# CarGurus, Inc.: Form 10-Q for the period ended Mar 31, 2024 - Company: [CarGurus, Inc.](/companies/carg.md) (CIK 1494259) - Form: 10-Q - Filed: 2024-05-09 - Accepted by EDGAR: May 9, 2024, 16:11 ET - Period: 2024-03-31 - Accession: 0000950170-24-056957 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1494259/000095017024056957/carg-20240331.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1494259/000095017024056957/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2024-03-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2024-01-01 to 2024-03-31 | $215.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $175.0m | us-gaap:GrossProfit | | Research and development | 3 months, 2024-01-01 to 2024-03-31 | $35.5m | us-gaap:ResearchAndDevelopmentExpense | | Operating income | 3 months, 2024-01-01 to 2024-03-31 | $26.3m | us-gaap:OperatingIncomeLoss | | Income tax | 3 months, 2024-01-01 to 2024-03-31 | $8.4m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2024-01-01 to 2024-03-31 | $21.3m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.20 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.20 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 108,632,159 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $52.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $28.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $77.4m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2024-03-31 | $246.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2024-03-31 | $323.8m | us-gaap:AssetsCurrent | | Total assets | at 2024-03-31 | $870.8m | us-gaap:Assets | | Current liabilities | at 2024-03-31 | $116.3m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2024-03-31 | $302.4m | us-gaap:Liabilities | | Long-term debt | at 2024-03-31 | $0 | us-gaap:LongTermDebt | | Shareholders' equity | at 2024-03-31 | $568.4m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 71,833 characters. *You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited interim condensed consolidated financial statements, or the Unaudited Condensed Consolidated Financial Statements, and the related notes thereto, appearing elsewhere in this Quarterly Report, and our consolidated financial statements and the related notes and other financial information included in our Annual Report. Some of the information contained in this discussion and analysis or elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and our performance and future success, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” For a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis you should review our Annual Report, including those cautionary statements set forth under Part I, Item 1A “Risk Factors.” We qualify all of our forward-looking statements by such cautionary statements.* *In this discussion, we use financial measures that are considered non-GAAP financial measures under SEC rules. These rules regarding non-GAAP financial measures require supplemental explanation and reconciliation, which are included elsewhere in this Quarterly Report. Investors should not consider non-GAAP financial measures in isolation from or in substitution for, financial information presented in compliance with United States, or U.S., generally accepted accounting principles, or GAAP.* *This section of this Quarterly Report discusses 2024 and 2023 items and period-to-period comparisons between 2024 and 2023. The period‑to‑period comparison of financial results is not necessarily indicative of future results.* ### Company Overview CarGurus, Inc. is a multinational, online automotive platform for buying and selling vehicles that is building upon its industry-leading listings marketplace with both digital retail solutions and the CarOffer online wholesale platform. The CarGurus platform gives consumers the confidence to purchase and/or sell a vehicle either online or in person, and it gives dealerships the power to accurately price, effectively market, instantly acquire, and quickly sell vehicles, all with a nationwide reach. We use proprietary technology, search algorithms, and data analytics to bring trust, transparency, and competitive pricing to the automotive shopping experience. We operate principally in the U.S. In the U.S., we also operate as independent brands the Autolist online marketplace and the CarOffer online wholesale platform. In addition to the U.S., we operate online marketplaces under the CarGurus brand in Canada and the United Kingdom, or U.K. In the U.K., we also operate as an independent brand the PistonHeads online marketplace. We have subsidiaries in the U.S., Canada, Ireland, and the U.K. and we have two reportable segments, U.S. Marketplace and Digital Wholesale. See Note 12 of the Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for further segment reporting and geographic information. We derive our revenue from marketplace revenue, wholesale revenue, and product revenue. Marketplace revenue is included in the U.S. Marketplace segment and Other category of segment reporting. Wholesale revenue and product revenue are included in the Digital Wholesale segment. We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages and Real-time Performance Marketing, or RPM, digital advertising suite, Digital Retail, and Sell My Car - Top Dealer Offers, or TDO, (ii) advertising revenue from auto manufacturers and other auto-related brand advertisers, and (iii) revenue from partnerships with financing services companies. We generate wholesale revenue primarily from (x) transaction fees earned from the purchase and sale of vehicles between dealers, or Dealer-to-Dealer transactions, (y) transaction fees earned from the sale of vehicles to dealers that we acquire at other marketplaces, and (z) transaction fees earned from performing inspection and transportation services, inclusive of Dealer-to-Dealer transactions, other marketplace-to-dealer transactions, and IMCO transactions (as defined below). We generate product revenue primarily from (A) aggregate proceeds received from the sale of vehicles to dealers that were acquired directly from customers, or Sell My Car - Instant Max Cash Offer, or IMCO transactions, and (B) proceeds received from the sale of vehicles that were acquired through arbitration. For the three months ended March 31, 2024, we generated revenue of $215.8 million, a 7% decrease from $232.0 million of revenue for the three months ended March 31, 2023. For the three months ended March 31, 2024, we generated consolidated net income of $21.3 million and Consolidated Adjusted EBITDA of $50.4 million, compared to consolidated net income of $11.9 million and Consolidated Adjusted EBITDA of $40.8 million for the three months ended March 31, 2023. See “Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest” below for more information regarding our use of Adjusted EBITDA, a non-GAAP financial measure, and a reconciliation of Adjusted EBITDA to our consolidated net income. ### Key Business Metrics We regularly review a number of metrics, including the key metrics listed below, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make operating and strategic decisions. We believe it is important to evaluate these metrics for the U.S. and International geographic regions. The International region derives revenue from marketplace revenue from customers outside of the U.S. International markets perform differently from the U.S. market due to a variety of factors, including our operating history in each market, our rate of investment, market size, market maturity, competition, and other dynamics unique to each country. ### Monthly Unique Users For each of our websites (excluding the CarOffer website), we define a monthly unique user as an individual who has visited any such website within a calendar month, based on data as measured by Google Analytics. We calculate average monthly unique users as the sum of the monthly unique users of each of our websites in a given period, divided by the number of months in that period. We count a unique user the first time a computer or mobile device with a unique device identifier accesses any of our websites during a calendar month. If an individual accesses a website using a different device within a given month, the first access by each such device is counted as a separate unique user. If an individual uses multiple browsers on a single device and/or clears their cookies and returns to our website within a calendar month, each such visit is counted as a separate unique user. We view our average monthly unique users as a key indicator of the quality of our user experience, the effectiveness of our advertising and traffic acquisition, and the strength of our brand awareness. Measuring unique users is important to us and we believe it provides useful information to our investors because our marketplace revenue depends, in part, on our ability to provide dealers with connections to our users and exposure to our marketplace audience. We define connections as interactions between consumers and dealers on our marketplace through phone calls, email, managed text and chat, and clicks to access the dealer’s website or map directions to the dealership. *(in thousands)* | Average Monthly Unique Users | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | United States | 34,006 | 31,986 | | International | 8,568 | 7,191 | | Total | 42,574 | 39,177 | 21 ### Monthly Sessions We define monthly sessions as the number of distinct visits to our websites (excluding the CarOffer website) that take place each month within a given time frame, as measured and defined by Google Analytics. We calculate average monthly sessions as the sum of the monthly sessions in a given period, divided by the number of months in that period. A session is defined as beginning with the first page view from a computer or mobile device and ending at the earliest of when a user closes their browser window, after 30 minutes of inactivity, or each night at midnight (i) Eastern Time for our U.S. and Canada websites, other than the Autolist website, (ii) Pacific Time for the Autolist website, and (iii) Greenwich Mean Time for our U.K. websites. A session can be made up of multiple page views and visitor actions, such as performing a search, visiting vehicle detail pages, and connecting with a dealer. We believe that measuring the volume of sessions in a time period, when considered in conjunction with the number of unique users in that time period, is an important indicator to us of consumer satisfaction and engagement with our marketplace, and we believe it provides useful information to our investors because the more satisfied and engaged consumers we have, the more valuable our service is to dealers. *(in thousands)* | Average Monthly Sessions | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | United States | 88,286 | 84,274 | | International | 19,714 | 16,672 | | Total | 108,000 | 100,946 | ### Number of Paying Dealers We define a paying dealer as a dealer account with an active, paid marketplace subscription at the end of a defined period. The number of paying dealers we have is important to us and we believe it provides valuable information to investors because it is indicative of the value proposition of our marketplace products, as well as our sales and marketing success and opportunity, including our ability to retain paying dealers and develop new dealer relationships. | Number of Paying Dealers | As of March 31, 2024 | 2023 | | --- | ---: | ---: | | United States | 24,419 | 24,394 | | International | 6,756 | 6,897 | | Total | 31,175 | 31,291 | ### Transactions We define Transactions within the Digital Wholesale segment as the number of vehicles processed from car dealers, consumers, and other marketplaces through the CarOffer website within the applicable period. Transactions consists of each unique vehicle (based on vehicle identification number) that reaches "sold and invoiced" status on the CarOffer website within the applicable period, including vehicles sold to car dealers, vehicles sold at third-party auctions, vehicles ultimately sold to a different buyer, and vehicles that are returned to their owners without completion of a sale transaction. We exclude vehicles processed within CarOffer's intra-group trading solution (Group Trade) from the definition of Transactions, and we only count any unique vehicle once even if it reaches sold status multiple times. Digital Wholesale includes Dealer-to-Dealer transactions and IMCO transactions. We view Transactions as a key business metric, and we believe it provides useful information to investors, because it provides insight into growth and revenue for the Digital Wholesale segment. Transactions drive a significant portion of Digital Wholesale segment revenue. We believe growth in Transactions demonstrates consumer and dealer utilization and our market share penetration in the Digital Wholesale segment. | Transactions | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | Transactions | 10,302 | 17,505 | 22 ### Quarterly Average Revenue per Subscribing Dealer (QARSD) We define QARSD, which is measured at the end of a fiscal quarter, as the marketplace revenue primarily from subscriptions to our Listings packages and RPM, our digital advertising suite, and other digital add-on products during that trailing quarter divided by the average number of paying dealers in that marketplace during the quarter. We calculate the average number of paying dealers for a period by adding the number of paying dealers at the end of such period and the end of the prior period and dividing by two. This information is important to us, and we believe it provides useful information to investors, because we believe that our ability to grow QARSD is an indicator of the value proposition of our products and the return on investment, or ROI, that our paying dealers realize from our products. In addition, increases in QARSD, which we believe reflect the value of exposure to our engaged audience in relation to subscription cost, are driven in part by our ability to grow the volume of connections to our users and the quality of those connections, which result in increased opportunity to upsell package levels and cross-sell additional products to our paying dealers. | Quarterly Average Revenue per Subscribing Dealer (QARSD) | As of March 31, 2024 | 2023 | | --- | ---: | ---: | | United States | $6,702 | $5,943 | | International | $1,882 | $1,550 | | Consolidated | $5,664 | $4,986 | ### Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest To provide investors with additional information regarding our financial results, we have presented within this Quarterly Report Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest, each of which is a non‑GAAP financial measure. These non‑GAAP financial measures are not based on any standardized methodology prescribed by GAAP, and are not necessarily comparable to any similarly titled measures presented by other companies. We define Consolidated Adjusted EBITDA as consolidated net income, adjusted to exclude: depreciation and amortization, impairment of long-lived assets, stock‑based compensation expense, transaction-related expenses, other income, net, and provision for income taxes. We define Adjusted EBITDA as Consolidated Adjusted EBITDA adjusted to exclude: Adjusted EBITDA attributable to redeemable noncontrolling interest. We define Adjusted EBITDA attributable to redeemable noncontrolling interest as net loss attributable to redeemable noncontrolling interest, adjusted to exclude: depreciation and amortization, impairment of long-lived assets, stock‑based compensation expense, other expense, net, and provision for income taxes. These exclusions are adjusted for redeemable noncontrolling interest of 38% by taking the noncontrolling interest's full financial results and multiplying each line item in the reconciliation by 38%. We note that we use 38%, versus 49%, to allocate the share of loss because it represents the portion attributable to the redeemable noncontrolling interest. The 38% is exclusive of CO Incentive Units, Subject Units, and 2021 Incentive Units (as each term is defined in Note 2 to our consolidated financial statements contained within our Annual Report), which are liability-classified awards that do not participate in the share of loss. Adjusted EBITDA attributable to redeemable noncontrolling interest is reflective of our acquisition of the remaining minority equity interests in CarOffer completed on December 1, 2023, or the 2023 CarOffer Transaction. Following the 2023 CarOffer Transaction there was no redeemable noncontrolling interest as of December 1, 2023, and as a result, Consolidated Adjusted EBITDA is equivalent to Adjusted EBITDA for the three months ended March 31, 2024. We have presented Consolidated Adjusted EBITDA and Adjusted EBITDA within this Quarterly Report because they are key measures used by our management and Board of Directors to understand and evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital. In particular, we believe that the exclusion of certain items in calculating Consolidated Adjusted EBITDA and Adjusted EBITDA can produce a useful measure for period‑to‑period comparisons of our business. We have presented Adjusted EBITDA attributable to redeemable noncontrolling interest because it is used by our management to reconcile Consolidated Adjusted EBITDA to Adjusted EBITDA. It represents the portion of Consolidated Adjusted EBITDA that is attributable to our redeemable noncontrolling interest. Adjusted EBITDA attributable to redeemable noncontrolling interest is not intended to be reviewed on its own. We use Consolidated Adjusted EBITDA and Adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe Consolidated Adjusted EBITDA and Adjusted EBITDA help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. Accordingly, we believe that Consolidated Adjusted EBITDA and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision‑making. We use Adjusted EBITDA attributable to redeemable noncontrolling interest to reconcile Consolidated Adjusted EBITDA to Adjusted EBITDA. It enables an investor to gain a clearer understanding of the portion of Consolidated Adjusted EBITDA that is attributable to our redeemable noncontrolling interest. Our Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest are not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest rather than consolidated net income and net loss attributable to redeemable noncontrolling interest, respectively, which are the most directly comparable GAAP equivalents. Some of these limitations are: - Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude depreciation and amortization expense and, although these are non‑cash expenses, the assets being depreciated may have to be replaced in the future; - Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude impairment of long-lived assets and, although these are non-cash adjustments, the assets being impaired may have to be replaced in the future; - Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude stock‑based compensation expense, which will be, for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy; - Consolidated Adjusted EBITDA and Adjusted EBITDA exclude transaction-related expenses incurred by us during a reporting period, which are inclusive of certain transaction and integration costs associated with the 2023 CarOffer Transaction and which may not be reflective of our operational performance during such period, for acquisitions that have been completed as of the filing date of our annual or quarterly report (as applicable) relating to such period; - Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude other income, net, which consists primarily of interest income earned on our cash, cash equivalents, and short-term investments, and foreign exchange gains and losses; - Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest exclude the provision for income taxes; - Adjusted EBITDA excludes Adjusted EBITDA attributable to redeemable noncontrolling interest, which is calculated as the net loss attributable to redeemable noncontrolling interest, adjusted for all exclusions used to calculate Consolidated Adjusted EBITDA as described above; and - other companies, including companies in our industry, may calculate Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest differently, which reduces their usefulness as a comparative measure. Because of these limitations, we consider, and you should consider, Consolidated Adjusted EBITDA, Adjusted EBITDA, and Adjusted EBITDA attributable to redeemable noncontrolling interest together with other operating and financial performance measures presented in accordance with GAAP. For the three months ended March 31, 2024 and 2023, the following table presents a reconciliation of Consolidated Adjusted EBITDA and Adjusted EBITDA to consolidated net income, the most directly comparable measure calculated in accordance with GAAP for each of the periods presented. *(in thousands)* | Reconciliation of Consolidated Adjusted EBITDA and Adjusted EBITDA: | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | Consolidated net income | $21,301 | $11,866 | | Depreciation and amortization | 7,481 | 11,576 | | Impairment of long-lived assets | — | 175 | | Stock-based compensation expense | 15,822 | 14,977 | | Transaction-related expenses | 811 | — | | Other income, net | (3,401) | (4,338) | | Provision for income taxes | 8,384 | 6,531 | | Consolidated Adjusted EBITDA | 50,398 | 40,787 | | Adjusted EBITDA attributable to redeemable noncontrolling interest | — | (677) | | Adjusted EBITDA | $50,398 | $41,464 | For the three months ended March 31, 2024 and 2023, the following table presents a reconciliation of Adjusted EBITDA attributable to redeemable noncontrolling interest to net loss attributable to redeemable noncontrolling interest, the most directly comparable measure calculated in accordance with GAAP, for each of the periods presented. *(in thousands)* | Reconciliation of Adjusted EBITDA attributable to redeemable noncontrolling interest: | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | Net loss attributable to redeemable noncontrolling interest | $— | $(4,266) | | Depreciation and amortization (1) | — | 2,948 | | Impairment of long-lived assets (1) | — | 67 | | Stock-based compensation expense (1) | — | 221 | | Other expense, net (1) | — | 348 | | Provision for income taxes (1) | — | 5 | | Adjusted EBITDA attributable to redeemable noncontrolling interest | $— | $(677) | (1) These exclusions are adjusted to reflect the noncontrolling interest of 38%. ### Components of Unaudited Condensed Consolidated Income Statements ### Revenue We derive our revenue from marketplace revenue, wholesale revenue, and product revenue. Marketplace revenue is included in the U.S. Marketplace segment and Other category of segment reporting. Wholesale revenue and product revenue are included in the Digital Wholesale segment. We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages, RPM, digital advertising suite, Digital Retail, and Sell My Car - TDO, (ii) advertising revenue from auto manufacturers and other auto‑related brand advertisers, and (iii) revenue from partnerships with financing services companies. We generate wholesale revenue primarily from (x) transaction fees earned from Dealer-to-Dealer transactions, (y) transaction fees earned from the sale of vehicles to dealers that we acquire at other marketplaces, and (z) transaction fees earned from performing inspection and transportation services, inclusive of Dealer-to-Dealer transactions, other marketplace-to-dealer transactions, and IMCO transactions. We generate product revenue primarily from (A) aggregate proceeds received from the sale of vehicles that were acquired through IMCO transactions, and (B) proceeds received from the sale of vehicles that were acquired through arbitration. #### Marketplace Revenue We offer multiple types of marketplace Listings packages to our dealers for our CarGurus U.S. platform (availability varies on our other marketplaces): Restricted Listings, which is free; and various levels of Listings packages, which each require a paid subscription under a monthly, quarterly, semiannual, or annual subscription basis. Our subscriptions for customers generally auto-renew on a monthly basis and are cancellable by dealers with 30 days' advance notice prior to the commencement of the applicable renewal term. Subscription pricing is determined based on a dealer’s inventory size, region, and our assessment of the connections and ROI the platform will provide them and is subject to discounts and/or fee reductions that we may offer from time to time. We also offer all dealers on the platform access to our Dealer Dashboard, which includes a performance summary, Dealer Insights tool, and user review management platform. Only dealers subscribing to a paid Listings package have access to the Pricing Tool, Market Analysis tool, and Instant Market Value, or IMV, Scan tool. For details on the Dealer Dashboard and these merchandising tools, refer to “Our Products and Services – U.S. Marketplace and Other – Dealer Offerings – Dealer Dashboard and Merchandising Tools” in Part I, Item 1 in our Annual Report. We also offer paid Listings packages for the Autolist and PistonHeads websites. In addition to displaying inventory in our marketplace and providing access to the Dealer Dashboard, we offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements marketed under RPM and our digital advertising suite. Through RPM, dealers can buy advertising that appears in our marketplace, on other sites on the internet, and/or on high-converting social media platforms. Such advertisements can be targeted by the user’s geography, search history, CarGurus website activity, and a number of other targeting factors, allowing dealers to increase their visibility with in-market consumers and drive qualified traffic for dealers. We also offer dealer advertising products for the PistonHeads website. We also offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements such as Digital Retail, which allows shoppers to complete much of the vehicle-purchase process online through the Dealers’ Listings page. Digital Retail is comprised of (i) the Digital Deal Platform, which gives dealers higher quality leads through upfront consumer-provided information, (ii) Geo Expansion, which expands the visibility of a dealer’s inventory in the search results beyond its local market, and (iii) Hard Pull Financing, which provides loan information. We also offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements such as TDO, which allows dealers to pay for leads to receive direct access to shoppers actively looking to sell their vehicles. Dealers can acquire inventory from shoppers who are looking to sell directly through the CarGurus Sell My Car page. Marketplace revenue also consists of non-dealer advertising revenue from auto manufacturers and other auto-related brand advertisers sold on a cost-per-thousand impressions basis, or CPM basis. An impression is an advertisement loaded on a web page. In addition to advertising sold on a CPM basis, we also have advertising sold on a cost-per-click basis. Pricing is primarily based on advertisement size and position on our websites and mobile applications. Auto manufacturers and other brand advertisers can execute advertising campaigns that are targeted across a wide variety of parameters, including demographic groups, behavioral characteristics, specific auto brands, categories such as Certified Pre-Owned, and segments such as hybrid vehicles. We do not provide minimum impression guarantees or other types of minimum guarantees in our contracts with customers. Advertising is also sold indirectly through revenue sharing arrangements with advertising exchange partners. We also offer non-dealer advertising products for the Autolist and PistonHeads websites. Marketplace revenue also includes revenue from partnerships with certain financing services companies pursuant to which we enable eligible consumers on our CarGurus U.S. website to pre-qualify for financing on cars from dealerships that offer financing through such companies. We primarily generate revenue from these partnerships based on the number of funded loans from consumers who pre-qualify with our lending partners through our site. #### Wholesale Revenue The CarOffer Matrix enables buying dealers to create standing buy orders and provides instant offers to selling dealers. Wholesale revenue includes transaction fees earned from Dealer-to-Dealer transactions, where we collect fees from both the buying and selling dealers. We also sell vehicles to dealers that we acquire at other marketplaces, where we collect a transaction fee from the buying dealers. Wholesale revenue also includes fees earned from performing inspection and transportation services, where we collect fees from the buying dealer. Inspection and transportation service revenue is inclusive of Dealer-to-Dealer transactions, other marketplace-to-dealer transactions, and IMCO transactions. Wholesale revenue also includes arbitration in which the vehicle is rematched to a new buyer and not acquired by us. Arbitration is the process by which we investigate and resolve claims from buying dealers. Wholesale revenue also includes fees earned from certain guarantees offered to dealers (which include 45-Day Guarantee and OfferGuard products), where we collect fees from the buying dealer or selling dealer, as applicable. #### Product Revenue The CarOffer Matrix enables consumers who are selling vehicles to be instantly presented with an offer. Product revenue includes the aggregate proceeds received from the sale of vehicles through IMCO transactions, including vehicle sale price and transaction fees collected from the buying dealers. Product revenue also includes proceeds received from the sale of vehicles acquired through arbitration, including vehicle sale price and transaction fees collected from buying dealers. Arbitration is the process by which we investigate and resolve claims from buying dealers. We control the vehicle in these transactions and therefore act as the principal. ### Cost of Revenue #### Marketplace Cost of Revenue Marketplace cost of revenue includes expenses related to supporting and hosting marketplace service offerings. These expenses include personnel and related expenses for our customer support team, including salaries, benefits, incentive compensation, and stock-based compensation; third-party service provider expenses such as advertising, data, and hosting expenses; amortization of developed technology; amortization of capitalized website development; amortization of capitalized hosting arrangements; and allocated overhead expenses. We allocate overhead expenses, such as rent and facility expenses, software expense, and employee benefit expense, to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category. #### Wholesale Cost of Revenue Wholesale cost of revenue includes expenses related to supporting and hosting Digital Wholesale service offerings, including Dealer-to-Dealer transactions and vehicles sold to dealers acquired at other marketplaces on the CarOffer Matrix. These expenses include vehicle transportation and inspection expenses; net losses on vehicles related to guarantees offered to dealers through Dealer-to-Dealer transactions; personnel and related expenses for employees directly involved in the fulfillment and support of transactions, including salaries, benefits, incentive compensation, and stock-based compensation; third-party service provider expenses; amortization of developed technology; amortization of capitalized website development; and allocated overhead expenses. We allocate overhead expenses, such as rent and facility expenses, software expense, and employee benefit expense, to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category. #### Product Cost of Revenue Product cost of revenue includes expenses related to vehicles sold to dealers through IMCO transactions and vehicles sold to dealers acquired through arbitration. These expenses include the cost of the vehicle and transportation expenses. ### Operating Expenses #### Sales and Marketing Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing team, including salaries, benefits, incentive compensation, commissions, and stock-based compensation; expenses associated with consumer marketing, such as traffic acquisition, brand building, and public relations activities; expenses associated with dealer marketing, such as content marketing, customer and promotional events, and industry events; consulting services; software subscription expenses; travel expenses; amortization of capitalized hosting arrangements; and allocated overhead expenses. A portion of our commissions that are related to obtaining a new contract are capitalized and amortized over the estimated benefit period of customer relationships. All other sales and marketing expenses are expensed as incurred. We expect sales and marketing expenses to fluctuate from quarter to quarter as we respond to changes in the macroeconomic and competitive landscapes affecting our existing dealers, consumer audience, and brand awareness. #### Product, Technology, and Development Product, technology, and development expenses consist primarily of personnel and related expenses for our research and development team, including salaries, benefits, incentive compensation, and stock-based compensation; software subscription expenses; consulting services; and allocated overhead expenses. Other than website development, internal-use software, and hosting arrangement expenses, research and development expenses are expensed as incurred. We expect product, technology, and development expenses to fluctuate as we invest in additional engineering resources to develop new solutions and make improvements to our existing platform. #### General and Administrative General and administrative expenses consist primarily of personnel and related expenses for our executive, finance, legal, people & talent, and administrative teams, including salaries, benefits, incentive compensation, and stock-based compensation; expenses associated with professional fees for audit, tax, external legal, and consulting services; payment processing and billing expenses; insurance expenses; software subscription expenses; and allocated overhead expenses. General and administrative expenses are expensed as incurred. We expect general and administrative expenses to fluctuate as we continue to scale our business. #### Depreciation and Amortization Depreciation and amortization expenses consist of depreciation on property and equipment and amortization of intangible assets and internal-use software. ### Other Income, Net Other income, net consists primarily of interest income earned on our cash, cash equivalents and short-term investments and foreign exchange gains and losses. ### Provision for Income Taxes We are subject to federal and state income taxes in the U.S. and taxes in foreign jurisdictions in which we operate. For the three months ended March 31, 2024 and 2023, a provision for income taxes was recognized as a result of the consolidated taxable income position. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. We regularly assess the need to recognize a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of March 31, 2024 and December 31, 2023, valuation allowances were immaterial. We assess our income tax positions and recognize an income tax benefit or expense based upon our evaluation of the facts, circumstances, and information available at the reporting date. For the three months ended March 31, 2024, income tax expense recognized related to uncertain tax provisions was immaterial. An immaterial amount of the reserve relating to uncertain tax positions was released as a result of settlement with taxing authorities. As of March 31, 2024, the income tax liability related to uncertain tax positions, exclusive of immaterial interest or penalties related to uncertain tax provisions, was $0.8 million, which would have favorably affected our effective tax rate, if recognized. For the three months ended March 31, 2023, we did not recognize income tax expense related to uncertain tax positions. As of December 31, 2023, the income tax liability related to uncertain tax positions, exclusive of immaterial interest or penalties related to uncertain tax provisions, was $0.8 million, which would have favorably affected our effective tax rate, if recognized. The Organisation for Economic Co-operation and Development introduced an international tax framework under Pillar Two which includes a global minimum tax of 15%. Pillar Two legislation has been enacted or substantively enacted in certain jurisdictions where we operate. The Pillar Two legislation became effective for our fiscal year beginning January 1, 2024. We have performed an assessment of its potential exposure to Pillar Two income taxes based on our most recent tax filings, country-by-country reporting, and financial statements for our constituent entities. Based on the assessment performed, we meet the Pillar Two transitional safe harbor effective tax rate relief as all jurisdictions in which we operate are above 15%. We do not expect any material exposure to Pillar Two income taxes in any jurisdictions. ### Results of Operations For the three months ended March 31, 2024 and 2023, the Unaudited Condensed Consolidated Income Statements are as follows: *(dollars in thousands)* | Revenue: | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | Marketplace | $187,219 | $167,127 | | Wholesale | 16,125 | 25,186 | | Product | 12,452 | 39,650 | | Total revenue | 215,796 | 231,963 | | Cost of revenue: | | | | Marketplace | 14,385 | 15,533 | | Wholesale | 14,224 | 22,068 | | Product | 12,226 | 39,382 | | Total cost of revenue | 40,835 | 76,983 | | Gross profit | 174,961 | 154,980 | | Operating expenses: | | | | Sales and marketing | 82,274 | 75,577 | | Product, technology, and development | 35,545 | 36,607 | | General and administrative | 28,066 | 24,919 | | Depreciation and amortization | 2,792 | 3,818 | | Total operating expenses | 148,677 | 140,921 | | Income from operations | 26,284 | 14,059 | | Other income, net: | | | | Interest income | 3,906 | 3,743 | | Other (expense) income, net | (505) | 595 | | Total other income, net | 3,401 | 4,338 | | Income before income taxes | 29,685 | 18,397 | | Provision for income taxes | 8,384 | 6,531 | | Consolidated net income | 21,301 | 11,866 | | Net loss attributable to redeemable noncontrolling interest | — | (4,266) | | Net income attributable to common stockholders | $21,301 | $16,132 | 29 For the three months ended March 31, 2024 and 2023, our segment revenue and our segment income (loss) from operations are as follows: *(dollars in thousands)* | Segment Revenue: | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | U.S. Marketplace | $172,988 | $155,621 | | Digital Wholesale | 28,577 | 64,836 | | Other | 14,231 | 11,506 | | Total | $215,796 | $231,963 | | **Segment Income (Loss) from Operations:** | | | | U.S. Marketplace | $34,217 | $26,539 | | Digital Wholesale | (10,340) | (11,225) | | Other | 2,407 | (1,255) | | Total | $26,284 | $14,059 | For the three months ended March 31, 2024 and 2023, the Unaudited Condensed Consolidated Income Statements as a percentage of total revenue are as follows (amounts in the table below may not sum due to rounding): | Revenue: | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | Marketplace | 87% | 72% | | Wholesale | 7 | 11 | | Product | 6 | 17 | | Total revenue | 100 | 100 | | Cost of revenue: | | | | Marketplace | 7 | 7 | | Wholesale | 7 | 10 | | Product | 6 | 17 | | Total cost of revenue | 19 | 33 | | Gross profit | 81 | 67 | | Operating expenses: | | | | Sales and marketing | 38 | 33 | | Product, technology, and development | 16 | 16 | | General and administrative | 13 | 11 | | Depreciation and amortization | 1 | 2 | | Total operating expenses | 69 | 61 | | Income from operations | 12 | 6 | | Other income, net: | | | | Interest income | 2 | 2 | | Other (expense) income, net | (0) | 0 | | Total other income, net | 2 | 2 | | Income before income taxes | 14 | 8 | | Provision for income taxes | 4 | 3 | | Consolidated net income | 10 | 5 | | Net loss attributable to redeemable noncontrolling interest | — | (2) | | Net income attributable to common stockholders | 10% | 7% | 30 For the three months ended March 31, 2024 and 2023, our segment revenue as a percentage of total revenue and our segment income (loss) from operations as a percentage of segment revenue are as follows (amounts in the table below may not sum due to rounding): | Segment Revenue: | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | U.S. Marketplace | 80% | 67% | | Digital Wholesale | 13 | 28 | | Other | 7 | 5 | | Total | 100% | 100% | | **Segment Income (Loss) from Operations:** | | | | U.S. Marketplace | 20% | 17% | | Digital Wholesale | (36) | (17) | | Other | 17 | (11) | | Total | 12% | 6% | ### For the three months ended March 31, 2024 and 2023 ### Revenue #### Revenue by Source *(dollars in thousands)* | Revenue: | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | Marketplace | $187,219 | $167,127 | $20,092 | 12% | | Wholesale | 16,125 | 25,186 | (9,061) | (36) | | Product | 12,452 | 39,650 | (27,198) | (69) | | Total | $215,796 | $231,963 | $(16,167) | (7)% | | **Percentage of total revenue:** | | | | | | Marketplace | 87% | 72% | | | | Wholesale | 7 | 11 | | | | Product | 6 | 17 | | | | Total | 100% | 100% | | | Overall revenue decreased $16.2 million, or 7%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Marketplace revenue increased $20.1 million, or 12%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented 87% of total revenue for the three months ended March 31, 2024, compared to 72% of total revenue for the three months ended March 31, 2023. The increase was due to an increase in Listings revenue, inclusive of certain digital add-on products, as a result of growth in QARSD, which was driven by signing on new dealers with higher average monthly recurring revenue and revenue expansion through product upgrades and price increases for existing dealers. Wholesale revenue decreased $9.1 million, or 36%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented 7% of total revenue for the three months ended March 31, 2024, compared to 11% of total revenue for the three months ended March 31, 2023. The decrease was due primarily to a 41% decrease in Transactions, which includes Dealer-to-Dealer transactions and IMCO transactions, to 10,302 for the three months ended March 31, 2024, from 17,505 for the three months ended March 31, 2023, as a result of our focus on improving the performance of our sales team and enhancing how dealers interact with the CarOffer Matrix over unit volume. Product revenue decreased by $27.2 million, or 69%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented 6% of total revenue for the three months ended March 31, 2024, compared to 17% of total revenue for the three months ended March 31, 2023. The decrease was due primarily to a decrease in proceeds received from the sale of vehicles through IMCO transactions, including lower average vehicle selling prices and lower transaction fees, due to the decrease in Transactions. The decrease in product revenue was also due in part to a decrease in proceeds received from the sale of vehicles acquired through arbitration as a result of decreased arbitration claims primarily due to decreased Transactions. #### Segment Revenue *(dollars in thousands)* | Revenue: | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | U.S. Marketplace | $172,988 | $155,621 | $17,367 | 11% | | Digital Wholesale | 28,577 | 64,836 | (36,259) | (56) | | Other | 14,231 | 11,506 | 2,725 | 24 | | Total | $215,796 | $231,963 | $(16,167) | (7)% | | **Percentage of total revenue:** | | | | | | U.S. Marketplace | 80% | 67% | | | | Digital Wholesale | 13 | 28 | | | | Other | 7 | 5 | | | | Total | 100% | 100% | | | U.S. Marketplace segment revenue increased $17.4 million, or 11%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented 80% of total revenue for the three months ended March 31, 2024, compared to 67% of total revenue for the three months ended March 31, 2023. The increase was due primarily to a $20.1 million increase in marketplace revenue, as described above. Digital Wholesale segment revenue, which is comprised of wholesale revenue and product revenue, decreased $36.3 million, or 56%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented 13% of total revenue for the three months ended March 31, 2024, compared to 28% of total revenue for the three months ended March 31, 2023. The decrease in Digital Wholesale segment revenue was due to a decrease in wholesale revenue and product revenue, as described above. ### Cost of Revenue *(dollars in thousands)* | Cost of Revenue: | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | Marketplace | $14,385 | $15,533 | $(1,148) | (7)% | | Wholesale | 14,224 | 22,068 | (7,844) | (36) | | Product | 12,226 | 39,382 | (27,156) | (69) | | Total | $40,835 | $76,983 | $(36,148) | (47)% | | **Percentage of total revenue:** | | | | | | Marketplace | 7% | 7% | | | | Wholesale | 7 | 10 | | | | Product | 6 | 17 | | | | Total | 19% | 33% | | | Overall cost of revenue decreased $36.1 million, or 47%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Marketplace cost of revenue decreased $1.1 million, or 7%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented 7% of total revenue for both the three months ended March 31, 2024 and 2023. The decrease was due primarily to a $1.1 million decrease in fees related to provisioning advertising. Wholesale cost of revenue decreased $7.8 million, or 36%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented 7% of total revenue for the three months ended March 31, 2024, compared to 10% of total revenue for the three months ended March 31, 2023. The decrease was due in part to a $3.4 million decrease in transportation expense and a $1.1 million decrease in inspection expense as a result of lower Transaction volume. The decrease was also due in part a $3.2 million decrease in amortization, primarily due to the acquired developed technology intangible asset as it became fully amortized during the quarter. Product cost of revenue decreased $27.2 million, or 69%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented 6% of the total revenue for the three months ended March 31, 2024, compared to 17% of total revenue for the three months ended March 31, 2023. The decrease was due primarily to a decrease in expenses related to vehicles sold to dealers through IMCO transactions as a result of decreased Transactions. The decrease in product cost of revenue was also due in part to a decrease in expenses related to vehicles sold to dealers acquired through arbitration as a result of decreased arbitration claims primarily due to lower Transaction volume. ### Operating Expenses #### Sales and Marketing Expense *(dollars in thousands)* | | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | Sales and marketing | $82,274 | $75,577 | $6,697 | 9% | | Percentage of total revenue | 38% | 33% | | | Sales and marketing expense increased $6.7 million, or 9%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase was due primarily to a $6.7 million increase in advertising and marketing expense due to new brand campaign and marketing efforts. #### Product, Technology, and Development Expense *(dollars in thousands)* | | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | Product, technology, and development | $35,545 | $36,607 | $(1,062) | (3)% | | Percentage of total revenue | 16% | 16% | | | Product, technology, and development expense decreased $1.1 million, or 3%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The decrease was due primarily to a $2.3 million decrease in expense as a result of increased website development capitalization and a $1.3 million decrease in consulting services. The decrease was offset in part by a $1.2 million increase in salaries and employee-related expenses due primarily to a 5% increase in headcount and a $0.5 million increase in rent and utilities. #### General and Administrative Expense *(dollars in thousands)* | | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | General and administrative | $28,066 | $24,919 | $3,147 | 13% | | Percentage of total revenue | 13% | 11% | | | 33 General and administrative expense increased $3.1 million, or 13%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase was due primarily to a $2.0 million increase in salaries and employee-related expenses, exclusive of stock-based compensation, due primarily to a 7% increase in headcount. The increase was also due in part to a $1.3 million increase in stock-based compensation due to new grants awarded to employees. #### Depreciation and Amortization Expense *(dollars in thousands)* | | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | Depreciation and amortization | $2,792 | $3,818 | $(1,026) | (27)% | | Percentage of total revenue | 1% | 2% | | | Depreciation and amortization expense decreased $1.0 million, or 27%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The decrease was the result of the customer relationships intangible asset related to the Digital Wholesale segment becoming fully amortized during the quarter. ### Other Income, net *(dollars in thousands)* | Other income, net: | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | Interest income | $3,906 | $3,743 | $163 | 4% | | Other (expense) income, net | (505) | 595 | (1,100) | 185 | | Total other income, net | 3,401 | 4,338 | $(937) | 22% | | **Percentage of total revenue:** | | | | | | Interest income | 2% | 2% | | | | Other (expense) income, net | (0) | 0 | | | | Total other income, net | 2% | 2% | | | Total other income, net decreased $0.9 million, or 22%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The $0.2 million increase in interest income was due primarily to higher interest earned on investments. These investments were subsequently sold during the three months ended March 31, 2024. The $1.1 million decrease in other (expense) income, net was due primarily to a $0.6 million increase in realized and unrealized loss associated with the fluctuation of certain foreign currencies. ### Provision for Income Taxes *(dollars in thousands)* | | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | Provision for income taxes | $8,384 | $6,531 | $1,853 | 28% | | Percentage of total revenue | 4% | 3% | | | Provision for income taxes increased $1.9 million, or 28%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to increased profitability. This was partially offset by an aggregated $0.4 million tax expense related to shortfalls on the taxable compensation of stock-based awards and the Section 162(m) excess officer compensation limitation recorded during the three months ended March 31, 2024, compared to a $3.4 million tax expense related to shortfalls on the taxable compensation of stock-based awards and the Section 162(m) excess officer compensation limitation recorded during the three months ended March 31, 2023. ### Segment Income (Loss) from Operations *(dollars in thousands)* | Segment Income (Loss) from Operations: | Three Months Ended March 31, 2024 | 2023 | Change Amount% | | | --- | ---: | ---: | ---: | ---: | | U.S. Marketplace | $34,217 | $26,539 | $7,678 | 29% | | Digital Wholesale | (10,340) | (11,225) | 885 | 8 | | Other | 2,407 | (1,255) | 3,662 | 292 | | Total | $26,284 | $14,059 | $12,225 | 87% | | **Percentage of segment revenue:** | | | | | | U.S. Marketplace | 20% | 17% | | | | Digital Wholesale | (36) | (17) | | | | Other | 17 | (11) | | | | Total | 12% | 6% | | | U.S. Marketplace segment income from operations increased $7.7 million, or 29%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented 20% of U.S. Marketplace segment revenue for the three months ended March 31, 2024, and 17% of U.S. Marketplace segment revenue for the three months ended March 31, 2023. The increase was due to an increase in revenue of $17.4 million, a decrease in cost of revenue of $1.1 million, and an increase in operating expenses of $10.8 million. Digital Wholesale segment loss from operations decreased $0.9 million, or 8%, in the three months ended March 31, 2024, compared to the three months ended March 31, 2023, and represented (36)% of Digital Wholesale segment revenue for the three months ended March 31, 2024 and (17)% of Digital Wholesale segment revenue for the three months ended March 31, 2023. The decrease in the loss was due to a decrease in revenue of $36.3 million, a decrease in cost of revenue of $35.0 million, and a decrease in operating expenses of $2.2 million. ### Liquidity and Capital Resources ### Cash, Cash Equivalents, Short-term Investments, and Borrowing Capacity As of March 31, 2024, our principal sources of liquidity were cash and cash equivalents of $246.3 million. As of December 31, 2023, our principal sources of liquidity were cash and cash equivalents of $291.4 million and short-term investments of $20.7 million. As of March 31, 2024, our borrowing capacity under the 2022 Revolver (as defined below) was $390.4 million. ### Sources and Uses of Cash During the three months ended March 31, 2024 and 2023, our cash flows from operating, investing, and financing activities, as reflected in the Unaudited Condensed Consolidated Statements of Cash Flows, were as follows: *(dollars in thousands)* | | Three Months Ended March 31, 2024 | 2023 | | --- | ---: | ---: | | Net cash provided by operating activities | $51,964 | $66,345 | | Net cash used in investing activities | (13,147) | (5,887) | | Net cash used in financing activities | (83,038) | (73,238) | | Impact of foreign currency on cash | (577) | 329 | | Net decrease in cash, cash equivalents, and restricted cash | $(44,798) | $(12,451) | Our operations have been financed primarily from operating activities. During the three months ended March 31, 2024 and 2023, we generated cash from operating activities of $52.0 million and $66.3 million, respectively. We believe that our existing sources of liquidity, including access to the 2022 Revolver, will be sufficient to fund our operations for at least the next 12 months from the date of the filing of this Quarterly Report. Our future capital requirements will depend on many factors, including our revenue; expenses associated with our sales and marketing activities and the support of our product, technology, and development efforts; expenses associated with our facilities build-out under our 1001 Boylston Street lease in excess of tenant allowance; payments received in advance from a third-party transaction processor; activity under the 2024 Share Repurchase Program (as defined below); and our investments in international markets. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, macroeconomic effects and other risks detailed more specifically in the “Risk Factors” section in Part I, Item 1A in our Annual Report. On September 26, 2022, we entered into a Credit Agreement with PNC Bank, National Association, as administrative agent and collateral agent and an L/C Issuer (as defined in the Credit Agreement), and the other lenders, L/C Issuers and parties thereto from time to time, or the Credit Agreement. The Credit Agreement consists of a revolving credit facility, or the 2022 Revolver, which allows us to borrow up to $400.0 million, $50.0 million of which may be comprised of a letter of credit sub-facility. The borrowing capacity under the Credit Agreement may be increased in accordance with the terms and subject to the adjustments as set forth in the Credit Agreement. Specifically, the borrowing capacity may be increased by an amount up to the greater of $250.0 million or 100% of Four Quarter Consolidated EBITDA (as defined in the Credit Agreement) if certain criteria are met and subject to certain restrictions. Any such increase requires lender approval. Proceeds of any borrowings may be used for general corporate purposes. The 2022 Revolver is scheduled to mature on September 26, 2027. As of both March 31, 2024 and December 31, 2023, there were no borrowings and $9.6 million in letters of credit outstanding under the 2022 Revolver, which reduces the borrowing capacity under the 2022 Revolver to $390.4 million. In connection with the 1001 Boylston Street lease, we expect to spend an additional $35.2 million to complete our buildout, of which $26.3 million has been committed and remains unspent as of March 31, 2024. These costs will be partially reimbursable under the tenant improvement allowance. On November 7, 2023, we announced that our Board of Directors authorized a share repurchase program, or the 2024 Share Repurchase Program, pursuant to which we may, from time to time, purchase shares of our Class A common stock for an aggregate purchase price not to exceed $250.0 million. Share repurchases under the 2024 Share Repurchase Program may be made through a variety of methods, including but not limited to open market purchases, privately negotiated transactions, and transactions that may be effected pursuant to one or more plans under Rule 10b5-1 and/or Rule 10b-18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The 2024 Share Repurchase Program does not obligate us to repurchase any minimum dollar amount or number of shares. The 2024 Share Repurchase Program has an effective date of January 1, 2024, and an expiration date of December 31, 2024, and prior to its expiration may be modified, suspended, or discontinued by our Board of Directors at any time without prior notice. All repurchased shares of our Class A common stock under the 2024 Share Repurchase Program will be retired. We have funded share repurchases and expect to continue to fund any additional share repurchases under the 2024 Share Repurchase Program through cash on hand and cash generated from operations. During the three months ended March 31, 2024, we repurchased and retired 3,538,194 shares for $81.1 million, exclusive of commissions and excise tax, at an average cost of $22.91 per share under the 2024 Share Repurchase Program. As of March 31, 2024, we had remaining authorization to purchase up to $168.9 million of our Class A common stock under the 2024 Share Repurchase Program. To the extent that our operating income, existing cash, cash equivalents, short-term investments, and our borrowing capacity under the 2022 Revolver are insufficient to fund our future activities, we may need to raise additional funds through a public or private equity or debt financing. Additional funds may not be available on terms favorable to us, or at all. See “*Risk Factors—Risks Related to Our Business and Industry— We may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances. If we are unable to generate sufficient cash flows or if capital is not available to us, our business, operating results, financial condition, and prospects could be adversely affected.”* in Part I, Item 1A in our Annual Report. ### Operating Activities Net cash provided by operating activities of $52.0 million during the three months ended March 31, 2024 was due primarily to consolidated net income of $21.3 million, adjusted for $15.8 million of stock-based compensation expense, $7.5 million of depreciation and amortization, and $3.3 million of amortization of deferred contract costs, partially offset by $9.1 million of deferred taxes. Net cash provided by operating activities was also attributable to a $12.7 million increase due to changes in our lease obligations, a $6.0 million decrease in prepaid expenses, prepaid income taxes, and other assets, a $0.7 million increase in accounts payable, and a $0.7 million increase in accrued expenses, accrued income taxes, and other liabilities. The increases in cash flow from operations were partially offset by a $4.2 million increase in accounts receivable and a $3.3 million increase in deferred contract costs. Net cash provided by operating activities of $66.3 million during the three months ended March 31, 2023 was due primarily to consolidated net income of $11.9 million, adjusted for $14.9 million of stock-based compensation expense, $11.6 million of depreciation and amortization, and $2.7 million of amortization of deferred contract costs, partially offset by $11.9 million of deferred taxes. Cash provided by operating activities was also attributable to a $10.3 million increase in accounts payable, an $8.6 million increase in deferred revenue, a $6.9 million decrease in accounts receivable, a $4.7 million decrease in prepaid expenses, prepaid income taxes, and other assets, a $4.5 million increase in accrued expenses, accrued income taxes, and other liabilities, a $4.5 million increase in lease obligations, and a $3.6 million decrease in inventory. The increases in cash flow from operations were partially offset by a $5.1 million increase in deferred contract costs. ### Investing Activities Net cash used in investing activities of $13.1 million during the three months ended March 31, 2024 was due primarily to $28.7 million of purchases of property and equipment and $5.5 million of capitalization of website development costs, offset in part by $20.7 million of sales of short-term investments, net of purchases. Net cash provided by investing activities of $5.9 million during the three months ended March 31, 2023 was due to $3.5 million of capitalization of website development costs and $2.4 million of purchases of property and equipment. ### Financing Activities Net cash used in financing activities of $83.0 million during the three months ended March 31, 2024 was due primarily to $77.4 million of payment for repurchase of our Class A common stock under the 2024 Share Repurchase Program, $5.1 million of payment of withholding taxes on net share settlements of restricted stock units, and $0.5 million of change in gross advance payments received from third-party transaction processor. Net cash used in financing activities of $73.2 million during the three months ended March 31, 2023 was due primarily to $69.0 million of payment for the repurchase of our Class A common stock under the share repurchase program announced by our Board of Directors in December 2022, pursuant to which we could, from time to time, purchase shares of our Class A common stock for an aggregate purchase price not to exceed $250.0 million, a $2.1 million change in gross advance payments received from third party transaction processor, and $2.1 million of payment of withholding taxes on net share settlements of restricted stock units. ### Contractual Obligations and Known Future Cash Requirements As of March 31, 2024, there were no material changes in our contractual obligations and commitments from those disclosed in our Annual Report, other than those appearing in the notes to the Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report, which are hereby incorporated by reference. ### Seasonality Across the retail automotive industry, consumer purchases are typically greatest in the first three quarters of each year, due in part to the introduction of new vehicle models from manufacturers and the seasonal nature of consumer spending. Additionally, the volume of wholesale vehicle sales can fluctuate from quarter to quarter driven by several factors, including the timing of used vehicles available for sale from selling customers, the seasonality of the retail market for used vehicles, and/or inventory challenges in the automotive industry, which affect the demand side of the wholesale industry. Macroeconomic conditions, such as slower growth or recession, higher interest rates, unemployment, consumer confidence in the economy, consumer debt levels, labor, disruptions, work stoppages, or strikes, the ongoing military conflict between Russia and Ukraine, the conflict in Israel and surrounding areas and the possible expansion of such conflict, foreign currency exchange rate fluctuations, and other matters that influence consumer spending and preferences, can also impact the volume of wholesale vehicle sales, as was evidenced by the global semiconductor chip shortage and other supply related shortages. The Digital Wholesale segment operating results have reflected the general seasonality of the wholesale vehicle sales market and macroeconomic conditions of the automotive industry. The U.S. Marketplace segment operating results have reflected the macroeconomic conditions of the automotive industry. However, to date, the U.S. Marketplace segment operating results have not been materially impacted by the general seasonality of the automotive industry. This could possibly change as our business and markets mature. As a result, revenue and cost of revenue related to volume will fluctuate accordingly on a quarterly basis. Typical seasonality trends may not be observed in periods where other external factors more significantly impact the wholesale industry. ### Off-Balance Sheet Arrangements As of March 31, 2024 and December 31, 2023, we did not have any off-balance sheet arrangement or material leases that are less than 12 months in duration that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources. ### Critical Accounting Estimates The preparation of the Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Although we regularly assess these estimates, actual results could differ materially from these estimates. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from management's estimates if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Changes in estimates are recognized in the period in which they become known. Critical estimates relied upon in preparing the Unaudited Condensed Consolidated Financial Statements include the determination of sales allowance and variable consideration in our revenue recognition, allowance for doubtful accounts, the impairment of long-lived assets, the capitalization of product, technology, and development costs for website development, internal-use software and hosting arrangements, the valuation of acquired assets and liabilities, the valuation and recoverability of intangible assets and goodwill, the valuation of redeemable noncontrolling interest, the recoverability of our net deferred tax assets and related valuation allowance, the valuation of inventory, and the valuation of liability-classified compensation awards. Accordingly, we consider these to be our critical accounting estimates and believe that of our significant accounting policies, these involve the greatest degree of judgment and complexity. For the three months ended March 31, 2024, there were no estimates related to the valuation of redeemable noncontrolling interest and the valuation of liability-classified compensation awards. Although no impairment was identified during the annual impairment test as of October 1, 2023, the excess of the fair value over the carrying value declined for the CarOffer reporting unit in the Digital Wholesale segment. If projected future operating results further decline, including as a result of economic conditions or operational challenges, we may need to record an impairment charge to reduce our goodwill at CarOffer, which could be material and negatively affect our operations. During the three months ended March 31, 2024, we did not identify any triggering events that would require an interim impairment assessment. For a detailed explanation of the judgments made in these areas, refer to Note 2 of the Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. ### Recently Issued Accounting Pronouncements Information concerning recently issued accounting pronouncements may be found in Note 2 of the Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report. ## Market risk As filed, 3,111 characters. Market risk represents the risk of loss that may affect our financial position due to adverse changes in financial market prices and rates. We are exposed to market risks as described below. ### Interest Rate Risk As of March 31, 2024, our exposure to market risk associated with changes in interest rates relates primarily to the 2022 Revolver, which allows us to borrow up to $400.0 million. The applicable interest rate is, at our option, based on a number of different benchmark rates and applicable spreads, as determined by the Consolidated Secured Net Leverage Ratio (as defined in Note 7 of the Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report). A fluctuation in interest rates does not have an impact on interest expense unless the 2022 Revolver is drawn upon. Such impact would also be dependent on the amount of the draw. As of both March 31, 2024 and December 31, 2023, there were no borrowings and $9.6 million in letters of credit outstanding under the 2022 Revolver, which reduces the borrowing capacity under the 2022 Revolver to $390.4 million. As of March 31, 2024, we had cash and cash equivalents of $246.3 million, which consisted of bank deposits, money market accounts, and mutual funds. As of December 31, 2023, we had cash, cash equivalents, and short-term investments of $312.1 million, which consisted of bank deposits, money market accounts, and mutual funds. Such interest-earning instruments carry a degree of interest rate risk. Given recent changes in the interest rate environment and in an effort to ensure liquidity, we expect variable returns from our cash equivalents for the foreseeable future. To date, fluctuations resulting from changes in the interest rate environment in interest income have not been material to the operations of the business. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. ### Inflation Risk We do not believe that inflation has had a material effect on our business, financial condition, or results of operations to date. However, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, operating results, and financial condition. Additionally, inflationary pressures could negatively impact vehicle purchasing behavior, which could have an adverse impact on our financial results. ### Foreign Currency Exchange Risk As of March 31, 2024 and December 31, 2023, we had immaterial foreign currency exposures in the British pound, the Euro, and the Canadian dollar. Historically, because our operations and sales have been primarily in the U.S., we have not faced any significant foreign currency risk. As we seek to grow our international operations in Canada and the U.K., our risks associated with fluctuation in currency rates may become greater, and we will continue to reassess our approach to managing these risks. ## Controls and procedures As filed, 7,311 characters. ### Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As described below, based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report, management identified a material weakness in our internal control over financial reporting. As a result of the material weakness, our Principal Executive Officer and Principal Financial Officer have concluded that, as of such date, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized, and reported as and when required. Notwithstanding this material weakness noted above, our management, including our Principal Executive Officer and Principal Financial Officer, has concluded that our financial statements included in this Quarterly Report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in accordance with GAAP. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The control deficiencies, which, in the aggregate, were assessed as a material weakness as disclosed in our Annual Report, have not yet been fully remediated. At December 31, 2023, we had unremediated operational control deficiencies at CarOffer associated with the operation of logical access and change management of information technology, or IT, general controls, or IT General Controls around program change and logical access in certain IT systems. Therefore, we were not able to have consistent, effective operation of manual controls that rely on data produced by and maintained within these affected IT systems. As of March 31, 2024, management was unable to demonstrate the consistent, effective operation of IT General Controls and manual controls that rely on data produced by and maintained within affected IT systems due to the limited remediation period. As a result, we did not have effective operation of internal controls over financial reporting to address the risks of material misstatement of various financial statement accounts at March 31, 2024. Management has determined that the impact of the previously identified deficiencies continue to aggregate into a material weakness at March 31, 2024. This material weakness did not result in a known material misstatement to our financial statements. However, the material weakness could have resulted in material misstatements in our interim or annual financial statements and disclosures which then may not have been prevented or detected. The material weakness also impacts the effectiveness of segregation of duties, impacts the effectiveness of financial controls which rely on information from relevant financial systems, and increases the reliance on corporate accounting personnel to identify errors at the CarOffer subsidiary level. #### Remediation Plan To address the material weaknesses in our internal control over financial reporting as of December 31, 2023, we have continued remediation efforts outlined in previous financial statements, as applicable, including enhancing our control procedures, and in some cases, increasing the frequency at which controls are performed for logical access in IT systems. In addition, until remediation steps have been completed and are operated for a sufficient period of time, and subsequent evaluation of their effectiveness is completed, the material weakness described above will continue to exist. Our ongoing remediation efforts are focused on continued employee training related to internal control over financial reporting and confirming sustained operation of effectively designed control activities, including IT General Controls. Management is committed to successfully implementing the remediation plan as promptly as possible. As of March 31, 2024, management has implemented or enhanced certain controls to address specific issues related to the material weakness. The material weakness will not be considered remediated until our management implements effective controls that operate for a sufficient period of time and our management has concluded through testing that these controls are effective. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects. See “*Risk Factors—Risks Related to Our Business and Industry—We have identified a material weakness in our internal control over financial reporting. If we are unable to remediate this material weakness, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and the market price of our common stock.”* in Part I, Item 1A in our Annual Report. ### Changes in Internal Control over Financial Reporting Except as otherwise noted above under "Remediation Plan," including the on-going remediation efforts described, there were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our plans for remediating the material weakness, described above, will constitute changes in our internal control over financial reporting, prospectively, when such remediation plans are effectively implemented. ## Risk factors As filed, 271 characters. Careful consideration should be given to the factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report, which could materially affect our business, financial condition, or future results, in addition to the information set forth in this Quarterly Report. Filed May 9, 2024. Source: SEC EDGAR, the filing index for accession 0000950170-24-056957. Last ingested by Listed: Nov 3, 2026, 21:07 ET. No prices; not investment advice.