2019 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, 2019
OR
☐ 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
Trading Symbol
CARG
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 ☒ 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 ☐ 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 ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such
files). Yes ☒ No ☐
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
☒
☐
Accelerated filer
Small reporting company
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. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s Class A common stock, par value $0.001 per share, held by non-affiliates of the registrant based on the
closing price of the registrant’s common stock as reported on the Nasdaq Global Market on June 30, 2019 was $2,464,065,369. Shares of voting and non-
voting stock held by executive officers, directors and holders of more than 5% of the outstanding stock have been excluded from this calculation because
such persons or institutions may be deemed affiliates. This determination of affiliate status is not a conclusive determination for other purposes.
As of February 6, 2020, the registrant had 91,983,435 shares of Class A common stock, and 20,314,644 shares of Class B common stock, par value
$0.001 per share, outstanding.
Portions of the registrant’s definitive Proxy Statement for its 2020 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.
DOCUMENTS INCORPORATED BY REFERENCE
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 Accountant 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,” “likely,” “may,” “might,” “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 and business 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;
the value proposition of our product offerings;
our ability to deliver quality leads at a high volume for our dealer customers;
our ability to maintain and acquire new customers;
our anticipated growth and growth strategies and our ability to effectively manage that growth;
our ability to grow our audience, as well as to maintain and build our brand;
our ability to continue to expand internationally;
our ability to realize benefits from our acquisitions and successfully implement our integration strategies;
the impact of competition in our industry and innovation by our competitors;
the impact of accounting pronouncements;
the impact of litigation;
our ability to hire and retain necessary qualified employees to expand our operations;
our ability to adequately protect our intellectual property;
our ability to stay abreast of and effectively comply with new or modified laws and regulations that currently apply
or become applicable to our business;
our ability to overcome challenges facing the automotive industry ecosystem, including global supply chain
challenges, changes to trade policies and other macroeconomic issues;
failure to maintain an effective system of internal controls necessary to accurately report our financial results and
prevent fraud;
our expectations with respect to the occupancy of our recently leased properties;
our expectations regarding cash generation and the sufficiency of our cash to fund our operations; 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 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.
1
PART I
Item 1. Business.
BUSINESS
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 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 under the CarGurus brand in Canada, the United Kingdom, Germany, Italy, and Spain. In the
United Kingdom, we also operate the PistonHeads online marketplace as an independent brand.
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 a used 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. As the only major U.S.
online automotive marketplace that defaults to 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 presenting consumers with data such as our Deal Ratings, Price History, Time on Site, and Vehicle History, we
believe our consumer audience is comprised of more informed, ready-to-purchase shoppers. By connecting dealers with more
informed, ready-to-purchase 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 or with a
subscription to one of our paid Listings packages. Non-paying dealers 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 with 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 dealers’ website, and map directions to dealerships. The primary objective of our traffic acquisition and site
improvement efforts is to generate greater volumes of consumer leads to dealers. Leads are a subcategory of connections that
we define as user inquiries via our marketplace to dealers by phone calls, email, or managed text and chat interactions.
Dealers with our paid Listings packages are able to display their dealer name, address, and dealership information on their
listings on our websites 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
number of paying dealers in our U.S. marketplace. Our U.S. marketplace had 28,990 paying dealers as of December 31, 2019
compared to 27,534 and 25,122 as of December 31, 2018 and December 31, 2017, respectively.
Our scaled online marketplace model drives powerful network effects. The industry-leading inventory selection offered by
our U.S. dealers attracts a large and engaged consumer audience. The value of robust connections to this audience incentivizes
dealers to purchase our paid Listings packages. Displaying listings from more paying dealers provides consumers with more
dealer information and methods to contact them. More consumers – 36.8 million average monthly U.S. unique users in 2019 – and
connections – 65.3 million in the U.S. in 2019 – 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.
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We generate marketplace subscription revenue from dealers through subscriptions to our products, including our paid
Listings packages (which include optional features and enhancements such as Delivery) and products marketed under our
Real-time Performance Marketing suite, including our Dealer Display advertising and audience targeting products and our
Dealer Search Engine Marketing product. We also generate advertising and other revenue from auto manufacturers and other
auto-related brand advertisers, as well as from non-dealer products such as through our consumer financing partnerships and
our peer-to-peer marketplace. Our rapid revenue growth and financial performance over the last several years exemplify the
strength of our marketplace. We generated revenue of $588.9 million in 2019, $454.1 million in 2018, and $316.9 million in
2017, representing year-over-year increases of 30% in 2019 and 43% in 2018. In 2019, we generated net income of $42.1
million and our Adjusted EBITDA, a non-GAAP financial measure, was $77.0 million, compared to net income of
$65.2 million and Adjusted EBITDA of $49.7 million in 2018 and net income of $13.2 million and Adjusted EBITDA of
$24.1 million in 2017. 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).
Consumer Challenges
As consumers determine the car they would like to purchase, the key questions they ask are:
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(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 sellers, a difficulty exacerbated by the lack of consistency in the way
that dealers characterize a car’s attributes. Traditionally, dealers had more information about car prices than consumers did,
as consumers had limited resources and tools to determine an appropriate price. Selecting the right dealer was also
challenging for consumers as dealer reputations were historically based primarily on word-of-mouth. The lack of clear,
unbiased, transparent information made it difficult for consumers to effectively compare vehicles, find the vehicles that best
suited 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 targeting the
relatively 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.” 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 trust in
us among our users, helping us to become the most visited online automotive marketplace in the United States according to
data from Comscore. In 2019, we experienced over 99.4 million average monthly sessions in the United States. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Business Metrics” for
how we define average monthly sessions. We believe this user traffic, an indicator of consumer satisfaction and engagement,
is critical to our marketplace success and will continue to strengthen our market position. We attract our audience from a
diverse range of acquisition channels including, but not limited to, direct navigation, mobile applications, email, organic
search, paid search advertising, social media advertising, display advertising, audience targeting, and brand advertising
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campaigns. In addition, we focus our efforts on attracting users that we believe are near a car purchasing decision, resulting in
a higher quality audience to which our dealers can market. For our United States marketplace, in 2019 we generated 65.3
million connections and 38.5 million leads, compared with 62.2 million connections and 33.8 million leads in 2018. We
define (i) connections as interactions between consumers and dealers via our marketplace through phone calls, email,
managed text and chat, and clicks to access the dealer’s website and map directions to the dealership and (ii) leads as user
inquiries via our marketplace to dealers by phone calls, email, or managed text and chat.
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 many 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, together
with Dealer Rating, drives our Deal Rating. We calculate IMV by applying more than 20 ranking signals and more than 100
normalization rules to tens of millions of data points, including the make, model, trim, year, features, condition, history,
geographic location, and mileage of the car. We apply the knowledge gained from analyzing the growing volume of
connections between consumers and dealers on our platform to build new features for our consumers and products for our
dealers.
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. The primary
objective of our traffic acquisition and site improvements is to generate greater volumes of consumer leads to our dealers.
These leads include phone calls, email, and managed text and chat interactions to dealers, which we believe yield the highest
value engagement for dealers. We provide all dealers with tools that are 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 our 19% growth in
average annual revenue per subscribing dealer, or AARSD, in the United States in 2019 compared to 2018.
Network Effects Driven by Scale. With the majority of dealers in the United States listing inventory on our platform
and having built the most visited online automotive marketplace in the United States according to data from Comscore, 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 paid Listings
packages to access the numerous benefits unavailable to non-paying dealers. Displaying listings from more paying dealers on
our websites 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 data points, which we use to further strengthen our traffic acquisition efforts and
marketplace search algorithms, the utility of analysis complementing each listing, the quality of our user experience, the
value of connections between consumers and dealers, and the efficacy of our dealer digital marketing products.
Attractive Financial Model. We have a strong track record of revenue growth, profitability, and capital efficiency. We
generated revenue of $588.9 million in 2019, $454.1 million in 2018, and $316.9 million in 2017, representing year-over-
year increases of 30% in 2019 and 43% in 2018. A significant portion of our revenue is recurring due to the subscription
nature of our products. In 2019, 2018, and 2017, dealer marketplace subscription revenue from our Listings packages, our
Dealer Display advertising and audience targeting products, and our Dealer Search Engine Marketing product, all of which
we consider to constitute recurring revenue, comprised 89% of total revenue in each year. 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 30% in 2019 and 43% in 2018, our Adjusted EBITDA grew 55% in 2019 and 106% in 2018.
As a percentage of revenue, our Adjusted EBITDA margin expanded to 13% in 2019 from 11% in 2018 and from 8% in
2017. In the United States, which is our most developed market, we grew our revenue by 27% in 2019 and 42% in 2018
while increasing our income from operations to $73.9 million in 2019 from $58.4 million in 2018 and $41.6 million in 2017.
Founder-Led Management Team with Culture of Innovation. Our founder, Chief Executive Officer 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 fostering a culture of innovation and delivering data-driven transparency to the automotive
market.
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Our Products
Consumer Marketplace
We provide consumers an online automotive marketplace where they can search for new and used car listings from our
dealers. With our U.S. marketplace’s peer-to-peer offering, consumers also have access to additional car listings from private
sellers, and are able to sell their car to other consumers. Through our marketplace, we provide consumers with information
that helps them find the most relevant car for their needs. A user accesses our marketplace through our websites or, in the
U.S. and certain international markets, by using our mobile applications. 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 postal code. Our
product offerings described below are available through our U.S. marketplace; their availability internationally varies by
country. We also offer paid listings subscriptions for dealers and display advertising products through the PistonHeads
website.
Used and Certified Pre-Owned Cars
Using our proprietary search algorithms, we immediately display the results of the consumer’s search, ranked by Deal
Rating, on a search results page, or SRP. Eligible used car listings in our marketplace are 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 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 many years of
regression modeling utilizing millions of 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, features, condition, history, and mileage. 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.
Dealer Ratings. Dealer Ratings are derived from user-generated content from our users’ experiences with dealers with
which they have connected. To promote high-quality reviews, we require that a user have interacted with the dealer via our
marketplace 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, mileage, Dealer Rating,
and dealer location for paying dealers. We provide in-depth search filters, including price, year, mileage, trim, color, options,
condition, body style, miles per gallon, seating capacity, vehicle ownership history, 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 numerous 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:
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Price History. Changes to a vehicle’s price on our platform. We also offer price change alerts to consumers on
searches they have saved, which allow them to respond quickly to changes in the market.
Time on Site. Length of time a vehicle has been on our platform 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, number of owners, 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 sorted 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-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 in our peer-to-peer marketplace in the United States. 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 from our audience.
We offer services to facilitate financing, processing payment, titling, and other aspects of the private-sale transaction. We
collect a fee from the selling consumer for these services.
Dealer Marketplace
Our marketplace connects dealers to a large audience of informed and engaged consumers. We offer multiple types of
marketplace Listings subscriptions to dealers through our platform: Restricted Listings, which is free, and various levels of
Listings packages, each of which requires a paid subscription. We price our paid Listings packages 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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Restricted Listings. We allow non-paying dealers to list their inventory in our marketplace as Restricted Listings
(formerly referred to as Basic Listings). Restricted Listings do not display the name, address, website URL, or
phone number of the relevant dealer and are subject to other limitations. 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.
Listings Paid Subscriptions. Paying dealers are able to subscribe to one of four Listings package levels: Standard,
Enhanced, Featured or Featured Priority. These paid Listings packages are designed to provide dealers with a
higher volume and quality of connections and leads from consumers than our Restricted Listings option. Dealers
that subscribe to a paid Listings package gain the opportunity to connect with consumers directly through email,
phone, and – excluding Standard Listings subscriptions – managed text and chat. Listings for all paying dealers on
our websites include a link to their website, dealership branding and information such as name, address, and hours
of operation, and map directions to their dealership, helping consumers easily contact or visit the dealer, which we
believe results in increased local brand awareness and walk-in traffic. A dealer that subscribes to our Featured or
Featured Priority Listings package receives the same benefits of the Standard and Enhanced Listings packages, as
well as opportunities for promotion of their Great Deal, Good Deal, and Fair Deal inventory in a clearly labeled
section at the top of the SRP. Featured Priority listings are specifically promoted in the first position of the SRP.
This premium placement for Featured and Featured Priority listings generates increased connection volume
relative to Standard or Enhanced Listings. In addition, a dealer that pays for our Enhanced, Featured or Featured
Priority Listings packages may subscribe to our Delivery feature, which expands the visibility of a dealer’s
inventory in the search results beyond its local market.
Dealer Dashboard and Merchandising Tools
All dealers with inventory on CarGurus may access the following Dealer Dashboard features and merchandising 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 and through our digital marketing products. 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 information helps dealers better merchandise their vehicles.
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(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.
Dealers subscribing to a paid Listings package 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 efficient vehicle acquisition.
Dealer Digital Marketing and Customer Acquisition Products
We offer dealers subscribing to one of our Enhanced, Featured or Featured Priority Listings packages the following
additional advertising and customer acquisition products and enhancements marketed under our Real-time Performance
Marketing suite:
(cid:129) Dealer Display Advertising and Audience Targeting. Dealers are able to buy display advertising that appears in
our marketplace, on other sites on the internet, and/or on Facebook, a high-converting social platform, to build
brand awareness and acquire customers. Advertisements can be targeted by the user’s geography, search history,
CarGurus website activity (including showing users relevant vehicles from a dealer’s inventory that they have not
yet discovered on our marketplace), and a number of other targeting factors, allowing dealers to increase their
visibility with in-market consumers and drive qualified traffic to their websites.
(cid:129) Dealer Search Engine Marketing. Leveraging the capabilities that we have developed for our own algorithmic
traffic acquisition, we offer a product that delivers search engine marketing, social media advertising, and
retargeting to programmatically drive qualified traffic to dealer websites. Utilizing algorithmic bidding strategies
and automated keyword list management, we help dealers to optimize traffic acquisition.
Auto Manufacturer and Other Advertiser Products
Our platform offers auto manufacturers and others the ability to purchase display advertising on our sites to execute
targeted marketing strategies:
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Brand Reinforcement. We allow auto manufacturers to buy advertising on our sites and target consumers based on
the make, model, and postal 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 sites, such as the New Car
front page, Used Car front page, and 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, and
minivan.
Consumer Segment Exposure. Auto manufacturers can target consumers both on CarGurus and third-party
websites based on various parameters, including estimated household income and vehicle specifications, such as
make or model, and postal codes.
Consumer Financing Partnerships
Through our partnerships with automotive lending companies, we allow eligible consumers on our U.S. website to pre-
qualify for financing on cars from dealerships that offer financing from these partners. We primarily generate revenue from
these partnerships based on the number of funded loans from consumers who pre-qualify with our lending partners through
our site.
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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 were focused primarily on algorithmic traffic acquisition. We employ a
team of strategists, engineers and data scientists that optimizes our user acquisition through search engines, social media, and
other digital marketing channels and has tested over 1 billion keywords on various search engines as well as sophisticated,
personalized remarketing, to nurture consumers toward finding the right car for them. We believe our expertise in this area
constitutes a competitive advantage over less sophisticated competitors and those who outsource these capabilities.
We augment our marketing efforts with brand-building investments in media, including television and online video, as
well as ongoing efforts to convey our unique brand value proposition throughout our core site experience. These brand efforts
launched more recently than our algorithmic traffic acquisition efforts, resulting in brand awareness that remains lower than
some other major U.S. online automotive marketplaces in the United States despite our large monthly audience and high user
engagement. We have made significant progress in closing our brand awareness gaps since launching brand marketing in
2017 and believe that we are well-positioned to continue to strengthen our brand by continuing to invest in brand building
efforts, particularly given our trusted product, which delivers well on the brand promises we convey.
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 and information about industry
trends. 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 increase 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 in the U.S., 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 the dealers’
marketing spend.
Provide Best Practices to Assist Dealers in Becoming Successful in Our Marketplace. We provide ongoing
communications through email, webinars, white papers, testimonials, and videos, which show dealers how to use
our products to position their inventory for success on our platform and beyond. We maintain consistent
communication with dealers via email, events and our Dealer Dashboard to ensure awareness of account
performance and recent product updates.
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. We also from time to time host
thought leadership events in local markets and an automotive conference, Navigate, to continue to share our
insights and help build our brand among dealerships.
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Sales
Our sales team is responsible for bringing dealers onto our marketplace and converting non-paying dealers to paid
subscriptions. We have built an efficient inside sales and account management team of approximately 350 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 the U.S., Canada and the U.K. In
addition, we have advertising sales employees based in Cambridge, Massachusetts; Detroit, Michigan; Los Angeles,
California; and certain foreign locations.
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, 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 customer 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 and promotes diversity, equity and inclusion. 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 Fortune’s “Best Places to Work” in 2019,
Computerworld’s “Best Places to Work in IT” in 2019, Boston Business Journal’s “Best Places to Work” for five years in a
row from 2015 to 2019, Boston Globe’s “Top Place to Work” in 2014, 2015, 2016 and 2018 and the Mass TLC Company of
the Year award in 2018.
As of December 31, 2019, we had 921 full-time employees, 105 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.
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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, release
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 automatically add their inventory to our index, 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 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 dealer websites, which show our Deal Rating for cars that have been rated as a Great Deal, Good
Deal, or Fair Deal. Our Deal Rating serves as trusted, third-party validation on dealer websites.
Infrastructure
Our development servers and U.S. and Canadian websites are hosted at third-party data centers near Boston,
Massachusetts, as well as through third-party cloud services in the U.S. Our European websites are hosted on third-party
cloud computing services near London, England. We use third-party content distribution networks to cache and serve many
portions of our sites at locations across the globe. We monitor and test at the application, host, network, and full site levels to
maintain availability and promote performance. We use third-party cloud computing services for many data processing jobs
and backup/recovery services.
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;
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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;
digital marketing providers;
peer to peer marketplaces, such as Craigslist;
sites operated by individual automobile dealers; and
online dealerships, such as Carvana and Vroom.
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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 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 and one pending international patent application. These applications
cover proprietary technology that relates to various functionalities on our platform, generally in connection with pricing,
ranking and detecting fraud in online listings. 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, including “CarGurus,” the CarGurus logo, the CG logo,
and related marks, which we have registered 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 trade names.
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 partners and our
general and product-specific terms of use on our websites.
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, local 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 sites are not themselves advertisements, 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 advertising laws and regulations,
which often originated decades before the emergence of the internet, are frequently subject to multiple interpretations, are not
uniform across jurisdictions, 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. 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.
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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 websites, 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 Featured Listings, Featured Priority Listings and Dealer Display
advertising and audience targeting products marketed under our Real-time Performance Marketing suite, 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 websites and mobile applications 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, in the U.S.
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.
In addition, we are subject to numerous federal, national, state, and local laws and regulations in the United States and
around the world regarding privacy and the collection, processing, storage, sharing, disclosure, use, cross-border transfer, and
protection of personal information and other data. While the scope of these laws and regulations is changing and remains
subject to differing interpretations, we seek to comply with industry standards and all applicable laws, policies, legal
obligations, and industry codes of conduct relating to privacy and data protection. We are also subject to the terms of our
privacy policies and privacy-related obligations to third parties.
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 U.S. website is www.cargurus.com. Information that is contained on, or that can be
accessed through, our websites is not incorporated by reference into this Annual Report on Form 10-K, and you should not
consider information on our websites 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, Inc. 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.
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.
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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 Annual Report, including
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial
statements and related notes, before 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 we are transitioning many of these dealers to
contracts with one-year committed terms, the majority of our contracts with dealers currently provide for one-month
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
business and financial results 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 materially and adversely affected.
If paying dealers do not experience the volume of consumer connections that they expect during their 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 platform. If we
fail to maintain or 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 the CarGurus marketplace for free; however, we impose certain limitations
on such free listings, such as excluding dealer identity and contact information, and these dealers do not receive access to the
paid features of our marketplace. In the future we may decide to impose additional restrictions on free listings. 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 paid
Listings packages. If dealers do not subscribe to our paid offerings at the rates we expect, or if a greater than expected
number of paying dealers elect to terminate their subscriptions or reduce their fees, our business and financial results would
be materially and adversely affected.
If dealers or other advertisers reduce their advertising spending 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, including display advertising and audience targeting services, 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;
our ability to keep pace with changes in technology and the practices and offerings of our competitors; and
our ability to offer an attractive 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 in our marketplace 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 advertising services 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 materially and
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 applications 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 the 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 websites, 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 websites. 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 websites. 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 methodologies in ways that are detrimental to us, or if our competitors’ internet search engine optimization
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 websites have 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 websites 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,
websites, and mobile applications useful for consumers and dealers or that otherwise provide value to 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, lower retention rates, and higher marketing and sales costs than our existing
products. We are likely to continue to modify 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, negatively impact 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 negatively affect our business and operating results.
The failure to build, maintain and protect 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. Our ability to protect our brand is also impacted by the success of our efforts to optimize our
significant brand spend and overcome the intense competition in brand marketing across our industry, including competitors
that may imitate our messaging in response to our success. If consumers were to believe that we are not focused on
providing them with a better automobile shopping experience, or if we fail to overcome brand marketing competition and
maintain a differentiated value proposition in consumers’ minds, our reputation and the strength of our brand may be
adversely affected.
Complaints or negative publicity about our business practices, our management team and employees, 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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Portions of our platform enable consumers and dealers using our sites 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 websites. 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.
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 $588.9 million for the year ended December 31, 2019 from $454.1 million for the year ended
December 31, 2018, representing a 30% increase between such periods, and increased to $454.1 million for the year ended
December 31, 2018 from $316.9 million for the year ended December 31, 2017, representing a 43% increase between such
periods. In the future, our revenue growth rates will continue to 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 that 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 data, competition for consumers and dealers using our
products, new and different competitors, monetizing dealers and other customers, new regulatory environments and laws,
different consumer behavior than 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 if we continue to expand internationally.
We may expand our international operations 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’ websites 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 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 additional international markets, which could affect our
business and potential growth.
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In addition to English, we have made portions of our platform available in French, German, Italian, 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 and regulatory
systems, alternative dispute resolution 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, managing and retaining qualified multilingual employees, including sales personnel;
adapting our websites and mobile applications to conform to local consumer behavior;
increased competition from local websites, mobile applications 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 and 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 United
Kingdom 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;
adverse changes in trade relationships among foreign countries and/or between the United States and such
countries;
double taxation of our international earnings and potentially adverse tax consequences arising from 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, marketing, 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 United States 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;
digital marketing providers;
peer to peer marketplaces, such as Craigslist;
sites operated by individual automobile dealers; and
online dealerships, such as Carvana and Vroom.
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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 adversely affected.
We also expect that new competitors will continue to enter the online automotive retail industry with competing
marketplaces, products, and services, or that existing competitors will expand to offer competing products or 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 platform and associated
products less competitive, unmarketable, or obsolete. In addition, if our competitors develop platforms 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 national and regional dealership associations, national and local regulators,
automotive 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 platform 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 platform 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 United States 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.
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We rely on third-party service providers and strategic partners for many aspects of our business, and any failure to
maintain these relationships or to successfully integrate certain third-party platforms could harm our business.
Our success will depend upon our relationships with third parties, including our payment processor, our data center
hosts, our information technology providers, our data providers for inventory and vehicle information, our human resources
information system provider, our billing subscription software provider, our customer relationship management software
provider, our financial planning and analysis software provider, our information integration platform providers, our
marketing platform providers, our business intelligence and data analytics providers, our search engine and social media
advertising providers, our invoice and expense provider, our equity administration provider, and our general ledger provider,
as well as our strategic partners, including consumer lenders. If these third parties experience difficulty meeting our
requirements or standards, have adverse audit results, violate the terms of our relationship or applicable law, fail to obtain or
maintain applicable licenses, 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 or strategic partners were to cease operations, temporarily or permanently, face
financial distress or other business disruptions, increase their fees, or if our relationships with these providers or partners
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.
Our enterprise systems require that we integrate the platforms hosted by certain third-party service providers. We are
responsible for integrating these platforms and updating them to maintain proper functionality. Issues with these integrations,
our failure to properly update third-party platforms or any interruptions to our internal enterprise systems could harm our
business by causing delays in our ability to quote, activate service and bill new and existing customers on our platform.
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. In addition, with further growth and expansion, our employee base will continue to spread
outside of our headquarters in Cambridge, Massachusetts. 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 materially and adversely affected.
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, or the reduction in their involvement in the
management of our business, 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.
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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 marketplace 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 Values, Deal Ratings, Dealer Ratings, New Car
Price Guidance and other features of our marketplace.
We provide consumers using our marketplace with our proprietary Instant Market Values, or IMV, Deal Ratings, and
Dealer Ratings, as well as other features to help them evaluate vehicle listings, including price guidance for new car listings,
or New Car Price Guidance. Revisions to or errors in our automated valuation models, or the algorithms that underlie them,
may cause the IMV, the Deal Rating, New Car Price Guidance, or other features to vary from our expectations regarding the
accuracy of these tools. In addition, from time to time, regulators, consumers, dealers and other industry participants may
question or disagree with our IMV, Deal Rating, Dealer Rating or New Car Price Guidance. 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 and could result in legal disputes.
As we acquire other companies or technologies, such activities 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 will 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, and other third parties.
Our failure to address these risks or other problems encountered in connection with acquisitions and investments could
cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated
liabilities, cause us to be reluctant to engage in future transactions, and harm our business generally. Acquisitions could
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result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expense, and
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.
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 United States federal, state and local 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.
Local Motor Vehicle Sales, Advertising and Brokering, and Consumer Protection Laws
The advertising and sale of new and used motor vehicles is highly regulated by the jurisdictions 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, 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 advertising laws and regulations are frequently subject to multiple interpretations and are not uniform from jurisdiction
to jurisdiction, 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.
If 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
jurisdictions, 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 platform, 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 United States 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.
Antitrust Laws
Antitrust and competition 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 such 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, and cash flows.
Other
Claims could be made against us under both United States and foreign laws, including claims for defamation, libel,
invasion of privacy, false advertising, intellectual property infringement, or claims based on other theories related to the
nature and content of the materials disseminated by users of our marketplace and portions 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 we will continue to be, exposed to legal and regulatory risks including with respect to privacy,
tax, law enforcement, content, intellectual property, competition, 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, trade relations between the United States and China and other macroeconomic issues, which
could have a material adverse effect on our business, revenue, results of operations, and financial condition.
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; rising interest rates, which may reduce
the demand for consumer credit due to the higher cost of borrowing; reductions in business and consumer confidence; stock
market volatility; increased unemployment; and changing trade barriers, including increased tariff rates or custom duties.
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.
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In addition, our business may be negatively affected by challenges to the larger automotive industry ecosystem,
including global supply chain challenges, changes to trade policies, trade relations between the United States and China and
other macroeconomic issues. These factors could have a material adverse effect on our business, revenue, results of
operations, and financial condition.
The consequences we may face from the exit of the United Kingdom from the European Union could have a material
adverse effect on our business, revenue, results of operations, and financial condition.
The United Kingdom’s exit from the European Union, or the EU, commonly referred to as “Brexit”, could adversely
affect European and global economic or market conditions, contribute to instability in global financial markets, create
uncertainty in the wider commercial, legal, and regulatory environment, and cause disruptions to our business and operations
in the United Kingdom, including with respect to our customers, suppliers, and consumers in the United Kingdom. As a
result of this economic uncertainty, our dealer customers in particular may be unwilling to subscribe to our websites or renew
or increase their existing subscriptions, as applicable. We may also face new regulatory costs and challenges that could have
an adverse effect on our operations. Brexit has created economic uncertainty and its consequences could have a material
adverse effect on our business, revenue, results of operations, and financial condition.
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 websites 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 websites or mobile applications 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 have experienced, and we may in the future experience, interruptions
with our systems. 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 websites and mobile applications,
and prevent or inhibit the ability of dealers and 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 near Boston, Massachusetts, and internationally near 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 or software. In
addition, we do not own or control the operation of these facilities. We also use third-party hosting services to back up some
data but do not maintain redundant systems or facilities for some of the services. A disruption to one or more of these
systems may cause us to experience an extended period of system unavailability, which could negatively impact our
relationship with consumers, customers and advertisers. 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
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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 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, transfer, 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.
Some functions of our marketplace involve the storage and transmission of consumers’ information, such as IP
addresses, contact information of users who connect with dealers and profile information of users who create accounts on our
marketplace, as well as dealers’ information. We also process and store personal and confidential information of our
vendors, partners, and employees. 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
on encryption and authentication technology licensed from third parties to effect secure transmission of such information.
Like all information systems and technology, our websites, mobile applications, and information systems are subject to
computer viruses, break-ins, phishing attacks, attempts to overload the systems 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, and could cause loss of critical data and the unauthorized disclosure, access,
acquisition, alteration, and 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 websites or
mobile applications, or the loss or unauthorized disclosure, access, acquisition, alteration, or use of confidential information,
consumers, customers, advertisers, partners, vendors, and employees may lose trust and confidence in us, and consumers may
decrease the use of our websites or stop using our websites entirely, dealers may stop or decrease their subscriptions with us,
and advertisers may decrease or stop advertising on our websites.
Further, outside parties have attempted and will continue to attempt to fraudulently induce employees, consumers, or
advertisers to disclose sensitive information in order to gain access to our information or our consumers’, dealers’,
advertisers’, and employees’ information. As cyber-attacks increase in frequency and sophistication, our cyber-security and
business continuity plans may not be effective in anticipating, preventing and effectively responding to all potential cyber-
risk exposures. In addition, 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 adversely affect our brand reputation, 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 dealers and advertisers to cancel their contracts, cause employees to
terminate their employment, cause employment candidates to be unwilling to pursue employment opportunities or accept
employment offers, and 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, national, state, and local laws and regulations in the United States and around the world
regarding privacy and the collection, processing, storage, sharing, disclosure, use, cross-border transfer, and protection of
personal information and other data. These laws and regulations are evolving, are subject to differing interpretations, may be
costly to comply with, may result in regulatory fines or penalties, may subject us to third-party lawsuits, may be inconsistent
between countries and jurisdictions, and may conflict with other requirements.
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We seek to comply with industry standards and are subject to the terms of our privacy policies and privacy-related
obligations to third parties, as well as all applicable laws, policies, legal obligations, and industry codes of conduct relating to
privacy and data protection. 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 and that new
regulations could be enacted. Several proposals have recently become effective or are pending, as applicable, before federal,
state, local, and foreign legislative and regulatory bodies that could significantly affect our business, including the General
Data Protection Regulation in the EU, or the GDPR, which went into effect on May 25, 2018, and the California Consumer
Privacy Act, or the CCPA, which went into effect on January 1, 2020. The CCPA, among other things, contains new
disclosure obligations for businesses that collect personal information about California residents and provides California
residents with additional rights relating to their personal information. The GDPR and CCPA in particular have already
required, and may further require, us to change our policies and procedures and may in the future require us to make changes
to our marketplace and other products. These and other requirements could reduce demand for our marketplace and other
offerings, require us to take on more onerous obligations in our contracts and restrict our ability to store, transfer, and process
data, which may seriously harm our business. Similarly, Brexit may require us to change our policies and procedures and, if
we are not in compliance, may also seriously harm our business. We may not be entirely successful in our efforts to comply
with the evolving regulations to which we are subject due to various factors within our control, such as limited internal
resource allocation, or outside our control, such as a lack of vendor cooperation, new regulatory interpretations, or lack of
regulatory guidance in respect of certain GDPR or CCPA requirements.
Any failure or perceived failure by us to comply with United States and international data protection laws and
regulations, our privacy policies, or our privacy-related obligations to consumers, customers, employees and other third
parties, or any compromise of security that results in the unauthorized release or transfer of sensitive information, which
could include personal information or other user data, may result in governmental investigations, enforcement actions,
regulatory fines, litigation, criminal penalties, or public statements against us by consumer advocacy groups or others, and
could cause consumers and dealers to lose trust in us, which could significantly impact our brand reputation and 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 employee, 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.
Our ability to attract consumers to our own websites and for our advertising clients depends on the collection of consumer
data from various sources, which may be restricted by consumer choice, privacy restrictions imposed by advertising
partners, web browsers or other software, and developments in laws, regulations and industry standards.
The success of our consumer marketing and the delivery of internet advertisements for our clients depends on our
ability to leverage data, including data that we collect from our clients, data we receive from our publisher partners and third
parties, and data from our operations. Using cookies and non-cookie-based technologies, such as mobile advertising
identifiers, we collect information about the interactions of users with our clients’ and publishers’ digital properties
(including, for example, information about the placement of advertisements and users’ shopping or other interactions with
our clients’ websites or advertisements). Our ability to successfully leverage such data depends on our continued ability to
access and use such data, which could be restricted by a number of factors, including:
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increasing consumer adoption of “do not track” mechanisms as a result of legislation including GDPR and CCPA;
privacy restrictions imposed by web browser developers, advertising partners or other software developers that
impair our ability to understand the preferences of consumers by limiting the use of third-party cookies or other
tracking technologies or data indicating or predicting consumer preferences; and
new developments in, or new interpretations of, privacy laws, regulations and industry standards.
Each of these developments could materially impact our ability to collect consumer data and deliver relevant internet
advertisements to attract consumers to our websites or to deliver targeted advertising for our advertising clients. If we are
unsuccessful in evolving our advertising and marketing strategies to adapt to and mitigate these evolving consumer data
limitations, our business results could be materially impacted.
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We have been, and may again be, subject to intellectual property disputes, which are costly to defend and could harm our
business and operating results.
We are subject to claims and litigation by third parties that we infringe their intellectual property rights, and we may
face allegations in the future that we have infringed the trademarks, copyrights, patents, and other intellectual property rights
of third parties, including from our competitors or non-practicing entities. We may also learn of possible infringement to our
trademarks, copyrights, patents, and other intellectual property. In addition, we could be subject to lawsuits where consumers
and dealers posting content on our websites disseminate materials that infringe the intellectual property rights of third parties.
We have encountered lawsuits in the past containing such allegations.
Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict
and may result in significant settlement costs or payment of substantial damages. Many potential litigants, including patent
holding companies, have the ability to dedicate substantially greater resources to enforce their intellectual property rights and
to defend claims that may be brought against them. Furthermore, a successful claimant could secure a judgment that requires
us to stop offering some features or prevents us from conducting our business as we have historically done or may desire to
do in the future. We might also be required to seek a license and pay royalties for the use of such intellectual property, which
may not be available on commercially acceptable terms, or at all. Alternatively, we may be required to modify our
marketplace and features while we develop non-infringing substitutes, which could require significant effort and expense and
may ultimately not be successful.
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 platform’s 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 internationally. Also, while we have registered the CARGURUS and CG logos in the EU and the United
Kingdom, as well as the word-mark CARGURUS in Italy, France, Spain, the United Kingdom and, for a subset of services,
Ireland, we were not able to register the word-mark CARGURUS in the EU and Germany as the mark was deemed to be non-
distinctive, and thus not registerable. We may be unable to register CARGURUS, the word-mark, in certain other countries
in the EU. 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 have created and may in the future 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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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.
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 websites. 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, and
financial condition. In addition, to the extent that such activity creates confusion among consumers or advertisers, our brand
and business could be harmed.
We may incur losses in the future if we fail to sufficiently grow our revenue or manage our costs effectively.
Although we have experienced significant growth in revenue on a year-over-year basis, our annual revenue growth rate
is likely to continue to decline in the future as a result of a variety of factors. Our international expansion and new product
launches will cause our costs to increase in future periods as we continue to expend substantial financial resources to enter
into those markets and promote the new products, as applicable. 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 may continue to increase our
costs and the demands on management and could harm our operating results.
As a public company, and particularly since December 31, 2018 when we ceased being an “emerging growth
company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we incur significant legal,
accounting, and other expenses to comply with applicable laws and regulations. In addition, the Sarbanes-Oxley Act of 2002,
or the Sarbanes-Oxley Act, and rules subsequently implemented by the SEC and the Nasdaq Stock Market, or Nasdaq,
impose various requirements on public companies, including requiring certain corporate governance practices. Our
management and other personnel devote and expect to continue to devote a substantial amount of time to these compliance
initiatives. Moreover, these rules and regulations have increased and may 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. 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, as we are a large accelerated filer, our independent registered public accounting firm is required to attest to the
effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, or
Section 404, and we now incur the cost of our compliance with Section 404. Our compliance with applicable provisions of
Section 404 requires 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.
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We must maintain proper and effective internal controls over financial reporting and any failure to maintain the
adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of
our Class A common stock could decline.
We are required, pursuant to Section 404 and the related rules adopted by the SEC, to furnish a report by management
on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment
includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
During the evaluation and testing process, if we identify and fail to remediate one or more material weaknesses in our internal
control over financial reporting, we will be unable to assert that our internal controls are effective.
In addition, our independent registered public accounting firm must attest to the effectiveness of our internal control
over financial reporting under Section 404. Our independent registered public accounting firm may issue a report that is
adverse to us in the event it is not satisfied with the level at which our controls are documented, designed or operating. We
may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and any required
remediation in a timely fashion. We are also required to disclose significant changes made to our internal control procedures
on a quarterly basis. Our compliance with Section 404 requires that we incur substantial accounting expense and expend
significant management efforts.
Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report
our financial condition or results of operations. If we are unable to assert that our internal control over financial reporting is
effective or our independent registered public accounting firm is unable to express an opinion on the effectiveness of our
internal control over financial reporting when it is required to issue such opinion, we could lose investor confidence in the
accuracy and completeness of our financial reports, the market price of our Class A common stock could decline, and we
could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.
Seasonality may cause fluctuations in our operating results.
Across the retail automotive industry, consumer purchases are typically greatest in the first three quarters of each year,
due in part to the introduction of new vehicle models from manufacturers, and our consumer-marketing spend generally
fluctuates accordingly. As consumer automotive 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 the trading price of our Class A common stock.
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, financial condition, and
prospects could be adversely affected.
We intend to continue to make investments to support our growth and may require additional capital to pursue our
business objectives and 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 platform and existing
products, enhance our operating infrastructure, expand internationally, 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
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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.
We could be subject to adverse changes in applicable tax laws, regulations and interpretations, as well as challenges to
our tax positions.
We are subject to taxation in the United States and certain other jurisdictions in which we operate. Changes in
applicable tax laws or regulations may be proposed or enacted that could materially and adversely affect our effective tax
rate, tax payments, results of operations, financial condition and cash flows.
In addition, tax laws and regulations are complex and subject to varying interpretations. For instance, on June 21,
2018, the United States Supreme Court issued its decision in South Dakota v. Wayfair, Inc., or the Wayfair Decision, which
overturned prior case law that held that out-of-state merchants were not required to collect sales taxes unless they had a
physical presence in the buyer’s state. Although we currently believe that the Wayfair Decision is unlikely to have a material
effect on our business, it has created uncertainty over sales tax liability, and could precipitate reactions by legislators,
regulators and courts that could adversely increase our tax administrative costs and tax risk, and negatively affect our overall
business, results of operations, financial condition and cash flows.
We are also regularly subject to audits by tax authorities. For example, we are currently under audit by the Internal
Revenue Service with respect to our 2016, 2017 and 2018 federal employment taxes. Any adverse development or outcome
in connection with these tax audits, and any other audits or litigation, could materially and adversely impact our effective tax
rate, tax payments, results of operations, financial condition and cash flows.
Failure to deal effectively with fraud or other illegal activity could lead to potential legal liability, harm our business,
cause us to lose paying dealer customers and adversely affect our reputation, financial performance and growth.
Based on the nature of our business we are exposed to potential fraudulent and illegal activity in our marketplace,
including:
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listings of automobiles that are not owned by the purported dealer or that the dealer has no intention of selling at
the listed price;
receipt of fraudulent leads that we may send to our dealers; and
deceptive practices in our peer-to-peer marketplace, including through the seller’s listing of inventory without
intent to sell or improper use of the private payment platform.
The measures we have in place to detect and limit the occurrence of such fraudulent and illegal activity in our
marketplace may not always be effective or account for all types of fraudulent or other illegal activity. Further, the measures
that we use to detect and limit the occurrence of fraudulent and illegal activity must be dynamic, as technologies and ways to
commit fraud and illegal activity are continually evolving. Failure to limit the impact of fraudulent and illegal activity on our
websites could lead to potential legal liability, harm our business, cause us to lose paying dealer customers and adversely
affect our reputation, financial performance and growth.
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.
Primarily by virtue of his holdings in shares of our Class B common stock, which has a ten-to-one voting ratio
compared to our Class A common stock, Langley Steinert, our founder, Chief Executive Officer 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
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of our company as a result of his positions as our Chief Executive Officer 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 the ability of our stockholders 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. Our founder
and certain of his affiliates hold a substantial number of the outstanding shares of our Class B common stock and therefore
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 the ability of our stockholders to influence
corporate matters for the foreseeable future.
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 trading price of our Class A common stock has been and may continue to be volatile and the value of our
stockholders’ investment in our stock could decline.
The trading price of our Class A common stock has been and may continue to 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 issuances of earnings guidance, as well as our press releases, other public
announcements, and filings with the SEC;
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(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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 positive 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 litigation has 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.
Our business could be negatively affected as a result of actions of activist stockholders, which could be disruptive and
potentially costly, and such activism could impact the trading value of our common stock and cause uncertainty about the
strategic direction of our business.
Even though we are a controlled company, the actions of activist stockholders could nevertheless adversely affect our
business. Activist stockholders may from time to time attempt to effect changes in our strategic direction, and in furtherance
thereof, may seek changes in how our company is governed. Responding to strategic proposals by activist stockholders related
to our business, strategy, management or operations, or the composition of our board of directors, could disrupt our operations,
be costly and time-consuming, or divert the attention of our board of directors and senior management from the pursuit of
business strategies. In addition, perceived uncertainties as to the future strategic direction of our business in relation to the
actions of an activist stockholder may be exploited by our competitors, cause concern to current or potential customers, result in
the loss of potential business opportunities, make it more difficult to attract and retain qualified personnel and/or affect our
relationships with vendors, customers and other third parties. Actions of an activist stockholder may also cause fluctuations in
the trading price of our Class A common stock based on temporary or speculative market perceptions or other factors that do
not necessarily reflect the underlying fundamentals and prospects of our business.
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.
31
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated
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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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.
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 prevent 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 have 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
amended and restated certificate of incorporation, a court could rule that such a provision is inapplicable or unenforceable.
32
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, the trading price and trading volume of
our Class A common stock 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, and our competitors. If any of the analysts that covers us changes its
recommendation regarding our stock adversely, or provides 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, our stockholders may only receive a return on their investment in our Class A common stock
if the trading price of their shares increases.
Our status as a “controlled company” could make our Class A common stock less attractive to some investors or otherwise
harm the trading price of our Class A common stock.
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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
the requirement that a majority of our board of directors consist of “independent directors” as defined under the
rules of Nasdaq;
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 rely and have relied on certain or all 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.
33
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 163,675 square feet of space in various parcels in three buildings with lease terms that expire in
November 2022, August 2023, January 2025, and December 2033, as applicable. We also lease office space in Dublin,
Ireland for our European operations. In 2019 we entered into (i) an amendment of an existing lease to increase our leased
office space at 55 Cambridge Parkway in Cambridge, Massachusetts, which additional space we expect to occupy in 2020,
and (ii) a lease for office space at 1001 Boylston Street in Boston, Massachusetts, which we expect to occupy in 2023.
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.
34
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, or IPO, was priced at $16.00 per share on October 11, 2017.
On February 13, 2020, the last reported sale price of our Class A common stock on the Nasdaq Global Select Market
was $34.10 per share.
Holders
As of February 6, 2020, we had 19 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, or the 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 Exchange Act or the Securities Act of 1933, as amended.
35
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, 2019 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.
$250
$200
$150
$100
$50
1 0 / 1 2 / 2
0 1 7
1 2 / 3 1 / 2
0 1 7
3 / 3 1 / 2
0 1 8
6 / 3 0 / 2
0 1 8
9 / 3 0 / 2
0 1 8
1 2 / 3 1 / 2
0 1 8
3 / 3 1 / 2
0 1 9
6 / 3 0 / 2
0 1 9
9 / 3 0 / 2
0 1 9
1 2 / 3 1 / 2
0 1 9
CarGurus, Inc.
Nasdaq Composite Index
S&P 500 Index
CARG
S&P 500 Index
Nasdaq Computer Index
10/12/2017 12/31/2017 3/31/2018 6/30/2018 9/30/2018 12/31/2018 3/31/2019 6/30/2019 9/30/2019 12/31/2019
128
202
132
116
139
123
122
101
102
109
105
105
100
100
100
145
114
119
112
121
124
131
119
124
126
108
115
139
104
108
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities
None.
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, 2019, 2018, and 2017 and
the consolidated balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements,
which are included elsewhere in this Annual Report on Form 10-K. We derived the consolidated statement of operations data
for the year ended December 31, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017, 2016 and
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.
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:
Interest income
Other income (expense), net
Total other income (expense), net
Income (loss) before income taxes
(Benefit from) provision for 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
Other Financial Information:
Adjusted EBITDA(3)
Year Ended December 31,
2019
2018(4)
2017
2016
2015
(in thousands, except share and per share data)
$
$
$
$
526,043 $
62,873
588,916
36,300
552,616
393,844
69,462
50,434
4,554
518,294
34,322
2,984
1,399
4,383
38,705
(3,441)
42,146 $
405,780 $
48,306
454,086
24,811
429,275
282,664 $
34,197
316,861
17,609
299,252
171,302 $
26,839
198,141
9,575
188,566
315,939
47,866
39,475
2,804
406,084
23,191
2,283
10
2,293
25,484
(39,686)
65,170 $
236,165
22,470
22,688
2,655
283,978
15,274
154,125
11,453
12,783
1,634
179,995
8,571
869
(306)
563
15,837
2,638
13,199 $
416
(42)
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)
1
(13)
(12)
(2,540)
(904)
(1,636)
0.38 $
0.37 $
0.60 $
0.57 $
0.13 $
0.12 $
(0.58) $
(0.58) $
(0.41)
(0.41)
111,450,443 108,833,028 55,835,265 44,138,922 43,141,236
113,431,850 113,364,712 60,637,584 44,138,922 43,141,236
$
76,989 $
49,658 $
24,097 $
10,965 $
(366)
(1)
Includes depreciation and amortization expense for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 of
$3,263, $2,225, $1,140, $438, and $153 respectively.
37
(2)
(3)
(4)
For years ended December 31, 2019, 2018, and 2017, see Note 11 of the notes to our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K for an explanation of the calculations of our net income (loss)
per share attributable to common stockholders. For years ended December 31, 2016 and 2015, see our Annual Report
on Form 10-K for the year ended December 31, 2017 for an explanation of the calculations of our net income (loss) per
share attributable to common stockholders.
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.
See Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-
K for an explanation of the impact of adoption of ASC 606.
2019(2)
2018(1)
December 31,
2017
(in thousands)
2016
2015
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)
27,950
24,269
74,250 $
$ 171,612 $ 157,687 $ 137,709 $
12,780
16,563
145,196 131,355 114,238
56,547
393,623 268,290 176,594 100,331
136,768
35,605
— 132,698
—
(67,972)
256,855 194,111 127,025
74,179
—
49,569
61,363
7,147
52,751
77,781
20,534
73,378
(16,131)
(1)
(2)
See Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-
K for an explanation of the impact of adoption of ASC 606.
See Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-
K for an explanation of the impact of adoption of ASC 842.
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, acquisition-related expenses, other (income) expense, net, and the (benefit from) provision for income
taxes. 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.
38
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 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 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 acquisition-related expenses incurred by us during a reporting period, which may not
be reflective of our operational performance during such period, for acquisitions that have been completed as of
the filing date of our annual or quarterly report (as applicable) relating to such period;
(cid:129) Adjusted EBITDA does not reflect other (income) expense, net which primarily includes interest income earned on
our cash, cash equivalents, and investments, sublease income and net foreign exchange gains and losses;
(cid:129) Adjusted EBITDA does not reflect the (benefit from) provision for income taxes; 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.
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.
Year Ended December 31,
2019
2018(2)(3)
2017
(in thousands)
2016
2015
Reconciliation of Adjusted EBITDA:
Net income (loss)
Depreciation and amortization
Stock-based compensation expense
Acquisition-related expenses(1)
Other (income) expense, net
(Benefit from) provision for income taxes
Adjusted EBITDA
$
$
$
42,146
7,817
34,301
549
(4,383)
(3,441)
$
76,989
$
65,170
5,029
20,794
644
(2,293)
(39,686)
$
49,658
$
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)
(1) Acquisition-related expenses relate to acquisition costs incurred during the years ended December 31, 2019 and 2018.
Refer to Note 3 and Note 16 to our consolidated financial statements appearing elsewhere in this Annual Report on
Form 10-K for further information.
(2)
In December 2019, we revised our definition of Adjusted EBITDA to exclude the impact of acquisition-related
expenses. This changed definition more accurately reflects management’s view of our business and financial
performance. Adjusted EBITDA for the year ended December 31, 2018 has been restated for comparison purposes.
There were no acquisition-related expenses incurred during the years ended December 31, 2017, 2016 or 2015.
(3)
See Note 2 of the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-
K for an explanation of the impact of adoption of ASC 606.
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. See “Special Note Regarding Forward-Looking Statements.” 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 regarding non-GAAP financial measures 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 under the CarGurus brand in
Canada, the United Kingdom, Germany, Italy, and Spain. In the United Kingdom, we also operate the PistonHeads online
marketplace as an independent brand.
We generate marketplace subscription revenue from dealers primarily through Listings, and Dealer Display
subscriptions, and advertising and other revenue from automobile manufacturers and other auto-related brand advertisers as
well as partnerships with financing services companies. We generated revenue of $588.9 million in 2019, $454.1 million in
2018, and $316.9 million in 2017, representing year-over-year increases of 30% in 2019 and 43% in 2018.
In 2019, we generated net income of $42.1 million and our Adjusted EBITDA was $77.0 million, compared to a net
income of $65.2 million and Adjusted EBITDA of $49.7 million in 2018, and a net income of $13.2 million and Adjusted
EBITDA of $24.1 million in 2017. See “Selected Consolidated Financial Data — Adjusted EBITDA” for more information
regarding our use of Adjusted EBITDA, a non-GAAP financial measure, and a reconciliation of Adjusted EBITDA to our net
income.
We have two reportable segments, United States and International. See Note 13 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. The
International segment derives revenues from marketplace subscriptions, advertising services, and other revenues from
customers outside of the United States. International markets perform differently from the United States market due to a
variety of factors, including our operating history in the market, our rate of investment, market size, market maturity,
competition and other dynamics unique to each country.
40
Monthly Unique Users
For each of our websites, we define a monthly unique user as an individual who has visited such website within a
calendar month, based on data as measured by Google Analytics. We calculate average monthly unique users as the sum of
the monthly unique users in a given period, divided by the number of months in that period. We count a unique user the first
time a computer or mobile device with a unique device identifier accesses one of our websites during a calendar month. If an
individual accesses a website using a different device within a given month, the first access by each such device is counted as
a separate unique user. We view our average monthly unique users as a key indicator of the quality of our user experience,
the effectiveness of our advertising and traffic acquisition, and the strength of our brand awareness. Measuring unique users
is important to us and we believe it provides useful information to our investors because our marketplace 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 or map directions to the dealership.
Average Monthly Unique Users
United States
International
Total
(1)
Includes users from the PistonHeads website.
Monthly Sessions
2019
Year Ended December 31,
2018
(in thousands)
2017
36,804
10,353 (1)
47,157
34,275
4,280
38,555
24,469
2,451
26,920
We define monthly sessions as the number of distinct visits to our websites that take place each month within a given
time frame, as measured and defined by Google Analytics. We calculate average monthly sessions as the sum of the monthly
sessions in a given period, divided by the number of months in that period. A session is defined as beginning with the first
page view from a computer or mobile device and ending at the earliest of when a user closes their browser window, after 30
minutes of inactivity, or each night at midnight (i) Eastern Time for our United States and Canada websites, (ii) Greenwich
Mean Time for our U.K. websites and (iii) Central European Time (or Central European Summer Time when daylight
savings is observed) for our Germany, Italy, and Spain websites, as applicable. A session can be made up of multiple page
views and visitor actions, such as performing a search, visiting vehicle detail pages, and connecting with a dealer. We believe
that measuring the volume of sessions in a time period, when considered in conjunction with the number of unique users in
that time period, is an important indicator to us of consumer satisfaction and engagement with our marketplace, and we
believe it provides useful information to our investors because the more satisfied and engaged consumers we have, the more
valuable our service is to dealers.
Average Monthly Sessions
United States
International
Total
(1)
Includes sessions from the PistonHeads website.
2019
Year Ended December 31,
2018
(in thousands)
2017
99,412
24,955 (1)
124,367
91,798
9,873
101,671
64,758
5,365
70,123
41
Number of Paying Dealers
A paying dealer is a dealer, based on a distinct associated inventory feed, that subscribes to one of our paid Listings
packages or Dealer Display advertising and audience targeting products at the end of a defined period. The number of paying
dealers we have is important to us and we believe it provides valuable information to investors because it is indicative of the
value proposition of our marketplace products, as well as our sales and marketing success, including our ability to retain
paying dealers and develop new dealer relationships.
Number of Paying Dealers
United States
International
Total
2019
28,990
7,125 (1)
36,115
As of December 31,
2018
27,534
3,938
31,472
2017
25,122
2,548
27,670
(1)
Includes paying dealers from the PistonHeads website.
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. This information is important to us, and we
believe it provides useful information to investors because we believe that 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. In
addition, increases in AARSD, which we believe reflect the value of exposure to our engaged audience in relation to
subscription cost, are driven by our ability to grow the volume of connections to our users and the quality of those
connections, which result in increased opportunity to upsell package levels and cross-sell additional products to our paying
dealers.
Average Annual Revenue per Subscribing Dealer (AARSD)
United States
International
Consolidated
2019
17,576 $
5,399 (1)$
15,757 $
As of December 31,
2018
14,819 $
4,778 $
13,718 $
$
$
$
2017
12,055
4,904
11,544
(1)
Excludes revenue and dealers for dealers that subscribe to the (i) PistonHeads website as it was acquired on January 8,
2019, and therefore, data for the trailing 12-month revenue calculation is not available and (ii) Italy website as it began
earning marketplace subscription revenue in April 2019, and therefore, data for the trailing 12-month revenue
calculation is not available.
Adjusted EBITDA
We define Adjusted EBITDA as net income, adjusted to exclude: depreciation and amortization, stock-based
compensation expense, acquisition-related expense, other (income) expense, net, and the (benefit from) provision for income
taxes. 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, please see “Selected Consolidated Financial Data — Adjusted EBITDA.”
42
Components of Consolidated Statements of Operations
Revenue
We derive revenue from two primary sources: (1) marketplace subscription revenue, which consists primarily of
Listings, and Dealer Display subscriptions, and (2) advertising and other revenue, which consists primarily of display
advertising revenue from auto manufacturers and other auto-related brand advertisers as well as partnerships with financing
services companies.
Marketplace Subscription Revenue
We offer multiple types of marketplace Listings packages to our dealers through our platform: Restricted Listings
(formerly referred to as Basic Listings), which is free; and various levels of Listings packages, which each require a paid
subscription under a monthly, quarterly, semiannual, or annual subscription basis. Contractual subscriptions for customers
generally auto-renew on a monthly basis and are cancellable by dealers with 30 days’ advance notice at the end of the
committed term. We also offer all dealers on our platform access to our Dealer Dashboard, which includes a performance
summary, Dealer Insights tool, and user review management platform. Dealers subscribing to a paid Listings package also
have access to the Pricing Tool and Market Analysis tool. The Pricing Tool and Market Analysis tool are available only to
paying dealers. Subscription pricing is determined based on a dealer’s inventory size, region, and our assessment of the
connections and ROI the platform will provide them.
In addition to listing inventory in our marketplace and providing access to the Dealer Dashboard, we offer dealers
subscribing to one of our Enhanced, Featured, or Featured Priority Listings packages other subscription advertising and
customer acquisition products, including Dealer Display, pursuant to which dealers can buy display advertising that appears
in our marketplace, and on other sites on the internet, and for which such advertisements can be targeted by the user’s
geography, search history, CarGurus website activity (including showing users relevant vehicles from a dealer’s inventory
that they have not yet discovered on our marketplace), and a number of other targeting factors, allowing dealers to increase
their visibility with in-market consumers and drive qualified traffic for dealers.
We also offer paid listings and display products through the PistonHeads website.
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. In addition to advertising sold on a CPM basis, we also have advertising sold on a cost
per click basis. 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.
Advertising and other revenue also includes revenue from partnerships with certain financing services companies
pursuant to which we enable eligible consumers on our United States website to pre-qualify for financing on cars from
dealerships that offer financing through such companies. Our revenues from these financing partnerships are based on a
funded-loan basis.
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 for our customer support team and third-party
service provider costs such as data center and networking expenses, allocated overhead costs, 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 scale our business and introduce new products.
43
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing team,
including salaries, benefits, incentive compensation, commissions, 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;
amortization of internal-use software; and allocated overhead costs. For periods subsequent to the adoption of ASC 606, a
portion of our commissions that are related to obtaining a new contract is capitalized and amortized over the estimated benefit
period of customer relationships. All other sales and marketing costs are expensed as incurred. 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 and related expenses for our development team, including salaries, benefits, incentive compensation, stock-based
compensation and allocated overhead costs. Other than website development and internal-use software costs as well as other
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 primarily of personnel and related expenses for our executive, finance,
legal, human resources, and administrative teams, including salaries, benefits, incentive compensation, and stock-based
compensation, 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 grow our business.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation on property and equipment, which includes leasehold
improvements, and amortization of intangible assets.
Other Income, Net
Other income, net consists primarily of interest income earned on our cash, cash equivalents, and investments, sublease
income and net foreign exchange gains and losses.
(Benefit from) Provision for 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 recognized a benefit from income taxes for the years ended December 31, 2019 and 2018 as a result of
stock-based compensation benefits recorded and a provision for income taxes for the year ended December 31, 2017 as a
result of our consolidated taxable income position. We recognize deferred tax assets and liabilities based on temporary
differences between the financial reporting and income tax bases of assets and liabilities using 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. Our valuation allowance against our net deferred
tax assets as of December 31, 2019 was immaterial. We have not provided a valuation allowance against our net deferred tax
assets at December 31, 2018 or 2017.
44
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.
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 from operations
Other income, net:
Interest income
Other income (expense), net
Total other income, net
Income before income taxes
(Benefit from) provision for income taxes
Net income
Additional Financial Data
Revenue
United States
International
Total
Income (Loss) from Operations
United States
International
Total
2019
Year Ended December 31,
2018
(in thousands)
2017
$
$
526,043
62,873
588,916
36,300
552,616
393,844
69,462
50,434
4,554
518,294
34,322
405,780
48,306
454,086
24,811
429,275
315,939
47,866
39,475
2,804
406,084
23,191
2,984
1,399
4,383
38,705
(3,441)
$
42,146
2,283
10
2,293
25,484
(39,686)
$
65,170
282,664
34,197
316,861
17,609
299,252
236,165
22,470
22,688
2,655
283,978
15,274
869
(306)
563
15,837
2,638
13,199
2019
Year Ended December 31,
2018
(in thousands)
2017
555,007
33,909
588,916
$
$
437,166
16,920
454,086
$
$
307,472
9,389
316,861
$
73,872
(39,550)
$
34,322
58,387
$
(35,196)
$
23,191
41,586
(26,312)
15,274
$
$
$
$
$
$
45
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 from operations
Other income, net:
Interest income
Other income (expense), net
Total other income, net
Income before income taxes
(Benefit from) provision for income taxes
Net income
Additional Financial Data
Revenue
United States
International
Total
Income (Loss) from Operations
United States
International
Total
Year Ended December 31,
2018
2017
2019
89%
11
100%
6
94
66
12
9
1
88
6
0
0
0
6
(1)
7%
89%
11
100%
5
95
69
11
9
1
90
5
0
0
0
5
(9)
14%
89%
11
100%
6
94
74
7
7
1
89
5
0
(0)
0
5
1
4%
Year Ended December 31,
2018
2017
2019
94%
6
100%
13%
(7)
6%
96%
4
100%
13%
(8)
5%
97%
3
100%
13%
(8)
5%
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
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
2019
2018
(dollars in thousands)
Amount
%
$ 526,043
62,873
$ 588,916
$ 405,780
48,306
$ 454,086
$ 120,263
14,567
$ 134,830
30%
30
30%
89%
11
100%
89%
11
100%
46
Overall revenue increased $134.8 million, or 30%, in the year ended December 31, 2019 compared to the year ended
December 31, 2018. Both marketplace subscription revenue and advertising and other revenue increased by 30%.
Marketplace subscription revenue increased $120.3 million in the year ended December 31, 2019 compared to the year
ended December 31, 2018 and represented 89% of total revenue in both 2019 and 2018. This increase in marketplace
subscription revenue was attributable primarily to a 19% growth in our AARSD for United States dealers to $17,576 as of
December 31, 2019 from $14,819 as of December 31, 2018 and to a 15% growth in the number of United States and
International paying dealers, to 36,115 as of December 31, 2019 from 31,472 as of December 31, 2018. The increase in our
AARSD for United States dealers was driven by new products, unit pricing and packaging as well as the investments made in
building our brand and growing our audience, which resulted in growth in volume of connections. The increase in paying
dealers was driven by the efforts of our sales and marketing teams to subscribe dealers to our Listings packages as well as by
the acquisition of PistonHeads.
Advertising and other revenue increased $14.6 million in the year ended December 31, 2019 compared to the year
ended December 31, 2018 and represented 11% of total revenue in both 2019 and 2018. The increase in advertising and other
revenue was driven by a 31% increase in the number of impressions delivered, which was partially offset by a 12% decline in
the average price per thousand impressions over the same period. The increase was also attributable to a $5.0 million increase
in revenue earned from partnerships with financing services companies.
Revenue by Segment
Revenue
United States
International
Total
Percentage of total revenue:
United States
International
Total
Year Ended December 31,
Change
2019
2018
(dollars in thousands)
Amount
%
$ 555,007
33,909
$ 588,916
$ 437,166
16,920
$ 454,086
$ 117,841
16,989
$ 134,830
27%
100
30%
94%
6
100%
96%
4
100%
United States revenue increased $117.8 million, or 27%, in the year ended December 31, 2019 compared to the year
ended December 31, 2018, due primarily to a 19% increase in AARSD for United States dealers and a 5% increase in the
number of United States paying dealers.
International revenue increased $17.0 million, or 100%, in the year ended December 31, 2019 compared to the year
ended December 31, 2018, due primarily to an 81% increase in the number of International paying dealers and a 13%
increase in AARSD for International dealers. The increase in International revenue was also partially attributable to revenue
from PistonHeads, which was acquired in January 2019.
Cost of Revenue
Cost of revenue
Percentage of total revenue
Year Ended December 31,
Change
2019
2018
(dollars in thousands)
Amount
%
$
36,300
$
6%
24,811
$
5%
11,489
46%
Cost of revenue increased $11.5 million, or 46%, in the year ended December 31, 2019 compared to the year ended
December 31, 2018. The increase was due primarily to a $4.4 million increase in fees related to provisioning advertising
campaigns on our websites, a $3.1 million increase in data center and hosting costs, a $1.9 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
$1.0 million increase in costs to improve the content on our websites and a $1.0 million increase in amortization and
depreciation.
47
Operating Expenses
Sales and Marketing Expenses
Sales and marketing
Percentage of total revenue
Year Ended December 31,
Change
2019
2018
(dollars in thousands)
Amount
%
$ 393,844
$ 315,939
77,905
25%
66%
$
69%
Sales and marketing expenses increased $77.9 million, or 25%, in the year ended December 31, 2019 compared to the
year ended December 31, 2018. This increase was due primarily to an increase in advertising and search engine marketing
costs of $48.5 million as well as an increase of $11.6 million in salaries and employee-related costs, exclusive of stock-based
compensation expense and commissions expense, which increased $4.9 million and $4.5 million, respectively. The increase
in salaries and employee-related costs, stock-based compensation expense and commissions expense was due primarily to a
25% increase in headcount. This increase for the year ended December 31, 2019 was also due in part to a $2.4 million
increase in marketing events and market research due to efforts to increase brand awareness, a $1.9 million increase in
consulting fees, a $1.6 million increase in software subscriptions, and a $0.9 million increase in lease costs due to new office
facilities at 121 First St. in Cambridge, Massachusetts. The increase for the year ended December 31, 2019 was also partially
attributable to sales and marketing expenses associated with the acquisition of PistonHeads.
Product, Technology, and Development Expenses
Product, technology, and development
Percentage of total revenue
Year Ended December 31,
Change
2019
2018
(dollars in thousands)
Amount
%
$
69,462
$
12%
47,866
$
11%
21,596
45%
Product, technology, and development expenses increased $21.6 million, or 45%, in the year ended December 31, 2019
compared to the year ended December 31, 2018. The increase was due primarily to a $13.7 million increase in salaries and
employee-related costs, exclusive of stock-based compensation expense, which increased $5.3 million. The increase in
salaries and employee-related costs and stock-based compensation expense was due primarily to a 32% increase in headcount
to support our growth and product innovations. This increase for the year ended December 31, 2019 was also due in part to a
$1.2 million increase in lease costs due to new office facilities at 121 First St. in Cambridge, Massachusetts, and a $0.9
million increase in software subscriptions. The increase for the year ended December 31, 2019 was also partially attributable
to product, technology, and development expenses associated with the acquisition of PistonHeads.
General and Administrative Expenses
General and administrative
Percentage of total revenue
Year Ended December 31,
Change
2019
2018
(dollars in thousands)
Amount
%
$
50,434
$
9%
39,475
$
9%
10,959
28%
General and administrative expenses increased $11.0 million, or 28%, in the year ended December 31, 2019 compared
to the year ended December 31, 2018. The increase was due to a $3.7 million increase in salaries and employee-related costs,
exclusive of stock-based compensation expense, which increased $3.3 million. The increase in salaries and employee-related
costs and stock-based compensation expense was due primarily to a 30% increase in headcount to support our expanded
operations as we continue to grow our business. This increase for the year ended December 31, 2019 was also due in part to a
$2.1 million increase in payment processing and billing costs due to increased customer transactions driven by an increase in
number of paying dealers, a $1.3 million increase in recruiting, insurance, and professional service fees, a $0.7 million
increase in software subscriptions, and a $0.5 million increase in lease costs due to new office facilities at 121 First St. in
Cambridge, Massachusetts, offset by a $0.6 million decrease in bad debt expense due to improved collections and focus on
reducing churn.
48
Depreciation and Amortization Expenses
Depreciation and amortization
Percentage of total revenue
Year Ended December 31,
Change
2019
2018
(dollars in thousands)
Amount
%
$
4,554
$
1%
2,804
$
1%
1,750
62%
Depreciation and amortization expenses increased $1.8 million, or 62%, in the year ended December 31, 2019
compared to the year ended December 31, 2018, due primarily to an increase in depreciation related to the additional
leasehold improvements required for new office facilities at 121 First St. in Cambridge, Massachusetts as well as
amortization of intangible assets.
Other Income, net
Other income, net
Interest income
Other income
Total other income, net
Percentage of total revenue:
Interest income
Other income
Total other income, net
NM — Not Meaningful
Year Ended December 31,
Change
2019
2018
(dollars in thousands)
Amount
%
$
$
2,984
1,399
4,383
$
$
2,283
10
2,293
$
$
701
1,389
2,090
31%
NM
91%
0%
0
0%
0%
0
0%
Other income, net increased $2.1 million, or 91%, in the year ended December 31, 2019 compared to the year ended
December 31, 2018. The $0.7 million increase in interest income is primarily due to the higher monthly average of
investment of cash in certificates of deposit and money market funds over the course of 2019 arising from our increased cash
from operations. The $1.4 million increase in other income, net was primarily due to $0.8 million of sublease income, as well
as a $0.6 million increase in realized foreign currency gain mainly resulting from the settlement of an intercompany note
payable in connection with the PistonHeads acquisition during the year ended December 31, 2019.
Benefit from Income Taxes
Benefit from income taxes
Percentage of total revenue
Year Ended December 31,
Change
2019
2018
Amount
%
(dollars in thousands)
$
(3,441)
$ (39,686)
$ (36,245)
(91)%
(1)%
(9)%
The difference in benefit from income taxes recorded during the years ended December 31, 2019 and 2018, was
principally due to $40.8 million of tax benefits related to excess stock-based compensation benefits recorded during the year
ended December 31 2018, as compared to $10.9 million of tax benefits related to excess stock-based compensation benefits
recorded during 2019, as well as an increase in federal and state research and development tax credits during 2019 as
compared to 2018.
49
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
2019
2018
(dollars in thousands)
Amount
%
$
$
73,872
(39,550)
34,322
$
$
58,387
$
(35,196)
$
23,191
15,485
(4,354)
11,131
27%
(12)
48%
13%
NM
13%
NM
United States income from operations increased $15.5 million, or 27%, in the year ended December 31, 2019 compared
to the year ended December 31, 2018. This increase was due to an increase in revenue of $117.8 million, offset in part by the
increases in operating expenses of $92.5 million and cost of revenue of $9.8 million.
International loss from operations increased $4.4 million, or 12% in the year ended December 31, 2019 compared to
the year ended December 31, 2018. The increase in International loss from operations reflects our continued investment into
international markets.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
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
2018
2017
(dollars in thousands)
Amount
%
$ 405,780
48,306
$ 454,086
$ 282,664
34,197
$ 316,861
$ 123,116
14,109
$ 137,225
44%
41
43%
89%
11
100%
89%
11
100%
Overall revenue increased $137.2 million, or 43%, in the year ended December 31, 2018 compared to the year ended
December 31, 2017. Marketplace subscription revenue increased by 44% while advertising and other revenue grew by 41%.
Marketplace subscription revenue increased $123.1 million in the year ended December 31, 2018 compared to the year
ended December 31, 2017, and represented 89% of total revenue in both 2018 and 2017. This increase in marketplace
subscription revenue was attributable primarily to a 14% growth in the number of United States and International paying
dealers, to 31,472 as of December 31, 2018 from 27,670 as of December 31, 2017, and to a 23% growth in our AARSD for
United States dealers to $14,819 as of December 31, 2018 from $12,055 as of December 31, 2017. The increase in paying
dealers was driven by the efforts of our sales and marketing teams to subscribe dealers to our Listings packages. The increase
in our AARSD for United States dealers was driven by the investments made in building our brand and growing our audience
which resulted in growth in volume of connections.
Advertising and other revenue increased $14.1 million in the year ended December 31, 2018 compared to the year
ended December 31, 2017, and represented 11% of total revenue in 2018 and 2017. The increase in advertising and other
revenue was due primarily to a 70% increase in the number of impressions, which was partially offset by a 17% decrease in
the average price per thousand impressions, in 2018 compared to 2017.
50
Revenue by Segment
Revenue
United States
International
Total
Percentage of total revenue:
United States
International
Total
Year Ended
December 31,
Change
2018
2017
(dollars in thousands)
Amount
%
$ 437,166
16,920
$ 454,086
$ 307,472
9,389
$ 316,861
$ 129,694
7,531
$ 137,225
42%
80
43%
96%
4
100%
97%
3
100%
United States revenue increased $129.7 million, or 42%, in the year ended December 31, 2018 compared to the year
ended December 31, 2017, due primarily to a 10% increase in the number of United States paying dealers and a 23% increase
in AARSD for United States dealers.
International revenue increased $7.5 million, or 80%, in the year ended December 31, 2018 compared to the year ended
December 31, 2017, due primarily to a 55% increase in the number of International paying dealers. International paying
dealers grew to 3,938 at December 31, 2018 from 2,548 at December 31, 2017.
Cost of Revenue
Cost of revenue
Percentage of total revenue
Year Ended
December 31,
Change
2018
2017
(dollars in thousands)
Amount
%
$
24,811 $
5%
17,609 $
6%
7,202
41%
Cost of revenue increased $7.2 million, or 41%, in the year ended December 31, 2018 compared to the year ended
December 31, 2017. The increase was due primarily to a $2.7 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 $1.7 million increase in fees
related to provisioning advertising campaigns on our websites, a $1.4 million increase in data center and hosting costs, and a
$1.2 million increase in amortization and depreciation.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing
Percentage of total revenue
Year Ended
December 31,
Change
2018
2017
(dollars in thousands)
Amount
%
$ 315,939
$ 236,165
79,774
34%
69%
$
74%
Sales and marketing expenses increased $79.8 million, or 34%, in the year ended December 31, 2018 compared to the
year ended December 31, 2017. The increase was due primarily to an increase in advertising costs of $65.5 million as well as
an increase of $8.1 million in salaries and employee-related costs (excluding commission expense) resulting from a 25%
increase in headcount and payroll taxes of $0.9 million driven by the employer portion of FICA taxes on the exercise of stock
awards and vesting of restricted stock units, or RSUs. This increase for the year ended December 31, 2018 was also due in
part to a $3.2 million increase in stock-based compensation expense related to RSUs resulting from the increase in headcount,
a $1.7 million increase in marketing events and market research due to efforts to increase brand awareness, a $0.8 million
increase in rent due to a new office building in Cambridge and rent increase in Ireland, and a $0.8 million increase in
51
software subscriptions. These increases were partially offset by a $2.7 million decrease in commission expense driven by our
adoption of Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers, or ASC 606,
during the year ended December 31, 2018.
Product, Technology, and Development Expenses
Product, technology, and development
Percentage of total revenue
Year Ended
December 31,
Change
2018
2017
(dollars in thousands)
Amount
%
$
47,866
$
11%
22,470
$
7%
25,396
113%
Product, technology, and development expenses increased $25.4 million, or 113%, in the year ended December 31,
2018 compared to the year ended December 31, 2017. The increase was due primarily to a $13.8 million increase in salaries
and employee-related costs resulting from a 59% increase in headcount and payroll taxes of $1.2 million driven by the
employer portion of FICA taxes on the exercise of stock awards and vesting of RSUs. This increase for the year ended
December 31, 2018 was also due in part to an $8.1 million increase in stock-based compensation expense related to RSUs
resulting from the increase in headcount, $0.8 million increase in rent due to a new office building in Cambridge, a $0.5
million increase in software subscriptions and a $0.5 million increase in consulting fees.
General and Administrative Expenses
General and administrative
Percentage of total revenue
Year Ended
December 31,
Change
2018
2017
(dollars in thousands)
Amount
%
$
39,475
$
9%
22,688
$
7%
16,787
74%
General and administrative expenses increased $16.8 million, or 74%, in the year ended December 31, 2018 compared
to the year ended December 31, 2017. The increase was due primarily to an increase of $4.7 million of insurance, legal,
consulting and external reporting fees driven by costs incurred to comply with public company requirements as well as an
increase of $4.4 million in salaries and employee-related costs resulting from a 45% increase in headcount and payroll taxes
of $0.3 million driven by the employer portion of FICA taxes on the exercise of stock awards and vesting of RSUs. This
increase for the year ended December 31, 2018 was also due in part to a $4.1 million increase in stock-based compensation
expense related to RSUs due to the increase in headcount, a $1.8 million increase in payment processing and billing costs due
to increased customer transactions with higher billings resulting from revenue growth and a $0.6 million increase in bad debt
expense.
Depreciation and Amortization Expenses
Depreciation and amortization
Percentage of total revenue
Year Ended
December 31,
Change
2018
2017
(dollars in thousands)
Amount
%
$
2,804
$
1%
2,655
$
1%
149
6%
Depreciation and amortization expenses increased $0.1 million, or 6%, in the year ended December 31, 2018 compared
to the year ended December 31, 2017.
52
Other Income, net
Other income, net
Interest income
Other income (expense)
Total other income, net
Percentage of total revenue:
Interest income
Other income (expense)
Total other income, net
Year Ended
December 31,
Change
2018
2017
(dollars in thousands)
Amount
%
$
$
2,283
10
2,293
$
$
869
$
(306)
$
563
1,414
316
1,730
163%
103
307%
0%
0
0%
0%
(0)
0%
Other income, net increased $1.7 million, or 307%, in the year ended December 31, 2018 compared to the year ended
December 31, 2017. The $1.4 million increase in interest income is primarily due to the investment of cash in certificates of
deposit, money market funds arising from our increased cash from operations, and an increase in interest rates. The $0.3
million increase in other income (expense) is primarily due the Euro strengthening against the U.S. Dollar in 2017 and
remaining relatively flat in 2018.
(Benefit from) Provision for Income Taxes
Year Ended
December 31,
2018
2017
(dollars in thousands)
Amount
Change
%
(Benefit from) provision for income taxes
Percentage of total revenue
$ (39,686)
$
(9)%
2,638
$ (42,324)
NM
1%
NM — Not Meaningful
The benefit from income taxes recorded during the year ended December 31, 2018, as compared to the provision for
income taxes recorded during the year ended December 31, 2017, was principally due to $40.8 million in stock-based
compensation benefits recorded during the year ended December 31, 2018, as well as an increase in federal and state research
and development tax credits and a lower federal statutory tax rate due to The Tax Cuts and Jobs Act, or the TCJA, as
compared to year ended December 31, 2017.
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
2018
2017
(dollars in thousands)
Amount
%
$
$
58,387
(35,196)
23,191
$
$
41,586
$
(26,312)
$
15,274
16,801
(8,884)
7,917
40%
(34)
52%
13%
NM
14%
NM
United States income from operations increased $16.8 million, or 40%, in the year ended December 31, 2018 compared
to the year ended December 31, 2017. This increase was due to an increase in revenue of $129.7 million, offset in part by the
increases in cost of revenue of $6.8 million and operating expenses of $106.1 million.
53
International loss from operations increased $8.9 million, or 34% in the year ended December 31, 2018 compared to
the year ended December 31, 2017. The increase in International loss from operations reflects our continued investment into
international markets and expansion into new countries.
Liquidity and Capital Resources
Cash, Cash Equivalents and Investments
At December 31, 2019 and 2018, our principal sources of liquidity were cash and cash equivalents of $59.9 million and
$34.9 million, respectively, and investments in certificates of deposit with terms of greater than 90 days but less than one
year of $111.7 million and $122.8 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 (used in) provided by financing activities
Impact of foreign currency on cash
Net increase (decrease) in cash, cash equivalents, and
restricted cash
$
2019
Year Ended December 31,
2018
(in thousands)
51,723
$
$
70,116
(80,278)
(22,257)
(23,395)
(14,693)
(44)
(1)
2017
25,691
(12,598)
44,780
159
$
33,165
$
(51,994) $
58,032
Our operations have been financed primarily from operating activities and our IPO. We generated cash from operating
activities of $70.1 million during 2019, $51.7 million during 2018, and $25.7 million during 2017, and we expect to generate
cash from operations for the foreseeable future.
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 mergers
and acquisitions. 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 a 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 of $70.1 million during 2019 was due primarily to net income of $42.1 million,
adjusted for $34.3 million of stock-based compensation expense, $8.4 million of amortization of deferred contract costs and
$7.8 million of depreciation and amortization, partially offset by $3.7 million of deferred taxes. Cash provided by operating
activities was also attributable to a $4.3 million increase in accounts payable, a $2.2 million increase in accrued expenses,
accrued income taxes, and other current liabilities and a $1.2 million increase in deferred revenue, partially offset by a $16.0
million increase in deferred contract costs, a $9.6 million increase in accounts receivable, and a $1.5 million decrease in lease
obligations.
Cash provided by operating activities of $51.7 million during 2018 was due primarily to net income of $65.2 million,
adjusted for $20.8 million of stock-based compensation expense, $5.0 million of depreciation and amortization and $3.7 of
amortization of deferred contract costs, partially offset by $39.0 million of deferred taxes. Cash provided by operating
activities was also attributable to a $9.3 million increase in accounts payable, a $4.5 million increase in deferred revenue, a
$4.3 million increase in lease obligations, a $2.7 million increase in accrued expenses, accrued income taxes, and other
current liabilities, partially offset by a $13.0 million increase in deferred contract costs, and an $11.8 million increase prepaid
expenses, prepaid income taxes, and other assets.
54
Cash provided by operating activities of $25.7 million during 2017 was due primarily to net income of $13.2 million,
adjusted for $5.0 million of stock-based compensation expense and $3.8 million of depreciation and amortization, partially
offset by $1.1 million of deferred taxes. Cash provided by operating activities was also attributable to a $6.2 million increase
in accounts payable and a $5.2 million increase in accrued expenses, accrued income taxes and other current liabilities,
partially offset by a $7.0 million increase in accounts receivable and a $2.3 million increase in prepaid expenses, prepaid
income taxes, and other assets.
Investing Activities
Cash used in investing activities of $22.3 million during 2019 was due to $19.2 million of acquisition cash payments,
$11.2 million of purchases of property and equipment and $3.0 million related to the capitalization of website development
costs. This was offset by $188.9 million of maturities of certificates of deposit, net of investments in certificates of deposit of
$177.8 million.
Cash used in investing activities of $80.3 million during 2018 was due to $212.8 million of investments in certificates
of deposit, net of maturities of $140.0 million, $6.0 million of purchases of property and equipment, and $1.5 million related
to the capitalization of website development costs.
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 purchases of property and equipment, and $2.2 million related to
the capitalization of website development costs.
Financing Activities
Cash used in financing activities of $14.7 million during 2019 was due primarily to the payment of withholding taxes
and option costs on net share settlements of restricted stock units and stock options of $16.5 million, partially offset by $1.8
million related to the proceeds from the exercise of stock options.
Cash used in financing activities of $23.4 million during 2018 reflects $25.9 million of payment of withholding taxes
on net share settlements of restricted stock units, and a $1.1 million payment of IPO costs, partially offset by $3.6 million
related to the proceeds from the exercise of stock options.
Cash provided by financing activities of $44.8 million during 2017 primarily reflects $44.4 million of IPO proceeds,
net of offering costs, and $0.4 million related to the proceeds from the exercise of stock options.
Contractual Obligations and Known Future Cash Requirements
Our operating lease obligations consist of various leases for office space in: Boston, Massachusetts; Cambridge,
Massachusetts; Detroit, Michigan; Los Angeles, California; Dublin, Ireland; and London, United Kingdom with various lease
terms expected to continue through 2038. 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 finance obligations as of December 31, 2019. All of our property, equipment, and
internal-use software have been purchased with cash, with the exception of $0.6 million of unpaid property and equipment
and immaterial amounts related to obligations under one finance lease as of December 31, 2019. 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, 2019 that are fixed and
determinable.
Operating lease obligations
Total contractual obligations
Total
Less than
1 year
1 to 3 years 3 to 5 years
(in thousands)
More than
5 years
$ 409,257 $
$ 409,257 $
13,150 $
13,150 $
30,521 $
30,521 $
44,981 $ 320,605
44,981 $ 320,605
The table above includes leases signed but not yet commenced as of December 31, 2019 and is based on expected
commencement dates.
55
On January 16, 2020 we completed an acquisition which is described in Note 16 of our consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2019 and 2018, we did not have any off-balance sheet arrangements, other than those entered into
prior to the adoption of ASC 842 and leases that are less than twelve months in duration, that have or are reasonably likely to
have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies and Significant Estimates
In preparing our consolidated financial statements in accordance with GAAP, we are required to make estimates and
assumptions that affect the amounts of assets, liabilities, revenue, costs and expenses, and disclosure of contingent assets and
liabilities that are reported in the consolidated financial statements and accompanying disclosures. We evaluate our estimates
and assumptions on an ongoing basis. Our actual results may 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
We derive revenue from two primary sources: (1) marketplace subscription revenue, which consists primarily of
Listings, and Dealer Display subscriptions, and (2) advertising and other revenue, which consists primarily of display
advertising revenue from auto manufacturers and other auto-related brand advertisers as well as partnerships with financing
services companies.
Marketplace Subscription Revenue
We offer multiple types of marketplace Listings packages to our dealers through our platform: Restricted Listings
(formerly referred to as Basic Listings), which is free; and various levels of Listings packages, which each require a paid
subscription under a monthly, quarterly, semiannual, or annual subscription basis. Contractual subscriptions for customers
generally auto-renew on a monthly basis and are cancellable by dealers with 30 days’ advance notice at the end of the
committed term. We also offer all dealers on our platform access to our Dealer Dashboard, which includes a performance
summary, Dealer Insights tool, and user review management platform. Dealers subscribing to a paid Listings package also
have access to the Pricing Tool and Market Analysis tool. The Pricing Tool and Market Analysis tool are available only to
paying dealers. Subscription pricing is determined based on a dealer’s inventory size, region, and our assessment of the
connections and ROI the platform will provide them.
Customers do not have the right to take possession of our software.
In addition to listing inventory in our marketplace and providing access to the Dealer Dashboard, we offer dealers
subscribing to one of our Enhanced, Featured, or Featured Priority Listings packages other subscription advertising and
customer acquisition products, including Dealer Display, pursuant to which dealers can buy display advertising that appears
in our marketplace, and on other sites on the internet, and for which such advertisements can be targeted by the user’s
geography, search history, CarGurus website activity (including showing users relevant vehicles from a dealer’s inventory
that they have not yet discovered on our marketplace), and a number of other targeting factors, allowing dealers to increase
their visibility with in-market consumers and drive qualified traffic for dealers.
Payment is typically due on first day of each calendar month and is recorded as accounts receivable or short-term
deferred revenue when payment is received in advance of services being delivered to the customers.
56
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. In addition to advertising sold on a CPM basis, we also have advertising sold on a cost
per click basis. Auto manufacturers and other brand advertisers can execute advertising campaigns that are targeted across a
wide variety of parameters, including demographic groups, behavioral characteristics, specific auto brands, categories such as
Certified Pre-Owned, and segments such as hybrid vehicles. We do not provide minimum impression guarantees or other
types of minimum guarantees in our contracts with customers. Pricing is primarily based on advertisement size and position
on our websites and mobile applications, and fees are billed monthly in arrears. Unbilled accounts receivables relate to
services rendered in the current period, but generally not invoiced until the subsequent period.
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. 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 us is recorded on a gross basis because we are the principal in the
arrangement, control the ad placement and timing of the campaign, and establish the selling price. We enter into contractual
arrangements directly with advertisers and are directly responsible for the fulfillment of the contractual terms including any
remedy for issues with such fulfillment.
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. The advertising partner is 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 principal in the arrangement.
Additionally, for auction-based partner agreements, we have latitude in establishing the floor price, but the final price
established by the exchange server is at market rates.
Customers are billed monthly in arrears and payment terms are generally thirty to sixty days from the date invoiced.
Advertising and other revenue also includes revenue from partnerships with certain financing services companies
pursuant to which we enable eligible consumers on our United States website to pre-qualify for financing on cars from
dealerships that offer financing through such companies. Our revenues from these financing partnerships are based on a
funded-loan basis.
Prior to adoption of ASC 606
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 recognize marketplace subscription revenue on a monthly basis as revenue is earned and advertising and other
revenue as impressions are delivered. Revenue is presented net of any taxes collected from customers.
We assess 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, 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 that 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.
57
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.
Following adoption of ASC 606
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, Revenue from Contracts
with Customers (Topic 606), which modifies how all entities recognize revenue, and consolidates revenue recognition
guidance into one ASC Topic (ASC Topic 606, Revenue from Contracts with Customers). Since we ceased to be an emerging
growth company as of December 31, 2018, we adopted the standard during the fourth quarter of 2018 and applied the
modified retrospective method of adoption with a cumulative catch-up adjustment to the opening balance of retained earnings
at January 1, 2018. Under this method, we applied the revised guidance for the year of adoption and applied ASC Topic
605, Revenue Recognition, in the prior years. As a result, we applied ASC 606 only to contracts that were not yet completed
as of January 1, 2018. We recognized a cumulative catch-up adjustment to the opening balance of retained earnings at the
effective date for contracts that still required performance by us on January 1, 2018. For contracts that were modified before
the effective date, we exercised the use of the practical expedient and reflected the aggregate effect of all modifications when
identifying performance obligations, determining the transaction price and allocating transaction price, which did not have a
material effect on the adjustment to retained earnings.
ASC 606 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. To achieve this core
principle, we apply the following five steps:
1)
2)
Identify the contract with a customer
Identify the performance obligations in the contract
3) Determine the transaction price
4) Allocate the transaction price to performance obligations in the contract
5) Recognize revenue when or as we satisfy a performance obligation
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers by revenue source for the years ended
December 31, 2019, 2018 and 2017.
Revenue by Revenue Stream
Marketplace subscription revenue
Advertising and other revenue
Total
2019
2018
2017
$
$
526,043 $
62,873
588,916 $
405,780 $
48,306
454,086 $
282,664
34,197
316,861
We provide disaggregation of revenue based on the marketplace subscription versus advertising and other revenue
classification in the table above and based on geographic region (see Note 13) as we believe these categories best depict how
the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Marketplace Subscription Revenue
For dealer listings, we provide a single similar service each day for a period of time. Each time increment (i.e. day),
rather than the underlying activities, is distinct and substantially the same and therefore our performance obligation is to
provide a series of daily activities over the contract term. Similar to the dealer listings, the dealer display advertising is
considered a promise to provide a single similar service each day. Each time increment is distinct and substantially the same
and therefore our performance obligation is to provide a series of daily activities over the contract term.
58
Total consideration for marketplace subscription revenue is stated within the contracts. There are no contractual cash
refund rights, but credits may be issued to a customer at our sole discretion. At an individual contract level, there is also no
variable consideration, such as sales allowance, that needs to be included in the transaction price. However, at a portfolio
level, we recognize that there are times when there is a customer satisfaction issue or other circumstance that will lead to a
credit. Due to the known possibility of future credits, a monthly sales allowance review is performed to defer revenue at a
portfolio level for such future adjustments in the period of incurrence. We establish sales allowances at the time of revenue
recognition based on our history of adjustments and credits provided to our customers. 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, credits and losses may vary from actual results which could lead to material
adjustments to the financial statements. 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.
Performance obligations are satisfied over time as the customer simultaneously receives and consumes the benefit of
the service. Revenue is recognized ratably over the subscription period beginning on the date we start providing services to
the customer under the contract. Revenue is presented net of any taxes collected from customers.
Advertising and Other Revenue
For advertising revenue, the performance obligation is to publish the agreed upon campaign on our websites and load
the related impressions.
Advertising contracts state the transaction price within the agreement with payment being based on the number of
clicks or impressions delivered on our websites. Total consideration is based on output and deemed variable consideration
constrained by an agreed upon delivery schedule. Additionally, there are generally no contractual cash refund rights. Certain
contracts do contain the right for credits in situations in which impressions are not displayed in compliance with contractual
specifications. At an individual contract level, we may give a credit for a customer satisfaction issue or other circumstance.
Due to the known possibility of future credits, a monthly review is performed to defer revenue at an individual contract level
for such future adjustments in the period of incurrence.
As consideration is driven by the number of impressions delivered on the CarGurus websites, the consideration for
each period is allocated to the period in which the service was rendered.
Performance obligations for company-sold advertising revenue and partner-sold advertising revenue are satisfied over
time as impressions are delivered. Revenue is recognized based on the total number of impressions delivered within the
specified period. Revenue from advertising sold directly by us is recognized based on the gross amount charged to the
advertiser and advertising revenue sold by partners is recognized based on the net amount of revenue received from the
content partners. Revenue is presented net of any taxes collected from customers.
Other revenue includes revenue from contracts for which the performance obligation is a series of distinct services with
the same level of effort daily. For these contracts, we estimate the value of the variable consideration in determining the
transaction price and allocates it to the performance obligation. Revenue is estimated and recognized on a ratable basis over
the contractual term. We reassess the estimate of variable consideration at each reporting period.
Contracts with Multiple Performance Obligations
We periodically enter into arrangements that include Listings and Dealer Display within marketplace subscription
revenue. These contracts include multiple promises that we evaluate to determine if the promises are separate performance
obligations. Performance obligations are identified based on services to be transferred to a customer that are distinct within
the context of the contractual terms. Once the performance obligations have been identified, we determine the transaction
price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. If
required, the transaction price is allocated to each performance obligation in the contract based on a relative standalone
selling price (“SSP”) method as the performance obligation is being satisfied. For our arrangements that include Listings and
Dealer Display, the performance obligations were satisfied over a consistent period of time and therefore the allocations did
not impact the revenue recognized.
59
Costs to Obtain a Contract
Commissions paid to sales representatives and payroll taxes are considered costs to obtain a contract. Under ASC 606,
the costs to obtain a contract require capitalization and amortization of those costs over the period of benefit. Although the
guidance specifies the accounting for an individual contract with a customer, as a practical expedient, we have opted to apply
the guidance to a portfolio of contracts with similar characteristics. We have opted to apply another practical expedient to
immediately expense the incremental cost of obtaining a contract when the underlying related asset would have been
amortized over one year or less. As such, we applied this practical expedient to advertising contracts as the term is one year
or less and these contracts do not renew automatically. The practical expedient is not applicable to marketplace subscription
contracts as the period of benefit including renewals is anticipated to be greater than one year as commissions paid on
contract renewals are not commensurate with the commissions paid on the initial contract. The assets are periodically
assessed for impairment.
For marketplace subscription customers, the commissions paid on contracts with new customers, in addition to any
commission amount related to incremental sales, are capitalized and amortized over the estimated benefit period of the
customer relationship taking into account factors such as peer estimates of technology lives and customer lives as well as our
own historical data. Commissions paid that are not directly related to obtaining a new contract are expensed as incurred.
Additionally, we allocate employer payroll tax expense to the commission expense in proportion to the overall payroll
taxes paid during the respective period. As such, capitalized payroll taxes are amortized in the same manner as the underlying
capitalized commissions.
The assets recognized for costs to obtain a contract were $3.2 million, $12.5 million and $20.1 million as of January 1,
2018, December 31, 2018 and December 31, 2019, respectively. Amortization expense recognized during the years ended
December 31, 2019 and 2018 related to costs to obtain a contract was $8.4 million and $3.7 million, respectively.
Capitalized Website Development and Internal-Use Software 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 beginning with the time when it is ready for intended use. Capitalized internal-use software costs are
amortized on a straight-line basis over their estimated useful life of the term of the hosting arrangement, taking into
consideration several other factors such as, but not limited to, options to extend the hosting arrangement or options to
terminate the hosting arrangement, beginning with the time when it is ready for intended use. Amounts amortized are
presented through operating expense, rather than depreciation or amortization. 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, 2019 and 2018, we capitalized $4.2 million and $2.0 million of website
development costs, respectively. We recorded amortization expense associated with our capitalized website development
costs of $1.6 million, $1.5 million and $0.8 million for the years ended December 31, 2019, 2018, and 2017, respectively.
During the year ended December 31, 2019, we capitalized $2.6 million and $0.6 million of internal-use software in
other non-current assets and in prepaid expenses and prepaid income taxes, respectively. We recorded amortization expense
associated with its internal-use software of $0.1 million for the year ended December 31, 2019.
60
Business Combinations
Valuation of Acquired Assets and Liabilities
We measure all consideration transferred in a business combination at its acquisition-date fair value. Consideration
transferred is determined by the acquisition-date fair value of assets transferred, liabilities assumed, including contingent
consideration obligations, as applicable. We measure goodwill as the excess of the consideration transferred over the net of
the acquisition-date amounts of assets acquired less liabilities assumed.
We make significant assumptions and estimates in determining the fair value of the acquired assets and liabilities as of
the acquisition date, especially the valuation of intangible assets and certain tax positions. We record estimates as of the
acquisition date and reassess the estimates at each reporting period up to one year after the acquisition date. Changes in
estimates made prior to finalization of purchase accounting are recorded to goodwill.
Intangible Assets
Intangible assets are recorded at their estimated fair value at the date of acquisition. We amortize intangible assets over
their estimated useful lives on a straight-line basis. Amortization is recorded over the relevant estimated useful lives ranging
from three to eleven years.
We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in
circumstances occur that could impact the recoverability of these assets. If the estimate of an intangible asset’s remaining
useful life is changed, we amortize the remaining carrying value of the intangible asset prospectively over the revised
remaining useful life.
For the year ended December 31, 2019, we did not identify any impairment of our intangible assets. We did not have
intangible assets prior to the closing of the PistonHeads acquisition on January 8, 2019.
Goodwill
Goodwill is recorded when consideration paid in a purchase acquisition exceeds the fair value of the net assets
acquired. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and
circumstances warrant a review. Conditions that could trigger a more frequent impairment assessment include, but are not
limited to, a significant adverse change in certain agreements, significant underperformance relative to historical or projected
future operating results, an economic downturn affecting automotive marketplaces, increased competition, a significant
reduction in our stock price for a sustained period or a reduction of our market capitalization relative to net book value.
We have determined that we have two reporting units, United States and International, as of and for the year ended
December 31, 2019. We evaluate impairment annually on October 1 by comparing the estimated fair value of each reporting
unit to its carrying value. We estimate fair value using a discounted cash flow model based on our most recent forecast at the
time of our annual impairment test.
For the year ended December 31, 2019, we did not recognize an impairment charge. We did not have goodwill prior to
the closing of the PistonHeads acquisition on January 8, 2019.
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.
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, 2019 or
2018.
61
The Tax Cuts and Jobs Act subjects a U.S. shareholder to tax on global intangible low-taxed income, or GILTI, earned
by certain foreign subsidiaries. An entity can make an accounting policy election, per the FASB Staff Q&A, Topic 740, No.
5, Accounting for Global Intangible Low-Taxed Income, either to recognize deferred taxes for temporary basis differences
expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred
as a period expense only. We elected to account for GILTI as a period cost in the year the tax is incurred.
Stock-Based Compensation
For stock-based awards issued under our stock-based compensation plans, the fair value of each award is determined
on the date of grant. 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.
Certain awards granted 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 initial public offering. The
SEC’s declaration of effectiveness of the registration statement on Form S-1 on October 11, 2017 satisfied the liquidity event
performance condition. Upon the achievement of the liquidity event, we 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, occurred on April 10, 2018, one hundred eighty-one days after the satisfaction of the performance
condition.
Given the absence of an active market for our common stock prior to the IPO, our board of directors was required to
estimate the fair value of our stock at the time of each grant of a stock-based award. We believe that the members of our
board of directors at all relevant times had sufficient business, finance or venture capital experience to make such estimates.
We and our board of directors 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 our common stock. Each valuation methodology includes estimates and
assumptions that required judgment. These estimates and assumptions include a number of objective and subjective factors
used to determine the value of our common stock at each grant date, including the following factors: (1) prices paid for our
convertible preferred stock, which we had sold to outside investors in arm’s-length transactions, and the rights, preferences,
and privileges of our convertible preferred stock and common stock; (2) valuations performed by an independent valuation
specialist; (3) our 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.
We believe this methodology was reasonable based upon our internal peer company analyses, and further supported by
arm’s-length transactions involving our convertible preferred stock. As our 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, and consolidated net income per share could have been
significantly different.
For RSUs issued under the stock-based compensation plans prior to the IPO, the fair value of each grant was calculated
based on the estimated fair value of our common stock on the date of grant. We estimated the fair value of most stock option
awards on the date of grant using the Black-Scholes option-pricing model.
For RSUs granted subsequent to the IPO, the fair value is determined based on the closing price of our Class A
common stock as reported on the Nasdaq Global Select Market on the date of grant.
We issue shares for stock option exercises and RSUs out of our shares available for issuance. No options were granted
during the years ended December 31, 2019, 2018, and 2017.
We account for forfeitures when they occur. The tax effect of differences between tax deductions related to stock
compensation and the corresponding financial statement expense compensation are recorded to tax expense. Excess tax
benefits recognized on stock-based compensation expense are classified as an operating activity in the consolidated
statements of cash flows.
62
During 2019, 2018 and 2017, we recorded tax benefits of $11.1 million, $40.8 million and $0.7 million, respectively,
related to differences between tax deductions related to stock compensation and the corresponding financial statement
expense compensation.
Recently Issued Accounting Pronouncements
Information concerning recently issued accounting pronouncements may be found in Note 2 to our consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-K.
63
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 as described below.
Interest Rate Risk
We did not have any long-term borrowings as of December 31, 2019 or 2018.
We had cash, cash equivalents, and investments of $171.6 million and $157.7 million at December 31, 2019 and 2018,
respectively, which consist of bank deposits, money market funds and certificates of deposit with maturity dates ranging from
six to nine months. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest
income have not been material to the operations of the business.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial
instruments to manage our interest rate risk exposure.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations to
date. However, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset
such higher costs through price increases. Our inability or failure to do so could harm our business, operating results, and
financial condition.
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, 2019 and 2018, we have foreign currency exposures in the British
pound, the Euro and the Canadian dollar, although such exposure is not significant. During the year ended December 31,
2019, our foreign currency exposure increased due to an intercompany note payable in connection with the PistonHeads
acquisition. The intercompany note payable was settled during the year ended December 31, 2019.
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 the heading other income (expense), net. Long-term
intercompany accounts are recorded at their historical rates.
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.
64
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, 2019 and 2018 ................................................................................
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018, and 2017 ............................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018, and 2017 ........
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Years Ended
December 31, 2019, 2018, and 2017 .........................................................................................................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018, and 2017 ............................
Notes to Consolidated Financial Statements ..................................................................................................................
Page No.
66
70
71
72
73
74
75
65
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,
2019 and 2018, 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, 2019, 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, 2019 and 2018, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) and our report dated February 14, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standards
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for
leases in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the related
amendments.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for
revenue and the capitalization and amortization of certain contract acquisition costs in 2018 due to the adoption of
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the related
amendments.
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
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. 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.
66
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions
on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
Description of the
Matter
For the year ended December 31, 2019, the Company recognized revenue of $588.9 million. As
explained in Note 2 to the consolidated financial statements, the Company recognizes revenue in
accordance with ASC Topic 606, Revenue from Contracts with Customers, upon transfer of control of
promised services to customers in an amount that reflects the consideration the Company expects to
receive in exchange for those services.
Auditing management’s recognition of revenue was challenging because of the higher extent of audit
effort and because the amounts are material to the consolidated financial statements and related
disclosures. During our risk assessment process, we identified a higher inherent risk related to revenue
primarily due to the size of the account and the volume of activity, as well as the focus on revenue from
readers of the financial statements.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls
over the Company’s revenue recognition process, including controls designed to mitigate the risk of
override of controls. This included testing controls over management’s review of manual journal entries
and revenue related account reconciliations.
Description of the
Matter
We substantively tested the Company’s revenue recognized for the year ended December 31, 2019,
through a combination of data analytics and tests of details. Our audit procedures included, among
others, performing a correlation analysis between the related accounts (i.e., revenue, deferred revenue,
account receivables, and cash) and testing the existence of cash receipts tied to revenue recognition.
Additionally, we reconciled revenue recognized to the Company’s general ledger to test completeness
and performed substantive test of details over significant customers deemed to be key items and a
representative sample of the remaining transactions.
Realizability of Deferred Tax Assets
As explained in Note 12 to the consolidated financial statements, the Company had gross deferred tax
assets of $68.6 million and gross deferred tax liabilities of $26.1 million, resulting in net deferred tax
assets of $42.5 million as of December 31, 2019. As of December 31, 2019, the Company has
significant deferred tax assets, including those generated as a result of excess tax deductions related to
stock-based compensation awards. Deferred tax assets are reduced by a valuation allowance if, based
upon the weight of all available evidence, it is more likely than not that some portion, or all, of the
deferred tax assets will not be realized. 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.
Auditing management’s assessment of the realizability of its deferred tax assets (including the
recognition, measurement, and disclosure of deferred tax assets) was subjective because the
assessment process is complex, involves judgment and includes assumptions about the Company’s
ability to generate sufficient taxable income in future periods to realize these benefits. The Company’s
ability to generate taxable income may be impacted by various economic and industry conditions.
67
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls
over the Company’s income tax process, including the Company’s assessment of the realizability of
deferred tax assets. This included testing controls over management’s review of the deferred tax
rollforward and valuation allowance position.
We tested management’s assessment of the realizability of deferred tax assets, including future taxable
income exclusive of reversing temporary differences and carryforwards. Audit procedures performed,
among others, included evaluating the assumptions used by the Company to determine the projections
of future taxable income by jurisdiction and testing the completeness and accuracy of the underlying
data used in its projections. For example, we tested the Company’s scheduling of the reversal of
existing temporary taxable differences and compared the projections of future taxable income with the
actual results of prior periods as well as management’s consideration of current industry and economic
trends. In addition, we also assessed the historical accuracy of management’s projections and
reconciled the projections of future taxable income with other forecasted consolidated financial
information prepared by the Company. This analysis is subjective because of the Company’s limited
history and limited opportunity to implement tax planning strategies at this point in the life cycle of the
Company. In addition, we involved our tax professionals to evaluate the application of tax law in the
Company’s projections of future taxable income.
Business Combinations
Description of the
Matter
As described in Note 3 to the consolidated financial statements, the Company completed one
acquisition during fiscal year 2019 for net consideration of $19.1 million. The acquisition of
PistonHeads Holdco Limited consisted of acquiring the entire issued share capital of Haymarket New4
Ltd. (a company incorporated in England & Wales and now known as PistonHeads Holdco Limited)
from Haymarket Media Group Ltd. The transaction was accounted for as a business combination
whereby the total purchase price was allocated to assets acquired and liabilities assumed based on the
respective fair values.
Auditing the Company's accounting for its acquisition of PistonHeads was complex due to the
significant estimation uncertainty in the Company’s determination of the fair value of identified
intangible assets of $4.5 million, which consisted of brand name and customer relationships. The
significant estimation uncertainty was primarily due to the complexity of the valuation models prepared
by management to measure the fair value of the intangible assets and the sensitivity of the respective
fair values to the significant underlying assumptions. The significant assumptions used to estimate the
fair value of the intangible assets included the discount rates and revenue growth rates. These
significant assumptions are especially challenging to audit as they are forward looking and could be
affected by future economic and market conditions.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls
over the Company’s valuation of acquired intangible assets. This included testing controls over the
Company’s estimation process supporting the recognition and measurement of intangible assets, as well
as controls over management’s judgments and evaluation of underlying assumptions regarding the
valuation.
Our audit procedures to test the estimated fair value of the acquired intangible assets included, among
others, evaluating the Company’s valuation methodology used to estimate the fair value of the brand
name and customer relationship intangible assets. We involved our valuation professionals to assist
with our evaluation of the methodology used by the Company and certain assumptions included in the
fair value estimates. For example, our valuation professionals performed independent comparative
calculations to estimate the acquired entities’ discount rate. Additionally, we evaluated the significant
assumptions used by the Company, primarily consisting of projected financial information of the
acquired entity (e.g., revenue growth rates), and evaluated the completeness and accuracy of the
underlying data supporting the significant assumptions and estimates. Specifically, when evaluating the
assumptions related to the revenue growth rates and changes in the business that would drive these
forecasted growth rates, we compared the assumptions to historical results of the acquired entity and
current industry and economic trends.
68
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Boston, Massachusetts
February 14, 2020
69
CarGurus, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share data)
At December 31,
2019
2018
Assets
Current assets:
Cash and cash equivalents
Investments
Accounts receivable, net of allowance for doubtful accounts of $240 and
$479, respectively
Prepaid expenses and prepaid income taxes
Deferred contract costs
Other current assets
Restricted cash
Total current assets
Property and equipment, net
Intangible assets
Goodwill
Operating lease right-of-use assets
Restricted cash
Deferred tax assets
Deferred contract costs, net of current portion
Other non-current assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses, accrued income taxes and other current liabilities
Deferred revenue
Deferred rent
Operating lease liabilities
Total current liabilities
Deferred rent
Operating lease liabilities
Deferred tax liabilities
Other non–current liabilities
Total liabilities
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized;
no shares issued and outstanding
Class A common stock, $0.001 par value; 500,000,000 shares authorized;
91,819,649 and 89,728,223 shares issued and outstanding at
December 31, 2019 and 2018, respectively
Class B common stock, $0.001 par value; 100,000,000 shares authorized;
20,314,644 and 20,702,084 shares issued and outstanding at
December 31, 2019 and 2018, respectively
Additional paid–in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
59,920 $
111,692
22,124
10,452
9,544
4,972
250
218,954
27,950
3,920
15,207
59,986
10,553
42,713
10,514
3,826
393,623 $
36,731 $
18,262
9,984
—
8,781
73,758
—
60,818
284
1,908
136,768
—
92
20
205,234
51,859
(350)
256,855
393,623
$
34,887
122,800
13,614
10,144
5,253
7,410
750
194,858
24,269
—
—
—
1,921
38,886
7,252
1,104
268,290
34,345
18,654
8,811
1,693
—
63,503
9,395
—
—
1,281
74,179
—
90
21
184,216
9,713
71
194,111
268,290
The accompanying notes are an integral part of these consolidated financial statements.
70
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 from operations
Other income, net:
Interest income
Other income (expense), net
Total other income, net
Income before income taxes
(Benefit from) provision for income taxes
Net income
Reconciliation of net income to net income attributable to common
stockholders:
Net income
Net income attributable to participating securities
Net income attributable to common stockholders — basic
Net income
Net income attributable to participating securities
$
$
$
$
Net income attributable to common stockholders — diluted
Net income per share attributable to common stockholders: (Note 11)
Basic
Diluted
Weighted–average number of shares of common stock used in
computing net income per share attributable to common stockholders:
Basic
Diluted
$
$
$
$
2019
Year Ended December 31,
2018
588,916 $
36,300
552,616
454,086 $
24,811
429,275
393,844
69,462
50,434
4,554
518,294
34,322
2,984
1,399
4,383
38,705
(3,441)
42,146 $
42,146 $
—
42,146 $
42,146 $
—
42,146 $
315,939
47,866
39,475
2,804
406,084
23,191
2,283
10
2,293
25,484
(39,686)
65,170 $
65,170 $
—
65,170 $
65,170 $
—
65,170 $
0.38 $
0.37 $
0.60 $
0.57 $
111,450,443 108,833,028
113,431,850 113,364,712
2017
316,861
17,609
299,252
236,165
22,470
22,688
2,655
283,978
15,274
869
(306)
563
15,837
2,638
13,199
13,199
(6,098)
7,101
13,199
(5,829)
7,370
0.13
0.12
55,835,265
60,637,584
(1)
Includes depreciation and amortization expense for the years ended December 31, 2019, 2018, and 2017 of $3,263
$2,225, and $1,140, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
71
CarGurus, Inc.
Consolidated Statements of Comprehensive Income
(in thousands)
Net income
Other comprehensive (loss) income:
Foreign currency translation adjustment
Comprehensive income
2019
Year Ended December 31,
2018
2017
$
42,146
$
65,170
$
13,199
$
(421)
41,725
$
(157)
65,013
$
258
13,457
The accompanying notes are an integral part of these consolidated financial statements.
72
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7
CarGurus, Inc.
Consolidated Statements of Cash Flows
(in thousands)
2019
Year Ended December 31,
2018
2017
42,146 $
65,170
$
13,199
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Currency (gain) loss on foreign denominated transactions
Deferred taxes
Provision for doubtful accounts
Stock–based compensation expense
Amortization of deferred contract costs
Changes in operating assets and liabilities:
$
Accounts receivable, net
Prepaid expenses, prepaid income taxes, and other assets
Deferred contracts costs
Accounts payable
Accrued expenses, accrued income taxes and other current liabilities
Deferred revenue
Deferred rent
Lease obligations
Other non–current liabilities
Net cash provided by operating activities
Investing Activities
Purchases of property and equipment
Capitalization of website development costs
Cash paid for acquisition
Investments in certificates of deposit
Maturities of certificates of deposit
Net cash used in investing activities
Financing Activities
Initial public offering proceeds
Payment of initial public offering costs
Proceeds from exercise of stock options
Financing cash flows from finance leases
Payment of withholding taxes and option costs on net share settlement of
restricted stock units and stock options
Net cash (used in) 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
Unpaid purchases of property and equipment
Unpaid initial public offering costs
Capitalized stock-based compensation expense in website development and
internal-use software costs
Cash paid for operating lease liabilities
7,817
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1,091
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176
—
The accompanying notes are an integral part of these consolidated financial statements.
74
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 online marketplaces under the
CarGurus brand in Canada, the United Kingdom, Germany, Italy, and Spain. The Company has subsidiaries in the United
States, Canada, Ireland, and the United Kingdom. In the United Kingdom, the Company also operates the PistonHeads online
marketplace as an independent brand.
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 convertible preferred stock into 60,564,678 shares of Class A common stock. Subsequent to the closing
of the IPO, there were no shares of convertible 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.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“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
(“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).
75
Due to the adoption of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), which is discussed
further in this Note 2, the consolidated balance sheets and the consolidated statements of operations, comprehensive income,
convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years ended December 31, 2019 and
2018 are not comparative to prior years.
Due to the adoption of ASC Topic 842, Leases (“ASC 842”), which is discussed further in this Note 2, the consolidated
balance sheet for the year ended December 31, 2019 is not comparative to prior years.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
Subsequent Event 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 for 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, other than those
disclosed in Note 16 of these consolidated financial statements.
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
sales allowances, variable consideration, the valuation of goodwill and intangible assets, the expensing and capitalization of
product, technology, and development costs for website development and internal‑use software, 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.
Revenue Recognition
The Company derives its revenue from two primary sources: (1) marketplace subscription revenue, which consists
primarily of Listings, and Dealer Display subscriptions, and (2) advertising and other revenue, which consists primarily of
display advertising revenue from auto manufacturers and other auto-related brand advertisers as well as partnerships with
financing services companies.
Marketplace Subscription Revenue
The Company offers multiple types of marketplace Listings packages to its dealers through its platform: Restricted
Listings (formerly referred to as Basic Listings), which is free; and various levels of Listings packages, which each require a
paid subscription under a monthly, quarterly, semiannual, or annual subscription basis. Contractual subscriptions for
customers generally auto-renew on a monthly basis and are cancellable by dealers with 30 days’ advance notice at the end of
the committed term. The Company also offers all dealers on the its platform access to a Dealer Dashboard, which includes a
performance summary, Dealer Insights tool, and user review management platform. Dealers subscribing to a paid Listings
package also have access to the Pricing Tool and Market Analysis tool. The Pricing Tool and Market Analysis tool are
available only to paying dealers. Subscription pricing is determined based on a dealer’s inventory size, region, and the
Company’s assessment of the connections and Return on Investment (“ROI”) the platform will provide them.
Customers do not have the right to take possession of the Company’s software.
76
In addition to listing inventory in the Company’s marketplace and providing access to the Dealer Dashboard, the
Company offers dealers subscribing to one of its Enhanced, Featured, or Featured Priority Listings packages other
subscription advertising and customer acquisition products, including Dealer Display, pursuant to which dealers can buy
display advertising that appears in the Company’s marketplace, and on other sites on the internet, and for which such
advertisements can be targeted by the user’s geography, search history, CarGurus website activity (including showing users
relevant vehicles from a dealer’s inventory that they have not yet discovered on the Company’s marketplace), and a number
of other targeting factors, allowing dealers to increase their visibility with in-market consumers and drive qualified traffic for
dealers.
Payment is typically due on first day of each calendar month and is recorded as accounts receivable or short-term
deferred revenue when payment is received in advance of services being delivered to the customers.
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 (“CPM”) basis. An impression is an
advertisement loaded on a web page. In addition to advertising sold on a CPM basis, the Company also has advertising sold
on a cost per click basis. 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. The Company does not provide minimum
impression guarantees or other types of minimum guarantees in its contracts with customers. Pricing is primarily based on
advertisement size and position on the Company’s websites and mobile applications, and fees are billed monthly in arrears.
Unbilled accounts receivables relate to services rendered in the current period, but generally not invoiced until the subsequent
period.
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 is recorded on a gross basis because the Company is the
principal in the arrangement, controls the ad placement and timing of the campaign, and establishes the selling price. The
Company enters into contractual arrangements directly with advertisers and is directly responsible for the fulfillment of the
contractual terms including any remedy for issues with such fulfillment.
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. The advertising partner is 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
principal in the arrangement. Additionally, for auction-based partner agreements, the Company has latitude in establishing
the floor price, but the final price established by the exchange server is at market rates.
Customers are billed monthly in arrears and payment terms are generally thirty to sixty days from the date invoiced.
Advertising and other revenue also includes revenue from partnerships with certain financing services companies
pursuant to which the Company enables eligible consumers on the Company’s United States website to pre-qualify for
financing on cars from dealerships that offer financing through such companies. The Company’s revenues from these
financing partnerships are based on a funded-loan basis.
Prior to adoption of ASC 606
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.
77
The Company recognizes marketplace subscription revenue on a monthly basis as revenue is earned and advertising
and other revenue as impressions are delivered. Revenue is presented net of any taxes collected from customers.
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 that 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.
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.
Following adoption of ASC 606
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
modifies how all entities recognize revenue, and consolidates revenue recognition guidance into one ASC Topic (ASC Topic
606, Revenue from Contracts with Customers) (“ASC 606”). Since the Company ceased to be an emerging growth company
as of December 31, 2018, the Company adopted the standard during the fourth quarter of 2018 and applied the modified
retrospective method of adoption with a cumulative catch-up adjustment to the opening balance of retained earnings at
January 1, 2018. Under this method, the Company applied the revised guidance for the year of adoption and applied ASC
Topic 605, Revenue Recognition (“ASC 605”), in the prior years. As a result, the Company applied ASC 606 only to
contracts that were not yet completed as of January 1, 2018. The Company recognized a cumulative catch-up adjustment to
the opening balance of retained earnings at the effective date for contracts that still required performance by the Company at
January 1, 2018. For contracts that were modified before the effective date, the Company exercised the use of the practical
expedient and reflected the aggregate effect of all modifications when identifying performance obligations, determining the
transaction price and allocating transaction price, which did not have a material effect on the adjustment to retained earnings.
ASC 606 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. To achieve this core
principle, the Company applies the following five steps:
1)
2)
Identify the contract with a customer
Identify the performance obligations in the contract
3) Determine the transaction price
4) Allocate the transaction price to performance obligations in the contract
5) Recognize revenue when or as the Company satisfies a performance obligation
78
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers by revenue source for the years ended
December 31, 2019, 2018 and 2017.
Revenue by Revenue Stream
Marketplace subscription revenue
Advertising and other revenue
Total
2019
2018
2017
$
$
526,043 $
62,873
588,916 $
405,780 $
48,306
454,086 $
282,664
34,197
316,861
The Company provides disaggregation of revenue based on the marketplace subscription versus advertising and other
revenue classification in the table above and based on geographic region (see Note 13) as it believes these categories best
depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Marketplace Subscription Revenue
For dealer listings, the Company provides a single similar service each day for a period of time. Each time increment
(i.e. day), rather than the underlying activities, is distinct and substantially the same and therefore the performance obligation
of the Company is to provide a series of daily activities over the contract term. Similar to the dealer listings, the dealer
display advertising is considered a promise to provide a single similar service each day. Each time increment is distinct and
substantially the same and therefore the performance obligation of the Company is to provide a series of daily activities over
the contract term.
Total consideration for marketplace subscription revenue is stated within the contracts. There are no contractual cash
refund rights, but credits may be issued to a customer at the sole discretion of the Company. At an individual contract level,
there is also no variable consideration, such as sales allowance, that needs to be included in the transaction price. However, at
a portfolio level, the Company recognizes that there are times when there is a customer satisfaction issue or other
circumstance that will lead to a credit. Due to the known possibility of future credits, a monthly sales allowance review is
performed to defer revenue at a portfolio level for such future adjustments in the period of incurrence. The Company
establishes sales allowances at the time of revenue recognition based on its history of adjustments and credits provided to its
customers. 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, credits and losses may vary
from actual results which could lead to material adjustments to the financial statements. 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.
Performance obligations are satisfied over time as the customer simultaneously receives and consumes the benefit of
the service. Revenue is recognized ratably over the subscription period beginning on the date the Company starts providing
services to the customer under the contract. Revenue is presented net of any taxes collected from customers.
Advertising and Other Revenue
For advertising revenue, the performance obligation is to publish the agreed upon campaign on the Company’s
websites and load the related impressions.
Advertising contracts state the transaction price within the agreement with payment being based on the number of
clicks or impressions delivered on the Company’s websites. Total consideration is based on output and deemed variable
consideration constrained by an agreed upon delivery schedule. Additionally, there are generally no contractual cash refund
rights. Certain contracts do contain the right for credits in situations in which impressions are not displayed in compliance
with contractual specifications. At an individual contract level, the Company may give a credit for a customer satisfaction
issue or other circumstance. Due to the known possibility of future credits, a monthly review is performed to defer revenue at
an individual contract level for such future adjustments in the period of incurrence.
As consideration is driven by the number of impressions delivered on the CarGurus websites, the consideration for
each period is allocated to the period in which the service was rendered.
79
Performance obligations for company-sold advertising revenue and partner-sold advertising revenue are satisfied over
time as impressions are delivered. Revenue is recognized based on the total number of impressions delivered within the
specified period. Revenue from advertising sold directly by the Company is recognized based on the gross amount charged to
the advertiser and advertising revenue sold by partners is recognized based on the net amount of revenue received from the
content partners. Revenue is presented net of any taxes collected from customers.
Other revenue includes revenue from contracts for which the performance obligation is a series of distinct services with
the same level of effort daily. For these contracts, the Company estimates the value of the variable consideration in
determining the transaction price and allocates it to the performance obligation. Revenue is estimated and recognized on a
ratable basis over the contractual term. The Company reassesses the estimate of variable consideration at each reporting
period.
Contracts with Multiple Performance Obligations
The Company periodically enters into arrangements that include Listings and Dealer Display within marketplace
subscription revenue. These contracts include multiple promises that the Company evaluates to determine if the promises are
separate performance obligations. Performance obligations are identified based on services to be transferred to a customer
that are distinct within the context of the contractual terms. Once the performance obligations have been identified, the
Company determines the transaction price, which includes estimating the amount of variable consideration to be included in
the transaction price, if any. If required, the transaction price is allocated to each performance obligation in the contract based
on a relative standalone selling price (“SSP”) method as the performance obligation is being satisfied. For the Company’s
arrangements that include Listings and Dealer Display, the performance obligations were satisfied over a consistent period of
time and therefore the allocations did not impact the revenue recognized.
Costs to Obtain a Contract
Commissions paid to sales representatives and payroll taxes are considered costs to obtain a contract. Under ASC 606,
the costs to obtain a contract require capitalization and amortization of those costs over the period of benefit. Although the
guidance specifies the accounting for an individual contract with a customer, as a practical expedient, the Company has opted
to apply the guidance to a portfolio of contracts with similar characteristics. The Company has opted to apply another
practical expedient to immediately expense the incremental cost of obtaining a contract when the underlying related asset
would have been amortized over one year or less. As such, the Company applied this practical expedient to advertising
contracts as the term is one year or less and these contracts do not renew automatically. The practical expedient is not
applicable to marketplace subscription contracts as the period of benefit including renewals is anticipated to be greater than
one year as commissions paid on contract renewals are not commensurate with the commissions paid on the initial contract.
The assets are periodically assessed for impairment.
For marketplace subscription customers, the commissions paid on contracts with new customers, in addition to any
commission amount related to incremental sales, are capitalized and amortized over the estimated benefit period of the
customer relationship taking into account factors such as peer estimates of technology lives and customer lives as well as the
Company's own historical data. Commissions paid that are not directly related to obtaining a new contract are expensed as
incurred.
Additionally, the Company allocates employer payroll tax expense to the commission expense in proportion to the
overall payroll taxes paid during the respective period. As such, capitalized payroll taxes are amortized in the same manner
as the underlying capitalized commissions.
The assets recognized for costs to obtain a contract were $3,207, $12,505 and $20,058 as of January 1, 2018, December
31, 2018 and December 31, 2019, respectively. Amortization expense recognized during the years ended December 31, 2019
and 2018 related to costs to obtain a contract was $8,416 and $3,689, respectively.
80
Financial Statement Impact of Adopting ASC 606
The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of
January 1, 2018 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the
modified retrospective method to adopt the new revenue guidance, the following adjustments were made on the consolidated
balance sheet as of January 1, 2018.
As
Reported
Adjustments
December 31,
2017
Marketplace
Subscription
Revenue
Costs to
Obtain a
Contract
As
Adjusted
January 1,
2018
Assets
Current assets:
Cash and cash equivalents
Investments
Accounts receivable, net
Prepaid expenses and prepaid income taxes
Deferred contract costs
Other current assets
Restricted cash
Total current assets
Property and equipment, net
Restricted cash
Deferred tax assets
Deferred contract costs, net of current portion
Other long–term assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses, accrued income taxes and other
current liabilities
Deferred revenue
Deferred tax liabilities
Deferred rent
Total current liabilities
Deferred rent, net of current portion
Other non–current liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock
Class A common stock
Class B common stock
Additional paid–in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
87,709
50,000
12,577
5,313
—
1,605
—
157,204
16,563
1,843
825
—
159
176,594
813
1,424
813
1,424
(190)
(635)
1,783
$
623
$
2,572
$
87,709
50,000
13,390
5,313
1,424
1,605
—
159,441
16,563
1,843
—
1,783
159
$ 179,789
$
23,908
$
23,908
13,588
4,305
—
1,165
42,966
5,648
955
49,569
—
78
28
185,190
(58,499)
228
127,025
176,594
$
13,588
4,305
153
1,165
43,119
5,648
955
49,722
153
153
153
—
—
—
78
28
185,190
(55,457)
228
130,067
$ 179,789
623
2,419
623
623
$
2,419
2,572
$
81
Marketplace Subscription Revenue
Under ASC 606, the Company’s accounting for contracts containing discounts resulted in accelerated revenue
recognition. The cumulative impact of this change to the Company’s accounts receivable on January 1, 2018 was $813.
Costs to Obtain a Contract
As described above, under the new guidance, the capitalized commission expense is amortized over the estimated
customer relationship period. The net impact of this change resulted in a $3,207 reduction to accumulated deficit for contracts
that still require performance by the Company at the date of adoption.
Income Taxes
The adoption of ASC 606 primarily resulted in an acceleration of revenue and the reduction of expense, which in turn
generated additional deferred tax liabilities that ultimately reduced the Company’s net deferred tax asset position. The
cumulative impact resulted in a reduction to deferred tax assets of $978 which put the Company in a net deferred tax liability
position on January 1, 2018.
82
Impact of New Revenue Guidance on Financial Statement Line Items
The following tables compare the reported consolidated balance sheet, statement of operations and cash flows, as of
and for the year ended December 31, 2018, to the pro-forma amounts had the previous guidance been in effect.
Balance Sheet
Assets
Current assets:
Cash and cash equivalents
Investments
Accounts receivable, net
Prepaid income taxes and prepaid income taxes
Deferred contract costs
Other current assets
Restricted cash
Total current assets
Property and equipment, net
Restricted cash
Deferred tax assets
Deferred contract costs, net of current portion
Other long–term assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses, accrued income taxes and other
current liabilities
Deferred revenue
Deferred rent
Total current liabilities
Deferred rent, net of current portion
Other non–current liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock
Class A common stock
Class B common stock
Additional paid–in capital
Retained earnings (accumulated deficit)
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
As of December 31, 2018
As
Reported
Marketplace
Subscription
Revenue
Costs to
Obtain a
Contract
$
$
34,887
122,800
13,614
10,144
5,253
7,410
750
194,858
24,269
1,921
38,886
7,252
1,104
268,290
939
$
5,253
939
5,253
(227)
(3,187)
7,252
$
712
$
9,318
$
Pro forma
as if the
previous
accounting
guidance
was
in effect
34,887
122,800
12,675
10,144
—
7,410
750
188,666
24,269
1,921
42,300
—
1,104
258,260
$
34,345
$
34,345
18,654
8,811
1,693
63,503
9,395
1,281
74,179
—
90
21
184,216
9,713
71
194,111
268,290
$
—
—
—
—
712
9,318
712
712
$
9,318
9,318
$
$
18,654
8,811
1,693
63,503
9,395
1,281
74,179
—
90
21
184,216
(317)
71
184,081
258,260
Total reported assets were $10,030 greater than the pro-forma balance sheet, which assumes the previous guidance
remained in effect as of December 31, 2018. This was largely due to the impact of $12,505 related to costs to obtain a
contract.
83
There were no changes to liabilities as of December 31, 2018 as a result of the adoption of ASC 606.
The following summarizes the significant changes on the Company’s consolidated statement of operations for
the year ended December 31, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to the pro-forma
amounts had the Company continued to recognize revenue under ASC 605.
Statement of Operations
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 from operations
Other income, net:
Interest income
Other income (expense)
Total other income, net
Income before income taxes
Provision for (Benefit from) income taxes
Net income
Basic
Diluted
Year Ended December 31, 2018
As
Reported
Marketplace
Subscription
Revenue
Costs to
Obtain a
Contract
$
454,086 $
24,811
429,275
126
$
126
—
315,939
47,866
39,475
2,804
406,084
23,191
2,283
10
2,293
25,484
(39,686)
65,170 $
0.60 $
0.57 $
$
$
$
(9,298)
—
126
(9,298)
9,298
—
126
37
89 $
— $
— $
—
9,298
2,399
6,899 $
0.07 $
0.06 $
Pro forma
as if the
previous
accounting
guidance
was
in effect
453,960
24,811
429,149
325,237
47,866
39,475
2,804
415,382
13,767
2,283
10
2,293
16,060
(42,122)
58,182
0.53
0.51
The adoption of ASC 606 resulted in an increase to revenue of $126 during the year ended December 31, 2018 due to
accelerated revenue recognition for contracts containing discounts. The adoption of ASC 606 also resulted in a $9,298
reduction in sales and marketing expense during the year ended December 31, 2018 as a result of capitalizing a portion of
commission expense, which was previously expensed under the previous guidance. During the year ended December 31,
2018, the cumulative impact of these changes was a $9,424 increase in income from operations which resulted in a $2,436
reduction to the benefit from income taxes. Additionally, the adoption of ASC 606 resulted in the Company’s basic and
diluted EPS for the year ended December 31, 2018 increasing $0.07 and $0.06, respectively.
84
The following summarizes the significant changes on the Company’s consolidated statement of cash flows for
the year ended December 31, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to the pro-
forma amounts had the Company continued to recognize revenue under ASC 605.
Statement of Cash Flows
Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Currency (gain) loss on foreign denominated transactions
Deferred taxes
Provision for doubtful accounts
Stock–based compensation expense
Amortization of deferred contract costs
Changes in operating assets and liabilities:
Accounts receivable, net
Prepaid expenses, prepaid income taxes, and other
assets
Deferred contracts costs
Accounts payable
Accrued expenses, accrued income taxes and other
current liabilities
Deferred revenue
Deferred rent
Other non–current liabilities
Year Ended December 31, 2018
As
Reported
Marketplace
Subscription
Revenue
Costs to
Obtain a
Contract
Pro forma
as if the
previous
accounting
guidance
was
in effect
$
65,170 $
89 $
6,899 $
58,182
(1,911)
(126)
37
2,399
3,689
(12,987)
5,029
(190)
(39,040)
1,680
20,794
3,689
(11,753)
(12,987)
9,345
2,695
4,508
4,289
405
51,723 $
5,029
(190)
(41,476)
1,680
20,794
—
(1,785)
(11,753)
—
9,345
2,695
4,508
4,289
405
51,723
Net cash provided by operating activities
$
— $
— $
The adoption of ASC 606 had no impact on the Company’s cash flows from operations. The aforementioned impacts
resulted in offsetting shifts in cash flows between net income and various working capital balances.
Contract Balances
The following tables summarize the opening and closing balances of receivables and contract assets from contracts
with customers as of January 1, 2018, December 31, 2018 and December 31, 2019.
Balance at January 1, 2018
Balance at December 31, 2018
Balance at December 31, 2019
Accounts
Receivable, net
Contract Assets
(current)
Contract Assets
(non-current)
$
13,390 $
13,614
22,124
$
1,424
5,253
9,544
1,782
7,252
10,514
Revenue recognized during the year ended December 31, 2019 and 2018 from amounts included in deferred revenue at
the beginning of the period was approximately $8,811 and $4,305, respectively.
Transaction Price Allocated to Future Performance Obligations
Topic 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to
performance obligations that have not yet been satisfied as of December 31, 2019.
85
For contracts with an original expected duration greater than one year, the aggregate amount of the transaction price
allocated to the performance obligations that were unsatisfied as of December 31, 2019 is approximately $35.0 million,
which the Company expects to recognize over the next twelve months.
For contracts with an original expected duration of one year or less, the Company has applied the practical expedient
available under Topic 606 to not disclose the amount of transaction price allocated to unsatisfied performance obligations as
of December 31, 2019. For performance obligations not satisfied as of December 31, 2019, and to which this expedient
applies, the nature of the performance obligations, the variable consideration and any consideration from contracts with
customers not included in the transaction price is consistent with performance obligations satisfied as of December 31, 2019.
The remaining duration is less than one year.
From time to time, the Company may enter into contracts that include variable consideration, for which the Company
estimates the value of the variable consideration in determining the transaction price and allocates it to the appropriate
performance obligation(s). The Company reassesses any estimates of variable consideration at each reporting period.
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 product offerings. These
costs include salaries, benefits, incentive compensation and stock-based compensation for the Company’s customer support
team, and third-party service provider costs such as data center and networking expenses, allocated overhead costs,
depreciation and amortization expense associated with the Company’s property and equipment, and amortization of
capitalized website development costs.
Concentration of Credit Risk
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 governmental 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, 2019, 2018 and 2017, no individual customer accounted for more than 10% of total
revenue.
As of December 31, 2019, one customer accounted for 18% of net accounts receivable. As of December 31, 2018, two
customers accounted for 21% and 14% of net accounts receivable, respectively. No other individual customer accounted for
more than 10% of net accounts receivable at December 31, 2019 or 2018.
Included in net accounts receivable at December 31, 2019 and 2018, is $8,880 and $5,814 of unbilled accounts
receivables related to advertising customers billed within a quarter subsequent to services rendered.
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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
(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.
As of December 31, 2019 and 2018, investments consisted of U.S. certificates of deposit (“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, 2019 and 2018. The Company adjusts the cost of investments for
amortization of premiums and accretion of discounts to maturity, if any. For the years ended December 31, 2019, 2018 and
2017, the Company did not have any premiums or discounts.
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, 2019, 2018 or 2017.
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, 2019 and 2018, 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, 2019 and 2018, restricted cash was $10,803 and $2,671, respectively, and primarily related to cash
held at a financial institution in an interest-bearing cash account as collateral for four letters of credit in 2019 and three letters
of credit in 2018 related to the contractual provisions for the Company’s building leases.
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.
Unbilled accounts receivables are recorded for services rendered in the current period, but generally not invoiced until
the subsequent period.
87
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, 2019, 2018, and 2017:
Year ended December 31, 2019
Year ended December 31, 2018
Year ended December 31, 2017
$
479 $
494
164
1,091 $
1,680
1,117
Balance at
Beginning of
Period
Provision
Write–offs,
net of
recoveries
Balance at
End of Period
240
479
494
(1,330) $
(1,695)
(787)
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:
Capitalized equipment
Capitalized software
Capitalized website development
Furniture and fixtures
Leasehold improvements
Estimated Useful Life
(In Years)
3
3
3
5
Lesser of asset life or lease term
Expenditures for repairs and maintenance are charged to expense as incurred, whereas major betterments are capitalized as
additions to property and equipment.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of long-lived assets, such as property and equipment and intangible assets,
for impairment at least annually and 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, 2019, 2018, and 2017, the Company did not identify any impairment of its
long-lived assets.
Business Combinations
Valuation of Acquired Assets and Liabilities
The Company measures all consideration transferred in a business combination at its acquisition-date fair value.
Consideration transferred is determined by the acquisition-date fair value of assets transferred, liabilities assumed, including
contingent consideration obligations, as applicable. The Company measures goodwill as the excess of the consideration
transferred over the net of the acquisition-date amounts of assets acquired less liabilities assumed.
88
The Company makes significant assumptions and estimates in determining the fair value of the acquired assets and
liabilities as of the acquisition date, especially the valuation of intangible assets and certain tax positions. The Company
records estimates as of the acquisition date and reassess the estimates at each reporting period up to one year after the
acquisition date. Changes in estimates made prior to finalization of purchase accounting are recorded to goodwill.
Intangible Assets
Intangible assets are recorded at their estimated fair value at the date of acquisition. The Company amortizes intangible
assets over their estimated useful lives on a straight-line basis. Amortization is recorded over the relevant estimated useful
lives ranging from three to eleven years.
The Company 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. If the estimate of an intangible asset’s
remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively
over the revised remaining useful life.
Goodwill
Goodwill is recorded when consideration paid in a purchase acquisition exceeds the fair value of the net assets
acquired. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and
circumstances warrant a review. Conditions that could trigger a more frequent impairment assessment include, but are not
limited to, a significant adverse change in certain agreements, significant underperformance relative to historical or projected
future operating results, an economic downturn affecting automotive marketplaces, increased competition, a significant
reduction in our stock price for a sustained period or a reduction of our market capitalization relative to net book value.
The Company has determined that it had two reporting units, United States and International, as of and for the year
ended December 31, 2019. The Company evaluates impairment annually on October 1 by comparing the estimated fair value
of each reporting unit to its carrying value. The Company estimates fair value using a discounted cash flow model based on
our most recent forecast at the time of its annual impairment test.
Capitalized Website Development and Internal-Use Software 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 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 beginning with the time when it is ready for intended use. Capitalized internal-use software costs are
amortized on a straight-line basis over their estimated useful life of the term of the hosting arrangement, taking into
consideration several other factors such as, but not limited to, options to extend the hosting arrangement or options to
terminate the hosting arrangement, beginning with the time when it is ready for intended use. Amounts amortized are
presented through operating expense, rather than depreciation or amortization. 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, 2019 and 2018, the Company capitalized $4,176 and $2,012 of website
development costs, respectively. The Company recorded amortization expense associated with its capitalized website
development costs of $1,643, $1,508 and $812 for the years ended December 31, 2019, 2018, and 2017, respectively.
89
During the year ended December 31, 2019, the Company capitalized $2,615 and $616 of internal-use software in other
non-current assets and in prepaid expenses and prepaid income taxes, respectively. The Company recorded amortization
expense associated with its internal-use software of $132 for the year ended December 31, 2019.
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 net income and reflected as a separate component of stockholders’ equity (deficit). Foreign currency
transaction gains and losses are included in net income 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).
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. Interest and penalties, if applicable, related to uncertain tax positions would be recognized as a
component of income tax expense. The Company has no recorded liabilities for uncertain tax positions as of December 31,
2019 and 2018.
The Tax Cuts and Jobs Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned
by certain foreign subsidiaries. An entity can make an accounting policy election, per the FASB Staff Q&A, Topic 740, No.
5, Accounting for Global Intangible Low-Taxed Income, either to recognize deferred taxes for temporary basis differences
expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred
as a period expense only. The Company has elected to account for GILTI as a period cost in the year the tax is incurred.
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, 2019 and 2018
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 4 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 10, the fair value of each award is determined on the date of grant. 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 initial public
offering. 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
90
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 occurred 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 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
believes that the members of its Board at all relevant times had sufficient business, finance or venture capital experience to
make such estimates. The Company and the Board 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 required judgment. These estimates and assumptions include a number
of objective and subjective factors used to determine 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, and consolidated net
income per share could have been significantly different.
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.
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.
The Company issues shares for stock option exercises and RSUs out of its shares available for issuance. No options
were granted during the years ended December 31, 2019, 2018, and 2017.
The Company accounts for forfeitures when they occur. The tax effect of differences between tax deductions related to
stock compensation and the corresponding financial statement expense compensation are recorded to tax expense. Excess tax
benefits recognized on stock-based compensation expense are classified as an operating activity in the consolidated
statements of cash flows.
During 2019, 2018 and 2017, the Company recorded tax benefits of $11,115, $40,765 and $681, respectively, related to
differences between tax deductions related to stock compensation and the corresponding financial statement expense
compensation.
See Note 10 for a summary of the stock option and RSU activity for the year ended December 31, 2019.
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 $287,107, $238,640, and $173,186 for the years ended December 31, 2019,
2018, and 2017, respectively.
91
Comprehensive Income
Comprehensive income is defined as the change in stockholders’ equity (deficit) of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. Comprehensive income consists of net
income and other comprehensive (loss) income, which includes certain changes in equity that are excluded from net income.
Specifically, cumulative foreign currency translation adjustments are included in accumulated other comprehensive (loss)
income. As of December 31, 2019 and 2018 accumulated other comprehensive (loss) income 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.
Recent Adopted Accounting Pronouncements
Lease Accounting
In February 2016, the FASB issued ASC 842, which requires a lessee to recognize most leases on the consolidated
balance sheet but recognize expenses on the consolidated 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-of-use asset for
the right to use the underlying assets for the lease term. The Company adopted ASC 842 as of January 1, 2019, using the
additional transition method offered through ASU No. 2018-11. This approach provides a method for recording existing
leases at the adoption date and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption.
Lease Overview
The Company’s operating lease obligations consist of various leases for office space in: Boston, Massachusetts;
Cambridge, Massachusetts; Detroit, Michigan; Los Angeles, California; Dublin, Ireland; and London, United Kingdom. The
Detroit, Los Angeles and London leases are immaterial to the Company. The Company also has an operating lease obligation
for data center space in Needham, Massachusetts.
On December 19, 2019, the Company entered into an operating lease for the lease of 273,595 square feet of office
space in Boston, Massachusetts at 1001 Boylston Street. The lease provides for leasehold improvement incentives and
provides for annual rent increases through the term of the lease. The “Commencement Date” of the lease term is the earlier
to occur of (i) the date that is twelve months following the Delivery Date (as defined in the lease) and (ii) the date that the
Company first occupies the premises for the normal conduct of business for the Permitted Use (as defined in the lease). The
initial term will commence on the Commencement Date and expire on the date that is one hundred and eighty full calendar
months after the Commencement Date (plus the partial month, if any, immediately following the Commencement Date). The
lease provides for the option to terminate early under certain circumstances including if there is a material delay in
construction (subject to the terms and conditions of the lease), and contains two Company options to extend the lease term
(including for a portion of the office space thereunder) for an additional period of five years.
On August 30, 2019, the Company amended its operating lease agreement in Cambridge, Massachusetts at 55
Cambridge Parkway, which was originally entered into on March 11, 2016 and subsequently amended on July 30, 2016, for
the lease of 51,923 square feet of office space. The 2019 amendment granted the Company an additional 36,689 square feet
of office space and extended the non-cancellable lease term through 2025 for the office space currently occupied. The
Company accounted for the additional 36,689 square feet of office space as a new lease as it provides an additional right-of-
use asset that is not included in the original lease and the additional lease payments were determined to be commensurate
with the standalone price of the additional space. The non-cancellable lease term of the additional space ends in 2025, with a
portion ending in 2023. The term extension of the existing 51,923 square feet of office space was recorded as a lease
modification within the consolidated balance sheet as of December 31, 2019. The lease, as amended, provides for (i) an
option to extend the lease term with respect to a portion of the office space for an additional period of five years, (ii)
leasehold improvement incentives and (iii) annual rent increases through the term of the lease.
92
On May 1, 2019, the Company entered into an operating lease in Needham, Massachusetts for the lease of data center
space with a non-cancellable term through 2022 with automatic renewal for one year thereafter if not terminated. The lease
provides for annual rent increases through the term of the lease.
On June 19, 2018, the Company entered into an operating lease in Cambridge, Massachusetts at 121 First Street for the
lease of 48,393 square feet of office space with a non-cancellable lease term through 2033 with an option to extend the lease
term for two additional periods of five years each. The lease provided for leasehold improvement incentives and provides for
annual rent increases through the term of the lease. The Company subleases the fifth floor and records the sublease income in
other income (expense), net within the consolidated income statement. The sublease income is immaterial as of December
31, 2019.
On September 26, 2017, the Company assumed an operating lease, which was entered into by the original lessee on
August 12, 2013, for the lease of 13,345 square feet of office space in Dublin, Ireland at Styne House, Upper Hatch Street
with a non-cancellable term through 2023. The lease provided for a rent increase at the end of year five of the original lease
term.
On October 8, 2014, the Company entered into an operating lease in Cambridge, Massachusetts at 2 Canal Park for the
lease of 48,059 square feet of office space with a non-cancellable lease term through 2022 with an option to extend the lease
term for one additional period of five years. The lease provided for leasehold improvement incentives and provides for annual
rent increases through the term of the lease.
The Company’s financing lease obligations consist of a lease for office equipment and are immaterial.
The leases in Boston Massachusetts and Cambridge, Massachusetts have associated letters of credit, which are
recorded as restricted cash within the consolidated balance sheet. At December 31, 2019 and 2018, restricted cash was
$10,803 and $2,671, respectively, and primarily related to cash held at a financial institution in an interest-bearing cash
account as collateral for the letters of credit related to the contractual provisions for the Company’s building leases. At
December 31, 2019 and 2018, portions of restricted cash were classified as a short-term asset and long-term asset.
Additionally, the 121 First Street lease agreement has an associated security deposit, which is recorded in other non-current
assets, net within the consolidated balance sheet.
Prior to adoption of ASC 842
Prior to the adoption of ASC 842, the Company categorized leases at their inception as either operating or capital
leases. On certain lease arrangements, the Company may have received rent holidays or other incentives. The Company
recognized lease costs on a straight‑line basis once it achieved control of the space, without regard to deferred payment terms,
such as rent holidays, that deferred the commencement date of required payments or escalating payment amounts. The
Company recorded the difference between required lease payments and rent expense as deferred rent. Additionally,
incentives received were treated as a reduction of costs over the term of the agreement, as they were considered an
inseparable part of the lease agreement.
As of December 31, 2018, the Company had deferred rent and rent incentives of $11,088, of which $1,693 and $9,395,
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, 2018 and 2017 was $7,711 and $5,994,
respectively.
Following adoption of ASC 842
Upon adoption of ASC 842, the Company elected the transition relief package, permitted within the standard, pursuant
to which the Company did not reassess the classification of existing leases, whether any expired or existing contracts contain
a lease, and whether existing leases have any initial direct costs. The Company also elected the practical expedient of not
separating lease components from non-lease components for all leases. There was no cumulative-effective adjustment to the
opening balance of retained earnings. The Company reviews all material contracts for embedded leases to determine if they
have a right-of-use asset.
The Company recognizes rent expense on a straight-line basis over the lease period. The depreciable life of assets and
leasehold improvement are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably
certain of exercise.
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Variable lease payments that depend on an index or a rate are included in the lease payments and are measured using
the prevailing index or rate at the measurement date. Variable lease payments not based on an index or a rate are excluded
from lease payments and are expensed as incurred.
The Company also made an accounting policy election to not recognize a lease liability or right-of-use asset on its
consolidated balance sheet for leases with an initial term of twelve months or less, and instead to recognize lease payments
on the consolidated income statement on a straight-line basis over the lease term and variable lease payments that do not
depend on an index or rate as expense in the period in which the achievement of the specified target that triggers the variable
lease payments becomes probable.
Adoption of the new standard resulted in the recording of net lease assets and lease liabilities of $52,334 and $63,280,
respectively, as of January 1, 2019. The standard did not materially impact the consolidated statement of cash flows and had
no impact on the consolidated income statement.
During the years ended December 31, 2019 and 2018, the Company recognized $10,260 and $7,711, respectively, of
lease costs for leases that have commenced. The Company allocates lease costs across all departments based on headcount in
the respective location.
For leases commenced, as of December 31, 2019, the weighted average remaining lease term was 8.8 years and the
weighted average discount rate was 5.2%. As most of the Company’s leases do not provide an implicit rate, the Company
uses an estimated incremental borrowing rate based on the information available at lease commencement in determining the
present value of lease payments. The Company estimated the incremental borrowing rate based on the rate of interest the
Company would have to pay to borrow a similar amount on a collateralized basis over a similar term. The Company has no
historical debt transactions and a collateralized rate is estimated based on a group of peer companies. The Company used the
incremental borrowing rate on January 1, 2019 for leases that commenced prior to that date.
Future minimum lease payments as of December 31, 2019 are as follows:
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less imputed interest
Total
$
Operating
Lease
Commitments
12,201
13,088
13,016
9,858
8,835
34,423
91,421
(21,822)
69,599
$
The chart above does not include options to extend lease terms that are not reasonably certain of being exercised or
leases signed but not yet commenced as of December 31, 2019. Total estimated future minimum lease payments for leases
signed but not yet commenced as of December 31, 2019, which includes 1001 Boylston Street and portions of 55 Cambridge
Parkway, are estimated to be $317,837 and have expected commencement dates ranging from February 2020 to January
2022.
Stock-Based Compensation
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718) (“ASU 2018-
07”). ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment
transactions for acquiring goods and services from non-employees. The amendments in this update state that an entity should
apply the requirements of Topic 718 to non-employee awards except for specific guidance on inputs to an option pricing
model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of
cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in
which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based
payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively
provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of
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a contract accounted for under Topic 606. The amendments in this update are effective for public business entities for fiscal
years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.
The Company has assessed the impact of this guidance on its consolidated financial statements and does not deem it to be
material. The Company adopted the guidance on January 1, 2019 prospectively.
Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic
350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract. This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is
a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software. This new standard requires companies to amortize the capitalized implementation costs over the term of the hosting
arrangement. Amounts amortized would be presented through operating expense, rather than depreciation or amortization.
Accounting for the service component of a hosting arrangement remains unchanged. The new standard is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and an
entity can elect to apply the new guidance on a prospective or retrospective basis. The Company adopted this standard
effective January 1, 2019 and applied the guidance using a prospective transition method for each period presented.
Recent Accounting Pronouncements Not Yet Adopted
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.
In December 2019, the FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. The
new guidance simplifies the accounting for income taxes by removing several exceptions in the current standard and adding
guidance to reduce complexity in certain areas, such as requiring that an entity reflect the effect of an enacted change in tax
laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The new
standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with
early adoption permitted. The Company is currently assessing the impact that adopting this guidance will have on its
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment. The new guidance simplifies the accounting for goodwill impairment by eliminating Step 2 of the
goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires entities to calculate the
implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by
assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess
of the implied fair value is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized
based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The
new standard is effective beginning in January 2020, with early adoption permitted. The Company does not expect the impact
of adopting this guidance to be material to its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. ASU 2016-13 and its subsequent related updates establish a new forward-looking
“expected loss model” that requires entities to estimate current expected credit losses on accounts receivable and financial
instruments by using all practical and relevant information. The new standard and its subsequent related updates are effective
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption
permitted. The Company is currently assessing the impact that adopting this guidance will have on its consolidated financial
statements, but does not expect it to be material.
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3. Acquisitions
On January 8, 2019, the Company, through CarGurus U.K. Limited, a company incorporated in England & Wales and
a wholly owned subsidiary of CarGurus Ireland Limited, a company incorporated in Ireland and a wholly owned subsidiary
of the Company (the “Purchaser”), completed its acquisition of PistonHeads, a U.K.-based automotive website
(“PistonHeads”), by acquiring the entire issued share capital of Haymarket New4 Ltd., a company incorporated in England &
Wales and now known as PistonHeads Holdco Limited (“NewCo”), from Haymarket Media Group Ltd., a company
incorporated in England & Wales (the “Seller”), on the terms and subject to the conditions set forth in the Put and Call
Option Agreement dated December 3, 2018, by and among the Purchaser, the Seller and Haymarket Group Limited, a
company incorporated in England & Wales. The PistonHeads website hosts used car classifieds, articles and user
forums. The Purchaser paid an aggregate of 15,000 GBP, or approximately $19,139, to acquire the business, inclusive of
1,000 GBP, or approximately $1,276, being held in escrow to secure post-closing claims, subject to the terms and conditions
of an escrow agreement among the escrow agents, the Purchaser and the Seller. Upon completion of the acquisition, NewCo
became a wholly owned subsidiary of the Purchaser. The business combination was intended to expand the Company’s
consumer audience in the U.K. As of December 31, 2019, the Company has incurred total acquisition-related costs of $779
related to the transaction.
The acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the
total purchase price is allocated to the intangible assets and goodwill. Acquired tangible assets and assumed liabilities are
immaterial. The following table presents the purchase price allocation recorded in the Company's consolidated balance sheet
as of the acquisition date, which was finalized as of December 31, 2019:
Intangible assets (1)
Goodwill (2)
Deferred tax liabilities (3)
Total purchase price
$
$
4,466 $
15,521
(848)
19,139 $
Estimated Fair
Value at Date
of Acquisition Adjustment
Adjusted Fair
Value at Date
of Acquisition
4,466
14,866
(193)
19,139
— $
(655)
655
— $
(1)
(2)
Identifiable definite-lived intangible assets were comprised of brand and customer relationships of $3,445 and $1,021,
respectively, with estimated useful lives of 11 years and 3 years, respectively, which will be amortized on a straight-
line basis over their estimated useful lives.
The goodwill represents the excess value of the purchase price over intangible assets acquired. The goodwill in this
transaction is primarily attributable to future customer growth in the U.K. market as a result of acquiring an established
platform and applying the Company’s technology to help improve the website experience on such platform; thus,
helping to drive additional traffic to the PistonHeads website in the future. All goodwill is assigned to the International
segment. The acquisition of PistonHeads was a stock acquisition and as a result, goodwill is not deductible for tax
purposes.
(3)
The deferred tax liability corresponds to the acquired intangible assets which do not have tax basis. As the Company
evaluated its purchasing price accounting, it determined to reduce the deferred tax liability which resulted in an
adjustment to goodwill, which was recorded during the second quarter of 2019.
Actual and pro forma results for this acquisition have not been presented as the financial impact to the Company’s
consolidated financial statements is not material.
4. 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.
96
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 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, 2019 and 2018:
Cash equivalents:
Money market funds
Investments:
Certificates of deposit
Total
Cash equivalents:
Money market funds
Investments:
Certificates of deposit
Total
December 31, 2019
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
$
$
29,196 $
— $
— $
29,196
—
29,196 $
111,692
111,692 $
— 111,692
— $ 140,888
December 31, 2018
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
$
$
24 $
—
24 $
— $
— $
24
122,800
122,800 $
— 122,800
— $ 122,824
The Company measures eligible assets and liabilities at fair value with changes in value recognized in earnings. There
were no liabilities that were measured at fair value as of December 31, 2019 and 2018. 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 and did not elect the fair
value option for any financial assets transacted during the year ended December 31, 2019 or the year ended December 31,
2018.
The following is a summary of cash, cash equivalents, and investments as of December 31, 2019 and 2018.
December 31, 2019:
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
$
59,920 $
— $
— $
59,920
111,692
$
$ 171,612
—
$
—
—
—
111,692
$ 171,612
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December 31, 2018:
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
5. Property and Equipment, Net
Property and equipment, net consists of the following:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$
34,887 $
— $
— $
34,887
122,800
$
$ 157,687
—
$
—
—
—
122,800
$ 157,687
Capitalized equipment
Capitalized software
Capitalized website development costs
Furniture and fixtures
Leasehold improvements
Construction in progress
Finance lease right-of-use assets
Less accumulated depreciation and amortization
Property and equipment, net
At December 31,
2019
2018
$
$
7,923 $
181
11,083
6,809
19,507
524
78
46,105
(18,155)
27,950 $
4,208
252
6,907
4,584
10,821
8,971
-
35,743
(11,474)
24,269
Depreciation and amortization expense, excluding amortization of intangible assets, was $7,168, $5,029, and $3,795
for the years ended December 31, 2019, 2018, and 2017, respectively. The increase of $8,686 in leasehold improvements and
the decrease of $8,447 in construction in progress at December 31, 2019 was primarily due to costs incurred to build out the
Company’s new leased facility at 121 First Street in Cambridge, Massachusetts. The facility became occupied subsequent to
December 31, 2018, at which time the assets ceased to be classified as construction in progress and became classified as
leasehold improvement.
6. Goodwill and other intangible assets
Goodwill
The changes in the carrying value of goodwill were as follows:
Balance at December 31, 2018
Initial value of PistonHeads acquisition
Foreign currency translation adjustment
Purchase price adjustment (1)
Balance at December 31, 2019
$
$
—
15,521
341
(655)
15,207
(1)
The purchase price adjustment corresponds to an adjustment for the deferred tax liability as a result of the Company’s
evaluation of income tax treatment, which was recorded during the second quarter of 2019.
The Company did not have a goodwill balance prior to the closing of the PistonHeads acquisition on January 8, 2019.
The Company tests goodwill for impairment at least annually or whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. The Company evaluated goodwill for impairment on October 1, 2019 and did not
recognize an impairment charge.
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Other Intangible Assets
Intangible assets as of December 31, 2019 consist of the following:
Brand
Customer relationships
Total
Weighted
Average
Remaining
Useful Life
(years)
Gross
Carrying
Amount
10.0 $
2.0
$
3,524
1,045
4,569
Accumulated
Amortization
313
$
336
649
$
Net Carrying
Amount
$
$
3,211
709
3,920
The Company did not have intangible assets prior to the closing of the PistonHeads acquisition on January 8, 2019. The
Company recorded amortization expense related to intangible assets of $649 for the year ended December 31, 2019.
The estimated useful life of brand and customer relationships is 11 years and 3 years, respectively. The Company
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.
Estimated amortization expense of intangible assets for future periods as of December 31, 2019, is as follows:
Year Ending December 31,
2020
2021
2022
2023
2024
2025 and thereafter
Total
Amortization
Expense
$
$
671
671
328
320
320
1,610
3,920
7. Accrued expenses, accrued income taxes and other current liabilities
Accrued expenses, accrued income taxes and other current liabilities consist of the following:
Accrued bonus
Other accrued expenses, accrued income taxes and other
current liabilities
Total
At December 31,
2019
2018
$
8,637 $
8,266
9,625
18,262 $
10,388
18,654
$
8. Commitments and Contingencies
Contractual Obligations and Commitments
The Company’s operating lease obligations are discussed in Note 2. All of the Company’s property, equipment, and
internal-use software have been purchased with cash with the exception of $647 of unpaid property and equipment and
immaterial amounts related to obligations under one finance lease as of December 31, 2019. The Company has no material
long-term purchase obligations outstanding with any vendors or third parties.
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.
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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, 2019 and 2018, the Company has not incurred any costs for
guarantees or indemnities.
9. Convertible Preferred Stock and Stockholders’ Equity
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.
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, 2019, 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 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
100
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.
At December 31, 2019, 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 of each share of Class B common stock will occur upon the
occurrence of certain events, as described in the Fourth Amended and Restated Certificate of Incorporation.
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:
Series A Preferred Stock
Series B Preferred Stock
Series C Preferred Stock
Series D Preferred Stock
Series E Preferred Stock
Original Issue
Price
Per Share
Shares
Liquidation
Amount
Carrying
Value
Authorized Outstanding
$ 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
1,483 $
2,295
2,295
1,316
1,316
68,000 67,872
60,000 59,732
11,091,782 10,094,108 $ 133,094 $132,698
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.
10. 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
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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.
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
2015 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. Unless determined otherwise by the Compensation Committee of the Board, as of the first trading
day of January of each calendar year during the term of the 2017 Plan (excluding any extensions), eligible beginning with
calendar year 2019, an additional number of shares of Class A common stock will be added to the number of shares of the
Company’s 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 (the “Evergreen Increase”). The
Compensation Committee of the Board determined to not effectuate the Evergreen Increase that was otherwise scheduled to
have occurred on each of January 2, 2019 and January 2, 2020. 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, 2019, 5,889,929 shares of Class A common stock were available for issuance under the 2017 Plan.
102
Stock Options
The following is a summary of the stock option activity for all stock-based compensation plans during the year ended
December 31, 2019:
Outstanding, December 31, 2018
Granted
Exercised
Forfeited and cancelled
Outstanding, December 31, 2019
Options exercisable at December 31, 2019
Weighted-
Average
Exercise Price
Common
Stock
1,807,515 $
—
(838,928)
(25,702)
942,885 $
913,197 $
for Equity
2.35
—
2.16
5.09
2.45
2.31
Weighted-
Average
Remaining
Contractual Life
(In Years)
Aggregate
Intrinsic
Value(1)
5.9 $ 56,716
28,902
5.0 $ 30,859
5.0 $ 30,016
(1)
The aggregate intrinsic value as of December 31, 2019 and 2018 was calculated based on the positive difference, if
any, between the estimated fair value of our common stock on December 31, 2019 and 2018, respectively, or the date
of exercise, as appropriate, and the exercise price of the underlying options.
There were no options granted in the years ended December 31, 2019, 2018 and 2017.
The aggregate intrinsic value for options exercised during the years ended December 31, 2018 and 2017 was $111,227
and $2,238, respectively.
As of December 31, 2019, there was $16 of unrecognized stock-based compensation expense related to unvested stock
options, which is expected to be recognized over a weighted-average period of 0.3 years.
Restricted Stock Units
The following is a summary of the RSU activity during the year ended December 31, 2019:
Unvested outstanding, December 31, 2018
Granted
Vested
Forfeited
Unvested outstanding, December 31, 2019
Number of
Shares
2,973,002 $
1,811,208
(1,317,736)
(383,173)
3,083,301 $
Weighted-
Average Grant
Date Fair Value
Aggregate
Intrinsic
Value
26.06 $ 100,279
39.07
23.93
31.70
33.89 $ 108,471
The weighted-average grant-date fair value of RSUs granted was $35.79 and $16.99 per share in 2018 and 2017,
respectively.
RSUs that vested and settled during the year ended December 31, 2018 totaled 1,781,201, which included 1,087,279
and 693,922 RSUs that vested in 2018 and 2017, respectively. RSUs that vested prior to April 10, 2018 did not settle until the
expiration of shareholder lock-up agreements on such date.
The total fair value of RSUs vested was $31,533, $15,994, and $2,505 in the years ended December 31, 2019, 2018 and
2017, respectively.
As of December 31, 2019, there was $92,700 of unrecognized stock-based compensation expense related to unvested
RSUs that is expected to be recognized over a weighted-average period of 2.8 years.
103
Stock-based Compensation Expense
For the years ended December 31, 2019, 2018, and 2017, total stock-based compensation expense was $34,301,
$20,794, and $5,028, 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 expense
Cost of revenue
Sales and marketing expense
Product, technology, and development expense
General and administrative expense
Total stock-based compensation expense
Year Ended December 31,
2018
2017
2019
155 $
34,146
$
34,301
247 $
20,547
$
20,794
281
4,747
5,028
Year Ended December 31,
2018
2017
2019
354 $
9,989
15,159
8,799
34,301 $
354 $
5,111
9,865
5,464
20,794 $
151
1,911
1,637
1,329
5,028
$
$
$
$
Excluded from stock-based compensation expense is $1,381, $490, and $176 of capitalized software development costs
and internal-use software costs in 2019, 2018 and 2017, respectively.
The income tax benefit from stock-based compensation expense was $2,953, $1,945, and $1,301 in the years ended
December 31, 2019, 2018, and 2017, respectively.
During the years ended December 31, 2019 and 2018, the Company withheld 452,678, and 658,931 shares of Class A
common stock, respectively, to satisfy employee tax withholding requirements and option costs due to net share settlements.
No shares were withheld during the year ended December 31, 2017. The shares withheld return to the authorized, but
unissued, pool under the 2017 Plan and can be reissued by the Company. Total payments for the employees’ tax obligations
to the taxing authorities and for option costs due to net share settlements were $16,470 and $25,885 for the years ended
December 31, 2019 and 2018, respectively, and are reflected as a financing activity within the consolidated statements of
cash flows.
Common Stock Reserved for Future Issuance
At December 31, 2019, 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
942,885
3,083,301
5,889,929
9,916,115
11. Earnings Per Share
Net income per share for the years ended December 31, 2019 and 2018 was computed by dividing net income by the
weighted-average number of common shares outstanding during the reporting period. The Company computes the weighted-
average number of common shares outstanding during the reporting period using the total number of shares of Class A
common stock and Class B common stock outstanding as of the last day of the previous year end reporting period plus the
weighted-average of any additional shares issued and outstanding during the reporting period.
Net income per share for the year ended December 31, 2017 was computed 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). For periods during the year ended December 31, 2017, the Company had convertible
Preferred Stock outstanding. The Company considered the convertible Preferred Stock to be participating securities because
they included rights to participate in dividends with the common stock. On October 16, 2017, in connection with the closing
104
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 latter of which subsequently converted in full
into shares of Class A common stock. As a result, there were no shares of Preferred Stock outstanding at the closing of the
IPO and the Company has not issued any new shares of Preferred Stock since such closing.
Under the two-class method, basic net income per share attributable to common stockholders is computed by dividing
the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding
during the period. Diluted net income 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 allocated net income first to preferred stockholders
based on dividend rights under the Company’s certificate of incorporation that was in effect prior to the closing of the IPO
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.
The Company has two classes of common stock authorized: Class A common stock and Class B common stock. The
rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each
share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten
votes per share. Each share of Class B common stock is convertible into one share of Class A common stock at the option of
the holder at any time or automatically upon certain events described in the Company’s amended and restated certificate of
incorporation, including on either the death or voluntary termination of the Company’s Chief Executive Officer. The
Company allocates undistributed earnings attributable to common stock between the common stock classes on a one-to-one
basis when computing net income per share. As a result, basic and diluted net income per share of Class A common stock and
per share of Class B common stock are equivalent.
During the years ended December 31, 2019 and 2018, holders of Class B common stock converted 387,440 shares and
7,534,710 shares, respectively, of Class B common stock to Class A common stock.
Diluted net income per share gives effect to all potentially dilutive securities. Potential diluted securities for the years
ended December 31, 2019, 2018 and 2017 consist of shares of common stock issuable upon the exercise of stock options and
shares of common stock issuable upon the vesting of RSUs. Potential dilutive securities for the year ended December 31,
2017 also included 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 years ended December 31, 2019 and 2018, dilutive net income per share was calculated by dividing net income
by the weighted-average number of shares of common stock outstanding during the period plus the dilutive impact of stock
options and shares of common stock issuable upon the vesting of RSUs. For the year ended December 31, 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.
105
The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and
diluted net income per share:
Numerator:
Net income
Net income attributable to participating securities
Net income attributable to common
stockholders — basic
Net income
Net income attributable to participating securities
Net income attributable to common
stockholders — diluted
Denominator:
Weighted–average number of shares of common stock
used in computing net income 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 per share —
diluted
Net income per share attributable to common
stockholders:
Basic
Diluted
Year Ended December 31,
2018
2019
2017
$
$
$
$
42,146 $
—
42,146 $
42,146 $
—
65,170 $
—
13,199
(6,098)
65,170 $
65,170 $
—
7,101
13,199
(5,829)
42,146 $
65,170 $
7,370
111,450,443 108,833,028 55,835,265
1,155,906
3,009,748 4,290,362
825,501
1,521,936
511,957
113,431,850 113,364,712 60,637,584
$
$
0.38 $
0.37 $
0.60 $
0.57 $
0.13
0.12
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, 2019, 2018, and 2017, as their effect would have
been anti-dilutive for the periods presented:
Restricted stock units outstanding
12. Income Taxes
2019
1,144,287
Year Ended December 31,
2018
126,816
2017
829
The domestic and foreign components of income before income taxes are as follows:
United States
Foreign
Income before income taxes
Year Ended December 31,
2018
24,426 $
1,058
25,484 $
2019
37,476 $
1,229
38,705 $
2017
15,543
294
15,837
$
$
106
The (benefit from) provision for income taxes contained the following components:
Year Ended December 31,
2018
2017
2019
Current (benefit) provision:
Federal
State
Foreign
Deferred (benefit) provision:
Federal
State
Foreign
$
— $
(220)
513
293
(860) $
92
122
(646)
(2,377)
(1,306)
(51)
(3,734)
(3,441) $
(27,675)
(11,499)
134
(39,040)
(39,686) $
3,262
431
62
3,755
(755)
(343)
(19)
(1,117)
2,638
Income tax (benefit) provision
$
The Company's effective tax rates for the years ending December 31, 2019 and 2018 are less than the U.S. federal
statutory rate due to excess tax deductions related to stock-based compensation awards and federal and state research and
development credits. The Company’s effective tax rate for the year ending December 31, 2017 is 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.
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,
2018
2017
2019
21.0%
0.2
2.9
—
(22.0)
(0.3)
(10.3)
(0.2)
(8.7)%
21.0%
(25.6)
4.1
—
(127.2)
(0.4)
(28.4)
0.7
(155.8)%
35.0%
3.1
1.2
(9.3)
(4.4)
(0.4)
(9.0)
0.5
16.7%
107
The approximate income tax effect of each type of temporary difference and carryforward as of December 31, 2019
and 2018 is as follows:
Deferred tax assets:
Net operating loss carryforwards
Credit carryforwards
Stock-based compensation
Landlord allowance on leasehold improvements
Lease liability
Intangible Assets
Deferred rent
Accruals and reserves
$
Valuation Allowance
Deferred tax liabilities:
Prepaid expenses
Deferred commissions
Right of use assets
Unbilled revenue
Fixed assets
Net deferred tax assets
$
As of December 31,
2019
2018
35,977 $
10,472
2,953
—
17,965
62
—
1,185
68,614
(62)
68,552
(1,523)
(5,100)
(15,270)
—
(4,230)
(26,123)
42,429 $
34,450
6,562
1,945
1,908
—
—
873
1,074
46,812
—
46,812
(931)
(3,187)
—
(227)
(3,581)
(7,926)
38,886
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 Company has provided an immaterial valuation allowance against its net deferred tax assets at December 31, 2019,
but did not provided a valuation allowance against its net deferred tax assets at December 31, 2018. 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,
with the exception of the deferred tax asset related to intangible assets in Ireland. The change in the valuation allowance for
the year ended December 31, 2019 was $62.
As of December 31, 2019, the Company has federal and state net operating loss carryforwards of $136,771 and
$114,459, respectively. The federal net operating losses carryforward indefinitely, subject to an annual limitation of 80% of
taxable income. The state net operating losses, excluding Florida and Georgia which carryforward indefinitely, expire at
various dates beginning in 2028. As of December 31, 2019, the Company has federal and state tax credit carryforwards of
$6,507 and $5,018, respectively, available to reduce future tax liabilities that expire at various dates through 2039.
Utilization of the net operating losses and tax credit carryforwards, respectively, 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 net
operating losses or 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 five
percent stockholders in the stock of a corporation by more than 50% in the aggregate over a three-year period.
At December 31, 2019 and 2018, the Company had no recorded liabilities for uncertain tax positions and had no
accrued interest or penalties related to uncertain tax positions.
108
The Company permanently reinvests the earnings, if any, of its foreign subsidiaries and, therefore, does not provide for
U.S. income taxes that could result from the distribution of those earnings to the U.S. parent. As of December 31, 2019, the
amount of unrecognized deferred U.S. taxes on these earnings would be immaterial.
The Company and its subsidiaries are subject to various U.S. federal, state, and foreign income taxes. The Company is
currently not subject to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for
the tax years of 2015 and prior. The Company is currently open to examination in its foreign jurisdictions for tax years 2017
and after. In 2018, the Internal Revenue Service commenced a federal income tax audit with respect to the Company’s 2016
tax year, which was concluded in October 2019 for an immaterial amount. In 2019, the Internal Revenue Service commenced
a federal employment tax audit with respect to the 2018, 2017 and 2016 calendar years, which is still open.
13. 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 the Company’s
operational overhead expenses, including technology and personnel costs, and other general and administrative costs
associated with running the Company’s 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 as follows:
Segment revenue:
United States
International
Total revenue
Segment income (loss) from operations:
United States
International
Total income from operations
Year Ended December 31,
2018
2017
2019
$
$
555,007 $
33,909
588,916 $
437,166 $
16,920
454,086 $
307,472
9,389
316,861
Year Ended December 31,
2018
2017
2019
$
$
73,872 $
(39,550)
34,322 $
58,387 $
(35,196)
23,191 $
41,586
(26,312)
15,274
As of December 31, 2019, total assets held outside of the United States were $32,528, primarily attributable to
$15,207 of goodwill and $3,920 of intangible assets. As of December 31, 2018, total assets held outside the United States
were not material.
14. Employee Benefit Plans
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.
109
During the year ended December 31, 2017, the Company began matching employee 401(k) contributions up to a set
limit. Total employer contributions were $2,708, $1,953, and $724 during the years ended December 31, 2019, 2018 and
2017, respectively.
15. Quarterly Financial Results (unaudited)
The following table presents certain unaudited quarterly financial information for the eight quarters in the period ended
December 31, 2019. 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.
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
(1)
Year ended December 31, 2019
Revenue
Cost of revenue
Gross profit
Income from operations
Net income
Basic net income per share
Diluted net income per share (1)
Year Ended December 31, 2018
Revenue
Cost of revenue
Gross profit
Income from operations
Net income
Basic net income per share
Diluted net income per share (1)
(1)
$ 158,153 $ 150,462 $ 145,031 $ 135,270
7,720
127,550
7,435
12,584
0.11
0.11
8,628
136,403
3,548
6,007
0.05 $
0.05 $
9,392
141,070
9,704
10,384
0.09 $
0.09 $
10,560
147,593
13,635
13,171
0.12 $
0.12 $
$
$
$ 126,090 $ 119,125 $ 110,296 $
5,959
104,337
3,953
33,343
0.31 $
0.29 $
6,412
112,713
5,877
13,882
0.13 $
0.12 $
6,871
119,219
6,902
12,450
0.11 $
0.11 $
$
$
98,575
5,569
93,006
6,459
5,495
0.05
0.05
(1)
The amounts were computed independently for each quarter, and the sum of the quarters may not total the annual
amounts.
16. Subsequent Events
On January 16, 2020, the Company acquired Autolist, an automotive shopping platform based in San Francisco,
California, pursuant to an Agreement and Plan of Merger by and among the Company, Alpine Merger Sub, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company (“Merger Sub”), Auto List, Inc., a Delaware corporation
(“Target”), and the stockholder representative(s) named therein, pursuant to which, among other things, the Company
acquired Target through the merger of Merger Sub with and into Target (the “Merger”), with Target surviving as a wholly
owned subsidiary of the Company. The Company paid an aggregate of approximately $22.0 million to consummate the
Merger, inclusive of $2.2 million that is held in escrow to secure post-closing claims. The Merger is intended to both expand
the Company’s consumer audience in the United States and enhance its value proposition for subscribing dealers. During the
year ended December 31, 2019, the Company incurred total acquisition-related costs of $0.4 million related to the
transaction. As the transaction occurred subsequent to period-end, the Company is still evaluating the purchase price
allocation of the transaction but expects the primary assets acquired to be intangible assets and goodwill. Acquired tangible
assets and assumed liabilities are expected to be immaterial. The allocation is expected to be finalized during the first half of
2020.
110
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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 the end of the period covered by this Annual Report on Form 10-K. Based on such
evaluation, our principal executive officer and principal financial officer have concluded that as of December 31, 2019, our
disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures
that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019,
using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its
Internal Control-Integrated Framework (2013). Based on this assessment and those criteria, management concluded that our
internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019, has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) that occurred during the fourth quarter ended December 31, 2019 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
111
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of CarGurus, Inc.
Opinion on Internal Control over Financial Reporting
We have audited CarGurus, Inc.’s internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CarGurus, Inc. (the Company) maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the 2019 consolidated financial statements of the Company and our report dated February 14, 2020
expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 14, 2020
112
Item 9B. Other Information.
None.
113
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 2020 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 2020 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 2020 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 2020 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 Accountant Fees and Services.
The information required by this Item is incorporated herein by reference from the information in our Proxy Statement
for our 2020 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.
114
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.
115
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
10.1
10.2#
10.3#
10.4#
10.5#
10.6#
10.7#
10.8#
10.9#
10.10#
10.11
10.12
10.13
10.14#
10.15#
10.16#
10.17
10.18#
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.
Description of the Registrant’s Securities
Registered Under Section 12 of the Securities
Exchange Act of 1934.
Form of Indemnification Agreement between
the Registrant and each of its directors and
executive officers.
Amended and Restated 2006 Equity Incentive
Plan.
Amended and Restated 2015 Equity Incentive
Plan and forms of agreements thereunder.
Omnibus Incentive Compensation Plan and
forms of agreements thereunder.
Offer Letter, dated March 17, 2006, by and
between the Registrant and Langley Steinert.
Offer Letter, dated August 10, 2015, by and
between the Registrant and Jason Trevisan.
Offer Letter, dated October 24, 2014, by and
between the Registrant and Samuel Zales.
Offer Letter, dated November 18, 2016, by and
between the Registrant and Thomas Caputo.
Offer Letter, dated August 2, 2017, by and
between the Registrant and Kathleen Patton.
Offer Letter, dated March 7, 2008, by and
between the Registrant and Oliver Chrzan.
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.
Form of Non-Employee Director Restricted
Stock Unit Agreement.
CarGurus, Inc. Annual Incentive Plan.
Form of Executive Restricted Stock Unit
Agreement.
Lease Agreement, dated as of June 19, 2018,
by and between US Parcel A, LLC and the
Registrant.
Consulting Agreement, dated April 1, 2019, by
and between the Registrant and Oliver Chrzan.
Incorporated by Reference
File
Number
001-38233
Form
8-K
8-K
001-38233
Filing Date
October 16,
2017
October 16,
2017
S-1/A
333-220495 September 29,
S-1
333-220495 September 15,
2017
2017
Exhibit
Number
3.1
Filed
Herewith
3.2
4.1
4.2
X
S-1
333-220495 September 15,
10.1
2017
S-1
333-220495 September 15,
10.2
2017
S-1/A
333-220495 September 29,
10.3
2017
S-1/A
333-220495 September 29,
10.4
2017
S-1
S-1
S-1
333-220495 September 15,
10.5
2017
333-220495 September 15,
10.6
333-220495 September 15,
10.7
2017
10-K
001-38233
10-K
001-38233
10-K
001-38233
2017
February 28,
2019
February 28,
2019
February 28,
2019
10.8
10.9
10.10
S-1
333-220495 September 15,
10.8
2017
S-1
333-220495 September 15,
10.9
2017
S-1
333-220495 September 15,
10.10
2017
8-K
8-K/A
10-Q
001-38233
March 26,
2018
001-38233
April 6, 2018
001-38233 May 3, 2018
8-K
001-38233
June 20, 2018
10-Q
001-38233
August 6,
2019
10.1
10.1
10.3
10.1
10.1
116
Form
10-Q
Incorporated by Reference
File
Number
001-38233
Filing Date
November 5,
2019
Exhibit
Number
10.1
Filed
Herewith
8-K
001-38233 December 20,
10.1
2019
X
X
X
X
X
X
X
X
X
X
X
X
X
Exhibit
Number
10.19
10.20
21.1
23.1
31.1
31.2
32.1*
32.2*
Exhibit Description
Second Amendment to Lease, dated as of
August 30, 2019 by and between 55
Cambridge Parkway, LLC and the Registrant.
Indenture of Lease between S&A P-12
Property LLC and the Registrant, dated as of
December 19, 2019.
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.
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 Inline XBRL Instance Document- the instance
document does not appear in the Interactive
Data File because its XBRL tags are embedded
within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema
Document.
101.CAL Inline XBRL Taxonomy Extension Calculation
Linkbase Document.
101.DEF Inline XBRL Taxonomy Extension Definition
Linkbase Document.
101.LAB Inline XBRL Taxonomy Extension Label
Linkbase Document.
101.PRE Inline XBRL Taxonomy Extension
Presentation Linkbase Document.
The cover page from the Company’s Annual
Report on Form 10-K for the year ended
December 31, 2019 has been formatted in
Inline XBRL.
Indicates a management contract or compensatory plan.
104
#
*
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.
117
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: February 14, 2020
CarGurus, Inc.
By:/s/ Langley Steinert
Langley Steinert
Chief Executive Officer 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/ Steven Conine
Steven Conine
/s/ Lori Hickok
Lori Hickok
/s/ Stephen Kaufer
Stephen Kaufer
/s/ Anastasios Parafestas
Anastasios Parafestas
/s/ Greg Schwartz
Greg Schwartz
/s/ Ian Smith
Ian Smith
Chief Executive Officer and Chairman
(Principal Executive Officer)
February 14, 2020
Chief Financial Officer and President, International
(Principal Financial Officer and Principal Accounting Officer) February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
Director
Director
Director
Director
Director
Director
118
Board of Directors
CORPORATE INFORMATION
Langley Steinert, Chief Executive Officer and Chairman
Steven Conine, Co‐Founder and Co‐Chairman of Wayfair, Inc.
Lori Hickok, former Executive Vice President, Chief Financial and Development Officer of Scripps Networks
Interactive, Inc.
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
Greg Schwartz, former President, Media & Marketplaces of Zillow Group, Inc.
Ian Smith, Managing Director at Allen & Company LLC
Executive Officers
Langley Steinert, Chief Executive Officer and Chairman
Samuel Zales, Chief Operating Officer and President
Jason Trevisan, Chief Financial Officer, Treasurer and President, International
Thomas Caputo, Chief Product Officer
Andrea Eldridge, Chief People Officer
Kyle Lomeli, Chief Technology Officer
Kathleen Patton, General Counsel and Secretary
Sarah Welch, Chief Marketing Officer
Corporate Headquarters
2 Canal Park, 4th Floor, Cambridge, Massachusetts 02141 USA
2020 Annual Meeting of Stockholders
Our annual meeting is being held virtually on Tuesday, June 2, 2020 at 1:00 p.m., eastern time, conducted
via live audio webcast at www.virtualshareholdermeeting.com/CARG2020.
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: Investor Relations, 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.
2 Canal Park
Cambridge, MA 02141
USA
© 2020 CarGurus, Inc.