Cars.com Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our business, financial condition, results of operations and quantitative and qualitative disclosures should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis also contains forward-looking statements and should be read in conjunction with the disclosures and information contained in “Note About Forward-Looking Information” in this Quarterly Report on Form 10-Q. The financial information discussed below and included elsewhere in this Quarterly Report on Form 10-Q may not necessarily reflect what our financial condition, results of operations and cash flows may be in the future. References in this discussion and analysis to “we,” “us,” “our” and similar terms refer to Cars.com Inc. and its subsidiaries, collectively, unless the context indicates otherwise. Business Overview We are a leading digital marketplace and solutions provider for the automotive industry that connects car shoppers with sellers and original equipment manufacturers (“OEM”s). Our marketplace empowers shoppers with the resources and information to make confident car buying decisions while our digital solutions and technology platform help sellers improve operational efficiency, profitability and sales. Our portfolio of brands includes Cars.com, Dealer Inspire and DealerRater, in addition to Auto.com, PickupTrucks.com and NewCars.com. In May 2017, we separated from our former parent company, TEGNA Inc. (“TEGNA”) by means of a spin-off of a newly formed company, Cars.com Inc., which now owns TEGNA’s former digital automotive marketplace business (the “Separation”). Our common stock began trading “regular way” on the New York Stock Exchange on June 1, 2017. In February 2018, the Company acquired all of the outstanding stock of Dealer Inspire, Inc. and substantially all of the net assets of Launch Digital Marketing LLC (the “DI Acquisition”). Overview of Results (in thousands, except percentages) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenue (1) $ 102,009 $ 148,207 $ 250,103 $ 302,405 Net loss (2) (24,644 ) (6,026 ) (812,078 ) (15,057 ) Retail revenue as % of total revenue 100 % 90 % 100 % 90 % Wholesale revenue as % of total revenue 0 % 10 % 0 % 10 % (1) The decrease in revenue for the three and six months ended June 30, 2020 was primarily attributed to the COVID-19 pandemic and related restrictions, including the impact of the discounts we provided to our dealer customers. (2) The net loss for the three months ended June 30, 2020 was primarily attributed to the decline in revenue, partially offset by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions. The net loss for the six months ended June 30, 2020 was primarily attributed to the goodwill and intangible asset impairment of $905.9 million, or $757.1 million net of tax, as well as the impact of the COVID-19 pandemic and related restrictions. The net loss in each period was impacted by the following costs (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Severance, transformation and other exit costs $ 4,764 $ 1,058 $ 6,168 $ 7,511 Transaction-related costs (1) 20 2,579 117 4,623 Costs associated with stockholder activist campaign — 5,225 — 7,920 Total $ 4,784 $ 8,862 $ 6,285 $ 20,054 (1) Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects. 2020 Highlights and Trends Coronavirus disease 2019 (“COVID-19”). In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it has spread throughout the United States and the rest of the world with different geographical locations impacted more than others. The COVID-19 pandemic has resulted in governmental authorities around the country implementing numerous measures to 18 contain the virus, such as quarantines, shelter-in-place orders and business shutdowns (the “related restrictions”). These restrictions have had, and we expect they will continue to have, a negative impact on regional and national economies and the automotive industry for an uncertain duration. While certain jurisdictions have relaxed some of these related restrictions, any resurgences of the pandemic may slow the reopening process. The COVID-19 pandemic and related restrictions have caused a widespread increase in unemployment and have resulted in reduced consumer spending and an economic slowdown or recession. OEMs and automobile dealers operate in a highly competitive market and are vulnerable to both decreased supply and demand for new and used vehicles, as well as corresponding changes in vehicle pricing. Furthermore, certain OEMs have temporarily ceased production and certain dealerships have temporarily or permanently closed and more may close in the future in light of the COVID-19 pandemic and related restrictions. As a result of negative changes in the financial condition of dealers and overall uncertainty related to the automotive industry, in the second half of March 2020, our customers began to adjust, reduce or suspend their operating activities. This resulted and may continue to result in decreased subscription revenue and reduced demand for our services. Moreover, depending upon the progress of the pandemic and the government and societal responses thereto, our customers may implement further cost-savings measures, including additional reductions of their advertising spend. In an effort to assist our dealer customers impacted by the COVID-19 pandemic and related restrictions, we provided, among other measures, financial relief in the form of certain invoice credits of 50% for April 2020 and 30% for May and June 2020. With respect to managing our expenses, we implemented multiple initiatives including both permanent and temporary measures, to adjust expenses with changes in revenue. These initiatives included an employee furlough and reduction in force, salary reductions, freezes on hiring and temporary labor, deferral of merit and promotion increases; a reduction of our marketing expense, while carefully maintaining consumer engagement as evidenced by our strong organic traffic; partnering with our vendors to reduce cost; and significant reductions of non-essential spending. We remain committed to and have intensified our efforts around cash flow discipline, including the identification of significant capital expenditures that can be deferred, and working capital management. The effects of the COVID-19 pandemic and the related restrictions, particularly reduced consumer spending and the discounts that we provided our dealer customers for the second quarter of 2020, have negatively impacted our results of operations, cash flows and financial position. In addition, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of the COVID-19 pandemic and related restrictions. Therefore, the results for the six months ended June 30, 2020, may not be indicative of the results for the year ending December 31, 2020. We have taken steps to strengthen our financial position during this period of heightened uncertainty. In June 2020, we entered into an amendment to our Credit Agreement (the “Second Amendment”) that provides for a waiver with respect to the Total Net Leverage Ratio and Consolidated Interest Coverage Ratio (each as defined in the Credit Agreement) financial covenants for the covenant testing periods through December 31, 2020 (the “Covenant Adjustment Period”). As of June 30, 2020, our liquidity, as defined in the Credit Agreement, was approximately $232.2 million including cash and cash equivalents and availability under the revolving credit facility. For information related to debt, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. We believe our core strategic strengths, including our powerful family of brands, growing high-quality audience and suite of digital solutions for advertisers will assist us as we navigate a rapidly changing marketplace. Additionally, we are focused on equipping our dealer customers with digital solutions to enable them to compete in an environment in which an increasing number of car-buying consumers are shopping from home. These solutions include virtual showrooms, home delivery badging, online chat and our FUEL TM In-Market Video (“FUEL IMV”) pro duct that allows dealers to target in-market buyers on streaming platforms . Reduction in Force . On April 29, 2020, we announced the permanent reduction in force of approximately 170 people, the majority of whom had been placed on furlough in early April 2020. We estimate the pre-tax costs for this action to be in the range of approximately $4.0 to $4.75 million, substantially all of which are related to employee severance and were recorded during the three months ended June 30, 2020. Traffic. Traffic provides an indication of our consumer reach. Although our consumer reach does not directly result in revenue, we believe our ability to reach in-market car shoppers is attractive to our dealers and national advertisers. We have been diligently focused on growing our audience, the fundamental deliverable of any marketplace business. Driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels and a shift from in-person to virtual automobile research and shopping , we have experienced consistent year-over-year quarterly traffic growth. In the second quarter of 2020, we maintained strong organic Traffic growth, at rates that accelerated throughout the quarter, and achieved 10% growth in Traffic and 6% growth in Average Monthly Unique Visitors, compared to the prior year. 19 Although we experienced strong traffic in the first two quarters of 2020, given the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions, competitive spending, and reduced consumer spending, among other factors, we are uncertain as to how this may impact our traffic for the rest of 2020 and beyond. Dealer Customers. In the second quarter of 2020, Dealer Customers declined by 905, or 5%, to 18,033 as of June 30, 2020, as compared with 18,938 as of March 31, 2020. This decrease was a result of lower sales and elevated cancellations as a result of the COVID-19 pandemic and related restrictions, partially offset by growth in digital solutions customers. Given the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending, we are uncertain as to how this may impact our dealer customers for the rest of 2020 and beyond. Credit Agreement Amendment. In June 2020, the Company entered into the Second Amendment to address the uncertainty around the impact of the COVID-19 pandemic that includes a covenant holiday with an exemption from the net leverage and interest coverage ratios through the end of 2020, and maximum net leverage of 6.50x effective March 31, 2021, with step downs thereafter. During the covenant holiday period there is a minimum liquidity requirement of $75.0 million. For information related to debt, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. FUEL IMV Launch. In February 2020, we announced the launch of FUEL IMV, an innovative digital video solution focused on the $9.7 billion spent on TV advertising by the U.S. auto market. The new solution helps dealers, original equipment manufacturers and regional/dealer ad associations target serious ready-to-buy shoppers with digital videos streamed across various platforms, and combat the high costs and inefficiencies of traditional television advertising. We began generating FUEL IMV revenue in the first quarter of 2020. Digital Solutions OEM Agreement. In 2019, we were selected as one of four preferred website providers to General Motors (“GM”). This allowed us to begin selling our website solutions to more than 4,100 GM dealers. This program is semi-exclusive and provides GM dealers a choice in provider for the first time in 15 years. We remain on track to launch the majority of our 800+ GM websites by the end of the year. This new agreement provides us with the opportunity to substantially increase our current website customer base, which was approximately 3,800 as of June 30, 2020. Technology Transformation. In February 2019, we announced a restructuring of the product and technology teams, which primarily focused on shifting our technology spend towards innovation to improve our speed of product delivery, to enable integration across current and future systems, and to migrate our systems to the cloud (the “Technology Transformation”). In connection with the Technology Transformation, we aligned our product and technology teams with our long-term growth strategy to expand beyond listings to a digital solutions marketplace. As part of this process, we streamlined the existing teams as we modernize our technology platform and invest in a more efficient cloud-based infrastructure focused on machine learning, product innovation and growth. Although the impact of the COVID-19 pandemic and related restrictions has elongated our timeline for the completion of the Technology Transformation, we have achieved cost efficiencies and expect to achieve further cost efficiencies upon completion of the Technology Transformation. Key Operating Metrics We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make operating and strategic decisions. Information regarding Traffic and Average Monthly Unique Visitors is as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change Traffic (Visits) 143,972,000 130,626,000 10 % 302,893,000 263,099,000 15 % Average Monthly Unique Visitors 22,810,000 21,559,000 6 % 23,869,000 21,984,000 9 % 20 Information regarding Dealer Customers and Direct Monthly Average Revenue Per Dealer is as follows: June 30, 2020 June 30, 2019 % Change March 31, 2020 % Change Dealer Customers 18,033 18,891 (5 )% 18,938 (5 )% Direct Monthly Average Revenue Per Dealer $ 1,442 $ 2,163 (33 )% $ 2,092 (31 )% Traffic (Visits). Traffic is fundamental to our business. Traffic to the CARS network of websites and mobile apps provides value to our advertisers in terms of audience, awareness, consideration and conversion. In addition to tracking traffic volume and sources, we monitor activity on our properties, allowing us to innovate and refine our consumer-facing offerings. Traffic is defined as the number of visits to CARS desktop and mobile properties (responsive sites and mobile apps), measured using Adobe Analytics. Traffic does not include traffic to Dealer Inspire websites. Visits refers to the number of times visitors accessed CARS properties during the period, no matter how many visitors make up those visits. Traffic provides an indication of our consumer reach. Although our consumer reach does not directly result in revenue, we believe our ability to reach in-market car shoppers is attractive to our dealer customers and national advertisers. We believe the growth in Traffic was driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels and a shift from in-person to virtual automobile research and shopping accelerated by the COVID-19 pandemic and related restrictions . For the three and six months ended June 30, 2020, mobile traffic accounted for 75% of total Traffic. For the three and six months ended June 30, 2019, mobile traffic accounted for 71% of total Traffic. Although we experienced strong traffic in the first two quarters of 2020, the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our traffic in 2020 and beyond. Average Monthly Unique Visitors (“UVs”). Growth in unique visitors and consumer traffic to our network of websites and mobile apps increases the number of impressions, clicks, leads and other events we can monetize to generate revenue. We define UVs in a given month as the number of distinct visitors that engage with our platform during that month. Visitors are identified when a user first visits an individual CARS property on an individual device/browser combination or installs one of our mobile apps on an individual device. If a visitor accesses more than one of our web properties or apps or uses more than one device or browser, each of those unique property/browser/app/device combinations counts towards the number of UVs. UVs do not include Dealer Inspire UVs. We measure UVs using Adobe Analytics. The growth in UVs was driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels and a shift from in-person to virtual automobile research and shopping accelerated by the COVID-19 pandemic and related restrictions . Dealer Customers . Dealer Customers represent dealerships using our products as of the end of each reporting period. Each physical or virtual dealership location is counted separately, whether it is a single-location proprietorship or part of a large consolidated dealer group. Multi-franchise dealerships at a single location are counted as one dealer. Total Dealer Customers declined 5% from March 31, 2020. This decrease was primarily driven by cancellations of marketplace customers and lower new dealer customer sales, principally due to the COVID-19 pandemic and related restrictions . This decrease was partially offset by growth in digital solutions customers. Total Dealer Customers declined 5% from June 30, 2019. This decrease was primarily driven by cancellations of marketplace customers and lower new dealer customer sales, principally due to the COVID-19 pandemic and related restrictions . This decrease was partially offset by growth in digital solutions customers. The unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our dealer customers in 2020 and beyond. Average Revenue Per Dealer (“ARPD”). We believe our ability to grow ARPD is an indicator of the value proposition of our products. We define ARPD as Direct retail revenue during the period divided by the monthly average number of direct dealer customers during the same period. ARPD declined 31% from the ARPD of $2,092 for the three months ended March 31, 2020, primarily due to the impact of the invoice credits we provided to our marketplace customers during the second quarter of 2020 and in response to the COVID-19 pandemic and related restrictions. 21 ARPD declined 33% from June 30, 2019, primarily due to the impact of the invoice credits we provided to our marketplace customers during the second quarter of 2020 and in response to the COVID-19 pandemic and related restrictions. Factors Affecting Our Performance. Our business is impacted by the changes in the larger automotive environment, including consumer demand and other macroeconomic factors, and changes related to automotive digital advertising. Changes in car sales volumes in the United States and reduced dealer profitability also influence OEMs’ and dealerships’ willingness to increase spend with automotive marketplaces like Cars.com. Beginning in the later part of March 2020, we observed decreased car sales and dealer profitability. Due to the impact of the COVID-19 pandemic and the related restrictions, these decreases are expected to continue in the near-term. The unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our business in 2020 and beyond. Our long-term success will depend in part on our ability to continue to transform our business toward a multi-faceted suite of digital solutions that complement our online marketplace offerings. We believe our core strategic strengths, including our powerful family of brands, growing high-quality audience and suite of digital solutions for advertisers will assist us as we navigate a rapidly changing marketplace. Additionally, we are focused on equipping our customers with digital solutions to enable them to compete in an environment in which an increasing number of car-buying customers are shopping from home. These solutions include virtual showrooms, home delivery badging, online chat and our FUEL TM In-Market Video pro duct that allows dealers to target in-market buyers on streaming platforms . The foundation of our continued success is the value we deliver to customers, and we believe that our large and growing audience of in-market, undecided car shoppers and innovative solutions deliver significant value to our customers. Results of Operations Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 Three Months Ended June 30, Increase (In thousands, except percentages) 2020 2019 (Decrease) % Change Revenue: Direct $ 83,242 $ 111,190 $ (27,948 ) (25 )% National advertising 16,021 19,296 (3,275 ) (17 )% Other 2,746 3,624 (878 ) (24 )% Retail 102,009 134,110 (32,101 ) (24 )% Wholesale — 14,097 (14,097 ) (100 )% Total revenue 102,009 148,207 (46,198 ) (31 )% Operating expenses: Cost of revenue and operations 22,912 24,319 (1,407 ) (6 )% Product and technology 12,031 15,339 (3,308 ) (22 )% Marketing and sales 32,036 53,740 (21,704 ) (40 )% General and administrative 16,460 21,963 (5,503 ) (25 )% Affiliate revenue share 4,601 2,176 2,425 111 % Depreciation and amortization 31,193 29,666 1,527 5 % Total operating expenses 119,233 147,203 (27,970 ) (19 )% Operating (loss) income (17,224 ) 1,004 (18,228 ) ***% Nonoperating expense: Interest expense, net (7,924 ) (7,711 ) (213 ) 3 % Other income, net 557 9 548 ***% Total nonoperating expense, net (7,367 ) (7,702 ) 335 (4 )% Loss before income taxes (24,591 ) (6,698 ) (17,893 ) ***% Income tax expense (benefit) 53 (672 ) 725 ***% Net loss $ (24,644 ) $ (6,026 ) $ (18,618 ) ***% *** Not meaningful Retail Revenue—Direct . Direct revenue consists of marketplace and digital solutions sold to dealer customers. Direct revenue is our largest revenue stream, representing 81.6% and 75.0% of total revenue for the three months ended June 30, 2020 and 2019, respectively. 22 As of October 1, 2019, we have successfully converted all affiliates to our direct control, and no longer have Wholesale revenue. We now have a direct relationship with all dealer customers and recognize the revenue associated with converted dealer customers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of Loss. During the three months ended June 30, 2020, the affiliate market conversions contributed an incremental $10.8 million to Direct revenue. For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. The overall decrease was primarily due to a 33% decline in ARPD from June 30, 2019 primarily due to the impact of the invoice credits we provided to our dealer customers during the second quarter of 2020 in response to the COVID-19 pandemic and related restrictions, as well as a 5% decline in Dealer Customers. Retail Revenue—National Advertising . National advertising revenue consists of display advertising and other solutions sold to OEMs, advertising agencies and automotive dealer customers. National advertising revenue represents 15.7% and 13.0% of total revenue for the three months ended June 30, 2020 and 2019, respectively. National advertising revenue declined 17%, primarily due to higher cancellations, principally due to the COVID-19 pandemic and related restrictions . Wholesale Revenue . Wholesale revenue represented the fees we charged for marketplace and digital solutions sold to dealers by affiliates. The fees represented approximately 60% of the retail value for the same online subscription products sold by our direct sales team. Wholesale revenue represented 9.5% of total revenue for the three months ended June 30, 2019. As of October 1, 2019, we successfully converted all affiliates to our direct control, and no longer have Wholesale revenue. For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. Cost of revenue and operations . Cost of revenue and operations expense primarily consists of expenses related to our pay-per-lead products, third-party costs for processing dealer vehicle inventory, product fulfillment, customer service and compensation costs. Cost of revenue and operations expense represents 22.5% and 16.4% of total revenue for the three months ended June 30, 2020 and 2019, respectively. Cost of revenue and operations expense decreased $1.4 million, primarily due to lower third party costs and lower compensation costs, driven by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions, partially offset by growth in dealer websites and related digital solutions, which have an inherently higher cost of revenue. Product and technology. The product team creates and manages consumer and dealer-facing innovation, manages consumer user experience and includes the costs associated with our editorial and data strategy teams. The technology team develops and supports our products and websites. Product and technology expense includes compensation costs, as well as license fees for vehicle specifications, search engine optimization, hardware/software maintenance, software licenses, data center and other infrastructure costs. Product and technology expense represents 11.8% and 10.3% of total revenue for the three months ended June 30, 2020 and 2019, respectively. Product and technology expense decreased primarily due to cost efficiencies and lower compensation costs as a result of the Technology Transformation and by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions. Marketing and sales . Marketing and sales expense primarily consists of traffic and lead acquisition costs (including search engine and other online marketing), TV and digital display/video advertising and creative production, market research, trade events and compensation costs for the marketing, sales and sales support teams. Marketing and sales expenses represent 31.4% and 36.3% of total revenue for the three months ended June 30, 2020 and 2019, respectively. Marketing and sales expense decreased due to a reduction of our marketing expense which was achieved by focusing on customer acquisition and leveraging efficiencies gained, while carefully maintaining consumer engagement as evidenced by our strong organic traffic, and a shift from in-person to virtual automobile research and shopping. General and administrative . General and administrative expense primarily consists of compensation costs for the executive, finance, legal, human resources, facilities and other administrative employees. In addition, general and administrative expense includes office space rent, legal and accounting services, other professional services, transaction-related costs and costs related to the write-off and loss on assets, excluding the goodwill and intangible asset impairment discussed below. General and administrative expense represents 16.1% and 14.8% of total revenue for the three months ended June 30, 2020 and 2019, respectively. During the three months ended June 30, 2020 and 2019, General and administrative expense included the following costs (in thousands): 23 Three Months Ended June 30, 2020 2019 Severance, transformation and other exit costs $ 4,764 $ 1,058 Transaction-related costs (1) 20 2,579 Costs associated with stockholder activist campaign — 5,225 Total $ 4,784 $ 8,862 (1) Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects. Excluding these costs, general and administrative expense decreased 10.9% for the three months ended June 30, 2020, compared to the prior year. General and administrative expenses decreased primarily due to our management of expenses, primarily related to compensation, to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions. Depreciation and amortization . Depreciation and amortization expense increased primarily due to depreciation and amortization on additional assets acquired. Affiliate revenue share. Affiliate revenue share expense represents payments made to affiliates pursuant to our affiliate agreements and amortization of the Unfavorable contracts liability related to converted markets. Affiliate revenue share expense increased, primarily due to the additional markets converted during the last twelve months, partially offset by the expiration of certain affiliate agreements and no amortization of the unfavorable contracts liability. A summary of Affiliate revenue share expense is as follows (in thousands): Three Months Ended June 30, 2020 2019 Affiliate revenue share expense, gross $ 4,601 $ 8,011 Less: Amortization of the Unfavorable contracts liability — (5,835 ) Affiliate revenue share expense, as reported $ 4,601 $ 2,176 For information related to the Unfavorable contracts liability, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. Interest expense, net . Interest expense, net increased by $0.2 million compared to the prior year. For information related to our interest rate swap, see Note 5 (Debt) and Note 6 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. Other income, net . Other income, net increased, primarily due to the unrealized gain on the mark-to-market adjustment related to the interest rate swap. For information related to the impairment, see Note 5 (Debt) and Note 6 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. Income tax benefit . The effective income tax rate, expressed by calculating the income tax benefit as a percentage of Loss before income taxes, was 0% for the three months ended June 30, 2020 and differed from the U.S. federal statutory rate of 21%, due to the full valuation allowance on the U.S. company’s net deferred tax asset position. 24 Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Six Months Ended June 30, Increase (In thousands, except percentages) 2020 2019 (Decrease) % Change Revenue: Direct $ 208,603 $ 226,284 $ (17,681 ) (8 )% National advertising 35,414 39,591 (4,177 ) (11 )% Other 6,086 7,573 (1,487 ) (20 )% Retail 250,103 273,448 (23,345 ) (9 )% Wholesale — 28,957 (28,957 ) (100 )% Total revenue 250,103 302,405 (52,302 ) (17 )% Operating expenses: Cost of revenue and operations 48,942 49,898 (956 ) (2 )% Product and technology 26,904 33,202 (6,298 ) (19 )% Marketing and sales 86,958 114,083 (27,125 ) (24 )% General and administrative 30,577 45,851 (15,274 ) (33 )% Affiliate revenue share 10,970 4,630 6,340 ***% Depreciation and amortization 62,154 57,791 4,363 8 % Goodwill and intangible asset impairment 905,885 — 905,885 ***% Total operating expenses 1,172,390 305,455 866,935 ***% Operating loss (922,287 ) (3,050 ) (919,237 ) ***% Nonoperating (expense) income: Interest expense, net (15,450 ) (15,277 ) (173 ) 1 % Other (expense) income, net (8,944 ) 128 (9,072 ) ***% Total nonoperating expense, net (24,394 ) (15,149 ) (9,245 ) 61 % Loss before income taxes (946,681 ) (18,199 ) (928,482 ) ***% Income tax benefit (134,603 ) (3,142 ) (131,461 ) ***% Net loss $ (812,078 ) $ (15,057 ) $ (797,021 ) ***% *** Not meaningful Retail Revenue—Direct . Direct revenue is our largest revenue stream, representing 83.4% and 74.8% of total revenue for the six months ended June 30, 2020 and 2019, respectively. As of October 1, 2019, we have successfully converted all affiliates to our direct control, and no longer have Wholesale revenue. We now have a direct relationship with all dealer customers and recognize the revenue associated with converted dealer customers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of Loss. During the six months ended June 30, 2020, the affiliate market conversions contributed an incremental $28.3 million to Direct revenue. For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. The overall decrease was primarily due to a 33% decline in ARPD from June 30, 2019 primarily due to the impact of the invoice credits we provided to our dealer customers during the second quarter of 2020 in response to the COVID-19 pandemic and related restrictions, as well as a 5% decline in Dealer Customers. Retail Revenue—National Advertising . National advertising revenue represents 14.2% and 13.1% of total revenue for the six months ended June 30, 2020 and 2019, respectively. National advertising revenue declined 11%, primarily due to higher cancellations, principally due to the COVID-19 pandemic and related restrictions . Wholesale Revenue . The fees represented approximately 60% of the retail value for the same online subscription products sold by our direct sales team. Wholesale revenue represented 9.6% of total revenue for the six months ended June 30, 2019. As of October 1, 2019, we successfully converted all affiliates to our direct control, and no longer have Wholesale revenue. For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. Cost of revenue and operations . Cost of revenue and operations expense represents 19.6% and 16.5% of total revenue for the six months ended June 30, 2020 and 2019, respectively. Cost of revenue and operations expense decreased primarily due to lower third party costs, driven by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related 25 restrictions, partially offset by an increase in compensation costs and growth in dealer websites and related digital solutions, which have an inherently higher cost of revenue . Product and technology. Product and technology expense represents 10.8% and 11.0% of total revenue for the six months ended June 30, 2020 and 2019, respectively. Product and technology expense decreased primarily due to lower compensation costs and cost efficiencies as a result of the Technology Transformation by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions. Marketing and sales . Marketing and sales expenses represent 34.8% and 37.7% of total revenue for the six months ended June 30, 2020 and 2019, respectively. Marketing and sales expense decreased due to a reduction of our marketing expense which was achieved by focusing on customer acquisition and leveraging efficiencies gained, while carefully maintaining consumer engagement as evidenced by our strong organic traffic, and a shift from in-person to virtual automobile research and shopping. General and administrative . General and administrative expense represents 12.2% and 15.2% of total revenue for the six months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020 and 2019, General and administrative expense included the following costs (in thousands): Six Months Ended June 30, 2020 2019 Severance, transformation and other exit costs $ 6,168 $ 7,511 Transaction-related costs (1) 117 4,623 Costs associated with stockholder activist campaign — 7,920 Total $ 6,285 $ 20,054 (1) Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects . Excluding these costs, general and administrative expense decreased 5.8% for the six months ended June 30, 2020, compared to the prior year. General and administrative expenses decreased primarily due to our management of expenses, primarily related to compensation, to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions. Depreciation and amortization . Depreciation and amortization expense increased primarily due to depreciation and amortization on additional assets acquired. Affiliate revenue share. Affiliate revenue share expense increased, primarily due to the additional markets converted during the last twelve months, partially offset by the expiration of certain affiliate agreements. A summary of Affiliate revenue share expense is as follows (in thousands): Six Months Ended June 30, 2020 2019 Affiliate revenue share expense, gross $ 10,970 $ 16,299 Less: Amortization of the Unfavorable contracts liability — (11,669 ) Affiliate revenue share expense, as reported $ 10,970 $ 4,630 For information related to the Unfavorable contracts liability, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. Goodwill and intangible asset impairment . We determined there was a triggering event, caused by the economic impacts of the COVID-19 pandemic and related restrictions. We performed interim quantitative impairment tests as of March 31, 2020. The results of the goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus, we recorded an impairment of $505.9 million and $400.0 million, respectively. For information related to the impairment, see Note 4 (Goodwill and Indefinite-lived Intangible Asset) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. Interest expense, net . Interest expense, net increased by $0.2 million compared to the prior year. For information related to our interest rate swap, see Note 5 (Debt) and Note 6 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. 26 Other (expense) income, net . Other (expense) income, net decreased, primarily due to an impairment of a $9.4 million of non-marketable investment, triggered by the COVID-19 pandemic and the related restrictions. This investment had been recorded within Investments and other assets on the Consolidated Balance Sheets. Income tax benefit . The effective income tax rate, expressed by calculating the income tax benefit as a percentage of Loss before income taxes, was 14% for the six months ended June 30, 2020 and differed from the U.S. federal statutory rate of 21%, primarily due to the tax impact of the goodwill and intangible asset impairments and a full valuation allowance on the U.S. company’s net deferred tax asset position. Liquidity and Capital Resources Overview. Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity available under our credit facilities. Our operations have generated positive operating cash flows in 2020 and 2019 which, along with our Term and Revolving Loans described below, provides adequate liquidity to meet our business needs, including those for investments and strategic acquisitions. In addition, we may raise additional funds through other public or private debt or equity financings. At this time, we do not expect the impact of the COVID-19 pandemic and related restrictions to impact our ability to meet our business needs for the foreseeable future. However, our ability to maintain adequate liquidity for our operations in the future is dependent upon a number of factors, including our revenue, macroeconomic conditions, the duration and severity of the economic and operational impacts caused by the COVID-19 pandemic and related restrictions, our ability to contain costs, including capital expenditures, and to collect accounts receivable, and various other factors, many of which are beyond our direct control. We are subject to certain financial and other covenants contained in our Credit Agreement. In June 2020, we entered into an amendment to our Credit Agreement that includes a covenant holiday with an exemption from the net leverage and interest coverage ratios through the end of 2020, and maximum net leverage of 6.50x effective March 31, 2021, with step downs thereafter. In addition, the Second Amendment also includes a minimum liquidity requirement of $75.0 million and adds an anti-cash hoarding covenant, which requires, during the Covenant Adjustment Period, mandatory prepayments of the revolving credit loans with the amount of any unrestricted cash located in the Company’s deposit accounts in excess of $75.0 million. The impact of the COVID-19 pandemic and related restrictions may affect our ability to comply with such covenants. We may also seek to raise funds through debt or equity financing in the future to fund operations, significant investments or acquisitions that are consistent with our strategy. If we need to access the capital markets, there can be no assurance that financing may be available on attractive terms, if at all. See Part II, Item 1A., “Risk Factors” of this Quarterly Report on Form 10-Q. As of June 30, 2020, Cash and cash equivalents were $56.9 million. Term Loan and Revolving Loan. As of June 30, 2020, the outstanding principal amount under the Term Loan was $371.3 million, with an interest rate of 5.5%, including the impact of the interest rate swap. The outstanding borrowings under the Revolving Loan were $275.0 million, with an interest rate of 3.3%. During the six months ended June 30, 2020, we made $16.9 million in mandatory Term Loan payments and $150.0 million in Revolving Loan payments. The debt repayments were primarily associated with the $165.0 million in proceeds related to our draw on our revolver during the first quarter of 2020. As of June 30, 2020, $175.0 million was available to borrow under the Revolving Loan. In October 2019, we entered into an amendment to our Credit Agreement to increase the total net leverage covenant during the remaining term of the Credit Agreement while preserving the favorable pricing structure from the original agreement. The amendment increased our maximum total net leverage ratio from 3.75x to 4.50x with incremental step downs through the maturities of the Term Loan and the Revolving Loan on May 31, 2022. In June 2020, we entered into an amendment to our Credit Agreement that includes a covenant holiday with an exemption from the net leverage and interest coverage ratios that addresses the impact of COVID-19 through the end of 2020, and maximum net leverage of 6.50x effective March 31, 2021, with step downs thereafter. During the covenant holiday period there is a minimum liquidity requirement of $75.0 million. As of June 30, 2020, our liquidity, as defined in the Credit Agreement, was approximately $232.2 million including cash and cash equivalents and availability under the revolving credit facility. Interest Rate Swap. The interest rate on borrowings under our Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on our borrowing, we entered into an interest rate swap agreement (the “Swap”) effective December 31, 2018. Under the terms of the Swap, we are locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in our Credit Agreement, on a notional amount of $300 million. The Second Amendment triggered a quantitative hedge effectiveness test, which resulted in the loss of hedge accounting. As a result, as of the date of the amendment, the unrealized loss included within Accumulated other comprehensive loss will be ratably reclassified into Net loss over the remaining term of the Swap. A portion of the unrealized loss shall be recorded to Interest expense, net and Income tax expense (benefit) within the Consolidated Statements of Loss. Subsequent to the Second Amendment, any changes in the fair value of the Swap are recorded within Other income (expense), net on the Consolidated Statements of Loss. 27 As of June 30, 2020, the fair value of the Swap was an unrealized loss of $16.1 million, of which $8.4 million and $7.7 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets. During the six months ended June 30, 2020 and June 30, 2019, $3.1 million and $0.7 million in Interest expense, net of which $0.3 million and zero was reclassified from Accumulated other comprehensive loss, respectively. During the six months ended June 30, 2020, $0.1 million was reclassified from Accumulated other comprehensive loss into Income tax expense (benefit) on the Consolidated Statements of Loss. Additionally, $0.6 million was included within Other income (expense), net on the Consolidated Statements of Loss related to the change in the fair value of the Interest rate swap from the date of the Second Amendment to June 30, 2020. Share Repurchase Program. In March 2018, our Board of Directors authorized a stock repurchase program to acquire up to $200 million of our common stock over a two-year period. We were allowed to repurchase stock from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. The timing and amounts of any purchases under the stock repurchase program will be based on market conditions and other factors including price. The repurchase program did not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. In March 2020, the repurchase program expired and there were no share repurchases during 2020. The Company repurchased and subsequently retired 1.7 million shares for $40.0 million during the six months ended June 30, 2019. Cash Flows. Details of our cash flows are as follows (in thousands): Six Months Ended June 30, 2020 2019 Change Net cash provided by (used in): Operating activities $ 57,629 $ 50,755 $ 6,874 Investing activities (8,725 ) (9,953 ) 1,228 Financing activities (5,508 ) (56,726 ) 51,218 Net change in cash and cash equivalents $ 43,396 $ (15,924 ) $ 59,320 Operating Activities. The increase in cash provided by operating activities was primarily related to reduction of net loss, excluding the impact of non-cash items, as well as changes in operating assets and liabilities. In addition, the net loss for the six months ended June 30, 2020 and 2019 was impacted by the following costs (in thousands): Six Months Ended June 30, 2020 2019 Severance, transformation and other exit costs $ 6,168 $ 7,511 Transaction-related costs (1) 117 4,623 Costs associated with stockholder activist campaign — 7,920 Total $ 6,285 $ 20,054 (1) Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects. Investing Activities. The decrease in cash used in investing activities is primarily due to a decrease in purchases of property and equipment. Financing Activities. During the six months ended June 30, 2020, cash used in financing activities is primarily related to $166.9 million in debt repayments and $3.3 million of debt issuance costs related to the Second Amendment. The debt repayments were primarily associated with the $165.0 million in proceeds related to our draw on our revolver during the first quarter of 2020. For information related to our Term and Revolving Loans, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. Commitments and Contingencies. For information related to commitments and contingencies, see Note 8 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements. We do not have any material off-balance sheet arrangements. 28 Critical Accounting Policies. For information related to critical accounting policies, see “Critical Accounting Policies and Estimates” in Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of the Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on February 26, 2020 and see Note 1 (Description of Business, Company History and Summary of Significant Accounting Policies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. During the six months ended June 30, 2020, there have been no changes to our critical accounting policies. Recent Accounting Pronouncements. For information related to recent accounting pronouncements, see Note 2 (New Accounting Pronouncements) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. 29