Cars.com Inc. 10-K

Item 1. Business. Cars.com Inc., a Delaware corporation, and its consolidated subsidiaries are referred to here as “CARS,” the “Company,” “our,” “us” or “we,” unless the context indicates otherwise. CARS conducts all of its operations through its wholly owned subsidiaries. Overview. We are a leading automotive marketplace platform that provides a robust set of digital solutions that connect car shoppers with sellers. We empower shoppers with the data, resources and digital tools needed to make informed buying decisions and seamlessly connect with automotive retailers. In a rapidly changing market, we enable dealers and automotive manufacturers (“OEMs”), with innovative technical solutions and data-driven intelligence, to better reach and influence ready-to-buy shoppers, acquire vehicles, provide financing tools with instant online loan screening and approvals, increase inventory turn, improve operating efficiency and gain market share. In addition to Cars.com™, our brands include Dealer Inspire®, a website and digital solutions provider enabling dealers to be more efficient through connected digital experiences; FUEL™, an advertising solution providing dealers and OEMs the benefit of leveraging targeted digital video and display marketing to Cars.com’s audience of in-market car shoppers; DealerRater®, a leading car dealer review and reputation management technology solution; CreditIQ®, a digital financing technology and Accu-Trade™, a vehicle valuation and appraisal technology. Our portfolio of brands also includes NewCars.com®. Our Business Attracting ready-to-buy car shoppers to our marketplace is crucial to meeting the needs of our customers. Driven by the strength of the Cars.com brand name and our extensive trusted editorial content, during 2022, we attracted over an average of 26 million monthly unique visitors, the majority coming to us organically. Approximately 85% of consumers who visit Cars.com intend to purchase a vehicle within the next six months, and we believe Cars.com has the category’s strongest site engagement according to a recent Cars.com survey. Our marketplace is core to our business, and we have built on this strength to increase our value to customers by providing additional digital solutions and technology. Cars.com is a leading automotive marketplace, through in-house innovations and targeted acquisitions we now provide a full suite of integrated platform capabilities. For Customers. Our primary customers are car dealers, OEMs, other national advertisers and lenders. For the year ended December 31, 2022, 89% of our revenue was generated from dealers, 9% related to OEMs and other national advertisers and 2% was generated from other customers. 1 • Dealer Customers. As of December 31, 2022, we had 19,506 dealer customers across all 50 states, including franchise dealers and independent dealers, with both digital and brick-and-mortar stores. The vast majority of our dealer customers utilize our marketplace subscription products. • OEMs. As of December 31, 2022, we served nearly all OEMs selling vehicles in the United States. For Shoppers. Buying a car is one of life’s most significant and researched decisions. According to Cars.com’s Q4 2022 Consumer Metrics Study, 41% of shoppers are extending their purchase timelines to find the right vehicle at the right price. Numerous product options with opaque, yet negotiable prices, and gaps in the online-to-offline shopping experience add complexity to an already overwhelming decision-making process. Shoppers want a streamlined, simplified automotive retail experience. CARS helps car shoppers cut through the clutter and support shoppers with tools designed to alleviate friction from search to signature. Dealers and OEMs value our marketplace for the chance to connect with our high-intent and engaged, in-market audience, and to improve their marketing and operational efficiency with our suite of solutions. Our marketplace functions as a definitive resource for car buyers. We are known for our scale and depth with over 2.5 million vehicle listings and over 12 million consumer reviews as of December 31, 2022, as well as our expert editorial reviews and significant news and research publications that help shoppers along their purchase journey. Our consumer experience is focused on reducing friction, improving speed and delivering powerful results through several pricing, comparison, research and communication tools that empower buyers. We also provide shoppers with solutions ranging from instant vehicle financing to vehicle appraisals that include instant cash offers. For Sellers. We offer local dealers, OEMs, dealer groups and auto-adjacent companies a variety of digital advertising products and solutions. We generate revenue primarily through the sale of our marketplace subscription products to dealer customers which provide access to our monthly audience of 26 million high-quality, in-market car shoppers. We complement our marketplace products with digital solutions and media offerings, which have become a key area of growth and are critical to our platform strategy. Through our acquisitions of CreditIQ and Accu-Trade, we now are able to provide dealers with advanced digital financing technology, as well as vehicle valuation and appraisal technology. History. Cars.com was established in 1998 as part of a joint venture formed by a number of leading newspaper and broadcast companies that realized their classified advertising businesses were being eroded as advertising began to move to the Internet. In 2014, one of the joint venturers, Gannett Co., Inc. (“Gannett”) acquired the interests of the other joint venturers, and we became a wholly owned subsidiary of Gannett. On May 31, 2017, Gannett, which had changed its name to TEGNA Inc. (“TEGNA”), effected a spin-off of Cars.com along with the DealerRater business that it had acquired in 2016 (the “Spin”), creating Cars.com Inc. and distributed 100% of our common stock to TEGNA’s shareholders. On June 1, 2017, our common stock began trading on the NYSE under the ticker symbol “CARS”. In February 2018, we acquired the stock of privately held Dealer Inspire Inc., which provides website and other technology solutions, and substantially all the assets of Launch Digital Marketing LLC, which provided the digital marketing services now offered by Dealer Inspire. In November 2021, we acquired the stock of CreditIQ, Inc., a privately held, automotive fintech platform that provides instant online loan screening and approvals to facilitate online car buying. In March 2022, we acquired certain assets and assumed certain liabilities of Accu-Trade, LLC; Accu-Trade Canada, LLC; Galves Market Data; and Headstart Logistics, LLC d/b/a MADE Logistics (collectively, “Accu-Trade”), which includes real-time, VIN-specific appraisal and valuation data, instant guaranteed offer capabilities and logistics technology. By investing in technology, organically and through acquisitions like CreditIQ and Accu-Trade, we strive to provide the best end-to-end car shopping experience for both buyers and sellers. Industry Dynamics. CARS operates in the large and growing automotive advertising and technology solutions market. Prior to the COVID-19 pandemic and the subsequent and sustained vehicle inventory shortages, dealers were experiencing margin compression, decreased OEM support and growing consumer expectations around service and support. However in 2022, limited inventory of new vehicles coupled with strong consumer demand has supported higher dealer profit margins for both new and used vehicles. It has also brought higher consumer expectations on what portion of the purchase journey they can complete prior to visiting the dealership. As a result, dealers are investing more in their websites and technology solutions, embracing technology solutions that help drive operational efficiency, and supporting shoppers in their preferred channels (i.e., online, offline or both). Those dealers that invest in and leverage technology are building a sustainable margin advantage. We believe we are the first truly integrated marketplace and solutions provider in the market today, and that we are well-positioned to support dealers with our comprehensive, multi-faceted, sales-oriented suite of tools and solutions. Products. Our core products for sellers include: Marketplace products. 2 • Marketplace subscription advertising. We sell marketplace subscription advertising packages to dealer customers, which allow them to showcase their available new and used vehicle inventory to our extensive audience of in-market car shoppers. We also offer our customers several add-on digital solutions and media products. Our marketplace subscription packages are our largest product by revenue and number of subscribing dealers. In addition, OEMs leverage marketplace listings for their certified pre-owned listings. Digital Solutions. • Website creation and platform hosting. Our Dealer Inspire website hosting and related solutions make automotive retail faster, easier and smarter from search to signature. Built on a customizable platform and designed with user behavior data, our websites are set apart by the advanced technologies that drive modern consumers toward purchase decisions. Website hosting is a product with high retention rates, supporting the reliability and stability of our revenue, and also diversifying our revenue streams. • Digital retailing solutions. Our digital retailing product suite is focused on bringing omnichannel commerce to the automotive industry at scale by simplifying the online to in-store process for dealers and buyers. Our Conversations product turns chats into customers by leveraging AI technology, live video chat capabilities and 24/7 managed chat support to instantly respond to all incoming messages. Conversations is built to connect today’s car buyers with sellers — wherever, whenever and however they want to shop. Our Online Shopper solution enables e-commerce transactions for dealers. The “Garage” feature allows shoppers to save vehicles, customize and compare side-by-side. This feature also allows shoppers to add finance and insurance products and aftermarket accessories, and to checkout, for delivery or pick-up in just three easy steps. Our CreditIQ solution enables shoppers to digitally secure instant vehicle financing. Dealers are empowered with the ability to utilize the lenders of their choice at no cost to the dealer. Participating lenders on the CreditIQ platform pay a fixed fee per funded loan. • Review and reputation management. Through DealerRater, we are one of the leading dealer review platforms in the industry, with more than 12 million consumer reviews integrated on the CARS platform. Our reputation management solutions enable dealers to build, measure, monitor and manage their review programs to drive more leads that close faster. DealerRater reviews are syndicated across a variety of platforms (including Cars.com), reaching on average more than 26 million consumers, digitally, each month. • Vehicle acquisition and valuation. Our Accu-Trade platform provides dealers with vehicle valuation and appraisal technology and connects consumers to the best buyer for their vehicle. Through this appraisal solution, dealers are able to efficiently identify, find and procure the exact vehicles they want for their lot. As part of this first-of-its-kind solution, Accu-Trade includes an appraisal device that generates a VIN-specific valuation and quickly delivers a tailored, consumer-facing condition report. Powered by wholesale and retail data sources, Accu-Trade guides dealers to understand and quickly act on the most profitable decision for each VIN, such as listing at the right price for retail in the dealer's market, sending to auction, selling directly to a nearby dealer, or liquidating with our offer guarantee. Additionally, through Accu-Trade, we provide technology that gives consumers instant and transparent cash offers for their exact VINs via our dealer websites, as well as Cars.com. Media. • Display advertising. Our display advertising products help dealers and OEMs extend their reach and efficiently access our large audience of in-market car shoppers. The geographically targeted advertising served on our Cars.com website and mobile app enables our customers to increase brand awareness and promote inventory. • In-market video. Launched in 2020, FUEL provides OEMs and dealers with the opportunity to reach Cars.com’s in-market car shopping audience of over 26 million average monthly shoppers on their screen of choice via social media platforms, streaming apps and connected TV. FUEL leverages Cars.com’s high-quality, in-market audience data to pinpoint serious ready-to-buy shoppers. This targeted approach drives high advertising efficiency for FUEL, which compares favorably to the high-cost broadcast television solutions that dealers and OEMs have historically relied on. • Social selling. In 2018, we pioneered the use of social media platforms to sell cars by launching multiple solutions for both dealers and OEMs to target and connect with in-market car shoppers on social media platforms, expanding their opportunity to sell more cars. We offer Cars Social, for both dealers and OEMs, which targets and serves native advertisements displaying real-time inventory to in-market car shoppers on Facebook and Instagram by leveraging our valuable audience data. • Digital advertising services. To maximize a dealer’s return on investment, the dealer's marketing and advertising campaigns need to seamlessly connect with the website experience to convert traffic into paying customers. We offer programs that manage dealer 3 search engine optimization, as well as paid media spend beyond the Cars.com platform. Our data analytics and insights ensure dealers’ investments are deployed in the most efficient manner possible. Our strengths and competitive advantages. Our vision is to become the largest digital automotive platform powering innovative digital and media solutions to create frictionless shopping experiences for shoppers and sellers. We are pursuing a product first growth strategy to cement our position as the destination for car shoppers and sellers. We believe our success is driven by our industry leading brand, high quality audience, differentiated technology solutions and customer centricity, which delivers sustainable revenue growth and cash flow from operations. A powerful family of brands delivering integrated digital and media solutions that enable our platform strategy. Our family of brands includes a suite of integrated digital and media solutions that define our platform strategy. Our solutions seamlessly connect buyers and sellers wherever they are in their vehicle shopping journey. Our platform helps sellers expand their consumer influence and engagement across the entire purchasing journey, ultimately increasing sales, creating operational efficiencies and improving profitability. Cars.com, our flagship brand, is synonymous with car shopping. Among our core competitors selling new and used vehicles, we rank No. 1 in brand awareness according to Qualtrics, a customer insights platform. We are a trusted and reliable partner for both car shoppers and sellers. Among automotive marketplaces, we believe we are a first mover in successfully extending our focus to automotive solutions. In addition to Cars.com, our robust portfolio of solutions is an important component of our strategy and a key differentiator relative to our competitors; it includes the following customer facing brands: • Dealer Inspire. A recognized leader in digital (websites, online retailing) and advertising solutions that is endorsed by nearly all OEMs selling cars in the United States. • DealerRater. A ratings and reviews tool that creates connections between shoppers and salespeople prior to shoppers even stepping on the lot. • FUEL. FUEL offers dealers and OEMs targeted digital video and advertising solutions that leverage our high quality audience data to reach in-market shoppers. • Accu-Trade. Accu-Trade provides instant, VIN-specific appraisal solutions improving transparency for consumers and increasing accuracy and efficiency for dealers. • CreditIQ. CreditIQ enables shoppers to secure instant vehicle financing online and provides dealers with higher quality leads with efficiencies including reduced time to close. A high-quality audience, at scale, enables our industry-leading platform . We have made strategic investments in technology and marketing to deliver what we believe is the industry’s most qualified car shopping audience. Our audience not only powers our marketplace advertising packages, it also drives our integrated platform strategy. It is key to our ability to efficiently grow and scale our media solutions that allow customers to target in-market shoppers and strengthens our digital solutions. In 2022, we had 26 million average monthly unique visitors that visited our marketplace nearly 600 million times. We generate the majority of our traffic organically. Our organic strength is driven by our high-quality content, which includes editorial and consumer reviews, trust that comes from our years in the market, and suite of easy to use consumer facing tools like Best Match. Over the past 20 years, we have made more than half a billion connections between car shoppers and sellers. According to a recent CARS survey, approximately 85% of our audience is in-market to buy a car, compared to a fraction of the general population . The average time to purchase a car is approximately two months, while approximately 50% of our audience plans to buy within 30 days. Resilient business model with an attractive cash flow financial profile and strong balance sheet. We generate nearly 90% of our revenue via subscription, creating a dependable recurring revenue stream across our diversified mix of marketplace subscription advertising packages, digital solutions, and media. Customer concentration is also limited and we generate an average monthly revenue of $2,329 from each of our nearly 20,000 dealers per month. Our asset-light business model drives significant net operating cash flow, in excess of $125.0 million in each of the last three years, resulting in substantial liquidity and financial flexibility, which enables us to invest in innovation, pursue strategic growth opportunities and maintain a healthy balance sheet with modest leverage. 4 Strong, experienced management team . Our management team has deep marketplace and industry knowledge and a demonstrated track record of delivering results. The team also brings unique experience driving innovation and digital transformation and unlocking value for customers while modernizing established industries. Business Strategy. Our vision is to become the largest digital automotive platform powering innovative digital and media solutions to create frictionless shopping experiences for buyers and sellers. We are pursuing a product-first growth strategy to cement our position as the destination for car shoppers and sellers. Our success is driven by our industry leading brand, high quality audience, differentiated technology solutions and customer centricity, which we believe will deliver sustainable high growth revenue, earnings, and cash flow. Our Long-Term Growth Strategy. Our strategy is to continue to invest in our key strengths: • Grow our network of dealer customers. We have a significant opportunity to grow our base of dealer customers. While we have a substantial dealer customer base of nearly 20,000, there are approximately 40,000 dealerships nationwide, providing us with ample room for growth. • Expand our relationship with dealer customers. We operate in the large and growing automotive advertising and technology solutions market. Dealers are investing more in media and digital solutions, including their websites, to drive operational efficiencies and to meet consumers’ preference to complete more of the car buying transaction online. We believe there is a sizable opportunity to cross-sell our existing suite of products and new products, like Accu-Trade, and continue to grow our monthly average revenue per dealer. • Increase shopper engagement . We have made strategic investments in our platform technology and consumer marketing to deliver what we believe is the industry’s most qualified car shopping audience. Our new solutions are increasing consumer engagement and driving more qualified leads and revenue to our customers. Shoppers interact with our platform in many ways, including researching vehicles, writing dealer reviews, securing qualified financing and obtaining instant offers for their trade-in vehicle. Higher consumer engagement creates more qualified leads for our customers, increases our attribution and ultimately drives increased product adoption and retention. • Invest in our brand. We intend to continue investing in our brand to drive deeper understanding and awareness of our platform across consumers, dealers, OEMs and other partners. We will leverage our brand in integrated marketing efforts as we launch new products in support of our platform strategy. • Innovate on our platform. We will continue to innovate for consumers and our dealer, OEM, lenders and national advertising customers. Our innovations will be focused on improving the user experience, continuing to advance dealer solutions and providing valuable data and insights for our customers. Competition. We face competition to attract consumers and paying dealers to our marketplace and to attract advertisers to purchase our advertising products and services, including our website creation and hosting services. Our competitors offer various marketplaces, solutions and media products that compete with us. Some of these competitors include: • Internet search engines, such as Google and Bing • Online marketplace and automotive sites, such as Facebook, AutoTrader, CARFAX, Edmunds, Kelley Blue Book, CarGurus and TrueCar • Sites operated by automobile sellers (traditional and digital) and by OEMs • Providers of offline, membership-based car-buying services, such as the Costco Auto Program • Website platform and solution providers, such as Dealer.com, Sincro (formerly CDK Global) and DealerOn • Automotive fintech solutions, such as AutoFi • Appraisal solutions and digital auctions, such as Autoniq, ACV Auctions, Backlot Cars and CarOffer • Digital advertising providers and agencies Competition for Consumers and Dealers. We compete for consumer visits with other online automotive marketplaces, OEM websites, free listing services, general search engines, social media and dealer websites. We compete for shopper traffic primarily on the basis of the quality of our user experience. We believe our user experience compares favorably due to the scale of our vehicle listings, the content and unbiased transparency of the information we provide on vehicles, pricing and dealers, as well as the intuitive nature of our user interface, sophisticated search tools and algorithms and our mobile user experience, among other factors. We compete for dealers’ marketing budget with offline customer acquisition channels, software and solutions spend, 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 return on investment to the customer that our marketplace provides. 5 We believe we are in a favorable market position due to our highly engaged, large, in-market consumer audience and the resulting volume and quality of connections we provide to dealers, resulting in an attractive ROI. Competition for Advertisers. We compete for a share of advertisers’ total marketing budgets against media sites, websites dedicated to helping consumers shop for cars, 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 products provide. We believe we are in a favorable market position due to our large in-market consumer audience, high consumer engagement and the effectiveness and relevance of our advertising products. Intellectual Property . We take a strategic approach to intellectual property management by protecting our intellectual property and brands using various intellectual property laws and through a combination of trademarks, trade dress, domain names, copyrights, and trade secrets and patents as appropriate. We have registered and unregistered U.S. and international trademarks, service marks, domain names and copyrights. In addition to the protection provided by our intellectual property rights, we enter into confidentiality and proprietary rights agreements with our employees, consultants, contractors and business partners. Our employees and contractors are also subject to invention assignment provisions. In addition, we control the use of our proprietary technology and intellectual property through provisions in both our general and product-specific terms of use on our mobile applications and websites. Regulatory Matters. Various aspects of our business and the solutions we offer are or may be subject to a continually expanding and evolving range of local, state, federal and international regulations. The advertising and sale of new or used vehicles is highly regulated by the states in which we do business. Although we do not sell automobiles, the dealers from which we derive a significant portion of our revenue do sell them and are subject to significant regulation. Moreover, state regulatory authorities or other third parties could take and, on some occasions, have taken the position that some of the regulations applicable to dealers or to the manner in which automobiles are advertised and sold generally are directly applicable to our business model. Additionally, our business is directly subject to laws, regulations, and standards covering marketing and advertising activities conducted by telephone, email, mobile devices, and the internet, such as limited to the Telephone Consumer Protection Act, the CAN-SPAM Act, and similar state consumer protection laws. Our digital solutions products may also be subject to laws governing accessibility, intellectual property ownership, obscenity, libel and privacy, among other issues. In addition, we are subject to numerous federal, national, state, and local laws and regulations in the United States and internationally regarding privacy and the collection, processing, storage, sharing, disclosure, use and protection of personal information and other data, such as the Gramm-Leach-Bliley Act or the California Consumer Privacy Act or the California Privacy Rights Act. While the scope of these laws and regulations is changing, 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. To operate in this highly regulated environment, we have developed our products and services with a view toward appropriately managing the risk that our regulatory compliance. If, and to the extent that, our products and services fail to satisfy relevant regulatory requirements, we could be subject to significant civil and criminal penalties, including fines, or the award of significant damages in class action or other civil litigation, as well as orders interfering with our ability to continue providing our products and services in certain states. Human Capital. CARS is committed to the highest standards of integrity, inclusion and responsible business practices. Our commitment to build a culture and business that cares about our employees, customers, industry and communities is a part of who we are – it’s in our DNA. We believe our highly innovative and effective teams are one of our biggest differentiators and the most important investment we can make at CARS. We promote and foster an environment that encourages constant learning and curiosity, including offering all of our employees additional learning and development opportunities. We provide individual training and certifications, across thousands of topics and interests, to ensure our teams continue developing the needed skills to grow in their careers at CARS and deliver their very best every day. Leadership development programs are also available to provide in-depth training courses to help managers build successful teams focused on innovating in our business and the ever-changing automotive and technology industries. The courses develop skills of influence, time management, coaching, feedback, conflict management, empathy and overall leadership. At CARS, we believe we offer competitive and equitable compensation and benefits that include: • An Employee Stock Purchase Plan, under which the vast majority of team members are eligible to participate; • Alternative work arrangements for eligible employees such as our flexible work program, including adoption of a hybrid work philosophy, which we believe improves work-life balance, productivity and overall employee satisfaction; and 6 • Family-friendly benefits such as paid parental leave, paid family medical leave, paid compassionate time, adoption assistance, subsidized back-up daycare, fitness programs and subsidies, legal support, tuition reimbursements, electric vehicle subsidies and volunteer opportunities. We also closely monitor employee satisfaction and engagement, conducting semi-annual, anonymous, company-wide surveys that are studied by our executive management team and shared with our Board of Directors. These surveys are an important way for us to identify areas where we can improve. We encourage employee participation in the surveys, with participation rates typically greater than 80%, which allows us to gather valuable insight into employee satisfaction. We believe that a diverse workforce enhances the value of the Company for all stakeholders. We undertake many initiatives to ensure that CARS is an inclusive place to work for people of all backgrounds, genders, nationalities, ethnicities, sexual orientations and beliefs. We incorporate diversity considerations into all aspects of our employment journey, from targeted recruitment to fostering diversity affinity groups through our Employee Resource Groups. We also offer regular Unconscious Bias training to encourage and uncover opportunities to create a more inclusive and open workplace. Our diversity initiatives are managed directly by our executive management team, underscoring our commitment to this important principle across all levels of the organization. At CARS we have solidified our commitment to diversity, equity and inclusion by monitoring and measuring diversity in talent acquisition and retention and by tying executive incentive compensation to performance in this area. We have a variety of active Employee Resource Groups at CARS, focused on serving as enterprise-wide champions for diversity, equity, and inclusion, helping us to identify areas in which we can become even more inclusive. These groups also allow for the open sharing of ideas and cultural awareness among our teams while providing civic engagement within our communities, leadership development, and improving overall cultural competence. As of December 31, 2022, CARS had approximately 1,700 full-time employees. None of our employees are represented by a labor union or are subject to a collective bargaining agreement. Available Information. Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge at https://investor.cars.com as soon as reasonably practicable after we file such material with, or furnish it to, the U.S. Securities and Exchange Commission (SEC). In addition, the SEC maintains a website (http://www.sec.gov) that contains information we electronically file with, or furnish to, the SEC. Information on our website is not part of this or any other report we file with, or furnish to, the SEC.