Cars.com Inc. 10-K

Item 1. Business. Cars.com Inc., a Delaware corporation, and its consolidated subsidiaries are referred to here as “CARS,” the “Company,” “our,” “us” or “we,” unless the context indicates otherwise. CARS conducts all of its operations through its wholly owned subsidiaries. Overview. We are a leading digital marketplace and solutions provider for the automotive industry, connecting car shoppers with sellers. Our vision is to become the largest digital automotive marketplace and platform powering innovative solutions and frictionless omni-channel experiences supporting local buyers and sellers. Our vision is realized through three strategic priorities: continue to build industry-leading shopping experiences to drive our audience, bring market-leading solutions to our customers, and enable online transactions to support local and small businesses across the country. Through our marketplace, dealer websites and other digital products, we showcase dealer inventory, elevate and amplify dealers’ and automotive manufacturers’ (“OEMs”) brands, connect sellers with our ready-to-buy audience and empower shoppers with the resources and information needed to make confident car buying decisions. Our digital solutions strategy builds on the rich data and audience of our digital marketplace to offer media and solutions that drive growth and efficiency for the automotive industry. We launched in 1998 with the flagship marketplace Cars.com and, on June 1, 2017, became a publicly traded company with our shares traded on The New York Stock Exchange (the “NYSE”). Our portfolio of brands now includes Cars.com™, Dealer Inspire®, DealerRater®, FUEL™, Auto.com™, PickupTrucks.com™ and NewCars.com®. Our Business Attracting ready-to-buy car shoppers to our marketplace is crucial to meeting the needs of our customers. Driven by the strength of the Cars.com brand name and our extensive trusted editorial content, we attract over 20 million unique visitors each month, the majority 1 coming to us organically. Approximately 85% of consumers who visit Cars.com intend to purchase a vehicle within the next six months, and we believe Cars.com has some of our category’s strongest site engagement. Our marketplace is core to our business, and we have built on this strength to increase our value to customers by also providing digital solutions. Through the acquisitions of DealerRater in 2016 and Dealer Inspire in 2018 and our recently launched FUEL product, we have materially expanded our solutions and media offerings to improve the sales, operational efficiency and profitability of our automotive customers. For Customers. Our primary customers are local car dealers, OEMs and other national advertisers. For the year ended December 31, 2020, 85% of our revenue was generated from car dealerships, 13% related to OEMs and other national advertisers and 2% was generated from other customers. • Dealer Customers. As of December 31, 2020, we served 18,372 dealer customers across all 50 states, including franchise dealers and independent dealers, with both digital and brick-and-mortar stores. The vast majority of our dealer customers are car sellers advertising through our marketplace subscription products. • Manufacturers. As of December 31, 2020, we served nearly all of the major automakers selling vehicles in the United States. For Shoppers. At the core of our business is a powerful marketplace that functions as a definitive resource for car buyers. We are known for our scale and depth with nearly four million used and new vehicle listings, nearly ten million consumer and expert editorial reviews, and a significant news and research section that helps shoppers along their purchase journey. Our user experience is focused on reducing friction, improving speed and delivering powerful results through several pricing, comparison, research and communication tools in order to empower buyers. As a result of the imposition of government restrictions in response to the novel coronavirus disease 2019 (“COVID-19”) pandemic, we launched additional digital products in 2020 to meet the rise in demand for online car shopping and buying. Both buyers and sellers have accelerated their adoption of digital tools, products and solutions. With digital tools and virtual buying and selling as a defining feature of our offerings, we pivoted quickly to meet the market in March 2020 with the launch of new Home Delivery and Virtual Appointment badges, allowing shoppers to easily identify which dealerships offer these digital and contactless buying options. Since we launched these badges, nearly twenty million vehicles across nearly 11,000 dealers nationwide have been badged. In addition, we launched Virtual Test Drives to enable shoppers to remotely experience many of the features and functionality of a vehicle. These new product launches complement our Conversations chat tool and our Online Shopper digital retailing tool to allow shoppers to communicate directly with dealers and confidently make purchase decisions, creating a frictionless shopping and selling experience, even with COVID-19 related restrictions (as defined below) and social distancing. For Sellers. We offer local dealers, OEMs, dealer groups and auto-adjacent companies a variety of digital products utilizing media, technology and data. We generate revenue primarily through the sale of our marketplace subscription products to local car dealer customers which provide dealers with access to our high-quality, in-market audience of car shoppers. We supplement our marketplace products with digital solutions offerings, which have become a key area of growth. History. Cars.com was established in 1998 as part of a joint venture formed by a number of leading newspaper and broadcast companies that realized their historic classified advertising businesses were being eroded as advertising began to move to the Internet. In 2014, one of the joint ventures, Gannett Co., Inc. (“Gannett”) acquired the interests of the other joint venturers, and we became a wholly-owned subsidiary of Gannett. On May 31, 2017, Gannett, which had changed its name to TEGNA Inc. (“TEGNA”), effected a spin-off of Cars.com along with the DealerRater business that it had acquired in 2016 (the “Spin”), creating Cars.com Inc. and distributing 100% of our common stock to TEGNA’s shareholders. On June 1, 2017, our common stock began trading on the NYSE under the ticker symbol “CARS”. In February 2018, we acquired the stock of privately held Dealer Inspire Inc. which provides website and other technology solutions, and substantially all the assets of Launch Digital Marketing LLC, which provided the digital marketing services now offered by Dealer Inspire. Industry Dynamics. CARS operates in the large and growing automotive advertising and technology solutions market. According to recent Automotive Outlook Reports from Borrell Associates, approximately 63% of the $33 billion U.S. auto advertising industry was projected to be spent on digital marketing in 2020. By 2023, advertising for the automotive industry is expected to grow to approximately $36 billion, with digital advertising expected to reach approximately 74% of the overall market spend over the same period. Furthermore, dealers spend four times more on digital solutions than marketing, according to Borrell Associates. Automotive dealers operate in a competitive market. Prior to the COVID-19 pandemic, dealers were experiencing margin compression, decreased OEM support, and growing consumer expectations around service and support. As a result, dealers are investing more in technology solutions and their first-party platforms (their own websites). This trend has accelerated in the current 2 COVID-19 environment. Dealers are embracing technology solutions that help drive operational efficiency and allow them to support consumers through their preferred channels (online, offline, or both). In part by leveraging technology solutions, many dealers are achieving record profitability. As the first truly integrated marketplace and solutions provider in the market today, we believe we are well-positioned to support dealers with our comprehensive, multi-faceted sales-oriented suite of tools and solutions . For shoppers, buying a car is one of life’s most significant and researched decisions. According to Mintel’s 2020 car purchasing study, approximately 69% of car shoppers believe buying a vehicle is stressful. Numerous product options with opaque, negotiable prices and gaps in the online-to-offline shopping experience add complexity to an already overwhelming decision-making process. Shoppers want a streamlined, simplified automotive retail experience. Marketplaces like Cars.com help car shoppers cut through the clutter and support shoppers with empowering tools from search to signature. Dealers and OEMs value our marketplace for the chance to connect with our unique, extensive and valuable in-market audience, and to improve their marketing efficiency with our suite of solutions and tools. According to the 2018 Car Buyer Journey study conducted by IHS Markit, nearly 80% of car shoppers utilize third-party sites such as Cars.com and spend more than 60% of their research time on these sites. Products. Our core products for sellers include: Marketplace products. • Marketplace subscription advertising. We sell marketplace subscription advertising to dealer customers through varying packages, which allow our dealer customers to showcase their available new and used vehicle inventory to our extensive audience of in-market car shoppers. We also offer our customers several add-on products, which include premium on-platform advertising products that can be uniquely tailored to an individual dealer customer. Our marketplace subscription service continues to be our largest product by revenue and number of subscribing dealers. • Social selling. In 2018, we pioneered the use of social media platforms to sell cars by launching multiple solutions for both dealers and OEMs to connect with in-market car shoppers on social media platforms, expanding their opportunity to sell more cars. We offer Cars Social, for both dealers and OEMs, which serves native advertisements displaying real-time inventory to consumers on Facebook and Instagram and leverages our valuable audience data to target in-market car shoppers. Digital Solutions. • Website platform hosting. Through our Dealer Inspire brand, a seven-time Automotive Website Award Pinnacle Platform Winner, our advanced website platform is the core of our connected ecosystem of solutions that make automotive retail faster, easier and smarter from search to signature. Built on a customizable platform and designed with user behavior data, our websites are set apart by advanced technologies that drive modern consumers toward purchase decisions. Website hosting is a business with high retention rates and supports the reliability, stability and diversification of our revenue streams. • AI chat tool . Our Conversations product turns chats into customers by leveraging AI technology, live video chat capabilities and managed chat support to instantly respond to all incoming messages 24/7. Conversations is built to connect today’s car buyers with sellers — wherever, whenever and however they want to shop. • Digital retailing . Our Online Shopper solution enables e-commerce transactions for dealers. The “Garage” feature allows shoppers to save vehicles, customize and compare their payments side-by-side, add finance and insurance products and aftermarket accessories, and checkout for delivery or pick-up in just three easy steps. • Review and reputation management . Through our DealerRater brand, we are one of the leading dealer review platforms in the industry, with nearly seven million consumer reviews. Our reputation management solutions enable dealers to build, measure, monitor and manage their review programs to drive more leads that close faster. DealerRater reviews are syndicated across a variety of platforms (including Cars.com), reaching more than 40 million consumers, digitally, each month. Advertising. • Display advertising . Our display advertising business helps dealers and manufacturers extend their reach and efficiently access our large audience of in-market car shoppers. The geographically targeted advertising served on our Cars.com site and mobile app enables retailers to increase brand awareness and promote inventory. • Digital advertising services . We also offer programs that manage dealer search engine optimization, as well as paid media spend beyond the Cars.com platform. Our data analytics and insights ensure dealers’ search investments are deployed in the most efficient manner possible. 3 • In-market video . Launched in 2020, FUEL is a digital video solution that provides OEMs and dealers with the opportunity to reach Cars.com’s in-market car shopping audience of over 20 million monthly shoppers on their screen of choice via social media platforms and streaming apps. FUEL leverages Cars.com’s high-quality, in-market audience data to pinpoint serious ready-to-buy shoppers. This targeted approach drives high advertising efficiency for FUEL, which compares favorably to high-cost broadcast television solutions that dealers and OEMs have historically relied on. Our strengths and competitive advantages. Our strategy is to drive growth and efficiency in the automotive industry by uniting media, solutions and data. We believe our business has many competitive advantages, including: A powerful family of brands with industry-leading fundamentals at scale. Cars.com is synonymous with car shopping. Among our competitors, we rank No. 1 in brand awareness according to Millward Brown, a leader in brand strategy consulting. We are trusted as a reliable partner for car buyers and sellers. Among marketplaces, we are a first mover in extending our focus to automotive solutions. Additionally, Dealer Inspire is widely recognized as an industry innovator that has helped to shape the future of automotive retail for sellers. In 2019, Dealer Inspire earned 9.5 out of 10 in a customer satisfaction survey. DealerRater is one of the leading dealer review platforms in the industry. Our newly launched FUEL solution further differentiates us, as we leverage our powerful audience data to efficiently target shoppers on streaming apps and social media platforms through digital video. Together, we believe Cars.com, Dealer Inspire, DealerRater and FUEL are a strong force delivering the first truly integrated digital marketplace and solutions provider in the market today. A high-quality audience, at scale, drives our leading marketplace . We have made strategic investments in technology and marketing to deliver what we believe is the industry’s most qualified audience of car shoppers. As of December 31, 2020, our network had 600 million annual site visits and 24 million Average Monthly Unique Visitors. As the category URL with a trusted consumer brand, we generate the majority of our traffic organically. Over the past 20 years, we have made more than half a billion connections between car shoppers and sellers. Further, approximately 85% of our audience is in-market to buy a car, compared to a fraction of the general population. The average time to purchase a car is less than 50 days, while approximately 49% of our audience plans to buy within 30 days. Thus, we offer unique reach for advertisers and attract OEMs and dealerships seeking digital platforms for impactful campaigns and transactions with consumers. The quality of our in-market audience is validated by the increasingly strong retention rates we are experiencing across our base of dealer customers. As of December 31, 2020, our network of over 18,000 dealer customers maintained nearly 4 million average daily listings on our marketplace. Internal research suggests that approximately 70% of consumers want to execute some portion of the automotive purchase online. Since the COVID-19 pandemic began, consumers’ interest in completing price negotiations online reached 50% at the height of the pandemic while those interested in conducting financing and credit applications online rose to 41%. Our marketplace plays an integral role in digitally connecting consumers and dealers to help facilitate these online transactions. A growing suite of digital solutions for the automotive industry. Our robust solutions portfolio is an important component of our strategy and a key differentiator from our competitors. Our solutions and technology help sellers expand their influence and engagement with consumers across the entire purchasing journey, increasing sales, creating operational efficiency and improving profitability. Examples of these solutions include: • Dealer Inspire . Dealer Inspire participates in the majority of OEM sponsored digital website programs in the United States. As of December 31, 2020, Dealer Inspire powered the digital storefront of dealers, hosting 4,400 websites. Our digital retailing and selling solutions, such as Conversations and Online Shopper, further enhance our value proposition to dealers. These fully integrated, value-add solutions allow consumers to explore pricing and financing options and enable consumers and dealers to engage directly via chat, video and text. • DealerRater . DealerRater’s platform for collecting and publishing ratings and reviews, including reviews of dealership salespeople, is an important point of connection, as many shoppers would like to connect with and select a salesperson to work with prior to stepping on the lot. According to a 2020 J.D. Power New Autoshopper Study, approximately 64% of car shoppers use consumer reviews to help narrow down their choices. • FUEL . Our FUEL solution provides dealers and OEMs the opportunity to harness the power and efficiency of digital video - a market that is predicted to grow to $4.8 billion by 2023 - by leveraging our unique, first-party audience data. Dealers and OEMs today rely on broadcast television and general audiences for advertising. Our in-market video strategy allows dealers 4 to become hyper-efficient with marketing spend and target only those shoppers who are looking to purchase a vehicle by serving them custom, interactive video content on video platforms such as YouTube, Hulu and Facebook. Competition. We face competition to attract consumers and paying dealers to our marketplace and to attract advertisers to purchase our advertising products and services. Our competitors offer various marketplaces, products, and services that compete with us. Some of these competitors include: • Internet search engines and online automotive sites, such as Google, Facebook, Craigslist, AutoTrader.com, eBay Motors, CARFAX, Edmunds.com, KBB.com, CarGurus.com and TrueCar.com • Sites operated by automobile sellers (traditional and digital) and by OEMs • Providers of offline, membership-based car-buying services, such as the Costco Auto Program • Website platform and solution providers, such as Dealer.com, Sincro (formerly CDK Global) and DealerOn • Digital advertising providers Competition for Consumers and Dealers. We compete for consumer visits with other online automotive marketplaces, free listing services, general search engines, and dealers’ websites. We compete for consumers primarily on the basis of the quality of the consumer experience. We believe we compete favorably on user experience due to the number of our vehicle listings, the unbiased transparency of the information we provide on cars, prices, and dealers, the intuitive nature of our user interface, sophisticated search tools and algorithms and our mobile user experience, among other factors. We compete for dealers’ marketing spend with offline customer acquisition channels, other online automotive marketplaces, dealers’ own customer acquisition efforts on search engines, and other internet sites that attract consumers searching for vehicles. We compete primarily on the basis of the return on investment (“ROI”) to the customer that our marketplace provides. We believe we compete favorably due to our large in-market consumer audience, high consumer engagement, and the volume and quality of connections we provide to well‑informed consumers, which results in an attractive ROI for dealers. Competition for Advertisers. We compete for a share of advertisers’ total marketing budgets against media sites, websites dedicated to helping consumers shop for cars, search engines and social media sites, among others. We also compete for a share of advertisers’ overall marketing budgets with traditional media, such as television, radio, magazines, newspapers, automotive guide publications, billboards, and other offline advertising channels. We compete for advertising spend based on the marketing ROI that our marketplace provides. We believe we compete favorably due to our large in-market consumer audience size, high consumer engagement, and the effectiveness and relevance of our advertising products. Intellectual Property . We protect our intellectual property and our brand using various intellectual property laws and through a combination of trademarks, trade dress, domain names, copyrights, trade secrets and patents, as well as contractual provisions and confidentiality procedures. We have registered and unregistered U.S. and international trademarks, service marks, domain names and copyrights. We have filed patent applications and acquired patents in the U.S. and foreign countries covering certain of our proprietary technology and intend to pursue additional patent protection to the extent we believe it will be beneficial and cost-effective. In addition to the protection provided by our intellectual property rights, we enter into confidentiality and proprietary rights agreements with our employees, consultants, contractors and business partners. Our employees and contractors are also subject to invention assignment provisions. In addition, we control the use of our proprietary technology and intellectual property through provisions in both our general and product-specific terms of use on our mobile applications and websites. Regulatory Matters. Various aspects of our business and the solutions we offer are or may be subject to a continually expanding and evolving range of local, state, federal and international regulation. In particular, the advertising and sale of new or used vehicles is highly regulated by the states in which we do business. Although we do not sell automobiles, the dealers from which we derive a significant portion of our revenue do sell them. Moreover, state regulatory authorities or other third parties could take and, on some occasions, have taken the position that some of the regulations applicable to dealers or to the manner in which automobiles are advertised and sold generally are directly applicable to our business model. By providing a medium through which users can post content and communicate with one another using text messages and other mobile phone communications , our business is subject to laws, regulations, and standards covering marketing and advertising activities conducted by telephone, email, mobile devices, and the internet, such as the Telephone Consumer Protection Act, the CAN-SPAM Act, and similar state consumer protection laws. Our digital solutions products may be subject to laws governing accessibility, intellectual property ownership, obscenity, libel, and privacy, among other issues. 5 In addition, we are subject to numerous federal, national, state, and local laws and regulations in the United States and internationally regarding privacy and the collection, processing, storage, sharing, disclosure, use, and protection of personal information and other data, such as the Gramm-Leach-Bliley Act or the California Consumer Privacy Act or the upcoming California Privacy Rights Act . While the scope of these laws and regulations is changing and remains subject to differing interpretations, we seek to comply with industry standards and all applicable laws, policies, legal obligations, and industry codes of conduct relating to privacy and data protection. We are also subject to the terms of our privacy policies and privacy-related obligations to third parties. To operate in this highly regulated environment, we have developed our products and services with a view toward appropriately managing the risk that our regulatory compliance or the regulatory compliance of our dealer customers could be challenged. If, and to the extent that, our products and services fail to satisfy relevant regulatory requirements, we could be subject to significant civil and criminal penalties, including fines, or the award of significant damages in class action or other civil litigation, as well as orders interfering with our ability to continue providing our products and services in certain states. Human Capital. CARS is committed to the highest standards of integrity, inclusion and responsible business practices. We believe our unmatched desire to build a culture and business that cares about our employees, customers, industry and communities is a part of who we are – it’s in our DNA. We believe our highly innovative and effective teams are one of the biggest differentiators and investments at CARS. We promote and foster an environment that encourages constant learning and curiosity, including offering all of our employees additional learning and development opportunities. More than 40% of our employees engage in some form of additional voluntary learning and development annually outside of our required trainings. We provide individual training and certifications, across thousands of topics and interests, to ensure our teams continue developing the needed skills to grow in their careers at CARS and deliver their very best every day. Leadership development programs are also available to provide in-depth training courses to help managers build successful teams focused on innovating in our business and the ever-changing automotive and technology industries. The courses develop skills of influence, time management, coaching, feedback, conflict management, empathy and overall leadership. At CARS, we believe we offer competitive and equitable compensation and benefits that include: • A leading Employee Stock Purchase Plan, under which all team members – including part-time and temporary employees – are eligible to participate • Alternative work arrangements for eligible employees, such as, our Work from Home program, which we believe improves work-life balance, productivity and overall employee satisfaction • Benefits such as family benefits, fitness programs and subsidies, tuition reimbursements, phone discounts, and volunteer opportunities We also closely monitor employee satisfaction and engagement, conducting semi-annual, anonymous company-wide surveys that are shared with our executive management team and Board of Directors. These surveys are an important way for us to identify areas where we can improve. The survey typically generates more than 80% participation rate, which allows us to gather valuable insight into employee satisfaction. We believe that a diverse workforce is necessary. We undertake many initiatives to ensure that CARS is an inclusive place to work for people of all backgrounds, genders, nationalities, ethnicities, sexual orientations and beliefs. We incorporate diversity considerations into all aspects of our employment journey, from targeted recruitment to fostering diversity affinity groups through our Employee Resource Groups. We also offer frequent Unconscious Bias training to encourage and uncover opportunities to create a more inclusive and open workplace. At CARS we have solidified our commitment to diversity, equity and inclusion by monitoring and measuring five key metrics: diversity in talent acquisition; retention of diverse employees; pay equity; learning and development; and succession planning. Our diversity initiatives are managed directly by our executive management team, underscoring our commitment to this important principle across all levels of the organization. Beginning in 2021, each metric will influence a portion of each of our executive team members’ compensation. We have a variety of active Employee Resource Groups at CARS, focused on serving as enterprise-wide champions for diversity, equity and inclusion – helping us to identify areas in which we can become even more inclusive. These groups also allow for the open sharing of ideas and cultural awareness among our teams while providing civic engagement within our communities, leadership development and improving overall cultural competence. As of December 31, 2020, CARS had approximately 1,500 full-time employees. In total, 46.3% of the employees identify as female and 22.7% identify as having a racial and ethnic background other than white. The CARS executive management team consists of 10 members, and 30.0% identify as female, 40.0% identify as having a racial and ethnic background other than white and 30.0% self- 6 identify as LGBTQIA. In addition, our Board of Directors consists of 10 members, 20 .0 % who identify as female and 20 .0 % as having a racial and ethnic background other than white . We also engage contractors to support our operations. None of our employees are represented by a labor union or subject to a collective bargaining agreement. Available Information. We file periodic reports (Forms 10-Q and 10-K) and current reports (Form 8-K) and other information with the Securities and Exchange Commission (“SEC”). Our filings with the SEC are available to the public on the SEC’s website at www.sec.gov . Our filings are also available to the public on, or accessible through, our corporate website for free via the “Investor Relations” section at http://investor.cars.com as soon as reasonably practicable after they are filed electronically with the SEC. The information we file with the SEC or contained on, or accessible through, our corporate website or any other website that we may maintain is not incorporated by reference herein and is not part of this report. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by SEC rules.