased 4% from December 31, 2018, primarily driven by the addition of Dealer Inspire revenues. Excluding the impact of Dealer Inspire revenues, ARPD would have decreased 2%, primarily due to higher cancellations and reduced spend from marketplace customers.

ARPD increased 9% from March 31, 2018, primarily driven by the addition of Dealer Inspire revenues and the favorable impact of the increase in large dealers in larger markets that we now control. Direct ARPD excluding revenues from dealer websites and related digital solutions from Dealer Inspire was $2,102, up 3% from the prior year.

Retail Revenues-Direct. Direct revenues consists of marketplace and digital solutions sold to Dealer Customers. Direct revenues is our largest revenue stream, representing 74.6% and 63.4% of total revenues for the three months ended March 31, 2019 and 2018, respectively. Direct revenues grew by $13.6 million, or 13%, compared to the prior year. During 2018, we amended our affiliate agreements with The McClatchy Company (‘McClatchy’), tronc, Inc. (‘tronc’) and the Washington Post to convert all of these affiliate markets prior to the expiration dates of the original affiliate agreements. During the three months ended March 31, 2019, the affiliate market conversions contributed an incremental $13.2 million to Direct revenues measured at the month of each of the conversions, while reducing Wholesale revenues by $11.4 million (of which $2.8 million relates to the Unfavorable contracts liability amortization). A full quarter’s impact of Dealer Inspire’s business contributed an incremental $11.5 million to Direct revenues. Excluding the affiliate market conversions and Dealer Inspire, Direct revenues decreased $11.1 million, or 14%, compared to the prior year, primarily due to a 12% decline in Direct Dealer Customers. Direct Dealer Customers decreased 3% from December 31, 2018. For information related to the affiliate market conversions, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., ‘Financial Statements’ of this Quarterly Report on Form 10-Q.

Retail Revenues-National Advertising. National advertising revenues consists of display advertising and other solutions sold to OEMs and advertising agencies. National advertising revenues represent 13.2% and 16.8% of total revenues for the three months ended March 31, 2019 and 2018, respectively. National advertising revenue declined 24%, as OEMs reduced their upfront commitments and we experienced a lower close rate on new sales to these customers. These declines are occurring as OEMs have reduced or shifted their spending during the quarter.

excluding the affiliate market conversions, Wholesale revenues was impacted by a 9% decline in Dealer Customers. For information related to the affiliate market conversions, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., ‘Financial Statements’ of this Quarterly Report on Form 10-Q.

Cost of revenues and operations. Cost of revenues and operations primarily consist of expenses related to our pay-per-lead products, third-party costs for processing dealer vehicle inventory, product fulfillment, customer service and compensation costs. Cost of revenues and operations represents 16.6% and 11.2% of total revenues for the three months ended March 31, 2019 and 2018, respectively. Cost of revenues and operations increased, primarily due to higher third-party costs, principally related to new product offerings, and incremental compensation costs associated with the full quarter’s impact of Dealer Inspire’s business.

Product and technology. The product team creates and manages consumer and dealer-facing innovation, manages consumer user experience and includes the costs associated with our editorial and data strategy teams. The technology team develops and supports the Cars.com products and website. Product and technology expenses include compensation costs, as well as license fees for vehicle specifications, search engine optimization, hardware/software maintenance, software licenses, data center and other infrastructure costs. Product and technology expenses represent 11.6% and 11.2% of total revenues for the three months ended March 31, 2019 and 2018, respectively. Product and technology expenses were flat, as the full quarter’s impact of Dealer Inspire’s business was offset by cost efficiencies.

Marketing and sales. Marketing and sales expenses primarily consist of traffic and lead acquisition costs (including search engine marketing and other online marketing), TV and digital display/video advertising and creative production, market research, trade events and compensation costs for the marketing, sales support and sales teams. Marketing and sales expenses represent 39.1% and 40.9% of total revenues for the three months ended March 31, 2019 and 2018, respectively. Marketing and sales decreased, primarily due to lower compensation costs as a result of the Sales Transformation and cost efficiencies associated with trade events. These costs were partially offset by the full quarter’s impact of Dealer Inspire’s business and an increase in performance marketing.

General and administrative. General and administrative expenses primarily consist of compensation costs for the finance, legal, human resources, facilities and other administrative employees. In addition, general and administrative expenses include office space rent, legal and accounting services, other professional services, transaction-related costs and costs related to the write-off and loss on assets. General and administrative expenses represent 15.5% and 15.2% of total revenues for the three months ended March 31, 2019 and 2018, respectively. General and administrative expenses decreased $0.4 million and 2% versus the prior year. During the three months ended March 31, 2019, we recognized $6.5 million related to severance, transformation and other exit costs; $2.7 million in costs associated with stockholder activist campaign and $2.0 million in transaction-related costs. During the three months ended March 31, 2018, we recognized $0.5 million related to severance, transformation and other exit costs; $3.8 million in costs associated with stockholder activist campaign; and $10.1 million in transaction-related costs. Excluding these costs, general and administrative expenses increased $2.8 million and 29% versus the prior year, primarily due to the full quarter’s impact of Dealer Inspire’s business and increased stock based compensation.

Affiliate revenue share. Affiliate revenue share expense primarily represents payments made to affiliates pursuant to our affiliate agreements. Affiliate revenue share expense decreased 25%, as the amortization of the Unfavorable contracts liability related to the converted affiliate markets is now recorded as a reduction of Affiliate revenue share expense, rather than Wholesale revenues. This decline was partially offset by higher costs associated with the early conversions of the McClatchy, tronc and Washington Post markets. For information related to the Unfavorable contracts liability, see Note 6 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., ‘Financial Statements’ of this Quarterly Report on Form 10-Q.

Depreciation and amortization. Depreciation and amortization expense increased 17%, primarily due to the full quarter’s impact of the Acquisition and additional amortization resulting from the reduction of the useful lives of certain assets related to the Technology Transformation.

Term Loan and Revolving Loan. As of March 31, 2019, the outstanding principal amount under the Term Loan was $410.6 million, with an interest rate of 4.3%, including the impact of the interest rate swap. The outstanding borrowings under the Revolving Loan were $275.0 million, with an interest rate of 4.1%. During the three months ended March 31, 2019, we made $5.0 million in voluntary revolving loan payments and $5.6 million in mandatory Term Loan payments. As of March 31, 2019, $175.0 million was available to borrow under the Revolving Loan. Our borrowings are limited by our net leverage ratio, which is calculated in accordance with our credit agreement, and was 3.0 to 1.0 as of March 31, 2019.

Interest Rate Swap. The interest rate on borrowings under our Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on our borrowing under our Term Loan, we entered into an interest rate swap agreement (the ‘Swap’) effective December 31, 2018. Under the terms of the Swap, we are locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in our Credit Agreement, on a notional amount of $300 million. As of March 31, 2019, the fair value of the Swap was an unrealized loss of $7.3 million. The Swap is designated as a cash flow hedge of interest rate risk and recorded at fair value in Other liabilities on the Consolidated Balance Sheets. Any gains or losses on the Swap will be reported as a component of Accumulated comprehensive (loss) income until reclassed to Interest expense, net in the same period the hedge transaction impacts earnings.

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