2017 ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-38233
CarGurus, Inc.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2 Canal Park, 4th Floor
Cambridge, Massachusetts
(Address of principal executive offices)
04-3843478
(I.R.S. Employer
Identification No.)
02141
(Zip Code)
Registrant’s telephone number, including area code: (617) 354-0068
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Class A Common Stock, par value $0.001 per share
Name of Exchange on Which Registered
The Nasdaq Stock Market LLC (Nasdaq Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:4) NO ⌧
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES (cid:4) NO ⌧
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES ⌧ NO (cid:4)
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the Registrant was required to submit and post such files). YES ⌧ NO (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be
contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
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⌧ (Do not check if a small reporting company)
Accelerated filer
Small reporting company
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Emerging growth company ⌧
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES (cid:4) NO ⌧
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public market
for the registrant’s Class A common stock, par value $0.001 per share. The registrant’s Class A common stock began trading on the Nasdaq Global
Select Market on October 12, 2017. The aggregate market value of the registrant’s Class A common stock held by non-affiliates of the registrant as
of such date was $771,446,882, based upon the last reported sales price for such date on the Nasdaq Global Select Market.
As of February 23, 2018, the registrant had 77,890,576 shares of Class A common stock, and 28,235,290 shares of Class B common stock, par
value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this
Annual Report on Form 10-K. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end
of the fiscal year to which this report relates. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy
Statement is not deemed to be filed as part of this Form 10-K.
Table of Contents
PART I
Item 1.
Business ........................................................................................................................................................
Item 1A. Risk Factors ..................................................................................................................................................
Item 1B. Unresolved Staff Comments.........................................................................................................................
Properties ......................................................................................................................................................
Item 2.
Item 3.
Legal Proceedings.........................................................................................................................................
Item 4. Mine Safety Disclosures...............................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .................................................................................................................................................
Selected Consolidated Financial Data ..........................................................................................................
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ......................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .....................................................................
Item 8.
Financial Statements and Supplementary Data ............................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................
Item 9.
Item 9A. Controls and Procedures...............................................................................................................................
Item 9B. Other Information .........................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ...........................................................................
Item 11. Executive Compensation ..............................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ....
Item 13. Certain Relationships and Related Transactions, and Director Independence.............................................
Item 14. Principal Accounting Fees and Services ......................................................................................................
PART IV
Item 15. Exhibits, Financial Statement Schedules......................................................................................................
Item 16. Form 10-K Summary....................................................................................................................................
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities
laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future
events or our future financial or operating performance. In some cases, you can identify forward-looking statements because
they contain words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “likely,”
“plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” or similar expressions and the
negatives of those terms. Forward-looking statements contained in this report include, but are not limited to, statements
about:
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our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or
gross margin, operating expenses, ability to generate cash flow, and ability to achieve, and maintain, future
profitability;
our anticipated growth and growth strategies and our ability to effectively manage that growth;
our ability to maintain and build our brand;
our ability to expand internationally;
the impact of competition in our industry and innovation by our competitors;
our ability to hire and retain qualified employees necessary to expand our operations;
our ability to adequately protect our intellectual property;
our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our
business;
the increased expenses and administrative workload associated with being a public company;
failure to maintain an effective system of internal controls necessary to accurately report our financial results and
prevent fraud; and
the future trading prices of our Class A common stock.
You should not rely upon forward-looking statements as predictions of future events. We have based the
forward-looking statements contained in this report primarily on our current expectations and projections about future events
and trends that we believe may affect our business, financial condition, operating results, and growth prospects. The outcome
of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the
section titled “Risk Factors” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing
environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and
uncertainties that could have an impact on the forward-looking statements contained in this report. Further, our
forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint
ventures, or investments we may make. We cannot assure you that the results, events, and circumstances reflected in the
forward-looking statements will be achieved or will occur, and actual results, events, or circumstances could differ materially
from those described in the forward-looking statements.
The forward-looking statements made in this report relate only to events as of the date on which the statements are
made. We undertake no obligation to update any forward-looking statements made in this report to reflect events or
circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as
required by law.
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Item 1. Business.
Overview
PART I
BUSINESS
CarGurus is a global, online automotive marketplace connecting buyers and sellers of new and used cars. Using
proprietary technology, search algorithms, and innovative data analytics, we believe we are building the world’s most trusted
and transparent automotive marketplace and creating a differentiated automotive search experience for consumers. Our
trusted marketplace empowers users with unbiased third-party validation on pricing and dealer reputation as well as other
information that aids them in finding “Great Deals from Top-Rated Dealers.” Our selection of car listings provides the largest
number of car listings available on any of the major U.S. online automotive marketplaces. In addition to the United States, we
operate online marketplaces in Canada, the United Kingdom, and Germany.
A core principle of our marketplace is transparency. For consumers considering used vehicles, we aggregate vehicle
inventory from dealers and apply our proprietary analysis to generate a Deal Rating as one of: Great Deal, Good Deal, Fair
Deal, High Priced, or Overpriced. Deal Rating illustrates how competitive a listing is compared to similar cars sold in the
same region in recent history. We determine Deal Rating principally on the basis of both our proprietary Instant Market
Value, or IMV, algorithm, which determines the market value of any given vehicle in a local market, and Dealer Rating, a
measure of a dealer’s reputation as determined by reviews of that dealer from our user community. By sorting organic search
results based on a used car’s Deal Rating, we enable consumers to find the most relevant car for their needs. For new cars, we
help our users understand deal quality by providing price analysis and our Dealer Rating. We also provide our users
information historically not widely available, such as Price History, Time on Site, and Vehicle History. We believe this
approach brings greater transparency, trust, and efficiency to a consumer’s car research and buying process, leading to higher
engagement and a more informed consumer who is better prepared to purchase at the dealership.
Our large, engaged, and predominantly mobile user base presents an attractive audience of in-market consumers for our
dealers. By connecting dealers with more informed consumers, we believe we provide dealers with an efficient customer
acquisition channel and attractive returns on their marketing spend with us. Dealers can list their inventory in our marketplace
for free with our Basic Listing product or with a paid subscription to our Enhanced and Featured Listing products. Dealers
with our Basic Listing product receive anonymized email connections and access to a subset of the tools on our Dealer
Dashboard at no cost. Dealers with a paid subscription receive connections to consumers that are not anonymous and can be
made through a wider variety of methods, including phone calls, email, managed text and chat, links to the dealer’s website,
and map directions to dealerships. In addition, dealers with our Enhanced and Featured Listing products are able to display
their dealer name, address, and dealership information on their listings to gain brand recognition, which promotes walk-in
traffic to the dealer. We also provide paying dealers with full access to our Dealer Dashboard, including inventory pricing
tools informed by real-time market conditions, which helps them more effectively price, merchandise, and sell their cars. Our
success with dealers is evidenced by the 23% and 66% growth in the number of paying dealers in our U.S. marketplace in
2017 compared to 2016 and in 2016 compared to 2015, respectively.
Our scaled online marketplace model drives powerful network effects. The industry-leading inventory selection offered
by our dealers attracts a large and engaged consumer audience. The value of robust connections to this audience incentivizes
dealers to purchase our Enhanced or Featured Listing products. Having more paying dealers provides consumers with more
dealer information and methods to contact them. More consumers and connections drive greater value to paying dealers on
our platform. Driven by these network effects, we continue to amass more data, which we use to continuously improve our
search algorithms, the accuracy of Deal Ratings, our user experience, and, ultimately, the quality of the connections between
consumers and dealers.
We generate marketplace subscription revenue from dealers through Listing and Dealer Display subscriptions and
advertising revenue from auto manufacturers and other auto-related brand advertisers. Our rapid revenue growth and
financial performance over the last several years exemplifies the strength of our marketplace. We generated revenue of
$316.9 million in 2017, $198.1 million in 2016, and $98.6 million in 2015, representing year-over-year increases of 60% in
2017 and 101% in 2016. In 2017, we generated net income of $13.2 million and our Adjusted EBITDA was $24.1 million,
compared to net income of $6.5 million and Adjusted EBITDA of $11.0 million in 2016 and a net loss of $1.6 million and
Adjusted EBITDA of $(0.4) million in 2015. See “Selected Consolidated Financial Data — Adjusted EBITDA” for more
information regarding our use of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our net income (loss).
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Consumer Challenges
Upon determining what type of car to purchase, consumers face many questions:
(cid:129) Which dealer has a car like this?
(cid:129) What is a fair price for this particular type of car?
(cid:129) Have others had a good experience buying from this dealer?
In answering these questions, consumers historically had limited access to unbiased information on specific vehicles,
car pricing, and dealer reputation. Every used car is unique, and so for consumers searching for used cars, it is difficult to
aggregate the relevant inventory of available cars across dealers, a difficulty exacerbated by the lack of consistency in the
way that dealers characterize a car’s attributes. Generally, dealers have also had more information about car prices than
consumers did, as consumers have had limited resources and tools to determine an appropriate price. Finally, selecting the
right dealer has also been challenging for consumers as dealer reputations have historically been based primarily on
word-of-mouth. The lack of clear, unbiased, transparent information made it difficult for consumers to effectively compare
vehicles, find the vehicle that best suits their needs and transact with well-regarded dealers.
Dealer Challenges
The economics of dealerships depend largely on sales volume, gross margin, and customer acquisition efficiency. To
achieve a high return on their marketing investments, dealers must find in-market consumers; yet because car purchases are
infrequent, only a small percentage of consumers are shopping for a car at any given point in time. Traditional marketing
channels, including television, radio, and newspaper, can effectively target locally but are inefficient in reaching the small
percentage of consumers who are actively in the market to buy a car. In addition, used car pricing is fluid because it is based
on rapidly shifting supply and demand dynamics. Dealers need to find ways to manage constantly changing inventory and
adjust pricing strategies to adapt to frequently changing market conditions.
Our Strengths
We believe that our competitive advantages are based on the following key strengths:
Trusted Marketplace for Consumers. We provide consumers with unbiased information, intuitive search results, and
other tools that empower them to find “Great Deals from Top Rated Dealers.” In the United States, we offer the largest online
selection of new and used car listings of any major U.S. online automotive marketplace. We aggregate and analyze these
listings using proprietary technology and data along with innovative data analytics to create a differentiated automotive
search experience for consumers. We believe that providing a transparent consumer experience with unbiased information
has instilled greater trust in us among our users, helping us become the most visited online automotive marketplace in the
United States according to comScore. In 2017, we experienced over 64.8 million average monthly sessions in the United
States. We define average monthly sessions as the number of distinct visits to our website that take place each month within a
given time frame, as measured and defined by Google Analytics. We believe this user traffic and engagement, critical to any
successful marketplace, will continue to strengthen our market position.
Proprietary Search Algorithms and Data-Driven Approach. We have built an extensive repository of data on cars,
prices, dealers, and the interactions between consumers and dealers that is the result of over seven years of data aggregation
and regression modeling. Our proprietary search algorithms and data analytics allow us to use this valuable data to bring
greater transparency to our platform. The primary product of this analysis is our determination of a used car’s IMV, which, in
addition to Dealer Rating, drives our Deal Rating. We calculate IMV by applying more than 20 ranking signals and more
than 100 normalization rules to millions of data points, including the make, model, trim, features, condition, history,
geographic location, and mileage of the car. The growing volume of connections between consumers and dealers on our
platform allows us to continually improve the accuracy of our IMV, Dealer Ratings, and used car search results sorted by
Deal Rating. We apply the knowledge gained from analyzing this ever-growing data set to build new products for our
consumers and dealers and to more efficiently launch marketplaces in new countries.
Strong Value Proposition to Dealers. We believe that our marketplace offers an efficient customer acquisition
channel for dealers, helping them achieve attractive returns on their marketing spend with us. We provide our dealer base
with connections to prospective car buyers; most of these connections have historically been for used cars. We define
connections as interactions between consumers and dealers in our marketplace through phone calls, email, managed text and
chat, and clicks to access the dealer’s website or map directions to the dealership. We provide all dealers with tools that are
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informed by real-time market conditions that help them merchandise and sell their cars, and our paying dealers get access to
additional valuable information from our Pricing Tool and Market Analysis tool. Our strong value proposition to the dealer
community is evidenced by the 23% growth in the number of paying U.S. dealers and 16% growth in average annual revenue
per subscribing dealer, or AARSD, in the United States in 2017 compared to 2016.
Network Effects Driven by Scale. Having engaged with the majority of dealers and built one of the largest consumer
audiences among automotive marketplaces in the United States, we believe that our scale creates powerful network effects
that reinforce the competitive strength of our business model. Our large consumer audience increases our appeal to dealers
and incentivizes more dealers to subscribe to our Enhanced or Featured Listing products to access the numerous benefits
unavailable to non-paying dealers. Having more paying dealers in our marketplace provides consumers with more dealer
information and methods to contact those dealers. More consumers and connections drive greater value and a higher return to
paying dealers’ marketing spend on our platform. Driven by these network effects, we continue to amass more data, which
we use to further strengthen our search algorithms, the utility of analysis complementing each listing, the quality of our user
experience, and the value of connections between consumers and dealers.
Attractive Financial Model. We have a strong track record of revenue growth, profitability, and capital efficiency. We
generated revenue of $316.9 million in 2017, $198.1 million in 2016, and $98.6 million in 2015, representing year-over-year
increases of 60% in 2017 and 101% in 2016. A significant portion of our revenue is recurring due to the subscription nature
of our products; in 2017, 2016, and 2015, dealer marketplace listing and dealer display advertising subscription revenue,
which we consider to be recurring revenue, comprised 89%, 86% and 76% of total revenue, respectively. Furthermore, our
revenue base is highly diversified due to the fragmented nature of the automotive dealer industry. We also have been able to
grow and invest in our future growth while improving profitability due to the operating leverage in our business model. On a
consolidated basis, while our revenue grew 60% in 2017 and 101% in 2016, our Adjusted EBITDA margin expanded to 8%
in 2017 from 6% in 2016 and from 0% in 2015. In the United States, which is our most developed market, we grew our
revenue by 57% in 2017 and 99% in 2016 while increasing our income from operations to $41.6 million in 2017 from
$27.5 million in 2016 and $0.6 million in 2015.
Founder-Led Management Team with Culture of Innovation. Our founder, Chief Executive Officer, President, and
Chairman, Langley Steinert, co-founded and was previously chairman of TripAdvisor, an online marketplace for
travel-related content based on the mission of using technology and a data-driven approach to provide transparency for
consumers’ travel planning. Led by Mr. Steinert and a management team with extensive experience guiding technology
companies in evolving industries, we bring the same commitment to data-driven transparency to the automotive market.
Our Products
Consumer Marketplace
We provide consumers an online automotive marketplace where they can search for new and used car listings from our
dealers, as well as sell their car. Through our marketplace, we provide consumers with information that helps them find the
most relevant car for their needs. A user accesses our U.S. marketplace through our desktop or mobile-optimized website at
cargurus.com or by using our mobile app. Most users specify whether they are searching for used, certified pre-owned, or
new cars and then provide their desired vehicle make and model and their zip code.
Used and Certified Pre-Owned Cars
Using our proprietary search algorithms, we immediately display the search results, ranked by Deal Rating, on a search
results page, or SRP. Nearly every used listing in our marketplace is assigned one of five Deal Ratings: Great Deal, Good
Deal, Fair Deal, High Priced, or Overpriced. Deal Rating illustrates how competitive a listing is compared to the most similar
cars sold in the same region in recent history. A listing’s Deal Rating is based primarily upon the IMV of the vehicle and the
Dealer Rating of the dealer.
Instant Market Value. IMV is a proprietary algorithm that determines the market value of a used vehicle in a local
market and is a key input for determining a vehicle’s Deal Rating. The IMV algorithm is the product of over seven years of
regression modeling utilizing more than seven million used car data points. IMV takes into account a number of factors,
including comparable currently listed and previously sold used cars in the local market and vehicle details including make,
model, trim, year, mileage, options, and vehicle history. Our algorithm uses more than 20 ranking signals and more than 100
normalization rules that distill unstructured data from hundreds of sources across thousands of dealers.
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Dealer Ratings. Dealer Ratings are unique user-generated content from our users’ experiences with dealers with whom
they have connected. To promote high-quality reviews, we require that a user must have interacted with the dealer on our site
to submit a review. We believe this requirement, together with additional qualification standards, results in a more valuable
Dealer Rating. Dealer Rating is an important component of a listing’s Deal Rating and as a result can impact the organic
search position of a listing.
Search Results Page. In addition to each car’s Deal Rating, our SRP provides users with other useful information,
including the difference between the listing price and the IMV that we have determined for the car, Time on Site, mileage,
Dealer Rating, and, for paying dealers, dealer location. We provide in-depth search filters, including price, mileage, trim,
color, options, condition, body style, miles per gallon, seating capacity, vehicle ownership and usage history, seller type, and
days on market, among others, which we believe deliver the most comprehensive search capability among major U.S. online
automotive marketplaces. We also provide our users with additional features to aid their search, including similar vehicle
recommendations, side-by-side vehicle comparisons, expert reviews, and user rankings. Our platform also gives users the
ability to save searches and receive alerts that keep them informed of relevant developments in the market, including newly
available inventory and price changes to cars they are monitoring.
Vehicle Detail Page. If a user clicks on one of the listings on the SRP, the user is taken to that listing’s vehicle detail
page, or VDP. VDPs are designed to provide extensive photos and a comprehensive description of the vehicle, dealer name,
address, and dealership information for paying dealers, detailed dealer reviews, methods to contact the dealer, payment
calculators, and helpful information about the vehicle, including:
Price History. Changes to a vehicle’s price on our site. We also offer price change alerts to consumers on searches
they have saved, which allows them to respond quickly to changes in the market.
Time on Site. Length of time a vehicle has been on our site and how many users have saved the vehicle to their list
of favorite listings, indicators of the likely demand for the car.
Vehicle History. Title check, accident check, owner number, and fleet status of the vehicle, giving consumers data
that helps them better understand the car’s condition.
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New Cars
Search results for new car listings are sorted by price of inventory matching the user’s search, with the lowest priced
listings first. Our new car VDPs include our Dealer Rating and many of the other features of our used car listings, such as
Price History and Time on Site. Deal Rating is not applicable to new car listings because it utilizes data not relevant to new
cars. Instead, we analyze data on manufacturers’ suggested retail prices, or MSRPs, and recent sales of similar new vehicles,
accounting for trade(cid:3)ins, incentives, and other factors that can affect the price of a new car, to provide users with comparative
price information.
Sell My Car
We also allow our consumer users to list their cars for free in our marketplace. Our Sell My Car offering enables
individual car owners to easily merchandise their vehicles, determine an appropriate selling price with our proprietary price
guidance, and manage their listings and communications with prospective buyers among our audience.
Dealer Marketplace
Our marketplace connects dealers to a large audience of informed and engaged consumers. We offer three types of
marketplace Listing products to dealers: Basic Listing, which is free, and Enhanced or Featured Listing, each of which
requires a paid subscription. We price our Enhanced and Featured Listing products as a monthly, quarterly, semiannual, or
annual subscription based on the dealer’s inventory size, region, and our assessment of the return on investment, or ROI, our
solution will provide them.
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Basic Listing. Basic Listing allows non-paying dealers to list their inventory in our marketplace anonymously.
Consumers can contact these dealers only through an anonymous, CarGurus-branded email address so the dealer
does not receive any of the consumer’s personal contact information from our platform. We do not display the
name, address, website URL, or phone number of any non-paying dealers on our website.
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Enhanced Listing. Enhanced Listing provides dealers with a higher volume and quality of connections to
consumers. Dealers that subscribe to Enhanced Listing gain the opportunity to connect with consumers directly
through email, phone, and managed text and chat. Our platform allows paying dealers to provide a link to their
website, dealership information such as name, address, and hours of operation, and map directions to their
dealership on VDPs, helping consumers easily contact or visit them, which we believe results in increased local
brand awareness and walk-in traffic.
Featured Listing. A dealer that pays the premium subscription rate for our Featured Listing product receives all of
the benefits of the Enhanced Listing product, as well as promotion of their Great Deal, Good Deal, and Fair Deal
inventory in a clearly labeled section at the top of the search results page. This premium placement for Featured
listings generates increased connection volume relative to Enhanced Listing.
Dealer Dashboard
Basic, Enhanced, and Featured Listing dealers all have access to the following Dealer Dashboard features and tools:
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Performance Summary. Provides dealers with real-time and historical data concerning the connections and
consumer exposure they have received in our marketplace. This enables dealers to analyze connections and SRP
and VDP views at a granular level to inform the dealer’s sales and merchandising efforts.
(cid:129) Dealer Insights. Provides pricing analysis of the dealer’s inventory, as well as a summary of a vehicle’s missing
information such as price, photos, or trim. This data helps dealers better merchandise their vehicles.
(cid:129) User Review Management. Allows dealers to track and manage their dealership reviews from our users. Dealers
can respond to users, report potentially fraudulent reviews, and publish positive reviews to social media platforms
for broader exposure.
Enhanced and Featured Listing dealers also have access to the following additional features and tools:
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Pricing Tool. Helps dealers evaluate the impact of pricing changes for each used vehicle in their inventory and the
resulting impact on the car’s Deal Rating, empowering dealers to make informed pricing decisions based on
market data in their local area.
(cid:129) Market Analysis. Informs dealers of local market trends in used cars, such as the most searched makes and models
in their local market. This information helps dealers align with local consumer preferences and inform strategies
for increasing inventory turnover and vehicle acquisition.
Dealer Advertising and Customer Acquisition Products
In addition to listing cars in our marketplace through our Listing products, we also provide all dealers with a web
widget that allows them to place Deal Rating Badges, which show our Deal Rating for cars that have been rated as a Great
Deal, Good Deal, or Fair Deal, on their own website. Our Deal Rating serves as trusted, third-party validation on their
website.
We offer Enhanced and Featured Listing dealers the following additional advertising and customer acquisition
products:
(cid:129) Dealer Display. Dealers are able to buy display advertising that appears in our marketplace and on other sites on
the internet to build brand awareness. Advertisements can be targeted by geography, search history, and a number
of other targeting factors, allowing dealers to increase their visibility with relevant consumers and drive consumers
to the dealer’s own website.
(cid:129) Dealer Search Engine Marketing and Social Media Advertising. Leveraging the capabilities we have developed
for our own algorithmic traffic acquisition, we offer a product that delivers search engine marketing, or SEM, and
social media advertising to programmatically drive qualified traffic to dealer websites. Utilizing algorithmic
bidding strategies and automated keyword list management, we help dealers to optimize traffic acquisition.
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Auto Manufacturer and Other Advertiser Products
Our platform offers auto manufacturers and others the ability to purchase display advertising on our site to execute
targeted marketing strategies:
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Brand Reinforcement. We allow auto manufacturers to buy advertising on our site and target consumers based on
the make, model, and zip code of the cars that a specific consumer is searching for, in order to increase exposure to
interested consumers.
Category Sponsorship. To address evolving priorities influenced by industry dynamics, seasonality, and other
factors, we offer the ability to sponsor exclusively prominent high traffic pages on our site, such as the New Car
front page, Used Car front page, or Research Center.
Automobile Segment Exclusivity. To support the introduction of new models or the success of existing models, we
allow manufacturers to target specific automobile segments, such as SUV, sedan, hybrid, luxury, truck, or
minivan.
Consumer Segment Exposure. Through our platform, auto manufacturers can target consumers both on our site
and on third-party sites based on various parameters, including estimated household income and vehicle
specifications, such as make or model, and zip codes.
Marketing
Our marketing initiatives aim to drive brand awareness and engagement among consumers and dealers and to position
us as a trusted online automotive marketplace.
Consumer Marketing
We have built our audience on the strength of our user experience, and we remain focused on delivering an engaging
consumer marketplace. The strength of the consumer experience that we offer is one of our most powerful marketing tools.
By providing an intuitive search experience in our marketplace and relevant content, updates, and tools to consumers during
their car search, we believe that the users who comprise our large and engaged audience provide informal endorsements to
other consumers, more powerful than most marketing messages.
Historically, our consumer marketing efforts have been focused primarily on algorithmic traffic acquisition. We
employ a team of engineers and data scientists that optimizes our user acquisition through search engines, social media, and
other digital marketing channels and has tested over 350 million keywords on various search engines. We believe our
expertise in this area constitutes a competitive advantage over less sophisticated competitors and those who outsource these
capabilities.
We have begun augmenting our marketing efforts with brand-building investments in broadcast media, such as
television, radio, and online video. Our brand awareness is currently lower than many other major U.S. online automotive
marketplaces in the United States, despite our large monthly audience and high user engagement. We believe that as a result
of our trusted product, audience engagement, and relatively low brand awareness, we are well-positioned to strengthen our
brand by investing in broadcast media.
Our vehicle listing data, on-site user behavior, connections between consumers and dealers, and opinion data from our
users create significant opportunities for us to develop and publish car shopping insights. We consistently gain earned media
coverage in national, regional, and trade press outlets as well as social channels by leveraging our proprietary data to inform
newsworthy content.
Dealer Marketing
The primary goals of our dealer marketing initiatives are to acquire dealers not yet in our marketplace, convert
non-paying dealers into paying dealers, retain our existing paying dealers, and expand annual subscription revenues from our
paying dealers. Our dealer marketing efforts aim to:
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Educate Dealers on the Quality of Our Audience and Attractive ROI. We educate dealers on our industry-leading
monthly visits, our strong user engagement, and the large number of connections that we facilitate through our
marketplace. We also highlight to dealers how unique features of our platform, such as our intuitive user interface
and our proprietary technology and data analytics, yield consumers that we believe are more informed and better
prepared to purchase at the dealership, which can lead to a higher ROI for their marketing spend.
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Provide Best Practices to Assist Dealers in Becoming Successful in Our Marketplace. We provide ongoing
communications through webinars, white papers, testimonials, and videos, which show dealers how to use our
products to position their inventory for success on our platform. We maintain consistent communication with
dealers by email and events to ensure awareness of recent product releases and provide custom account
management.
Provide Thought Leadership that Educates Dealers on Marketplace Trends. We generate insightful content on
market trends and best practices in digital advertising that are shared through webinars, dealer forums, dealer
advisory councils, and our participation in industry conferences and events.
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Sales
Our sales team is responsible for bringing dealers onto our marketplace as paying or non-paying dealers. We have built
an efficient inside sales and account management team of over 200 employees worldwide who sell our marketplace products
to franchise and independent dealers. We have built a field sales team that works with strategic franchise and national
dealership groups in large metropolitan areas. In addition, we have advertising sales employees based in Cambridge,
Massachusetts; Detroit, Michigan; Los Angeles, California; and London, England.
We have a comprehensive dealer account management process to assist dealers in becoming successful in our
marketplace. We assign a Customer Success Associate to every new paying dealer to assist with onboarding and integration
with any relevant software systems. The designated Customer Success Associate spends time educating dealers on a range of
topics, including effectively using the Dealer Dashboard and tracking sales, and measuring ROI for their marketing spend.
After the onboarding period, a Dealer Relations Account Manager is designated to assist the dealer in utilizing our tools and
maximizing ROI from our offerings, including optimizing inventory acquisition, effectively pricing vehicles, vehicle
merchandising, and keeping inventory up to date with complete vehicle information. We believe this active communication
with our dealers fosters customer satisfaction and increases retention.
Culture and Employees
Our company culture has developed out of our data-driven and innovative approach to the automotive market. We
leverage data to drive innovation across all facets of our business and continuously optimize our products and processes to
serve our consumers, dealers, advertisers, and partners. Our approach emphasizes original thought, impact, and collaboration
across our organization, and we recognize and award employees who drive positive impact across these constituencies. We
encourage collaboration across our entire workforce and invest in creating a work environment that facilitates partnership
among our employees. In that spirit, we have identified our core values as follows:
(cid:129) We are pioneering. From the beginning, we set out to radically change how people buy and sell cars. We tackle
difficult problems head on. We are curious. We are risk takers. We embrace change even if it’s uncomfortable.
(cid:129) We are transparent. We believe transparency is the foundation of trust and enables better decision making. We
communicate clearly and honestly. We deliver unbiased guidance. Our products, services and company culture are
built on these principles.
(cid:129) We are data-driven. We rely on data, not hunches, to make decisions. We listen to our instincts but we validate
through rapid testing, learning and optimizing. We translate complex data into actionable insights for our users,
our customers and our people.
(cid:129) We are collaborative. We celebrate our individual strengths and perspectives but know that our success requires
teamwork. We partner, we listen and we leverage feedback from each other, our users and our customers.
(cid:129) We move quickly. We believe there’s power in speed. We iterate quickly and often, continuously improving as
we go. We are not afraid to break things. If we fail, we do it fast, learn from it and move on.
(cid:129) We have integrity. We act responsibly and consider the impact of our actions on each other, our partners and the
world around us. We believe empathy, respect and fairness are essential. We set high ethical standards and expect
principled leadership from our people.
We have won a number of awards recognizing our strong culture, including Boston Globe’s “Top Place to Work” for
three years in a row from 2014 to 2016 and Boston Business Journal’s “Best Places to Work” for four of the past five years in
2017, 2016, 2015 and 2013.
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As of December 31, 2017, we had 549 full-time employees, 35 of whom were based outside the United States. None of
our employees is represented by a labor union or covered by a collective bargaining agreement. We have not experienced any
work stoppages, and we consider our relations with our employees to be good.
Technology and Product Development
We are a technology company focused on innovative, actionable data analysis. We design our mobile and web products
to create an unbiased, transparent experience for both consumers and dealers. We believe in rapid development and frequent
updates and have internal tools and automation that allow us to efficiently evolve our products. Our software is built using a
combination of internally developed software, third-party software and services, and open source software.
Our Search Technology
Our search and ranking technology is served by a proprietary in-memory search index solution that is scalable, fast, and
extensible, allowing us to expand more easily into new markets, as demonstrated by our international marketplace launches.
We have highly flexible interfaces that allow dealers to add their inventory to our index without changing data or formats,
enabling us to quickly integrate hundreds of inventory sources with minimal effort and easily support inventory growth.
Our Mobile Technology
We have designed our marketplace to appeal to mobile users by developing our products with a mobile-first mindset.
All of our search results pages use a single-page application type approach to eliminate page reloads and improve
responsiveness. We also use techniques, including predictive pre-fetching and infinite scrolling, to load content onto a user’s
mobile device more efficiently.
Our Integrations
We make available several application program interfaces and web widgets that integrate with customer relationship
management and inventory management solutions, among other platforms. These integrations allow dealers to incorporate
designated data and tools into the fabric of their marketing and customer engagement strategies. For example, our Deal
Rating Badges are used on over one thousand websites and allow our Deal Rating feature to be promoted across the internet.
Infrastructure
Our websites are hosted at third-party data centers near Boston, Massachusetts; Dallas, Texas; and London, England.
We use third-party content distribution networks to cache and serve many portions of our site at locations across the globe.
We monitor and test at the application, host, network, and full site levels to maintain availability and promote performance.
Our development servers are located at our corporate headquarters in Cambridge, Massachusetts. We use third-party cloud
computing services for many data processing jobs.
Competition
We face competition to attract consumers and paying dealers to our marketplace and to attract advertisers to purchase
our advertising products and services. Our competitors offer various marketplaces, products, and services that compete with
us. Some of these competitors include:
(cid:129) major U.S. online automotive marketplaces: AutoTrader.com, Cars.com, and TrueCar.com;
(cid:129) U.S. online automotive content publishers, such as Edmunds.com, KBB.com and Carfax.com;
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online automotive marketplaces and websites in international markets;
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internet search engines;
peer to peer marketplaces; and
sites operated by individual automobile dealers.
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Competition for Consumers and Dealers
We compete for consumer visits with other online automotive marketplaces, free listing services, general search
engines, and dealers’ websites. We compete for consumers primarily on the basis of the quality of the consumer experience.
We believe we compete favorably on user experience due to the number of our vehicle listings, the unbiased transparency of
the information we provide on cars, prices, and dealers, the intuitive nature of our user interface, and our leading mobile user
experience, among other factors.
We compete for dealers’ marketing spend with offline customer acquisition channels, other online automotive
marketplaces, dealers’ own customer acquisition efforts on search engines, and other internet sites that attract consumers
searching for vehicles. We compete primarily on the basis of the ROI that our marketplace provides. We believe we compete
favorably due to our large user audience, high user engagement, and the volume and quality of connections we provide to
well-informed consumers, which results in an attractive ROI for dealers.
Competition for Advertisers
We compete for a share of advertisers’ total marketing budgets against media sites, websites dedicated to helping
consumers shop for cars, major internet portals, search engines, and social media sites, among others. We also compete for a
share of advertisers’ overall marketing budgets with traditional media, such as television, radio, magazines, newspapers,
automotive guide publications, billboards, and other offline advertising channels. We compete for advertising spend based on
the marketing ROI that our marketplace provides. We believe we compete favorably due to our large user audience size, high
user engagement, and the effectiveness and relevance of our advertising products.
Intellectual Property
We protect our intellectual property through a combination of patents, copyrights, trademarks, service marks, domain
names, trade secret protections, confidentiality procedures, and contractual restrictions.
We have three pending U.S. patent applications. These applications cover proprietary technology that relates to various
functionalities on our platform, generally in connection with ordering, adjusting, and fraud detection. We intend to pursue
additional patent protection to the extent we believe it would be beneficial to our competitive position.
We have a number of registered and unregistered trademarks. We registered “CarGurus,” the CarGurus logo, the CG
logo, and related marks, as trademarks in the United States and certain other jurisdictions. We pursue additional trademark
registrations to the extent we believe doing so would be beneficial to our competitive position.
We are the registered holder of several domestic and international domain names that include “CarGurus” and
variations of our name.
In addition to the protection provided by our intellectual property rights, we enter into confidentiality and proprietary
rights agreements with our employees, and relevant consultants, contractors, and business partners. We control the use of our
proprietary technology and intellectual property through provisions in contracts with our customers and our general and
product-specific terms of use on our website.
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Regulatory
Various aspects of our business are, may become, or may be viewed by regulators from time to time as subject, directly
or indirectly, to U.S. federal, state, and foreign laws and regulations. In particular, the advertising and sale of new or used
motor vehicles is highly regulated by the states and jurisdictions in which we do business. Although we do not sell motor
vehicles and we believe that vehicle listings on our site are not themselves advertisements, state regulatory authorities or third
parties could take the position that some of the laws or regulations applicable to dealers or to the manner in which motor
vehicles are advertised and sold generally are directly applicable to our business. These state advertising laws and
regulations, which often originated decades before the emergence of the internet, are frequently subject to multiple
interpretations, are not uniform from state to state, sometimes impose inconsistent requirements with respect to new or used
motor vehicles, and the manner in which they should be applied to our business model is not always clear. State regulators or
other third parties could take, and on some occasions have taken, the position that our marketplace or related products violate
applicable brokering, bird-dog, consumer protection, or advertising laws or regulations.
In order to operate in this regulated environment, we develop our products and services with a view toward
appropriately managing the risk that our regulatory compliance, or the regulatory compliance of the dealers whose inventory
is listed on our website, could be challenged.
We consider applicable advertising and consumer protection laws and regulations in designing our products and
services. With respect to paid advertising, other than display advertising and Featured Listings, we believe that most of the
content displayed on the websites we operate does not constitute paid advertising for the sale of motor vehicles. Nevertheless,
we endeavor to design the content in a manner that would comply with relevant advertising regulations and consumer
protection laws if, and to the extent that, the content is considered to be vehicle sales advertising.
Our website and mobile application enable us, dealers, and users to send and receive text messages and other mobile
phone communications, which requires us to comply with the Telephone Consumer Protection Act, or TCPA. The TCPA, as
interpreted and implemented by the Federal Communications Commission and federal and state courts, imposes significant
restrictions on utilization of telephone calls and text messages to residential and mobile telephone numbers as a means of
communication, particularly when the prior express consent of the person being contacted has not been obtained.
Corporate Information
We were originally organized on November 10, 2005 as a Massachusetts limited liability company under the name
“Nimalex LLC.” Effective July 15, 2006, we changed our name to “CarGurus LLC.” On June 26, 2015, we converted into a
Delaware corporation and changed our name to “CarGurus, Inc.”
Our principal executive offices are located at 2 Canal Park, 4th Floor, Cambridge, Massachusetts 02141, and our
telephone number is (617) 354-0068. Our website is www.cargurus.com. Information that is contained on, or that can be
accessed through, our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not
consider information on our website to be part of this Annual Report on Form 10-K.
CarGurus, the CarGurus logo, and other trademarks or service marks of CarGurus appearing in this Annual Report on
Form 10-K are the property of CarGurus. Trade names, trademarks, and service marks of other companies appearing in this
Annual Report on Form 10-K are the property of their respective holders. We have omitted the ® and ™ designations, as
applicable, for the trademarks used in this Annual Report on Form 10-K.
Information About Segment and Geographic Revenue
We have two reportable segments, United States and International. Information about segment and geographic revenue
is set forth in Note 12 of the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-
K.
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Additional Information
The following filings are available on our investor relations website after we file them with the Securities and
Exchange Commission, or the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Proxy Statements
for our annual meetings of stockholders. These filings are also available for download free of charge on our investor
relations website. Our investor relations website is located at http://investors.cargurus.com. You may obtain copies of these
documents by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549.
The SEC also maintains a website that contains reports, proxy statements and other information about issuers, like us, that
file electronically with the SEC. The address of that website is https://www.sec.gov.
We webcast our earnings calls and certain events that we participate in or host with members of the investment
community on our investor relations website. Additionally, we provide news and announcements regarding our financial
performance, including SEC filings, investor events, press and earnings releases, on our investor relations website. Corporate
governance information, including our policies concerning business conduct and ethics, is also available on our investor
relations website under the heading “Governance.” No content from any of our websites is intended to be incorporated by
reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any reference
to our websites is intended to be an inactive textual reference only.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in Jumpstart Our Business Startups Act of 2012, or the JOBS Act,
and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an
emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of
the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We
have elected to use the extended transition period for complying with new or revised accounting standards; as a result of this
election, our financial statements may not be comparable with those of companies that comply with public company effective
dates. We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of
our IPO or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth
company if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our
stock held by non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on
Form 10-K) or we issue more than $1.0 billion of non-convertible debt securities over a three-year period.
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Item 1A. Risk Factors.
Investing in our Class A common stock involves a high degree of risk. You should consider carefully the risks and
uncertainties described below, together with all of the other information contained in this report and in our other public
filings in evaluating our business. Our business, financial condition, operating results, cash flow, and prospects could be
materially and adversely affected by any of these risks or uncertainties. In that event, the trading price of our Class A
common stock could decline. See “Special Note Regarding Forward-Looking Statements.”
Risks Related to Our Business and Industry
Our business is substantially dependent on our relationships with dealers, and our subscription agreements with these
dealers do not contain long-term contractual commitments. If a significant number of dealers terminate their subscription
agreements with us, our business and financial results would be materially and adversely affected.
Our primary source of revenue consists of subscription fees paid to us by dealers for access to enhanced features on our
automotive marketplace. Our subscription agreements with dealers generally may be terminated by us with 30 days’ notice
and by dealers with 30 days’ notice at the end of the committed term. While the majority of our contracts with dealers
currently provide for one-month committed terms, we are transitioning many of these dealers to contracts with one-year
committed terms. The contracts do not contain contractual obligations requiring a dealer to maintain its relationship with us
beyond the committed term. Accordingly, these dealers may cancel their subscriptions with us in accordance with the terms
of their subscription agreements. If a significant number of our paying dealers terminate their subscriptions with us, our
revenue would be materially and adversely affected.
If we fail to maintain or increase the number of dealers that pay subscription fees to us, or fail to maintain or increase the
fees paid to us for subscriptions, our business and financial results would be harmed.
If paying dealers do not experience the volume of consumer connections that they expect during their monthly or
annual subscription period, or do not experience the level of car sales they expect from those connections, they may terminate
their subscriptions at the conclusion of the committed term or may only be willing to renew their subscriptions at a lower
level of fees. Even if dealers do experience increased consumer connections or sales, they may not attribute such increases to
our marketplace. If we fail to expand our base of paying dealers or fail to maintain or increase the level of fees that we
receive from them, our business and financial results would be materially and adversely affected.
We allow dealers to list their inventory in our marketplace for free; however, dealer identity and contact information
are not permitted in such free listings and these dealers do not receive access to the paid features of our marketplace. Many
dealers start with us on a non-paying basis and then become paying customers in order to take advantage of the features of
our Enhanced or Featured Listing products. If dealers do not subscribe to our paid offerings at the rates we expect, or if a
greater than expected number of our paying dealers elect to terminate their subscriptions, our business and financial results
would be harmed.
If dealers or other advertisers reduce their advertising spend with us and we are unable to attract new advertisers, our
business would be harmed.
A significant amount of our revenue is derived from advertising revenues generated primarily through advertising sales
to dealers, auto manufacturers, and other auto-related brand advertisers. We compete for this advertising revenue with other
online automotive marketplaces and with television, print media, and other traditional advertising channels. Our ability to
attract and retain advertisers, and to generate advertising revenue, depends on a number of factors, including:
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our ability to increase the number of consumers using our marketplace;
our ability to compete effectively for advertising spending with other online automotive marketplaces;
our ability to continue to develop our advertising products in our marketplace;
our ability to keep pace with changes in technology and the practices and offerings of our competitors; and
our ability to offer an attractive return on investment, or ROI, to our advertisers for their advertising spend with us.
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Our agreements with dealers for display advertising generally include terms ranging from one month to one year and
may be terminated by us with 30 days’ notice and by dealers with 30 days’ notice at the end of the committed term. The
contracts do not contain contractual obligations requiring an advertiser to maintain its relationship with us beyond the
committed term. Our other advertising contracts, including those with auto manufacturers, are typically for a defined period
of time and do not have ongoing commitments to advertise on our site beyond the committed term. We may not succeed in
capturing a greater share of our advertisers’ spending if we are unable to convince advertisers of the effectiveness or
superiority of our marketplace as compared to alternative channels. If current advertisers reduce or end their advertising
spending with us and we are unable to attract new advertisers, our advertising revenue and business and financial results
would be harmed.
If we are unable to provide a compelling vehicle search experience to consumers through our platform, the number of
connections between consumers and dealers using our marketplace may decline and our business and financial results
would be materially and adversely affected.
If we fail to continue to provide a compelling vehicle search experience to consumers, the number of connections
between consumers and dealers through our marketplace could decline, which in turn could lead dealers to stop listing their
inventory in our marketplace, cancel their subscriptions, or reduce their advertising spend with us. If dealers stop listing their
inventory in our marketplace, we may not be able to maintain and grow our consumer traffic, which may cause other dealers
to stop using our marketplace. This reduction in the number of dealers using our marketplace would likely adversely affect
our marketplace and our business and financial results. As consumers increasingly use their mobile devices to access the
internet and our marketplace, our success will depend, in part, on our ability to provide consumers with a robust and user-
friendly experience through their mobile devices. We believe that our ability to provide a compelling vehicle search
experience, both on the web and through mobile devices, is subject to a number of factors, including:
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our ability to maintain an attractive marketplace for consumers and dealers, including on mobile platforms;
our ability to continue to innovate and introduce products for our marketplace on mobile platforms;
our ability to launch new products that are effective and have a high degree of consumer engagement;
our ability to maintain the compatibility of our mobile application with operating systems, such as iOS and
Android, and with popular mobile devices running such operating systems; and
our ability to access and analyze a sufficient amount of data to enable us to provide relevant information to
consumers, including pricing information and accurate vehicle details.
If use of our marketplace, particularly on mobile devices, does not continue to grow, our business and operating results
would be harmed.
We rely on internet search engines to drive traffic to our website, and if we fail to appear prominently in the search
results, our traffic would decline and our business would be adversely affected.
We depend, in part, on internet search engines such as Google, Bing, and Yahoo! to drive traffic to our website. The
number of consumers we attract to our marketplace from search engines is due in part to how and where our websites rank in
unpaid search results. These rankings can be affected by a number of factors, many of which are not under our direct control
and may change frequently. For example, when a consumer searches for a vehicle in an internet search engine, we rely on a
high organic search ranking of our webpages to refer the consumer to our website. Our competitors’ internet search engine
optimization efforts may result in their websites receiving higher search result rankings than ours, or internet search engines
could change their methodologies in a way that would adversely affect our search result rankings. If internet search engines
modify their search algorithms in ways that are detrimental to us, or if our competitors’ efforts are more successful than ours,
overall growth in our traffic could slow or our traffic could decline. In addition, internet search engine providers could
provide dealer and pricing information directly in search results, align with our competitors, or choose to develop competing
products. Search engines may also adopt a more aggressive auction-pricing system for keywords that would cause us to incur
higher advertising costs or reduce our market visibility to prospective users. Our website has experienced fluctuations in
search result rankings in the past, and we anticipate fluctuations in the future. Any reduction in the number of consumers
directed to our website through internet search engines could harm our business and operating results.
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Any inability by us to develop new products, or achieve widespread consumer and dealer adoption of those products, could
negatively impact our business and financial results.
Our success depends on our continued innovation to provide products and services that make our marketplace, website,
and mobile application useful for consumers and dealers. These new products must be widely adopted by consumers and
dealers in order for us to continue to attract consumers to our marketplace and dealers to our products and services.
Accordingly, we must continually invest resources in product, technology, and development in order to improve the
attractiveness and comprehensiveness of our marketplace and its related products and effectively incorporate new internet
and mobile technologies into them. These product, technology, and development expenses may include costs of hiring
additional personnel, engaging third-party service providers and other research and development activities. In addition,
revenue relating to new products is typically unpredictable and our new products may have lower gross margins and higher
marketing and sales costs than our existing products. We may also change our pricing models for both existing and new
products so that our prices for our offerings reflect the value those offerings are providing to consumers and dealers. Our
pricing models may not effectively reflect the value of products to consumers and dealers, and, if we are unable to provide a
marketplace and products that consumers and dealers want to use, they may become dissatisfied and instead use our
competitors’ websites and mobile applications. Without an innovative marketplace and related products, we may be unable to
attract additional, unique consumers or retain current consumers, which could affect the number of dealers that become
paying dealers and the number of advertisers that want to advertise in our marketplace, which could, in turn, harm our
business and financial results.
We may be unable to maintain or grow relationships with data providers, or may experience interruptions in the data they
provide, which may create a less valuable or transparent shopping experience and negatively affect our business and
operating results.
We obtain data from many third-party data providers, including inventory management systems, automotive website
providers, customer relationship management systems, dealer management systems, governmental entities, and third-party
data licensors. Our business relies on our ability to obtain data for the benefit of consumers and dealers using our
marketplace. For example, our success in international markets is dependent in part upon our ability to obtain and maintain
inventory data and other vehicle information for those markets. The large amount of inventory and vehicle information
available in our marketplace is critical to the value we provide for consumers. The loss or interruption of such inventory data
or other vehicle information could decrease the number of consumers using our marketplace. We could experience
interruptions in our data access for a number of reasons, including difficulties in renewing our agreements with data
providers, changes to the software used by data providers, efforts by industry participants to restrict access to data, and
increased fees we may be charged by data providers. Our marketplace could be negatively affected if any current provider
terminates its relationship with us or our service from any provider is interrupted. If there is a material disruption in the data
provided to us, the information that we provide to consumers and dealers using our marketplace may be limited. In addition,
the quality, accuracy, and timeliness of this information may suffer, which may lead to a less valuable and less transparent
shopping experience for consumers using our marketplace and could materially and adversely affect our business and
financial results.
The failure to build and maintain our brand would harm our ability to grow our audience and to expand the use of our
marketplace by consumers and dealers.
While we are focused on building our brand recognition, maintaining and enhancing our brand will depend largely on
the success of our efforts to maintain the trust of consumers and dealers and to deliver value to each consumer and dealer
using our marketplace. If consumers were to believe that we are not focused on providing them with a better automobile
shopping experience, our reputation and the strength of our brand may be adversely affected.
Complaints or negative publicity about our business practices, our marketing and advertising campaigns, our
compliance with applicable laws and regulations, the integrity of the data that we provide to consumers, data privacy and
security issues, and other aspects of our business, irrespective of their validity, could diminish consumers’ and dealers’
confidence and participation in our marketplace and could adversely affect our brand. There can be no assurance that we will
be able to maintain or enhance our brand, and failure to do so would harm our business growth prospects and operating
results.
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The “Questions” section of our website enables consumers and dealers using our site to communicate with one another
and other persons seeking information or advice on the internet. Claims of defamation or other injury could be made against
us for content posted on our website. In addition, negative publicity and user sentiment generated as a result of fraudulent or
deceptive conduct by users of our marketplace could damage our reputation, reduce our ability to attract new users or retain
our current users, and diminish the value of our brand.
While we have historically focused our marketing efforts on internet and mobile channels, we have begun brand-focused
campaigns using television and radio and these efforts may not be successful.
As a consumer brand, it is important for us to increase the visibility of our brand with potential users of our
marketplace. While we have historically focused our marketing efforts on internet and mobile channels, we have begun to
advertise through television, radio, and other channels we have not used previously, with the goal of driving greater brand
recognition, trust, and loyalty from a broader consumer audience. If our brand-focused campaigns are not successful and we
are unable to recover our marketing costs through increases in user traffic and increased subscription and advertising revenue,
or if we discontinue our brand marketing campaigns, it could have a material adverse effect on our business and financial
results.
Our recent, rapid growth is not indicative of our future growth, and our revenue growth rate will continue to decline in
the future.
Our revenue increased to $316.9 million in 2017 from $198.1 million in 2016, representing a 60% increase between
such periods. In the future, our revenue growth rates will decline as we achieve higher market penetration rates, as our
revenue increases to higher levels, and as we experience increased competition. As our revenue growth rates decline,
investors’ perceptions of our business may be adversely affected and the market price of our Class A common stock could
decline. In addition, we will not be able to grow as expected, or at all, if we do not accomplish the following:
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increase the number of consumers using our marketplace;
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that they are paying;
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attract and retain advertisers placing advertisements in our marketplace;
further improve the quality of our marketplace, and introduce high quality new products; and
increase the number of connections between consumers and dealers using our marketplace.
If we fail to expand effectively into new markets, both domestically and abroad, our revenue, business, and financial
results will be harmed.
We intend to continue to expand our operations to target new markets, both domestically and abroad, and there can be
no assurance our expansion into these new markets will be successful. Our expansion into new markets places us in
unfamiliar competitive environments and involves various risks, including the need to invest significant resources and the
likelihood that returns on such investments will not be achieved for several years, or possibly at all. In attempting to establish
a presence in new markets, we expect, as we have in the past, to incur significant losses in those markets and face various
other challenges, such as obtaining and maintaining access to inventory data, competition for consumers and dealers using
our marketplace, monetizing dealers, new regulatory environments and laws, different consumer shopping habits than those
we are familiar with, and our ability to expand the number of our account managers to cover those new markets. Our current
and any future expansion plans will require significant resources and management attention. Furthermore, expansion into
international markets may not yield results similar to those we have achieved in the United States.
Our international operations involve risks that are different from, or in addition to, the risks we may experience as a result
of our domestic operations, and our exposure to these risks will increase as we expand internationally.
We have started to expand our operations internationally and plan to enter additional markets in the next twelve
months. We expect to expand our international operations significantly by continuing to enter new markets and expanding
our offerings in new languages. In most international markets, we would not be the first entrant, and our competitors may be
more established or otherwise better positioned than we are to succeed. Our competitors may offer services to dealers that
make dealers dependent on them, such as hosting dealers’ webpages and providing inventory feeds for dealers, which would
make it difficult to attract dealers to our marketplace. Dealers may also be parties to agreements with other dealers and
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syndicates that prevent them from being able to access our marketplace. In addition, we may also face litigation from
competitors in new markets. Any of these barriers could impede our expansion into international markets, which could affect
our business and potential growth.
In addition to English, we have made portions of our platform available in French, German, and Spanish, and we will
need to make all or portions of our platform available in additional languages as we launch in new countries. We may have
difficulty modifying our technology and content for use in non-English speaking markets or fostering new communities in
non-English speaking markets. Our ability to manage our business and conduct our operations internationally requires
considerable management attention and resources, and is subject to the particular challenges of supporting a rapidly growing
business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute resolution systems,
regulatory systems, and commercial infrastructures. Expanding internationally may subject us to new risks or increase our
exposure in connection with current risks, including risks associated with:
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recruiting and retaining qualified, multilingual employees, including sales personnel;
adapting the website to conform to local automobile shopping expectations;
increased competition from local websites and periodicals and potential preferences by local populations for local
providers;
compliance with applicable foreign laws and regulations, including different privacy, censorship, and liability
standards and regulations, and different intellectual property laws;
providing solutions in different languages for different cultures, which may require that we modify our solutions
and features so they are culturally relevant in different countries;
the enforceability of our intellectual property rights;
credit risk and higher levels of payment fraud;
compliance with anti-bribery laws, including compliance with the Foreign Corrupt Practices Act and the U.K.
Bribery Act;
currency exchange rate fluctuations;
foreign exchange controls that might prevent us from repatriating cash earned outside the United States;
political and economic instability in some countries;
double taxation of our international earnings and potentially adverse tax consequences due to changes in the tax
laws of the United States or the foreign jurisdictions in which we operate; and
higher costs of doing business internationally.
We participate in a highly competitive market, and pressure from existing and new companies may adversely affect our
business and operating results.
We face significant competition from companies that provide listings, information, lead generation, and car-buying
services designed to help consumers shop for cars and to enable dealers to reach these consumers. Our competitors offer
various marketplaces, products, and services that compete with us. Some of these competitors include:
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other U.S. automotive websites, such as Edmunds.com, KBB.com, and Carfax.com;
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online automotive marketplaces and websites in international markets;
internet search engines;
peer to peer marketplaces; and
sites operated by individual automobile dealers.
We compete with these and other companies for a share of dealers’ overall marketing budget for online and offline
media marketing spend. To the extent that dealers view alternative marketing and media strategies to be superior to our
marketplace, we may not be able to maintain or grow the number of dealers subscribing to, and advertising on, our
marketplace, and our business and financial results may be harmed.
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We also expect that new competitors will continue to enter the online automotive retail industry with competing
marketplaces, products, and services, which could have an adverse effect on our business and financial results.
Our competitors could significantly impede our ability to expand the number of dealers using our marketplace. Our
competitors may also develop and market new technologies that render our existing or future marketplace and associated
products less competitive, unmarketable, or obsolete. In addition, if our competitors develop marketplaces with similar or
superior functionality to ours, and our web traffic declines, we may need to decrease our subscription and advertising fees. If
we are unable to maintain our current pricing structure due to competitive pressures, our revenue would likely be reduced and
our financial results would be negatively affected.
Our existing and potential competitors may have significantly more financial, technical, marketing, and other resources
than we have, and the ability to devote greater resources to the development, promotion, and support of their marketplaces,
products, and services. They may also have more extensive automotive industry relationships than we have, longer operating
histories, and greater name recognition. As a result, these competitors may be able to respond more quickly with new
technologies and to undertake more extensive marketing or promotional campaigns than we can. Additionally, to the extent
that any competitor has existing relationships with dealers or auto manufacturers for marketing or data analytics solutions,
those dealers and auto manufacturers may be unwilling to partner with us. If we are unable to compete with these
competitors, the demand for our marketplace and related products and services could substantially decline.
In addition, if one or more of our competitors were to merge or partner with another of our competitors, the change in
the competitive landscape could adversely affect our ability to compete effectively. Our competitors may also establish or
strengthen cooperative relationships with our existing or future data providers, technology partners, or other parties with
whom we have relationships, thereby limiting our ability to develop, improve, and promote our solutions. We may not be
able to compete successfully against current or future competitors, and competitive pressures may harm our business and
financial results.
Our business could be adversely affected if dealer associations or auto manufacturers were to discourage or otherwise
deter dealers from subscribing to our marketplace.
Although the dealership industry is highly fragmented, a small number of interested parties have significant influence
over the industry. These parties include state and national dealership associations, state regulators, car manufacturers,
consumer groups, independent dealers, and consolidated dealer groups. If and to the extent these parties believe that
dealerships should not enter into or maintain subscription agreements with us, this belief could become shared by dealerships
and we may lose a number of our paying dealers.
Furthermore, auto manufacturers may provide their franchise dealers with financial or other marketing support
conditioned upon such dealers’ adherence to certain marketing guidelines. Auto manufacturers may determine that the
manner in which certain of their franchise dealers use our marketplace is inconsistent with the terms of such marketing
guidelines, which determination could result in potential or actual loss of the manufacturers’ financial or other marketing
support to the dealers whose use of our marketplace is deemed objectionable. The potential or actual loss of such marketing
support may cause such dealers to cease paying for our paid features, which may adversely affect our ability to maintain or
grow the number of our paying dealers.
Dealer closures or consolidations could reduce demand for our products, which may decrease our revenue.
In the past, the number of U.S. dealers has declined due to dealership closures and consolidations as a result of factors
such as global economic downturns. When dealers consolidate, the services they previously purchased separately are often
purchased by the combined entity in a lesser quantity or for a lower aggregate price than before, leading to volume
compression and loss of revenue. Further dealership consolidations or closures could reduce the aggregate demand for our
products and services. If dealership closures and consolidations occur in the future, our business, financial position and
results of operations could be materially and adversely affected.
We rely on third-party service providers for many aspects of our business, and any failure to maintain these relationships
could harm our business.
Our success will depend upon our relationships with third parties, including those with our payment processor and data
center hosts, our information technology providers, our data providers for dealer inventory and vehicle information, our
human resources information system provider, our billing subscription software provider, our customer relationship
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management software provider, and our general ledger provider. If these third parties experience difficulty meeting our
requirements or standards, or if the relationships we have established with such third parties expire or otherwise terminate, it
could make it difficult for us to operate some aspects of our business, which could damage our business and reputation. In
addition, if such third-party service providers were to cease operations, temporarily or permanently, face financial distress or
other business disruptions, increase their fees, or if our relationships with these providers deteriorate or terminate, we could
suffer increased costs and we may be unable to provide consumers with content or provide similar services until an
equivalent provider could be found or we could develop replacement technology or operations. In addition, if we are
unsuccessful in identifying or finding high-quality partners, if we fail to negotiate cost-effective relationships with them, or if
we ineffectively manage these relationships, it could have an adverse impact on our business and financial results.
If we continue to grow rapidly, we may not be able to manage our growth effectively.
We have experienced rapid growth in our headcount and operations, which places substantial demand on management
and our operational infrastructure. As we continue to grow, we must effectively integrate, develop, and motivate a large
number of new employees, while maintaining the beneficial aspects of our company culture. If we do not manage the growth
of our business and operations effectively, the quality of our services and efficiency of our operations could suffer, which
could harm our brand, results of operations, and overall business.
We depend on key personnel to operate our business, and if we are unable to retain, attract and integrate qualified
personnel, our ability to develop and successfully grow our business could be harmed.
We believe our success has depended, and continues to depend, on the efforts and talents of our executives and
employees. Our future success depends on our continuing ability to attract, develop, motivate, and retain highly qualified and
skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. In
addition, the loss of any of our executive officers or key employees could materially adversely affect our ability to execute
our business plan and strategy, and we may not be able to find adequate replacements on a timely basis, or at all. Our
executive officers and other employees are at-will employees, which means they may terminate their employment
relationships with us at any time, and their knowledge of our business and industry would be extremely difficult to replace.
We cannot ensure that we will be able to retain the services of any members of our senior management or other key
employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our
business could be materially and adversely affected.
If we are unable to successfully respond to changes in the market, our business could be harmed.
While our business has grown rapidly as consumers and dealers have increasingly accessed our marketplace, we expect
that our business will evolve in ways which may be difficult to predict. For example, we anticipate that over time we may
reach a point when investments in new user traffic are less productive and the continued growth of our revenue will require
more focus on developing new products for consumers and dealers, expanding our marketplaces into new international
markets to attract new consumers and dealers, and increasing our fees for our products. It is also possible that consumers and
dealers could broadly determine that they no longer believe in the value of our marketplace. Our continued success will
depend on our ability to successfully adjust our strategy to meet the changing market dynamics. If we are unable to do so, our
business could be harmed and our results of operations and financial condition could be materially and adversely affected.
We may be subject to disputes regarding the accuracy of Instant Market Value, Deal Rating, Dealer Rating, and other
features of our marketplace.
We provide consumers using our marketplace with our proprietary Instant Market Value, or IMV, Deal Rating, Dealer
Rating, and other features to help them evaluate vehicle listings. Revisions to our automated valuation models, or the
algorithms that underlie them, may cause the IMV, Deal Rating, or other features to vary from our expectations regarding the
accuracy of these tools. In addition, from time to time, consumers and regulators question or disagree with our IMV, Deal
Rating, or Dealer Rating. Any such questions or disagreements could result in distraction from our business or potentially
harm our reputation, could result in a decline in consumers’ use of our marketplace or could result in legal disputes.
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We are subject to a complex framework of federal, state, and foreign laws and regulations, many of which are unsettled,
still developing and contradictory, which have in the past, and could in the future, subject us to claims, challenge our
business model, or otherwise harm our business.
Various aspects of our business are, may become, or may be viewed by regulators from time to time as subject, directly
or indirectly, to U.S. federal and state laws and regulations, and to foreign laws and regulations. Failure to comply with such
laws or regulations may result in the suspension or termination of our ability to do business in affected jurisdictions, the
imposition of significant civil and criminal penalties, including fines or the award of significant damages against us and
dealers in class action or other civil litigation, or orders or settlements requiring us to make adjustments to our marketplace
and related products and services.
State Motor Vehicle Sales, Advertising and Brokering, and Consumer Protection Laws
The advertising and sale of new or used motor vehicles is highly regulated by the states in which we do business.
Although we do not sell motor vehicles, and although we believe that vehicle listings on our site are not themselves
advertisements, state regulatory authorities or third parties could take the position that some of the laws or regulations
applicable to dealers or to the manner in which motor vehicles are advertised and sold generally are directly applicable to our
business. These state advertising laws and regulations are frequently subject to multiple interpretations and are not uniform
from state to state, sometimes imposing inconsistent requirements with respect to new or used motor vehicles. If our
marketplace and related products are determined to not comply with relevant regulatory requirements, we or dealers could be
subject to significant civil and criminal penalties, including fines, or the award of significant damages in class actions or
other civil litigation, as well as orders interfering with our ability to continue providing our marketplace and related products
and services in certain states. In addition, even absent such a determination, to the extent dealers are uncertain about the
applicability of such laws and regulations to our business, we may lose, or have difficulty increasing the number of paying
dealers, which would affect our future growth. For example, in April 2015 the Texas Department of Motor Vehicles, or the
TX DMV, notified us that it believed the Price History and IMV information on our website violated the prohibition on
advertising savings clauses on used vehicles. The TX DMV informed us that if we failed to address the issue within 30 days,
it would potentially subject dealers it considered to be advertising on our website to fines. After discussions with the TX
DMV, we modified our website to remove the Price History and certain references and comparisons to IMV for used vehicles
listed on our website that are for sale in Texas.
If state regulators or other third parties take the position in the future that our marketplace or related products violate
applicable brokering, bird-dog, consumer protection, consumer finance or advertising laws or regulations, responding to such
allegations could be costly, could require us to pay significant sums in settlements, could require us to pay civil and criminal
penalties, including fines, could interfere with our ability to continue providing our marketplace and related products in
certain states, or could require us to make adjustments to our marketplace and related products or the manner in which we
derive revenue from dealers using our marketplace, any or all of which could result in substantial adverse publicity,
termination of subscriptions by dealers, decreased revenues, distraction for our employees, increased expenses, and decreased
profitability.
Federal Laws and Regulations
The Federal Trade Commission, or the FTC, has the authority to take actions to remedy or prevent acts or practices that
it considers to be unfair or deceptive and that affect commerce in the United States. If the FTC takes the position in the future
that any aspect of our business, including our advertising and privacy practices, constitutes an unfair or deceptive act or
practice, responding to such allegations could require us to defend our practices and pay significant damages, settlements,
and civil penalties, or could require us to make adjustments to our marketplace and related products and services, any or all of
which could result in substantial adverse publicity, distraction for our employees, loss of participating dealers, lost revenues,
increased expenses, and decreased profitability.
Our platform enables us, dealers, and users to send and receive text messages and other mobile phone communications.
The Telephone Consumer Protection Act, or the TCPA, as interpreted and implemented by the Federal Communications
Commission, or the FCC, and federal and state courts, imposes significant restrictions on utilization of telephone calls and
text messages to residential and mobile telephone numbers as a means of communication, particularly if the prior express
consent of the person being contacted has not been obtained. Violations of the TCPA may be enforced by the FCC, by state
attorneys general, or by others through litigation, including class actions. Statutory penalties for TCPA violations range from
$500 to $1,500 per violation, which is often interpreted to mean per phone call or text message. Furthermore, several
provisions of the TCPA, as well as applicable rules and orders, are open to multiple interpretations, and compliance may
involve fact-specific analyses.
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Any failure by us, or the third parties on which we rely, to adhere to, or successfully implement, appropriate processes
and procedures in response to existing or future laws and regulations could result in legal and monetary liability, fines and
penalties, or damage to our reputation in the marketplace, any of which could have a material adverse effect on our business,
financial condition, and results of operations. Even if the claims are meritless, we may be required to expend resources and
pay costs to defend against regulatory actions or third-party claims. Additionally, any change to the TCPA or its
interpretation that further restricts the way consumers and dealers interact through our platform, or any governmental or
private enforcement actions related thereto, could adversely affect our ability to attract customers and could harm our
business, financial condition, results of operations, and cash flows.
Federal Antitrust Laws
The antitrust laws prohibit, among other things, any joint conduct among competitors that would lessen competition in
the marketplace. We believe that we are in compliance with the legal requirements imposed by the antitrust laws. However, a
governmental or private civil action alleging the improper exchange of information, or unlawful participation in price
maintenance or other unlawful or anticompetitive activity, even if unfounded, could be costly to defend and could harm our
business, results of operations, financial condition, or cash flows.
Other
Claims could be made against us under both U.S. and foreign laws, including claims for defamation, libel, invasion of
privacy, copyright or trademark infringement, or claims based on other theories related to the nature and content of the
materials disseminated by users of our marketplace and the “Questions” section of our websites. In addition, domestic and
foreign legislation has been proposed that could prohibit or impose liability for the transmission over the internet of certain
types of information. Our defense against any of these actions could be costly and involve significant time and attention of
our management and other resources. If we become liable for information provided by our users and transmitted in our
marketplace in any jurisdiction in which we operate, we could be directly harmed and we may be forced to implement new
measures to reduce our exposure to this liability.
The foregoing description of laws and regulations to which we are or may be subject is not exhaustive, and the
regulatory framework governing our operations is subject to continuous change. As we expand our operations internationally,
we are and will continue to be exposed to legal and regulatory risks including with respect to privacy, tax, law enforcement,
content, intellectual property, and other matters. The enactment of new laws and regulations or the interpretation of existing
laws and regulations, both domestically and internationally, in an unfavorable way may affect the operation of our business,
directly or indirectly, which could result in substantial regulatory compliance costs, civil or criminal penalties, including
fines, adverse publicity, loss of participating dealers, lost revenues, increased expenses, and decreased profitability. Further,
investigations by governmental agencies, including the FTC, into allegedly anticompetitive, unfair, deceptive or other
business practices by us or dealers using our marketplace, could cause us to incur additional expenses and, if adversely
concluded, could result in substantial civil or criminal penalties and significant legal liability, or orders requiring us to make
adjustments to our marketplace and related products and services.
Our business is subject to risks related to the larger automotive industry ecosystem, including consumer demand, global
supply chain challenges, and other macroeconomic issues.
Decreases in consumer demand could adversely affect the market for automobile purchases and, as a result, reduce the
number of consumers using our platform. Consumer purchases of new and used automobiles generally decline during
recessionary periods and other periods in which disposable income is adversely affected. Purchases of new and used
automobiles are typically discretionary for consumers and have been, and may continue to be, affected by negative trends in
the economy, including the cost of energy and gasoline, the availability and cost of credit, reductions in business and
consumer confidence, stock market volatility, and increased unemployment. Further, in recent years the market for motor
vehicles has experienced rapid changes in technology and consumer demands. Self-driving technology, ride sharing,
transportation networks, and other fundamental changes in transportation could impact consumer demand for the purchase of
automobiles. A reduction in the number of automobiles purchased by consumers could adversely affect dealers and car
manufacturers and lead to a reduction in other spending by these groups, including targeted incentive programs. In addition,
our business may be negatively affected by challenges to the larger automotive industry ecosystem, including global supply
chain challenges and other macroeconomic issues. These factors could have a material adverse effect on our business, results
of operations, and financial condition.
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Making decisions that we believe are in the best interests of our marketplace may cause us to forgo short-term gains in
pursuit of potential but uncertain long-term growth.
In the past, we have forgone, and we will in the future continue to forgo, certain expansion or short-term revenue
opportunities that we do not believe are in the long-term best interests of our marketplace, even if such decisions negatively
impact our results of operations in the short term. For example, we manage the text-chat feature of our website where
consumers can message paying dealers. Our management of this feature has helped improve dealer response times to
consumers, which in turn improves the consumer experience. While our management of this feature provides value to both
consumers and paying dealers and could be a potential source of short-term revenue for us, we are not currently charging for
this feature and are instead focusing on the potential long-term value of this feature to our marketplace and its users.
However, this strategy may not result in the long-term benefits that we expect, in which case our user traffic and engagement,
business, and financial results could be harmed.
A significant disruption in service on our website or our mobile application could damage our reputation and result in a
loss of consumers, which could harm our business, brand, operating results, and financial condition.
Our brand, reputation, and ability to attract consumers, dealers, and advertisers depend on the reliable performance of
our technology infrastructure and content delivery. We may experience significant interruptions with our systems in the
future. Interruptions in these systems, whether due to system failures, computer viruses, ransomware, or physical or
electronic break-ins, could affect the security or availability of our marketplace on our website and mobile application, and
prevent or inhibit the ability of consumers to access our marketplace. For example, past disruptions have impacted our ability
to activate customer accounts and manage our billing activities in a timely manner. Such interruptions could also result in
third parties accessing our confidential and proprietary information, including our intellectual property. Problems with the
reliability or security of our systems could harm our reputation, harm our ability to protect our confidential and proprietary
information, result in a loss of consumers and dealers, and result in additional costs.
Substantially all of the communications, network, and computer hardware used to operate our platform is located in the
United States in Boston, Massachusetts and Dallas, Texas, and in Europe in London, England. Although we have two
locations in the United States and we believe our systems are redundant, there may be exceptions for certain hardware. In
addition, we do not own or control the operation of these facilities. We also use Amazon Web Services and Google Cloud
Storage to back up some data. Our systems and operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses,
earthquakes, and similar events. The occurrence of any of these events could result in damage to our systems and hardware or
could cause them to fail. In addition, we may not have sufficient protection or recovery plans in certain circumstances.
Problems faced by our third-party web hosting providers could adversely affect the experience consumers have while
using our marketplace. Our third-party web hosting providers could close their facilities without adequate notice. Any
financial difficulties, up to and including bankruptcy, faced by our third-party web hosting providers or any of the service
providers whose services they use may have negative effects on our business, the nature and extent of which are difficult to
predict. If our third-party web hosting providers are unable to keep up with our growing capacity needs, our business could
be harmed.
Any errors, defects, disruptions, or other performance or reliability problems with our network operations could cause
interruptions in access to our marketplace as well as delays and additional expense in arranging new facilities and services
and could harm our reputation, business, operating results, and financial condition.
Although we carry business interruption insurance, it may not be sufficient to compensate us for the potentially
significant losses, including the potential harm to the future growth of our business, that may result from interruptions in our
service as a result of system failures.
We collect, process, store, share, disclose, and use consumer information and other data, and our actual or perceived
failure to protect such information and data or respect users’ privacy could damage our reputation and brand and harm
our business and operating results.
Use of some functions of our marketplace involves the storage and transmission of consumers’ information, such as IP
addresses and contact information of users who connect with dealers, profile information of users who create accounts on our
marketplace, and dealers’ information. Some of this information may be private, and security breaches could expose us to a
risk of loss or exposure of this information, which could result in potential liability, litigation, and remediation costs. For
example, hackers could steal our users’ profile passwords, names, email addresses, phone numbers, and zip codes. We rely
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on encryption and authentication technology licensed from third parties to effect secure transmission of such information.
Like all information systems and technology, our website, mobile application, and information systems may be subject to
computer viruses, break-ins, phishing attacks, attempts to overload our servers with denial-of-service or other attacks,
ransomware, and similar incidents or disruptions from unauthorized use of our computer systems, any of which could lead to
interruptions, delays, or website shutdowns, or could cause loss of critical data or the unauthorized disclosure, access,
acquisition, alteration, or use of personal or other confidential information. If we experience compromises to our security that
result in website or mobile application performance or availability problems, the complete shutdown of our website or mobile
application, or the loss or unauthorized disclosure, access, acquisition, alteration, or use of confidential information,
consumers and advertisers may lose trust and confidence in us, and consumers may decrease the use of our website or stop
using our website entirely, and advertisers may decrease or stop advertising on our website. Further, outside parties may
attempt to fraudulently induce employees, consumers, or advertisers to disclose sensitive information in order to gain access
to our information or our consumers’ or advertisers’ information. Because the techniques used to obtain unauthorized access,
disable or degrade service, or sabotage systems change frequently, often are not recognized until after being launched against
a target, and may originate from less regulated and remote areas around the world, we may be unable to proactively address
these techniques or to implement adequate preventative measures.
Any or all of the issues above could negatively impact our ability to attract new consumers and increase engagement by
existing consumers, cause existing consumers to curtail or stop use of our marketplace or close their accounts, cause existing
advertisers to cancel their contracts, or subject us to governmental or third-party lawsuits, investigations, regulatory fines, or
other actions or liability, thereby harming our business, results of operations, and financial condition.
There are numerous federal, state, and local laws and regulations in the United States and around the world regarding
privacy and the collection, processing, storing, sharing, disclosing, using, cross-border transfer, and protecting of personal
information and other data, the scope of which are changing, subject to differing interpretations, and which may be costly to
comply with, may result in regulatory fines or penalties, and may be inconsistent between countries and jurisdictions or
conflict with other requirements.
We seek to comply with industry standards and are subject to the terms of our privacy policies and privacy-related
obligations to third parties. We strive to comply with all applicable laws, policies, legal obligations, and industry codes of
conduct relating to privacy and data protection, to the extent possible. However, it is possible that these obligations may be
interpreted and applied in new ways or in a manner that is inconsistent from one jurisdiction to another and may conflict with
other rules or our practices or that new regulations could be enacted. Several proposals are pending before federal, state, and
foreign legislative and regulatory bodies that could significantly affect our business. The General Data Protection Regulation
in the European Union, which will go into effect on May 25, 2018, may require us to change our policies and procedures and,
if we are not in compliance, may seriously harm our business. Any failure or perceived failure by us to comply with our
privacy policies, our privacy-related obligations to consumers or other third parties, or our privacy-related legal obligations,
or any compromise of security that results in the unauthorized release or transfer of sensitive information, which could
include personally identifiable information or other user data, may result in governmental investigations, enforcement
actions, regulatory fines, litigation, or public statements against us by consumer advocacy groups or others, and could cause
consumers and dealers to lose trust in us, which could have an adverse effect on our business. Additionally, if any third party
that we share information with experiences a security breach or fails to comply with its privacy-related legal obligations or
commitments to us, such matters may put consumer or dealer information at risk and could in turn expose us to claims for
damages or regulatory fines or penalties, and harm our reputation, business, and operating results.
We may in the future be subject to intellectual property disputes, which are costly to defend and could harm our business
and operating results.
We may from time to time face allegations that we have infringed the trademarks, copyrights, patents, and other
intellectual property rights of third parties, including from our competitors or non-practicing entities, or may learn of possible
infringement to our trademarks, copyrights, patents, and other intellectual property. We could also be subject to lawsuits
where consumers and dealers posting content on the “Questions” section of our website disseminate materials that infringe
the intellectual property rights of third parties. We have encountered lawsuits in the past containing allegations of intellectual
property infringement. For example, in December 2015, Trader Corporation, or Trader, alleged that we infringed its
copyright in 196,740 photos of cars that were uploaded onto our Canadian website. Trader sought statutory and punitive
damages of approximately CAD$ 99 million along with a permanent injunction prohibiting us from reproducing any other
photos in which Trader owns copyright without Trader’s consent. On April 6, 2017, the Commercial List of the Ontario
Superior Court, or the Commercial List, granted an order declaring that we infringed Trader’s copyright in 152,532 photos
and awarded Trader statutory damages of CAD$ 305,064 in the aggregate, but dismissed Trader’s claim for punitive damages
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and a permanent injunction. Following release of the decision, the parties agreed that there would be no legal fees or interest
payable. In addition, the parties agreed that neither would appeal the decision of the Commercial List.
Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict
and may require us to stop offering some features, purchase licenses, or modify our marketplace and features while we
develop non-infringing substitutes or may result in significant settlement costs.
In addition, we use open source software in our platform and will use open source software in the future. From time to
time, we may face claims from companies that incorporate open source software into their products, claiming ownership of,
or demanding release of, the source code, the open source software, or derivative works that were developed using such
software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in
litigation, require us to purchase a costly license or require us to devote additional product, technology, and development
resources to change our platform or services, any of which would have a negative effect on our business and operating
results.
Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, these
matters, and the time and resources necessary to litigate or resolve them, could harm our business, our operating results, and
our reputation.
Failure to adequately protect our intellectual property could harm our business and operating results.
Our business depends on our intellectual property, the protection of which is crucial to the success of our business. We
rely on a combination of patent, trademark, trade secret, and copyright law and contractual restrictions to protect our
intellectual property. In addition, we attempt to protect our intellectual property, technology, and confidential information by
requiring our employees and consultants to enter into confidentiality and assignment of inventions agreements and third
parties to enter into nondisclosure agreements as we deem appropriate. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our website features, software, and functionality or obtain and use
information that we consider proprietary.
Competitors may adopt service names similar to ours, thereby harming our ability to build brand identity and possibly
leading to user confusion. In addition, there could be potential trade name or trademark infringement claims brought by
owners of other registered trademarks, or trademarks that incorporate variations of the term “CarGurus.” If we are restricted
in any way in registering our CARGURUS mark in international markets, it could impact our ability to establish and grow
our business in Europe and other countries. For example, O2 Holdings Limited (now O2 Worldwide Limited, or O2
Worldwide), based in the United Kingdom, previously opposed our UK application to register the mark CARGURUS based
on its prior registered rights for the mark GURU in the United Kingdom. We have reached an agreement with O2 Worldwide
that permits us to continue to use our CARGURUS mark and logos in the United Kingdom and the European Union for our
services in the automotive field in the manner we have to date, and to register such mark in the United Kingdom and the
European Union for such services. However, the agreement with O2 Worldwide sets forth certain limitations on our use of
the CARGURUS mark and logos in the United Kingdom and in the European Union, or the EU. Also, while we have
registered the CARGURUS and CG logos in the EU, we are not able to register the word-mark CARGURUS in the EU as the
mark was deemed to be non-distinctive, and thus unregisterable. We may be unable to register CARGURUS, the word mark,
in any country in the EU, other than the United Kingdom. If we are unable to register the CARGURUS word mark in any
country, it may limit our ability to challenge unauthorized users of marks that are the same as or similar to CARGURUS.
We currently hold the “CarGurus.com” internet domain name and various other related domain names. The regulation
of domain names is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional
domain name registrars, or modify the requirements for holding domain names. As a result, we may not be able to acquire or
maintain all domain names that use the name CarGurus. In addition, third parties may create copycat or squatter domains to
deceive consumers, which could harm our brand, interfere with our ability to register domain names, and result in additional
costs.
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We may acquire other companies or technologies, which could divert our management’s attention, result in additional
dilution to our stockholders, and otherwise disrupt our operations and harm our operating results.
Our success will depend, in part, on our ability to grow our business in response to the demands of consumers, dealers,
and other constituents within the automotive industry as well as competitive pressures. In some circumstances, we may
determine to do so through the acquisition of complementary businesses and technologies rather than through internal
development. The identification of suitable acquisition candidates can be difficult, time-consuming, and costly, and we may
not be able to successfully complete identified acquisitions. The risks we face in connection with acquisitions include:
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diversion of management time and focus from operating our business to addressing acquisition integration
challenges;
coordination of technology, product, research, and development, and sales and marketing functions;
transition of the acquired company’s consumers and data to our marketplace and products;
retention of employees from the acquired company;
cultural challenges associated with integrating employees from the acquired company into our organization;
integration of the acquired company’s accounting, management information, human resources, and other
administrative systems;
the need to implement or improve controls, procedures, and policies at a business that prior to the acquisition may
have lacked effective controls, procedures, and policies;
potential write-offs of intangibles or other assets acquired in such transactions that may have an adverse effect on
our operating results in a given period;
potential liabilities for activities of the acquired company before the acquisition, including patent and trademark
infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown
liabilities; and
litigation or other claims in connection with the acquired company, including claims from terminated employees,
consumers, former stockholders, or other third parties.
Our failure to address these risks or other problems encountered in connection with future acquisitions and investments
could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated
liabilities, and harm our business generally. Future acquisitions could result in dilutive issuances of our equity securities, the
incurrence of debt, contingent liabilities, amortization expense, or impairment charges associated with acquired intangible
assets or goodwill, any of which could harm our financial condition. Also, the anticipated benefits of any acquisitions may
not materialize.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other
proprietary information.
In order to protect our technologies and processes, we rely in part on confidentiality agreements with our employees,
independent contractors, and other advisors. These agreements may not effectively prevent disclosure of confidential
information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of
confidential information. Others may also independently discover our trade secrets and proprietary information, and in such
cases we may not be able to assert our trade secret rights against such parties. To the extent that our employees, contractors,
or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may
arise as to the rights to related or resulting know-how and inventions. The loss of confidential information or intellectual
property rights, including trade secret protection, could make it easier for third parties to compete with our products. In
addition, any changes in, or unexpected interpretations of, intellectual property laws may compromise our ability to enforce
our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and
determine the scope of our proprietary rights, and failure to obtain or maintain protection of our trade secrets or other
proprietary information could harm our business, results of operations, reputation, and competitive position.
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We may be unable to halt the operations of websites that aggregate or misappropriate our data.
From time to time, third parties may misappropriate our data through website scraping, robots, or other means and
aggregate this data on their websites with data from other companies. In addition, copycat websites may misappropriate data
in our marketplace and attempt to imitate our brand or the functionality of our website. If we become aware of such activities,
we intend to employ technological or legal measures in an attempt to halt their operations. However, we may be unable to
detect all such activities in a timely manner and, even if we could, technological and legal measures may be insufficient to
halt their operations. In some cases, particularly in the case of entities operating outside of the United States, our available
remedies may not be adequate to protect us against the impact of the operation of such websites. Regardless of whether we
can successfully enforce our rights against the operators of these websites, any measures that we may take could require us to
expend significant financial or other resources, which could harm our business, results of operations, or financial condition.
In addition, to the extent that such activity creates confusion among consumers or advertisers, our brand and business could
be harmed.
We have incurred operating losses in the past and we may generate losses in the future.
We have incurred net operating losses in the past. Although we did not experience such losses in fiscal year 2016 or
2017 and we have experienced significant growth in revenue, our revenue growth rate is likely to decline in the future as a
result of a variety of factors. Our international expansion may cause our costs to increase in future periods as we continue to
expend substantial financial resources to enter into those markets. Our costs may also increase due to our continued new
product development and general administrative expenses, such as legal and accounting expenses related to being a public
company. If we fail to increase our revenue or manage these additional costs, we may incur losses in the future.
Complying with the laws and regulations affecting public companies has increased and will continue to increase our costs
and the demands on management and could harm our operating results.
Now that we are a public company, we expect to incur significant legal, accounting, and other expenses that we did not
incur as a private company and these expenses will increase after we cease to be an “emerging growth company,” as defined
in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. In addition, the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, and rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and
Nasdaq impose various requirements on public companies, including requiring certain corporate governance practices. Our
management and other personnel expect to devote a substantial amount of time to these compliance initiatives. Moreover,
these rules and regulations have increased and will continue to increase our legal, accounting, and financial compliance costs
and have made and will continue to make some activities more time consuming and costly. For example, these rules and
regulations have made it more difficult and more expensive for us to obtain director and officer liability insurance. These
rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of
directors or our board committees or as executive officers.
In addition, the Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal
control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In
particular, beginning with the year ending December 31, 2018, we will need to perform system and process evaluation and
testing of our internal control over financial reporting to allow management to report on, and our independent registered
public accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act, or Section 404. As an emerging growth company, we have elected to avail ourselves
of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of
our internal control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption
when we cease to be an emerging growth company and, when our independent registered public accounting firm is required
to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will
correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial
accounting expense and expend significant management time on compliance-related issues as we implement additional
corporate governance practices and comply with reporting requirements.
Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes(cid:3)(cid:3)Oxley Act
could have a material adverse effect on our stated operating results and harm our reputation.
We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley
Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial
reporting for that purpose. As a newly public company, we are required to comply with the SEC’s rules implementing
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Section 302 of the Sarbanes(cid:3)Oxley Act, which require management to certify financial and other information in our quarterly
and annual reports and provide an annual management report on the effectiveness of controls over financial reporting.
Though we are required to disclose changes made in our internal controls and procedures on a quarterly basis, we are not
required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the
year following our first annual report required to be filed with the SEC. As an emerging growth company, our independent
registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over
financial reporting pursuant to Section 404 until after we are no longer an emerging growth company. At such time, our
independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at
which our controls are documented, designed or operating.
To comply with the requirements of being a public company, we have undertaken various actions, and may need to
take additional actions, such as implementing new internal controls and procedures and hiring additional accounting or
internal audit staff. Testing and maintaining internal control can divert our management’s attention from other matters that
are important to the operation of our business. Additionally, when evaluating our internal control over financial reporting,
we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed
upon us for compliance with the requirements of Section 404. If we identify any material weaknesses in our internal control
over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or to assert that
our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to
express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an emerging
growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market
price of our Class A common stock could be materially adversely affected, and we could become subject to investigations by
Nasdaq, the SEC or other regulatory authorities, which could require additional financial and management resources.
Seasonality may cause fluctuations in our operating results.
Across the retail automotive industry, consumer purchases typically increase through the first three quarters of each
year, due in part to the introduction of new vehicle models from manufacturers, and our consumer-marketing spend grows
accordingly. As consumer purchases slow in the fourth quarter, our rate of marketing spend typically also slows. This
seasonality has not been immediately apparent historically due to the overall growth of other operating expenses. As our
growth rates begin to moderate, the impact of these seasonality trends on our results of operations could become more
pronounced.
We expect our results of operations to fluctuate on a quarterly and annual basis.
Our revenue and results of operations could vary significantly from period to period and may fail to match expectations
as a result of a variety of factors, some of which are outside of our control. Our results may vary as a result of fluctuations in
the number of dealers subscribing to our marketplace and the size and seasonal variability of our advertisers’ marketing
budgets. As a result of the potential variations in our revenue and results of operations, period-to-period comparisons may not
be meaningful and the results of any one period should not be relied on as an indication of future performance. In addition,
our results of operations may not meet the expectations of investors or public market analysts who follow us, which may
adversely affect our stock price.
Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly traded company, interacting with
public company investors and complying with the increasingly complex laws pertaining to public companies. Our
management team may not successfully or efficiently manage our transition to being a public company subject to significant
regulatory oversight and reporting obligations under the federal securities laws and the scrutiny of securities analysts and
investors. These new obligations and constituents will require significant attention from our management team and could
divert their attention away from the day(cid:3)to(cid:3)day management of our business, which could materially adversely affect our
business, financial condition and operating results.
We may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or
unforeseen circumstances. If capital is not available to us, our business, operating results, and financial condition may be
harmed.
Although we have not needed to raise substantial equity in the past to support the growth of our business, we intend to
continue to make investments to support our growth and may require additional capital to pursue our business objectives and
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respond to business opportunities, challenges, or unforeseen circumstances, including to increase our marketing expenditures
to improve our brand awareness, develop new products, further improve our marketplace and existing products, enhance our
operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we may need to engage in
equity or debt financings to secure additional funds. However, additional funds may not be available when we need them, on
terms that are acceptable to us, or at all. Volatility in the credit markets may also have an adverse effect on our ability to
obtain debt financing.
If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders
could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges
superior to those of holders of our Class A common stock. If we are unable to obtain adequate financing or financing on
terms satisfactory to us, when we require it, our ability to continue to pursue our business objectives and to respond to
business opportunities, challenges, or unforeseen circumstances could be significantly limited, and our business, operating
results, financial condition, and prospects could be adversely affected.
Risks Related to Our Class A Common Stock
Our founder controls a majority of the voting power of our outstanding capital stock, and, therefore, has control over key
decision-making and could control our actions in a manner that conflicts with the interests of other stockholders.
Langley Steinert, our founder, Chief Executive Officer, President, and Chairman, is able to exercise voting rights with
respect to a majority of the voting power of our outstanding capital stock and therefore has the ability to control the outcome
of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or
sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a change of control,
merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this
concentrated control could result in the consummation of such a transaction that our other stockholders do not support. This
concentrated control could also discourage a potential investor from acquiring our Class A common stock, which has limited
voting power relative to the Class B common stock, and might harm the trading price of our Class A common stock. In
addition, Mr. Steinert has the ability to control the management and major strategic investments of our company as a result of
his positions as our Chief Executive Officer, President, and Chairman, and his ability to control the election or replacement of
our directors. As a board member and officer, Mr. Steinert owes a fiduciary duty to our stockholders and must act in good
faith in a manner he reasonably believes to be in the best interests of our stockholders. If Mr. Steinert’s status as an officer
and director is terminated, his fiduciary duties to our stockholders will also terminate, but his voting power as a stockholder
will not be reduced as a result of such termination unless such termination is either made voluntarily by Mr. Steinert, due to
Mr. Steinert’s death, or if the sum of the number of shares of our capital stock held by Mr. Steinert, by any Family Member
of Mr. Steinert, and by any Permitted Entity of Mr. Steinert (as such terms are defined in our amended and restated certificate
of incorporation), assuming the exercise and settlement in full of all outstanding options and convertible securities and
calculated on an as-converted to Class A common stock basis, is less than 9,091,484 shares. As a stockholder, even a
controlling stockholder, Mr. Steinert is entitled to vote his shares in his own interests, which may not always be aligned with
the interests of our other stockholders.
We believe that Mr. Steinert’s continued control of a majority of the voting power of our outstanding capital stock is
beneficial to us and is in the best interests of our stockholders. In the event that Mr. Steinert no longer controls a majority of
the voting power, whether as a result of the disposition of some or all his shares of Class A or Class B common stock, the
conversion of the Class B common stock into Class A common stock in accordance with its terms, or otherwise, our business
or the trading price of our Class A common stock may be adversely affected.
The multiple class structure of our common stock has the effect of concentrating voting control with our founder and
certain other holders of our Class B common stock, which will limit or preclude your ability to influence corporate
matters.
Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. Stockholders
who hold shares of Class B common stock, including certain of our executive officers, employees, and directors and their
affiliates, together hold a substantial majority of the voting power of our outstanding capital stock. Because of the ten-to-one
voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively control a
majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our
stockholders for approval so long as the shares of Class B common stock represent at least 9.1% of all outstanding shares of
our Class A and Class B common stock. This concentrated control will limit or preclude your ability to influence corporate
matters for the foreseeable future.
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Transfers by holders of Class B common stock will generally result in those shares converting into Class A common
stock, subject to limited exceptions, such as certain transfers effected for estate planning or charitable purposes. The
conversion of Class B common stock into Class A common stock will have the effect, over time, of increasing the relative
voting power of those holders of Class B common stock who retain their shares in the long term. If, for example, Mr. Steinert
retains a significant portion of his holdings of Class B common stock for an extended period of time, he could, in the future,
continue to control a majority of the combined voting power of our outstanding capital stock.
The price of our Class A common stock may be volatile and the value of your investment could decline.
The trading price of our Class A common stock may be volatile and fluctuate substantially. The trading price of our
Class A common stock depends on a number of factors, including those described in this “Risk Factors” section, many of
which are beyond our control and may not be related to our operating performance. Factors that could cause fluctuations in
the trading price of our Class A common stock include the following:
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price and volume fluctuations in the overall stock market from time to time;
changes in operating performance and stock market valuations of other technology companies generally, or those
in our industry in particular;
sales of shares of our Class A common stock by us or our stockholders;
failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts
who follow our company, or our failure to meet these estimates or the expectations of investors;
announcements by us or our competitors of new products;
the public’s reaction to our press releases, other public announcements, and filings with the SEC;
rumors and market speculation involving us or other companies in our industry;
actual or anticipated changes in our operating results or fluctuations in our operating results;
actual or anticipated developments in our business, our competitors’ businesses, or the competitive landscape
generally;
litigation involving us, our industry or both, or investigations by regulators into our operations or those of our
competitors;
developments or disputes concerning our intellectual property or other proprietary rights;
announced or completed acquisitions of businesses or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidelines, interpretations, or principles;
any significant change in our management;
conditions in the automobile industry; and
general economic conditions and slow or negative growth of our markets.
In addition, the stock market in general, and the market for technology companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of
those companies. Broad market and industry factors may seriously affect the market price of our Class A common stock,
regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market
and the market prices of a particular company’s securities, securities class action litigations have often been instituted against
these companies. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our
management’s attention and resources.
Sales of substantial amounts of our Class A common stock in the public markets, or the perception that such sales might
occur, could depress the market price of our Class A common stock.
The market price for our Class A common stock could decline as a result of the sale of substantial amounts of our
Class A common stock, particularly sales by our directors, executive officers, and significant stockholders, a large number of
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shares of our Class A common stock becoming available for sale, or the perception in the market that holders of a large
number of shares intend to sell their shares. Based on shares outstanding at December 31, 2017, we had outstanding
77,884,754 shares of Class A common stock. Of these shares, the 10,810,000 shares of our Class A common stock sold in our
initial public offering, or IPO, are freely tradable, and the balance of the outstanding shares will be available for sale in the
public market following the expiration of lock-up agreements entered into in connection with our IPO, which is expected to
occur on April 10, 2018. The representatives of the underwriters in our IPO may release these stockholders from their lock-
up agreements at any time and without notice, which would allow for earlier sales of shares in the public market. Sales of a
substantial number of such shares upon expiration of the lock-up, the perception that such sales may occur, or early release of
these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at
a time and price that you deem appropriate.
On April 10, 2018, the holders of 54,998,789 shares of our Class A common stock will have rights, subject to some
conditions, to require us to file registration statements covering their shares of Class A common stock or to include their
shares in registration statements that we may file for ourselves or our stockholders.
In addition, the shares of Class A common stock subject to outstanding options and restricted stock units for Class A
common stock under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans,
which we registered on a registration statement on Form S-8 which we filed with the SEC on October 24, 2017, will become
eligible for sale in the public market in the future, subject to certain legal and contractual limitations.
If a substantial number of shares are sold, or if it is perceived that they will be sold, in the public market, before or after
the expiration of the contractual lock-up period, the trading price of our Class A common stock could decline substantially.
The exclusion of our Class A common stock from major stock indexes could adversely affect the trading market and price
of our Class A common stock.
Several major stock index providers have announced they will begin to exclude, or are considering plans to exclude,
from their indexes the securities of companies with unequal voting rights such as ours. Exclusion from stock indexes could
make it more difficult, or impossible, for some fund managers to buy the excluded securities, particularly in the case of index
tracking mutual funds and exchange traded funds. The exclusion of our Class A common stock from major stock indexes
could adversely affect the trading market and price of our Class A common stock.
Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law,
could impair a takeover attempt.
The provisions of our amended and restated certificate of incorporation and amended and restated bylaws, and
provisions of Delaware law, may have the effect of rendering more difficult, delaying, or preventing an acquisition deemed
undesirable by our board of directors. Our corporate governance documents include provisions:
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creating a classified board of directors whose members serve staggered three-year terms;
authorizing “blank check” Preferred Stock, which may contain voting, liquidation, dividend, and other rights
superior to our Class A common stock and which, from and after the date, referred to as the threshold date, on
which the votes applicable to the Class A common stock and Class B common stock controlled by Mr. Steinert,
represent less than a majority of the aggregate votes applicable to all shares of the outstanding Class A common
stock and Class B common stock, could be issued by our board of directors without stockholder approval;
limiting the liability of, and providing indemnification to, our directors and officers;
limiting the ability of our stockholders to call and bring business before special meetings;
requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and
for nominations of candidates for election to our board of directors;
limiting the ability, from and after the threshold date, of stockholders to amend our amended and restated
certificate of incorporation;
limiting the ability, from and after the threshold date, of stockholders to fill vacant directorships and remove
directors; and
prohibiting cumulative voting by stockholders.
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These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our
management.
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware
General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from
engaging in certain business combinations without approval of the holders of substantially all of our outstanding common
stock.
Any provision of our amended and restated certificate of incorporation, amended and restated bylaws, or Delaware law
that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a
premium for their shares of our Class A common stock, and could also affect the price that some investors are willing to pay
for our Class A common stock.
Our amended and restated certificate of incorporation includes a forum selection clause, which could limit our
stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an
alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by law, be the sole and
exclusive forum for any stockholder to bring: (i) any derivative action or proceeding brought on behalf of us; (ii) any action
asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or agents to us or to
our stockholders; (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General
Corporation Law or our amended and restated certificate of incorporation or amended and restated bylaws; (iv) any action to
interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or our amended
and restated bylaws; or (v) any action asserting a claim against us or any of our directors, officers, or other employees or
agents governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares
of our capital stock is deemed to have notice of and consented to the foregoing provisions. This forum selection provision in
our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum
for disputes with us. It is also possible that, notwithstanding the forum selection clause included in our certificate of
incorporation, a court could rule that such a provision is inapplicable or unenforceable.
If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our
market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could
decline.
The trading market for our Class A common stock is influenced by the research and reports that industry or securities
analysts may publish about us, our business, our market, or our competitors. If any of the analysts who may cover us change
their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our
competitors, our stock price would likely decline. If any analyst that covers us were to cease coverage of our company or fail
to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price
or trading volume to decline.
We do not intend to pay cash dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings
to finance the operation and expansion of our business, and we do not expect to declare or pay any cash dividends in the
foreseeable future. As a result, you may only receive a return on your investment in our Class A common stock if the trading
price of your shares increases.
Our status as a “controlled company” could make our Class A common stock less attractive to some investors or otherwise
harm our stock price.
More than 50% of our voting power is held by Mr. Steinert. As a result, we are a “controlled company” under the
corporate governance rules for Nasdaq-listed companies. Under these rules, a company of which more than 50% of the voting
power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with
certain Nasdaq corporate governance requirements, including:
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the requirement that a majority of our board of directors consist of “independent directors” as defined under the
rules of Nasdaq;
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(cid:129)
the requirement that we have a compensation committee that is composed entirely of directors meeting Nasdaq
independence standards applicable to compensation committee members with a written charter addressing the
committee’s purpose and responsibilities;
the requirement that our compensation committee be responsible for the hiring and overseeing of persons acting as
compensation consultants and be required to consider certain independence factors when engaging such persons;
and
the requirement that director nominees either be selected, or recommended for board of directors’ selection, either
by “independent directors” as defined under the rules of Nasdaq constituting a majority of the board of director’s
“independent directors” in a vote in which only “independent directors” participate, or by a nominations
committee comprised solely of “independent directors.”
We have relied on certain of these exemptions. Accordingly, should the interests of our controlling stockholder differ
from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of
companies that are subject to all of the corporate governance rules for Nasdaq-listed companies. Our status as a controlled
company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth
companies may make our Class A common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and may remain an emerging growth company
until the last day of our fiscal year following the fifth anniversary of our IPO, subject to specified conditions. For so long as
we remain an emerging growth company, we are permitted and intend to rely on exemptions from some disclosure
requirements that are applicable to other public companies that are not emerging growth companies. These exemptions
include:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
being permitted to provide only two years of audited financial statements, in addition to any required unaudited
interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” disclosure;
not being required to comply with the auditor attestation requirements in the assessment of our internal control
over financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting
Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing
additional information about the audit and the financial statements;
reduced disclosure obligations regarding executive compensation; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
stockholder approval of any golden parachute payments not previously approved.
We have taken advantage of reduced reporting burdens in this Annual Report on Form 10-K. We cannot predict
whether investors will find our Class A common stock less attractive because we rely on these exemptions. If some investors
find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common
stock and our stock price may be more volatile. In addition, the JOBS Act provides that an emerging growth company can
take advantage of an extended transition period for complying with new or revised accounting standards. This allows an
emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private
companies. We have elected to avail ourselves of this exemption and, therefore, while we are an emerging growth company
we will not be subject to new or revised accounting standards at the same time that they become applicable to other public
companies that are not emerging growth companies.
32
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We do not own any real property. Our principal executive offices are located in Cambridge, Massachusetts where we
lease a total of approximately 99,982 square feet of space in two buildings under leases that expire in November 2022 and
January 2024. We also lease office space Dublin, Ireland, for our European operations, and in Detroit, Michigan, for
additional space for our advertising sales employees.
Item 3. Legal Proceedings.
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course
of our business. We are not presently subject to any pending or threatened litigation that we believe, if determined adversely
to us, individually, or taken together, would reasonably be expected to have a material adverse effect on our business or
financial results.
Item 4. Mine Safety Disclosures.
Not applicable.
33
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information for Common Stock
Our Class A common stock has been listed on the Nasdaq Global Select Market under the symbol “CARG” since
October 12, 2017. Prior to that date, there was no public trading market for our Class A common stock. Our initial public
offering was priced at $16.00 per share on October 11, 2017. The following table sets forth for the periods indicated the high
and low sales prices per share of our Class A common stock as reported on the Nasdaq Global Select Market:
Fourth Quarter (from October 12, 2017 to December 31,
2017)
$
35.42 $
25.85
High
Low
On February 28, 2018, the last reported sale price of our Class A common stock on the Nasdaq Global Select Market was
$32.28 per share.
Holders
As of February 23, 2018, we had 130 holders of record of our Class A common stock. The actual number of
stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners but whose
shares are held in street name by brokers and other nominees. The number of holders of record does not include stockholders
whose shares may be held in trust by other entities.
Dividends
We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain
future earnings to fund development and growth of our business, and we do not anticipate paying cash dividends in the
foreseeable future.
Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange
Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise
be subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of
CarGurus, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.
34
The following graph shows a comparison from October 12, 2017 (the date our Class A common stock commenced
trading on the Nasdaq Global Select Market) through December 31, 2017 of the cumulative total return for our Class A
common stock, the Nasdaq Composite Index and the S&P 500 Index. All values assume a $100 initial cash investment and
data for the Nasdaq Composite Index and the S&P 500 Index assume reinvestment of dividends, if any. Such returns are
based on historical results and are not intended to suggest future performance.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF CARGURUS, INC.
$120
$115
$110
$105
$100
$95
$90
10/12/2017
10/31/2017
11/30/2017
12/29/2017
CarGurus, Inc.
Nasdaq Composite Index
S&P 500 Index
Recent Sales of Unregistered Securities
From January 1, 2017 through the filing our Registration Statement on Form S-8 on October 24, 2017, we issued to
employees (i) an aggregate of 85,684 shares of Class A common stock and 169,012 shares of Class B common stock upon
the exercise of options granted under our Amended and Restated 2006 Equity Incentive Plan and Amended and Restated
2015 Equity Incentive Plan, with exercise prices ranging from $0.05 to $6.78 per share, for an aggregate exercise price of
approximately $288,000 and (ii) an aggregate of 848,634 restricted stock units relating to 848,634 shares of Class A common
stock.
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public
offering, and we believe that each such transaction was exempt from the registration requirements of the Securities Act of
1933, as amended, or the Securities Act, in reliance on Section 3(a)(9) of the Securities Act, Rule 701 promulgated under the
Securities Act, as transactions pursuant to a compensatory benefit plan approved by our board of directors, and Section
4(a)(2) of the Securities Act, as transactions by an issuer not involving a public offering, or transactions which did not
constitute sales of securities under the Securities Act. Each recipient of securities issued in the transactions that were deemed
to be exempt in reliance upon Section 4(a)(2) of the Securities Act acquired the securities for investment only and not with a
view to, or for resale in connection with, any distribution thereof, and appropriate legends were affixed to any share
certificates issued in each such transaction. In each case, the recipient received adequate information regarding us or had
adequate access, through his or her relationship with us, to information about us.
Use of Proceeds from Public Offering of Common Stock
On October 11, 2017, our registration statement on Form S-1, as amended (File No. 333-220495), filed in connection
with our initial public offering, or IPO, was declared effective by the Securities and Exchange Commission, or SEC, and, on
October 16, 2017, we closed our IPO consisting of 10,810,000 shares of Class A common stock, which included the full
exercise by the underwriters of their option to purchase 1,410,000 additional shares of Class A common stock, at a public
offering price of $16.00 per share, before underwriting discounts. We issued and sold 3,205,000 shares of Class A common
stock and the selling stockholders sold an additional 7,605,000 shares of Class A common stock. The aggregate offering
price for shares sold in our IPO was approximately $173.0 million.
35
Following the sale of the shares in connection with the closing of our IPO, the offering was concluded. We received
$43.2 million in net proceeds, after deducting underwriting discounts and commissions of $3.6 million and $4.5 million of
other offering expenses. The selling stockholders received, in the aggregate, $113.2 million in net proceeds, after deducting
underwriting discounts and commissions of $8.5 million. Certain of the underwriting discounts and commissions paid in our
IPO were paid to Allen & Company LLC, an entity that beneficially owned more than 10% of our Preferred Stock prior to
our IPO and that is affiliated with Ian Smith, a member of our board of directors. Goldman Sachs & Co. LLC and Allen &
Company LLC acted as joint lead book-running managers of our IPO.
As of December 31, 2017, we have retained proceeds from the IPO for working capital requirements.
There has been no material change in the planned use of proceeds from our initial public offering as described in our
final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act on October 12, 2017.
Purchases of Equity Securities
We did not purchase any of our registered equity securities during the period covered by this Annual Report on Form
10-K.
36
Item 6. Selected Consolidated Financial Data.
The following Selected Consolidated Financial Data should be read in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and related notes, and
other financial information included in this Annual Report on Form 10-K.
We derived the consolidated statements of operations data for the years ended December 31, 2017, 2016, and 2015 and
the consolidated balance sheet data as of December 31, 2017 and 2016 from our audited consolidated financial statements,
which are included elsewhere in this Annual Report on Form 10-K. We derived the consolidated balance sheet data as of
December 31, 2015 from our audited consolidated financial statements, which are not included in this Annual Report on
Form 10-K. Historical results are not necessarily indicative of the results to be expected in future periods.
Year Ended
December 31,
2016
(in thousands, except share and per share data)
2015
2017
Consolidated Statements of Operations Data:
Revenue:
Marketplace subscription
Advertising and other
Total revenue
Cost of revenue(1)
Gross profit
Operating expenses:
Sales and marketing
Product, technology, and development
General and administrative
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other income (expense), net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Net income (loss) per share attributable to common
stockholders, basic and diluted:(2)
Basic
Diluted
Weighted—average shares used to compute net income
(loss) per share attributable to common
stockholders:(2)
Basic
Diluted
$
$
$
$
282,664 $
34,197
316,861
17,609
299,252
236,165
22,470
22,688
2,655
283,978
15,274
563
15,837
2,638
13,199 $
171,302 $
26,839
198,141
9,575
188,566
154,125
11,453
12,783
1,634
179,995
8,571
374
8,945
2,448
6,497 $
75,142
23,446
98,588
4,234
94,354
81,877
8,235
5,801
969
96,882
(2,528)
(12)
(2,540)
(904)
(1,636)
0.13 $
0.12 $
(0.58) $
(0.58) $
(0.41)
(0.41)
55,835,265 44,138,922 43,141,236
60,637,584 44,138,922 43,141,236
Other Financial Information:
Adjusted EBITDA(3)
$
24,097 $
10,965 $
(366)
(1)
(2)
Includes depreciation and amortization expense for the years ended December 31, 2017, 2016, and 2015 of $1,140,
$438, and $153, respectively.
See Note 9 of the notes to our consolidated financial statements included elsewhere in this report for an explanation of
the calculations of our net income (loss) per share attributable to common stockholders.
37
(3)
See “— Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income
(loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
Consolidated Balance Sheet Data:
Cash, cash equivalents, and investments
Property and equipment, net
Working capital
Total assets
Total liabilities
Convertible preferred stock
Total stockholders’ equity (deficit)
2017
December 31,
2016
(in thousands)
2015
$
137,709 $
16,563
114,238
176,594
49,569
—
127,025
74,250 $
12,780
56,457
100,331
35,605
132,698
(67,972)
61,363
7,147
52,751
77,781
20,534
73,378
(16,131)
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we monitor and have presented within
this Annual Report on Form 10-K Adjusted EBITDA, which is a non-GAAP financial measure. This non-GAAP financial
measure is not based on any standardized methodology prescribed by U.S. generally accepted accounting principles, or
GAAP, and is not necessarily comparable to similarly titled measures presented by other companies.
We define Adjusted EBITDA as net income (loss), adjusted to exclude: depreciation and amortization, stock-based
compensation expense, other (income) expense, net, the provision for (benefit from) income taxes, and certain one-time,
non-recurring items, if and when applicable. We have presented Adjusted EBITDA in this Annual Report on Form 10-K
because it is a key measure 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 Adjusted EBITDA can produce a useful measure for
period-to-period comparisons of our business.
We use Adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe
Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the
expenses that we exclude. Accordingly, we believe that Adjusted EBITDA provides 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. In addition, we evaluate our Adjusted EBITDA in relation to our revenue. We
refer to this as Adjusted EBITDA margin and define it as Adjusted EBITDA divided by total revenue.
Our Adjusted EBITDA is 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 Adjusted
EBITDA rather than net income (loss), which is the most directly comparable GAAP equivalent. Some of these limitations
are:
(cid:129) Adjusted EBITDA excludes 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;
(cid:129) Adjusted EBITDA excludes depreciation and amortization expense and, although these are non-cash expenses, the
assets being depreciated may have to be replaced in the future;
(cid:129) Adjusted EBITDA does not reflect interest expense, or the cash requirements necessary to service interest, which
reduces cash available to us;
(cid:129) Adjusted EBITDA does not reflect income tax payments or tax benefits that reduce cash available to us; and
(cid:129)
other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces
its usefulness as a comparative measure.
Because of these limitations, we consider, and you should consider, Adjusted EBITDA together with other operating
and financial performance measures presented in accordance with GAAP.
38
The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable
measure calculated in accordance with GAAP, for each of the periods presented.
Reconciliation of Adjusted EBITDA:
Net income (loss)
Depreciation and amortization
Stock-based compensation expense
Other (income) expense, net
Provision for (benefit from) income taxes
Adjusted EBITDA
Year Ended
December 31,
2017
2016
2015
(in thousands)
$
$
13,199 $
3,795
5,028
(563)
2,638
24,097 $
6,497 $
2,072
322
(374)
2,448
10,965 $
(1,636)
1,122
1,040
12
(904)
(366)
39
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together
with our consolidated financial statements and the related notes and other financial information included elsewhere in this
report. Some of the information contained in this discussion and analysis or elsewhere in this 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. You should review the “Risk Factors” section of this Annual Report on Form
10-K 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. In this discussion, we use
financial measures that are considered non-GAAP financial measures under Securities and Exchange Commission rules.
These rules require supplemental explanation and reconciliation, which is included elsewhere in this Annual Report on Form
10-K. Investors should not consider non-GAAP financial measures in isolation from or in substitution for, financial
information presented in compliance with U.S. generally accepted accounting principles, or GAAP.
Company Overview
CarGurus is a global, online automotive marketplace connecting buyers and sellers of new and used cars. Using
proprietary technology, search algorithms, and innovative data analytics, we provide information and analysis that create a
differentiated automotive search experience for consumers. Our trusted marketplace empowers users with unbiased
third-party validation on pricing and dealer reputation as well as other information that aids them in finding “Great Deals
from Top-Rated Dealers.” In addition to the United States, we operate online marketplaces in Canada, the United Kingdom,
and Germany.
On October 16, 2017, we completed our initial public offering, or the IPO, in which we issued and sold 3,205,000
shares of our Class A common stock at a public offering price of $16.00 per share for aggregate gross proceeds of $51.3
million. We received $43.2 million in net proceeds after deducting $3.6 million of underwriting discounts and commissions
and $4.5 million in offering costs. Upon the closing of the IPO, all of the outstanding shares of our Preferred Stock
automatically converted into 20,188,226 shares of Class A common stock and 40,376,452 shares of Class B common stock.
The 40,376,452 shares of Class B common stock subsequently converted into 40,376,452 shares of Class A common stock
resulting in a total conversion of all outstanding shares of Preferred Stock into 60,564,678 shares of Class A common stock at
the conversion rates then in effect. At the closing of the IPO, there were no shares of Preferred Stock outstanding.
We generate marketplace subscription revenue from dealers through Listing and Dealer Display subscriptions, and
advertising revenue from automobile manufacturers and other auto-related brand advertisers. Our rapid revenue growth and
financial performance over the last several years exemplify the strength of our marketplace. We generated revenue of $316.9
million in 2017, $198.1 million in 2016, and $98.6 million in 2015, representing year-over-year increases of 60% in 2017 and
101% in 2016.
In 2017, we generated net income of $13.2 million and our Adjusted EBITDA was $24.1 million, compared to a net
income of $6.5 million and Adjusted EBITDA of $11.0 million in 2016 and a net loss of $1.6 million and Adjusted EBITDA
of $(0.4) million in 2015. See “Selected Consolidated Financial Data — Adjusted EBITDA” for more information regarding
our use of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our net income (loss).
We have two reportable segments, United States and International. See Note 12 of our Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K for more information.
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 United States and International segments. International
is defined as all non-U.S. markets in which we operate. International markets will likely perform differently from the U.S.
market due to a variety of factors, including our operating history in the market, our rate of investment, market size, market
maturity, and other dynamics unique to each country.
Monthly Unique Users
We define a monthly unique user as an individual who has visited our 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 in a
40
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 our website during a calendar month. If an individual accesses our website
using a different device within a given month, the first access by each such device 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
because our marketplace subscription 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 and map directions
to the dealership.
Average Monthly Unique Users
2017
Year Ended
December 31,
2016
(in thousands)
2015
United States
International
Monthly Sessions
24,469
2,451
20,120
1,396
14,986
198
We define monthly sessions as the number of distinct visits to our 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 device and ending at the earliest of when a user closes their browser window, after 30 minutes of inactivity,
or at midnight Eastern Time each night. 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 the volume of sessions in a time
period, when considered in conjunction with the number of unique users in that time period, is an indicator of consumer
satisfaction and engagement with our marketplace.
Average Monthly Sessions
2017
Year Ended
December 31,
2016
(in thousands)
2015
United States
International
Number of Paying Dealers
64,758
5,365
46,706
2,627
31,531
342
A paying dealer is a dealer, based on a distinct associated inventory feed, that subscribes to our Enhanced or Featured
Listing product at the end of a defined period. We believe that the number of paying dealers is indicative of the value
proposition of our Listing products, and our sales and marketing success, including our ability to retain paying dealers and
develop new dealer relationships.
Number of Paying Dealers
United States
International
As of
December 31,
2016
20,349
952
2017
25,122
2,548
2015
12,276
53
41
Average Annual Revenue per Subscribing Dealer (AARSD)
We measure the average annual revenue we receive from each paying dealer. We define AARSD, which is measured at
the end of a defined period, as the total marketplace subscription revenue during the trailing 12 months divided by the
average number of paying dealers during the same trailing 12-month period. Our ability to grow AARSD is an indicator of
the value proposition of our products and the return on investment, or ROI, our paying dealers realize from our products.
Increases in AARSD are driven by our ability to grow the volume of connections to our users and the quality of those
connections, effectively illustrate the value of brand exposure to our engaged audience in relation to subscription cost, upsell
package levels, and cross-sell additional products to our paying dealers.
Average Annual Revenue per
Subscribing Dealer (AARSD)
United States
International
As of
December 31,
2017
12,055 $
4,904 $
2016
10,383 $
3,830
2015
8,835
n/a*
$
$
*
International revenues were not generated before October 2015 and, therefore, sufficient data for the trailing 12-month
calculation is not available.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), adjusted to exclude: depreciation and amortization, stock-based
compensation expense, other (income) expense, net, the provision for (benefit from) income taxes, and certain one-time,
non-recurring items, if and when applicable. We monitor and have presented Adjusted EBITDA in this Annual Report on
Form 10-K as a non-GAAP financial measure to supplement the financial information we present on a GAAP basis to
provide investors with additional information regarding our financial results. Adjusted EBITDA, as a non-GAAP financial
measure, should not be considered in isolation from, or as an alternative to, measures prepared in accordance with GAAP.
We consider, and you should consider, Adjusted EBITDA together with other operating and financial performance measures
presented in accordance with GAAP. Also, our non-GAAP measure may not necessarily be comparable to similarly titled
measures presented by other companies.
We believe that Adjusted EBITDA is a key indicator of our operating results. For further explanation of the uses and
limitations of this measure and a reconciliation of our Adjusted EBITDA to the most directly comparable GAAP measure,
net income (loss), please see “Selected Consolidated Financial Data — Adjusted EBITDA.”
Components of Consolidated Statements of Operations
Revenue
Our revenue is derived from two primary sources: marketplace subscription revenue, which consists of listing and
display advertising subscriptions from dealers, and advertising and other revenue, which consists primarily of display
advertising revenue from auto manufacturers and other auto-related brand advertisers.
Marketplace Subscription Revenue
We offer three types of marketplace Listing products to our dealers: Basic Listing, which is free; and Enhanced or
Featured Listing, which require a paid subscription under a monthly, quarterly, semiannual, or annual subscription basis.
Subscription pricing is determined based on a dealer’s inventory size, region, and our assessment of the connections and ROI
our platform will provide them. We also offer Listing dealers access to our Dealer Dashboard, which includes a performance
summary, Dealer Insights tool, user review management platform, Pricing Tool, and Market Analysis tool. The Pricing Tool
and Market Analysis tool are available only to paying dealers.
In addition to listing their inventory in our marketplace and providing them access to our Dealer Dashboard, we offer
Enhanced and Featured Listing dealers other subscription advertising and customer acquisition products, including display
advertising that appears in our marketplace and on other sites on the internet, which can be targeted by geography, search
history, and a number of other factors, and dealer search engine marketing, which helps dealers more effectively acquire
customers through paid search, social media, and retargeted advertising.
42
Marketplace subscription revenue is recognized on a monthly basis as the service is delivered to the dealer.
Advertising and Other Revenue
Advertising and other revenue consists primarily of non-dealer display advertising revenue from auto manufacturers
and other auto-related brand advertisers sold on a cost per thousand impressions, or CPM, basis. An impression is an
advertisement loaded on a web page. 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.
For a description of our revenue accounting policies, see “— Critical Accounting Policies and Significant Estimates.”
Cost of Revenue
Cost of revenue primarily consists of costs related to supporting and hosting our product offerings. These costs include
salaries, benefits, incentive compensation, and stock-based compensation expense related to the customer support team and
third-party service provider costs such as data center and networking expenses, allocated overhead, depreciation and
amortization expense associated with our property and equipment, and amortization of capitalized website development
costs. We allocate overhead costs, such as rent and facility costs, information technology costs, and employee benefit costs,
to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each
operating expense category. We expect these expenses to increase as we continue to grow our business and introduce new
products.
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff,
including salaries, benefits, incentive compensation, commissions, stock-based compensation, and travel costs; costs
associated with consumer marketing, such as traffic acquisition, brand building, and public relations activities; costs
associated with dealer marketing, such as content marketing, customer and promotional events, and industry events; and
allocated overhead. We expect sales and marketing expenses to increase as we grow our audience and attempt to strengthen
our brand awareness and, as informed by trends in our business and the competitive landscape of our market, fluctuate from
quarter to quarter, which will impact our quarterly results of operations.
Product, Technology, and Development
Product, technology, and development expenses, which include research and development costs, consist primarily of
personnel costs of our development team, including payroll, benefits, stock-based compensation expense and allocated
overhead costs. Other than website development costs that qualify for capitalization, research and development costs are
expensed as incurred. We expect product, technology, and development expenses to increase as we develop new solutions
and make improvements to our existing platform.
General and Administrative
General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal,
human resources, and administrative personnel, including salaries, benefits, incentive compensation, and stock-based
compensation expenses, in addition to the costs associated with professional fees for external legal, accounting and other
consulting services, insurance premiums, payment processing and billing costs, and allocated overhead costs. We expect
general and administrative expenses to increase as we incur the costs of compliance associated with being a publicly traded
company, including legal, audit, and consulting fees.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation on property and equipment and leasehold
improvements.
43
Other Income (Expense)
Other income (expense) consists primarily of interest income earned on our cash, cash equivalents, and investments,
interest expense on lease obligations, and net foreign exchange gains and losses.
Provision for (Benefit from) Income Taxes
We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions in which we
operate. We have recorded a provision for income taxes for the periods ended December 31, 2017 and 2016 as a result of our
consolidated taxable income position. We have recognized a benefit from income taxes for the period ended December 31,
2015 due to our taxable loss position for that period. We recognize deferred tax assets and liabilities based on temporary
differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. We regularly
assess the need to record 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. We have not provided a valuation allowance
against our net deferred tax assets at December 31, 2017 or 2016.
Results of Operations
The following table sets forth our selected consolidated statements of operations data for each of the periods indicated.
The period-to-period comparison of financial results is not necessarily indicative of future results.
2017
Year Ended
December 31,
2016
(in thousands)
2015
Revenue:
Marketplace subscription
Advertising and other
Total revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Product, technology, and development
General and administrative
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other income (expense), net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Additional Financial Data
Revenue
United States
International
Total
Income (loss) from Operations
United States
International
Total
$
282,664 $
34,197
316,861
17,609
299,252
171,302 $
26,839
198,141
9,575
188,566
236,165
22,470
22,688
2,655
283,978
15,274
563
15,837
2,638
13,199 $
154,125
11,453
12,783
1,634
179,995
8,571
374
8,945
2,448
6,497 $
75,142
23,446
98,588
4,234
94,354
81,877
8,235
5,801
969
96,882
(2,528)
(12)
(2,540)
(904)
(1,636)
2017
Year Ended
December 31,
2016
(in thousands)
2015
307,472 $
9,389
316,861 $
195,824 $
2,317
198,141 $
98,566
22
98,588
41,586 $
(26,312)
15,274 $
27,461 $
(18,890)
8,571 $
637
(3,165)
(2,528)
$
$
$
$
$
44
The following table sets forth our selected consolidated statements of operations data as a percentage of revenue for
each of the periods indicated.
Revenue:
Marketplace subscription
Advertising and other
Total revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Product, technology, and development
General and administrative
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other income (expense), net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Additional Financial Data
Revenue
United States
International
Total
Income (loss) from Operations
United States
International
Total
Year Ended
December 31,
2016
2015
2017
89%
11
100%
6
94
74
7
7
1
89
5
—
5
1
4%
86%
14
100%
5
95
78
6
6
1
91
4
—
4
1
3%
76%
24
100%
4
96
83
9
6
1
99
(3)
—
(3)
(1)
(2)%
Year Ended
December 31,
2016
2015
2017
97%
3
100%
13%
(8)
5%
99%
1
100%
14%
(10)
4%
100%
—
100%
—%
(3)
(3)%
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue
Revenue by Source
Revenue
Marketplace subscription
Advertising and other
Total
Percentage of total revenue:
Marketplace subscription
Advertising and other
Total
Year Ended
December 31,
Change
2017
2016
(dollars in thousands)
Amount
%
$ 282,664
34,197
$ 316,861
$ 171,302
26,839
$ 198,141
$ 111,362
7,358
$ 118,720
65%
27
60%
89%
11
100%
86%
14
100%
45
Overall revenue increased $118.7 million, or 60%, in the year ended December 31, 2017 compared to the year ended
December 31, 2016. Marketplace subscription revenue increased by 65% while advertising and other revenue grew by 27%.
Marketplace subscription revenue increased $111.4 million in the year ended December 31, 2017 compared to the year
ended December 31, 2016, and represented 89% of total revenue in 2017 compared to 86% of total revenue in 2016. This
increase in marketplace subscription revenue was attributable primarily to a 30% growth in the number of U.S. and
International paying dealers, to 27,670 as of December 31, 2017 from 21,301 as of December 31, 2016, and to a 16% growth
in our AARSD for U.S. dealers to $12,055 in the year ended December 31, 2017 from $10,383 in the year ended December
31, 2016. We believe that this increase in paying dealers was driven by the overall growth in the number of unique users to
our website and mobile applications and the efforts of our sales and marketing teams to subscribe dealers to our Enhanced
and Featured Listing paid products.
Advertising and other revenue increased $7.4 million in the year ended December 31, 2017 compared to the year ended
December 31, 2016, and represented 11% of total revenue in 2017 compared to 14% of total revenue in 2016. The increase in
advertising and other revenue was due primarily to a 16% increase in the number of impressions delivered in 2017 and a 28%
increase in the average price per thousand impressions in 2017 compared to 2016. The increase was also partially offset by a
reduction in other advertising revenue.
Revenue by Segment
Revenue
United States
International
Total
Percentage of total revenue:
United States
International
Total
Year Ended
December 31,
Change
2017
2016
(dollars in thousands)
Amount
%
$ 307,472
9,389
$ 316,861
$ 195,824
2,317
$ 198,141
$ 111,648
7,072
$ 118,720
57%
305
60%
97%
3
100%
99%
1
100%
U.S. revenue increased $111.6 million, or 57%, in the year ended December 31, 2017 compared to the year ended
December 31, 2016, due primarily to a 23% increase in the number of U.S. paying dealers and a 16% increase in AARSD for
U.S. dealers.
International revenue increased $7.1 million in the year ended December 31, 2017 compared to the year ended
December 31, 2016, due primarily to an increase in the number of International paying dealers. International paying dealers
grew to 2,548 at December 31, 2017 from 952 at December 31, 2016.
Cost of Revenue
Cost of revenue
Percentage of total revenue
Year Ended
December 31,
Change
2017
2016
(dollars in thousands)
Amount
%
$
17,609
$
6%
9,575
$
5%
8,034
84%
46
Cost of revenue increased $8.0 million, or 84%, in the year ended December 31, 2017 compared to the year ended
December 31, 2016. The increase was due primarily to a $2.4 million increase in employee-related costs for our customer
support team to support the growth in customers, a $1.9 million increase in fees related to provisioning advertising campaigns
on our websites, a $1.3 million increase in costs related to connecting consumers with dealers through a variety of methods,
including phone calls, email, and managed text and chat, a $0.9 million increase in costs to improve the content on our
website, a $0.8 million increase for data center and hosting costs, and a $0.5 million increase in amortization of website
development costs.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing
Percentage of total revenue
Year Ended
December 31,
Change
2017
2016
(dollars in thousands)
Amount
%
$ 236,165
$ 154,125
82,040
53%
74%
$
78%
Sales and marketing expenses increased $82.0 million, or 53%, in the year ended December 31, 2017 compared to the
year ended December 31, 2016. This increase was due primarily to an increase in advertising costs of $61.0 million, a $12.8
million increase in salaries, commissions, and related expenses due to our increased revenue and a 21% increase in
headcount, a $2.0 million increase in expenses related to marketing events and activities, a $1.7 million increase in consulting
fees, a $1.0 million increase in rent due to the expansion of our office space, and a $0.8 million increase in software
subscriptions. The increase for the year ended December 31, 2017 was also due to a $1.7 million increase in stock-based
compensation expense primarily due to the recognition of expense related to RSUs with a performance condition satisfied on
the effectiveness of the registration statement for our IPO. Although the performance-based vesting condition was satisfied,
under the terms of the awards, the settlement of such vested RSUs and the issuance of common stock with respect to such
vested RSUs will occur on April 10, 2018, one hundred eighty-one days after the satisfaction of the performance condition.
Product, Technology, and Development Expenses
Product, technology, and development
Percentage of total revenue
Year Ended
December 31,
Change
2017
2016
(dollars in thousands)
Amount
%
$
22,470
$
7%
11,453
$
6%
11,017
96%
Product, technology, and development expenses increased $11.0 million, or 96%, in the year ended December 31, 2017
compared to the year ended December 31, 2016. The increase was due primarily to an increase in salaries and related
employment expenses due to a 68% increase in headcount to support our growth and product innovations. The increase for
the year ended December 31, 2017 was also due to a $1.7 million increase in stock-based compensation expense primarily
due to the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of the
registration statement for our IPO.
General and Administrative Expenses
General and administrative
Percentage of total revenue
Year Ended
December 31,
Change
2017
2016
(dollars in thousands)
Amount
%
$
22,688
$
7%
12,783
$
6%
9,905
77%
47
General and administrative expenses increased $9.9 million, or 77%, in the year ended December 31, 2017 compared
to the year ended December 31, 2016. The change primarily reflected an increase of $5.0 million of salaries and employee-
related costs as a result of our 81% increase in headcount as we continued to grow our business and require additional
personnel to support our expanded operations, a $1.4 million increase in payment processing and billing costs due to
increased customer transactions with higher billings, a $1.1 million increase in external consulting and insurance fees driven
by costs incurred to comply with public company requirements, and a $0.6 million increase in bad debt expense. The increase
for the year ended December 31, 2017 was also due to a $1.3 million increase in stock-based compensation expense primarily
due to the recognition of expense related to RSUs with a performance condition satisfied on the effectiveness of the
registration statement for our IPO.
Depreciation and Amortization Expenses
Depreciation and amortization
Percentage of total revenue
Year Ended
December 31,
Change
2017
2016
(dollars in thousands)
Amount
%
$
2,655
$
1%
1,634
$
1%
1,021
62%
Depreciation and amortization expenses increased $1.0 million, or 62%, in the year ended December 31, 2017
compared to the year ended December 31, 2016, due primarily to increased depreciation of additional leasehold
improvements.
Other Income, net
Year Ended
December 31,
Other income, net
Percentage of total revenue
2017
$
563 $
—
Amount
2016
(dollars in thousands)
374 $
—
Change
%
189
51%
Other income, net increased $0.2 million, or 51%, in the year ended December 31, 2017 compared to the year ended
December 31, 2016, due primarily to the investment of cash in certificates of deposit and money market funds arising from
our increased cash from operations.
Provision for Income Taxes
Provision for income taxes
Percentage of total revenue
Year Ended
December 31,
Change
2017
2016
(dollars in thousands)
Amount
%
$
2,638
$
1%
2,448
$
1%
190
8%
The provision for income taxes increased $0.2 million, or 8%, in the year ended December 31, 2017 compared to the
year ended December 31, 2016. In 2017, we recorded a tax provision on earnings with an effective tax rate of 16.7%
compared to 27.4% in 2016. Our lower effective tax rate during 2017 is primarily the result of discrete items recorded
including IPO deductible costs and higher excess tax deductions relating to stock-based compensation awards. Our lower
effective tax rate during 2017 was also driven by higher R&D tax credits.
48
Income (Loss) from Operations by Segment
United States
International
Total
Percentage of segment revenue:
United States
International
NM — Not Meaningful
Year Ended
December 31,
Change
2017
2016
(dollars in thousands)
Amount
%
$
$
$
41,586
(26,312)
$
15,274
$
27,461
(18,890)
$
8,571
14,125
(7,422)
6,703
51%
(39)
78%
14%
NM
14%
NM
U.S. income from operations increased $14.1 million, or 51%, in the year ended December 31, 2017 compared to the
year ended December 31, 2016. This increase was due to an increase in revenue of $111.6 million, offset in part by the
increases in cost of revenue of $6.5 million and operating expenses of $91.0 million.
International loss from operations increased $7.4 million in the year ended December 31, 2017 compared to the year
ended December 31, 2016. The increase in International loss from operations reflects our continued investment into
international markets and expansion into new countries.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue
Revenue by Source
Revenue
Marketplace subscription
Advertising and other
Total
Percentage of total revenue:
Marketplace subscription
Advertising and other
Total
Year Ended
December 31,
Change
2016
2015
(dollars in thousands)
Amount
%
$ 171,302
26,839
$ 198,141
$
$
75,142
23,446
98,588
$
$
96,160
3,393
99,553
128%
14
101%
86%
14
100%
76%
24
100%
Overall revenue increased by $99.6 million, or 101%, in the year ended December 31, 2016 compared to the year
ended December 31, 2015. Marketplace subscription revenue increased by 128% while advertising and other revenue grew
by 14%.
Marketplace subscription revenue increased $96.2 million in the year ended December 31, 2016 compared to the year
ended December 31, 2015, and represented 86% of total revenue in 2016 compared to 76% of total revenue in 2015. This
increase in marketplace subscription revenue was attributable primarily to a 73% growth in the number of paying dealers, to
21,301 as of December 31, 2016 from 12,329 as of December 31, 2015, and to an 18% growth in our AARSD to $10,383 in
the year ended December 31, 2016 from $8,835 in the year ended December 31, 2015. We believe that this increase in paying
dealers was driven by the overall growth in the number of unique users to our website and mobile applications and the efforts
of our sales and marketing teams to convert Basic Listing dealers to Enhanced and Featured Listing paying dealers.
49
Advertising and other revenue increased $3.4 million in the year ended December 31, 2016 compared to the year ended
December 31, 2015, and represented 14% of total revenue in 2016 compared to 24% of total revenue in 2015. The increase in
advertising and other revenue was due primarily to a 53% increase in the number of impressions in 2016 compared to 2015.
This increase was partially offset by a 19% decrease in the average price per thousand impressions in 2016 compared to
2015. The increase was also partially offset by a reduction in other advertising revenue.
Revenue by Segment
Revenue
United States
International
Total
Percentage of total revenue:
United States
International
Total
NM — Not Meaningful
Year Ended
December 31,
Change
2016
2015
(dollars in thousands)
Amount
%
$ 195,824
2,317
$ 198,141
$
$
98,566
22
98,588
$
$
97,258
2,295
99,553
99%
NM
101%
99%
1
100%
100%
—
100%
U.S. revenue increased $97.3 million, or 99%, in the year ended December 31, 2016 compared to the year ended
December 31, 2015, due primarily to a 66% increase in the number of U.S. paying dealers.
International revenue increased $2.3 million in the year ended December 31, 2016 compared to the year ended
December 31, 2015. The first international paying dealers began their subscriptions in the fourth quarter of 2015 and grew to
952 paying dealers at December 31, 2016.
Cost of Revenue
Cost of revenue
Percentage of total revenue
Year Ended
December 31,
Change
2016
2015
(dollars in thousands)
Amount
%
$
9,575
$
5%
4,234
$
4%
5,341
126%
Cost of revenue increased $5.3 million, or 126%, in the year ended December 31, 2016 compared to the year ended
December 31, 2015. The increase was due primarily to a $1.7 million increase in employee-related costs for our customer
support team to support the growth in customers, a $1.5 million increase in fees related to provisioning advertising campaigns
on our websites, a $1.1 million increase in costs related to connecting consumers with dealers through a variety of methods,
including phone calls, email, and managed text and chat, a $0.4 million increase for data center and hosting costs, a
$0.3 million increase in costs to improve the content on our website, and a $0.2 million increase in amortization of website
development costs.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing
Percentage of total revenue
Year Ended
December 31,
Change
2016
2015
(dollars in thousands)
Amount
%
$ 154,125
$
78%
81,877
$
83%
72,248
88%
50
Sales and marketing expenses increased $72.2 million, or 88%, in the year ended December 31, 2016 compared to the
year ended December 31, 2015. This increase was due primarily to an increase in advertising costs of $50.3 million, a
$16.0 million increase in salaries, commissions, and related expenses due to our increased revenue and an 84% increase in
headcount, a $1.3 million increase in expenses related to marketing events and activities, a $0.9 million increase in rent due
to the expansion of our office space, and a $0.8 million increase in consulting fees.
Product, Technology, and Development Expenses
Product, technology, and development
Percentage of total revenue
Year Ended
December 31,
Change
2016
2015
(dollars in thousands)
Amount
%
$
11,453
$
6%
8,235
$
8%
3,218
39%
Product, technology, and development expenses increased $3.2 million, or 39%, in the year ended December 31, 2016
compared to the year ended December 31, 2015. The increase was due primarily to an increase in salaries and related
employment expenses due to our 66% increase in headcount to support our growth and product innovations.
General and Administrative Expenses
General and administrative
Percentage of total revenue
Year Ended
December 31,
Change
2016
2015
(dollars in thousands)
Amount
%
$
12,783
$
6%
5,801
$
6%
6,982
120%
General and administrative expenses increased $7.0 million, or 120%, in the year ended December 31, 2016 compared
to the year ended December 31, 2015. The change primarily reflected an increase of $2.3 million of salaries and
employee-related costs as a result of our 157% increase in headcount as we continued to grow our business and required
additional personnel to support our expanded operations, a $1.5 million increase in payment processing and billing costs due
to increased customer transactions from higher revenue, a $1.5 million increase in legal fees for litigation and other services,
and a $0.5 million increase from external consulting fees including audit and tax services.
Depreciation and Amortization Expenses
Depreciation and amortization
Percentage of total revenue
Year Ended
December 31,
Change
2016
2015
(dollars in thousands)
Amount
%
$
1,634
$
1%
969
$
1%
665
69%
Depreciation and amortization expenses increased $0.7 million, or 69%, in the year ended December 31, 2016
compared to the year ended December 31, 2015, due primarily to increased depreciation and amortization of additional
leasehold improvements.
Other Income (Expense)
Other income (expense), net
Percentage of total revenue
NM — Not Meaningful
Year Ended
December 31,
2016
2015
Amount
(dollars in thousands)
Change
%
$
374 $
—
(12) $
—
386
NM
51
Other income (expense), increased $0.4 million in the year ended December 31, 2016 compared to the year ended
December 31, 2015, due primarily to the investment of cash in certificates of deposit and money market funds due to our
increased cash from operations and the issuances of Preferred Stock in financing transactions.
Provision for (Benefit from) Income Taxes
Year Ended
December 31,
2016
2015
(dollars in thousands)
Amount
Change
%
Provision for (benefit from) income taxes
Percentage of total revenue
$
2,448
$
1%
(904)
$
(1)%
3,352
NM
NM — Not Meaningful
The provision for income taxes increased $3.4 million in the year ended December 31, 2016 compared to the year
ended December 31, 2015. In 2016, we recorded a tax provision on earnings with an effective tax rate of 27.4%. In 2015, we
recorded a tax benefit of $0.9 million, or 35.6% effective tax benefit, as a result of our taxable loss position for that period.
The Company’s effective tax rate for the year ended December 31, 2016 is lower than the U.S. federal statutory rate primarily
due to research and development income tax credits. The Company anticipates credits, primarily related to research and
development tax credits, to continue to impact the effective tax rate in the future.
Income (Loss) from Operations by Segment
United States
International
Total
Percentage of segment revenue:
United States
International
NM — Not Meaningful
Year Ended December 31,
Change
2016
2015
(dollars in thousands)
Amount
%
$
$
$
27,461
(18,890)
$
8,571
$
637
(3,165)
(2,528) $
26,824
(15,725)
11,099
NM
NM
NM
14%
NM
1%
NM
U.S. income from operations increased $26.8 million in the year ended December 31, 2016 compared to the year ended
December 31, 2015. This increase was due to an increase in revenue of $97.3 million, offset in part by the increases in cost of
revenue of $4.3 million and operating expenses of $66.2 million.
International loss from operations increased $15.7 million in the year ended December 31, 2016 compared to the year
ended December 31, 2015. The increase in International loss from operations reflected our investment into international
markets and expansion into new countries.
52
Liquidity and Capital Resources
Cash, Cash Equivalents and Investments
At December 31, 2017 and 2016, our principal sources of liquidity were cash and cash equivalents of $87.7 million and
$29.5 million, respectively and investments in certificates of deposit with terms of greater than 90 days but less than one year
of $50.0 million and $44.8 million, respectively.
Sources and Uses of Cash
Our cash flows from operating, investing, and financing activities, as reflected in the consolidated statements of cash
flows, are summarized in the following table:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Impact of foreign currency on cash
Net increase (decrease) in cash, cash equivalents, and
restricted cash
2017
Year Ended
December 31,
2016
(in thousands)
2015
$
25,691 $
(12,598)
44,780
159
20,004 $
(51,992)
690
(45)
12,915
(7,615)
49,965
—
$
58,032 $
(31,343) $
55,265
Our operations were initially financed by a capitalization of approximately $5 million from external capital and
subsequently financed primarily by operating profits and sales of capital stock. We generated cash from operating activities
of $25.7 million during 2017, $20.0 million during 2016 and $12.9 million during 2015, and we expect to generate cash from
operations for the foreseeable future.
In addition, on October 16, 2017, we closed our initial public offering, in which we issued and sold 3,205,000 shares of
our Class A common stock at a public offering price of $16.00 per share for aggregate gross proceeds of $51.3 million. We
received $43.2 million in net proceeds after deducting $3.6 million of underwriting discounts and commissions and $4.5
million in offering costs.
We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months
from the date of the filing of this Annual Report on Form 10-K. However, our future capital requirements will depend on
many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the support of our
product, technology, and development efforts, the timing and extent of our investment in international markets and our
investment in mergers and acquisition opportunities. To the extent that existing cash, cash equivalents, and investments and
cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or
private equity or debt financing. Additional funds may not be available on terms favorable to us, or at all.
Operating Activities
Cash provided by operating activities during 2017 was $25.7 million, due primarily to net income of $13.2 million,
non-cash items including $5.0 million of stock-based compensation expense and $3.8 million of depreciation and
amortization, a $6.2 million increase in accounts payable, and a $5.2 million increase in accrued expenses. These increases
were partially offset by a $7.0 million increase in accounts receivable and a $2.3 million increase in prepaid expenses and
other assets.
Cash provided by operating activities during 2016 was $20.0 million. This was due primarily to our net income of
$6.5 million, an increase in accounts payable of $5.8 million, primarily related to higher marketing costs, an increase in
accrued expenses of $4.1 million due to higher accrued bonuses and commissions, an increase of $1.9 million in deferred
revenue related to customer prepayments, and an increase in deferred rent of $1.9 million related to new office space. These
increases were partially offset by a $2.2 million increase in prepaid expenses primarily related to income tax payments and a
$1.4 million increase in accounts receivable due to revenue growth.
Cash provided by operating activities during 2015 was $12.9 million. This was primarily due to increases in accounts
payable, deferred rent, and accrued expenses of $6.1 million, $4.7 million, and $2.5 million, respectively.
53
Investing Activities
Our investing activities consist primarily of purchases of property and equipment, capitalized website development
costs, and short-term investments.
Cash used in investing activities of $12.6 million during 2017 was due to $50.0 million of investments in certificates of
deposit, net of maturities of $44.8 million, $5.2 million of investments in furniture, computer equipment, and leasehold
improvements, and $2.2 million related to the capitalization of website development costs.
Cash used in investing activities of $52.0 million during 2016 resulted primarily from $59.8 million of investments in
certificates of deposit, net of maturities of $15.0 million, $5.8 million of investments in furniture, computer equipment, and
leasehold improvements, and $1.4 million related to the capitalization of website development costs.
Cash used in investing activities of $7.6 million during 2015 resulted primarily from $6.4 million of investments in
furniture, computer equipment, and leasehold improvements and $1.3 million related to the capitalization of website
development costs.
Financing Activities
Cash provided by financing activities of $44.8 million during 2017 primarily reflects $44.4 million of initial public
offering proceeds, net of offering costs and $0.4 million related to the proceeds from the exercise of stock options.
Cash provided by financing activities of $0.7 million during 2016 primarily reflects $59.7 million of proceeds from the
issuance of Series E Preferred Stock, net of issuance costs, and a tax benefit of $0.8 million related to the exercise of stock
options, which was partially offset by the $60.0 million used for the repurchase of previously issued Preferred Stock,
common stock, vested options, and restricted stock units.
Cash provided by financing activities of $50.0 million during 2015 primarily reflects $67.9 million of proceeds from
the issuance of Series D Preferred Stock, net of issuance costs. The proceeds were partially offset by the $18.0 million used
for the repurchase of previously issued Preferred Stock, common stock and vested options.
Contractual Obligations and Known Future Cash Requirements
Our lease obligations consist of various leases for office space in Massachusetts, Detroit and Dublin with various lease
terms through January 2024. The terms of our Massachusetts lease agreements provide for rental payments that increase on
an annual basis. We recognize rent expense on a straight-line basis over the lease period. We do not have any debt or material
capital lease obligations as of December 31, 2017 and all of our property, equipment, and software have been purchased with
cash, with the exception of $0.5 million of unpaid property and equipment costs at December 31, 2017. We have no material
long-term purchase obligations outstanding with any vendors or third parties.
Set forth below is information concerning our known contractual obligations at December 31, 2017 that are fixed and
determinable.
Operating lease obligations
Total contractual obligations
Off-Balance Sheet Arrangements
Total
Less than
1 year
23 years
(in thousands)
45 years
More than
5 years
$
$
40,279 $
40,279 $
7,363 $
7,363 $
15,347 $
15,347 $
15,232 $
15,232 $
2,337
2,337
As of December 31, 2017 and 2016, we did not have any off-balance sheet arrangements, except for operating leases
entered into in the normal course of business as discussed above.
54
Critical Accounting Policies and Significant Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates
are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.
Our actual results could differ from these estimates.
We believe that of our significant accounting policies, which are described in Note 2 to the notes to our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K, the following accounting policies involve a
greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully
understanding and evaluating our consolidated financial condition and results of our operations.
Revenue Recognition
Our revenue is derived from two primary sources: marketplace subscription revenue, which consists of listing and
display advertising subscriptions from dealers, and advertising and other revenue, which consists primarily of display
advertising revenue from auto manufacturers and other auto-related brand advertisers.
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an
arrangement; (2) the service has been provided to the customer; (3) the collection of fees is reasonably assured; and (4) the
amount of fees to be paid by the customer is fixed or determinable.
We offer two types of paid marketplace listing products to dealers, Enhanced or Featured Listing, which require a
subscription under subscription contracts with initial terms ranging between one month to one year. Contracts for customers
generally auto-renew on a monthly basis and are cancellable by dealers with 30-days’ advance notice at the end of the current
term. In addition, the arrangement allows dealers to access a dashboard to track sales leads and manage their accounts, which
we refer to as the Dealer Dashboard. Customers do not have the right to take possession of our software. We recognize
revenue in accordance with Accounting Standards Codification, or, ASC, 605, Revenue Recognition. We recognize revenue
on a monthly basis as revenue is earned. These contracts generally provide the customer with the ability to list an unlimited
amount of automobile inventory on our website.
In addition to listing their inventory in our marketplace, we periodically enter into multiple-element service
arrangements that provide dealers with Enhanced or Featured Listing products, as well as other advertising and customer
acquisition products including display advertising, which appears in our marketplace and on other sites on the internet and
requires a paid subscription under contracts with initial terms ranging from one month to one year. Contracts for customers
generally auto-renew on a monthly basis and are cancellable by dealers with 30-days’ advance notice at the end of the current
term.
We assess arrangements with multiple deliverables under Financial Accounting Standards Board, or FASB,
Accounting Standards Update, or ASU, No. 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Revenue
Arrangements — a Consensus of the FASB Emerging Issues Task Force (ASU 2009-13), which amended the previous
multiple-element arrangements accounting guidance. Pursuant to ASU 2009-13, in order to treat deliverables in a
multiple-element arrangement as separate units of accounting, the deliverables must have stand-alone value upon delivery. If
the deliverables have stand-alone value upon delivery, we account for each deliverable separately. We have concluded that
each element in the arrangement has stand-alone value as the individual services can be sold separately. In addition, there is
no right of refund once a service has been delivered. Therefore, we have concluded each element of the arrangement is a
separate unit of accounting. While these arrangements are considered multiple-element arrangements, the recognition of the
units of accounting follow a consistent ratable recognition given the pattern over which services are provided.
Advertising and other revenue consists primarily of non-dealer display advertising revenue from auto manufacturers
and other auto-related brand advertisers sold on a cost per thousand impressions, or CPM, basis. Impressions are the number
of times an advertisement is loaded on a web page. Pricing is primarily based on advertisement size and position on our
websites, and fees are generally billed monthly. We recognize such revenue as impressions are delivered.
We do not provide minimum impression guarantees or other types of minimum guarantees in our contracts with
customers.
55
We sell advertising directly to auto manufacturers and other auto-related brand advertisers as well as indirectly through
revenue sharing arrangements with advertising exchange partners. The advertising we sell is not subject to revenue sharing
arrangements. Company-sold advertising revenue is recognized based on the gross amount charged to the advertiser.
Partner-sold advertising revenue is recognized based on the net amount of revenue received from the content partners.
Revenue from advertising sold directly by us to auto manufacturers and other auto-related brand advertisers is recorded
on a gross basis predominately because we are the primary obligor responsible for fulfilling advertisement delivery, including
the acceptability of the services delivered. We enter into contractual arrangements directly with advertisers, and are directly
responsible for the fulfillment of the contractual terms and any remedy for issues with such fulfillment. We also have latitude
in establishing the selling price with the advertiser, as we sell advertisements at a rate determined at our sole discretion.
Advertising revenue subject to revenue sharing agreements between us and advertising exchange partners is recognized
based on the net amount of revenue received from the partner predominately because the advertising partner, and not us, is
the primary obligor responsible for fulfillment, including the acceptability of the services delivered. In partner-sold
advertising arrangements, the advertising partner has a direct contractual relationship with the advertiser. There is no
contractual relationship between us and the advertiser for partner-sold transactions. When an advertising exchange partner
sells advertisements, the partner is responsible for fulfilling the advertisements, and accordingly, we have determined the
advertising partner is the primary obligor. Additionally, we do not have any latitude in establishing the price with the
advertiser for partner-sold advertising.
Revenue is presented net of any taxes collected from customers.
We establish sales allowances at the time of revenue recognition based on our history of adjustments and credits
provided to our customers. Sales allowances relate primarily to credits issued for service interruption. In assessing the
adequacy of the sales allowance, we evaluate our history of adjustments and credits made through the date of the issuance of
the financial statements. Estimated sales adjustments and credits and ultimate losses may vary from actual results which
could be material to the financial statements; however, to date, actual sales allowances have been materially consistent with
our estimates. Sales allowances are recorded as a reduction to revenue in the consolidated statements of operations.
Website and Software Development Costs
We capitalize certain costs associated with the development of our websites and internal-use software products after the
preliminary project stage is complete and until the software is ready for its intended use. Research and development costs
incurred during the preliminary project stage or costs incurred for data conversion activities, training, maintenance, and
general and administrative or overhead costs are expensed as incurred. Capitalization begins when the preliminary project
stage is complete, management authorizes and commits to the funding of the software project with the required authority, it is
probable the project will be completed, the software will be used to perform the functions intended and certain functional and
quality standards have been met. Qualified costs incurred during the operating stage of our software applications relating to
upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs
that cannot be separated between maintenance of, and minor upgrades and enhancements to, internal-use software are
expensed as incurred.
Capitalized website and software development costs are amortized on a straight-line basis over their estimated useful
life of three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment
whenever events or changes in circumstances occur that could impact the recoverability of these assets.
During the years ended December 31, 2017 and 2016, we capitalized $2.2 million and $1.4 million of website
development costs, respectively. We recorded amortization expense associated with our capitalized website development
costs of $0.8 million, $0.3 million and $0.2 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Income Taxes
We account for income taxes in accordance with the liability method. Under this method, deferred tax assets and
liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and
liabilities using statutory rates. In addition, this method requires 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.
56
We account for uncertain tax positions recognized in the consolidated financial statements by prescribing a
more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. Interest and penalties, if applicable, related to uncertain tax positions would be recognized as a
component of income tax expense. We have no recorded liabilities for uncertain tax positions as of December 31, 2017 or
2016.
Stock-Based Compensation
We recognize stock-based compensation for stock-based awards, including stock options and restricted stock units, or
RSUs, based on the estimated fair value of the awards. Through the period ended December 31, 2016, we applied an
estimated forfeiture rate in determining the total stock-based compensation expense to record for the period. On January 1,
2017, we adopted ASU 2016-09 and elected to account for forfeitures when they occur, on a modified retrospective basis.
The cumulative effect adjustment related to this accounting policy change for forfeitures was not material. We recognize
compensation expense for service-based awards on a straight-line basis over the requisite service period for each separate
vesting portion of the award, with the amount of compensation expense recognized at any date at least equaling the portion of
the grant-date fair value of the award that is vested at that date.
For RSUs issued under our stock-based compensation plans, the fair value of each grant is calculated based on the
estimated fair value of our common stock on the date of grant. We estimate the fair value of most stock option awards on the
date of grant using the Black-Scholes option-pricing model. Certain stock option awards that have an exercise price that is
materially above the current estimated fair market value of our common stock are considered to be “deeply out of the
money,” and are valued at the date of grant using a binomial lattice option-pricing model. The fair value of each option grant
issued under our stock-based compensation plans that is not considered “deeply out of the money” was estimated using the
Black-Scholes option-pricing model.
RSUs granted prior to our IPO were subject to both a service-based vesting and a performance-based vesting condition
achieved upon a liquidity event, defined as either a change of control or an initial public offering of our common stock, or
IPO. Prior to October 11, 2017, we had not recognized compensation cost related to stock-based awards with these
performance conditions as the liquidity event had not occurred. The Securities and Exchange Commission’s declaration of
effectiveness of our registration statement on Form S-1 on October 11, 2017 satisfied the liquidity event performance
condition. The cumulative unrecognized stock-based compensation expense related to these awards was $2.5 million through
October 11, 2017.
We determined the assumptions for the Black-Scholes option-pricing model as discussed below. Each of these inputs is
subjective and generally requires significant judgment to determine.
(cid:129)
(cid:129)
(cid:129)
(cid:129)
Fair Value of Our Common Stock. Prior to our IPO, our stock was not publicly traded, and therefore we estimated
the fair value of our common stock through obtaining contemporaneous third-party valuations. Subsequent to the
IPO, we determine the fair value of our common stock based on the closing share price on the date of grant.
Expected Term. The expected term represents the period that the stock-based awards are expected to be
outstanding. The expected term of stock options granted has been determined using the simplified method, which
uses the midpoint between the vesting date and the contractual term.
Risk-Free Interest Rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of
grant for zero-coupon U.S. Treasury constant maturity notes with terms approximately equal to the stock-based
award’s expected term.
Expected Volatility. Because we did not have a trading history of our common stock prior to our IPO, the expected
volatility was derived from the average historical stock volatilities of several public companies within our industry
that we consider to be comparable to our business over a period equivalent to the expected term of the stock-based
awards.
(cid:129) Dividend Rate. The expected dividend is zero as we have not paid and do not anticipate paying any dividends in
the foreseeable future.
If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation for future
awards may differ materially compared with the awards granted previously.
57
The weighted average fair values of options granted during the years ended December 31, 2016 and 2015 were $0.90
and $0.46, respectively. No options were granted during 2017. The weighted average assumptions utilized to determine the
fair value of options granted are presented in the following table:
Expected dividend yield
Expected volatility
Risk–free interest rate
Expected term (in years)
Emerging Growth Company Status
2016
2015
—
49%
1.57%
6.07
—
64%
1.73%
6.05
We are an “emerging growth company,” as defined in Jumpstart Our Business Startups Act of 2012, or the JOBS Act,
and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not emerging growth companies. We may take advantage of these exemptions until we are no longer an
emerging growth company. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of
the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. We
have elected to use the extended transition period for complying with new or revised accounting standards; and as a result of
this election, our financial statements may not be comparable to companies that comply with public company effective dates.
We may take advantage of these exemptions up until the last day of the fiscal year following the fifth anniversary of our IPO
or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company
if we have more than $1.07 billion in annual revenue, we have more than $700.0 million in market value of our stock held by
non-affiliates (and we have been a public company for at least 12 months and have filed one annual report on Form 10-K) or
we issue more than $1.0 billion of non-convertible debt securities over a three-year period.
Recent Accounting Pronouncements
For information on recent accounting pronouncements, see “Recent Accounting Pronouncements” in the notes to the
consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
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 related to changes in interest rates.
Interest Rate Risk
We did not have any long-term borrowings as of December 31, 2017 or as of December 31, 2016.
We had cash, cash equivalents, and investments of $137.7 million and $74.3 million at December 31, 2017 and
December 31, 2016, respectively, which consist of bank deposits, money market funds and certificates of deposit with
maturity dates ranging from nine to twelve months. Such interest-earning instruments carry a degree of interest rate risk. To
date, fluctuations in interest income have not been significant for us. Due to the short-term nature of our investment portfolio,
we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our
portfolio, and, accordingly, we do not expect our operating results or cash flows to be materially affected by a sudden change
in market interest rates.
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.
58
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations to
date, including during the year ended December 31, 2017. 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.
Foreign Currency Exchange Risk
Historically, because our operations and sales have been primarily in the United States, we have not faced any
significant foreign currency risk. As of December 31, 2017 and December 31, 2016, we have foreign currency exposures in
the British Pound and the Euro, although such exposure is not significant. We do not believe a 10% change in the relative
value of these currencies on December 31, 2017 would have had a material effect on our results of operations or financial
condition.
Our foreign subsidiaries have intercompany accounts that are eliminated upon consolidation, and these accounts expose
us to foreign currency exchange rate fluctuations. Exchange rate fluctuations on short-term intercompany accounts are
recorded in our consolidated statements of operations under other income (expense).
As we expand internationally, our risks associated with fluctuation in currency rates will become greater, and we will
continue to reassess our approach to managing these risks.
59
Item 8. Financial Statements and Supplementary Data.
CarGurus, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm ........................................................................................
Consolidated Balance Sheets as of December 31, 2017 and 2016 .............................................................................
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016, and
Page No.
61
62
2015 .......................................................................................................................................................................
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016, and
2015 ......................................................................................................................................................................
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years Ended
December 31, 2017, 2016, and 2015 .......................................................................................................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015..........................
Notes to Consolidated Financial Statements ................................................................................................................
63
64
65
67
68
60
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of CarGurus, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CarGurus, Inc. (the Company) as of December 31, 2017
and 2016, the related consolidated statements of operations, comprehensive income, convertible preferred stock and
stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2017, and the
related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in
conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Boston, Massachusetts
March 1, 2018
61
CarGurus, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
Current assets
Cash and cash equivalents
Investments
Accounts receivable, net of allowance for doubtful accounts of $494 and
$164, respectively
Prepaid income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Restricted cash
Deferred tax assets
Other long–term assets
Total assets
Liabilities, convertible preferred stock, and stockholders’ equity (deficit)
Current liabilities
Accounts payable
Accrued expenses
Deferred revenue
Deferred rent
Total current liabilities
Deferred rent, net of current portion
Deferred tax liabilities
Other non–current liabilities
Total liabilities
Commitments and contingencies (Note 6)
Convertible preferred stock
Stockholders’ equity:
$
$
$
Class A common stock, $0.001 par value; 500,000,000 shares authorized;
77,884,754 and 14,022,132 shares issued and outstanding at
December 31, 2017 and 2016, respectively
Class B common stock, $0.001 par value; 100,000,000 shares authorized;
28,226,104 and 28,044,264 shares issued and outstanding at
December 31, 2017 and 2016, respectively
Additional paid–in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Total stockholders’ equity (deficit)
Total liabilities, convertible preferred stock, and stockholders’ equity (deficit)
$
At December 31,
2017
2016
87,709 $
50,000
12,577
1,533
5,385
157,204
16,563
1,843
825
159
176,594 $
23,908 $
13,588
4,305
1,165
42,966
5,648
—
955
49,569
29,476
44,774
6,653
1,815
2,789
85,507
12,780
2,044
—
—
100,331
16,426
8,384
3,330
910
29,050
5,673
292
590
35,605
—
132,698
78
14
28
185,190
(58,499)
228
127,025
176,594 $
28
3,714
(71,698)
(30)
(67,972)
100,331
The accompanying notes are an integral part of these consolidated financial statements.
62
CarGurus, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share data)
Revenue
Cost of revenue(1)
Gross profit
Operating expenses:
Sales and marketing
Product, technology, and development
General and administrative
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other income (expense), net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Reconciliation of net income (loss) to net income (loss)
attributable to common stockholders:
Net income (loss)
Deemed dividend to preferred stockholders
Net income attributable to participating securities
Net income (loss) attributable to common stockholders — basic
Net income (loss)
Deemed dividend to preferred stockholders
Net income attributable to participating securities
Net income (loss) attributable to common stockholders — diluted
Net income (loss) per share attributable to common
stockholders: (Note 9)
Basic
Diluted
Weighted–average number of shares of common stock
used in computing net income (loss) per share
attributable to common stockholders:
Basic
Diluted
Year Ended December 31,
2016
2015
2017
316,861 $
17,609
299,252
236,165
22,470
22,688
2,655
283,978
15,274
563
15,837
2,638
13,199 $
13,199 $
—
(6,098)
7,101 $
13,199 $
—
(5,829)
7,370 $
198,141 $
9,575
188,566
154,125
11,453
12,783
1,634
179,995
8,571
374
8,945
2,448
6,497 $
6,497 $
(32,087)
—
(25,590) $
6,497 $
(32,087)
—
(25,590) $
98,588
4,234
94,354
81,877
8,235
5,801
969
96,882
(2,528)
(12)
(2,540)
(904)
(1,636)
(1,636)
(15,930)
—
(17,566)
(1,636)
(15,930)
—
(17,566)
0.13 $
0.12 $
(0.58) $
(0.58) $
(0.41)
(0.41)
$
$
$
$
$
$
$
$
55,835,265
60,637,584
44,138,922
44,138,922
43,141,236
43,141,236
(1)
Includes depreciation and amortization expense for the years ended December 31, 2017, 2016, and 2015 of $1,140,
$438, and $153, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
63
CarGurus, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Net income (loss)
Other comprehensive income (loss):
Foreign currency translation adjustment
Comprehensive income (loss)
Year Ended December 31,
2017
2016
2015
13,199 $
6,497 $
(1,636)
258
13,457 $
(30)
6,467 $
—
(1,636)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
64
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T
CarGurus, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization
Unrealized currency loss on foreign denominated transactions
Deferred taxes
Provision for doubtful accounts
Stock–based compensation expense
Excess tax benefit related to exercise of stock options
Changes in operating assets and liabilities:
Accounts receivable, net
Prepaid expenses, prepaid income taxes, and other assets
Accounts payable
Accrued expenses
Deferred revenue
Deferred rent
Other non–current liabilities
Net cash provided by operating activities
Investing Activities
Purchases of property and equipment
Capitalization of website development costs
Investments in certificates of deposit
Maturities of certificates of deposit
Net cash used in investing activities
Financing Activities
Initial public offering proceeds, net of offering costs paid of $3,308
Proceeds from issuance of preferred stock, net of offering costs
Proceeds from exercise of unit options and stock options
Excess tax benefit related to exercise of stock options
Cash paid for repurchase of preferred stock, common stock, and
vested options
Net cash provided by financing activities
Impact of foreign currency on cash, cash equivalents, and
restricted cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Supplemental disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
Supplemental disclosure of non–cash investing and financing
activities:
Unpaid purchases of property and equipment
Unpaid initial public offering costs
Capitalized stockholders' compensation in website development costs
Year Ended December 31,
2016
2015
2017
$
13,199 $
6,497 $
(1,636)
3,795
128
(1,117)
1,117
5,028
—
(7,039)
(2,287)
6,244
5,191
962
227
243
25,691
(5,157)
(2,215)
(50,000)
44,774
(12,598)
44,382
—
398
—
2,072
—
782
508
322
(821)
(1,432)
(2,226)
5,811
4,118
1,856
1,927
590
20,004
(5,846)
(1,372)
(59,774)
15,000
(51,992)
—
59,732
137
821
1,122
—
(649)
284
1,040
(26)
(716)
(820)
6,104
2,469
1,089
4,654
—
12,915
(6,353)
(1,262)
—
—
(7,615)
—
67,872
67
26
—
44,780
(60,000)
690
(18,000)
49,965
159
58,032
31,520
89,552 $
(45)
(31,343)
62,863
31,520 $
—
55,265
7,598
62,863
4,393 $
29
2,045 $
26
510 $
1,142
176
476 $
—
—
316
17
—
—
—
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
67
CarGurus, Inc.
Notes to Consolidated Financial Statements
(in thousands, except share and per share data, unless otherwise noted)
1. Organization and Business Description
CarGurus, Inc. (the “Company”), is a global, online automotive marketplace connecting buyers and sellers of new and
used cars. Using proprietary technology, search algorithms, and innovative data analytics, the Company provides information
and analysis that create a differentiated automotive search experience for consumers. The Company’s marketplace empowers
users worldwide with unbiased third-party validation on pricing and dealer reputation, as well as other useful information that
aids them in finding “Great Deals from Top-Rated Dealers.”
The Company is headquartered in Cambridge, Massachusetts and was incorporated in the State of Delaware on
June 26, 2015. The Company operates principally in the United States and has also launched marketplaces in Canada, the
United Kingdom, and Germany. The Company has wholly owned subsidiaries in the United States, Ireland, and the United
Kingdom.
Prior to June 26, 2015, the Company operated as CarGurus LLC and was organized on November 10, 2005 as a limited
liability company under the laws of the Commonwealth of Massachusetts. In connection with the conversion into a Delaware
corporation, the Class A unitholders received an equal number of shares of Class B common stock, the Class B unitholders
received an equal number of shares of Series A convertible preferred stock, or Series A Preferred Stock, the Class C
unitholders received an equal number of shares of Series B convertible preferred stock, or Series B Preferred Stock, and the
Class D unitholders received an equal number of shares of Series C convertible preferred stock, or Series C Preferred Stock.
In connection with this conversion, the Company also reclassified members' retained earnings of $1,057, accumulated under
CarGurus LLC, to additional paid-in capital of CarGurus, Inc.
On October 16, 2017, the Company completed its initial public offering (“IPO”), in which the Company issued and
sold 3,205,000 shares of its Class A common stock, including the full exercise by the underwriters of their option to purchase
705,000 shares of Class A common stock, at a public offering price of $16.00 per share for aggregate gross proceeds of $51.3
million. The Company received $43.2 million in net proceeds after deducting $3.6 million of underwriting discounts and
commissions and $4.5 million in offering costs. In addition to shares of Class A common stock issued and sold by the
Company, certain selling stockholders sold an aggregate of 7,605,000 shares of Class A common stock, including the full
exercise by the underwriters of their option to purchase 705,000 shares of Class A common stock, as part of the IPO. Upon
the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into 20,188,226
shares of Class A common stock and 40,376,452 shares of Class B common stock. The 40,376,452 shares of Class B
common stock subsequently converted into 40,376,452 shares of Class A common stock resulting in a total conversion of all
outstanding shares of Preferred Stock into 60,564,678 shares of Class A common stock. Subsequent to the closing of the IPO,
there were no shares of Preferred Stock outstanding.
The Company is subject to a number of risks and uncertainties common to companies in its and similar industries and
stages of development including, but not limited to, rapid technological changes, competition from substitute products and
services from larger companies, management of international activities, protection of proprietary rights, patent litigation, and
dependence on key individuals.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of certain significant accounting policies as
described below and elsewhere in these notes to the consolidated financial statements. The Company believes that a
significant accounting policy is one that is both important to the portrayal of the Company’s financial condition and results,
and requires management’s most difficult, subjective, or complex judgments, often as the result of the need to make estimates
about the effect of matters that are inherently uncertain.
68
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America, or GAAP. Any reference in these notes to applicable guidance is meant
to refer to the authoritative U.S. generally accepted accounting principles as found in the Accounting Standards Codification,
or ASC, and Accounting Standards Update, or ASU, of the Financial Accounting Standards Board, or FASB.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenue and expenses during the reporting period.
Significant estimates relied upon in preparing these consolidated financial statements include revenue recognition and
revenue reserves, contingent liabilities, allowances for doubtful accounts, expected future cash flows used to evaluate the
recoverability of long-lived assets, the expensing and capitalization of product, technology, and development costs for
website development and internal-use software, the determination of the fair value of stock awards issued prior to the IPO,
stock-based compensation expense, and the recoverability of the Company’s net deferred tax assets and related valuation
allowance.
Although the Company regularly assesses these estimates, actual results could differ materially from these estimates.
Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical
experience and various other assumptions that it believes 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.
Subsequent Events Considerations
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the
financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional
disclosure. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and
determined that there are no material recognized or unrecognized subsequent events requiring disclosure.
Revenue Recognition
The Company derives its revenue from two primary sources: marketplace subscription revenue, which consists of
listing and display advertising subscriptions from dealers, and advertising and other revenue, which consists primarily of
display advertising revenue from auto manufacturers and other auto-related brand advertisers.
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of
an arrangement; (2) the service has been provided to the customer; (3) the collection of fees is reasonably assured; and (4) the
amount of fees to be paid by the customer is fixed or determinable.
The Company offers two types of paid marketplace listing products to dealers, Enhanced and Featured Listings, which
require a contractual subscription with initial terms ranging from one month to one year. Contracts for customers generally
auto-renew on a monthly basis and are cancellable by dealers with 30-days’ advance notice at the end of current term. In
addition, the arrangement allows the dealers to access a dashboard to track sales leads and manage its account. Customers do
not have the right to take possession of the Company’s software. The Company recognizes revenue in accordance with ASC
605, Revenue Recognition. The Company recognizes revenue on a monthly basis as revenue is earned. These contracts
generally provide the customer with the ability to list an unlimited amount of automobile inventory on the Company’s
website.
69
In addition to listing dealers’ inventory on its marketplace, the Company periodically enters into multiple-element
service arrangements that provide dealers with Enhanced or Featured Listing products, as well as other advertising and
customer acquisition products including display advertising, which appears on its marketplace and on other sites on the
internet and requires a paid subscription under contracts with initial terms ranging from one month to one year. Contracts for
customers generally auto-renew on a monthly basis and are cancellable by dealers with 30-days’ advance notice at the end of
the current term.
The Company assesses arrangements with multiple deliverables under ASU No. 2009-13, Revenue Recognition (Topic
605), Multiple-Deliverable Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force. Pursuant to
ASU 2009-13, in order to treat deliverables in a multiple-element arrangement as separate units of accounting, the
deliverables must have stand-alone value upon delivery. If the deliverables have stand-alone value upon delivery, the
Company accounts for each deliverable separately. The Company has concluded that each element in the arrangement has
stand-alone value as the individual services can be sold separately. In addition, there is no right of refund once a service has
been delivered. Therefore, the Company has concluded each element of the arrangement is a separate unit of accounting.
While these arrangements are considered multiple element-arrangements, the recognition of the units of accounting follow a
consistent ratable recognition given the pattern over which services are provided.
Advertising and other revenue consists primarily of non-dealer display advertising revenue from auto manufacturers
and other auto-related brand advertisers sold on a cost per thousand impressions, or CPM, basis. Impressions are the number
of times an advertisement is loaded on a web page. Pricing is primarily based on advertisement size and position on the
Company’s mobile applications and websites, and fees are generally billed monthly. The Company recognizes such revenue
as impressions are delivered.
The Company does not provide minimum impression guarantees or other types of minimum guarantees in its contracts
with customers.
The Company sells advertising directly to auto manufacturers and other auto-related brand advertisers, as well as
indirectly through revenue sharing arrangements with advertising exchange partners. Company-sold advertising is not subject
to revenue sharing arrangements. Company-sold advertising revenue is recognized based on the gross amount charged to the
advertiser. Partner-sold advertising revenue is recognized based on the net amount of revenue received from the content
partners.
Revenue from advertising sold directly by the Company to auto manufacturers and other auto-related brand advertisers
is recorded on a gross basis predominately because the Company is the primary obligor responsible for fulfilling
advertisement delivery, including the acceptability of the services delivered. The Company enters into contractual
arrangements directly with advertisers and is directly responsible for the fulfillment of the contractual terms and any remedy
for issues with such fulfillment. The Company also has latitude in establishing the selling price with the advertiser, as the
Company sells advertisements at a rate determined at its sole discretion.
Advertising revenue subject to revenue sharing agreements between the Company and advertising exchange partners is
recognized based on the net amount of revenue received from the partner predominately because the advertising partner, and
not the Company, is the primary obligor responsible for fulfillment, including the acceptability of the services delivered. In
partner-sold advertising arrangements, the advertising partner has a direct contractual relationship with the advertiser. There
is no contractual relationship between the Company and the advertiser for partner-sold transactions. When an advertising
exchange partner sells advertisements, the partner is responsible for fulfilling the advertisements, and accordingly, the
Company has determined the advertising partner is the primary obligor. Additionally, the Company does not have any
latitude in establishing the price with the advertiser for partner-sold advertising.
Revenue is presented net of any taxes collected from customers.
The Company establishes sales allowances at the time of revenue recognition based on its history of adjustments and
credits provided to its customers. Sales allowances relate primarily to credits issued for service interruption. In assessing the
adequacy of the sales allowance, the Company evaluates its history of adjustments and credits made through the date of the
issuance of the financial statements. Estimated sales adjustments and credits and ultimate losses may vary from actual results
which could be material to the financial statements; however, to date, actual sales allowances have been materially consistent
with the Company’s estimates. Sales allowances are recorded as a reduction to revenue in the consolidated statements of
operations.
70
Deferred Revenue
Deferred revenue primarily consists of payments received in advance of revenue recognition from the Company’s
marketplace revenue and is recognized as the revenue recognition criteria are met. The Company generally invoices its
customers monthly. Accordingly, the deferred revenue balances do not represent the total contract value of annual or
multiyear subscription agreements. Deferred revenue that is expected to be recognized during the succeeding 12-month
period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent in the consolidated
balance sheets. All deferred revenue was recorded as current for all periods presented.
Cost of Revenue
Cost of revenue primarily consists of costs related to supporting and hosting the Company’s website and product
offerings. These costs include salaries, benefits, incentive compensation and stock-based compensation expense related to the
customer support team, and third-party service provider costs such as data center and networking expenses, allocated
overhead, depreciation and amortization expense associated with the Company’s property and equipment, and amortization
of capitalized website development costs.
Concentration of Credit Risk and Significant Customers
The Company has no significant off-balance sheet risk, such as foreign exchange contracts, option contracts, or other
foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk
consist primarily of cash, cash equivalents, investments, and trade accounts receivable. The Company maintains its cash, cash
equivalents, and investments principally with accredited financial institutions of high credit standing. Although the Company
deposits its cash and investments with multiple financial institutions, its deposits, at times, may exceed federally insured
limits.
Credit risk with respect to accounts receivable is dispersed due to the large number of customers. The Company
routinely assesses the creditworthiness of its customers. The Company generally has not experienced any material losses
related to receivables from individual customers, or groups of customers. The Company does not require collateral. Due to
these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be
probable in the Company’s accounts receivable.
For the years ended December 31, 2017 and 2016, no individual customer accounted for more than 10% of total
revenue. For the year ended December 31, 2015, one customer accounted for 14% of total revenue.
As of December 31, 2017, two customers accounted for 29% and 17% of net accounts receivable, respectively. As of
December 31, 2016, two customers accounted for 24% and 15% of net accounts receivable, respectively. No other individual
customer accounted for more than 10% of net accounts receivable at December 31, 2017 or 2016.
Cash, Cash Equivalents, and Investments
The Company considers all highly liquid investments with an original maturity of three months or less at the date of
purchase to be cash equivalents. Investments not classified as cash equivalents with maturities less than one year from the
balance sheet date are classified as short-term investments, while investments with maturities in excess of one year from the
balance sheet date are classified as long-term investments. Management determines the appropriate classification of
investments at the time of purchase, and re-evaluates such determination at each balance sheet date.
Cash and cash equivalents primarily consist of cash on deposit with banks, and amounts held in interest-bearing money
market accounts. Cash equivalents are carried at cost, which approximates their fair market value.
The Company’s investment policy, which was approved by the Audit Committee of the Company’s board of directors,
or the Board, permits investments in fixed income securities, including U.S. government and agency securities, non-U.S.
government securities, money market instruments, commercial paper, certificates of deposit, corporate bonds, and
asset-backed securities.
71
As of December 31, 2017 and 2016, investments consisted of U.S. certificates of deposit, or CDs, with remaining
maturities of less than twelve months. The Company classifies CDs with readily determinable market values as
held-to-maturity, because it is the Company’s intention to hold such investments until they mature. As such, investments
were recorded at amortized cost at December 31, 2017 and 2016. The Company adjusts the cost of investments for
amortization of premiums and accretion of discounts to maturity. The Company includes such amortization and accretion in
interest income (expense).
Realized gains and losses from sales of the Company’s investments are included in other income (expense), net. There
were no realized gains or losses on investments for the years ended December 31, 2017, 2016 or 2015.
The Company reviews investments for other-than-temporary impairment whenever the fair value of an investment is
less than the amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a
reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statements of
operations if the Company has experienced a credit loss, has the intent to sell the investment, or if it is more likely than not
that the Company will be required to sell the investment before recovery of the amortized cost basis. Evidence considered in
this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and
duration of the impairment, and changes in value subsequent to the end of the period. As of December 31, 2017 and 2016, the
Company determined that no other-than-temporary impairments were required to be recognized in the consolidated
statements of operations.
Restricted Cash
At December 31, 2017 and 2016, restricted cash was $1,843 and $2,044, respectively, and primarily related to cash
held at a financial institution in an interest-bearing cash account as collateral for two letters of credit related to the contractual
provisions for the Company’s building lease security deposits. As of December 31, 2017 and 2016, the restricted cash is
classified as a long-term asset.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded based on the amount due from the customer and do not generally bear interest. The
Company offsets gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful
accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts
receivable and is based upon historical loss patterns, the number of days that billings are past due, and an evaluation of the
potential risk of loss associated with specific accounts. Account balances are charged against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote. The Company does not have any
off-balance sheet credit exposure related to its customers. Provisions for allowances for doubtful accounts are recorded in
general and administrative expense.
The Company considers current economic trends when evaluating the adequacy of the allowance for doubtful accounts.
If circumstances relating to specific customers change, or unanticipated changes occur in the general business environment,
particularly as it affects auto dealers, the Company’s estimates of the recoverability of receivables could be further adjusted.
Below is a summary of the changes in the Company’s allowance for doubtful accounts for the years ended
December 31, 2017, 2016, and 2015:
Year ended December 31, 2017
Year ended December 31, 2016
Year ended December 31, 2015
Balance at
Beginning of
Period
Provision
Write–offs, net of
recoveries
Balance at
End of
Period
$
164 $
75
30
1,117 $
508
284
(787) $
(419)
(239)
494
164
75
72
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life of the related asset. The estimated useful lives of the Company’s property and equipment are as
follows:
Computer equipment
Capitalized software
Website development costs
Furniture and fixtures
Leasehold improvements
Estimated Useful Life
(In Years)
3
3
3
5
Lesser of asset life or lease term
Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are
capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or
changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the
Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of
the asset.
Foreign Currency Translation
The reporting currency of the Company is the U.S. dollar. The functional currency of the Company’s foreign
subsidiaries is the local currency of each subsidiary. All assets and liabilities in the balance sheets of entities whose
functional currency is a currency other than the U.S. dollar are translated into U.S. dollar equivalents at exchange rates as
follows: (1) asset and liability accounts at period-end rates; (2) income statement accounts at weighted-average exchange
rates for the period; and (3) stockholders’ equity accounts at historical exchange rates. The resulting translation adjustments
are excluded from income (loss) and reflected as a separate component of stockholders’ equity (deficit). Foreign currency
transaction gains and losses are included in net income (loss) for the period. The Company may periodically have certain
intercompany foreign currency transactions that are deemed to be of a long-term investment nature; exchange adjustments
related to those transactions are made directly to a separate component of stockholders’ equity (deficit).
Capitalized Website and Software Development Costs
The Company capitalizes certain costs associated with the development of its websites and internal-use software
products after the preliminary project stage is complete, and until the software is ready for its intended use. Research and
development costs incurred during the preliminary project stage or costs incurred for data conversion activities, training,
maintenance, and general and administrative or overhead costs are expensed as incurred. Capitalization begins when the
preliminary project stage is complete; management authorizes and commits to the funding of the software project with
appropriate authority; it is probable the project will be completed; the software will be used to perform the functions
intended; and certain functional and quality standards have been met. Qualified costs incurred during the operating stage of
the Company’s software applications relating to upgrades and enhancements are capitalized to the extent it is probable that
they will result in added functionality, while costs that cannot be separated between maintenance of, and minor upgrades and
enhancements to, internal-use software are expensed as incurred.
Capitalized website development costs and software development costs are amortized on a straight-line basis over their
estimated useful life of three years. Management evaluates the useful lives of these assets on an annual basis and tests for
impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
During the years ended December 31, 2017, 2016, and 2015, the Company capitalized $2,215, $1,372, and $1,262 of
software and website development costs, respectively. The Company recorded amortization expense associated with its
capitalized software and website development costs of $812, $343, and $153 for the years ended December 31, 2017, 2016,
and 2015, respectively.
73
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets, such as property and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. During this
review, the Company re-evaluates the significant assumptions used in determining the original cost and estimated lives of
long-lived assets. Although the assumptions may vary from asset to asset, they generally include operating results, changes in
the use of the asset, cash flows, and other indicators of value. Management then determines whether the remaining useful life
continues to be appropriate, or whether there has been an impairment of long-lived assets based primarily upon whether
expected future undiscounted cash flows are sufficient to support the assets’ recovery. Recoverability of these assets is
measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to
generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the
carrying value and the fair value of the impaired asset.
For the years ended December 31, 2017, 2016, and 2015, the Company did not identify any impairment of its
long-lived assets.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method. Under this method, deferred
tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases
of assets and liabilities using statutory rates. In addition, this method requires 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.
The Company accounts for uncertain tax positions recognized in the consolidated financial statements by prescribing a
more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company has no recorded liabilities for uncertain tax positions as of December 31, 2017 and 2016.
Disclosure of Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, investments,
accounts receivable, accounts payable, and accrued expenses, approximated their fair values at December 31, 2017 and 2016
due to the short-term nature of these instruments.
The Company has evaluated the estimated fair value of financial instruments using available market information. The
use of different market assumptions, estimation methodologies, or both, could have a significant effect on the estimated fair
value amounts. See Note 3 for further discussion.
Stock-Based Compensation
For stock-based awards issued under the Company’s stock-based compensation plans, which are more fully described
in Note 8, the fair value of each award is estimated on the date of grant, and, up through the year ended December 31, 2016,
an estimated forfeiture rate was used when calculating stock-based compensation expense for the period. The Company
recognizes compensation expense for service-based awards on a straight-line basis over the requisite service period for each
separate vesting portion of the award, with the amount of compensation expense recognized at any date at least equaling the
portion of the grant-date fair value of the award that is vested at that date.
Certain awards granted by the Company prior to the IPO were subject to service-based vesting conditions and a
performance-based vesting condition achieved upon a liquidity event, defined as either a change of control or an IPO. The
Securities and Exchange Commission’s declaration of effectiveness of the Company’s registration statement on Form S-1 on
October 11, 2017 satisfied the liquidity event performance condition. Upon the achievement of the liquidity event, the
Company recorded previously unrecognized cumulative stock-based compensation expense of $2.5 million related to these
awards. Although the performance based vesting condition was satisfied, under the terms of the awards, the settlement of
such vested RSUs and the issuance of common stock with respect to such vested RSUs, will occur on April 10, 2018, one
hundred eighty-one days after the satisfaction of the performance condition.
Given the absence of an active market for the Company’s common stock prior to the IPO, the Board, the members of
which the Company believes have extensive business, finance, and venture capital experience, was required to estimate the
fair value of the Company’s common stock at the time of each grant of a stock-based award. The Company and the Board
74
utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public
Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, to
estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions that require the
Company’s judgment. These estimates and assumptions include a number of objective and subjective factors in determining
the value of the Company’s common stock at each grant date, including the following factors: (1) prices paid for the
Company’s convertible Preferred Stock, which the Company had sold to outside investors in arm’s-length transactions, and
the rights, preferences, and privileges of the Company’s convertible Preferred Stock and common stock; (2) valuations
performed by an independent valuation specialist; (3) the Company’s stage of development and revenue growth; (4) the fact
that the grants of stock-based awards involved illiquid securities in a private company; and (5) the likelihood of achieving a
liquidity event for the common stock underlying the stock-based awards, such as an IPO or sale of the Company, given
prevailing market conditions.
The Company believes this methodology was reasonable based upon the Company’s internal peer company analyses,
and further supported by arm’s-length transactions involving the Company’s convertible Preferred Stock. As the Company’s
common stock was not actively traded, the determination of fair value involved assumptions, judgments, and estimates. If
different assumptions had been made, stock-based compensation expense, consolidated net income (loss), and consolidated
net income (loss) per share could have been significantly different.
For RSUs granted subsequent to the IPO, the fair value is determined based on the closing price of the Company’s
Class A common stock as reported on the Nasdaq Global Select Market on the date of grant.
For RSUs issued under the Company’s stock-based compensation plans prior to the IPO, the fair value of each grant
was calculated based on the estimated fair value of the Company’s common stock on the date of grant. The Company
estimated the fair value of most stock option awards on the date of grant using the Black-Scholes option-pricing model.
Certain stock option awards that have an exercise price that was materially above the current estimated fair market value of
the Company’s stock are considered to be “deeply out of the money,” and are valued at the date of grant using a binomial
lattice option-pricing model.
The fair value of each option grant issued under the Company’s stock-based compensation plans that was not
considered “deeply out of the money,” was estimated using the Black-Scholes option-pricing model. As there was no public
market for its common stock prior to the IPO, the Company determined the volatility for options granted based on an analysis
of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of
granted options has been determined using a weighted-average of the historical volatility measures of this peer group of
companies. The expected life of options has been determined utilizing the “simplified method.” The simplified method is
based on the average of the vesting tranches and the contractual life of each grant. The risk-free interest rate is based on a
treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid, and does
not anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield was assumed to be zero. In
addition, the Company applied an estimated forfeiture rate of 5% in determining the expense recorded in the accompanying
consolidated statements of operations for the years ended December 31, 2016 and 2015.
In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting (ASU 2016-09). The guidance identifies areas for simplification involving
several aspects of accounting for share-based payments, including income tax consequences, classification of awards as either
equity or liabilities, an option to make a policy election to recognize gross stock-based compensation expense with actual
forfeitures recognized as they occur, as well as certain classification changes on the statement of cash flows. The Company
adopted ASU 2016-09 on January 1, 2017 and elected to account for forfeitures when they occur, on a modified retrospective
basis. The cumulative effect adjustment related to the Company’s accounting policy change for forfeitures was not material.
In accordance with the adoption of this guidance, the tax effect of differences between tax deductions related to stock
compensation and the corresponding financial statement expense compensation will no longer be recorded to additional
paid-in capital in the balance sheet. Instead, such amounts will be recorded to tax expense. During 2017, the Company
recorded tax benefits of $681, related to differences between tax deductions related to stock compensation and the
corresponding financial statement expense compensation. The Company also elected to prospectively apply the change in
presentation of excess tax benefits, wherein excess tax benefits recognized on stock-based compensation expense is now
classified as an operating activity in the consolidated statements of cash flows. The Company did not adjust the
classifications of excess tax benefits in its consolidated statements of cash flows for the years ended December 31, 2016 or
2015. The adoption did not have any other material impact on the Company’s consolidated financial statements.
75
The weighted-average fair value of options granted during the years ended December 31, 2016 and 2015 was $0.90 and
$0.46, respectively. No options were granted during 2017. The weighted-average assumptions utilized to determine the fair
value of options granted are presented in the following table:
Expected dividend yield
Expected volatility
Risk–free interest rate
Expected term (in years)
2016
2015
—
49%
1.57%
6.07
—
64%
1.73%
6.05
See Note 8 for a summary of the stock option and RSU activity for the years ended December 31, 2017, 2016, and
2015.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense, which is included within sales and marketing expense
in the consolidated statements of operations, was $173,186, $112,167, and $61,865 for the years ended December 31, 2017,
2016, and 2015, respectively.
Leases
The Company categorizes leases at their inception as either operating or capital leases. On certain lease arrangements,
the Company may receive rent holidays or other incentives. The Company recognizes lease costs on a straight-line basis once
control of the space is achieved, without regard to deferred payment terms, such as rent holidays, that defer the
commencement date of required payments or escalating payment amounts. The difference between required lease payments
and rent expense has been recorded as deferred rent. Additionally, incentives received are treated as a reduction of costs over
the term of the agreement, as they are considered an inseparable part of the lease agreement.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in stockholders’ equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) consists of net
income (loss) and other comprehensive (loss) income, which includes certain changes in equity that are excluded from net
income (loss). Specifically, cumulative foreign currency translation adjustments are included in accumulated other
comprehensive income (loss). As of December 31, 2017, 2016, and 2015, accumulated other comprehensive income (loss) is
presented separately on the consolidated balance sheets and consists entirely of cumulative foreign currency translation
adjustments.
Contingent Liabilities
The Company has certain contingent liabilities that arise in the ordinary course of business activities. The Company
accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the
loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a
liability. The Company does not accrue for contingent losses that, in its judgment, are considered to be reasonably possible,
but not probable; however, it discloses the range of such reasonably possible losses.
Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or JOBS Act,
and may take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not emerging growth companies. The Company may take advantage of these exemptions until the
Company is no longer an emerging growth company. Section 107 of the JOBS Act provides that an emerging growth
company can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or
revised accounting standards. The Company has elected to use the extended transition period for complying with new or
revised accounting standards and as a result of this election, its financial statements may not be comparable to companies that
comply with public company effective dates. The Company may take advantage of these exemptions up until the last day of
the fiscal year following the fifth anniversary of the IPO or such earlier time that it is no longer an emerging growth
76
company. The Company would cease to be an emerging growth company if it has more than $1.07 billion in annual revenue,
has more than $700.0 million in market value of its stock held by non-affiliates (and it has been a public company for at least
12 months, and has filed one annual report on Form 10-K), or it issues more than $1.0 billion of non-convertible debt
securities over a three-year period.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and
adopted by the Company on or prior to the specified effective date. Unless otherwise discussed, the Company believes that
the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or
results of operations upon adoption.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-
09”), which modifies how all entities recognize revenue, and consolidates into one ASC Topic (ASC Topic 606, Revenue
from Contracts with Customers) the current guidance found in ASC Topic 605, and various other revenue accounting
standards for specialized transactions and industries. ASU 2014-09 outlines a comprehensive five-step revenue recognition
model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. ASU 2014-09 may be applied using either a full retrospective approach, under which all years included in the
financial statements will be presented under the revised guidance, or a modified retrospective approach, under which
financial statements will be prepared under the revised guidance for the year of adoption, but not for prior years. Under the
latter method, entities will recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the
effective date for contracts that still require performance by the entity at the date of adoption. The Company currently expects
to adopt the standard, using the modified retrospective method.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of
Effective Date (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 is now
effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within
those annual reporting periods. For all other entities the guidance in Update 2014-09 is effective for annual reporting periods
beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December
15, 2019. As an emerging growth company, the Company expects to adopt the standard effective January 1, 2019; however,
if the Company ceases to be an emerging growth company as of December 31, 2018, the Company will be required to adopt
the standard in the fourth quarter of 2018.
The Company has developed an implementation plan to adopt this new guidance. As part of this plan, the Company is
currently assessing the impact of the new guidance on its results of operations. Based on the Company’s procedures
performed to date, nothing has come to its attention that would indicate that the adoption of ASU 2014-09 will have a
material impact on its revenue recognition; however, further analysis is required and the Company will continue to evaluate
this assessment throughout 2018. While the Company is still evaluating the impact that this guidance will have on its
financial statements and related disclosures, the Company’s preliminary assessment is that there will be an impact relating to
the accounting for costs to acquire a contract. Under the standard, the Company will be required to capitalize certain costs,
primarily commission expense to sales representatives, on its consolidated balance sheet and amortize such costs over the
period of performance for the underlying customer contracts. The Company is still evaluating the impact of capitalizing costs
to execute a contract.
Other Recent Accounting Pronouncements
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is intended to add or clarify guidance on the
classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice
related to such classifications. For public entities, the guidance in ASU 2016-15 is required for annual reporting periods
beginning after December 15, 2017, with early adoption permitted. For all other entities, the guidance is effective for annual
reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently in the process
of evaluating the impact and timing of adoption of ASU 2016-15 on its consolidated financial statements.
77
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires a
lessee to recognize most leases on the balance sheet but recognize expenses on the income statement in a manner similar to
current practice. The update states that a lessee will recognize a lease liability for the obligation to make lease payments and a
right-to-use asset for the right to use the underlying assets for the lease term. Leases will continue to be classified as either
financing or operating, with classification affecting the recognition, measurement, and presentation of expenses and cash
flows arising from a lease. For public entities, the new standard is effective for interim and annual periods beginning on or
after January 1, 2019, with early adoption permitted. For all other entities, the new standard is effective for annual periods
beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact this guidance may
have on its consolidated financial statements.
3. Fair Value of Financial Instruments Including Cash, Cash Equivalents and Investments
ASC 820, Fair Value Measurements and Disclosures, establishes a three-level valuation hierarchy for instruments
measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s
own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset
or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are
developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use
of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions
that market participants would use in pricing an asset or liability. The Company uses valuation techniques to measure fair
value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as
follows:
Level 1 — Quoted unadjusted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-derived valuations in which all observable inputs and significant value drivers
are observable in active markets.
Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are
unobservable, including assumptions developed by the Company.
The valuation techniques that may be used to measure fair value are as follows:
Market Approach — Uses prices and other relevant information generated by market transactions involving identical or
comparable assets or liabilities.
Income Approach — Uses valuation techniques to convert future amounts to a single present amount based on current
market expectations about those future amounts, including present value techniques, option pricing models, and excess
earnings method.
Cost Approach — Based on the amount that currently would be required to replace the service capacity of an asset
(replacement cost).
78
The following tables present, for each of the fair value levels, the Company’s assets that are measured at fair value on a
recurring basis at December 31, 2017 and 2016:
Assets:
Cash equivalents:
Money market funds
Investments:
Certificates of deposit
Total
Assets:
Investments:
Certificates of deposit
Total
December 31, 2017
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1 Inputs)
Significant
Other
Observable
Inputs
(Level 2 Inputs)
Significant
Unobservable
Inputs
(Level 3 Inputs)
Total
$
60,709 $
— $
— $
60,709
—
60,709 $
50,000
50,000 $
$
—
50,000
— $ 110,709
December 31, 2016
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1 Inputs)
Significant
Other
Observable
Inputs
(Level 2 Inputs)
Significant
Unobservable
Inputs
(Level 3 Inputs)
Total
$
$
— $
— $
44,774 $
44,774 $
— $
— $
44,774
44,774
The Company measures eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair
value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or
liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial
assets or liabilities and did not elect the fair value option for any financial assets and liabilities transacted in the years ended
December 31, 2017 or 2016.
The following is a summary of cash, cash equivalents, and investments as of December 31, 2017 and 2016.
December 31, 2017:
Cash and cash equivalents due in 90 days or less
Investments:
Certificates of deposit due in one year or less
Total cash, cash equivalents, and investments
December 31, 2016:
Cash and cash equivalents due in 90 days or less
Investments:
Certificates of deposit due in one year or less
Total cash, cash equivalents, and investments
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
87,709 $
— $
— $
87,709
50,000
$
$ 137,709
—
$
—
50,000
$ 137,709
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
29,476 $
— $
— $
29,476
44,774
74,250 $
$
—
$
— $
44,774
74,250
79
4. Property and Equipment, Net
Property and equipment consists of the following:
Computer equipment
Capitalized software
Website development costs
Furniture and fixtures
Leasehold improvements
Construction in progress
Less accumulated depreciation
Property and equipment, net
At December 31,
2017
2016
$
$
3,532 $
174
4,895
4,421
10,797
46
23,865
(7,302)
16,563 $
2,001
114
2,680
3,386
8,202
119
16,502
(3,722)
12,780
Depreciation and amortization expense, which includes amortization expense associated with capitalized software and
website development costs, was $3,795, $2,072, and $1,122 for the years ended December 31, 2017, 2016, and 2015,
respectively.
5. Accrued Expenses
Accrued expenses consist of the following:
Accrued bonuses
Other accrued expenses
At December 31,
2017
2016
$
$
7,807 $
5,781
13,588 $
4,662
3,722
8,384
The Company had accrued bonuses of $7.8 million and $4.7 million at December 31, 2017 and 2016, respectively. The
increase of $3.1 million in accrued bonuses is primarily due to increased headcount in 2017, as compared to 2016.
6. Commitments and Contingencies
Operating Leases
The Company leases its facilities under non-cancelable operating leases with various expiration dates through January
2024. Rent expense for non-cancelable operating leases with free rental periods or scheduled rent increases is recognized on a
straight-line basis over the terms of the leases. The difference between required lease payments and rent expense has been
recorded as deferred rent.
As of December 31, 2017, the Company had deferred rent and rent incentives of $6,813, of which $1,165 and $5,648,
respectively, are classified as a short-term liability and a long-term liability in the corresponding consolidated balance sheet.
As of December 31, 2016, the Company had deferred rent and rent incentives of $6,583, of which $910 and $5,673,
respectively, are classified as a short-term liability and a long-term liability in the corresponding consolidated balance sheet.
Rent expense related to the operating leases for the years ended December 31, 2017, 2016, and 2015 was $5,994, $3,678, and
$2,700 respectively.
80
Future minimum rental commitments under the Company’s operating leases at December 31, 2017 are as follows:
Year Ending December 31,
2018
2019
2020
2021
2022 and thereafter
Operating
Lease
Commitments
7,363
7,653
7,694
7,794
9,775
40,279
$
$
Legal Matters
From time to time the Company may become involved in legal proceedings or be subject to claims arising in the
ordinary course of its business. The Company is not presently subject to any pending or threatened litigation that it believes,
if determined adversely to the Company, individually, or taken together, would reasonably be expected to have a material
adverse effect on its business or financial results.
Guarantees and Indemnification Obligations
In the ordinary course of business, the Company enters into agreements with its customers that include commercial
provisions with respect to licensing, infringement, indemnification, and other common provisions. The Company does not, in
the ordinary course, agree to indemnification obligations for the Company under its contracts with customers. Based on
historical experience and information known at December 31, 2017, 2016, and 2015, the Company has not incurred any costs
for guarantees or indemnities.
7. Convertible Preferred Stock and Stockholders’ Equity
On July 7, 2015, the Company completed a Series D convertible preferred stock, or Series D Preferred Stock, offering
in the amount of $67,872, net of issuance costs of approximately $128. In connection with this issuance, the Company used a
portion of the proceeds received, approximately $18,000, to repurchase and retire certain outstanding shares of Series A,
Series B, and Series C Preferred Stock and common stock, as well as certain vested stock options from existing stockholders.
The difference between the amount implicitly paid to repurchase the various classes of Preferred Stock and the corresponding
carrying value of the underlying shares, or $15,930, was treated as a deemed dividend and was recorded against retained
earnings. As the shares of common stock were repurchased for constructive retirement, the excess purchase price over the
corresponding par value was charged directly to retained earnings.
On August 23, 2016, the Company completed a Series E convertible preferred stock, or Series E Preferred Stock,
offering in the amount of $59,732, net of issuance costs of approximately $268. In connection with this issuance, the
Company used the proceeds received to repurchase and retire certain outstanding shares of Series A, Series B, and Series C
Preferred Stock and common stock, as well as certain vested stock options and restricted stock units from existing
stockholders. The difference between the amount implicitly paid to repurchase the various classes of Preferred Stock and the
corresponding carrying value of the underlying shares, or $32,087, was treated as a deemed dividend and was recorded
against retained earnings. As the shares of common stock were repurchased for constructive retirement, the excess purchase
price over the corresponding par value was charged directly to retained earnings.
On June 21, 2017, the Company amended and restated its Certificate of Incorporation pursuant to the Third Amended
and Restated Certificate of Incorporation. Under the Third Amended and Restated Certificate of Incorporation, the total
number of shares of all classes of stock which the Company had authority to issue was (i) 120,020,700 shares of Class A
common stock, par value $0.001 per share, (ii) 80,013,800 shares of Class B common stock, par value $0.001 per share, and
(iii) 11,091,782 shares of Preferred Stock, par value $0.001 per share, of which 3,333,000 shares were designated Series A
Preferred Stock, 3,329,497 shares were designated Series B Preferred Stock, 1,648,978 shares were designated Series C
Preferred Stock, 1,673,105 shares were designated Series D Preferred Stock, and 1,107,202 shares were designated Series E
Preferred Stock. The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
and Series E Preferred Stock are referred to collectively as the Preferred Stock.
81
Upon the effectiveness of the Third Amended and Restated Certificate of Incorporation, (i) each share of Class A
common stock issued and outstanding was recapitalized, reclassified, and reconstituted into two fully paid and non-assessable
shares of outstanding Class A common stock and four fully paid and non-assessable shares of outstanding Class B common
stock, and (ii) each share of Class B common stock of the Company issued and outstanding was recapitalized, reclassified,
and reconstituted into two fully paid and non-assessable shares of outstanding Class A common stock and four fully paid and
non-assessable shares of outstanding Class B common stock.
Further, upon the effectiveness of the Third Amended and Restated Certificate of Incorporation, the number of shares
of common stock as to which each outstanding option to purchase common stock was exercisable for and each outstanding
RSU was convertible into was adjusted such that upon exercise of outstanding stock options or vesting of outstanding RSUs,
each holder would receive two fully paid and non-assessable shares of Class A common stock and four fully paid and
non-assessable shares of Class B common stock in respect of each share of common stock previously underlying such option
or RSU. The exercise price per share of common stock underlying each outstanding option was adjusted upon the
effectiveness of the Third Amended and Restated Certificate of Incorporation to be one-sixth of the exercise price per share
in effect immediately prior to such adjustment and the fair market value per share of common stock issuable upon settlement
of such RSU was adjusted to be one-sixth of the fair market value per share in effect immediately prior to the recapitalization.
All share and per share data shown in the accompanying consolidated financial statements and related notes have been
retroactively revised to reflect the share recapitalization.
On October 16, 2017, in connection with the closing of the IPO, all of the outstanding shares of Preferred Stock
automatically converted into 20,188,226 shares of Class A common stock and 40,376,452 shares of Class B common stock.
The 40,376,452 shares of Class B common stock subsequently converted into 40,376,452 shares of Class A common stock
resulting in a total conversion of all outstanding shares of Preferred Stock into 60,564,678 shares of Class A common stock.
Subsequent to the closing of the IPO, there were no shares of Preferred Stock outstanding.
Immediately following such conversion, the Company’s Fourth Amended and Restated Certificate of Incorporation
became effective. Pursuant to the Fourth Amended and Restated Certificate of Incorporation, the Company is authorized to
issue up to 500,000,000 shares of Class A common stock, 100,000,000 shares of Class B common stock, and 10,000,000
shares of Preferred Stock, all with a par value of $0.001 per share. As of December 31, 2017, the Preferred Stock is
undesignated and no Preferred Stock is outstanding.
In addition, pursuant to the Fourth Amended and Restated Certificate of Incorporation, all shares of Class B common
stock will automatically convert into shares of Class A common stock, on a share for share basis, upon the date falling after
the first to occur of (1) the death of Langley Steinert, the Company’s Chief Executive Officer, President and Chairman, (2)
his voluntary termination of all employment with the Company and service on the Company’s board of directors, or (3) the
sum of the number of shares of capital stock held by Langley Steinert, by any Family Member of Langley Steinert, and by
any Permitted Entity of Langley Steinert (as such terms are defined in the Fourth Amended and Restated Certificate of
Incorporation), assuming the exercise and settlement in full of all outstanding options and convertible securities and
calculated on an as-converted to Class A common stock basis, being less than 9,091,484. Shares of Class B common stock
will not automatically convert into shares of Class A common stock upon the termination of Mr. Steinert's status as an officer
and director, unless such termination is either made voluntarily by Mr. Steinert or due to Mr. Steinert's death. Once converted
into Class A common stock, the converted shares of Class B common stock will not be reissued. In addition, if all shares of
Class B common stock are converted into Class A common stock, then any outstanding options or convertible securities with
the right to purchase or acquire shares of Class B common stock shall become a right to purchase or acquire shares of Class
A common stock.
Common Stock
Each share of Class A common stock entitles the holder to one vote for each share on all matters submitted to a vote of
the Company’s stockholders at all meetings of stockholders and written actions in lieu of meetings. Each share of Class B
common stock entitles the holder to ten votes for each share on all matters submitted to a vote of the Company’s stockholders
at all meetings of stockholders and written actions in lieu of meetings.
Holders of common stock are entitled to receive dividends, when and if declared by the Board.
82
At December 31, 2017, each share of Class B common stock was convertible into one share of Class A common stock
at the option of the holder at any time. Automatic conversion will occur upon the occurrence of a Transfer, as defined in the
Fourth Amended and Restated Certificate of Incorporation, of such share of Class B common stock.
Upon the effectiveness of the Company’s Fourth Amended and Restated Certificate of Incorporation, additional terms
of conversion and transfer were implemented as discussed above.
Preferred Stock
Prior to the Company’s IPO, at which time all shares of Preferred Stock were converted into shares of common stock,
the Company’s Preferred Stock consisted of the following:
Original Issue
Price
Per Share
Shares
Authorized Outstanding
Liquidation
Amount
Carrying
Value
Series A Preferred Stock
Series B Preferred Stock
Series C Preferred Stock
Series D Preferred Stock
Series E Preferred Stock
$ 0.525053 3,333,000 2,824,703 $
$ 0.780899 3,329,497 2,938,486
$ 0.849012 1,648,978 1,550,612
$40.642989 1,673,105 1,673,105
$54.190650 1,107,202 1,107,202
1,483
2,295
1,316
67,872
59,732
11,091,782 10,094,108 $ 133,094 $ 132,698
1,483 $
2,295
1,316
68,000
60,000
The holders of the Company’s Preferred Stock had certain voting and dividend rights, as well as liquidation preferences
and conversion privileges. All rights, preferences, and privileges associated with the Preferred Stock were terminated at the
time of the Company’s IPO in conjunction with the conversion of all outstanding shares of Preferred Stock into shares of
common stock.
8. Stock-based Compensation
Equity Incentive Plans
The Company’s Amended and Restated 2006 Equity Incentive Plan (the “2006 Plan”) provided for the issuance of non-
qualified stock options, restricted stock and stock awards to the Company’s employees, officers, directors and consultants.
The 2006 Plan authorized up to an aggregate of 3,444,668 shares of the Company's Class B common stock for such
issuances. In conjunction with the effectiveness of the Company’s 2015 Equity Incentive Plan (the “2015 Plan”), the Board
voted that no further stock options or other equity-based awards may be granted under the 2006 Plan.
In 2015, the Board first adopted the 2015 Plan, which became effective on June 26, 2015. The 2015 Plan provided for
the issuance of incentive stock options, non-qualified stock options, restricted stock, stock awards and restricted stock units
(“RSUs”) to employees, consultants and non-employee directors. As of the effective date of the 2015 Plan, up to 603,436
shares of common stock were authorized for issuance under the 2015 Plan. The 2015 Plan was amended and restated
effective August 6, 2015 to permit the granting of RSUs under the 2015 Plan, remove Class B common stock from the pool
of shares available for issuance under the 2015 Plan and make certain other desired changes. The 2015 Plan was further
amended and restated at October 15, 2015 to add a ten-year term and to make certain other desired changes.
The 2015 Plan was further amended and restated effective August 22, 2016 to merge the 2006 Plan into the 2015 Plan,
to increase the number of shares of Class A common stock that may be issued under the 2015 Plan, and to lengthen the term
of the 2015 Plan to expire on August 21, 2026. In addition, pursuant to this amendment and restatement of the 2015 Plan,
prior to giving effect to the recapitalization that occurred on June 21, 2017, there were (i) 618,691 shares of Class A common
stock, plus (ii) 802,562 shares of Class B common stock authorized under the 2015 Plan; provided, however, that (1) the
number of shares of Class A common stock was increased, on a share for share basis, by the number of shares of Class B
common stock that were (a) subject to outstanding options granted under the 2006 Plan that expired, terminated, or were
cancelled for any reason without having been exercised, (b) surrendered in payment of the exercise price of outstanding
options granted under the 2006 Plan or (c) withheld in satisfaction of tax withholding upon exercise of outstanding options
granted under the 2006 Plan, and the number of shares of Class B common stock reserved under the amended and restated
2015 Plan was decreased, on a corresponding share for share basis, (2) no new awards of Class B common stock could be
granted under the amended and restated 2015 Plan, and (3) except with respect to outstanding options granted under the 2006
Plan that were exercised on or after the date of the amendment and restatement, no Class B common stock could be issued
under the 2015 Plan.
83
In connection with the recapitalization that occurred on June 21, 2017, the 2015 Plan was further amended and restated
to account for each outstanding common stock option being adjusted such that each share of common stock underlying such
option became two shares of Class A common stock and four shares of Class B common stock underlying such option, and
each outstanding RSU being adjusted such that each share of common stock issuable upon settlement of such RSU became
two shares of Class A common stock and four shares of Class B common stock issuable upon settlement of such RSU.
Pursuant to the 2015 Plan as further amended in connection with the recapitalization, there were (i) 3,181,740 shares of
Class A common stock and (ii) 5,161,644 shares of Class B common stock authorized for issuance under the 2015 Plan.
In connection with the IPO, in October 2017, the Board adopted, and the Company’s stockholders approved, the
Omnibus Equity Compensation Plan (the “2017 Plan”) for the purpose of granting incentive stock options, non-qualified
stock options, stock awards, stock units, other share-based awards and cash awards to employees, advisors and consultants to
the Company and its subsidiaries and non-employee members of the Company’s board of directors. The 2017 Plan is the
successor to the 2015 Plan. The 2017 Plan authorizes the issuance or transfer of the sum of: (i) 7,800,000 shares of the
Company’s Class A common stock, plus (ii) the number of shares of our Class A common stock (up to 4,500,000 shares)
equal to the sum of (x) the number of shares of Class A common stock and Class B common stock of the Company subject to
outstanding awards under the 2015 Plan as of October 10, 2017 that terminate, expire or are cancelled, forfeited, exchanged,
or surrendered on or after October 10, 2017 without having been exercised, vested, or paid prior to October 10, 2017,
including shares tendered or withheld to satisfy tax withholding obligations with respect to outstanding grants under the Prior
Plan, plus (y) the number of shares of Class A common stock reserved for issuance under the 2015 Plan that remain available
for grant under the 2015 Plan as of the October 10, 2017. The aggregate number of shares of Class A common stock that may
be issued or transferred under the 2017 Plan pursuant to incentive stock options will not exceed 12,300,000 shares of Class A
common stock. As of the first trading day of January of each calendar year during the term of the 2017 Plan (excluding any
extensions), beginning with calendar year 2019, an additional number of shares of Class A common stock will be added to
the number of shares of our Class A common stock authorized to be issued or transferred under the 2017 Plan and the number
of shares authorized to be issued or transferred pursuant to incentive stock options, equal to 4% of the total number of shares
of our Class A common stock outstanding on the last trading day in December of the immediately preceding calendar year, or
6,000,000 shares, whichever is less, or such lesser amount as determined by the Board. In conjunction with the adoption of
the 2017 Plan, options and RSUs outstanding under the 2015 Plan will remain outstanding but no additional grants will be
made from the 2015 Plan.
At December 31, 2017, 7,831,708 shares of Class A common stock were available for issuance under the 2017 Plan.
The following is a summary of the stock option activity for all stock-based compensation plans during the year ended
December 31, 2017:
Outstanding, December 31, 2016
Granted
Exercised
Forfeited and cancelled
Outstanding, December 31, 2017
Options exercisable at December 31, 2017
Weighted-
Average
Exercise
Price
for Equity
1.63
—
1.45
2.12
1.60
1.02
Common
Stock
5,698,812 $
—
(274,784)
(382,488)
5,041,540 $
3,981,196 $
Weighted-
Average
Contractual Life
(In Years)
Aggregate
Intrinsic
Value(1)
6.9 23,893
2,238
6.0 143,059
5.6 115,157
(1)
The aggregate intrinsic value was calculated based on the positive difference, if any, between the estimated fair value
of our common stock on December 31, 2015, 2016, and, 2017, respectively, or the date of exercise, as appropriate, and
the exercise price of the underlying options.
There were no options granted in 2017. The weighted-average grant-date fair value of options granted was $0.90 per
share in 2016 and $0.46 per share in 2015.
The aggregate intrinsic value for options exercised during the years ended December 31, 2016 and 2015 was $2,021
and $936, respectively.
84
The Company entered into RSU agreements with certain of its employees pursuant to the 2015 Plan and the 2017 Plan.
The RSUs granted under the 2015 Plan are subject to both a service-based vesting condition and a performance-based vesting
condition based on a liquidity event, defined as either a change in control or an IPO. The Securities and Exchange
Commission’s declaration of effectiveness of the Company’s registration statement on Form S-1 on October 11, 2017
satisfied the liquidity event performance condition. Although the performance based vesting condition was satisfied, under
the terms of the awards, the settlement of such vested RSUs and the issuance of common stock with respect to such vested
RSUs, will occur on April 10, 2018, one hundred eighty-one days after the satisfaction of the performance condition. As a
result, no RSUs settled as of December 31, 2017. RSUs granted under the 2017 Plan are subject to only a service-based
vesting condition.
The following is a summary of the RSU activity during the year ended December 31, 2017:
Unvested outstanding, December 31, 2016
Granted
Vested
Cancelled
Unvested outstanding, December 31, 2017
Number of
Shares
1,580,094 $
1,606,538
(693,922)
(120,330)
2,372,380 $
Weighted-
Average Grant
Date Fair Value
Aggregate
Intrinsic
Value
3.25 $
16.99
3.61
5.45
12.34 $
8,754
27,298
(13,276)
(1,594)
71,124
The weighted-average grant-date fair value of RSUs granted was $3.89 and $2.05 per share in 2016 and 2015,
respectively.
No RSUs vested in the years ended December 31, 2016 and 2015.
For the years ended December 31, 2017, 2016, and 2015, total stock-based compensation expense was $5,028, $322,
and $1,040, respectively. The following two tables show stock compensation expense by award type and where the stock
compensation expense is recorded in the Company’s consolidated statements of operations:
Options
RSUs
Total stock-based compensation
Cost of revenue
Sales and marketing expense
Product, technology, and development expense
General and administrative expense
Year Ended December 31,
2016
2015
2017
281 $
4,747
$
5,028
322 $
—
322 $
1,040
—
1,040
Year Ended December 31,
2016
2015
2017
151 $
1,911
1,637
1,329
5,028 $
18 $
163
104
37
322 $
4
67
883
86
1,040
$
$
$
$
Excluded from stock-based compensation expense is $176 of capitalized software development costs in 2017. Stock-
based compensation expense related to capitalized software development costs was immaterial in 2016 and 2015.
The income tax benefit from stock-based compensation expense was $1,301, $67, and $75 in the years ended
December 31, 2017, 2016, and 2015, respectively.
As of December 31, 2017, there was $462 of unrecognized stock-based compensation expense related to unvested
stock options, which is expected to be recognized over a weighted-average period of 1.9 years.
As of December 31, 2017, there was $26,864 of unrecognized stock-based compensation expense, related to unvested
stock-based restricted stock units which is expected to be recognized over a weighted-average period of 3.3 years.
85
Common Stock Reserved for Future Issuance
At December 31, 2017, the Company had reserved the following shares of voting common stock for future issuance:
Common stock options outstanding
Restricted stock units outstanding
Shares available for issuance under the 2017 Plan
Total shares of authorized common stock reserved for
future issuance
5,041,540
3,066,302
7,831,708
15,939,550
9. Earnings Per Share
Net income (loss) per share information is determined using the two-class method, which includes the
weighted-average number of shares of common stock outstanding during the period and other securities that participate in
dividends (a participating security). The Company considers the Preferred Stock to have been participating securities because
they included rights to participate in dividends with the common stock.
Under the two-class method, basic net income (loss) per share attributable to common stockholders is computed by
dividing the net income (loss) attributable to common stockholders by the weighted-average number of shares of common
stock outstanding during the period. Diluted net income (loss) per share attributable to common stockholders is computed
using the more dilutive of (1) the two-class method or (2) the if-converted method. The Company allocates net income first to
preferred stockholders based on dividend rights under the Company’s certificate of incorporation and then to preferred and
common stockholders based on ownership interests. Net losses are not allocated to preferred stockholders as they do not have
an obligation to share in the Company’s net losses.
Since June 26, 2015, the date of the Company’s conversion from a limited liability company to a corporation, and as of
the date of this Annual Report on Form 10-K, the Company had and has two classes of common stock authorized: Class A
common stock and Class B common stock. As more fully described in Note 7, the rights of the holders of Class A and
Class B common stock were and are identical, except with respect to voting and conversion. Each share of Class A common
stock was and is entitled to one vote per share and each share of Class B common stock was and is entitled to ten votes per
share. Each share of Class B common stock was and is convertible into one share of Class A common stock at the option of
the holder at any time. In addition, each share of Class B common stock was and is automatically convertible into one share
of Class A common stock upon transfer of such share, which is defined to include entering into a voting agreement, whether
or not for value, except for certain transfers described in both the Company’s Third Amended and Restated Certificate of
Incorporation and Fourth Amended and Restated Certificate of Incorporation, which exception includes transfers to certain
family members of the transferor stockholder. Upon either the death or voluntary termination of the Company’s Chief
Executive Officer, all shares of Class B common stock were and are automatically convertible into one share of Class A
common stock. Upon the effectiveness of the Company’s Fourth Amended and Restated Certificate of Incorporation,
additional terms of conversion and transfer were implemented. The Company allocates undistributed earnings attributable to
common stock between the common stock classes on a one-to-one basis when computing net income (loss) per share. As a
result, basic and diluted net income (loss) per share of Class A common stock and share of Class B common stock are
equivalent.
Diluted net income (loss) per share gives effect to all potentially dilutive securities. Potential dilutive securities consist
of shares of common stock issuable upon the exercise of stock options, shares of common stock issuable upon the vesting of
RSUs, and shares of common stock issuable upon the conversion of the outstanding Preferred Stock. The dilutive effect of
these common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method.
For the year ended 2017, the two-class method was used in the computation of diluted net income per share, which was
equally as dilutive as the if-converted method. For the years ended December 31, 2016 and 2015, the net loss attributable to
common stockholders is divided by the weighted-average number of shares of common stock outstanding during the period
to calculate diluted earnings per share. The dilutive effect of common stock equivalents has been excluded from the
calculation as their effect would have been anti-dilutive due to the net losses incurred for the periods after including the
effects of deemed dividends on the Preferred Stock.
86
The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and
diluted net income (loss) per share:
Numerator:
Net income (loss)
Deemed dividend to preferred stockholders
Net income attributable to participating securities
Net income (loss) attributable to common stockholders —
basic
Net income (loss)
Deemed dividend to preferred stockholders
Net income attributable to participating securities
Net income (loss) attributable to common stockholders —
diluted
Denominator:
Weighted–average number of shares of common stock used
in computing net income (loss) per share attributable to
common stockholders — basic
Dilutive effect of share equivalents resulting from
stock options
Dilutive effect of share equivalents resulting from
unvested restricted stock units
Weighted–average number of shares of common stock
used in computing net income (loss) per share —
diluted
Net income (loss) per share attributable to common
stockholders:
Basic
Diluted
Year Ended
December 31,
2016
2017
$
$
$
13,199 $
—
(6,098)
6,497 $
(32,087)
—
7,101 $
13,199 $
—
(5,829)
(25,590) $
6,497 $
(32,087)
—
2015
(1,636)
(15,930)
—
(17,566)
(1,636)
(15,930)
—
$
7,370 $
(25,590) $
(17,566)
55,835,265 44,138,922 43,141,236
4,290,362
511,957
—
—
—
—
60,637,584 44,138,922 43,141,236
$
0.13 $
0.12 $
(0.58) $
(0.58) $
(0.41)
(0.41)
The following potentially dilutive common stock equivalents have been excluded from the calculation of diluted
weighted-average shares outstanding for the years ended December 31, 2017, 2016, and 2015, as their effect would have
been anti-dilutive for the periods presented:
Stock options outstanding
Restricted stock units outstanding
Convertible preferred stock
10. Income Taxes
Year Ended
December 31,
2016
2017
5,698,812
—
829
1,580,094
— 10,094,108
2015
5,626,710
553,986
9,586,620
The domestic and foreign components of income (loss) before income taxes are as follows:
Year Ended
December 31,
2016
2017
15,543 $
294
15,837 $
8,919 $
26
8,945 $
2015
(2,540)
—
(2,540)
United States
Foreign
Income (loss) before income taxes
$
$
87
The provision for (benefit from) income taxes contained the following components:
Current provision:
Federal
State
Foreign
Deferred (benefit) provision:
Federal
State
Foreign
$
Income tax (benefit) provision
$
Year Ended
December 31,
2016
2015
2017
3,262 $
431
62
3,755
(755)
(343)
(19)
(1,117)
2,638 $
1,440 $
223
3
1,666
880
(98)
—
782
2,448 $
(276)
21
—
(255)
(544)
(105)
—
(649)
(904)
The Company's effective tax rates for the years ending December 31, 2017 and 2016 are less than the U.S. federal
statutory rate primarily due to federal and state research and development credits, excess tax deductions related to stock-
based compensation awards and tax deductions for fees incurred during the IPO process. The Company’s effective tax rate
for the year ended December 31, 2015 is greater than the U.S. federal statutory rate primarily due to state income taxes.
U.S. federal taxes at statutory rate
State taxes, net of federal benefit
Nondeductible expenses
Tax deductible IPO costs
Stock compensation
Foreign rate differential
Credits
Other
Total
Year Ended
December 31,
2016
2015
2017
35.0%
3.1
1.2
(9.3)
(4.4)
(0.4)
(9.0)
0.5
16.7%
35.0%
4.5
2.0
—
—
(0.1)
(15.0)
1.0
27.4%
34.0%
3.6
(1.4)
—
—
—
—
(0.6)
35.6%
The approximate income tax effect of each type of temporary difference and carryforward as of December 31, 2017
and 2016 is as follows:
Deferred tax assets:
Credit carryforwards
Stock-based compensation
Landlord allowance on leasehold improvements
Deferred rent
Accruals and reserves
Deferred tax liability:
Fixed assets
Net deferred tax assets (liabilities)
As of
December 31,
2017
2016
$
$
166 $
1,301
1,078
583
606
3,734
(2,909)
(2,909)
825 $
141
67
1,468
968
612
3,256
(3,548)
(3,548)
(292)
88
The Company uses the asset and liability method to account for income taxes in accordance with ASC 740, Income
Taxes. Under this method, deferred income taxes are recognized for the future tax consequences of differences between the
tax and financial accounting bases of assets and liabilities at each reporting period. Deferred income taxes are based on
enacted tax laws and statutory tax rates applicable to the period in which these differences are expected to affect taxable
income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be
realized.
The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. Among other things, the TCJA reduces
the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of
certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. As
of December 31, 2017, the Company recognized a provisional amount of $187 which is included as a component of income
tax expense from continuing operations.
The Company re-measured certain deferred tax assets and liabilities based on the rates at which they are anticipated to
reverse in the future, which is generally 21%. However, the Company is still examining certain aspects of the TCJA and
refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new
deferred tax amounts. The provisional amount recorded related to the re-measurement of the Company’s deferred tax
balance was a tax expense of $151.
The one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) for which the
Company has previously deferred from U.S. income taxes. The Company recorded a provisional amount for its one-time
transition tax liability of $36 for its foreign subsidiaries, resulting in an increase of income tax provision of $36. The
Company has not yet completed its calculation of the total post-1986 foreign E&P for these foreign subsidiaries. Further, the
transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may
change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation
and finalize the amounts held in cash or other specified assets. As of December 31, 2017, foreign earnings, which were not
significant, have been retained indefinitely by the Company’s foreign subsidiaries for reinvestment. Upon repatriation of
those earnings, in the form of dividends or otherwise, the Company could be subject to withholding taxes payable to the
various foreign countries.
The Company has not provided a valuation allowance against its net deferred tax assets at December 31, 2017 and
2016. Based upon the level of historical U.S. earnings and future projections over the period in which the net deferred tax
assets are deductible, at this time, management believes it is more likely than not that the Company will realize the benefits
of these deductible differences.
As of December 31, 2017, the Company has state tax credit carryforwards of $227, available to reduce future tax
liabilities that expire at various dates through 2032. Net operating loss carryforwards arising in taxable years ending after
December 31, 2017 are no longer subject to expiration under the Internal Revenue Code of 1986, as amended (the “Code”).
Utilization of the tax credit carryforwards may be subject to an annual limitation due to ownership change limitations that
have occurred previously or that could occur in the future, as provided by Section 382 of the Code, or Section 382, as well as
similar state provisions. Ownership changes may limit the amount of tax credit carryforwards that can be utilized annually to
offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from
transactions that increase the ownership of 5% stockholders in the stock of a corporation by more than 50% in the aggregate
over a three-year period.
The Company previously adopted the provision for uncertain tax positions under ASC 740, Income Taxes. The
adoption did not have an impact on the Company’s retained earnings balance. At December 31, 2017 and 2016, the Company
had no recorded liabilities for uncertain tax positions and had no accrued interest or penalties related to uncertain tax
positions.
The Company and its subsidiaries are subject to various U.S. federal, state, and foreign income taxes. The Company is
currently open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the
tax years ended 2014 through 2017. Currently, there are no income tax audits in process.
89
11. Related Party Transactions
On October 16, 2017, the Company completed its IPO. Allen & Company LLC acted as an underwriter in the IPO.
Immediately prior to the IPO, Allen & Company LLC and its associated persons, including Ian Smith, a member of the
Board, beneficially owned shares of the Company’s outstanding Preferred Stock representing 13.5% of the Company’s
outstanding Preferred Stock. In connection with Allen & Company LLC’s role as an underwriter in the IPO, pursuant to the
underwriting agreement, Allen & Company LLC purchased 2,190,200 shares of our Class A common stock in the IPO at
$14.88 per share for a total purchase price of $32,590,176, after deducting underwriting discounts and commissions paid to
Allen & Company LLC of $2,453,024. Consummation of this transaction, which occurred prior to the Company’s adoption
of a formal related person transaction policy, was approved by the Board.
12. Segment and Geographic Information
The Company has two reportable segments, United States and International. Segment information is presented in the
same manner as the Company’s chief operating decision maker, or CODM, reviews the Company’s operating results in
assessing performance and allocating resources. The CODM reviews revenue and operating income (loss) for each reportable
segment as a proxy for the operating performance of the Company’s United States and International operations. The
Company’s chief executive officer is the CODM on behalf of both reportable segments.
The United States segment derives revenues from marketplace subscriptions, advertising services, and other revenues
from customers within the United States. The International segment derives revenues from marketplace subscriptions,
advertising services, and other revenues from customers outside of the United States. A majority of our operational overhead
expenses, including technology and personnel costs, and other general and administrative costs associated with running our
business, are incurred in the United States and not allocated to the International segment. Assets and costs discretely incurred
by reportable segments, including depreciation and amortization, are included in the calculation of reportable segment
income (loss) from operations. Segment operating income (loss) does not reflect the transfer pricing adjustments related to
the Company’s foreign subsidiaries, which are recorded for statutory reporting purposes. Asset information is assessed and
reviewed on a global basis.
Information regarding the Company’s operations by segment and geographical area is presented below:
Segment revenue:
United States
International
Total revenue
Segment income (loss) from operations:
United States
International
Total income (loss) from operations
Year Ended
December 31,
2016
2015
2017
$
$
307,472 $
9,389
316,861 $
195,824 $
2,317
198,141 $
98,566
22
98,588
Year Ended
December 31,
2016
2015
2017
$
$
41,586 $
(26,312)
15,274 $
27,461 $
(18,890)
8,571 $
637
(3,165)
(2,528)
As of December 31, 2017 and 2016, property and equipment held outside the United States was not material.
90
13. Components of Other Income (Expense), Net
The components of other income (expense), net, are as follows:
Interest income
Interest expense
Foreign exchange losses
Other income (expense), net
14. Employee benefit plans
Year Ended
December 31,
2016
2015
2017
$
$
869 $
(29)
(277)
563 $
416 $
(26)
(16)
374 $
—
(12)
—
(12)
The Company maintains a defined contribution savings plan for all eligible U.S. employees under Section 401(k) of the
Code. Effective July 1, 2017, the Company implemented a matching policy, under which the Company matches 50% of an
employee’s annual contributions to the 401(k) plan, up to a maximum of the lesser of (i) 6% of the employee’s base salary,
bonus and commissions paid during the year or (ii) $5,000. Matching contributions are subject to vesting based on the
employee’s start date and length of service. Employees can designate the investment of their 401(k) accounts into several
mutual funds. The Company does not allow investment in its common stock through the 401(k) plan.
During the years ended December 31, 2016 and 2015, the Company did not make any employer contributions to the
plan. During the year ended December 31, 2017, the Company began matching employee 401(k) contributions up to a set
limit. Total employer contributions were $724 during the year ended December 31, 2017.
15. Quarterly Financial Results (unaudited)
The following table presents certain unaudited quarterly financial information for the eight quarters in the period ended
December 31, 2017. This information has been prepared on the same basis as the audited financial statements and includes all
adjustments (consisting only of normal recurring adjustments) necessary to present fairly the unaudited quarterly results of
operations set forth herein.
(1)
Year ended December 31, 2017
Revenue
Cost of revenue
Gross profit
Net income
Basic net income per share
Diluted net income per share (1)
Year ended December 31, 2016
Revenue
Cost of revenue
Gross profit
Net income
Basic net (loss) income per share
Diluted net (loss) income per share (1)
(1)
Fourth
Third
Second
First
Quarter
Quarter
Quarter
Quarter
$ 90,597
5,242
85,355
2,267
0.02
0.02
$
$
$ 60,764
2,904
57,860
3,838
(0.66)
(0.66)
$
$
$ 82,989
4,720
78,269
2,379
0.02
0.02
$
$
$ 53,136
2,852
50,284
2,138
0.02
0.02
$
$
$ 76,240
4,322
71,918
4,346
0.04
0.04
$
$
$ 45,627
2,141
43,486
269
(0.00)
(0.00)
$
$
$ 67,035
3,325
63,710
4,207
0.04
0.04
$
$
$ 38,614
1,678
36,936
252
(0.00)
(0.00)
$
$
(1)
The amounts were computed independently for each quarter, and the sum of the quarters may not total the annual
amounts.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
91
Item 9A. Controls and Procedures.
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 Securities
Exchange Act of 1934, as amended, as of December 31, 2017. Based on such evaluation, our principal executive officer and
principal financial officer have concluded that as of December 31, 2017, our disclosure controls and procedures were
effective.
Management’s Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K for the year ended December 31, 2017 does not include a report of management’s
assessment regarding internal control over financial reporting or an attestation report of the Company’s registered public
accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public
companies.
Inherent Limitations of Internal Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our
disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a
simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31,
2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
92
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated herein by reference from the information in our Proxy Statement
for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year
to which this Annual Report on Form 10-K relates.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference from the information in our Proxy Statement
for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year
to which this Annual Report on Form 10-K relates.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference from the information in our Proxy Statement
for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year
to which this Annual Report on Form 10-K relates.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated herein by reference from the information in our Proxy Statement
for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year
to which this Annual Report on Form 10-K relates.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated herein by reference from the information in our Proxy Statement
for our 2018 Annual Meeting of Stockholders, which we will file with the SEC within 120 days of the end of the fiscal year
to which this Annual Report on Form 10-K relates.
93
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents filed as a part of this Report:
(1) Financial Statements
The financial statements of CarGurus, Inc. are included in Item 8 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
All financial statements schedules are omitted as they are either not required or the information is otherwise
included in the consolidated financial statements and related notes.
(3) Index to Exhibits
The documents listed in the Exhibit Index immediately preceding the signature page of this Annual Report on Form
10-K are incorporated by reference or are filed or furnished with this Annual Report on Form 10-K, in each case as
indicated therein (numbered in accordance with Item 601 of Regulation S-K).
Item 16. Form 10-K Summary.
Not applicable.
94
EXHIBIT INDEX
Incorporated by Reference
Exhibit
Number
3.1
3.2
4.1
4.2
10.1
Exhibit Description
Amended and Restated Certificate of
Incorporation of the Registrant.
Amended and Restated Bylaws of the
Registrant.
Specimen Class A common stock certificate of
the Registrant.
Amended and Restated Investors’ Rights
Agreement, dated August 23, 2016, by and
among the Registrant and certain of its
stockholders.
Form of Indemnification Agreement between
the Registrant and each of its directors and
executive officers.
Form
8-K
File
Number
001-38233
8-K
001-38233
S-1/A
333-220495
S-1
333-220495
S-1
333-220495
10.2# Amended and Restated 2006 Equity Incentive
S-1
333-220495
Plan.
10.3# Amended and Restated 2015 Equity Incentive
S-1/A
333-220495
Plan and forms of agreements thereunder.
10.4# Omnibus Incentive Compensation Plan and
forms of agreements thereunder.
10.5# Offer Letter, dated March 17, 2006, by and
between the Registrant and Langley Steinert.
10.6# Offer Letter, dated August 10, 2015, by and
between the Registrant and Jason Trevisan.
10.7# Offer Letter, dated October 24, 2014, by and
10.8
10.9
10.10
21.1
23.1
31.1
31.2
32.1*
between the Registrant and Samuel Zales.
Lease, dated as of October 8, 2014, by and
between the Registrant and BCSP Cambridge
Two Property LLC.
Office Lease Agreement, dated as of March 11,
2016, by and between 55 Cambridge
Parkway, LLC and the Registrant.
First Amendment to Lease, dated as of July 30,
2016 by and between 55 Cambridge
Parkway, LLC and the Registrant.
List of Subsidiaries of the Registrant.
Consent of Ernst & Young LLP, Independent
Registered Public Accounting Firm.
Certification of Principal Executive Officer
Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer
Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Filing Date
October 16,
2017
October 16,
2017
September 29,
2017
September 15,
2017
September 15,
2017
September 15,
2017
September 29,
2017
September 29,
2017
September 15,
2017
September 15,
2017
September 15,
2017
September 15,
2017
September 15,
2017
Filed
Herewith
Exhibit
Number
3.1
2
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
S-1/A
333-220495
S-1
S-1
S-1
S-1
333-220495
333-220495
333-220495
333-220495
S-1
333-220495
S-1
333-220495
September 15,
2017
10.10
XX
X
X
X
X
95
Exhibit
Number
32.2*
Exhibit Description
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema
Document.
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition
Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase
Document.
101.PRE XBRL Taxonomy Extension Presentation
Linkbase Document.
# Indicates a management contract or compensatory plan.
Incorporated by Reference
Form
File
Number
Filing Date
Exhibit
Number
Filed
Herewith
X
X
X
X
X
X
X
* The certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Annual Report on Form
10-K and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except
to the extent that the registrant specifically incorporates it by reference.
96
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 1, 2018
CarGurus, Inc.
By:/s/ Langley Steinert
Langley Steinert
Chief Executive Officer, President and Chairman of the
Board of Directors
POWER OF ATTORNEY
Each person whose individual signature appears below hereby constitutes and appoints Langley Steinert and Jason
Trevisan, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or
her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on
behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or
any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ Langley Steinert
Langley Steinert
/s/ Jason Trevisan
Jason Trevisan
/s/ Stephen Kaufer
Stephen Kaufer
/s/ Anastasios Parafestas
Anastasios Parafestas
/s/ David Parker
David Parker
/s/ Simon Rothman
Simon Rothman
/s/ Ian Smith
Ian Smith
Chief Executive Officer, President and Chairman of
the Board of Directors (Principal Executive Officer)
March 1, 2018
Chief Financial Officer and Treasurer (Principal
Financial and Accounting Officer)
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
Director
Director
Director
Director
Director
97
CORPORATE INFORMATION
Board of Directors
Langley Steinert, Chief Executive Officer, President and Chairman
•
• Stephen Kaufer, President and Chief Executive Officer of TripAdvisor, Inc.
• Anastasios Parafestas, President and Managing Member of The Bollard Group LLC and its private
equity arm, Spinnaker Capital LLC
• Simon Rothman, Partner and Executive in Residence at Greylock Partners
• Greg Schwartz, Chief Business Officer of Zillow Group, Inc.
•
Ian Smith, Managing Director at Allen & Company LLC
Executive Officers
Langley Steinert, Chief Executive Officer, President and Chairman
Jason Trevisan, Chief Financial Officer and Treasurer
•
•
• Samuel Zales, Chief Operating Officer
• Thomas Caputo, Senior Vice President, Product
• Oliver Chrzan, Senior Vice President, Engineering
• Kathleen Patton, Senior Vice President, General Counsel and Secretary
• Sarah Welch, Senior Vice President, Consumer Marketing
Corporate Headquarters
• 2 Canal Park, 4th Floor, Cambridge, Massachusetts 02141 USA
2018 Annual Meeting of Stockholders
• Our annual meeting is being held on May 24, 2018 at 11:00 a.m. Eastern Time at the offices of
Morgan, Lewis & Bockius LLP, One Federal Street, Boston, Massachusetts 02110 USA
Requests for Reports and Other Stockholder Inquiries
• Our quarterly and annual reports, including Forms 10-Q and 10-K, are available on the investor
relations section of our website, https://investors.cargurus.com. Requests for additional copies
and other stockholder inquiries should be directed to: CarGurus, Inc., Attn: General Counsel, 2
Canal Park, 4th Floor, Cambridge, Massachusetts 02141 USA
Stock Exchange Listing
• Our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “CARG”
Stock Transfer Agent
• Broadridge Financial Solutions, Inc., Edgewood, NY USA
Independent Registered Public Accounting Firm
• Ernst & Young LLP, Cambridge, MA USA
This Annual Report includes forward-looking statements about our future results of operations, our mission,
business strategies and plans, business environment and future growth. These statements are subject to risks and
uncertainties (including those identified in the “Risk Factors” section of the Form 10-K included in this Annual
Report), and our actual results could be materially different. Forward-looking statements represent our beliefs
and assumptions only as of the date of this Annual Report and we have no obligation to update them.
CarGurus, Inc.
2 Canal Park, 4th Floor
Cambridge, Massachusetts 02141 USA
© 2018 CarGurus, Inc.