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, media and solutions provider for the automotive industry, connecting car shoppers with sellers. Through our marketplace, dealer websites and other digital solutions, we showcase dealer inventory, elevate and amplify dealer and automobile original equipment manufacturer (“OEM”) brands, connect with our ready-to-buy audience and empower shoppers and sellers with the resources and information needed to make confident car-buying and selling decisions. Our digital solutions strategy builds on the rich data and audience of our digital marketplace to offer solutions to drive growth and efficiency for the automotive industry. Our portfolio of brands now includes Cars.com, Dealer Inspire, DealerRater, FUEL, 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue (1) $ 144,392 $ 152,090 $ 394,495 $ 454,495 Net loss (2) (12,261 ) (426,157 ) (824,339 ) (441,214 ) Retail revenue as % of total revenue 100 % 96 % 100 % 92 % Wholesale revenue as % of total revenue 0 % 4 % 0 % 8 % (1) The decrease in revenue for the three and nine months ended September 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 in the second quarter of 2020. (2) The net loss for the three months ended September 30, 2020 was primarily attributed to the recording of an additional $30.9 million income tax expense for the correction of an error related to the recording of the valuation allowance against the deferred tax assets in connection with an impairment recorded in the first quarter of 2020. This was partially offset by a net $8.5 million tax benefit related to our ability to carryback 2019 and 2020 federal tax losses to prior years to claim refunds of federal income taxes paid in those years related to the Coronavirus Aid, Relief, and Economic Security Act and related regulations. The net loss for the nine months ended September 30, 2020 was primarily attributed to the goodwill and intangible asset impairment of $905.9 million as well as the impact of the COVID-19 pandemic and related restrictions. The net loss for the three and nine months ended September 30, 2019 is primarily attributed to the $431.3 million (net of tax of $30.2 million) goodwill and indefinite-lived intangible asset impairment. The net loss in each period was also impacted by the following costs (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Severance, transformation and other exit costs $ 289 $ 2,114 $ 6,457 $ 9,625 Costs associated with stockholder activist campaign — 905 — 8,825 Transaction-related costs (1) 59 — 176 4,623 Total $ 348 $ 3,019 $ 6,633 $ 23,073 (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 19 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 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 third quarter of 2020, we maintained strong organic Traffic growth and achieved 10% growth in Traffic and in Average Monthly Unique Visitors, compared to the prior year period. Although we experienced strong traffic in the first three 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 third quarter of 2020, Dealer Customers increased by 97, or 1%, to 18,130 as of September 30, 2020, as compared with 18,033 as of June 30, 2020. This increase was a result of new sales of marketplace and digital solutions customers supported by strength in retention rates. 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. FUEL. Launched in 2020, FUEL is a digital video solution that provides OEMs and dealers with the opportunity to reach our in-market car shopping audience data of 25 million monthly shoppers on their screen of choice via social media platforms and streaming apps. FUEL leverages our high-quality, in-market audience data to pinpoint serious ready-to-buy shoppers. We believe this targeted approach drives high advertising efficiency for FUEL, which compares favorably to expensive or high-cost broadcast television solutions that dealers and OEMS on which they historically relied. We began generating FUEL 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 half 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 4,000 as of September 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. Bond Offering and Credit Agreement Amendment. On October 30, 2020, we issued $400.0 million aggregate principal amount of 6.375% senior unsecured notes due 2028. We used the net proceeds from the offering, together with cash on hand, to repay $235.0 million of borrowings under our revolving facility, repay $162.8 million of borrowings under our term loan and pay fees associated with the offering. On October 30, 2020, we entered into an amendment (the “Third Amendment”) to the Credit Agreement, in which we refinanced an aggregate principal amount of $430.0 million, comprised of a $230.0 million senior secured revolving credit facility and a $200.0 million senior secured term loan facility, with a revised maturity date of May 31, 2025. The Third Amendment also includes the following: • A maximum senior secured leverage ratio of 3.50x, with a step up for material permitted acquisitions; 20 • A minimum interest coverage ratio of 2.75x, with a step up to 3.00x on June 30, 2023; • A revised interest rate grid updated to reflect a maximum alternate base rate margin of 1.75% and a maximum Eurodollar margin of 2.75%; • Certain modifications to negative covenants restricting additional indebtedness, investments, acquisitions, debt repayments and certain dividends and distribution; • Provisions to accommodate the replacement of the existing LIBOR Rate with a successor benchmark interest rate; and • Ended the covenant adjustment period that was implemented pursuant to the Second Amendment and removed the related minimum liquidity requirement and anti-cash hoarding covenant. As of September 30, 2020, our liquidity was $258.8 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. Impact of COVID-19 on our business. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it has since spread throughout the United States and the rest of the world with different geographical locations impacted more than others. The pandemic has resulted in governmental authorities around the country implementing numerous measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns (the “related restrictions”). The related 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 lead to a reimplementation of such restrictions. 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. As a result of overall uncertainty related to the automotive industry, in the second half of March 2020, our customers began to adjust, reduce or suspend their operating and marketing 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% in April, 30% in May and 30% in June 2020. With respect to managing our expenses, we implemented several initiatives, including both permanent and temporary measures, to adjust expenses with changes in revenue. Invoice credits ended at the end of June, and we have since returned to normalized pricing. 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 pro duct that allows dealers to target in-market buyers on streaming platforms . The effects of the COVID-19 pandemic and related restrictions, particularly reduced consumer spending and the discounts that we provided our dealer customers in 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 pandemic and related restrictions. Therefore, our results for the nine months ended September 30, 2020, may not be indicative of the results for the year ending December 31, 2020. 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 September 30, Nine Months Ended September 30, 2020 2019 % Change 2020 2019 % Change Traffic (Visits) 158,791,000 144,378,000 10 % 461,684,000 407,477,000 13 % Average Monthly Unique Visitors 25,349,000 23,080,000 10 % 24,363,000 22,349,000 9 % 21 Information regarding Dealer Customers and Direct Monthly Average Revenue Per Dealer is as follows: September 30, 2020 September 30, 2019 % Change June 30, 2020 % Change Dealer Customers 18,130 18,635 (3 )% 18,033 1 % Direct Monthly Average Revenue Per Dealer $ 2,183 $ 2,174 0 % $ 1,442 51 % 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 nine months ended September 30, 2020, mobile traffic accounted for 74% and 75% of total Traffic, respectively. For the three and nine months ended September 30, 2019, mobile traffic accounted for 73% and 72% of total Traffic, respectively. Although we experienced strong traffic in the first three 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 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 increased 1% from June 30, 2020. This increase was a result of growth in both marketplace and digital solutions dealer customers, improved retention rates in local marketplace and dealer solutions customers and improved sales of our local marketplace product . Total Dealer Customers declined 3% from September 30, 2019. This decrease was primarily driven by lower new dealer customer sales and higher cancellations of marketplace customers in the second quarter of 2020, 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 increased 51% from the ARPD of $1,442 for the three months ended June 30, 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. 22 ARPD was up slightly compared to September 30, 2019. 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 vehicle 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, with the onset of COVID-19, we observed decreased vehicle sales and dealer profitability. However, COVID-19 has also accelerated certain dealers’ adoption of digital solutions. In part by leveraging technology solutions, many dealers are achieving record profitability. 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 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 September 30, 2020 Compared to Three Months Ended September 30, 2019 Three Months Ended September 30, Increase (In thousands, except percentages) 2020 2019 (Decrease) % Change Revenue: Direct $ 123,955 $ 122,878 $ 1,077 1 % National advertising 17,753 20,161 (2,408 ) (12 )% Other 2,684 3,642 (958 ) (26 )% Retail 144,392 146,681 (2,289 ) (2 )% Wholesale — 5,409 (5,409 ) (100 )% Total revenue 144,392 152,090 (7,698 ) (5 )% Operating expenses: Cost of revenue and operations 25,434 25,089 345 1 % Product and technology 15,455 14,923 532 4 % Marketing and sales 45,776 50,789 (5,013 ) (10 )% General and administrative 13,289 13,414 (125 ) (1 )% Affiliate revenue share — 5,158 (5,158 ) (100 )% Depreciation and amortization 25,375 28,970 (3,595 ) (12 )% Goodwill and intangible asset impairment — 461,463 (461,463 ) (100 )% Total operating expenses 125,329 599,806 (474,477 ) (79 )% Operating income (loss) 19,063 (447,716 ) 466,779 ***% Nonoperating expense: Interest expense, net (10,779 ) (7,712 ) (3,067 ) 40 % Other income, net 1,957 1,402 555 40 % Total nonoperating expense, net (8,822 ) (6,310 ) (2,512 ) 40 % Income (loss) before income taxes 10,241 (454,026 ) 464,267 ***% Income tax expense (benefit) 22,502 (27,869 ) 50,371 ***% Net loss $ (12,261 ) $ (426,157 ) $ 413,896 ***% *** 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 85.8% and 80.8% of total revenue for the three months ended September 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 23 Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of Loss. During the three months ended September 30, 2020, the affiliate market conversions contributed an incremental $16.4 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 increase was $1.1 million or 1% compared to the three months ended September 30, 2019, driven by the conversion of affiliate dealers and growth in digital solutions revenue offset in part by a 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 12.3% and 13.3% of total revenue for the three months ended September 30, 2020 and 2019, respectively. National advertising revenue declined 12%, 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 3.6% of total revenue for the three months ended September 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 17.6% and 16.5% of total revenue for the three months ended September 30, 2020 and 2019, respectively. Cost of revenue and operations expense increased $0.3 million, primarily due to higher compensation costs and 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, search engine optimization, hardware/software maintenance, software licenses, data center and other infrastructure costs. Product and technology expense represents 10.7% and 9.8% of total revenue for the three months ended September 30, 2020 and 2019, respectively. Product and technology expense increased primarily due to higher compensation costs, primarily related to share-based compensation, partially offset by our management of expenses due to the COVID-19 pandemic and related restrictions and the Technology Transformation. 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 31.7% and 33.4% of total revenue for the three months ended September 30, 2020 and 2019, respectively. Marketing and sales expense decreased due to a reduction of our marketing expense which was achieved by focusing on consumer 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, accounting and 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 9.2% and 8.8% of total revenue for the three months ended September 30, 2020 and 2019, respectively. During the three months ended September 30, 2020 and 2019, General and administrative expense included the following costs (in thousands): Three Months Ended September 30, 2020 2019 Severance, transformation and other exit costs $ 289 $ 2,114 Costs associated with stockholder activist campaign — 905 Transaction-related costs (1) 59 — Total $ 348 $ 3,019 (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. 24 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 increased 24.5% for the three months ended September 30, 2020, compared to the prior year period. General and administrative expenses increased primarily due to higher compensation, primarily related to share-based compensation. Affiliate revenue share. Affiliate revenue share expense represents payments made to affiliates pursuant to our affiliate agreements offset in part by amortization of the Unfavorable contracts liability related to converted markets. There was no affiliate revenue share expense in the current period due to the expiration of certain affiliate agreements. A summary of Affiliate revenue share expense is as follows (in thousands): Three Months Ended September 30, 2020 2019 Affiliate revenue share expense, gross $ — $ 11,017 Less: Amortization of the Unfavorable contracts liability — (5,859 ) Affiliate revenue share expense, as reported $ — $ 5,158 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. Depreciation and amortization . Depreciation and amortization expense decreased primarily due to certain assets becoming fully depreciated and amortized, as compared to the prior year period. Goodwill and intangible asset impairment . As of September 1, 2019, we determined there was a triggering event, primarily caused by a sustained decrease in our stock price after the completion of the strategic alternatives review process, and performed an interim quantitative impairment test. 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 $379.2 million and $82.3 million, respectively in the third quarter of 2019. Interest expense, net . Interest expense, net increased by $3.1 million compared to the prior year period due to an increase in our interest rate paid as a result of the Second Amendment and the loss of hedge accounting on the Swap (as defined below). For information related to the 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 Swap. For information related to the Swap, see 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 expense (benefit) . The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income (loss) before income tax, was 220% for the three months ended September 30, 2020 which varied from the statutory federal income tax rate of 21%, primarily due to the recording of an additional $30.9 million income tax expense related to the correction of an error related to the recording of the valuation allowance against the deferred tax assets in connection with the impairment charges recorded in the first quarter of 2020. 25 Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 Nine Months Ended September 30, Increase (In thousands, except percentages) 2020 2019 (Decrease) % Change Revenue: Direct $ 332,558 $ 349,162 $ (16,604 ) (5 )% National advertising 53,167 59,752 (6,585 ) (11 )% Other 8,770 11,215 (2,445 ) (22 )% Retail 394,495 420,129 (25,634 ) (6 )% Wholesale — 34,366 (34,366 ) (100 )% Total revenue 394,495 454,495 (60,000 ) (13 )% Operating expenses: Cost of revenue and operations 74,376 74,987 (611 ) (1 )% Product and technology 42,359 48,125 (5,766 ) (12 )% Marketing and sales 132,734 164,872 (32,138 ) (19 )% General and administrative 43,866 59,265 (15,399 ) (26 )% Affiliate revenue share 10,970 9,788 1,182 12 % Depreciation and amortization 87,529 86,761 768 1 % Goodwill and intangible asset impairment 905,885 461,463 444,422 96 % Total operating expenses 1,297,719 905,261 392,458 43 % Operating loss (903,224 ) (450,766 ) (452,458 ) 100 % Nonoperating (expense) income: Interest expense, net (26,229 ) (22,989 ) (3,240 ) 14 % Other (expense) income, net (6,987 ) 1,530 (8,517 ) ***% Total nonoperating expense, net (33,216 ) (21,459 ) (11,757 ) 55 % Loss before income taxes (936,440 ) (472,225 ) (464,215 ) 98 % Income tax benefit (112,101 ) (31,011 ) (81,090 ) ***% Net loss $ (824,339 ) $ (441,214 ) $ (383,125 ) 87 % *** Not meaningful Retail Revenue—Direct . Direct revenue is our largest revenue stream, representing 84.3% and 76.8% of total revenue for the nine months ended September 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 nine months ended September 30, 2020, the affiliate market conversions contributed an incremental $44.5 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 the second quarter impact of the COVID-19 pandemic and related restrictions, during which we provided invoice credits to our dealer customers and experienced a decline in dealer customers. This was partially offset by an increase in revenue from the affiliate conversions and growth in digital solutions. Retail Revenue—National Advertising . National advertising revenue represents 13.5% and 13.1% of total revenue for the nine months ended September 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 7.6% of total revenue for the nine months ended September 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 18.9% and 16.5% of total revenue for the nine months ended September 30, 2020 and 2019, respectively. Cost of revenue and operations expense decreased primarily due to lower 26 third party 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 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 10.7% and 10.6% of total revenue for the nine months ended September 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 and our management of expenses to adjust to changes in revenue primarily related to the second quarter discounts given to our dealers due to the COVID-19 pandemic and related restrictions. Marketing and sales . Marketing and sales expenses represent 33.6% and 36.3% of total revenue for the nine months ended September 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, driven by the COVID-19 pandemic. General and administrative . General and administrative expense represents 11.1% and 13.0% of total revenue for the nine months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2020 and 2019, General and administrative expense included the following costs (in thousands): Nine Months Ended September 30, 2020 2019 Severance, transformation and other exit costs $ 6,457 $ 9,625 Costs associated with stockholder activist campaign — 8,825 Transaction-related costs (1) 176 4,623 Total $ 6,633 $ 23,073 (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 increased 2.9% for the nine months ended September 30, 2020, compared to the prior year period. General and administrative expenses increased primarily due to increased compensation costs, primarily related to share-based compensation. Depreciation and amortization . Depreciation and amortization expense increased primarily due to depreciation and amortization on additional assets acquired, partially offset by certain assets being fully depreciated and amortized as compared to the prior year period. Affiliate revenue share. Affiliate revenue share expense increased, primarily due to the full amortization of the Unfavorable contracts liability in 2019 which no longer provided a benefit in the current year period, partially offset by the expiration of certain affiliate agreements and the associated expense. A summary of Affiliate revenue share expense is as follows (in thousands): Nine Months Ended September 30, 2020 2019 Affiliate revenue share expense, gross $ 10,970 $ 27,315 Less: Amortization of the Unfavorable contracts liability — (17,527 ) Affiliate revenue share expense, as reported $ 10,970 $ 9,788 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 . As of March 31, 2020, 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 impairments, 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. 27 As of September 1, 2019, we determined there was a triggering event, primarily caused by a sustained decrease in our stock price after the completion of the strategic alternatives review process, and performed an interim quantitative impairment test. 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 $379.2 million and $82.3 million, respectively in the third quarter of 2019. Interest expense, net . Interest expense, net increased by $3.2 million compared to the prior year period due to an increase in our interest rate paid as a result of the Second Amendment and the loss of hedge accounting on the Swap. For information related to the 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 (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 and was recorded in the three months ended March 31, 2020. This investment had been recorded within Investments and other assets on the Consolidated Balance Sheets. Income tax benefit . The effective income tax rate was 12% for the nine months ended September 30, 2020, which varied from the statutory federal income tax rate of 21%, primarily due to the tax impact of the goodwill and intangible asset impairments and the full valuation allowance recorded against the deferred tax assets during the nine months ended September 30, 2020. 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 the Term Loan and the Revolving Credit Facility described below, provides adequate liquidity to meet our business needs, including those for investments and strategic acquisitions. 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 operationa l 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 the Credit Agreement, as amended, including by the Third Amendment. The impact of the COVID-19 pandemic and related restrictions may affect our ability to comply with such covenants. In June 2020, we entered into an amendment (the “Second Amendment”) to the Credit Agreement, which included 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. 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 our deposit accounts in excess of $75.0 million. 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 September 30, 2020, Cash and cash equivalents were $43.8 million. Term Loan and Revolving Loan. As of September 30, 2020, the outstanding principal amount under the Term Loan was $362.8 million, with an interest rate in effect of 5.5%, including the impact of the Swap. The outstanding borrowings under the Revolving Loan were $235.0 million, with an interest rate in effect of 3.3%. During the nine months ended September 30, 2020, we made $25.3 million in mandatory Term Loan payments and $190.0 million in Revolving Loan payments. The debt repayments were primarily associated with the $165.0 million draw on our revolver during the first quarter of 2020 related to the uncertainty around the COVID-19 pandemic and related restrictions. As of September 30, 2020, $215.0 million was available to borrow under the Revolving Loan. In October 2019, we entered into an amendment (the “First 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 First 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 (the “Second Amendment”) 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 September 30, 2020, our liquidity was $258.8 million including cash and cash equivalents and availability under the revolving credit facility. 28 Bond Offering and Credit Agreement Amendment. On October 30, 2020, we issued $400.0 million aggregate principal amount of 6.375% senior unsecured notes due 2028 (the "Notes”). We used the net proceeds from the offering, together with cash on hand, to repay $235.0 million of borrowings under our revolving facility, repay $162.8 million of borrowings under our term loan and pay fees associated with the offering. On October 30, 2020, we entered into an amendment (the “Third Amendment”) to the Credit Agreement, in which we refinanced with an aggregate principal amount of $430.0 million, comprised of a $230.0 million senior secured revolving credit facility and a $200.0 million senior secured term loan facility, with a revised maturity date of May 31, 2025. The Third Amendment also includes the following: • A maximum senior secured leverage ratio of 3.50x, with a step up for material permitted acquisitions; • A minimum interest coverage ratio of 2.75x, with a step up to 3.00x on June 30, 2023; • A revised interest rate grid updated to reflect a maximum alternate base rate margin of 1.75% and a maximum Eurodollar margin of 2.75%; • Certain modifications to negative covenants restricting additional indebtedness, investments, acquisitions, debt repayments and certain dividends and distribution; • Provisions to accommodate the replacement of the existing LIBOR Rate with a successor benchmark interest rate; and • Ended the covenant adjustment period that was implemented pursuant to the Second Amendment and removed the related minimum liquidity requirement and anti-cash hoarding covenant. 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 through May 31, 2022. 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 $300.0 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 life of the Term Loan. 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. As of September 30, 2020, the fair value of the Swap was an unrealized loss of $14.2 million, of which $8.5 million and $5.7 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets. During the nine months ended September 30, 2020 and September 30, 2019, $7.4 million and $1.2 million was recorded in Interest expense, net, of which $2.5 million and zero was reclassified from Accumulated other comprehensive loss, respectively. During the nine months ended September 30, 2020, $0.4 million was reclassified as a tax benefit from Accumulated other comprehensive loss into Income tax expense (benefit) on the Consolidated Statements of Loss. Additionally, $2.5 million of income was included within Other income (expense), net on the Consolidated Statements of Loss related to the change in the fair value of the Swap from the date of the Second Amendment to September 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 the nine months ended September 30, 2020. The Company repurchased and subsequently retired 1.7 million shares for $40.0 million during the nine months ended September 30, 2019. Cash Flows. Details of our cash flows are as follows (in thousands): Nine Months Ended September 30, 2020 2019 Change Net cash provided by (used in): Operating activities $ 96,866 $ 80,550 $ 16,316 Investing activities (12,603 ) (16,008 ) 3,405 Financing activities (54,043 ) (70,232 ) 16,189 Net change in cash and cash equivalents $ 30,220 $ (5,690 ) $ 35,910 29 Operating Activities. The increase in cash provided by operating activities was primarily related to the reduction of net loss, excluding the impact of non-cash items, partially offset by changes in operating assets and liabilities. In addition, the net loss for the nine months ended September 30, 2020 and 2019 was impacted by the following costs (in thousands): Nine Months Ended September 30, 2020 2019 Severance, transformation and other exit costs $ 6,457 $ 9,625 Costs associated with stockholder activist campaign — 8,825 Transaction-related costs (1) 176 4,623 Total $ 6,633 $ 23,073 (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 nine months ended September 30, 2020, cash used in financing activities is primarily related to $50.3 million of net debt repayments, inclusive of $215.3 million in debt repayments, partially offset by $165.0 million in proceeds related to our draw on our revolver during the first quarter of 2020. Additionally, there was $3.4 million of debt issuance costs. 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. 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 nine months ended September 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. 30